chapter 15 trade and policy reform in latin america
TRANSCRIPT
Chapter 15
Trade and Policy Reform
in Latin America
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Learning Objectives
• Describe the strengths, weaknesses, and reasons for import substitution industrialization.
• Explain the strategy and performance of economic populism.
• Give the main reasons for the debt crisis of the 1980s and analyze its relationship to ISI.
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Learning Objectives (cont.)
• Discuss the goals of economic policy reforms that began in the later 1980s.
• Explain why some Latin American leaders have become impatient with economic policy reforms.
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Introduction: Defining a “Latin American” Economy
• A “Latin American” economy is considered “all of the Americas south of the United States” (Webster’s dictionary)
• However, Latin America is quite diverse, and one needs to be careful not to over-generalize
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Population, Income, and Economic Growth
• For long stretches of the 20th century, Latin America was one of the fastest-growing regions of the world
• From 1900-1960 real GDP per capita grew at similar rates to Europe, U.S., or Asia
• The Debt Crisis turned the 1980s into a Lost Decade, as growth was negative, inflation skyrocketed, and poverty increased
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TABLE 15.1 Population and GDP for Latin America and the Caribbean, 2010
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TABLE 15.1 (continued) Population and GDP for Latin America and the Caribbean, 2010
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TABLE 15.1 (continued) Population and GDP for Latin America and the Caribbean, 2010
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Import Substitution Industrialization: Origins and Goals of ISI
• Economic policy reform in Latin America brought the demise of the economic development strategy known as import substitution industrialization (ISI)
• ISI shifts policies from outward, export orientation toward an inward, targeted industrial strategy
• ISI is a form of industrial policy that focuses on those industries that produce substitutes for imported goods
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Import Substitution Industrialization: Origins and Goals of ISI (cont.)
• Terms of trade (TOT): (index of export prices)/(index of import prices)
• Argentine economist, Raul Prebisch and a German exile, Hans Singer argued that coffee, tin, copper, bananas, and other primary commodity exports would inevitably experience price declines relative to the prices paid for manufactured goods
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Import Substitution Industrialization: Origins and Goals of ISI (cont.)
• In effect, Latin America would be marked by export pessimism—each unit of exports would earn a declining unit of imports
• ISI would boost industries that produce substitutes for imported goods
• Export pessimism formed the basis of orthodox economic policy from roughly the 1950s through the 1970s
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Criticisms of Import Substitution Industrialization
• Government involvement in production decisions caused a misallocation of resources; not market failures as assumed
• Exchange rate overvaluation
• Policies were too biased in favor of urban areas
• ISI trade and competition policies were heavily protectionist and often favored the creation of domestic monopolies
• ISI fostered rent-seeking and corruption
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Macroeconomic Instability and Economic Populism
• Many Latin America specialists blame faulty macroeconomic policies on populist or economic populist political movements
• Crises are often attributed to economic populism and populist policies: political movements using expansionary fiscal and monetary policies without regard of inflation risks, budget deficits, and foreign exchange constraints
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Populism in Latin America: Three Conditions of Populism
• Deep dissatisfaction with the status quo (slow growth)
• Rejection of the traditional constraints of macro policy
• Promises to raise wages while freezing prices and restructuring the economy by expanding domestic production of imported goods
• “reactivating, redistributing, and restructuring”
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Stages of Populist Policies
• Economic stimulus through government expenditures and printing money
• Creation of bottlenecks • Increase in prices and budget deficits/debt• Acceleration of inflation • Pervasive shortages become pervasive• Capital flight and decline in wages• Resort to IMF intervention
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TABLE 15.2 Economic Indicators during the Garcia Administration
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The Debt Crisis of the 1980s
Causes of the Debt Crisis:
•Collapse of world oil prices (Mexico particularly affected)
•Increase in international interest rates
•Longstanding political mismanagement
•High rates of lending in 1974–1982
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TABLE 15.3 Debt Indicators at the Onset of the Debt Crisis, 1983
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Responses to the Debt Crisis
• U.S. Treasury Secretary James Baker, 1985, tried to organize a renewed lending program by commercial banks through the Baker Plan
• U.S. Treasury Secretary Nicolas Brady engineered the Brady Plan in 1989: Latin American countries required to reform their economies to obtain debt relief
• Capital flows began to return to Latin America
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Neoliberal Policy Reform and the Washington Consensus
• In the late 1980s, Latin America launched economic policy reforms that began to alter the fundamental relationships between business and government and between their national economy and the world.
