Industrialization

Industrialization, an increase in the proportion of total gross domestic product (GDP) resulting from the manufacture of goods in mechanized factories. This process began relatively late in Latin America and has, partly as a consequence, developed slowly and unevenly. Since the conquest and colonization of Latin America by European powers, the economies of the area have been oriented toward the production of agricultural commodities and mineral resources for export. While Latin America possesses the natural and mineral resources required for industrial growth, the international division of labor has not favored the creation of manufacturing enterprises. The export orientation of Latin America, fashioned during three hundred years of colonial rule, retarded the growth of a domestic market, limited the purchasing power of domestic consumers, and either obstructed or concentrated capital formation. Some development theorists explain the relative weakness of the industrial sector as a reflection of the natural comparative advantage enjoyed by Latin American countries in the production of tropical commodities such as coffee, sugarcane, and bananas. Others argue that agro-export specialization was forced on Latin America by imperial powers whose industrial growth required a steady supply of primary materials and captive markets for their manufactured products. Whatever the cause of industry's belated appearance, the fact remains that industrial production did not surpass agricultural output in any of the Latin American republics until the mid-twentieth century.

Industrialization resulted from deliberate government efforts to break out of an international division of labor in which Latin America specialized in agricultural exports. Government policies have been influenced by a bitter initial experience with free-trade policies in the early independence period. Spanish and Portuguese colonial policies permitted a degree of growth in small cottage industries. In colonial Mexico a primitive textile industry developed in the eighteenth century. While English textile plants mechanized the production process, the Mexican plants (obrajes) mass-produced cotton textiles by using cheap manual labor working inefficient looms, yet satisfied a substantial portion of Mexican demand for cotton textiles. As less expensive and higher-quality English textiles flooded the market after the lifting of trade restrictions in the early independence period, these native industries were wiped out by the competition. Subsequent efforts to revive the textile manufacturers failed, but the political leadership in Mexico and elsewhere learned that weak native industries could not modernize and grow stronger without substantial government protection.

With the spread of liberalism in the nineteenth century, governments adopted policies that encouraged the development of mechanized factories. The first stage of industrial development occurred between 1850 and 1914, when a dramatic increase in export production, combined with indirect government incentives for industry, established the foundations for the region's first manufacturing plants. Railroad construction, designed primarily to facilitate agricultural exports, also stimulated industrial growth by reducing transportation costs and uniting the domestic market. New banking laws and the confiscation of communal and church lands fostered capital accumulation, while educational reforms and immigration incentives helped to produce a skilled labor force. Capital surpluses generated in the industrializing countries also made some capital available for investment in Latin America.

Yet the major impetus for industrialization came from the dramatic expansion of agricultural exports. In São Paulo, Brazilian entrepreneurs diverted some of the proceeds from the coffee boom (roughly 1830–1910) to the establishment of factories producing the bags in which they exported a majority of the world's coffee. In and around Buenos Aires, a few meat-packing plants developed with the expansion of the cattle industry. While the early industries in Latin America were often tied to the export sector, the increase in agricultural productivity also expanded the domestic market for consumer goods. A few consumer-goods industries developed to supply domestic demand for processed foods, beer, cigarettes, shoes, and textiles.

Hence the first stage of industrialization is often referred to as an era of export-led industrial growth, characterized by the establishment of small, low-technology industries processing agricultural products or manufacturing light consumer goods for local consumers. The total contribution of industry to the GDP paled in comparison to the leading economic sector—exports of primary products—yet the foundations of Latin America's consumer-goods industry were laid in the late nineteenth century. The emergence of the manufacturing sector is reflected in the establishment of industrial organizations such as the Society of Manufacturing Development in Chile (1883), the Industrial Union of Argentina (1887), and the National Society of Industries of Peru (1897). Industry made its most significant advances in the largest countries, Argentina, Brazil, and Mexico, where natural and mineral resources, a relatively large domestic market, and a measure of capital accumulation favored the development of a manufacturing base. Mexico began producing steel in 1901, Argentina's industries employed 323,000 workers by 1915, and the Rio de Janeiro-São Paulo axis was a hub of industrial activity around the turn of the twentieth century. Even in the smaller countries of Central America a few consumer-goods industries had developed by 1900.

