Transcript Bureaucratic Authoritarianism, Foreign Investment, and

Bureaucratic Authoritarianism,
Foreign Investment, and Debt
Crisis
Hichol Cho
The New Authoritarianism in Latin America
- David Collier
-
The industrialization in Latin America resulted in emergence of the
Bureaucratic Authoritarianism. The gov. is ruled by the military as
the institution rather than by individual military rulers.
- The relationship b/w democracy and industrial modernization does
not always exist.
- Political economic model by the bureaucratic authoritarian
countries is often inconsistent and involves corruption and income
inequality.
-
Latin American countries are generally characterized by late
industrialization, and reliance on foreign investment and
technology.
The Bureaucratic Authoritarianism
-- Hirschman argues that understanding the different phase of
industrialization and its important consequences can help us
understand the emergence of the Bureaucratic
Authoritarianism.
-- Jose Serra states that there is a relationship b/w the
economic development and emergence of the Bureaucratic
Authoritarianism. He argues that it will result in 1)the
exploitation of working class, 2)deepening of the industrial
production, and 3)economic rationality.
Three distinct political phases in Latin America
-- O’Donnell
1. Oligarchy – the political competition is limited. The elite of
the primary product export sectors dominates the state.
2. Populist – it is based on multi-class coalition of urbanindustrial interests, including the industrial elites and the
urban popular sector. The state promotes the initial phase of
industrialization focused on consumer goods.
3. Bureaucratic Authoritarianism – This non-democratic
system excludes the popular sector. The state is controlled by
the technocrats. They perceive the popular sector as an
obstacle to the economic development. This model promotes
the advance industrialization.
This system was seen in;
-- Brazil (post-1964)
-- Argentine(1966-1970, 1976)
-- Chile and Uruguay(post-1973)
Economic and Social Change
The three main factors influenced the transition from one
system to another, which are Industrialization,
Activation of the popular sector, and Technocratic
role.
1. Industrialization,
-- The domestic firms begin to produce for the local markets
previously supplied by imports. These firms are protected by
tariff and subsidies.
-- The cost of importing the intermediate inputs is high, and it
leads to the deficit and inflation. The gov tries to solve this
problem by deepening the industrialization through domestic
manufacturing of intermediate inputs.
--This would require the foreign investment. The gov would
make a new policy to draw the foreign investment.
2. Activation of the Popular Sector,
-- The popular sector becomes increasingly powerful after the
initial phase of industrialization. They will oppose the new
fiscal policy. This would result in political and economic
crisis.
3. Technocratic Role,
-- The industrialization enlarges technocratic society. They
perceive the popular sector as an obstacle to the economic
growth. As a result, they would make the intervention in
politics, economy, and social life. They would gradually form
the bureaucratic Authoritarianism.
External Debt and Macro Economic Performance in Latin
America and East Asia,
- Jeffrey Sachs
Why East Asia performed better than Latin America?
-- External shocks in Asia were less severe than those in Latin
America.
-- Latin America over-borrowed.
-- Latin America mismanaged the exchange rate and trade.
-- While Asian economies are market oriented, Latin America is
not.
-- Compare to Asia, trade in Latin America deteriorated more
sharply. Also, Latin America was more affected by the higher
interest rate.
The Role of External Shocks
Was the external shock accountable for the economic crisis in
Latin America?
-- The sustained rise in the U.S. interest rate after 1979
deteriorated Latin America’s existing debt because their
currencies were pegged to dollars.
-- Asian countries’ debt was non-banking borrowing, originating
from export credit agent.
-- HOWEVER, the real interest rate shock was large and negative
only for Brazil, Korea and Chile. This implies that Latin
America’s poor economic performance was not linked to the
external shocks. In fact, Korea and Thailand had larger
negative shock.
Comparing the debt service to export ratio.
--
Latin America’s debt was higher as proportion of export. This
made them vulnerable to the shocks.
-- In Latin America, the debt servicing requirements exceeded
total export in 1980-1983, while East Asia’s debt was below
the export.
Trade Policies and Exchange Rate Management
Latin America’s Trade failed due to the two main failures.
1) As debt is accumulated, the price of tradable goods should rise
to encourage the movement of resources into the tradable
goods sectors. However, it did not happen in Latin America.
2) Investment in tradable should be in sectors that are profitable
when outputs and inputs are evaluated at the world price,
rather than the tariff distorted price. However, they failed to do
so.
Three sectors approach;
the importable, exportable, and non-tradable
The author argues that two sectors approach (only the importable
and exportable) can be misleading. Three sector approach can
better explain the trade problem in Latin America.
-- The protectionist policy does not hurt export when resources
are drawn from the non-tradable into the tradable. This is the
case in Japan and Korea, where they maintain the rapid export
growth with the protected import.
-- On contrary, Latin America’s over-valuation benefited the
import at expense of the export.
Political Economy of export led growth
-- There is the link b/w the shift to ISI and decline of the
agricultural sector. In Latin America, urban workers and
capitalists are important constituents. Thus, their interests were
served first. In Asia, the rural sectors have more power.
-- Since the urban workers prefer the over-valuation, Latin
American currencies will appreciate to meet the interest of
urban workers.
-- In Asia, once the export promotion begins, the industrial
exporters gain the power and continue the undervalued
exchange rate. In Latin America, the exporters will eventually
grow weak under the influence of over-valuation.
Latin America’s Debt Crisis
- Franko
-- The borrowing to support ISI becomes an unstable
foundation for growth because the borrowing might outpace
the payment ability of the country.
-- ISI is driven by the failure of private sectors to provide
critical goods and services in the economy. As a result, the
state invests in sectors with huge capital requirement for entry.
However, this state owned firms are generally inefficient.
External Shocks
-- The real interest rate was negative from 1974 until 1977. This
gave the strong incentive for Latin America to borrow. In
addition, banks were willing to lend to the state-owned firms.
--However, the external condition radically changed in 1979. The
interest rate increased rapidly. Consequently, Latin America
fell into debt.
--The value of the currency began to fall and this encouraged
people to invest outside of their country = Capital Flight.
--Overvaluation of currency caused the further capital flight. It
further increased the deficit.
Why would a country allow overvaluation?
1. Strong currency value allows companies to buy the
intermediate inputs at lower cost, which is good for ISI.
2. When countries peg their currencies to the strong foreign
currency, overvaluation may happen.
3. When countries tries to depreciate their currency after noticing
the overvaluation, it might cause the additional inflationary
shock.
Questions
1. Which factor was most accountable for creating the
economic crisis?
2. What lessons can be learned from the economic crisis
in Latin America?
3. Were internal or external causes more to blame in the
Latin American debt crisis?