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The motive ideas

Norberto González*

In its most orthodox version, neoclassical economic guided the evolution of two important economic
theory has occupied a leading place in Latin American policies: those of the United States and of Germany.
economic policy discussions in recent years. According Due to lack of space, I shall not deal with the case of
to this doctrine, the market mechanisms –if allowed to Japan, which also applied policies in the last century
operate in complete freedom– allocate production which combined State and private action. The first two
resources in the most efficient manner possible. Any cases will be used in this essay as the background for
interference by State policy with this allocation will analysing the ideas of Prebisch and ECLAC applied to
lead to loss of efficiency and a reduction in the growth the case of Latin America.
rate of the economy compared with the optimum level
that could be obtained through the free play of the 1. The case of the United States. Alexander
market forces. The virtues of the main body of this Hamilton
economic theory for interpreting reality have been
proved over more than two centuries. But this does not These ideas on the industrialization of the United States
justify overlooking the serious limitations affecting the were set forth by Alexander Hamilton in 1791 (see
operation of the market or the differences observed in Hamilton, 1934). This author questioned the validity
that operation in the different stages of countries’ of the objections against policies for the promotion of
development. In the historical period in which they manufactures and the assertion that –without
began their industrialization processes, the countries government aid– industry would grow as quickly as
which are now developed applied policies of active State the natural state of things and the interests of the
participation in combination with the free functioning community required. According to Hamilton, this
of the market, and formulated theories which gave assertion is not always true. Inertia and a tendency to
technical backing to those policies. imitate are reflected in fears about failing in new
Although these facts have been studied and are well ventures, the obstacles inseparable from first
known in academic circles, very little reference is made experiments in competing with nations which have
to them in economic policy discussion in our region. I already perfected a particular branch of industry, and
therefore propose in this essay to recall the ideas which the artificial incentives with which foreign countries
support their citizens (Hamilton, 1934).
Hamilton goes on to say that “Experience teaches
* Former Executive Secretary of ECLAC. The basic material for this article
was prepared while the author was collaborating with the Institute of
… that the simplest and most obvious improvements,
Economics of the University of the Oriental Republic of Uruguay, in the most ordinary occupations, are adopted with
when the Institute was under the direction of Octavio Rodríguez. hesitation, reluctance and by slow gradations. The

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spontaneous transition to new pursuits … may be beginning customs protection increases the price of
expected to be attended with proportionably greater manufactures, he maintains “that in course of time, in
difficulty. … these changes would be likely to be more a nation capable of large industrial development, such
tardy than might consist with the interest either of articles can be produced at a cheaper rate than they can
individuals or of the Society … and … in many cases be imported from abroad” (List, 1856, p. 224). The
they would not happen. … To produce the desireable initial sacrifice “is amply compensated by the
changes, as early as may be expedient, may therefore acquisition of a productive power, which ensures not
require the incitement and patronage of government. only a larger product of wealth in future, but also a
The apprehension of failing in new attempts is perhaps greater industrial independence” (List, 1856, p. 224).
a more serious impediment … it is essential that [those Citing Say, he accepts that the State may protect
embarking on such new ventures] should be made to national industry provided that within a few years that
see … the prospect of such a degree of countenance industry can survive unaided, just like “... a shoemaker’s
and support from government, as may be capable of apprentice, to whom a few years’ teaching and support
overcoming the obstacles, inseperable from first is accorded that he many learn his trade to live without
experiments”. “The superiority antecedently enjoyed further help from his parents” (List, 1856, p. 262).
by nations, who have preoccupied and perfected a List’s proposals go further than those of Hamilton.
branch of industry, constitutes a more formidable He not only refers to the greater independence in
obstacle … to the introduction of the same branch into industrial matters that this policy gives to a country,
a country, in which it did not before exist. To maintain but also notes that the progress of industry in a
between the recent establishments of one country and predominantly agricultural country has more general
the long matured establishments of another country, a consequences for development. It stimulates urban
competition upon equal terms, both as to quality and growth and has a positive influence on social and
price, is in most cases impracticable … without the political development, on intellectual and cultural
extraordinary aid and protection of government”. Thus, progress, and on creative capacity. Industrial
government aid for infant industry in a new country development makes possible increased productivity
may be essential in order to offset inequalities of throughout the economy and development of the means
competition in the initial period. of transport.
