Download Chapter 15

Chapter 15
Trade and
Policy Reform
in Latin
America
Copyright © 2011 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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Introduction: Defining a “Latin
American” Economy
• A “Latin American” economy is considered
“all of the Americas south of the United
States” (Webster’s dictionary)
• However, Latin America is quite diverse,
and one needs to be careful not to overgeneralize
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Population, Income,
and Economic Growth
• For long stretches of the 20th century, Latin
America was one of the fastest-growing
regions of the world
• From 1900-1960 real GDP per capita grew at
similar rates to Europe, U.S., or Asia
• The Debt Crisis turned the 1980s into a Lost
Decade, as growth was negative, inflation
skyrocketed, and poverty increased
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TABLE 15.1
Population and GDP for Latin America and
the Caribbean, 2007
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TABLE 15.1 (continued)
Population and GDP for Latin America and
the Caribbean, 2007
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TABLE 15.1 (continued)
Population and GDP for Latin America and
the Caribbean, 2007
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Import Substitution Industrialization:
Origins and Goals of ISI
• Key points about reliance on import substitution
industrialization (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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Criticisms of ISI
• Government involvement in production
decisions caused a misallocation of
resources; not market failures as assumed
• 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 economic
populism and 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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Populism in Latin America: 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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The 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 15.2 Debt Indicators at the Onset of
the Debt Crisis, 1983
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Responses to the Debt Crisis
• U.S. Treasury Secretary James Baker, 1985, tried to
organize a renewed lending program by commercial
banks through the Baker Plan
• 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 and the
“Washington Consensus”
• 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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TABLE 15.3
Inflation Rates, 1982–1992
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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 abandoned
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Stabilization Policies to
Control Inflation
• Some Latin American countries adopted the
orthodox model of cutting government
spending, reforming the tax system, and
limiting the creation of new money
• Others adopted the heterodox model:
same as orthodox model but also included
freezing of wages and prices
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TABLE 15.4
Average Tariff Rates, in Percents, Selected
Countries
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Structural Reform and Open Trade
• Structural reform policies include:
- The privatization of government-owned
enterprises, deregulation and redesign of the
regulatory
- Environment of overregulated industries such
as financial services, and
- Reform of trade policy
• Individual countries, especially Chile and Mexico,
started negotiating bilateral free trade agreements
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Structural Reform and Open Trade
(cont.)
• The three main goals of trade reform:
- To reduce the anti-export bias of trade
policies that favored production for domestic
markets over production for foreign markets
- To raise the growth rate of productivity
- To make consumers better off by lowering
the real cost of traded goods
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TABLE 15.5
Openness Indexes, 1985 and 2007
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Table 15.6 Regional Trade Blocs
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The “Washington Consensus”
• Macroeconomic reforms proposed by the consensus:
– 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 Consensus”
(cont.)
• Microeconomic reforms proposed by the consensus:
– 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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The Next Generation of 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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