I. PACKENHAM MODEL TO ASSESS PROSPECTS FOR ECONOMIC REFORM The main four “hypotheses” or “explanatory factors” that explain how successful a country will be at making MARKET REFORMS. Used to explain why ARGENTINA made market oriented reforms quickly during Menem’s presidency. And why in BRAZIL its taken much longer to make these reforms. Specially during Collor de Mello’s time. Packenham argues that the model could be applied to other countries. 1. Structure of Situation for Elected President - (Political Credentials of President) President from a leftist background gets elected and says: “even I, a leftist, must implement market reforms”. By doing this he has more credibility than he would if had ALWAYS been in favor of market reforms.

• Carlos Menem in Argentina from the Peronist (leftist) party. At least in his first term.

• Fernando Collor de Mello in Brazil, who was from the “right” had always been in favor of reforms.

• Like “Nixon going to China”. President of the U.S. (very anti-communist) decides to open diplomatic relations.

2. Political Party System - (Fragmented vs. Consolidated) If a party system is “fragmented” (or “weak”), it means there are many political parties, which are not well established. It is very difficult for the National Congress to pass reforms and reach agreements.

• Brazil was (and is) very fragmented, many political parties and relatively new.

• Argentina only two parties. The “Peronists” (Partido Justicialista) and the “Radicals” (Union Civica Radical). The later in existence since 1890.

3. Presidential Leadership - (Leadership Skill) If the President is a skilled leader he will be able to persuade Congress into making reforms. If not he wont.

• Menem very politically skillful… at least in his first term. • Collor was not skilful at all… at least after he got elected!

4. Consensus in Civil Society - (Consensus) If there is consensus in society in favor of market reforms, then they can be made more easily than countries with a lot of disagreement about them.

• In Argentina there was, because everything else had failed. • But in Brazil there was a lot of disagreement.

II. CULTURAL/HISTORICAL OVERVIEW SECTION In 1973 the Central Banks of USA, Canada, Japan, Germany, France, United Kingdom, Italy, The Netherlands, Belgium, Sweden and Switzerland agreed to establish a flexible rate system since it was hard to resist the free market forces It’s a floating system that combines supply and demand and the intervention of central banks buying and selling foreign currency

1. Fiscal Discipline - Reducing fiscal deficits 2. Public Expenditure Priorities - Switch spending from subsidies, especially subsidies

for state enterprises, to education and health 3. Tax Reform - Increase tax revenues and broaden the tax base 4. Interest Rates - Interest rates should be market determined and positive 5. Exchange Rate - Should be competitive, not overvalued* 6. Trade Policy - Free trade. Some trade protection OK if protecting an infant

industry (limited amount for a limited time)

7. Foreign Direct Investment - Encourage it. 8. Privatization - Do it! 9. Deregulation - Do it! 10. Property Rights - Protect them

Williamson’s own critique…

• A moderate budget deficit maybe acceptable during time of recession. • Labor reform is important (making laws more flexible). • Stronger and more independent civil service, judiciary, and regulatory system. • Policies to improve education, boost micro-lending, and strengthen IPR • Liberalization of Capital Markets = Destabilization

III. ASSESSING PROSPECTS FOR MILITARY INTERVENTION 1. Modernization Theory

• Principal proponents: Seymour Martin Lipset, Robert Novak, Talcott Parsons • Argument: Catholic, centralist, tradition/values = authoritarianism • Solution: adopt “Western” values; diffusion of values

2. Marxist Theory • Principal proponents: Karl Marx, V.I. Lenin, dependency school • Argument: military serves interests of bourgeoisie

3. National Interest/“New Professionalism” Approach • Principal proponent: Alfred Stepan • Argument: broad professional training in economic development and “internal

security” has created “new professionalism” in military 4. Institutional Interest Approach

• Principal proponent: Martin Needler • Argument: military defends institutional interests: hierarchy, prestige, budgets,

internal order and stability IV. BARGAINING MODELS 1. Theodore Moran (extractive industries)

Key Concept: “Obsolescing Bargain” - Extractive Industries (e.g., copper mining)

TNE Advantages Host Government Advantages Skills Mineral ores Experience Labor force Access to market Control over taxation Finance Capital

INITIALLY: The TNE has the bargaining advantage. LATER: Bargaining advantage MAY shift (over time) to Host Government WHY DOES THIS SHIFT TAKE PLACE?

• Reduction of uncertainty • learning curve • sunk costs

Manufacturing Industries may differ:

• HIGH-TECH: bargaining advantage favors TNEs • LOW-TECH: bargaining advantage MAY favor Host Government

OTHER RELEVANT FACTORS: 1. Proprietary knowledge 2. Competition within the industry 3. Public visibility of industry

2. Robert Grosse “Business-Government Relations”

Bargaining advantages Favors the firm or government

Expected regulation

Proprietary knowledge Firm Low Marketing skills Firm Low Export dependence Firm Low Scale/scope economies Firm Low Ease of moving facilities Firm Low Dependence on local resources Government High Dependence on local markets Government High Public visibility Government High Competitiveness of the industry Government High

3. Roy Nelson, “Corporate Strategic Alliances and Bargaining in Latin America”

• Traditional Hypothesis 1: the bargaining advantage will reside with the TNC,

and will remain with the TNC, to the extent that competitive success in the segment of the industry in question is based on rapid technological innovation, high levels of advanced technical training for personnel, and large expenditures on R&D.

