“What Development Strategy for Latin America?” SUMMARY: The author begins by reviewing the region’s positive economic and social performance from 1950 to 1980. Against this background, he discusses the debt crisis of the 1980s, the subsequent structural reform programs of the 90s, and prospects for long-term economic growth in the region. He outlines a strategy for future economic growth in Latin America that includes a significant role for the State in leading economic development policy.
Development in Latin America: 1950 – 1980
Outstanding economic growth: GDP increase of approximately 5.5% annually (regardless of political system and despite some ups and downs)
Income Distribution: better than other developing countries
Role of government – important in providing incentives for industrialization AND providing social programs for poor.
The Debt and Financial Crises
Second oil shock – 1980 – led to floating of interest rates and deregulation of banking system, resulting in higher interest rates. For Latin America this caused a situation of scarce and high-cost financing. Int’l recession also reduced int’l trade and led to fall in commodity prices. Latin American countries continued to borrow in disadvantageous conditions, leading to debt crisis.
Debt Overhang Despite stabilization programs, Latin American countries plagued by outward flow of external funds and stock of external debt. Huge debt overhang – deterrent to private investment due to fear of future taxation.
Expansion of Exports Remarkable that during 1980s financial crisis, surge in manufactured exports led to trade surplus, making up for loss in value of commodity exports due to adverse terms of trade.
Decline in Investment – 1981-89 gross domestic investment fell by 3.2%/yr, also loss in domestic consumption (counterparts of trade surplus)
Need for Economic Growth
Unsatisfied social demands – social expenditures often main losers during stabilization process.
Income redistribution – rapid and sustained economic growth is only way to improve real income distribution.
Legitimacy of democratic political systems will be questioned if gov’t can’t satisfy citizens’ needs.
Strategy for Economic Growth
International Trade – exports of manufactures (not just raw materials) is important for the future of Latin America – can provide stimulus to increase competition and introduce new technologies.
Technology Acquisition and Development – Technological innovation more constant source of economic growth than international trade in the long-term. Latin America needs to 1) incorporate new technologies (computers, telecom etc) AND 2) absorb improved technologies (manufacturing). Increased demand for new types of engineering skills – need for improved training of workers in high tech industries.
New Role for the State – 1) formulation of a development strategy – lessons from example of East Asia, where public sector played crucial role in implementing growth strategy. Strategy should include debt reduction, promotion of manufactured exports, incorporation of new technologies, and new role for the State. 2) Regulation of economic activity by well-qualified civil servants (need adequate training programs. 3) Provision of public goods; 4) Fiscal Performance – increased social and welfare demands and decreased sources of financing for gov’t – underfinanced gov’ts result in inefficiency and corruption.
CONCLUSION: Governments of Latin America should pursue these initiatives: 1) reach agreements for debt relief/reduction; 2) generate long-term investment programs; 3) restructure and improve gov’t services. Region needs concerted effort by governments to eliminate constraints on current institutions.