Developing Countries In The World Economy

Jaime de Melo

• Publisher: WSPC
• Year: 2015
• ISBN:
  9789814494915
• Topic: Biological Sciences
• Subtopic: Science General
• Index: Biological Sciences

Differences in the choices of trade and macro policies, both by developing countries and by developed countries towards developing countries, have been critical in determining the overall performance of developing countries. All too often, the performance of developing countries has not been assessed using appropriately conducted studies. The papers in this book are chosen to bridge this gap and show how a quantitative approach to policy evaluation can help resolve controversies and explain the choice of observed policies.

The book brings together carefully selected papers that assess the impacts of various trade and macro policies, by quantifying the policies of developing countries at the macro level (exchange rate, investment, savings) and at the sector level (trade and industrial policies), in addition to policies of developed countries towards developing countries (trade preferences, quotas, VERs and migration policies). Facets of the political economy of trade, migration, and climate policies are explored (such as the enlargement of the EU, the rise of regionalism and how it can ease the pains of adjustment to trade liberalization, openness and inequality). Growing tensions between trade and the environment are also investigated. In short, this book covers a wide area of events ranging from external and internal shocks to external and internal policies, showing how the consequences of these events can be brought to rigorous quantitative analysis.

Differences in the choices of trade and macro policies, both by developing countries and by developed countries towards developing countries, have been critical in determining the overall performance of developing countries. All too often, the performance of developing countries has not been assessed using appropriately conducted studies. The papers in this book are chosen to bridge this gap and show how a quantitative approach to policy evaluation can help resolve controversies and explain the choice of observed policies.

The book brings together carefully selected papers that assess the impacts of various trade and macro policies, by quantifying the policies of developing countries at the macro level (exchange rate, investment, savings) and at the sector level (trade and industrial policies), in addition to policies of developed countries towards developing countries (trade preferences, quotas, VERs and migration policies). Facets of the political economy of trade, migration, and climate policies are explored (such as the enlargement of the EU, the rise of regionalism and how it can ease the pains of adjustment to trade liberalization, openness and inequality). Growing tensions between trade and the environment are also investigated. In short, this book covers a wide area of events ranging from external and internal shocks to external and internal policies, showing how the consequences of these events can be brought to rigorous quantitative analysis.

Contents:

• Reforms, Adjustment and Growth:
  • What Went Wrong with the Recent Reforms in the Southern Cone (with Vittorio Corbo and James Tybout)
  • The Effects of Financial Liberalization on Savings and Investment in Uruguay (with James Tybout)
  • Adjustment with a Fixed Exchange Rate: Cameroon, Côte d'Ivoire and Senegal (with Shantayanan Devarajan)
  • Growth-Oriented Adjustment Programs: A Statistical Analysis (with Riccardo Faini, Abdelhak Senhadji and Julie Stanton)
  • Adjustment, Investment and the Real Exchange Rate in Developing Countries (with Riccardo Faini)
  • Fiscal Spending and Economic Growth: Some Stylized Facts (with Céline Carrère)
• Trade Policies, Market Structure and Market Access:
  • Pricing Policy Under Double Market Power: Madagascar and the International Vanilla Market (with Marcelo Olarreaga and Wendy Takacs)
  • The Influence of Increased Foreign Competition on Industrial Concentration and Profitability (with Shujiro Urata)
  • The Effects of Trade Reforms on Scale and Technical Efficiency: New Evidence from Chile (with Vittorio Corbo and James Tybout)
  • Do Exporters Gain from VERs? (with Alan Winters)
  • Are Different Rules of Origin Equally Costly? Estimates from NAFTA (with Céline Carrère)
  • Has Distance Died? Evidence from a Panel Gravity Model (with Jean-François Brun, Céline Carrère and Patrick Guillaumont)
• Political Economy:
  • The New Regionalism: A Country Perspective (with Arvind Panagariya and Dani Rodrik)
  • The Protectionist Bias of Duty Drawbacks: Evidence from Mercosur (with Olivier Cadot and Marcelo Olarreaga)
  • Why OECD Countries Should Reform Rules of Origin (with Olivier Cadot)
  • The Political Economy of Migration in a Ricardo–Viner Model (with Jean-Marie Grether and Tobias Müller)
  • Attitudes Towards Immigration: A Trade Theoretic Approach (with Sanoussi Bilal and Jean-Marie Grether)
  • The Political Economy of Migration and EU Enlargement: Lessons from Switzerland (with Florence Miguet and Tobias Müller)
• Challenges Ahead — An Inclusive Globalization and Environmental Policies:
  • Openness, Inequality and Poverty: Endowments Matter (with Julien Gourdon and Nicolas Maystre)
  • FDI, the Brain Drain and Trade: Channels and Evidence (with Artjoms Ivlevs)
  • Trade in a 'Green Growth' Development Strategy: Issues and Challenges
  • Unravelling the Worldwide Pollution Haven Effect (with Jean-Marie Grether and Nicole Mathys)

