From Structuralism to From Structuralism to the New Institutional the New Institutional

EconomicsEconomicsBy Ryan ForslundBy Ryan Forslund

The political Economy of Latin The political Economy of Latin American DevelopmentAmerican Development

Albert O. HirschmanAlbert O. Hirschman

LES TRENT GLORIEUSESLES TRENT GLORIEUSES Debt crisis of 1982 lead to fall in raw material Debt crisis of 1982 lead to fall in raw material

prices, reduction in imports, public expenditures, prices, reduction in imports, public expenditures, and private investmentsand private investments

There has been uneven growth in the region since There has been uneven growth in the region since the crisisthe crisis

There was growth before this yet it was not There was growth before this yet it was not acknowledged. acknowledged.

This shows the trend to recognize the good only in This shows the trend to recognize the good only in a time of recession so it can be contrasted.a time of recession so it can be contrasted.

One reason is the fact that much of the good went One reason is the fact that much of the good went hand in hand with the bad: social tension, poverty hand in hand with the bad: social tension, poverty from urbanization, urban and rural divide, so onfrom urbanization, urban and rural divide, so on

From 1945-1980 serious improvements were made in From 1945-1980 serious improvements were made in Latin AmericaLatin America

Increase in population, GDP, higher life expectancy, Increase in population, GDP, higher life expectancy, better health care, education, lower infant mortality, better health care, education, lower infant mortality, smaller families, better sex edsmaller families, better sex ed

Important to note with the growth in population the Important to note with the growth in population the living standards did increase, and more educated on living standards did increase, and more educated on how to control population growthhow to control population growth

Can be seen that improvements in all these areas have Can be seen that improvements in all these areas have even taken place in the poorest regionseven taken place in the poorest regions

The improvement is largely due to education, even in The improvement is largely due to education, even in times of downturn or recession the lessons they have times of downturn or recession the lessons they have learned have not been forgotten: despite developmental learned have not been forgotten: despite developmental fluctuations the social advances will remainfluctuations the social advances will remain

There are things to fear however: oil prices, debt in the There are things to fear however: oil prices, debt in the region, and so onregion, and so on

People in Latin America feel they must stop looking in People in Latin America feel they must stop looking in the past for answers and try to find something the past for answers and try to find something completely newcompletely new

Industrialization and deindustrialization in Industrialization and deindustrialization in

Argentina and ChileArgentina and Chile Divide between the countries of the Rio de la Plata and Divide between the countries of the Rio de la Plata and

the tropical countriesthe tropical countries Raul Prebisch said all of Latin America must join together Raul Prebisch said all of Latin America must join together

in coming out of the role of supplier of raw material to the in coming out of the role of supplier of raw material to the world economy: to do so must industrializeworld economy: to do so must industrialize

Yet the tropical, previously poorer countries, have now Yet the tropical, previously poorer countries, have now surpassed the growth of the others (Brazil and Mexico)surpassed the growth of the others (Brazil and Mexico)

These countries were more populous and focused in on These countries were more populous and focused in on the domestic market due to the ISI system: the share of the domestic market due to the ISI system: the share of national income on the continent by Brazil and Mexico national income on the continent by Brazil and Mexico was at 61.3% in 1981 was at 61.3% in 1981

Two criticisms made by those that did not develop: Two criticisms made by those that did not develop: industrialization catered to higher classes and “inward-industrialization catered to higher classes and “inward-oriented” causing misallocation of resources, balance-of-oriented” causing misallocation of resources, balance-of-payments problems, and rent-seekingpayments problems, and rent-seeking

Failed to see problems with ISI as ‘growing pain’ that Failed to see problems with ISI as ‘growing pain’ that could be fixed by incremental policy makingcould be fixed by incremental policy making

There were instances were the growing pain theory was There were instances were the growing pain theory was applied and ISI shifted somewhat to substantial exports applied and ISI shifted somewhat to substantial exports of manufactured goods due to policy of manufactured goods due to policy

