Andes, LARR, c 2

In what way is the hypothesized import substituting industrialization of third world countries during the Second World War comparable to the anecdote of the desert island economist with a sardine can? Central to both accounts are counterfactual assumptions regarding the means of production. The marooned economist proclaims, "Let us assume we have a can opener." Those who allege that major wartime industrialization occurred in various underdeveloped countries take a similar, though implicit, position: they assume the existence of capacity for the production of investment goods in each of the countries in question. For André Gunder Frank, who did much to popularize, but not to document, the wartime industrialization hypothesis, it was sufficient that "the metropolis was otherwise occupied." [1] While the countries of Europe may well have been "otherwise occupied", this was not true for the United States in the sense that Frank means. Occupation with the war effort by the U.S. required, inter alia, mobilizing the scarce resources of the entire Western Hemisphere. The key phrase used by the Administration of Franklin Roosevelt in the 1930s to characterize relations with the Latin American countries -- "the Good Neighbor Policy" -- was displaced very early in the 1940s by a new phrase which was to have far greater operational significance -- "Hemispheric Defense". The requirements of Hemispheric Defense brought the Latin American countries closer in numerous respects to the United States than they had ever been previously.

Harold G. Vatter has observed that the Second World War produced in the United States "an economic controls bureaucracy of a magnitude never known before or since." [2] The range of influence of that bureaucracy did not stop at the borders of the United States but extended throughout most of the Western Hemisphere. The various Latin American countries found themselves involved with the U.S. in the administration of U.S. export controls, in arrangements for sharing scarce resources such as petroleum, in contracts for the exclusive sale of minerals and other strategic raw materials at fixed prices to the United States, in Lend Lease agreements, and a host of other ventures.

Our concern here will be with the relation between wartime administrative controls in the U.S. and the scarcity of materials and industrialization in the three largest Pacific Coast Andean countries (Chile, Colombia, and Peru). The popular belief that significant wartime import substitution occurred in Latin America tends in one case after another not to be borne out by the evidence. In some cases, there are estimates of high industrial growth rates. These do not necessarily signify import substitution, although often they are equated. Markos Mamalakis, for example, speaks of the war years as the "golden era of industrialization" in Chile. He points to a 9.3 percent annual increase of industrial output between 1940-45 and associates it with import substitution sponsored by the Chilean Development Corporation (CORFO). [3] Mamalakis himself has provided us with the data to seriously challenge the import substitution claim. In his Historical Statistics of Chile, we find that real gross domestic capital formation was no higher in 1945 than in 1940, having fallen in 1942 to 78 percent of the 1940 level (See Table 1). That portion of capital formation represented by real expenditures on machinery and equipment were in 1945 17 per cent below the 1940 value, while the component corresponding to imports had fallen in 1944 to two-thirds the 1940 value. The growth of wartime output would thus appear to have been associated primarily with greater utilization of existing capacity than of new import substitution.

Rosemary Thorp and Geoffrey Bertram, in their analysis of Peru, limit the "spurt of rapid growth in import-substituting manufacturing" to the period from 1938 to 1942. [4] Rather than the expected seizing of opportunities by local industries as the war proceeded, they found increasing utilization of installed capacity, shortages and a decline in both capital goods imports and the investment ratio. [5] They point to one extreme instance of a cement factory established in Arequipa in 1941 by several prominent Peruvian families which was still trying in 1945 to obtain imported equipment necessary for its operation.

In yet another major study of industrialization in the Andean area, Jan Peter Wogart speaks of the shortages of imported capital goods in Colombia during World War II and of the increased use of capacity originally installed in the 1920s. [6] Wogart points to a precipitous fall in the average investment-output ratio for industry from 44.7 percent in 1925-29 to 12.5 percent in 1930-44. [7]

The phrase "wartime scarcities" appears in most of the discussions of import substitution and serves as an effective device for sidestepping systematic analysis. Recourse to the sparse data available, for a period when national accounts estimates were in their infancy, is of limited assistance. We can, however, point to the substantially increased role of the United States as a major trading partner, absorbing the equivalent of Germany's share of the imports of Colombia and Peru and to the increased importance of other South American countries as import sources for Chile, Colombia and Peru (see Table 2). But this, too, will not suffice to convey the centrality of the United States to developments in the Andes during the war. Data on changes in the share of the major producer goods imports procured from the United States by Chile in 1939 and 1945 provide a rough gauge of the substantially increased importance of U.S. goods for both new investment and the maintenance of existing output (see Table 3).

