Ffrench-Davies, Munoz, Palmer

Cambridge History of Latin America

A Summary 

In A Nutshell

The most important post war development in the Latin American economies was the increasing integration between external and domestic economic structures. This happened in a time when protectionism was at the heart of the ISI policy. Traditionally LA had been intertwined with the word economy through demand for the raw materials it supplied. Despite the policy initiatives to develop in a way free of external dependence, LA became dependent on the core countries in new ways. Principally:

  • Technology – the ISI model was not generating indigenous technologies except in the largest economies, thus complex technology was increasingly imported as industrialization increased.
  • Imports – The import substituting sector was heavily dependent on input imports. As these products were mostly for the domestic market, the consequence was negligible savings of forex.
  • Debt-led growth – in oil shocks of the 70s led net oil importers in the region to borrow heavily in order to maintain growth rates. Even oil rich states borrowed heavily as the $s generated by the oil shocks paid to less developed middle eastern states were not capable of absorption so they were invested in LA. The region became heavily dependent on continuing finance, and extremely sensitive to rate changes etc. in the core countries.

 The World Economy

  • 25 years post WWII was a “Golden Age” of prosperity in EU/US/Japan (EJU). GDP increased threefold. Huge increase in manufactures. Increased stability. US was outperformed by the others. This came to a halt in the 1970s due to slower productivity growth and continued real-wage increases, as well as the oil shocks.
  • Less developed countries (LDCs) performed even better than the EJU. LA produced the best outcomes (unless the NICs are taken as a sub-group of Asia). Exports increased 6% p.a.
  • The boom in the LDCs driven by exceptional demand from the EJU for manufactures, which for the first time surpassed primary commodity imports. Indeed growth in manufactures imports outstripped imports of commodities way beyond the 1973 shocks.
  • LA did well in exporting new manufactured products, but their share of world trade fell as they neglected the commodity market due to the ISI policies which meant most resources were absorbed domestically. Thus the export sector and particularly agricultural production were the victims of the ISI policies. This was reflected in a significant shift from agricultural labour to industry and services.
  • In the 1973-81 period the region was able to continue growing whilst the core was experiencing a significant slowdown. They seemed to be immune from the problems of the shock period. However, this was largely due to the increasingly easy access to foreign capital post oil-shocks.
  • After 1981, LA diverged from the other more successful LDCs (Asia in particular) when the long period of sustained growth (3 decades at 5.5% per year) came to a halt. Real incomes declined and there was stagnation. Hyperinflation and huge negative capital transfers occurred.

 Latin America and the World Economy


  • Pessimism with prospects for primary export led growth and optimism for ISI. Thus there was progressive delinking from world economy, and ambitious industrialization programmes.
  • Depression led to collapse in demand for primary products from the core along with a halt in new lending. This caused severe hardship. During the war, trading was much more restrictive meaning that domestic manufacturing had to fill the gap left by core products absent due to war. In the post war period, although supply side returned to normal LA found it difficult to diversify its exports. This was because LA could not break into the developed markets, and the debt defaults of the 30s cast a shadow meaning that international finance was not available for investment. And so it was against this economic backdrop that the ideological and political system of ISI came to be seen as a means of getting LA to diversify away from its traditional output structures i.e. by switching the engine of growth from commodity to manufacturing.
  • However the pessimistic view of commodity led growth meant that when demand did pick up at the end of the 1950s, LA was no in a good position to capitalize on the opportunity. This stagnation in export volume and the concurrent declining terms of trade meant that although output was increasing on PPP terms the exports were diminishing. The trade surplus vanished and became a deficit, only of 2% GDP, but this was enough to make credit constraints even tougher, and this further obstructed growth, investment etc.
  • Many countries (Arg, Braz, Chile) tried deficit spending to get around the credit constraint financing infrastructure programmes. This generated inflationary pressures and in the end led to IMF sponsored stabilizations plans that focused on monetarist policies without addressing the structural sources of inflation. These policies would necessarily slow the process of industrialization, investment and education.
  • ISI in the 50s struggled due to the inefficient controls it imposed – obstacles to commodity exports, quantitative import restrictions (rather than ad. Valorem). By the end of the 50s states were experiencing problems with the model, and unemployment/poverty persisted.
  • One of the main criticisms was that domestic markets were not big enough for firms to benefit from scale. The answer to this “watertight compartment” problem was regional integration which began to be talked about toward the end of the decade, perhaps influenced by the increasing integration in the core countries – GATT etc.
  • Growth was good in the decade: manufacture grew at 6.6%; investment at 7.9% and GDP at 5.1%. HOWEVER, too many resources dedicated to ISI meant a neglect of traditional export sectors particularly agriculture (for which the region had strong comparative advantage). Governments were overly optimistic about ISI – overreliance on the economic dynamism of one particular economic activity led to unbalanced structures. Nb the same thing would happen in the 80s.


