George Mason University What Was The Role Of Agriculture In Each Discussion
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Draw on Lectures 6&7 and associated readings. How does the industrialization experience of Latin America compare to that in the U.S. Midwest? What was the role of agriculture in each? Explain why Raul Prebisch and Albert Hirschman encouraged the Import Substitution Industrialization strategy in Latin Ameirca in the 1950s and the 1960s. What were the major features of the strategies and what were the effects, both positive and negative?
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Agriculture-led Industrialization
in the American Midwest
A contrasting experience
Read Meyer: Introduction, Ch1 pp. 13, 37-45, Ch2 pp. 47-61
Ch3 pp. 81-82, 101-103; Ch 4 pp. 111-112, 118-125
Objectives
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The purpose of this section is to offer a
contrasting experience of industrialization to that
of Latin America.
Industrialization in Americas Midwest was
powered by the demand for farm equipment.
Rather than being biased against agriculture, it
was led by agriculture.
Latin Americas poor farmers could not afford
farm equipment. Rich farmers had access to
abundant cheap unskilled labor, so they didnt
really need farm equipment.
Contrasting Agriculture in Lat Am &
American Midwest in the 19th Century
Latin America
American Midwest
Latifundio minifundio
distribution of land
Abundant unskilled labor
Medium sized farms
Little market for farm
machinery, agriculture had
poor consumption linkage
Substantial demand for farm
equipment and other
consumer goods from a
large, prosperous
agricultural sector.
Abundant land, shortage of
labor
Contrasting Agriculture in Lat Am &
American Midwest in the 19th Century
Latin America
American Midwest
ISI subsidies to encourage
industrialization
Rapid industrialization driven
by demand from farmers
Industrialization took place in Industrialization took place
the 1950s-1970s
beginning in the 1830s when
the area was first settled
Difficult to compete with the Farm demand gave Henry
industries in N. America &
Ford the edge in automobile
Europe
production.
A case study from N. Illinois
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Good example of a prosperous farming area
with considerable demand for farm equipment
and other consumer goods.
Chicago was a mere fur-trading settle in 1832.
In 1850 railroads began to head W. out of
Chicago first toward Galena & Rockford.
By the Civil War, Chicago was the most
important livestock market in the U.S.
By 1870, Chicago was a city of 300,000; by
1900, it was a city of 1.7. million.
Growth based on commercial agriculture
Rockford was situated
On the Rock River, halfway
Between Chicago &
Galena.
Excellent water power for
industry, flour & gristmills,
lumber, but also farm
implement industry.
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Farmers prospered in 19th century. Rockford area farm, 1886.
Photo courtesy of Midway Village and Museum Center
Midwest began industrializing in 1830s,
when Latin America newly independent
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Cyrus McCormick invented the reaper in VA
1831, came to Chicago in 1847.
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John Deere came to Illinois in 1836, and
designed a steel edged singing plow.
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J.I. Case moved to Racine, Wisconsin in
1844, age 23, to build a better thresher.
McCormick
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Survival of the
fittest over 50+
yrs:
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1831 Hand Rake
Reaper
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1869 Advance
Self-Rake Reaper
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1883 Twine
Binder
McCormick Twine Binder 1886
IHC on eve of WWI, 1913
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In 1902 McCormick joined with Deering and
three other harvester producers to create
International Harvester Co. (IHC) Four more
harvester producers were also absorbed.
IHC produced 80% of harvesting equip in the
world.
It had least 12 plants in U.S.
10 plants in foreign countries
It produced all kinds of machinery, including
tractors, trucks, and gas engines.
IHC, 1910
IHC, 1914
John Deere Plow
John Deere on eve of WWI, 1913
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6 factories in IllinoisIowa Rock IslandMoline area
5 more: IA, NY, AR,
WI, Ontario
More than 300 types
of steel plows
All kinds of machinery
Extensive domestic
network of distributors
John Deere factory in Moline, 1859
John Deere factory in Moline, 1880s
J.I. Case Outfit, 1853
1907
Case
Outfit
Implements on the average prosperous
Midwestern farm, 1910
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Average Iowa farmer in 1910 had $440 worth of
implements:
manure spreader, corn binder, corn planter,
grain binder, wagon, windmill, several plows,
harrows, cultivators, gas engine, hay equipment.
(at discounted value)
All of these implements would have been
produced in the United States.
No similar industry in Latin America; implements
imported from N. America, if any.
1913
1913
The Golden Age of Agriculture
1901-1920
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A time of farming prosperity in the U.S.