Thanks to the reports by Hamilton and by some of He highlights the interdependence between
his followers, such as H.B. Carey, who advocated these industrial and agricultural development, noting that
ideas in 1865, these concepts spread and strongly industrial development stimulates and diversifies
influenced the trade and industrial policy applied by demand for agricultural products (List, 1856, p. 295).
the United States during its industrialization process During the process of industrial development, each new
(see Mill, 1987). industry supports the development of others (List, 1856,
p. 377). This assertion brings out the intersectoral and
2. The case of Germany. Frederick List not merely individual nature of industrial policies.
List hints at the structural nature of the economic
The industrialization policy for Germany was set forth development process when he asserts that the
in similar, albeit broader, terms by Frederick List in development of manufacturing is only attained slowly
the nineteenth century (List, 1856). List claims that, and gradually. It takes a long time to improve
during the initial period of development of an industry equipment, production processes and distribution
in a new country, government aid for the infant industry systems. It is easier to perfect and expand an existing
may be essential in order to equalize the conditions of enterprise than to start up a new one. Old industries,
competition. He maintains “The protective system is which have been developed over generations, can be
the only means by which nations less advanced can be promoted more easily than new ones. It is more difficult
raised to the level of that nation which enjoys a to make an enterprise progress when there have been
supremacy in manufacturing industry. A monopoly not few or no such enterprises in the country in the past,
conferred by nature, but seized by being first on the since in new enterprises the managers and workers have
ground; the protective system, regarded from this point to be trained or brought in from outside, and the
of view, will be most effective promoter of universal prospects are not promising enough to give capitalists
association among nations, and consequently free trade” the degree of confidence needed to ensure their
(List, 1856, p. 201). Although he recognizes that in the participation. Over generations, it is possible to improve

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the price, quality and quantity of the production (List, itself perfectly suitable to the circumstances of the
1856, pp. 373-374). country. The superiority of one country over another
These ideas open up a broader horizon than that of in a branch of production, often arises only from having
the industrial sector itself and are forerunners of later, begun it sooner. There may be no inherent advantage
technical proposals. The manufactures of a newly on one part, or disadvantage on the other, but only a
industrialized country, List says, “can be compared with present superiority of acquired skill and experience. A
a youth struggling with a fully grown man. The country which has this skill and experience yet to
manufactures of the chief industrial and commercial acquire, may in other respects be better adapted to the
power possess a thousand advantages over those of new production than those which were earlier in the field:
or as yet not fully mature nations. They have ... skilful and besides, it is a just remark of Mr. Rae, that nothing
and experienced workmen in great numbers and at low has a greater tendency to promote improvements in any
wages, men of special skills and experience in branch of production, than its trial under a new set of
management, ... financial institutions, ... transport conditions. But it cannot be expected that individuals
facilities, ... efficient storage and distribution systems, should, at their own risk, or rather to their certain loss,
... a domestic market which provides them with support introduce a new manufacture, and bear the burthen of
for conquering outside markets”. In those conditions, carrying it on until the producers have been educated
it would be useless for a new country to trust exclusively up to the level of those with whom the processes are
in the natural evolution of the economy to develop an traditional. A protecting duty, continued for a reasonable
industry in free competition with the most highly time, might sometimes be the least inconvenient mode
developed nations (List, 1856, pp. 378-379). List, like in which the nation can tax itself for the support of
Hamilton and other classical authors, considered that such an experiment. But it is essential that the protection
there must be limits on policies for the promotion and should be confined to cases in which there is good
protection of industry: protection and support should ground of assurance that the industry which it fosters
not have excessive levels, should be kept in being only will after a time be able to dispense with it” (Mill, 1987,
for a reasonable length of time, and should be applied pp. 922-923).
