Latin America’s New Insertion in the World Economy

This volume examines the contributions governments can make in order to stimulate efficient and export-orientated manufacturing production in small- and medium-sized economies in Latin America in the coming years. The study focuses on the progress that has been made recently to correct policy failures of the past, the obstacles and bottlenecks that have occurred in the process of economic transition and the challenges the selected countries face in order to stimulate in a systemic way the development of an internationally competitive manufacturing sector.

International trade has a long history, dating back to antiquity. It brought, and brings, gains to those directly involved in it. More important, participation in international trade also brings gains to society at large - though not necessarily to all its individual members. Therefore, the general opinion, of economists and non-economists alike, is: the more trade the better. In policy terms: remove all obstacles to trade, so that it can freely spread and expand its beneficial effects.

For governments there is no getting around the need to follow an exchangerate policy. First, a decision has to be made on which system to adopt: a fixed-rate (for all practical purposes a fixed-but-adjustable peg) system, a fully-floating rate system, or something in between, such as a predetermined crawling peg or tablita system. Second, in a fixed-rate system some level of the exchange rate must be chosen and in a floating-rate system a choice must be made between fully free-floating and ‘dirty’ floating. The choice depends on a government’s policy aims and on the economic environment.

The experience of policy-driven structural adjustment – whether in response to major external shocks or as a means of overcoming systemic obstacles to growth – is an integral part of Latin American economic history. Indeed, the origins of the present industrial system in the region can be found in the domestic response to exogenous shifts in world trading and financial patterns during the 1929–49 period. However, during the past ten years, a particular form of structural adjustment has been adopted – albeit with variations as to depth and timing – throughout the region both as a response to the 1982 debt crisis and as an attempt to construct a new model of capital accumulation and growth to replace the post-war strategy which, it is felt, can no longer provide sustainable growth.

The growth of EPFZs – also known as special economic zones, foreign trade zones or free economic zones – is probably one of the most significant institutional innovations to have spread on the world economic scene in the past twenty years. Two areas of concern come to mind when considering EPFZs as an alternative option to the export development strategy for countries in the region of Central America and the Caribbean. The first can best be expressed in terms of the characteristics and the past experience with EPFZs in developing countries with respect to their contribution to export and/or industrial development; the second in terms of the ways EPFZs are being used as instruments of export development in countries of the region within a changing international environment, and their potential for growth.

The previous chapter by Weersma-Haworth has indicated that EPFZs are not a new phenomenon in Central America and the Caribbean and that an increasing number of zones has been established in the countries in the region. The study shows that nearly all countries in the region have designed packages of instruments to attract foreign investors to the zones within their borders. Moreover, it has been indicated that the way zones operate has been changing in several respects and that zones may differ substantially in terms of management and organisation, sources of investments and types of specialisation. As a consequence, it is hard to generalise about the contribution of EPFZs to industrial development, employment and exports. This chapter reviews the policies pursued in El Salvador to stimulate the establishment of EPFZs and presents a case study of the functioning of the San Bartolo EPFZ.

The objective of this chapter is to identify and measure the main factors that account for overall economic growth in some small Latin American countries during the post-war period. Growth accounting analysis provides insight into the contribution of factor accumulation and the overall efficiency of the economy to economic growth. We shall follow the approach put forward by Maddison (1991), whose analysis of economic performance is conducted basically at two levels: ‘ultimate’ and ‘proximate’ causes of growth. ‘Ultimate’ causes of economic growth refer to institutions, ideologies, pressure groups, historical accidents and economic policy at the national level. At the same time, positive and negative influences from outside the country are involved. It is rather difficult to quantify these ‘ultimate’ features and legitimate scope for disagreement on what is important remains.

In this chapter, we shall focus on social development in Latin America during the period 1980–90, in which most Latin American countries applied adjustment policies. In assessing social development, we shall use so-called social outcome indicators such as poverty, health status, education levels and employment status; process indicators which are the outcome of economic and social policy measures, such as the personal and functional income distribution, the intersectoral distribution of production and employment; and input indicators, which are, in most cases, more closely related to policy variables such as expenditure on social services, and human capital formation.

