Trade and Policy Reform in Latin America - Essay Example

?Trade and Policy Reform in Latin America A Summary The region of Latin America is a cornucopia of varied cultures, socio-economic standards and values. The common threads that sew them together are their linguistic base and the colonization of Spain and Portugal. Another commonality is the nations’ shift in policies from an outward, export-oriented policy to an inward, targeted industrial strategy. This was known as the Import Substitution Industrialization (ISI). From years of enjoying economic stability, the seventies brought about the Latin American Debt Crisis turning the eighties into a Lost Decade wherein growth was negative, inflation rates skyrocketed and poverty increased from one country to the next. The ISI saw its end during the crisis of the 80’s and the vision that it can create long term economic inefficiencies. For many years, the region relied much on exports of agricultural commodities to earn foreign revenue but most of the export sectors were often owned and controlled by foreign capitalists. However, during World War 1 and the Great Depression of the thirties, the flow of Latin American exports was disrupted reducing their export earnings. Although World War 2 increased the demand for their minerals and foodstuffs, it nevertheless dropped again after the war ended. Trade analysis or the ratio of average export prices to average import prices or terms of trade (TOT) reported an export pessimism as the prices for the raw materials Latin America exported fell. This was why the head of the UN Economic Commission on Latin America (ECLA), Prebisch, ruled that the region veer away from their dependence on raw material exports and concentrate on industrial development by replacing imported manufactured goods with domestic ones. This was his idea of “import substitution industrialization”. Since exportation of goods bred reliance on foreign exchange and lowered export prices meant lower income from foreign currency, ISI proposed that producing locally made products would reduce the need for foreign exchanged used to buy goods abroad that could be made locally. Thus, Latin America began producing its own products progressing from simple consumer times such as toys, clothes and foodstuff to more complex industrial goods. ISI seemed to be promising until government forces meddled. It was criticized that governments misallocated resources when they got too involved in production decisions of companies. Other criticisms included the overvaluation of exchange rates; policies being biased in favour of urban areas; the inequality of income worsened and the controversy of widespread rent-seeking. ISI did not succeed in furthering the region’s economy, but it had less of an effect in creating the economic crisis of the 80’s than misguided macroeconomic policies of the countries in Latin America. Economic populism or the acquisition of support from labor and domestically oriented business has been blamed for such faulty macroeconomic policies. This was triggered by the deep satisfaction with the status quo due to slow growth or recession; the rejection of policy makers of traditional constraints on macro policy such as the justification of printing money due to the existence of high unemployment and idle factories offering its space without inflation. Policy makers vowed to raise wages while freezing prices and restructure the economy by expanding the domestic production of imported goods. Still, in reality, wages were lower than before and international interventions led by IMF were implemented to stop high inflation and to end a balance of payment crisis. Being sunk in debt was blamed on the collapse of oil prices in the early eighties as well as the fact that the foreign currency owed was dollars, which had variable interest rates. The faulty macroeconomic policies of Latin America left national expenditure much higher than the national income, hence a return to growth was not very likely. In an attempt to keep government expenditures higher than warranted, many Latin American countries resorted to printing money leading to high and increasing rates of inflation. The heavy debts became apparent to everyone inside and outside Latin America that after interest and principal payments were made, there was insufficient export earnings for domestic investment and consumption, so there was no growth determined. Capital flows began returning to Latin America in the late eighties together with holdings of various financial assets such as stocks and bonds issued by private companies. Such positive measures earned the nod of investors around the world again. Most Latin American countries began a series of economic policy reforms changing their relationships between business and government and between their national economy and the world. These reforms had various degrees of success as governments implemented stabilization plans in stopping rising inflation rates and controlling budget deficits. Most countries started privatizing government-owned components of their economies which included manufacturing enterprises, financial and other services, mining operations, tourism and utility companies, among others. Slowly, trade policies became more open and less discriminatory against exports. The reforms brought about positive outcomes but still, many problems persisted. Poverty remained in most countries and inequality continued to increase in others. The absence of basic facilities such as schools, health clinics, roads, clean water and other infrastructure elements limited the reach of economic growth. Latin America continued to struggle with inflation stabilization and exchange rate policy. Chile began reforming its trade policies back in the 70’s. Other countries followed suit, and realized that opening trade would restore economic growth. In the late 80’s and early 90’s, nearly all countries have already reduced their tarriff and nontariff barrier (NTB) levels as these countries began to turn to alternative forms of market opening. Trade reforms had three goals, namely to reduce anti-export bias of trade policies favouring the production for domestic markets over production for foreign markets; raising the growth rate of productivity and to benefit consumers by lowering the real cost of traded goods. In spite of economic reforms, it was not enough to offer much encouragement since rates of poverty and levels of inequality hardly changed. The reforms created negative impressions among the different countries and a repudiation of the last two decades of reforms. Moderate reformers have developed a second generation of reforms that take into account the regions’ institutions and that address the problems of social and economic inequality. One way was to develop a more inclusionary economic system by creating opportunities for excluded groups so that countries will be less prone to macroeconomic crises. It also creates greater flexibility by addressing some of the rigid legalities of institutions. For example, small firms and individually-owned businesses or homes are situated on properties without formal titles. This makes it impossible for such owners to use their properties as collateral for loans or to participate in the formal financial system. Their growth is limited because they do not have access to full economic participation of a large share of small-scale businesses. Bureaucratic processes should be reformed to cater to such small businesses and individuals rather than concentrate on the large companies. Reforms are also in order for bankruptcy laws which encourage the risk-taking competition policies breaking up monopolies and financial sector supervision that limits risks that are unwanted or unnecessary. Latin America’s trade policies and economic recovery still have a long way to go in achieving fruition. The financial problems that grew from the distant past have accumulated over the years that it makes it difficult for current citizens to untangle in order to move on. Latin American countries continue to aspire to stabilize their economic situation and participate more in trading endeavours. Read More