Yet military regimes would have a profound effect on Yet military regimes would have a profound effect on economieseconomies

Had no problem eliminating hundreds of industries Had no problem eliminating hundreds of industries causing massive unemployment, even though some causing massive unemployment, even though some industries were corrupt industries were corrupt

Monetarist policies enacted in Argentina and Chile: Monetarist policies enacted in Argentina and Chile: overvaluation of domestic currency and high domestic overvaluation of domestic currency and high domestic interest rates interest rates

This lead to many large companies to borrow foreign This lead to many large companies to borrow foreign money at a much lower rate yet when exchange rate money at a much lower rate yet when exchange rate ultimately devalued interest rates shot up cause the ultimately devalued interest rates shot up cause the loans to be to great to handle loans to be to great to handle

Government had to step in: originally said economic Government had to step in: originally said economic mission was to make economy more privatized yet mission was to make economy more privatized yet ended up controlling central bank and many private ended up controlling central bank and many private industriesindustries

Desubstitution of Imports and a Curious Desubstitution of Imports and a Curious Convergence in MexicoConvergence in Mexico

The Mexican oil boom and the aftermath The Mexican oil boom and the aftermath Relatively steady growth in Mexico until oil was foundRelatively steady growth in Mexico until oil was found By 1975 it became major producer and exporter of oil By 1975 it became major producer and exporter of oil PEMEX brought in ¼ of the countries total revenuePEMEX brought in ¼ of the countries total revenue There was a large increase in the demand for imports to There was a large increase in the demand for imports to

match their exports and this would lead to the eventual match their exports and this would lead to the eventual downturn downturn

Though it did not deindustrialize it did go through Though it did not deindustrialize it did go through something called ‘import desubstitution’something called ‘import desubstitution’

Imports soared and domestic prices rose and government Imports soared and domestic prices rose and government refused to do anything to slow the flow of imports: this refused to do anything to slow the flow of imports: this lead to the debt crisislead to the debt crisis

Mexico thought this oil boom could help development yet Mexico thought this oil boom could help development yet they did not keep the imports and capital flight under they did not keep the imports and capital flight under control control

““Forced-March Industrialization” in BrazilForced-March Industrialization” in Brazil As stated earlier Brazil was one of the continents economic As stated earlier Brazil was one of the continents economic

powers: despite having no oil and depending on its import, powers: despite having no oil and depending on its import, this was blessing is disguisethis was blessing is disguise

Despite having largest debt (1 of every 3 $ from exports Despite having largest debt (1 of every 3 $ from exports goes to debt)goes to debt)

Yet have been growing due to expansion of exports and Yet have been growing due to expansion of exports and cuts in imports, reviving domestic economic activitycuts in imports, reviving domestic economic activity

This has been possible because of brand new changes being This has been possible because of brand new changes being made and importantly military to civilian rule (Geisel made and importantly military to civilian rule (Geisel Administration did however enact helpful developmental Administration did however enact helpful developmental plans)plans)

Despite oil shock in 1973 Brazil handled it different then Despite oil shock in 1973 Brazil handled it different then others: instead of restrictive economic policies they moved others: instead of restrictive economic policies they moved investments away form cars, focus on final stage of ISI: investments away form cars, focus on final stage of ISI: capital goods (chemical and metallurgical industries)capital goods (chemical and metallurgical industries)

O’Donnell says final stage of ISI makes it difficult for O’Donnell says final stage of ISI makes it difficult for democratic government in Latin America this is why democratic government in Latin America this is why successes only acknowledged after the military regime was successes only acknowledged after the military regime was gonegone

From Import-Substitution to Import-From Import-Substitution to Import-

PreemptionPreemption A country is considered to be economically maturing when they A country is considered to be economically maturing when they

undermine the ISI system, whether it de intentional or notundermine the ISI system, whether it de intentional or not They can do this intentionally by choosing an industry and They can do this intentionally by choosing an industry and

enacting policy to ensure their domestic market produces it enacting policy to ensure their domestic market produces it better then the importsbetter then the imports

