0.- Agosin y Ffrench-davis 166332

8/3/2019 0.- Agosin y Ffrench-davis 166332

1/51

Trade Liberalization and Growth: Recent Experiences in Latin AmericaAuthor(s): Manuel R. Agosin and Ricardo Ffrench-DavisReviewed work(s):Source: Journal of Interamerican Studies and World Affairs, Vol. 37, No. 3, Special Issue:Report on Neoliberal Restructuring (Autumn, 1995), pp. 9-58Published by: Center for Latin American Studies at the University of MiamiStable URL: http://www.jstor.org/stable/166332 .

Accessed: 25/11/2011 15:15

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of

content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms

of scholarship. For more information about JSTOR, please contact [email protected].

Center for Latin American Studies at the University of Miami is collaborating with JSTOR to digitize, preserve

and extend access toJournal of Interamerican Studies and World Affairs.

http://www.jstor.org
http://www.jstor.org/action/showPublisher?publisherCode=miamihttp://www.jstor.org/stable/166332?origin=JSTOR-pdfhttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/stable/166332?origin=JSTOR-pdfhttp://www.jstor.org/action/showPublisher?publisherCode=miami


2/51

Trade Liberalization andGrowth: Recent Experiences inLatin America *Manuel R.Agosin and Ricardo Ffrench-Davis

INTRODUCTIONN recent years, many Latin American countries (LACs) haveembarked upon trade liberalization drives. This articlereviews the radical changes in trade policy which this hasentailed, together with the current and foreseeable results, andoffers some policy recommendations regarding complementarymeasures.

The first sustained experience with trade liberalization inrecent decades was in Chile, which launched a process in the1970s that, by the end of that decade, had made its economyone of the most open in the world.Manuel R.Agosin is Directorof the GraduateSchool of Economics andBusiness at the Universidad de Chile in Santiago. He has served in variousagencies of the United Nations that deal with international economics anddevelopment, including acting as a consultant for the Economic Commission

for LatinAmerica and the Caribbean(ECLAC),he UN Conference on Tradeand Development (UNCTAD),and the Inter-AmericanDevelopment Bank(IDB). He has also served as advisor to the ChileanMinistryof ForeignAffairson interational economic relations and is co-editor (with D. Tussie) ofTRADEAND GROWTH:NEW DILEMMASN TRADEPOLICY Macmillan,1993).RicardoFfrench-Davis is currentlyserving as principalregional advisorto the Economic Commission for LatinAmerica and the Caribbean(ECLAC)in Santiago de Chile. A former director of research for the Central Bank ofChile, he has also served as vice-president of, and researcher for, theCorporaci6nde Investigaciones Economicas para Latinoamerica CIEPLAN).A prolific author of many books and articles, he is most recently co-editor(with S. Griffith-Jones) of COPING WITH CAPITALSURGESIN LATINAMERICALynne Rienner, 1995).* Updated and revised version of the article "TradeLiberalizationinLatinAmerica,"which appeared in the CEPALReviewNg 50 (August 1993).9


3/51

10 JOURNALOF INTERAMERICANTUDIESAND WORLDAFFAIRSBy the mid-1980s, after more than half a century of

protectionism, a tendency towards radicalchange in develop-ment strategies and policies of several LACs was becomingevident. As early as 1983, CostaRicaset out on a path designedto effect a gradual transition from the model of import-substitution, which it had been implementing at both nationaland Central American levels, to a model oriented towardsforging a more dynamic position in the internationaleconomy.Shortlythereafter,in 1985, Bolivia and Mexico embarked uponrelatively fast-paced liberalization programs as well.With the early 1990s, several other countries also joinedin this movement, including Argentina, Brazil, Peru andVenezuela. Even Colombia, which had undertaken a gradualprogram in 1990 that was designed to open up its economyover a 4-year time span, decided the following year (1991) tostep up the pace of this liberalization effort so that it could becompleted in 1992. Thus, although they were moving forwardat differentspeeds, itwas clear that the countries of the regionhad reached a major turning point.

Implicitly or explicitly, each country had to decide theprofile of the process of liberalization,what to liberalize and byhow much, in what sequence, and what otherpolicies it shouldadopt to ensure that its particular iberalizationscheme wouldcontribute to development (see Section I). Inthis articlewe willattempt to come up with some answers to those questions,based on recent events in LatinAmerica.

Section IIreviews some partof the voluminous literatureon Asian export-oriented economies (the Republic of Korea,Taiwan and, more recently, Indonesia, Malaysiaand Thailand)so that the more recent experiences of the Latin Americancountries (LACs) can be compared with others of a longerstanding and very differentcharacter.The greatest differencesbetween the liberalization efforts of the LACsand the way inwhich Asian countries have opened up their economies arethat most LatinAmerican liberalization programs have beencarried out rapidly with the state playing a passive role,whereas the opening of the Asian economies has been a long,


4/51

AGOSIN NDFfRENCH-DAVIS:RADEUBERAIZATIONNDGROWTH 11state-led process involving construction of a productionapparatusoriented towards internationalmarkets.' Whenimportswere liberalizedin Asia, the economy's structuraltransformationad alreadybeen advancing,andexportshadbeen on the rise for a long time. These conditions werebuttressed, n most cases, by macroeconomicequilibriaandmuch higher ratios of investment.In contrast,the drasticimport iberalization arried utinLatinAmericawaslaunchedduring the initial stage of the various internationalizationstrategieswhich, in turn, often coincided with stabilizationprocesses and low ratesof capitalformation.SectionIIIexaminessome of the key elements of thesereformprogramsnthe lightof the conditions hat areneededto open up an economy so as to stimulate its long-termdevelopment.Clearly,n the worldof today,economiesmustachieve international ompetitivenessand a more dynamicposition in world marketsif they are to secure sustaineddevelopment.Consequently,restrictions n importsmustbereduced. Regardlessof whatever benefits may have beenprovided on the domestic frontin the past, the old sort ofprotectionist olicyisundoubtedlyan obstacle o developmentin today'senvironment.The basicproblemwithprotectionistpoliciesof the pastwas that, nthe finalanalysis,policymakers idnot knowwhatthey were promoting, nor why (Ffrench-Davis,1986). AsFritschand Francohave noted, protectionis not only verycostlybut,when indiscriminatelypplied,mayultimately ndup bynotprotectinganythingnparticularFritsch ndFranco,1993: 32). The protectionistpolicies of the past, in LatinAmerica as well as other regions, were often exploited byprivateconcerns nsearchof economicrents.Inmanycasesnosocial benefits were evident, and the resulting industrialstructures ended to be not competitiveon the internationalmarketand to remaindependenton governmentprotectionindefinitely. t should also be recognized,however,thattheseschemespermittedhe establishment f industrialectorsthathave servedas the basis forsubsequent ormsof developmentthatare morestronglyoriented owards nternationalompeti-tiveness thanwas possible previously.


5/51

12 JOURNALOF INTERAMERICANTUDIESAND WORLDAFFAIRSIn order for trade reforms to be successful, the value

added by the creation of new activities must exceed the valuesubtracted by the destruction (or elimination) of existingactivities. This tends to be associated with an increase inexports that is greaterthan the decrease in importsubstitution;2that export activitymust have positive spillover effects for therest of the economy, which will depend upon the degree ofdiversification and the amount of value-added they contain;and that internationalcompetitiveness must be attainedthrougha continuing increase in productivity, ratherthan by means oflow wages and/or rising subsidies or tax exemptions.

This is why it is essential that economies be opened up ina way that (1) does not entail indiscriminate destruction ofexisting installed capacity and (2) will permit effective switch-ing of productive activities. This process also needs to becoupled with a sustained, credible change in relative pricesfavorable to the production of exportables, and with improve-ment in, or creation of, the marketsand institutions essential toa steady increase in productivity: via labor training, improve-ments in infrastructure,incentives for technological innova-tion, development of long-term segments of capital markets,and enhanced ability to negotiate access to external markets.Generally speaking, thishas not been the focus chosen byLatinAmerican countries in launching their trade liberalization

initiatives. The specific approaches adopted tended to sufferfrom serious shortcomings in three crucialareas.First,unilateralbids to open up an economy would make sense in an open,dynamic, competitive world economy, but are less advisable inan internationaleconomy where (a) protectionism is still a veryreal factor, (b) trade is growing slowly, and (c) a strong trendtowards the formation of regional trade blocs is observed (seeECLAC, 995:ChapterII).Second, thisprocess is based on staticcomparative advantages and short-term gains in resourceallocation, but it becomes vulnerable if it is concentrated inareas of activity whose markets are more sluggish and lessactive in terms of technological innovation. Third, in financialmarkets and on the capitalaccount of the balance of payments,


6/51

AGOSIN NDFfRENCH-DAVIS:RADE LBERALNZATIONNDGROWITH 13the recent move towardderegulationof capitalmarketshashampered hereallocation fresources hatwassupposedto bebrought about by trade liberalizationbecause, under theconditionsprevailing n the 1990s, it has been conducive tosharp appreciationof exchange rates and high real interestrates. These factors discourage the productive investmentneeded to producestructuralhangeand cause resourcesnotonly to move away fromthe productionof tradeablebut toconcentratemore in purelyfinancial nvestment.I. TRADE LIBERALIZATIONPROGRAMSIN LATIN AMERICAM /ANY countries in the region have undertaken tradeliberalization eforms n recentyears(see Table1).Withthe exceptionof CostaRica,8 of the9 countries howninTable1 introducedreforms hatcould be describedas both drasticandabrupt.Moreover,n7 of these 8 countries withChile helone exception), import iberalizationwas carriedout over aperiod of just 2-3 years (1989-90 to 1992-93).The bulk ofArgentina'siberalization rogramwas implemented argely nApril1991,whereas heprocess ook5anda halfyears nChile:from late 1973to mid-1979.

