Theoretical Framework

China’s development impact in the Latin America and the Caribbean region has made this last to once again rely its economic development in commodities and natural resources exports. However, the region can still manage to diversify this revenue engine and develop its own industry and start its process of industrialization. Successful cases in Asia like the one in China, Taiwan, India, and South Korea teach us that the adoption of Import Substitution Industrialization model (ISI) in an open economy can become a strategic tool for a further development. These economies have shown the world that even though the ISI sometimes is contrasted with the export-oriented industrialization. These two are not mutually exclusive and many countries' policies can combine elements of both models. The specific case of Taiwan industrialization is a good example of this trend.⁹

According to the basic conceptions of the ISI model mainly represented by the economists Raul Prebisch and Hans Singer, poor countries whose economic development is mainly based on exporting primary goods and products would always face a deteriorating terms of trade vis-à-vis rich countries.¹⁰ With a declining real price for primary goods after

9 Alice Amsden, "La sustitución de importaciones en las industrias de alta tecnología: Prebisch renace en Asia," Revista de la CEPAL 82, (2004): 2, accessed June 2013,

http://www.eclac.cl/publicaciones/xml/9/19409/lcg2220e-Amsden.pdf.

10 International Relations and Security Network (ISM), "So What Kind of Economic Growth?,"

International Relations and Security Network (ISM), (February 9, 2012), accessed June 2013,

http://www.isn.ethz.ch/Digital-Library/Articles/Special-Feature/Detail/?lng=en&id=136933&contextid774=136933&contextid775=136932&tabid=136932.

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the World War II, the countries that specialized in commodities production received less revenues and foreign exchange but they had to pay more for manufactured goods bought from industrialized countries. This disadvantage position deteriorates the term of trade and made most Latin American countries promote domestic industrialization to reduce their dependence and vulnerability to the first world. Thus, the ISI was adopted by those Latin American countries in order to gain their independence. However, we have been witnessed that the ISI model in the region didn’t have the effects they did had in Asia.¹¹ In the Asian case, the shift in the industrialization model by substituting domestically manufactured products for foreign imports was reflected in a better way to develop their infant industries.

These industries initially could not compete in the global market by themselves and the government protection was needed at least during the initial period.¹² This government intervention was made through sponsored protective tariffs, import quotas, exchange rate controls, special preferential licensing for capital goods imports, subsidized loans, and the maintenance of a strong currency. These measures are not limited to Asian countries but with the notable exception of the United Kingdom, every country that industrialized before World War II followed a variation of the ISI model.¹³

The ISI model was criticized during the 1980s and was not regarded as a great success.

Indeed, by the 1980s it had been mostly abandoned in favor of the export-substitution (ESI) model. Under this model the countries were encouraged to have more economic openness

11Kanayo Ogujiuba et al, "Import Substitution Industrialization as Learning Process: Sub Saharan African Experience as Distortion of the “Good” Business Model," Business and Management Review Vol. 1(6) , (2011): 2, accessed June 2013, http://www.businessjournalz.org/articlepdf/bmrn61513.pdf.

12International Relations and Security Network (ISM), "So What Kind of Economic Growth?,"

International Relations and Security Network (ISM), (February 9, 2012), accessed June 2013,

http://www.isn.ethz.ch/Digital-Library/Articles/Special-Feature/Detail/?lng=en&id=136933&contextid774=136933&contextid775=136932&tabid=136932.

13 Kanayo Ogujiuba et al, "Import Substitution Industrialization as Learning Process: Sub Saharan African Experience as Distortion of the “Good” Business Model," Business and Management Review Vol. 1(6) , (2011): 1, accessed June 2013, http://www.businessjournalz.org/articlepdf/bmrn61513.pdf.

