Im­port sub­sti­tu­tion made coun­tries such as Ar­gentina poorer

The Washington Times Daily - - POLITICS - BY JAMES M. ROBERTS James M. Roberts is a re­search fel­low in The Her­itage Foun­da­tion’s Cen­ter for Free Mar­kets and Reg­u­la­tory Re­form.

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. ●

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