017_The_Economic_DEVELOPMENT_(book4you.org)_165

State-led Industrialization 139

profound impact on the region. This second globalization process developed

slowly, however, and the first signs of it were not seen in developing countries

until world demand for their export products (which had by then come to include

a growing number of manufactured products) began to strengthen in the 1960s

and access to the eurodollars market began to open up on a broad scale in the

1970s.

This period spans two very different stages. The first, during the Great Depres-

sion and the Second World War, was a transitional phase marked by slow

economic growth (an annual growth rate of 2.6 percent, or a per capita rate of

just 0.6 percent for the fifteen countries for which the relevant information is

available for that period) (see Tables A.l and A.2). The second, stretching from

the end of the War to 1980, which can be regarded as the period when state-led

industrialization was at its height, was marked by the highest economic growth

rates to be attained by Latin America in its entire history: an annual rate of 5.5

percent and a per capita rate of 2.7 percent. As we will see later on, this was also

the period when the Latin American region achieved the steepest productivity

gains in its history. The population explosion and rapid urbanization were

prominent features as well. The population swelled from 100 million in 1929 to

158 million in 1950 and 349 million in 1980, rising at an annual rate of2.7 percent

between the last two years cited. Meanwhile, the region's urban population

jumped from 32 percent of the total population in 1930 and 42 percent in 1950

to 65 percent in 1980.

These patterns in economic growth and in terms of social and structural

changes varied a great deal across the region during both of these phases. Even

prior to the 1929 crash, the Southern Cone countries, which have been classified in

Group 3 in preceding chapters, had sufficiently large domestic markets, thanks to

their relatively high income levels, to permit some measure of diversification in

the production sector and to engender a form of social development that was

more conducive to the introduction of industrialization policies. Paradoxically,

however, these countries were the first to exhaust their potential for inward-

looking growth and were among those that grew the least during the period that

will be covered in this chapter. This was also the case of Cuba.

On the other hand, the development of the domestic markets of most of the

countries in Groups 1 and 2 was much more limited during the era when primary-

sector exports predominated, and there was ·less diversification of the social and

production sectors as well. These two groups of countries tended to become

increasingly similar owing to the structural convergence of rural Indo-American

and Afro-American societies as slavery receded and as wage-based labor relations

expanded. ,

There was, however, an increasing divergence between the larger countries,

such as Brazil and Mexico, and even mid-sized countries such as Colombia, Peru,

and Venezuela, on the one hand, and the smaller nations, on the other. While the

larger countries did share the characteristics that typify the nations in Groups 1

and 2, as discussed in Chapter 1, they were able to compensate for the population's

low income levels because of the size of their domestic markets and to attain a

significant degree of industrialization in certain regions and/or cities; in a number

of cases, these processes dated back to the late nineteenth century. These countries

were, for the most part, at the forefront of the industry-led growth process and

140 Economic Development ofLatin America

manag~d to make great strides in catching up to the countries in Group 3 durin

the penod under review. The fact that the region's two largest economies were als~
~hose ~at performed the best suggests that size was a very important factor as the

?dmestlc market gained in importance. Nonetheless, some small economies also
dI very well.

For t?e above ~e~sons, in this chapter we will modify the typology that we have
been u~mg and divide Groups 1 and 2 into small countries and mid-sized or large
countr~es. ~roup 3, which will generally be referred to as the Southern Cone
countnes, will remain as it is.

MAJOR EXTERNAL DISTURBANCES AND THE GRADUAL
ARRIVAL OF A NEW ERA

External shocks

The Great Depression dealt the death blow to the first globalization process It

thr~w world trade into disarray, deepened the protectionist trends that had b~en
taking shape a~ou~d the world since the late nineteenth century, and precipitated
~steep .downshde m economic activity in the United States, which had been the
mdustnal cente~ on which Latin America had increasingly come to rely after
Western Europe~ growth b~gan to falter in the aftermath of the First World War.
U~~er GeriT,iany s leadership, but also in keeping with the preferences of the
Bnti~h Empire and other European powers, as well as some North American

treaties, a vast number of bilateral trade agreements were concluded that ultim-

ately led to th~ collapse of multilateralism in world trade. Multilateralism would

naco~tor~eytu~,rn until the General Agreement on Tariffs and Trade (better kno :n-b~~'t~
GATT) reintroduced in 1947 the fundamental principle of
C~lillmatwn among tradi~g partners (the most-favored nation principle), al-
t ough n~mer~us exceptions were left in place as a legacy of colonial times.
Commodity pnc~s began to fall off steeply in mid-1928, before the collapse of
Wall Street, and, m ~OP1e cases, such as sugar and cocoa prices, long before that.
Th~ 1920s boo.m m external financing, which had benefited most of the Latin

Amencan countnes, gave way to a reduction in capital flows starting in mid-1928

and. to a complete halt in such flows soon thereafter. Although, as discussed in

e~rher chapters, ever since independence, Latin America had witnessed a succes-

SIOn of short-lived credit booms cut short by sudden stops of external financing

the c~cle of the. 1920s .and 193~s was the sharpest and most widespread eve:

e~penenced ~ntil that time. Mexico, which was still in the throes of the changes
tnggered ~y Its revolu~ion and which had not been making payments (apart from

some partial ones) on Its external debt since 1914, was the great exception in terms

of market access during the 1920s. Moreover, the dramatic financial crisis that

overtook the United States in the wake of the crash on Wall Street in October
1929-and ~he wave of suspensions of debt servicing around the world that

followed-disrupte~ the entire international financial system. Three decades

would pass before It would revive with the advent of the eurodollars market in

State-led Industrialization 141

the 1960s, and it would take even longer for private capital flows to return to Latin
America on a significant scale.

After the convoluted process that led to the restoration of the gold standard
following the First World War, its ultimate abandonment in September 1931 by
the country that had been its progenitor in the eighteenth century, Great Britain,
was one of the clearest signs of the changing times. Much the same thing
happened with the new international medium of exchange, the dollar, which
became inconvertible into gold for domestic transactions and was devalued
against gold in late January 1934 for external transactions (the price of a troy
ounce of gold rose from US$20.67 to US$35). The large-scale use of exchange
controls, which accompanied the collapse of the gold standard in several coun-
tries, but which dated as far back as the First Wodd War in many of them, was the
hallmark of a particular era in economic policy throughout the world. In fact, the
International Monetary Fund, created in 1944 at the conference in Bretton
Woods, accepted the idea that countries could control international capital
flows as one of the principles of the international economic order that emerged
out of the Second World War, although the objective was still to phase out those
controls for commercial transactions. Yet even in the case of the European
powers, convertibility was not restored for trade purposes until 1958, with the
start-up of the European Economic Community (created in 1957), and for capital
transactions until 1990.

The collapse of exports and the sharp turnaround in external financing in the
1930s put pressure on the balance of payments and fiscal accounts. Although the
Latin American countries were familiar with this type of problem, this time these
events took place on a much greater scale and led to the wholesale abandonment
of the gold standard by the countries of the region.3 Some of them did so early on,
but even those that struggled to abide by the "rules of the game" of the gold
standard by adjusting public finances and allowing the money supply to shrink
dramatically (as their international reserves waned) had little justification to
continue along this course once Great Britain abandoned it. The large-scale use
of exchange controls and bilateral payment agreements in the industrialized world
thus spread to the countries of the region. Import rationing had been widespread
in developed countries during the First World War (and would be again during
the Second) and soon became part of Latin America's arsenal of protectionist
measures. Another was the use (and, later, abuse) of multiple exchange rates-
and, here again, the countries of the region were following in the footsteps of a
number of European countries. The few countries that refrained from manipulat-
ing the exchange rate and/or using exchange controls were, for the most part,
small countries that were heavily influenced by the United States or that used the
dollar as a means of payment. Cuba and Panama are, respectively, the two clearest
examples.

Numerous, although not always successful, attempts to manage commodity
markets at the international level had been made since the start of the twentieth
century (see, for example, Rowe 1965: part IV). As we saw in the preceding

3 For an in-depth analysis of the impact that the Great Depression had on Latin America, see Diaz-
Alejandro (2000), the volume compiled by Thorp (2000), and Bulmer-Thomas (2003: ch. 7).

142 Economic Development of Latin America

chapter, this was a response to the downturn in the real prices of some commod-
ities at the turn of the century, which became more widespread following the First
World War and especially so during the deep worldwide deflation of 1920-1. All
of this indicates that the upswing seen later on in the 1920s can be viewed as a
recovery from depressed real price levels.

The most significant case of commodity price regulation in Latin America was
Brazil's management of the world coffee market. Ever since 1907, Brazil had been
adopting a series of measures to hold back part of the crop from export markets in
order to improve prices. Starting in 1924, these efforts, which came to be known as
the "permanent defense" of coffee prices, were led by the st~te of Sao Paulo, but
they had to be abandoned in October 1929 because of the difficulty of obtaining
the necessary external financing. As prices plummeted, and faced with the huge
inventories that had built up as a result of the preceding policy and a series of
bumper crops, the federal government opted for the physical destruction of coffee
stocks, which were dumped into the sea or burned. This policy was financed by
taxing coffee growers.4 Starting in 1931, Brazil also sought to reach an agreement
with Colombia on a system for holding back a portion of the crop. Colombia
balked at first and did not sign an agreement until1936, which it then suspended
unilaterally after just six months; its intervention in the market was thus confined
to the period from October 1936 to March 1937. Regulation of the coffee market
would later be promoted by the United States, at the outset of the Second World
War, under the Inter-American Coffee Agreement of 1940, which, as will be
discussed later on in this chapter, was essentially a politically motivated accord.

The attempts made to manage the sugar market provide another example. The
precipitous collapse of sugar prices that began in 1925 first led to restrictions on
production in Cuba, the largest sugar exporter in the world, and, later, to the
Chadbourne Plan (crafted by an American lawyer with ties to US sugar interests
in Cuba), which was signed in Brussels in 1931 by a group of exporters that
represented somewhat more than half of world production.5 The objective was,
here again, to reduce exports and production. The plan was abandoned in 1935,
after these producers had lost some 20 percentage points of their share in the
world market. It was followed by a broader arrangement, the International Sugar
Agreement, which was signed in 1937 in London by forty-one countries, including
some importing countries. This was the first in a series of such agreements.

The magnitude and timing of the trade shock is depicted in the upper part of
Figure 4.1, which provides an overview of the changes that occurred in three key
external-sector variables in the seven largest ,Latin American economies: real
exports, their purchasing power (which also depends on trends in the terms of
trade), and real imports. The figure shows the unweighted averages for these
variables for the seven economies, but the weighted averages tell much the same
story. The quantum of exports shrank by 28 percent between 1929 and 1932, and
this reduction, in combination with a sharp deterioration in the terms of trade,
caused the purchasing power of exports to fall by 48 percent by 1932 and by

4 For a history of these interventions, see Delfim Netto (1979: chs 2 and 3), Pelaez (1973), and
Wickizer (1942: ch. 10).

5 Cuba, Java (which was still a Dutch colony), and Peru, which exported cane sugar, and Belgium,
Czechoslovakia, Hungary, Germany, Polanc), and Yugoslavia, which were producers of beet sugar.

State-led Industrialization 143

A. Simple average for LA7, 1929=100

- - Export quantum · Import quantum - - Purchasing power of exports

120

100

80

60

40 •._------:::'_-

20

B. Simple average, including all countries with available information, 1929=100

- - Export quantum · Import quantum - - Purchasing power of exports

100
80
60

~ g c;; li) <D ,..._ co

0) 0) 0) C') C') C') C')
0) 0) 0) 0)

Figure 4.1. External trade indices, 1929-45. A. Simple average for LA?, 1929 100.
B. Simple average, including all countries with available information, 1929 = 100

Note: LA7 includes the seven largest economies in the region.
The figures on exports and imports quantum exclude Panama, Paraguay, and the Dominican Repubtic. The 1940-5

period also excludes Cuba. The figures on purchasing power exclude Bolivia, Cuba, Ecuador, Panama, Paraguay, and the
Dominican Republic.

Source: Authors' estimates based on ECLAC (1976) for the LA7, Bulmer-Thomas (1987) for Central America, Bertola
(1991) for Uruguay, and Santamaria and Malamud (2001) for Cuba.

144 Economic Development of Latin America

51 percent, when it reached its low point, in 1933. It then made a strong recovery
that lasted untill937, thanks to the recovery of the industrialized economies that
began in 1933 (in Europe) and 1934 (in the United States). In fact, by 1937, the
quantum of exports had surpassed its 1929levels by 16 percent. The terms of trade
remained depressed, however (with some exceptions, as we shall see later on), and
the purchasing power of exports was consequently still21 percent below its 1929
level. With the advent of another recession in the United States in 1937-8 and the
slowdown in European economies that came with it, the recovery in Latin
American exports faltered, and the terms of trade weakened once again. The
lower portion of Figure 4.1, which traces the trend in the quantum of exports and
imports for a wider range of countries (expressed as simple averages), corrobor-
ates these observations, although, in this case, the recovery of 1933-7 was a bit
weaker, which indicates that the smaller economies were, on average, harder-hit.

These trade shocks were exacerbated by the suspension of international finan-
cing. In the absence of statistics on the capital account of the balance of payments,
the only way to estimate the extent of the impact generated by the crisis that
followed the boom in external financing is to look at the effect that it had on the
trade balance and on imports. When Wall Street bond issues peaked in 1926-8,
the Latin American countries issued US$346 million in securities annually
(ECLAC 1964: table 19), which was equivalent to 13 percent of their exports.6
However, debt issuance fell to just slightly over half of that level in the two
following years (and most of that was accounted for by refinancing) and dried
up completely in 1931. As a result, while exports slipped by 32 percent in nominal
dollar terms between 1926-8 and 1931-2, imports dropped by 53 percent. From
the standpoint of the trade balance, Latin America had to use an additional 23
percent of its export earnings to generate the trade surplus that it needed to service
its external debt (and to meet other non-trade payments). The combined effect of
this factor and the decline in the purchasing power of exports was a 62 percent
drop in real imports between 1929 and 1932 (see Figure 4.1.A).

