The Political Economy of Latin America in the Postwar Period

[ Latin American Studies ]

The Political Economy of Latin America in the Postwar Period

Edited by Laura Randall

1997

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6 x 9 | 329 pp. | 45 tables, 8 maps, 13 figures

ISBN: 978-0-292-77083-6

The historic and increasing interdependence of the Latin American and U.S. economies makes an understanding of the political economies of Latin American nations particularly timely and important. After World War II, many nations initially implemented import substituting industrialization policies. Their outcomes, and the shift in policies, are related to the domestic policies and world economic conditions that led to government deficits, inflation, foreign borrowing, debt renegotiation, and renewed emphasis on common markets and other devices to stimulate trade and investment.

In The Political Economy of Latin America in the Postwar Period, important policy measures are evaluated, such as indexation of prices and contracts; special provisions for financing the government through the Central Bank; stabilization; and deregulation of the economy.

The introduction presents trends in Latin American growth and the factors that influence them. This is followed by parallel studies of the economic development of Argentina, Brazil, Chile, Cuba, Ecuador, Mexico, and Peru from 1945 to the mid-1990s. Noted experts bring their considerable experience to analyzing the content and impact of the economic theories that guided policymaking and their effects on output, income, and quality of life.

  • 1. Introduction (Laura Randall)
  • 2. Chile (William F. Maloney)
  • 3. Brazil (Werner Baer and Claudio Paiva)
  • 4. Mexico (Miguel Ramírez)
  • 5. Argentina (Robert McComb and Carlos E. J. M. Zarazaga)
  • 6. Peru (Efraín Gonzales de Olarte)
  • 7. Ecuador (Joan B. Anderson)
  • 8. Cuba (Carmelo Mesa-Lago)
  • Index

Why edit a textbook on Latin American economies when there are texts describing Latin America as a whole? Because such generalizations do not adequately account for the importance of policies, people, and differences among Latin American nations in determining their economic development. Although Argentina, Brazil, Chile, Cuba, Ecuador, Mexico, and Peru—chosen to represent all major regions of Latin America—are linked by language and culture, they differ in size, resource endowments, and political and historical traditions; hence each nation is best studied in the context of its own history and world events. For those interested in an overview, this introduction provides a summary of some issues and trends common to the seven nations, against which the economic history, institutions, and policies of each nation can be evaluated. These are growth rates (see charts 1.1 and 1.2); development policies; the role of government; spending patterns, capital, and growth; foreign financing of Latin American development; exports, land reform, and growth; who benefits from Latin American growth (income distribution); and common development patterns.

Growth Rates

Latin American economies during many periods of their history compared favorably with the economy of the United States at similar stages of development. The Inter-American Development Bank suggests that because almost one-half of the Latin American labor force was in agriculture in 1965 it should be compared to the United States in 1870, when 48 % of the labor force was in agriculture (Urrutia 1991 b, pp. 46 and 55). For example, Latin America grew 3.5 % per year in 1913-50 and 4.7% per year in 1950-73, compared to 1.1 % for advanced countries in 1820-70, 1.4% in 1870-1913, and 1.2% in 1913-50 (Maddison 1983, p. 28; Maddison 1991, p.17). The same pattern is observed in the growth of per capita gross domestic product, indicating a strong performance, because the first effect of economic growth is the increased life expectancy rates and consequent increase in population of a developing nation.

Inadequate worldwide adjustments to oil price increases contributed to a fall in the growth rate of Latin American nations to 3.8% in 1973-80; continuing gyrations in commodity prices and sharp changes in interest rates led to transfers of real resources to service their foreign debt in the 1980s—4% of Latin American gross domestic product was transferred abroad, compared to a prior inflow of 2%, for a shift of 6% of gross domestic product—with a consequent fall in real per capita income. Despite the problems from 1973 to the early 1990s, their long-run overall economic performance was still strong; the 1950-90 economic growth of Mexico and Brazil was more rapid than that of the United States. Latin American economic growth, however, was not uniform among the nations studied in this book: Argentina, Chile, and the United States grew more slowly than Brazil, Ecuador, Mexico, and Peru from 1950 to 1980 (Morley 1994, p. 1).

