Stages of Economic Policy in Latin Stages of Economic Policy in Latin America: The Return of Prebisch in the America: The Return of Prebisch in the

Age of Finance CapitalAge of Finance Capital

Prebisch and ISI: 1930s-1960sPrebisch and ISI: 1930s-1960s Oil Shocks and Debt Accumulation 1960s-1970sOil Shocks and Debt Accumulation 1960s-1970s The Lost Decade, Hyperinflation, & Return to the The Lost Decade, Hyperinflation, & Return to the

Market 1980s - early 1990sMarket 1980s - early 1990s Emerging Market Euphoria - early 1990sEmerging Market Euphoria - early 1990s The Mexican Peso CrisisThe Mexican Peso Crisis

Phase I: Trade Volatility, Trade Crises Phase I: Trade Volatility, Trade Crises

Latin America’s Secular Decline in the Terms of TradeLatin America’s Secular Decline in the Terms of Trade

Chronic Balance of Trade DeficitsChronic Balance of Trade Deficits

Import Constrained GrowthImport Constrained Growth

1930s Depression and “Inward Development”1930s Depression and “Inward Development”

Prebisch HypothesisPrebisch Hypothesis

Supply Side and Demand Side formulations-- Supply Side and Demand Side formulations-- Unequal exchange in the dynamic relations of Unequal exchange in the dynamic relations of trade between the Center and Peripherytrade between the Center and Periphery

– Supply Side:Supply Side: Perfect competition in peripheral Perfect competition in peripheral product and factor markets. Imperfect Competition product and factor markets. Imperfect Competition in the Center. Economic surplus from peripheral in the Center. Economic surplus from peripheral productivity gains is transferred to the Center in productivity gains is transferred to the Center in lower commodity prices.lower commodity prices.

Productivity augmenting investment in the Productivity augmenting investment in the Periphery...Periphery...

……generates potential surplus profitsgenerates potential surplus profits

Profits from these productivity increases are not realized in the Periphery, but are, instead, transferred to the Center nations in the form of falling prices for imported Peripheral inputs.

Producing a corresponding reduction in the Terms of Trade for the Periphery...

Prebisch HypothesisPrebisch Hypothesis

Demand Side Demand Side -- “Elasticities Pessimism” -- “Elasticities Pessimism”

Center: Manufactured product exports with high Center: Manufactured product exports with high income elasticity of demand income elasticity of demand

Periphery: Primary materials, low value added, Periphery: Primary materials, low value added, extractive exports with low income elasticity extractive exports with low income elasticity of demand of demand

Import Substitution: 1930s-1960sImport Substitution: 1930s-1960s

Restrict manufactured imports to reverse trade Restrict manufactured imports to reverse trade imbalanceimbalance

Promote domestic high value added industrial Promote domestic high value added industrial production to substitute foreign importsproduction to substitute foreign imports

Peripheral Growth and Debt Dependency:Peripheral Growth and Debt Dependency:A ModelA Model

XX**

p = mc * Yp = mc * Y**

cc (Peripheral Export (Peripheral Export Growth)Growth)

MM**

p = mp * Yp = mp * Y**

pp (Peripheral Import Growth)(Peripheral Import Growth)

XX**

= M = M**

(Balanced Trade (Balanced Trade Condition)Condition)

mc * Ymc * Y**

c = mp * Yc = mp * Y**

pp mp > mc mp > mc impliesimplies (Elasticities Pessimism)(Elasticities Pessimism)

YY**

c > Yc > Y**

pp (Dependent Growth)(Dependent Growth)

YY**

p > Yp > Y**

c c if and only ifif and only if X X**

< M < M* *

(Peripheral Growth with(Peripheral Growth with Trade Deficits & DebtTrade Deficits & Debt

Accumulation) Accumulation)

From Dependent Trade to Debt-Led GrowthFrom Dependent Trade to Debt-Led Growth

Growth with balanced trade was necessarily Growth with balanced trade was necessarily dependent growthdependent growth

For Peripheral growth rates to outpace the For Peripheral growth rates to outpace the Center required continuous recourse to debt Center required continuous recourse to debt accumulationaccumulation

