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ECONOMIC LIBERALIZATION IN LATIN AMERICA UNDER THE HISTORICAL LENS UNITED NATIONS DESA JOSÉ ANTONIO OCAMPO UNDER-SECRETARY-GENERAL OVER THE PAST TWENTY-FINVE YEARS, LATIN AMERICA’S ECONOMIC POLICY HAS BEEN BASED ON TWO BASIC ASSUMPTIONS: ¾ State-led Industrialization was inefficient ¾ The liberalization of market forces was necessary, therefore, to generate competitive and dynamic economies THESE CLAIMS CONFRONT, NEVERTHELESS, TWO STUBBORN FACTS: ¾ The last twenty-five years have been the worst in the region’s history of economic performance ¾ Economic growth was highly superior under the State-led industrialization model THE LAST TWENTY-FIVE YEARS PERFORMANCE HAS BEEN MEDIOCRE 6.0 GDP growth 5.0 4.0 3.0 2.0 1.0 0.0 1950-1980 1980-1990 Weigthed average 1990-1997 Simple average 1990-2004 THE LAST TWENTY-FIVE YEARS PERFORMANCE HAS BEEN MEDIOCRE 3.0 Per worker GDP growth 2.0 1.0 0.0 (1.0) (2.0) (3.0) 1950-1980 1980-1990 Weighted average 1990-1997 Simple average 1990-2004 COMPARED TO THE REST OF THE WORLD, WE HAVE RECEDED TO THE SAME LEVELS OF A CENTURY AGO 35 33 31 29 27 25 23 21 19 17 15 120 110 100 90 80 70 60 Latina America/World Maddison Latin America/US Maddison LA/W World Bank LA/US W orld Bank 2003 2000 1997 1991 1990 1980 1973 1965 1950 1913 1900 50 1870 Latin America/World 130 Latin America/United States Iner-regional disparities FOUR QUESTIONS THAT WE MUST ANSWER ¾ Why did the State-led industrialization model collapse? ¾ Why was the debt crisis so severe? ¾ Why was the later economic recovery so frustrating? ¾ Is the mediocre economic performance associated to an equally poor social performance? FIRST QUESTION WHY DID THE STATE-LED INDUSTRIALIZATION MODEL COLLAPSE? EXHAUSTION OF IMPORT SUBSTITUTION? ¾ In the majority of the countries, Import substitution was exhausted long before the debt crisis. ¾ For that reason, a new strategy had emerged : a “mixed model” 9 Export promotion 9 Regional integration 9 Gradual rationalization of protection 9 In inflationary countries, gradual devaluation schemes ¾ To talk about “import substitution” as the dominant model in the 1970s, is thus a clear anachronism. ¾ In this framework, Latin America had a dynamic performance since the mid sixties’ THE LATE PHASE OF STATE-LED INDUSTRIALIZATION WAS RELATIVELY SUCCESFUL 35 33 31 29 27 25 23 21 19 17 15 120 110 100 90 80 70 60 Latina America/W orld Maddison Latin America/US Maddison LA/W World Bank LA/US W orld Bank 2003 2000 1997 1991 1990 1980 1973 1965 1950 1913 1900 50 1870 Latin America/World 130 Latin America/United States Iner-regional disparities THERE ARE SEVERAL MYTHS ABOUT EXPORT DYNAMISM DURING THIS PHASE ¾ The slow dynamism of exports was concentrated in the early post-war years and in major countries ¾ Exports accelerated since the mid-1950s ¾ However, the region lost market share in the commodity markets, specially oil and oil products EXPORTS ACCELERATED SINCE THE MID-1950s… Latin America without Venezuela (Simple average) 7% 6% 5% 4% 3% 2% 1% 0% 1945-1955 1956-1965 Exports growth 1966-1973 GDP growth 1974-1980 EXPORTS ACCELERATED SINCE THE MID-1950s… 10% Exports growth 8% 6% 4% 2% 0% 1945-1955 1956-1965 1966-1973 1974-1980 -2% -4% Large and medium countries (without Ven) Small countries Venezuela THE REGION LOST MARKET