The onset of World War I disrupted international trading patterns and ushered in a second stage of industrial development, which lasted from 1914 to 1945. With war reducing demand for Latin American exports and cutting off imports, Latin Americans were faced with the choice of forgoing consumption of some manufactured goods or producing them in domestic plants. Governments chose to foster industrial development through import-substitution industrialization (ISI) strategies, a set of policies designed to promote the manufacture of products previously imported from foreign plants. While ISI is a development strategy associated with the post-World War II era, Latin American governments established the broad framework of ISI between 1914 and 1945. In their ad hoc responses to emergency situations, such as revenue shortages and scarcity, governments found that by increasing tariffs, a common practice for revenue-starved governments, and offering fiscal incentives, they could stimulate growth in the industrial sector. Protective tariffs and fiscal incentives made investment in industry more attractive to domestic entrepreneurs, who had always feared competition with British and American industries. Some foreign capitalists invested in South American industry, but the stimulus for industrial expansion was generated locally. Governments gave greater incentives to industry because the new factories provided employment for a growing urban population, reduced the total cost of the country's imports, and improved the national balance of payments.

From 1914 to 1945, through two world wars and one Great Depression, import-substitution policies accelerated the rate of Latin American industrialization. Between 1915 and 1947, the number of industrial plants increased from 40,200 to 83,900 in Argentina and from 13,000 to 78,400 in Brazil. During the same period, industrial employment increased from 45,000 to 176,000 in Chile and from 323,000 to 1,921,000 in Argentina. Most of the industrial expansion occurred in the primary or consumer-goods sector, but a few intermediate and heavy industries were established. Chilean factories manufactured paper, glass, and cement; Brazil produced iron and steel; and Argentina manufactured farm machinery. By 1950, the industrial output of Latin America exceeded agricultural production. Import-substitution industrialization policies, while they were not popularly labeled as such at the time, had transformed the economic structure of Latin America.

Industrialization also contributed to significant changes in politics and society. With the emergence of industries came an industrial bourgeoisie, a proletariat, and a larger middle class, most of them resident in increasingly more populous urban centers. Urbanization reflected the growth of industry and also promoted it, for with a larger domestic market came greater incentive to increase manufacturing capacity. Moreover, the industrial bourgeoisie and the proletariat, occasionally united in populist political parties by a charismatic leader, penetrated the political structure and pushed forward development programs that accelerated industrial development. This was especially true during the populist regimes of Getúlio Vargas in Brazil (1930–1945 and 1951–1954), Juan Domingo Perón in Argentina (1946–1955 and 1973–1974), and Lázaro Cárdenas in Mexico (1934–1940).

Populist politics of the post-1945 era ushered in the third stage of industrial development, an era one might label "dependent industrial growth" or "advanced import-substitution industrialization." Development issues took center stage in national politics, and reformists advocated more ambitious development projects to combat unemployment, raise the standard of living, and "catch up" with the more advanced industrial economies. Beginning in the late 1940s under the forceful leadership of Raú l Prebisch, an Argentine economist, the United Nations Economic Commission for Latin America (ECLA) urged the republics to promote industrialization in order to escape increasingly unfavorable world-market conditions for raw-material exporters. In the minds of policymakers in Latin America and the United States, industrialization became a panacea for a whole range of economic, social, and political problems that plagued the region. By the end of the 1950s, virtually every nation of Latin America was committed to rapid industrial growth.

Political factors at the national level coincided with and were perhaps strengthened by conditions that favored the growth of multinational industries. Industries based in Europe and North America, looking for new markets and new outlets for their capital, began to invest more heavily in Latin American industry. Prior to 1945, foreign investment was concentrated in agriculture, transportation, and mining. In the postwar period, foreign capital flowed in ever larger amounts to the manufacturing sector. In 1949, the German multinational company Volkswagen set up a plant in Brazil, and it was followed by Ford, General Motors, and Mercedes Benz in the 1950s. In the third stage of industrial development, governments attempted to harness and coordinate the domestic and foreign factors that propelled industrial growth to its highest levels in the 1970s.

