reflections on latin american growth
I recently wrote about the incredible economic development of East Asia during the latter half of the 20th century. Through government facilitated growth that focused on building up the fundamental stages of development — agriculture, manufacturing, and financial services — countries like Japan, South Korea, China, and Singapore broke free from decades of stagnation and even economic and societal devastation in the case of Maoist communism. What was most incredible about this transformation was that many of the tactics implemented by East Asian governments were diametrically opposed to the neoclassical theories that Western economists espoused. While it might be a stretch to say that government intervention caused sustained economic growth in the East, it surely played a role.
After learning a bit about Asian development, my interest turned towards Latin American economic development. I realized that I knew far less about Latin American economics than I had known about Asian economics, even before I’d read Studwell’s How Asia Works. The extent of my knowledge came from recollections of Latin American history I’d learned in high school, and from the infrequent news articles I read in The Economist that bemoaned socialist governments like Venezuela which had racked up insane amounts of debt and were prone to chronic hyperinflation. Part of my desire to learn about Latin America came from the fact that despite it being our direct neighbor to the south (coming from the U.S.), the continent receives far less attention in mainstream journalism than Asia and Europe. I felt as though my understanding of Latin America’s politics and economics was prone to holes and fallacious logical bridges I’d constructed in my mind due to both my lack of coherence on the region as well as its tremendous amount of diversity with respect to culture, political institutions, society, and geography. I was lucky to come upon a short textbook by Javier A. Reyes and W. Charles Sawyer called Latin American Economic Development which satisfied my desire for a survey of economic themes and trends that were common to many Latin American countries.
I finished the book a few days ago and have been mulling over some of the ideas expressed in the book since. What I found most intriguing when reading about the history and development of Latin America was that even though a majority of Latin American countries used similar economic policy choices as those seen in East Asia — import substitution industrialization, a positive current account, and the creation of state-owned enterprises, just to name a few — they experienced lower and more volatile growth than East Asian countries which saw sustained growth rates ranging from 5–8% a year. Why was this the case? Were they wrong to allow governments to facilitate the process of development, rather than ceasing authority to the omniscient markets? I realized it wasn’t so much the fact that Latin American governments intervened with their economies but rather the way they intervened that contributed to low growth and perpetual economic turbulence.
The most fascinating thing I learned from How Asia Works was how import substitution industrialization, when properly administered, could be a path to higher growth for developing countries that may have otherwise faced inordinate amounts of foreign competition. Both Latin American and East Asian countries implemented import substitution policies that were designed to encourage the creation of competitive domestic industries. In East Asia, many governments successfully fostered the growth of globally competitive manufacturing industries such as the South Korean chaebol groups through these protective policies as well as through culling firms that couldn’t stack up. In Latin America, however, a crucial difference prevented import substitution policies from effectively delivering the same outcomes. Because their capital-to-labor ratio was comparatively so low, as a result of a low national savings rate (high savings rate leads to high investment in capital), Latin American countries were at a comparative disadvantage when it came to capital-intensive production. Rather than protecting the labor-intensive production of commodities, Latin American governments poured inordinate amounts of money into subsidizing industrial practices that were comparatively inefficient due to the lack of capital. While there was certainly a place for the protection of industry, many Latin American countries neglected commodity and agricultural production— arenas where Latin America had a significant comparative advantage, all things considered.
Other causes of growth retardation I found interesting were: an intense reluctance towards imports, obdurate fixed exchange regimes that persisted up through the 1980s even as the world had transitioned to managed floats, incredibly inefficient state-owned enterprises that weren’t assessed like East Asian SOEs were, frequent intermarriage between monetary and fiscal authorities that led to worrisome debt monetizations, restrictive labor laws that fueled the growth of an unregulated informal labor market, and disastrous economic policy strings the IMF attached to Latin American loans.
Reading about Latin American’s economic history was eye-opening, to say the least. I realized how there are regions in Latin America such as Chile and Brasil that are much more prosperous than their neighbors as a direct result of prudential policymaking and clear delineations between fiscal and monetary powers. At the same time though, there are prevalent issues that go deeper than what leading economic indicators may suggest. While Latin America can be classified as a middle-income continent, this categorization is a faulty indicator of economic health due to the staggering levels of wealth inequality and extreme poverty experienced by large majorities of Latin American populations. In 2006, 41.4% of Latin America made $2 or less per day, according to the U.N. Development Program. And aside from Africa, Latin American countries ranked as those with the highest levels of income inequality.
It would be irresponsible of me to simplify the challenges Latin America faced and still faces without taking into account both its extreme diversity as well as its colonial history, to which many of its modern shortcomings can be traced to. Latin America was left in a deeply fragmented state following its independence and was understandably scarred by its colonial past in which its encomiendas and haciendas epitomized its existence as an extraction state by European powers. I don’t want to simply criticize Latin America because it’s easy to do so, especially when compared to the “East Asian miracle”. Learning from past mistakes as well as encouraging inclusive growth that coincides with the fortification of democratic institutions is possible and is already in motion. Resisting populist urges, demanding stronger systems of accountability, and increasing long-term investments are necessary conditions to achieving this growth.
As many development economists are, I too am optimistic about Latin America’s future. Despite the enormous challenges faced by countries such as Venezuela and Argentina, I do think that Latin American citizens know what a brighter future entails and are working to ensure that their governments are pursuing policies that promote sustainable economic growth.
Going forward, I hope to read more about modern solutions that have aimed to redress past policy failures, as well as dive deeper into the sub-regional development plights of Latin American countries.
