Import Substitution Industrialisation (ISI)

When the ISI was implemented after the Second World War, most of its fiscal, commercial and monetary policies focused on propelling national industrialisation to satisfy the domestic market. In the mid 1950s, scholars from the Dependency School, like Prebish (1959) and Singer (1950), pointed out that it was necessary to have in mind the structural differences between central economies and periphery countries before applying development policies. They thought that infant industries in developing countries required protectionism from international competition, especially from developed countries.

For Latin American countries, the deterioration in the terms of trade and foreign ownership were the main mechanism for the transfer of surplus value from the periphery to the centre. The ISI had two major objectives: to improve the balance of payments and industrialise the country through import substitutes’ production. Some arguments in favour of the ISI were that the low demand for agricultural goods from the industrial nations, the fluctuation of their international prices, and the dependency on traditional exports could not guarantee high rates of economic growth and equilibrium in the balance of payments.

In the case of Mexico, it is said that this process intensified when the production of cotton and its commercialisation - the main activity in the north- collapsed in the mid-1960s due to synthetic goods. Additionally, the end of a temporary job programme between Mexico and the US increased unemployment. This situation was the main reason to elaborate an alternative programme applicable along the border, known as Programa de Industrializacion Fronteriza22.

In addition to the agricultural sector, crude oil extraction and the petro-chemical industry were the main sources of financial resources. International oil price fluctuations were another key factor influencing the vulnerability of the economy. Meanwhile, across Latin America the instability and low levels of development were a common issue. The Dependency school in Latin America provided the theoretical and political basis to explain why underdevelopment was the result of the centre-periphery unequal relationship. Basically, they predicted that this relation of exploitation could not be broken, unless periphery countries limited the influence of external forces. The best way to achieve industrialisation and protect the economy at the same time was conceived under the ISI. It was expected that

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Among other objectives, this programme established an industrialisation scheme with preferential trade tariffs in order to allow temporary import of raw materials. At the same time, the US would concede preferential import tariffs and tax reductions to investors along the border. This was the antecedent of the assembly industry (or

industrialisation would occurred in three phases, first the national industry would produce final goods; second they would produce intermediate goods and thirdly, the country would be able to produce capital goods (Flores, 1998).

During this period, the instruments used by trade policies were: quantitative restrictions, import licences, official prices, import tariffs and subsidies on capital goods and public services and final goods. On the other hand, national exporters received some fiscal and economic stimuli such as: certificates to reclaim taxes, tax exemptions in raw material imports and short-term credits. However, it became clear that it was more profitable to invest in import substitution goods that assured high revenues than to produce export goods and compete in the international market.

In the long run, the limitations of domestic markets did not permit exploitation of large-scale economies; and national investors had little incentives to improve product quality and technical methods. Prices were not really determined by the free market. Discrimination against exports affected economic growth because their decline restrained the possibility of financing deficits in the current account and also limited economic development.

At the same time, public investment growth rate increased dramatically for example, from 43% (between 1960 and 1965) to 70%, (between 1965 and 1970). On the other hand, the average growth rate of private investment average rate was 36% and 43%, in the same periods. Total investment experienced an abrupt rise in 1971, when President Luis Echeverria applied an expansive public policy to stimulate the economy. Such policy implied a strong government intervention financed by resources obtained from oil exports and external debt. Eventually, this untenable rising trend ended when international oil prices drop.

The economic crisis experienced in 1982 was the result of a set of many unsolved structural problems that automatically led the country to declare a moratorium on external

debt. The debt renegotiation with international creditors made it necessary to reduce the public deficit and therefore public investment in the economy. From them on, the country experienced a structural change that favoured private investment in many sectors that were considered previously as national property.

The end of the ISI had many causes, protectionism created a dependent national industry on public funds while fiscal and commercial stimuli were unable to promote competitiveness and efficiency. Additionally the fixed exchange rate represented the strongest instrument of monetary policy to stimulate production as it allowed imports at competitive prices. Ultimately, all these instruments distorted market prices and did not reflect efficiency and real costs. On the contrary, they caused inadequate resource allocation that ended up affecting export production.