Farmers were a good market for new
technology that industry was producing:
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Farm machinery
Kodak cameras
Telephones
Phonographs
Many other goods
The Golden Age of Agriculture 1901-1920
Farmers bought:
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Gasoline engines
Davis 1906
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Automobiles
Davis 1911
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Tractors
Davis 1926
By 1906 automobile producers were
targeting farmers.
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15 HP Ford Model N introduced in 1906,
$600.
Ford grew up on a farm and he knew that
farmers would buy automobiles at the right
price
20 HP Model T introduced in 1908, $850
Buick, IHC, Sears selling autos to farmers
250 automobile manufacturers in 1908
The Automobile on the Farm
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Farmers were familiar with fixing machines,
and they were already familiar with gasoline
engines.
Between 1910-1914 farmers were the fastest
growing market for automobiles.
By 1914, more than 20% of registered autos
owned by farmers (and probably most of the
ones that werent registered.)
33% of population was on the farm in 1914.
Auto & farmhouse, 1912, Read about explosion
of cars on the farm in Ch 2 of the Days on Farm text
Farmers began to buy tractors ~WWI
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1917 farm population was
32% of total population
1901-1917 were
prosperous years on the
farm
Farmers were
businessmen with
significant purchasing
power.
U.S. Govt relied on them
to help finance the war.
Their purchasing power
drove American business.
WWI was a Gasoline war — Mechanics
were in demand
Many American farm
boys were already
good mechanics.
Human capital had
increased on U.S.
farms! not in Latin
America
WWI demanded Food to Win the War
Be patriotic! Buy a tractor!
What to buy? A Fordson tractor!
Henry Ford and the Tractor Market
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Ford first sold tractors in the U.K. for the war
effort, 1917.
The Fordson tractor was introduced in the
U.S. spring 1918.
Lightweight, inexpensive, Ford name.
Stole the market, by 1921 Ford had ¾ of the
tractor market in the U.S.
By 1920, half the cars in the world were
Model Ts.
% Farms with automobiles, trucks, tractors, 1920
80
70
60
50
Autos
Trucks
Tractors
40
30
20
10
0
U.S.
Iowa
N.Y.
Miss
Farmers with trucks, ca 1924
courtesy of the Boone County Historical Museum
Better tractors in the 1920s:
John Deere, Model D, 1923
1932 version of the IHC Farmall
introduced in 1924
% Farms with automobiles, trucks, tractors,
1930 Few tractors sold in the 1920s, but cars
nearly universal on Midwestern farms by 1930
100
90
80
70
60
Autos
Trucks
Tractors
50
40
30
20
10
0
U.S.
Iowa
N.Y.
Miss
Summary How does this relate to
Latin America?
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Consider the dates again this story of
Midwestern industrialization ended by 1930.
Henry Ford and GM are huge automobile
manufacturing is key to U.S. economic growth.
Latin America is way behind just beginning to
industrialize encouraged a bit by Great
Depression and World War II.
The consumption linkage from a prosperous
farm sector played a big role in the Midwest.
Import Substitution
Industrialization
1930-1980
Read C&H Ch4, Sect 2-5
Franko Ch3, pp. 62-74
Objectives
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Introduce the Import Substitution
Industrialization (ISI) Strategy and why Latin
America adopted the strategy
What were its major features?
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What were the successes and the costs?
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Additional aspects of the ISI strategy
inflation, state enterprise, anti-agriculture
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The Great Depression led to:
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Collapse of demand for exports from Lat Am
and collapse of trade
Collapse of govt revenue from export
industries
Some countries reverted to subsistence
production many people did
Other countries experienced growth in
industries to replace goods previously
imported
ISI by default as noted by C&H text
WWII Accelerated Industrialization
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U.S. was producing as much as possible for
the war effort: trucks, ambulances, airplanes,
shells.
Increased demand for raw materials from
Latin America incomes increased
But unable to import many goods due to war
Expansion of domestic industry, again by
default.
Infant industries protected by lack of imports
from abroad during the war.
Post WWII Intellectual climate
encouraged Industrialization
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Prebisch published his attack on the factor
price equalization theorem in 1949 (See
lecture 5)
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Sir Arthur Lewis presented the Lewis Model
in 1954-55 (See lecture 2)
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Falling terms of trade for primary products
Tradition bound agricultural sector
Message in both was that agriculture should
be abandoned in favor of industry.
Balanced vs Unbalanced Growth Latin
America chose Unbalanced Growth
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Balanced Growth the Big Push, Soviet
style intervention, heavily planned
investment, associated with Austrian
Economist: Paul Rosenstein-Rodan
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Unbalanced Growth Linkages &
bottlenecks relies on prices to provide
signals for areas that need investment,
associated with Albert Hirshman
Hirshmans Linkages
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Backward Linkages inputs to production.