• Traditional Hypothesis 2: the bargaining advantage will reside with the local firm to the extent that competitive success in the segment of the industry in question is based on knowledge of local conditions, local marketing and distribution networks, and local needs.

• Traditional Hypothesis 3: The bargaining advantage will initially favor the TNC but will “obsolece” over time in favor of the local firm where:

i. Large amounts of capital are sunk ii. Reduction of uncertainty takes place iii. The “learning curve” is easy to ascend

• Modified Hypothesis 1: in “environmentally sensitive” sectors where

environmental policies or regulations will affect the development of the industry, the bargaining advantage – even in segments of the industry with low levels of technological innovation, low levels of technical training of personnel, and low expenditures on R&D – will reside with U.S. based TNCs and will tend to remain like that.

• Modified Hypothesis 2: “knowledge sensitive” industries where personnel with advanced technical training as well as technological adaptation is important to success, the bargaining advantage may tend to be relatively evenly distributed initially but with obsolesce in favor of the local firm over time.

• Modified Hypothesis 3: In “financial capital sensitive” industries where foreign partner’s contribution is financial capital, and are therefore sensitive to changes in the local availability of financial capital, the bargaining advantage will tend to obsolesce in favor of the local firm over time.

V. BRAZIL Historical/analytical points/current events highlighted in lecture The “model” for predicting devaluations developed in the Hipskind article, and as discussed in class (I referred to it as a framework for assessing prospects for devaluation). A Framework for Assessing Prospects for Currency Devaluation:

• Flexibility of Exchange Rate: fixed or flexible? • Size of Current Account Deficit: large or small?

• Size of Budget Deficit: large or small? • Amount of Foreign Reserves: small or large? • Amount of Foreign Debt: large or small? • Political Risk: high or low?

Packenham model - Lula

• Political Party System: fragmented • Legacy of military regime • Result: Lula’s Partido dos Trabalhadores (PT) has fewer than 1/5 of seats

Chamber of Deputies. Alliances necessary • Political Credentials of President: good • Leadership Skills of President: good • Political Consensus: low

See also: Real Plan; Causes and Consequences of the 1999 Devaluation; Cardoso; political obstacles to economic reform in Brazil; Lula. Again, pay special attention to Packenham’s article, Nelson’s article on Cardoso, the summary I wrote up on the “Causes and Consequences of the Devaluation of the Real,” online articles (especially priority articles), and “Current Events” articles. VI. ARGENTINA Convertibility Law

• Minister of the Economy, Domingo Cavallo, 1991: Fixed peso at parity with dollar • Strengthened tax collection agency • Cut government payroll by over 200,000 • Continued privatizations: Entel, Aerolineas Argentinas, Yacimientos Petrolíferos

Fiscales (1992) • Encouraged Mercosur: free trade zone took effect January 1, 1995

Results of Convertibility Law • Budget surpluses (a result of privatizations and payroll cuts) • Inflation rate down from 2,300%/year to <1%/year • >$10,000 per capita income: among the highest in Latin America • Economic growth • Recipient of large amounts of DFI • Unemployment: almost 15%

Consequences of Convertibility Law • Under Convertibility Law, deficits had been covered NOT by printing money, but

by selling government bonds—debts now huge • High interest rates, and drastic efforts to cut budget deficit, lead to two-year

recession, high levels of unemployment • Corralito imposed, late 2001 • December 2001 riots: de la Rua resigns • A number of interim presidents follow : Duhalde, Kirchner • End of Convertibility Plan, January, 2002; devaluation follows • Corralito policy continues; lasts until December, 2002 • “Pesification” implemented (asymetric) • Tax on exports • Social unrest, riots continue

Packenham model – Kirchner (Popularidad de kirchner de 70%)

• Political Party System: still somewhat “consolidated,” but less so than before?. Peronists (PJ) - some internal conflict, UCR, Frepaso, other parties, etc. (HOWEVER: after October 2005 elections, Peronists now have strong majorities in both CD and Senate)

• Political Credentials of President: good

• Leadership Skills of President: good • Political Consensus: low

Current Issues

• Corralito has ended for withdrawals from savings and checking accounts • Pesification and tax on exports remain • Return of inflation, but not hyperinflation • High unemployment

Union Cívica Radical (UCR) formed, 1890. Hipóloto Yrigoyen is leader – representing the interests of the middle class See also: Peron, Menem, Partido Justicialista, Look especially at the online article by Martin Feldstein, and “Current Events” articles. Note: readings that will be especially important for essays, as well as for multiple choice section, are Packenham, Needler, and the articles on bargaining, especially in relation to the EMBRAER case. VERY IMPORTANT NOTE: I will also ask some multiple choice questions related to the readings for Broadcast 4 (on Mercosur and Other Trade Pacts and Costa Rica).

