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The Latin American Transformation: Mercantilism to
Capitalism
Pedro Romero AlemanGeorge Mason University
08/27/2007
Latin America Landscape
The Puzzle
“Why did Latin America stagnate in the twentieth century while the US and Canada surged ahead?” Franko: 2003 p. 30
Conventional Answers
Marxist theories Exploitation by developed countries (Colonial
Vestiges) Center – Periphery or International Division of
Labor Vicious Circle of Poverty (Ragnar Nurkse)
Countries are poor because they’re poor Low income, low savings, therefore low capital
which leads to low incomes.
Critiques Poverty as a natural state of human beings Rich nations were also in the past poor People in those countries at that time faced the
same problems Low incomes, savings and capital accumulation Malnutrition, unhealthy environments, population
pressures But they were able to get out of the vicious circle Hong Kong y Chile, Cuba y Venezuela
An Alternative View
"It may be true that in certain conditions, where an undeveloped government apparatus is scarcely yet adequate to perform [such as a minimal state], it would be wise to confine to it, since an additional burden would exceed its weak powers and the effect of attempting more would be that it did not even provide the indispensable conditions for the functioning of a free society."
Friedrich Hayek, 1979. Vol 3 Pg 41. Brackets added.
An Alternative View
Constitutions as rent seeking instruments Legal labyrinth Interest group conflicts
Consequences: EFW, GDP pc Absence of enforcement Property Rights unprotected Higher transaction costs/Entry barriers Corruption Lower Economic Growth
Repressed Societies
Source: Gwartney, James and Robert Lawson (2004). Economic Freedom of the World: 2004 Annual Report.Vancouver: The Fraser Institute. Data retrieved from www.freetheworld.com
Economic Freedom Index
0123456789
10
1975 1980 1985 1990 1995 2000 2002
Bolivia Colombia Ecuador Peru Venezuela Chile
Growth impossible without Institutions
GDP vs RULE LAW
5
6
7
8
9
10
11
-1.2 -0.7 -0.2 0.3 0.8 1.3 1.8 2.3
Index of Rule of Law
Ln(GDP pc) PPP
Chile
Colombia
Ecuador
Hong Kong
Peru
Venezuela
US
Source: Data retrieved from the International Institute for Corporate Governance at http://iicg.som.yale.edu/data/datasets.shtml
Fiscal Opacity
Institutional Matrix and Resources Political System
“legal relations that govern society”Property rights
Private-Public-Communal-Absence of Ownership
Economic System“a process of material transformation”
DecisionsConsumption-Production-Distribution
Natural Resources“They are out there”
Constraints/AdvantagesRenewable and Non-renewable Resources
Latin America Transformation Productive structure: Consumption goods,
intermediate (production) goods, time or process consuming time.
Public Policies can either hinder or foster/preserve the production process Institutional matrix: Rule of Law or Rule of men
The manner in which a society structures its political/legal institutions helps shape the character of life in that society.
Mercantilism “The property rights over land and water within the limits of the
national territory belong to the State, which has the right to transfer it to the individuals…The State will have anytime the right to impose over private property any requirement stemming from the public interest…The State has the direct control over all the natural resources on the continent and maritime border plus everything under the ground…” Mexican Constitution, 1917. Art. 27.
The goal was to make an equitable (re)distribution of the wealth.
318 amendments by the end of 1980 Inflation of law Centralization of political power, none or few checks and
balances
Inward Development Strategies
Import Substitution Industrialization ISI: government as the main developmental actor. Exchange rate and trade tools used to promote
industrialization Raul Prebisch and ECLAC Keynesianism, disliking/non-satisfaction
w/capitalism, given LATAM backwardness
Inward Development Strategies Local and international elites favor short-term
profits instead of long-term dynamic growth Latifundia (redistribuion of land) Paul Baran thought revolution as the only way-out F. Henrique Cardoso thought that autonomous
development was possible. Structuralists: ToT, government as counterbalance
to Multinational Companies A. Hirschman: development as bottleneck, lack of
complementary factors
But…
“Somewhat ironically, in the first stages of import substitution industrialization, national imports usually rose.” Franko: 59
Outward Development Strategies
Subsidies to production for exportation Cheap credit to domestic banks Supported by international organizations Interest groups, barriers to entry High devaluations of national currencies
Consequences Lack of rule of law Poor protection property rights Distortions of Productive Structure of the
economy Urban in detriment of rural development Low quality industrial goods in detriment of
agricultural goods Large Government Spending but limited
governance capabilities
Consequences
Huge fiscal deficits and external debts Inflation, volatile currencies Higher interest rates than elsewhere A complex tax scheme that hinders
entrepreneurship Informality Poverty
Consequences
Argentina’s Happy 1990s So what went wrong? The federal government's fiscal position deteriorated steadily during
the boom years this partly reflected a recognition of unfunded pension liabilities.
The fiscal problem reflected a lack of discipline at the provincial level Once off-balance sheet borrowing is taken into account as well, the
consolidated budget deficit was around 2½ percent of GDP even as the boom peaked in 1997 and 1998.
In 1994 the average federal employee was paid 25 percent more than the average private sector employee; by 1998 the differential had risen to 45 percent.
By the mid-to-late 1990s, public sector employment accounted for 12.5 percent of the labor force in Argentina, compared to barely 7 percent in Brazil and Chile
Argentina's total foreign currency debt was around five times the size of its foreign currency receipts from exports of goods and services.
A Message of Hope “Economic achievement and progress depend largely
on human aptitudes and attitudes, on social and political institutions and arrangements which derive from these, on historical experience, and to a lesser extent on external contacts, market opportunities and on natural resources.” Bauer:1976, p. 41
Bottom-up approaches to development Entrepreneurship
No politicians Limited and Constitutional Government