Unformatted text preview: The Economy of La.n America ISI Raul Prebisch World is divided in two: 1.Periphery Primary goods 2.Center Industrial goods Prebisch main cri.cs is that: Unequal distribu.on of economics gains Raul Prebisch Unequal distribu.on of the gain of trade Declining terms of trade Terms of trade = Index of export prices Index of import prices Countries have to export more to import the same quan.ty of goods Declining in the Terms of Trade Low elas.city of demand for agricultural goods As the global economy grows the rela.ve demand for
primary goods declines Technology add value, increasing its market price well beyond the cost of basic inputs Primary goods are extremely vola.le Main Message
Progress is to hard if you are mainly a primary good exporter Import Subs.tu.on Industrializa.on ISI promote internal source of growth Create industries capable of producing subs.tutes for expensive imports Simultaneously promo.ng industrial growth and the expansion of internal economies State should promote na.onal technological capabili.es that would spill over other sectors BoPle Neck Scare complementary factors Technology, infrastructure, and entrepreneurial capital Land, labor, and capital Government should invest in the complementary factors to promote economic growth Main Ideas Backward linkage Growth of an industry leads to the growth of an industry that supply it Forward linkage Growth of an industry leads to the growth of an industry that uses its output as input Government should promote key industries that will lead to backward and forward linkage Example: Steel Backward linkage Smelters and iron ore Forward linkage Auto or Machine industry ISI Toolbox 1. Ac.ve Industrial Policy 2. Protec.ve Industrial Instruments 3. Accommoda.on of Fiscal and Monetary Policies Industrial Policy
State Owned Enterprises (SOE) Totally owned Mix with private sector Examples: oil, petrochemicals, telecommunica.on, steel, and aircraX Require government purchase from na.onal firm Require foreign firms to establish join venture Pressure foreign firms to increase local content Reasons for SOE Weak private sector Economics of scale Public externali.es Dynamic public managers Natural resources rents Public historical factors Protec.onism Tariffs on final goods Quotas on imports Exchange rate overvalua.on Import license Reasons for Protec.onism Infant industries Give a chance to domes.c firms to grow without compe.ng to large mul.na.onal firms Government overvalued exchange rate to promote import of cri.cal goods by over valua.ng this inputs are rela.ve cheaper Some countries high tariffs gave incen.ve to mul.na.onal to set up factories within the country Fiscal and Monetary Policy Subsidies for cheap inputs such as electricity Subsidies for public transporta.on Tax breaks in produc.on Preferen.al interest rates Na.onal Development Banks Example: BNDE and CORFO Accommoda.ng monetary policy ...
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- Spring '08