Bureaucratic Authoritarianism, Bureaucratic Authoritarianism, Foreign Investment, and Debt Foreign Investment, and Debt

CrisisCrisis

Hichol ChoHichol Cho

The New Authoritarianism in Latin AmericaThe New Authoritarianism in Latin America- David Collier- David Collier

- The industrialization in Latin America resulted in emergence of the The industrialization in Latin America resulted in emergence of the Bureaucratic Authoritarianism. The gov. is ruled by the military as Bureaucratic Authoritarianism. The gov. is ruled by the military as the institution rather than by individual military rulers.the institution rather than by individual military rulers.

- The relationship b/w democracy and industrial modernization does - The relationship b/w democracy and industrial modernization does not always exist. not always exist.

- Political economic model by the bureaucratic authoritarian - Political economic model by the bureaucratic authoritarian countries is often inconsistent and involves corruption and income countries is often inconsistent and involves corruption and income inequality. inequality.

- - Latin American countries are generally characterized by late Latin American countries are generally characterized by late industrialization, and reliance on foreign investment and industrialization, and reliance on foreign investment and technology. technology.

The Bureaucratic AuthoritarianismThe Bureaucratic Authoritarianism

-- -- HirschmanHirschman argues that understanding the different phase of argues that understanding the different phase of industrialization and its important consequences can help us industrialization and its important consequences can help us understand the emergence of the Bureaucratic understand the emergence of the Bureaucratic Authoritarianism. Authoritarianism.

-- -- Jose Serra Jose Serra states that there is a relationship b/w the states that there is a relationship b/w the economic development and emergence of the Bureaucratic economic development and emergence of the Bureaucratic Authoritarianism. He argues that it will result in 1)the Authoritarianism. He argues that it will result in 1)the exploitation of working class, 2)deepening of the industrial exploitation of working class, 2)deepening of the industrial production, and 3)economic rationality. production, and 3)economic rationality.

Three distinct political phases in Latin AmericaThree distinct political phases in Latin America-- O’Donnell-- O’Donnell

1. 1. OligarchyOligarchy – – the political competition is limited. The elite of the political competition is limited. The elite of the primary product export sectors dominates the state. the primary product export sectors dominates the state.

2. 2. PopulistPopulist – – it is based on multi-class coalition of urban-it is based on multi-class coalition of urban-industrial interests, including the industrial elites and the industrial interests, including the industrial elites and the urban popular sector. The state promotes the initial phase of urban popular sector. The state promotes the initial phase of industrialization focused on consumer goods.industrialization focused on consumer goods.

3. 3. Bureaucratic AuthoritarianismBureaucratic Authoritarianism – – This non-democratic This non-democratic system excludes the popular sector. The state is controlled by system excludes the popular sector. The state is controlled by the technocrats. They perceive the popular sector as an the technocrats. They perceive the popular sector as an obstacle to the economic development. This model promotes obstacle to the economic development. This model promotes the advance industrialization. the advance industrialization.

This system was seen in;This system was seen in;

-- Brazil (post-1964)-- Brazil (post-1964)

-- Argentine(1966-1970, 1976)-- Argentine(1966-1970, 1976)

-- Chile and Uruguay(post-1973) -- Chile and Uruguay(post-1973)

Economic and Social ChangeEconomic and Social Change

The three main factors influenced the transition from one The three main factors influenced the transition from one system to another, which are system to another, which are IndustrializationIndustrialization, , Activation of the popular sectorActivation of the popular sector, and , and Technocratic Technocratic role.role.

1. 1. IndustrializationIndustrialization,,

-- -- The domestic firms begin to produce for the local markets previously supplied by imports. These firms are protected by tariff and subsidies.

-- The cost of importing the intermediate inputs is high, and it leads to the deficit and inflation. The gov tries to solve this problem by deepening the industrialization through domestic manufacturing of intermediate inputs.