Inallcases, albeitto varyingextents,quantitativeestric-tions have been dismantled,and tariffshave been loweredsignificantly. n general,the amount of tariffprotectionpro-vided differsconsiderably rom itspre-reformevels, and thespreadof ratesof effectiveprotectionhas diminished ubstan-tially.However,no countryhasyetadopteda tariff ateofzero,while only Chile has a uniform ariff currently11%).Boliviafollowsclosebehind,witha tariff ystemconsistingof onlytwobracketsand a 10%maximum.Allthe other countrieshave anumberof different ariffrates,with ceilingsthatrangefrom10%to 35%,and with average rates of between 7%and 18%.Theseregional rends ntradepolicyhavebeen complementedby free tradeagreements, itherbilateral rmultilateral, hichcover a wide spectrumof items.3


7/51

Table 1. Latin America (Selected Countries): Summary of UnilatMaximum Number oftariff tariff rates Average tariffIni- Year- Ini- Year- Ini- Year-

Programme tially end tialy end tialy endCountry starting date 1993 1993 1993 Non-tArgentinab 1989 65 30 3 39c 15c In 1988theproductionwas reduceIn 1989-19

temporaryspecificduti2 12d 7d Withfew exand licensewere abolis105 35 29 7 51e 14e In 1990theprior-liceneliminated.

requiremecapitalgood100 20 14 4 44d 12d Nearlyall rprior-licenliftedin late

Bolivia 1985 150 10

Brazil 1988

Colombia 1990


8/51

Table 1. Continued Latin America (Selected Countries): Summary ofMaximum Number oftariff tariff rates Average tariffIni- Year- Ini- Year- Ini- Year-

Programme tially end tially end tially endCountry starting date 1993 1993 1993 Non-tCostaRica 1986 100 20 4 27e 14e ImportperwerephaseChilef 1973 220 10 57 1 94e 10' Inthe 1970on imports

as priceba1985 35 11 1 1 35e 1le PricebandsantidumpiMexico 1985 100 20 10 3 24c 12C ThecoverareducedfroinJune 198andofficialPeru 1990 108 25 56 2 66e 18e Importice

quotas ain Septem


9/51

Table 1 Concluded. Latin America (Selected Countries): Summary ofMaximum Number oftariff tariff rates AveragetariffIni- Year- Ini- Year- Ini- Year-

Programme tially end tially end tially endCountry starting date 1993 1993 1993 Non-tVenezuela 1989 135 20 41 4 35d 10d The numberestrictions

1988to 200whichin sotariff o 940SOURCE:ECLAC1995), table V.1.a - Fromthe year before the liberalization programme began up to 1993; the exchange rate for expb - Includes surcharges.c - Weighted by domestic production.d - Weighted by importse - Simple average of all tariff items.f- Chile's first trade liberalization programme was completed in 1979. The uniform tariff of 10%information in the first row is for that period (1973-1982). The second row contains informationafter rising to 35%,were successively reduced to 20%(1985), 150/0(1988)and 11%(1991).


10/51

AGOSIN NDRfRENCH-DAVIS:RADE IBERALZATIONNDGROWTH 17In a number of countries, measures to liberalize tradehave been accompanied by liberalizationof the capitalaccountas well. Under the conditions prevailingsince the beginning ofthe 1990s, when international capital markets began, oncemore, to take a positive view of the LatinAmerican countries,liberalizationof the capitalaccount has prompted considerableappreciationof exchange rates(Calvo,LeidermanandReinhart,1993; ECLAC, 995: ChapterX) justwhen trade reforms werein urgent need of depreciation instead. Some countries (Chile

and Colombia) have been more successful than others incountering this pressure on their currencies; in order to do so,however, they have resorted to foreign exchange controls andother heterodox forms of "financialengineering".4In the subsections that follow, we will examine reformsrecently implemented in three countries of the region withinthe framework set out below. These three countries (Chile,Mexico and Bolivia) have been chosen because their reformshave been in place long enough for their effects to be reflectedin economic performance, thereby providing a basis by whichto evaluate the impacts made on growth and investment.

1. TheFrameworkor an AnalysisofStrategies f InternationalnsertionTrade reforms are usually undertaken as part of a wide-ranging process of change, in which internationalcompetitive-ness and exports play a leading role. The main instrument ofreform has been a rapid, indiscriminate liberalization ofimports.The aimwas, andis,to expose producers ofimportables,which had frequently benefited fromhigh levels of protection,to outside competition. It was expected that this would resultin higher productivity, less inefficiency, the absorption of new

technologies, and an increase in specialization. Producers thatfailed to adapt to outside competition would be crowded outof the market,and the resources freed up by theirdisplacementwould then be swiftly absorbed by other activities, primarilythe production of exportables.


11/51

18 JOURNALOF INTERAMERICANTUDIESANDWORLDAFFAIRSInthisscenario,exportsreceived ndirect ncouragement

fromthe reduced cost and widerrangeof importablenputswhich thus become available,and fromdepreciationof theexchangerate hat his liberalization f importswouldsuppos-edly prompt n the foreign exchangemarket.The reactionofimport-substitutingctivitieswill depend on the extent towhich relativeprices change,the rapidityof thatchange,andhow well the relevantproducersare ableto adjust. t is moreeffective if producers can be given the requisitetime forrestructuring,houghno morethan isstrictlynecessary, o thatthey will find themselves in the situationof being activelypushedto change.Forexample,ifa tariff s redundant, llthewater can be eliminatedvery quickly,but the reduction ofutilizedeffectiveprotection houldbe pacedto allowproduc-ers to introduce nnovations, ncrease heir evel of specializa-tion,and reallocateheirresources.Thepaceof the adjustmentis dependent upon two factors:(1) the credibilityof thetimetable orchange,and(2)how muchaccessproducershaveto the set of resourcesneeded forrestructuring.hese factorshelpdeterminewhetherexposure o competitionwill functionas a creative,or a destructive,process.Howexportsreactwilldependon how muchuse is madeof importables,and on how such goods had been dealt withinthepastunder hepre-reformrade ystem.Imports f inputsandcapitalgoods by exportershave oftenbenefited rom ariffexemptions;nevertheless, n severalcases,exportshave beendiscouragedby inoperative,or arbitrary,rade restrictions.The realexchangerate s a decisive factor n determiningthe response of production (both of exportables andimportables). n order for a reform o be successful,the neteffect of the changesmadein incentivesmust be to boost theproductionof tradeable.Abilityo restructure ill alsodependon the overall dynamismof investmentand technologicalinnovation, hesupplyof trainedmanpower, he featuresof thedomestic capitalmarket,the existinginfrastructure,nd thedegree of access to externalmarkets.


12/51

AGOSINAND FfRENCH-DAVIS:RADEUBERAIUZATIONND GROWTH 19The combination f changesin relativeprices,theircred-ibility,andtheirpace of change (gradualor rapid),andin themacro- and meso-economic context in which reformsareimplemented,will determinewhether heireffecton thealloca-tion of resourceswill be predominantly ositiveor negative.Therearetwo broadly ompetingalternatives ere:eithertherestructuringrocesscan startout withanexpansionof theproduction rontier,as hasoccurred nthe newly industrializ-ing countries(NICs)of Asia, or it can begin with a drop in

economicactivityand formpartof an adjustment rocessthattakesplace below the production rontier.Both aredepictedin Figure1.Figure 1.

Export-led eform

Xo


13/51

20 JOURNALOF INTERAMERICANTUDIESAND WORLDAFFAIRSIn Figure 1, the X axis represents the value added in theproduction of exportables and the Raxis represents the rest ofthe gross domestic product (GDP) (the sum of importables andnon-tradeables). RoXOs the initial frontier and Po s the startingpoint of actual production, below the frontier,which entails alow export coefficient and some degree of inefficiency inresource allocation. Within the framework of a dynamicexpansion of the production frontier,the reforms should bringeffective production closer to that frontierand should shift the

output mix towards a larger share of exportables.In an export-led strategy, in which the liberalization ofimportsplays a secondary supporting role (as in the case of thedynamic economies of EastAsia), the adjustmentprocess willtend to follow a path such as that described by the curve PPe.This curve denotes a more than proportional increase in Xtogether with a moderate growth rate for R,within the contextof an expanding production frontier and a gradual increase inthe efficiency of existing firms. Thus, the economy is posi-tioned on, or near, a steadily expanding production frontier.The curve PoP,denotes a differentstrategy, similar to thatused in LatinAmerica;this approach is led by import liberal-ization and involves the bankruptcyof a significant portion ofimport-substitutingfirms, together with a gradual increase inexports. These "desubstitution"pressures dominate adjust-

ment during the early stages of the process, and the economywill therefore be positioned below the production frontier.This facttends to discourage investment, which will, moreover,force the frontier to remainstationaryduringthe initialyears ofthe reform.Withthis second strategy, it is probable thatthe firmswhosurvive will tend to be, on average, strongerand more dynamicthan in the firstcase. During the early years of the adjustment,however, the volume of productive resources available andtheir rate of use will be lower, owing to the higher rate ofbankruptcies and downscaling of activity;the underutilizationof resources will thus be greater, and the stimulus for totalinvestment will be weaker. Therefore, a higher degree of


14/51

AGOSINAND FfRENCH-DAVIS:RADELIBERAIZATIONND GROWTH 21microeconomic efficiency will tend to be combined with alower degree of macroeconomic efficiency. The hysteresis ofthe process dictates its end result, since what happens duringthe transition will have a determinant effect upon the level ofwell-being, and on the production structure, that emergeswhen the adjustment process is completed.

Of course, there is room for a large number of variationsin these two options in the process of changing productionpatterns. Even within each product category, differentintertemporaltrends will probablybe observed. Therewill alsobe crossovers between categories: import-substituting enter-prises may be converted, in part or in whole, into importers,or - in response to reforms- may become exporters (Katz,1993). For the sake of this discussion, however, we havefocused on two sharply differentiated alternatives in an effortto characterize two opposing styles of interationalization.

Figure 1 illustratesthese two alternativestrategies,whosepaths and end points are represented by the points ofproduction P12 nd Pe2.Both exhibit sharp increases in X butvery different results for R. The point Pe2 is associated witheconomies such as those of Japan, Korea and Taiwan, whoseGDP has shown strong growth over an extended period of timeand which maintain an X-led economic growth. During the1960s and 1970s, Brazil'sgrowth curve was characterizedby amore even rate of expansion in X and R (in the vicinity of theprolongation of OPo).Chile's situation, on the other hand, isdepicted more accurately by P2,with a steep increase in X butthe stagnation of Ras compared to output in PO: etween 1981and 1989, X rose substantially (a 51%increase in real exportsof goods and services per capita) whereas R climbed slowly,in absolute terms, and actually decreased in per capita terms(the production of importables rose while the production ofnon-tradeable fell). Towards the end of the process, however,rapid growth emerges in R as well (as happened between thelate 1980s and 1994).