Popular insurgency and the Cuban Revolution Popular insurgency and the Cuban Revolution shifted capital inflows from FDI to portfolio shifted capital inflows from FDI to portfolio and ‘hot money’ investmentsand ‘hot money’ investments

Phase II: Oil shocks & Debt Accumulation Phase II: Oil shocks & Debt Accumulation 1960s-1970s1960s-1970s

ISI Policies fostered rapid economic growthISI Policies fostered rapid economic growth Manufacturing growth confined to Brazil, Manufacturing growth confined to Brazil,

Mexico, and ArgentinaMexico, and Argentina Growth came at the expense of large debt Growth came at the expense of large debt

overhangoverhang World oil price escalation increased Latin debt World oil price escalation increased Latin debt

accumulation as petrodollars were recycled to accumulation as petrodollars were recycled to finance battered current accountsfinance battered current accounts

Stylized FactsStylized Facts

Latin America’s Current Account Deficits Latin America’s Current Account Deficits (%GDP)(%GDP)

19721972 2.2%2.2% 19821982 5.5%5.5% Latin America’s Growth RateLatin America’s Growth Rate 1960s - 70s1960s - 70s 7-10%7-10% Latin America’s Ratio of Foreign Debt to GDPLatin America’s Ratio of Foreign Debt to GDP 19751975 19%19% 1982 46%1982 46%

Debt Overhang & Increased Interest Rate Debt Overhang & Increased Interest Rate Sensitivity of Region’s External BalanceSensitivity of Region’s External Balance

Vulnerability to external shocks: 1980s Vulnerability to external shocks: 1980s Reagan-Volker anti-inflation policy -- instant Reagan-Volker anti-inflation policy -- instant financial insolvencyfinancial insolvency

CA -CA -KA -KA -OR +OR +

Reagan-Volker Interest Rate Hikes turn US Reagan-Volker Interest Rate Hikes turn US capital markets into a financial “black hole”capital markets into a financial “black hole”

Roll-over financing for Latin America dries upRoll-over financing for Latin America dries up

Phase III: The Lost Decade, Phase III: The Lost Decade, Hyperinflation, & Return to the Market Hyperinflation, & Return to the Market

1980s - early 1990s1980s - early 1990s Current Account (development deficits) no longer Current Account (development deficits) no longer

financed by Capital inflowsfinanced by Capital inflows Loans come due, debt service burden balloonsLoans come due, debt service burden balloons IMF calls for austerity to generate CA surpluses to IMF calls for austerity to generate CA surpluses to

generate foreign exchange to repay debtgenerate foreign exchange to repay debt Fiscal Deficits deepen to beyond 12% of GDP to Fiscal Deficits deepen to beyond 12% of GDP to

finance local currency spendingfinance local currency spending Historically pathological hyperinflation ensues -- a Historically pathological hyperinflation ensues -- a

follow-on from the debt crisisfollow-on from the debt crisis

Consolidation of the Washington ConsensusConsolidation of the Washington Consensus Orthodox vs Heterodox Stabilization Efforts in the Mid-Orthodox vs Heterodox Stabilization Efforts in the Mid-

1980s1980s Failed Heterodox programs in Peru,Arg, and Brazil push Failed Heterodox programs in Peru,Arg, and Brazil push

policy consensuspolicy consensus Capital Surges and Emerging Market Euphoria (Early Capital Surges and Emerging Market Euphoria (Early

1990s)1990s)

Phase IV: The Peso Crisis, Global Phase IV: The Peso Crisis, Global Financial Volatility, and Reform FatigueFinancial Volatility, and Reform Fatigue

Anatomy of a Currency Crisis and Global Anatomy of a Currency Crisis and Global ContagionContagion

CA -CA - 8%/GDP8%/GDP

KA + KA + 8%/GDP8%/GDP

OR OR fixed exchange ratefixed exchange rate

CA -CA -KA -KA -OR + OR + fixed exchange rate -- International Reserves Drainfixed exchange rate -- International Reserves Drain

Mexican Current AccountMexican Current Account

Political Economy -- Hot Money & Bad Political Economy -- Hot Money & Bad Political AssumptionsPolitical Assumptions

