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A Suggested Policy for Industrial Reinvigoration in Latin America

Published online by Cambridge University Press:  05 February 2009

William C. Thiesenhusen
William C. Thiesenhusen
Affiliation:
The author thanks his colleagues at the Land Tenure Center, University of Wisconsin, Peter Dorner, Don Kanel, Herman Felstehausen, Elsa Chancy, Ann Seidman, John Bielefeldt, John Strasma, Kenna Jarvis and Larry Lynch for helpful comments on an early draft of this manuscript.
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Extract

While the seventies will see a continuing debate over the merits of alternative development strategies, histories of Latin America's industrial progress over the past two or three decades can now be filed under ‘import substitution’. Bruton explains, ‘In the narrowest terms, import substitution refers simply to the take-over of an existing domestic market from the foreign producer by prohibiting his imports in one way or another’.

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Journal of Latin American Studies , Volume 4 , Issue 1 , May 1972 , pp. 85 - 104
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Copyright © Cambridge University Press 1972

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References

1 Henry, J. Bruton, ‘Import Substitution and Productivity Growth’, Journal of Development Studies, 4 (04 1968), 306.Google Scholar

2 Albert, O. Hirschman, ‘The Political Economy of Import-Substituting Industrialization in Latin America’, Quarterly Journal of Economics, 82 (02 1968), 6.Google Scholar

3 David, Felix, ‘Monetarists, Structuralists, and Import-Substituting Industrialization: A Critical Appraisal’, in Inflation and Growth in Latin America, Werner, Baer and Isaac, Kerstenetzky (eds.) (Homewood, Ill., Richard D. Irwin, 1964), p. 384.Google Scholar

4 United Nations, Economic Commission for Latin America, The Process of Industrial Development in Latin America (E/CN.12/716/Rev.1), 1966, p. 34.Google Scholar As Prebisch has written, ‘The simple … phase of import substitution has reached, or is reaching, its limit in the countries where industrialization has made most progress’; in Towards a New Trade Policy for Development, Report by the Secretary-General of the United Nations Conference on Trade and Development (New York, United Nations, 1964), P. 22. Furtado claims, ‘In Latin America, experience has proved that this substitutive form of industrialization tends to lose its impulse… and leads eventually to stagnation’. Celso, Furtado, ‘U.S. Hegemony and the Future of Latin America’, in Latin American Radicalism, Irving, Louis Horowitz, Josué, de Castro, and John, Gerassi(eds.) (New York, Random House, 1969), p. 67.Google Scholar

5 For an excellent discussion of the usual sequence of industrial development, see Hollis, B. Chenery, ‘Patterns of Industrial Growth’, American Economic Review, 50 (09 1960), 624–54.Google Scholar For an extension of this research, see also Hollis, B. Chenery and Lance, Taylor, ‘Development Patterns: Among Countries and Over Time’, The Review of Economics and Statistics, 50 (11 1968), 391–416. In general, GNP is positively correlated with amount of value added in industry, and the higher a country's GNP, the more likely it is to have ‘advanced manufactures’.Google Scholar

6 ‘The poor economic prospects for agriculture [in Latin America] are not a consequence of a lack in natural endowment. In the Argentine, much of the Pampas is excellent farm land … The natural endowment of Chile is first-rate … Nor do I exclude Brazil, Colombia, Peru and other Latin American countries in this rating of their respective natural endowments for increasing the productive capacity of agriculture.’ Theodore, W. Schultz, Economic Growth and Agriculture (New York, McGraw Hill, 1968), p. 176.Google Scholar In analyzing FAO data, Kuznets reports, ‘resources are unquestionably ample, without approaching their full utilization to meet the estimated [food] increase required [by population growth in the near future]’. Simon, Kuznets, ‘Economic Capacity and Population Growth’, unpublished paper presented at the Conference on World Population Problems, Graduate School of Business, Indiana University, 05 1967.Google Scholar

