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The recent devaluation of the Mexican peso, with all its accompanying disruptions, was a symptom of still unresolved structural problems. Apparent successes of the economy during the ‘stabilizing development’ of the 1960s caused the deferral of difficult solutions to underlying fiscal, financial and social problems.Given the eventual devaluations in 1976 and subsequent float of the peso, the new administration hopes to address more effectively fiscal and social disequilibria, but US cooperation will be required in the form of long-term credit to facilitate internal growth and employment, and in migration policy to permit a safety valve for Mexico's large and growing labour surplus.

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Abstract

The recent devaluation of the Mexican peso, with all its accompanying disruptions, was a symptom of still unresolved structural problems. Apparent successes of the economy during the 'stabilizing development' of the 1960s caused the deferral of difficult solutions to underlying fiscal, financial and social problems. Echeverría's 'shared development' policies heightened the instability of the economy by avoiding tax reforms, postponing inevitable peso devaluation and failing to implement measures to reduce social inequalities. Given the eventual devaluations in 1976 and subsequent float of the peso, the new administration hopes to address more effectively fiscal and social disequilibria, but US cooperation will be required in the form of long-term credit to facilitate internal growth and employment, and in migration policy to permit a safety valve for Mexico's large and growing labour surplus.

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Why Mexico's 'stabilizing development' was actually destabilizing (with some implications for the future)

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The recent devaluation of the Mexican peso, with all its accompanying disruptions, was a symptom of still unresolved structural problems. Apparent successes of the economy during the 'stabilizing development' of the 1960s caused the deferral of difficult solutions to underlying fiscal, financial and social problems. Echeverría's 'shared development' policies heightened the instability of the economy by avoiding tax reforms, postponing inevitable peso devaluation and failing to implement measures to reduce social inequalities.

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Mexico's trade liberalization policy and structural changes in the manufacturing industry and export structure throughout the last two decades.This approach, using panel data techniques allows an evaluation of the structural change, which pegs Mexico's exports to the international production network, considering that Mexico has transformed a substantial part of its industrial structure into a foreign assembly operation of USA's industry. Additionally, econometric estimations indicate that has changed since the NAFTA. These results show an outlasting restriction to economic growth, very much in line with Thirlwall's law.

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Abstract

This paper evaluates Mexico's trade liberalization policy and structural changes in the manufacturing industry and export structure throughout the last two decades. Using the System of National Accounts (SNA) of production and reclassifying it according to the Harmonized Tariff System (HTS), we assess the income elasticity of imports by Great Divisions of the SNA manufacturing production. This approach, using econometric panel data techniques allows an evaluation of the structural change, which pegs Mexico's exports to the international production network, considering that Mexico has transformed a substantial part of its industrial structure into a foreign assembly operation of USA's industry. Additionally, econometric estimations indicate that import elasticity has changed since the NAFTA. These results show an outlasting restriction to economic growth, very much in line with Thirlwall's law.

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From the Import Substitution Model to the Import-Export Model: Reassessing Mexico's Trade Liberalization Process During the Last Two Decades

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This paper evaluates Mexico's trade liberalization policy and structural changes in the manufacturing industry and export structure throughout the last two decades. Using the System of National Accounts (SNA) of production and reclassifying it according to the Harmonized Tariff System (HTS), we assess the income elasticity of imports by Great Divisions of the SNA manufacturing production.

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it relied upon the growth of a market that was limited in size. In most cases, the lack of experience in manufacturing and the lack of competition reduced innovation and efficiency, which restrained the quality of Latin American produced goods, and protectionist policies kept prices high.In addition, power was concentrated in the hands of a few, which decreased the incentive for entrepreneurial development.

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advantages: employment creation, import reduction, and saving in foreign currency that reduced the pressure on foreign reserves.

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6.3.1 Precatching-up Stage

The precatching-up stage is characterized by the import-substitution policy phase during the 1960 and 1970s. Brazil had a highly regulatory system for controlling foreign firms and the import of goods and services. During this period FDI grew to attend to the needs of a highly protected market, benefiting from market and trade restrictions. The government provided significant investments in basic infrastructure to sustain industrialization in the largest and traditional locations in the Southeast (São Paulo).

