Economic Development in Latin America

The economies of Latin America have presented fascinating challenges for development economists. At times, these economies appeared to be textbook case studies of successful development experiences; at other times, they almost defied interpretation. In this volume, a sample of some of these challenges is presented; the contributions range from broad concerns with development to more familiar themes of the role of agriculture and income inequality, as well as to more recent concerns with investment in human capital, regional problems (within countries), and the important role that external institutions have played and continued to play in the continent. While some of the analyses examine all of Latin America, most are focused on one country and in particular on Brazil. Werner Baer is one of the world’s leading authorities on the economy of the Latin American giant, and thus it should not be surprising that many of the contributions in this volume reflect this particular interest.

Werner Baer’s work has been concerned with real, practical problems, mainly in Latin America. He has made great contributions to their solu-tions. He has, on the whole, avoided the more speculative reaches of our subject. Yet, I think, or at least hope, that the following more philosophical than economic reflections will meet with his approval.

The generation of Latin Americans who made policy in the 1930s had learned the bitter lesson of overdependence on commodity prices, and their representatives took the lead at Bretton Woods Conference of the United Nations to call for a trading system that would support prices at stable and remunerative levels. At the 1944 meeting, delegates from Chile, Cuba, Bolivia, Brazil, and Peru all presented resolutions to that effect (U.S. Department of State, 1948). Brazil even proposed a special conference on price stability in commodities. Chile and Iraq sponsored a declaration to “bring about orderly marketing of staple commodities at prices fair to producer and consumer.” (U.S. Department of State, 1948, p. 941) Yet Bretton Woods created a liberal international monetary and trading system, establishing the International Monetary Fund and the World Bank,¹ and paying little heed to the Latin American concern about commodities.

Werner Baer’s contributions to the analysis of Latin American economic development occupy a well deserved place in the economic literature dedicated to the region. But Werner is an unusual scholar. He has been not only an influential thinker and researcher, but also he has “engineered” one of the largest informal networks of scholars interested in Latin American Economics — encompassing generations of his students (including myself) and collaborators at Vanderbilt University, the University of Illinois at Urbana-Champaign, the University of São Paulo, the Catholic Universities in Rio and Lima, etc. Accordingly, his impact on the debate of Latin America’s economic experience goes well beyond his writings.

The recent experience of the IMF in Latin America is far from promising. The failure of Argentina’s economic program in 2001 represented a hard blow to the effectiveness of the IMF’s (2003) rescue policies and diminished the institution’s support among both developing and developed countries. In many instances, Dr. Baer analyzed the relationship of Brazil and other Latin American countries with the IMF and other international institutions (Amann and Baer, 2002; 2005; Baer, 2001; Baer et al., 2002). One of his main concerns is how countries deal with the IMF’s proposed policies and what degree of freedom governments have. This paper is an attempt to evaluate how much a country needs the IMF. The recent experience of devaluation and recovery of Argentina and Brazil offers an interesting case for analysis. After devaluation in 1999, Brazil pursued an economic policy closely monitored and supported by the IMF, while Argentina, after the crisis of 2001–2002, pursued a more independent policy that, in many cases, went against the IMF’s recommendations. This chapter compares the performance of both countries and the benefits of whether or not to pursue an IMF recipe for getting out of a balance of payments crisis. As it shows, following the IMF recipe is not a guarantee for either success or failure.

Much of the literature on the informal self-employed sector in LDCs, with roots in Harris and Todaro (1970), has assumed a dualistic labor market where self-employed workers who are unprotected by labor legislation are rationed out of protected or “formal” salaried sector jobs by above-market clearing remuneration in the protected sector. In this view, the sector is generally an involuntary holding pattern for young workers entering the labor force or older workers dismissed from formal jobs. In economic upturns, transitions should be largely unidirectional, from informal microenterprises to the formal sector.