  • Reciprocal trade liberalization in the developed world was a key feature of this period.
  • The influence of the NICs as well as the problems noted above (anti-export bias and slow growth in primaries) meant that export promotion came on the agenda in LA. The old model was no longer useful in 1960. LA used export promotion, regional integration, export processing zones etc. but exports were still not seen at the primary engine for growth in the manufacturing sector.
  • The “crawling peg” ex rate policy in Chile, Colombia and Brazil was a major step (see below).
  • The oil shocks corrected terms of trade problems as price of other commodities increased with oil. The increased world demand for manufactures meant big growth in the states with a good industrial base. Manufactures exported rose 11% p.a. but commodities only at 3% despite increased demand of 7% in the core countries. But commodities still accounted for 80% of total trade by LA so the slow growth had a –ve effect on the trade balance, which meant a return to deficit by 1971.
  • Overall however, this was a period of dynamic growth. GDP grew at 5.9%


  • Four-fold increase in oil price. Came at a time the Golden Age was winding down.
  • Oil exporters in LA were the main beneficiaries (Venezuela, Ecuador and Mex). Incomes increased in those countries but most significantly in Mexico as it did not restrict output in line with OPEC attempts to maintain a high price for oil.
  • Debt increased hugely in the region as oil producers became more credit worthy, and petrodollars were free to be invested by the banks.
  • Brazil initiated debt-led growth as though the price hikes were temporary. Chile went for more orthodox economic activity restricting policies at home. Eventually after the 1979 shock Brazil was too compelled to reduce economic activity.
  • Most countries in the period were faced with a glut of cheap overseas funds. At the same time certain neo-conservative experiments were occurring (Arg and Chile) which saw some liberalization of trade, and this together with the cheap funds meant a large increase in imports and a concurrent increase in the current account deficit. Thus a strong and unstable financial link was forged between LA and the core, where traditionally the link had been through commodity trade-flows.
  • This left LA open to three big shocks:
  1. Rise in IRs associated with second oil shock
  2. 14% deterioration of terms of trade between 1980-82
  3. Sudden cessation of lending.
  • The core was passing on some of its adjustment costs to LA through increasing nominal IRs, contracting imports etc.
  • Growth in the period was still competent. However toward the end it became clear that mounting deficits and debt could not be serviced with foreign debt forever. The halt to lending meant LA now had to service debt from export revenues. The Debt-led model was no longer feasible and a period of harsh adjustment was needed.

 The 1980s

  • Bad external environment +huge debt +increase in LIBOR (from 2.5% to 22%) + stagnation of demand for primaries + 23% drop in terms of trade.
  • Manufactures performed better – and rose to 40% total trade.
  • Imports had to be reduced from $127bn to $78bn and this was done through devaluation and demand reduction. Inflation driven by public sector deficits reached epic proportions.
  • Welcome to stagflation.

 ISI-Led Growth and Structural Change

  • Although different policies, all LA states had same feature of relying on manufacturing sector as main engine of growth 1950-80. Policy instruments and successes vary. E.g. Mexico grew much faster than Arg, as did Brazil.
  • Rapid growth driven by investment of 7% p.a. Countries with the best performance were those with the most capital accumulation (Braz, Mex). There was additional divergence when some states went neo-con in the 70s (Chile). In 50s the investment financed by domestic savings as no access to financial markets. This changed toward the end of the period.
  • Capital goods were largely imported indicating that growth was not endogenous (the multiplier effect is much larger when capital goods produced at home). Increased in investments caused imports to rise. The larger economies were able to develop capital goods industries. The % of investments that were imports rose after first oil shock as credit became available, there was more capital in the system, and some countries were liberalizing trade.
  • The productive structure was altered. I.e. significant fall in importance of agriculture as part of GDP. More marked in the faster growing countries. From the point of view of comparative advantage this was hard to justify. Some states (Chile, Ecuador, Peru) undertook land reforms. However, much of the peasant population did not live on the large estates so they did not benefit from the expropriation. Also success was also based on access to credit, technological assistance etc. so reforms were only as successful as initiatives to form cooperatives, and the ability of the state to adapt public institutions at a time when the focus was on manufacturing.
  • Agri production rose, but mostly due to increased land under cultivation not productivity increases. As domestic incomes rose, imports of food rose, especially as trade was liberalized, and there were cheap subsidized imports available from EU etc.