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rather than shielding infant domestic industries from foreign competition. It was believed that by opening itself up to competition, the country would quickly adopt current best practices, encourage the diffusion of technology, and enhance its productivity.¹⁴

If we look to the information provided, we may wonder what was wrong with the ISI model adopted by Latin American countries and why it did succeed for the Asian economies like Taiwan, China, South Korea, and India. This actually is one of the most debated questions in the development literature. According to the literature the different effects of the ISI model in these two regions is not based on the type of policy instrument employed to create rents and promote industrial entrepreneurship but what made the difference was how the rents created by the government policy intervention was managed. Thus, the key issue was the efficient government intervention policies compromised to create a productive entrepreneurship. Latin American countries’ entrepreneurship is not considered productive because there is still lead by weak and inefficient governments composed by rent-seeking groups who undermine markets and consider public sector as a source to distribute patronage and increase their own incomes. This rent-seeking behavior caused reduction in productive investments but increase in their personal budget.¹⁵

In case of these Asian countries, the whole private and public organizations were aware that in order to establish high tech industries, it was needed a solid entrepreneurship with specialized human resources capable to create a multiplier effect. Since the risk to train people and keep their loyalty was high, thus, there were just two options to get well-qualified employees. The first option was to rely on private companies and their efforts to hold their

14 International Relations and Security Network (ISM), "So What Kind of Economic Growth?,"

International Relations and Security Network (ISM), (February 9, 2012), accessed June 2013,

http://www.isn.ethz.ch/Digital-Library/Articles/Special-Feature/Detail/?lng=en&id=136933&contextid774=136933&contextid775=136932&tabid=136932.

15 Kanayo Ogujiuba et al, "Import Substitution Industrialization as Learning Process: Sub Saharan African Experience as Distortion of the “Good” Business Model," Business and Management Review Vol. 1(6) , (2011): 2-3, accessed June 2013, http://www.businessjournalz.org/articlepdf/bmrn61513.pdf.

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qualified human resources. The second option relied on the government as a platform to train expertise and spread the created capacities to the private sector. This last option was the most successful in Asia.¹⁶

Besides human resources, private sector also needed useful and updated information about the market trends so the products can arrive on time and before the profitability decline.

National organizations were the ones with less opportunity costs, more knowledge about the market and more probability to take advantage of the fixed assets in local related industries and to become the ones with major incentives and lead this process. With a qualified human resources and government support in information supply, the government also engaged in the provision of research and development facilities and laboratories as scientific parks in India and Taiwan which were of government property. Thus there is no doubt that the pioneers of high technology industry in these Asian countries have been the state owned enterprises.¹⁷ The ISI model applied to the Asian economies has never underestimate the importance of international relations because in a globalized world the governments have to emphasize the role played by the private firms as a way to use indirect mechanism to promote technological upgrading which means to attract FDI and develop local technological capabilities.¹⁸

Taking the experience of the Asian countries, the Latin America and the Caribbean region needs to explore the more structural economic and political trends of ISI to see whether the governments in the region should reshape their activist industrial policy. In order to make the catching up industrialization process much effective, the ISI must be considered as an entry route that serves as basis for technological learning for dynamic export

16 Alice Amsden, "La sustitución de importaciones en las industrias de alta tecnología: Prebisch renace en Asia," Revista de la CEPAL 82, (2004): 3, accessed June 2013,

http://www.eclac.cl/publicaciones/xml/9/19409/lcg2220e-Amsden.pdf.

17 Ibid., 5.

18 Kanayo Ogujiuba et al, "Import Substitution Industrialization as Learning Process: Sub Saharan African Experience as Distortion of the “Good” Business Model," Business and Management Review Vol. 1(6), (2011): 4, accessed June 2013, http://www.businessjournalz.org/articlepdf/bmrn61513.pdf.

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industrialization. For this purpose it’s important to have; 1) solid, qualified, educated and capable entrepreneurship, 2) government policies committed to facilitate the transition from natural-resource based economy to high tech industries, 3) stronger engage with the global market place to ease technology transfer and, 4) control regulated openness policies in order to maximize the benefits and minimize the potential destabilizing forces. The political and social counterpart should have the capacity to 1) supply the strategic public goods‘ and externalities that can influence the private sector to engage in productive entrepreneurship, 2) develop programs to increase and diversify exports with controls on the imports of good and inflows of strategic FDI and foreign capital, 3) pursue a complementarity relation of public and private-sector entrepreneurial initiatives, and 4) include elements to expand domestic demand and selective ISI based on competitiveness on the world market.¹⁹

1.8 Research Hypothesis