Transcript From Structuralism to the New Institutional Economics

From Structuralism to the New
Institutional Economics
By Ryan Forslund
The political Economy of Latin American
Development
Albert O. Hirschman
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LES TRENT GLORIEUSES
Debt crisis of 1982 lead to fall in raw material prices,
reduction in imports, public expenditures, and private
investments
There has been uneven growth in the region since the crisis
There was growth before this yet it was not acknowledged.
This shows the trend to recognize the good only in a time
of recession so it can be contrasted.
One reason is the fact that much of the good went hand in
hand with the bad: social tension, poverty from
urbanization, urban and rural divide, so on
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From 1945-1980 serious improvements were made in Latin America
Increase in population, GDP, higher life expectancy, better health
care, education, lower infant mortality, smaller families, better sex ed
Important to note with the growth in population the living standards
did increase, and more educated on how to control population
growth
Can be seen that improvements in all these areas have even taken
place in the poorest regions
The improvement is largely due to education, even in times of
downturn or recession the lessons they have learned have not been
forgotten: despite developmental fluctuations the social advances
will remain
There are things to fear however: oil prices, debt in the region, and
so on
People in Latin America feel they must stop looking in the past for
answers and try to find something completely new
Industrialization and deindustrialization in Argentina and
Chile
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Divide between the countries of the Rio de la Plata and the tropical
countries
Raul Prebisch said all of Latin America must join together in coming
out of the role of supplier of raw material to the world economy: to
do so must industrialize
Yet the tropical, previously poorer countries, have now surpassed the
growth of the others (Brazil and Mexico)
These countries were more populous and focused in on the domestic
market due to the ISI system: the share of national income on the
continent by Brazil and Mexico was at 61.3% in 1981
Two criticisms made by those that did not develop: industrialization
catered to higher classes and “inward-oriented” causing misallocation
of resources, balance-of-payments problems, and rent-seeking
Failed to see problems with ISI as ‘growing pain’ that could be fixed
by incremental policy making
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There were instances were the growing pain theory was applied and
ISI shifted somewhat to substantial exports of manufactured goods
due to policy
Yet military regimes would have a profound effect on economies
Had no problem eliminating hundreds of industries causing massive
unemployment, even though some industries were corrupt
Monetarist policies enacted in Argentina and Chile: overvaluation of
domestic currency and high domestic interest rates
This lead to many large companies to borrow foreign money at a
much lower rate yet when exchange rate ultimately devalued interest
rates shot up cause the loans to be to great to handle
Government had to step in: originally said economic mission was to
make economy more privatized yet ended up controlling central bank
and many private industries
Desubstitution of Imports and a Curious Convergence in
Mexico
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The Mexican oil boom and the aftermath
Relatively steady growth in Mexico until oil was found
By 1975 it became major producer and exporter of oil
PEMEX brought in ¼ of the countries total revenue
There was a large increase in the demand for imports to match their
exports and this would lead to the eventual downturn
Though it did not deindustrialize it did go through something called
‘import desubstitution’
Imports soared and domestic prices rose and government refused to
do anything to slow the flow of imports: this lead to the debt crisis
Mexico thought this oil boom could help development yet they did
not keep the imports and capital flight under control
“Forced-March Industrialization” in Brazil
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As stated earlier Brazil was one of the continents economic powers:
despite having no oil and depending on its import, this was blessing is
disguise
Despite having largest debt (1 of every 3 $ from exports goes to debt)
Yet have been growing due to expansion of exports and cuts in
imports, reviving domestic economic activity
This has been possible because of brand new changes being made
and importantly military to civilian rule (Geisel Administration did
however enact helpful developmental plans)
Despite oil shock in 1973 Brazil handled it different then others:
instead of restrictive economic policies they moved investments away
form cars, focus on final stage of ISI: capital goods (chemical and
metallurgical industries)
O’Donnell says final stage of ISI makes it difficult for democratic
government in Latin America this is why successes only acknowledged
after the military regime was gone
From Import-Substitution to Import-Preemption
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A country is considered to be economically maturing when they
undermine the ISI system, whether it de intentional or not
They can do this intentionally by choosing an industry and enacting