– The region adopted a neoliberal model or neoliberalism favoring free markets and minimal government intervention in the economy
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Neoliberal Policy Reform and the Washington Consensus (cont.)
Three Aspects of Neoliberal Reforms
•Implementation of stabilization plans to stop inflation and control budget deficits
•Privatization of state-owned enterprises
•Protectionist trade policies were abandoned
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Neoliberal Policy Reform and the Washington Consensus (cont.)
• These reforms came to be known as the Washington Consensus on policy reform
• Both the neoliberal agenda and the Washington Consensus were considered policy prescriptions for reform of government finances and management of the economy
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The “Washington Consensus”
• Macroeconomic reforms proposed by the Consensus:– Avoid large budget deficits
– Spend public money on health, education, and basic services
– Cut taxes, but tax a wider range of activities and improve collection
– Make certain real interest rates are positive; limit the use of preferential rates
– Make the exchange rate competitive and credible
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The “Washington Consensus” (cont.)
• Microeconomic reforms proposed by the Consensus:
– Use tariffs instead of quotas, and gradually reduce them
– Encourage foreign direct investment– Privatize state enterprises in activities where
markets work– Remove the barriers to firm entry and eliminate
restrictions on competition– Guarantee the security of property rights
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Stabilization Policies to Control Inflation
• Some Latin American countries adopted the orthodox model of cutting government spending, reforming the tax system, and limiting the creation of new money
• Others adopted the heterodox model: same as orthodox model but also included freezing of wages and prices
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TABLE 15.4 Inflation Rates, 1982–1992
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Structural Reform and Open Trade
• Structural reform policies include:
– The privatization of government-owned enterprises, deregulation and redesign of the regulatory
– Environment of overregulated industries such as financial services, and
– Reform of trade policy
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Structural Reform and Open Trade (cont.)
• In 1970s Chile began to reform its trade policies
• In 1985 and 1986 Mexico and Bolivia followed
• In the late 1980s and early 1990s, nearly all the countries of Latin America began reducing both the level of tariffs and nontariff barriers (NTBs)
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Structural Reform and Open Trade (cont.)
• The three main goals of trade reform:– To reduce the anti-export bias of trade
policies that favored production for domestic markets over production for foreign markets
– To raise the growth rate of productivity– To make consumers better off by lowering
the real cost of traded goods
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Regional Trade Blocs in Latin America
• Latin America has many regional trade agreements; some of the oldest
• NAFTA was implemented January 1, 1994
• December ‘94, thirty-four countries in the Western Hemisphere committed to a Free Trade Area of the Americas (FTAA) no later than 2005
• By 2002, the FTAA idea was nearly dead, but Latin American countries have continued to sign bilateral and plurilateral agreements
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TABLE 15.5 Average Tariff Rates, in Percents, Selected Countries
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Table 15.6 Regional Trade Blocs
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The Next Generation of Reforms
• Both Neoliberalism and Washington Consensus viewed negatively by many Latin American citizens
- reforms of the last two decades have created uncertainty and change
- have not begun to fulfill expectations of growth and prosperity.
• More moderate reformers developing a second generation of reforms
– take into account the region’s institutions– address the problems of social and economic inequality
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The Next Generation of Reforms (cont.)
• Mechanisms for addressing Latin America’s highly unequal distribution of income
• Greater emphasis on primary education and health care for children
• A set of social policies called conditional cash transfers (CCT)
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The Next Generation of Reforms (cont.)
• A few Latin American countries, including Mexico and Chile, have become the most open and outward oriented of countries anywhere
• Results elsewhere have been disappointing