Session 5
Albert Fishlow, “Some Reflections on Comparative Latin American Economic
Performance and Policy,” Wider Working Papers, 22, August 1987
Balassa argues that the inward orientation, lack of appropriate incentives to savings and investment,
and the excessive role of the state were the three fundamental deficiencies of Latin American
Economies during the debt crisis. He prescribes as remedies: trade liberalization and reliance on
market signals.
Jeffrey Sachs argues that the most important differences between Latin America and the Asian model
are centered on exchange rate management and on the trade regime. He also argues that the Latin
America countries did not use the foreign borrowing to develop a resource base in tradable goods,
especially export industries, adequate for future debt servicing.
Fishlow on the other hand, presents the following argument:
1. The “dismal” Latin American performance has been exaggerated (due to selectivity of
comparisons and the relative severity of the external shock on this region).
2. Faulty exchange rate management and trade policy is not as key to lagging performance as
has been stressed (in fact, during the period when Latin America fell off the pace,
exchange rate policies in the region were aggressively favorable to exports).
3. The political constraints underlying Latin American policy response and development
strategy extend beyond the urban-rural distinctions stressed by Sachs. Simple deregulation
and privatization are not first best solutions, reconstructing a developmental state is.
Latin American Economic Performance
GDP growth: After 1980 there is an absolute decline in the region’s product. There is a significant
disparity among Latin American countries, such that the differences between Latin America and East
Asia are not statistically significant (the better performing Latin American countries might be mistaken
for East Asian countries) showing that one must be careful when making generalizations.
Inflation: Higher inflation clearly differentiates Latin America from East Asia (consequence of the oil
price shocks and significant balance of payments adjustments).
Indebtedness: the weighted debt-GNP ratio of Latin America tripled in 10 years and the debt service to
export ratio almost doubled. South Asian conservatism and ineligibility for borrowing from banks equally
comes through.
Latin American countries increased availability of bank lending whenever possible in the seventies.
Debt was consistent with policies of continuity, which appealed to governments seeking to legitimize
their power. Access to external saving became habit forming and state enterprises were increasingly
the issuers of debt. Investment ratios and growth rates for the borrowers increased.
However, there were three factors that complicated Latin American performance:
 Exaggerated borrowing that began to become evident in 1980, mainly to expand public
spending.
 Asymmetric Latin American opening to the international economy was worrisome. There was
danger in such reliance on capital inflow by economies that were so closed.
 Massive external shocks intervened after 1980 and proved the Latin American vulnerability
(shock on the terms of trade; rise in real interest rates; reduced growth on export volume of
developing countries; and the shift in willingness of commercial banks to lend). The interest rate
and capital supply effects had a greater impact on the Latin American countries.
While financial markets remained open to East Asian countries facilitating their adjustment to
compensate for the trade shock, this was not true for Latin America. Given its reliance on capital
markets, when they faced a second shock (a rise in real interest rates), they couldn’t count anymore on
financial markets to adjust. It became clear that countries borrowed too much relative to their short-term
capacity to adjust to variability in the external environment. So, when the crisis came, imports had to be
disproportionately reduced, at the expense of output and income growth.
Trade Policies and Performance
Opposed to East Asian countries where exports where the instrument for industrialization, for Latin
America, already industrialized and with higher income and wages (due to import substitution scheme),
the export market was never conceived as the basis for growth of the manufacturing sector, but as a
means to supply needed foreign exchange.
Despite Latin America’s greater dependence upon borrowing, the new attention to exports was
sustained. For example, Mexico increased its export volume at a rate exceeding that of Korea and
Taiwan. Unfortunately, with price movements that effort translated into little revenue.
Latin America’s better trade results were on the whole associated with better exchange rate
management (this is an argument by Sachs which shows that real exchange rate change between 1976
and 1981 was almost the same for Latin America and East Asia). However, research by Fishlow had
proven the elasticity of export growth with respect to exchange rate misalignment is very small (.2%) so
the average rate deviations are not statistically significant in explaining the difference in export
orientation.
The Role of the State
Balassa and other authors (neoclassical approach) argue that a central factor to the severity of the
economic and social crisis of the eighties was the expanding role of the state: intervention: creates a
surplus and individual agents will spend resources and change rules to get their hands on it; it favors
distribution rather than growth; and it leads to rulers favoring powerful supporting groups in the
establishment of a certain property rights structure.
The principal deficiency of the neo-classical approach is its failure to inform about the conditions, under
which the state can play a positive role, this is, in fact, the case of East Asia.
The Latin American developmental state took another form. It emphasized import substituting
industrialization rather than export promoting industrialization because the opportunities for international
trade were not so clear, and because export promotion translated into an emphasis upon the primary
sector and the reinforcement of the traditional rural elite whose influence industrialization was suppose
to diminish to give way to a modernizing urban middle class.
Trade policy was not about trade, it was about internal production incentives and finance. The state was
interventionist and could set national goals, but it lacked the political power fully to implement them.
Exports were needed to relieve the balance of payments constraint, not to provide a source of demand
for domestic industry.
The Latin American developmental state remained inward looking as an expression to a commitment to
industrialization, but also as a result of the rise of an urban society organized around that industrial and
public sectors. Nationalism was equated with protectionism even though the consumer durable style of
industrialization required large foreign investment. These domestic interests diluted technocratic
capacities of the state to define an independent development strategy.
As industrialization proceeded pressures were brought to bear from a variety of diverse groups asking
for subsidies. State enterprises multiplied with their own claims on resources. This translated to a larger
fiscal drain. The net consequence was a diminished efficiency of investment.
The task of Latin American developmental state has, therefore, been more complicated than its East
Asian counterpart. State capacities have been consistently more limited. Fiscal deficits and the resort to
the inflation tax are a measure of their weakness.
The lesson is not to draw the wrong lesson from East Asia by focusing on specific exchange rate,
interest rate and other policy instruments, but to ask how to reconstruct a Latin American
developmental state than can consistently implement the right policies.