It is not surprising that these circumstances led to another wave of external debt
defaults,7 which began in January 1931 in Bolivia, but which spread to the rest of
the region in the ensuing months and years. Argentina was an exception among
the larger countries, as it was party to a trade agreement with the United Kingdom
which is still a subject ofheated debate (O'Connell2000). Venezuela was another,
as it ultimately paid off its external debt in 1930. Many of the smaller countries
continued to service their external debts, although, in most cases-notably the
Dominican Republic, Honduras, and Nicaragua-they did not do so fully but
instead paid the interest and only part of the amortizations due. Cuba suspended
its debt service payments in 1934 but eventually covered them. Countries that
declared defaults made partial payments in some years and bought back part of
their debt bonds at depressed market prices. Nonetheless, in 1935, 97.7 percent of
dollar-denominated bonds issued by Latin American countries (excluding Argen-
tina) were in default and, as late as 1945, after some countries had renegotiated

6 All the trade statistics cited here refer to the data used in this book.
7 For a detailed analysis, see Marichal (1989: ch. 7 and 8) and Stallings (1987: ch. 2). Additional
information and very useful analyses are provided by the United Nations (1955) and ECLAC (1964).

State-led Industrialization 145

their debts, 65.0 percent of their debt (again, excluding Argentina) was still in
arrears (United Nations 1955: table XII). As we will see later on, the external debt
default turned out to be a good deal for the countries of the region.

Although the debt servicing performance of some Central American and
Caribbean countries reflected the United States' influence over them, the truth
is that the Hoover Administration refused to defend lenders,8 and the Roosevelt
Administration was much more interested in reviving trade and creating closer
ties with Latin America through its "good neighbor" policy than in defending the
interests of US creditors. What is more, in the international arena, the tendency
was to allow the suspension of debt servicing, even in industrialized countries, as
evidenced by Germany's interruption of reparations payments in 1932, with the
acquiescence of the victors in the First World War, and the one-year suspension of
service payments on Europe's war-related debts with the United States, which
became a permanent feature in 1934.

Thanks to the foreign-exchange savings made possible by the reduction in
external debt payments, between 1932 and 1937 real imports made a much
more robust recovery than other foreign trade indicators did, marking up an
expansion of 115 percent versus the 52 percent increase in the purchasing power
of exports in the seven largest Latin American economies (84 percent versus 32
percent for the region's countries as a whole). They also weathered the ensuing
two-year downswing in trade better than exports did.

The impact of these trade shocks and trends in external debt differed across
countries (see Table 4.1). The initial export shock was particularly strong for
Chile, whose saltpeter exports dried up completely and whose copper exports
plunged. The purchasing power of its exports plummeted by 84 percent during
the first three years of the crisis. Cuba faced an equally dramatic situation,
although, in its case, the crisis came sooner and in a more gradual way. In addition
to the glut on the world market, US protectionism proved fatal for Cuba, which
was hit by tariff increases in 1921 and 1922, coming on top of the deflation of
international prices in 1920-1, and again in 1930, with tariffs reaching levels, in
the worst moments of the crisis, that were twice as high as the f.o.b. price of its
sugar exports. Protectionist measures against Cuban sugar exports began to ease
somewhat in 1934, but the U.S. import quota system then in place still discrimin-
ated against this Caribbean country. The purchasing power of its exports slid by
76 percent between 1924 and 1932. At the other end of the spectrum, Colombia
may have been the country that was in the most comfortable position, both during
the depths of the crisis (along with Venezuela) and during the 1930s in general.

Almost all the countries benefited when exports rebounded between 1932 and
1937, and Argentina saw a considerable improvement in its terms of trade, thanks
to the impact that a drought in North America had on its export prices. Imports
also made a robust recovery in almost all the countries during that same period,
although for different reasons, since this recovery was driven by the combination
of an export recovery and the debt default in most of the countries, but by an

8 In 1932, Secretary of State Stimson declared that no loan was backed by the United States
government: "No foreign loan has ever been made which purported to have the approval of the
American government as to the intrinsic value of the loan" (quoted by Stallings 1987: 79).

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State-led Industrialization 147

improvement in the terms of trade in Argentina and Uruguay. Some of them
continued to increase their imports in 1937-9, but Colombia was the only country
to have a higher real level of imports in 1939 than in 1929.

The comparison of the shocks experienced by different countries also provides
some interesting insights into the influence that different industrialized countries'
policies had on the region.9 The adverse effects of Argentina's dependence on
Great Britain had been apparent ever since 1914, when its economy slowed, as it
did again in the 1930s, not only as a result of Britain's preferential treatment of its
colonies and the emphasis it placed on correcting bilateral trade deficits, but also
because of the British government's greater readiness to intervene on behalf of its
financial agents and institutions. 10 Brazil and, especially, Colombia, on the other
hand, benefited from their dependence on the United States, since their exports
were not targeted by protectionist interests and the government was not greatly
interested in intervening on behalf of its financial institutions. Cuba did not enjoy
any of these benefits because its main export product was subject to strong
protectionist measures on the part of the United States (measures that also
afforded special privileges to the Philippines and Puerto Rico) and because
powerful US financial interests were firmly established on the island. Germany's
bilateralism, on the other hand, ultimately had a positive effect on the exports of
various Latin American countries, including, notably, Brazil, Colombia, and

Guatemala.

Macroeconomic activism and the recovery

The steep decline in trade and the lack of external financing forced the countries
to adopt severe adjustment measures. These measures combined devaluations
(usually in conjunction with multiple exchange rates) with higher tariffs, currency
and import controls, and defaults on external debt obligations. All of these
measures heightened the changes in relative prices that had been triggered by
the crisis and created strong incentives for producing previously imported goods
(especially manufactures) domestically. This gave added momentum to the in-
dustrialization process especially in the (mostly large) countries which had already
managed to expand their manufacturing sectors during the era of commodity-
export-led growth. A number of small and medium-sized countries also produced
domestic substitutes for previously imported agricultural goods and, more
generally, restructured their agricultural sectors in response to the effects of the
international crisis on their export crops.

The nature of these macroeconomic adjustments altered the countries' eco-
nomic structures in ways that would have long-term implications. Nonetheless,
the Great Depression was more of a transitional phase for the countries of the
region, rather than bringing about a sudden, radical change in their development
patterns. On the one hand, as we saw in Chapter 3, industrialization and

9 Abreu (2000) provides an interesting comparison of the impacts of British and American policies
on Argentina and Brazil.

10 See Eichengreen and Portes (1989).

148 Economic Development of Latin America

25.0% .,--------------------------------~

,f·""'""\ l

20.0% t;------------------------~·"--"~

,7
.'I
.'I
.'I

15.0% +----+-------------------!1'------___.j

.'I
.'I
... '1

.·/"'10.0% t----""""'"':--:::---Y~'-'-.:....:..:....,...,..,.,o.;.c:-..-.-.----.~.:..""·.~.... r=----------i

-.....·.·,··..,.....,.' ..-:;.'

