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Reflect on this QUESTION/COMMENT:  What was Import Substitution Industrialization and what were its successes and failures?  What was the Debt Crisis; what caused it and who benefited from it and why?

Economic�Geography

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Part�2:�Commodity�Trade�to�Import�
Substitution�Industrialization�(ISI)

Industry�before�WW1
� Colonial�manufacturing�– woolen�textile�factories�

(obrajes)�established�in�Mexico�and�Andean�
highlands�in�1500s�(forced�labor);�dyes�(indigo,�
cochineal);�leather,�wood�furniture,�iron�farm�
implements,�food,�alcoholic�beverages
� Manufacturing�repressed�under�mercantilism;�

dependent�on�foreign�manufactured�goods
� Latin�America�was�one�of�the�world’s�least�

industrialized�regions�before�WW1
� There�had�been�little�or�no�effort�towards�

developing�industrial�production�after�
independence�(elites�kept�up�commodity�trade)

� Commodity�trade�had�not�generated�a�broad�
enough�increase�in�standard�of�living�to�create�
national�markets�for�consumer�goods�(limited�to�
small�middle�&�upper�class)

� Commodity�export�economy�generated�
sufficient�foreign�exchange�to�permit�
importation�of�manufactured�products�–
consumer�goods�(like�fine�textiles)�and�capital�
goods�(transportation�equipment)

Global�Changes�&�Shifting�Commodities
� PostͲindependence�investment�by�foreign�

countries�brought�new�production�technologies�
(machinery,�refrigeration,�steam�power)�–
improves�largeͲscale�agriculture�
production/processing,�and�metals;�political�calm�
brings�immigrants�from�Europe

� WW1�upset�global�trading�patterns�and�had�
profound�effects�on�Latin�America’s�commodity�
trade
� Strategic�commodities�were�in�demand�–

industrial�metals�(tin,�copper,�lead),�petroleum�
and�basic�food�stuffs�(grains,�meat)

� Nonessential�commodities’�demand�dropped�–
coffee,�cacao

� Fates�of�individual�nations�varied�depending�on�mix�
of�export�commodities,�but�overall�there�was�a�
reduction�in�export�earnings�and�foreign�exchange

� Structural�reorientation�as�the�US�begins�to�replace�
Britain�as�neocolonial�power�in�the�region

86�:DU�3RVWHU

Global�Changes�and�Shifting�Production
� Manufacturing�production�in�the�US�

and�Europe�dramatically�shifted�during�
wartime�to�military�supplies,�
armaments,�munitions

� Production�of�consumer�and�capital�
goods�for�export�markets�declined�
dramatically

� By�the�end�of�the�war,�there�were�no�
consumer/capital�goods�to�import�even�
when�a�country�had�money�to�do�so

86�:DU�3RVWHU

More�Global�Changes
� The�worldwide�depression�that�occurred�in�the�1930s�further�

emphasized�to�Latin�America�the�problems�with�commodity�trade;�
demand�for�products�fell�by�up�to�2/3�from�1928Ͳ1932
� Example:�Brazil’s�exports�fell�by�60%�between�1929Ͳ1932

� Conclusion:�the�state�needed�to�play�a�much�stronger�role�in�the�
economy

� Academic�theories�develop�to�explain�persistent�poverty�and�
underdevelopment�in�Latin�America
� CoreͲPeriphery�&�Dependency�Models�– industrialized,�

technologically�advanced�countries�make�up�the�core,�and�less�
industrialized�countries�make�up�the�periphery�that�have�to�
trade�for�highͲcost�manufactures�with�lowͲcost�commodities;�
underdevelopment�caused�primarily�by�neocolonialist�trade�
relationships

Phase�of�“Inward�Orientation”
� In�the�1930s�industries�began�to�develop�in�Latin�America,�and�

the�state�began�investing�in�infrastructure�development
� WW2�helped�to�fuel�this�shift�as�the�US�and�Europe�were�

desperate�for�Latin�American�exports�– this�commodity�trade�
boom�funded�the�strategy�of�Import�Substitution�
Industrialization

� Governments�supported�this�new�strategy�by�erecting�
formidable�tariffs�on�imports that�could�be�produced�at�home;�
nationalizing�key�industries;�overvaluing�currency

Import�Substitution�Industrialization�(ISI)
� Substituting�locally�manufactured�products�for�imported�goods�

(making�stuff�instead�of�buying�it)
� Initially,�this�strategy�was�used�for�production�of�basic�consumer�goods

– clothing,�shoes,�soap
� Larger�states�with�more�advanced�economies�(Brazil,�Mexico,�Argentina)�

promoted�the�manufacturing�of�consumer�durables (1950sͲ60s)�–
radios,�television,�refrigerators�
� They�also�successfully�moved�from�automobile�assembly�to�

manufacturing�– help�from�Ford,�Volkswagen,�Renault,�GM
� Smaller�countries�tried�this�too�– Venezuela,�Peru,�Ecuador
� Most�smaller�producers�failed,�and�automotive�manufacturing�was�

dominated�by�Brazil�and�Mexico�by�2000

Import�Substitution�Industrialization�(ISI)
� ISI�also�sought�to�promote�the�development�

of�basic�industrial�infrastructure�–
steelmaking,�chemical�production,�petroleum�
refining
� Capital�investment�and�sophistication�

required�to�establish�and�operate�these�
industries�meant�that�governments�rather�
than�private�investors was�the�source�of�
this�development�– stateͲowned�
industries�and�industrial�complexes�(e.g.,�
Volta�Redonda�steel�plant�east�of�Rio�in�
Brazil)

