Structuralists led by Raul Prebisch, Celso Furtado, Anibal Pinto and H.W. Singer distinguished outward and inward directed development strategies.
Till the 19th Century, resource-based exported development strategy was the dominant feature of all the Latin American economies. This strategy was explicitly titled towards forging international trade links on a comprehensive scale. In the first three decades of 20th Century, however, it began to lose its momentum.
In the first place, the First World War affected adversely their exports, disrupted their supply of essential imports mainly on the account of blocked trade routes. Second, the ‘Great Depression’ of 1930s gave another serious blow to the export earnings of most of the Latin American countries.
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Forced by unprecedented circumstances, these countries marked a shift from outward-oriented commodity export based development strategy to inward-looking internationalism, which swayed, and also emerged as the predominant development ideology.
Components of this strategy included an interventionist nationalist state in power; protectionist policy regime to encourage domestically owned enterprises as against foreign controlled ones; pressure of emerging class of urban professional elites to undertake/follow modernisation on European and North American patterns and strive for industrialisation.
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Led by Getulio Vargas in Brazil (1930s) and Peron in Argentina (mid-1940s) and with the support of urban modernising professionals, they paved way for initiating import substitution industrialisation to stave off their crisis-ridden economies.
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Even in Mexico (1920s) the main tenets of nationalist preference for local ownership of strategic or basic industries, (i) national ownership of industries in which domestic private sector produce efficiently and (ii) foreign ownership to complement nationally owned industries.
Subsequently in the aftermath of the Second World War, under the intellectual leadership of Raul Prebisch, the ECLA School of Thought emerged as the leading force to advocate inward-looking development strategic for Latin American and other developing countries. The cornerstone of this strategy was the phase of import substitution industrialisation under heavy state protection.
However, as subsequent developments show, this strategy had its own pitfalls and failures and choice of either export oriented or import substitution industrialisation which was irrelevant from the perspective of long-term development of economy.
Failure of outward-oriented development strategy caused many by exogenous circumstances; upsurge in nationalist fervour created by populist leaders such as Vargas and Peron; rise of modernising class of professionals; and a developmentalist state conceived as a liberating, equalizing and modernising force in society were responsible to initiate and pave way for an alternative strategy popularly known as inward-looking development strategy.
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Under these circumstances in the postwar years, the ECLA led by the structuralist Raul Prebisch provided the intellectual support to launch a phase of import substitution industrialisation in these countries which lasted in an intermittent way till 1980s.
ECLA School of Thought of ECLA Theory of Development provided the most cogent intellectual arguments for inward-looking development strategies. According to this School, there existed market imperfections and distortions; lags in technological transfers and pricing mechanism predominant in the world economic system favouring the Centre at the cost of Periphery.
However, in the 1960s, the economic thinking in developing countries became increasingly critical of import substituting industrialisation for countries at certain stage of development. It had become difficult to transform import demand into demand for domestically manufactured products.
It has been argued that external and internal problems had accumulated to the point where they acted as a brake on the dynamism to the process of import substitution industrialisation.
The ISI strategy, which was largely adopted to relieve the foreign exchange bottleneck, ended up in aggravating the problem further and constraining the economic growth.
These countries became vulnerable to the balance of payment problem as an increasing proportion of imports consisted of raw materials, spare parts machinery, which was essential for sustaining industrial production.
ISI failed to absorb the surplus labour and improving the distribution of income thereby aggravating the phenomenon of structural duality. The widening gap between the subsistence sector and the capitalist sector constrained the development process. The major drawback, which the ISI faced, was that it targeted the internal demand and neglected the external demand.