0.0% fuTn"TT1"TT1"TT1"TT1TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT"T"T"TTTTTTTTTrrrrrrrrrrrr......,,.,...j

~~~~~~~~~~~~~#~~~~~~~~~~~~~~~~~*~*~*~~~~~~

- - LA13 - - LA 13 excluding Venezuela
• • • • • • LA18 - - - LA18 excluding Venezuela

Figure 4.2. Exports of goods and services as a share of GDP (% of GDP at constant 2000
dollars)

Notes: LAD excludes Bolivia, Cuba, Ecuador, Panama, Paraguay, and Dominican Republic. LA IS excludes Cuba.
Source: Authors' estimates based on ECLAC historical series

protectionism were already firmly entrenched in the preceding historical phase.
But that did not rule out the possibility of further export growth. On the contrary,
the expectation during the 1930s was that exports would rebound from this
cyclical recession, as had occurred in the past and indeed happened again in
1932-7. At that point, the region felt the full impact of the crash in world markets
and began to look inward. The countries' export coefficients, which had been
declining but which had rebounded in 1934-7, plummeted in 1937-49 to less than
half their former level (see Figure 4.2 for the caiculations for the region, excluding
Venezuela). The events of 1937, particularly the beginning of a new recession in
the United States, can therefore be regarded as a confirmation of the fact that the
era of commodity-export-led growth had definitely come to an end.

As industrialization and agricultural import substitution became more promis-
ing sources of economic growth within an international economic environment in
which, for quite a long time, expectations of a recovery in international trade were
disappointed, it was understandable that the authorities increasingly turned their
attention toward these sources of growth. In the late 1930s, this situation
prompted governments to set up special agencies (development banks, in particu-
lar) to promote new manufacturing activities. Chile, Colombia, and Mexico all
established their main development banks during this period (1934-40). As
discussed in Chapter 3, Argentina, Brazil, Costa Rica, and Uruguay had estab-
lished major public-sector banks much earlier on, in the nineteenth or early
twentieth centuries. On top of this came the idea-quite novel in most of the

State-led Industrialization 149

countries during those years-of nationalizing certain "strategic" sectors. Mexico's
nationalization of the oil industry in 1938 was a landmark event in this respect.

Although these changes in macroeconomic policy were adopted as emergency
measures, they became permanent features. It is therefore in this field, rather than
in development policies as such, that the earliest changes were made. The aban-
donment of orthodox monetary policies, in conjunction with the fiscal relief
afforded by the external debt default, paved the way for the adoption of expan-
sionary monetary and fiscal policies, which helped support the recovery of
domestic demand. This was much more evident in the case of monetary policy
than it was of fiscal policy. In the absence of domestic mechanisms for financing
public-sector deficits, including the as-yet moderate use being made of central
bank loans to governments, the most typical emergency measure for financing
deficits was therefore to hold back payments to civil servants and government
contractors. The expansion of the money supply was also accompanied by direct
interventions in the credit markets, which included the establishment of a number
of state-owned commercial banks, in addition to the development banks men-
tioned earlier. The devaluation put an end to the deflation experienced in the early
years of the crisis in most Latin American countries (as in the rest of the world),
which had increased the real burden of debts contracted by the private sector
during the boom years and had prompted a number of countries to adopt debt
relief measures.

The early and generally successful recovery of the Latin American countries from
the Great Depression was thus driven by varying combinations of agricultural and
manufactured import substitution and the recovery of domestic demand on the
back of expansionary macroeconomic (especially monetary and credit) policies.

The classic analysis of Diaz-Alejandro (2000) of the impact that the Great
Depression had on the various countries sheds a great deal of light on the subject.
He differentiates between countries that responded proactively, adopting foreign-
trade and macroeconomic adjustment measures (in particular, in his view, by
devaluing the currency), from those that reacted passively and did not take these
steps. He concludes that the former achieved a better macroeconomic outcome
than the latter. His conclusion is backed up by the fact that both Brazil and
Colombia experienced acceptable growth rates after registering moderate declines
at the beginning of the crisis. Mexico was able to jump-start its economic growth
following a severe contraction in the early years of the crisis. Costa Rica, among
the smaller economies, succeeded in turning in a good performance, and Chile
managed to fend off a draconian shock and to post a moderate growth rate. Cuba
was at the other end of the spectrum, in that it gave priority to its trade relations
with the United States, under-what is more-disadvantageous conditions, to the
detriment of its macroeconomic autonomy and the diversification of its produc-
tion structure.u As a result, its GDP growth path continued to be determined by
the volatile proceeds from its sugar exports.

11 See Santamaria (2001: ch. VI). In response to the crisis that it faced early on, Cuba had adopted
protectionist measures in 1927 that led to some agricultural and industrial import substitution. The
effect of these measures was, however, softened by the trade agreements that it concluded with the
United States in the 1930s.

150 Economic Development of Latin America

There are other cases, however, that do not follow the dichotomy proposed by
Diaz-Alejandro. It does not apply, for example, to Venezuela, which did not
devalue its currency (in fact, it revalued it, since it did not raise the price of gold
when the United States did so in January 1934, although soon thereafter it did
introduce a favorable exchange rate for coffee and cocoa) but which, even so,
posted the best economic growth rates in the region in the 1930s, together with
Brazil and Colombia.12 Nor does it apply to Argentina or Uruguay, which
implemented quite proactive policies but did not have particularly strong show-
ings during this period (see Table 4.2.A). The comparison of Argentina with Brazil
is particularly interesting, since Brazil had a much higher growth rate even though
it experienced a much more severe external shock.

In any event, economic growth during the 1930s, although above the world
average (and, as we will see in the following chapter, above the region's average
growth during the debt crisis of the 1980s), was still low and was sharply below
the rate for the 1920s: 2.1 percent per year between 1929 and 1939 versus 4.9
percent between 1921 and 1929. Furthermore, this was the case for almost all the
countries, even those that turned in a relatively good performance in the 1930s.
In fact, Mexico and Costa Rica were the only economies that grew more rapidly
in the 1930s than in the 1920s.13 What was important during these years was
therefore not so much the aggregate growth rate but rather the strength and
increasing diversification of manufacturing production (see Haber 2006 and
Table 4.2.B), which gave rise to what we might call the "pragmatic" phast;! of
import substitution. The boom seen in the textile industry, food processing for
the domestic market (edible oils, for example), cement production, oil refining,
pharmaceuticals, and, in some countries, the iron and steel industry was a
reflection of this shift toward the domestic market, as was seen in the case of
agricultural import substitution. The reorientation of transport infrastructure
away from railroads and toward roadways and the large-scale transport expan-
sion plans that many countries put in place as part of their economic recovery
programs also contributed to the integration of the domestic market, as noted by
various studies.

As a whole, the direct contribution made by import substitution during this
period was, in relative terms, the largest ever recorded (0.8 percentage points out
of a total growth rate of 2.1 percent) and, in some cases, accounted for an even
larger proportion (see Table 4.3). In Chile and Uruguay, this factor accounted for
all of what little growth there was, and, in Venezuela, import substitution made a
far greater contribution to growth than the continued expansion of oil production.
Import substitution also helped to ease the pressure on the balance of payments,
which in turn paved the way for a modest increase in domestic demand. Exports,
for their part, had a slightly negative effect during the period as a whole, with some
exceptions (Brazil and Venezuela), although they clearly made an important
contribution to the 1932-7 recovery.

12 The same is true of Guatemala, although, in its case, the economic growth rates are suspiciously
high, particularly because they are based on a steep increase in agricultural output for the domestic
market.

13 Guatemala would also be in this group, but see the preceding footnote.

State-led Industrialization 151

Table4.2. Indices of production, 1929 = 100 1945

1929 1932 1937 1939 1942 153.4
157.6
A. Gross Domestic Product 100.0 85.2 117.3 124.3 132.4
Latin America (7 countries) 100.0 83.0 118.4 127.0 130.7 171.7
170.7
Weighted average 100.0 95.1 129.2 136.0 141.5
Simple average 100.0 82.3 117.3 125.6 147.6 132.4
Large countries 132.7
Brazil 100.0 86.3 109.9 114.6 123.9 120.8
Mexico 100.0 55.9 104.9 108.4 116.6
Southern Cone 100.0 87.3 102.6 110.7 103.5 168.9
Argentina 133.7
Chile 100.0 104.0 127.9 144.6 150.5 193.0
Uruguay 100.0 78.3 114.8 117.3 116.9
Andean 100.0 78.8 124.4 142.6 117.9 145.8
Colombia 129.3
Peru 100.0 95.4 134.8 147.0 141.5 140.1
Venezuela 100.0 82.4 113.9 113.6 131.1 110.2
Central America 100.0 85.1 151.4 175.1 213.5 110.0
Costa Rica 100.0 97.5 82.4 89.6 87.3 126.9
El Salvador 100.0 68.1 87.6 100.8 195.0
Guatemala 88.9 56.4 68.2 92.0 90.1
Honduras 100.0 73.0 112.4 102.3 156.4 99.8
Nicaragua 100.0 90.5 98.7 122.4 120.8
Cuba (1924 = 100) 112.3 220.9
100.0 97.1 162.5 181.9 260,4
United States 100.0 69.3 144.8 152.3 210.7
Core Europe (12 countries) 135.2 167.0
100.0 82.5 135.2 152.9 223.4
B. Industrial production 100.0 85.0 122.9 128.9 186.5
Large countries 100.0 n.d. 126.0 n.d.
n.d. · n.d.
Brazil 100.0 106.6 n.d. 312.8
Mexico 100.0 78.3 232.1 266.8 142.9
Southern Cone 100.0 n.d. 186.1 126.5 125.2
Argentina 115.9 n.d.
Chile 100.0 108.5 n.d. n.d.
Uruguay 100.0 66.1 n.d. 179.7
Andean 100.0 82.6 220.3 210.2 116.1
Colombia 100.0 82.6 167.8 92.9 100.0 137.0
Peru 100.0 66.0 94.6 104.3 126.1 147.8
Venezuela 141.3 113.0 121.7 258.0
Central America 164.0 234.0
Costa Rica 104.3
El Salvador 82.0
Guatemala
Honduras
Nicaragua

Sources: A. Annex B: OxLAD

152 Economic Development of Latin America

Table4.3. Sources of economic growth, 1929-45

1929-1939 1939-1945 ?

D Exp IS Total D Exp IS Total

Brazil 1.8 0.4 0.9 3.1 3.8 -0.2 0.3 4.0
Mexico 3.0 -1.4 0.8 2.3 6.0 0.1 -0.9 5.2
2.4 -0.5 0.8 2.7 4.9 0.0 -0.3 4.6
Large Countries 1.0 -0.2 0.6 1.4 1.8 2.4
Argentina -0.1 -0.3 1.3 0.8 1.9 -0.2 0.8 3.4
Chile 0.7 -0.3 0.7 1.0 0.8 0.5 1.0 1.5
Uruguay 0.5 -0.3 0.8 1.1 1.5 0.1 0.6 2.4
2.9 0.6 3.8 1.6 0.1 0.8 2.6
Southern Cone 1.2 0.3 0.4 1.6 2.4 0.4 0.6 2.2
Colombia 0.7 0.0 2.0 3.6 0.9 0.1 5.2
Peru 1.6 0.9 1.0 3.0 1.6 -0.2 0.4 3.3
Venezuela 2.9 0.4 1.0 3.9 -0.2 3.9 0.4 -0.1
0.2 0.0 0.7 1.3 2.3 1.4 0.4 2.2
Andean 3.9 0.3 1.7 5.8 -3.9 0.0 -3.6
Costa Rica 0.3 0.2 0.3 -1.1 2.6 -0.3 -0.1 3.5
El Salvador -1.2 -1.7 0.5 -1.3 4.2 -0.1 0.5 3.9
Guatemala 1.2 -0.5 0.8 1.7 1.0 0.5 1.2
Honduras -0.3 3.2 0.3 0.3 4.2
Nicaragua 1.6 0.8 2.1 2.9 0.4 0.1 3.4
-0.3 -0.8 0.3
CeQtral America -0.1
Ecuador 0.9
Latin America 0.2

Note: D = Domestic Demand, Exp = Exports, IS = Import Substitution

Simple averages are presented below each group.

Sources: Authors' estimations based on GOP data from the Annex and external trade series according to Figure 4.1.
All of them are estimated at constant 2000 prices.

The abandonment of the gold standard thus opened the way for the introduc-
tion of countercyclical macroeconomic policies, but these policies took very
different forms in the center and in the periphery of the world economy. In the
industrialized center, the aim was to promote the proactive management of
aggregate demand. This was reflected in the pragmatic decision taken by numer-
ous industrialized countries to increase public-sector spending and adopt expan-
sionary monetary policies in order to deal with the crisis as they turned away from
the gold standard's "rules of the game." The principle that economic policy should
take a proactive approach to the management of aggregate demand was, further-
more, firmly established in economic theory with the publication in 1936 of John
Maynard Keynes's The General Theory of Employment, Interest and Money. The
ensuing macroeconomic policy activism, whose chief objective was to smooth out
the business cycle, came to be the dominant element in the industrialized coun-
tries' macroeconomic policies in the decades to come.

In the periphery, macroeconomic policy activism took a different tack. The
main reason for this is that the source of cyclical fluctuations in the center and the
periphery differs: whereas, in industrialized countries, variations in aggregate
demand are the underlying determinant of cyclical swings, in developing coun-
tries (including those of Latin America), the main determinant was (and still is)
external shocks that are transmitted from industrialized countries to the periphery
via trade and international financing. Consequently, countercyclical management
efforts focused on direct balance-of-payment interventions. This was also an

State-led Industrialization 153

outgrowth of the fact that an expansionary management of demand during
business cycle downswings is not viable until a country overcomes its foreign-
exchange constraints, since an increase in demand will tend to aggravate the
balance-of-payment crisis. This is a lesson that the Latin American countries
learned and re-learned over a number of decades. Thus, it was only possible to
manage demand in a way that would mitigate the recessionary effects of external
shocks once balance-of-payments adjustment measures had been adopted, which
included, in the 1930s, external debt defaults.

This approach was at the center of the macroeconomic debate for half a
century. Latin American policymakers focused their attention on the rationaliza-
tion of foreign-exchange outflows during crises and, increasingly, on the gener-
ation of new sources of export earnings. Both were a means of averting the type of
procyclical management of aggregate demand that would otherwise be necessary
in order to reduce the pressure on the balance of payments during cyclical
downswings. In contrast, the International Monetary Fund, which was founded
in 1944, became the advocate of the procyclical management of demand (i.e.,
contractionary policies during crises) following principles that were in a sense
similar to the gold standard's "rules of the game," although now relaxed somewhat
thanks to the possibility of readjusting exchange rates and providing multilateral

financing during crises.
In sum, whereas the main thrust of Keynesian thinking was to use proactive

monetary and fiscal policies to stabilize aggregate demand, policy efforts to
manage the balance of payments as a means of coping with aggregate external
supply shocks have played a much more important countercyclical role in the
Latin American economies, where macroeconomic disturbances were primarily

triggered by events outside the region.

The impact of the Second World War

The Second World War further pushed policymakers in the direction of interven-
tionism in foreign trade and industrialization. The interruption of supplies of
some products in international markets as a result of rationing and the shortages
typical of the war triggered another decline in import volumes (see Figure 4.1) and
served as a justification for promoting a new array of manufacturing activities in
countries where the industrialization process had taken root.

A desire to garner the support of Latin American countries for the Allies during
the War led the United States to conclude agreements with many Latin American
. countries to build up stocks of strategic raw materials (as Japan also did at the start
of the War), to support the Inter-American Coffee Agreement and to finance,
through the Export-Import Bank, various initiatives undertaken by Latin Ameri-
can governments, many of which focused on import-substituting sectors. Some-
what paradoxically, the United States thus helped create the Latin American
interventionist state (Thorp 1998b). The creation of an Inter-American develop-
ment bank-an idea that had already been touted by some Latin American
countries-was also on the US agenda. Although this idea did not prosper
at the time, it was the basis for the proposals that Harry Dexter White, the
US negotiator, brought to Bretton Woods, which served as the inspiration

154 Economic Development of Latin America

for the creation of the World Bank (Helleiner 2009). In the wake of the Cuban
Revolution, the (here, again, strongly politically motivated) creation of the Inter-
American Development Bank (IDB) finally became a reality.

The War had diverse impacts on Latin American exports. The difficulty of
reaching European markets for several years and even in reaching the US market
during the German U-boat campaign in the Caribbean in 1942 and the first half of
1943 hurt many countries' exports. But war-related shortages ended up being a
blessing for the region, whose production capacity remained intact in the midst of
the destruction caused by the fighting and sparked strong export-sector growth in
the closing years of the War. Thanks to its proximity to the United States, Mexico
enjoyed a short-lived manufacturing export boom, especially in textiles, but was
unable to keep up those exports after the War (Cardenas 2000). Venezuela and
then Cuba had the benefit of being able to offer strategic products (petroleum) or
goods that were in short supply (sugar). Generally speaking, although commodity
prices began to rise after the initial adverse shock, the price controls imposed by
the contenders, together with the rising cost of imports (due, in part, to high
transport costs), prevented the Latin American countries' terms of trade from
improving. In fact, no significant upswing in the terms of trade was experienced
until the War came to an end.

Since the War prevented countries from spending their increased export
earnings on imports, international reserves began to swell. In some nations,
especially in the southern part of the continent, a large part of those reserves
was denominated in inconvertible pounds sterling. This build-up, together with
the rising world prices and shortages of manufactures, fueled inflation but also
had some other novel effects. One of these was that central banks began to issue
bonds in order to curb ("sterilize") the expansion of the money supply generated
by the build-up of international reserves. This was another step toward the
development of a proactive central banking system, which was to take hold
following the Second World War.

The result of this combination of modest export growth, continued import
substitution, and, above all, the expansionary macroeconomic climate of those
years (including the growth of the money supply, as mentioned above) was a
moderate upturn in the growth rate relative to the average for the 1930s (see
Table 4.3). However, some of the economies that were growing rapidly at that
time experienced a slowdown.

Another interesting effect of this build-up in reserves was that a supply of
foreign exchange was available to fund an upsurge in investment and the purchase
of foreign infrastructure firms and public utilities after the end of the War.
General Peron's use of reserves in inconvertible pounds sterling that had accumu-
lated during the Second World War to nationalize the British-run railways was the
most notable case. Also, thanks to the international assets that were amassed
during those years, together with debt defaults, Latin America embarked upon the
post-war period with extremely low public-sector debts.

Renegotiations with US creditors had recommenced in earnest at the start of
the Second World War. These talks were encouraged by the US, once again for
political reasons, and were buoyed by the possibility of securing credit from the
Export-Import Bank (and, after the war, from the World Bank). The most
successful deal was the one made by Mexico in 1941, which secured a 90 percent

State-led Industrialization 155

reduction in its debt, including that associated with the nationalization of US oil
and railroad investments (Marichal 1989: ch. 8). This was, however, an accord
designed to resolve one of the largest-scale defaults in world history. None of the
other countries obtained reductions in the debt principal, but they did secure cuts
in interest, and creditors agreed not to compound the interest arrears.

Eichengreen and Portes (1989: table 2.1) have estimated that the region paid an
ex-post effective interest rate of slightly over 3 percent on the debts it incurred in
the 1920s. This was between four and five percentage points less than the original
terms, making the Latin American nations the most successful negotiators of all
the countries that had access to capital markets before the crisis. Using a different
methodology, Jorgensen and Sachs (1989) have calculated that the present value
of Colombia's external debt, discounted by the interest rate on US bonds, was
reduced by 15 percent, whereas countries that entered into negotiations later on
(Chile in 1948, Peru in 1953, and Bolivia in 1958) obtained reductions of between
44 percent and 48 percent. Argentina, on the other hand, paid 25 percent more
than the US Treasury and failed to obtain any benefits in terms of access to capital
markets during the 1930s or after the War, because that market had ceased to
exist. It should be pointed out, however, that Jorgensen's and Sachs's calculations
underestimate the benefits for debtor countries which had taken on debts at a
higher interest rate than the rate for US government bonds.

EVENTS, IDEAS, AND INSTITUTIONS THAT SHAPED

STATE-LED INDUSTRIALIZATION

The events of the 1930s and the Second World War planted the seed for a new era,
but its fruition was a long time in corning and the process lacked a clear direction
for quite some time. The way in which this new era came into being was closely
related to the privileged position occupied by Latin America at the start of the
post-war period. Latin America had been, in effect, a bystander during the war
and, along with the United States (with the obvious exception of the Great
D.epression), had undergone the strongest growth of any region in the inter-war
period, expanding its share in world output by nearly three percentage points
(from 4.2 percent in 1913 to 7.2 percent in 1950; see Table 1.1 in Chapter 1). It is
therefore not surprising that the region chose to consolidate its pattern of struc-
tural change.

This was a strikingly different approach from that taken by other developing
regions. Whereas the independent nations of Asia and Africa that emerged from
the decolonization process saw industrialization as a means of breaking with the
colonial past, for Latin America it represented the continuation of a strategy that
had been undertaken for quite practical reasons and that was viewed, quite rightly,
as having been successful. This gave rise to two paradoxes that have received very
little attention in the Latin American development debate.

The first was that it led Latin American countries to opt for a less interventionist
state than in other developing regions. This may seem odd in the light of the view,
which gained general acceptance later on, that an excessive state presence was one

156 Economic Development of Latin America

of the region's chief problems. In the wake of the Second World War, however,
with very few and partial exceptions (the United States, in particular), the choice
was not between state intervention and a return to the liberalism of the past, but
rather between central planning and the creation of mixed economies involving
more moderate forms of state intervention. Following in the footsteps of Western
Europe, Latin America opted for the latter path, i.e., for less rather than more state
intervention. This tendency did not, however, reach the degree of embedded
autonomy (even in the case of Brazil, which was perhaps the strongest proponent
