In the century before the First World War, Latin America followed a model of export-led growth. A successful export-led growth model implies a rapid rise in exports and in exports per head coupled with increases in labor productivity in the export sector. Yet this is only the first, albeit very important, condition for a significant rise in real income per head. The second condition is the transfer of productivity gains in the export sector to the nonexport economy. Thus the export sector needs to become the “engine of growth,” stimulating investment outside the export sector itself.

The export sector could provide such a stimulus in many ways. For example, thinking in terms of backward linkages, the growth of the export sector could promote investments in railways, which in turn would generate investments in sawmills (for lumber), capital goods (e.g., locomotives), and workshops for repair and maintenance of the rolling stock. In terms of forward linkages, the export sector could also contribute to a faster rate of investment. For example, cattle raising for export leads not only to investments in beef and beef-extract production but also to investments in the leather industry, the shoe industry, and even the chemical industry.

The economic development of Latin America since independence is a story of unfulfilled promise. Despite the abundance of natural resources and a favorable ratio of land to labor, and after two centuries of freedom from colonial rule, not one republic has yet achieved the status of a developed country. Furthermore, the gap between living standards in Latin America and the United States – often taken as the most relevant country for comparison – has widened since the early nineteenth century. Although individual countries in various periods have grown rapidly, none has been able to sustain a high rate of growth of GDP per head for long enough to eliminate the gap with the developed countries.

Even though the collapse of Iberian rule ended restrictions on commerce, Latin America continued to operate in a world in which rules were made by others. Unable to break into the charmed circle of advanced capitalist countries, Latin America remained a peripheral region in which external influence was preeminent. Trade cycles, investment and consumption patterns, the accumulation of debt, and the transfer of technology have all been driven by forces over which Latin America has exercised little control. Even during the period of inward-looking development, the ability of external events to shape internal dynamics was powerful.

By the beginning of the 1950s, and even more so by the end of the Korean War, the Latin American republics were faced with a clear choice: to opt explicitly for an inward-looking model of development that would reduce their vulnerability to external shocks or to press ahead with export-led growth on the basis of some combination of export intensification and export diversification.

This choice was not made in a vacuum. Each option favored different groups within society, giving a political twist to most of the economic arguments. At the same time, international and regional institutions pressed hard to influence the outcome. Although the International Monetary Fund (IMF) favored outward-looking policies as a solution to balance-of-payments problems, the Economic Commission for Latin America (CEPAL), under the dynamic leadership of Raúl Prebisch, defended inward-looking policies. With the deterioration in the net barter terms of trade (NBTT) after the Korean War (a key feature in CEPAL's case for inward-looking development), the intellectual pendulum began to swing toward import-substituting industrialization (ISI). Yet many governments were still reluctant to abandon export-led growth altogether, in recognition of the key role still played by the export sector in economic, social, and political terms.

The Second World War, which began in Europe in September 1939, was the third major external shock to strike Latin America in twenty-five years. Despite many similarities with the impact of the First World War and some with the Depression of 1929, the implications of the Second World War for Latin America were quantitatively and qualitatively different from the earlier shocks.

First, the war was far more devastating for Latin America in terms of disruption to its traditional markets. By 1940, the Axis powers controlled much of the European coastline from northern Norway to the Mediterranean Sea, and the consequent British blockade deprived the Latin American republics, despite their initial neutrality in the war, of access to continental European markets. Furthermore, the British market – so important for Argentina and Uruguay – started to shrink as the United Kingdom retreated into a war economy in which only the most essential imports were permitted.

Second, the war erupted after nearly a decade of growing disillusionment with the traditional export-led model in Latin America. World trade in the 1930s had recovered, but it was increasingly “managed,” often bilateral, and heavily distorted by higher tariffs and a plethora of non-tariff barriers. The great powers had frequently acted irresponsibly (e.g., the Smoot–Hawley tariff) or selfishly (e.g., the Roca–Runciman pact). The result was a growing sense of nationalism in a number of Latin American republics and a greater commitment – albeit poorly articulated – to inward-looking development and industrialization as an alternative model to traditional export-led growth.

By the middle of the nineteenth century, the growth of the world economy and the secular expansion of international trade provided the background for all discussion in Latin America on economic policy and economic development. Throughout the subcontinent, a broad measure of agreement had been reached that Latin America's best hope for rapid economic advancement rested on closer integration into the world economy through commodity exports and capital imports, with some countries also favoring European immigration. Alternative theories, which emphasized either protection of domestic import-competing activities or (less realistically) the promotion of manufactured exports, commanded little support among the political elite.

As the early postindependence period had shown, the growth of commodity exports in the presence of a favorable external stimulus could not be taken for granted. The obstacles on the supply side were still considerable, and the political weakness of many of the emerging states was a major handicap. Even an apparently strong state, such as Argentina under General Juan Manuel de Rosas (1829–52), lacked the necessary political consensus to implement successfully a set of consistent economic policies.

The Mexican government's August 1982 threat of default on its external public debt was the trigger that finally unleashed the debt crisis. The net flow of bank lending to Latin America ground to a halt, and the net transfer of resources suddenly turned negative. Even countries like Colombia, which had been prudent about accumulating foreign-debt obligations, were affected as private financial institutions in the developed countries reversed their previously optimistic forecasts concerning Latin America.

The decline in bank lending set in motion a chain of events that was to lead by the end of the decade to a New Economic Model (NEM), based on export-led growth and a smaller role for the state, for the majority of republics. The transition to a new trajectory was not painless. Yet countries had few alternatives, for the logic of the situation demanded a response from governments all along the political spectrum. Only in energy-rich Venezuela under President Chávez (1999–2013) was it feasible to run an economy in which the state was largely responsible for capital accumulation and where the inefficiencies and waste associated with the model were numerous. The NEM emerged in part as a pragmatic response to the series of adjustment and stabilization programs adopted in each republic in the 1980s. Forced by the negative transfer of resources to accumulate trade surpluses, Latin American republics finally gave higher priority to the question of export promotion, which had been on the agenda in most republics since the 1960s. Unable to borrow funds abroad, governments also began to address the problems of fiscal reform, inefficient state-owned enterprises, and indiscriminate subsidies.