ABSTRACT
From the 1930s to the early 1960s, a growth strategy known as import substitution industrialization (ISI) dominated economic planning in Latin America. Although the region has long since undergone a reversal of the ideology associated with ISI, the economic structure in place today contains vestiges of this attempt to achieve industrial self-sufficiency. This chapter discusses the consequences and criticisms of ISI. Economists joined politicians in their support for ISI, calling attention to the lack of foreign exchange as an important constraint on growth. In a world where the terms of trade moved against traditional primary export products, domestic production would have to substitute for nonessential imports, freeing foreign exchange for needed inputs. The theory of comparative advantage, which underlies arguments for free trade, implies that countries gain by exporting goods that intensively use their relatively abundant factors. In Latin America, these are natural resources and labor. The theory fails to take into account, however, the dynamic nature of resource endowments.