This is known as ‘import-preempting industrialization This is known as ‘import-preempting industrialization Brazil used this idea with regard to the info-tech industry, Brazil used this idea with regard to the info-tech industry,

minicomputers: using Reserva de Mercado the spur their minicomputers: using Reserva de Mercado the spur their domestic market to start producing in a certain amount of timedomestic market to start producing in a certain amount of time

Conditions for this to work in Brazil: strong potential domestic Conditions for this to work in Brazil: strong potential domestic market, helps national defense, pick an important industrymarket, helps national defense, pick an important industry

Again a certain amount of time is given to the domestic Again a certain amount of time is given to the domestic company foe it to ‘grow up’ company foe it to ‘grow up’

It must have a strong balance between using previous It must have a strong balance between using previous knowledge on producing the product as well as a reinvent spirit knowledge on producing the product as well as a reinvent spirit to make it their ownto make it their own

Must be easily profitably even captured by LCDs cheaper labor Must be easily profitably even captured by LCDs cheaper labor

The “Heterodox Shock” TherapyThe “Heterodox Shock” Therapy This was to bring down inflation in Argentina and Brazil (Plan This was to bring down inflation in Argentina and Brazil (Plan

Austral and Plan Cruzado)Austral and Plan Cruzado) Each country had three digit inflation for years and were running Each country had three digit inflation for years and were running

very close to hyperinflation very close to hyperinflation They needed to find a way to try and make inflation tolerable They needed to find a way to try and make inflation tolerable Structuralists saw ‘fundamental’ inflationary pressures from Structuralists saw ‘fundamental’ inflationary pressures from

domestic social structures (land tenure) and the ‘propagation’ domestic social structures (land tenure) and the ‘propagation’ phenomena (wage-price spiral)phenomena (wage-price spiral)

All other options were unappealing to solving the problem and All other options were unappealing to solving the problem and conceived the formula know as the ‘heterodox shock’conceived the formula know as the ‘heterodox shock’

11stst the old currency is replaced with a new one, 2 the old currency is replaced with a new one, 2ndnd prices and prices and wages are temporarily frozen, 3wages are temporarily frozen, 3rdrd indexation of wages, salaries, and indexation of wages, salaries, and monetary instruments abolished, 4monetary instruments abolished, 4thth government cuts its borrowing government cuts its borrowing from the central bank, 5from the central bank, 5thth prereform contracts involving future prereform contracts involving future payments are assumed to have made provisions for future inflation payments are assumed to have made provisions for future inflation

This also tried to end the tug-of-war between the social groups for This also tried to end the tug-of-war between the social groups for income shares income shares

Eventually this failed but must be noted why: this was during new Eventually this failed but must be noted why: this was during new democratic governemnts that had to deal with what the military left democratic governemnts that had to deal with what the military left behind and hyperinflation would have be devasting to these new behind and hyperinflation would have be devasting to these new governments and a cycle back to military regimes could take placegovernments and a cycle back to military regimes could take place

This however did not happen because the people were happy to be This however did not happen because the people were happy to be ride of the military regime and despite its failure they were willing ride of the military regime and despite its failure they were willing to tryto try

Conclusion Conclusion

One of the main problems between North One of the main problems between North and South America was the lack of and South America was the lack of communication, especially with regard to communication, especially with regard to the huge debt between the twothe huge debt between the two

Latin America is seen by most as a region Latin America is seen by most as a region of borrowers, despite the economic of borrowers, despite the economic notion that deals involving multiple notion that deals involving multiple parties are made for mutual benefitparties are made for mutual benefit

As noted some countries were able to As noted some countries were able to face the many hardships better then face the many hardships better then others (Brazil and Colombia)others (Brazil and Colombia)