to activities in which the country had the possibility of Neoclassical theory has refined the infant industry
being competitive (List, 1856, pp. 390-393). Customs argument and clarified its validity. But at the same time
duties should be considered and applied only for the it has helped to limit its application. It analyses the case
benefit of sectors which offered basic advantages for of external economies, where the company making the
the country. investment does not capture all the resulting benefits,
part of which may be diverted to other firms through
3. More general cases: John Stuart Mill and the transfer of skilled labour, or through firms which
neoclassical theory supply the company which made the investment with
non-tradeable goods, or through acquisition of its
Mill acknowledged the legitimacy of industrialization products (Corden, 1974, pp. 256-257). In these cases,
policy by incorporating the infant industry argument it might be necessary to compensate that company for
into classical theory. His ideas (Mill, 1987) were based the benefits of the investment that it does not capture.
on the more pragmatic and limited version of Hamilton Neoclassical theory also takes account of the case
rather than that of List.1 where there are reciprocal external economies and none
Pages 922 and 923 of Mill (1987) contain the of the companies involved captures the total result of
following well-known paragraph: “The only case in the investment (Corden, 1974, p. 260).
which, on mere principles of political economy, In the neoclassical school, there is some skepticism
protecting duties can be defensible, is when they are about the application of industrialization policies.
imposed temporarily (especially in a young and rising Although the validity of the infant industry argument
nation) in hopes of naturalizing a foreign industry, in is usually accepted, it is considered that such policies
are not the best alternative, but rather second- or third-
best options. It is maintained that rather than applying
1
active industrial policies it would be more efficient to
List showed himself to be a capable and far-sighted economist,
but he advocated nationalist views which shocked other authors of improve the information available to entrepreneurs for
his time, as described in the essay by G. A. Matile, who edited taking their decisions or to try to improve the capital
List’s works. markets, leaving it to the market, free of all outside

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interference, to allocate resources. This would give in which carefully targeted subsidies can be a useful
industrial policies less leeway than was allowed to them instrument … for improving either resource allocation
by the classical authors who influenced the or income distribution” (Williamson, 1990, p. 12).
industrialization processes of the United States and Stiglitz (1998) also takes a broader view on economic
Germany. policies which can be applied without distorting the
Two main positions may be observed in the recent operation of the markets.
application of neoclassical theory to economic policy
for the developing world in general and Latin America 4. The case of Latin American industrialization:
in particular: the Prebisch and ECLAC approach
On the one hand, there is the more orthodox point
of view, which gives public policies a much-reduced Prebisch and ECLAC also opted for an approach
role and leaves the allocation of production resources involving deliberate industrialization, with State
to the unfettered functioning of the market. It attaches participation, in support of the private sector. They took
decisive importance to maintaining fiscal and monetary a broad-based approach which, although centering
balance, and advocates the reduction of the public sector mainly on economic matters in its operational aspects,
to a minimum, the privatization of State activities, and also covered social issues, especially for the
deregulation. The supporters of this approach are openly interpretation of the process. Changes in economic
hostile to active production development policies and structures, industrialization, agricultural development,
attempts to change the economic structure, such as international economic relations, saving and
promotion of industry, policies designed to support investment, employment and income distribution were
technological progress, and trade policies based on other issues analysed extensively and in depth.
protection and export promotion. Prebisch had been brought up in the classical
During the Reagan administration in the United economic tradition, and in the first years of his
States, this line of thinking, promoted by a supply-side professional life he was an orthodox economist. As he
economy, was very much in vogue. Even after the end himself said: “I believed in the universal validity of the
of that administration, however, it has continued to theories developed in the centres” (González and
enjoy strong support, especially among conservative Pollock, 1991). As a young Under-Secretary of Finance
groups, Latin America’s private international creditors, of his country, in the early 1930s, he recommended the
and domestic sectors in Latin American countries government to apply orthodox policies in monetary,
associated with those financial circles. In the words of fiscal, trade and exchange matters. Soon, however, his
Feinberg (1990): “On one side are those who favor the ideas began to change, as a result of his experience in
restrictive Reaganite model: provide for national government which began in that period and continued
defense, set the appropriate macro conditions, and walk later in the Central Bank of the Argentine Republic.
