From Structuralism to Neostructuralism:

Ideas, Policies and Outcomes in Development Economics: The Influence of Latin America’s
Structuralist Economic Thought
Remarks by Nora Lustig, Tulane University
Annual Conference: Inaugural Panel
Helsinki, Finland - September 17, 2015
After the Second World War and up until the 1980s, the main goal of economic policies in Latin
America was to develop an indigenous industrial sector, seen as essential to become a mature
economy. Given that LA was a late comer, industrialization called for the protection against
foreign competition of the indigenous sector and state support. This gave rise to Import
Substitution Industrialization. During this period, economic policy was characterized by a heavy
dose of protectionism vis-à-vis manufacturing imports and foreign direct investment and other
components of state-led development.
The ISI strategy was at the core of what is known as Latin America’s structuralist economic
thought. It can be said that Latin American structuralism officially began at the end of 1949 and
the beginning of 1950 with the publication by the UN Economic Commission for Latin America
and the Caribbean (ECLAC) of two documents: “The Economic Development of Latin America
and Some of Its Main Problems” and “The Economic Study of Latin America 1949.”
In spite of the fact that these were official documents of a United Nations organization, their
main ideas can be attributed to the work of the very influential Argentine economist Raúl
Prebisch—then head of ECLAC--. Prebisch developed the intellectual basis of the “centerperiphery” framework and—together with Brazilian economist Hans Singer--the theory of
secular deterioration of terms of trade for commodity producers and exporters.
The view at the time was that without protecting imports from foreign competition, Latin
America would never industrialize and without a robust industrial sector, the economies of the
region would never fully develop.
Thinkers at the time assumed that industrialization through import substitution would lead the
peripheral economies to a more independent, democratic, and egalitarian growth path than
growth based on primary goods exports.
But reality turned out to be very different. The severe limitations of industrialization via import
substitution became evident all too soon. As industrialization proceeded, the problem of external
imbalances became more acute and unmanageable. Balance of payments crisis became frequent.
Because ISI relied on (implicitly and explicitly) taxing the primary goods sector, agriculture
became less dynamic. A stagnating agricultural sector resulted in bottlenecks in the production
of foodstuffs and, hence, in inflationary pressures.
Second, because the industrial sector used imported capital-intensive technology, employment in
urban areas did not grow fast enough to absorb migrant labor from depressed rural areas giving
rise to expanding urban poverty (marginalidad).
Third, as the import-substitution process advanced, the resources that could be transferred from
the primary sector to industry declined and the process depended more and more on state
subsidies to make it viable (large infrastructure projects, subsidies on key inputs such as energy
and the government as last-resort employer).
While public expenditures complementary to the industrialization process increased, government
revenues could not keep pace because of a stagnating primary sector and a subsidized industrial
sector. An imbalance in the public finances was thus unleashed, resulting in demand pressures
that contributed to higher inflation and, eventually, fiscal crises.
Disappointment with the results of the import-substitution process gave way to new currents of
thought within structuralism.
The Radical View concluded that the only way of overcoming the limits to growth was by
changing the system altogether and adopting socialism through either revolution (such as Cuba
did) or democratic means (such as Chile attempted under Allende in the early 1970s).
Another group-the reformists--argued that development within capitalism was feasible but it
required a re-enforcement of the inward-looking strategy through changes in the composition of
domestic consumer demand. Growth within capitalism existed but only if the distribution of
income became decidedly more equal.
Celso Furtado, an influential Brazilian structuralist economist, was among the main proponents
of this view. Furtado and his followers considered that the restrictions on growth were
fundamentally supply-side in nature. The supply constraints emerged during the “difficult” stage
of import substitution, when the productive structure moved increasingly to more capitalintensive sectors with also higher import requirements. This resource allocation, in turn, was the
result of an unequal distribution of income that generated a demand profile biased toward these
sectors. This growth pattern exacerbated inequality, poverty, and foreign dependency. Within
this framework, then, a more equal distribution of income would be accompanied by higher
output and employment growth rates as well as a higher degree of national control over domestic
capital and output.