This precatching-up stage in Brazil corresponds to a period that can be identified as Stage 2 in the investment development path (see chapter: Determinants of Foreign Direct Investment: Theoretical Approaches (Dunning and Narula, 1996). Because of the policies adopted by the government, the country starts creating some location-specific advantages. This will mean the beginning of a process of FDI increase, driven by the growth of the domestic market in terms of size or purchasing power. At the beginning of Stage 2, MNCs' FDI strategy is a direct reaction to the import-substitution policies adopted by the government. That is, FDI will be stimulated by the government's application of tariff and nontariff barriers to protect domestic industry or any particular sector of the national economy.

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URL: https://www.sciencedirect.com/science/article/pii/B9780128020678000062

Sri Lanka

Upon independence Sri Lanka, like the rest of South Asia, turned to import substitution policies and centralized planning and saw little economic growth or poverty reduction. Starting in 1977, moves began towards a more liberalized economy, but the payoffs have been slow in coming. However, the country's garment industry has profited from this openness and accounts for most of the country's manufactured exports. Sri Lanka was more affected by the recent global economic downturn than other countries in the region (Van Horen and Pinnawala, 2006: 315; Carrasco et al., 2010; Ranjith and Widner, 2011).

Sri Lanka's economy has rebounded from its recent low point in 2009 and is experiencing increasing investor confidence and numbers of tourists as the long-running civil war has come to an end. Around 60% of the economy is in the service sector, which along with the agriculture sector has shown a good recovery. Inflation has been moderate and while public debt growth has slowed it is still high. Investment, both domestic and foreign, continues to be limited. A major reduction in 'red tape' and a more business-friendly environment along with a more efficient financial sector might be necessary to increase levels of private investment which are needed for increased growth (Asian Development Bank, 2011a: 173-6).

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URL: https://www.sciencedirect.com/science/article/pii/B9780857094483500127

3.1.4 Protectionist measures

In recent times, protectionist measures aimed at bolstering infant industries or providing an incentive for import substitution have generally been proscribed through international trade agreements. While it is generally accepted that countries would seek to support and promote domestic industries, doing so by shielding them from domestic competition from imports or financing their competitive struggles with foreign firms was prohibited as being inconsistent with the general principle of free trade. Even if some merit might exist for supporting infant industries, as many countries have done historically, implementing this support through protectionist measures would complicate trade governance by blurring the boundary between mercantilism and efforts at industrial promotion.

Acceptance of this argument is by no means universal. In the context of this chapter, the pivot of the controversy is the assumption that the prohibited actions are either ineffective or redundant to other policies that would be similarly effective. This assumption is supported to the extent that knowledge is a global public good or that the available processes of knowledge generation and distribution, that is, ones that do not contravene agreements (such as thematic funding), will suffice to allow entry into new areas of production or commercial activity. The assumption is contradicted if these conditions do not hold. While it is straightforward to find examples of countries entering new industries, contradicting a strong version of the infant industry argument, it is possible, although nearly impossible to establish, that prohibitions of protectionist measures have prevented entry into "important" industries (a broad counterfactual) or created "weak" entrants (for which there may be many other reasons).

The same problems apply to the analysis for historical examples where it is claimed that protectionist measures were of critical importance in supporting domestic technology development. While the fact of such measures is undisputed, the counterfactual claim of what would have happened in their absence is largely speculative. For example, in the case of the United States, domestic pig iron-making capacity was aided by protectionist measures in the nineteenth century with greater effect prior to the Civil War than following-however, in neither period is it likely that the industry would have disappeared without the tariff (Davis and Irwin, 2009; Irwin, 2000). The counterfactual (without protectionist measures) international division of labor in steel making in the latter half of the nineteenth century, during the most active period of American industrialization, is thus a matter of pure speculation.

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URL: https://www.sciencedirect.com/science/article/pii/S0169721810020125

4 Structural Adjustment and Economic Liberalization

The first and second oil shocks of 1973 and 1979 forced many developing countries to abandon the state-led import substitution industrialization model and undertake far-reaching economic liberalization programs. Oil rents allowed most countries in the Middle East and North Africa to avoid instituting painful structural reforms. The earliest reformers, Jordan, Morocco, Tunisia, and Turkey, were all countries with limited oil revenues. The collapse of oil prices in the 1980s forced the other countries of the region to introduce drastic cuts in public investments, reduce public sector hiring, and curtail safety nets, with a few, such as Egypt and Algeria, adopting wide-ranging macroeconomic stabilization, structural adjustment, and privatization programs ( Hopfinger 1996, Harik and Sullivan 1992, Harik 1997, Niblock and Murphy 1993, Celasun 2000).

