ABSTRACT
To understand the origins of ISI in Latin America, one needs to briefly return to the Golden Age. Latin America prospered during this period by exporting commodities and importing products that it could not produce or could be produced more cheaply in other parts of the world. In more formal terms, the region exported products in which it had a comparative advantage and imported comparative disadvantage products. This sort of trade worked well for Latin America in the late nineteenth and early twentieth centuries. On average, commodity prices were high and export earnings were substantial. This allowed the region to easily import the manufactured goods that
were needed for consumption and economic development. The onset of the Great Depression seriously dented the faith in this sort of trade not only in Latin America but much of the world. The export earnings of the region were falling but the prices of the manufactured goods being imported were not falling nearly as fast. This was creating serious strains in the balance of payments. As a result of this, a group of economists at the central bank of Argentina began researching this problem. By the late 1930s, Raul Prebisch and his colleagues had started to develop some economic reasoning on this issue. Part of the problem was introduced in the previous chapter. The supply of most commodities is inelastic. Thus, when the Great Depression hit, the prices of most commodities fell dramatically. On the other hand, it was posited that the supply of manufactured goods was much more elastic. This implies that if the demand for these goods falls then the price will not fall by a substantial amount. This is a reasonable explanation for some of the balance of payments problems Latin America was experiencing during the Great Depression. The prices of commodities fell much faster than the price of manufactured goods.