While a manufacturing base existed in 1945, plants were generally small, inefficient, and incapable of competing directly with foreign enterprises. Moreover, with some exceptions in the larger countries, few plants existed in the intermediate and capital-goods sectors, the industries that generate self-sustaining growth by producing tools, machines, and equipment that are subsequently utilized in other productive enterprises. Consequently, ISI in the post-1945 period has involved a higher degree of state intervention to expand manufacturing into the so-called heavy industries. States erected tariff barriers, subsidized and occasionally nationalized industries, funded industrial development banks, constructed hydroelectric plants and other power facilities, and loosened restrictions on foreign investment.

Government policies stimulated even higher levels of foreign investment, as multinational corporations were eager to get behind tariff barriers and take advantage of government incentives. Although foreign capital contributed less than 10 percent of total investment per year, it helped establish key industries like steel, petrochemicals, pharmaceuticals, automobiles, and other capital-goods industries. While ECLa economists and some political leaders would have preferred to industrialize with only national capital, others argued that foreign capital was a necessary ingredient in the total development program. Without it, few countries could have developed intermediate and heavy industries.

International political factors also contributed to an increase in industrial productivity. In an effort to correct the conditions that bred revolutionary movements in Latin America, the United States committed itself to finance the Alliance for Progress in 1961. Over the next ten years, the U.S. government made available billions of dollars in low-interest, long-term loans to finance economic diversification, infrastructural development, and other projects that governments could not have financed otherwise on such flexible terms. A significant part of the development effort involved regional economic integration. Recognizing that the growth of industry required the expansion of markets, governments in Central and South America attempted to form common markets in which tariffs on manufactured goods would be gradually eliminated. While these integration measures failed to achieve all that had been intended, they helped to stimulate industrial exports and attract foreign investment.

A combination of domestic incentives, increased levels of foreign development assistance, direct foreign investment, and economic integration produced spectacular increases in industrial productivity. Between 1950 and 1978, Latin America's manufacturing sector grew at an average annual rate of 6.5 percent. The value of the industrial product increased more than five times, from $13 billion in 1950 to $77.2 billion in 1978. As shown in the accompanying table, the growth in industrial productivity was greatest in Brazil, which recorded a remarkable 12 percent annual growth rate between 1965 and 1973, during the so-called Brazilian miracle.

As a result of these high growth rates, the industrial sector replaced agriculture as the leading economic sector. In 1950 the agricultural sector accounted for 25 percent of the GDP, while industrial output represented 19.6 percent of the GDP. By 1978 industry was the leading economic sector in Latin America, accounting for 26 percent of the GDP. Brazil led all Latin American countries in the value added by the manufacturing sector, producing a record $97.7 billion in 1987. Mexico's industrial sector, however, contributed a greater percentage of the country's gross domestic product, as shown in the associated table.

High industrial growth rates were accompanied by significant changes within the manufacturing sector. The contribution of the consumer-goods sector to total GDP declined from almost 66 percent in 1950 to 40 percent in 1980. During the same period, the contribution of intermediate industries increased from 25 percent to 33 percent, and consumer durables increased from 11 percent to 25 percent. The development of heavy industries was most successful in Argentina, Brazil, and Mexico, which even began to export industrial products in significant quantities during the third stage of industrial development.

The world recession of 1979–1984 slowed the rate of industrial growth throughout the region, and Latin American industry has still not recovered the high growth rates of the previous decades. Burdened by foreign debt and shortages of foreign exchange, the most industrialized countries were still registering negative growth rates in the mid-1980s. The decline in industrial productivity forced policymakers to reconsider the strategies that had been so successful since World War II. In the 1980s and 1990s particularly, many countries embarked on neoliberal development strategies, eliminating tariff protection for industries, privatizing state corporations, and offering incentives to foreign manufacturers. International firms established export-manufacturing facilities throughout the region. Liberalization policies brought Latin American industries into global competition in more profound ways. In spite of macroeconomic instability, some industries survived and also succeeded. The manufacturing sector showed signs of recovery in the 1990s, but the adoption of neoliberal policies will not likely reduce industry's dependence on foreign capital and the state. Some of the most productive Brazilian industries (automobiles, tires, cement, and pharmaceuticals) are controlled by multinational firms. As these firms are free to repatriate profits, critics are openly questioning the contribution of foreign enterprises to Brazilian development. At the same time, business leaders have called for an industrial policy that will enhance national firms' competitiveness, encourage efficiency, and regulate unfair trading practices. Moreover, in the twenty-first century, several countries have derived sizable export revenues from traditional and new commodities. Thus, despite high growth rates in Brazil and elsewhere, industrialization has not been the panacea for the many social and economic problems faced by Latin America.

