Import Substitution and Economic Growth

In spite of Latin America’s dismal economic performance between the 1950s and 1980s, the region experienced strong capital deepening. Furthermore, productivity (measured as TFP) grew at low rates in comparison with the U.S. In this paper, we suggest that all these facts can be explained as a consequence of the restrictive trade regime adopted at that time. Our analytical framework is based on a dynamic Heckscher-Ohlin model, with scale economies in the capitalintensive sector. We assume an economy that is initially open and specialized in the production of labor-intensive goods. The trade regime is modeled as a move to a closed economy. The model produces results consistent with the Latin American experience. Speci…cally, for a su¢ ciently small country, there will be no long-run growth in income per capita, but capital per capita will increase. As a result, measured TFP will fall. JEL Classi…cation: O41, F12, F43, E65 Email: [email protected]. I am especially indebted to Hal Cole, Matthias Doepke and Lee Ohanian for their help and encouragement. I also thank Andy Atkeson, Christian Broda, Roger Farmer, Bernardo Guimaraes and Jean-Laurent Rosenthal for valuable suggestions and comments. All errors are mine.