Import substitutionandeconomicgrowth

DespiteLatinAmerica’sdismalperformancebetweenthe1950sand1980s,theregion experiencedstrongcapitaldeepening.Wesuggestthatthesefactscanbeexplainedasa consequenceoftherestrictivetraderegimeadoptedatthattime.Ourframeworkis basedonadynamicHeckscher–Ohlinmodel,withscaleeconomiesinthecapital- intensivesector.Initially,theeconomyisopenandproducesonlythelabor-intensive good. Thetraderegimeismodeledasamovetoaclosedeconomy.Themodelproduces results consistentwiththeLatinAmericanexperience.Specifically,asufficientlysmall countryexperiencesnolong-runincomegrowth,butanincreaseincapital.