Development Policies

Development style shifted from export-led growth and government provision of infrastructure before World War I to increasing attention to development of the domestic market. The closing of world markets during World War I, preferential trading agreements during the Great Depression, and disruptions to trade during World War II made exportled growth appear to be unduly risky. Governments therefore protected local industries using raw materials in which the nation had a comparative advantage and took measures to develop financial and physical infrastructure. Direct investment by foreigners had led to conflicts about pricing, availability of products, and remittance of profits. In cases where domestic private investment did not enter fields believed essential for national economic development, the government took on the role of entrepreneur.

After World War II, the United Nations Economic Commission for Latin America often emphasized external rather than internal bottlenecks that inhibited growth. Emphasis was placed on the falling terms of trade, defined as the ratio between prices for Latin American exports and those for their imports. A conclusion was that producing goods formerly imported was a better growth strategy than emphasizing export growth. Resources were taken from agriculture and other sectors and used to protect industry. Manufactured products were protected from import competition, and industries were created, frequently by government entities acting alone or in combination with domestic or foreign investors. At the same time, concern with employment was greater than worries about inflation: both job creation—through government firms and other parts of the public sector more than through increases in central government employment—and inflation typified post-World War II Latin American economic development. Although there were many complaints about Latin American economic performance at the time, economic growth was stronger in 1950-73 than in later periods because of the disruption caused by skyrocketing oil prices in the 1970s and debt-related problems in the 1980s.

This led to changes in economic policy in the eighties and nineties, consistent with an analysis indicating that from 1950 to 1989 the restriction of individual liberties by the state reduced the rate of investment in Latin American economies; that anticipated inflation and current public spending reduced economic growth; that there was no proof that a fall in the terms of trade reduced long-term economic growth; and that the expansion of the export sector increased economic growth (Feliz 1992, p. 17). These findings confirm the policy prescriptions suggested and implemented from the mid-eighties: increase democratic political procedures, reduce government spending and inflation, and increase exports.

The Role of Government

Summarizing results for Argentina, Brazil, Chile, Mexico, and Peru, public sector spending—which except for Chile was largely financed by foreign borrowing—rose from 30% of gross domestic product in 1970 to almost 50% in 1985. In Chile, it rose from 41 % in 1970 to 56% in 1972, under President Salvador Allende, falling after his death to 40% in 1985. The increase in public sector spending in rich nations occurred over the course of half a century. In Latin America, it took place in one decade (Larrafn and Selowsky 1991, pp. 2-3 and 310).

This growth reflects not only the growth of central government expenditures, but also that of state and local governments, firms owned in whole or in part by the government, and other government entities whose budgets are not included in that of the central government. The share of public enterprises in total government spending rose from 34 to 50% during this period (Larraín and Selowsky 1991, pp. 308-9). The expansion was triggered by the oil crisis, with governments expanding their activities to earn money to pay for oil imports by increasing the production of tradable goods in oil-importing nations and expanding production of oil and its substitutes in all countries, as well as in industries that supply the expanded sectors. However, public sector growth was not the unique cause of external indebtedness. "Chile's indebtedness was due almost totally to ... private sector overspending. ... Part of [Argentina and Mexico's] increase in foreign debt was the result of a public sector deficit and part of an increase in the Central Bank's foreign debt. The funds received were used to support the currency and ended up as capital flight. Only in Brazil and Peru are public deficits accountable for the bulk of the build-up in foreign debt" (Larraín and Selowsky 1991, p. 10; also pp. 6, 308-9, 319).

Consequently, Larraín and Selowsky recommend that public sector finances be strengthened by improving the tax system; by eliminating transfers from the central government to public enterprises, ensuring that this is a result of increased efficiency rather than only of increases in the prices they charge; and by reducing deficits of state and provincial governments, usually from provincial banks and central monetary authorities. This requires adequate supervision of banking and a fully independent Central Bank. Chile and Mexico have recently implemented the latter reform (Larraín and Selowsky 1991, p. 316).

The tax system traditionally has been plagued by tax evasion, which increased with increased burdens of inflation, with falls in income, and with increased ratios of future to current income (Fishlow and Friedman 1994, p. 121). During the 1970s and 1980s, the tax system increased its coverage, but also tended to increase the burden on the poor: value added taxes and contributions to social security provided increasing shares of government revenue during the seventies, and value added taxes continued to do so in the eighties in Brazil, Chile, and Mexico. Taxes on income, profits, and capital gains fell substantially in Brazil, Mexico, and Peru (Werneck 1991, p. 59; International Monetary Fund, Government Finance Statistics Yearbook).