See alsoEconomic Development; Technology.

BIBLIOGRAPHY

Werner Baer, Industrialization and Economic Development in Brazil (1965).

Albert O. Hirschman, "The Political Economy of Import-Substituting Industrialization in Latin America," in Quarterly Journal of Economics 82, no. 1 (1968): 1-32.

Warren Dean, The Industrialization of São Paulo, 1880–1945 (1969).

Celso Furtado, Economic Development of Latin America, 2d ed. (1976).

Fernando Henrique Cardoso and Enzo Faletto, Dependency and Development in Latin America (1979).

Frederick Stirton Weaver, Class, State, and Industrial Structure: The Historical Process of South American Industrial Growth (1980).

Robert N. Gwynne, Industrialization and Urbanization in Latin America (1986).

Stephen H. Haber, Industry and Underdevelopment: The Industrialization of Mexico, 1890–1940 (1989).

Fernando Fajnzylber, Industrialization in Latin America: From the "Black Box" to the "Empty Box" (1990).

Additional Bibliography

Altenburg, Tilman, and Dirk Messner, eds. América Latina competitiva: Desafíos para la economía, la sociedad y el estado. Caracas: Nueva Sociedad: Instituto Alemán de Desarrollo (IAD); Deutsche Gesellschaft für Techni-sche Zusammenarbeit (GTZ), 2002.

Cárdenas, Enrique, José Antonio Ocampo, and Rosemary Thorp, eds. Industrialización y Estado en la América Latina: La leyenda negra de la posguerra. México, D.F.: Fondo de Cultura Económica, El Trimestre Económico, 2003.

Davis, Diane E. Discipline and Development: Middle Classes and Prosperity in East Asia and Latin America. Cambridge, U.K.: Cambridge University Press, 2004.

Dijkstra, A. Geske. Trade Liberalization and Industrial Development: Theory and Evidence from Latin America. The Hague: Institute of Social Studies, 1997.

Durand, Francisco, and Eduardo Silva, eds. Organized Business, Economic Change, and Democracy in Latin America. Coral Gables, FL: North-South Center Press, 1998.

Katz, Jorge M., and Ricardo Bielschowsky, eds. Estabilización macroeconómica, reforma estructural y comportamiento industrial: Estructura y funcionamiento del sector manufacturero latinoamericano en los años 90. Buenos Aires: Alianza Editorial, 1996.

Murga Frassinetti, Antonio. Industrialización y capital extranjero en Honduras. Tegucigalpa: Centro de Documentación de Honduras, 1999.

Olmedo Carranza, Bernardo. Apuntes sobre industrialización y sector externo en América Latina: El caso de México. México: Universidad Nacional Autónoma de México, Instituto de Investigaciones Económicas: Miguel Ángel Porrú a, 2006.

Schneider, Ben Ross. Business Politics and the State in Twentieth-Century Latin America. New York: Cambridge University Press, 2004.

Shadlen, Kenneth C. Small Industry in Postwar Latin America: Economic Internationalization and the Institutional Bases of Business Activism in Argentina, Brazil, and Mexico. Storrs: Center for Latin American & Caribbean Studies, University of Connecticut, 1999.

Ugarteche, Oscar. El falso dilema: América Latina en la economía global. Lima: Fundación Friedrich Ebert-FES (Perú); Caracas, Venezuela: Editorial Nueva Sociedad, 1997.

                                               Paul J. Dosal