Import Substitution Made Countries Such as Argentina Poorer


Import Substitution Made Countries Such as Argentina Poorer

Apr 24th, 2017 2 min read
James M. Roberts

Research Fellow For Economic Freedom and Growth

James M. Roberts' primary responsibility is to edit the Rule of Law and Monetary Freedom sections of Index of Economic Freedom.
In 1930 Argentina was one of the 10 wealthiest nations in the world. Today, according to the CIA, income per capita in Argentina ranks 87th, lower than in Russia or Kazakhstan. Photo: iStock

Trade policy discussions in Washington lately have centered on the possibility of raising trade barriers or instituting protectionist import-tax schemes that favor certain American industries in the hopes of generating U.S. jobs.

Before going that route, Trump administration officials and members of Congress would do well to study the sorry history of such ideas. One such idea, implemented primarily in Latin America in the years after World War II, was called “Import Substitution.” It did not end well for the countries that tried it.

Initially conceived during the Great Depression, Import Substitution was intended to help developing countries industrialize rapidly and reduce dependence on costly imported manufactured goods. The theory hinged on the notion that, by imposing protectionist policies, the government would give domestic manufacturers a leg up on foreign competition, speeding their growth and assuring their success. It was the trade and investment policy complement to the other influential — and Big Government-centric — economic policy of that era, Keynesianism.

Tariffs were raised, quotas on imports were established, and governments designated “infant industry” winners in the economy by subsidizing and protecting certain key economic sectors (e.g., agriculture, power and production of capital-intensive goods such as cement, steel, aluminum, paper products, chemicals, automobiles and heavy machinery). Often, the governments created inefficient and corrupt state-owned enterprises in these favored business sectors.

Proponents of Import Substitution, such as Argentinian economist Raul Prebisch, argued that free trade ill served commodity-producing countries such as his.

In Prebisch’s static, zero-sum view of the world, only the industrialized West (e.g., the U.S. and Europe) could make a go of manufacturing in a free trade environment. That left the rest of the world dependent on selling raw materials to the Western industrial colossus, which in turn sold manufactured goods back to them at inflated prices.

Prebisch called this Marxist-tinged idea “Dependency Theory.” It exploited and fomented a sense of resentment against Yankee imperialists — a Latinized version of class warfare politics. And intellectuals throughout the hemisphere gobbled it up.

After the war, Prebisch directed the Economic Commission for Latin America (ECLAC) at the United Nations — a post that enabled him to push his theories on the world stage. Under Prebisch the ECLAC (and, later, a successor entity known as UNCTAD) became a major venue in which leftist activists promoted various wealth redistribution schemes in the 1950s and 1960s.

Prebisch’s goal was self-sufficiency for developing countries. Ironically, the result of his policies was greater dependency.

Import substitution countries came to rely even more heavily on imports, while the goods they produced were of inferior quality and not competitive in global export markets. And nowhere did this reality become more painfully obvious than in Argentina.

In 1930 Argentina was one of the 10 wealthiest nations in the world. Today, according to the CIA, income per capita in Argentina ranks 87th, lower than in Russia or Kazakhstan. It is also lower than next-door Chile, a nation that turned away from Import Substitution in the 1970s and implemented market-based reforms.

Today we are hearing a twisted version of “Dependency Theory” from protectionists in the U.S. Essentially, they argue that Americans have become dangerously dependent on manufactured goods from the rest of the world.

These economically nationalistic arguments ignore the many benefits Americans gain from imports, not the least of them the millions of jobs they have created here at home.

By not having to produce low-tech basic goods and commodities, Americans can focus on innovation — developing whole new industries using state-of-the-art, computer-assisted manufacturing techniques or thinking up new online services to create the world’s first 21st century economy.

Let’s hope that, at the end of the day, the Trump administration and Congress recognize that imports support U.S. jobs and that erecting trade barriers that restrict the flow of goods, services and investment stifles economic growth.

Americans have seen “Evita.” They know how that story ends.

This piece originally appeared in The Washington Times