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Forward Linkages
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Automobiles are a forward linkage to steel
Clothing is a forward linkage to textiles
Consumption Linkages
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Cotton is a backward linkage to textiles
Iron is a backward linkage to steel
As one sector grows and incomes increase,
consumer market for finished goods increases
Target industries with good linkages
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not ag or mining, often last industries
Features of the ISI strategy
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Protective tariffs
Import quotas & licensing
Overvalued exchange rates & exchange
controls
Tax incentives, low interest rates, & direct
subsidies to industrialists & exporters
Resulted in high rates of growth &
industrialization
Note that
growth was
strong in Lat
America
between
1942-1980,
the period of
ISI
Costs of the Strategy
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Overvalued exchange rates hurt traditional
exports, loss of foreign exchange
Overvalued exchange rates encouraged inputs
from abroad rather than backward linkages to
domestic economy
Low interest rates encouraged capital intensive
industry low employment
High tariffs increased cost of consumer goods
ISI incentives encouraged rent seeking and
favored elites little reduction in inequality
Foreign firms were able to hide behind
protective walls
From Franko, 4th edition, p. 64
The Example of the Auto Industry
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Appendix to Franko 1999 edition.
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An important sector in several Latin American countries
Argentina, Mexico, Brazil
Brazil & Mexico are centers of considerable innovation
not just assembly
But foreign owned
Auto Industry promoted with hopes for its forward and
backward linkages
Multinational had an early entry Ford opened first
assembly plant in Argentina in 1916 Other companies
in Brazil, Mexico, Chile
Mixed results more success in the 1990s rather than
the ISI years.
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Other aspects of ISI strategy
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The ISI strategy was tolerant of Structural
Inflation, an inevitable part of growth
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ISI fostered State Enterprise
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ISI was biased against the Agricultural sector
ISI recognized many sources of
Structural Inflation
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Bottlenecks & shortages cause prices to rise
Inelasticity of supply of agriculture if demand
shifts out, prices rise quickly
Inadequacy of infrastructure electricity, roads,
transport, cement
Short-term inadequacies of skilled labor
Inadequate tax system, based on exports
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Relied on printing press
New import taxes, excise & sales taxes caused inflation
Tolerate inflation rather than choke off growth
ISI & State Enterprise
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State-owned Enterprise (SOE)
Govt is the principal stockholder and
exercises control
Produces goods or services for sale to the
public (not public goods)
Profitability is not the only goal also social
objectives
From Franko, 4th edition, p. 64
Why did they establish SOEs?
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Economic reasons
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Socio-political reasons
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Retain the rents and reinvest in domestic
economy
Employment objectives
Capital lumpiness
Commanding Heights & Nationalism
Social goals like income redistribution, regional
imbalances, compete with the elite families
Aid donors encouraged them
SOE had a very mixed/poor record
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Often operated at a deficit didnt generate
savings
Inefficient not subject to the market test
patronage opportunities sometimes laden
with workers
Commercial and social goals were
sometimes incompatible (banks, utilities)
ISI & Agriculture
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Encouraged a serious bias against
agriculture Latin America turned away from
its natural comparative advantage
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Why?
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Sir Arthur Lewis ag as the stagnant backward
sector
Raul Prebisch — Falling Terms of Trade for
commodity exports, encouraged ISI strategy
Anti-agriculture aspects of ISI
Overvalued exchange rates hurt agricultural
exports, encouraged food imports.
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hurt domestic agriculture.
? Terms of trade turned against agriculture.
P of Ag/ (P of mfg & inputs to Ag)
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Low incentives to invest in agriculture
Food shortages & rural-urban migration
Kuznets (1961) recognized that Agriculture
should be a partner in development
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Agriculture could be a source of income and thus
tax revenue
Agriculture could provide Factor contributions
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Food as input to production
Manpower from rural areas
Capital surplus to invest
Market contribution — demand for mfg
Ag exports could provide foreign exchange
Strong agriculture sector could support
Industrialization
Summary
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In the 1950s, ISI seemed like a good idea.
See Prebisch, Lewis.
The strategy increased growth, but this came
at a cost.
Some of the most problematic aspects were
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A high tolerance for inflation,
Inefficient state enterprise
A strong bias against agriculture where Latin
America had a comparative advantage
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Explanation & Answer:
800 Words
Tags:
industrialization
Latin America
automobile production
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