Models of Economic Development in Latin America (20th Century)

Models of Economic Development in Latin America (20th Century)
Import-Substitution Industrialization
In Latin America and many Third World countries, the import-substitution industrialization model was pronounced. Notably, it was after the First World War. The countries proposed ways of substituting imported goods with locally produced products. According to Hirschman (1968), the states implemented subsidies for local industries and high import tariffs for exchange trades. The model was characterized by a fall in currencies in Latin American countries and Third World countries. These led to less importation as European countries had prevented the importation of goods as well. Secondly, the import substitution industrialization model was characterized by state promotion of local industries to replace imports from Europe. Local producers were given incentives and lower tariffs for local products. Moreover, there were import tax barriers, overestimation of currencies, and excessive bureaucracy by powerful states.
For a while, before the 1970s, the model worked as it provided high employment in the local industries. It led to growth in medium and small-scale enterprises (Hirschman, 1968). There was an increase in consumption in the utilization of local goods with lower transport costs for raw materials. The governments also provided welfare to the industrial workers. However, with time the system became exhausted. The high consumption rate could not keep up with local production, leading to high prices of goods. Local industry leaders and politicians created oligarchs with an increased number of regional monopolies. The markets were fully state-regulated, which diminished the free market system. Over time the local industries were complacent and did not encourage innovation and technology adoption for more excellent production rates and goods. In addition, there was little competition for the local industries. Eventually, the local industries became stagnant by the 1970s and 1980s.
Neoliberal Model
The neoliberal model promotes individualism in a capitalistic environment that allows for free trade or free market principles of doing business. Unlike the import-substitution industrialization model, the push is against government intervention (Rodríguez, 2021). The primary characteristic of the model is the privatization of business and industrialization. Often it involves the relinquishing of state-owned properties and businesses to individuals for business growth. Such state-operated industries include social services institutions, utility companies, and banks. Moreover, Rodríguez (2021) notes that neoliberalism also encourages less regulation of the market, and deregulation allows for greater profitability. Neoliberalism also encouraged globalization in a free trade enterprise. This led to multination and multilateral organizations. Unfortunately, this meant the diminishing of reasonable public consideration and low government expenditure. Unlike the import-substitution model, social welfare was eliminated.
Washington Consensus
The Washington consensus was characterized by a reduction of monetary deficit by developing countries. According to Marangos (2020), this was done by reducing government expenditure. Additionally, it included deregulation to allow the privatized industries to grow freely. Consequently, tax reforms followed to allow other industries to flourish with greater profitability. Over-valued currencies were corrected to allow competitive forex rates and free trade within the global market. Moreover, import tariffs were abolished for competitive international free trade. Foreigners were also allowed to invest in developing countries without any trade barriers. The central banks were required to allow foreigners access to their foreign currencies on a current account basis. Another significant characteristic of the Washington reform was the enhancement of property rights. Property rights meant easy access for individuals to get into business and control access of workers to their private enterprises. Finally, financial adjustments were made to allow for individual insurance and banking and the growth of capital markets.
Reasons for Neoliberalism Adoption in Latin America in the 1990s
Neoliberalism, in 1990s Latin America, was an attempt to replace the import-substitution industrialization model of the 1970s and 1980s (Rodríguez, 2021). The breakdowns of the import substitution industrialization system included oligarchies and monopolies. Most Latin American countries ended up with very few wealthy individuals over many low-income individuals (Hirschman, 1968). Moreover, the system created authoritarian governments in 1964 in Brazil and Argentina. The authoritarian governments created bad business relationships between the country and both local and foreign investors. They were ultimately leading to low business and industrial developments. The ascent of neoliberalism occurred in a setting set apart by deficient democratization. Moreover, the tradition of provincial power structures and a reconfigured tyranny reliably preferred market-based strategies. The governmental issues of neoliberalism and the arrangement of works on questioning the standardizing, monetary and political direction of social orders in Latin America have been supposed to be the consequences of a mix of global and homegrown elements.
The globalization of the 1980s also forced Latin American countries to adopt neoliberalism. The world was opening up at a high rate with new advancements in technology such as the internet and fast transport systems. Additionally, new leaders who were democratically elected led the push for neoliberalism. Before the democratic movement in Latina America, the region faced a significant debt and oil crisis which crippled the economies Hirschman (1968). Neoliberalism was also an outcome of the dependence of Latin American countries on their colonizers. The countries had to follow European policies and standards to be able to operate on the international global markets.
Successes and Limitations of the Neoliberal Model
With less state interference and more free market promotion, the world was willing to invest in Latin American countries. Foreign investors were willing to buy property and build industries in Latin American countries that were more advanced, further leading to more significant economic growth. Neoliberals brought about more competition to the local monopolies forcing better and cheaper goods and services for the consumers. The countries enjoyed the shift from authoritarian leaders into free economy democratic states. Individuals were allowed to have property rights and benefit from their own investments. In the medium-term, jobs were created, and the middle class increased in Latin American countries.
The limitations of the Neoliberalism model that was promoted further through the Washington consensus included a significant stall in many Latin American countries’ loss in gross domestic product. Moreover, due to a lack of social welfare, the poverty levels and health decreased significantly. Few individuals became very rich, while the majority remained poor due to low wages. The adoption of new technologies and the importation of expatriates caused an increase in unemployment. This led to president Carlos Menem and Fernando Collor de Mello's ouster in Argentina and Brazil, respectively. Violence was significant in Venezuela and Peru, where both presidents fled the country. Since the 1990s, these countries have suffered from high inflation rates. Neoliberalism led to too much freedom and deregulation of the free market, which led to some groups and companies taking advantage of bad business practices. In the long run, the country suffered from low tax incomes and foreign takeover of vital social services such as health and education.
References
Hirschman, A. O. (1968). The political economy of import-substituting industrialization in Latin America. The Quarterly Journal of Economics, 8...