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Stages of Development and Contours of Economic Policy in Latin America

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 Independence Primary Product Export-led Growth 1800 ’ s – 1930

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Stages of Development and Contours of Economic Policy in Latin America

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  1. Stages of Development and Contours of Economic Policy in Latin America Ricciardi

  2. Stages of Development and Contours of Economic Policy in Latin America • Colonialism – Wars of Independence • Primary Product Export-led Growth 1800’s – 1930 • Import Substitution Industrialization (Prebisch): 1930s-1960s • Debt-Led Accumulation & Oil Shocks: 1960s-1970s • The Lost Decade – Debt Crisis 1980s • Hyperinflation 1984 – 1991 • Washington Consensus & EM Euphoria Mid 80s–Early 90s • Reform Fatigue, Peso Crisis, Financial Contagion 1994-2002 • Veranillo – China-led Commodity Booms 2003-2008 • Return of the Left – Good and ‘Bad’ – ISI, Decoupling, & Socialism in the 21st Century • Global Financial Crisis – Gringo Pathology 2007-? • Improved Equity & Growth for La Am – Resiliencein crisis and new models for development Periodization

  3. One Hundred Years of Latin American Accumulation

  4. Volatility– Masquenovela

  5. Volatility– Mas que novela

  6. 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 • Paradigm • Wars

  7. 1800s • 1930s Phase I: (Free) Trade Volatility, Trade Crises Latin America’s Secular Decline in the Terms of Trade Chronic Balance of Trade Deficits Import (Foreign Exchange) Constrained Growth 1930s Depression forces “Inward Development” Open Economy Extractive Export Led External Imbalance Current Account Crises

  8. 1800s Prebisch Hypothesis • 1930s • 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

  9. 1800s 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. • 1930s • Producing a corresponding reduction in the Terms of Trade for the Periphery...

  10. 1800s Prebisch Hypothesis • 1930s 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 Demand Side

  11. 1800s Phase II - Import Substitution Industrialization: 1930s-1960s • 1930s 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 • 1960s • Paradigm Shift

  12. Structural Factors: Peripheral Growth and Debt Dependency • X*p = mc * Y*c (Peripheral Export Growth) • M*p = mp * Y*p (Peripheral Import Growth) • X* = M*(Balanced Trade Condition) • mc * Y*c = mp * Y*p • mp > mc implies (Elasticities Pessimism) • Y*c > Y*p (Dependent Growth) • Y*p > Y*c if and only if X* < M* (Peripheral Growth with Trade Deficits & Debt Accumulation) Overcoming Crises in Trade By Means of The Over Accumulation Of Debt From Dependent Trade to Debt Led Growth

  13. 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%

  14. ECLA Popular insurgency and Paradigm ShiftsThe Cuban Revolution shifted capital inflows from FDI to portfolio and ‘hot money’ investments • Dependency • Theory • Socialism • In Chile

  15. 1800s Summary - Phase III: Oil shocks & Debt Accumulation 1960s-1970s • 1930s ISI Balance Sheet • Fostered rapid economic growth • Manufacturing growth confined to Brazil, Mexico, and Argentina • Growth came at the expense of large debt overhang • World oil price escalation increased Latin debt accumulation as petrodollars were recycled to finance battered current accounts Neoliberalism Mach I: Chicago Monetarism Takes Chile • 1960s • 1970s Shock Policies

  16. 1800s 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 • 1930s • 1960s • 1970s • 1980s

  17. 1800s IMF and Crisis Adjustment in Latin America • 1930s 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? • 1960s • 1970s • 1980s The Lost Decade

  18. 1800s Debt Overhang & Increased Interest Rate Sensitivity of Region’s External Balance • 1930s • Vulnerability to external shocks: 1980s Reagan-Volker anti-inflation policy -- instant financial insolvency CA - KA - OR + • 1960s • 1970s • 1980s

  19. 1800s Phase V: Hyperinflation, Labor Discipline & The Return to the Market 1980s - early 1990s • 1930s • Current Account (development deficits) no longer financed by Capital inflows • Loans come due, debt service burden balloons • IMF calls for austerity to generate CA surpluses to generate foreign exchange to repay debt • Fiscal Deficits deepen to beyond 12% of GDP to finance local currency spending • Public Finance by the ‘Maquinita’ • Historically pathological hyperinflation ensues -- a follow-on from the debt crisis • 1960s • 1970s • 1980s • 1990s

  20. Hyperinflation Data

  21. 1800s Underlying Fiscal Imbalance • 1930s • 1960s • 1970s • 1980s • 1990s Y ‘la Maquinita’

  22. 1800s VI: Neoliberalism Mach II: Consolidation of the Washington Consensus • 1930s Orthodox vs Heterodox Stabilization Efforts in the Mid-1980s Failed Heterodox programs in Peru, Argentina, and Brazil push policy consensus Capital Surges and Emerging Market Euphoria (Early 1990s) • 1960s • 1970s • 1980s • 1990s

  23. Washington Consensus • 1800s • 1930s Fiscal Discipline Reordering public expenditure priorities Tax reform Liberalization of interest rates A competitive exchange rate Trade liberalization Liberalization of inward foreign direct investment Privatization Deregulation Property rights • 1960s • 1970s • 1980s • 1990s

  24. 1800s Phase VII: The Peso Crisis, Global Financial Volatility, and Reform Fatigue • 1930s • 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 • $/Peso • 1960s • 1970s • 1980s Capital Flight Pesos/t • 1990s • 1994 • 2002 • Chiapas

  25. 1800s • 1930s • Mexican Current Account • 1960s • 1970s Political Economy -- Hot Money & Bad Political Assumptions • 1980s • 1990s Peso Crisis in Detail

  26. 1800s • 1930s • Exchange Rate Collapse • 1960s • 1970s • 1980s • 1990s • 1994 Peso Crisis 1994 – in the News

  27. 1800s Lessons of the Peso Crisis for Latin America • 1930s 1) 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. • 1960s • 1970s • 1980s • 1990s

  28. 1800s VIII: Veranillo: China-Led Commodity Boom • 1930s • 1960s • 1970s • Energy and commodities pricesrise with Asian industrial demand • Rising Terms of Trade, Balance of Payments Surplus accumulation in Latin America • 1980s • 1990s • 2003 • 2008 • ?

