Wednesday, May 19, 2010

ISI or Export-Led Growth?

Historians of economic development examine two strategies for economic growth: Import Substitution Industrialization (ISI), or manufacturing at home what you used to buy from others, and Export-Led Growth, or making more products to sell abroad. Historians typically favor export-driven growth. It has a better track record. It worked for the Asian Tigers, whereas ISI failed in Latin America in the 1970s. And Export-Led Growth allows each country to specialize more and make better use of their Comparative Advantage, which economists argue leads to greater global efficiency.

I'd like to apply these theories to my new community. We export pineapples and cheese. We import ice cream, vegetables, meat, and trucks. If we want to increase our standard of living and have more ice cream, economists would probably recommend that we grow even more pineapples and sell them to buy more ice cream.

Can we apply this at the village level? One company's pineapple plantation alone is seven thousand hectares--70 square kilometers. While we're grateful to have these jobs in the community, large scale monoculture has environmental disadvantages.

Maybe we can use our milk to make more ice cream. That's inefficient, economists say--better to increase the industrial pineapple farming and leave ice cream production to the ice cream factories elsewhere. But there's also the issue of transaction costs and transportation costs. I'm sure it's less efficient to make ice cream at home, but you don't have to ship it or market it. You can sell it directly to your neighbors. And maybe our lives will be better, because now we're ice cream artisans in addition to employees. And it's nice to to feel ownership for your ice cream.

So--ice cream or pineapples? What do you think?


  1. I ate sherbet out of a tiny pineapple today. It was made in South Africa. Just sayin'.

  2. Which is more profitable? That is what economists would say is most efficient. The idea is that export-orientation tends to be more profitable, especially if a product can compete despite transportation costs. After accounting for 1st moment profits, account for 2nd moment volatility, which obviously results from monoculture and increases economic and political risk. For example, families lose their farms, countries default on debt, and pillaging tyrants may seize control. Thus, for individual entrepreneurs (or countries), combine 1st and 2nd moments into risk-adjusted returns.

    Which is greater? Integral of Discounted Risk-Adjusted Returns (of Pineapples) dt vs. Integral of Discounted Risk-Adjusted Returns (of Ice-Cream) dt?

  3. Ojo, compaƱero! Nothing in economics is static. We make things sit still so we can analyze them, but we are talking about human behavior, so everything is, in reality, in constant motion.

    So it is with comparative advantage: when community leadership presents a vision of the future that is challenging yet attainable, remarkable things happen. No community should ever content itself with producing whatever it produces, whether it's pineapples or computers. But neither should a community necessarily seek to produce what it wants to consume.

    Is your community capturing all the value-added from its pineapples that it can? Who slices and cans them? Who makes the cans? Who prints the labels? Who decides what the labels look like? Who owns the pineapple brand? Who controls the channel to the consumer?

    Having captured it all, where do the resulting profits go? Education, training, equipment upgrades, infrastructure improvements?

    The United States began as a farming colony and became a leading economic innovator without a nickel of foreign assistance (lots of foreign investment, however). Every country can do likewise.

  4. Helados all the way! Why dwell so much on historical trends and analitical calculations. Try to get your hands on Sra Varela's helado's de coco before they are sold out and you will know the answer to your question. Then, once you savor the flavor while enjoying the incredible company, ask yourself "Is Sra. Varela proud of herself, her family and content with her life?"