--This would require the foreign investment. The gov would make a new policy to draw the foreign investment.

2. Activation of the Popular Sector,2. Activation of the Popular Sector, -- The popular sector becomes increasingly powerful after the -- The popular sector becomes increasingly powerful after the

initial phase of industrialization. They will oppose the new initial phase of industrialization. They will oppose the new fiscal policy. This would result in political and economic fiscal policy. This would result in political and economic crisis.crisis.

3. Technocratic Role,3. Technocratic Role,

-- The industrialization enlarges technocratic society. They -- The industrialization enlarges technocratic society. They perceive the popular sector as an obstacle to the economic perceive the popular sector as an obstacle to the economic growth. As a result, they would make the intervention in growth. As a result, they would make the intervention in politics, economy, and social life. They would gradually form politics, economy, and social life. They would gradually form the bureaucratic Authoritarianism. the bureaucratic Authoritarianism.

External Debt and Macro Economic Performance in External Debt and Macro Economic Performance in Latin America and East Asia,Latin America and East Asia,

- - Jeffrey SachsJeffrey Sachs

Why East Asia performed better than Latin America?Why East Asia performed better than Latin America?

-- External shocks in Asia were less severe than those in Latin -- External shocks in Asia were less severe than those in Latin America.America.

-- Latin America over-borrowed.-- Latin America over-borrowed.-- Latin America mismanaged the exchange rate and trade. -- Latin America mismanaged the exchange rate and trade. -- While Asian economies are market oriented, Latin America is -- While Asian economies are market oriented, Latin America is

not.not.-- Compare to Asia, trade in Latin America deteriorated more -- Compare to Asia, trade in Latin America deteriorated more

sharply. Also, Latin America was more affected by the higher sharply. Also, Latin America was more affected by the higher interest rateinterest rate..

The Role of External ShocksThe Role of External Shocks

Was the external shock accountable for the economic crisis in Was the external shock accountable for the economic crisis in Latin America?Latin America?

-- -- The sustained rise in the U.S. interest rate after 1979 The sustained rise in the U.S. interest rate after 1979 deteriorated Latin America’s existing debt because their deteriorated Latin America’s existing debt because their currencies were pegged to dollars.currencies were pegged to dollars.

-- Asian countries’ debt was non-banking borrowing, originating -- Asian countries’ debt was non-banking borrowing, originating from export credit agent. from export credit agent.

-- HOWEVER, the real interest rate shock was large and negative -- HOWEVER, the real interest rate shock was large and negative only for Brazil, Korea and Chile. This implies that Latin only for Brazil, Korea and Chile. This implies that Latin America’s poor economic performance was not linked to the America’s poor economic performance was not linked to the external shocks. In fact, Korea and Thailand had larger external shocks. In fact, Korea and Thailand had larger negative shock. negative shock.

Comparing the debt service to export ratioComparing the debt service to export ratio. .

-- Latin America’s debt was higher as proportion of export. This made them vulnerable to the shocks.

-- In Latin America, the debt servicing requirements exceeded total export in 1980-1983, while East Asia’s debt was below the export.

Trade Policies and Exchange Rate ManagementTrade Policies and Exchange Rate Management

Latin America’s Trade failed due to the two main failures.Latin America’s Trade failed due to the two main failures.

1) As debt is accumulated, the price of tradable goods should rise 1) As debt is accumulated, the price of tradable goods should rise to encourage the movement of resources into the tradable to encourage the movement of resources into the tradable goods sectors. However, it did not happen in Latin America.goods sectors. However, it did not happen in Latin America.

2) Investment in tradable should be in sectors that are profitable 2) Investment in tradable should be in sectors that are profitable when outputs and inputs are evaluated at the world price, when outputs and inputs are evaluated at the world price, rather than the tariff distorted price. However, they failed to do rather than the tariff distorted price. However, they failed to do so. so.