  29. From 2003 – 2007 Latin America Enjoys Steady Economic Growth 1994 – Mexican Peso Crisis 1997 – Brazil Real Crisis & International Contagion 2001 – US Sept. 11 Crisis

  30. 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].

  31. …And the Region Remained the Most Unequal in the World • Gini Coefficient in comparison with other regions Will Social Entrepreneurship address these concerns?

  32. Mature popular struggles assert control over the state and energy assets to command dollar reserve surpluses for redistributive social policy agendas. • The Pirates of the Caribbean - extend to Pirates of the Andes -Bolivia, Ecuador…

  33. The “Good Left” and “Bad Left” --models of a Left Agenda in Latin America • The IMF irrelevant as windfall dollar surpluses payoff old debt • Latin America projects new axes of accumulation: South-South, and South-East collaboration in a multipolar world. • Banco de Sur • Seis Horas

  34. Changed Political Landscape • 1800s • Rafael Correa 2007 • Ecuador • Hugo Chavez 1998 • Venezuela • 1930s • Daniel Ortega 2007 • Nicaragua • Lula 2003 • Brazil • Fernando Lugo 2008 • Paraguay Deposed 2012 • Kirchner 2003 • Argentina • 1960s • Alvaro Colom 2008 • GuatemalaLost 2011 elect • 1970s • Tabare Vasquez 2005 • Uruguay • 1980s • Mauricio Funes 2008 • El Salvador • 1990s • Evo Morales 2006 • Bolivia • 2003 • Jose Mujica 2009 • Uruguay • 2008 • Manuel Zelaya 2006 • Honduras • Deposed in coup 2009

  35. Changed Political Landscape … • 1800s • Rouseff 2010 • Brazil • 1930s • Kirschner 2011 • Argentina • 1960s • Rafael Correa 2013 • Ecuador (3rd Term) • 1970s • 1980s • 1990s • Nicolas Maduro 2013 • Venezuela • 2003 • 2008 • 2013

  36. Countries with the most significant reductions in poverty are notthose customarily associated with Washington Consensus Policies • Inequality Left Governments in Argentina, Bolivia, Ecuador, Honduras, Nicaragua, Venezuela…

  37. 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 AMÉRICA LATINA: TASAS DE POBREZA, 1980-2008 (En porcentajes) • Inequality • Fuente: Comisión Económica para América Latina y el Caribe (CEPAL), sobre la base de información oficial.

  38. Poverty Reduction 2011-2012 • Inequality • Fuente: Comisión Económica para América Latina y el Caribe (CEPAL), sobre la base de información oficial.

  39. Financial Crisis – A Gringo Pathology? 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 not between light and heavy financial regulation, but between relying on creative individuals or government planners to escape poverty.” William Easterly

  40. LONG HISTORY OF THE CRISIS • Development model based on deregulation • Model based on the segmentation and increased predominance of the financial sector over the productive • Production patterns that are jeopardizing the future habitability of the planet • Globalization patterns with high concentrations of wealth • Paradigms such as the “invisible hand” and “trickle down theory” are no longer credible • ECLAC ECLAC COYUNTURA ACTUAL

  41. 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 COYUNTURA ACTUAL

  42. 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 COYUNTURA ACTUAL

  43. Business Trends 1985-2010: • CRECIMIENTO DEL COMERCIO MUNDIAL Y APORTE DE LOS PAÍSES EN DESARROLLO, 2003-2010 • (En porcentajes) • MUNDO: DISTRIBUCIÓN DE LAS EXPORTACIONES,1985 Y 2010 • (En porcentajes del comercio mundial) • 1985 • 2010 a ECLAC COYUNTURA ACTUAL • 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. • Fuente: CEPAL sobre la base de datos del CPB Netherlands Bureau for Economic Policy Analysis.

  44. The crisis highlights the importance of South-South trade in global performance. In 2018 South-South trade will surpass North-North trade • EVOLUCIÓN DE LAS EXPORTACIONES POR REGIONES, 1985-2020 • (En porcentajes del total) ECLAC COYUNTURA ACTUAL • Fuente: CEPAL, División de Comercio Internacional e Integración, sobre la base de cifras oficiales • Cifras para el período 2011-2020 son proyecciones sobre la base de la tendencia lineal de largo plazo de las exportaciones por región.

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

  46. 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) ECLAC COYUNTURA ACTUAL

  47. The space we live in: Air Pollution and Health Risk ECLAC COYUNTURA ACTUAL

  48. Where is Latin America and the Caribbean today? 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 • 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 ECLAC COYUNTURA ACTUAL

  49. 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 COYUNTURA ACTUAL

  50. TINA (there is no alternative) vs • Its for you to create, con fuerza, conciencia y corazón

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