Transcript I. Trade Volatility, Trade Challenges, Trade Crises

Stages of Economic Policy in Latin
America: The Return of Prebisch in the
Age of Finance Capital
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Prebisch and ISI: 1930s-1960s
Oil Shocks and Debt Accumulation 1960s-1970s
The Lost Decade, Hyperinflation, & Return to the
Market 1980s - early 1990s
Emerging Market Euphoria - early 1990s
The Mexican Peso Crisis
Phase I: Trade Volatility, Trade Crises
Latin America’s Secular Decline in the Terms of Trade
Chronic Balance of Trade Deficits
Import Constrained Growth
1930s Depression and “Inward Development”
Prebisch Hypothesis
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Supply Side and Demand Side formulations-Unequal exchange in the dynamic relations of
trade between the Center and Periphery
– Supply Side: Perfect competition in peripheral
product and factor markets. Imperfect Competition
in the Center. Economic surplus from peripheral
productivity gains is transferred to the Center in
lower commodity prices.
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Productivity augmenting investment in the
Periphery...
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…generates 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 Hypothesis
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Demand Side -- “Elasticities Pessimism”
Center: Manufactured product exports with high
income elasticity of demand
Periphery: Primary materials, low value added,
extractive exports with low income elasticity
of demand
Import Substitution: 1930s-1960s
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Restrict manufactured imports to reverse trade
imbalance
Promote domestic high value added industrial
production to substitute foreign imports
Peripheral Growth and Debt Dependency:
A Model
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X p = mc * Y c
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M p = mp * Y p
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X =M
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mc * Y c = mp * Y p
mp > mc implies
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Yc> Yp
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(Peripheral Export Growth)
(Peripheral Import Growth)
(Balanced Trade Condition)
(Elasticities Pessimism)
(Dependent Growth)
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Y p > Y c if and only if X < M
(Peripheral Growth with
Trade Deficits & Debt
Accumulation)
From Dependent Trade to Debt-Led Growth
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Growth with balanced trade was necessarily
dependent growth
For Peripheral growth rates to outpace the
Center required continuous recourse to debt
accumulation
Popular insurgency and the Cuban Revolution
shifted capital inflows from FDI to portfolio
and ‘hot money’ investments
Phase II: Oil shocks & Debt Accumulation
1960s-1970s
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ISI Policies fostered rapid economic growth
Manufacturing growth confined to Brazil,
Mexico, and Argentina
Growth came at the expense of large debt
overhang
World oil price escalation increased Latin debt
accumulation as petrodollars were recycled to
finance battered current accounts
Stylized Facts
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Latin America’s Current Account Deficits (%GDP)
1972
2.2%
1982
5.5%
Latin America’s Growth Rate
1960s - 70s
7-10%
Latin America’s Ratio of Foreign Debt to GDP
1975
19%
1982
46%
Debt Overhang & Increased Interest Rate
Sensitivity of Region’s External Balance
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Vulnerability to external shocks: 1980s
Reagan-Volker anti-inflation policy -- instant
financial insolvency
CA KA OR +
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Reagan-Volker Interest Rate Hikes turn US
capital markets into a financial “black hole”
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Roll-over financing for Latin America dries up
Phase III: The Lost Decade,
Hyperinflation, & Return to the Market
1980s - early 1990s
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Current Account (development deficits) no longer
financed by Capital inflows
Loans come due, debt service burden balloons
IMF calls for austerity to generate CA surpluses to
generate foreign exchange to repay debt
Fiscal Deficits deepen to beyond 12% of GDP to
finance local currency spending
Historically pathological hyperinflation ensues -- a
follow-on from the debt crisis
Consolidation of the Washington Consensus
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Orthodox vs Heterodox Stabilization Efforts in the Mid1980s
Failed Heterodox programs in Peru,Arg, and Brazil push
policy consensus
Capital Surges and Emerging Market Euphoria (Early
1990s)
Phase IV: The Peso Crisis, Global
Financial Volatility, and Reform Fatigue
Anatomy of a Currency Crisis and Global
Contagion
CA - 8%/GDP
KA + 8%/GDP
OR fixed exchange rate
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CA KA OR +
fixed exchange rate -- International Reserves Drain
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Mexican Current Account
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Political Economy -- Hot Money & Bad
Political Assumptions
Peso Crisis in Detail
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Exchange Rate Collapse
Lessons of the Peso Crisis for Latin America
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1) The current account is a key variable that should
not get “out of line”.
– the current account deficit should rarely exceed 3% of GDP
in the long run.
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2) The composition of capital inflows-short-term
portfolio versus long-term direct investment funds-is
extremely important.
– Short term portfolio flows are very sensitive to short-term
changes in interest rates and other political and
macroeconomic variables. FDI is less volatile and does not
respond to short-term speculative factors.
Lessons of the Peso Crisis for Latin America
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3) Productivity gains are a fundamentally
important element in the way in which the
overall external sector develops.
4) There is an inherent danger in using fixed
exchange rates as a stabilization device.
– Experience has shown that they tend to generate
real exchange rate overvaluation and loss in
external competitiveness.
Lessons of the Peso Crisis for Latin America
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5) The structure of Government debt is
extremely important
– short-term debt represents a true danger under free
capital mobility.
IMF and Crisis Adjustment in Latin America
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IMF Kill or Cure?
International Lender of Last Resort or Arm of Int'l Finance Capital?
Absorption Approach to Financial Programming
X - M = Y - (C +I+G)
X - M = (S - I) + (T - G)
(net private savings, government surplus)
IMF Conditionality:
Debt Service or Economic Development?
Contagion and Banking Liberalization
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Nash, “Bankers are just like the rest of us, only
richer”...
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IMF: 131 of member 181 nations experienced
banking crises in the last five years whose
resolution cost > 5% of GDP
Prebisch Revisited
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Final Note:
The composition of exports for Latin America
is still dominated by low value added primary
product production…
– Commodity Composition of Trade: US & S. America
– Commodity Composition of Trade: US & Central America
The Struggle Over Intellectual Property - the Last Frontier Against the
Commodification of Life Itself
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Digital Capitalism - Marketing and the Weightless Economy
Entrepreneurship, Franchising, and the Hollywood
Organizational Model
Intellectual Capital - Monopolizing Ideas
The “New Enclosures” -- Eliminating Public Space -Appropriation of Genes, Frequency Spectrum, Culture, and
Social Reproduction
Access to Life Itelf as a Purchased Commodity