From 1960 to 2010 the economies of Latin America grew more slowly, with higher income inequality, than the economies of East Asia. Latin American and East Asia countries took different development approaches resulting in different results. The origin of these differences can be attributed to historical and social factors as well as to contrasting debate over the role of government policies. Economists have long argued about what kinds of policies are effective in bringing about economic development. One can argues there has to be a greater role for government and Import-Substituting Industrialization (ISI) and the other endorses a minimum role for government and allowing the market mechanism to reign with Export-Oriented Industrialization (EOI).
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There are two kinds of market imperfection. First, complementary demand (industries rely on other industries to create demand), which means nobody is going to take the risk to open factory until there are enough demands from people who can afford their goods. Second, pecuniary external economies (industries rely on other industries to components and raw materials). Just like the complementary demand end up with same problems where the starting point is neither one is producing, neither one is investing in these industries. In other words, neither one unilaterally will make a move until government gets involved and help both industries pop up and the same time by giving subsidy or incentives so we can move to a more efficient outcome. Structuralists argued that the way to overcome these coordination problems was with a state-led big push. The state would engage in economic planning and either make necessary investments itself or help coordinate the investments of private economic actors. Structuralism provided the intellectual justification for a state-led development strategy. This state-centered approach to development came to be called Import Substitution Industrialization. The strategy of ISI was based on a simple logic: Countries would industrialize by substituting domestically produced goods for manufactured item they had previously …show more content…
There were imbalance in government budgets which their spending were more than they were taking in. ISI tented to generate persistent budget deficits because it prescribed heavy government involvement in the economy. Second, they suffered from the current account deficits which can be define as importing much more than they were exporting. Import substitution gave rise to current account deficits because it generated a considerable demand for imports while simultaneously reducing the economy’s ability to export. This cannot be sustain because countries have a certain amount of foreign currency and if they have long term trade deficits then they are depleting their foreign currencies. Exports declined for two reasons, first, the manufacturing industries were not compatible against abroad good (imported goods). Second, Government policies weakened the agriculture sector because they were focusing on
There are two kinds of market imperfection. First, complementary demand (industries rely on other industries to create demand), which means nobody is going to take the risk to open factory until there are enough demands from people who can afford their goods. Second, pecuniary external economies (industries rely on other industries to components and raw materials). Just like the complementary demand end up with same problems where the starting point is neither one is producing, neither one is investing in these industries. In other words, neither one unilaterally will make a move until government gets involved and help both industries pop up and the same time by giving subsidy or incentives so we can move to a more efficient outcome. Structuralists argued that the way to overcome these coordination problems was with a state-led big push. The state would engage in economic planning and either make necessary investments itself or help coordinate the investments of private economic actors. Structuralism provided the intellectual justification for a state-led development strategy. This state-centered approach to development came to be called Import Substitution Industrialization. The strategy of ISI was based on a simple logic: Countries would industrialize by substituting domestically produced goods for manufactured item they had previously …show more content…
There were imbalance in government budgets which their spending were more than they were taking in. ISI tented to generate persistent budget deficits because it prescribed heavy government involvement in the economy. Second, they suffered from the current account deficits which can be define as importing much more than they were exporting. Import substitution gave rise to current account deficits because it generated a considerable demand for imports while simultaneously reducing the economy’s ability to export. This cannot be sustain because countries have a certain amount of foreign currency and if they have long term trade deficits then they are depleting their foreign currencies. Exports declined for two reasons, first, the manufacturing industries were not compatible against abroad good (imported goods). Second, Government policies weakened the agriculture sector because they were focusing on