The basic question for developing countries with respect to their international trade relations is how trade can contribute more to economic growth and industrialisation. There is a certain agreement among economists that international trade and economic growth are interrelated. However, the way in which they are related – trade as an engine or a handmaiden of economic growth – is still a matter of dispute as discussed in the contribution by Linnemann in this volume (Chapter 2). Industrialisation is a complex dynamic process influenced by many factors. Chenery (1960) showed that there are some similar tendencies in the industrialisation processes across countries. In his famous paper ‘Patterns of Industrial Growth’ he showed a strong positive correlation between an increase in income per caput and the rise of value added per capita in industry (manufacturing and construction). The per capita income elasticity of value added of industry and of manufacturing appeared to be larger than one, indicating that the share of industry and manufacturing in national production increases.

The Chilean economy displays the weaknesses that the small Latin American countries have in common: low levels of physical and human capital per caput, a small domestic market, and dependence on a single major export product: copper. However, what sets the Chilean case apart from other Latin American countries, are the early and radicalliberalisations that have been put into effect since 1973. The import-substitution industrialisation strategy was abandoned radically, and an export-led growth policy was implemented. The government did not assume an active role to stimulate this open industrial development pattern as was the case in the Asian NICs.

After the oil crisis of 1973 the new military government in Uruguay abandoned the industrialisation strategy of import substitution and changed the incentive system to stimulate industrial exports. Growth rates of GDP and exports accelerated, and this revitalisation was sponsored to a large extent by the government by means of subsidised credits and tax exemptions for exporting firms (Corbo and de Melo, 1985, pp. 165–8). After 1978, economic policy was directed at price stability, but pegging the peso to the $US without the necessary control over the monetary variables led to highly distorted prices and increasing overvaluation of the currency. Growth continued on the basis of rising imports and a huge inflow of foreign capital. At the same time, domestic industry lost its competitiveness due to the overvalued exchange rate (Corbo and de Melo, 1985, p. 160).

This chapter analyses the obstacles to improving their competitiveness faced by Venezuelan industrial firms. Section 13.2 gives a brief overview of export performance. Section 13.3 describes policies that influence the investment and export behaviour of firms, in particular macro-economic policy and trade policy, including export promotion instruments and institutions. Section 13.4 identifies the barriers to export that may be deduced from a survey of Venezuelan manufacturing firms. The section discusses barriers at the level of the firm, as well as in the economic context.

Costa Rica is a relatively rich Central American country. It is also one of the smallest countries in the region, both in land area and in market size. Foreign trade and aid are therefore of prime importance to the economy. The country had experienced high growth rates of GOP after the Second World War, at an average 6 per cent per year between 1965 and 1980. This growth was based on exports of traditional goods such as coffee, sugar, meat and bananas. Manufacturing industry was built up in this period and expanded rapidly. It benefited from an expanding domestic market, from state subsidies, and from a high effective rate of protection as a member country of CACM.

In response to disequilibria, traditional economic theory tends to concentrate on stabilisation and adjustment through exchange-rate policy that favours the production of tradables, fiscal policy that reduces deficits, and trade reforms that eliminate anti-export biases or which favour exports outright. However, it has become increasingly clear that the development of international competitiveness goes beyond this simple recipe, and that it has additional ‘systemic’ requirements (ECLAC, 1990a). Guatemala’s experience, especially from 1987 to 1992, illustrates how the initial contribution of stabilisation and exchange-rate policy to growing exports may be threatened by the weakness of these other requirements. These include physical infrastructure, education, and institutional arrangements. In Section 15.2 a description is presented of basic exchange-rate policies and trade reforms adopted from 1980 to 1992 and attempts to determine their effects on export and investment performance. Section 15.3 deals with export performance, in particular with the development of non-traditional and manufactured exports. Section 15.4 reviews systemic obstacles to the further development of these exports. In Section 15.5 the main conclusions are summarised.

This volume has analysed the contributions governments in small and medium-sized countries in Latin America can make to the strengthening of the international competitiveness of the economy. The study has focused in particular on the role government may play in enhancing in a systemic manner the capabilities of domestic manufacturing firms to penetrate international markets by improving the macro-economic context, adjusting the incentive structure for manufacturing industries and improving institutional support for export industries.