Development Doctrine and Modernization Theory - Import substitution

In these early, untheorized foreign aid projects, American advisers worked out an impromptu strategy that came to be called import substitution industrialization (ISI). Engineers in Taiwan, noting that fertilizer imports consumed a large share of the island's scarce foreign exchange, imported equipment to manufacture artificial fertilizers domestically. They constructed hydroelectric dams to fuel the plants, and one by one they substituted domestically made articles for imported ones, freeing more capital for industrial expansion. In the Philippines and Turkey, U.S. financial missions imposed tax and exchange laws that accomplished the same result by placing barriers on the importation of products that could be made domestically. Import substitution policies shifted imports toward capital goods, equipment, and technologies and away from consumer goods and commodities, and in the process they enlarged state control over the economy. The success of such strategies often depended on the state's ability to administer controls effectively and without corruption.

Import substitution suited many new nations' vision of a gleaming industrial future. Nehru famously remarked in 1954 that dams were the temples of modern India and industry its religion. Surveying the immense Bhakra-Nangal canal, he observed that "when we see big works our stature grows with them, and our minds open out a little." Modernity was the goal and justification for many independence movements, and the erection of a new steelworks or railway span hailed the arrival of full nationhood. The Olympian planning commissions that met at the Yojana Bhavan in New Delhi or at the Central Bank in Manila exercised an authority over the national economy that few colonial viceroys could equal. Import substitution policies also partially counteracted international trade patterns that kept newly independent states in the subordinate role of exporting raw materials to the industrial nations and importing finished goods.

In the early 1950s, structuralist theories located the causes of underdevelopment in lingering colonial trade patterns and recommended import substitution as a solution. Raul Prebisch, secretary-general of the UN Economic Commission for Latin America (ECLA), pointed to the deterioration of the terms of trade between the industrial and nonindustrial areas. Beginning in the 1930s, the value of commodity and raw materials exports declined steadily relative to the value of manufactured imports. Left unchecked, the "Prebisch effect" would widen the gap between rich and poor nations. Gunnar Myrdal, a Swedish economist who had worked with the Rockefeller Foundation, delivered a series of lectures in 1955 at the Egyptian Central Bank in Cairo in which he explained that market expansion would cause inequality to increase, both internationally and within nations, unless counteracted by comprehensive planning and European-style state welfare programs. In Truman's usage, "underdevelopment" was a noun describing an age-old condition to be remedied with modern technology. Structuralists changed it into a transitive verb. Underdevelopment was a process; it was what the rich nations were doing to the poor nations.

Although the structuralist formula originated abroad, the United States endorsed the import substitution approach until the late 1950s. The State Department sympathized with nationalist ambitions short of expropriation or discrimination against U.S. investment, and preferred Prebisch's doctrine to the "extreme" economic nationalism of Argentine president Juan Perón. American support for import substitution stemmed from concern about the overdevelopment of U.S. heavy industry as a result of wartime mobilization. Capital goods purchases by industrializing nations provided a badly needed outlet for American production and a stimulus to European recovery. Import substitution aroused considerable opposition within the United States from congressional conservatives, adversely affected industries, and the Wall Street Journal, but the economic and strategic benefits outweighed the political costs, at least until 1958. When criticism prevented the Eisenhower administration from participating directly in drafting economic plans, private companies and foundations stepped in. A U.S. engineering firm drafted Taiwan's first four-year plan, and the Ford Foundation dispatched a team of economists to advise India's planning commission. As the United States turned against import substitution, structuralism survived as a critique of American development policies that ignored the built-in inequities of the world system.

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