� Only�Brazil�is�able�to�effectively�transition�to�
production�of�capital�goods – products�used�
to�make�other�products�– lathe�(a�press�for�
molding�and�forming�steel),�drill�press

Success�of�ISI
� From�1950Ͳ70,�Latin�America’s�GDP�tripled�and�Brazil�had�an�annual�

growth�rate�of�8.5%
� Model�tended�to�work�best�in�the�countries�with�the�region’s�largest�

economies�– Brazil�and�Mexico�had�over�60%�of�Latin�American�
manufactures

� Peru�and�Venezuela�also�experienced�appreciable�success�during�this�
period

� Other�countries�which�had�done�well�exporting�commodities�did�
comparatively�poorly�during�this�phase�– Argentina,�Chile,�Uruguay

� Central�American�countries�were�even�less�successful�with�ISI�– their�
small�internal�markets�provided�little�demand�so�manufacturing�was�
limited�to�only�basic�consumer�goods

Economic�Failures�of�ISI
� Economic�failures�of�ISI��
� Protected�industries�had�no�reason�to�invest�and�innovate�– fell�

behind�in�technology�and�production
� Political�interference�encouraged�corruption�and�incompetence�–

appointed�through�political�favoritism��
� Limited�local�markets�– especially�in�smaller�countries;�most�

people�too�poor�to�buy�more�than�basics
� Early�freeͲtrade�agreements�didn’t�work�– smaller�countries�

opened�their�markets�but�received�little�in�return�
� Borrowing�to�pay�for�industrial�development�– governments�

borrowed�more�money�than�their�enterprises�produced�– would�
lead�to�massive�debt

� Always�importing�industrial�inputs�– only�Brazil�able�to�develop�
capital�goods�industry

Social�Failures�of�ISI
� Social�failures�of�ISI��
� Aggravated�inequality�in�society�– held�down�food�prices�to�keep�

industrial�wages�low�which�penalized�farmers�
� Spurred�urbanization�of�poor�– millions�of�peasants�left�the�

countryside�and�added�to�the�masses�in�shantytowns�on�the�edge�
of�cities�

� Income�disparity�not�improved�– which�kept�local�markets�limited�
� Job�creation�did�not�keep�up�with�population�growth

Economic�Geography

Part�3:�The�Debt�Crisis�&�the�Neoliberal�Order

ISI�and�Escalating�Debt

� In�the�attempt�to�move�through�the�stages�of�industrialization,�
from�ISI�to�exporter�of�manufactured�goods,�largeͲscale�
investments�were�funded�by�foreign�capital

� Some�places�in�the�region�had�astonishing�results��ͲͲ Brazil�
especially,�where�manufactured�exports�increased�from�US$1B�
(1967)�to�US$40B�(1980)

� However,�foreign�debt�multiplied�due�to�massive�borrowing�by�
state�corporations;�example:�by�the�1980s,�Pemex�had�a�debt�
of�$15B

Dance�of�the�Millions

� The�frenzied�foreign�borrowing�that�began�with�rising�oil�
prices�in�1973Ͳ74

� Petrodollars�– capital�from�OPEC�countries�flooded�private�
banks�and�Latin�America�looked�like�a�good�place�to�invest�–
thought�countries�can’t�go�bankrupt
� The�region�received�US�$60B�in�loans�between�1975Ͳ82�–
60%�went�to�Brazil�&�Mexico�– with�Argentina�they�
became�top�three�debtors

� Much�of�the�money�was�not�spent�in�productive�ways
� Capital�flight�and�corruption�– money�was�siphoned�out�of�
region�by�government�and�business

� Prestige�‘megaprojects’�– hydroelectric�dams�and�roads
� Military�equipment�– military�governments�(Brazil,�
Argentina)�bought�the�latest�equipment�for�their�troops

Defaulting�on�Foreign�Debt
� The�Debt�Crisis�began�in�August�1982�

when�Mexico�reported�that�it�would�
not�be�able�to�make�its�upcoming�
payment�on�its�$80B�debt

� By�October�1983,�27�countries�had�
defaulted�on�$239B�debt,�16�were�
Latin�American�countries�– the�four�
largest,�Mexico,�Brazil,�Venezuela�
and�Argentina,�owed�$176B�(74%)

� About�$37B�of�that�was�owed�to�the�
eight�largest�US�banks

� Precipitated�by�the�rise�in�interest�
rates�in�the�US�– loans�had�floating�
interest�rates�– and�US�recession�that�
curbed�demand�for�Latin�American�
exports