The comparative economic performance of nations over the long run has been a major field of interest for some time now, both in Economic History and in Growth Economics. Thanks to the recent availability of macroeco-nomic data for many Western countries, its analysis has become possible using endogenous models which take into account the usual variables in the Solow formulation plus control variables, such as human capital, technology, or social capability. While recognizing the relevance of institutional factors, economic historians have appeared reluctant, however, to incorporate them formally into their equations.¹ This is particularly evident in the abundant historical literature on the economics of growth and convergence during the so-called “first era of globalization” (Baumol, 1986; Bordo et al., 2003; O’Rourke and Williamson, 1997; 1999; Pamuk and Williamson, 2000).² The classic work by O’Rourke and Williamson (1999), which quantifies in detail the causes of catch-up and convergence within the late nineteenth-century Atlantic economy, dismisses institutional influences on the grounds that open economy forces provide adequate explanation for the differential behavior of these economies. The assumption is that during the nineteenth century “the State took a broadly liberal policy stance” (p. 14) and institutional divergence among nations can therefore be treated as marginal to the problem under consideration.

Throughout his sharp writings and lucid presentations on Latin American economies, Professor Werner Baer has shown a vivid interest in exchange rate policy and its growth and welfare consequences. In particular, he has consistently been concerned with how macroeconomic strategies shape the income distribution and the level of unemployment in developing countries.¹

In his long career teaching so many of us to ask the important questions about the Brazilian economy, Werner Baer has often focused on its unequal distribution of income. The persistence of inequality for so much of its history has troubled him, as it has so much of the Brazilian economics profession. It would be optimistic to think that we will soon have much better answers or better policies than we currently do, but surely an important step on that journey begins by asking the right questions. Werner’s intellectual style has always been to look at the actual numbers, rather than try to extract some delicate hypotheses from a theoretical model.

The impressive work of Werner Baer on Brazil is a major landmark in the study of the development of the country he chose to analyze. This is particularly the case regarding his interpretation of development based on industrialization in the post-World War II period. A major text on this is his Industrialization and Economic Development in Brazil (1965), which was translated into Portuguese and published in Brazil under the title A Industrialização e o Desenvolvimento Econômico do Brasil (several editions). This book was an important source of study for a generation of Brazilian economists. In it, he focuses on the role of agriculture in the development of Brazil and, particularly, of the limitations this sector experienced as import substitution industrialization was reaching its climax in the late 1950s and early 1960s; he also examines Brazil’s agrarian problem in the period. Similarly, in his major opus, The Brazilian Economy — Growth and Development (2001) which is now on its fifth edition (a sixth edition is in the making), Werner Baer offers us a keen analysis of the more recent developments in the agricultural and agrarian scenes.

High income concentration and poverty in Brazil have been intensively studied by Paes de Barros et al. (2000a; 2000b). In their words, “… Brazil is not a poor country, but a country with too many poor people ….” Their careful research clearly shows that high poverty rates are the result mainly of the high concentration of income and “unequal opportunities for social and economic inclusion.” Although international comparisons show that between 1978 and 1998 almost 70 percent of countries have a per capita income below Brazil’s, 10 percent of the richest families in the country have access to 50 percent of the aggregate family income, whereas 50 percent of the poorest households have only 10 percent of the same aggregate income.

This chapter takes as its analytical base, and is inspired by, the seminal book of Prof. Werner Baer, The Brazilian Economy. This work has shaped and influenced the thought of Brazilian and Brazilianist economists for generations and as a consequence has helped to promote better understanding of the Brazilian economy and its evolution to a more developed and better country. The present work assumes that one has a basic knowledge of The Brazilian Economy (Baer, 2001) and from there makes an analysis of how the changes in the structure of the Brazilian economy has had an impact on employment. Following Baer (2001), the evolution of the Brazilian job market has been affected by different periods in the nation’s political and economic historical course. In this respect, state intervention has to a greater or lesser extent been a constant presence.

Despite some remarkable improvements in the last few years, trade liberalization in Brazil is still modest compared to other countries. The Brazilian international trade coefficient, measured by the sum of imports and exports, is still much lower than that observed for countries with a similar national income. This factor (although not alone) has restricted the growth of the Brazilian economy. One of the major elements of the trade liberalization process the Brazilian economy has undergone is concerned with its trading relationships in a growing context of regionalism. This was energized after the creation of MERCOSUR in the early 1990s, and is still in the process of negotiation, aimed at the geographic expansion of trade agreements with partner countries. For either economic or political reasons, Brazil has sought different regional integration strategies in an attempt to foster economic development.