15/51

22 JOURNALOF INTERAMERICANTUDIESANDWORLDAFFAIRS2. Chile

Chile's radeliberalization cheme is the oldest and thelongest continuously-appliedprogram n the region. In late1973,beforethe introduction f reforms,Chile's oreigntradewas subjectto a greatdeal of governmentcontrol:nominaltariffsaveraged94%and rangedfrom 0% o 750%; ountlessnon-tariffbarrierswere inplace, including he requirement flargepriordepositsfor 60%of allimportsandthediscretionaryauthorization,by the CentralBank, of exemptions to thatrestriction; nd a complicatedmultipleexchange-rate ystemwas in place that involved 8 differentofficialrates,with a1,000% ifferencebetweenthe lowest andthehighest Ffrench-Davis,Leivaand Madrid,1992;Meller,1992).5A. Thesweepingreformsof the 1970s. As partof a far-reachingscheme for handingover the vast majorityof eco-nomic decisionsto market orces,tradepolicy reformswerelaunched in 1973 that included eliminationof all non-tarifftradebarriers, sharpreduction ntariff evels, and establish-ment of a single exchangerate.Although t was not an initialgoal of the program,a low, uniform ariff 10%)hadalsobeenestablishedbyJune 1979.

During the first two years of the trade liberalizationprogram,real devaluationsof the government-controlledx-changerateoffset the reduction n the averagenominallevelof protection see Table2).Thisgaveastrongboost to exportsother thancopperand afforded ome protection or the moreefficientimport-substitutingctivities.In 1976,however, theoveralldirectionof fluctuationsnthe realexchange-rate eganto show a lag.Onemainreasonforthe lagwas thatexchange-ratepolicygraduallyhiftedawayfrom upport ortheopeningup of the economy and towardsthe controlof inflation.Thistrend reached its peak in 1979when the nominalexchange-rate was fixed in an effort o anchordomestic inflation o theinternational ate as rapidlyas possible.


16/51

AGOSINAND FfRENCH-DAVIS:RADELIBERALIZATIONND GROWTH 23Table 2. Chile: Average Tariff and Real Exchange Rate,1973-1994

Real exchange rateb(1980-100)Averagetarif All ExcludingYear (percentages) countries Latin America

1973 94.Oc - 110.0c1974 75.6 - 115.21975 49.3 - 156.21976 35.6 - 126.61977 24.3 - 105.61978 14.8 - 117.21979 12.1 - 114.61980 10.1 - 100.01981 10.1 - 85.01982 10.1 - 98.71983 17.9 - 118.51984 24.4 - 122.01985 25.8 - 152.21986 20.1 171.8 171.81987 20.0 179.2 179.01988 15.1 191.0 186.11989 15.1 186.6 174.91990 15.1 193.6 170.41991 13.1 182.8 164.21992 11.1 168.2 152.01993 11.1 166.9 149.41994 11.1 162.5 142.7Source: Ffrench-Davis, Leiva and Madrid (1991) and Central Bank of Chile.a - Simple average, excluding preferential arrangements such as those negotiatedwith the LatinAmerican Integration Association (ALADI)and Mexico.b - Annual average. The external price index used for the heading "Allcountries"

was constructed on the basis of the following countries, on weighted by sharein Chilean trade: Argentina, Brazil,Canada,France,Germany, Italy,Japan, Peru,Republic of Korea, Spain, United Kingdom and the United States. The heading"ExcludingLatinAmerica"excludes Argentina, Brazil and Peru. For the years upto 1985, the informationwas taken from Ffrench-Davis,Leiva and Madrid(1991);from 1986 on, it was obtained from the CentralBank of Chile. Formethodologi-cal reasons, the "All countries" data is presented only from 1986 on.c - December 1973.


17/51

24 JOURNALOF INTERAMERICANTUDIESANDWORLDAFFAIRSThe opening up of the capitalaccount,in combinationwith the high level of liquidityof the international apitalmarkets, onstitutedanotherreasonfor the currencyo appre-ciate.Beginning n 1977,therewas a gradual elaxationof thequantitativeimits hathadbeen placedon the amountswhichChileanbankscould borrow abroad n orderto financelocallendingindomesticcurrencyinfact,bymid-1979, hese wereeliminatedaltogether).Restrictions egardingminimumbor-rowing terms were also relaxed until they were eliminated

entirely n 1982.Heavy capital nflowsto Chile,where local-currency nterestrateswere considerablyhigherthan interna-tional rates, buoyed up the real appreciationof the peso(Ffrench-Davis,Leivaand Madrid,1992).Interestingly nough, in 1979,when the tradeliberaliza-tiondrivewas brought o completionand a uniform10%ariffwas established, he realexchange-ratehovered at almostthesame level that had been in effect back in 1974 when theliberalizationprocess firstbegan. Although herehad been agreat deal of water in the average nominal tariff(94%)inexistenceatthebeginningofthe liberalization rocess,andtheamount by which domestic prices exceeded internationalpriceswas certainly maller, he factremains hatsuch a sharpreduction ntariffswas unprecedentednLatinAmericaat thattime.Basic radepolicytheorywould have indicateda need for

a compensatorydevaluation;policymakers nitiallyassertedthe same, but actuallydidjustthe opposite in the end. Inthethreeyearsthat followed completionof the import iberaliza-tion program,appreciationaccelerated,which had a severedampeningeffect on the productionof tradeable(Ffrench-Davis, 1986).B. Rectification fthereformsn the1980s.The domesticandbalance-of-paymentsrises hathit Chile n 1982asa resultof acombination f errorsneconomicmanagementplusthreesevere externalshocks(an increase n interestrates,a dropincopper prices, and then the suspension of externalcredit)causedaggregatedemand o fallby27%,and GDP o shrinkbyover15%,between1981and1983.Inan effort o cope with the


18/51

AGOSINAND FfRENCH-DAVIS:RADELIBERALIZATIONND GROWTH 25

crisis,a numberof discretedevaluationswere appliedby mid-1982and,lateron, a crawlingpeg was reintroduced.Between1981and1988, herealexchange-rate epreciatedby 119%.Atthe sametime,the uniformariffwas raisedgradually,nstages,up to 35%n September1984(withannualaveragesof 24% n1984and 26% n 1985).Startingn March1985,as the severeshortageof foreignexchange eased, the tariffwas graduallylowered once again,until it reached 11%by mid-1991.

Following hecrisis, radepolicybecame moreflexibleinseveralrespects.Thegovernmentbeganto make activeuse ofantidumpingmeasures to protect the economy from unfairtradepractices.Tothisend,the total ariffthenormalcompen-satory urcharges)was raised oamaximum f 35% thelevelto which Chilehad committed tselfunderthe termsof GATIin 1979 - on importsthat Chile could prove were beingdumped.In addition,pricebands, intentionallymade consis-tentwithinternationalrice rendsoverthemedium-term, ereset for three main agricultural roducts:wheat, sugar andoilseeds. Notonlydid thissignificantlyavoragriculture, ut italsoconstituted departurerom heuniform ariff.Withregardto exports, the system of drawbacks was refined, and asimplifiedsystemwas adoptedfor minorexports.Under thissystem,suchexportswere eligiblefor a refundof up to 10%oftheirvalue so long as totalexportsof the correspondingtemdid not exceed a given annualmaximum.C. Contrastsbetweenthe two reformprograms.In sum,Chile has carriedout two differenttrade reformprograms:(1) a radicalreformin 1974-79and (2) a moderate reformpackage, with a mix of liberalizationand intervention, n1985-91.While it is true thatthe basic characteristics f thecountry'sradepolicy- intermsof the dismissalof non-tariffbarriersand the adoption of a uniform tariff- have notchangedsince 1979, it should be remembered hat the tariffhad, once again,become relativelyhighby 1984andwas, inaddition, accompanied by antidumpingmeasures and thepricebandsmentionedabove.Infact,the tariff evel averaged20% in 1984-89, which was double the average rate for


19/51

26 JOURNALOF INTERAMERICANTUDIESAND WORLDAFFAIRS1979-82. The greatest difference, however, was that, in the firstliberalizationdrive, the exchange rate had appreciated steadilyduring the second half of the 1970s and into the early 1980s.On the other hand, duringthe 1980s, the reduction of the tariff- from its maximum level of 35%in September 1984 to 11%byJune 1991 (its present level) - was accompanied by a sharpdepreciation in realterms (associated with the debt crisis).Thisdevelopment sent positive signals to exporters while manag-ing, at the same time, to faroutweigh the slightlynegative effectwhich tariff reduction exerted on the production of import-competing goods. As a result, the production of exportablesgrew more steadily during the second program. Also, andunlike the first effort at liberalization, it was coupled with astrong upturn in the production of import substitutes, espe-cially from 1984 to the end of the decade.

Since 1989, Chile has had to cope with another influx ofexternal capital. However, whereas a prolonged rise in thecurrency's value was permitted during the first liberalizationprogram, in keeping with the country's increasingly liberalpolicy regarding private capital flows, the focus shifted in1991, and an effort was made to curb appreciation of the pesoin order to safeguard the competitive capabilities of theproducers oftradeable. Consequently, policy emphasis shiftedaway from unlimited entry for capital inflows, and an efforthas been made to hinder international arbitrage of interestrates. The Central Bank now uses a crawling peg whose pointof reference is no longer the dollar but, rather, a basket ofcurrencies. The rate of this basket is allowed to fluctuatewithin a +10%band and is subject to a dirty float. As regardscapital flows, short-term external credits are subject to areserve requirement (currentlyset at 30%)and to a tax. Thesepolicies have curbed the real upward thrust in the currency,which began early in 1988, strengthened between January1991 and late 1992, and then strengthened again in 1994(Ffrench-Davis, Agosin, and Uthoff, 1995).

