than did free trade. Aggregate investment dropped in the 1980s and 1990s (below 20 percent for
most countries for most of the period) and never recovered the levels of the 1960s and 1970s. As
noted earlier, ISI was a propitious environment for conglomerates and MNCs; MNCs were
induced to invest in manufacturing to jump tariff barriers and conglomerates also invested heavily.
Since domestic markets were small and profitable, conglomerates raced each other to get into
each new market or sector (Amsden 1989). Both sets of firms struggled when governments
rolled back ISI protections. New MNC investment gravitated out of manufacturing into services
and raw materials, or to countries with better skills, lower wages, and closer proximity (like
Mexico).
32
Conglomerates were able to adjust quickly to market reforms but did so mostly by
exiting uncompetitive industries and expanding into non-tradable sectors and commodity exports,
and both areas had limited growth potential.
Based partly on East Asia’s export success in previous decades, reformers hoped that
trade liberalization would rapidly increase overall trade, especially through higher value added
exports. However, outside the special case of post-Nafta Mexico, the proportion of higher
technology exports did not expand in the 1990s (Baumann 2002, 59). A possible explanation lies
in a convergence of disincentives. MNCs often kept the higher technology parts of their
commodity chains in developed countries or East Asia and had few incentives to move them to
the low-skill (and often high-wage due to currency overvaluations) economies in Latin America.
Domestic conglomerates lacked core competencies based on proprietary technologies and hence
had few incentives to bet heavily on specializing in particular sectors for export.
Neoliberals in the 1980s also hoped that market reform, especially trade liberalization,
would favor unskilled labor and hence serve not only to increase efficiency and growth but also
equity while reducing poverty. This was not the result in Latin America (Stallings and Peres
2000).
33
In fact the sectors that responded rapidly to new export opportunities were not the sort
- 29 -
------------------------------------
32
Absolute flows of FDI into Latin America reached all time highs, but much of this investment
went to acquire firms (some through large privatization programs). Cross border merges and
acquisitions do not though add to the aggregate rate of investment.
Convention