International economic integration and growth in Latin America.

 
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27 October 2014

Integration of Latin America into the international economy over the past quarter century has led to faster export growth, but not to faster GDP or productivity growth

Contrary to mainstream analysis, under the current market reforms countries have underperformed as compared to the prior period of state-led industrialization

Growth was much more volatile than in the past, reflecting large vulnerabilities to external shocks

Deeper integration into the global economy has been a distinctive feature of Latin American development strategies over the past quarter century. The dominant elements of such integration have been export-led growth relying on market forces and open capital accounts. This has been combined with some state intervention to promote foreign direct investment (FDI), export processing zones, and regional integration and free trade agreements.

The effects of integration

Integration into global markets has not proven to be successful for most Latin American countries. Contrary to mainstream analysis, under the current market reforms countries have underperformed as compared to the prior period of state-led industrialization.

Good export performance has been the most positive outcome of Latin America's increased economic integration, with intraregional trade having a particularly positive effect on exports. However, good trade performance has not been reflected in GDP or productivity growth in most economies of the region. Furthermore, while the recent commodity boom has been a windfall, particularly for South American mineral exporters, this generates risks of further accelerating the premature de-industrialization process that has taken place since the 1970s.

The process of open integration in the global economy has also left a legacy of weaknesses in technologies that support the productive capacity. Although FDI and the rise of companies operating in multiple Latin American countries have been positive features of the ongoing transformations, openness to volatile financial flows from outside the region has been a major source of the steeply rising and falling business cycles that have characterized the past decades in Latin America.

The collapse of global trade during the great recession in 2008-09 and its incomplete recovery have no doubt added an extra element of uncertainty in trade and production sector structures. This means, in particular, that growth in Latin America is likely to be even slower going...

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