policy to ensure their domestic market produces it better then the
imports
This is known as ‘import-preempting industrialization
Brazil used this idea with regard to the info-tech industry,
minicomputers: using Reserva de Mercado the spur their domestic
market to start producing in a certain amount of time
Conditions for this to work in Brazil: strong potential domestic
market, helps national defense, pick an important industry
Again a certain amount of time is given to the domestic company foe
it to ‘grow up’
It must have a strong balance between using previous knowledge on
producing the product as well as a reinvent spirit to make it their own
Must be easily profitably even captured by LCDs cheaper labor
The “Heterodox Shock” Therapy
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This was to bring down inflation in Argentina and Brazil (Plan Austral and Plan
Cruzado)
Each country had three digit inflation for years and were running very close to
hyperinflation
They needed to find a way to try and make inflation tolerable
Structuralists saw ‘fundamental’ inflationary pressures from domestic social
structures (land tenure) and the ‘propagation’ phenomena (wage-price spiral)
All other options were unappealing to solving the problem and conceived the
formula know as the ‘heterodox shock’
1st the old currency is replaced with a new one, 2nd prices and wages are
temporarily frozen, 3rd indexation of wages, salaries, and monetary instruments
abolished, 4th government cuts its borrowing from the central bank, 5th prereform
contracts involving future payments are assumed to have made provisions for
future inflation
This also tried to end the tug-of-war between the social groups for income shares
Eventually this failed but must be noted why: this was during new democratic
governemnts that had to deal with what the military left behind and hyperinflation
would have be devasting to these new governments and a cycle back to military
regimes could take place
This however did not happen because the people were happy to be ride of the
military regime and despite its failure they were willing to try
Conclusion
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One of the main problems between North and
South America was the lack of communication,
especially with regard to the huge debt between the
two
Latin America is seen by most as a region of
borrowers, despite the economic notion that deals
involving multiple parties are made for mutual
benefit
As noted some countries were able to face the many
hardships better then others (Brazil and Colombia)
From Structuralism to the New Institutional Economics
Jonathan C. Brown
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Structuralism arose out of the depression and its antithesis
came out of the failure of this: the wreckage of ISI thought
to bring about hyperinflation, debt, social unrest, rebellions,
and ultimately military regimes
This discredited structuralism and brought on neoclassical
economics
Structuralists argue there must be state lead development
and states ownership of means of production
Institutionalists look for the promoters of growth in the
institutional arrangements: the ‘rules of the game’
Structures, Endowments, and Institutions in the Economic
History of Latin America
John H. Coatsworth
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Despite some growth after the WW2 ear, many are
now worried yet again about the long run in the
region, specifically structures, endowments, and
institutions on growth
With looking for ways to estimate long term effects
of growth they have been able better look at
historical trends, potentially answering old questions
and posing new ones
Latin America’s development and growth can be
looked at from pre-colonial to colonial times, up to
independence
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It is now accepted while under Spanish or Portuguese
control the region had per capita rates at least equal to those
of western Europe
Following the independence movements starting in 1810
very little growth occurred
Following 1870 the big eight economies had a larger growth
rate then many advanced countries
With the move to ISI yet another downturn was faced,
inward-oriented growth strategies have not proven to work
well at all, despite ISIs failure no alternative has been found
As with the economic peaks and valleys living standards too
rose and fell: stagnation till the late 19th century when there
has been slow but steady increases since
A notable difference between Latin Americas growth and
the west is living standards and economic growth rose
together in L.A. and in the west living standards came much
later after development
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Two post WW2 trends for inequality were: state-led
ISI which increased wage inequality (protecting
certain industries and higher wages for state
employees) and cold war politics promoting elites to
be friendly to the US
Two affects from inequality: slowed improvements
in living standards and it kept poverty rates
exceptionally high
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Three important things have been learned about the structuralists and
the cepalinos (worked for CEPAL, the UN Economic Commission
for Latin America) 1st the created ambitious programs of economic
research and data collection, 2nd the indorsed the ISI based on high
tariff protection as dominate economic policy strategy, 3rd the US
pressured the adoption of ISI for many LDCs
