“The diverging paths of industrialization in Latin America and East Asia”

Abstract

This paper explains the divergence between Latin America and East Asia over the 20th cen- tury as the result of their opposite industrialization strategies. Initially twice as rich as East

Asia, Latin America’s industrialization by import substitution (ISI) provided indiscriminate protection to national industries without incentives to export and increased manufacturing

shares but failed to decrease those of agriculture. East Asia’s export-oriented industrializa- tion (EOI) rested on performance based-protection targeting exports along strong structural

change. Employment emerges as the only dimension of manufacturing that raises per capita income and growth in both the short and long run. A large productivity gap on agriculture

reveals a big potential to grow through labor reallocation from agriculture towards manufac- turing. The importance of the domestic market size and the natural resource curse explain

the relative success of Brazil and Mexico applying ISI and Latin America’s problems to industrialize given its history as commodity exporter. Growth accounting points at capital as the main driver of East Asian success and TFP stagnation as the reason behind Latin America’s low growth since the debt crisis of the 1980s.