in the region of the idea of a developmentalist state) that was characteristic of the
shining examples of this type of model in the post-war period: Japan and the
Republic of Korea (Evans 1995). Only Cuba would adopt, and long after, a central
planning model. The failed experiments of the Popular Unity Administration in
Chile in the early 1970s and the Sandinista revolution in Nicaragua that began in
1978 were related, but they both aimed at a more mixed economic model than
Cuba did.

The second paradox is that this process was driven, especially in its early stages,
by objective factors rather than by an industrialization process led by economic
elites. One ofthese objective factors was that, until the mid-1960s, the recovery of
international trade did not open up many promising opportunities for developing
countries. Furthermore, the industrialization process appeared on the Latin
American horizon at a time when primary-sector export interests were still
quite powerful. There was, however, no clear-cut distinction in cases where, in
line with a pattern that dates back to the late nineteenth century, entrepreneurs
diversified their risk by investing in various sectors. In addition, commodity
exports continued to play an important role during this phase of development
because, among other reasons, the industrialization process still relied quite
heavily on the foreign exchange that these exports generated. This is why one of
the distinctive features that Hirschman (1971) saw as differentiating the Latin
American industrialization process from the "late-industrializing" countries of
Europe, as studied by Gerschenkron (1962), was the weakness of industrial
interests vis-a-vis those of commodity exporters.

The term "import-substitution industrialization" has been widely used to refer
to the period between the end of the Second World War and the 1970s. As noted
at the start of this chapter, however, this is not a very useful term because the
policies introduced during this period were not limited to import substitution but
instead called for an increasingly important role for the state in many other
spheres of economic and social development. Secondly, as we have discussed in
the preceding chapter, Latin America already had a long tradition of protection-
ism and industrialization. Thirdly, exports continued to play a pivotal role, not
only as a source of foreign exchange for all the countries and as a source of
government finance for those with major mining industries, but also as an engine
for economic growth in a number of economies in the region, as we will see later
on. Similarly, almost all the medium-sized and large countries introduced export
promotion mechanisms in the mid-1960s, which was also a time when greater
opportunities were beginning to open up in the international economy. This gave
rise to a "mixed model" that, as we will see, combined import substitution with
export promotion and regional integration. This model was also a mixed one in
the sense that it actively promoted the modernization of the agricultural sector

State-led Industrialization 157

through the use of tools similar to those employed to stimulate industrialization
while relying on an even more sophisticated system of intervention.

In addition, these efforts did not always result in a net import substitution
effect, nor was import substitution a consistent driver of economic growth.
Domestic demand, on the other hand, played a decisive role. This is illustrated
in Table 4.4, which shows that import substitution was a major factor only during
the period of frequent balance-of-payments crises-or the period of "external
strangulation," to use the term coined by ECLAC-that spanned from the end of
the post-war commodity price boom (which peaked during the Korean War) to
the mid-1960s (1957-67 in the table, although the start and end of this phase
varied from country to country). This was also the period during which the second
phase of import substitution began (involving the production of intermediate
goods and consumer durables, as well as, to a lesser extent, capital goods). 14 Later
on, other industries would also join these ranks in some countries, such as the
automobile industry, which arrived later on in the Andean countries, and the
capital goods industries that sprang up in Brazil in the 1970s.

It should be noted, however, that the methodology used to estimate the
different demand factors' contributions to economic growth tends to underesti-
mate the importance of external trade policies, since periods in which foreign
exchange was in greater supply were invariably also times when domestic demand
grew more rapidly (1945-57 and 1967-74). Balance-of-payments policies also
played an important role in buoying the growth of domestic demand in 1957-67.
This corroborates the analysis presented in Chapter 1 of the period of state-led
industrialization as a whole. That analysis indicated that the relationship between
the countries' growth and the portion of that growth that can be accounted for by
the growth of trading partners was better during the period of industrialization
than during either of the two phases of export-led development. Thus, within the
balance-of-payments constraints existing at that time, the industrialization pro-
cess can be said to have galvanized domestic demand.

For the reasons already discussed, the concept of state-led ind\lstrialization is a
more appropriate one for describing the new development strategy. The state
indeed took on a wide range of responsibilities. In the economic sphere, apart
from its ongoing balance-of-payments interventions aimed at cushioning the
impact of the external cycles that had taken shape since the Great Depression, it
also took on a stronger (in some cases, monopolistic) role in developing infra-
structure, in founding development banks and commercial banks, in designing
mechanisms for ensuring that private financial institutions would channel funds
into priority sectors (directed credit), in providing support to private domestic
firms in the form of protective measures and government contracts, and in
actively intervening in agricultural markets. In the social sphere, it also took on
a more active role in the delivery of education and health services, housing, and, to

a lesser extent, social security benefits.

14 See, for example, the estimates of the contribution made by import substitution to the industri-
alization process in Brazil, Colombia, and Mexico in Abreu, Bevilaqua, and Pinho (2000), Ocampo and
Tovar (2000), and Olrdenas (2000). The period concerned generally corresponds to the years noted
above, but with some variations across countries.

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State-led Industrialization 159

This process also entailed major social and political changes. The population
boom of the 1950s and 1960s was coupled with rapid urbanization (see below).
Power relations were therefore redefined in the context of more urban societies,
and the relationship between the state and increasingly powerful business elites
changed as well. Adverse trends in the distribution of wealth and income, oflong-
standing and more recent character, also triggered a surge in ancestral tensions in
rural areas and the emergence of new conflicts in urban zones.

In the late 1940s and early 1950s, the Economic Commission for Latin America
(ECLA),15 with Raul Prebisch at the helm, developed a theory of industrialization
that had a powerful impact throughout the developing world and on public policy
and theoretical debates in international forums. These ideas (as expressed by
Prebisch, in particular) had an especially strong influence on the United Nations
Conference on Trade and Development (UNCTAD) from 1964 on and in the
negotiations concerning the development of a new international economic order
that followed. Many of these patterns, practices, and even concepts predated the
work of ECLAC, however. As expressed with particular clarity by Love (1994:
395): "Industrialisation in Latin America was fact before it was policy, and policy
before it was theory." Be this as it may, it was ECLAC that crafted a theoretical
justification for this new strategy, along with a sense of regional identity. 16

The ideas developed by ECLAC were as widely disseminated as they were
criticized, although these criticisms sometimes focused on what can only be
described as a caricature of those concepts-as would also prove to be the case,
later on, with the market reform agenda. This line of thinking fitted in with a
cluster of new theories about economic development that emerged in the 1940s
and that coalesced into a new "subdiscipline": development economics. The views
of ECLAC regarding industrialization and state intervention were largely in step
with the conventional wisdom of the time, which equated development with
industrialization. Furthermore, at least until the 1970s, the World Bank supported
state interventionism, invested in many import-substitution projects, and, until
the late 1970s, continued to advocate the idea that industrialization was an
essential element of economic development (Webb 2000). The influence exerted
by another great development theoretician, Hollis Chenery, the Chief Economist
of the World Bank in the 1970s (see, for example, Chenery 1979), was decisive and
was reflected, inter alia, in the Bank's early World Development Reports of the late
1970s. In addition, as we have seen, during the Second World War the United
States supported Latin America's industrialization process, and private US inter-
ests, along with other foreign investors, also fell into step with this new strategy
because they understood the opportunities that it offered for investment in
protected markets and for the sale of capital goods to Latin America.

15 Later on the Economic Commission for Latin America and the Caribbean (ECLAC), after the
Caribbean countries joined the organization.

16 In his semi-autobiography, Furtado (1989) offers up a fascinating history ofECLAC's early years,
and Dosman (2008) provides an excellent biography of Prebisch set against the backdrop of the
intellectual controversies of this time. For an assessment of the contributions made by ECLAC, see
Fishlow (1988), Love (1994), Bielschowsky (1998 and 2009), Rosenthal (2004), and Rodriguez (1980

and 2006).

160 Economic Development of Latin America

The core ideas that all of these approaches to development shared were that
industrialization was the main channel for the transfer of technological progress
and that, in the course of the growth process, the production structure would shift
toward an increasing share of modern industrial activities and services and a
declining share of primary sectors, especially agriculture. The aspect of this
interpretation that was most closely associated with ECLAC was the emphasis
on the redefinition of the patterns characterizing the countries' integration into
the world economy. This perspective, which was embodied in the "Latin Ameri-
can manifesto," as Albert Hirschman referred to the 1949 Economic Survey of
Latin America (Prebisch 1973), posited that the solution was not to isolate the
Latin American economies from the international economy but rather to redefine
the international division of labor in a way that would allow the Latin American
countries to reap the benefits of technological change, which they saw-and quite
rightly so-as being closely linked to industrialization. Seen from this vantage
point, the development process promised to provide a way of making the change
from countries simply being producers of commodities to being manufacturers.
This was a far cry from the autarky (i.e., isolationism in respect of the inter-
national economy) that misinterpretations of ECLAC writings ascribed to it. This
entailed an explicit policy effort to change the region's production and social
structures, which Sunkel (1991) referred to as "development from within," rather
than "inward-looking development." One of the tenets of Prebisch's argument,
which ECLAC adopted as its own, was that the terms of trade for commodities
would, over time, deteriorate. This assumption has not been borne out either by
the subsequent literature or by events during the industrialization period, which
was when the ECLAC's influence was at its peak. 17

Industrialization policies were altered as time went by, both in order to correct
policy excesses and in response to the new opportunities that began to open up in
the world economy from the 1960s on. As has been pointed out in various
histories of ECLAC (Bielschowsky 1998; ECLAC 1998; and Rosenthal 2004),
from the 1960s on, ECLAC became increasingly critical of the excesses of import
substitution and started to advocate a "mixed" model that combined import
substitution with export diversification and regional integration. ECLAC played
a pivotal role in the creation of the Latin American Free Trade Association
(LAFTA) in 1960, which later would become the Latin American Integration
Association (LAIA), as well as in the establishment of the Central American
Common Market, also in 1960, and of the Andean Group in 1969. ECLAC also
pressed for social reforms, many of which were, later on, embraced by the United
States as part of the Alliance for Progress launched by President Kennedy in the
early 1960s.

This strategy was also tailored to the circumstances that existed in the early
post-war years. The fact that the attention of the US government veered away
from Latin America in the early post-war period (Thorp 1998b) was exacerbated
by the fact that, favorable short-term trends notwithstanding, continued

17 As was seen in Chapter 1, Ocampo and Parra (2003 and 2010) show that there was a substantial
deterioration in the terms of trade for commodities in the twentieth century, but that this overall
decline was associated with two major downturns: one in the 1920s and the other in the 1980s. In'the
intervening period, which was one of state-led industrialization, no downward trend was in evidence.

State-led Industrialization 161

dependence on commodity exports did not, given past trends, seem like an
attractive option. What is more, balance-of-payments crises soon made a re-
appearance in the post-war years and were aggravated by cyclical downswings
in commodity prices following the Korean War, all of which contributed to the
feeling that the "dollar shortage" was a reality in Latin America as well as in
Europe. In the early post-war years, the inconvertibility of European currencies
acted as an additional constraint for countries whose main export market was
Europe. Tight external financing was yet another element; the little financing that
was available was primarily in the form of bilateral US aid (which was in very
short supply before the launch of the Alliance for Progress and even, in fact, after
that), chiefly via the Export-Import Bank and the limited lending provided by the

World Bank.
High levels of protection were still the rule in industrialized countries, and there

would clearly have to be a long period of sustained growth in international trade
before countries and policymakers that had lived through its collapse could be
convinced that exporting was once again a viable option. Although the General
Agreement on Tariffs and Trade (GATT) had been signed in 1947 by, among
others, a number of Latin American countries,18 the idea of having a strong
institution to regulate world trade was blocked when the US Congress refused
to ratify the charter for the International Trade Organization (of which GATT was
to be a part) that had been framed in Havana. Moreover, it soon became clear that
the sectors in which developing countries had the most export potential (agricul-
ture and textiles) would be sidelined from the GATT trade liberalization arrange-
ments, as became evident when the United States, with the support of Western
Europe, removed trade in farm products from GATT disciplines in the mid-1950s
and began to introduce a series of restrictions on trade in textiles, which would
ultimately take the form of the Multifiber Agreement. All of this fed the "export
pessimism" that characterized some post-war visions and the inkling that import-
substitution efforts and strict state management of the scant supply of foreign
exchange were essential in order to overcome the persistent balance-of-payments
constraints faced by the region. 19

The reconstruction of international trade in the aftermath of the Second World
War was based on two types of agreements: GATT, which, together with the
creation of the European Economic Community, provided a framework for the
expansion of trade between European countries and with the United States, and
the Council for Mutual Economic Assistance, which encompassed the Commun-
ist countries of Central and Eastern Europe and the Soviet Union. As time passed,
however, and although these agreements continued to focus on intra-industrial
trade among developed countries and to play a vital role in these countries'
"golden age" of economic growth, the first of these processes opened up oppor-
tunities for developing countries to export manufactures. Mechanisms were also

18 Brazil, Chile, Cuba, the Dominican Republic, Nicaragua, Peru, and Uruguay were founders of this
organization or became members early on. Argentina joined in 1967.

19 This also gave rise to ECLAC's view of balance-of-payments crises as a structural phenomenon
caused by the high income-elasticity of import demand and the lower income and price elasticities of
exports, particularly in the case of commodities. These ideas were the underpinnings for the emphasis
on balance-of-payments adjustments in the region's macroeconomic policies.

162 Economic Development of Latin America

put in place that were specifically designed to boost developing countries' share
in world trade, such as the Generalized System of Preferences (GSP), and a series
of commodity agreements, which took on a new life with the fall of raw material
prices in the mid-1950s. A major agreement that was important to Latin
American countries was the coffee agreement that began to be partially imple-
mented in the late 1950s and which led to a series of formal international
agreements that, with brief interruptions, regulated the world coffee market
with quotas from 1962 until 1989.20 In addition, although the reconstruction
of the international financial system was largely focused on developed countries,
starting from the mid-1960s and, even more so, the early 1970s, other possible
sources of financing, apart from multilateral banks and bilateral agencies, began
to emerge.

Following the Cuban Revolution, Latin America began to figure more promin-
ently on the US foreign policy agenda. The creation of the Inter-American
Development Bank (IDB) in 1959 was the most immediate sign of this shift,
followed soon thereafter by the launch of the Alliance for Progress in Punta del
Este, Uruguay, in 1961. As noted earlier, this last initiative was largely based on the
recommendations that ECLAC had been making since the 1950s, which included
a mixed economic planning model, regional integration, agrarian reform, tax
reforms in which direct taxation would play a major role, and greater investment
in social sectors. The volume of funds was less than had been promised, however,
and the conditionality of US aid soon became a source of friction.

INDUSTRIALIZATION PHASES AND
VARYING EXPERIENCES

The Latin American industrialization process went through three different stages
during the period covered in this chapter. The first was the "pragmatic" phase of
import substitution, which was triggered by changes in relative prices and eco-
nomic policy responses to the external shocks of the 1930s and the Second World
War. These events, and especially those of the Second World War, were the
impetus for the development of the first plans for promoting new industries and
reducing the countries' reliance on imports, especially in what were considered to
be "vital" or "strategic" sectors. This idea was particularly attractive for military
governments, such as those that governed Argentina, Brazil, and, in the years
immediately following the war, Venezuela.

The second phase, which could be called the "classical" phase of Latin Ameri-
can industrialization, took place between the end of the war and the mid-1960s
and was relatively more important in the larger economies. The shortage of
foreign exchange continued to be one of its hallmarks. This was because, despite
the initially high levels of international reserves, balance-of-payments crises soon
became a recurrent problem in the post-war period. As the countries' dollar

20 Bates (1997) offers the best available historical analysis of the negotiation of these international
coffee agreements.

State-led Industrialization 163

A.lMF Programs

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.§ .rE.a.

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eran
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0 l{) 1'- 1'- 1'- 1'- 1'- 0
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(j) (j) (j) (j) (j) (j) (j) (j) (j) (j) (j) (j) (j) (j) (j) (j)

B. International Reserves, Gross and Net of IMF lending (% of GOP)

6.0%

5.0%

4.0%

3.0%

2.0% '\_

1.0%

0.0% 0 c.o CX) c0.o Cc.\oJ 'c<.ot c.o CX) 0 C\J c.o <0 0
l{) c.o 1'- 1'- 1'- 1'- <0
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(j) (j) (j) (j) (j) (j)
l{)(j)l{) (j)
(j) (j) (j)

1-- LA gross reserves · LA net reserves!

Figure 4.3. Indicators of balance-of-payments crises, 1950-80. A. IMF programs.
B. International reserves, gross and net of IMF lending (% of GDP)

Note: Net reserves is calculated as the difference between gross international reserves and IMF loans.
Sources: International Financial Statistics (IMF) and ECLAC's historical series of GOP in current dollars

reserves evaporated when the repressed import demand that had built up during
the war years was unleashed, the first balance-of-payments crises soon broke out
after the war came to an end. They were followed by a wave of such crises when
commodity prices fell following the Korean War (the period of"external strangu-
lation" in ECLAC's terminology). Figure 4.3 shows the number of Latin American
countries that had lending arrangements with the International Monetary Fund
(IMP), the amount of financing that it provided to them, and their levels of
international reserves (measured as percentages of Latin America's GDP). As
the figure illustrates, all of these indicators point to a deteriorating situation

164 Economic Development of Latin America

from the mid-1950s to the early 1960s, which then began to improve in the mid-
1960s. Early o.q, however, many countries displayed a tendency to make IMP
programs an almost permanent feature of their economic management.

In keeping with the trend that had taken shape during the "pragmatic" phase,
the typical policy response to each successive crisis was to raise protection levels
further. But at this point, almost every country of the region began to introduce a
more consciously thought-out industrialization strategy, generally as part of an
explicit development plan. These strategies employed differing mixes of trad-
itional policy tools, although they were wielded with greater-at times exces-
sive-zeal: tariff and non-tariff protection; multiple exchange rates and foreign-
exchange rationing; development banks; and investments in infrastructure. And
they combined them with new policy tools: regulations governing sectoral alloca-
tions of credit for the private sector and interest rates; tax incentives; public-sector
investments in strategic sectors, including energy, telecommunications, and some
transport services, but also some steel, chemicals or petrochemicals industries;
subsidized prices for the inputs used by state-owned enterprises that controlled
those strategic sectors; "laws of similars" (which essentially blocked imports that
would compete with domestically produced goods); and regulations or laws
requiring industries in the country to buy domestic raw materials and intermedi-
ate goods.

One hallmark of this model was that, rather than altering the structure of
protection in order to promote new industries, new layers of protection were
superimposed on existing ones. This practice gave rise to a "geologic" pattern of
protectionist strata that was to become an emblematic feature of state-led indus-
trialization in Latin America. This was clearly due to the political economy of the
time, in which protection for a given sector came to be viewed as a permanent
entitlement. By the same token, incentives were never regarded as temporary (i.e.,
as promotional measures for infant industries that were to be dismantled once
those industries had become competitive). This complex web of measures made it
difficult to tell which sectors were actually being favored. The unwieldy system of
