Why by the 1920s Chile Had Developed a Significant Manufacturing Sector - Essay Example

Why by the 1920s Chile had developed a significant manufacturing sector Name Institution Course Tutor Date After the First World War, Latin American countries continued to experience growth in their manufacturing sectors. Nevertheless, the external environment in which the countries were operating was unfavourable making export growth to stagnate at some points. Importantly, in the period after 1913 there were some challenges facing primary exporters of products in Latin American countries even before prices eventually declined in the late 1920s (Ocampo and Ros 2011). Although prices were low and markets were unpredictable, throughout the period between 1913 and 1929 few countries had recovered to normal operations and developed a significant manufacturing sector (Bulmer-Thomas 2014). Using Chile as a case study, this essay explores why by the 1920s, the country had developed significantly its manufacturing sector. Since the mid-nineteenth century, there has been at least much attempts of industrial development in many countries in Latin America. The existing evidence shows that the manufacturing industries that were established grew at a very low rate. This period was characterized by very low per capita income and isolated markets due to high costs of transport and hence could not support modern manufacturing (Haber, 2005). Nevertheless, in 1890s the speed of industrial growth increased drastically. In 1941, Chile being one of the largest countries in Latin America that witnessed sizable manufacturing sector. Its sector produced variety of non-durables consumer goods such as footwear, soap, paper among other commodities (Alvarez and Fuentes 2006). According to Haber (2005) during this period, domestic firms played a role in the manufacturing sector as they produced intermediate inputs, construction goods and metal workings, which included steel and iron structural shapes, and fabrication of agricultural equipments and parts used in repairing railroad. Therefore, one of the major contributing factors to Chile’s growth in manufacturing sector by the 1920s was the expansion of foreign trade. Two factors led to growth in foreign trade. First, like other Latin countries, Chile was on the silver standard and this at some point fell in value relative to gold. As a result, Chile saw her currency depreciate relative to gold currencies used by the North Atlantic countries (Haber 2005). In respect to the likely prediction of international trade, depreciation in real exchange rate led tradable sectors to expand at the expense of sectors that were not tradable. Second, there was a decline in the cost of transport internationally during the late nineteenth century because steel-hulled steamships replaced wood and sail (O’Rourke and Williamson 1999). Thus these two circumstances facilitated foreign trade in Chile. But how did foreign trade promote a significant manufacturing sector in the country? Expansion in foreign trade led to increase in aggregate demand for commodities manufactured in Chile which created the need to increase the production for exports. Additionally, Chile had to shift from its traditional import substitution industrialization political development strategy to a more export-oriented approach as argues Björk (2005). This significantly improved its manufacturing sector by the 1920s since more communities were to be produced to meet the existing demand. As Behrman (1976) observed, the growth in export sector and railway networks, as well as implicit trade protection due to depreciation in rates of real exchange created a favourable environment for the expansion of the manufacturing sector in Chile by the 1920s. Chile experienced different events during this period. First, a wage earning population came into existence that comprised of miners, ranch hands, stevedores, plantation workers and railway workers who generated more demand for consumer goods (Ocampo and Ros 2011). This means that there was need to increase the volume of production to meet the prevailing demand for consumer goods. Second, the growing population of people who were working and were now consumers did not comprise of just workers who suffered away in communities as connotes Haber (2005) but they were recognized as part of a national market which the railways linked with Chile from wherever their relevant locations. In other words, all this population contributed significantly to Chile’s market for commodities. Third, the railroads were themselves consumers of commodities manufactured in the country. Some of the items that were used to repair the railroad shops such as steel ingots and pig iron were manufactured in the country. This also contributed to the expansion of the manufacturing sector in Chile. Lastly, expansion of the export sector in Chile stimulated the development and growth of urban centers (Behrman 1976). Consequently, this resulted to increase in demand for goods