If we are to draw any conclusions from Chile's experi-ence, one of them must certainly be that the second reform


20/51

AGOSIN NDFfRENCH-DAVIS:RADE IBERALIZATIONNDGROWTH 27program yielded better results that the first (Ffrench-Davis,Leiva and Madrid, 1991). The first was begun during a deepdepression (1974-75) and ended in another (1981-82). Bothcriseswere associated with severe externaldisturbances whosedomestic effects were exacerbated by the naive dogmatismwith which the liberalization of the external sector wasimplemented, and by the confusion that surrounded theprogram's goals and the policy tools requiredto achieve them.

During the first trade liberalization program, the sharpreduction in tariffsand the dismantlingof quantitativecontrolsappear to have had a greater impact on export growth than thevery modest reduction in tariffsof the second program. In thefirstsituation, the point of departurewas one in which the largemajorityof domestic prices of current importables (consumerand intermediate) were not tied to international prices;6consequently, there was enormous room to reduce coststhrough substituting imported inputs for domestic ones, andthere were broad opportunities for bringing about change inrelative profitability.The fact remains, however, that becauseof the recessionary situation in which the reform was imple-mented, the suddenness with which it was initiated, and thetrends exhibited by the exchange-rate and interest rates, thestrong export performance was achieved at an extremely highcost, and its dynamism was transmittedtoo weakly to the restof the economy. Indeed, per capita GDP (as measured bycomparing its 1974 and 1981 peaks) grew by less than 1%peryear, investment was far below its historical levels, and theeconomy exhibited a sharp de-industrialization(see Table 3).

In 1984 the Chilean economy began to recover and thenwent on to sustain growth based on an expansion of exportablesupply in nontraditional sectors. Nevertheless, the primaryreason for the strong performance turned in by nontraditionalexports was not the reduction of the country's tariffs sincetariffs were lowered quite moderately and a system of draw-backs was in place for exporters.

Duringthe second liberalizationdrive,depreciation of thecurrencywas the main reason for Chile'sexport success, as the


21/51

28 JOURNAL OF INTERAMERICAN TUDIES AND WORLD AFFAIRSTable 3. Chile: Selected Growth Indicators, 1961-93'(Percentages)

1961-71 1971-74 1974-81 1981-89 1989-93GDPgrowthrate 4.7 0.3 2.8 2.5 5.8Realgrowth ratestotalexportsb 3.4 9.1 7.1 8.5 9.7Non-copperexportsb 4.7 8.5 12.8 11.5 11.9Importsof goodsand servicesd - - 10.4 0.1 10.0

1961-70 1971-73 1974-81 1982-89 1990-93Gross fixed invest-ment/GDP 20.2 15.9 15.7 15.1 20.4(at 1986 prices)c 17.8 18.1 24.2Manufactures/GDP 25.4 27.2 22.2 20.7 20.9ExportsdGDP 12.0 9.9 21.4 27.0 33.5Source: Calculation by the authors based on figures from the Central Bank of Chileand from Ffrench-Davis and Mufioz (1990), tables 1,3 and 6.a - At 1977 pricesb - Exports of goodsc - At constant prices of 1986. Recent revisions of the national accounts makesfigures on capital formation noncomparable with previous series. That is whytwo different series are presented.d - Exports and imports of goods and services, according to national accounts in1977 prices.

real exchange rate more than doubled between 1981 and 1988(ECLAC,1995: Chapter IV). Foreign direct investment (FDI)also played a significant role in that export performance,particularlyin the mining sector.Two aspects that must be taken into consideration whenevaluating Chile's two trade reform programs are the impactthey had on the formation of capital and growth of themanufacturingsector. Although formation of gross fixed capi-tal and capital efficiency had increased ever since the recessionof the early 1980s ended, the coefficient for fixed investmentwas still less than 20% of GDP by the beginning of the 1990s,a mark that had been reached as far back as the 1960s (all

expressed in 1977 pesos). Inability to surpass that ratio of


22/51

AGOSINAND FfRENCH-DAVIS:RADELIBERAIZATION ND GROWTH 29investment prevented significant growth from being achievedin the 1974-89 period; indeed, the average, cumulative growthrate for that period was only 2.6%per year (see Table 3).

During the first liberalizationprogram,the economy wassubject to rapid de-industrialization,as evidenced by a 5-pointdrop in manufacturing'sshare of GDP.Manypotentially strongmanufacturing enterpriseswent bankruptas a consequence ofthe particularcombination of trade, exchange-rate, and inter-est-rate policies during that period.The improved performance of trade and manufacturingduring the second liberalization notwithstanding, the de-industrializationprocess set in motion by the firstprogramhasnever been reversed, and exports are still concentrated innatural-resource-intensive products. However, the share ofproducts with more value added has been expanding fromtheir low base, investment has continued to rise, and thecreation of new productive capacity (though only since theearly 1990s) has begun to increase at a sustainable pace thatnow, and only now, is faster than the rate recorded for the1960s as well.

3. MexicoLike Chile, Mexico also launched a drasticimport liberal-

ization programand, in mid-1985, began a gradual dismantlingof its traditional industrialpolicy. It is importantto note that, incontrast to Chile'sexperiment of the 1970s,Mexico's liberaliza-tion effort was both preceded, and followed, by a steep realdepreciation of the currency (in 1982-83 and, again, in1986-87) which gave the manufacturingsector a large foreign-exchange "cushion" or its adjustment(Ten Kate, 1992). Theselarge devaluations were necessary in order to cope with thebalance-of-payments and fiscal crises sparked by the suspen-sion of external credit in 1982 and, later, the drop in oil pricesin 1986-87.7

Before embarking upon its trade liberalization program,Mexico had employed a wide variety of policies to control


23/51

30 JOURNALOF INTERAMERICANTUDIESANDWORLDAFFAIRSimports, stimulate industrialoutput, and steer the manufactur-ing sector towards external markets. In addition to a widelydispersed tariffstructurehaving a ceiling rate of 100%,Mexicanproducers were protected by a system of licenses that appliedto 92%of all importsandby the use of officialprices forcustomsvaluations, which were, in a fifth of the cases, higher than theactual import prices. Exportersof nontraditionalproductsweregiven large tax breaks to offset the anti-export bias of tradepolicy. Furthermore,for quite some time Mexico had success-fully been using industrial promotion programs oriented to-wards import substitution in "strategicsectors"(in some casesin conjunction with export promotion measures). These pro-grams, which provided firms with protection in the domesticmarket and with tax incentives in exchange for achievingincreasingly higher levels of local integrationor export targets,had become the country'smain industrialpolicy tool duringthe"difficultstage" of import substitution (Ros, 1992).

A. The reformprogram launched in 1985. The tradeliberalization programbegan inJuly 1985 with the eliminationof quantitative controls on a large number of tariffpositions.These applied primarily to intermediate and capital goods,though some consumer goods were also affected. In thebeginning, tariff rates were kept high in order to offset theelimination of directcontrols.Then, the following year,Mexicojoined the General Agreement on Tariffsand Trade (GATr) inJuly 1986; its "entryfee" was a commitment to continue tosubstitute tariffsfor direct controls and, lateron, to reduce tariffrates. At the same time, an antidumping system was estab-lished. In late 1987, together with introduction of what wascalled the Economic SolidarityPact, trade reformswere inten-sified: a large part of the prior permit requirements forconsumer goods were discontinued; the remaining officialprices were eliminated; and the tariff structurewas simplifiedto involve only five rates, ranging from 0% to 20%, with aproduction-weighted average of 12% and an import-weightedaverage of 6%).


24/51

AGOSIN NDFfRENCH-DAVIS:RADE BERAUZATIONNDGROWTH 31Because Mexico's trade reformprogramencompassedexportsas well, many exportpermitrequirementswere elimi-nated.Thosequantitativexportrestrictionshatstillremain neffect are made necessary by the existence of either pricecontrols onsomeagriculturalroducts) rby agreements, othbilateraland international, rincipallywith regardto coffee,sugar,steel and textiles,which, together,still representedafourthof itsnon-oilexports, ncluding he valueaddedby themaquila industry).Traditional xport subsidies were elimi-

natedasa consequence,atleastinpart,of bilateral greementswiththeUnitedStates.Theonlyexport ncentives n effect areprograms hat allow duty-freeentryfor "temporary"mportsand exemptionsfor inputs importedby exportfirms.The use of industrialpromotionpolicies has also beenreducedsubstantially, lthough heycontinued o exertsignifi-cant effects on exports. The programsthat remain,whichcontinueto place quantitative estrictionson imports,applyprimarilyo the automobile,microcomputer nd pharmaceu-ticalindustries.The thick exchange-ratecushion created by the realdevaluationsof 1986 and 1987 enabled the governmenttolaunch its EconomicSolidarityPact,which included both afreeze on the exchange rate and wage restraints.n fact,theexchange ratebegan to be used as an anchorforthe control

of inflation.The nominalexchange ratewas frozen in 1988,and,eversince1989,nominaldevaluations ave beenless thanthe net rate of inflation the domesticrate minus the externalrate).Since1987,the realexchangeratehassteadilyappreci-ated (see Table4).The EconomicSolidarityPact was highly successful ininducing sharp cutbacks in the inflation rate. Along withprivatization f the banking system and participationn theBradyPlan, he Pacthelpedto alterexpectationsregardinghefuture of the Mexican economy. In turn, this change alsohelpedto bring n a largevolume of foreigncapitaland led torepatriationf flightcapital hathad left the countryduring hedebtcrisis.This nflowofcapitalhasmade tpossibletosustain,


25/51

Table 4. Mexico: Trade Policy Indicators and Real Exchan(Percentages)

Domestic Domesticproduction productionprotected protectedby import by official Average Number ofYear permits a b prices a b tariff a b tariff lines

1981 64.0 13.4 22.81983 - - -1984 92.2 18.7 23.5 -1985 47.1 25.4 28.5 101986 39.8 18.7 24.5 111987 25.4 0.6 11.8 111988 21.3 - 10.2 51989 19.8 - 12.5 31990 17.9 - 12.4 31991 - - 12.0 31992 - - 12.0 31993 - - 12.0 31994 - - 12.0 3Source: Ten Kate (1992), Ros (1992) and ECLAC1992a and 1994b).a - The figures shown for 1985 through 1990 refer to December of each year; the figures for 1981 cor1984 correspond to June 1985.b - Weighted by output.c - Exchange rate applying to exports (ECLAC,1992a and 1994b).


