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The Latin American
Transformation: Mercantilism to
Capitalism
Pedro Romero Aleman
George Mason University
08/27/2007
Latin America Landscape
The Puzzle
 “Why did Latin America stagnate
in the twentieth century while the
US and Canada surged ahead?”
Franko: 2003 ...
Conventional Answers
 Marxist theories
 Exploitation by developed countries (Colonial
Vestiges)
 Center – Periphery or ...
Critiques
 Poverty as a natural state of human beings
 Rich nations were also in the past poor
 People in those countri...
An Alternative View
 "It may be true that in certain conditions, where
an undeveloped government apparatus is scarcely
ye...
An Alternative View
 Constitutions as rent seeking instruments
 Legal labyrinth
 Interest group conflicts
 Consequence...
Repressed Societies
Source: Gwartney, James and Robert Lawson (2004).
Economic Freedom of the World: 2004 Annual Report.
V...
Growth impossible without
Institutions
GDP vs RULE LAW
5
6
7
8
9
10
11
-1.2 -0.7 -0.2 0.3 0.8 1.3 1.8 2.3
Index of Rule of...
Fiscal Opacity
Institutional Matrix and Resources
Political System
“legal relations that govern society”
Property rights
Private-Public-C...
Latin America Transformation
 Productive structure: Consumption goods,
intermediate (production) goods, time or process
c...
Mercantilism
 “The property rights over land and water within the limits of the
national territory belong to the State, w...
Inward Development Strategies
 Import Substitution Industrialization ISI:
government as the main developmental
actor.
 E...
Inward Development Strategies
 Local and international elites favor short-term
profits instead of long-term dynamic growt...
But…
 “Somewhat ironically, in the first
stages of import substitution
industrialization, national imports
usually rose.”...
Outward Development Strategies
 Subsidies to production for exportation
 Cheap credit to domestic banks
 Supported by i...
Consequences
 Lack of rule of law
 Poor protection property rights
 Distortions of Productive Structure of the
economy
...
Consequences
 Huge fiscal deficits and external debts
 Inflation, volatile currencies
 Higher interest rates than elsew...
Consequences
Argentina’s Happy 1990s
 So what went wrong?
 The federal government's fiscal position deteriorated steadily during
the ...
A Message of Hope
 “Economic achievement and progress depend largely
on human aptitudes and attitudes, on social and
poli...
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Latin America Transformation

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Diagnosis of institutional problems in Latin America, Recommendations to break out institutional traps

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Latin America Transformation

