Industrialization is a phenomenon that comprises both social and economic changes in society often due to disparate factors. In most areas of the world, the industrialization process occurred after the Agrarian Revolution following an increasing demand for basic commodities to satisfy the ever-growing populations. The process required most societies to adopt various social and economic transformations in order to create the right environment for the accommodation of technological innovations and advancements depending on the countries’ unique situations.
In most settings, changes in the way people conducted trade and demand for commodities led to the transformation of political policies in order to create financial benefits for states as well as individual populations. However, in some instances, as is the case with Mexico, political policies played a bigger role in the institution of industrialization as compared to economic forces such as supply, demand, and availability of resources.
In the former scenario, the reorganization of society depended largely on social interactions affecting trade, thus allowing market forces to control the industrialization process freely with support from governments through policy enforcements. This aspect essentially means that the progression of the process was not dependent on political institutions, but on free social and economic interactions amongst individuals in different societies. In the later case, the political class dictated the speed and direction of the industrialization process, thus forcing society to conform and adapt to the changes.
This paper comprises a case study of the later scenario focusing on the industrialization of Mexico as the main example. The paper explores the country’s transition into import substitution industrialization (ISI), reasons why the Mexican government chose the ISI as the strategy of choice, and some of the benefits that the strategy had on the Mexican economy. The paper also takes an objective look at some of the limitations that the ISI strategy had on the economy and some of the changes that have occurred since the inception of the industrialization process in order to establish whether the ISI process would work for other developing countries looking to adopt this method of transition into industrialization.
Brief background of the industrialization process in Mexico
The preference of the Mexican government for import substitution industrialization was historically evident, given the country’s political history. During the era of Porfirio Diaz – the twenty-ninth president of Mexico between the years 1884 and 1911 before his deposition, Diaz exercised political control over the country’s economy through the application of authoritarian rule and use of military tactics.
Although Diaz was infamous for his repressive leadership tactics, he also left a legacy of internal economic stability and substantial economic growth through control and manipulation of the country’s economic situation at the time. His ‘no re-election’ slogan earned him favor with the people and created a false sense of democracy, especially considering the view that he often picked a candidate that he could manipulate into doing his bidding as his successor and endorsed the person to the public (Lewis, 2004).
Diaz’s first goal over his twenty-six years of leadership was establishing lasting peace in order to redeem the image that the international community had of Mexico, which was ridden with strife with little chance of economic progress. His way of maintaining peace involved suppressing banditry using the countryside police officers, giving competing forces such as the Mestizo’s government positions, and refraining from interference with the wealth of the elite Creoles.
However, in the same breath, Diaz dissolved local authorities, employed his closest allies in high-ranking administrative positions, suppressed the media, and took control of lands rich in minerals such as copper (Lewis, 2004). He encouraged foreign investment in the mining sector in the northern border region of the country by giving limited access to investors for a set fee. The majority of people in the rural areas worked in large-scale wheat and grain farms in the central region. There were few revolts at the time due to the increase in economic growth and the violent means with which the government quelled such uprisings. The Mexican citizenry deposed Diaz after imprisoning his main opponent in the 1911 elections in a bid to secure a second term in office, which was contrary to his ‘no re-election’ policy.
In essence, Porfirio Diaz’s personal way of dealing with political problems and the resultant success of control over the country’s economy played a significant role in the establishment of a state-controlled economy between the 1950s and 1960s, through the initiation of import substitution industrialization. Although his successors adopted a liberal manner of dealing with social freedoms in the political arena, the politics behind the economic growth strategy for the country exhibited a less liberal approach.
The adoption of import substitution industrialization (ISI)
In the early 1920s, after the deposition of Pofirio Diaz, a large part of the Mexican population took advantage of the existence policies on free movement between the country and the United States in a bid to obtain gainful employment as laborers in the US. The American government in turn took advantage of the abundant availability of cheap labor and established the Emergency Quota Act in 1921, which essentially restricted immigration into the US with the exception of immigrant laborers from Mexico.
As part of the Act’s provisions, the American government reserved the right to keep a small percentage of every laborer’s earnings for payment to such laborer on the day he or she agreed to move back to Mexico. This provision aimed at ensuring that the stay for immigrants was temporary, although it did not quite achieve its desired effect. In the 1930, the Great Depression caused economic strain on the American government, thus forcing it to curtail further immigration exceptions to Mexican laborers, which in turn caused strain on the Mexican government in terms of provision of primary needs such as food and power supply for its population (US Library of Congress, 2014).
In the years between 1934 and 1951, the Mexican government under the leadership of President Miguel Aleman established high protectionist tariffs aimed at increasing the production of consumer goods mainly for the local market. However, the protectionist policies protected the business interests of individual owners of large-scale wheat and grain plantations and did little to solve the labor problem in the country, thus causing uprisings, which made Mexico a less attractive market for investors in the international community (Haber, 1995).
In 1970, the government fully adopted import subsidization in a bid to resolve some of the problems it was experiencing with the populace. Although it placed strict policies on consumer goods such as agricultural products, it kept is doors open to capital investments. The main reason behind such reservation on investments is that the government lacked the financial capacity to initiate the import substitution process fully because tax revenue was not enough to sustain the provision of basic social amenities while providing financial backing for the establishment of more industries (Perereault & Martin, 2005). This approach resulted in self-sufficiency as far as food production was concerned and allowed enough production of primary consumer goods for export to the international markets.
Import substitution industrialization
Import substitution industrialization (ISI) is a trade policy that supports the development of domestic industries at a national level with the aim of manufacturing products capable of replacing imports. The trade policy operates on the premise that countries that depend largely on imports place their governments at risk of over dependency on necessities and create a subsequent vulnerability in their economies.
Examples of such vulnerabilities include excessive expenditure during periods when import countries experience food shortages, risks of starvation for the population, and lack of enough machines for infrastructural development among others (Bruton, 1998). The ISI provides a solution for most of these problems by advocating for government policies that support the development of local manufacturing industries and reduction of importation as the primary means of achieving economic growth.
German-American economist Friedrich List is among some of the most famous economists that advocated for the ISI principle between the eighteenth and twentieth century, especially with regard to developing Latin American nations at the time including Mexico. According to Friedrich, different countries experienced different paces of development, especially during and after the Second World War period due to the unique circumstances in which the states found themselves (Bruton, 1998).
For instance, some European nations had vast natural resources at their disposal in addition to the availability of a substantial labor force, thus easing the reconstruction process of the economy. In contrast, countries such as Mexico had a substantial labor force, but they relied heavily on importation of goods such as food and infrastructural materials to cater for their bulging populations.
Although the free market policy existent in such countries transformed the nations into ready markets for those with considerable success in development after the World War 2 and afforded populations with goods, the expenses that thee countries incurred were high, recurrent, and erratic. Friedrich developed the ‘infant industry’ argument in which he contended that developing countries should concentrate on supporting industries in their early stages of development as a strategy to achieve self-sufficiency (Bruton, 1998).
One of the strategies that states utilize in such achievements is nationalization of industries. This strategic plan essentially involves the acquisition of industries by the state through majority shareholding, thus awarding the government control in such industries through either votes on corporate policy decisions or the direct running of the company’s operations by government representatives.
The main advantage of this method is that it allows the government to control pricing of products from such a company to create desirable demand to the advantage of consumers. The second strategic method in which governments exercise control over their economies through the ISI is subsidization of vital industries. Subsidies involve the reduction of acquisition of raw materials for specific products with the aim of reducing production costs for the industries.
Subsidies operate on the premise that low production costs make products available to consumers, thus increasing demand. An increase in demand for goods translates into an increase in consumer spending and subsequently tax revenue available to the government for development of social amenities. Subsidies apply to state corporations as well as private companies (Hoshino, 2001). Some of the most prominent industries that benefit from subsidizations include agriculture, power generation, oil distribution, and water supply among others.
Another strategy that some states apply in the actualization of the ISI is the implementation of protectionist policies that encourage economic patriotism. Protectionism is an economic principle that encourages the restriction of importation of goods and services through government policies such as imposition of tariffs and setting high standards in quality of goods and services. Although economists argue that protectionist policies “often equal the playing ground between goods and services produced locally and imports” (Ross, 1993, p.46), the strategic application of protectionist policies can utterly hinder the importation of goods, thus resulting in reliance of locally manufactured products.
In the case of Mexico, the protectionist policies that the government had enacted in the 1960s took the form of licensing criteria whereby the government only issued licenses for specific products depending on their availability within the country. The Mexican government also established domestic content requirements (DCRs) in 1962 for the automobile industry in a bid to increase innovation, promote the use of local material in the industry, and ultimately grow the economy. Ros (1993) holds that apart from the Maquiladora program that fostered a free trade regime in the northern border region for export processing plants, the Mexican government put no effort in creating export policies.
The ISI strategies that the Mexican government implemented between the 1950s and 1960s, including the ones mentioned above, fostered positive economic growth and development, which reduced the country’s dependence on international aid coupled with promoting adaptability of the population to circumstances where supply did not meet the demand during certain periods. However, the implementation of the ISI strategy also featured certain limitations to the Mexican economy (Monero-Brid, Santamaria, & Valdivia, 2005). Although the benefits of developing infant industries are numerous, overly enthusiastic ISI policies have the effect of crippling the economy by limiting the market opportunities that other countries enjoy through the practice of free international trade.
Factors that made industrialization possible in Mexico
One of the major factors that made the inception and actualization of the ISI possible in Mexico is the availability of a sufficient labor force. Due to the land policies existent during President Porfirio Diaz’s reign, a majority of the population in the rural areas in Mexico did not own land, and thus they relied on other means of income for survival. The country’s mines and plantations were barely enough, which resulted in a huge surplus in the labor force (Hoshino, 2001). The abrupt end of the immigration exceptions that the Mexican laborers enjoyed in the United States further strengthened the resolve of the largely unemployed population to work in the new industries after their establishment.
Secondly, the country had a sufficient endowment of natural resources. The northern border region of the country had copper mines that provided job opportunities, thus mitigating the unemployment problem that the country experienced at the time. Women and children mostly chose jobs that were not as physically demanding as the mines, such as working on wheat plantations.
Although the wages in such employment lines were meager, they provided for most households in the rural areas that could not afford land rates with a means of earning enough money for basic needs. The discovery of oil in the 1970s improved the level of employment in addition to providing export products such as petroleum that earned the government sufficient revenue (Ros, 1993).
Foreign investments in the form of capital imports had a great impact on the actualization of industrialization in the country. Just like businesses, governments rely heavily on investments from other nations in order to ensure that they run essential projects simultaneously, especially when prioritization of such projects is not an option. For instance, in a scenario where a government has to supply additional food to its population and provide power supply to newly inhabited areas, it is difficult to pick one and neglect the other, thus creating the need to attract additional funding to tax revenue in the form of foreign investments.
Another factor that played a significant role in the success of Mexico’s industrialization process is political stability in the country. Political stability forms one of the main requirements for the creation of a healthy economy. Lack of political stability often leads to destruction of essential resources such as infrastructure, prevents investment opportunities, and hinders amicable relations with other nations willing to engage in trade or offering political council.
For instance, in the Latin American circle of nations, relations between Cuba and the United States were often shaky during the Mexican industrialization period leading to strenuous relations between Mexico and the US. However, the presence of political stability in the country coupled with natural resources such as copper and relaxed policies on immigration provided the American government with an incentive to engage in trade relations with Mexico though capital investments.
Lastly, the existence of an international market for Mexico’s primary consumer products generated support from the government regarding infant markets. Although the internal market for Mexico was mostly under the control of the state, the rules outside the territorial borders were different. International trade relies mostly on the market forces of supply and demand in order to establish successful trade relations. In most cases, countries whose products attract more demand than others do achieve more success in international trade.
For instance, one of the commodities with the most demand worldwide is oil, thus making oil-producing countries some of the most successful countries in international trade. Demand for oil hardly ever falls, even during periods when oil prices are high. In the same light, much of Mexico’s consumer goods at the time attracted high demand in the international market, thus drawing profits for the infant industries and funds for further expansion.
At some point, the demand for oil and copper surpassed that of consumer products such as grain, thus resulting in little government focus on the consumer industry and a subsequent public outcry over the government’s neglect on labor policies. The lack of an adequate international market for products made in the country would have resulted in a stagnation of the import substitution process due to saturation of products in the internal market, as was the case later on between 1987 and the early 1990s.
Applicability of the ISI in other nations
The applicability of the ISI policies to other nations squarely depends on the circumstances of those nations at the time. The advantages and disadvantages of the strategy’s application are identical in most cases. However, as with the Mexico case, the application of import substitution cannot be a permanent solution to support internal markets and gradually, a country has to progress towards free trade in order to truly succeed in steady economic growth.
Advantages of the ISI
One of the main advantages of the ISI is that nations that adopt the strategy reduce their dependence on other nations, thus reducing the number of instances in which the economies of such countries experience vulnerability. Just as is the case with business relationships amongst companies, unforeseen circumstances may sometimes occur, thus hindering the reliability of one party in relation to the execution of a certain requirement of an agreement with another party (Bruton, 1998).
For instance, in a case where one party relies on another for the supply of agricultural products and the supplying country experiences a sudden storm destroying the products, the buyer in this case would be vulnerable to starvation assuming the lack of an alternative solution. However, assuming that the buying country has its own supply of agricultural produce and it buys the produce from the other country as a precautionary measure during periods of internal shortage of the products, such vulnerability would be non-existent.
The ISI encourages internal generation of products that a country would otherwise need to rely on another in order to achieve access, thus reducing instances of vulnerability. Secondly, the successful execution of the ISI policies results in the predictability of the economy (Lewis, 2004). For instance, in the case of Mexico, the ISI was the government’s way of controlling the economy and ensuring that the country’s population has enough essential consumer products without resorting to exorbitant expenditure by government institutions.
The Mexican government during President Diaz’s rule was in a position to control the internal market forces and subsequently the economy though support of infant industries that dealt with the manufacture of consumer products. The government’s control over most industries in the country also afforded relevant institutions the opportunity to identify problems as soon as they developed and formulate solutions before the problems developed to magnitude that the government could not control internally.
Thirdly, import substitution fosters innovation in a country and allows it the opportunity to compete with other countries with significantly higher levels of development. Most developing countries lag behind economically as they focus on solving internal problems that their populations face while competing with developed countries in various areas of the economy. Globalization has added to the pressure for such countries to keep up with blurring paces at which developments such as technological gadgets replace most tasks that people are used to handling manually.
The ISI provides some solutions to this dilemma by allowing developing countries to develop innovations that cater for internal needs before advancing to join the global race towards technological excellence (Monero-Brid et al., 2005). In Mexico, the institution of the ISI policies allowed the country to develop industries that addressed issues of food production and provision of employment for its large labor force. Although the nation delved too long on the concept, the pace at which it undertook development of innovations allowed it the chance to adapt progressively to rules of free trade without having to deal with provision of basic consumer goods to its population.
Another advantage resultant of the adoption of the ISI is the ability of the strategy to increase the bargaining power of a country in international trade. Although most countries that choose to apply the ISI limit their international trade activities, as was the case with Mexico, these countries still rely on the sale of products and services that they develop through the support of infant industries in order to generate substantial revenue to grow their economies (Perereault & Martin, 2005).
In most business transactions, a party that has a lot to lose when an agreement fails to materialize is likely to make bad judgments due to possession of lower bargaining power. However, parties that negotiate from points of strength are more likely to reach a compromise that benefits both sides. The ISI increases the bargaining power that a country has in negotiation of international trade dealings due to the manageable resolution strategies that the ISI provides for internal problems regarding necessities such as food and energy supply.
The ISI also increases the taxable revenue that industries in a country generate, thus resulting in more government income (Haber, 1995). Governments rely majorly on tax income in order to satisfy the needs of their populations in terms of provision of basic social needs and amenities. Although internal industries generate a significant amount of a country’s earnings, additional income is often available through the encouragement of importation and taxes that subsequently accrue.
In most cases, governments charge higher rates for imports by foreign countries than they do for local industries. The additional income often creates an incentive for governments to encourage importation of goods and services. The most common exception to this rule exists when the imports are basic consumer products in which governments usually encourage importation as a means of lowering local prices for the benefit of the citizenry.
By looking at taxation from this perspective, it is clear that fostering local industries will generate more taxes for the government than allowing foreign competitors into the local market. Higher taxes for foreign industries translate into fewer imports due to high prices of the products when they finally reach the consumers. Fewer imports translate into lower tax revenue for the government, thus making the ISI the better option due to the creation of a stable flow in tax revenue.
Lastly, the ISI promotes economic patriotism, which fosters the growth of the local market even after the liberalization of the internal market in later stages of a country’s economic progress. Economic patriotism entails the coordinated behavior of companies in which particular groups of consumers or companies prefer goods and services produced in their own countries or in regions within which their countries participate in trade, as opposed to goods and services from foreign nations.
The ISI generates familiarity of local products and consumer trends that foster confidence in local products to the benefit of local manufacturers with regard to international trade. The predictability of the quality of products, potential job opportunities, and the possibility of discounted pricing that accrue from the practice, in addition to tax revenue for the government due to increased consumer spending make the concept attractive to local governments. Most consumers are less adventurous with basic consumer goods than they are with luxury items, thus establishing confidence in a country’s participation in free trade, as in international trade.
Disadvantages of the ISI
One of the main disadvantages of the ISI is the creation of monopolies. Although monopolies generate adequate income for industry owners, they stifle competition and prevent consumers from enjoying benefits that accrue from healthy business competition. With time, monopolies breed laxity in the quality of products available for consumers. Additionally, monopolies enjoy tyranny in pricing that place consumers at a disadvantage. Ultimately, the consumers’ demand for such goods may drop, thus defeating the purpose of the ISI policy implementations.
Secondly, the ISI regulations often result in economic stagnation as the case study of Mexico proves. Although the reception of new industries creates a sense of promise for income generation from the industry owners’ point of view, with time, the products saturate the internal market to the point where they fall in price to the detriment of the state concerning tax revenue. Therefore, at such point, unless the markets open up to policies of free trade, the stagnation and eventual deterioration of industries negate the core purpose of the establishment of the ISI policies.
The third disadvantage of the ISI policy implementation concerns the availability of ready markets for the compliant nations. In trade, the concept of reciprocity often applies to parties conducting dealings in terms of what they expect from each other in the form of good faith. In long-term trade relations, parties are often willing to create compromises during certain instances for the benefit of future dealings.
In the case of import substitution, especially when the regulations are as strict as Mexico used to be, one party supplies consumer as well as capital goods while the other can only supply capital goods. Such instances are often good for short-term trade relationships, but they do not work well with long-term dealings for once the other party gets a trade collaborate with a better offer of better conditions, the trade dealings collapse. Therefore, it is often difficult for the ISI compliant countries to find long-term ready markets for their products. With time, the task becomes harder as other countries open to free trade join the market.
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