7 Brannon has analyzed the problems of development which attend growing welfare commitments in Uruguay, one of the most urbanized of Latin American countries. Russell, H. Brannon, The Agricultural Development of Uruguay: Problems of Government Policy (New York, Praeger, 1968).Google Scholar

8 Raup describes this on-farm investment as resulting in ‘ accretionary capital’: ‘In …early stages [of agricultural development], slow gains in capital stocks predominate. Investment decisions are typically made in small segments, spread over many seasons or gestation periods. Impressive amounts of capital are formed, but by many small, plodding steps… Capital formation in farming is rarely concentrated either in space or in time. It accumulates by an incremental process that is best described as accretionary.’ Philip, M. Raup, ‘Land Reform and Agricultural Development’, in Agricultural Development and Economic Growth, Herman, M. Southworth and Bruce, F. Johnston (eds.) (Ithaca, New York, Cornell University Press, 1967), pp. 272–3.Google Scholar

9 Per capita agricultural production in Latin America was lower in 1968 than at the beginning of the decade. If the 1957–9 per capita agricultural production were represented by 100, the 1961 index number would be 101, the figure for 1965 would be 105, and the yearly 1966–8 average, 97. See ‘The World Agricultural Situation: Review of 1968 and Outlook for 1969’, U.S. Department of Agriculture, Economic Research Service, Foreign Agricultural Economic Report No. 50 (Washington, D.C., 1969), Table 1, p. 7.Google Scholar

10 Smithies suggests the possibility also that ‘ the demonstration effect may work on both demand and supply. People not only acquire the taste for the goods … but they also acquire the habit of expending the effort needed to acquire them, and of allocating that effort between immediate consumption and acquiring the equipment for increasing consumption in the future. In that event, the demonstration effect is complete and constructive and can act as a powerful stimulus to development.’ Arthur, Smithies, ‘Rising Expectations and Economic Development’, The Economic Journal, 71 (06 1961), 259.Google Scholar See also Rostow, W. W., ‘How to Make a National Market’, U.S. Department of State Bulletin, 49 (28 10 1963), 667–73.Google Scholar

11 As Eckstein has argued, ‘While administratively it may be easier to collect taxes from a small number of landlords than from a numerous peasantry, politically just the reverse may be true. Actually land reform may serve as one of the means by which it becomes politically feasible to transfer the accumulating function from the landlord to the state.’ Quoted in Philip, M. Raup, ‘Land Reform and Agricultural Development’, p. 279.Google Scholar Certainly a progressive sales tax could be devised so that least necessary goods carry highest levies. Smithies suggests that if more industrial products are demanded, new consumers will be willing to pay excise taxes which can be directed to development purposes. Smithies, , ‘Rising Expectations’, p. 26.Google Scholar On the other hand, the post-revolutionary Bolivian peasant has consistently resisted taxation, and Mason claims that, apart from the U.S., ‘ the Japanese government seems to have been one of the few governments, outside the Communist world, capable of effective taxation of agricultural income’. Edward, S. Mason, Economic Planning in Underdeveloped Areas: Government and Business (New York, Fordham University Press, 1958), p. 30.Google Scholar