26/51

AGOSINAND FfRENCH-DAVIS:RADETLBERALIZATIONND GROWTH 33and to hasten, the pace of revaluation.Capital nflows have alsobeen stimulated by reformsin other areas of economic policy,such as domestic deregulation, the privatization of a largenumber of government-owned enterprises, the opening up ofthe economy to foreign investment, and authorization forforeign mutual funds to invest in the stock market. In order tomoderate these capital inflows, some controls on the banks'acceptance of foreign-currency deposits were reinstituted inApril 1991: e.g., a certain percentage of such funds cannot beloaned out in pesos but must be held as liquid foreign-exchange assets instead, while foreign-currency deposits maynot exceed 10% of total deposits.

B. GDP and exportperformance. Although manufacturingexports have achieved high rates of growth and the manufac-turing sector's share of GDP has expanded slightly, Mexico'spost-reform growth overall has been quite modest, while thedeficit on current account has been growing, reaching ex-tremely high levels (see Table 5). From 1985 to 1993, there wasno increase at all in per capita GDP and investment, despitesubstantial recovery, remains below historical levels (invest-ment coefficients have ranged from 16% to 21.7%of GDP, ascompared to ratios of 22-25%during the 1970s).The Mexican economy has, however, undergone a majorstructuralchange in the form of a sustained increase in non-oil

exports (including maquila services), which climbed fromUS$7 billion in 1980, to US$16 billion in 1988, and to US$28billion in 1993. By the end of the 1980s, manufactures hadcome to account for 85%of the country'stotal non-oil exports.Supporters of across-the board trade liberalization con-tend that import liberalization is what has made the boom innon-oil exports possible, by giving producers of exportablesaccess to high-quality inputs at international prices and bymaking it less profitable to produce for the domestic market(thereby encouraging, if indirectly, an export-oriented reallo-cation of resources). However, the sharp increase in non-oilexports had begun in 1983, before the introduction of tradereforms, thus it is difficult to attribute he expansion entirely to


27/51

34 JOURNALOF INTERAMERICANTUDIESAND WORLDAFFAIRSthose reforms.Ros(1992)has estimated hatnearlyhalfof theincrease in non-oil exports duringthe 1982-88period wasaccountedforbyjustthreesectors(theautomobile,computerand maquila industries)8which did not benefit from theliberalizationmeasures for one of two reasons: eithertheirimportsof inputswere alreadyduty-free the maquiladoras),or those imports hat were competitivewith theiroutput,orwith their importedinputs,remainedsubjectto restrictionsunder the industrial evelopmentprograms suchas automo-biles and personal computers).One hypothesis which fits better with actual trendsobservablein the Mexicaneconomy of the 1980s and early1990s s thatthe boom in non-oilexportshad moreto do, first,with the steep realdepreciationof the currencyrecordedin1982-83and1986-87,and then with thedepression hathitthedomesticmarkets,which obliged producers o look for mar-kets outsidethecountry, specially nthe UnitedStates. mportliberalizationmayhaveplayeda moresecondaryrole.MostofMexico'snew manufacturing xportsin the 1980swere pro-ducedbyindustrieshatwere foundedduring he eraof importsubstitutionwith relativelymoderatenew investment.Therewas no large-scale eallocation f resourceso sectors n whichMexicomay be supposed to enjoya comparativeadvantage(labour-intensivectivitiesorientedprimarilyowardsexternalmarkets).Hence, Mexico'ssuccessfulbid to expand exportswas initiallymade possible largely by its earlier import-substitutioneffortand by the developmentprograms mple-mentedinstrategic ectors(Ros,1992).During he secondhalfof the 1980s,thisprocesswas reinforcedand expanded by amore depreciatedexchangerate.More recently, however, as time went by and withMexico'sentry ntoNAFTAaswell as other radeagreements),new export activitieshave been developed. Nevertheless, tmust be stressed that importshave expanded to a notablylarger degree, with a risingdeficitand currentaccount(seeTable5).


28/51

Table 5. Mexico Selected Growth Indicators, 1

Fixed Deficit on BillioGDP investment Manufactures/ currentgrowth rate GDP GDP accountYear (%/) (%/) (US$ billion) Goods

1970-1979 6.5 20.2b 22.8 2.6 -1980 8.3 24.8 22.1 10.8 6.01985 2.6 19.1 21.4 -0.5 6.91986 -3.8 16.4 21.0 1.8 9.71987 1.9 16.1 21.3 -3.7 12.01988 1.2 16.8 21.7 2.6 14.11989 3.3 17.3 22.5 4.1 15.01990 4.4 18.7 22.8 8.4 16.91991 3.6 19.6 22.9 14.9 18.71992 2.8 21.1 22.8 24.9 19.21993 0.6 20.7 22.5 23.5 22.61994 3.5 21.7 22.5 29.2 27.2Source: ECLAC1994), Ros (1992) y "Estudio Econ6mico de America Latinay el Caribe, 1994".a - Share of total merchandise exports plus maquila services accounted for by non-oil merchandiseb - Simple average for the period 1970-1979 in constant 1980 dollars.


29/51

36 JOURNALOF INTERAMERICANTUDIESANDWORLDAFFAIRS4. Bolivia

During the last quarter of 1985, in order to stabilize itseconomy, overcome hyperinflation, and resume growth, Bo-livia initiated an ambitious trade liberalization programwhichit has been applying ever since (Morales, 1992). Prior toembarking upon this program, Bolivia had a highly dispersedtariff structure, with a maximum rate of 150%;it also hadbanned some imports and required import permits for others.Its first steps were to establish a single exchange rate, restorecomplete convertibility, dismantle its quantitativerestrictions,and reduce tariff levels. In addition, the capital account wasopened up almost entirely. Since then, majorreal devaluationshave been made (see Table 1).9

InJuly 1986,Bolivia simplified its tariffstructuregreatlybyestablishing a uniform 20%tariffrate. Earlyin 1988, the tariffon capital goods was lowered to 10%,with the 20%ratebeingretained for other products until the end of that year when itwas reduced to 17%.In 1990, tariffs were lowered to 5%oncapital goods and to 10% or other products, where they haveremained to this date. Thus, the Bolivian economy has becomeone of the most open economies in LatinAmericaand, indeed,the world. In order to stimulate nontraditional exports, asubsidy equivalent to 10% of the value of exports wasestablished. This instrument, which was known as the TariffDrawback Certificate CRA),was intended to mitigate the anti-export bias generated by the duties levied on imported inputsthat were used in producing exportables. Forfiscal reasons andby agreement with the InternationalMonetaryFund (IMF)andthe World Bank, the CRAwas discontinued in early 1991.As may be seen in Table 6, Bolivia has been able to putan end to hyperinflationever since 1986;nevertheless, its rates

of GDP growth have been quite modest, especially whencompared to those of the 1970s. Inthe eight years following thesteep declines registeredin 1985and 1986,growth ofpercapitaGDP has averaged only 1.2%annually. What little economicgrowth has been achieved was barely enough to bring per


30/51

AGOSINAND FfRENCH-DAVIS:RADELIBERALIZATIONND GROWTH 37Table 6. Bolivia: Selected Economic Indicators, 1970-94

(Percentages) NonGross Real Total traditionalfix rate exports exports'GDP investment/ of growth (US$ (US$Year growth GDP of exports million) million)1970-80 3.9 16.9 -10.51980-84 -1.9 11.5 -28.3 871b 68b1985 -1.0 12.4 -7.6 673 351986 -2.5 13.4 4.5 638 1081987 2.6 13.7 -0.2 569 1061988 3.0 13.6 3.7 600 1081989 3.5 12.6 18.5 822 2041990 4.7 12.4 20.8 927 2921991 5.1 12.5 2.3 849 2511992 1.2 14.1 -2.4 608 2061993 4.1 14.3 16.8 710 2841994 4.2 12.9 25.0 985 508Sources: ECLAC 1994), ECLAC 1995) and "Estudio Econ6mico de America y elCaribe, 1994".a - Total exports minus zinc, tin, silver, wolframium, antimonium, gold, lead, otherminerals, natural gas and other hidrocarbures.b - Simple average.

capita GDP up to 87% of what it had been before the crisis ofthe early 1980s. In addition, the investment ratio fell followingthe reforms. The decline in private gross fixed investment -from 7% of GDP in 1982 to less than 4% in 1990 - wasparticularly worrisome (Morales, 1992) although it rose againin 1991-93. One positive development, in addition to the sharpdrop in inflation, has been the diversification of exports,though these still remain concentrated in mineral and agricul-tural products.


31/51

38 JOURNALOF INTERAMERICANTUDIESAND WORLDAFFAIRSNontraditional exports rose steeply from 1988 to 1990,

slipped down in 1991-1992,only to move rapidly upward againin 1993-94. The quantum of total exports rose only 74%from1980 to 1994 (vis-a-vis 120%for the region as a whole). Thus,the Bolivian experiment demonstrates that, in a largelyundiversified economy with low levels of productivity,reformsaimed at altering market signals in order to align domesticprices with internationalprices areclearlynot sufficient, in andof themselves, to initiate or carryforward a timely process ofstructuralchange. Change takes place, but too slowly and withweak, or lagging, pulls on investment and economic growth.II. LESSONS FROM DYNAMIC

ASIAN ECONOMIESESPITEheirgreat diversity, he manufactures-exportingeconomies of Asia share a number of characteristics incommon with one another in the area of their respectivedevelopment policies and strategies (and in their results). Thisfact alone makes comparison between them and the LatinAmerica countries particularly nstructive.The analysis in thissection is based on the experiences of the Republic of Koreaand Taiwan, which have been engaged in outward-lookingindustrializationfor several decades. Ever since the late 1970s,

other Asian economies (Indonesia, Malaysia and Thailand)have undertaken somewhat similar policies and have alsoreaped positive rewardsin terms of promotinggrowth based onthe export of manufacturedgoods (Agosin, 1992;Noland, 1990;Ariffand Hill, 1989). In all these economies, industrializationstartedoutwith animport-substitutionmodel.Withoutexception,subsequent policies, aimed at giving the economy an outward-looking orientation,have been superimposed upon the existingimport-substitutionsystem (Noland, 1990:Chapters2 and 3). Inlarge part,these economies made the transition to an outward-oriented industrialization model based on the industrialskillsand capacities developed earlier.