Similar tables may be constructed for Peru and Colombia, but a comparative table for the three countries cannot readily be prepared owing to differences in import category coverage. Chile has been chosen to illustrate the point because of its smaller overall prewar dependence on U.S. imports. Table 3 clearly shows the preponderant position the United States came to occupy in the supply of a range of capital goods and intermediate goods for industry.

In recent years a chief constraint on economic development has been the shortage of foreign exchange. A reflection of this has been the tendency of the import expenditures by Third World countries to consistently outrun export earnings. Table 4 clearly indicates that a different situation prevailed for Chile, Colombia and Peru during the war years when many imported goods were either unavailable or severely limited. They each accumulated exchange reserves: central bank official holdings of gold and foreign currency increased from U.S.$33 million at the end of 1938 to $110 million at the end of 1945 in Chile; from $27 million to $177 million in Colombia and from $21 million to $38 million in Peru. [8] These increases occurred despite declines in the term of trade that were a consequence of the fixed prices for the sale of their exports which they had agreed to with the U.S. [9] The reduced supply of many imported goods during the war years slowed and distorted economic processes in Chile, Colombia and Peru. The decreased availability of imports also led the governments in Santiago, Bogota and Lima to accept closer links with Washington than ever before as I shall describe below.

Shortages throughout the Americas were most acutely felt first in 1942 with the full scale mobilization of the United States economy, the stepping up of Lend-Lease shipments, principally to Europe (total amounts went from 14.4 percent of total U.S. exports in 1941 to 60.9 percent in 1942 and 79.5 in 1943) [10] and the loss of shipping capacity occasioned by the intensified activities of German submarines in both the Atlantic and the Caribbean. Among the U.S. economic responses to these difficulties were price controls, rationing -- beginning with tires in January 1942 [11] -- and the amplification of the already existing controls over exports.

Export controls predate America's entry into the war by one and one-half years, authority having been given by the Export Control Act of July 2, 1940. Control over commodities was supplemented one year later by control over purchasers, or more broadly over direct or indirect transactions with "persons deemed to be acting for the benefit of Germany or Italy". [12] More than 1800 names of individuals and business institutions in Latin America were contained in the first "Proclaimed List of Certain Blocked Nationals" published on July 19, 1941. [13]

The organization of export controls was changed often during the war as the military balance altered and as scarcities and productive capabilities changed. In mid-1943 the U.S. instituted a scheme of decentralized controls, which put the responsibility for screening orders for imports on the Western Hemisphere governments, subject to priority categories established unilaterally by the U.S. In this connection, the United States insisted that Chile, Colombia, and Peru (and others) agree to create or designate state agencies which were to examine all applications for "import recommendations" in order to select and segregate "on a provisional basis those which are considered most urgently required." [14] The recommendations were to go to the local U.S. Embassy to be reviewed for consistency with supply availabilities and the country's minimum essential requirements. The Embassies were instructed to strike from the lists requests from firms on the Proclaimed Lists of Axis-connected Individuals. [15] Final import recommendations were to be approved jointly by the U.S. Embassy and the country's Import Department. The extent to which the recommendations were translated into actual imports turned on decisions by the U.S. Board of Economic Warfare (later the Foreign Economic Administration) which in issuing export licenses took account of the supply situation in the U.S., the availability of transport and the state of the war. [16] It should be noted that while "minimum essential requirements" were spoken of, there was no assurance that they would be met.

In matters related to wartime trade, the U.S. proposed, the U.S. disposed and Chile, Colombia, Peru and the others accommodated themselves as well as they were able to the succession of faits accomplis. In early 1944, as the Bretton Woods conference approached, the Latin American governments learned of the wish of the U.S. to remove from the Decentralization Plan a range of items including petroleum products, motor vehicles, and repair parts for maintenance and capital equipment. [17] The State Department voiced its strong opposition to any attempt to replace national import recommendations with import licensing. U.S. Secretary of State Cordell Hull referred to the need for the "progressive diminution and elimination of wartime controls . . . in anticipation of efforts to revitalize and augment international trade in the post-war period. [18] American export controls, however, were to remain in force. Moreover, it was clearly stated the "rollback of decentralization should not be interpreted as indicating a general increase in supply". [19]

