Terms in this set (29)
In the 1970s, Latin American countries faced what economists call negative real interest rates when they were borrowing. What does this mean, and why did that make it attractive for Latin American countries to borrow from commercial banks?
Negative real interest rate occurs when inflation or cost of goods rise faster than the interest rate, or any time that the interest rate is less than inflation. It made it attractive to LA countries to borrow, because it made the debt repayments seem very cheap (pay back less than you borrow)
Structuralists were critical of the international division of labor that resulted in Latin American countries exporting primary products to core countries,such as the United States and Europe. What were their main concerns about how specialization in primary product exports would affect Latin American growth and development?Give one other reason why agricultural and natural resource exports might be problematic to long-term growth and development outcomes
Terms of trade declines and lack of technological progress would impede Latin America's growth and productivity outcomes. They could also be problematic for any of the resource curse reasons -profligate borrowing, corruption, dutch disease and so on.
Import substitution industrialization in Latin America was not able to absorb the increasing urban supply of labor. Give two economic explanations for why the manufacturing sector provided relativelylow labor absorption during this eraeven during its periods of relatively strong growth
Availability of cheap machinery. Machinery was cheap due to lower tariffs and overvalued domestic currencies. Labor friendly legislation did not provide the incentivefor firms to higher more workers.These factors made it relatively less attractive to hire labor and more attractive to hire capital. The inefficiency of the ISI model and getting stuck in final consumer goods are also reasonable answers
Engerman and Sokoloff develop an argument for why the U.S.and Latin America experienced divergent experiences with respect to industrialization based on their colonial heritage. Offer one supply-side and one demand-side explanation for the U.S.' relative success.If the South had won the U.S. Civil War in the 1860s, why might the U.S. industrialization experience have been more like Latin America's?
Potential supply side arguments: US had broader access to education and more public investment in infrastructure which helped to improve productive potential for industrialization. US also had a family-farm based agricultural model of grains and livestock that generated more industrial linkages than some of the plantation crops.Potential demand side arguments: More equal income distribution and higher average incomes of typical consumers provided a broader base of demand thathelped to reach economies of scale in industry. South would not have promoted public education for the masses or had the broad income distribution tosupport industrialization. This is similar to Latin America
Describe two potential risks of using a fixed exchange rate policy to combat inflation and give an example of a country that experienced a 'crisis' of some sort following this type of policy.
Fixed exchange rate policy can make imports look cheap when the real exchange rate is appreciating (higher domestic inflation than elsewhere), and this can lead to balance of payments pressures.Fixed exchange rate policy can also lead to major financial inflows and later outflows (capital flight) if investors become nervous about the sustainability of the fixed exchange rate.Both of these can undercut investment and growth in the economy
A resource boomcan give rise to "Dutch Disease" effects of over-dependence on one commodity export, an over-developed non-tradable sector, and inflation. This question ask you first to explain why a larger price increase or discovery of a prime reserve in oil, for example, can give rise to these' Dutch Disease effects, using the two mechanisms identified in the Dutch Disease model presentation. Next, describe two conditions under which these effects might not be of much concern, in terms of sustained growth and development. Finally, briefly explainone policy approach that might be used to reduce the potential ill-effects of 'Dutch Disease'
Resource movement and income spending effects lead to over dependence on the boom sector and the NT sector. These effects are explained in the notes and diagrams. These outcomes might not be a concern if prices stay high in the boom sector and ifinvestments in physical and human capital for the two sectors are readily reversible. Sterilization/sovereign wealth funds are examples.
Neoliberal policies of the 1990s rested on three main pillars: trade liberalization, privatization, and deregulation.Explain how each of these pillars might have contributed to the major upsurge in FDI that many countries experienced in the 1990s. Then, perhaps based on a country that you know better from the presentations, discuss what types of FDI were common, and what those types might mean for improving the export and productivity outcomes of the country.
Trade liberalization can lead to a surge in FDI if the country has a potential comparative advantage to pursue (e.g., Peru in mining); privatization can lead to asurge in FDI via first attracting foreign investors to buy the state-run enterprises and second by bringing attention of investors to other opportunities in the country (open for business argument); deregulation can lower barriers to investment and raise expected returns, both of which could be attractive to foreign investors. Lots of options here depending on the country and what type of FDI you think they might attract
Argentina, Brazil, Chile, Peru, and several Central American countries were ruled bymilitary governments in the 1960s-1980s. Choose one or perhaps two of those countries, identify it (them) at top of your response, and then characterize the basic economic strategies the military government(s) pursued and how those strategies affected growth, trade, and inequality outcomes. Discuss also two or three challenges the succeeding civilian governments faced once the military stepped down from power. Which of those challenges were they able to address with some success and which without much success? Do not worry about explaining why they were or were not successful.