32/51

AGOSINAND FfRENCH-DAVIS:RADE UBERAZATIONAND GROWTH 39In general, the strategy employed was that of providingroughly equivalent incentives to producing for export andproducing for the domestic marketwithin any given industry,but to offer quite dissimilar incentives (and ones that changedover time) to different industries.In formalterms, the effectiveexchange rate for exports, which incorporatesthe effects of allthe various incentives offered (tariffs,subsidies, and so on), wasmore or less equal to the effective exchange rate for import-substitution activities in industry i, but differed substantially

between industry and industry :TCE(X)=TCE(M,);TCE TCE.Although the level of protection in Korea and Taiwan hasdecreased considerably over the past few decades, to the pointthat it now approaches the levels typicalof developed countries(Noland, 1990), these economies began their outward-orientedindustrialization drives with high protective barriersthat werenever dismantled for the sake of reorienting the economytowards export.10One facet of this process, which an observercannot help but notice, is the tendency of the state to offerincentives on the one hand and then, at some subsequent time,take them away on the other. In other words, the state hasdemonstrated a striking ability to institute promotion policieson a temporary basis. Furthermore,all such incentives havetraditionallybeen granted only in exchange for achievement ofsome specific performancetarget,usually in the area of exports.Another highly significant aspect of these practices is thesuccess of the authoritiesin forestallinga majorrevaluation,orin preventing the sharp fluctuations in the real exchange rate,such as is commonly seen in the LACs.The presence of tariffsand othersubstantialtradebarriersoffers obvious indication thatthe currencies of these Asian economies were overvalued, butthe degree of overvaluation was moderate and was offset, inmost cases, by various sorts of export subsidies. In order to

control their exchange rate,most of these economies exercisedeffective control overthe control of foreign capitalandmanagedto achieve a satisfactorydegree of macroeconomic stability.The Asian experiences suggest that trade liberalization isnot an essential element of export-based industrialization.In


33/51

40 JOURNALOF INTERAMERICANTUDIESAND WORLDAFFAIRSfact, most of these economies have been able to maintainpolicies that are relativelyprotectionist n nature and yet togrow outwardat the same time. Two basic factorshelp toaccountforthis phenomenon,which contradictsall conven-tional trade policy prescriptions.First,in all the successfulcases,theauthorities ave madeheavyuse of various ubsidiesfor exports in order to offset the anti-exportbias implicit nprotecting importables;each one of the Asian economiesunder scrutiny has drawback mechanisms for tariffs andindirect axes to exporters.Thesecond factor s that ncentiveshave been provided n exchangeforachieving pecific perfor-mancetargetsand for limitedperiodsof time.

Althoughall of Asia's ast-growing conomieshave cer-taincharacteristicsncommon, herearesignificantdifferencesamong them as well, which should be of interest to LatinAmerica.Perhapsthe most interestingaspect of the Koreanexperiencehas been the differential reatmentaccorded ma-ture and infant industries Westphal,1992).The tradepolicyappliedto mature ndustrieswas intended to be neutral,sodrawback mechanisms were designed to refund customsduties and indirect axes to both directandindirectexporters(thelatterbeingproducershatsell inputs o exporters).Duringthe 1960s, hese businessesalsoenjoyedadditionalncentives,such as access to crediton easy terms,preferential ccess toimportpermits,and some reductions n direct axes.l1The provisionof incentives(which were tied to exporttargets) orgovernment-promotednfant ndustrieswas muchmore aggressive. The principalmethod employed for thispurposewas to award emporarymonopoliesto selected firmsin those industrialsectors that the governmentwished topromote in returnfor reachingcertain,and specific, exporttargets. In practice, this meant that promotion of import-substitutingactivitydid double dutyas an export-promotionmechanismaswell. These firms oon becameexporters incethey were able to subsidize externalsales by means of thesubstantial rofitsrealized nthe domesticmarket.Perhaps hecrucial factor in reachingthis goal was that the incentives


34/51

AGOSIN NDFfRENCH-DAVIS:RADE IBERALIZATIONNDGROWTH 41employedinduced these firms o seek to become internation-ally competitive from the very beginning. This emphasisenabled them to take rapidadvantageof economies of scaleandto follow a learn-from-experiencetrategy.Another mportant lementwasthe preferential ccesstoshort-andlong-term rediton easyterms,which wasprovidedto firms nthe selectedsectors.Inpointoffact, hegovernment,by choosing certainsectors, was actually favoring certainconglomerateswhose creation t hadencouraged.Thisstimu-lusto provokethe emergenceof agentsof productionnstate-sponsored sectors, togetherwith access to ample creditforthose activities at subsidized interestrates, was the state's(successful)way of making up for any shortcomings n thecapitalmarkets Amsden,1993).The industrialpolicy was asequentialone: during he 1960s,the stateplaceditsprioritieson investmentsncement, ertilizers ndoilrefineries;rom helate1960s ntotheearly1970s, heemphasis hifted osteelandpetrochemicals;hen, formost of the 1970s,the focus shiftedagain: to shipyards,capital goods and consumer durables(includingmotorvehicles).Finally, n the 1980s,prioritywasgiven to electronics, elecommunications nd informatics.The industrial ndtradepolicies applied nthe Taiwaneseeconomy have been similar n some ways, particularlywithregard o thesequencingof statesupport orspecificfirmsandsectors: nthe 1950s,specialassistancewasgivento thetextile,glass,plastics,cement,and consumerelectronicsndustries;nthe 1960s,itwent to synthetic extiles andsteel;in the 1970s,tomotorvehicles; incethe latterpartofthe1970s, he attentionhas gone to informaticsWade,1990aand 1990b:Chapter ).All of these were industries hat were expected to becomeinternationally ompetitive.Someofthepromotionmechanismswere similar o thoseused in Korea,includingprotectionof the domesticmarket,subsidizedlong-termcredit,and tax exemptions.One some-what differentaspectof the Taiwaneseexperiment,however,was the aggressiveuse of stateenterprises ndinvestmentand


35/51

42 JOURNALOF INTERAMERICANTUDIESAND WORLDAFFAIRSthe promotion of foreign investment (usually in partnershipwith national capital) in the sectors chosen for promotion.

As time has passed, the leadership role of the state inputting this industrialstrategy into practicehas been temperedand taken on a less interventionist cast in both Taiwan andKorea. It is expected that, as a result of the trade reforms nowbeing undertaken, tariff evels and spreads will approach thoseof industrialized countries (Noland, 1990: 9-11). As the statewithdraws from its leadership role in industry, protectiongradually takes on the same function in these economies thatit performs in industrialized countries, i.e., that of defendingthe most backward economic sectors (especially agriculture).III. CRITERIAORAN EVALUATION

N examination f LatinAmerican iberalizationffortsandthe longer-lived Asian programs yields conclusions thatmay have an important bearing on the management ofeconomic policy in LatinAmerica. These findings can help toadjustreformsnow underway so thatthey will contributemoreefficiently to the countries' efforts to change their productionpatterns and to speed up growth.

1. The Relationship etween ImportLiberalizationand ExportPromotionExperience has demonstrated that it is highly effective toliberalize imports once a sustained increase in exports and adynamic transformation of the production apparatus havealready been achieved. The cases of the EastAsian countriesbear witness to this fact (Sachs, 1987). This is the first of theoptions set forthin the analyticalscheme presented earlier(see

Section II.1 and Figure 1). Although this course of action is nolonger a feasible option formany LatinAmericancountries, theAsian countries' experiences demonstrate the need to takedirect steps to boost exports rather than waiting for importliberalization alone to have the desired effect on exportperformance.


36/51

AGOSIN NDFfRENCH-DAVIS:RADE BERALATIONNDGROWTH 43In the majorityof liberalizationprogramsunderwayin

LatinAmerica,the option of promoting exports first andliberalizing mports aterhasalreadybeen explicitlyruledout;a liberalizationprogramhas alreadybeen carriedout, and itwas done in a countrycontextwhere creationof productivecapacitywas farfromdynamic. mportshave been liberalizedwithout providing any significantmeasure of support forexportsother hananassumption fspontaneousdepreciationof the currency.Thisassumptionended to oppose thereality:in Chile during the 1979-82 period, in Mexico from 1988onwards,and in countrieswhose liberalization ook place inthe 1990s.]Moreover,all the countries hathave undertakensweeping reformshave proceededeitherto dismantleor cutback on export promotionschemes that had been successfulin the past.Thissuggeststhat the costs of these liberalizationprogramswillbe high,intermsof growth,during hetimethattransition s beingmadeto a new equilibrium.One construc-tive questionthatmightbe posed at this point is: given theconstraintsmposed by the path alreadychosen, how can theoverallefficiencyof the reformsbe enhanced?Thesuggestionsthatfollow are directed owardsachievingthat end.2. Incentives: Selectivity versus Neutrality

Neitherthe mainstream f past experienceor the casesdiscussedheresupport hehypothesis hat,once a countryhasneutralized ts incentivesby dismantlingprotectionand dis-continuingsubsidies,resourceswill be reallocated pontane-ouslyandcostlesslyto those sectorsinwhichthatcountryhascomparative dvantages.Chile'sexperienceattests o the highcosts of a radicalliberalizationdrive which did away withselectivity.It is unlikelythat the costs of transitionwill becompensatedfor by more rapidgrowthafteradjustmenthasbeen completed. As the Asian experiences suggest, moregradual, electivepoliciesto liberalize mports, ogetherwithgreatersupportfor nontraditional xports, might well haveenabled heeconomyto turn nastrongerperformance verall.


