A changing development strategy.

• Author: Fishlow, Albert
• Position: Development, Trade, and Inequality - Report

Latin America experienced high rates of growth in the first decade of the twenty-first century. Will the region--increasingly split into Atlantic and Pacific countries with different policies--be able to continue this pace into the future? That will depend upon high rates of investment, regulatory stability, and openness to technological advancement to sustain gains in productivity and permit continued improvements in income distribution.

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Latin America has systematically evolved over the last thirty years? Three stages characterize this process.

The initial period, from the mid to late 1980s, saw the end of military governments and a return to civilian leadership in many countries. That transition occurred in the midst of an economic crisis and an inability of countries to meet their high levels of debt service. To be sure, there were and continue to be country differences. But, the valid generalization was an end to both military dictatorships and reliance upon external commercial banks to finance expansion of investment directed toward internal industrial activity.

This ended an era of both internal fiscal deficits and external current account deficits central to the expansion of the 1970s. Foreign funds could no longer compensate for the imbalances that developed in the late 1970s and early 1980s. Countries would have to restructure not only economically but also politically. And many of them--ranging from Mexico in the north to Argentina and Chile in the south--restructured dramatically. Meaningful elections soon appeared, and constitutions were rewritten.

Stabilization was not always immediately successful. Argentina had its failed Plan Austral, just as Brazil did not succeed with its Cruzado Plan, though sub sequent formulations succeeded by correcting some of these earlier errors. Other countries proceeded differently. Bolivia went into hyperinflation, allowing relative prices to converge to dollar values, and then was able to increase government revenues after conversion to a virtually dollar-based structure. Mexico utilized the government to negotiate price and wage limits and gradually brought down both. None of these arrangements proceeded as the International Monetary Fund had earlier suggested.

Governments yielded their direct control over a range of activities in the second phase extending from mining, petroleum exploration, and production, to capital-intensive industries like steel, to public utilities like communication and electric power. Such privatization was motivated less by the prospect of increased productivity, although that did emerge, than by the desperate need for resources essential to reducing the large fiscal deficits that had earlier translated into high rates of inflation and accumulated public debt. Equally, governments belatedly came to appreciate the possibilities of external trade as a mechanism for growth. Exports were given greater priority than before, and that transformation was given greater weight by the emergence of the North American Free Trade Agreement (NAFTA) and later efforts to generalize freer regional trade with the United States throughout the continent.

As this process took hold, critics from the left were quick to criticize this apparent commitment to liberal economics and instead preferred a more leftist emphasis upon social policies and attempts to alter the highly unequal distribution of income found virtually throughout the region. (2) This was given greater weight by the slowing of expansion at the end of the 1990s, a period marked by a re-emergence of inflationary stresses in many countries within the region. Internal politics generally moved toward the left, and social policies received more attention than had previously been the case. More attention was directed to the possibility of greater governmental intervention once more, and the allure of industrial policy was palpable.

The favorable initial years of the twenty-first century also saw improved terms of trade and rising demands for primary products that translated into higher flows of foreign investment and domestic consumption. Latin American expansion between 2003 and 2007 was greater than before. Income distribution improved almost everywhere, and the percentage of the population that was poor dramatically declined as income per capita grew.

In the midst of better economic performance, the prospects for a universal, regional trade agreement yielded a more diverse response. Central America, the Dominican Republic, Chile, Peru, and Colombia opted in favor of free trade agreements with the United States, while the Southern Common Market (MERCOSUR) countries of Argentina, Brazil, Paraguay, and Uruguay expanded to incorporate Venezuela and to reject any such alliance. Bolivia and Ecuador have also become associate members of MERCOSUR, with interest in future membership.

The worldwide recession has led to the third and present phase, in which Latin America, after the global downturn of 2008-2009, is confronting a different form of globalization. Now, it is clearer that the dream of delinking developing countries from the fate of the developed was an illusion. Notwithstanding the greater role of these newer powers within the global economy--one that will continue to expand--what happens in the world's leading economies still matters: their growth, interest rates, exchange rates, openness, availability of advanced technology, and other characteristics make a large difference.

Regionally, the different stances on the role of international trade and foreign investment widened. Macroeconomics also provides a measure of the extent of this difference. High rates of inflation have returned to Argentina and Venezuela, and there are pressures elsewhere. Government regulation has become the primary determinant of economic strategy in a subset of Atlantic countries. (3) Markets are not merely aided but rather fully shunned in determining priorities.

A major question therefore arises. Will this present division diminish, or will it further widen? Brazil is the key unknown. On the one side, there are the countries in the Bolivarian Alliance for the Peoples of Our America, and, on the other, there are those along the Pacific. MERCOSUR in the 1990s was a valuable source of economic growth, but it has not been a large factor since. Argentina increasingly opted in favor of Venezuela and has preferred a return to a past strategy of import substitution. Brazil has reached out to the countries along the Pacific coast, themselves benefiting from Asian growth. Still, with lower recent growth and higher protective tariffs, there is great temptation to emphasize the domestic Brazilian market and forego opportunities for external trade.

Here, I wish to concentrate upon four themes that will determine the ability of countries within the region to sustain a convergent developmental process and contribute to greater hemispheric unity.

The first is a need for high rates of investment...