Three sectors approach; Three sectors approach; the importable, exportable, and non-tradablethe importable, exportable, and non-tradable

The author argues that two sectors approach (only the importable The author argues that two sectors approach (only the importable and exportable) can be misleading. Three sector approach can and exportable) can be misleading. Three sector approach can better explain the trade problem in Latin America. better explain the trade problem in Latin America.

-- The protectionist policy does not hurt export when resources -- The protectionist policy does not hurt export when resources are drawn from the non-tradable into the tradable. This is the are drawn from the non-tradable into the tradable. This is the case in Japan and Korea, where they maintain the rapid export case in Japan and Korea, where they maintain the rapid export growth with the protected import.growth with the protected import.

-- On contrary, Latin America’s over-valuation benefited the -- On contrary, Latin America’s over-valuation benefited the import at expense of the export. import at expense of the export.

Political Economy of export led growthPolitical Economy of export led growth

-- There is the link b/w the shift to ISI and decline of the agricultural sector. In Latin America, urban workers and capitalists are important constituents. Thus, their interests were served first. In Asia, the rural sectors have more power.

-- Since the urban workers prefer the over-valuation, Latin American currencies will appreciate to meet the interest of urban workers.

-- In Asia, once the export promotion begins, the industrial exporters gain the power and continue the undervalued exchange rate. In Latin America, the exporters will eventually grow weak under the influence of over-valuation.

Latin America’s Debt CrisisLatin America’s Debt Crisis- Franko- Franko

-- The borrowing to support ISI becomes an unstable -- The borrowing to support ISI becomes an unstable foundation for growth because the borrowing might outpace foundation for growth because the borrowing might outpace the payment ability of the country. the payment ability of the country.

-- ISI is driven by the failure of private sectors to provide -- ISI is driven by the failure of private sectors to provide critical goods and services in the economy. As a result, the critical goods and services in the economy. As a result, the state invests in sectors with huge capital requirement for entry. state invests in sectors with huge capital requirement for entry. However, this state owned firms are generally inefficient. However, this state owned firms are generally inefficient.

External ShocksExternal Shocks

-- The real interest rate was negative from 1974 until 1977. This -- The real interest rate was negative from 1974 until 1977. This gave the strong incentive for Latin America to borrow. In gave the strong incentive for Latin America to borrow. In addition, banks were willing to lend to the state-owned firms. addition, banks were willing to lend to the state-owned firms.

--However, the external condition radically changed in 1979. The --However, the external condition radically changed in 1979. The interest rate increased rapidly. Consequently, Latin America interest rate increased rapidly. Consequently, Latin America fell into debt. fell into debt.

--The value of the currency began to fall and this encouraged --The value of the currency began to fall and this encouraged people to invest outside of their country = Capital Flight. people to invest outside of their country = Capital Flight.

--Overvaluation of currency caused the further capital flight. It --Overvaluation of currency caused the further capital flight. It further increased the deficit. further increased the deficit.

Why would a country allow overvaluation?Why would a country allow overvaluation?

1. Strong currency value allows companies to buy the 1. Strong currency value allows companies to buy the intermediate inputs at lower cost, which is good for ISI. intermediate inputs at lower cost, which is good for ISI.

2. When countries peg their currencies to the strong foreign 2. When countries peg their currencies to the strong foreign currency, overvaluation may happen.currency, overvaluation may happen.

3. When countries tries to depreciate their currency after noticing 3. When countries tries to depreciate their currency after noticing the overvaluation, it might cause the additional inflationary the overvaluation, it might cause the additional inflationary shock.shock.

QuestionsQuestions

1. Which factor was most accountable for creating the 1. Which factor was most accountable for creating the economic crisis? economic crisis?

2. What lessons can be learned from the economic crisis 2. What lessons can be learned from the economic crisis in Latin America?in Latin America?

3. Were internal or external causes more to blame in the 3. Were internal or external causes more to blame in the Latin American debt crisis? Latin American debt crisis?