Structuralists and dependency school writers saw institutions as the
key to economic success of failure (one example give by Love is the
concentration of land ownership)
Economic growth needed to be carefully regulated by a powerful
state (thought was aggressive state could manipulate external trade
and capital flow in order to promote domestic industry
They did have two good assumptions: 1st the less-developed world
could not follow the path taken by the developed world, 2nd external
dependence exacerbates economic inequality
Brazil and Argentina did however show that some countries did need
state-led management strategies
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After the failure of ISI much of Latin America Started
opening up to more external trade and investments but it is
important to note that economic reform is not enough by
itself to ensure growth
Institutions play a role and have two parts, politics and
path dependence
Engerman and Sokoloff say endowments lead to
concentration of wealth (land ownership) elite power
Yet many refute this, elites did not monopolize land
ownership, while those in Europe did, they were ‘colonial’
and didn’t have much power
While this trend did eventually happen, it was long after
the colonial period and for different reasons: what they say
hampered growth actually helped it because elites need to
bring in capital and growth was its by product
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“Crony Capitalism”
aka ‘vertical political integration’ (VPI)
This was seen in Mexico after 50 years of hardship
and was the best way for them to have some growth
(protection for elites in politics, bankers,
industrialists and foreign companies )
Some VPI government were aggressive but also they
were considered ‘farsighted’ at times and they were
even able to take on populists tones for temporary
periods of time
Conclusion
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It was found that the institutional deficiencies that
hampered growth and development are not in the
factor endowments but the political economy of
conquest and enslavement
Thanks to a export-led globalization there has been
the opportunity for L.A. to shift away from their
past institutions and try to find new paths
Scholars in L.A. must look at development with a
skeptical eye yet they must also be open to
experimentation in order to bring a new better
system to the region
The Origins of Structuralism
H.W. Arndt
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Main points: world as inflexible, many obstacles to change,
little adaptation, resources being stuck, applied to LDCs:
they look to manage change by administrative action
The Doctrine of Market Failure: capitalism unjust,
unstable, and prone to collapse
Structuralist Theory of Inflation: Basic Inflationary
Pressures (structural limitations, rigidity or inflexibility of
the economic system) lack of movement of resources
hence cannot adapt to rapid demand
All this leads to rigid market structures, monopolies,
immobile labor and capital, and inequalities in returns to
labor and capital
Government Failures in Development
Anne Krueger
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The role of government is to provide infrastructure to facilitate
economic development, should also be able to compensate for
market failure
Huge governmental failures lead to high cost public sector
enterprises and on the other hand failure of transportation and
communication facilities: this lead to large scale corruption
What is the government? In LDCs was thought that government
intervention was needed, this lead to protection of monopolies
It is hard to find a government that is selfless, yet this is what is need
to enact positive change
Government activities should be done on a large scale, protection of
laws, provision of information, and provision of public services
It must be noted that actions taken by government are not costless,
second is that large administrative action must be put into these
actions, low-rent seeking policies must be adopted, and what is done
must be transparent
Import Substitution Industrialization
Cardoso and Helwege
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Primary commodity markets are unstable
Latin American terms of trade: dollar price of exports over dollar
price of imports: this shows a deteriorating terms of trade
L.A. can export goods that are natural resources and labor steps
must be taken to shift countries in L.A. from capital poor to rich
The goal of ISI was to promote new industries but this had
problems: protection lead to overvalued exchange rates, exaggerated
industrial growth, as taxes on exports failed to grow inflation
occurred
Criticisms of ISI: uneven protection, overcapacity, agriculture,
budget deficits, interest rates, labor, foreign direct investment
After it failed there were improvements within the countries, living
stands especially yet economic growth was lacking
After ISI how well a country would pull through was in large part
due to how successful they were in the export markets
Discussion
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1. What do you think of the idea that the good
accomplishments are only acknowledged in
times of hardships? Do you believe this?
2. What do you think of Structuralism? Do you
think it was a bad idea to adopt from the start or
did any good come out of it?
3. If other countries handled the oil shock in the
way Brazil did do you think they would have
been better off ?