Stages of Development and Contours of Economic Policy in Latin America

Ricciardi

Stages of Development and Contours of Economic Policy in Latin America

• Colonialism – Wars of IndependenceColonialism – Wars of Independence• Primary Product Export-led Growth Primary Product Export-led Growth 1800 1800’’s – 1930s – 1930• Import Substitution Industrialization (Prebisch): Import Substitution Industrialization (Prebisch): 1930s-1960s 1930s-1960s• Debt-Led Accumulation & Oil Shocks:Debt-Led Accumulation & Oil Shocks: 1960s-1970s 1960s-1970s• The Lost Decade – Debt CrisisThe Lost Decade – Debt Crisis 1980s 1980s• HyperinflationHyperinflation 1984 – 1991 1984 – 1991 • Washington Consensus & EM EuphoriaWashington Consensus & EM Euphoria Mid 80s–Early 90s Mid 80s–Early 90s• Reform Fatigue, Peso Crisis, Financial Contagion 1994-2002 Reform Fatigue, Peso Crisis, Financial Contagion 1994-2002 • Veranillo – China-led Commodity BoomsVeranillo – China-led Commodity Booms 2003-2008 2003-2008• Return of the Left – Good and Return of the Left – Good and ‘‘BadBad’’ – ISI, – ISI,

Decoupling, & Socialism in the 21Decoupling, & Socialism in the 21stst Century Century• Global Financial Crisis – Gringo PathologyGlobal Financial Crisis – Gringo Pathology 2007-? 2007-?• Improved Equity & Growth for La Am – ResilienceImproved Equity & Growth for La Am – Resilience

in crisis and new models for developmentin crisis and new models for development

One Hundred Years of Latin American Accumulation

Latin America’s Exploitation by means of Free Markets: Prebisch vs Smith, “Which Witch” Interrupted Latin American Growth?

Raul Prebisch – Structuralist – Free Markets produce unequal exchange in the dynamic relations of trade between the Center and Periphery

Calls for ISI - State directed trade policy that shaped the Latin American policy mindset for 40 years

Adam Smith – Classical – “Gains from Trade” produced out of enhanced labor productivity effects of increasing the extent of the market.

Laissez Faire

Phase I: (Free) Trade Volatility, Trade Crises

Latin America’s Secular Decline in the Terms of TradeChronic Balance of Trade Deficits

Import (Foreign Exchange) Constrained Growth1930s Depression forces “Inward Development”

Open Economy Extractive Export LedExternal ImbalanceCurrent Account Crises

1800s

1930s

Prebisch Hypothesis

Supply Side and Demand Side formulations-- Unequal exchange in the dynamic relations of trade between the Center and Periphery

– Supply Side: Perfect competition in peripheral product and factor markets. Imperfect Competition in the Center. Economic surplus from peripheral productivity gains is transferred to the Center in lower commodity prices.

Immiserization through trade for late developer, innovating, entrepreneurial, primary resource extractors, by means of falling terms of trade

1800s

1930s

Profits from these productivity increases are not realized in the Periphery, but are, instead, transferred to the Center nations in the form of falling prices for imported Peripheral inputs.

Producing a corresponding reduction in the Terms of Trade for the Periphery...

1800s

1930s

Prebisch Hypothesis

Demand Side -- “Elasticities Pessimism”

Center: Manufactured product exports Low income elasticity of demand for imports from the Periphery

Periphery: Primary materials, low value added, extractive exports High income elasticity of demand for imports from the Center

1800s

1930s

Phase II - Import Substitution Industrialization: 1930s-1960s

Restrict manufactured imports to reverse trade imbalance

Promote domestic high value added industrial production to substitute foreign imports

Decades of Policy Consensus for State Led Development Initiatives

1800s

1930s

1960s

Paradigm Shift

Structural Factors: Peripheral Growth and Debt Dependency

• XX**p = mc * Yp = mc * Y**cc (Peripheral Export Growth)(Peripheral Export Growth)

• MM**p = mp * Yp = mp * Y**pp (Peripheral Import Growth)(Peripheral Import Growth)

• XX** = M = M** (Balanced Trade Condition)(Balanced Trade Condition)

• mc * Ymc * Y**c = mp * Yc = mp * Y**pp• mp > mc mp > mc impliesimplies (Elasticities Pessimism)(Elasticities Pessimism)