MC 40-8=32 Essay 54 Total 86 Please see my comments at the end of your essay.

NAME: José CAMPUS: PHX

Midterm Exam: GM 6030: RBE: Latin America Dr. Roy Nelson / Summer 2005

Part I: Multiple Choice (40%) Answer ALL of the following multiple choice questions (2 points each)

Please highlight your answers.

1. The reforms that President Nestor Kirchner of Argentina must make in order to satisfy the IMF’s conditions are all of the following EXCEPT:

a) renegotiate rates with privatized utility companies

b) maintain a primary budget surplus (before interest payments) of at least 3% of GDP

c) reform the national government’s relationship with the provincial governments by passing an amendment to the constitution similar to Brazil’s fiscal responsibility law

d) increase taxes on exports e) In fact, President Kirchner must do ALL of the above in order

to satisfy the IMF’s conditions

2. The “enduring democracy” view disagrees with Seligson’s “cycles” view, which says that Latin America swings back and forth between democracy and authoritarianism in regular cycles. Which of the following trends or factors support the “enduring democracy” argument?

a) The end of the Cold War b) Literacy rates and GDP/capita have increased significantly

in Latin America in the last several decades c) Military governments throughout Latin America have been

discredited

d) ALL of the above support the “enduring democracy” argument

3. Which of the following was NOT a cause (either direct or indirect) of Brazil's January, 1999 devaluation of the Real? a) Brazil's fragmented political party system made enacting economic reforms (and, therefore, reducing the budget deficit) difficult. This contributed to investors' nervousness, because they believed that eventually, the Central Bank might have to finance the budget deficit as it had in the past by abandoning the fixed exchange rate the "Real Plan" had established, and, instead, going back simply to printing money to finance the deficit. b) Brazil's exchange rate, pegged to the dollar, became increasingly "overvalued." This, plus the "Brazil Cost," contributed to the difficulty Brazil experienced in exporting its products. This created another deficit the current account (trade) deficit. That could be financed by foreign investment (sales of Brazilian government bonds, etc.), as long as investors were willing to keep putting their money in Brazil. But as the trade deficit grew in size, investors became increasingly more nervous. c) Itamar Franco's refusal to pay his state's external debt - which then had to be assumed by the national government created the perception that the domestic budget deficit problem would only get worse. When investors sold off billions of dollars in assets in January 1999, and exchanged their Brazilian currency for dollars so that they could take their money home, they flooded the market with a large supply of Brazilian real. Even with IMF assistance, the Central Bank lacked sufficient dollar reserves to buy up this local currency to maintain its value. d) Brazil's large amounts of foreign direct investment (FDI). e) All of the above were causes of Brazil's 1999 devaluation.

4. The populist Argentine president Juan Peron did all of the following EXCEPT:

a) Increased wages b) Made his third wife, Isabel, his temporary vice president.

When he died unexpectedly, she became president c) Protected domestic industry with high tariffs

d) Started a Marxist political party known as Unión Cívica Radical, the Radical Party

5. Which of the following has facilitated President Kirchner’s ability to implement economic reforms in Argentina?

a) he is a member of the Peronist party b) Argentina’s political party system seems to have become

more fragmented c) Argentina currently seems to lack a strong consensus in

favor of market-oriented reforms d) there are conflicts within the Peronist party itself e) all of the above would make it easier for Kirchner to

implement market-oriented reforms

6. What is one of Lula’s main objections to the Free Trade Area of the Americas (FTAA)?

a) It will result in excessive foreign direct investment (FDI) in Brazil.

b) Lula does not want to open Brazil’s market until the U.S. reduces agricultural subsidies.

c) Brazil is currently having difficulty exporting its products. The FTAA would make this even more difficult.

d) All of the above. e) Both “a” and “b,” but not “c.”

7. Normally, after a large devaluation, a country experiences high rates of inflation. Why did inflation remain relatively low in Brazil after the massive devaluation of the real in 1999?

a) Brazil did not rely on imports to the extent of other

economies b) after the devaluation, the National Congress passed some

reforms to help keep the budget deficit under control; therefore, the Central Bank did not have to “print money” to finance its budget deficit

c) The Central Bank president, Arminio Fraga, maintained a tight monetary policy by means of “inflation targeting” – if

inflation rose beyond a certain level, he raised interest rates to keep it in check.

d) all of the above

8. All of the following are part of the original “Washington Consensus” on policies Latin American governments should follow (as summarized by U.S. economist John Williamson in 1990, not as “refined” later), EXCEPT:

a) Foreign direct investment (FDI) should be encouraged, not restricted.

b) “Fiscal discipline” is important (budget deficits should be avoided).

c) In order to make sure that market-oriented economic reforms are successful politically, governments should also give special attention to poverty alleviation and the social dimension to their policies.

d) Whenever possible, government-owned companies should be privatized.

e) Labor reform – making the labor market more flexible in order to encourage foreign investment – is highly important.

f) Neither “c” nor “e” was part of the original Washington Consensus.

