Latin AmericaClass 4

Components of New Economic Policy Packages

creating macroeconomic stability by controlling public sector deficits

opening up the external sector reduce the role of the state in the

productive process targeted poverty-reducing

packages

Opening up of Latin America Trade Reforms include:

– Reduction of coverage of non-tariff barriers

– reduction of average tariff level

– reduction of dispersion of tariff structure

– reduction or elimination of export taxes

– creation of regional trading blocs

0 50 100

1. Bolivia

1. Chile

1. Mexico

2. Costa Rica

2. Uruguay

3. Argentina

3. Brazil

3. Colombia

3. Guatemala

3. Paraguay

3. Peru

3. Venezuela

1985

1991-92

Average protection of tariffs & paratariffs

(percent)

0 20 40 60 80

1. Bolivia

1. Chile

1. Mexico

2. Costa Rica

2. Uruguay

3. Argentina

3. Brazil

3. Colombia

3. Guatemala

3. Paraguay

3. Peru

3. Venezuela

1985-87

1991-92

Average coverage of NTBs

(percent)

Exchange rate adjustments

0 50 100 150 200

Argentina

Bolivia

Brazil

Chile

Colombia

Costa Rica

Ecuador

El Salvador

Guatemala

Honduras

Jamaica

Mexico

Panama

Paraguay

Peru

Uruguay

Venezuela

1980*

1987

1993

1985=100

Volume of exports

-10 0 10 20

Argentina

Bolivia

Brazil

Chile

Colombia

Costa Rica

Ecuador

Mexico

Paraguay

Peru

Uruguay

Venezuela

1970-80

1982-87

1987-91

Annual % rate of change

Exports of manufactured goods as percent of all

exports0 20 40 60

Argentina

Bolivia

Brazil

Chile

Colombia

Costa Rica

Ecuador

Mexico

Paraguay

Peru

Uruguay

Venezuela

1980*

1991

Annual % change in export volume and value,

1991-93-10 0 10 20

Argentina

Bolivia

Brazil

Chile

Colombia

Costa Rica

Ecuador

Mexico

Paraguay

Peru

Uruguay

Venezuela

Volume

Value

Impacts of opening up these economies

to the global economy???

Impacts of opening up these economies

to the global economy???

Problem: Relatively short experience

Problem: Relatively short experience

Mexico’s Maquiladora Progam

Dates back to 1960s allows duty-free import of inputs to

make products for re-export U.S. levies tariffs on value added

only originally intended to solve

development problems of northern border zone

later extended to entire country

Employment effects

By 1993: >2,000 plants; > 500,000 workers

Changes in the work process

Year Labor costs %of operating

% skilledworkers

Avg.employees per

plant1875-81 avg 18 9 186

1982 16 11 2171984 12 12 2971986 10 13 2811988 11 13 2651990 13 13 238

Change in sectoral composition (% of

empl.)Sector 1979 1982 1990

Transportequip.

4.5 9.7 21.5

Electric &electronicequip.

25.7 26.1 11.6

Electric &electronicmaterials

31.2 32.3 25.3

Other 38.5 32.0 41.6

0

5

10

15

20

1979

*19

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

90

% of total inputs

Use of Domestic Inputs

Use of Domestic Inputs

Factors Factors High prices, low quality and

unpredictable delivery limited industrial history of

northern region locus of authority for purchasing

inputs tariff problems somewhat unique

to this program

Impact of modest local inputs

Impact of modest local inputs

Modest economic multiplier effects

Have post-reform growth prospects met

expectations???One assessment.–Easterly et al. 1997. Has

Latin America’s post-reform growth been disappointing? Journal of International Economics 43: 287-311.

Starting pointStarting point

Next stepsNext stepsRelate changes in growth across countries to:–changes in economic policies–controlling for:

initial per capita GDP population growth rates educational attainment terms-of-trade changes

Phase One:–examine coefficients for the policy variables change in inflation level of government consumption financial reform measure measures of trade reform privatization of public enterprises

Phase Two:–Create predicted change values

for Latin American countries–Compare to actual growth rates

Findings. There is no Latin American growth puzzle. Latin American economies performed roughly as expected.

Phase 3An explicit comparison of

Latin America and East and SE Asia in the early 1990s

Average change between1986-90 and 1991-93

DifferenceEast Asia -LatinAmerica

Predicted difference ingrowth rate change

East Asia LatinAmerica

IncludingInvestment

ExcludingInvestment

Per capita GDP growth -1.12 2.04 -3.16 -2.77 -3.42

Policy indicators(total) -1.15 -1.63

Volume of trade/GDP 14.58 20.43 -5.85 -0.15 -0.07

Gov’tconsumption/GDP

-5.27 -5.10 -0.17 0.00 0.00

Inflation rate 0.55 -20.61 21,16 -0.71 -1.13

M2/GDP 12.66 17.13 -4.47 -0.08 -0.02

Black market premium -0.88 -22.14 21.26 -0.24 -0.41

Investment/GDP 10.55 10.03 0.52 0.02 ---

Other determinants ofgrowth(total)

-1.63 -1.59

Explaining the Difference in Growth Rate Changes between East Asia and Latin America (1991-93 compared to 1986-90)

Mexican Debt Crisis of Late 1994 and the Tequila Effect

(Sachs et al. 1996)weak banking sectorscurrency overvaluationlimited foreign currency reserves