From Structuralism to the New Institutional From Structuralism to the New Institutional EconomicsEconomics

Jonathan C. BrownJonathan C. Brown Structuralism arose out of the depression and Structuralism arose out of the depression and

its antithesis came out of the failure of this: its antithesis came out of the failure of this: the wreckage of ISI thought to bring about the wreckage of ISI thought to bring about hyperinflation, debt, social unrest, rebellions, hyperinflation, debt, social unrest, rebellions, and ultimately military regimesand ultimately military regimes

This discredited structuralism and brought on This discredited structuralism and brought on neoclassical economicsneoclassical economics

Structuralists argue there must be state lead Structuralists argue there must be state lead development and states ownership of means of development and states ownership of means of production production

Institutionalists look for the promoters of Institutionalists look for the promoters of growth in the institutional arrangements: the growth in the institutional arrangements: the ‘rules of the game’‘rules of the game’

Structures, Endowments, and Institutions in Structures, Endowments, and Institutions in the Economic History of Latin Americathe Economic History of Latin America

John H. CoatsworthJohn H. Coatsworth

Despite some growth after the WW2 ear, Despite some growth after the WW2 ear, many are now worried yet again about the many are now worried yet again about the long run in the region, specifically long run in the region, specifically structures, endowments, and institutions on structures, endowments, and institutions on growthgrowth

With looking for ways to estimate long term With looking for ways to estimate long term effects of growth they have been able effects of growth they have been able better look at historical trends, potentially better look at historical trends, potentially answering old questions and posing new answering old questions and posing new ones ones

Latin America’s development and growth Latin America’s development and growth can be looked at from pre-colonial to can be looked at from pre-colonial to colonial times, up to independence colonial times, up to independence

It is now accepted while under Spanish or It is now accepted while under Spanish or Portuguese control the region had per capita rates Portuguese control the region had per capita rates at least equal to those of western Europeat least equal to those of western Europe

Following the independence movements starting in Following the independence movements starting in 1810 very little growth occurred1810 very little growth occurred

Following 1870 the big eight economies had a Following 1870 the big eight economies had a larger growth rate then many advanced countries larger growth rate then many advanced countries

With the move to ISI yet another downturn was With the move to ISI yet another downturn was faced, inward-oriented growth strategies have not faced, inward-oriented growth strategies have not proven to work well at all, despite ISIs failure no proven to work well at all, despite ISIs failure no alternative has been found alternative has been found

As with the economic peaks and valleys living As with the economic peaks and valleys living standards too rose and fell: stagnation till the late standards too rose and fell: stagnation till the late 1919thth century when there has been slow but steady century when there has been slow but steady increases sinceincreases since

A notable difference between Latin Americas A notable difference between Latin Americas growth and the west is living standards and growth and the west is living standards and economic growth rose together in L.A. and in the economic growth rose together in L.A. and in the west living standards came much later after west living standards came much later after developmentdevelopment

Two post WW2 trends for inequality Two post WW2 trends for inequality were: state-led ISI which increased were: state-led ISI which increased wage inequality (protecting certain wage inequality (protecting certain industries and higher wages for state industries and higher wages for state employees) and cold war politics employees) and cold war politics promoting elites to be friendly to the promoting elites to be friendly to the US US

Two affects from inequality: slowed Two affects from inequality: slowed improvements in living standards and it improvements in living standards and it kept poverty rates exceptionally high kept poverty rates exceptionally high

Three important things have been learned about the Three important things have been learned about the structuralists and the cepalinos (worked for CEPAL, the structuralists and the cepalinos (worked for CEPAL, the UN Economic Commission for Latin America) 1UN Economic Commission for Latin America) 1stst the the created ambitious programs of economic research and created ambitious programs of economic research and data collection, 2data collection, 2ndnd the indorsed the ISI based on high tariff the indorsed the ISI based on high tariff protection as dominate economic policy strategy, 3protection as dominate economic policy strategy, 3rdrd the the US pressured the adoption of ISI for many LDCsUS pressured the adoption of ISI for many LDCs