9. Using the Packenham Model for assessing prospects for economic reform in a given country, choose the factor or situation that would tend to INCREASE the chances that a government will be able to implement effective, market-oriented economic reforms.

a) The recently-elected civilian president is from a leftist political party. A former autoworker with a well-earned reputation as an advocate of protectionism for domestic industry, he is also known as a champion of the working class. Upon taking office, however, he proposes market-oriented economic reforms as the only way to solve the country's economic crisis

b) the country's political party system is highly fragmented c) BOTH "a" and "b" would increase the chances for effective,

market-oriented reforms

d) None of the above would increase the chances for effective, market-oriented reforms.

10. Which of the following was a major cause of the riots in Argentina in

December 2001? a) Argentina’s continued membership in the Mercosur customs

union b) The prospect of former President Menem facing trial over

corruption charges c) the government’s corralito policy, which restricted

withdrawals from bank accounts d) All of the above was a direct cause of social unrest in

Argentina. e) None of the above.

11. Although we have not specifically studied Mexico in this course, we did discuss how the Packenham model might be applied to President Fox’s efforts to implement reform in Mexico. Following the Packenham model, which of the following might tend to make enacting market-oriented reforms more difficult in Mexico at the present time?

a) President Fox’s background as former president of Coca-Cola de Mexico

b) Increased political fragmentation in the party system c) Lack of political consensus in the Congress d) All of the above factors would make enacting market

reforms more difficult e) None of the above would make enacting market reforms

more difficult

12. Which of the following is FALSE about the Unión Cívica Radical (UCR), or Radical Party, in Argentina?

a) It has been in existence since the late 1800s, and is still an

important political party in Argentina b) It is a Marxist party, now legalized, that was responsible for

terrorist acts of violence in Argentina in the late 1960s c) It represents middle class interests in Argentina d) It formed an alliance with another party, Frepaso, to form a

coalition (known as Alianza) to oppose the Peronists

e) It is currently the majority party in Argentina’s National Congress.

13. An “institutional interest” explanation for military intervention would argue that the military in a given country might be more likely to intervene in a civilian government, either “behind the scenes” (more likely nowadays, if this were to happen, than a direct “takeover”) or in an outright military coup, if:

a) the interests of important industrialists are threatened b) a civilian president’s policies seem likely to create long term

economic and political instability c) in order to reduce the budget deficit, the president

proposes big cuts in the military budget d) None of the above is consistent with the “institutional

interest” perspective.

14. Which of the following represents the so-called “unholy trinity” – groups that were part of the traditionally powerful oligarchy in Latin America in the 19th century, but which still have power today?

a) industrialists, landowners, evangelical Protestants

b) labor unions, peasants, the military

c) the military, Catholic Church, landowners

d) the military, indigenous people (“indians”), the Catholic Church

15. Provincial legislatures in Argentina have some independence in making

policy. They can even do the following:

a) print their own money without any objection from the national government

b) pass laws limiting the size of retail stores c) establish tariff barriers separate from the Mercosur Common

External Tariff rate d) none of the above is correct

16. Which of the following would be a lesson that could reasonably be learned from Argentina’s recent financial crisis?

a) Overvalued exchange rates, a currency crises, and widespread defaults may be risks associated with countries with fixed exchange-rate systems. Countries with market-determined floating exchange rates are more likely to avoid these problems.

b) Latin American governments that borrow large amounts of money in dollars to cover their deficits are following a risky strategy.

c) The encouragement of foreign direct investment was NOT the cause of the Argentine crisis; therefore, reversing this policy now would not solve the crisis.

d) All of the above would be lessons that could be learned from this crisis.

17. Consider the following scenarios. In which of these situations would a U.S.-based transnational corporation (TNC) have the most bargaining power in its negotiations with a host government in Latin America?

a) A TNC is planning to build a major manufacturing plant that will create over 2,000 relatively high-paying jobs. However, the company is willing to consider only one state within a very large country as the possible location for its manufacturing plant – a state that already has received enormous amounts of foreign investment that is similar to what the TNC offers.

b) A TNC in a high technology industry is considering four different countries as possible sites for its manufacturing plant. Two of these countries have federal systems, allowing the TNC to select which state within those countries would be the best place for the investment. No other company in this particular industry (a high growth sector) has established manufacturing operations in Latin America – this company would be the first.

c) both scenarios "a" and "b" would give the TNC a great deal of bargaining power

d) Neither of the scenarios would give the TNC any bargaining power in its negotiations with a host government in Latin America.

18. Which of the following was true about former President Fernando Collor de Mello in Brazil?

a) His policies were even more “populist” and protectionist than those of Getúlio Vargas, known in Brazil as the “father of the poor.”

b) O Globo, Brazil’s dominant media conglomerate, contributed greatly to his success in the beginning with favorable media coverage – and to his downfall later, when the media giant turned against him

c) Collor had the strong support of his political party, Partido dos Trabalhadores, until he resigned in 1992.

d) All of the above are true statements.