A further impetus for pursuing economic reforms comes from prospects for greater trade liberalization and exposure to international competition as a result of accession to the World Trade Organization and the implementation of the Euro-Mediterranean partnership agreements. These agreements that 12 countries in the region have either negotiated or are in the process of negotiating with the European Union, emerge from a Euro-Mediterranean conference held in Barcelona in 1995. The partnership aims at creating free trade areas for all industrial products between the countries of the region and the European Union. The partnership agreements would also significantly increase aid flows to the region to facilitate the introduction of structural reforms. The prospects of intensified international competition and more open economies in the region has spawned an active literature on the consequences of these developments on the region's economies (Galal and Hoekman 1997, Handoussa and Reiffers 2000).

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URL: https://www.sciencedirect.com/science/article/pii/B0080430767033027

Business groups are corrupt, crony, rent-seeking instruments

Scholars of Asia's industrialisation have observed that developmental states have established several policies designed to nurture the growth of infant industries. Policies such as import substitution and export-led development, which were designed to protect domestic firms from the rigours of international competition, also provided politicians and bureaucrats with significant control and discretion over resources such as licences, import quotas, subsidies, government contracts and access to local monopolies. Moreover, to give domestic firms the chance to grow, developmental states often suppressed market forces. In particular, developmental states actively and passively suppressed the development of capital markets' discriminatory taxation and cumbersome and restrictive issuance procedures that hamper market development. Passive suppression refers to the neglect of regulations governing corporate disclosure, accounting standards and protection for minority stockholders (Prowse, 1996). In these conditions, the success of a firm often depended heavily upon their 'rent-seeking' capacity to access and influence politicians and less upon managerial and technological capabilities (Kock and Guillén, 2001). Several scholars point out that in the early years of industrialisation, well-connected entrepreneurs developed widely diversified businesses based upon their capacity for rent-seeking (Yoshihara, 1988; McVey, 1992).

Once established, a small elite of patriarchs and oligarchs with substantial economic power can go on to wield significant political influence in the countries where they are based. A principal use of their political power is to resist policy changes that threaten their economic interests. Several scholars have recognised that powerful interest groups can thwart or co-opt reform processes (Shleifer and Treisman, 2000). Politics favour incumbent firms because they tend to be wealthier and more powerful than new entrants. For example, incumbents are better placed to articulate the risks posed by foreign firms than are outsiders seeking entry to a business group. If the rules governing corporate structure provide incumbents with control rights or rents they will be reluctant to relinquish their rights and may be willing to invest substantial resources in activities that preserve those rights. While close links between the state and leading entrepreneurs were thought to facilitate the goals of the developmental state, particularly in the allocation of capital to high social return projects (World Bank, 1993), attention has more recently focused upon the costs of close government-business relations (Haggard, 2001). Specifically, business groups and their allies in government and financial sectors may form a coalition to preserve existing institutions in their current relational form. In a period of structural market change, the preservation of outmoded institutions may shrink the pie, but it may be rational for incumbents to do so if they are able to maintain the size of their own pieces (Bebchuk and Roe, 1999). In this regard, political theory suggests that incumbents may capture and derail institutional innovations (Haggard, 2001) and reverse institutional developments that create competition from new entrants (Rajan and Zingales, 2001).

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URL: https://www.sciencedirect.com/science/article/pii/B978184334244150001X

1 Background

Independent India's development strategy assigned industry the critical role of attaining economic development. Industry was expected to not only produce all the goods hitherto imported (import substitution) to make India self-sufficient but also to absorb surplus labour from agriculture into high productivity jobs and thus place India on a higher path of development. India initiated a wide range of policy measures to attain these objectives. Notwithstanding these government policy initiatives, industry's contribution to the economy in terms of its share in output and employment remained low. The disappointing performance of industry continued even after the economic policy reforms of 1991. Instead, the service sector's contribution to both economic growth and employment generation surpassed that of industry. This prompted some analysts to argue that service-led growth of India was sustainable, although premature given its level of income, understating industry. Other analysts and Indian policymakers believe that industry is still critical for economic development of India and hence needs to be promoted. The government has been trying to revive industry through various policy initiatives over time including the recent 'National Manufacturing Policy' of 2011 and 'Make in India' of 2014.

In this context, this chapter analyses the performance of Indian industry in all its important dimensions by reviewing existing studies. This chapter specifically examines the importance, performance, problems and prospects of Indian industry. For the purposes of analysis, the paper focuses on industry, particularly the manufacturing sector.