12 Common market arrangements are, of course, one method of market expansion that has been seriously attempted in Latin America. But even with the best of luck, multinational marketing arrangements will certainly reach a ceiling far short of potential unless component individual markets are redirected. There are other problems too. Surrendering some control of the development process to regional authorities seems a step that Latin American govern ments approach with reluctance. The reasons are not difficult to discover. Speaking of the Latin American Free Trade Area and the Central American Common Marker, one Latin American social scientist seems to overstate the problem by observing, wherever such common markets have managed to come into being, the strategic sectors are taken over or controlled by foreign interests. The small member-nations merely provide the geographic and social setting for processes lying outside their sphere of decision … the end result being … neo-colonial or satellitic dependence,’ Helio, Jaguaribe, Economic and Political Development: A Theoretical Approach and a Brazilian Case Study (Cambridge, Mass., Harvard University Press, 1968), p. 37.Google Scholar Another (who might also be accused of some hyperbole) proclaims that while desarrollista governments will promote integration, ‘ given Latin America's present capitalistic structure and degree of industrialization, it would be utopian to think that Latin American businessmen would become the prime movers of economic integration or even approach it enthusiastically ’. Michel, Teubal, ‘The Failure of Latin America's Economic Integration’, in Latin America: Reform or Revolution?, James, Petras and Maurice, Zeitlin (eds) (New York, Fawcett Premier, 1968), p. 139.Google Scholar While smal nations are most fearful of being dominated by big ones, in an economic sense they probably have most to gain from trade liberalization. See Bela, Balassa, ‘Country Size and Trade Patterns: Comment’, American Economic Review, 59 (03 1969), 201–4.Google Scholar This may be the reason why the biggest defenders of common market arrangements in South America are those which would neither gain greatest economic dividends nor lose most in political leverage–the countries of intermediate size. The Andean countries would meet the criterion and the Andean Area Common Market was founded 26 May 1969. See the New York Times, 28 May 1969. Speaking of the European Economic Community and comparing it to Latin American efforts at integration, Dell concludes that ‘ the channels of trade were all there, ready made; transport facilities were available … In Latin America, on the other hand, it is a matter of creating something that never before existed.’ Sidney, S. Dell, ‘The Early Years of LAFTA's Experience’, in Latin American Economic Integration: Experience and Prospects, Miguel, S. Wionczek (ed.) (New York, Praeger, 1966), p. 107.Google Scholar What is more, Latin America's exports are mainly competitive rather than complementary, and again in contrast to EEC, the negotiating mechanism (especially for the Latin American Free Trade Area) is much more clumsy. Perhaps most important, however, ‘Economic progress in the region depends on much more than lowering of the barriers to area trade. Reductions of tariffs and other obstacles to trade would be futile unless accompanied by reforms in land tenure and tax structure … Latin America cannot establish a meaningful common market in the midst of economic and social stagnation.’ ibid., p. 122. For a cogent discussion of the difficulties of Latin American integration see William, P.Glade, The Latin American Economies: A Study of Their Institutional Evolution (New York, Van Nostrand, 1969), pp. 471–82.Google Scholar

13 Gunnar, Myrdal, speech to the Third International Congress of Food Science and Technology; see New York Times, II 08. 1970.Google Scholar

14 Naciones Unidas, Comisión Económics para America Latina, Estudio Económico de América Latina: 1967 (E/CN.12/808/Rev.I), 1968, PP. 4 and 229; and United Nations, Economic Commission for Latin America, Economic Suruey of Latin America, 1968 (E/CN.12/825), April 1969, part I, p. 34, and part II, p. 1.

15 Simon, Kuznets, Economic Growth and Structure: Selected Essays (New York, W. W. Norton & Co., 1965), pp. 263–4. There is a distinction to be made, however: while the bulk of U.S. private savings comes from corporate sources, this is not the case in most less- developed countries.Google Scholar

16 United Nations, Economic Commission for Latin America, ‘ Income Distribution in Latin America’, Economic Bulletin for Latin Amerisca, 12, no. 2 (1968), 50.

17 Simon, Kuznets, Modern Economic Growth: Rate, Structure, and Spread (New Haven, Yale University Press, 1966), p. 426.Google Scholar

18 United Nations, Economic Commission for Latin America, The Economic Development of Latin America in the Post-War Period (E/CN.12/659/Rev.I), 1964, p. 54.Google Scholar

19 United Nations, Economic Commission for Latin America, Economic Survey, 1968, part 1, p. 25.Google Scholar Kuznets elaborates the general argument from which he concludes, ‘the size distribution of income among family units, adjusted for the number of persons per unit and for other effects, is distinctly more unequal in underdeveloped than in developed countries’. Simon, Kuznets, ‘Quantitative Aspects of the Economic Growth of Nations: Distribution of Income by Size’;, Economic Development and Cultural Change, 11 (01 1963, part II), 36.Google Scholar

