The long and sad history of LAC
development or
Two hundred years of LA
economic liberalism:
• Alicia Puyana
• FLACSO
Presented at the IDEAS conference: India, China and
the global economy
Magnolia Hall, New Dehli,, January 2008
CONTENT
•
•
Why L.A. experiences are interesting
A dash of history: The deep roots of Latin American
Liberalism.
•
What made possible the reforms and the role of the
economists.
2. The objectives of the reforms.
3. NAFTA and the strategy of “competitive liberalization”
4. The paradoxes of liberalized economies:
growth, productive structure, productivity and wages
and poverty
5. Lessons to be learned from Mexico and other Latin
American countries
Latin America is an excellent case to analyze the
strengths and weakness of the neoliberal
economic model.
• Chile started the reforms in early seventies.
Chile was the experiment upon which the WC
was drafted. Exports of RB Manuf.
• Mexico in 1985 was an early and radical
reformer and by signing in 1993 the North
American Free Trade Agreement NAFTA,
constitutes the life experiment of the outcomes
of the USA policy of Competitive Liberalization.
• Mexico specializes in ensemble manufactures.
• All other are liberalizing at high speed and
integrating their economies tighter with the USA.
• The outcomes may be similar to the ones
Mexico has experienced.
Policies instrumented in the new model are
retarding growth and leading to:
the stagnation of tradable sectors in the generation
of GDP and employment and the explosion of
the informal sector
the concentration of wealth, financial and industrial
capital, production and exports.
Increasingly unequal distribution of income with a
growing share of capital and the corresponding
fall of labour.
unending adjustment, based on monetary
contraction, high interest rates and overvaluation
to achieve macroeconomic stability.
A dash of history:
The deep roots of Latin American
Liberalism.
A. Latin American Independence and the
economy
Liberal thinking is deeply rooted in L. A since mid
19 Century.
• Independence leaders were Spaniards borne in
Latin America fiercely committed to free trade
and political liberalism interested trading by
themselves without the mediation of Spain.
• The independence had not any national
economic project different to engage in free
trade. Their idea of nation building did not
contemplate to integrate indigenous population.
• By 1860 liberal economic model was totally
embedded and fully implanted in the newly
born Latin American republics. It lasted up
to mid XX Century.
B. XX century: the rise of economics as
independent branch of knowledge
In the interwar LA economists and policy makers were
familiar with German and English economists. They did
not know Marxism and other critics of capitalism they
ignored Chayanov’s works.
By the end of the second WW, thanks to Keynes, Leontief,
Rosestein-Rodan, Nurse, the successes of the Soviet
Union, the ideas of state intervention and planning were
in fashion all over the world Latin America included.
After the IIWW planning was supported to order the
loans of the WB to build infrastructure and heavy
industry and to guarantee the supply of raw
materials for the reconstruction of the World
economy: oil, stell.
But it was not until the 1950 that the ISI lead by the state
took form and legitimated state intervention.
LA structuralism came to live
C The short live of state intervention and L.A.
structuralism.
ISI was based on FDI and long lasting protection for capital
intensive industries. It did not developed a dynamic
internal market. Urban informal sector started to growth
and agriculture to decay.
Industrialization and state intervention and protectionism
were accepted all over the world and justified by the
newly created WB, IMF and GATT.
Structuralism distance from neo-classical analysis in its
emphasis on macroeconomics, institutions and
interdisciplinary approaches to economic issues, as well
as in treating long-term, trans-cyclical, changes.
The short live of LAC structuralism has two phases:
i) The analysis of the failures of export lead model giving
rise to the Prebisch-Singer thesis of unequal exchange.
ii) The decline, in Brazil, Mexico, Argentina and Chile of the
ISI as a viable growth strategy.
What made possible the reforms and
the role of the economists
D. The coming back of Economic Liberalism
and the role of economists
Structural reforms and adjustment programmes were
possible due to the impact of the crisis. It was feasible to
introduced changes only when crisis hinder all possible
resistance, as the model of “war of attrition” indicates*.
Chile in 1973, and the rest after the debt crisis of 1982.
*The political conflict over what type of stabilization to
implement leads to delays. A stabilization occurs when
one of the competing groups can impose its desired
policies on the other(s) which have exhausted their
ability to resist the undesired stabilization
For the first time the economic doctrine became an
undisputable true. A scientific model politically neutral
The role of economists
The role of economists: In the 80s economists
appeared in the political scenario as the
legitimate bearers of scientific economic
knowledge entrusted with professional
responsibility for formulating and developing
economic policies.
