Ideas, Policies and Economic Development in the Americas

Esteban Pérez-Caldentey, Matias Vernengo

• Publisher: Routledge
• Year: 2007
• ISBN:
  9781135986520
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The interplay of ideas and policies is central to understanding the historical evolution of economies. Ideas shape economic institutions and real economic constraints are the source of new economic ideas. The history of economic ideas, both those that are fairly recent and those that are considerably older, may provide a fertile ground for new appr

1 Introduction

Ideas, policies and economic development in the Americas

Esteban Pérez Caldentey and Matías Vernengo¹

The evolution of economies is a contingent historical process shaped to a great extent by the interplay of ideas and policies. Ideas are “more powerful than commonly understood” and can under certain circumstances have a definite and long lasting impact on policy.² In turn, policies both when they are deemed successful or unsuccessful provide a fertile ground for the development of new ideas or the re-casting of old ones. The economic history of Latin America and the Caribbean over the past 50 years exemplifies the symbiosis, by no means a linear one, between ideas and policies.

The economic history of Latin America and the Caribbean is characterized by a succession of policy phases associated with different conceptual frameworks embodying contrasting and at times contradictory visions of the workings of emerging market economies.

Following World War II, Latin America governments focused their efforts on policies to promote “industrialization” and growth. At this stage development was conceived as a process of factor accumulation and more specifically as a process of capital accumulation. Capital accumulation and industrialization was an essential requirement to break the cycle of poverty and “underdevelopment,” especially for those countries that were most affected by declining terms of trade for primary commodities. The development strategy consisted of obtaining the supply of capital required for development, creating the inducement to investment and generating the savings capacity to finance that investment.

As the development focus shifted from physical capital to human capital,³ greater interest was placed in social development objectives, including health, education and nutrition. The quest for growth and also that for social objectives depended on an efficient and flexible price mechanism in developing countries. This assumption was strongly questioned by the structuralist school. Structuralism argued that price, factor and market rigidities led to misallocation of resources and structural disequilibria.⁴ Structural heterogeneity, duality and polarization were some of the key concepts coined and developed by structuralist thinkers.

The move away from policies associated with structuralism towards those of the Washington Consensus was spurred by Latin America’s debt crisis in the 1980s, persistent macroeconomic disequilibria and high rates of inflation. The Washington Consensus championed economic stabilization and structural reform policies which were seen as pre-conditions for the efficient functioning of Laissez-Faire.⁵ The implementation of the Washington Consensus policies was accompanied by a reduction in inflation, but at the same time these managed to stifle growth and were not able to reduce inequality or improve economic and social welfare.

The Washington Consensus was questioned on that very basis leading to a revival and rediscovery of several insights of the old structuralist school.⁶ Among these the most important include the change of the meaning of stabilization and to “reform” the structural reforms.⁷

More importantly the same international organizations such as the World Bank that advocated structural reform and orthodox macroeconomic policies have changed their views to champion the expansion of government expenditure on capital and human infrastructure as a key element in the development process much like the early development theorists. This represents a break with the very foundations of the Washington Consensus and signals its definitive demise.⁸

In Latin America and the Caribbean the interplay between ideas and policies seems to take the form of that of a circular flow. Either within the neoclassical economic literature or in the (neo)-structuralist tradition, much of the policy debate is about the re-casting of old ideas. The echoes and influence of the past seem to be forever present and much of what passes for new ideas are nothing but old ideas in new goat skins. As a result the current Latin American and Caribbean approaches are unprepared to confront new development challenges.⁹ There is a growing divide between theory and reality; and no current development approach is able to bridge the gap. From the point of view of the editors of this book the lack of adequate attention paid to the relationship between ideas and policies explains part of this absence of progress.

Indeed, the history of economic ideas and their intricate relation to economic policies remains a relatively unexplored field in Latin American and Caribbean studies. This book contributes to this emerging literature.¹⁰

A unifying theme in all the contributions to the book is the understanding that there is a close relationship between the behavior of economies over time and the nature and evolution of ideas and that both are mediated by economic policy. Ideas shape policy and policy dictates to a large extent behavior. Also the interpretation of given historical episodes can alter the nature and scope of ideas. For this reason those interested in Latin American and Caribbean economic development should look back with a critical eye to the economic ideas of Latin American and Caribbean authors. Conventional wisdom, whatever the nature of its ideology – often based on ideas imported from abroad – misperceived the real obstacles to economic development in the past and the same may be happening at present.