• YY**c > Yc > Y**pp (Dependent Growth)(Dependent Growth)

• YY**p > Yp > Y**c c if and only ifif and only if X X** < M < M* *

(Peripheral Growth with(Peripheral Growth with Trade Deficits & DebtTrade Deficits & Debt

Accumulation)Accumulation)

OvercomingCrises in TradeBy Means of The OverAccumulationOf Debt

FromDependent Trade to Debt LedGrowth

Stylized Facts

Latin America’s Current Account Deficits (%GDP)

1972 2.2% 1982 5.5%Latin America’s Growth Rate 1960s - 70s 7-10%Latin America’s Ratio of Foreign Debt to GDP 1975 19% 1982 46%

Popular insurgency and Paradigm ShiftsThe Cuban Revolution shifted capital inflows from FDI to portfolio and ‘hot money’ investments

ECLA

DependencyTheory

SocialismIn Chile

Summary - Phase III: Oil shocks & Debt Accumulation 1960s-1970s

ISI Balance SheetISI Balance Sheet Fostered rapid economic growthFostered rapid economic growth Manufacturing growth confined to Brazil, Mexico, and Manufacturing growth confined to Brazil, Mexico, and

ArgentinaArgentina Growth came at the expense of large debt overhangGrowth came at the expense of large debt overhang World oil price escalation increased Latin debt World oil price escalation increased Latin debt

accumulation as petrodollars were recycled to finance accumulation as petrodollars were recycled to finance battered current accountsbattered current accounts

Neoliberalism Mach I: Chicago Monetarism Takes ChileNeoliberalism Mach I: Chicago Monetarism Takes Chile

1800s

1930s

1960s

1970s

Shock Policies

Phase IV: Debt Crisis - The Loans Come Due • Global Rise of Monetarism response to claims on the state

• From 1982-85 Net Capital Outflows from Latin America to DCs averaged 6% of Regional GDP - $34 Billion/ Year

• Transfer Achieved by Contraction of Region’s Economy -- 6% of GDP Annually

• Upper Classes Incurred the Debt. Lower Classes Paid it Off

• Private, Corporate LT Loans – Profits from Operations Privatized while Losses from Failures ‘Socialized’ into Mounting Government Deficits

• The ‘Lost Decade’ of the 1980s was an Engineered Contraction to Produce Trade Surplus to Service International Debt Obligations

1800s

1930s

1960s

1970s

1980s

IMF and Crisis Adjustment in Latin America

IMF Conditionality - Kill or Cure?International Lender of Last Resort or Arm of Int'l Finance Capital?

Absorption Approach to Financial Programming X - M = Y - (C +I+G)X - M = (S - I) + (T - G) (net private savings, government surplus)

IMF Conditionality: Debt Service or Economic Development?

1800s

1930s

1960s

1970s

1980s

The Lost Decade

Debt Overhang & Increased Interest Rate Sensitivity of Region’s External Balance

Vulnerability to external shocks: 1980s Reagan-Vulnerability to external shocks: 1980s Reagan-Volker anti-inflation policy -- instant financial Volker anti-inflation policy -- instant financial insolvencyinsolvency

CA -CA -KA -KA -OR +OR +

1800s

1930s

1960s

1970s

1980s

Phase V: Hyperinflation, Labor Discipline & The Return to the Market 1980s - early 1990s

Current Account (development deficits) no longer Current Account (development deficits) no longer financed by Capital inflowsfinanced by Capital inflows

Loans come due, debt service burden balloonsLoans come due, debt service burden balloons IMF calls for austerity to generate CA surpluses to IMF calls for austerity to generate CA surpluses to

generate foreign exchange to repay debtgenerate foreign exchange to repay debt Fiscal Deficits deepen to beyond 12% of GDP to Fiscal Deficits deepen to beyond 12% of GDP to

finance local currency spendingfinance local currency spending Public Finance by the Public Finance by the ‘‘MaquinitaMaquinita’’ Historically pathological hyperinflation ensues -- a Historically pathological hyperinflation ensues -- a

follow-on from the debt crisisfollow-on from the debt crisis

1800s

1930s

1960s

1970s

1980s

1990s

Hyperinflation Data

Underlying Fiscal Imbalance

Y ‘la Maquinita’

1800s

1930s

1960s

1970s

1980s

1990s

VI: Neoliberalism Mach II: VI: Neoliberalism Mach II: Consolidation of the Washington Consensus