37/51

44 JOURNALOF INTERAMERICANTUDIESAND WORLDAFFAIRSIf the aim is to make efficientchanges in production

patterns n such a way that the economy will become moreopen to trade and forge an upgraded position for itself ininternationalmarkets,then the negative pulls generatedbyliberalizationwill notsuffice;policiesthatcreatepositivepullswill also be needed. Obviously, his does not implya returnothehigh,indiscriminatelyrotectivebarriers fthepast.Infact,it canbe argued hatimport-substitutionolicieserredon theside of failing o discriminatenoughrather hanby beingtooselective. What s needed is a muchgreaterdegreeof selectiv-ity,notin thesense ofsupporting pecificactivitieswhichmaybe difficult o identify)but, rather,of makingsure that anydeviationsfromneutrality re few andwell chosen.There are no compelling reasons, either practicalortheoretical,for opting for absoluteuniformityn the case oftariffs.If most industrialactivities are subject to dynamiceconomiesof scaleof a moreorless diffusenature, henitcanbe argued asit isbyRodrik, 992) hat tisbestto benefitbroadcategoriesof activitiesrather hanbecomingembroiled n thedifficulttask of trying to "pickwinners"through favoringspecificindustries.Moderation,ntermsof the numberof tarifflevels andbrackets,willhelpto curbabuses.Furthermore,nytariffn excess of the baselevelshouldbe temporarynnature.Sincethe LatinAmerican ountrieshaveoptedforabove-zerotariffevels and,inallcasesbutChile, orsome degreeofdifferentiation,hen roughlyequivalent exportsubsidies arerequired n orderto avoid the anti-exportbias of the past. Inotherwords, equivalent ncentives should be extendedto agiven product designed for exportas well as for sale in thedomesticmarket.

Export ubsidiesarenecessary,especially f the aimis topromotean efficient orm of industrializationn the presenceof importduties.One elementthat s essential fananti-exportbias is to be avoided is the establishmentof drawbacksoninputsused inproducingexportablegoods. Indeed,casescanbe foundinboth LatinAmericae.g., Colombia,CostaRicaandBrazil)and Asia where subsidies for nontraditional xports


38/51

AGOSIN NDFfRENCH-DAVIS:RADEIBERALZATIONNDGROWTH 45have been in place for extended periods of time and haveyielded positive results.In order to minimize the possibility thatsuch subsidies may be misused, consideration might be givento designing a system whereby subsidies would decrease asexports increase, based on a preestablished, publicly-an-nounced timetable that is not subject to renegotiation.

Selectivity involves a number of different aspects whichextend beyond the bounds of trade policy and cannot beexamined in detail here. Some of these elements would includethe following: (1) ways to give exporters access to pre- andpost-shipment commercial credit at international interestrates;(2) measures to supplement the capital market and eliminateits bias against new projects;(3) improvement of the physicaland social infrastructureneeded to develop the export sector;(4) FDIpolicies that would facilitateaccess to new technologyand international markets; and (5) adoption of a coherentpolicy regardingtradenegotiations for gaining better access toexternal markets.

One factwhich policymakers should bear in mind as theyformulate trade policies for the 1990s is that the internationalsituation has changed substantially since the burgeoningeconomies of East Asia embarked upon their export-basedindustrialization processes in the 1960s and 1970s. Today, itwould be much more difficult to offer incentives of themagnitude that were granted by the East Asian economies atthe time, not only because the present internationaleconomicenvironment is more sluggish and more protectionist (whichmakes it now more likely, for example, that importing coun-tries would protect themselves against export subsidies bylevying countervailing duties), but because the rules andstandardsgoverning international rade are now more stringentthan formerly.Moreover, if the UruguayRound of the GATT sbroughtto a successful conclusion, itis highly probable that theroom in which the less-developed countries (LDCs) cansubsidize exports will be circumscribed even further.


39/51

46 JOURNALOF INTERAMERICANTUDIESAND WORLDAFFAIRS3. Gradualor AbruptLiberalization?

The LatinAmericancountries(LACs) hat have under-takentrade iberalizationn recentyearshaveclearlyoptedtopursuea rapidcourse.Thus,the commentsthat follow herewill be directedprimarilyo those countries hat have notyetconsolidatedtheir reformprocess.It is still too earlyto evaluate the resultsof the recent,drasticreformefforts.Be thatas itmay,the experiencesof theEastAsianeconomies, as well as of Colombia rom the mid-1960sto 1989 (Ocampoand Villar,1992) and of CostaRicaduring 1983-1990 (Herrera, 1992), appear to suggest theadvisability f agradualapproach hatpermitsreconversionofexisting ndustries atherhandestruction f alargepercentageof the country'snstalledcapacity,as inevitablyoccursduringa rapidly-applied iberalization nitiative,particularlyf theexchange rateappreciates.Thetransition hatColombiamadeinthemid-1960s, roman import-substitution odel to a pragmaticmodel thatgaveequalpriority o both import-substitutionnd export promo-tion, was an important actorin steeringthe manufacturingsector towards an increasinglyexternal orientation whileavoiding,at the same time, the traumaassociatedwith suchdrastic iberalizationdrivesas thlatof Chile in the 1970s. InCostaRica, ariff eduction ookplace gradually ndintandemwithexport ncentivesanddrawbackmechanisms.Theexpan-sion of nontraditional xports- the most salient feature ofCostaRicandevelopmentduring he 1980s was generated,in large part,by firms that had been establishedduringtheearlier import-substitution hase. In addition, a deliberateeffortwas made to promoteforeign nvestmentnthe produc-tion of such exportablegoods as textilesand electronics.

The adoptionof a gradualapproachdoes not meanthatallreformsneed tobe gradual,however.Theelimination f theslack in tariffs, he conversionof quantitative estrictions ntotariffs("tariffization"),nd the necessary adjustmentsn theexchangerate can allbe done at a singleblow. Nevertheless,


40/51

AGOSIN NDFfRENCH-DAVIS:RADEBERALIZATIONNDGROWTH 47subsequenttariff eductions houldbe phasedin gradually oas to keep pace withproducers'ability o adapttheirproduc-tion structureso increasedcompetition.4. The Role of the ExchangeRate

The way in which the exchange rate is handled willundoubtedlyplaya decisive role in determininghe outcome.Averting nexchange-rateagwould seemto be essential othesuccess of anytradereformwhatsoever,regardlessofwhetherit takes the formof a drastic iberalization riveor a gradual,controlledopeningof the economy. Once again,the Chileanexperimentof 1976-81(as well as the experiences of otherSouthern Cone countriesduringthe 1970s) show just howharmful he combined impactof a real appreciationof thecurrencyanda drasticmport-liberalizationrogram an be. Incontrast, he new adjustmenthat Chileundertookbetween1983 and 1991 was much more successful,and sustainable,thantheprogrammplementedduring he 1970sbecausetariffreductionwas coupledwith a steep real devaluation.Most liberalizationprograms hat have taken place inLatinAmericamore recentlyare being implementedin thepresence of a sharp real appreciation. n fact, some of thecountries n which the import-liberalizationrocesshas beenmost abrupthave also experiencedsevere lags in their ex-change rates. The question of how best to manage theexchange rate so as to bolster the process of changingtheproduction tructures an aspectof economicpolicythat hasnot yet been addressedsatisfactorilyn LatinAmerica.The experiencesof diverseLACsdemonstrate hat mereapplication fanexchange-rate olicyalone is notanadequatesubstitute or aneffective,comprehensiveanti-inflationolicy.Except nthe short erm,when it isused as a meansof changingexpectations,heexchange-rate nchor ordomesticpriceshasproven to be extremelyflimsy,particularlyn high-inflationcountries.Stabilizingpricelevels is certainlyan essentialstepin any policy attempt o bringabout a permanentchange in


41/51

48 JOURNALOF INTERAMERICANTUDIESANDWORLDAFFAIRSrelativeprices,butthis cannotbe achievedsimplyby fixing henominalexchangerate. Onthe contrary,he exchangerateisan indispensable ool forchangingproductionpatternswhilemaintainingan externalequilibrium.This is one of the mes-sages of the EastAsian success experience.5. CapitalAccountLiberalization

Another esson to be derivedfromexamining he differ-ences between the LatinAmericanand Asianexperiencesisthatliberalization f capital lows canjeopardize he achieve-ment of trade iberalizationbjectives.12inancialiberalizationhas two components - one internal and the other external -that usually go together. Domestic financial liberalizationinvolves,interalia,allowing nterest ates o be determinedbymarket orces. External inancial iberalizationakesthe formof a combination of various measures: either permittingnonresidentsto deal in the domestic financial market orpermitting esidents o take out loansin internationalinancialmarkets;permitting esidents o buy foreignexchangein thedomestic marketand then to investor spend it abroad;andpermitting oreign-currencyransactions o be conducted indomestic markets. While domestic financial liberalizationstrengthensthe link between inflation and interest rates,external financial liberalizationweakens the link betweendomestic prices and the exchange rate (Akyuz, 1993). Thismakes it more difficultto implementa trade liberalizationprogram uccessfully, or two reasons.First, he combinationof domestic and external financial liberalizationmeasuresmakes heexchange-ratemoreunstableanddifficultocontrol.Second,it raises interestratesand makes them morevolatile,thereby discouragingproductive nvestment.

Thesimultaneous iberalization f domesticand externalfinancialdealingsposes seriousproblems orthemanagementof economic policy. Internal iberalizationmeasuresusuallylead to steep increases n interest ates bothnominalandreal)andto wide swings in those rates overa protractedperiodof


42/51

AGOSIN NDFfRENCH-DAVIS:RADEIBERAIZATIONNDGROWTH 49time. When a gap opens up between domesticand interna-tional interestrates,and it appears hat this is not going to beclosed by a depreciationof the currency, hen destabilizingcapitalflows can reach considerableproportions.Underconditionssuch as those thatprevailedduring hesecondhalfofthe 1970sorearly nthe 1990s,external inancialliberalizationmakes managementof the real exchange ratemore difficult(Williamson,1992). Short-term apital flows,generatedbythe hope of turninga speculativeprofit romthedifferential etween international nd domestic interestrates,may cause the realexchangerate to become highlyunstableand,thus,mayhinder he managementof thisvariable,whichisaneconomicpolicytool of crucialmportancenanyattemptto change productionpatterns.