used in construction such as wood products, cement, and steel and iron products. Merchants in Chile, who had earlier involved in the importation of manufactured products, eventually recognized the potential implicit trade protection and growing markets had created. Upon realizing this, they started to establish various manufacturing enterprises to be managed by their people. In turn, the manufacture of consumer goods resulted to demand for intermediate inputs, such as paper, glass bottles and basic chemicals (Haber 2005). Indeed, this is how Chile managed to significantly expand its manufacturing sector by the 1920s because emergence of demand for new commodities motivated the development of new manufacturing facilities. It did not take longer before nascent industrialists in Chile began to exert pressure on the government to expose high tariffs on the commodities they produced. They felt that the foreign competition was going to increase and work against them. Additionally, they pressured the government for zero or low tariffs on the inputs they acquired to use in production (Björk 2005). All in all, it is clear that the initiative taken by the merchants in Chile to set up their own manufacturing enterprises highly contributed to Chile having a significant manufacturing sector as earlier as before 1920s. The process of developing the manufacturing sector as a result the growth in the sector of export has been intensively investigated in Chile. According to Kirsch (1977) by 1914, the manufacturing sector in Chile comprised of large-scale producers who used mechanized techniques to produce commodities. Interestingly, Chile had already established a promising capital goods industry what was primarily used to produce railway cars. Later, this firm shifted to shipbuilding and other industries related to metal working and production (Haber 2005). Actually, Chile had nearly a similar mix of industries for consumer goods found in Argentina such as shoes, beer, cigarettes and paper. Besides having a large and flourishing industry for producing cement, Chile also produced intermediate good and construction products (Bulmer-Thomas 2014). All these developments were a consequence of a growing export sector. Before the Pacific war, Chile exported majorly wheat and copper and all the two commodities were domestically owned (Behrman 1976). Although the amount of exports for these products declined during the war, the export of Nitrates picked up in the postwar periods and this boosted Chile’s industry by a huge margin. According to Behrman (1976) the manufacturing sector in Chile had expanded to become modern by the 1920s after it embraced mechanized techniques of production. As such, its operations were on a large scale. This was motivated by increased protectionism. As Haber (2005) demonstrated, Chile and other Latin American countries had the highest tariffs around the world before the First World War. On average, import tariffs in Latin America were much higher, compared to those of the industrialized nations in Western. Intensive studies on tariffs and tariff policies in Chile show that policy-makers moved to protectionism as early as 1897 after receiving pressure from the Sociedad de Fomento Fabril, an organized lobby group that had been instituted in 1883 (Lederman 2005). Chile’s overall pattern was meant to ensure increased protection for the local industries for as long as up to 1950. As a result of protectionism, manufacturers in Chile actively lobbied for subsidies from the government by early 1920s in order to establish many new industries. Indeed, this really worked since the manufacturing sector ultimately became a major sector in Chile’s economy early enough. Besides using protective tariffs to promote its manufacturing sector by the 1920s, Chile’s ability to develop and adapt new technology also helped to move the manufacturing sector to greater heights. As early as 1914, Chile was able to mobilize capital for the purchase of capital goods that came with new technology (Haber 2005). The financial system in Chile was able to connect individuals with liquid wealth with those employed in productive investments which played significant role in increasing the growth rate of the manufacturing sector in the country. One of the requirements under the political economy of financial system is that a country needs to have a stable currency, a central bank, a banking system and a well developed market for securities in order to experience economic prosperity (Alvarez and Fuentes 2006). Chile at some point in time before the 1920s had some of these features and therefore manufacturers tended to have adequate capital. This had positive effects on the growth of the manufacturing sector in Chile. In fact, by 1913-14 Chile had already established its manufacturing sector. The existing estimates reveal that manufacturing in Chile during this period accounted for 14.5 percent of its total value addition Haber (2005), which was quite encouraging. The interruption