protection to which all of this gave rise did not go uncriticized, of course, and one
of its critics was ECLAC itself.

Regional and subregional integration came to be seen as the most promising
way of rationalizing this protective structure. According to ECLAC's original
view, regional integration would reduce the costs of import substitution by
increasing the size of the market, which was of critical importance in attaining
economies of scale in the larger economies' more advanced sectors and in enab-
ling the smaller economies to achieve some degree of industrialization. It was also
expected that integration would impose some market discipline on protected
sectors, which had readily achieved high levels of industrial concentration (and,
in some cases, had even formed monopolies) at the national level. It was also seen
as a platform for the development of new export activities, particularly in the
manufacturing sector.

However, with the exception of the Central American Common Market,
regional integration initiatives soon ran up against the same problems of political
economy that had hampered efforts to rationalize the protectionist structure in
general. After a few successful multilateral rounds in the early 1960s, the Latin
American Free Trade/Integration Association (LAFTA/LAIA) was faced with

State-led Industrialization 165

strong opposition to the liberalization of competitive imports (i.e., imports pro-
duced by one country that could compete with those of another member country).
In its later stages, it therefore concentrated on bilateral agreements concerning
complementary imports. When the Andean Group was created in 1969, it also
came under similar pressure and it, too, focused its attention on the liberalization
of intraregional trade in complementary imports. The Central American
Common Market and, in particular, the Andean Group also attempted to pro-
gram industrial development in their expanded markets and to plan new, comple-
mentary investments, but these efforts were almost invariably resounding failures.

"Export pessimism" was also a hallmark of the "classical" phase, but there were
significant regional differences. With the exception of a few countries (Venezuela
and a number of smaller economies, but also Mexico to some extent), export
growth was disappointing in the years immediately following the war. However,
this picture brightened considerably for the smaller countries starting in the mid-
1950s, when their exports began to increase, and for the region as a whole from
the mid-1960s on (see Table 4.5). Surprisingly, however, a steep downturn was
seen in the exports ofVenezuela, which had been the region's strongest exporter
between the 1920s and 1950s. Actually, in many cases (particularly in the Central
American economies but also in some mid-sized countries such as Peru), import
substitution was simply superimposed upon what essentially remained a com-
modity-export-led model (for Peru, see Thorp and Bertram 1978: part IV). And
this was also true of Venezuela, where the industrialization policy was seen as a
way of "sowing the oil" (Baptista and Mommer 1987; Astorga 2000; Di John
2009). The sharp reduction in the share of exports in GDP that began in 1938 was
thus followed by a gentler decline in the 1950s that came more or less to an end in
the 1960s (see Figure 4.2 for the regional patterns, excluding Venezuela).

Differences in opinion concerning commodity export opportunities did not
extend to foreign direct investment (FDI). On the contrary, the promotion of
investment by transnational corporations in new import-substituting activities
became a core component of state-led industrialization in Latin America. FDI was
also seen as a reliable source of private external financing in a world economy that
offered few other options. Nonetheless, many countries of the region banded
together in staunchly opposing traditional forms of foreign investment in natural
resources and infrastructure. Thus, the Latin American countries did not reject
FDI during this stage, but did channel it in ways that they saw as being in their
national interest. In fact, up until the 1970s, the region succeeded in attracting the
lion's share of total FDI flows to the developing world. This trend will be discussed
in greater detail in a later section.

The third phase came when state-led industrialization reached what could be
regarded as its "mature" stage. Increasingly divergent regional trends were the most
conspicuous feature of this period, however. There were three major strategies,
which were in some cases adopted in a sequential way by individual countries.
The first oil shock, in 1973, was a significant turning point in this respect.

The first strategy, which was the dominant one between the mid-1960s and the
first oil shock (as well as the one that was most closely in keeping with ECLAC's
views), placed increasing emphasis on export promotion and was what we have
called the "mixed model." In a way, this component brought the strategy being
applied by the mid-sized and large economies more closely into line with the

166 Economic Development of Latin America

Table4.5. Latin American export sector dynamics

Real growth in exports of goods and External openness (exports as % of

services in constant 2000 dollars GDP at constant 2000 dollars)

1945-57 1957-67 1967-74 1974-80 1945-57 1958-67 1968-74 1975-80

Large countries 0.6% 4.2% 11.3% 10.1% 6.0% 3.6% 4.0% 4.1%
Brazil 4.4% 3.0% 6.3% 10.6% 8.6% 6.8% 5.9% 6.1%
Mexico
-0.2% 3.0% 1.3% 7.3% 5.0% 4.1% 3.5% 4.5%
Southern Cone -1.0% 4.6% 3.2% 13.6% 13.2% 11.0% 10.3% 17.5%
Argentina -4.3% 4.9% 1.0% 10.5% 9.7% 8.4% 8.2% 11.2%
Chile
Uruguay 1.6% 3.9% 5.4% 6.0% 11.2% 9.3% 9.0% 8.8%
4.8% 6.7% -1.3% 6.7% 11.8% 14.8% 12.1% 10.2%
Andean 10.2% 2.9% -0.1% -5.1% 55.2% 49.0% 36.7% 19.2%
Colombia
Peru 4.7% 8.3% 11.4% 0.9% 15.0% 12.9% 17.9% 16.6%
Venezuela 4.5% 9.0% 3.7% 4.5% 9.8% 12.2% 12.9% 14.4%
0.7% 8.3% 11.2% 3.3% 8.8% 10.0% 12.9% 13.3%
Central America 3.1% 8.9% 2.5% 6.7% 21.7% 23.2% 30.0% 27.1%
Costa Rica 13.0% 8.4% 5.1% -5.2% 21.8% 31.1% 33.4% 37.5%
El Salvador
Guatemala -3.2% 2.8% 4.8% -1.4% 17.4% 11.7% 12.7% 11.1%
Honduras 6.2% 5.7% 11.9% 2.0% 28.8% 33.6% 38.9% 35.7%
Nicaragua 6.1% 9.2% 9.3% 23.7% 22.8% 30.3% 39.9%
5.2% 5.2% 18.6% 11.1% 11.0% 11.6% 11.6%
Other -0.8% -1.0% 10.7% 10.6% n.d. 19.0% 16.8% 15.6%
Bolivia 5.5% 0.1%
Ecuador 3.7% 3.9%
Panama 4.4% 5.5% 10.9% 10.0% 8.6% 7.6%
Paraguay 4.2% 6.0%
Dominican Republic 1.9% 8.6% 7.9% 6.6% 6.3% 6.6%
3.4% 3.2%
Weighted averages 4.7% 5.6% 10.5% 9.5% 7.9% 6.7%
Latin America 6.0% 7.7%
(18 countries) 2.3% 5.2% 15.5% 15.6% 18.4% 19.6%
Excluding 5.4% 5.7%
Venezuela 2.9% 5.6% 16.4% 16.4% 17.1% 16.9%
Largest economies 5.6% 6.1% 6.2% 14.0% 14.4% 15.9% 16.8%
(7 countries) 3.1% 7.0% 15.9% 14.1% 11.6% 10.0%
Smaller economies 4.0% 3.7% 4.6% 16.8% 17.8% 20.5% 21.3%
(11 countries) 3.2%
6.3% 7.0%
Simple averages 0.0%
Latin America
(18 countries)
Excluding
Venezuela
Largest economies
(7 countries)
Smaller economies
(11 countries)

Source: See Table 4.4

strategy already being followed by smaller countries. It was based on existing
integration agreements but also, more importantly, on new opportunities being
opened up by the region's expanding exports oflight manufactures to industrial-
ized countries.

In keeping with the long-standing "geological" pattern, this new strategy laid
another stratum of export incentives on top of the existing layers of protection,

State-led Industrialization 167

which included a mix of tax incentives (direct subsidies or soft interest rates, along
with tariff exemptions or drawbacks) and credit facilities for exporters, as well as
export requirements for foreign firms and the creation of free trade zones. In this
last respect, Mexico's establishment of a program for maquila operations near the
US border in 1965 (the same year that a similar program was launched in Taiwan)
was the first innovation of this sort. Export incentives were generally coupled with
some degree of rationalization of the existing production structure and the
management of foreign exchange (specifically, the unification of multiple ex-
change rates or the simplification of multiple-rate systems), along with a more
active foreign-exchange policy that provided for a more flexible exchange rate
(crawling pegs) in order to cope with the recurrent overvaluations that so often
beset inflation-prone economies. This kind of exchange-rate system was intro-
duced by Argentina, Colombia, Chile, and Brazil in 1965-8 (Frenkel and Rapetti
2011).

Interestingly enough, the heightened awareness of the importance of exports
was coupled with a more critical view of FDI. The idea that national investors
should play a central role in new manufacturing sectors had been on the· table
since the Second World War. In many cases, this role was taken on by state-owned
enterprises. However, the defense of national investors was an issue that received
increasing attention in the 1960s and 1970s, which is also when caps were placed
on royalties and profit remittances in response to the general view that trans-
national corporations were reaping exorbitant profits from their investments in
the region. The Andean Group's regulations were perhaps the most exemplary in
this regard: the statute on foreign investment (Decision No. 24 of 1970) reserved,
in effect, certain sectors for firms in which a majority interest was held by Andean
investors,21 limited the benefits that foreign firms could derive from the expanded
market and placed restrictions on overseas profit remittances and royalty pay-
ments. The nationalization of the copper industry in Chile and the oil industry in
Venezuela in the early 1970s was part of another kind of pattern that dated back to
an earlier time.

Nevertheless, in 1973-81 Latin America continued to receive nearly 70 percent
of total direct FDI flows to the developing world (Ocampo and Martin 2004: table
3.2). Foreign investment was still welcome for the development of new industries
and exports, and more than a few state-owned enterprises entered into strategic
partnerships with multinationals. Consequently, the idea that Latin America
rebuffed foreign investors during the period of state-led industrialization is
inaccurate. It was more a matter of steering investment in certain directions. In
fact, Japan and two of the first "Asian tigers"-the Republic of Korea and
Taiwan-were actually more closed to foreign investment during those years
than Latin America was.

The second strategy was to expand import substitution even further. Peru is the
best example of a country that turned away from its commodity-exporting
tradition and bucked regional trends in favor of a more inward-looking policy

21 Public utilities and the financial, communications, transport, and domestic marketing sectors
were reserved for companies in which Andean investors held at least a 51 percent interest. Decision No.
24 also introduced a ten-year freeze on the use of concessions as a channel for investment in primary
sectors.

168 Economic Development of Latin America

in the late 1960s (Thorp and Bertram 1978: part IV). In addition, Brazil, Mexico,
and Venezuela all launched ambitious industrial investment plans focusing on
intermediate and capital goods after the first oil shock (which was a negative shock
for Brazil but a positive one for the other two countries). Brazil coupled this move
with a major export drive and ended up being the country with the most complete
industrial structure in the region (Castro 1985).

The third strategy involved a frontal attack on the role of the state in economic
development. Since the mid-1960s, there had been a gradual shift in intellectual
debates toward a more liberal view of economic policy that gave the market a greater
role in resource allocation. As in the nineteenth century, liberal economics was not
initially linked with liberal politics. In fact, in the countries of the Southern Cone
(Argentina, Chile, and Uruguay), which were pioneers in this respect, the sweeping
market reforms of the second half of the 1970s were carried out by military
dictatorships. However, even in cases where highly liberal ideologies held sway, the
oil crisis led these countries to use very attractive state incentives for the promotion
of non-traditional industrial exports in an effort to cover the trade deficit.

Partly as a result of this increasingly wide range of experiences, the industri-
alization process reached its peak in Latin America in 1973-4. Until then, the
manufacturing sector's share of GDP had climbed steadily, but after those water-
shed years (and, thus, long before the collapse triggered by the debt crisis), the
region's industrialization coefficient began to decline (see Figure 4.4). In any
event, the industrialization process differed a great deal across countries (see
Table 4.6). Among the larger nations, increases in the manufacturing sector's
share of GDP between 1950 and 1974 were the greatest in Argentina, Brazil,
Colombia, and Mexico and were far smaller in Peru and Venezuela, while they
were almost negligible in Chile, where the manufacturing sector's share was
already very large as of 1950. Yet the industrialization process also made rapid
headway in a number of small countries, particularly Ecuador and several Central

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Figure 4.4. Manufacturing value added as a share of GDP, 1950-2006

Source: Authors' estimations based on ECLAC historical series

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170 Economic Development of Latin America

American nations, where, as noted earlier, it was mixed in with a commodity
export structure. Between 1974 and 1980, it continued to make inroads in only a
very few countries; it did so to some extent in Mexico and Venezuela, among
the larger nations, and was especially strong in Ecuador and Nicaragua, among the
smaller ones. In Brazil, manufacturing's share of GDP edged down slightly, but
industrial growth remained very dynamic.

The pace of industrialization was closely linked to the size of the economy and
was reflected particularly in the composition of manufacturing value-added. This
can be seen from Table 4.7, which provides estimates of the shares of the different
sectors in manufacturing value-added in 1974, with the countries being listed in
order of the size of their industrial sectors. In the smaller economies, the more
traditional industries accounted for between 60 percent and 80 percent of manu-
facturing value-added by the end of the most intensive phase of industrialization,
but even in Colombia and Peru, they accounted for about half. In Chile's and
Venezuela's economic structures, one particular sector played a highly significant
role (basic metals and oil refining, respectively). Thus, only Brazil, Mexico, and
Argentina were highly diversified. Apart from Chile and Venezuela, the countries'
production structures were heavily influenced by a few sectors in which they had
or had acquired competitive advantages, such as textiles in some small economies
(Uruguay and Bolivia, and, in Central America, Guatemala and El Salvador),
processing industries (paper and chemicals) in Colombia, foodstuffs in Argentina,
and transport equipment in Mexico. These patterns were mirrored in these
countries' exports of manufactures, both during this period and in the following
phase of development.

Finally, the industrialization process was also accompanied by local techno-
logical capacity-building. In some cases, these capacities came hand in hand with
industrialization as such (e.g., in the form of new equipment in which better
technologies were embedded). In others, they came with foreign investment.
Industrialization also required an explicit learning process and an effort to
adapt technologies, which gave rise to a considerable number of secondary
innovations. Adaptations were necessary, among other reasons, in order to elim-
inate specific bottlenecks, adjust to conditions typical of given firms' locations
(smaller production scales, use of local raw materials, technical assistance for
input suppliers), or redesign products for local markets. The participants in this
learning process and in the adaptation of technologies ranged all the way from
quite small companies to the largest corporations, including the subsidiaries of
multinationals and state-owned enterprises. Some of the larger corporations set
up research and development departments. In the most outstanding success
stories, some firms gained enough expertise to sell technology, in the form of
licenses and engineering services, primarily to other Latin American countries.
For a now broader range of production units, this became a decisive factor in
building the capacity required to take advantage of the opportunities opened up
by manufacturing exports from the mid-1960s on.22

22 This microeconomic perspective on import substitution is closely associated with the work of
Jorge Katz (see, for example, Katz 1978 and 1984, and Katz and Kosacoff 2000). See also Teitel (1993)
and Teitel and Thouml (1987) on the transition from import substitution to export activity in various
sectors of the economies of Argentina and Brazil, as well as the more recent work of Bertola et al.
(2009).

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State-led Industrialization 173

The national innovation systems that were developed were not strong enough,
however, to create solid technological networks of the type that were being built
up at that time by Japan and some of the first Asian tigers (especially the Republic
of Korea and Taiwan). As a result, they failed to achieve a sustained reduction in
the technological gap between the region and industrialized countries. Nor was
there any focused policy for promoting technological spillovers from foreign
investment, which suggests that policymakers mistakenly assumed that these
kinds of spillovers would occur spontaneously. The science and technology
systems that countries did develop were primarily supply-driven models whereby
the state promoted the creation of scientific and technological centers, but these
centers were generally confined to state-owned enterprises and, as we will see, the
agricultural sector. The education and research systems were, for the most part,
not apprised of the needs of the production system, which, what is more, was not
generating a demand for large numbers of highly qualified technical teams
(ECLAC 2004: ch. 6).

There are various opposing views regarding the protection of high-technology
industries. In a classic work, Fajnzylber (1983) argued that the protection meas-
ures in place were biased toward capital goods imports and that they therefore
were repressing this sector's development and were discriminating against tech-
nology-intensive economic activities in the countries of the region. Opposing
views have been expressed by analysts of Brazil's industrialization process, who
have argued that, in that country (perhaps the only one that made significant
inroads in this area), the protection of capital goods industries drove up invest-
ment costs and exerted an adverse influence toward the end of the period of
industrialization (Abreu, Bevilacqua, and Pinho 2000).

ECONOMIC AND SOCIAL PERFORMANCE DURING THE
PERIOD OF STATE-LED INDUSTRIALIZATION

Economic growth

As discussed in Chapter l, during the period of state-led industrialization, Latin
America's growth rate outpaced the world average and matched the rate recorded
by the developed countries of the West. This was a stellar achievement, since, after
having bested the world growth rate since 1870, even during the international
turmoil experienced during the inter-war period, Latin America went on to take
part in the economic boom that followed on the heels of the Second World War-
the period in which the world economy grew faster than at any other time in its
history-and, in particular, the "golden age" of the most highly industrialized
economies (up to 1973).

This overall performance was, however, punctuated with major failings,
such as the poor showings of what had been the leading economies of the
region in the early twentieth century (the Southern Cone and Cuba) and the
inability of even those that were growing rapidly to narrow the gap between
them and the industrialized world or, as noted above, to develop the kinds of

174 Economic Development of Latin America

7.0%
6.0%

5.0%

4.0%

•

3.0%

2.0%
1.0%

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I~ Series 1 Series 2 - Series31

Figure 4.5. GDP decennial growth rates

Moving av~rage annual growth rate over the decade that ends in the year indicated in the graph

Source: Authors' estimations based on the information in the Annex
Series 1 includes Argentina, Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Peru, Uruguay, and Venezuela (the

first two data points exclude Cuba and Ecuador)
Series 2 includes all countries, except Bolivia, Panama, Paraguay, and the Dominican Republic.
Series 3 includes all countries.

national innovation systems that would have been needed in order to do so.
This inability to consolidate ambitious integration programs· that would help to
overcome the limitations of the region's domestic markets was also a serious
constraint and, in a sense, the major factor that stymied the application of the
ECLAC model.

Per capita GDP grew at an annual rate of 2.7 percent between 1945 and 1980,
which is a record rate for such an extended period of time. In addition, because of its
rapid population growth, Latin America's share in world production continued to
climb, reaching 9.5 percent by 1980, which was two percentage points more than at
the end of the Second World War and four points more than in 1929 (see
Table 1.1). Figure 4.5 shows estimated ten-year economic growth rates based on
increasingly broad-coverage totals for the countries of the region. As can be seen
from the figure, the average annual 5.5 percent growth rate for 1945-80 had been
attained very rarely before that time (a rate of about 5 percent was posted in the
decade leading up to the First World War and in the 1920s) and had never been
achieved for such a long period; nor would it be seen again during the three decades
following the 1980s debt crisis. This was also the most economically stable period in
history (see Table 1.5). Thus, it was not without reason that this phase of regional
development was described by Hirschman (1987) as "les trente glorieuses" and by

State-led Industrialization 175

Kuczynski and Williamson (2003: 29 and 305) as the "golden age" of economic
growth in Latin America.

Productivity growth was also faster during these years that it had ever been in
the region's history. Table 4.8 gives estimates indicating that GDP per worker rose
by an annual rate of 2.7 percent between 1950 and 1980. Astorga, Berges, and
Fitzgerald (2011) have discerned three well-defined stages in the trend in labor
productivity in the region's six largest economies during the twentieth century: a
period of slow growth up to 1936, an upswing between 1936 and 1977, followed by
a period of stagnation from that time until the end of the century. These authors
demonstrate that the same thing occurred with total factor productivity (TFP).
Even though there are many different methods for calculating TFP, regardless of
which methodology is used there is a vast body of literature that indicates that
total factor productivity climbed steeply between 1950 and 1975. This period was
then followed by relative stagnation, which lasted up until the debt crisis, after
which TFP lost ground; it has only recently started to recover from the significant
reduction it experienced over a span of almost three decades. This is shown in

Table 4.8. Economic dynamism

GDP GDP GDP

per capita per worker

Brazil 7.0% 4.1% 3.4%
Mexico 6.6% 3.4% 3.4%
6.8% 3.7% 3.4%
Large countries 3.3% 1.6% 2.0%
Argentina 3.5% 1.4% 1.9%
Chile 2.2% 1.3% 1.2%
Uruguay 3.0% 1.4% 1.7%
5.1% 2.3% 2.3%
Southern Cone 4.9% 2.1% 2.4%
Colombia 6.0% 2.2% 2.4%
Peru 5.3% 2.2% 2.4%
Venezuela 6.3% 3.2% 2.9%
4.1% 1.2% 1.4%
Andean 5.0% 2.2% 2.7%
Costa Rica 4.3% 1.3% 1.9%
El Salvador 4.1% 1.0% 0.7%
Guatemala 4.8% 1.8% 1.9%
Honduras 3.2% 0.9% 2.4%
Nicaragua 6.1% 3.2% 4.1%
6.1% 3.2% 3.6%
Central America 5.5% 2.8% 3.0%
Bolivia 5.8% 2.7% 2.6%
Ecuador 5.4% 2.6% 3.1%
Panama 5.5% 2.7% 2.6%
Paraguay 4.9% 2.2% 2.5%
Dominican Republic 3.6% 2.2% 2.8%
4.1% 3.5% 3.9%
Other 4.5% 2.6%
Latin America

Arithmetic mean
United States
Industrialized Europe (EU12)
World

Source: ECLAC historical series in 2000 constant prices. Labor force data according to ILO. The data on productivity
for the world, EU12, and United States come from Maddison (2001: table E-5).

176 Economic Development of Latin America

1.40

1.35 ,

1.30 I

- -~1.25
I

--

/

/ _ \1.20 /

/

/ /
/
///---/,,, '\\ - --1.15 \~//
1.10 I
''' X~
/II I1.05 /;
~
~I
~1.00
0.95

0.90

