On the other hand, demand for manufactured products rises much more steeply over time. According to Todaro (2000), every 1 per cent increase in an industrialised country's income will raise the demand for food by 0.6 per cent and for primary commodities by 0.5 per cent, but demand for manufactures by 1.9 per cent. The fact that manufactured products are 'value added' – the total value of the finished good is more than the sum of the raw materials used to make it – means not only that more can be earned by exporting them but that valuable foreign exchange for imports can be saved if products are produced for the domestic market as well. In addition, LDCs compete with each other for finite industrialised country markets.
As each country attempts to maximise its trade share, competition increases and prices go down. This was particularly true during the 1980's as so many LDCs were coerced into opening up their economies to international trade in order to make repayments on debts; commodity prices went down especially rapidly7. For an LDC wishing to maximise the benefits of trade, these are cogent arguments for the development of an industrial base, and these have resulted in emphasis on industry and a neglect of agriculture in recent decades, which has further fuelled the slow growth of income from primary commodities8.
The crucial difference between import substitution industrialisation and export-led strategies is that the first is 'inward-looking' identifying a strong role for the state, and the second is 'outward-looking', relying on market forces to achieve industrialisation, but there are commonalities as well. Both sets of policies concern themselves with the establishment of industrial capacity and with international context and trade. In addition, they are not mutually exclusive; LDCs have drawn on components of each to formulate an overall trade and industry strategy.
It is interesting, for instance, that Brazil, often cited as an economic 'miracle' (see for instance Todaro, 1992, and Hewitt, Johnson and Wield, 1992), through following an import substitution industrialisation strategy, is classified as 'moderately outward oriented' by the World Bank, while Malaysia and Thailand, seen by many as newly-industrialised examples of export-led growth strategy, share the same classification as Brazil (Development Report, 1987). In terms of inward versus outward -oriented trade orientation, the World Bank's 1987 report measures economic performance by orientation and these clearly show that although both strategies resulted in improved GDP, inflation, GNP per capita and percentage of manufactured exports between 1963 and 1985, that outward-orientation had markedly better performance9.
As mentioned above, each one reflects prevailing ideologies of its time; import substitution industrialisation was followed by many countries, especially in Latin America, from the 1930's onwards, and came about as a result of the effects on inter-regional trade of the Great Depression of 1930's US, and structuralist views of international trade.
Export-led strategy gained in popularity when the successes a number of East Asian countries in developing not only a successful industrial base, but also reducing poverty, became clear in the 1970's and 1980's. This policy is supported by the World Bank and Western economists and prevails as the preferred route to development. Import substitution industrialisation concerns itself with the production of previously imported goods for the domestic market while export-led industrialisation promotes the production of goods for the international market.
These are supported by appropriate monetary policies; import substitution industrialisation seeks to protect 'infant industries' by erecting barriers to foreign imports such as tariffs and quotas, while export-promotion strategies lower these barriers and encourage foreign direct investment and multinationals by setting up 'export processing zones' (EPZs). Proponents of import substitution industrialisation defend their protectionism by emphasising the dual objective of greater domestic industrial development and the ability to move towards exporting goods once they become internationally competitive, while supporters of export-promotion cite the growth benefits of accessing large world markets instead of narrow domestic ones, and the great successes in some of the East Asian economies. Each strategy has its advantages and disadvantages; what follows here is a more detailed analysis of import substitution industrialisation followed by one of export-led growth.
The ideologies and theories that evolved into structuralism and were applied through import substitution industrialisation have their origins in Latin America's declining economic position after 1900. After independence, many Latin American countries had expanded commodity exports, such as coffee in Brazil, copper in Chile and sugar in Cuba, but over-production was having an impact on growth by the 1920's10. With the Wall Street Crash and subsequent depression in North America and Europe during the 1930's, commodity prices crashed as demand fell, resulting in a decrease in foreign exchange earnings. This had two effects; one was a reduction in the amount of money available for industrialisation, and the other a reduction in the ability to import manufactured goods11.
A number of economists began to look at this pattern of events in the context of the experience of Latin American trade, and 'dependency theory' was put forward. Dependency theory said that a country's progress was not merely dependent on that country's resources and endowments, rather the 'core' (industrialised) countries made the rules and the 'periphery' (LDC) countries were pawns in the international pursuit of profit.
Dependency theorists, especially Andre Gundar Frank, felt that while the periphery was tied to the core, no sustainable growth would occur due to declining terms of trade controlled by the core12. International trade was therefore seen as exacerbating inequalities, and it was clear that while trade with industrialised partners was slow, Latin American countries would have to become more self-sufficient and find another way to develop their economies. Paul Baran and Ra Prebisch recognised the importance of local elites forming alliances with international capitalists as key in hindering long-term growth, with a relationship that had existed under colonialisation and persisted afterwards through the pattern of a few large-scale, rich landowners using a large amount of labour to farm extensively, while the smallholdings owned by poorer families were farmed intensively.
Fernando Enrique Cardoso and Enzo Faletto saw active state policy as an enabler of development in the poor 'periphery'; a change in government policy would see it acting in the country's interests against these local and international elites to take the maximum benefit from available labour, land and mineral resources.
Dependency theory grew in popularity as a number of these prominent and politically powerful economists took on its ideas. Prebisch – an Argentine economist who had been the director of the National Bank before taking over as chairman of the Economic Commision for Latin America in 1948 – took the idea of dependency to the ECLA and led the analysis of Latin American economic performance, concentrating on a number of factors that had combined to produce poor economic growth. It looked at a number of factors that had contributed to the situation, including the volatility of primary products; declining terms of trade; low income elasticity for agricultural products; the fact that most technology was controlled by 'core' countries and the lack of 'added value' in primary products.
They noted also the positive correlation between interruption of normal trade patterns with the 'core' countries, and strong internal growth in Latin American economies; and looking at how the economy was shaped by power and politics. The conclusion was that the free market had failed to achieve sustainable development in Latin America.
The alternative to the free market was the development of import substitution industrialisation. It sought to develop industries in a protected environment, producing substitutes for technological imports and added value manufactured products. This would expand the local economy and feed into the development process, creating an expanding domestic market for finished goods.
While industries were in their first stages, they could be nurtured by an active state that would bring in capital and investment for technology, encouraging capital investment by multinational companies (MNCs) in structurally important industries such as telecommunications, that would provide necessary technological hardware and know-how, while improving infrastructure for further industrial development. For instance, foreign ownership in Brazil's industrial sector exceeded 50 per cent by 1970. Further, the sector could be developed through state-owned industries (SOEs), whose profits would feed back into the state that had supported their development.
Key to import substitution industrialisation was the idea of industrial linkages, both forwards and backwards. These were seen as crucial to maximise the development process – not only would the protected industry benefit from protection and support, but also its suppliers, transporters and finishers. Externalities are more important in industry than other sectors and this was seen as a great benefit. A classic example of industrial linkages is the development of the car industries in Mexico, Argentina and Brazil under import substitution industrialisation, where component manufacturers and suppliers of rubber, steel and glass benefited. In Argentina, the car industry and its linkages account for 22 per cent of employment.
In addition, import substitution industrialisation could not succeed without influence on the market by the state; popular support was therefore required not only to assure the wealthy elite with international links that the strategy would benefit them, but also the poor and working class, to ensure their cooperation. Latin American import substitution industrialisation therefore had a strong political element, with a tendency for the more inward-looking economies to have strong populist leaders such as Juan Peron in Argentina and Getulio Vargas in Brazil, who could mobilise support of the labour force and industrial elites to take on the changing policy.