From the 1970s to the 1990s the share of spending on defense fell. Concern shifted in Argentina and Brazil to general government services and public order. During the 1980s, except for Chile and Argentina, the share of spending on education, health, social security, and welfare fell. The transfer of funds abroad to service or reduce the foreign debt clearly came at the expense of the welfare of the present generation of the poor and middle classes. The rationale was that renewed lending and structural reform, which were said to depend on repayment of at least some of the foreign debt, were necessary for the economic welfare of future generations. The pattern of government revenue collection and expenditure, designed to increase economic growth, worsened the distribution of income and welfare in the short run.

Spending Patterns, Capital, and Growth

Moreover, spending patterns became similar to those of rich nations, resulting in a lowering of growth rates. For example, Mexican private consumption patterns rapidly approached those of the United States, leaving less room for personal savings than other nations had obtained at similar stages of development. In consequence, if the level of consumption were to be maintained, increases in investment would have to be made by the government or obtained from foreign sources, which explains the opening to foreign investment in recent years. The composition as well as the level of investment is significant (Randall 1993a). Investment in people, homes, and infrastructure was necessary for the population's well-being, even though investment in machinery and equipment was directly related to economic growth (De Long and Summers 1991, p. 445).

The composition of investment varied among Latin American nations and indicated preferences for present comfort or future growth. Mexico emphasized investment in machinery, equipment, and housing. In Argentina, Brazil, and Chile, the share of investment in housing fell. Argentina and Chile concentrated investment in machinery and equipment, Brazil, in nonresidential structures. The Mexican distribution of investment was thought to balance needs of current housing and future growth more adequately than other nations and may explain why Mexico had relatively little violence until the 1994 economic and political crisis.

Foreign Financing of Latin American Development

Development can be financed by public or private savings and investment, from domestic or foreign sources. Developing nations traditionally use both domestic and foreign funds. Although foreign direct investment in Latin America rarely accounted for more than 10% of gross domestic capital formation, it was important both for its contribution to growth and for its provision of foreign exchange, which was used to import goods and services essential for growth that were not available within the nation that imported them. The massive reduction of direct investment and transfer of funds abroad to service the foreign debt in the early and mid-eighties severely reduced Latin America's economic capacity for growth. To reverse this trend, Latin American nations restructured their debt and opened their financial markets. Increasingly deep discounts in the secondary market for debt issues from 1987 to 1989 led, in some cases, to swapping government debt for equity (attractive because the debt was accepted at close to par for conversion purposes), while commercial debt was reduced under the 1989 Brady Plan, which facilitated forgiveness of private debt in exchange for International Monetary Fund and World Bank debt guarantees and greater Latin American reforms in fiscal, monetary, and international commercial policy. The private sector consequently increased its share in total investment from 57% in 1983 to 62% in 1990, although this was below the 1970s level of 64% (Pfeffermann and Madarassy 1992).

Exports, Land Reform, and Growth

Worldwide, the nations that had the most successful export-led growth stressed education and implemented land reform before the export expansion. In Latin America, education as a share of total central government expenditures was stagnant or falling from the mid-1970s to the mid-1990. Moreover, Mexico's land reform slowed significantly; Chilean land reform was partially reversed after Allende; limited land reforms were undertaken by Ecuador and Peru (Peru, however, ended restrictions on private land ownership in 1995). Only Cuba initiated a major land reform in the postwar era. Thus, the preconditions allowing the poor to benefit directly from export expansion—through owning land on which exports are produced (Morley 1994, p. 20) or obtaining skills to produce manufactured goods and other exports—are missing.

Export expansion, however, is a central Latin American economic policy in the 1990s, free trade agreements having been established among many Latin American nations and between Canada, Mexico, and the United States. (The most recent is the Association of Caribbean States: it was created in August 1995 to offer some protection for the small economies in the region that are endangered by rapid changes in global trade.) It is anticipated that a Western Hemisphere Free Trade Area will gradually be established during the next twenty years.

