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The Myth of ISI?

8 Aug

One of the important lessons of 1970s and 80s development policy that was repeated again and again in my undergrad Political Science classes was that structural adjustment (SA) was largely a failure–following the other failure of import substitution industrialization (ISI). So I was more than interested to read Dani Rodrik’s argument that ISI’s reputation is undeserved.
I don’t know enough about the Latin American domestic industrial sectors (or much past introductory microeconomics) to argue for or against implementing ISI as a development program, but as a historical matter, ISI did seem to be one of the major factors in the “lost decade” of Latin American debt and low productivity. The Economist’s Free Exchange blog sums it up:

Rodrik warns us not to confuse microeconomics with macroeconomics. He is right to say that a country’s build-up of foreign debt is a function of macroeconomics (national spending exceeding national output). But countries bounce back from foreign-debt crises by exporting their way out of them. That is much harder to do if a country’s skewed microeconomics has left a big share of its output unfit for foreign consumption.

From a political economy perspective, I can understand the appeal in the 1970s of self-sufficiency that ISI promised, especially since dependency theory was still fashionable. You can create jobs in your country and higher standards of living without having to play the games of the much more powerful developed nations, who are less concerned with your interests anyway. But much of the foreign debt crisis was predicated on international loans that Latin American countries gladly took on to continue investing in their developing sectors. Too many governments in Latin America either thought the favorable borrowing conditions would continue forever (but then again, who wants to bet on variable interest rates predicated on an a commodity [oil] surplus being stable?) or that they could grow their way out of the problem (have profitable enough sectors to service the debt and stop taking out new loans).

In the end, it seems like you’ll have to rely on exports to either spur further growth (if ISI is a success) or pay for debt (if the interest rates change). Perhaps it wasn’t ISI qua ISI that was the problem, but certainly many of the Latin American governments weren’t the best choices to implement such a program.