The collapse of world demand in the early 1930s cut export earnings across Latin America and made imported manufactured goods harder to buy. Many governments responded by encouraging domestic production behind tariffs and import controls. This shift laid the practical groundwork for import substitution industrialization (ISI)—building local industries to replace imports.
After the 1939 earthquake, Chile established CORFO (the Production Development Corporation) to lead reconstruction and promote new basic industries. CORFO became a key institution for Chile’s state-led industrial strategy, using public investment and state enterprises to expand domestic production. This approach matched the broader ISI trend spreading across the region.
Brazil created Companhia Siderúrgica Nacional (CSN) as a state-owned firm to build domestic steelmaking capacity. Steel was a strategic “basic input” needed for machinery, construction, and transportation—sectors central to industrialization. CSN’s start helped reduce dependence on imported steel and supported later waves of ISI.
CSN began operations in 1946, turning earlier state investment into working industrial capacity. With domestic steel production growing, Brazil could support more local manufacturing and infrastructure building. This strengthened the “build at home” logic that ISI depended on.
Under Juan Domingo Perón, Argentina adopted ambitious national planning and stronger protection for domestic industry. The first Five-Year Plan (1947–1951) aimed to reorganize trade and expand industrial capacity, with the state playing a major coordinating role. This reflected ISI’s emphasis on domestic markets and government direction.
Raúl Prebisch’s influential ECLAC (CEPAL) report argued that commodity-exporting economies faced structural disadvantages in world trade and needed industrialization to develop. The document gave a widely cited intellectual basis for ISI, strengthening policy support for tariffs, planning, and domestic industry-building across Latin America.
Brazil’s government under President Juscelino Kubitschek launched the Plano de Metas (Goals Plan) to accelerate growth by investing in energy, transportation, and basic industries. The plan helped expand industrial capacity and infrastructure that supported import substitution, including major efforts to develop the automobile and capital-goods sectors. It also increased reliance on financing and foreign capital, a recurring tension in ISI strategies.
Countries signed the 1960 Treaty of Montevideo to create the Latin American Free Trade Association (LAFTA), which came into effect in 1962. A core goal was to expand regional markets through tariff concessions, addressing one of ISI’s major limits: small domestic markets. Regional integration was meant to help new industries achieve scale and reduce costs.
The Cartagena Agreement created the Andean Group (later the Andean Community), aiming to coordinate industrial development and gradually reduce trade barriers among members. This approach tried to make ISI more effective by planning which industries would be built where, and by creating larger protected regional markets. It represented a more structured, regional version of import-substitution thinking.
Brazil’s Second National Development Plan (II PND) launched in late 1974 for 1975–1979, focusing on basic inputs, capital goods (machines and equipment), food, and energy. This marked a “deeper” stage of ISI: moving beyond consumer goods toward heavier, more complex industries. It increased investment needs and often required substantial external borrowing.
In August 1982, Mexico announced it could not service its external debt, helping trigger the wider Latin American debt crisis. High external borrowing—used in part to finance industrialization and public spending—became unsustainable when global conditions changed, including higher interest rates and weaker export earnings. The crisis forced policy shifts that reduced protection and expanded IMF-linked stabilization programs.
Through the 1980s, many Latin American governments moved away from ISI’s high tariffs, tight import controls, and large state-led industrial programs. Countries increasingly adopted trade liberalization, privatization, and export-oriented strategies as they worked through debt and inflation pressures. By the late 1980s, ISI was no longer the dominant development strategy for most of the region.
Import Substitution Industrialization in Latin America (1930s–1980s)