Latin America Class 3

Why did Latin America persist with ISI??? Perspective 1: –Political influence of land-based oligarchy and their foreign allies Perspective 2: –James Mahon Was Latin America too rich to prosper? Journal of Development Studies 28(2):

Mahon’s Thesis Springboard is the productivity of primary commodity exports led to appreciation of Latin American exchange rates Problem: manufactures were not competitive in world market at prevailing exchange rates

Required currency devaluation to make them competitive And the consequence of signif. currency devaluation??? –Decreased real wages or purchasing power for the population How much devaluation would have been required??? –Assume competitiveness may be approximated by real wage levels

Brazil Colombia Taiwan Hourly Wage Rates, current $US Wage comparisons: Latin America and East Asia, early 1960s

Questions politicians might have asked? How quickly might we expect real wages to recover fully??? –At 15% per year--5 to 9 years What are prospects for upturn in primary export prices? What is my likelihood of my benefiting politically from long term gains? Will IMF permit such devaluation?

Resource Curse Thesis Resource-rich countries tend to squander their resource advantage –Why??? Optimistic estimation of prospects leads to pursuit of lax economic policies

Richard Auty’s version Mineral economies under-performed relative to control group Why? –Capital intensiveness with small workforce –large inputs of foreign capital –few local production linkages---> low revenue retention within the country

Compounded by “Dutch Disease” appreciation of exchange rates due to rapid flow of mineral rents (revenues in excess of production costs and a normal return on capital) into the domestic economy

Auty views Brazil as a special case Market richness is the curse Belief that large internal market allows an AUTARKIC strategy of self-sufficiency. –We don’t have to go through a stage of dependence on low wage labor-intensive exports.

3. Another Factor perpetuating ISI The 1980s debt crisis Interpreted as evidence of need to protect the region from global shocks one response is heightened protection

Import Protection in the Developing World, 1985 percent

Transformation of economic policy Source: –Sebastian Edwards Crisis and Reform in Latin America. World Bank. Discusses factors responsible for and components of the new model

Factors The East Asian experience The Chilean experience –av. annual growth rate is 6.7% per year--a role model Role of World Bank and IMF –alternative interpretations Collapse of the Soviet Union

Components of the New Policy Packages Creation of macroeconomic stability by controlling public sector deficits Opening the external sector to foreign competition Reducing the role of the state (deregulation and privatization) Implementing targeted poverty- reducing packages

Privatization and Deregulation 1950s and 1960s: steady growth of state-owned enterprises. Why? –Deal with natural monopolies and oligopolies –provide key services at low prices –reduce vulnerability to external shocks –create a socialist-oriented society But SOEs grew well beyond strategic sectors

Regulatory legislation Control entry into industries control price and quantity of goods produced heavy regulation of labor relations

Problems State-owned enterprises –incur major losses requiring subsidies –fuels inflation –provide poor services Controls over private enterprise encourage rent- seeking and corruption

Privatizations in Latin America and Caribbean,

Potential Issues By 1993, 151 of the 500 largest enterprises in Latin America were foreign-owned some of the most sensitive sectors –public utilities, mining, telecommunications Symptoms of a decline in national autonomy??? Exploitation issue???