SHARE IN FOOD AND ENERGY MARKETS… Latin Am erica/World Share in total exports 30 25 20 15 10 5 0 1953 1958 1963 1968 Food Raw material Oil and derivates 1973 1980 1990 2000 …HOWEVER, IT BENEFITED FROM THE GROWTH OF WORLD MANUFACTURING TRADE 5 20 4 15 3 10 2 1 5 0 0 1953 1958 1963 1968 1973 1980 1990 2000 In world total Developing countries In developing countries In world total Latin America in m anufacture exports A BETTER EXPLANATION OF THE CRISIS: MACROECONOMIC VULNERABILITIES ¾ In spite of export dynamism, larger external deficits ¾ Larger investment requirements ¾ Fiscal vulnerabilities ¾ Even more important: distortions generated by the abundant external financing ¾ 9 They affected to a larger extent the more liberalized economies of the Southern Cone… 9 … they had affected in the past the export economies… 9 … would affect, again, in the 1990s, the liberalized economies This is, therefore, a more generalized phenomenon compared to the alleged exhaustion of the “import substitution” model DETERIORATION OF THE RELATION GROWTH/ TRADE BALANCE IN THE 1970s… Annual GDP growth 7% 1971-1980 6% 1961-1970 5% 1951-1960 1991-1997 4% 3% 2% 1% 1998-2003 1981-1990 0% -4% -2% Trade balance 0% 2% 4% Net resource transfers …AND LARGER INVESTMENT REQUIREMENTS 7% 1961-1970 Annual GDP growth 6% 1971-1980 1951-1960 5% 4% 1991-1997 3% 2% 1% 0% 17.0% 1998-2003 19.0% 1981-1990 21.0% 23.0% 25.0% Fixed capital investment as a percentage of GDP (1995 dollars) 27.0% SECOND QUESTION WHY WAS THE DEBT CRISIS SO SEVERE? GROWTH DURING THE LOST DECADE WAS HALF OF THE EXPERIENCED DURING THE GREAT DEPRESSION GDP growth (9 countries) 2.5% 2.2% 2.0% 1.5% 1.1% 1.0% 0.5% 0.0% 1929-1939 1980-1990 THIS IS TRUE IN THE MAJORITY OF THE COUNTRIES (CHILE IS THE ONLY EXCEPTION) GDP growth 5.0% 4.0% Colombia 1980-1990 3.0% Chile 2.0% México 1.0% -1.0% Guatemala Venezuela Uruguay 0.0% -1.0% Brasil 0.0% 1.0% 2.0% 3.0% Argentina Perú -2.0% 1929-1939 4.0% 5.0% 6.0% 7.0% THE BASIC REASONS: TWO EXTERNAL SHOCKS WITHOUT PRECEDENTS (OR ONLY DISTANT PRECEDENTS) ¾ The reversal of the capital account : from positive transfers of around 2-3% of GDP to negative transfers of 4-5% of GDP. ¾ Collapse in the prices of non-oil commodities (-32%). ¾ These shocks confronted vulnerable economies in macroeconomic terms. Percent of GDP AN ABRUPT REVERSAL IN EXTERNAL FINANCING… 4.0 2.0 0.0 -2.0 -4.0 -6.0 Financial flows 2003 2000 1997 Direct foreign investm ent 1994 1991 1988 1985 1982 1979 1976 1973 1970 Total HIGH INTEREST RATES GENERATED AN UNFORESEEN EXPLOSION OF THE EXTERNAL DEBT COEFFICIENT 450.0 70 60 350.0 50 300.0 250.0 40 200.0 30 150.0 20 100.0 Percentage of GDP Percentage of exports 400.0 10 50.0 0.0 0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 External debt as a percentage of exports External debt as a percentage of GDO COLLAPSE OF COMMODITY PRICES 110 100 90 80 Cae 32% 70 60 50 Aggregate index of commodities relative prices 1999 1989 1979 1969 1959 1949 1939 1929 40 THE INTERNATIONAL RESPONSE WAS VERY DIFFERENT: ¾ In the 1930s the moratorium of the debt eased the recovery, and was tolerated by the United States. ¾ In the 1980s, late and insufficient solutions. Meanwhile, highly conditional financing. THE 1930s vs. THE 1980s: PURCHASING POWER OF EXPORTS Relative to 1929 Relative to 1979 Year 10 Year 9 Year 8 Year 7 