Who Benefits from Latin American Growth? Income Distribution Latin American income is more unequally distributed than that of rich nations at a similar stage of development. In rich nations the top 10 % of the population had 34-42% of the income from 1911 to 1938. In Latin America in the 1950s and 1960s they had roughly 50 to 60%. In 1970 the upper 10% had 22% of income in Argentina and 52% in Mexico. In 1980 the range was from 30% in Argentina to 50% in Peru. A comparison of Latin American nations to others found that in 1965 only Costa Rica, Panama, Uruguay, and Venezuela were more egalitarian than other nations with similar characteristics. Brazil, Honduras, Jamaica, and Mexico were much more unequal (Urrutia 1991b, p. 47). Poverty was nearly always reduced by economic growth, but it increased with the disruption of growth during the 1980s, when inequality increased: 31 of Latin America lived on less than $2 per day in 1989, compared to 26.5% in 1980 (Morley 1994, p.14). Rural urban migrations reduced rural poverty, while urban poverty increased. More than half of Latin America's poverty is now urban, and Brazil has a 36% larger share of poor people than other Latin American nations. Mexico's stabilization policy after 1984 increased inequality of income distribution, while in Argentina urban poverty decreased (Altimir 1993).

For Latin America as a whole, the partial economic recovery did not restore income distribution to its earlier levels of somewhat greater equality, although inequality tends to decrease with economic growth through most of the developing world. Nations with more democratic political processes have more equal income distributions. A special feature of income distribution is that in Mexico and Peru 80% of the Indian population has an income of less than $2 per day, compared to 18 % of Mexico's and 50% of Peru's nonindigenous population. Much of this difference in income reflects differing levels of education and, consequently, of employment (Psacharopoulos and Patrinos 1993, 1994, pp. 41-43).

To gain access to education and other services, women, national minorities, and "nonwhite" citizens are increasingly mobilized. In 1994 Colombia reserved seats in its legislature for minorities. This should ameliorate their poverty: there is an emerging consensus that income distribution does not vary automatically with stages of growth, but depends on national economic policy—which the minorities can now help to create—as well as world economic conditions (Altimir forthcoming). Moreover, both land reform and increased investment in education are recommended as policy measures that will increase the equality of income distribution.

One reason why the poor accept unequal distribution of income is the existence of safety net social programs. Brazil, with a highly unequal income distribution, had a rapid decline in infant mortality during the 1980s, in part due to availability of oral rehydration therapy and improved water supply and sanitation. Increased coverage of unemployment insurance, beginning in 1990, and the existence of food programs for children and workers moderated the plight of some of the Brazilian poor, although the poorest are not adequately helped. The improvements were strongest after 1985, and the opening toward democracy. Mexico similarly has increased its safety nets for the poor, although its adjustment policies have led to unemployment and poverty. On the other hand, when the poor have not initiated a revolution, they have increased robberies to stay alive, when they otherwise have no chance of getting a job. The striking worsening of income inequality has been matched by increasing robberies and kidnappings.

Not all of these developments result from market forces. Latin American governments often established marketing boards, requiring producers to sell their products to them. The marketing boards paid producers prices below those that they received for their products that they sold on world markets. This was done in part because it was easier to use marketing boards than to collect taxes. The government kept the funds arising from the difference between export receipts and payments to the producers. The funds were at least in part to finance economic development. The low prices paid to produce however, discouraged investment in agriculture. Investment in other sectors was more profitable.

As a result, the productivity of agriculture lagged behind that of other er sectors, and incomes from agricultural activities were below average. Agricultural real income and wages fell 20% during the 1980s, compared to 5% in manufacturing and 7% in construction (Morley 1994, p. 20). Labor productivity in agriculture rose from 30% to 42% of average economy-wide GDP per worker in Chile and 36% to 45% in Brazil—which encouraged commercial, export promotion, and import substitution agriculture. It fell from 100% to 68% in Argentina, from 29% to 23% in Mexico, and from 34% to 21% in Peru. Labor migration from rural areas to the cities increased; reallocation of labor accounted for 28% of Latin America's productivity growth (Syrquin 1991, pp. 110-14). In the case of Mexico, the low productivity of traditional agriculture led the government to reform the Mexican agrarian reform, anticipating that long-run overall economic growth would absorb the estimated 16 million people who would be forced out of agriculture (Randall 1996a, 1996b). This assumed that the new economic policies would adequately attract investment and that the Mexican experience would therefore differ from that of Latin America during the 1980s, when urban indigence and poverty increased more rapidly than that of the rural areas (Altimir 1994, p. 11).

