Econ 1320 Revision Lecture

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Econ 1320 Revision Lecture

• Final
• 12 January 2009

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(1) The Colonial Legacy

• Colonization of Latin America was driven by
• Mining (gold and silver)
• Agriculture
• Marginal productivity of labor (MPL)
• Although MPL high in Latin America, extraction
  of gold and silver and agricultural production
  facilitated by
• Encomienda (under repartida and mita), slavery,
  the hacienda system ? income inequalities, and,
  also
• Retarded industrialization because
• Monopoly over trade with the Iberian powers
• Lack of domestic demand
• Protectionist policies by emerging industrial
  powers

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(2) The great depression

• Rapid (but unequal) primary commodity export
  growth in the late 1800s (the golden age)
  generated economic growth and development.
  Following the outbreak of WWI, however
• Primary commodity prices became more unstable
• Transfer of British hegemony in Latin America to
  the US
• Nascent industrialization
• But Latin America continued reliance on exports
  during the 1930s prompted
• A tremendous collapse in primary commodity
  exports
• A change in ideology pertaining the right path
  for economic development in the region,
• I.e., Center-periphery, declining terms of
  trade

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(3) Import Substitution Industrialization (ISI)

• ISI policies sought to develop industries in a
  protected environment
• Main goal create local industries for production
  of substitutes for via domestic growth expansion
  of industrial growth
• State intervention
• Tools
• Industrial Policy
• 2) International trade policy
• Fiscal and monetary policy
• Crisis of ISI
• - Exhaustion due to the limited size of the
  internal market,
• - Export market could not develop because
  manufactured protected goods did not meet
  international standards
• - Neglect of agriculture .

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(4) Populism

• Urban phenomenon identified by
• Political scientists incorporate the workers in
  a process of industrialization of for
  ameliorative redistributive measures (P. W.
  Drake (1982))
• Economists income inequalities create political
  pressure to distribute due to unsustainable
  macroeconomic policies (Sachs (1989))
• Populist cycles Initial conditions, and populist
  leaders reaction create a) Initial expansion
  and high wages, 2)bottlenecks, 3) inflation low
  real wages, 4) IMF intervention

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(5) The 1980s Debt Crisis the lost decade

• Widespread defaults on sovereign debt starting in
  the early 1980s
• Demand side countries could borrow at low
  interest rates from foreign commercial banks to
  finance investment, but expenditures in
  consumption and capital flight exacerbated the
  extent of the crisis
• Supply side petrodollars due to oil shocks in
  the 1970s ready for financial intermediation by
  commercial banks at low interest rates
• Macroeconomic environment changed in the early
  1980s, tight US monetary policies, and fall in
  price of primary commodity exports
• Solutions Baker plan, Brady plan, market-based
  solutions (MBS), and debt write-downs and MBS
  based on Krugmans debt overhang hypothesis)

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(6) Stabilization, Trade Liberalization, and
Privatization

• Also known as Washington Consensus Policies
• Stabilization
• Anti-inflationary policies (orthodox and
  heterodox)
• Trade liberalization
• Unilateral reduction on trade and FDI
  restrictions, join the World Trade Organization,
  and creation of trade blocks
• Privatization
• Selling of SOEs to foreign and/or private
  investors
• Washington consensus policies did not bring
  expected rewards in terms of growth. Various
  explanations exchange rates, banking crises,
  regulation, and other structural reforms not yet
  implemented

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(7) Capital flows and Recent Financial crises

• Most capital inflows in the 1990s and 21st
  century Remittances and FDI
• The latter due to investors optimism, largely
  viewed a a success of Washington Consensus
  Policies
• Problems emerged, however, particularly because
  foreign exchange crises, banking sector crises,
  and contagion

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(8) Redefining the Role of the State

• Early literature emphasized the notion of a
  benevolent state acting in the interest of
  society
• More recently, state perceived as acting in the
  interest of groups and government officials
• A minimalist view
• A government should not go very far in the
  production of
• goods, and services outside the social,
  administrative, and
• security sectors

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(9) Corruption

• Definition Sale by government officials of
  government property for personal gain
  (Shleifer-Vishny (1993)
• Corruption with and without theft
• Link between corruption and political regimes
• From Franko textbook
• Manifestation of corruption in Latin America
• Attempts to lower the incidence of corruption
  (examples)
• From lecture notes difference across Latin
  American countries

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(10) Agriculture

• Agriculture linked to rural poverty
• Agriculture linked to indigenous populations in
  the region
• Rural Urban migration and its effects on both
  poverty rural and urban
• The controversy over agriculture and poverty, and
  over agriculture and the environment

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(11) Poverty

• Commonly used methods of assessing poverty
• Ranking of Latin America relative to the rest of
  the world
• The HDI notion
• State intervention for poverty-reduction in Latin
  America

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(12) Income inequalities

• Commonly used methods of income inequalities
• Lorenz and the Gini coefficient
• Latin America and the rest of the world
• What might be the driving forces behind lower
  inequality in recent years

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Case Studies

• Argentina on Import Substitution
  Industrialization (Cavallo articles)
• Brazil and South Korea compared The automobile
  industry (Franko textbook)
• Venezuela on Populism (Coupal article)
• Mexico on Trade Liberalization (Tornell article
  on NAFTA)
• Chile on averting financial crises (Franko
  textbook)
• El Salvador on corruption (Franko textbook)
• Brazil on Income Inequalities (Ferreira article)
• Mexico on fighting poverty (PROGRESA/OPORTUNIDADES
  ), Skoufais article