IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

The Political Economics of Import Substitution Industrialization

Listed author(s):
  • Claudio Sapelli


    (Instituto de Economía. Pontificia Universidad Católica de Chile.)

Chile has shown in Latin America that an open economy can detach itself from the vicissitudes of its neighbors. It also has shown that it delivers growth. However, other countries in Latin America have considered reinventing the ALALC strategy of the sixties, a strategy of opening to regional trade while closing itself to trade outside the region. Chile followed that strategy at some point. How did it get from there to here? How is the political economics of the reform from an ISI strategy to an open economy? Is there a role for IFIs in that process? This paper discusses Chilean economic policy choices in the period 1950-1973, the period of the import substitution industrialization (ISI) strategy. The ISI model rested on two main pillars: a closed economy (high tariff barriers, quotas and exchange controls) and a strong role for the state (government expenditure as a large share of GDP, extensive regulations and an increasing presence of state-owned firms). Particular emphasis is put on trying to explain how the ISI strategy was sustained and what led to its demise. The framework of interpretation provided in the paper is also applied to Uruguay, in an attempt to gauge its capacity to interpret what happened in another Latin American country. Policy is endongenous, and hence reform is endogenous. Credibility can affect the chances of reform to succeed. According to the reasoning presented here, a key issue is to study the factors that affect the equilibrium rent extraction rate. There are many incentives to announce and then reverse a liberalization program. If investors believe in reform, and invest, then there is a short run boost to GDP, and then investors a repartially expropriated by the reversal (since without the liberalization their project was not profitable). Hence announcements are not credible unless signaling of commitment is present. This paper argues there is a role for IFIs in this process but that the loan size and the amount of conditionality are key in making the liberalization process credible. If the size is too small or there is not enough conditionality, then the rent seeking government will fool both the investors and the IFI by getting the investment, the loan, and not reforming. Investors know this moral hazard problem and hence invest less than expected initially, making the elasticity of supply to the RER lower, and making the optimal RER higher. The signaling of commitment is key to triggering investment. But if IFIs get into the problem and are unable to sustain conditionality or estimate the adequate size of the loan, then IFIs will lose credibility and this signaling device will be devoid of utility. IFIs can solve the time inconsistency problem faced by rent seeking governments that results in very low investment. However, if the donor agencies become unreliable in enforcing conditionality, they will result in countries free riding on the signal, the signal losing credibility, and IFIs will lose the ability to perform the role. This is a common property problem: each country individually would rather the IFI enforce the conditionality for all other countries and not for itself. If the negotiation process in the IFI permits this to occur sufficient times all are worse off since then a signaling device is lost.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Instituto de Economia. Pontificia Universidad Católica de Chile. in its series Documentos de Trabajo with number 257.

in new window

Date of creation: 2003
Handle: RePEc:ioe:doctra:257
Contact details of provider: Postal:
Avda. Vicuña Mackenna 4860, Macul, Santiago

Phone: (562) 354-4303
Fax: (562) 553-1664
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

in new window

  1. Claudio Sapelli, 1993. "The political economy of structural adjusment," Estudios de Economia, University of Chile, Department of Economics, vol. 20(esp Year ), pages 141-156, june.
  2. Claudio Sapelli, 2000. "The Political Economy of the Chilean Transition to Democracy," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 37(112), pages 537-556.
  3. Claudio Sapelli, 1990. "La Economía Política de los Impuestos: Una Aplicación al Sector Pecuario Uruguayo," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 27(82), pages 491-508.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ioe:doctra:257. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jaime Casassus)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.