Bureaucratic Authoritarianism, Foreign Investment, and Debt Crisis

1. Bureaucratic Authoritarianism, Foreign Investment, and Debt Crisis Hichol Cho

2. The New Authoritarianism in Latin America- David Collier • The industrialization in Latin America resulted in emergence of the Bureaucratic Authoritarianism. The gov. is ruled by the military as the institution rather than by individual military rulers. - The relationship b/w democracy and industrial modernization does not always exist. - Political economic model by the bureaucratic authoritarian countries is often inconsistent and involves corruption and income inequality. - Latin American countries are generally characterized by late industrialization, and reliance on foreign investment and technology.

3. The Bureaucratic Authoritarianism -- Hirschman argues that understanding the different phase of industrialization and its important consequences can help us understand the emergence of the Bureaucratic Authoritarianism. -- Jose Serra states that there is a relationship b/w the economic development and emergence of the Bureaucratic Authoritarianism. He argues that it will result in 1)the exploitation of working class, 2)deepening of the industrial production, and 3)economic rationality.

4. Three distinct political phases in Latin America-- O’Donnell 1. Oligarchy – the political competition is limited. The elite of the primary product export sectors dominates the state. 2. Populist – it is based on multi-class coalition of urban-industrial interests, including the industrial elites and the urban popular sector. The state promotes the initial phase of industrialization focused on consumer goods.

5. 3. Bureaucratic Authoritarianism – This non-democratic system excludes the popular sector. The state is controlled by the technocrats. They perceive the popular sector as an obstacle to the economic development. This model promotes the advance industrialization. This system was seen in; -- Brazil (post-1964) -- Argentine(1966-1970, 1976) -- Chile and Uruguay(post-1973)

6. Economic and Social Change The three main factors influenced the transition from one system to another, which are Industrialization, Activation of the popular sector, and Technocratic role.

7. 1. Industrialization, -- The domestic firms begin to produce for the local markets previously supplied by imports. These firms are protected by tariff and subsidies. -- The cost of importing the intermediate inputs is high, and it leads to the deficit and inflation. The gov tries to solve this problem by deepening the industrialization through domestic manufacturing of intermediate inputs. --This would require the foreign investment. The gov would make a new policy to draw the foreign investment.

8. 2. Activation of the Popular Sector, -- The popular sector becomes increasingly powerful after the initial phase of industrialization. They will oppose the new fiscal policy. This would result in political and economic crisis. 3. Technocratic Role, -- The industrialization enlarges technocratic society. They perceive the popular sector as an obstacle to the economic growth. As a result, they would make the intervention in politics, economy, and social life. They would gradually form the bureaucratic Authoritarianism.

9. External Debt and Macro Economic Performance in Latin America and East Asia,- Jeffrey Sachs Why East Asia performed better than Latin America? -- External shocks in Asia were less severe than those in Latin America. -- Latin America over-borrowed. -- Latin America mismanaged the exchange rate and trade. -- While Asian economies are market oriented, Latin America is not. -- Compare to Asia, trade in Latin America deteriorated more sharply. Also, Latin America was more affected by the higher interest rate.

10. The Role of External Shocks Was the external shock accountable for the economic crisis in Latin America? -- The sustained rise in the U.S. interest rate after 1979 deteriorated Latin America’s existing debt because their currencies were pegged to dollars. -- Asian countries’ debt was non-banking borrowing, originating from export credit agent. -- HOWEVER, the real interest rate shock was large and negative only for Brazil, Korea and Chile. This implies that Latin America’s poor economic performance was not linked to the external shocks. In fact, Korea and Thailand had larger negative shock.

11. Comparing the debt service to export ratio. -- Latin America’s debt was higher as proportion of export. This made them vulnerable to the shocks. -- In Latin America, the debt servicing requirements exceeded total export in 1980-1983, while East Asia’s debt was below the export.

12. Trade Policies and Exchange Rate Management Latin America’s Trade failed due to the two main failures. 1) As debt is accumulated, the price of tradable goods should rise to encourage the movement of resources into the tradable goods sectors. However, it did not happen in Latin America. 2) Investment in tradable should be in sectors that are profitable when outputs and inputs are evaluated at the world price, rather than the tariff distorted price. However, they failed to do so.

13. Three sectors approach; the importable, exportable, and non-tradable The author argues that two sectors approach (only the importable and exportable) can be misleading. Three sector approach can better explain the trade problem in Latin America. -- The protectionist policy does not hurt export when resources are drawn from the non-tradable into the tradable. This is the case in Japan and Korea, where they maintain the rapid export growth with the protected import. -- On contrary, Latin America’s over-valuation benefited the import at expense of the export.

14. Political Economy of export led growth -- There is the link b/w the shift to ISI and decline of the agricultural sector. In Latin America, urban workers and capitalists are important constituents. Thus, their interests were served first. In Asia, the rural sectors have more power. -- Since the urban workers prefer the over-valuation, Latin American currencies will appreciate to meet the interest of urban workers. -- In Asia, once the export promotion begins, the industrial exporters gain the power and continue the undervalued exchange rate. In Latin America, the exporters will eventually grow weak under the influence of over-valuation.

15. Latin America’s Debt Crisis- Franko -- The borrowing to support ISI becomes an unstable foundation for growth because the borrowing might outpace the payment ability of the country. -- ISI is driven by the failure of private sectors to provide critical goods and services in the economy. As a result, the state invests in sectors with huge capital requirement for entry. However, this state owned firms are generally inefficient.

16. External Shocks -- The real interest rate was negative from 1974 until 1977. This gave the strong incentive for Latin America to borrow. In addition, banks were willing to lend to the state-owned firms. --However, the external condition radically changed in 1979. The interest rate increased rapidly. Consequently, Latin America fell into debt. --The value of the currency began to fall and this encouraged people to invest outside of their country = Capital Flight. --Overvaluation of currency caused the further capital flight. It further increased the deficit.

17. Why would a country allow overvaluation? 1. Strong currency value allows companies to buy the intermediate inputs at lower cost, which is good for ISI. 2. When countries peg their currencies to the strong foreign currency, overvaluation may happen. 3. When countries tries to depreciate their currency after noticing the overvaluation, it might cause the additional inflationary shock.

18. Questions 1. Which factor was most accountable for creating the economic crisis? 2. What lessons can be learned from the economic crisis in Latin America? 3. Were internal or external causes more to blame in the Latin American debt crisis?