Members of the profession's elite become
indispensable to politicians, to economically
powerful groups and to congressional
lawmakers.
They become public actors when they enter the
institutional and political structure. At that
moment knowledge and power are linked.
Who integrates the economists elit
•
•
•
•
•
•
•
•
Total economists
29000
U. de los Andes
4.5%
1305
Other Universities
94.5%
25810
Doctorado offical scholarshpis
0.56%
164
De Uniandes
70.0%
114
It should have only
8
4.5% of scholarships or 0.56% of its graduates
That university has supplyied 70% of the heads of
minsitries of treassury, Planning, and Central Bank.
• Are Uniandes economists so superior?
Who supported the coming back of liberalism and the
Washington Consensus
1n 1984 a “modernizing elite” of economists and political scientists
arrived with “academic training in neoclassical economics with
graduate degrees from the most prestigious U.S. Universities”, they
instrumented the reforms, and were the architects behind NAFTA.
Two main groups supported the reforms and NAFTA: the states,
political elites, and the large, export- oriented, business groups
interested in rules of origins and special treatment for automotive
and textiles.
Mexican negotiators were convinced that NAFTA would solve all the
problems of the underdevelopment of the country: “[…] they
[Mexican negotiators] look at problems from the same point of views
from the north of the Rio Bravo. Highly impressed by the USA they
wanted to emulate it. They say ‘the United States are performing
well; if we join them all Mexican problems will be over’” (Bhagwati,
1999:24)
Why the model was so saleable
• Three economic conditions facilitated the penetration of
US neo-liberal doctrines:
• the recession and debt crisis of the early 1980s,
• the concomitant rise of globalization, and
• the subsequent renewal of growth, however slow and
selective, in the 1990s.
• The neoliberal model was easy to sell for its ability to
respond to the crises affecting L:A countries:
• foreign debt, inflation, ISI and the welfare state. But is
“major attraction was their ability to lure foreign capital
The Latin American policies copied from US blueprints
reduced uncertainties for US investors and traders”.
NAFTA and the strategy of
“competitive liberalization”
NAFTA AND Competitive liberalization
• Competitive Liberalization uses regional and
bilateral agreements to force WTO negotiations.
• It looks to:
• open markets abroad to U.S. companies,
• to strength market-oriented laws and regulations
overseas,
• to place the U.S. at the centre of the world
trading system.
• Foreign and security policy considerations have
influenced U.S. trade policymaking
Competitive Liberaliztion or the contest for the
USA market
CL puts countries to compite to gain
acces to USA market. All want to join
the club and willing to pay the price for
joining the Club, at no costs for USA:
“American openness is high and our
trade barriers are low, so when we
negotiate free trade agreements with
our counterparts we almost always
open other markets more than we must
change our own” Zoellic:
Competitive Liberaliztion or the contest for the
USA market
• USA have never taken the initiative to initiate
negotiations. It has to be taken by interested countries.
• The USA only agrees to negotiate if countries fullfil
conditions:
• Have reformed the eocnomies, show solidarity with the
USA in multialteral negotiations and support the USA
national security policy
• This has made the United States essentially reactive in
first instance, this posture gives the United States
considerable negotiating clout
• “After all, the United States can always point out that
it did not seek this negotiation, with the implied
threat that negotiations could be terminated if further
concessions are not forthcoming from the trading
partner” (Evenett , S. Meier, M. 2006 9.
Competitive Liberaliztion or the contest for the
USA market
• USA selects countries with which will negotiate. One
criterion is not to harm USA interests, for instance
agriculture.
• Another is solidarity in the fight against terrorism,
participation in the agreement of non proliferation of
neuclear weapons. Another element is how big support
from NGO a country has.
The interest of República Dominicana was rejected
because the country did not support USA in WTO
negotiations. Once the country behaved negotioans
started. (Evennet, 2006:12).
• New Zeland: nuclear ships.
Competitive Liberaliztion or the contest for the
USA market
• In exchange for the access to its market the
strategy looks for important concessions in
priority areas: services, agriculture intellectual
property, investments, labour and environmental
regulations anticorruption legislation. (Evennet,
2006 y 2005; USTR, 2006).
• But access to the American market could be an
illusion: tariffs are low and the USA has
negotiated several agreements reducing the
advantages given in the previous ones.