away”. There were two main aspects of that change: i) he came
On the other hand, there is also a less rigid to the conclusion that, in the light of the world crisis,
neoclassical position which accepts some degree of the Argentine economy would not recover using
active policies to promote industrial and technological orthodox policies, in view of the ongoing deterioration
development and support new exports. This position in exports, which contrasted with the tendency towards
sets quite strict limits for such policies, however, both strong growth in import needs; and ii) the failure of the
as regards the instruments used and the intensity with 1933 World Economic Conference and the fact that
which they are applied in particular sectors, and also Keynes’s ideas on international cooperation found
the length of time they are applied to each sector of almost no acceptance among the European countries
production. Generally, though not always, it accepts convinced him that Argentina could not hope for a
one exception to the ideal of free trade, namely, infant solution through the reactivation of world demand. The
industries, which may warrant substantial protection, tough bilateral negotiations for the Roca-Runciman
but only on a temporary basis (Williamson, 1990, p. 15). treaty with Great Britain clearly revealed to him the
In another paragraph, Williamson refers to his own limits imposed by a high degree of dependence on the
position on subsidies: “… for my taste, the hostility export of primary commodities to a few foreign markets
toward subsidies tends to be too general. I fully (González and Pollock, 1991).
sympathize with the hostility toward indiscriminate As a result of this experience, he became convinced
subsidies, but I also believe that there are circumstances that it was essential to change the country’s structure

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of production and of exports through industrialization, inefficiency, so they recommended integration among
and that to secure this objective it was necessary to the Latin American countries in order to create bigger
combine the play of the market forces with State action markets and greater competition, and ECLAC gave strong
designed to promote and guide private sector action. support to the Central American integration process,
Prebisch had become clearly aware of the profound the Latin American Free Trade Association (LAFTA)/
repercussions on developing countries caused by crises Latin American Integration Association (ALADI) and
originating in the developed countries, and knew that the Andean Group. From the 1960s on, as the markets
little could be done to avoid such crises. of the developed countries showed themselves to be
His experience in Argentina served as the ground somewhat more receptive to Latin American
in which Prebisch’s ideas initially germinated, to be manufactures, ECLAC maintained a programme to
subsequently developed in ECLAC and later still in the provide technical support for policies to promote the
United Nations Conference on Trade and Development export of manufactures.
(UNCTAD). There was also an ongoing evolution of the priority
According to Prebisch, the developing countries production sectors in the industrialization process, from
–which were on the periphery– specialized in the sectors producing non-durable and durable consumer
production of primary commodities. This resulted in goods at the start, to intermediate and capital goods
an asymmetrical structure of their trade and financial with greater requirements in terms of investment and
relations with the developed countries. They exported technology later on. The production of consumer goods
low-technology goods and imported high-technology created the subsequent demand for intermediate and
ones. Their exports were produced by unskilled labour, capital goods: a form of evolution endorsed by ECLAC
with a weak level of trade union organization, and the studies on industrial sectors and policies.
demand for them was marked by low income elasticity. In order for progress to be made in policies to
As a result, this demand grew only sluggishly, and the support the production of manufactures, two
exports provided low and unstable wages and profit complementary elements were required:
margins. Their imports, in contrast, contained skilled, i) A technology policy whereby the State provided
highly unionized labour, and their income elasticity was support for the creative adaptation of outside
high, meaning higher wages and profit margins and technology to the special conditions of the Latin
faster growth for the supplier countries. American countries and helped to speed up the
This asymmetrical structure of the external innovation process. This increased efficiency,
relations of the developing countries limited their reduced costs, and improved the quality of the
growth potential, while their structural economic and goods produced, so that they were better adapted
social heterogeneity was reflected in unequal income to the demand on external markets. A project was
distribution whose most evident –though not its only– carried out in collaboration with the Inter-
features were poverty and marginality. American Development Bank (IDB) in this field.
