Latin America & East Asia Compared

1. Latin America & East Asia Compared Lecture # 12 Week 6

2. Structure of this lecture • Development model adopted by Asian NICs • How does it compare to ISI in Latin America • Economic performance compared • Case Study: Brazil Automobile Industry • With hindsight: ISI in Brazil?

3. Development model adopted by Asian NICs In a nutshell: • high tariff barriers • Focus subsidies and investment  industries which would make goods for export • Not to attempt to undervalue the local currency • Boost competitiveness, particularly in the 1970s E.g., South Korea made large investments into heavy and chemical industries, such as shipbuilding, steel and petrochemicals. • This focus on export markets allowed them to create competitive industries.

4. Main difference according to several economists (e.g., Rodrik) Twofold: • Budget deficits were low relative to those of Latin America, and • Exchange rates were not overvalued Total Factor productivity : 1960 – 1970 1970-1980 1980-1990 East Asia 1.5 0.9 0.3 Latin America 1.6 1.1 -2.3

5. Economic performance compared Source: World Bank Statistics

6. Case study: Brazil Largest country in Latin America Fifth largest in the world About 160 million inhabitants Highest income inequality Primary commodities: -Sugar (16th C) -Minerals (18th C) -Coffee (mid-19th C) -Rubber (19th C to 20thC) ISI Policies 1945 – 1980: One of the fastest growing economies Diversified industrial base under ISI

7. The automobile industry • Dates back to 1916 assembly plants created by Ford • Propelled by the expansion of roads in the region • World War II: Propelled locally produced parts • 1950s: ISI policies impose restrictions on imports of finished cars, and local production by foreign firms has to meet a required 90% local manufacturing content • Attraction of foreign capital to foreign manufactures: 89 cents subsidies for every dollar invested in industry • Production increased from 110,000 in 1951 to 191,194 in 1962, but domestic content was far greater

8. 1970s: Export promotion prompted with fiscal benefits to those firms that met “targets” • Exports increased from 2.2% in 1979 to 27.3% in 1981 • As of 1981 production fell drastically due to declining domestic demand (debt crisis- lost decade) • Brighter prospects with trade integration (MERCOSUR) and decreasing tariffs under trade integration trends

9. Contributing to “sophisticated” exports (Stage II Industrialization) Source: UN Statistics

10. South Korea • Small domestic demand • Production for export market • Imported technology (avoided R&D investments) • Like Brazil, imports of finished cars was banned • Unlike Brazil, South Korea limited production to domestic ownership • Sales to the US increased rapidly in the 1970s, but have recently declined

11. Comparable performance Automobile production 2005 #1 Japan: 8,618,730 #2 Germany: 5,123,240 #3 United States: 5,016,310 #4 France: 3,283,780 #5 Korea, South: 2,651,270 #6 Spain: 2,266,900 #7 United Kingdom: 1,628,020 #8 Brazil: 1,521,430 #9 Canada: 1,369,000 #10 Italy: 1,125,770 #11 China: 1,090,820 #12 Russia: 980,736 #13 Mexico: 960,896 Main differences: a) S. Korea continues to compete in the world markets, and b) Car industry in Brazil financed with FDI ---- Next Class: Topic 13, Stabilization and Adjustment. Have a nice weekend -