Why are some areas poor? One possible reason could be that they exhibit high concentrations of households with the “wrong” characteristics, such as a low level of education, larger families, etc. If households were free to migrate, any social policy aimed at improving educational levels in these areas, for example, would end up stimulating migration. As a result, the inequality observed after the adjustment process would indicate a scenario of no geographical differences in living standards (income, living conditions, etc.). It would be completely explained by the different sets of personal characteristics across regions. In this case, there would be no place for targeting a specific region in the implementation of policy measures: there would be no need for “regional” policies. On the other hand, moving can be costly and risky for poor people, because of transportation costs and other personal (emotional, noneconomic) factors. As Ravallion (1993) points out, it could be difficult for policymakers to target household characteristics, indicating that geographic targeting could be needed, even after factoring in migration. Park et al. (2002) evaluated the effectiveness of the regional targeting of a large-scale, Chinese poverty alleviation program, and found out that political factors affected targeting and that leakage grew as a result of increased coverage. Bird and Shepherd (2003) tested social and political exclusion variables and typical geographical variables in explaning rural poverty in Zimbabwe, and showed that proximity to urban areas is an important factor.

It was with distinct pleasure that I received an invitation to contribute this chapter to help celebrate Werner Baer’s seventy-fifth birthday. Werner has played a critical and unique role in the evolution of development economics and the study of the economies of Latin America. In a career spanning six decades, he has been instrumental in producing research that has succeeded in being of the highest quality while also managing to be engaging and accessible. From his base in Vanderbilt University and then the University of Illinois, Werner has fostered the careers of generations of economists. His influence has been especially marked in Latin America where economics departments and finance ministries across the region are replete with his former students. He has also been extraordinarily energetic in fostering ongoing academic ties between the U.S. and Latin America. In this sense, it is no exaggeration to say that Werner has made a significant contribution to hemispheric relations.

The traditional debate on fiscal federalism focuses on the trade-off between allocative efficiency and distributive concerns. From the point of view of the allocation of public resources, it is well known that local governments are better suited to accommodate in an efficient way differing preferences among agents. This view suggests that the best fiscal policies are decided at a decentralized local government level. However, from the point of view of the distribution of wealth, the central government has a clear role in designing revenue-sharing rules to achieve a more equitable redistribution of income among different regions of a country with heterogeneous levels of development. This second view suggests a higher level of centralization in a government’s fiscal policy decisions.¹ Therefore, the optimal level of decentralization in a federation must reflect the right balance between those two opposing views.²

According to large surveys with tourist and travel agencies abroad, Brazil has an image associated with joyfulness and seems to be eternally celebrating. Such surveys indicate that happiness is one of the main characteristic of the Brazilian people.¹ The Brazilian Tourism Institute (EMBRATUR) names the Brazilian Northeast State Bahia as the land of happiness. After a visit to Brazil, moviemaker Fellini once said that he was convinced that Brazilians were the happiest people in the World. Brazilian anthropologist, Darcy Ribeiro (1996), argued that Brazilians have a unique joyful-ness for life that is hard to find in other parts of the world.² In this article we study happiness in Brazil from a comparative perspective. We study whether there are any differences in the overall reported life satisfaction among Brazilian and American college students. We use two samples collected through direct surveys with college students at Purdue University in Indiana, United States, and at Universidade Federal de Pernambuco (UFPE), Brazil.³ We asked about their overall life satisfaction (see the two questionnaires in the appendix). We think that it is important to compare two similar groups in two different societies. On the one hand, they share similar aspirations and preoccupations, such as their academic grades, future career, and romance, to any college student around the world. On the other hand, socioeconomic conditions and social norms are very different in the two societies.

I arrived as a new graduate student at the University of Illinois some few years ago, not long after Werner Baer had joined the faculty. I was fairly quickly to become one of Werner’s great failures, and have only gradually developed into what I hope is one of his modest successes.

The contribution of Professor Werner Baer to Economics in Brazil is enormous. His contribution was, and of course still is, multidimensional, and it is very difficult to tell which aspect is the most important. His influence in the shaping up of graduate studies in the country is recognized by all the Brazilian pioneers. He was instrumental in developing institutions, organizing courses, identifying young professors to be trained abroad, arranging scholarships for them in the U.S., and helping them to be accepted in American universities, introducing academic standards in the selection of graduate students in the country, forming an association of graduate programs, etc. His permanent residence in Brazil in the fledgling years of the organization of the Brazilian graduate programs in Economics was very important. Not only did he teach courses but he also advised students, invited visiting professors, and managed to lead the newborn system to safe grounds.