Illustrative examples include the misconceived idea that free trade would have positive impact on growth, dominant in the aftermath of independence, or the lack of understanding of the importance of financial development were central in shaping institutions. Similarly ideas regarding proper exchange rate policy, the necessary degree of openness to foreign capital, and the appropriate policies to combat inflation had enduring effects on economic policies, and the resulting economic structures of the countries in the region.

A second important unifying theme in the book is that the limitations of the structuralist approach and the failure of the Washington Consensus to live up to its promise underscores the need to renew interest and develop critical perspectives on development economics. The contributors to this volume view economic history and history of ideas as a source fountain for the development of new and original ideas.

The point was hammered home by Celso Furtado. Furtado recounts Prebisch’s farewell from ECLAC in a conference in Mar del Plata in 1963. Reflecting on the importance of intellectuals and of ideas in the process of economic development, Furtado ended his own speech at the conference suggesting that “for men that project themselves with creative thinking and that have the ability to influence reality with the power of their ideas there are no permanent departures, because they are always present” (Furtado, 1989, p. 167).

A third unifying theme is that reality can not be conformed to fit preconceived ideas, but that ideas should be modified and molded to fit a changing reality. An example is provided by ECLAC’s changing conceptual framework. Over time the early preoccupation among ECLAC authors and the Latin American structuralists shifted from the technological gap with the center to the clear gap between Latin America and the more successful industrialization of East Asian economies – Fajnzylber (1983) being the most important mark of the intellectual change. The official report, Transformación Productiva con Equidad (ECLAC, 1990), was concerned with the successful integration of Latin America into the world economy. The changing structure of international markets, where the Fordist paradigm was transformed by flexible specialization techniques or Toyotism, is crucial in this view. Export orientation and a greater degree of openness were then seen as part of a strategy to reduce technological dependence.¹¹

Last, but not least, the book takes seriously the role of ideas imported from abroad, and their effects on economic development. According to Roberto Schwarz (1992, p. 34) “it is true that the backwarderness and the attempts to keep up have internal causes, but it is also true that forms and techniques [. . .] that are adopted at times of modernization were created out of social conditions very different from ours and that their importation produces a maladjustment which is a constant trait of our civilization.” It is in this context that the “indigenous” ideas of structuralists in Latin America and the Caribbean should be revaluated.

An outline of the book

First, Luiz Carlos Bresser-Pereira argues that the method that Celso Furtado utilizes is essentially historical and that his passion – a measured passion – was for Brazil. For Bresser, in the second half of the twentieth century no intellectual contributed more than Furtado for the understanding of Brazil. He was committed to its development, frustrated with its incapacity to achieve it, and always acute in analyzing the economic and political challenges that the country successively faced. In order to demonstrate these ideas, the chapter presents a broad review of Furtado’s work.

In the following chapter James Cypher discusses whether neoliberal ideas and policies are passé in Latin America. Cypher argues that a paradigmatic shift in development policies requires a three-pronged attack on conventional wisdom. First, the old paradigm must be subjected to theoretical review and found to be demonstrably lacking in many of its formulations. Second, empirical evidence need be marshaled to demonstrate that the application of the theory has produced results inconsistent with the predictions of the theory. Last, but not least, an alternative theory must be put forward and there must be sufficient force behind this new set of ideas to displace or marginalize the earlier paradigm. According to the author the last movement is critical and determinant, and constitutes the crystallization of a defining political moment. Cypher suggests that recent shifts in broad political alignments in several important Latin American nations now suggest some likelihood of ringing down the neoliberal era.

The following chapter by Kenneth Jameson deals with the relevance of early twentieth-century Latin American economists in establishing exchange rate regimes and monetary institutions. The role of Latin Americans is contrasted to the better known participation of U.S. “money doctors,” e.g. Edwin Kemmerer’s role in the Andean region, in promoting certain foreign exchange and monetary regimes. Jameson enumerates some of the cases where Latin American analysts were active players and participants in analyzing exchange rate and monetary issues and in formulating domestic policy to address them. The role of Latin American economists in a variety of international monetary conferences and commissions from 1903–1922 is investigated. In addition, the chapter describes how Alberto Pani guided the formulation of Mexican economic policy after the Mexican Revolution and his ability to chart an independent course for Mexico. The conclusion is that there is evidence of “intense discussions of economic issues” based on Latin Americans’ economic analysis. The role of foreign advisors was often to break the political impasse and to recommend the policy the inviting government wanted to implement.