The Chileans concurred as usual, but expressed concern that the proposed rollback would cause the loss of information vital to them in the administration of their exchange and import control arrangements. They sought assurances that they would receive regular information from Washington respecting quotas or estimates of supply for Chile. [20] The Chileans wished the U.S. to give heed to Chilean advance import permits when approving exports, but Hull would no longer have any part of it. [21]

Whatever form the administration of U.S. export controls took, final decisions rested squarely with Washington. When loans were granted to Latin American countries, there was no assurance that approvals would follow for the shipment of goods to be bought with those funds. The Peruvian Central Bank was granted a $25 million loan in 1942 for the purchase in the U.S. of materials and equipment needed for various projects, including industrial ones. It was impressed upon Peru at the time that priorities for purchase would be granted "only after careful study and determination that the establishment of the industry . . . will contribute directly in important measure to the war effort of the United States and the security of the hemisphere." [22]

To cite but one additional instance, the U.S. approved the shipment in 1943 of graphite electrodes to allow an increase in the output of a Chilean tin refining plant. The shipments of casserite from Bolivia used in the operation were also subject to approval by Washington. The same letter from Hull which details the preceding, raises the possibility of a halt in tin shipments if Chile fails to conserve tin and questions the disposition of any surplus output (presumably an implicit concern about exports to Argentina, which at the time was still nominally neutral). [23]

The use of country committees set up at the suggestion of the United States for sharing the economic burden of the war and endeavoring to meet needs as locally perceived dates back to mid-1941 when greatly increased oil shipments from the U.S. to Great Britain raised the specter of acute shortages on the East Coast of the United States. A number of leading oil company executives submitted a report to the Office of Production Management calling for a hemisphere-wide approach. In the words of Time:

Within two months this became national policy. On August 30, 1941, Cordell Hull wrote to the U.S. Ambassadors in Latin America instructing them to obtain the cooperation of each of the various countries in establishing a National Oil Pool committee. These national committees were to determine imported oil requirements and were to communicate them to the U.S.-based Petroleum Supply Committee for Latin America. [25] Hull spoke of distributing the reduction in available tanker tonnage "in such a way as to bring about equality among all the American Republics". [26] By October 1941 Chile and Peru were among the countries which had established national committees required for the operation of what came to be known as the Latin American Petroleum Pool. Sumner Welles, the Undersecretary of State, pointing to the early success of the Pool, confidently predicted that not only would the current requirements of each country soon be fully met, but that inventories would be built up as well. [27]

Then came Pearl Harbor, followed shortly thereafter by the wholesale sinking of oil tankers in the Caribbean Sea by German submarines. The resulting shipping capacity shortage was not amenable to feats of reorganization. With much reduced tanker space available, substantial cutbacks in crude petroleum output were necessary in Mexico, Venezuela, and Colombia (19.6, 35.4, and 56.9 percent cuts respectively in 1942 relative to 1941). [28] In these circumstances, "equality of burden" turned out to be "equality" among oil importing Latin American countries. Chile's petroleum supplies, which were now coming from Peru rather than California, were sharply reduced by orders from Washington. By mid-1942 Chile was receiving for non-war uses a "basic allotment" of forty percent of its 1941 supply. War industries - those producing Chilean copper and nitrates - were to receive up to their full needs. [29] By way of comparison, the current value of U.S. consumer expenditures for gas and oil for user operated transportation in 1942 was 78.9 percent of its 1941 peak level. [30]

Modern economies and societies run on oil. Without it, activities must be curtailed. By October 1942 Chile had prohibited the use of most private cars and had suppressed the use of more than one-third of the cars used by government agencies. The operation of trucks between Santiago and the port areas of Viña del Mar and Valparaiso were prohibited, thus reserving to the state railways the inter-city movement of goods. [31] As also occurred in Brazil, the Chileans expanded the output of dehydrated alcohol which was mixed with gasoline to cushion somewhat the impact of the shortage. [32]