20 Keith, B. Griffin, ‘Latin American Development: Further Thoughts’, Oxford Economic Papers, 20 (03 1968), 127Google Scholar

21 Cole, J. P., Latin America: An Economic and Social Geography (London, Butterworth & Co., 1965), p. 203.Google Scholar

22 United Nations, Economic Commission for Latin America, ‘Income Distribution’, p. 59.Google Scholar

23 United Nations, Economic Commission for Latin America, The Process of Industrial Development in Latin America (E/CN.12/716/ Rev.I), 1966, p. 242.Google Scholar

24 ibid., p. 36.

25 From 1960 to 1965 the 2.1% average annual growth in employment was associated with a 5.6% average increase in manufacturing output. United Nations, Economic Commission for Latin America, Economic Survey of Latin America, 1966 (E/CN.12/767), 05 1967, Tables 1–11 and 1–13, pp. 50 and 63.Google Scholar On this issue, see also Werner, Baer and Michel, E. A. Herve, ‘Employment and Industrialization in Developing Countries’, Quarterly Journal of Economics, 80 (02. 1966), 88–107,Google Scholar and Fernando, H. Cardoso and José, Luis Reyna, ‘Industrialization, Occupational Structure, and Social Stratification in Latin America’, in Constructive Change in Latin America, Cole, Blasier (ed.) (Pittsburgh, University of Pittsburgh Press, 1968), pp. 19–55.Google Scholar

26 ECLA, Economic Survey, 1968, part I, pp. 63–4.Google Scholar

27 Simon, Kuznets, Modern Economic Growth, Table 4.2, pp. 168–9.Google Scholar

28 See Kuznets, ibid., pp. 181–95, and Irving, B. Kravis, The Structure of Income: Some Quantitative Essays (Philadelphia, University of Pennsylvania Press, 1962), pp. 222–55.Google Scholar A trend of this nature belies the general Marxist contention that as growth proceeds, real wages might rise, but not the relative share of labor. Even if real wages rose, misery would grow… since workers would be worse off relative to capitalists.’ Sumner Slichter, quoted in Herman, P. Miller, Rich Man, Poor Man (New York, Thomas Y. Crowell Co., 1964), p. 38.Google Scholar

29 América en Cifras 1967, Situación Económica, part 4 (Washington, D.C., Unión Pan- americana, 1968), pp. 69–75.

30 Joseph, A. Schumpeter, Capitalism, Socialism, and Democracy (3rd ed., New York, Harper and Brothers, 1950), pp. 67–8.Google Scholar

31 United Nations, Economic Commission for Latin America, A Measurement of Price Levels and the Purchasing Power of Currencies in Latin America, 1960–1962 (E/CN.12/653), 1963.Google Scholar

32 United Nations, Economic Commission for Latin America, ‘Income Distribution’, pp. 50–1.Google Scholar

33 Jorge, Ahumada, ‘Economic Development and Problems of Social Change in Latin America’, in Social Aspects of Economic Development in Latin America, vol. I, Egbert, de Vries and José, Medina Echavarría (eds.) (Paris, UNESCO, 1963), p. 336.Google Scholar

34 This is one of the major conclusions of the series of country reports on the agricultural sector prepared by the Inter-American Committee for Agricultural Development. See its Land Tenure Conditions and Socio-Economic Development of the Agricultural Sector for Argentina, Brazil, Chile, Colombia, Guatemala, Ecuador, and Peru (Washington, D.C., 1965–1956).