of international markets for products and capital goods due to the First World War did not heavily disrupt Chile’s industrial development (Haber 2005). In any case, it had already made several steps in improving its manufacturing sector. On the better part, the manufacturing sector in Chile was helped by the fact that most European countries had resorted to war production. Nevertheless, the manufacturing sector, to some extent, continued to grow at a low rate until the war came to an end (Ocampo and Ros 2011). Data on industrial investment and production in Chile reveals a lot about it prosperity during the early years. According to Palma (2000) production from Chile’s manufacturing sector increased during the 1920s and the country diversified the production of commodities to produce also consumer durables. The total output from manufacturing increased drastically between 1918 and 1925 with 24 percent (Palma 2000). Interestingly, the share of intermediate, consumer durable, and capital goods increased from 18 -24 percent in total output. Although there was a slow growth in the rate of total output of production towards the end of the 1920s, Chile continued to diversify into more complex commodities (Palma 2000). Therefore, diversification helped Chile to grow its manufacturing sector with the chemicals, transport equipment, and metal machinery being the fastest growing industries. It is right to argue that beginning in 1890s Chile undertook a 100-year experience and during this period, it built incredible manufacturing sector despite the existing barriers to trade. The country did not conduct this experiment due to the ideological commitment by the public officials to industrialization or due to economic theories that were a challenge to free trade (Haber 2005). Ideally, the growth in the manufacturing sector in Chile occurred even before structural theories were developed. Industralisation in Chile was highly contributed by the dedicated process of economic development founded on prevailing export economy (Bulmer-Thomas 2014). The contribution of the government to growth in Chile’s manufacturing sector cannot be underestimated. The government for Chile devised complicated systems that were meant to support domestic manufacturers. Additionally, it was not just a financier but also a partner and in some cases direct owner of manufacturing firms in Chile. Conclusively, like other few Latin American countries, Chile had a significant manufacturing sector by the 1920s because of the favourable conditions that existed in the country before this period. As discussed above, Chile experienced growth in its manufacturing sector because of increase in foreign trade which caused the demand for its products to shift up. Consequently, Chile was forced to increase it production capacity in order to meet the high demand. Additionally, the growth in export sector and railway networks, as well as implicit trade protection because of depreciation in the rates of real exchange created a favourable environment for the expansion of the manufacturing sector in Chile by 1920s. Importantly, Chile received government support through the protectionism policies which helped domestic manufacturers to invest in the country without fear of unfair competition from foreign manufacturers. Reference List Alvarez, R. and Fuentes, J.R., 2006. Trade reforms and manufacturing industry in Chile (pp. 71-94). Palgrave Macmillan UK. Behrman, J.H., 1976. The Foreign Sector and Chilean Economic Development: An Overview. In Foreign Trade Regimes and Economic Development: Chile (pp. 3-45). NBER. Björk, I., 2005. Spillover effects of FDI in the manufacturing sector in Chile. Bulmer-Thomas, V., 2014. Post-war Economies (Latin America), in: 1914-1918-online. International Encyclopedia of the First World War, ed. by Ute Daniel, Peter Gatrell, Oliver Janz, Heather Jones, Jennifer Keene, Alan Kramer, and Bill Nasson, issued by Freie Universität Berlin, Berlin. Haber, S., 2005. Development strategy or endogenous process? The industrialization of Latin America. Technical report. Kirsch, H. 1977. Industrial Development in a Traditional Society: The Conflict of Entrepreneurship and Modernization in Chile, Gainesville, University Press of Florida. Lederman, D., 2005.The Political Economy of Protection: Theory and the Chilean Experience, Stanford: Stanford University Press. O’Rourke, K and Williamson, J. 1999. Globalization and History: The Evolution of a Nineteenth Century Atlantic Economy, Cambridge Mass: MIT Press. Ocampo, J.A. and Ros, J., 2011. Shifting paradigms in Latin America’s economic development. Oxford Handbook of Latin American economics, Oxford Handbooks in Economics, Oxford University Press, Oxford, pp.1-23. Palma, G., 2000. From an Export-led to an Import-substituting Economy: Chile 1914-39,” in Rosemary Thorp ed., An Economic History of Latin America, Volume 2, Latin America in the 1930s: the Role of the Periphery in World Crisis (London: Palgrave, 2000), pp. 51-53. Read More