Petroleum shortages continued to plague Chile throughout the war and we find in mid-1944 the American Ambassador to Chile pleading with Washington for supplementary shipments for Chile. [33] The response from the State Department chastised Chile for "flagrantly disregarding the equitable consumption limits applied to her petroleum imports" and asked the Ambassador his opinion of the minimum gasoline required to "avoid complete disruption of bus transportation". [34]

Certain lines of industrial development were simply vetoed by Washington as being inconsistent with the pursuit of wartime objectives. When Washington first proposed to purchase Peru's entire rubber output less an "appropriate amount" for domestic consumption, the Government of Peru was called upon to agree "to restrict expansion of rubber manufacturing facilities and to curtail rubber manufacturing as much as possible." [35] When the Peruvian Minister of Finance David Dasso responded that Peru had been contemplating the establishment of a tire factory for two years, [36] Washington countered that the establishment of a tire factory in Peru, "is probably out of the question" as far as the U.S. was concerned. [37] Machinery was, however, eventually forthcoming from the U.S. to allow Goodyear to begin producing tires in Lima in 1943 using rubber from the Amazon region of Peru. Chile, which produces no rubber, was unable throughout the war years to obtain equipment to allow the operation of a tire plant built near Santiago in 1941 through an arrangement between CORFO and U.S.-based General Tire and Rubber. [38]

While Chile was crippled by petroleum shortages, rubber rich Peru was hobbled by a shortage of tires. The new Goodyear plant was producing 100 tires per day in 1944, far too little to meet local demand. Those classed as essential users could secure new tires, but only in exchange for old tires which were made available to public cabs. Strict control of loading and of speed, together with rationing, brought annual natural rubber use down to 40 percent of its normal level. [39]

Quantitatively the largest part of the increase came about through the expansion of activities of established firms, principally through longer hours of work or additional shifts. At the same time a large number of new enterprises were launched. Many of these consisted of improvised operations, using secondhand or locally contrived equipment and producing articles of poor quality at high cost. [40]

In each of the three countries I have considered one could tally up on one's fingers the consequential new factories established in the five years from 1941 to 1945 inclusive. Some of the new plants were either set up by U.S. investors or involved American advisers. In virtually all cases, those administering U.S. export controls had to authorize the shipment of the equipment, if not its production as well.

Thorp and Bertram were able to identify one dozen large scale ventures which came into operation in Peru during the entire period from 1930 to 1948, and of these only four appear to have begun production during the war: Fleishmann's yeast factory in Lima (1941), General Milk's Leche Gloria in Arequipa (1942), Goodyear's tire factory in Lima (1943) and W. R. Grace's chemical plant at its sugar plantation in Paramonga (early 1940s). [41] At least three other projects were initiated during the war years and completed later: Rayon Peruana (1946), Productora Peruana's chemical plant (1946), and the Arequipa cement plant (already referred to) on which work had begun in 1941. [42] In the view of Thorp and Bertram, Peru's economic elite "retained other options" throughout the 1930s and 1940s, notably real estate purchases and construction. [43] This was reflected in the consumption of cement which grew at an annual average compound rate of 14.1 percent from 1940 to 1946. [44]

During the war years in Chile, a factory producing plywood and a rayon yarn mill (1941) were built [45] as was a new cement plant (1945) constructed with equipment formerly used in the U.S. [46] A copper fabricating plant was set up in 1942 [47] and a copper rolling mill and wire-drawing plant began operations in 1944 with equipment acquired by CORFO from the United States. [48]

Wartime import substitution in the Andean countries was clearly not the simple process that some would have us believe it was. The United States was not "otherwise occupied"; indeed to paraphrase Calvin Coolidge, "the business of America was (in part) Latin America". Administrators in Washington had at their disposal detailed information on production, trade, and the operation of firms in Latin America. Major new investments in Chile, Colombia, Peru and elsewhere were subject to Washington's veto and even output levels in the Andean countries were not independent of decisions in the United States.

While there may have been close cooperation during the war years between the government in Washington and those in the Latin American capitals, this occurred in a context in which the material needs of the European Allies were paramount. This cooperation brought some measure of support to war-related economic activities in Colombia, Peru, and Chile. It also sought, to the extent possible, to keep within tolerable limits the sacrifices exacted from the Andean countries. Widespread import substituting industrialization was simply not on the agenda and could not take place without access to the necessary imported capital equipment.