35 Helio, Jaguaribe, Economic and Political Development, p. 43.Google Scholar

36 Raymond, Vernon, The Dilemma of Mexico's Development: The Roles of the Private and Public Sectors (Cambridge, Mass., Harvard University Press, 1963), pp. 85 and 93.Google Scholar

37 Sanford, A. Mosk, Industrial Revolution in Mexico (Berkeley, Calif.: University of California Press, 1954), p. 320.Google Scholar Pérez López notes, ‘Three factors provided the impetus for the growth in natural product from 1934 to 1945: the recuperation of the industrial countries which augmented demand for our exports, the internal policy of land redistribution and construction of public works, and the demand impulse of the Second World War’. Enrique, Perez Lopez, ‘El producto nacional’, in México: Cincuenta Años de Revolución, vol. I: Economia, Enrique Beltrán et al. (eds.) (Mexico, D.F., Fondo de Cultura Económica, 1960), p. 576.Google Scholar

38 Edmundo, Flores, ‘The Economics of Land Reform’, International Labour Review, 92 (07 1965), 34.Google Scholar

39 Vernon, , The Dilemma of Mexico's Development, pp. 183–4.Google Scholar Even so, Furtado reports, ‘Of the Latin American countries that have made substantial advances in the “substitution” type of industrialization, Mexico is the only case which has not yet shown a clear tendency toward stagnation. It must, however, be taken into account that this is the only country in the group which has promoted far-reaching agrarian reform.’ Furtado, , ‘U.S. Hegemony’, p. 67, footnote 7.Google Scholar

40 Bruce, F. Johnston, ‘Agriculture and Economic Development: The Relevance of the Japanese Experience’, Food Research Institute Studies, 6, no. 3 (1966), 287.Google Scholar

41 Because of government action–and for other reasons which Kuznets spells out–relative distribution of income in the U.S. moved toward equality ‘ with these trends particularly noticeable since the 1920s but beginning perhaps in the period before World War I’. Simon, Kuznets, Economic Growth and Structure, p. 260.Google Scholar This egalitarian shift seems to have ended after the Second World War, however; there appears to have been no change in the size distribution of income in the U.S. for several decades. See Miller, , Rich Man, Poor Man. Recurrent concentration of income is a built-in problem of all capitalistic societies and must be persistently countered with government action.Google Scholar

42 Alexander, Gerschenkron, Economic Backwardness in Historical Perspective: A Book of Essays (Cambridge, Mass., Harvard University Press, Belknap Press, 1962), p. 125.Google Scholar

43 Bruce, F. Johnston, ‘Agricultural Development and Economic Transformation: A Comparative Study of the Japanese Experience’, Food Research Institute Studies, 3 (11 1962), 247.Google Scholar

44 Vernon, , The Dilemma of Mexico's Development, pp. 56–7.Google Scholar

45 Johnston, , ‘Agricultural Development and Economic Transformation ’, p. 247.Google Scholar

46 Johnston, , ‘Agriculture and Economic Development’, p. 286.Google Scholar This comparative conclusion should not denigrate progress made by the Mexican campesino. See Folke, Dovring, ‘Land Reform and Productivity in Mexico’, Land Economics, 46 (08 1970), 264–74.Google Scholar

47 The capital formation problem is analyzed in Organization of American States, The Alliance for Progress and L.atin American Development Prospects: A Five-Year Review, 1961–1965 (Baltimore, The Johns Hopkins Press, 1967), pp. 90–159. Gross investment, savings, and marginal savings rate figures are taken from Paul N. Rosenstein-Rodan, ‘ The Alliance for Progress and Peaceful Revolution’, in Latin American Radicalism, Horowitz, , de Castro, , and Gerassi, , loc. cit., pp. 54–6.Google Scholar The marginal savings rate is estimated at 10% for 57 of the Alliance for Progress Countries in Hollis, B. Chenery and Peter, Eckstein, ‘ Development Alternatives for Latin America ’ (Memorandum), Project for Quantitative Research in Economic Development, Harvard University, Dcc. 1966.Google Scholar

48 The export constraint has been detailed in much recent literature. One example is the paper given by Ricardo, Arriazu (IMF) at the annual meeting of the American Agricultural Economics Association, II 08 1970, Columbia, Missouri, published in the American Journal of Agricultural Economics, 12 1970.Google Scholar