19. Which of the following was NOT a factor, either direct or indirect, that led eventually to the Argentine government’s defaulting on its debts and (not long after that) to the devaluation of the Argentine peso?

b) The government’s inability in the late 1990s to balance the budget, in part because the Argentine constitution allowed the provincial governments to pass on their debts to the central government. Because of the fixed exchange rate – which prevented the government from financing the deficit by simply printing more money – the government was forced to finance the increasingly large deficits by borrowing (issuing government bonds), at high rates of interest.

c) Brazil’s 1999 devaluation of the real, resulting in large trade deficits in Argentina – which the government also had to finance by borrowing (issuing government bonds).

d) Because Argentina’s exchange rate was rigidly fixed to the dollar, the Argentine peso became increasingly overvalued in the 1990s as the U.S. dollar appreciated. This made

Argentine exports seem more expensive to consumers in countries with weaker currencies.

e) Menem’s privatization of state-owned enterprises (SOEs) in the early 1990s.

f) Strong union pressures, which prevented the Menem and de la Rua governments from reforming rigid labor laws. This weakened Argentina’s international competitiveness by making its exported products expensive.

20. Based on your reading of the Intel case, which of the following made Brazil less attractive than other countries on Intel’s short list as a location for a high-technology company interested in establishing a plant that would manufacture products for export to the United States?

a) The “Brazil cost” – extra costs associated with doing business in Brazil

b) Relative lack of interest in attracting Intel on the part of São Paulo state government officials, compared to other countries on Intel’s short list

c) Intel executives’ perception that labor unions might be more aggressive in Brazil than in some other countries on the short list

d) All of the above

Essay Questions On Next Page

Part II: Essay (60%)

Write on ONE of the following. Remember: be sure to use as many examples and illustrations as possible to support your argument. Make specific reference to the reading whenever possible.

1. KORPUS, a large U.S.-based sporting goods company that sells athletic clothing, small radios and cameras), is considering investing in South America. The company hires you as a consultant. KORPUS would like to know whether it should set up new stores in Brazil, Argentina and/or Costa Rica. In your answer:

1. Based on assigned readings and class lectures on Brazil, which of the following is NOT a concern of Brazil’s current president President Luis Inácio (“Lula”) da Silva as he enters his second four-year term?

a) Brazil’s high crime rate

b) reforms that can help accelerate Brazil’s economic growth rate

c) consolidating multiple state sales tax rates into a single national value-added tax

d) finding a way to pay off Brazil’s loans to the IMF

2. Based on the Packenham Model, which of the following would make it easier politically for President Kirchner to implement economic reforms in Argentina – if he were willing to do so?

a) he is a member of the Peronist party

b) Argentina currently seems to lack a strong consensus in favor of market-oriented

reforms

c) there are conflicts within the Peronist party itself

d) all of the above would make it easier for Kirchner to implement market-oriented reforms

3. Based on your reading of the EMBRAER case (and other assigned reading), as well as class discussion, which of the following would be TRUE about the EMBRAER case that we studied in class?

a) The Brazilian government’s support for EMBRAER over the years – and specifically,

the original creation of EMBRAER itself – would be consistent with the “Washington Consensus” approach to economic policymaking.

b) The WTO prohibits most export subsidies. This also applies to the Brazilian

government’s current subsidies to help finance the sale of EMBRAER’s planes to foreign buyers.

c) Some analysts could argue that EMBRAER “won” the outcome of its negotiations

with Cessna and Piper, in part, because EMBRAER was able to play one transnational enterprise off of another.

d) This case clearly demonstrates that when they are negotiating joint ventures, U.S.-

based transnational enterprises always have more bargaining power than host country governments or local firms.

e) Both “a” and “c” are correct.

f) Both “a” and “d” are correct

4. According to an article by Lara Sowinski which was part of the assigned reading for today’s broadcast, entitled “What can DR-CAFTA Do for You?”, which of the following is TRUE about DR-CAFTA?

a) It has already been approved by the U.S. Congress, but has not yet been ratified by all

the other countries that negotiated this agreement.

b) Although the U.S. Congress finally approved DR-CAFTA, it faced strong opposition from some U.S. sugar producers and textile manufacturers.

c) ALL of the following are advantages that doing business with DR-CAFTA countries

offers to many U.S. firms, compared to doing business with Asian countries: 1) proximity to U.S. market; 2) similar time zone; 3) few manufacturers of heavy machinery in Dominican Republic or Central America

d) ALL of the above are true statements

5. Which of the following was NOT a cause (either direct or indirect) of Brazil's January, 1999 devaluation of the Real?

a) Brazil's fragmented political party system made enacting economic reforms (and, therefore, reducing the budget deficit) difficult. This contributed to investors' nervousness, because they believed that eventually, the Central Bank might have to finance the budget deficit as it had in the past by abandoning the fixed exchange rate the "Real Plan" had established, and, instead, going back simply to printing money to finance the deficit.

