The long and sad history of LAC development or Two hundred years of LA economic liberalism: Alicia Puyana FLACSO Presented at the IDEAS conference: India, China and the global economy Magnolia Hall, New Dehli,, January 2008

CONTENT Why L.A. experiences are interesting A dash of history: The deep roots of Latin American Liberalism. What made possible the reforms and the role of the economists. 2. The objectives of the reforms. 3. NAFTA and the strategy of competitive liberalization 4. The paradoxes of liberalized economies: growth, productive structure, productivity and wages and poverty 5. Lessons to be learned from Mexico and other Latin American countries

Latin America is an excellent case to analyze the strengths and weakness of the neoliberal economic model. Chile started the reforms in early seventies. Chile was the experiment upon which the WC was drafted. Exports of RB Manuf. Mexico in 1985 was an early and radical reformer and by signing in 1993 the North American Free Trade Agreement NAFTA, constitutes the life experiment of the outcomes of the USA policy of Competitive Liberalization. Mexico specializes in ensemble manufactures. All other are liberalizing at high speed and integrating their economies tighter with the USA. The outcomes may be similar to the ones Mexico has experienced.

Policies instrumented in the new model are retarding growth and leading to: the stagnation of tradable sectors in the generation of GDP and employment and the explosion of the informal sector the concentration of wealth, financial and industrial capital, production and exports. Increasingly unequal distribution of income with a growing share of capital and the corresponding fall of labour. unending adjustment, based on monetary contraction, high interest rates and overvaluation to achieve macroeconomic stability.

A dash of history: The deep roots of Latin American Liberalism.

A. Latin American Independence and the economy Liberal thinking is deeply rooted in L. A since mid 19 Century. Independence leaders were Spaniards borne in Latin America fiercely committed to free trade and political liberalism interested trading by themselves without the mediation of Spain. The independence had not any national economic project different to engage in free trade. Their idea of nation building did not contemplate to integrate indigenous population. By 1860 liberal economic model was totally embedded and fully implanted in the newly born Latin American republics. It lasted up to mid XX Century.

B. XX century: the rise of economics as independent branch of knowledge In the interwar LA economists and policy makers were familiar with German and English economists. They did not know Marxism and other critics of capitalism they ignored Chayanovs works. By the end of the second WW, thanks to Keynes, Leontief, Rosestein-Rodan, Nurse, the successes of the Soviet Union, the ideas of state intervention and planning were in fashion all over the world Latin America included. After the IIWW planning was supported to order the loans of the WB to build infrastructure and heavy industry and to guarantee the supply of raw materials for the reconstruction of the World economy: oil, stell. But it was not until the 1950 that the ISI lead by the state took form and legitimated state intervention. LA structuralism came to live

C The short live of state intervention and L.A. structuralism. ISI was based on FDI and long lasting protection for capital intensive industries. It did not developed a dynamic internal market. Urban informal sector started to growth and agriculture to decay. Industrialization and state intervention and protectionism were accepted all over the world and justified by the newly created WB, IMF and GATT. Structuralism distance from neo-classical analysis in its emphasis on macroeconomics, institutions and interdisciplinary approaches to economic issues, as well as in treating long-term, trans-cyclical, changes. The short live of LAC structuralism has two phases: i) The analysis of the failures of export lead model giving rise to the Prebisch-Singer thesis of unequal exchange. ii) The decline, in Brazil, Mexico, Argentina and Chile of the ISI as a viable growth strategy.

What made possible the reforms and the role of the economists

D. The coming back of Economic Liberalism and the role of economists Structural reforms and adjustment programmes were possible due to the impact of the crisis. It was feasible to introduced changes only when crisis hinder all possible resistance, as the model of war of attrition indicates *. Chile in 1973, and the rest after the debt crisis of * The political conflict over what type of stabilization to implement leads to delays. A stabilization occurs when one of the competing groups can impose its desired policies on the other(s) which have exhausted their ability to resist the undesired stabilization For the first time the economic doctrine became an undisputable true. A scientific model politically neutral

The role of economists The role of economists: In the 80s economists appeared in the political scenario as the legitimate bearers of scientific economic knowledge entrusted with professional responsibility for formulating and developing economic policies. Members of the profession's elite become indispensable to politicians, to economically powerful groups and to congressional lawmakers. They become public actors when they enter the institutional and political structure. At that moment knowledge and power are linked.