Defaulting�on�Foreign�Debt
� Foreign�creditors�and�their�governments�

reacted�after�Mexico’s�default�to�remove�
threat�to�the�global�banking�system
� Rescheduling�terms�of�payment�–

deferred�but�with�high�interest�rates
� Lend�new�money�to�use�in�making�debt�

payments
� Creditors�stuck�together�but�renegotiated�

with�countries�individually�– controlled�
terms�of�repayment�– highly�profitable�
(banks�earned�extra�US$1.7B�on�$49.5B)

� Cut�all�loans�except�those�needed�for�
payment�of�interest��Ͳ most�money�now�
coming�from�international�institutions�–
International�Monetary�Fund�(IMF)

� A�“blessing�in�disguise”�for�the�US�and�
Washington�Consensus�– overhaul�Latin�
America’s�economy�to�fit�with�neoliberal�
paradigm�

Economic�Restructuring�&�Neoliberal�Reform

� PHASE�1:�Stabilization�– make�
debt�payments

� Cut�government�spending
� Cutting�imports�– increase�
exports
� Devaluation�of�
currency
� Remove�barriers�to�
trade

� During�the�1980s,�money�
flowed�from�poor�to�rich�
(debtor�countries�to�creditor�
countries)�ͲͲ $218.6B

Economic�Restructuring�&�Neoliberal�Reform
� PHASE�2:�Structural�adjustment�– reforms,�restructuring�policies

� Cut�state’s�role�in�economy�– free�trade
� Austerity�programs�– cut�social�spending�– health�care,�education
� Deregulation�– of�various�aspects�of�the�economy
� Privatization�of�formerly�state�controlled�industries�–foreign�
investment

� Falling�investment�and�domestic�recession�(caused�by�austerity�programs)�
provoked�industrial�collapse�– regressed�to�the�levels�of�1966;�1950�for�
Chile�&�Uruguay

PHASE�3:�Privatization
� Selling�formerly�stateͲrun�industries�

to�private�investors
� Represents�reinvestment�in�the�

region�by�foreign�investors�that�began�
in�the�early�1990’s
� Putting�economy�in�the�hands�of�

the�private�sector
� Debt�for�equity�– exchanging�debt�

for�shares�in�newly�privatized�
companies

� Part�of�neoliberal�ideology�– shrinking�
state�– private�capital�makes�more�
efficient�choices

� Some�corruption�occurred�during�the�
privatization�process�– lack�of�
transparency�and�accountability�–
Mexico’s�billionaires�rose�from�2�to�24�
under�Salinas�(all�with�close�ties�to�
PRI)

Critiques�of�SAPs
� Debt�burden�not�reduced
� Hurts�women�and�children�

disproportionately�– loss�of�
jobs�&�austerity�programs

� Applies�same�solutions,�
regardless�of�context

� Undermines�ability�of�
governments�to�make�their�
own�decisions�– limits�
sovereignty

� Undermines�ability�of�people�
to�lobby�governments

� Free�movement�of�goods,�
capital�without�free�
movement�of�labor

Economic�Shifts�Under�Neoliberalism
� Market�Niche�Strategy�– return�to�exportͲoriented�

commodity�trade
� NonͲtraditional�agricultural�exports�(cut�flowers,�shrimp�

farms,�strawberries,�snow�peas�vs.�bananas,�sugar)
� Highly�competitive�– risks�saturation�of�market�as�
more�producers�enter�it
� Highly�perishable�products�makes�transportation�
expensive�– risks�are�taken�by�the�producer
� Production�of�temperate�crops�is�not�in�the�local�
knowledge�base�– represents�further�risks
� Buyers�demand�perfect�“looking”�produce
� Pesticide�treadmill�– more�inputs�needed�to�produce�
these�crops�which�has�environmental�costs
� Requires�large�capital�investment�– large�foreign�firms�
dominate�– lowͲwage�labor�is�local�contribution

� Burgeoning�economies�in�Asia�(particularly�China)�are�driving�
renewed�commodity�boom�in�the�region�– Lula�of�Brazil�was�
especially�aggressive�in�pursuing�these�trade�relationships

Back�to�Commodity�Trade
Country Main

Commodity�
Exports

CEs as�%�of�
Total�Exports

Belize Sugar,�bananas 98.6

Bolivia Gas,�zinc,�tin,�
silver

92.9

Chile Copper,�fruit,
fish,�paper/pulp

88.2

Ecuador Bananas,�oil,�
shrimp

90.9

Mexico Oil,�silver,�
copper,
tomatoes

24.9

Paraguay Soybeans,�
cotton,�beef

92.1

Venezuela Oil 92.7

Economic�Shifts�Under�Neoliberalism
� Flexibilization�of�Labor�– way�of�managing�labor�to�get�the�most�profits�

for�a�company
� Companies�seek�flexible�employment�relations�that�permit�them�to�

increase�or�diminish�their�workforce,�reassign�or�redeploy�as�
desired�(no�job�security)

� So�that,�labor�has�become�the�new�“commodity”�of�the�developing�
world�(countries�offer�cheap�labor�for�manufacturing)

� Mexico�has�faired�better�in�terms�of�maintaining�manufacturing�
exports,�partly�due�to�its�maquiladoras;�however,�1/3�moved�to�China�
(2001Ͳ2003)

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