Globalization and Development Volume III: In Search of a New Development Paradigm by Shigeru Thomas Otsubo

Author:Shigeru Thomas Otsubo [Otsubo, Shigeru Thomas]
Language: eng
Format: epub
ISBN: 9781138932265
Google: jOw9rgEACAAJ
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Goodreads: 26637182
Publisher: Routledge
Published: 2015-01-15T09:39:14+00:00

Long cycles of openness and protectionism have characterized the Latin American approach to globalization. After independence, the young states embraced international trade and access to international financial markets as tools for development, yet most17 saw their overall commodity production and exports stagnate until the 1870s. The reasons for this initial disappointment included: territorial conflicts, political instability, and fiscal crises (Bulmer-Thomas, 2003). In contrast, the period from 1870 to the end of the 1920s showed faster growth of exports due to increasing demand and investment from the United States (Conde, 1992). This expansionary period ended due to two international shocks. The First World War and later the Great Depression generated not only a large reduction in external demand and foreign direct investment, but also a collapse in the terms of trade, which affected the already weak fiscal capacity of the region.

Motivated by these shocks and the general protectionist policies that characterized the world after the Great Depression, Latin America implemented an import substitution industrialization strategy from the beginnings of the 1930s to the end of the 1970s. The intellectual foundation of this approach came to be summarized in the so-called dependency theory (Cardoso and Faletto, 1979), a framework in which the world is understood as a core–periphery structure where wealthy and powerful states (the core) enrich themselves at the expense of underdeveloped states (periphery). Prebisch (1950) and Singer (1950) first described the economic arguments of this framework and highlighted the existence of a secular deterioration in the terms of trade for commodity-exporting countries.18 In light of these arguments, Latin American countries tried to accelerate their structural transformation through the protection of their infant industries. But, after some mixed results,19 the debt crisis20 of the 1980s ended all the protectionist strategies of the region. The need for internal and external adjustment started a new cycle towards trade liberalization.

There are at least two main lessons from the historical trade strategies of Latin America. First, regional output is extremely sensitive to changes in export prices and international financial conditions. Recall that both the transitions from the commodity-export period and the import-substitution period were largely driven by changes in these factors. To overcome such high sensitivity, a gradual diversification of both export products and markets is needed. An example demonstrating the latter is Chile, which found new markets for its main exports in Asia. Second, fiscal revenues are also negatively affected by these external shocks, and as a result, governments struggle to implement countercyclical policies to compensate the decline in net exports. As mentioned in the previous subsection, the design of fiscal savings rules, which are based on both potential output and long-run export prices, can help to reduce these fluctuations.

Although the trade liberalization process that started in the 1990s increased exports and encouraged trade agreements within the region, Latin America still has low regional trade coefficients. De Gregorio (2005) highlights that the level of intraregional trade is low when compared to other regions. For example, in the 1960s trade among countries in South America represented 10% of their total trade.

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