Structuralists and dependency school writers saw Structuralists and dependency school writers saw institutions as the key to economic success of failure (one institutions as the key to economic success of failure (one example give by Love is the concentration of land example give by Love is the concentration of land ownership)ownership)

Economic growth needed to be carefully regulated by a Economic growth needed to be carefully regulated by a powerful state (thought was aggressive state could powerful state (thought was aggressive state could manipulate external trade and capital flow in order to manipulate external trade and capital flow in order to promote domestic industry promote domestic industry

They did have two good assumptions: 1They did have two good assumptions: 1stst the less-developed the less-developed world could not follow the path taken by the developed world could not follow the path taken by the developed world, 2world, 2ndnd external dependence exacerbates economic external dependence exacerbates economic inequality inequality

Brazil and Argentina did however show that some Brazil and Argentina did however show that some countries did need state-led management strategies countries did need state-led management strategies

After the failure of ISI much of Latin America After the failure of ISI much of Latin America Started opening up to more external trade and Started opening up to more external trade and investments but it is important to note that investments but it is important to note that economic reform is not enough by itself to ensure economic reform is not enough by itself to ensure growth growth

Institutions play a role and have two parts, politics Institutions play a role and have two parts, politics and path dependenceand path dependence

Engerman and Sokoloff say endowments lead to Engerman and Sokoloff say endowments lead to concentration of wealth (land ownership) elite concentration of wealth (land ownership) elite powerpower

Yet many refute this, elites did not monopolize land Yet many refute this, elites did not monopolize land ownership, while those in Europe did, they were ownership, while those in Europe did, they were ‘colonial’ and didn’t have much power‘colonial’ and didn’t have much power

While this trend did eventually happen, it was long While this trend did eventually happen, it was long after the colonial period and for different reasons: after the colonial period and for different reasons: what they say hampered growth actually helped it what they say hampered growth actually helped it because elites need to bring in capital and growth because elites need to bring in capital and growth was its by productwas its by product

““Crony Capitalism” Crony Capitalism” aka ‘vertical political integration’ (VPI)aka ‘vertical political integration’ (VPI) This was seen in Mexico after 50 years This was seen in Mexico after 50 years

of hardship and was the best way for of hardship and was the best way for them to have some growth (protection them to have some growth (protection for elites in politics, bankers, for elites in politics, bankers, industrialists and foreign companies )industrialists and foreign companies )

Some VPI government were aggressive Some VPI government were aggressive but also they were considered but also they were considered ‘farsighted’ at times and they were ‘farsighted’ at times and they were even able to take on populists tones for even able to take on populists tones for temporary periods of timetemporary periods of time

Conclusion Conclusion

It was found that the institutional It was found that the institutional deficiencies that hampered growth and deficiencies that hampered growth and development are not in the factor development are not in the factor endowments but the political economy of endowments but the political economy of conquest and enslavement conquest and enslavement

Thanks to a export-led globalization there Thanks to a export-led globalization there has been the opportunity for L.A. to shift has been the opportunity for L.A. to shift away from their past institutions and try to away from their past institutions and try to find new paths find new paths

Scholars in L.A. must look at development Scholars in L.A. must look at development with a skeptical eye yet they must also be with a skeptical eye yet they must also be open to experimentation in order to bring a open to experimentation in order to bring a new better system to the region new better system to the region

The Origins of StructuralismThe Origins of StructuralismH.W. ArndtH.W. Arndt

Main points: world as inflexible, many obstacles Main points: world as inflexible, many obstacles to change, little adaptation, resources being to change, little adaptation, resources being stuck, applied to LDCs: they look to manage stuck, applied to LDCs: they look to manage change by administrative action change by administrative action

The Doctrine of Market Failure: capitalism The Doctrine of Market Failure: capitalism unjust, unstable, and prone to collapseunjust, unstable, and prone to collapse