49 It is of course possible that this development might merely lead to increased imports of inputs. It should be emphasized that ‘rural demand will obviously give a greater stimulus to industrialization if a country pursues an agricultural development path relying to a substantial extent on increased use of farm inputs that are within the capacity of a developing country's industrial sector at successive stages of technical maturity ’. Bruce, F. Johnston and Soren, T. Nielsen, ‘Agricultural and Structural Transformation in a Developing Economy’, Economic Development and Cultural Change, 94 (04 1966), 284.Google Scholar

50 Quoted in Johnston, , ‘Agricultural Development and Economic Transformation’, p. 251.Google Scholar

51 See Arthur, Domike, ‘Industrial and Agricultural Employment Prospects in Latin America’ and Solon Barraclough, ‘Rural Development and Employment Prospects in Latin America’. Both papers were prepared for the Second Conference on Urbanization and Work in Modernizing Areas, St Thomas, Virgin Islands, 2–4 11 1967.Google Scholar Also, see William, C. Thiesenhusen, ‘Population Growth and Agricultural Employment in Latin America with Some U.S. Comparisons’, American Journal of Agricultural Economics, 51 (11. 1969), 735–52.Google Scholar

52 United Nations, Economic Commission for Latin America, ‘ Small Scale Industry in the Development of Latin America’, Economic Bulletin for Latin America, 12, no. 1 (05 1967), 63 and 66–8. The textual quote continues, ‘For instance, in the textile industry in Latin America small mills of low technological levels exist side by side and in competition with large scale modern establishments’.Google Scholar

53 Philip, M. Hauser feels that the present rapid rate of growth of urban areas—and especially primate cities— compounds the difficulties of development. See his ‘The Social, Economic, and Technological Problems of Rapid Urbanizations’, in Industrialization and Society, Bert, F. Hoselitz and Wilbert, E. Moore (eds.) (UNESCO-Mouton, 1963), pp. 199–217.Google Scholar For an opposing view, see William, Alonso, ‘Urban and Regional Imbalances in Economic Develop. ment’, Economic Development and Cultural Change, 17 (10 1968), 1–14.Google Scholar

54 Statistical Abstract of Latin America: 1966 (Los Angeles, University of California, Latin American Center, 1967), p. 26.Google Scholar

55 One can also see pitfalls in this development approach if an agrarian reform policy was not correctly executed and accompanied by other policy measures. I. A continuing high rate of population growth can thwart the process. In the case of Mexico, for instance, land reform allowed a marked rise in the levels of living over latifundio days, but population growth seems to have played a leading role in checking a continued improvement as the government assumed the role of first claimant to subsequent income growth. 2. If burgeon. ing peasant unions insist on a high cost per settler land reform program, in which amenities take precedence over productive investment, or if the government aims to reimburse land-lords quickly and somewhere near market value, such actions could fuel inflation. 3. If the government is not powerful enough to extract some of the surplus for reinvestment or if the government forces savings which it proceeds to dissipate, reform will result in little development. One should not underestimate the difficulties of taxation of agriculture. If expropriation proceedings are spread over a long period of time, a great deal of insecurity may be introduced into the private sector, thus neutralizing the stability usually engendered by reform. If excess capacity does not exist in some strategic simple consumer lines, over-stimulation of peasant demand might lead to increased inflation. Similarly, if entrepreneurs do not respond readily to new market incentives the economy will soon overheat. 6. If the government does not move toward dismantling the complex system of protection that exists–especially among more complex manufactures of a luxury nature–it is possible that little will happen. Tariffs may be so intractable and resources so immobile that factors are incapable of being reallocated in accordance with an altered market demand (this should not be construed as an argument for the arbitrary removal of tariff barriers in strategic intermediate industry which the government is consciously encouraging, although it must be fully recognized that tariffs are usually ‘ second best ’ to direct subsidies).

56 John, H. Kautsky (ed.), Political Change in Underdeveloped Countries: Nationalism and Communism (New York, John Wiley & Sons, 1962), p. 23.Google Scholar