Year 6 Year 5 Year 4 Year 3 Year 2 Year 1 160 150 140 130 120 110 100 90 80 70 60 Year 0 Index year 0=100 Exports deflated by MUV THE 1930s vs. THE 1980s: TRADE BALANCE AS A PERCENTAGE OF EXPORTS (minus previous decade average) 1930´s (year 0=1929) 1980´s (year 0=1979) Year 10 Year 9 Year 8 Year 7 Year 6 Year 5 Year 4 Year 3 Year 2 Year 1 Year 0 45 40 35 30 25 20 15 10 5 0 -5 -10 “Díaz-Alejandro (1984) summed up the developments as follows: “what could have been a serious but manageable recession has turned into a major development crisis unprecedented since the early 1930s mainly because of the breakdown of international financial markets and an abrupt change in conditions and rules for international lending. The non-linear interactions between this unusual and persistent external shock and risky or faulty domestic policies led to a crisis of severe depth and length, one that neither shocks nor bad policy alone could have generated” THIRD QUESTION WHY WAS THE LATER ECONOMIC RECOVERY SO FRUSTRATING? COMMON BUT INACCURATE ANSWERS : ¾ Emphasis in positive effects of reforms… ¾ …but the lack of suitable conditions for the functioning of markets ¾ Slow productivity growth ¾ Fundamental problems that these answers do not take into consideration: 9 Latin America grew satisfactorily before the 1980s 9 Nothing guarantees full utilization of resources 9 Economic losses during transition 9 Static efficiency vs. dynamic efficiency PRODUCTIVITY GROWTH IS SLOW… 2.5 Total factors' productivity 2.0 1.5 1.0 0.5 0.0 (0.5) (1.0) (1.5) (2.0) 1950-1980 1980-1990 Weighted average 1990-1997 Simple average 1990-2002 …BUT THIS IS DUE, TO A GREAT EXTENT, TO THE UNDERUTILIZATION OF PRODUCTIVE RESOURCES 1990-2000 Annual per worker GDP growth 4% Chile 3% Argentina 2% Panamá -0.03 -0.02 -0.01 Uruguay 1%El Salvador Costa Rica Bolivia Guatemala México Brasil 0% 0 0.01 -1% Ecuador -2% Annual informal sector growth 0.02 Colombia 0.03 0.04 Venezuela THE GREAT PARADOX: GREATER INTERNATIONAL INSERTION IN RECENT YEARS… …BUT SLOW ECONOMIC GROWTH EXPORT DIVERSIFICATION HAS BEEN RAPID Share in total exports 100% 12% 8% 23% 40% 80% 62.2% 60% 40% 20% 0% 1953 1958 1963 1968 Manufactures Energy Commodities Food 1973 1980 1990 2000 5 20 4 15 3 10 2 1 5 0 0 1953 1958 1963 1968 1973 1980 1990 2000 In world total In developing countries In developing countries In world total IN PARTICULAR, THE MARKET SHARE IN WORLD MANUFACTURING TRADE HAS INCREASED HOW CAN WE EXPLAIN THIS PARADOX? ¾ Limited production linkages ¾ In manufactures, new “enclaves” ¾ In natural resources, limited employment generation ¾ Deterioration in the trade balance/growth relationship ¾ This generates greater dependency on external financing… ¾ … and, due to the consequent real volatility, low levels of investment ¾ The constant tendency to currency appreciation during periods of extensive external financing aggravates this problem. ADDITIONAL DETERIORATION OF THE GROWTH/TRADE BALANCE RELATIONSHIP… 7% 1971-1980 Annual GDP Growth 6% 1961-1970 5% 1951-1960 1991-1997 4% 3% 2% 1% 0% -4% 1998-2003 1981-1990 -3% -2% -1% Trade Deficit 0% 1% 2% Net resource transfers 3% …AND LOW INVESTMENT LEVELS 7% 1961-1970 Annual GDP growth 6% 1971-1980 1951-1960 5% 4% 1991-1997 3% 2% 1% 0% 17.0% 1998-2003 19.0% 1981-1990 21.0% 23.0% 25.0% Fixed capital investment as a percentage