~~~~~~~~~~~~~~~~~~~~~~~#~~~*~*~~~*~~~*~*~~~~~~~~

I I--AL7 --AL17---USA

Figure 4.6. Total factor productivity (simple average, 1960 = 1)

So11rce: !DB (2010) and background information for the study by Daude and Fernandez-Arias (2010)
LA7: average of the seven largest economies; LA17: average of all economies excluding Cuba and Guatemala

Figure 4.6, which provides an overview of the findings of a recent IDB study
(2010).23 All of these estimates are in keeping with the observation that the largest
productivity gains were experienced during the years when the industrialization
process had made major strides.

Growth was also strong because of major changes in the production structure
and the robust institution-building that accompanied them (see, in this last
connection, Thorp 1998a: ch. 5). The manufacturing sector was the engine of
economic growth, as we have seen, but modern services were also expanding
swiftly: financial services, transport infrastructure (with roads and air transport
overshadowing railroads), telecommunications, and public utilities (electricity,
water, and sewerage). The state played a direct role in the development of some
strategic industrial sectors by setting up state-owned enterprises in those indus-
tries, but this was typical only of some countries, especially the larger ones. The
state also played a pivotal role in the petroleum industry and large-scale mining,
often-following the path that Mexico had opened up in 1938-through natio-
nalizations. The most widespread trend in the region, however, was for the state to
become involved in the development of modern utilities, often through the

23 See Astorga, Berges, and Fitzgerald (2011), Hofman (2000), and Aravena eta!. (2010).

State-led Industrialization 177

nationalization of private companies (the largest of which were foreign-owned)
that had entered those sectors earlier on.