The ideas outlined above triggered a series of studies that analyzed the relationship between
inequality and growth through the impact of the former on savings, the composition of demand
and the capital- and import-intensity of output. In general, these studies found a found evidence
of a potentially positive, yet small, relationship between greater equality and growth. (Cline,
1972; Wells, 1977; Berry, 1981; Lustig, 1981; Bonelli and Viera da Cunha, 1983).
Perhaps more importantly, the ideas also inspired a series of real life attempts at widespread
redistribution: for example, the socialist reformist experiment in Chile (Allende) and of the
Sandinistas in Nicaragua, state-sponsored land reforms in Bolivia and Peru, and the attempts to
increase real wages through minimum wages and/or labor-friendly legislation in Argentina,
Brazil, Mexico, Peru and Uruguay during the 1970s and 1980s.
In practice, sadly, most redistributive processes failed. They generated output shortages and
fueled inflation. Moreover, reformist or revolutionary redistributive processes entailed conflicts
that caused financial and physical decapitalization, both of which negatively affected output.
Income redistribution turned out to be much more difficult than anticipated: it led to economic
chaos and social conflict.
Reformist redistribution was attempted at the same time that in most countries in LA there were
leftist guerrilla movements whose objective was to overthrow capitalism. Those were the days
of the Cold War. The economic, political and military elites could rely on support from the
United States in fighting the left. Many countries in Latin America faced military coups and long
years of bloody and repressive authoritarian regimes.
Attempts at trying to remove the bottlenecks associated with the ISI strategy through
redistribution backfired. In the 1960s and early 1970s, far from resulting in self-sustained
growth, redistributive policies exacerbated imbalances and undermined democracy.
However, the ISI strategy was given another respite. Rising external and fiscal deficits during the
second half of the 1970s were funded by rich country commercial banks eager to re-cycle a flood
of the so-called petro-dollars. As a result, Latin American sovereign and private foreign debt rose
in country after country.
When interest rates started to rise in the United States in the early 1980s, debt servicing became
increasingly more difficult. With commodity prices signaling a downward trend and rising
interest rates in the United States, commercial banks became increasingly reluctant to lend to a
region whose economic prospects seem shaky.
The debt crisis ensued.
In order to avoid default and stabilize domestic prices, governments had to borrow from
multilateral financial institutions such as the IMF, the World Bank and the Inter-American
Development Bank.
This lending, however, came with strict conditionality.
Conditionality involved draconian fiscal austerity and major changes in economic policy. In
order to have access to the much needed foreign exchange, LAC had to give up its inwardlooking/state-led development strategy and slash fiscal deficits, devalue their currencies,
liberalize its trade and foreign investment regimes as well as its financial sector, privatize state
companies, and dismantle its industrial policy.
These set of policies—associated with Chicago-trained economists--became eventually known as
the Washington Consensus, a term coined by the Washington-based economist John Williamson.
The dominant mainstream thinking at the time considered that the policies pursued under ISI
were at the root of LA’s poor economic performance and structuralist thinking was demonized
and banished from mainstream circles.
The recurrent failure of IMF-led programs to curb inflation in LA during the debt crisis of the
1980s, however, led to the eventual development and legitimization of more heterodox
The structuralist theory of inflation gave great importance to the transmission or reproduction
mechanisms—such as wage indexation and oligopolistic pricing--by which inflationary pressures
are translated into an increase in the general level of prices in the entire economy. These analyses
have been the foundations for the so-called heterodox stabilization programs, which direct the
bulk of the measures toward eliminating “inertial” inflation and distributive conflicts by freezing
prices and salaries.
Leading scholars in the region such as Brazilian economists Persio Arida and Francisco Lopes
from Brazil) derived sophisticated models of inertial inflation. The ideas were incorporated into
policy in several countries –Plan Austral in Argentina and Plano Real in Brazil, for example--,
with different degrees of success.