Orthodox vs Heterodox Stabilization Efforts in the Mid-1980sOrthodox vs Heterodox Stabilization Efforts in the Mid-1980sFailed Heterodox programs in Peru, Argentina, and Brazil push policy Failed Heterodox programs in Peru, Argentina, and Brazil push policy

consensusconsensusCapital Surges and Emerging Market Euphoria (Early 1990s)Capital Surges and Emerging Market Euphoria (Early 1990s)

1800s

1930s

1960s

1970s

1980s

1990s

Washington ConsensusWashington Consensus

1.1. Fiscal DisciplineFiscal Discipline2.2. Reordering public expenditure prioritiesReordering public expenditure priorities3.3. Tax reformTax reform4.4. Liberalization of interest ratesLiberalization of interest rates5.5. A competitive exchange rateA competitive exchange rate6.6. Trade liberalizationTrade liberalization7.7. Liberalization of inward foreign direct investmentLiberalization of inward foreign direct investment8.8. PrivatizationPrivatization9.9. DeregulationDeregulation10.10. Property rightsProperty rights

1800s

1930s

1960s

1970s

1980s

1990s

Phase VII: The Peso Crisis, Global Financial Volatility, and Reform Fatigue

Anatomy of a Currency Crisis and Global Contagion

CA - 8%/GDP

KA + 8%/GDP

OR fixed exchange rate

CA -KA -OR + fixed exchange rate -- International Reserves Drain

1800s

1930s

1960s

1970s

1980s

1990s19942002

Pesos/t

$/Peso

Capital Flight

Chiapas

Mexican Current Account

Political Economy -- Hot Money & Bad Political Assumptions

Peso Crisis in Detail

1800s

1930s

1960s

1970s

1980s

1990s

Exchange Rate Collapse

Peso Crisis 1994 – in the News

1800s

1930s

1960s

1970s

1980s

1990s1994

Lessons of the Peso Crisis for Latin America1) The current account is a key variable that should not get “out of line”.

– the current account deficit should rarely exceed 3% of GDP in the long run.

2) The composition of capital inflows-short-term portfolio versus long-term direct investment funds-is extremely important.

– Short term portfolio flows are very sensitive to short-term changes in interest rates and other political and macroeconomic variables. FDI is less volatile and does not respond to short-term speculative factors.

3) Productivity gains are a fundamentally important element in the way in which the overall external sector develops.

4) There is an inherent danger in using fixed exchange rates as a stabilization device.

– Experience has shown that they tend to generate real exchange rate overvaluation and loss in external competitiveness.

5) The structure of Government debt is extremely important– short-term debt represents a true danger under free capital mobility.

1800s

1930s

1960s

1970s

1980s

1990s

Energy and commodities pricesEnergy and commodities prices rise with rise with Asian industrial demandAsian industrial demand

Rising Terms of Trade, Balance of Payments Rising Terms of Trade, Balance of Payments Surplus accumulation in Latin AmericaSurplus accumulation in Latin America

VIII: Veranillo: China-Led Commodity Boom

?

1800s

1930s

1960s

1970s

1980s

1990s

20032008

From 2003 – 2007 Latin America Enjoys Steady Economic GrowthFrom 2003 – 2007 Latin America Enjoys Steady Economic Growth

1994 – Mexican Peso Crisis1994 – Mexican Peso Crisis1997 – Brazil Real Crisis & International Contagion1997 – Brazil Real Crisis & International Contagion2001 – US Sept. 11 Crisis2001 – US Sept. 11 Crisis

Reform Fatigue: Market fundamentalist policies pursued since the 1980s did not produce the rapid, sustained

economic growth that was expected…

LATIN AMERICA AND THE CARIBBEAN: GDP GROWTH COMPARED WITH TOTAL GDPOF DEVELOPING COUNTRIES AND THE WORLD

(Annual rates of variation)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of official figures and World Bank, World Development Indicators [online database].

0

1

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8

1959

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1991

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2007

2008

Latin America and the Caribbean Developing countries World

Gini Coefficient in comparison with other regions

…And the Region Remained the Most Unequal in the World

Will Social Entrepreneurship address these concerns?Will Social Entrepreneurship address these concerns?

Mature popular struggles Mature popular struggles assert control over the state assert control over the state and energy assets to and energy assets to command dollar reserve command dollar reserve surpluses for redistributive surpluses for redistributive social policy agendas. social policy agendas.