b) Brazil's exchange rate, pegged to the dollar, became increasingly "overvalued." This,

plus the "Brazil Cost," contributed to the difficulty Brazil experienced in exporting its products. This created another deficit the current account (trade) deficit. That could be financed by foreign investment (sales of Brazilian government bonds, etc.), as long

as investors were willing to keep putting their money in Brazil. But as the trade deficit grew in size, investors became increasingly more nervous.

c) Itamar Franco's refusal to pay his state's external debt - which then had to be assumed

by the national government created the perception that the domestic budget deficit problem would only get worse. When investors sold off billions of dollars in assets in January 1999, and exchanged their Brazilian currency for dollars so that they could take their money home, they flooded the market with a large supply of Brazilian real. Even with IMF assistance, the Central Bank lacked sufficient dollar reserves to buy up this local currency to maintain its value.

d) Brazil's large amounts of foreign direct investment (FDI).

e) all of the above were causes of Brazil's 1999 devaluation.

6. The populist Argentine president Juan Peron did all of the following EXCEPT: a) Increased wages

b) Made his third wife, Isabel, his temporary vice president. When he died unexpectedly,

she became president

c) Protected domestic industry with high tariffs

d) Started a Marxist political party known as Unión Cívica Radical, the Radical Party

7. Normally, after a large devaluation, a country experiences high rates of inflation. Which of the following is NOT a reason why inflation remained relatively low in Brazil after the massive devaluation of the real in 1999?

a) As a major producer of both raw materials and manufactured goods itself, Brazil did

not rely on imports to the extent of other economies in Latin America.

b) after the devaluation, the National Congress passed some reforms to help keep the budget deficit under control; therefore, the Central Bank did not have to “print money” to finance its budget deficit

c) the Central Bank president maintained a tight monetary policy by means of “inflation

targeting” – if inflation rose beyond a certain level, he raised interest rates to keep it in check.

d) The Brazilian government imposed price controls on all products in the aftermath of

the devaluation.

8. Which of the following were part of the original “Washington Consensus” on policies Latin American governments should follow (as summarized by U.S. economist John Williamson in 1990, not as “refined” later)?

a) Foreign direct investment (FDI) should be encouraged, not restricted.

b) “Fiscal discipline” is important (budget deficits should be avoided).

c) In order to make sure that market-oriented economic reforms are successful

politically, governments should also give special attention to poverty alleviation and the social dimension to their policies.

d) Whenever possible, government-owned companies should be privatized.

e) Labor reform – making the labor market more flexible in order to encourage foreign

investment – is highly important.

f) In times of recession, governments should pursue an “anti cyclical” fiscal policy – increase government spending and cut taxes, even if a large budget deficit results, in order to stimulate economic growth.

g) “a,” “b,” and “d” were all part of the ORIGINAL Washington Consensus. h) “a,” “b,” and “e” were all part of the ORIGINAL Washington Consensus

9. Which of the following was NOT a factor, either direct or indirect, that led eventually to the Argentine government’s defaulting on its debts and (not long after that) to the devaluation of the Argentine peso?

a) The government’s inability in the late 1990s to balance the budget, in part because the Argentine constitution allowed the provincial governments to pass on their debts to the central government. Because of the fixed exchange rate – which prevented the government from financing the deficit by simply printing more money – the government was forced to finance the increasingly large deficits by borrowing (issuing government bonds), at high rates of interest.

b) Brazil’s 1999 devaluation of the real, resulting in large trade deficits in Argentina –

which the government also had to finance by borrowing (issuing government bonds). c) Because Argentina’s exchange rate was rigidly fixed to the dollar, the Argentine peso

became increasingly overvalued in the 1990s as the U.S. dollar appreciated. This made Argentine exports seem more expensive to consumers in countries with weaker currencies.

d) Menem’s privatization of state-owned enterprises (SOEs) in the 1990s. e) Strong union pressures, which prevented the Menem and de la Rua governments from

reforming rigid labor laws. This weakened Argentina’s international competitiveness by making its exported products expensive.

10. Which of the following was a major cause of the riots in Argentina in December 2001?

a) Argentina’s continued membership in the Mercosur customs union b) Menem’s arrest on corruption charges c) Kirchner’s borrowing money from Venezuela to help pay off Argentina’s debt to the IMF. d) the government’s corralito policy, which restricted withdrawals from bank accounts e) all of the above were direct causes of social unrest in Argentina in 2001.

11. Using the Packenham Model for assessing prospects for economic reform in a given country, choose the factor or situation that would tend to INCREASE the chances that a government will be able to implement effective, market-oriented economic reforms.

a) the recently-elected civilian president is from a leftist political party. A former

autoworker with a well-earned reputation as an advocate of protectionism for domestic industry, he is also known as a champion of the working class. Upon taking office, however, he proposes market-oriented economic reforms as the only way to solve the country's economic crisis

b) the country's political party system is highly fragmented

c) BOTH "a" and "b" would increase the chances for effective, market-oriented reforms

d) none of the above would increase the chances for effective, market-oriented reforms.