In the following chapter Julio López Gallardo and Ricardo Mansilla provide a renewed view of structuralist theories of inflation. Starting with a structural model of inflation, as proposed by the Latin American structuralist school, the authors move on to an inertial model of inflation, where the price rise results from the pattern of wage bargain and price determination. They find that the initial price increase plays a crucial role as regards the rate of inflation. They suppose that an expansionary policy which provokes a current account deficit eventually brings about currency depreciation. In their model, the future rate of inflation is entirely determined by the extent of the initial currency depreciation. They conclude that this point helps to understand the different inflationary experiences of advanced vis-à-vis developing economies.

In the next chapter, Carlos Mallorquín discusses Raúl Prebisch’s ideas after he left the Argentinean Central Bank in 1943 and before he entered the Economic Commission for Latin America (ECLA)¹² in 1949, and wrote his famous economic development “manifesto.” Mallorquín analyzes the radicalization of Prebisch’s ideas, in particular his macroeconomic thinking related to the nature of the business cycles, and how those ideas were to some extent frozen by the requirements of the more formal environment of the United Nations.

Juan Carlos Moreno-Brid and Jaime Ros take the Herculean task of discussing the recent pro-market reform in Mexico through the lens of the process of economic development since independence. They suggest that a recurrent problem in Mexican history has been the lack of understanding of the real constraints to economic development, and that this lack of vision might be a problem in the present too. In this context, they provide three main conclusions. First, the notion that the crisis was brought about by the exhaustion of past development strategies should not be taken for granted, even though they would be very far from defending every single aspect of past development strategies. Second, the solution to the new obstacles may require more and better, rather than less, state participation in the economy. As the authors have tried to show, the source of these new problems has to be found in part in the retreat of the state, in such areas as public infrastructure investment. But as a result of the shift in ideological climate, very little attention is being given to these problems and to what government policy can do about them while, at the same time, too much is expected from the efficiency gains of market reforms.

José Antonio Ocampo and María Angela Parra provide a critical review of the terms of trade debate that followed the development of the so-called Prebisch–Singer hypothesis. They suggest that Prebisch and Singer were correct on empirical grounds,¹³ but that the validity of their hypothesis was not necessary to defend industrialization in developing countries. In their view, the excessive focus of ECLAC on the terms of trade problem sidetracked the discussion from what matters, namely that industrialization is necessary to take advantage of its dynamic economies of scale.

Esteban Pérez Caldentey, in his chapter, analyzes the policies inspired by the strategy of “industrialization by invitation” formulated by Arthur Lewis and their effects on the English-speaking Caribbean countries and Puerto Rico. The strategy consisted, in a nutshell, in attracting foreign capital through a series of incentives. Foreign capital was a means of overcoming limitations to industrial development imposed by the small volume of trade of Caribbean economies. It was also a means of acquiring entrepreneurial skills and capital resources which were lacking in small developing economies. The chapter argues that in both the English-speaking Caribbean and Puerto Rico the policies guided by the strategy of “industrialization by invitation” succeeded in attracting foreign direct investment. However, the expansion of foreign direct investment was accompanied by a stagnation of domestic investment. More important, the policies that followed actually increased the dependency of the economies in question on foreign capital flows.

Diego Sanchez-Ancochea analyzes the differences of Anglo-Saxon and Latin American structuralist ideas. The author claims that Anglo-Saxon structuralists deserve criticism for not paying enough attention to the relation between developed and developing countries, and because of their limitless faith in the capacity of the state to intervene efficiently in the economic system. Latin American structuralists, on the other hand, emphasized center–periphery interaction, and the ability to analyze the interaction between global processes and the domestic particularities of Latin American countries from a historical perspective makes this latter brand of structuralism particularly relevant in the current global era.

In the last chapter, Matías Vernengo criticizes the view according ...

Table of contents

• Cover Page
• Ideas, Policies and Economic Development in the Americas
• Title Page
• Copyright Page
• Figures
• Tables
• Contributors
• Foreword
• Acknowledgments
• 1 Introduction
• 2 Method and passion in Celso Furtado
• 3 Shifting developmental paradigms in Latin America
• 4 Exchange rate regimes from a Latin American analytical perspective
• 5 The Latin American theory of inflation and beyond
• 6 The unfamiliar Raúl Prebisch
• 7 Mexico’s market reforms in historical perspective
• 8 The continuing relevance of the terms of trade and industrialization debates
• 9 Strategies of “industrialization by invitation” in the Caribbean
• 10 Anglo-Saxon versus Latin American structuralism in development economics
• 11 Economic ideas and policies in historical perspective