The cornerstone of the recommendations he made ii) As well as the efforts of the developing countries
on the basis of this diagnosis was the industrialization themselves, the export of manufactures required
process, which would make it possible to change the the active collaboration of the developed countries,
domestic production structure and external relations. which should open up their markets. One of the
This process could not be induced fast enough solely main objectives of Prebisch’s work at UNCTAD
through the unaided effect of the free market forces, –ably seconded by ECLAC in the Latin American
but required active public protection and promotion area– was the creation of a generalized system of
policies in the fields of trade, taxation and credit. preferences, with unilateral opening of the markets
This policy varied with time, changing its emphasis of the developed countries in favour of the
according to the variations in the international economic developing countries, through specific lists of
situation and the development of industry in the region. goods that the developing countries were interested
In the post-war period, the markets of the developed in exporting.
countries were closed by high protectionist barriers, so Although industrialization was the hub of the policies
that policy was aimed preferentially at the domestic advocated by Prebisch and ECLAC, its success would call
market, through import substitution. Prebisch and for the simultaneous application of other policies too.
ECLAC, however, considered that in view of the small Thus, an international cooperation policy was
size of that market import substitution meant required, in order to secure a substantial increase in the

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flow of medium- and long-term capital from the support from the domestic market, so that better income
developed countries to the region. Domestic saving distribution –quite apart from its importance for equity–
capable of being turned into foreign exchange was not was of great economic significance because it promoted
sufficient to finance an acceptable growth rate, as was the broadening of the domestic market and the
reflected in the saving and trade deficits. International incorporation into it of a high proportion of the previously
cooperation was possible, thanks to the political climate marginalized population. With regard to employment
prevailing at the end of World War II and the political –the other aspect of marginality– specific objectives and
competition between the capitalist developed countries forms of development were proposed which would make
and the socialist countries. The World Bank, which was it possible to progress towards the solution of structural
set up soon after the war, was complemented with the unemployment and underemployment within a
establishment of the Inter-American Development Bank reasonable length of time.
(IDB), in whose creation ECLAC played a leading role. Another two methodological aspects were given a
Mechanisms were also established in the countries of great deal of attention by ECLAC: the investment projects
the region to ensure that medium- and long-term capital manual, and planning – two technical instruments
of public origin was invested efficiently, with the highest which were placed at the disposition of countries in
possible yield in terms of its contribution to economic order to help them to ensure the most efficient possible
development and employment and with guaranteed use of their resources. In the projects manual, a project
payment capacity. These mechanisms operated preparation technique was described which increased
efficaciously until the abundance of international funds projects’ contributions to development and employment
created by the oil price rises from the 1970s on and the to the maximum, thus offering a means of relieving
surplus savings being accumulated by the developed external constraints. This technique was very useful for
countries turned the shortage of international funds into submitting projects to financing bodies and evaluating
a glut. This led to the slackening of the discipline which their effects from the point of view of the entrepreneur
had prevailed up to then and encouraged unproductive and society. Planning, for its part, was put forward as a
or imprudent use of the funds, culminating in the 1980s means for designing medium- and long-term policies
in the Latin American external debt crisis. and following up their implementation in order to
It was also necessary to pay special attention to two ensure, as far as possible, that the structural changes
interrelated social issues: income distribution and pursued were effectively obtained. It aimed to secure
employment. Income distribution was a matter of coherence of the objectives proposed in development
growing concern for Prebisch and ECLAC from the 1950s policies and compatibility of those policies with the
on, unlike conventional theory, which paid little attention restricted resources available, especially savings and
to this issue because it based its ideas on the principle foreign exchange. ECLAC therefore made the
that, in an equilibrium situation, redistribution could not institutionalization of development planning one of the
improve one person’s income without adversely affecting main objectives.
that of another person. ECLAC, however, considered that
Latin American industrialization received substantial (Original: Spanish)

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