Download Chapter 15

Chapter 15
Trade and
Policy Reform
in Latin
America
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
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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TABLE 15.1 Population and GDP for
Latin America and the Caribbean, 2005
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TABLE 15.2 Average Annual
Growth in Real GDP, 1960–2000
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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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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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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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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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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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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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TABLE 15.4 Inflation Rates,
1982–1992
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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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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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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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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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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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TABLE 15.5 Average Tariff Rates
in Latin America
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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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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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TABLE 15.6 Openness Indexes,
1985 and 2004
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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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Chapter 15
Additional
Chapter Art
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TABLE 15.3 Debt Indicators at the
Onset of the Debt Crisis, 1983
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TABLE 15.7 Regional Trade
Blocs
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Latin America
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Latin America: Trade Blocs
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