Elites and structural inertia in Latin America: an introductory note on the political economy of development.

Author:Cimoli, Mario

In the post-reform era, Latin America has reinforced its pattern of specialization in natural resources and standardized commodities and its growth rate has diverged from that of one of the most dynamic economies in recent years. Additionally, many experts and international organizations consider that the persistent income inequality that permeates the entire region is a matter to be addressed, mainly through social policy.

While it is acknowledged that innovation is ubiquitous in all processes of economic development, the importance of the interaction between innovation, production structure and income distribution process is not always recognized. Innovation represents a break from past familiar practices, a considerable uncertainty about how to make the new practice work effectively, a need for sophisticated learning by doing and using, and, consequently, and a process of creative accumulation and structural change.

This paper deals with the idea that the production structure and the diversification of knowledge activities define the feasible set of conditions for income distribution and elite concentration. Our starting point is the body of ideas pioneered by Prebisch and Fajnzylber on the negative effects of natural resource specialization and concentration of property rights in terms of income distribution and the balance of political power between different social groups. They assert that highly concentrated ownership of natural resources combined with a proportionally small sector of other manufacturing activities is a source of income inequality and further concentration of political power (Prebisch 1976; Fajnzylber 1990).

In fact, the relationship between structural change and economic development may be traced back to the analyses conducted by the development theory pioneers (Nurske 1953; Hirschman 1958; Gerschenkron 1962). Structural change would allow increasing returns and technological learning; and a growing share of industrial sectors in total value added would generate spillover effects, backward and forward linkages and technological externalities, and this in turn, would accelerate capital accumulation and growth. The recent literature on innovation highlights the role of technological change in shaping structural change and growth (Dosi 1988; Dosi, Pavitt and Soete 1990; Cimoli and Della Giusta 1998; Ocampo 2005). Furthermore, a more complex production system requires policies capable of managing complementarities and public activities in such a way as to generate and spread knowledge (Metcalfe 1995; Cimoli et al. 2006b). Economies that are able to foster innovation and transform their production structure by increasing the proportion of R&D (research and development)-intensive sectors or production stages will converge on developed countries in terms of growth rates and per capita income.

By examining the sources of structural change, the paper will shed light on the role played by the elites in the structural inertia of Latin America. The evidence supports the notion that a diversified knowledge structure generates and distributes rents in a more equitable way. Rents are distributed according to the different competencies (skills and capabilities) and complementarities needed to produce complex products that incorporate knowledge. A knowledge-intensive, diversified structure regulates market power asymmetries in favor of those activities that further stimulate knowledge generation and diversification. Conversely, a production structure based on natural resources and specializing in activities that use cheap labor generates rent-seeking behavior that reinforces that pattern and resists structural change. When a small social group monopolizes this type of power distribution, there is even more reason for resistance to the implementation of policies to change the production structure. Thus, policies that promote diversification of production activities and transform production structure have to be accompanied by endogenous incentives on the part of the social groups that generate and diffuse knowledge.

The paper is organized as follows. Section one briefly describes the inconsistency of the market-efficiency approach in fostering development. Section two sets out two complementary exercises that test the importance of the production structure in growth and convergence. Section three describes the incentives driving the generation and distribution of rents in the resource and knowledge courses. The relation between elite concentration and production structure is empirically described and analyzed in the fourth section. And, the last section is devoted to the conclusion.

Market Efficiency and the Sources of Development

Many Latin American countries made significant changes to their macroeconomic policies and regulatory regimes during the 1980s. Trade and financial liberalization, the deregulation of markets and the privatization of economic activities all formed part of such programs. These were strongly influenced by the belief that the political economy of the Latin American countries must be transformed if they were to enhance their long-term growth performance, while simultaneously attaining significant welfare improvements.

The reforms were strongly influenced by the conventional "welfare-equilibrium" view. In the tradition of this approach, markets and competition are built entirely on the idea of a logical consistency between competitive markets, preference functions and adjusting variables (prices and quantities). The market is generally defined as the institution in which perfectly informed and rational utility-maximizing agents meet in order to carry out transactions. This characterization is central to resource allocation and to the selection of efficient market outcomes. Prices and factors are completely flexible and information is perfectly distributed.

This is a very appealing and politically attractive conceptual basis upon which to operate, since it implies that any institutional setting other than a fully competitive economy (full flexibility of prices and factors, and no "noise" created by government intervention in the economy) will lead to a general equilibrium that is below Pareto optimality. In such a view, any State intervention in resource allocation or institutional features that reduces price and factor flexibility will produce a misallocation of resources and hinder the achievement of a sustainable long-term equilibrium. Thus, the reforms were guided by the need for market "flexibility" and less government intervention.

Orthodox authors have argued a priori that trade liberalization and market deregulation efforts automatically plot a development path governed by market efficiency. Trade liberalization strengthens the region's comparative advantages by reallocating resources to those production activities that boost the demand for unskilled labor, narrow the wage gap and reduce the anti-export bias of the import substitution era, when the labor factor was underutilized (Krueger 1978; Williamson 1990).

Have these reforms been successful? Although a definitive assessment has yet to be made, frustration at the outcomes of the reforms seems to be spreading among both policymakers and academics in the region. Many experts are beginning to suggest that expectations regarding the likely benefits of these reforms may have been grossly over-optimistic. Divergent paths in growth rates and per capita income are generalized facts. Persistent poverty and income inequality permeate the entire region and the weakness of the institutional setting forms a common backdrop to State interventions in different areas of the economy.

Should we be surprised by those results? The answer is no, because in the theoretical construct of welfare equilibrium, market efficiency can be attained without the promotion of either equitable distribution or convergence. The inequality in the welfare-equilibrium approach is due to the lack of assets (health, education, skills and social connections), poor returns (low wages, low agricultural prices, low output prices) and the volatility of these returns (droughts, market recessions, commodity price fluctuations) (Sen 1982; 1984). Convergence does not occur because the main sources of growth (i.e., innovation, externality, indivisibility and complementarities) are all elements that distort the approach's conceptual apparatus. However, these "interferences" with good and efficient market behavior are, in fact, sources of growth. Unless such sources are created and propagated, there is no basis on which to foster growth and a divergent growth pattern will result; in other words: "quod nullum est, nullum producit effectum."

From the standpoint of welfare equilibrium, policies are promoted only "when there are market failures" of some kind and this is the departure point for most of the analysis (Cimoli et al. 2006b). However, albeit quite common, the "market failure" language tends to be quite misleading in that the yardstick by which it evaluates the necessity and efficacy of any policy consists of the conditions under which standard normative ("welfare") theorems hold. The problem with this framework is not the relevance of market failures. On the contrary, the problem is that hardly any empirical set-up significantly resembles the yardstick in terms of market completeness, "perfectness" of competition, knowledge possessed by economic agents, stationarity of technologies and preferences, "rationality" in decision-making, and so forth (the list is long indeed!). In a profound sense, judged by standard canons, the whole world may be seen as one huge market failure!

If we abandon the idea, for example, of the stationarity of technology and we construe technical progress as being built into product manufacturing, we can see that the economic system might be dynamically better-off (in terms of productivity, innovativeness, etc.) evolving in...

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