Basic story would be that there is a range of strategies from populist ISI (Peru under Velasco) to authoritarian international monetarist (Chile under Pinochet, Argentina under Hoz) to state-led ISI (Brazil). Overall, most of the regimes did not have particularly good growth, trade, and inequality performance. Arguably the 1980s for Pinochet went well in terms of export and GDP growth
Key Policy Measures of the Washington Consensus
All aimed at attracting foreign capital flows: tight monetary policy and high interest rates; exchange rate fixing or controls; privatization; deregulation; trade liberalization; regional trade integration (i.e. NAFTA)
Outcomes: increase net private capital inflows, growth restored with inflation declines; trade deficits again because of sufficient private capital inflows
Total capital inflow to Latin America 1970s-90s
Primary source of capital was FDI; privatizations play a big role as do gov't bond sales to int'l financial markets
What did L.A. fail to do during the 1990s recovery period
improvements in human capital and training, job creation and wage growth, reductions in inequality, more investment in tradeables sector, technology improvements, export dynamism, move away from foreign dependence on foreign capital flows (still require debt relief)
Factors that influence capital flows:
market size and potential growth; interest rates; privaization opportunities; FDI regulations; exchange rates; fiscal stability; relative returns with risk spreads
Four types of Capital Flows
(1) FDI: direct purchase of assets by foreign owners (2) Portfolio bond investments: bonds issues by private firms or government that are purchased by foreign investors
(3) portfolio equity investments: stock share of local firms and cash holdings by foreign investors
(4) bank and trade-related lending: loans by banks or companies to firms or gov't
Pros of 1990s Capital Flows
Allows economic reactivation; strengthens external balances and allows trade deficits to be run as economy is consuming and investing; technology transfer and incresed productivity; learning and spillovers; export orientation more likely
Concerns of 1990s capital flows
Footloose portfolio investments - equity less so than bonds; market power of FDI, especially privatizations of public monopolies; may not be modernizing key export sectors and putting the country on a sustainable footing in terms of future export growth to pay off large consumption and investment expenditures of present
Monetarist Theory of Inflation
Inflation is always and everywhere a monetary phenomenon; deficit financing by printing more pesos to pay off debt erodes confidence in the peso; correlation of fiscal deficits, increasing money supply & inflation
Structuralist Theory of Inflation
Multiple causes related to the structure of the economy; external price shocks, weak gov't systems, inertial inflation. SOLUTIONS: controlling money supply, break inflation, strengthen tax systems
Trilemma of Anti-Inflation Policy
cannot have domestic monetary policy, open capital accounts, and fixed exchange rates at the same time
Why does the Trilemma of Anti-Inflation Policy exist
if exchange rates are fixed and capital accounts are open, then flow of capital determines the money supply (preferred by monetarists); and if money supply management is key, and exchange rates are fixed, then you need capital controls (preferred by structuralists)
Benefits of privatization
reduce govt spending, lower prices, gain govt money, more competition, more efficient, more tech change, more access
Costs of privitization
monopoly, regulation challenges, less access, loss of national control over industrialization, externalities may not be privately appropriable
trade agreements rationale
improve access to key markets, deepen the gains from trade and liberalization, attract FDI (NAFTA and Mexico - Mexico seeking FDI, tech and industry, higher wage jobs
customs union with progressive tariff reductions
Types of Capital Flows
FDI, portfolio bond investments, portfolio equity investment, bank and trade lending
Pros of Capital Flows
economic reactivation, strengthens external balances and allows trade deficits to be run as economy is consuming and investing, technology transfer and increasing productivity, export orientation more likely
Cons of Capital Flows
privitization of public monopolies, may not be modernizing key export sectors, footloose portfolio investments
IMF plan to deal with Debt Crisis
problem of temporary liquidity rather than insolvency; advocated for country-by-country negotiatioons between bank and IMF to reschedule debt in return for austerity programs to stabilize balances; goal of fully paying off interest and loan
Baker Plan to deal with Debt Crisis
pushed World Bank to loan more to reactivate growth; encouraged banks to do more lending and looked toward public money to reactivate; but banks avoided putting out new money
Brady plan to deal with Debt Crisis
voluntary debt reduction systems;Mexico went first