During the 1980s, falling individual incomes led to increased participation of women in the paid labor force. Women's wages were higher relative to men's wages in the government than in the private sector. The difference reflected the greater variation in educational level of Latin Americans, as well as the greater variation in levels of technology used in different industries. The size of the firm, union strength, government policy, and nationality of owner all influenced wages (Abuhada and Romaguero 1993, p. 203; Randall 1987,1989,1993). Workers in large and medium-sized enterprises lost 7% of their average real wages and incomes during the 1980s, compared to 30% in small enterprises and the public sector and 42% in the informal sector. During this period, urban minimum wages fell 24%.

The difference in wages received reflected the greater variation in educational level of Latin Americans, as well as the greater variation in levels of technology used in various industries (Infante and Klein 1991, p. 132). It seems reasonable to assume that when education, especially at the primary school level, is more widely available, dispersion in wages and in overall income will fall. In this respect, Latin America will increasingly resemble richer areas, with better-functioning markets.

Common Latin American Development Patterns

The history of Latin American economic development in the postwar period is detailed in the following chapters, which describe who owns the economy, how the economy grows, concepts of economic growth, who contributes to growth, and who is the first to benefit from growth.

At first, all seven nations had largely private ownership in a mixed capitalist system, in which the state provided infrastructure and regulated the economy, but had little direct ownership of wealth. Influenced by dependency and import substitution industrialization theories, governments increased their provision of infrastructure, their protection of industry, and their creation or takeover of firms. Only Cuba expanded this to almost complete state ownership of the economy.

These shifts in ownership changed the conditions of economic interdependence, but did not eliminate it. Oil imports and exports accounted for a large share of the balance of payments and influenced the selection of economic policies. These often were to borrow abroad and increase the supply of money at home, leading to an unacceptable debt burden and inflation. The government deficit led to foreign borrowing; escape from the debt required an increase in government tax revenue and a reduction in government spending, often by selling its enterprises, reducing the bureaucracy, or restricting the salaries of its employees. Many Latin American nations feared that they could not compete effectively with newly industrializing Asian economies in world markets. They could nonetheless obtain the benefits of expanded and competitive markets through the establishment of free trade agreements, most notably the North American Free Trade Agreement (NAFTA) and the Common Market of the South (MERCOSUR). This would make it easier to obtain funds for development. Moreover, foreign investment began to be welcomed as a supplement to domestic savings.

However, much of foreign investment was in short-term, highly liquid instruments. Investors could invest and withdraw funds instantaneously, with serious impacts on the money supply and stock market. The relatively small to medium size of Latin American economies limited the ability of national monetary authorities to compensate for such capital movements. Thus, limited controls on capital movements were introduced.

In the medium term, moreover, domestic savings would become available. It was expected that lower population growth rates would decrease the number of dependents per worker and enable families to save and invest more of their income and make it possible to increase investment in education and other infrastructure, in order to obtain a better distribution of the benefits of economic growth.

The country studies begin with Chile, whose sharp shifts between reform, revolution, and free market delineate the choices amongpolicies and the means of obtaining them that are available to Latin American policymakers. Next comes Brazil, whose economic development provides an example of the results of emphasizing the domestic market and of the use of techniques such as indexing—tying prices to an indicator of inflation—on economic deelopment. The study of Mexico incorporates analysis of policy shifts, the role of oil, and increased integration into the world economy. Argentine economic history highlights the impact of stop-go policies and reliance on macroeconomic policy tools in a politically divided nation. Peruvian economic policies incorporated land reform and state ownership, without continuing economic growth or stable redistribution of income. Ecuador has transformed its economy from predominantly rural, agricultural, and commercial activities to an urban economy dominated by oil. Economic recession has forced increased reliance on the state, as private savings have dried up. Cuba for many years led Latin America in increasing benefits available to its poor. Cuba's policy shifts among several models of a state-dominated economy precluded steady economic growth. The breakup of the Union of Soviet Socialist Republics removed significant economic support. Cubans' level of living, including government-provided services, declined.

Country Studies

The following sections outline central points in the country studies.