Who integrates the economists elit Total economists U. de los Andes 4.5% 1305 Other Universities 94.5% Doctorado offical scholarshpis 0.56% 164 De Uniandes 70.0% 114 It should have only 8 4.5% of scholarships or 0.56% of its graduates That university has supplyied 70% of the heads of minsitries of treassury, Planning, and Central Bank. Are Uniandes economists so superior?

Who supported the coming back of liberalism and the Washington Consensus 1n 1984 a modernizing elite of economists and political scientists arrived with academic training in neoclassical economics with graduate degrees from the most prestigious U.S. Universities, they instrumented the reforms, and were the architects behind NAFTA. Two main groups supported the reforms and NAFTA: the states, political elites, and the large, export- oriented, business groups interested in rules of origins and special treatment for automotive and textiles. Mexican negotiators were convinced that NAFTA would solve all the problems of the underdevelopment of the country: […] they [Mexican negotiators] look at problems from the same point of views from the north of the Rio Bravo. Highly impressed by the USA they wanted to emulate it. They say the United States are performing well; if we join them all Mexican problems will be over (Bhagwati, 1999:24)

Why the model was so saleable Three economic conditions facilitated the penetration of US neo-liberal doctrines: the recession and debt crisis of the early 1980s, the concomitant rise of globalization, and the subsequent renewal of growth, however slow and selective, in the 1990s. The neoliberal model was easy to sell for its ability to respond to the crises affecting L:A countries: foreign debt, inflation, ISI and the welfare state. But is major attraction was their ability to lure foreign capital The Latin American policies copied from US blueprints reduced uncertainties for US investors and traders.

NAFTA and the strategy of competitive liberalization

NAFTA AND Competitive liberalization Competitive Liberalization uses regional and bilateral agreements to force WTO negotiations. It looks to: open markets abroad to U.S. companies, to strength market-oriented laws and regulations overseas, to place the U.S. at the centre of the world trading system. Foreign and security policy considerations have influenced U.S. trade policymaking

Competitive Liberaliztion or the contest for the USA market CL puts countries to compite to gain acces to USA market. All want to join the club and willing to pay the price for joining the Club, at no costs for USA: American openness is high and our trade barriers are low, so when we negotiate free trade agreements with our counterparts we almost always open other markets more than we must change our own Zoellic:

Competitive Liberaliztion or the contest for the USA market USA have never taken the initiative to initiate negotiations. It has to be taken by interested countries. The USA only agrees to negotiate if countries fullfil conditions: Have reformed the eocnomies, show solidarity with the USA in multialteral negotiations and support the USA national security policy This has made the United States essentially reactive in first instance, this posture gives the United States considerable negotiating clout After all, the United States can always point out that it did not seek this negotiation, with the implied threat that negotiations could be terminated if further concessions are not forthcoming from the trading partner (Evenett, S. Meier, M

Competitive Liberaliztion or the contest for the USA market USA selects countries with which will negotiate. One criterion is not to harm USA interests, for instance agriculture. Another is solidarity in the fight against terrorism, participation in the agreement of non proliferation of neuclear weapons. Another element is how big support from NGO a country has. The interest of República Dominicana was rejected because the country did not support USA in WTO negotiations. Once the country behaved negotioans started. (Evennet, 2006:12). New Zeland: nuclear ships.

Competitive Liberaliztion or the contest for the USA market In exchange for the access to its market the strategy looks for important concessions in priority areas: services, agriculture intellectual property, investments, labour and environmental regulations anticorruption legislation. (Evennet, 2006 y 2005; USTR, 2006). But access to the American market could be an illusion: tariffs are low and the USA has negotiated several agreements reducing the advantages given in the previous ones.

NAFTA AND Competitive liberalization Competitive libalization is not only a trade policy: We need to align the global trading system with our values… And we must always seek to strengthen freedom, democracy, and the rule of law. (Zoellick). The Bush Administration looked at TPA for far more than catching up with its trading partners, but also to reassert its central position as the writer of rules for the world trading system Evenett, and Meier, 2006 It contaminated trade policy with extra trade conditions and eliminated non reciprocity in MFN

NAFTA AN EXAMPLE OF COMPETITIVE LIBERALIZATION

NAFTA included agreements on: The agricultural sector. No single product was excluded. Highly protective rules of origin. Dispute resolution procedures that favours the USA producers. Commitments on FDI, intellectual property rights, labour standards Just a free trade zone was complemented with agreements in FDI, property rights, free trade in services, amongst others. It open the chain of the agreements under the USA policy of competitive liberalization which eliminates the unconditionality of the MFN principle, does not provide any guarantee of access to the USA market, and permeates trade with commitments on security. NAFTA an example of Competitive Liberaliztion.

