The text below is composed of short excerpts (abstract, introduction, conclusion) from Esteban Pérez Caldentey and Matías Vernengo, “Back to the Future: Latin America’s Current Development Strategy,” International Development Economics Associates Working Paper No. 07/2008. The full text of “Back to the Future” is available (in PDF) at <networkideas.org/working/dec2008/07_2008.pdf>. — Ed.
From 2002 to 2006, Latin America registered one of the highest average growth rates in over two decades. The empirical evidence suggests that the good economic performance of the last 6 years (including 2007-08) is increasingly and strongly correlated either with a positive terms-of-trade shock, mostly in South America, or with the increase in the flow of remittances, particularly in Central and North America. In other words, Latin America now exports commodities and people. The paper shows the possible limitations of this development strategy.
From 2002 to 2006, Latin America registered one of the highest average growth rates in over two decades. Aggregate demand decomposition into the three major sectors of the economy (external, government and private) shows that the growth trajectory is explained mainly by the favorable performance of the external sector and, to a lesser extent, by the increase in the debt of the private sector.2
Since the late 1990s, Latin America has been able to reduce its current account imbalance and, from 2002 onwards, managed to achieve a surplus. The improvement in the external sector conditions is attributable partly to a commodity price boom that benefited a subset of Latin American countries, namely those that specialize in the exports of commodity products and which comprise mainly South American economies and Mexico. The commodity price boom was triggered by the increased demand for primary products from Asian countries and, in particular, by China.
In addition to the terms of trade, another explanatory factor is the significant increase in remittance flows since 2002, as a result of a sizeable increase in illegal immigration flows from Latin America to the rest of the world. Remittances have benefited most Latin American economies. But the positive effect of remittances on the current account is much greater, for the most part, in those economies that were not favorably affected by the boom in the terms of trade, namely Central American economies. In addition, in the case of these countries, the excess of private sector consumption over income (private debt) also helped to boost aggregate demand.
For its part, the government sector did not provide an additional stimulus to aggregate demand. In the great majority of cases, countries opted to reduce their budget deficit and, in a few, the fiscal stance was outright contractionary.
The analysis adopted in this paper does not attribute an important role to financial flows.3 At the aggregate regional level, the transfer of net financial resources to Latin America is roughly nil. At the more detailed level, countries that were favorably affected by the movement in the terms of trade, record a negative net transfer of resources for the period 2002-2006. That is, they were not net recipients but were rather net suppliers of financial flows to the rest of the world. The rest of the countries, were net recipients of financial flows during 2002-2006, but on a much lower scale than in the period 1990-2001.
Latin America’s current development strategy is based on a variation of the agro-export model adopted during the late 19th and early 20th centuries, even though some differences exist. At that time primary production for export supported the development of Latin America. However, the external demand for primary commodities proved to be insufficient to guarantee the full employment of Latin America’s productive potential. One policy alternative based on free market principles to fill the gap between the demand and supply of resources, which could not be implemented at the time, was to allow workers to migrate.4 Roughly a century after, Latin America’s economic performance is not only sustained by primary production for export but also by the export of labor. In addition, this free market-driven approach has solidified a regional division of labor within the Latin American region. The north exports mainly labor and the south mainly commodities.
Moreover, as in the nineteenth century, the current pattern of productive specialization and growth are driven and shaped by financial factors. In the latter half of the nineteenth century, free capital mobility was fundamental to the creation of the agro-export model. Long-term financial flows from the center to the periphery allowed the creation of the infrastructure that led to the export boom in the region. Currently, global financial imbalances have determined to a great extent the growth performance of Latin American countries.5 The impressive American current account deficits, specially with Asia, have allowed an incredible expansion in that part of the world, and increasing demand for commodities that has led to a renewed change in the patterns of production in Latin America.
The difference lies in the fact that in the 19th and early 20th century, free capital mobility and the role of financial factors reflected a successful integration with the hegemonic economy of the period (England), which functioned for all purposes like a closed circular flow with no leakages. Currently, global imbalances have created price increases that may not be sustainable and, to some extent, are driving the process of productive specialization in Latin America. Further, the hegemonic country (United States) is also a producer of commodities and, in many cases, a competitor of the region for external markets.6
This paper first analyses the current development strategy of Latin America and places it in a historical context. The remainder of the paper is divided into six sections. The first section analyses the current economic performance of Latin American economies using a demand-driven approach and more specifically the financial balance approach. Sections two, three and four examine the performance of the external sector, remittances and the contribution of financial flows. The fifth section provides econometric support for the hypotheses put forward in this paper. The sixth section presents the conclusions of the paper and draws policy implications.