This chapter is organised into five sections. Section 2 briefly discusses the importance of industry in the wider perspective of economic development as well as in the immediate context of India. Section 3 examines the performance of industry in terms of industry and manufacturing shares in gross domestic product (GDP) and employment, their growth rates and productivity and the structure of the small manufacturing segment. Section 4 analyses the factors that are responsible for the slow process of industrialisation in India. Section 5 recapitulates the important findings and makes concluding remarks.

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URL: https://www.sciencedirect.com/science/article/pii/B9780081020050000058

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The precatching-up stage is characterized by the import-substitution policy phase during the 1960 and 1970s. Brazil had a highly regulatory system for controlling foreign firms and the import of goods and services. During this period FDI grew to attend to the needs of a highly protected market, benefiting from market and trade restrictions.

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is the idea that blocking imports of manufactured goods can help an economy by increasing the demand for domestically produced goods.

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Import substitution is the idea that blocking imports of manufactured goods can help an economy by increasing the demand for domestically produced goods. The logic is simple: Why import foreign-made cars or clothing or chemicals when one could produce those goods at home and employ workers in doing so?

This idea goes back centuries in economic thought but is commonly associated with the Argentine economist Raúl Prebisch, who publicized his ideas in Latin America and around the world in the 1950s. Many developing countries adopted import substitution trade strategies after World War II, when economic development was equated with industrialization and capital investment. By the 1980s, however, the idea had fallen out of favor with the rise of the "Washington Consensus" that supported freer trade.

This "rise and fall" of import substitution is illustrated in a Google N-gram of book references to the idea (see figure). References to import substitution took off in the 1960s, leveled off in the 1970s and 1980s, and then declined in the 1990s when the " Washington Consensus" in favor of trade liberalization became popular.[1]

Yet today, import substitution may be coming back in vogue. Several African countries have recently indicated they may be embracing it once again.[2] Other countries such as China, India, and even the United States seek to promote domestic manufacturing and exclude imports from the market. For example, in the United States, the Trump administration has been taking steps to "reshore" production of automobiles, semiconductors, and other manufactured goods to boost American output and create manufacturing jobs.

In this context, it is somewhat surprising and instructive to learn that even the original proponents of import substitution were rather qualified in their advocacy of this policy and were among the first to recognize its potential flaws and dangers.

A newly released PIIE working paper, " The Rise and Fall of Import Substitution," examines the views on import substitution of early intellectual leaders in development economics. This list includes Raúl Prebisch, Gunnar Myrdal, Ragnar Nurkse, and Albert Hirschman, all of whom were leaders in the field of trade and development and wrote extensively in the 1950s, 1960s, and 1970s.

While these economists are commonly thought to have issued blanket endorsements of import-substituting policies, the paper finds that some of them were quite critical of protectionist policies. It appears that even the early supporters of import substitution were aware of the potential downsides to such policies.

For example, Prebisch and Myrdal are most commonly recognized as the staunchest critics of "free trade" and advocates of import substitution. Yet Prebisch also worried that economic efficiency would be sacrificed if developing countries, with their very small domestic markets, tried to pursue a policy of self-sufficiency. And Myrdal issued a blistering attack on the quantitative controls on imports and feared their implementation would be rife with inefficiency and corruption.

For their part, although they accepted the need for countries to have a development strategy, Nurkse and Hirschman were openly critical of import substitution and thought that such policies could backfire.

By the 1960s, it was evident that import substitution policies, particularly in Latin America and South Asia, were leading to highly protected and inefficient domestic industries, in addition to stifling exports and reducing foreign exchange earnings. Furthermore, countries pursuing a policy of export promotion seemed to be doing better. As a result, support for import substitution-at least among thought leaders, if not policymakers-began to wane.

And yet, sometimes old ideas return in new guises and import substitution may yet rise again. The lessons of past experience might temper one's enthusiasm for the resurrection of such anti-import policies.

Notes

1. The book references to import substitution presented in the figure are a lagging indicator of the opinion of thought leaders about the idea. Academic discussion of import substitution was greatest in the 1950s and 1960s and fell off in the 1970s and 1980s.

2. The Economist reports: "Tito Mboweni, South Africa's finance minister, wants to 'set up manufacturing to make what we need and stop relying on imports from China.' Uganda is trying to discourage imports. Ghana also says it is making import substitution a priority."

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Import substitution is making an unwelcome comeback

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Import substitution is the idea that blocking imports of manufactured goods can help an economy by increasing the demand for domestically produced goods. The logic is simple: Why import foreign-made cars or clothing or chemicals when one could produce those goods at home and employ workers in doing so?