Chile

William Maloney notes that Chilean economic history is as much a story of reconstituting a social contract as of restructuring an economy. In the immediate postwar period, the largely foreign-owned copper industry was the motor of economic growth. Domestic industry was developed by protection and was financed in large part by the Chilean Development Corporation (CORFO), while agriculture was controlled by traditional groups. High inflation and stop-go policies hindered exports during the fifties. Orthodox stabilization attempts failed. In 1959-61 monetary and commercial reforms brought a larger role for market mechanisms. The government adopted a ten-year program that included land reform and shifted toward structuralist analysis of industrial stagnation, inflation, balance of payments crises, and dependency. The small domestic market limited the possibility of successful import substituting industrialization. Small scale of production led to high costs and an inability to expand exports. In the sixties the government turned to land reform with compensation, in part paid for by increased revenues from copper.

The fragmentation of Chilean politics allowed Allende to win the presidency with one-third of the vote. He completed the nationalization of the copper industry—begun in the sixties—intervened in firms that had labor disputes, and expropriated 60% of Chile's agricultural land. Increased wages led to an increase in demand for food; this, combined with the fall in agricultural output, led to food shortages, a rise in wheat imports, and a trade deficit. Deteriorating economic conditions contributed to the military coup of 1973.

Twenty years later, Chile had obtained a market-based economy and democratic politics. Since 1987 output, savings, and real wages have grown impressively, with low rates of unemployment and inflation. Greater integration in the world economy has increased exports tenfold since 1975, eliminating import bottlenecks for industry. These developments ended stop-go policy cycles and helped to insulate Chile from the effects of short-term outflow of foreign capital. Spending on social programs began to increase and was directed to the very poor.

In the transition from an interventionist to a market economy, economic power was concentrated when government enterprises were sold to private owners at 50 to 70% of their net worth. Some 35% of redistributed agricultural land was returned to its owners. Labor market reform included the replacement of the government pension fund system with mandatory workers' savings in a personal account.

Maloney concludes that the Chilean achievements indicate that the ability to establish credible and permanent rules of the game may be as important as the relative importance of the market and of the state in the economy.

Brazil

Werner Baer and Claudio Paiva characterize Brazil's government as both a policymaker and a direct participant in economic activities. International trade provides a smaller share of gross domestic product than in many other Latin American nations. Brazil's economy grew rapidly, gradually shifting from primary exports to industry. Starting in the early fifties, this transformation was intensified by policies designed to produce goods in Brazil that had previously been imported (import substituting industrialization) and to increase public and private investment, especially in infrastructure and modern industry. Development was concentrated in the Center-South, and income distribution became more concentrated.

Brazil's reaction to the oil price increase in 1973 was not to reduce economic activity in response to the oil shock, but instead to increase exploration for oil and to produce alcohol as a substitute for gasoline. By the early 1980s the increase in world interest rates made it difficult for Brazil to meet its debt service obligations, while budget deficits and inflation led to stagnation of the economy in the 1980s and early 1990s.

Attempts were made to gradually open the economy to foreign competition, to privatize some government enterprises, to control federal, state, and public enterprise expenditures, to improve tax collection, and to introduce a new currency, in order to restore confidence in the credibility of Brazilian economic policy. New inflows of foreign funds were primarily invested in government securities and in the stock market. The Brazilian economy consequently was vulnerable to rapid responses to changing interest rates, which could lead to a sudden outflow of funds.

Brazilian economic policy has included indexing prices and contracts to the rate of inflation; agricultural policies favoring the landowning elite and commercial farmers, while neglecting technical change and agricultural support policies; and a shift in import substituting industrialization policy from favoring consumer goods to benefiting basic inputs and capital goods and to expanding manufactured goods exports. The favored sectors have grown, as has the informal economy, largely in services.

Mexico

Miguel Ramírez points out that active participation of the government in Mexico's economy began with an alliance between the state, landed elites, and foreign capital under Porfirio Díaz (1876-1911). The Mexican Revolution (1910-17) tried to shift state actions to benefit peasants, workers, and small businessmen, especially under President Lázaro Cárdenas (1934-40), who implemented land reform and nationalized the oil industry.

In 1940 emphasis shifted to private capital formation, which was aided by protection of Mexican markets, first through shortages of imports during World War II and then through government provision of infrastructure, including credit through a development bank.

In the postwar period, Mexico implemented import substituting industrialization policies, while also promoting the development of exports by the commercial agricultural sector. A sharp devaluation in 1954 led to a shift in policies, which emphasized "Stabilizing Development" (1955-70). It combined price stability with investment in social infrastructure and basic industry. Increasing social and political problems led the Echeverría administration (1970-76) to abandon Stabilizing Development and instead to increase government spending, creating state enterprises. Attempts at tax reform failed, and the government turned to foreign investors and the Central Bank for financing. Inflation and devaluation followed. Inflation, increasing interest rates, and the collapse of the price of oil led to capital flight and devaluation, a temporary moratorium on debt payments, and nationalization of banks in 1982.