of GDP (1995 dollars) 27.0% A MORE GENERAL STRUCTURALIST INTERPRETATION: ¾ The new model solves in a better way the problem of incentives to economic efficiency… ¾ ... but this benefit is only static and microeconomic ¾ The previous model, solved much better the problems of dynamic efficiency in the productive structure of the economy 9 Creation of new production capabilities 9 Creation of new production linkages FOURTH QUESTION IS THE MEDIOCRE ECONOMIC PERFORMANCE ASSOCIATED TO AN EQUALLY POOR SOCIAL PERFORMANCE? SOCIAL PERFORMANCE IN THE LAST DECADES (1) ¾ Human development advance experienced a slow down in the last decades ¾ However, the majority of the social indicators continued to improve ¾ In many of them, there was no “lost decade” ¾ Rather, gigantic underutilization of human capital ¾ Democracy’s advance has been reflected in an increase of social spending. THE IMPROVEMENT IN THE QUALITY OF LIFE CONTINUED, ALTHOUGH AT A SLOWER PACE Standard of living Index relative to the United States 80% 75% 70% 65% 60% 55% 50% 45% 40% 35% LA-6 countries LA-13 countries 2000 1995 1990 1985 1980 1975 1970 1965 1960 1955 1950 1945 1940 1935 1930 1925 1920 1915 1910 1905 1900 30% RECENT INDICATORS SHOW A FASTER IMPROVEMENT IN THE 1990s IN THE SIX LARGEST ECONOMIES… Hum an Develo pment Asto rga et al vs UNDP 6 countries 80% 75% 70% 65% 60% 55% 1975 1980 1985 HSLI (6) 1990 IDH UNDP (6) 1995 2000 …ALTHOUGH NOT IN THE SMALLER ECONOMIES Hum an Develo pment Asto rga et al vs UNDP 13 remaining co untries 75% 70% 65% 60% 55% 50% 45% 40% 1975 1980 1985 HSLI (13) 1990 IDH UNDP (13) 1995 2000 THE EFFORT OF THE REGION IN TERMS OF SOCIAL SPENDING HAS BEEN NOTEWORTHY SOCIAL EXPENDITURE AS A PERCENTAGE OF GDP 16 Education Health Social Security 14 Housing 13.8 12.1 12 10.1 10 8 6 4 2 0 1990-1991 1996-1997 2000-2001 SOCIAL PERFORMANCE IN THE LAST DECADES (2) ¾ The main problems dwell in the connections from the economic to the social system ¾ Additional distributive deterioration… ¾ …on already very high levels of social segmentation ¾ Current social policy can help to fight poverty… ¾ …but inequality remains outside the agenda ¾ Inequality might be becoming a development trap Population under poverty level THE POVERTY-PER CAPITA GDP RELATIONSHIP HAS DETERIORATED COMPARED TO 1980 49 48 47 46 45 44 43 42 41 40 3200 1990 1994 2003 1997 1980 3300 3400 3500 3600 Per capita GDP in dollars 3700 3800 INCOME DISTRIBUTION HAS WORSENED IN SEVERAL COUNTRIES CHANGES IN INCOME DISTRIBUTION’S GINI COEFFICIENT, 1990-1999 1990 Brasil Bolivia 1999 0.627 Increased 0.640 0.538 Increased 0.586 Nicaragua 0.582 0.584 Guatemala 0.582 0.582 Colombia 0.601 Decreased 0.572 Paragu ay 0.447 Increased 0.565 Ho ndu ras 0.615 Decreased 0.564 Chile 0.554 0.559 Panama 0.560 0.557 0.501 Argentina 0.542 Increased 0.536 Mexico 0.539 0.461 Increased 0.521 0.507 Increased 0.518 Venezuela 0.471 Increased 0.498 Costa Rica 0.438 Uruguay 0.492 Ecu ador Salvador 1.0 0.473 Increased 0.440 Decreased 0.8 0.6 0.4 0.2 0.0 0.2 0.4 0.6 0.8 1.0 THE POLICY AGENDA ¾ More emphasis on the economy’s real stability ¾ Productive development strategies for open economies ¾ Improve the social linkages of the economic system ECONOMIC LIBERALIZATION IN LATIN AMERICA UNDER THE HISTORICAL LENS UNITED NATIONS DESA JOSÉ ANTONIO OCAMPO UNDER-SECRETARY-GENERAL