1. Chapter 15
Trade and Policy Reform in Latin America

2. Chapter Objectives
Discuss the long-run performance of the economies of Latin America
Examine the origins and extent of Latin America´s economic crisis of the 1980s
Discuss the economic reforms of the late 1980s and 1990s
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3. TABLE 15.1 Population and GDP for Latin America and the Caribbean, 2005
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4. TABLE 15.2 Average Annual Growth in Real GDP, 1960–2000
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5. Import Substitution Industrialization
Reliance on import substitution (ISI) policies from the 1930s to the debt crisis of the 1980s
Raúl Prebisch of ECLA argued that Latin America experienced declining terms of trade (TOT): (index of export prices)/(index of import prices)
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
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6. Problems with Import Substitution
Government involvement in production decisions caused a misallocation of resources
Exchange rate overvaluation
Policies were too biased in favor of urban areas
Income inequalities worsened
ISI fostered rent-seeking and corruption
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7. Macroeconomic Instability and Economic Populism
Latin America has experienced macroeconomic crises over the past 50 years
Crises are often attributed to 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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8. 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
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9. Stages of Populist Policies
Economic stimulus through government expenditures and printing money
Creation of bottlenecks
Increase in prices and budget deficit
Acceleration of inflation
Pervasive shortages become pervasive
Capital flight and decline in wages
Resort to IMF help
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10. Debt Crisis of the 1980s
Causes: Collapse of world oil prices (Mexico particularly affected) and increase in international interest rates in the early 1980s
Longstanding political mismanagement
High rates of lending in 1974–1982
Let’s analyze these in greater detail…
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11. TABLE 15.4 Inflation Rates, 1982–1992
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12. Resolving the Debt Crisis
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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13. Economic Policy Reform
In the late 1980s, Latin America launched economic policy reforms
The region adopted a neoliberal model—favoring free markets and minimal government intervention in the economy
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14. 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 scrapped
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15. The “Washington Consesus”
Macroeconomic reforms:
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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16. The “Washington Consesus” (cont.)
Microeconomic reforms:
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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17. TABLE 15.5 Average Tariff Rates in Latin America
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18. Stabilization Policies to Control Inflation
Some Latin American countries adopted the orthodox model—cutting government spending, reforming the tax system, limiting the creation of new money
Others adopted the heterodox model—same as orthodoxy but also freezing of wages and prices
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19. Structural Reform and Open Trade
In the 1980s, Latin American countries began reducing both tariff and nontariff barriers (NTBs)
Regional integration schemes were revived: Central American Common Market (CACM), the Andean Pact, Caribbean Community (CARICOM)
New regional integration schemes were created: NAFTA, Common Market of the South (MERCOSUR)
Individual countries, especially Chile and Mexico, started negotiating bilateral free trade agreements
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20. TABLE 15.6 Openness Indexes, 1985 and 2004
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21. Current Issues after the Reforms
Neoliberalism is viewed negatively by many Latin American citizens because it has not resulted in stable economies, falling prices, or greater equality
A second generation of reforms are underway to create more inclusionary economic systems
A few Latin American countries, including Mexico and Chile, have become the most open and outward oriented of countries anywhere, but the results elsewhere have been disappointing.
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22. Chapter 15
Additional Chapter Art

23. TABLE 15.3 Debt Indicators at the Onset of the Debt Crisis, 1983
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24. TABLE 15.7 Regional Trade Blocs
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25. Latin America
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26. Latin America: Trade Blocs
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