In 1983 Mexico turned to neoliberal economic policies, emphasizing expenditure cuts, instead of shifting expenditure to investment in infrastructure. The new administration tried to reassure the business community. It first imposed a stabilization plan and then established solidarity pacts, starting in 1987, that were signed with representatives of business and labor. A continuation of these policies, and the establishment of NAFTA during the Salinas administration (1988-94), contributed to the massive inflow of foreign capital. Economic policy mistakes and political assassinations led to capital flight, collapse of the peso, and a massive fall in income. There was a displacement of peasants as a result of the reform of traditional collective agricultural landholdings (the ejido).

Funds from privatization eased government finances, but the economy suffered from a banking crisis, as well as failures of small and mediumsized businesses as a result of debt burdens. The continuing political and economic crisis suggests that until Mexico renews its emphasis on social development in a sound economy there will be only limited possibilities for further growth.

Argentina

Robert McComb and Carlos Zarazaga's study indicates that Argentina developed with scarce labor and scarce mineral resources. The economy was primarily agricultural. Its products were the basis of light industry, which began to be protected in the early twentieth century. Economic regulation of the economy by relying on a Central Bank began in 1935; Juan Domingo Perón substantially increased government ownership and control of the economy in the forties and early fifties.

The small size of the highly protected Argentine market made it difficult to export goods. This gave rise to "stop-go" policy cycles that began with a devaluation to promote exports and reduction in real income designed to reduce imports. The increased price of imports led to inflation, which made Argentine goods uncompetitive in world markets.

The continuing alternation of economic policies, as well as shifts between civilian and military governments, led to recurring economic crises and, in 1973, to Perón's return to the presidency. The policy cycles of renewed intervention in the economy and inflation contributed to the 1976 military coup. The new government followed disastrous economic policies, culminating in the economic sphere in banking scandals and financial crises, and in the political sphere in the Malvinas/Falkland war with Great Britain. The discredited military government was replaced by the elected president Raúl Alfonsín in 1983. His flawed economic policies led to a run on dollars and the election of Carlos Menem, who was faced with hyperinflation. He abandoned his populist platform and implemented wide-ranging free market economic reforms, opening the economy to foreign trade, reducing public sector employment, and privatizing state enterprises.

Inflation fell and growth spurted from 1993 to 1995, but was interrupted by the "tequila effect," a panic in 1995 spreading from Mexico, which had devalued sharply, to other Latin American nations. Growth was resumed in 1996, in part as a result of the creation of MERCOSUR. Income distribution was inequitable, and there was resistance to Menem's reforms, leading to fears of increased political and economic conflict, as Menem sought to modify the constitution so that he could succeed himself in office—a strategy followed by President Alberto Fujimori in Peru and considered by President Fernando Henrique Cardoso in Brazil.

Peru

Efraín Gonzales de Olarte emphasizes that since the 1950s the Peruvian economy has been transformed, but has not developed. Income distribution was unequal throughout the postwar period and worsened during recessions. The nation relied on the export of raw materials, whose export was financed by foreign investment. Domestic production was insufficient to supply consumer goods for the rapidly increasing population. In the mid-fifties import substituting industrialization policies were adopted. From the sixties to the eighties Peru followed a semiindustrial primary export growth-led economic policy, based on mining and fishing exports.

The military regime of 1968-75 increased foreign borrowing, but also nationalized the International Petroleum Company as well as the Principal mining and fishing enterprises, creating labor communities to own them. Land reform did not increase the share of agriculture in output. The role of government in the economy increased. The state became the principal investor and employer. The increasing burden left insufficient funds for domestic needs. In the early 1980s Sendero Luminoso attacks disrupted the nation. In reaction, the newly elected president, Alberto Fujimori, tried to reverse the economic conditions that had contributed to their rise by undertaking a drastic stabilization policy.

The "Fujishock" policies included, successfully, privatization and reform of fiscal administration and, less successfully, liberalization of foreign trade and deregulation of markets.