  • Started early in the three big economies (late C19th). Disruption of trade by WWI and II gave further stimulus to manufacturing sectors.
  • ISI started with production of light consumer goods, moving to consumer durables and then capital goods. Technology got more complex throughout the process. The earlier ISIers (Arg, Chile) ran into difficulty as they could not exploit scale due to lack of exporting capability. Braz/Mex achieved 10 x increases. Arg only 3x. By the end of the 70s the large economies has 22-32% GDP from manufactures.
  • Some Southern Cone countries de-industrialized with neo-con experiments.
  • It is argued that no “endogenous core” of manufacturing activities was created to stimulate other sectors of the economy. Why? Extreme protectionism, overvalued ex rates, instability of domestic politics (meaning short-term investments only) and high propensity to consume based on premature diversification of consumption patterns.
  • The 1980s revealed these weaknesses.
  • ISI reversed trade deficit in manufactures etc.
  • ISI increased dependence of local production on import of intermediate/capital goods. This was a new supply side connection, and meant that volatility in the core would be transmitted to LA. “Import-Intensive ISI” brought about a new rigidity in demand for imports. This outcome was reinforced by almost negative protection for intermediate goods meaning there was no domestic production incentives.
  • ISI showed an anti-export bias. Little appreciation that exports (primaries) could be a good engine for dynamic growth (based on pessimism from depression etc.). Exports often had negative protection, discouraging investments and export diversification which remained dependent on primary products. This meant a trend toward trade deficits.
  • During 60s there was an awareness that ISI was not reducing volatility, nor improving credit constraints. A greater trade balance was needed. This was planned to be done by regional integration. The trade boom 60s and the rise of the NICs was another reason to diversify exports as quickly as possible.
  • “Crawling peg” ex-rates helped too. There were tariff reforms attempting to end anti-export bias. Public investments in infrastructure etc. Results: exports of manufactures grew at a new rate of 11%p.a. as opposed to 3% in the 50s. Brazil diversified the most. The most successful countries were those that had a supportive industrial base. This export growth occurred against a backdrop of increasing protectionism in EJU.
  • Trade liberalization in the 70s increased exports but made LA more sensitive to world economy changes. The stronger liberalizing countries (Chile, Arg, Uru) were more linked to external instability (in 1982 Chile had sharpest recession in the region but as external environment improved in late 80s it was best grower). Mixed policy countries were more stable
  • In general large countries most successful. Diversification, liberalization etc. were less effective in smaller countries perhaps as lack of domestic market meant little ability to profit from scale.

 Economic Integration

  • A tool for reinforcing ISI. Development from within LA as whole (Prebisch). By expanding the markets industry would benefit from bigger markets, and competition with regional peers to bring back market discipline to the project.
  • LAFTA, Andean pact, etc. all projects spawned in the 60s. There were significant achievements. Intra-LA trade increased substantially. However, conflicts of interest, short-sighted pressure groups, and economic policy instability meant that it did not provide an effective test for ISI. There was stagnation of the integration project, and intra-LA trade declined sharply during the 80s. This was partly driven by the domestic demand contraction of adjustment. Intra-LA trade should have been fostered in this adjustment period at the expense of external imports as this would have meant higher capacity utilization.
  • The larger countries were unwilling to play a leadership role and did not do enough to ensure that benefits were distributed evenly throughout the economies of varying sizes. Producers were unwilling to surrender monopoly power to foreign firms. There was an overemphasis on tariff reduction when the NTBs were actually more important.
  • Some successes were had, and there was some specialization as a result. In the end it was instability, abrupt changes in politics/economics, debt etc. that led to a less than impressive record.

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