The Import-substitution Industrialisation (ISI) Failure in Argentina - Essay Example

?Import-substitution Industrialization (ISI) Failure in Argentina In the Latin America, countries have over the last fifty years pursued a strategy to economic prosperity known as the import substitution industrialization (ISI). ISI is a strategy aimed at replacing imported goods in a country with goods produced locally (Bruton, 1998). Argentina was the main leader in trying to implement ISI policies in Latin America. The strategy looked promising as was given much support by the United Nations Economic Commission for Latin America (ECLA) Raul Prebisc (Edwards, 2008). Import substitution industrialization in Argentina depended on the exchange rate and trade restrictions. They included several exchange rates, import licenses, quotas, protective tariffs, and export taxes. The main aim was to limit external trade and prepared the domestic market for local manufactures. Further, another aim was to protect the domestic industries from stiff competition arising from external industries. The domestic industries were expected to compete internationally. However, these policies typically led to inefficient firms and high cost industrial substitutes. The consequences were diverse, for instance, the local industries could not pose any competitive challenge internationally. As a result, Latin Americans had to pay high prices for substandard goods that could not satisfy their need for quality (Paolera & Taylor, 2003). Further, Argentina was not able to have foreign exchange to pay for the much required imports; they had spent much time de-emphasizing exports. ISI had actually led to some economic gains, however, by 1980s, it had been exhausted. During 1980s and 1990s, Argentina was forced to injstitute a number of policies with the aim of opening its economy, decrease the size of the government as well as improving efficiency (Jackiewicz & Bosco, 2012). Other countries in the Latin America such as Brazil and Paraguay experience government involvement in infrastructure development and in the production sectors. However, the major difference between these countries and Argentina was the issue of funding. This issue was not well addressed in Argentina. The country began to use inflation taxation as the best solution to their problems. Inflation taxation occurs when the government decides to print money to pay the state bills. From the mid 1940s, Argentina witnessed huge difference in its rising inflation figures from the low inflation figures in other countries of the world (Zanetta, 2004). High inflation rates, high fiscal deficits and huge government debts were the main challenges facing Argentina from 1940s to the end of the century. Several argentine citizens argued that the excessive government interference in the economy and the fiscal laxness were not the only problems that led to economic down turn in Argentina. Another challenge that faced Argentina was the relatively trained administrative personnel. The argentine government was not prepared to put in place policies that could lead to stable economic growth. Corruption also affected this problem as well (Birkbeck, 2011). President Peron’s earlier economic gains in Argentina quickly ran into a number of challenges. In 1949, Peron’s government witnessed inflation of about 31percent. This was due to Peron’s strategy of demand expansion through wage increases. At this time, employment was already high. Further, the controlling of imports and the stronger purchasing power siphoned off exports and led to inflation in Argentina (Birkbeck, 2011). In 1949, Argentina was affected by its first foreign trade deficit since the First World War. In addition, the drought that affected Argentine’s agricultural export further affected argentine’s economy. Further, the terms of trade had started to work against the country. The terms of trade included the rising prices of imports and the decreasing prices of exports. Peron’s approach to economic growth was making the problems worse. For instance, in giving artificially low prices to farmers, to ensure that urban food costs were low, the argentine government created a disincentive to invest in and production of agricultural exports. Their main aim was to sell products at high external prices and buy at low internal process. The proceeds were then to be used to improve industrialization through subsidies, cheap foreign exchange and investments (Zanetta, 2004). While the economy was experiencing numerous challenges, President Peron responded with an traditional stabilization program. These programs included the tightened credit, reduced government spending as well as putting strict limits on wages and prices. The main aim of President Peron was to get back the economy into the right progressive path. The new strategies seemed to be working well to president Peron. President Peron and his administration put together another five year plan after the reelection of the government in 1953. The strategy was less nationalist and populist than the first one; the president called for increased foreign investment. The government even signed a deal with standard oil of California in 1954 (Zanetta, 2004). The Argentine government had to request workers to accept a two year wage freeze. During this time, agriculture was no longer the direct target in Argentina as it was before. In fact, the government changed its policy towards an export driven perspective. The government realized that they had to get the economy back from the economic stagnation era. Unfortunately, the argentine government’s policies became more harmful while the presidents political strategies grew more strident and radical (Edwards, 2008). Political instability and political influence to the economy were the main causes of economic downturn experienced