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ISI Class Notes Part 1

Terms in this set (4)

Structuralists - South America: Fernando Henrique Cardoso and Enzo Faletto agree with the assessment that the center countries controlled the dynamic of development. DISAGREE with the political revolutionary prescription.
Economic solution: Development in the periphery would be possible by via industrialization and strong government.

They said that the periphery needs POWERFUL STATEs:
-Act in the national interest
-Counteract the strength of local and international economic elites
-Promote genuine development in the periphery.
Necessary Condition: ACTIVE STATE to counterbalance the greedy hand of the international market.

Raul Prebish studied the economic performance of LA during first half of 1900s. He studied LAC international price and demand of primary commodity -> price and demand volatility. Concluded: international price of LAC primary exports tended to decrease relative to those of manufactured goods -> benefit industrialized countries from trading with developing ones.

Prebish Ho: Declining commodity Terms of Trade
-Price of most exported primary-goods tended to decrease: Px decrease
-Price of imported manufactured-goods after the WWI and WWII and great depression tended to increase: Pm increase
Commodity Terms of Trade tended to decrease over time against LAC in favor of developed world.
TOT = Px/Pm
TOT: measures how much imports can be purchased through the sale of exports. Decreasing TOT meant: LAC needed to export higher volumes (since prices tended to decrease) to be able to purchase same imports.
Declining TOT for LAC over time meant: ongoing flow transferring income from poor countries to rich countries. Reason of underdevelopment in LAC was due to the way poor countries got integrated into the World System.
To stop the ongoing flow of transferring income. Economic Solution: LAC should produce manufacturing goods -> stop buying them abroad (Import Substitution Industrialization - ISI)

Prebish: Conclusions and Economic development proposal:
The disadvantage of LAC with the rest of the world was due to:
-Type of goods produced and exchanged in the World: LAC produce and export agricultural goods while importing manufactured goods.
-Unequal international distribution of income due to declining TOT (Pxagr < Pmmanf)
Without ISI: periphery would need to export more primary commodities to be able to import same quantities of manufactured and technological goods.

Structuralists - Theoretical Background
Free Markets fail to promote development so markets by themselves perpetuated old rigid institutions. Due to these free market failures, state intervention is needed.
-Weak private sector
-Industrialization needed large investment
-An active state was justified as necessary to support industrialization of LAC.

Prebish Conclusions and Economic Development Theory:
- Rejected the idea of comparative advantage for LA's economic development and instead he proposed
inward Import Substitution Industrialization strategy of
econ dev: ISI leading by strong gov
- 1948 the United Nations Economic Commission for
LA(ECLA, CEPAL in Spanish) was created and Raúl
Prebish became its chairman in 1949.

Raul Prebish (Argentinean 1901-1986)
-Industrialized via ISI
Instead of importing manufactured goods from abroad LAC will now produce the manufactured goods: Substitute what it was imported from the North and produce it at home.
Key Requirement: LAC should isolate from international trade to PROTECT INFANT INDUSTRIES.

Theory Behind ISI: Replicating the North... Arthur Lewis' (1954) explained that dual economies consisted of:
-Large Traditional Sector: In traditional sector, labor productivity (Y/L) was zero, virtually no physical capital (K), and market mechanisms were not in place.
-Small Traditional Sector: Similar to the North in terms of technology, use of capital, and dependence on a market mechanism.
1. All new investment should be in the modern sector.
2. Labor should move from the traditional sector to the modern sector.
3. Modern sector would expand while the traditional sector diminished.

Structuralists: ideas behind the theory
-Lewis: primary emphasis -> K accumulation -> depended directly on the capacity to import physical capital.
-Since domestic saving was a constraint in poor countries: foreign aid and international loans guaranteed by government supplement the domestic investment and the domestic saving needed to reach growth.

Goals of LAC Inward Industrial Growth Model:
1. To break world division of production where LAC exported food and raw materials and imported manufactured goods from USA and Europe.
Leading TO
2. To establish domestic LAC industries would produce consumer manufactured goods LAC used to import from abroad.
Leading TO
3. To promote in LAC internal sources of economic growth -> self-sufficiency in manufactured goods, placing LAC less at the mercy of world economy.

ISI - Inward Growth Model Goals
-Promote Domestic Industrial growth and expansion of internal economies. Econ strategy via Industrialization would induce a process of learning.

ISI - Main Characteristics
1) Initial stages: protect infant domestic industry from
international competition via import tariffs
2) Later on: once local manufacturing production improved in
quality & price then,
3) LAC domestic manufacturing production would be able to
compete in the international markets Export
manufacturing goods
Assumption: Returns from ISI would be re-invested in LAC's industrial sector -> sustainable.

ISI and the Theory of Protection: The domestic price with no international trade is higher than the world price. Opening up to trade would lead to a perfectly horizontal demand curve at the lower world price (p2). So if LAC lowers the price to the world price, domestic quantity demanded increases (Q3). But domestic quantity supplied would decrease (Q2). The difference between Q3 and Q2 would be how much is needed to be imported. The government cant protect the infant industry by imposing a tariff (P2*(1+t)) so that the price goes up. A little less will be demanded and a little more can be supplied. Overall less importing. Tariff Qs = c. Tarriff Qd = d. This cd line can be extended down (like a rectangle) to P2 (the world price without a tariff). This rectangle is the tariff revenue the government would collect.

Consequences when moving from open trade to tariff protection:
Short run: consumers are penalized with high prices and lower consumption (Qd decreases) -> Consumers subsidized domestic manufactured producers.
Long Run: ISI protection would allow local industries to grow, reap the benefits of economies of scale, learn by doing, and eventually become more competitive -> improve quality of production -> lower prices to P2. Able to compete in the international markets.

At LR: protective tariff would be removed and gov would replace loss of tariff revenue with internal taxes on consumers and domestic industries.