  1. 1. The Latin American Transformation: Mercantilism to Capitalism Pedro Romero Aleman George Mason University 08/27/2007
  2. 2. Latin America Landscape
  3. 3. The Puzzle  “Why did Latin America stagnate in the twentieth century while the US and Canada surged ahead?” Franko: 2003 p. 30
  4. 4. Conventional Answers  Marxist theories  Exploitation by developed countries (Colonial Vestiges)  Center – Periphery or International Division of Labor  Vicious Circle of Poverty (Ragnar Nurkse)  Countries are poor because they’re poor  Low income, low savings, therefore low capital which leads to low incomes.
  5. 5. Critiques  Poverty as a natural state of human beings  Rich nations were also in the past poor  People in those countries at that time faced the same problems  Low incomes, savings and capital accumulation  Malnutrition, unhealthy environments, population pressures  But they were able to get out of the vicious circle  Hong Kong y Chile, Cuba y Venezuela
  6. 6. An Alternative View  "It may be true that in certain conditions, where an undeveloped government apparatus is scarcely yet adequate to perform [such as a minimal state], it would be wise to confine to it, since an additional burden would exceed its weak powers and the effect of attempting more would be that it did not even provide the indispensable conditions for the functioning of a free society." Friedrich Hayek, 1979. Vol 3 Pg 41. Brackets added.
  7. 7. An Alternative View  Constitutions as rent seeking instruments  Legal labyrinth  Interest group conflicts  Consequences: EFW, GDP pc  Absence of enforcement  Property Rights unprotected  Higher transaction costs/Entry barriers  Corruption  Lower Economic Growth
  8. 8. Repressed Societies Source: Gwartney, James and Robert Lawson (2004). Economic Freedom of the World: 2004 Annual Report. Vancouver: The Fraser Institute. Data retrieved from www.freetheworld.com Economic Freedom Index 0 1 2 3 4 5 6 7 8 9 10 1975 1980 1985 1990 1995 2000 2002 Bolivia Colombia Ecuador Peru Venezuela Chile
  9. 9. Growth impossible without Institutions GDP vs RULE LAW 5 6 7 8 9 10 11 -1.2 -0.7 -0.2 0.3 0.8 1.3 1.8 2.3 Index of Rule of Law Ln(GDP pc) PPP Chile Colombia Ecuador Hong Kong Peru Venezuela US Source: Data retrieved from the International Institute for Corporate Governance at http://iicg.som.yale.edu/data/datasets.shtml
  10. 10. Fiscal Opacity
  11. 11. Institutional Matrix and Resources Political System “legal relations that govern society” Property rights Private-Public-Communal-Absence of Ownership Economic System “a process of material transformation” Decisions Consumption-Production-Distribution Natural Resources “They are out there” Constraints/Advantages Renewable and Non-renewable Resources
  12. 12. Latin America Transformation  Productive structure: Consumption goods, intermediate (production) goods, time or process consuming time.  Public Policies can either hinder or foster/preserve the production process  Institutional matrix: Rule of Law or Rule of men  The manner in which a society structures its political/legal institutions helps shape the character of life in that society.
  13. 13. Mercantilism  “The property rights over land and water within the limits of the national territory belong to the State, which has the right to transfer it to the individuals…The State will have anytime the right to impose over private property any requirement stemming from the public interest…The State has the direct control over all the natural resources on the continent and maritime border plus everything under the ground…” Mexican Constitution, 1917. Art. 27.  The goal was to make an equitable (re)distribution of the wealth.  318 amendments by the end of 1980  Inflation of law  Centralization of political power, none or few checks and balances
  14. 14. Inward Development Strategies  Import Substitution Industrialization ISI: government as the main developmental actor.  Exchange rate and trade tools used to promote industrialization  Raul Prebisch and ECLAC  Keynesianism, disliking/non-satisfaction w/capitalism, given LATAM backwardness
  15. 15. Inward Development Strategies  Local and international elites favor short-term profits instead of long-term dynamic growth  Latifundia (redistribuion of land)  Paul Baran thought revolution as the only way-out  F. Henrique Cardoso thought that autonomous development was possible.  Structuralists: ToT, government as counterbalance to Multinational Companies  A. Hirschman: development as bottleneck, lack of complementary factors
  16. 16. But…  “Somewhat ironically, in the first stages of import substitution industrialization, national imports usually rose.” Franko: 59
  17. 17. Outward Development Strategies  Subsidies to production for exportation  Cheap credit to domestic banks  Supported by international organizations  Interest groups, barriers to entry  High devaluations of national currencies
  18. 18. Consequences  Lack of rule of law  Poor protection property rights  Distortions of Productive Structure of the economy  Urban in detriment of rural development  Low quality industrial goods in detriment of agricultural goods  Large Government Spending but limited governance capabilities
  19. 19. Consequences  Huge fiscal deficits and external debts  Inflation, volatile currencies  Higher interest rates than elsewhere  A complex tax scheme that hinders entrepreneurship  Informality  Poverty
  20. 20. Consequences
  21. 21. Argentina’s Happy 1990s  So what went wrong?  The federal government's fiscal position deteriorated steadily during the boom years  this partly reflected a recognition of unfunded pension liabilities.  The fiscal problem reflected a lack of discipline at the provincial level  Once off-balance sheet borrowing is taken into account as well, the consolidated budget deficit was around 2½ percent of GDP even as the boom peaked in 1997 and 1998.  In 1994 the average federal employee was paid 25 percent more than the average private sector employee; by 1998 the differential had risen to 45 percent.  By the mid-to-late 1990s, public sector employment accounted for 12.5 percent of the labor force in Argentina, compared to barely 7 percent in Brazil and Chile  Argentina's total foreign currency debt was around five times the size of its foreign currency receipts from exports of goods and services.
  22. 22. A Message of Hope  “Economic achievement and progress depend largely on human aptitudes and attitudes, on social and political institutions and arrangements which derive from these, on historical experience, and to a lesser extent on external contacts, market opportunities and on natural resources.” Bauer:1976, p. 41  Bottom-up approaches to development  Entrepreneurship  No politicians  Limited and Constitutional Government

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