NAFTA AND Competitive liberalization
Competitive libalization is not only a trade policy:
“We need to align the global trading system with our
values…
And we must always seek to strengthen freedom,
democracy, and the rule of law”. (Zoellick).
• The Bush Administration looked at “TPA for far more
than catching up with its trading partners, but also to
reassert its central position as the writer of rules for the
world trading system” Evenett, and Meier, 2006
• It “contaminated trade policy with extra trade conditions
and eliminated non reciprocity in MFN
• NAFTA AN EXAMPLE OF
COMPETITIVE
LIBERALIZATION
NAFTA an example of Competitive Liberaliztion.
•
•
•
•
NAFTA included agreements on:
The agricultural sector. No single product was excluded.
Highly protective rules of origin.
Dispute resolution procedures that favours the USA
producers.
• Commitments on FDI, intellectual property rights, labour
standards
• Just a free trade zone was complemented with
agreements in FDI, property rights, free trade in
services, amongst others.
• It open the chain of the agreements under the USA
policy of “competitive liberalization” which eliminates the
unconditionality of the MFN principle, does not provide
any guarantee of access to the USA market, and
permeates trade with commitments on security.
NAFTA an example of Competitive Liberaliztion.
Mexico did:
Liberalized more than the USA.
Received lower trade preferences than MX gave the USA.
Included in the list for later liberalization plus quotas and
tariffs, larger shares of its imports from the USA than the
USA did.
Accepted USA quotas and tariffs to products in which
Mexico competes with USA producers: tomatoes and
fruits and vegetables.
Renounced to any preferential treatment as LDC.
Suffers the erosion of preferences due to the several trade
agreements the USA has signed with countries of similar
development level and similar productive structure.
NAFTA an example of Competitive Liberaliztion.
• Tariff preferences Mexico
• Sector
Gave received
Agric.
Footwear
Textiles app.
Machin.
Transp.
14.1
19.5
19.9
12.1
14.9
2.0
5.2
9.0
1.5
2.0
• By 2002 fifty per cent of the preference was lost due to new USA
trade agreements:Jordan, Marruecos, Bahrain – Oman, Middle East
Free Trade Zone, Costa Rica, El Salvador, Guatemala, Honduras,
Nicaragua, Dominican Republic, Perú, Colombia, Oman,
Singapore, Australia y South Africa del Sur. Has negotiated with:
Thailand, Korea, Panama , y los Arab Emirates.
The paradoxes of liberalized economies:
growth, productive structure,
productivity and wages and poverty
Latin America: External coeficient of the GDP=
Exps+Imps/GDP
Brzl
Arg
Chile
Mex
LAC
80
Percentages of GDP
70
60
50
40
30
20
10
0
1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005
The more open an economy the lower the difference between international and domestic prices.
Production and export structures should move towards comparative advantage, then, those
countries that reallocate resources towards exports should grow faster.
LAC. Trade balance as % of GDP
9.5
Percentaqes of GDP
7.5
5.5
3.5
1.5
-0.5
0 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04
7
-2.5
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20
-4.5
-6.5
Brazil
China
India
Mexico
LATIN AMERICA PER CAPITA GDP 1900-2006
In ppp 2000 dollars
5.0
4.5
20,000
15,000
4.0
10,000
3.5
5,000
3.0
0
2.5
19
00
19
05
19
10
19
15
19
20
19
25
19
30
19
35
19
40
19
45
19
50
19
55
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
20
05
PPP 1990 dollars
25,000
L.A. GDP
USA
USA/LA
PCGD PUSA/PCGD LA
5.5
30,000
19
50
19
53
19
56
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
Constant PPP 2000 dollars
China and India are closing the gap with LAC
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
LA
China
India
19
60
19
63
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
PPP 1990 dollars
Labour productivity per hour
20,000
15,000
10,000
5,000
0
China
India
Brazil
Mexico
Labour productivity per hour
relative to USA
Mexico
Colombia
Chile
Brazil
Argentina
55.0
50.0
Percentages
45.0
40.0
35.0
30.0
25.0
20.0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
The sturdiness of LAC malady:
poverty
1970
1980
1986
1990
1994
1997
2000
2005
Poverty
Extreme poverty
total urban rural total urban rural
40
26
62
19
11
34
35
25
54
15
9
28
37
30
65
22
17
30
41
41
65
20
15
40
46
39
64
19
13
40
44
37
63
18
12
37
42
37
62
18
12
38
40
34
59
15
10
32
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1981
1980
%
L. AMERICA: TOTAL UNEMPLOYMENT
11.0
10.0
9.0
8.0
7.0
6.0
5.0
4.0
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
Percentages of GDP
LAC: STRUCTURE OF GDP
60
50
40
30
20
10
0
AGR.