Peru's savings did not provide as much economic growth as expected because of maldistribution of investment. Peru educated its population, but did not create enough jobs, which led to emigration of large numbers of professionals and students. Five percent of the Peruvian population now lives abroad. Some 81% of the economically active are unemployed, underemployed, or engaged in unreported activities. During the post-World War II period, the government maintained questionable relative prices, overvalued the exchange rate, allowed real salaries to decline, and permitted interest rate instability. This, combined with political instability, led to declining willingness to invest in the Peruvian economy. Nonetheless, average levels of education increased, economic expectations changed from dependence on the state to self-reliance, and it is increasingly understood that the government needs to promote development without direct intervention in the economy.

Ecuador

Joan B. Anderson points out that physically Ecuador is one of the smallest countries in South America. Its regional split, with agribusiness and commerce on the coast and the traditional oligarchy and capital in the sierra, both prevented the development of a highly concentrated population in the capital and contributed to political instability. Economic instability was heightened by reliance on a single export, most recently, oil.

Primarily agricultural in 1950, by 1990 the nation was more than half urban, living in coastal areas because rural well-being was below that in urban areas. Ecuador's population tripled and real annual per capita growth was 2.3%, although there was negative growth and inflation during the 1980s.

Industrialization was encouraged by import substituting industrialization policies that began in 1957 and tax, education, and agrarian reform in the early sixties. Oil exports beginning in the early 1970s led to increased receipts and a faster increase in imports financed by increases in the foreign debt. General improvements in the level of economic welfare through the early 1980s did not result in major changes in Ecuador's highly unequal income distribution or adequately develop a domestic market.

In the mid-eighties Ecuador adopted a free market approach to economic policy, which was modified by more government intervention in the economy at the end of the decade. In the 1990s the economy again grew; economic "adjustment" measures were adopted. Their cost was borne by the poor. The inequality in Ecuador's income distribution was largely the result of protection, rather than of differences in productivity.

Agriiculture has had both large landholdings and farms too small to support the rural population. Rural-urban migration resulted; attempts and reform have been frustrated, while policies favoring industry also have hindered the development of agriculture.

The public sector now pays more than half of the nation's wage bill, but has decreased its investment in infrastructure and has begun to privatize government firms. It opened the oil industry to foreign participation in the early 1990s. Foreign participation in the economy must supply savings no longer available from Ecuadoreans, whose savings decreased when the nation's gross domestic product fell. Increased attention to agriculture, infrastructure, and human capital is needed to increase Ecuador's economic development.

Cuba

Carmelo Mesa-Lago indicates that in the 1950s Cuba was ranked as one of the most advanced Latin American economies. Unlike similar Latin American nations, it had small state ownership of production and services, other than in education, banking, and public health. There was great dependence on sugar exports and therefore on shifting sugar prices and on U.S. policies governing overall sugar quotas and preferences granted according to sugar imports' country of origin.

Fidel Castro seized power in 1959. His government replaced a capitalist system with a series of socialist economic systems and shifting emphases on sugar and other economic sectors. Despite these shifts, until 1990, when 94.1% of the civilian sector worked for the state, Cuba steadily moved toward collectivization of production and more equal distribution of income. The collapse of socialist nations has led to an opening to foreign investment and some private ownership in the 1990s: this has provided only a small fraction of the funds previously obtained from the Soviet bloc. Remittances of funds from Cubans living abroad and the expansion of self-employment and free agricultural markets have contributed to an increase in inequality of income distribution.

Plans for industrialization were replaced in 1966 by emphasis on sugar. Shifting reforms characterized planning until 1986, when Cuba moved away from a market economy, until Russia's economic collapse and the end of its subsidies to the Cuban economy. This forced a more shift toward a market economy, while the decline in value of socialist countries' currencies has significantly reduced the burden of repaying Cuba's debt to them. Cuba has been unable to make debt service payments to countries with stronger currencies, because of insufficient exports and lack of access to hard currency credit. The nation's growth was intermittent and declined by about one-half in 1990-94, when it began to lose its earlier gains in provision of employment, free social services, and increased equality of income distribution.

Conclusion

The studies in this book indicate that, despite long-run success, the depression of the eighties and early nineties makes it essential to redistribute income and invest in the population for political stability and economic growth with development to prevail in Latin America.

 

Edited by Laura Randall

Editor Laura Randall is Professor and Graduate Adviser in the Department of Economics at Hunter College, CUNY.