a large industrial base in countries such as Mexico and Brazil, this program still required strong imports of technology and key components, and did not necessarily result in highly competitive economies when compared to those of North America, Europe, and Japan. In part this is due to the relative subordinate role of manufacturing (Gereffi & Hempel 1996), compared to areas such as services, design, information, and financial resources that have become the new 'command' areas in the current period of financial capitalism.
Direct foreign investment, in particular from the U.S., Europe and Japan, has been crucial in building modern Latin American economies. Direct foreign investment, especially when combined with technological and skills transfer, can be crucial in buoying developing economies. At the same time, as we have seen in the case of Mexico and Central America, certain types of plants (the maquiladoras) can shift the pattern of industrialisation and employment in disconcerting ways, producing a new types of dependence (Ochoa & Wilson 2001, p7; Kunhardt 2001, p53; Cooney 2001, p55). Even more dangerous is the 'hot money' of portfolio funds which invests in the liquid assets of stocks, bonds, and leasing agreements (Skidmore & Smith 2001, p410). These funds can be rapidly pumped into a country if it is viewed as a good investment area, but also can be rapidly moved out if there is a perception of instability or better opportunities elsewhere. Hot money, for example, was directly implicated as a major factor in the Asian financial crisis, especially for Thailand (see Rosenberger 1997). Thus, although 'helpful in the short run (by improving the balance of payments and increasing foreign exchange reserves) such funds became a timebomb, ready to leave at the first sign of trouble. That is what happened in Mexico in 1994 and Brazil in 1998-99.' (Skidmore & Smith 2001, p410). There may have been some learning curve here since 1998 by investment institutions, e.g. there was little regional contagion from the Argentine financial crisis.
These factors had led to the formulation of dependency theory, which was actively promoted from the 1950s down through the 1970s: -
Then, in the early 1950s, the pioneering economic work of the Economic Commission for Latin America (ECLA) focused on the existence of a center-periphery world system which favored the central industrial countries. According to ECLA's analysis those countries specialized in the production of industrial goods grew faster than those specialized in the production of raw materials and therefore the gap between central and peripheral economies was becoming increasingly wider. This is why it propounded the idea that the countries of Latin America had to modernize their societies by switching from raw material export-orientated economy to an industrial-led economy in order to lessen their dependency on the external demand for raw materials and to substitute for it the expansion of the internal demand. This meant for ECLA a change from a model of development 'towards the outside' to a model of development 'towards the inside'. The political and economic initiative to bring about modernization and industrialization had to be mainly in the hands of the state. (Larrain 1999, p192)
Ironically, though dependency theory could outline the problem for these developing states, it did not find a genuine solution to the problem. In a general sense, Latin American countries remained highly dependent upon and influenced by the 'foreign sector', including foreign investors and corporation, as well as international agencies such as the IMF, the World Bank (Skidmore & Smith 2001, p401) and the Inter-American Development Bank. At times, this foreign dependence could be highly