Econ 1320 Revision Lecture

1. Econ 1320 Revision Lecture Final 12 January 2009

2. (1) The Colonial Legacy Colonization of Latin America was driven by • Mining (gold and silver) • Agriculture • Marginal productivity of labor (MPL) Although MPL high in Latin America, extraction of gold and silver and agricultural production facilitated by: Encomienda (under repartida and mita), slavery, the hacienda system  income inequalities, and, also: Retarded industrialization because: • Monopoly over trade with the Iberian powers • Lack of domestic demand • Protectionist policies by emerging industrial powers

3. (2) The great depression Rapid (but unequal) primary commodity export growth in the late 1800s (“the golden age) generated economic growth and development. Following the outbreak of WWI, however: • Primary commodity prices became more unstable • Transfer of British hegemony in Latin America to the US • Nascent industrialization But Latin America continued reliance on exports during the 1930s prompted: • A tremendous collapse in primary commodity exports • A change in ideology pertaining the “right” path for economic development in the region, I.e., Center-periphery, declining terms of trade…

4. (3) Import Substitution Industrialization (ISI) • ISI policies sought to develop industries in a protected environment • Main goal: create local industries for production of substitutes for via domestic growth expansion of industrial growth • State intervention Tools • Industrial Policy 2) International trade policy • Fiscal and monetary policy Crisis of ISI: - Exhaustion due to the limited size of the internal market, - Export market could not develop because manufactured protected goods did not meet international standards - Neglect of agriculture ….

5. (4) Populism • Urban phenomenon identified by Political scientists: incorporate the workers in a process of industrialization of for ameliorative redistributive measures” (P. W. Drake (1982)) Economists: income inequalities create political pressure to distribute due to unsustainable macroeconomic policies (Sachs (1989)) • Populist cycles: Initial conditions, and populist leaders’ reaction create: a) Initial expansion and high wages, 2)bottlenecks, 3) inflation & low real wages, 4) IMF intervention

6. (5) The 1980s Debt Crisis & the lost decade • Widespread defaults on sovereign debt starting in the early 1980s • Demand side: countries could borrow at low interest rates from foreign commercial banks to finance investment, but expenditures in consumption and capital flight exacerbated the extent of the crisis • Supply side: petrodollars due to oil shocks in the 1970s ready for financial intermediation by commercial banks at low interest rates • Macroeconomic environment: changed in the early 1980s, tight US monetary policies, and fall in price of primary commodity exports • Solutions: Baker plan, Brady plan, market-based solutions (MBS), and debt write-downs and MBS based on Krugman’s “debt overhang hypothesis)

7. (6) Stabilization, Trade Liberalization, and Privatization Also known as “Washington Consensus Policies” • Stabilization Anti-inflationary policies (orthodox and heterodox) • Trade liberalization Unilateral reduction on trade and FDI restrictions, join the World Trade Organization, and creation of trade blocks • Privatization Selling of SOEs to foreign and/or private investors Washington consensus policies did not bring expected rewards in terms of growth. Various explanations: exchange rates, banking crises, regulation, and other structural reforms not yet implemented

8. (7) Capital flows and Recent Financial crises • Most capital inflows in the 1990s and 21st century: Remittances and FDI • The latter due to investors’ optimism, largely viewed a a success of Washington Consensus Policies • Problems emerged, however, particularly because foreign exchange crises, banking sector crises, and contagion

9. (8) Redefining the Role of the State • Early literature emphasized the notion of a “benevolent state” acting in the interest of society • More recently, state perceived as acting in the interest of groups and government officials A minimalist view: A government should not go very far in the production of goods, and services outside the social, administrative, and security sectors

10. (9) Corruption Definition: Sale by government officials of government property for personal gain (Shleifer-Vishny (1993) Corruption with and without theft Link between corruption and political regimes From Franko textbook • Manifestation of corruption in Latin America • Attempts to lower the incidence of corruption (examples) From lecture notes: difference across Latin American countries

11. (10) Agriculture • Agriculture linked to rural poverty • Agriculture linked to indigenous populations in the region • Rural – Urban migration and its effects on both poverty rural and urban • The controversy over agriculture and poverty, and over agriculture and the environment

12. (11) Poverty • Commonly used methods of assessing poverty • Ranking of Latin America relative to the rest of the world • The HDI notion • State intervention for poverty-reduction in Latin America

13. (12) Income inequalities • Commonly used methods of income inequalities • Lorenz and the Gini coefficient • Latin America and the rest of the world • What might be the driving forces behind lower inequality in recent years

14. Case Studies • Argentina on Import Substitution Industrialization (Cavallo articles) • Brazil and South Korea compared: The automobile industry (Franko textbook) • Venezuela on Populism (Coupal article) • Mexico on Trade Liberalization (Tornell article on NAFTA) • Chile on averting financial crises (Franko textbook) • El Salvador on corruption (Franko textbook) • Brazil on Income Inequalities (Ferreira article) • Mexico on fighting poverty (PROGRESA/OPORTUNIDADES), Skoufais article