ECON-2220 Study Guide - Midterm Guide: Fernando Henrique Cardoso, Andre Gunder Frank, Paul Sweezy
15 May 2018
School
Department
Course
Professor
Import Substitution Industrialization
1. Dependency theory: reaction against the theory of linear stages of development
a. Underdeveloped countries are not developed countries in the making
b. Rich countries become rich by making other countries poor
c. Paul Baran said that there are alliances between local elites in developing
countries and international capitalists in international markets
i. Shared social bonding that gave power and privilege to the LAC’s upper
class
d. Industrial developed countries comprise the center and developing countries
comprise the periphery
e. Key players: Paul Baran, Andre Gunder Frank, Paul Sweezy
f. Solution is complete revolution
i. While the periphery is tied to the center, there is no possibility of
sustainable growth in developing countries.
2. structuralists–South America
a. Fernando Henrique Cardoso and Enzo Faletto
b. Agree with the assessment that the center countries controlled the dynamic of
development
i. Center: North
1. Advanced economies
2. Produce technologically advanced products
3. High income elasticity
4. High local productivity leads to higher wages
ii. Periphery: South
1. Developing countries
2. Primary products
3. Low income elasticity
4. Surplus labor and low labor productivity leads to lower wages
c. Disagree with the revolutionary prescription
d. Alternative solution: development within the periphery would be possible bia
industrialization and strong government
i. Periphery needs powerful states that act in the national interest, counteract
the strength of local and international economic elites, and promote
genuine development in the periphery
e. Necessary condition: ACTIVE STATE to counterbalance the greedy hand of the
international market
f. Raúl Prebish studied the economic performance of Latin America during the first
half of the 1900s
i. Concluded that LAC international price of primary exports tended to
decrease relative to those of manufactured goods-->industrialized
countries higher benefit from trade than developing ones
ii. Declining terms of trade
1. Price of the most exported primary goods tended to decrease
2. Price of most imported manufactured goods after WWI, WWII,
great depression tended to increase
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iii. Declining terms of trade meant that LAC needed to export higher volumes
(since prices tended to decrease) to be able to purchase the same imports--
>ongoing flow transferring income from poor countries to rich countries
g. Reason for underdevelopment in LAC: the main problem was the way poor
countries got integrated into the World System
h. Theoretical background
i. Free markets fail to promote development-->markets by themselves
perpetuated old rigid institutions
ii. Due to free market failures-->state intervention
1. Weak private sector
2. Industrialization needed large investment
3. An active state was justified as necessary to support
industrialization of LAC
i. Promoting domestic production of imported manufacturing goods--
>industrialization-->ISI
j. Disadvantage of LAC with the rest of the world was due to
i. Type of goods produced and exchanged with the world
ii. Unequal international distribution of income
k. Periphery needed to export more and more primary goods to be able to import the
same quantities of manufactured and technological goods
l. Rejected the idea for comparative advantage for Latin America’s economic
development and instead he proposed inward import substitution industrialization
of economic development
m. UN Economic Commission for Latin America was created and Raúl Prebish
became its chairman in 1949
3. Key requirement for ISI: LAC should isolate from international trade to protect infant
industries
4. Theory behind ISI
a. Replicating the North
b. Dual economies
i. Large traditional sector: labor productivity was zero, virtually no physical
capital, and market mechanisms not in place
ii. Small modern sector: similar to the North in terms of technology, use of
capital, and dependence on a market mechanism
c. Requirements
i. All new investment should be in the modern sector
ii. Labor should move from the traditional sector to the modern sector
iii. Modern sector would expand while the traditional sector diminished
5. Lewis: primary emphasis: capital formation
a. Depended directly on the capacity to import physical capital
6. Since domestic saving was a constraint in poor countries, foreign aid and public debt
supplemented the local investment and the domestic saving needed to reach growth
7. Inward industrial growth model: goals
a. To break world division of production
i. Where LA exported food and raw materials, imported manufactured foods
from USA and Europe
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b. To establish domestic LAC industries should produce consumer goods LAC used
to import from abroad
c. To promote internal sources of economic growth leads to self sufficiency in
manufactured goods, placing Latin America less at the mercy of the world
economy
8. Would induce a process of learning
9. Main characteristics of the industrialization process:
a. Initial stages: protection infant industry
b. Later on: manufacturing production will improve in quality and price
c. Manufacturing production would be able to compete in the international markets--
>export manufacturing goods
i. The assumption was that the returns from ISI would be re-invested in
LAC’s industrial sector (which would be sustainable)
10. Theory of protection
a. Consequences of protecting infant industries:
i. Short run: consumers are penalized with high price and lower
consumption
1. Consumers subsidized domestic manufactured producers
ii. Long run: ISI protection would allow local industries to grow, reap the
benefits of economies of scale, learn by doing, and eventually lower prices
iii. Once long run is reached, protective tariff would be removed and
government could replace loss of tariff revenue with internal taxes on
domestic industries
11. Government policies to promote and protect infant industries
a. Industrial policies
i. Anchored in the formation of state owned enterprises (SOEs)-->state
active role in production
ii. What types of enterprises?
1. Oil
2. Railroads
3. Airports
4. Petrochemicals
5. Aircraft
6. Steel
7. Utility companies
8. Telecommunication
iii. Economic rationale of SOEs
1. Economies of scale: most SOEs need large investments with the
goal of serving entire national markets
2. Public value such as infrastructure (railroads, energy, etc.) was
thought to be public responsibility
3. SOEs had larger time horizon for investment returns (hard to
afford for private enterprise)
iv. Subsidies: the government will provide subsidies to private infant
industries to import new technology, import some inputs and intermediate
goods
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Document Summary
Periphery: south: developing countries, primary products, low income elasticity, surplus labor and low labor productivity leads to lower wages, disagree with the revolutionary prescription, alternative solution: development within the periphery would be possible bia industrialization and strong government. >ongoing flow transferring income from poor countries to rich countries: reason for underdevelopment in lac: the main problem was the way poor countries got integrated into the world system, theoretical background. >industrialization-->isi: disadvantage of lac with the rest of the world was due to. Large traditional sector: labor productivity was zero, virtually no physical capital, and market mechanisms not in place. Small modern sector: similar to the north in terms of technology, use of capital, and dependence on a market mechanism: requirements, all new investment should be in the modern sector. The assumption was that the returns from isi would be re-invested in. Lac"s industrial sector (which would be sustainable: theory of protection, consequences of protecting infant industries:
