ISI
Transformation: political changes:
Wage increase
Improved working conditions
Political inclusion in the …

Negative of ISI: (characterized by two different stages)
Agricultural becomes uncompetitive
-exchange rate: money is over-value, the price will be higher than the other countries.
Keep the domestic currency strong relative to foreign currencies
Need to import capital goods (machinery) to produce consumer goods
Overvalued exchange rate made commodity exports artificially expensive and therefore less competitive in the international market
- agricultural production and its social consequencs: agricultural production stagnated rural wages declined –migration to the cities migrants resided in urban slums increase in the size of the informal sector
Exhaustion of the first stage - limited dynamism
1st stage: production stage : substitution industrialization light industries- the easy phase required little technologies most financed by domestic business
2nd stage: deepening of industrialization required more sophisticated technology and know-how domestic business (main loser) could not finance the second stage multinational corporations were invited to invest in Latin American tensions within populist multi-class coalition
Inflation
Erodes the purchasing power of currency
Affects the poor, who can’t store their wealth in assets that do not lose their value (property)
A highly organized and politically mobilized working class demands wage increase forcing the government to print more money -> bottlenecks

Indebtedness
FOREIGN DEBT
ISI required massive state spending (subsidies for business, wages&social welfare for works
Severe imbalances in balance of payments
Demands for increasing wages

Balance of payments difficulties
Export revenues could not finance the capital needed for imports of machinery
Export revenues could not finance foreign debt payments

All above led to the collapse of ISI
-------In a context of extremely high mobilization of the urban working class

Afterwards,
Demise of ISIS and populist regimes
1960s: military dictatorships two paradigmatic cases:
Argentina: Juan Carlos Ongania
Brazil: Humberto Castelo Branco

Goals: Political exclusion of the urban working class – presidents no longer represented the interests of the working class
But “moderate” economic claims
Deepening of ISI with alliances with MNCs – short-lived

Was ISI inherently flawed?:
If there’s strong leadership / economic model --- but government didn’t give more support for the industries become more competitive
ISI—should be shorter term
Problems: ISI in Latin A was in Democratic context (need supports from the workers) democracies pose limitations

Alternative to ISI: NEO-LIBERALIS? Large middle class

Political Radicalization:
Violent overthrow of elite-led institutions
Political and economic inclusion of the working class
The Cuban Way –Cuban revolution
Armed struggle as a viable political alternative
The Chilean Way – Salvador Allende
Legal(electoral ) way to socialism

Why dictatorship
Economic social – conflict
Intl. factors: -u.s / soviet(cuba) –cold war

Long term versus short-term /proximate factors:
Changing role of the military
International influences
Catholic hurch
Tensions resulting from ISI deepening/political polarization

Role of the military in Latin American:
Prominent role since colonial era: miliias caudillos

Old professionalism: external wars
Political neutrality

New Professionalism:
Internal security – “restore order”: counterbalance/control social uprisings(Guerrila uprisings/mobilization of the working class)
National economic development
Military skills needed:political technical and military

Consequences: politicization of the military
Doctrine that implicity “legitimized” long term militarian

International influences:
Cold war:
Cuba/soviet Union
US-business interests:
-US Army School of the Americas (1946)
-anti-communist counter-insurgency
-western Hemisphere institute for security cooperation
Direct CIA intervention-e.g. arbenz 1954, Bay of Pigs 1961, Chile 1973

Exhaustion of ISI easy phase&political tensions
Political and economic conflict
Competing mass mobilizations
Perceived threat to middle class

Bureaucratic authoritarianism (BA)
Guillermo O’Donnel – modernization and Bureaucratic Authoritariansim
Characteristics:
Coalition actors:
Domestic bourgeoisie
Military = state
Multi –national cooperation
Repression
No elections, no political rights for labor movemens/unions
Presidents no longer represent the interests of the working class

Composition of ne political coalition (working class is excluded

Neoconservative regimes:
Argentina 1976, chile 1973, Uruguay 1973

Replace completely ISI
Trade liberalization (open the economy)
De-industrialization
Privatization

*the change of economic model and regime type change over night neoliberalism was imported under the dictatorship
Economic consequences of neoconservative policies in the 1970s
Trade liberalization: Bankruptcies of local industries rate of growth decreased production in manufacturing sector drpped and size of the industrial labor force decreased real wages deceased

Effects of ISI
The State: require the rulers borrow debt
Debt Crisis:
70s petrodollars flew massively to LA
Higher oil prices in the late 1970s lead the US to increase interest rates --- OPEP crisis (2ND shock) ---<after U.S support Israel, OPEC decided to cut supplies in economic model, and cut the budget to the U.S, AND THE Latin America borrows mainly from U.S
1982 – Mexican default and contagion
Stop of all new lending, prominence of IMF lending
Governments borrow from central bank – central bank print money & inflation

1980S – Lost Decade
-Contraction or low growth high inflation high indebtedness real wages decline
Unemployment rises
Government debt increases (in %)

In response to the problems: introduce neoliberalism
1.Need to generate macroeconomic stability through the control of public sector deficit
2. Importance of opening the external sector to foreign competition (liberalization)
3.Need to reduce the role of the state in the productive process through privatizations and deregulation programs

Actions: -cut government spending –remove subsidies
Cut taxes
Privatize state-owned companies – competition
Liberalize trade – cut/remove tariffs
Allow foreign investment
Deregulation

Needs for restructure --- structural adjustment
IMF and World Bank prescriptions – the Washington Consensus
Trade liberalization Liberalization of capital controls reduction of all kinds of state regulation privatization of state –owned enterprsies liberalization of labor markets reduction of public employment
Goal: cut balance of payments’ fiscal deficits, reduce inflation, reduce capital flight

Main challenge of implement Neoliberalism: there are many labors receive benefits from ISI --- which Neoliberalism cut much of the employment etc.

-Trade liberalization: economies are opened, imports of intermediate goods are allowed, removal of protection of domestic industries
Liberalization of capital controls:
1Elimination of barriers to FDI/foreign capital (foreign direct investment)
2Reduction of all kinds of state regulation:
3Elimination of subsidies (for rural development, transportation, utility consumption, industrial promotion)
4. Privatization of state –owned enterprsies reduce pressure on the budget * increase eeficiency by allowing the private sector to manage neterprises * 5.reduction of public employment * -public employees (bureaucrats, workers of state-led industries) are fired * 6.Liberalization fo labor markets * -relaxation of laws to hire and fire personnel/temporal workers * -wage flexibility (i.e, wage levels and not decided collectively) * 7.import tariffs were cut * * Why neoliberalism: * Policy that IMF suggests (external) * They look up the Asian (external) * More efficiency * -Middle class discontent with hyperinflation (inflation effects the poor very bad) * - Chicago Boys * * International casues: * Reagan/theater * U.S policy – Washington Consensus * Conditionality – iMF * * Shock therapy: get it done, stop the hyperinflation: government spend how much it gets

Trade liberalization:
Economies are opened, imports of intermediate goods are allowed, removal of protection of domestic industries:

Winners: MNCs * Exporters *
Losers: Urban work class Landowners state workers
Liberalization of capital controls: elimination of barriers to FI Foreign capital

Reducion of all kinds of state regulation: elimination of subsidies (rural development, transportation, utility consumption, industrial promotion)

Democracy and market reforms
Problem of public opinion
-Unemployment
-cuts in government services
-weakens unions

Prblem of time lag

-Positive eefects can take time
-Politicians have short windows to reelection

Chile under Pinochet
-Argentina
The democratic paradox
Democracy and an open economy (neoliberalism) go hand in hand
Implementing neoliberalism under democracy entails very high risks – democracy might undermine the impletmentation of neoliberalism
Why? Militray regimes could ignore voters who will suffer from neoliberalism, democracies cannot
Puzzle: hwo to implement reforms under democracy?
Solutions: Neoliveralism by surprise (stokes)
Negotiation
International pressure –IMF, WB, US foreign policy

Stokes:
Difficult to win elections on neoliberal platform

Politicians use “bait and switch”
Run on leftist or vague platform
Switch once elected – 12 new presidents violate the promises about economic policy

Neopopulism
Small concessions to poor/informal
Major reforms favoring a ffluent

Is neoliberalism by surprise bad for democracy? – bad for democracy , losing constituent; if ISI continues, the democracy will upset the states like the dictatorship ； they contribute to weaken institutions

Neoliberalism by negotiation
Key actors (domestic business&union leaders) who might resist neoliberalism are invited to negotiate
Compromise over reforms
Union leaders are given a say in the reform process and they become shareholders of the newly privatized SOEs(argentina and mexico)
Technocrats in the government form alliances with groups of beneficiaries well informed about the payoffs of the reforms at the very outset of , or pior tom the implementation of neoliberalism

Socioeconomic effects
Real wages decline * Unemployment grows dramatically
Poverty increases dramatically

Exam: different stages of the political regimes