At the beginning, structuralist ideas about stabilization were treated with utmost suspicion by the
international financial institutions and many conservative policymakers. However, over time
some of its tenets were increasingly embraced by mainstream economics, both in academia and
policy circles. A prominent example of the mainstreaming of heterodox points of view in the
anti-inflation battle of Latin America in the 1980s is the Mexican “Pacto” introduced in 1988. In
spite of the strict adherence to orthodoxy that had characterized government economic policy
throughout the 1980s, after several failed attempts with IMF-style stabilization programs, the
“Pacto” included measures to crush the inertial component of inflation (such as wage and price
The development of anti-inflation programs that combined some ingredients from orthodox
economics and heterodox-Latin American structuralism is an example in which outcomes fed
into ideas that in turn drove policy, and led to a public policy that could claim success. The
fusion of ideas in policymaking ended up curbing inflation in most of Latin America.
Throughout the 1980s and 1990s, country after country in Latin America implemented—albeit in
different degrees-- the policies advocated by the Washington Consensus. Trade and capital
accounts were liberalized, state-owned enterprises were privatized, and subsidies, private
investment restrictions and credit rationing schemes were curbed if not eliminated.
Some twenty-five years later, the Washington Consensus´ market-oriented reforms have still not
paid off. With the exception of Chile, output and productivity growth in the region has been
lackluster, excluding the recent years of the now gone commodity boom. Most of LA is still
heavily reliant on commodity (or commodity-based) exports and thus subject to the vicissitudes
that volatile commodity markets face.
In contrast, countries such as China, India and Vietnam which have followed a more dirigiste
approach in their economic policies enjoyed rapid growth for a significant period of time. This
led to a lot of “soul-searching” among mainstream economists. The result has been a
skyrocketing number of development theorists and applied economists modeling and testing the
role of structural characteristics such as market failures, unequal distribution of land, income and
wealth, and social norms and institutions in shaping development outcomes.
Two salient examples of the mainstreaming of structuralist thinking are the importance attributed
to creating new comparative advantages through state intervention—a modern form of
“industrial policy,” and the rising concern with the negative impact of inequality on growth.
The realization that market failures may be at the root of LAC’s lackluster performance gave rise
to a new form of industrial policy whose objectives are to internalize externalities, improve
efficiency, provide public goods, and address coordination failures and capital market
imperfections. Because these policies involve government actions that are not targeted to specific
sectors (horizontal) as well as some which are (vertical), some authors have proposed to call
them productive development policies or PDP to distinguish them from the industrial policies of
the inward-looking period.
The link between inequality and growth has also been the subject of renewed theoretical and
empirical research. The most complete theoretical discussion of the link between inequality and
growth by structuralist economists considered how inequality shaped the composition of
consumer demand which in turn fostered a composition of supply which stifled growth. This
relationship has also been the subject of new theoretical analysis by, in particular, the US-based
Indian economist. Debraj Ray. Another example of new economic thinking on the relationship
between inequality and growth—which was also present in structuralist thinking--emphasizes the
role of imperfect capital markets and indivisibilities in available technologies. In their presence,
the poor may be unable to invest in profitable ventures because they usually find themselves shut
out of lending markets. In this case the initial wealth distribution affects economic performance
and inequality both in the short and in the long run. Under these circumstances, a one-time
redistribution from rich to poor is good for efficiency and reduces inequality.
Thus, both mechanisms—shaping a country’s comparative advantage through state intervention
and addressing the link between inequality, composition of consumption and slower growth-which were present in structuralist thinking from very early on have been “gentrified” by
present-day development economists through the use of rigorous theoretical models. We have
come so far that today one of the key voices in warning the world about the perilous
consequences of inequality for growth is no other than the IMF itself.
It is encouraging to observe how economic theorists, applied economists, international financial
organizations and governments have given up fundamentalist positions and chosen a path that
integrates views from different schools of thought.
Hopefully, this open mind in the realm of ideas will result in policymaking that promotes
inclusive and sustainable growth as well.
Thank you.
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