IND
SRV
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
Mexico. Structure of GDP by sectors 1960-2006
70
60
50
40
30
20
10
0
Agric.
Mining.
Manuf.
Const.
Serv.
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
Chile: Structure of GDP by sectors 1960-2006
60
50
40
30
20
10
0
Agric
Min.
Man.
Cons.
Servicios
LAC: Exports of Manufactures as % of World sectoral
trade. 1955-2005
Percentages
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
55 9 59 9 63 9 67 9 71 9 75 9 79 9 83 9 87 9 91 9 95 9 99 0 02
9
1
1
1
1
1
1
1
1
1
1
1
1
2
Source: Unctad, Handbook of Statistics, http://stats.unctad.org
LAC did gain shares of total trade in mnufactures, but is still low and after 1999
declining as a result of the dinamic entrance of China and India
LAC: Share of the manufactures sector in total GDP,
Imports and Exports.
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
1965
1968
1971
V. Agr.
1974
1977
1980
1983
1986
Expts
1989
1992
1995
1998
2001
Impts
Latin American Countries registered trade deficit in manufactures and are not
Integratin national value added, neither labour
2004
LAC: Share of the manufactures sector in total GDP, Imports
and Exports.(1960-2005)
59
Porcentages
49
39
29
19
9
1965
1968
1971
1974
1977
1980
Export.
México
1983
1986
1989
1992
1995
1998
2001
Valor Agreg.
América Latina
No hay correspondencia entre el crecimiento de las exportaciones manufactureras
Y el crecimiento de la participación del sector en el PIB
2004
Lessons to be learned from
Mexico and other Latin
American countries
Capital formation per worker 1980-2006
USA
Constant 2000 dollars
16000
LAC
WLD
14000
12000
10000
8000
6000
4000
2000
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
0
Capital accumulation per worker is no growing. It represents
a technological setback
LAC LA
CH
IND
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
Constant 2000 dollars
Capital formation per worker 1980-2006
2500
2000
1500
1000
500
0
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
The realities: appreciation of the peso
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
-
The realities: Banking system is not
financing growth
90
80
70
60
50
40
30
20
10
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
Some lessons from the Mexican and LAC
experiences with trade liberalization
• North-South integration or perhaps liberalizing
the economy with the intensity Mexico did does
not allow a less developed economy to harvest the
positive growth effects of external trade.
• Negotiating with a super power is hard and the
possibilities to reach agreements that will give
room for special treatment according to level of
development are nil
•
Some lessons from the LAC trade liberalization
• Some policy elements that explain the effects of
liberalization on the Economy:
• A) the structure of tariff created negative effective
protection for agriculture and industrial intermediate
goods and inputs.
• B) Fiscal policy reduced public expenditure in
investments,compromising the growth of the economy.
Private investments have not fully replaced public
investments.
• C) Fiscal policy is prociclical agravating the crisis. Fiscal
income is too dependent in oil rents and VAT.
• D) Exchange rate appreciation have negativelly
• affected tradable sectors specially those of intensive use of
domestic factors. and have lowered productivity growth
Observed trends of the Mexican economy after
liberalization
• Since 1988 the overvaluation of the currency has only has
been interrupted by the 1994 crisis.
• In 2002 the short run deviation of the exchange rate from its
long run value was more than 40 Per cent.
• This is reason enough to expect adverse effects on the
competitiveness and profitability of the Mexican trading
sectors, which in turn inhibits investment and therefore growth
in productivity.
• Tradable sectors have stagnated as source of GDP and total
employment
• Mexican exports are being displaced by competitors
Some lessons from the Mexican experiences
with trade liberalization
• Exchange rate should not be used to control inflation
only, but as a tool of development in coordination with a
monetary policy both aiming at the same objectives.
• Public investments should be incremented to induced
sectoral growth and elevating productivity of importable
and exportable sectors and integrating more national
value added not by reducing employment.
• It is not possible to further enlarge the external
coefficient of the economy: the strategy should be to
reduced the penetration of imports, by taking advantage
of the possibilities of import substitution created in the
NAFTA region.
• To reduced intense Dutch disease affecting the Mexican
economy by implementing active sectoral policies.