2/8 This is a very common misperception. The ISI period ran from the late 1930s to the early 1970s, and peaked in the 1950s and 1960s. During this period, ISI economies in Latin America grew extraordinarily quickly and produced many of the first development "miracles" in history.

3/8 In fact at the time, it was widely accepted that several of the larger Latin American economies would reach European levels of development before the end of the century. That all came apart by the end of the 1970s, but to blame it on ISI makes little sense.

4/8 A much more plausible reason is the 10-fold surge in oil prices during the 1970s, not because the cost of energy rose (in fact many countries in Latin American produced and even exported oil) but rather because of its impact on capital flows.

5/8 With OPEC nations pouring vast sums into the international banking system, these had to be recycled, and were mostly recycled into developing countries, and especially into Latin America, the most credible of developing countries at the time.

6/8 As I often point out, any forced change in a country's external imbalances must force changes in its internal imbalances. The sudden massive net capital inflows into Latin American economies necessarily caused a massive transformation of their economies.

7/8 Among the most important of these changes were surges in the value of Latin American currencies, which became among the most expensive in the world. The irony, of course, was that appreciating currencies effectively reversed the whole point of the ISI policies.

8/8 In a way you can say that it wasn't ISI that led to the terrible debt crisis of the 1980s, but rather its sudden, sharp reversal during the mid and late 1970s. Blaming ISI for the crisis was always more of an ideological tactic than it was an empirical observation.

@michaelxpettis This great thread is why Pettis & Setser are the economists of the moment - battling against mainstream orthodoxy that is often a thinly disguised ideologically bound belief system. It's Flows, flows, flows. Not theories, theories, theories.

@SimonJohnBowden Thanks, Simon.

@michaelxpettis How can the economy of a country be separated from its politics, especially in Latin America? When the economy goes well, surely it must make sense economically, but when it goes badly, there could be thousands of reasons and the economic one could be the least relevant.

@michaelxpettis Excellent Explanation by Michael Sir. It's not the industrial policies of the Latin American countries that end up in accumulation of external Debt that caused the Latin American crisis in the 1980s and 1990s. The higher oil prices in the 1970s oil shock due to the Arab Israeli

@michaelxpettis So called “development banks” were the main factor behind hyperinflation in Peru, as huge fiscal deficits were monetized. Import quotas, licenses, differentiated import tariffs (there were 87 tariff levels if I recalled correctly) and more were abolished starting in 1991 here.

@michaelxpettis @BtwstAsk 👆 The best analysts worth watchin📈📈📈