The Pirates of the Caribbean The Pirates of the Caribbean - extend to Pirates of the - extend to Pirates of the Andes -Bolivia, Ecuador…Andes -Bolivia, Ecuador…

The The ““Good LeftGood Left”” and and ““Bad LeftBad Left”” --models of a Left Agenda in --models of a Left Agenda in Latin AmericaLatin America

The IMF irrelevant as windfall The IMF irrelevant as windfall dollar surpluses payoff old debt dollar surpluses payoff old debt

Latin America projects new axes Latin America projects new axes of accumulation: South-South, of accumulation: South-South, and South-East collaboration in and South-East collaboration in a multipolar world.a multipolar world.

Banco de SurBanco de Sur Seis Horas

Hugo Chavez 1998Venezuela

Lula 2003Brazil

Tabare Vasquez 2005Uruguay

Evo Morales 2006Bolivia

Manuel Zelaya 2006Honduras Deposed in coup 2009

Rafael Correa 2007Ecuador

Daniel Ortega 2007Nicaragua

Fernando Lugo 2008Paraguay Deposed 2012

Alvaro Colom 2008Guatemala Lost 2011 elect

Mauricio Funes 2008El Salvador

Jose Mujica 2009Uruguay

1800s

1930s

1960s

1970s

1980s

1990s

20032008

Kirchner 2003Argentina

Changed Political Landscape

Rafael Correa 2013Ecuador (3rd Term)

1800s

1930s

1960s

1970s

1980s

1990s

20032008

Kirschner 2011Argentina

Changed Political Landscape …

2013

Rouseff 2010Brazil

Nicolas Maduro 2013Venezuela

Countries with the most significant reductions in poverty are notCountries with the most significant reductions in poverty are notthose customarily associated with Washington Consensus Policiesthose customarily associated with Washington Consensus Policies

Left Governments in Argentina, Bolivia, Ecuador, Left Governments in Argentina, Bolivia, Ecuador, Honduras, Nicaragua, Venezuela…Honduras, Nicaragua, Venezuela…

In terms of poverty, the lost decade of the 1980s was followed by the difficult decade of 1990s, entering the new century with positive achievements

Fuente: Comisión Económica para América Latina y el Caribe (CEPAL), sobre la base de información oficial.

AMÉRICA LATINA: TASAS DE POBREZA, 1980-2008(En porcentajes)

Fuente: Comisión Económica para América Latina y el Caribe (CEPAL), sobre la base de información oficial.

Poverty Reduction 2011-2012

The economic experience of the region over recent decades leaves countries to view today's crisis from a different perspective:

“The crisis came from abroad, not just from the subprime situation, but also from a market-oriented economic model. Now we have to discuss whether the role being assigned to the State is temporary or permanent and if we should open new spaces for public policies, and in this context, assess the capabilities the region has lost."

Alicia Bárcena, Executive Secretary, ECLAC

“Financial meltdown will not cause the U.S. to abandon democratic capitalism, but the outcome is less clear for countries deciding whether capitalism is the best system. In many of these countries the choice is notbetween light and heavy financial regulation, but between relying on creative individuals or government planners to escape poverty.”

William EasterlyWilliam Easterly

Financial Crisis – A Gringo Pathology?

LONG HISTORY OF THE CRISIS

Development model based on deregulationDevelopment model based on deregulation Model based on the segmentation and increased Model based on the segmentation and increased

predominance of the financial sector over the predominance of the financial sector over the productiveproductive

Production patterns that are jeopardizing the Production patterns that are jeopardizing the future habitability of the planetfuture habitability of the planet

Globalization patterns with high concentrations Globalization patterns with high concentrations of wealthof wealth

Paradigms such as the Paradigms such as the ““invisible handinvisible hand”” and and ““trickle down theorytrickle down theory”” are no longer credible are no longer credible

ECLAC ECLAC

ECLAC

COYUNTURAACTUAL

The 2008 & 2011 crises had a high political, economic and social impact

• The current crisis reflects a turning point:– It broke the continuity of the neoliberal model – Represents a deep crisis in a model associated with

two decades of concentration of wealth • The crisis is generating spaces of deep

discussion on: – The future of the economic logic of accumulation – The rules of the global economic system – The role of public policy – The failure of global institutions to confront and

respond to global systemic problems

ECLAC

COYUNTURAACTUAL

Economic and military power has shifted from the Atlantic to the Pacific and from North to South