in Argentina. It is evident that President Peron’s economic policies were not adequate to spur economic growth in Argentina. The military had to overthrow the government so as to provide solution, open the economy and stimulate foreign investment in Argentina. The military also promised to reduce the state intervention into the economy. However, the military attempts in closing down state owned corporations did not take place. There was strict opposition from powerful interest groups. The military refused to hand over its stake in the industrial sector. Manufactures had already become accustomed to the military’s subsidies. Such subsidies included a privilege to access cheap credit and cheap foreign exchange. In Argentina, the state led development had taken root and was not able to ease (Edwards, 2008). From the years of 1950s t0 1980s, very little economic gains were made in Argentina. Problems such as lack of fiscal discipline, inflation, and balance-of-payments problems became common phenomenon in the argentine economy. This period saw the introduction of several useful and destructive economic plans due to the frequent regime changes (Edwards, 2008). Import-substitution Industrialization (ISI) Success in South Korea Import substitution industrialization (ISI) had great impact to South Korea economically. In 1945, South Korea got librated from Japanese colonial rule. Shortly after the country was liberated from Japan, the country was demolished during the Korean war of 1950. This war completely destroyed economic prospects of South Korea; most of the industries were virtually destroyed. This led to South Korea being the poorest country in the world in the 1950s. The government had to depend on United States for foreign aid (Ranis, 1995). From the 1960s onwards, the economy of South Korea began to improve. President Park Chung-hee and his administration introduced economic development strategy plan that was aimed at improving industrialization. They also had a plan to increase exports which led to the improved economic growth at a faster rate. In the 1960s, South Korea’s per-capita gross national income (GNI) was at a mere $76, however, GNI increased to $20,045 by 2007. Currently, South Korea’s Gross Domestic Product is one of the world’s largest, at $970 billion. In less than five decades, South Korea has been able to make huge economic gains (Ranis, 1995). South Koreas economic success was driven by the government initiated paradigm. The government introduced a top-down economic directives and regulations rather than introducing a liberal market system. Further, the government was successful in using depoliticized institutions to intervene in economic progress. The authoritarian government had to improve the country’s industrial infrastructure as well as improve the international competition within its economy (Rodrik, Grossman and Norman, 1995). The South Korean government also planned and implemented economic growth oriented strategies. Such strategies included export oriented industrialization (EOI) which was aimed at increasing the pace of industrialization by promoting export of goods. This would ensure that the country enjoy an international comparative advantage. The government of South Korea was able to provide its citizens and investor’s preferential credit allocation and tax breaks to export oriented industries. In addition, the South Korea’s government had tamed accounting without budget deficits; they were also able to keep inflation in check in order to stabilize its currency value for export promotion. The government was also able to suppress the labor movements and collaborated with government sponsored unions to keep wages down (Rodrik, Grossman and Norman, 1995). In addition to the government’s contribution to economic progress in South Korea, the country was also able to enjoy high rates of private savings and investments. South Korea was able to have quality, and highly educated human capital at cheaper labor costs. High rates of domestic savings enabled South Korea to be less dependent on foreign aid. Investing in the education sector ensured that south Korea receive quality services from the labor work force. Consequently, South Korean citizens were willing to spend more time working. All these factors made a significant impact on the economic growth of South Korea (Rodrik, Grossman and Norman, 1995). After launching their first economic development plan in 1962, South Korea experiences an average economic growth of about 10 percent. However, this growth was affected by first great crisis in the 1970s from the two oil shocks. The first oil crisis occurred during the Arab-Israeli war that too place in 1973. This war raised inflation rates in South Korea from 3.2 percent to 20 percent in 1974. However, South Korea was still able to register economic growth despite challenges brought by the war. The second oil crisis caused by the Iranian revolution in 1979 had diverse effects to the South Korean economy. Political instability brought about by the assassination of President Park Chung-hee further led to increased inflation rates greater than 20 percent. There was also export slow down, and increased unemployment in South Korea (Ranis, 1995). Statist approach is the main theoretical framework behind south Koreas economic growth. According to this theory, the government is charged with designing and the implementation of economic policies (Heo & Roehrig, 2010). The private sector is then expected to follow the governments lead. In statist approach, the government plays a role in managing the economy while the business enterprises are privately owned. This is in contrast with the argentine system where the government had full control of the business enterprises (Ranis, 1995). Import substitution industrialization in South Korea depended on