For the region as a whole, the pattern was one of accelerating economic growth
in the years immediately following the War. This trend was buoyed by high raw
materials prices but was followed by a slowdown between the mid-1950s and mid-
1960s (see Table 4.4) as a result of the wave of balance-of-payments crises referred
to earlier. In the late 1960s and early 1970s, growth sped up sharply, peaking at an
all-time record rate for Latin America of 6.7 percent per annum between 1967 and
1974. Although growth slowed somewhat after the first oil shock, it was still quite
rapid in the last years of the period under analysis, especially in comparison to the
steeply lower growth rates of industrialized economies and the world economy as
a whole at that time. Balance-of-payments crises had once again become frequent
occurrences, however (see Figure 4.3), and the foundations for growth were
becoming shaky. This shift was coupled, as we have seen, with the stagnation or
retrogression of the industrialization process in most of the countries, along with
the build-up of a debt overhang starting in the mid-1970s. We will take a closer
look at this situation in the following chapter.

However, economic growth was not evenly distributed across the region or in
individual countries over time (see Tables 4.4 and 4.8). On the bright side, the
region's two largest economies-Brazil and Mexico-turned in strong perform-
ances, particularly between 1967 and 1974. This was no doubt a reflection of the
priority that their development programs placed on the domestic market. Most of
the Andean economies also did well, and this was particularly true of Venezuela in
the period immediately following the War (when it was, in fact, the fastest-
growing economy in the region) and Colombia from 1967 on.

However, apart from the cases of Brazil, Mexico, and Venezuela (for shorter
periods in the case of the latter two), the region's growth rates were not high
enough to put it into the "major leagues" at the international level. They were, in
particular, below those of the Asian economic success stories: Japan, above all, but
also the first generation of Asian tigers (Republic of Korea, Hong Kong, Singapore,
and Taiwan). Although there was some degree of convergence toward more
developed countries, Brazil's per capita GDP was equivalent to just 33 percent
and Mexico's to 39 percent of that of the industrialized West in 1980, which was
even less than the percentages achieved by the Southern Cone countries earlier on.
What is more, as shown in Table 4.8, the industrialized European countries
(EU12), which were recovering from the devastation of the War, made great
strides in closing the gap with the United States which very few Latin American

countries were able to emulate.
On the downside, there was the slow pace of growth in the economies that had

been the most successful ones during the commodity-export-led growth era: the
three economies of the Southern Cone and Cuba. Since the First World War, the
Southern Cone countries (Argentina, Chile, and Uruguay), which are classed as
being in what we have called Group 3, had registered the highest levels of per
capita income, but those levels then began to decline, slipping from 88 percent of
per capita GDP of the industrialized West in 1913 and 81 percent in 1929 to
71 percent in 1950 and 47 percent in 1980. In contrast to the regional average,
these countries also turned in their best performances in the first post-war growth

phase.

178 Economic Development of Latin America

For its part, Cuba (statistics for which are not included in these tables)
experienced extreme volatility up until its revolution against a backdrop of
exceedingly sluggish growth, with a per capita GDP as of 1957 that was virtually
the same as it had been in 1916 and only slightly higher than in 1905. The
transition to a centrally planned economy and uncertainty as to the economic
role to be played by the island's sugar industry caused the economy to lose
even further ground in the early stages of the revolution, and it did not begin
to regain that ground until the early 1970s; from that time until 1985, the
country achieved its most sustained period of rapid growth since the start of
the revolution.24

The fate of the smaller economies varied from country to country. Costa
Rica, Ecuador, and Panama posted long-term per capita GDP growth rates
above the regional average. So did the Dominican Republic and Guatemala during
the 1967-74 boom and Paraguay in 1974-80. Bolivia and Nicaragua, on the other
hand, fared the worst of all the countries in the region in terms of per capita
growth for this period as a whole. Exports played a more important role as an
engine of growth in the smaller countries than in the larger ones, but this alone
cannot account for the differences in the individual countries' performance.25
Export growth was an important element in driving growth in, for example,
Panama and Ecuador (in this case, in the later part of this period as a result of
the discovery of oil reserves), but not in Costa Rica, where domestic demand took
center stage. Furthermore, a strong export performance was not always the key to
success, as illustrated by the case of Nicaragua.

Most of the countries that did poorly had undergone revolutions: Bolivia,
Cuba, Chile, and Nicaragua (in historical sequence). The other two-Argentina
and Uruguay-also experienced violent shifts in their political and institutional
structures with the advent of military dictatorships, as also occurred in Chile
following its revolutionary foray. More broadly, with the exception of Costa
Rica and Panama (the two best performers), Central America was overtaken by
civil wars at the end of the period under analysis. Colombia was also immersed in
its own civil war (a period known simply as "the Violence") in the early post-war
period, which was the time when its economy faltered the most.

Another notable success story in the decades following the Second World War
was the region's ability to absorb two major demographic shocks which were
mentioned at the start of this chapter: accelerating population growth and rapid
urbanization. Declining death rates and the lagged transition in birth rates exerted
powerful demographic pressures that reached their height between the mid-1950s
and the mid-1960s. Overall, the population swelled by an average annual rate of
2.7 percent between 1950 and 1980, although the rates varied a great deal across
countries. Most of the relatively more developed countries in the region at the
start of the twentieth century (the Southern Cone nations and Cuba) posted lower

24 See Santamaria (2011). Two perspectives on the complex transition to a centrally planned

economy are provided by Mesa-Lago (1981) and Rodriguez"(1990). ,

25 A simple correlation between the direct contribution of exports and GDP growth for the last two

groups shown in Table 4.4 yields a high coefficient (over 0.6) in the first two post-war growth phases

that peaked (0.75) in 1967-74, but then slid to 0.4 in 1974-80,

State-led Industrialization 179

population growth rates in 1929-50 (with the exception of Chile) because they
had made the demographic transition earlier on. The steepest growth rate was
seen in Venezuela, which was a major destination country for migrants during
that period (see Table 4.9). Rising population growth rates translated into a
younger age structure and higher dependency rates, which kept many women
out of the labor market. As a result, the workforce tended to grow more slowly
than the total population, particularly in the 1950s and 1960s. When birth rates
began to decline in the mid-1960s, the labor force participation rate for women
began to climb, and, as the young people born in the preceding decades began to
reach working age, the growth of the overall workforce started to increase sharply.

The combination of these two demographic phenomena spurred the growth of
the urban population, which peaked at average annual rates of 4.4 percent
between 1950 and 1970. This was unprecedented in world history and, in fact,
was only to be replicated on a smaller scale in other parts of the developing world
much later on. The level of urbanization was already near or over 50 percent in
1930 in the Southern Cone and Cuba, whereas in the rest of the economies it was
just 33 percent (Mexico) or less (see Table 4.9). By 1980, it was already close to 80
percent in the countries where urbanization came early on (slightly lower than
that in Cuba) and in Venezuela, and was above 60 percent in the other four largest
countries (Brazil, Mexico, Colombia, and Peru). Thus, the countries' degrees of
urbanization were correlated with their levels of development, but also with

their size.

Agriculture, exports, and macroeconomic imbalances

The criticisms that have traditionally been leveled at the Latin American industri-
alization process have focused on three issues: its anti-agriculture and anti-export
biases and the macroeconomic imbalances that characterized it. A thorough
analysis does not, however, corroborate the first of these traits and indicates

that the second and third features were present in no more than a limited group

of countries.
Agriculture w(\s not, in fact, sidelined from the growth trends in production and

productivity or from the dynamic institution-building process of the time. Al-
though, as is typical of overall patterns of growth, its share of GDP shrank, farm
output expanded at an annual rate of 3.5 percent in 1950-74 and sped up to 4.3
percent in 1974-80, albeit with sharp differences across countries (see Table 4.6
and ECLAC and FAO 1978). These growth rates were above the world average
and higher than the rates that would typically be experienced after 1980, as will be
shown in the following chapter. Thanks to the mix of technological change and
the absorption of underemployed surplus labor in rural areas, agricultural prod-
uctivity rose sharply between the mid-1950s and the mid-1980s.Z6 This was the
period during which Latin America made the transition from extensive to

26 In their analysis of the sources of productivity gains in the six largest economies, Astorga, Berges,
and Fitzgerald (2011) also find that 1936-77 was the period during which agricultural productivity rose
the most in comparison to either the early or closing decades of the twentieth century.

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State-led Industrialization 181

intensive agriculture with the help, to differing degrees in different countries, of
improved seeds, mechanization, and irrigation, along with the widespread growth
of quasi-industrial livestock production (poultry, in particular) (Solbrig 2006) .
What was much more worrisome than the supposedly slow pace of growth in
outpllt was the increasing dualism of the sector in most countries, as the expan-
sion of agribusiness was, in most cases, coupled with a backward campesino sector
and, more generally, a rural society that was lagging behind the rest of the country.

This subject will be explored more fully later on.
It is no doubt true that trade policy discriminated against agriculture (Ander-

son and Valdes 2008), but this was primarily the result of explicit or implicit taxes
(e.g., via differential exchange rates) on traditional export products, especially
coffee and sugar and, in some countries, a few other goods. The counterpart of
discrimination against traditional export products was the protection provided to
agricultural production that competed with imports.27 Protection measures in-
eluded, in many countries, regulations requiring industrial firms to purchase the
harvests of certain crops or the use of government import monopolies to ensure
that imports would not displace domestic harvests. Overvaluation of the currency
could also have generated a bias against agriculture at various points in time in
some countries, but this was not such a widespread problem, as will be seen; nor
was it particularly characteristic of the period of industrialization.

More importantly, the institutional apparatus created by the state to bolster the
modernization of the agricultural sector encompassed technological development,
agricultural extension services, credit, and marketing. This institutional frame-
work was, for the most part, more ambitious than the one designed to support
industrial development, which relied heavily on a mix of protection and state
financing. The contrast between the two sectors is particularly striking in the case
of technology services. Many countries put effective mechanisms in place for the
introduction of new agricultural products and the improvement of farming
practices, but lacked a technology policy as such for the manufacturing sector.
Fiscal policy also provided for lower tariffs on agricultural inputs and machinery
and for specific income tax breaks (in countries where this was an important
factor) for agricultural enterprises. As transport infrastructure expanded, the
extension of the agricultural frontier also played an important role in many
countries, especially in Brazil. The resulting growth rates indicate that these
positive measures outweighed the trade policy bias, although the latter was
reflected in the agricultural sector's decreasing share in total exports and increas-

ing share in the domestic market (ECLAC and FAO 1978).
The anti-export bias was a much more important factor. In fact, one of the

greatest drawbacks of state-led industrialization was its inability to take full
advantage of the growing strength of post-war world trade. Apart from Cuba,
Latin America's share in world trade shrank to just slightly more than 4 percent in
the early 1970s, which was some three percentage points less than it had been in
1925-9 or in the run-up to the First World War. The reduction was much greater

27 This appears to be a more appropriate interpretation of the information provided by Anderson
and Valdes (2008) than the one that points to a more widespread anti-agricultural bias. See, for
example, Figure 1.3 of that study, which shows that almost all products that competed with imports

were protected.

182 Economic Development of Latin America

relative to the levels experienced in the early post-war years, but that comparison
is not a relevant one, since the differential, in that case, is more a reflection of the
low levels of trade associated with the devastation of Europe and the high
commodity prices of those years (see Figure 1.3).

Viewed in terms of products, the inability to take full advantage of the expan-
sion of commodity trade was the main reason for this decline, as Latin America
lost a hefty portion of its share in world commodity trade in the course of its
industrialization (see Table 4.10 and Ffrench-Davis, Munoz, and Palma 1998). In
the case of food products, where the reduction was particularly steep, a large part

Table 4.10. Latin American exports, 1953-2000

SITC* 1953 1958 1963 1968 1973 1980 1990 2000

Composition of Latin American exports 100.0 100.0 100.0 100.0 100.0 100.0
37.8 38.0 38.6 26.9 21.7 13.3
Total 0-9 100.0 100.0 18.4 16.2 15.4 11.9 11.9 6.9

Food 0+1 52.7 46.0 31.4 27.0 21.2 37.5 26.1 17.0
1.4 1.9 2.6 2.9 5.1 4.7
Crude materials, 2+4 19.4 17.3
0.6 1.3 4.6 6.0 11.7 35.8
except fuels 10.2 15.4 17.0 14.3 23.0 21.8

Fuels 3 19.6 28.1 30.5 23.2 19.2 14.9 15.0 18.1
Chemicals and 5 1.2 1.0 43.2 42.1 41.1 36.9 30.9 37.5
25.1 23.8 22.5 24.4 29.6 30.3
related products
45.1 25.8 16.5 12.1 18.3 14.6
Machinery 7 0.1 0.2 20.5 13.6 12.2 12.2 11.0 15.8
Miscellaneous 6+8 6.8 6.9
4.0 3.2 7.7 9.1 8.5 20.1
manufactured 14.0 13.8 11.7 11.9 10.4 13.4

articles 6.8 5.5 4.7 4.8 3.7 5.7
15.1 15.2 13.1 12.5 9.3 12.0
Latin America as % of developing countries 9.2 8.3 7.4 8.5 9.0 11.8

Total 0-9 35.9 32.8 27.0 18.0 11.4 9.3 11.5 9.7
1.4 1.4 1.6 1.8 2.0 2.8
Food 0+1
0.2 0.2 0.7 1.1 1.2 4.9
Crude materials, 2+4 2.5 2.9 2.7 2.7 2.9 4.7

except fuels

Fuels 3
Chemicals and 5

related products

Machinery 7
Miscellaneous 6+8

manufactured

articles

Latin America as % of world

Total 0-9 10.1 8.3
Food 0+1 23.9 19.4
Crude materials, 2+4 11.0 9.3

except fuels

Fuels 3 19.5 20.4
Chemicals and 5 2.7 1.5

related products

Machinery 7 0.0 0.1
Miscellaneous 6+8 2.6 2.2

manufactured

articles

'Standard International Trade Classification

Source: United Nations, Yearbook of International Trade Statistics (1958); and authors' calculations based on UN-
COMTRADE

State-led Industrialization 183

of the blame can be laid at the door of the protectionism of industrialized
countries and the mounting production and export subsidies that they put in
place, which hit Argentina, Cuba, and Uruguay particularly hard. However, Latin
America's share of food and other commodity exports shrank even relative to the
rest of the developing world. The decrease in export share was even more striking
in the case of oil as world exports shifted from Venezuela and Mexico to the
Middle East.