• China will grow 8 to 9% in 2011 and 2012• Raw material prices may slow but will continue

at historically high levels• The last decade saw strengthened economic ties

with China and Asia and the Pacific in general and growing South-South relations

– In the event of a new recession in developed countries or a new global financial crisis, the margin of maneuver in emerging countries will depend on:– external balance and international reserves– The nature of monetary and fiscal policy – The structure of foreign trade, in terms of products

and markets

ECLAC

COYUNTURAACTUAL

Business Trends 1985-2010: CRECIMIENTO DEL COMERCIO MUNDIAL

Y APORTE DE LOS PAÍSES EN DESARROLLO, 2003-2010

(En porcentajes)

Fuente: CEPAL sobre la base de datos del CPB Netherlands Bureau for Economic Policy Analysis.

MUNDO: DISTRIBUCIÓN DE LAS EXPORTACIONES,1985 Y 2010(En porcentajes del comercio mundial)

1985 2010

a

Fuente: CEPAL sobre la base de Naciones Unidas, Base de datos estadísticos sobre el comercio de mercaderías (COMTRADE).a Estimación sobre la base del 90% de las exportaciones mundiales.

ECLAC

COYUNTURAACTUAL

The crisis highlights the importance of South-South trade in global performance. In 2018 South-South trade will surpass North-North trade

Fuente: CEPAL, División de Comercio Internacional e Integración, sobre la base de cifras oficialesCifras para el período 2011-2020 son proyecciones sobre la base de la tendencia lineal de largo plazo de las exportaciones por región.

EVOLUCIÓN DE LAS EXPORTACIONES POR REGIONES, 1985-2020 (En porcentajes del total)

ECLAC

COYUNTURAACTUAL

The boom in commodity prices has led to the “reprimarization” of the region’s export structure

LATIN AMERICA AND THE CARIBBEAN: STRUCTURE OF WORLDWIDE EXPORTS SINCE THE EARLY 1980s(Percentages of the regional total)

Source: Economic Commission for Latin America and the Caribbean (ELCAC), on the basis of United Nations COMTRADE database.

ECLAC

COYUNTURAACTUAL

Climate change poses an additional challenge to the development of the region, which should be adaptive, sustainable and low carbon

IMPACTO DE LOS DESASTRES EN AMERICA LATINA Y EL CARIBE – 1972-2008(Basado en las evaluaciones hechas por CEPAL)

38,042 34,202 32,965 9,384

4,229,260 5,442,5002,671,888

33,641,911

2,639,038.12

11,719,490.00

25,030,829.52

55,387,034.13

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

1970-80 1980-90 1990-2000 2000-2008

Muertos Población directamente afectada

DAÑOS TOTALES (millones de dólares corrientes) Expon. (Población directamente afectada)

ECLAC

COYUNTURAACTUAL

ECLAC

COYUNTURAACTUAL

The space we live in: Air Pollution and Health Risk

Where is Latin America and the Caribbean today?

•Implications for the region historical and recent debt deal:

– Worsening distribution of income

– Increasing heterogeneity of production

– Low investment and low savings rates

– Segmentation of labor and social protection

– Increased racial, ethnic and gender discrimination

– Asymmetric vulnerability to climate change

• Learning from the past• More prudent

macroeconomic policy• More progressive in social

terms• With economies growing in

2010 but slowing in 2011 and 2012

• Urgent to rethink a new development agenda with equality at the center

• Requires closing productive and social gaps

ECLAC

COYUNTURAACTUAL

New equation: State-market-society

• Citizens claim their space in the process of making decisions that affect them and raise the urgent need to redefine the State-Market-Society equation:– The public as a space of collective interests and not as the state or

nation – A market that is dynamic, innovative and responsive to social interests; – A society that is inclusive, caring, and embraces solidarity; – A better state, modern and agile, to guarantee welfare and sustainability

of development.• This requires:

– Political agreements for a new social and inter-generational contract with a definition of responsibilities, rights protection, and systems of accountability

– Strengthening a culture of collective development based on tolerance for difference and diversity

– Strategic vision and long-term development from within, promoting productive agreements between actors

– State policies, not only of government or administration, by way of democratic institutions

ECLAC

COYUNTURAACTUAL

TINA (there is no alternative)

vs

Its for you to create, con fuerza, conciencia y corazón