Copyright © 2011 Pearson Addison-Wesley. All rights reserved. Chapter 15 Trade and Policy Reform in...
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Transcript of Copyright © 2011 Pearson Addison-Wesley. All rights reserved. Chapter 15 Trade and Policy Reform in...
Copyright © 2011 Pearson Addison-Wesley. All rights reserved.
Chapter 15
Trade and Policy Reform
in Latin America
Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 15-2
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
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 over-generalize
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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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Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 15-5
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
Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 15-8
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…
Table 15.2 Debt Indicators at the Onset of the Debt Crisis, 1983
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Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 15-15
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
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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Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 15-23
TABLE 15.5 Openness Indexes, 1985 and 2007
Table 15.6 Regional Trade Blocs
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Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 15-25
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
Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 15-27
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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