Moreover,nstabilityn exchangeand interest ates endsto giveriseto anattitudenwhichprofit-seeking redominatesover considerationsof productivityand to send confusingsignalsto the allocatorsof resources.Some recentexamplescan be foundintheregionof fairlysuccessfulapproachesto managingspeculative capital.Onesuch example is that of Chile,which learnedfrom its experi-ence in the late 1970s.Morerecently, he adoptionof a morepragmatic ttitudehas madepartial rotectionof theexchange-rate evel possibleand hashelpedto makethebenefitsof tradeliberalizationmoretangible.Colombiahasalso availed tselfofa varietyof measuresto staunchthe short-term apitalflowsthatthreatened o triggera sharprevaluation.Brazilhas madesome attempts o moderate hort-term inancial lows as well.In a number of other LACs,recent efforts at tradeliberalizationhave been accompanied by fairly ambitiousinitiatives to institute financialliberalization,coupled withheavy capital nflowsthathavetendedto outstriphe abilityofthe monetaryauthoritiesto sterilize those flows. In thesecountries, he move to dismantlecontrolson capitaland theauthorities'nabilityo regulatecapitalmovementsare hinder-ingthe efficiencyof opening productiveactivitiesup to trade.


43/51

50 JOURNAL OF INTERAMERICAN TUDIESAND WORLD AFFAIRS

Hence, the problemthat the region faces vis-a-vts hebalance-of-payment apitalaccount is how to link domesticcapitalmarketsup with externalcapitalmarkets n a way thatwill minimizeunnecessary nefficiencies currencyapprecia-tions that endtopushthe markets wayfromequilibrium) ndthe destabilizingeffects of short-termcapital flows, whichusuallyappearwhen they are not needed and tend to dry upwhen they are essential to balance-of-payments quilibrium.Therefore, tappearsnecessary o distinguishbetween capitalflows withlong-termproduction bjectives e.g., foreigndirectinvestment),which arebeneficial,and other short-term lowsof a purelyspeculativenature,whichneed to be discouraged.IV. CONCLUDING REMARKS

N conclusion,past experienceseems to demonstrate hat,together with a rationalization f trade incentives,somedegreeofselectivitymustbe exercisedwithrespect oproductivedevelopmentpolicy.Thisiswhathas been done inthe fastest-growingeconomies of EastAsia. The problemlies in how toidentifythe most efficientmechanisms,which will includegraduallydecreasing ncentives, ied to specificexport argets,and the reformsneeded in the institutional tructureof thepublicsector.Thedegreeof selectivitymustactuallybe greaterthanduring he import-substitutionhase, and the criteriaonwhich its administrations based need to be clearlydefined.Protectionornational roductionctivities ndexportncentivesare part of a policy package aimed at implementing adevelopment strategy that involves changing productionpatterns.But experienceteaches (1) that incentivesmust bemoderateandhavedefinite ime imits;2)thatdeparturesromneutralitymust be few and carefullychosen;and (3) that theanti-exportbias of protectionmust be counterbalancedwithexport ncentives. talsoseems to be more efficient o provideincentives or broadcategoriesof activities,.e.,thosethathavethegreatestchanceof providingdynamicbenefits hatwill notbe internalizedby the market.


44/51

AGOSIN NDFfRENCH-DAVIS:RADE IBERAIZATIONNDGROWTH 51Promotion of nontraditional xports appears to be aparticularly ppropriate phereforselectivetradepolicies.The main reasonsfor implementing uch measures are(a) the need to offset the anti-exportbias inherent n tariffs;(b) the positive externalitiesgenerated by export activity;(c) the shortcomingsn capitalmarkets orfinancingexports;and(d) the economiesof scale andopportunitiesorlearningthatexportingprovides.Withoutan activepolicy forpromo-tion of exports, he latterwill tend to concentraten onlya few

enterprisesandinproducts or which demand s less dynamicand which are more vulnerable n globalmarkets.One basicprerequisiteorfostering he competitivenessof export firms is guaranteeingtheir access to inputs oncompetitive erms.Thesefirmsshouldhave access to flexiblemechanismsfor importing nputs, on a temporarybasis, toproduce exportables.Otheralternatives re tariffexemptionsor drawbacks,with a minimumof redtape.Such mechanismscouldalso be appliedto indirectexporters domesticproduc-ers of inputsfor exporters).Pioneeringexportfirmscould be supportedby offeringincentivesfor exportof new productsor for entryinto newmarkets.One such mechanism s a "simplified rawback,"orproductswhose export level is below a given amount for aspecific period.These incentives hould be moderate helping

to place competitive,or near-competitive, roducts n foreignmarkets), imitedin time,andsubject o preciseperformanceresults n terms of new productsor markets.The public sector can foster improvedperformance nforeignmarketsby providingthe following:(1) institutionalsupportforexport activity,especiallyin the areas of informa-tion,financingandexport nsurance;2) managementrainingto encourage businesses to focus on exporting;(3) negotiationsto improveaccess to externalmarkets;and(4) promotionof the exportable supply abroad.Pioneeringeffortsare also being made in such areasas investingabroadto support exportactivities,marketing hains,and jointven-tures with firms n targetmarkets.


45/51

52 JOURNALOF INTERAMERICANTUDIESAND WORLDAFFAIRSDomesticdevelopmentof the exportable upplyshould

also be activelysupported n order o enable it to adaptto thedemandsof foreignmarkets.Timely, up-to-date nformationon the requirementsof export markets, n termsof quality,environmentalregulations,standardization,deadlines, andvolume would facilitate his task.Past export-promotionpolicies often neglected sectorsbased on natural esources.Recent echnologicaladvances nmicroelectronics,data processing, telecommunicationsandsatellite technologies considerablyaugment the supply ofinformation n the qualityandvolumeof economicallyavail-able natural esources.Thisis one morereasonforacquiringand strengtheningcomparativeadvantages n nontraditionalnaturalresourcesthat could offersignificanteconomic rents.To be effective, an export-promotion ystem must beselective. It is impossibleto promote everything ndiscrimi-

nately.The selection of sectors,and export-promotion eci-sions ingeneral,shouldbe madeinclose, systematic oopera-tion between the publicandprivate ectors.Exporter ssocia-tions should thereforebe strengthened.Otheraspectsofselectivitymentioned husfar,andwhichhave not been accordeddue attention n recentreformefforts(or, for thatmatter,some of long standing,such as Chile's),have to do with what the statedoes to correctmarket ailureshampering investment that is oriented towards changingproductionpatterns.Such actionby the state would includepolicies for supplementing he capitalmarket,attractingor-eign investment o new sectorsthat show promiseof offeringcomparativeadvantages,upgradingthe physical and socialinfrastructure,s well asapplyinganeffective rainingprogramfor labor.

In orderto open up the production ectorin a way thatwill furthera country'sdevelopment,correctionswill have tobe madeinthemore extreme ormsof liberalization dvocatedin recentyears.Realisticadjustmentswill certainlyhaveto bemade in the policies being applied by manycountries.


46/51

AGOSIN NDFHRENCH-DAVIS:RADE IBERAIZATIONNDGROWTH 53Trade policy reforms should be accompanied by greater

recognition of the role that the exchange rate plays in bringingabout changes in production patterns. It appears to be impos-sible to steer private sector production activities firmly in thedirection oftradeable unless a more favorable, stable exchangerate can be maintained (i.e., one able to withstand the influenceof temporary swings in the economy). The region's economicauthorities need to pay more attention to the policies neededto achieve this objective, one of which will surely be regulationof short-term capital flows.One essential condition for a successful liberalizationeffort is a supportive international environment. Unless protec-tionism is eradicated from the central countries, liberalizationwill be greatly weakened as a policy option - not for just a fewcountries, as in East Asia in the 1960s - but for a broad rangeof countries that are currently pursuing liberalization initiativesand seeking export-led development.

NOTES1. In this article we will make use of the distinction drawn byDamill and Keifman (1992) between "opening"and "liberalization."The former concept applies to a policy package designed to orientan economy towards international markets as part of an export-ledprocess. The latterrefers to the dismantlingof protective barriersandother government controls as part of an import-led process.2. This does not mean that the option of import substitutionshould be discarded. The largerthe domestic marketin question, thegreater the potential scope of import substitution. This is attested toby the fact thatthe exports of countries such as the United StatesandJapan represent only 10%and 15%,respectively, of their GDP. Whatis trulynew about the development strategythat is now takingshapeis the idea that firmsproducing goods and services, whether for thedomestic orinternationalmarket,must become increasinglycompeti-tive during the learning period. This is achieved, in part, throughexposure to outside competition.3. Up until June 1990, the mainstream opinion was thatintegration accords should be of a partial,very limited scope, alongthe lines of the Latin American Integration Association (LAIA)


47/51

54 JOURNALOF INTERAMERICANTUDIESAND WORLDAFFAIRSagreement in force at the time. The predominant view was that tradeblocs were inefficient and hindered world trade. President Bush'sEnterprisefor the Americas changed all that,however, and concernsabout trade diversion appeared to have been forgotten.

4. Regardingthe case of Chile, see Ffrench-Davis,Agosin, andUthoff (1995); for a comparativeanalysis and policy prescriptionsseeDevlin, Ffrench-Davis and Griffith-Jones 1995).5. Notice that this was the situation in 1973. However, in thesecond half of the 1960s, there was a reformin process that includedthe gradualrationalizationof the importregime and the improvementof mechanisms of export promotion.See Ffrench-Davis 1973, Ch.IV).6. Most capital goods imports were subject to a wide range oftariffexemptions.7. In Mexico, as in Chile, these devaluations help to balancefiscal accounts, since the earnings from its main export are a majorsource of tax revenue and have converted the public sector into a netsupplier of foreign exchange.8. Inkeeping with Ros(1992), here only thevalue-addedby themaquila sector is classified under merchandise exports.9. The system used by Boliviafordeterminingitsexchange-ratecan be characterized as a dirtyfloat.10. For example, in 1976, more than a decade afterits industri-alization process was launched, the Republic of Korea had tariffsranging from 0%to 150%,and for nearly 1,000 tariff tems (approxi-mately 40% of all items), the rates were between 30%and 60%.Non-tariffmechanisms and exemptions were also used heavily (Ffrench-Davis, 1986).11.Incentives other than drawback mechanisms started to

disappear in the 1970s, but the levels of protection provided for thesesectors on the domestic market

Documents

0.- Agosin y Ffrench-davis 166332