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Latin America Class 3

Latin America Class 3. Why did Latin America persist with ISI???. Perspective 1: Political influence of land-based oligarchy and their foreign allies Perspective 2: James Mahon. 1992. Was Latin America too rich to prosper? Journal of Development Studies 28(2): 241-263. Mahon’s Thesis.

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Latin America Class 3

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  1. Latin AmericaClass 3

  2. Why did Latin America persist with ISI??? • Perspective 1: • Political influence of land-based oligarchy and their foreign allies • Perspective 2: • James Mahon. 1992. Was Latin America too rich to prosper? Journal of Development Studies 28(2): 241-263.

  3. Mahon’s Thesis • Springboard is the productivity of primary commodity exports • led to appreciation of Latin American exchange rates • Problem: manufactures were not competitive in world market at prevailing exchange rates

  4. Required currency devaluation to make them competitive • And the consequence of signif. currency devaluation??? • Decreased real wages or purchasing power for the population • How much devaluation would have been required??? • Assume competitiveness may be approximated by real wage levels

  5. Wage comparisons: Latin America and East Asia, early 1960s Taiwan Colombia Brazil Hourly Wage Rates, current $US

  6. Questions politicians might have asked? • How quickly might we expect real wages to recover fully??? • At 15% per year--5 to 9 years • What are prospects for upturn in primary export prices? • What is my likelihood of my benefiting politically from long term gains? • Will IMF permit such devaluation?

  7. Resource Curse Thesis • Resource-rich countries tend to squander their resource advantage • Why??? Optimistic estimation of prospects leads to pursuit of lax economic policies

  8. Richard Auty’s version • Mineral economies under-performed relative to control group • Why? • Capital intensiveness with small workforce • large inputs of foreign capital • few local production linkages---> low revenue retention within the country

  9. Compounded by “Dutch Disease” • appreciation of exchange rates due to rapid flow of mineral rents (revenues in excess of production costs and a normal return on capital) into the domestic economy

  10. Auty views Brazil as a special case • Market richness is the curse • Belief that large internal market allows an AUTARKIC strategy of self-sufficiency. • We don’t have to go through a stage of dependence on low wage labor-intensive exports.

  11. 3. Another Factor perpetuating ISI • The 1980s debt crisis • Interpreted as evidence of need to protect the region from global shocks • one response is heightened protection

  12. Import Protection in the Developing World, 1985 percent

  13. Transformation of economic policy • Source: • Sebastian Edwards. 1995. Crisis and Reform in Latin America. World Bank. • Discusses factors responsible for and components of the new model

  14. Factors • The East Asian experience • The Chilean experience • av. annual growth rate 1985-94 is 6.7% per year--a role model • Role of World Bank and IMF • alternative interpretations • Collapse of the Soviet Union

  15. Components of the New Policy Packages • Creation of macroeconomic stability by controlling public sector deficits • Opening the external sector to foreign competition • Reducing the role of the state (deregulation and privatization) • Implementing targeted poverty-reducing packages

  16. Privatization and Deregulation • 1950s and 1960s: steady growth of state-owned enterprises. Why? • Deal with natural monopolies and oligopolies • provide key services at low prices • reduce vulnerability to external shocks • create a socialist-oriented society • But SOEs grew well beyond strategic sectors

  17. Regulatory legislation • Control entry into industries • control price and quantity of goods produced • heavy regulation of labor relations

  18. Problems • State-owned enterprises • incur major losses requiring subsidies • fuels inflation • provide poor services • Controls over private enterprise encourage rent-seeking and corruption

  19. Privatizations in Latin America and Caribbean, 1988-93

  20. Potential Issues • By 1993, 151 of the 500 largest enterprises in Latin America were foreign-owned • some of the most sensitive sectors • public utilities, mining, telecommunications • Symptoms of a decline in national autonomy??? • Exploitation issue???

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