One of the larger questions that arises from this analysis relates to the circumstances necessary to bring to today's struggle for socio-economic development in the Third World the sense of mutual commitment and shared sacrifice that characterized "hemispheric defense" during the Second World War. I have no answer to William James' search for the "moral equivalent of war", but would observe that a fuller understanding of the degree of economic cooperation between nations that took place in wartime raises tantalizing visions of what might be possible if peoples were linked in common cause.

United States	31.0	42.1	54.0	65.9	41.1	56.0
Canada	0.6	1.5	2.2	4.2	2.7	4.8
United Kingdom	8.2	4.6	9.5	2.9	8.4	3.3
Germany	22.7	0.0	12.8	0.0	14.7	0.0
Italy	3.9	0.0	2.3	0.0	2.0	0.0
Japan	3.7	0.0	0.2	0.0	3.1	0.0
Argentina	4.4	20.5	0.5	6.5	5.4	13.8
Brazil	1.3	7.0	0.5	4.5	0.2	3.0
Chile	-	-	0.2	1.6	2.1	5.8
Colombia	0.0	0.0	-	-	0.0	0.1
Peru	7.5	15.8	0.1	2.3	-	-
Others	16.7	8.5	17.7	12.1	20.3	13.2

	1939 Imports U.S. share Percent	1945 Imports U.S. share percent	Total Imports Million U.S. $
Iron & steel semi-manufactures
Wire	33.8	99.6	2.0
Rolled	38.3	98.4	2.9
Sheets, rectangular	72.4	99.9	1.0
Tinplate	69.8	100.0	0.9

Iron & steel manufactures
Pipes & tubes	17.1	67.1	1.1

Machinery, apparatus & tools
Agricultural	62.9	84.6	1.3
Mining	90.7	99.2	0.9
Industrial	36.4	80.8	7.4

Motors, turbines & boilers	24.6	93.8	0.9

Parts for motors, turbines & boilers	58.7	97.1	0.9

Electrical machinery & apparatus	40.5	93.7	4.7

Railroad equipment	30.2	98.7	2.2

Automobile chassis	83.2	99.8	1.3

Chemical products, industrial	41.6	76.3	3.7

Drugs & pharmaceuticals	19.8	78.9	2.1

Pigments, colors, paints, varnishes, etc.	18.3	72.8	1.7

						Sum
	1941	1942	1943	1944	1945	1941-45

Chile
With U.S.	45.8	102.7	98.2	98.7	85.2	430.6
With rest of World	3.7	-52.9	-51.9	-48.1	-36.9	-186.1
Total	49.5	49.8	46.3	50.6	48.3	244.5

Colombia
With U.S.	-12.8	47.5	52.1	44.3	14.6	145.7
With rest of World	-8.0	-9.8	-10.7	-13.8	-34.0	-76.3
Total	-20.8	37.7	41.4	30.5	-19.4	69.4

Peru
With U.S.	-8.1	-4.1	-8.4	-7.4	-8.9	-36.9
With rest of World	23.9	23.0	6.4	10.5	26.1	89.9
Total	15.8	18.9	-2.0	3.1	17.2	53.0

[M]Myron J. Frankman is Associate Professor of Economics at McGill University, Montreal, Quebec. Revision of this paper was completed while the author was Professeur Visiteur at the Centre d'Etudes en Aministration Internationale (CETAI) of the Ecole des Hautes Etudes Commerciales, Montreal. His research interest is international economic organization and cooperation, past and present.

	1940	1941	1942	1943	1944	1945	1946
Gross Fixed Capital Formation	241.0	237.6	189.0	202.9	228.2	241.0	333.8
Machinery & Equipment	108.1	104.4	84.8	87.2	75.9	89.8	132.4
Imported	95.2	88.8	64.8	70.1	62.2	78.2	115.8
National	12.9	15.6	20.0	17.1	13.7	11.6	16.6

	Base=100	1939	1940	1941	1942	1943	1944	1945	1945/1939 percent	1945/1941 percent
Chile	1925	54.0	52.0	52.0	56.0	48.0	50.0	45.0	83.3	86.5
Colombia	1950	65.9	47.3	60.4	56.0	47.2	46.9	47.8	72.5	79.1
Peru	1937	86.8	76.3	64.2	57.0	55.9	62.1	65.1	75.0	101.4