Since, as we have seen, export growth in many small countries was quite strong
from the 1950s on (see Table 4.5), it becomes clear that the general trend was
shaped primarily by what happened in the larger nations. Argentina, the leader in
the era of commodity-export-led growth, turned in the most disappointing
performance, which was very poor indeed up to the mid-1960s. Its share of
world exports slid from 2.6 percent in 1925-9 (and just slightly less than that
before the First World War) to just 0.4 percent by the end of the period covered in
this chapter. Cuba-the other great success story during the commodity-export-
led growth phase, with a nearly 1 percent share of world trade as late as the
1920s-also saw its share of world exports implode both before and after its
revolution. In relative terms, Chile's and Uruguay's shares in the world market
also shrank to a fraction of what they had been up until the 1920s. In other words,
among the leading countries in the early twentieth century, resounding failures in
terms of economic growth during this period were mirrored in export
development.

Brazil fared no better in terms of exports up to the mid-1960s, but, in its case,
this was part of a longer-term trend dating back to the early twentieth century.
Mexico, after marking up satisfactory export growth rates, particularly during the
Second World War, also performed poorly in this respect between the mid-1950s
and mid-1970s. Venezuela, which had been the region's strongest exporter in the
early decades of the post-war period, saw its growth begin to slacken in the 1960s,
and its share of the world oil trade began to dwindle. Its fuel exports also shrank in
the 1970s as a result of its entry into the Organization of Petroleum-Exporting
Countries (OPEC), an organization for which it was one of the staunchest
supporters.

In the 1960s, the shift in economic policy toward a mixed model in a number of
medium-sized and large countries boosted export growth. The chief result of this
change was an upswing in exports of manufactures to industrialized nations and
other countries in the region-thanks, in the latter case, to the region's emerging
integration processes. Even though regional integration was largely confined to
complementary goods, it was effective in paving the way for the growth of
intraregional trade in manufactures. Thanks to both trends, in the 1960s and
1970s the share of manufactures in Latin America's total exports began to expand
(see Table 4.10 and ECLAC 1992). The changeover to a mixed model also set the
stage for the development of new agricultural export products in many countries.

The countries' inability to streamline and reorganize the cumbersome system of
protection inherited from the "classical" period nonetheless took a heavy toll. For
established industries, these protection measures ceased to play a positive role as
an investment incentive and instead became simply a source of economic rents
and/or a bulwark against the cyclical overvaluation of the exchange rate, as well as
being one of the underlying causes of the increasingly high degree of industrial

184 Economic Development ofLatin America

concentration. The protection system was also, to some extent, self-destructive in
terms of its explicit objective of reducing dependence on imported inputs and
technologies, since many of the new activities were highly intensive in such inputs.
The system had not been designed to implement time-bound protection measures
and generally lacked mechanisms for tying incentives to performance.

With the introduction of multiple exchange-rate systems, the management of
the exchange rate became an additional tool of trade policy. The ability to use
exchange rates as a tool for implicitly taxing competitive imports and traditional
exports, while subsidizing non-traditional exports, was administratively attractive,
since all this required was a decision by the central bank, rather than a long,
drawn-out debate in parliaments. In addition, since explicitly taxing traditional
exports was politically delicate, discriminatory exchange rates were, for most
countries, the only available means of doing so. Considerable improvements
were made in the countries' exchange-rate regimes from the mid-1950s on
(under strong IMF pressure), and especially when the process reached its
"mature" stage, at which point most of the multiple exchange-rate regimes were
simplified or eliminated.

Running counter to the view of overvaluation as a central feature of State-led
industrialization, J¢rgensen and Paldam (1987) have shown that there was no
long-term appreciation of the real official exchange rate in any of the eight largest
Latin American countries in 1946-85?8 The most disturbing feature of the
exchange-rate regimes in place during this period was their high degree of
volatility around the long-term trend of the real basic exchange rate, especially
in economies that were prone to inflation. Starting in the mid-1960s, crawling
exchange-rate peg systems (gradual mini-devaluations) were introduced in an
effort to alter this pattern. The instability of the real exchange rate made it difficult
to create stable incentives for new exports and prompted sectors that competed
with imports to demand increased protection as a defense against the cyclical
appreciation of the real exchange rate.

Brazil and Colombia succeeded in using crawling peg systems in order to shield
the real exchange rate from instability starting in the mid- or late 1960s. Chile
would do the same after the trauma that it experienced in the 1970s (hyperinfla-
tion during the time of the Popular Unity coalition, followed by dramatic macro-
economic disequilibria during the early years of the ensuing dictatorship).
Argentina did not take the same tack, however, but instead continued to contend
with an unstable real exchange rate until after the turn of the century.

Contrary to the widely held view of Latin America as an inflation-prone region,
it should be pointed out that high inflation was not a widespread problem in the
region until the 1960s. Actually, as noted by Sheahan (1987), in the 1950s and
1960s, only four countries-all of them in the southern part of the continent
(Brazil and the three countries of the Southern Cone)-had inflation rates above

28 Quite to the contrary, according to their results, real devaluations occurred over the long term in
Brazil and Venezuela. Even more importantly, there were discrete devaluations of the real exchange
rate in a number of countries in the early years of the post-war period that had long-lasting effects
(Mexico in 1948, Peru in 1949-50, Brazil in 1953, Chile in 1956, Colombia in 1957, and Venezuela in
1961). This could mean that the exchange rates inherited from the War were significantly overvalued
and were then corrected.

State-led Industrialization 185

world rates. An important factor underlying inflationary trends in the Southern
Cone was the strength of these countries' trade union movements, and they were
joined by Bolivia and Paraguay during the political turmoil experienced in those
countries in the 1950s. With the exception of Brazil and the Southern Cone,
however, the countries of the region had lower inflation rates in the 1960s than the
Asian countries (which have a reputation for low inflation), and ten countries
(Mexico, Venezuela, Paraguay, all the Central American nations, Cuba, and the
Dominican Republic) had inflation rates below the world average (4 percent). As
shown in Figure 4.7, both the inflation rate in countries that were not inflation-

A. Median -~----------- ------------~~
25.0

20.0

0.0

0 C\J '<t (0 00 0 C\J '<t (0 00 0 C\J '<t (0 00 0
lO lO lO lO lO (0 (0 (0 (0 (0 I'- I'- I'- I'- I'- 00
0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0> 0>

I- - Latin America (18 countries)

B. Simple average

180.0 , - - - - - - - - - - -

160.0

140.0 -

120.0 ______, __· _ _ _,_ __
100.0 - - · - - - -

80.0

60.0 ----------

40.0 1 - - - - - - - - - - ·.• - - - - - - - - - - - - - -----~-----

20.0

I- - Non-inflationary IInflationary

Figure 4.7. Inflation rate in Latin America (annual percentage change of CPI). A. Median.
B. Simple average

Source: IMF, International Financial Statistics

Note: The "Inflationary" group includes Argentina, Brazil, Chile, and Uruguay.

186 Economic Development of Latin America

prone and the median inflation rate for Latin America ranged between 2 percent
and 4 percent between the mid-1950s and 1971. Even in the high-inflation
countries, the rate tended to subside to levels of between 10 percent and 20
percent following sporadic surges.

The heating-up of inflation witnessed in the 1970s was part of a worldwide
phenomenon, and yet, even so, the low-inflation economies of Latin America
continued to do well. If the highest-inflation countries of the region (Brazil and
the Southern Cone countries) are factored out of the equation, then the simple
average inflation rate for the Latin American countries for 1971-80 amounts to
14.2 percent, as compared to the IMF estimate of 17.1 percent for developing
countries as a whole. Here again, the bad news came from the countries with a
tradition of high inflation, which at this point ushered in the era of triple-digit
inflation.29 These sky-high rates were associated with serious political crises (the
demise of the governments of Allende in Chile and Isabel Peron in Argentina, in
that order) but also with economic measures (the indexation of prices and wages
in all of them). The soaring inflation rates of the 1980s therefore appear to be
more an effect, rather than a cause, of the debt crisis. This question will be
analyzed in greater depth in the following chapter.

The trend of fiscal accounts also indicates that public expenditure tended to rise
steadily over the long term, with the only interruption coming during the years of
"external strangulation." On average, in relative terms, central government public
spending doubled between 1950 and 1982, climbing from 12 percent to 22 percent
of GDP. This upturn was financed, however, by tax increases, with fiscal deficits,
in general, remaining moderate until the 1960s (see Figure 4.8). The main excep-
tions were, once again, in Brazil and the Southern Cone countries in the 1950s and
1960s, and the fiscal deficit skyrocketed in Chile during the years of the Popular
Unity Administration. Thus, the number of countries with fiscal deficits did not
rise alarmingly until later on, in the second half of the 1970s, and was closely
linked to the boom in external financing witnessed during those years.

It is interesting to note that the state did not increase its involvement in
production activities a great deal except in certain specific sectors. This indicates
that the upsizing of the government was, for the most part, confined to traditional
items of social and infrastructure spending. Table 4.11 illustrates the role played
by state-owned enterprises, measured in terms of their share in branches of
economic activity other than agriculture, based on a well-known World Bank
study (1995). As may be seen from the table, by the end of the period covered in
this chapter, state-owned enterprises' share in non-agricultural GDP averaged 10
percent, which was lower than the average for the rest of the developing world.
This corroborates the observation made earlier in this chapter: widely accepted
stereotypes to the contrary, after the Second World War Latin America opted for
less, rather than more, government. The major exception was, as we have noted,
the decision to tightly control mining resources (including hydrocarbons), which

29 There had been some episodes of this sort before, but they had been very sporadic. As noted in
the preceding chapter, these kinds of inflationary spirals had also been experienced during the civil
wars that Colombia and Mexico underwent at the start of the twentieth century.

State-led Industrialization 187

A. Government revenues and spending as a share of GOP (simple average)
24.0

22.0

20.0 I
18.0 I

16.0

14.0

12.0

10.0 ll) c0o
<0
0 (") <0 Ol Ol Ol

ll) ll) ll) ll)
Ol Ol Ol Ol

- LA 14 Revenues - - - LA17 Revenues
••· ••• LA14 Expenditures - - LA 17 Expenditures

B. Fiscal Balance as a share of GOP (simple average)

0.0~--~~--~-~--~~--~~--~~-.,-~-.--~-.--~-.~

-6.0 (") <0 Ol C\1 ll) co ;:::. '<t I'- 0co (c"o)
ll) ll) <0 I'- I'-
0 ll) <0 <0

ll)

Ol Ol Ol Ol Ol Ol Ol Ol Ol Ol Ol Ol

1 - LA14 - LA17

Figure 4.8. Public-sector finances, 1950-85. A. Government revenues and spending as a
share of GDP (simple average). B. Fiscal balance as a share of GDP (simple average)

Source: OxLAD. LA17 excludes Bolivia and Cuba. LA14 also excludes Nicaragua, Paraguay, and Uruguay.
The figures are simple averages. The information of expenditure for Brazil refers to primary expenditures and

deficits.

188 Economic Development of Latin America

Table 4.11. Share of state-owned enterprises in economic activity

State-owned enterprises in non-agricultural Public-sector banks: % of
activities (% non-agricultural GDP) assets of ten largest banks

1979-1981 1984-1986 1989-1991 1970 1995

Argentina 5.4 5.2 3.9 71.9 60.5
Bolivia 16.3 21.0 21.7
Brazil 6.4 53.1 18.5
Chile 12.8 6.6 9.4
Colombia 7.0 16.9 10.9 70.8 31.7
Costa Rica 5.9 14.7 10.9
Ecuador n.d. 11.4 9.4 91.5 19.7
El Salvador n.d. 11 12.1
Guatemala n.d. n.d. n.d. 57.7 53.9
Honduras 5.3 n.d. n.d.
Mexico 10.2 6.3 6.9 100.0 90.9
Nicaragua n.d. 15.3 10.8
Panama 7.9 n.d. n.d. 100.0 40.6
Paraguay 4.2 8.8 10.0
Peru 7.9 7.3 4.8 100.0 26.4
Dominican Republic n.d. 11.3 5.9
Uruguay 6.2 n.d. n.d. 32.1 22.2
Venezuela 26.8 4.8 2.5
22.6 29.6 49.2 29.9
Latin America 9.7 Weighted means
Mrica 21.3 10.7 9.7 82.7 35.6
Asia 13.0 23.0 20.4
Emerging economies 12.1 15.1 14.0 90.4 63.4
Socialist countries 13.8 12.5
All countries (92) 17.9 17.1

55.0 48.0

87.4 26.5

70.1 38.9

42.3 68.8

82.9 58.0

Arithmetic means

69.7 41.7

100.0 61.8
58.9 41.6

Source: State-owned enterprises according to World Bank (1995); banks according to La Porta et al. (2002)

is why state-owned enterprises tended to have larger shares in economic activity
in countries with major oil and mining sectors.

The other major exception was the financial sector (see Table 4.11), in which
Latin American state-owned institutions had a larger share during the 1970s than
the world average for non-socialist countries. In some cases (Argentina, Brazil,
and Uruguay), this dates back to the commodity-export-led growth model that we
examined in the preceding chapter. In others, although there were some prece-
dents, it was more evident during this period. Costa Rica, for example, national-
ized the financial sector early on (1948), while other countries would do so later on
as part of a political shift to the left. There was, nonetheless, a general tendency to
set up national development banks and state-owned commercial banks and other
financial institutions (insurance companies), as well as to channel credit toward
priority sectors and to control interest rates.

To what extent did this hamper the countries' financial development and lead
to a suboptimal use of bank financing and capital markets?30 This is not an easy

30 This is the hypothesis championed by Haber (2006).