Is Import Substitution Industrialization (ISI) still possible?

For a very long time Import Substitution Industrialization (ISI) was seen as a four-letter word. The notion was that ISI had led to extensive inefficiencies and that the debt crisis of the 1980s was its last breath. The old ideas about comparative advantage were back with a vengeance, and the prescription was for trade liberalization, encapsulated in the Washington Consensus. Export orientation was promoted, since it was widely believed that an emphasis on exports would force integration into world markets, more efficient allocation of resources, and that external markets would impose discipline by eliminating uncompetitive firms.

The problem with the conventional wisdom is that the ISI period corresponds to a high growth phase for most developing countries, one in which they caught up with the developed world despite the fast growth in the latter, which would not have been possible if ISI-driven growth did produce tremendous inefficiencies on an economy wide scale.

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Commercial Policy in Latin America

Last week I taught my Raúl Prebisch class, in my Latin American Economic History and Development course, dealing with Import Substitution Industrialization (an annual thing now). The classic paper in English was published in the American Economic Review of 1959. The masters' students have to read the original paper. This follows my two previous posts (here and here) on trade. A few things that are important to notice.

Prebisch clearly says that industrialization (and hence the expansion of domestic production) is an inevitable part of the process of development, something that has been often forgotten as if strategies based on services or intensive agriculture are alternatives to industrialization. We still live in industrial societies (not post-industrial ones), and industry remains the main source for productivity growth (something that was referred to as Kaldor's Second Law of development).

Second, even if there is strong growth of productivity in the primary sector, these tend to be passed to prices and benefit the consumers, mostly in developed countries, whereas at least part of the increases in productivity in the other two sectors are retained by workers in the form of higher wages. So the problem of industrialization is associated to the ability to keep in the developing countries the fruits of technological progress, and not with protectionism for the sake of domestic special interests. Further, the workers expelled from the primary sector (if productivity is to grow there) must be incorporated in the other sectors, and as a result a preoccupation with what he calls (following Lewis) 'surplus manpower' (p. 255).

Last but not least, it's worth again emphasizing on the question of protection (since Prebisch is seen often as the Devil by Free Traders*), that Prebisch (p. 259) notes clearly that: "protection by itself does not increase productivity."

* The typical attitude is I did not read it, and I did not like it. The aversion of the mainstream to Prebisch is so strong that Dani Rodrik confesses in his Prebisch Lecture (see the irony?!) that a month before he had not read any of his works. Basically he found out that Prebisch: "did not favour indiscriminate protection. He anticipated his later critics by recognizing that trade protection on its own would not lead to increased productivity in manufactures, and that it might even resuit in the opposite."