Peso Crisis in Detail

Exchange Rate CollapseExchange Rate Collapse

Lessons of the Peso Crisis for Latin AmericaLessons of the Peso Crisis for Latin America 1) 1) The current account is a key variable that should The current account is a key variable that should

not get “out of line”.not get “out of line”.– the current account deficit should rarely exceed 3% of GDP the current account deficit should rarely exceed 3% of GDP

in the long run.in the long run. 2) 2) The composition of capital inflows-short-term The composition of capital inflows-short-term

portfolio versus long-term direct investment funds-is portfolio versus long-term direct investment funds-is extremely importantextremely important..– Short term portfolio flows are very sensitive to short-term Short term portfolio flows are very sensitive to short-term

changes in interest rates and other political and changes in interest rates and other political and macroeconomic variables. FDI is less volatile and does not macroeconomic variables. FDI is less volatile and does not respond to short-term speculative factors.respond to short-term speculative factors.

Lessons of the Peso Crisis for Latin AmericaLessons of the Peso Crisis for Latin America

3) 3) Productivity gains are a fundamentally Productivity gains are a fundamentally important element in the way in which the important element in the way in which the overall external sector developsoverall external sector develops..

4) There is an inherent danger in using fixed 4) There is an inherent danger in using fixed exchange rates as a stabilization device.exchange rates as a stabilization device.– Experience has shown that they tend to generate Experience has shown that they tend to generate

real exchange rate overvaluation and loss in real exchange rate overvaluation and loss in external competitiveness.external competitiveness.

Lessons of the Peso Crisis for Latin AmericaLessons of the Peso Crisis for Latin America

5) The structure of Government debt is 5) The structure of Government debt is extremely importantextremely important– short-term debt represents a true danger under free short-term debt represents a true danger under free

capital mobility.capital mobility.

IMF and Crisis Adjustment in Latin AmericaIMF and Crisis Adjustment in Latin America

IMF Kill or Cure?IMF Kill or Cure?International Lender of Last Resort or Arm of Int'l Finance Capital?International Lender of Last Resort or Arm of Int'l Finance Capital?

Absorption Approach to Financial Programming Absorption Approach to Financial Programming

X - M = Y - (C +I+G)X - M = Y - (C +I+G)X - M = (S - I) + (T - G) X - M = (S - I) + (T - G) (net private savings, government surplus)(net private savings, government surplus)

IMF Conditionality: IMF Conditionality:

Debt Service or Economic Development?Debt Service or Economic Development?

Contagion and Banking LiberalizationContagion and Banking Liberalization

Nash, “Bankers are just like the rest of us, only Nash, “Bankers are just like the rest of us, only richer”...richer”...

IMF: 131 of member 181 nations experienced IMF: 131 of member 181 nations experienced banking crises in the last five years whose banking crises in the last five years whose resolution cost > 5% of GDP resolution cost > 5% of GDP

Prebisch RevisitedPrebisch Revisited

Final Note:Final Note: The composition of exports for Latin America The composition of exports for Latin America

is still dominated by low value added primary is still dominated by low value added primary product production…product production…– Commodity Composition of Trade: US & S. AmericaCommodity Composition of Trade: US & S. America

– Commodity Composition of Trade: US & Central Commodity Composition of Trade: US & Central AmericaAmerica

The Struggle Over Intellectual Property The Struggle Over Intellectual Property -- the Last Frontier Against the -- the Last Frontier Against the Commodification of Life ItselfCommodification of Life Itself

Digital Capitalism - Marketing and the Weightless EconomyDigital Capitalism - Marketing and the Weightless Economy Entrepreneurship, Franchising, and the Hollywood Entrepreneurship, Franchising, and the Hollywood

Organizational Model Organizational Model Intellectual Capital - Monopolizing IdeasIntellectual Capital - Monopolizing Ideas The “New Enclosures” -- Eliminating Public Space -- The “New Enclosures” -- Eliminating Public Space --

Appropriation of Genes, Frequency Spectrum, Culture, and Appropriation of Genes, Frequency Spectrum, Culture, and Social ReproductionSocial Reproduction

Access to Life Itelf as a Purchased CommodityAccess to Life Itelf as a Purchased Commodity