In the 1900s, the now largely abandoned dependency theory ruled the study of international relations. It claimed that developing nations were economically dependent on developed (mostly European) nations that benefited off of that dependency. As such, it was in the interest of developed nations to control and limit the development of poorer countries and the interest of those poorer nations to become independent from the developed world. Import Substitution Industrialization (ISI) is an economic policy that many developing nations applied during these years to overcome their dependence on the developed world. ISI meant, as the name suggests, substituting importation of secondary goods from the developed world with domestic industrialization and emphasized state support of specific industries. Some countries in Latin America (such as Brazil, Argentina, and Mexico) and Eastern Asia (such as Japan, South Korea, and China) implemented the policy. Notably, while in Latin America this policy made little difference, the countries in Eastern Asia that applied ISI have become world powers and significant global trade partners. Why?
Culture. In Latin American countries, corruption and poor planning caused the state-associated industries to flood the market with low quality goods and siphoned most of the profits into the pockets of a few political and business leaders. A famous example of ISI production failure, admittedly from Yugoslavia not Latin America, is the “Yugo” car brand known for a design that was “hard to view on a full stomach” and quality so poor some said it was like it was “assembled at gunpoint.” Meanwhile in South Korea strong dedication to collectivism, and high social value on honor and integrity contributed to stellar electronics and steel industries producing companies that are household names such as KIA, LG, and Samsung. The wealth from these companies flooded the government and country with cash it invested well. This feat took a level of social trust unimaginable in most of the world. For the western hemisphere, it might as well be magic. Since their boom, South Korea, Japan, and Singapore have established more fair and inclusive economies and institutions that have made them economically indistinguishable from Western Europe.
In the landmark book Why Nations Fail by Acemoglu and Robinson, the authors explore another related question. Why has the growth of the United States outpaced the growth of Latin America every decade since colonization? In the early 1800s, for example, Mexico and the United States were more similar than different. Today, the border stands between two different worlds. In a page turning inquiry, Acemoglu and Robinson conclude the most influential difference is the nature of the political and economic institutions. In Latin America, countries’ “extractive institutions” were established with the sole purpose of extracting value from the land, labor, and capital of the New World. In the American colonies, “inclusive institutions” that had checks and balances, were transparent, and needed approval from those they governed, converted land, labor, and capital into high quality of life and supercharged the economy. In recent decades, Latin American countries have sought to establish inclusive institutions with the power to pull them out of their centuries-long rut. Despite the efforts, many of these countries have not been able to overcome the cynicism of the constituents and the corruption of the captains.
We have some well-researched theories with quasi-experimental evidence that argues the key to success is cooperation in good-faith, charity for neighbors and descendants, and high integrity. A poorly designed system will succeed if its participants cooperate in good-faith and integrity. Likewise, even a well designed system will fail with intransigent or untrusting participants. The “Asian Tigers” of East Asia succeeded in spite of poor theory and practice because of their collectivism. Meanwhile, parts of Latin America often continue to fall short in spite of good ideas because of their deep-seated mistrust. Successful governments are sewn from a strong social fabric. In the U.S. right now one half of the country wants to “overthrow capitalism” while the other half is calling for the dismissal of university presidents and professors. The only thing these two Americas have in common is that they don’t trust the government, they have misgiving toward their neighbor, and they think the other is going to destroy the rest. Simply put, I believe if the U.S. were to start again today we would fail because we lack social trust. Our wealth-machine extracts life from the people, our people endlessly consume products and media, and our media destroy the wealth-machine without creating—endangering our people. Fortunately, we have overcome this divide before and there are signs we can do it again.