Mexico did: Liberalized more than the USA. Received lower trade preferences than MX gave the USA. Included in the list for later liberalization plus quotas and tariffs, larger shares of its imports from the USA than the USA did. Accepted USA quotas and tariffs to products in which Mexico competes with USA producers: tomatoes and fruits and vegetables. Renounced to any preferential treatment as LDC. Suffers the erosion of preferences due to the several trade agreements the USA has signed with countries of similar development level and similar productive structure.

NAFTA an example of Competitive Liberaliztion. Tariff preferences Mexico Sector Gave received Agric Footwear Textiles app Machin Transp By 2002 fifty per cent of the preference was lost due to new USA trade agreements:Jordan, Marruecos, Bahrain – Oman, Middle East Free Trade Zone, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Dominican Republic, Perú, Colombia, Oman, Singapore, Australia y South Africa del Sur. Has negotiated with: Thailand, Korea, Panama, y los Arab Emirates.

The paradoxes of liberalized economies: growth, productive structure, productivity and wages and poverty

Latin America: External coeficient of the GDP= Exps+Imps/GDP The more open an economy the lower the difference between international and domestic prices. Production and export structures should move towards comparative advantage, then, those countries that reallocate resources towards exports should grow faster.

LAC. Trade balance as % of GDP

LATIN AMERICA PER CAPITA GDP In ppp 2000 dollars

China and India are closing the gap with LAC

Labour productivity per hour

Labour productivity per hour relative to USA

The sturdiness of LAC malady: poverty

L. AMERICA: TOTAL UNEMPLOYMENT

LAC: STRUCTURE OF GDP

Mexico. Structure of GDP by sectors

Chile: Structure of GDP by sectors

LAC: Exports of Manufactures as % of World sectoral trade Source: Unctad, Handbook of Statistics, LAC did gain shares of total trade in mnufactures, but is still low and after 1999 declining as a result of the dinamic entrance of China and India

LAC: Share of the manufactures sector in total GDP, Imports and Exports. Latin American Countries registered trade deficit in manufactures and are not Integratin national value added, neither labour

LAC: Share of the manufactures sector in total GDP, Imports and Exports.( ) México América Latina No hay correspondencia entre el crecimiento de las exportaciones manufactureras Y el crecimiento de la participación del sector en el PIB

Lessons to be learned from Mexico and other Latin American countries

Capital formation per worker Capital accumulation per worker is no growing. It represents a technological setback

Capital formation per worker

The realities: appreciation of the peso

The realities: Banking system is not financing growth

Some lessons from the Mexican and LAC experiences with trade liberalization North-South integration or perhaps liberalizing the economy with the intensity Mexico did does not allow a less developed economy to harvest the positive growth effects of external trade. Negotiating with a super power is hard and the possibilities to reach agreements that will give room for special treatment according to level of development are nil

Some lessons from the LAC trade liberalization Some policy elements that explain the effects of liberalization on the Economy: A) the structure of tariff created negative effective protection for agriculture and industrial intermediate goods and inputs. B) Fiscal policy reduced public expenditure in investments,compromising the growth of the economy. Private investments have not fully replaced public investments. C) Fiscal policy is prociclical agravating the crisis. Fiscal income is too dependent in oil rents and VAT. D) Exchange rate appreciation have negativelly affected tradable sectors specially those of intensive use of domestic factors. and have lowered productivity growth

Observed trends of the Mexican economy after liberalization Since 1988 the overvaluation of the currency has only has been interrupted by the 1994 crisis. In 2002 the short run deviation of the exchange rate from its long run value was more than 40 Per cent. This is reason enough to expect adverse effects on the competitiveness and profitability of the Mexican trading sectors, which in turn inhibits investment and therefore growth in productivity. Tradable sectors have stagnated as source of GDP and total employment Mexican exports are being displaced by competitors

Some lessons from the Mexican experiences with trade liberalization Exchange rate should not be used to control inflation only, but as a tool of development in coordination with a monetary policy both aiming at the same objectives. Public investments should be incremented to induced sectoral growth and elevating productivity of importable and exportable sectors and integrating more national value added not by reducing employment. It is not possible to further enlarge the external coefficient of the economy: the strategy should be to reduced the penetration of imports, by taking advantage of the possibilities of import substitution created in the NAFTA region. To reduced intense Dutch disease affecting the Mexican economy by implementing active sectoral policies.