the exchange rate and trade enhancement while in Argentina, trade was restricted. They included several exchange rates, import licenses, quotas, protective tariffs, and export taxes. The main aim was to increase external trade and this prepared the domestic market for local manufactures as well as to the international manufacturers. Further, another aim was to protect the domestic industries from stiff competition arising from external industries (Heo & Roehrig, 2010). The domestic industries were expected to compete internationally. These policies typically led to efficient firms and low cost industrial substitutes. The benefits were numerous, for instance, the local industries could pose competitive challenge internationally. As a result, South Korea had to pay low prices for standard goods that could satisfy their need for quality (Rodrik, Grossman and Norman, 1995). In south Korea as opposed to north Korea, low inflation rates, low fiscal deficits and low government debts were the main strengths of south Korea from 1940s to the end of the century. Several south korean citizens argued that the minimal government interference in the economy and the fiscal strictness were not the only factors that led to economic growth in south Korea. Another factor that helped south Korea was the highly trained administrative personnel. The south Korean government was prepared to put in place policies that could lead to stable economic growth (Heo & Roehrig, 2010). From the above discussion, it is important to note that Political instability and political influence to the economy were the main causes of economic downturn and economic growth experienced in Argentina and south Korea.. It is evident that President Peron’s economic policies were not adequate to spur economic growth in Argentina. The military had to overthrow the government so as to provide solution, open the economy and stimulate foreign investment in Argentina, on the contrary, the dictatorship form of governance in south Korea ensured that the country is stably so as to prevent any political coups that could affect the economy. In Argentina, the military promised to reduce the state intervention into the economy. However, the military attempts in closing down state owned corporations did not take place. There was strict opposition from powerful interest groups. The military refused to hand over its stake in the industrial sector. Manufactures had already become accustomed to the military’s subsidies. Such subsidies included a privilege to access cheap credit and cheap foreign exchange. In Argentina, the state led development had taken root and was not able to ease. Another important lesson that can be leant from the experiences of Argentina and south Korea is that no economic gain can be achieved without investing in the advanced technologies. Technological advancement ensures that goods of high quality are produced so that they can pose competitive challenge in the global market arena. In order to facilitate technological advancement, the government should consider investing in the science and technology sectors. Further in order for the government to provide preferential credit to credit oriented investors, the government should consider buying bank stocks so as to acquire the main banks. Further, it is important to note that the government cannot make any economic gain without first maintaining a favorable value of their currency. This ensures that exports are stabilized. Various economies in the world should aslo move capital from the private money markets to banks. This can be done by raising interest rates of saving accounts. The ultimate benefit of this strategy is that it is capable of being an important source of domestic investment. In addition, it is important to note that high interest rates on bank accounts attract citizens to deposit their money at bank instead of using their income at the private money market. Since banks give loans to investors, high interest rates to savings means that more money will be available to fasten domestic investment for new investors. Conclusion Various governments should note that in order to improve their economies several factors must be put into place. These factors include non interference of the state into the running of the economy, zero tolerance to corruption, investing in technological advancement and improving the levels of education. All these factors when carefully taken into consideration, automatically leads to faster economic growth. Replacing imports without putting necessary measure such as technological advancement in industrialization leads to the production of substandard goods that cannot compete both locally and internationally. References Birkbeck, C (2011). Making Global Trade Governance Work for Development: perspectives and priorities from developing countries. Cambridge, Cambridge University Press. Bruton, H. J., (1998), “A Reconsideration of Import Substitution”, Journal of Economic Literature, Vol. XXXVI, pp. 903-36 Ranis, G., (1995), “Another Look at the East Asian Miracle”, World Bank Economic Review, 9(3), pp. 509-34 Edwards, T (2008). Argentina; A global studies handbook. Buenos Aires, ABC-CLIO. Heo, U & Roehrig, T (2010). South Korea since 1980. Cambridge, Cambridge University Press. Jackiewicz, E & Bosco, F (2012). Placing latin America; Contemporary themes in Geography. New York, Rowman & Litle Fields. Paolera, G & Taylor, A (2003). A new Economic History of Argentina. Cambridge, Cambridge University Press. Rodrik, D., Grossman, G., and Norman, V., (1995), Getting Interventions Right: How South Korea and Taiwan Grew Rich, Economic Policy 10(20), pp 53-107. Zanetta, C (2004). The Influence of the World Bank on National Housing and Urban policies: the case of Mexico and Argentina During the 1990s. New York, Ashgate Publishing. Read More