Structuralist Theory of Inflation: Basic Structuralist Theory of Inflation: Basic Inflationary Pressures (structural limitations, Inflationary Pressures (structural limitations, rigidity or inflexibility of the economic system) rigidity or inflexibility of the economic system) lack of movement of resources hence cannot lack of movement of resources hence cannot adapt to rapid demandadapt to rapid demand

All this leads to rigid market structures, All this leads to rigid market structures, monopolies, immobile labor and capital, and monopolies, immobile labor and capital, and inequalities in returns to labor and capital inequalities in returns to labor and capital

Government Failures in DevelopmentGovernment Failures in Development

Anne KruegerAnne Krueger The role of government is to provide infrastructure to The role of government is to provide infrastructure to

facilitate economic development, should also be able to facilitate economic development, should also be able to compensate for market failurecompensate for market failure

Huge governmental failures lead to high cost public Huge governmental failures lead to high cost public sector enterprises and on the other hand failure of sector enterprises and on the other hand failure of transportation and communication facilities: this lead to transportation and communication facilities: this lead to large scale corruption large scale corruption

What is the government? In LDCs was thought that What is the government? In LDCs was thought that government intervention was needed, this lead to government intervention was needed, this lead to protection of monopolies protection of monopolies

It is hard to find a government that is selfless, yet this is It is hard to find a government that is selfless, yet this is what is need to enact positive change what is need to enact positive change

Government activities should be done on a large scale, Government activities should be done on a large scale, protection of laws, provision of information, and protection of laws, provision of information, and provision of public services provision of public services

It must be noted that actions taken by government are It must be noted that actions taken by government are not costless, second is that large administrative action not costless, second is that large administrative action must be put into these actions, low-rent seeking policies must be put into these actions, low-rent seeking policies must be adopted, and what is done must be transparent must be adopted, and what is done must be transparent

Import Substitution IndustrializationImport Substitution Industrialization Cardoso and HelwegeCardoso and Helwege

Primary commodity markets are unstablePrimary commodity markets are unstable Latin American terms of trade: dollar price of exports over Latin American terms of trade: dollar price of exports over

dollar price of imports: this shows a deteriorating terms of dollar price of imports: this shows a deteriorating terms of trade trade

L.A. can export goods that are natural resources and labor L.A. can export goods that are natural resources and labor steps must be taken to shift countries in L.A. from capital steps must be taken to shift countries in L.A. from capital poor to richpoor to rich

The goal of ISI was to promote new industries but this had The goal of ISI was to promote new industries but this had problems: protection lead to overvalued exchange rates, problems: protection lead to overvalued exchange rates, exaggerated industrial growth, as taxes on exports failed to exaggerated industrial growth, as taxes on exports failed to grow inflation occurred grow inflation occurred

Criticisms of ISI: uneven protection, overcapacity, agriculture, Criticisms of ISI: uneven protection, overcapacity, agriculture, budget deficits, interest rates, labor, foreign direct investmentbudget deficits, interest rates, labor, foreign direct investment

After it failed there were improvements within the countries, After it failed there were improvements within the countries, living stands especially yet economic growth was lackingliving stands especially yet economic growth was lacking

After ISI how well a country would pull through was in large After ISI how well a country would pull through was in large part due to how successful they were in the export marketspart due to how successful they were in the export markets

Discussion Discussion 1. What do you think of the idea that the 1. What do you think of the idea that the

good accomplishments are only good accomplishments are only acknowledged in times of hardships? Do acknowledged in times of hardships? Do you believe this?you believe this?

2. What do you think of Structuralism? 2. What do you think of Structuralism? Do you think it was a bad idea to adopt Do you think it was a bad idea to adopt from the start or did any good come out from the start or did any good come out of it?of it?

3. If other countries handled the oil 3. If other countries handled the oil shock in the way Brazil did do you think shock in the way Brazil did do you think they would have been better off?they would have been better off?