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In Guise of Conclusion:
Back to the Peripheral Integration to the World Economy
Even though some left-of-center governments have tried to implement alternatives to the Washington Consensus, the Latin American economic expansion since 2002 does not result from specific government policies.11 There has been, in certain aspects, a break with the neoliberal policies. For example, in Bolivia, Ecuador and Venezuela, national governments took over the hydrocarbon sector. Venezuela has also nationalized other key industries, including steel, electricity and telecommunications, going against the privatization mantra of the Washington Consensus. Also, monetary and exchange rate policies in Argentina and Venezuela have definitely departed from neoliberal orthodoxy.
Yet, the empirical evidence suggests that the good economic performance of the last 6 years is increasingly and strongly correlated either with a positive terms-of-trade shock, mostly in South America, or with the increase in the flow of remittances, particularly in Central and North America. The current economic boom shares with the old agro-export model of the 19th and early pre-WWII 20th century the fact that the dynamic element is external demand, and, as a result, subject to the same risks associated with external shocks. Also, as in the agro-export model, financial factors shape and determine the pattern of productive specialization in Latin America.
There is, however, an important difference with the development model of the Belle Époque or the early pre-WWII 20th century. While immigration was integral to the late 19th century boom and, as noted above, migration policies could hardly be implemented at the beginning of the 20th century, the 21st century economic boom has been related for some economies to significant emigration. Latin America now exports commodities and people. The current development model applies the logic of integration into international markets to its full extent and perfects the old agro-export model. As a result, Latin America specializes in the exports of its abundant factors, natural resources and labor.
We do not believe that Latin America is condemned to live in the past, and trust that an alternative development strategy is possible. This would require the recovery of the capacity and willingness of the State to invest, the utilization of industrial, commercial and exchange rate policies to stimulate export diversification, and more space for macroeconomic policies to promote the expansion of domestic markets. The rejection of the Washington Consensus by most Latin American governments is unfortunately more a question of rhetoric than of reality. In today’s Latin America, the Washington Consensus has been taken to its full fruition, even by governments professing a radically opposite political discourse.
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1 The opinions expressed here are the authors’ own and may not coincide with those of the institutions with which they are affiliated. Preliminary versions of this paper were presented in FLACSO, Quito and the University of Utah, and we thank participants for their comments. We also thank Jan Kregel and Mark Weisbrot for comments on an earlier version of this paper. Errors or omissions, if any, are entirely ours.
2 See Godley (2000); Eatwell and Taylor (2000).
3 For a contrary view, see Ocampo (2007). In his analysis Ocampo does attribute a fundamental role to the terms-of trade variable.
4 See Kregel (2007); Cypher (2007).
5 Jan Kregel brought the role of financial factors in shaping the 19th and 20th century pattern of productive specialization of Latin American countries to the attention of one of the authors of this paper.
6 See Pérez Caldentey and Vernengo (2008) for a comparison of the Argentinean integration to England and the United States in the two different globalization periods, that is, the late 19th and 20th centuries.
11 There has been an expansion of social spending, without changing the fiscal stance though, and in some cases, like Argentina and Venezuela, monetary and exchange rate policies have been more expansionary.
Cypher, J. (2007) “Shifting Developmental Paradigms in Latin America: Is Neoliberalism History?” In E. Pérez Caldentey and M. Vernengo (eds.), Ideas, Policies and Economic Development in the Americas, London and New York: Routledge.
Eatwell J. and Taylor L. (2000) Global Finance at Risk, New York: The New Press.
Godley, W. (2000) “Seven Unsustainable Processes: Medium-term Prospects and Policies for the United States and the World,” Strategic Analysis, The Levy Economics Institute of Bard College.
Kregel, J (2007) “Nurkse and the Role of Finance in Development Economics,” The Levy Institute of Bard College, Working Paper No. 520.
Ocampo, J.A. (2007), “The Macroeconomics of the Latin American Economic Boom,” CEPAL Review, No. 93. pp. 7-28.
Pérez Caldentey, E. and Vernengo, M. (2008) “A Tale of Two Monetary Reforms: Argentinean Convertibility in Historical Perspective,” Studi e Note di Economia, XII (2), Agosto, pp. 139-70.