12. One assigned reading related to today’s broadcast was entitled “An Ominous Step: Mercosur and Venezuela.” Which of the following is NOT consistent with the points made in this article?

a) by admitting a regime whose president is ambivalent about democracy, Mercosur

devalues its “democratic clause,” requiring all members to be full democracies

b) Within Mercosur, Venezuela’s entry may strengthen Argentina in its rivalry with Brazil, since Kirchner’s populist policies are more similar to Chavez’s than Lula’s more pragmatic economic policies, and Argentina has the greater need for energy imports.

c) Only now that Venezuela is a full member of Mercosur will the other Mercosur

members get access to Venezuela’s oil exports – before Venezuela’s entry as a full member, the Mercosur countries were not able to import any oil from Venezuela whatsoever.

d) Venezuela’s entry into Mercosur as a full member may make Mercosur’s

relationships with the rest of the world more complicated

e) Venezuela will now have to adopt Mercosur’s common external tariff

13. Which of the following is FALSE about the Unión Cívica Radical (UCR), or Radical Party, in Argentina?

a) It has been in existence since the late 1800s, and is still an important political party in

Argentina b) It is a Marxist party, now legalized, that was responsible for terrorist acts of violence

in Argentina in the late 1960s c) It represents middle class interests in Argentina

d) It is currently the majority party in Argentina’s National Congress. e) Both “b” and “d” are false.

14. An “institutional interest” explanation for military intervention would argue that the military in a given country might be more likely to intervene in a civilian government, either “behind the scenes” (more likely nowadays, if this were to happen, than a direct “takeover”) or in an outright military coup, if:

a) the interests of important industrialists are threatened b) a civilian president’s policies seem likely to create long term economic and political

instability c) in order to reduce the budget deficit, the president proposes big cuts in the military

budget d) none of the above is consistent with the “institutional interest” perspective.

15. Provincial legislatures in Argentina have some independence in making policy. Currently, they can and DO implement the following policies:

a) print their own money, thus creating their own distinct provincial currencies. A practice always strongly supported by the IMF, this is something that all of Argentina’s provincial governments still do.

b) pass laws limiting the size of retail stores c) establish tariff barriers separate from the Mercosur Common External Tariff rate d) none of the above is correct

16. Which of the following would be a lesson that could reasonably be learned from Argentina’s recent financial crisis?

a) Overvalued exchange rates, a currency crises, and widespread defaults may be risks

associated with countries with fixed exchange-rate systems. Countries with market-determined floating exchange rates are more likely to avoid these problems.

b) Latin American governments that borrow large amounts of money in dollars to cover

their deficits are following a risky strategy. c) The encouragement of foreign direct investment was NOT the cause of the Argentine

crisis; therefore, reversing this policy now would not solve the crisis. d) All of the above would be lessons that could be learned from this crisis.

17. State governments in Brazil have more independent control over economic policy than Mexican states. Which of the following is something that Brazilian states can offer

to prospective foreign investors considering where to locate a manufacturing plant, but Mexican states cannot offer?

a) free land b) free training for local workers at the plant (for a limited period of time) c) loans and exemptions from state income tax d) In fact, both Brazilian AND Mexican states can offer ALL of the above.

18. Following the Packenham model, which of the following might tend to make enacting market-oriented reforms MORE DIFFICULT in any Latin American country?

a) The president of the country had a previous career as a high-ranking executive for a

major U.S. multinational corporation

b) Increased political fragmentation in the country’s party system

c) Lack of political consensus in the Congress regarding market reforms

d) All of the above

e) None of the above

19. Consider the following scenarios. In which of these situations would a U.S.-based transnational corporation (TNC) have the most bargaining power in its negotiations with a host government in Latin America?

a) a TNC is planning to build a major manufacturing plant that will create over 2,000

relatively high-paying jobs. However, the company is willing to consider only one state within a very large country as the possible location for its manufacturing plant – a state that already has received enormous amounts of foreign investment that is similar to what the TNC offers.

b) a TNC in a high technology industry is considering four different countries as

possible sites for its manufacturing plant. Two of these countries have federal systems, allowing the TNC to select which state within those countries would be the best place for the investment. No other company in this particular industry (a high growth sector) has established manufacturing operations in Latin America – this company would be the first.

c) both scenarios "a" and "b" would give the TNC a great deal of bargaining power

d) neither of the scenarios would give the TNC any bargaining power in its negotiations

with a host government in Latin America.

20. Which of the following was a reform or set of reforms Brazil has ALREADY made that the IMF demanded, as part of its “conditions,” that Argentina adopt as well (at least in some form)? (NOTE: now that the Kirchner government has paid off its debt to the IMF, implementation of this reform seems much less likely in Argentina – at least not until after the presidential election in 2007.)

a) Enacting labor market reform for the private sector (making the private sector labor market more flexible by making it easier to hire and fire workers)

b) Fully privatizing the state-owned oil company c) Enacting a fiscal responsibility law (making it more difficult for states to pass on their

debt to the national government) d) Joining Mercosur as a full member e) All of the above f) Both “a” and “c” ONLY g) Both “b” and “c” ONLY

a) provide an assessment of prospects for the continuation and sustainability of market-oriented economic reforms in Brazil and/or Argentina in the future. [NOTE: In your answer, you should use the Packenham Model as a framework for your analysis. Don't just summarize Packenham, however; USE the model to assess prospects for current and future market-oriented economic reforms in Brazil and/or Argentina. Also, make reference to lectures/other readings, where relevant.])

b) discuss any other factors (possible locations within the country?

demographics? culture? bargaining?) that might be relevant to Korpus.

Korpus Stores Location in Latin America Analysis Korpus is a large U.S.-based sporting good company that is considering in investing in South America, especially in Argentina or Brazil. This essay will demonstrate that investing in Argentina rather than Brazil will be a better option for Korpus. My analysis will be based in the Packemham model and then I will analyze both countries demographically, culturally and some other factors. The Packemham Model The Packemham model takes into consideration four factors. Applying the model to Argentina we can find that the President Nestor Kirchner has very good political credentials. The main point here is that he is part of the Peronist party which is a populist party. He has forced to make many market reforms so that way many people have credibility on what he is doing. So in the first point of the model Argentina is making it good. Referring to Brazil, Lula has also good credibility. He has the same characteristics of Kirchner. He is a leftist and populist that is making many market reforms so this point gives him also good credentials. The second point of the model talks about the political party system. In Argentina the political system is really consolidated. The Peronist now have strong majority in the congress. So the political system is Argentina is good. In Brazil, the political party system is really fragmented. They have 11 parties and no one has a real power. Brazil needs to find alliances to resolve this problem which is really affecting the way to reach reforms to help the country’s growth. The third point of the model refers to the leadership skill of the president. In Argentina, the way in which Kirchner arrived to the presidency makes him a leader. He won the elections with any political power. He quickly demonstrated that he was willing to fight for the people, the way in which the restructured the deal with bondholders make the Argentinean president a real leader. In the

case of Lula, he is also a good leader because he was able to form alliances with other parties. The political consensus is the last point of the model. In Argentina is point is low, as in many Latin American countries. The crisis that the country lived made difficult to find consensus in market reforms. Also another important point is the internal conflict that the ruling party is living. The Peronist is having problems to find consensus so it has hardened the way to Kirchner to find consensus. Also in Brazil this point is low. As I mention before, the way in which the political party system is fragmented have made difficult to find consensus. As we see in above points, Argentina has a better near future scenario. Argentina would be a better option to invest for Korpus if we only take into consideration this model. Needed Reforms Both countries are having problem in reaching consensus to develop market reforms. Brazil needs to work especially in the Tax Reform which is affecting the country and the foreign direct investment. Other important reforms that Brazil need are the Social Security Reform and the State Owned Enterprises (SOE) Reform. In the case of Argentina, many reforms are now on the table but I think not as important issue that Brazil is trying to resolve. The first point that Argentina needs to work is the reform the elimination of taxes on export transaction. Argentina mainly is working to complete all the recommendations that the IMF asked for. As we see both countries need some important reforms to have a better FDI scenario. But I think that the Argentina’s recovery and the current political and economic situation help Argentina to be a better option. Additional Factors Transportation: An important factor to take into consideration is distribution. Korpus needs to move inventories from the U.S. or manufacturing countries to the new stores. Argentina has better infrastructure in highways, railroad and airports. Argentina has the best railroad system of all the Latin American countries. They have daily flights to the United States. Their highways are privatized and in really good conditions. So the distribution inside or outside Argentina would no have any problem. In Brazil the situation is different; the transportation is a really big issue. They have deteriorated highways, inefficient railroad. They also have daily fights to the United States and an acceptable international airport. Both countries are really far from the United States, so distance is not a decision factor.

Cultural: Argentineans culture is really similar to the ones in Europe. I think that all marketing strategies would be easier to develop in Argentina than in Brazil which their culture is really different that in the United States. Economic: Argentineans are used to spend more money than in Brazil. The GDP per person in Argentina is higher in Brazil, which has one of the lowest in Latin America. Bargaining: I think that this point would be the same in both countries. Korpus would find a lot of competition in both countries, so it will be difficult to have a bargaining power in any country. As we see, Argentina ill be a better option for Korpus to invest. The result by using the Packemham model helped me to determine that Argentina would have a better future for investing. The reforms implemented in Argentina are still needed in Brazil. Finally, the additional factors also support the decision in going thru Argentina. Jose, You make some good points here and this shows a clear understanding of the Packenham model. However, your essay is a bit thin. I would have liked a deeper analysis drawing more on class lectures and readings to illustrate your points. Thanks, Roy Nelson