Key Features:

• One of the few books that addresses the performance of developing countries through appropriately conducted studies with rigorous quantitative analyses
• Adopts a quantitative approach in evaluating policies and shows how this can help resolve controversies and explain the choice of observed policies
• Analysis of the policies in developing countries is done across the macro level and sector levels, as well as on the policy choices of developed countries towards developing countries

Part I

Reforms, Adjustment and Growth

What Went Wrong with the Recent Reforms in the Southern Cone

Vittorio Corbo

World Bank and Pontificia Universidad Catolica de Chile

Jaime de Melo

World Bank

James Tybout

Georgetown University and World Bank

I. Introduction

For decades, Argentina, Chile, and Uruguay pursued inward-looking development strategies that relied heavily on extensive government intervention. Accordingly, these economies were characterized by antiexport biases, high spreads in protection across sectors, and heavily controlled financial systems. Likewise, each economy suffered from recurrent balance-of-payments crises and low growth. During the 1970s, these countries attempted to switch from import-substitutionled industrialization to a more neutral strategy. Furthermore, to improve resource allocation, the three countries moved (in varying degrees) toward liberalization of markets. Commodity price controls were practically eliminated, government deficits were reduced and/or eliminated, trade barriers were reduced, interest rates were decontrolled, constraints on capital flows were reduced, and constraints on labor markets were relaxed. However, except for Chile, many forms of intervention still remained.

The reforms started around 1974 in Uruguay and Chile and 1976 in Argentina. At that time, all three countries were in severe macroeconomic disequilibrium with acute foreign exchange shortages and severe fiscal-deficit-induced inflation. Hence, the reform packages entailed short-term rescue operations and stabilization policies as well as long-term policies to progressively remove government intervention across product and factor markets.

The outcome of these reform packages is well known. All three economies experienced initial success with the early stages of their stabilization and liberalization programs. But each eventually encountered a boom-bust cycle, large increases in external indebtedness, and major internal financial crises. What did the reform packages accomplish, and why did they ultimately fail?

The thesis of this paper is that initially some efficiency gains were made but that these were ultimately overshadowed by problems with policy inconsistencies, implementation difficulties, and overlooked market frictions. These factors generated a sustained appreciation of the real exchange rate and a large spread between the costs of dollar-denominated and peso-denominated loans. In turn, the appreciation and interest-rate spreads created protracted opportunities for arbitrage that distracted firms from the business of production. Eventually, firms became sufficiently in debt, so that as expectations of a major devaluation developed, they were forced into crisis borrowing to cover soaring interest costs.

To lay the basis for our argument, we review briefly in Section II the initial conditions facing each country on the eve of the reforms and the sequencing of reforms in each country. A distinction is made between stabilization policies (to reduce inflation and balance-of-payments crises) and liberalization policies (to promote better resource allocation). Section III reviews the stylized outcomes of the three reform packages. Section IV traces problems experienced in each country to particular ways in which policy was implemented. Lessons to be drawn from the experience of the reforms follow in Section V.

II. The Reforms and Their Intent¹

When the military seized power, both Argentina and Chile were experiencing high fiscal deficits, severe inflation, and balance-of-payments crises.² Annual inflation rates were approaching 1,000% in Chile (September 1973) and 2,300% in Argentina (March 1976). In the prereform crisis the government deficit as a share of GDP was 12.0% in Argentina and 16.1% in Chile (table 1). Moreover, net Central Bank exchange reserves were negative in Argentina and close to zero in Chile. To compound these problems, both countries suffered from numerous microeconomic distortions such as tariffs, interest ceilings, and price controls.

In Uruguay, macroeconomic imbalances were not as pronounced when the military came to power: inflation was only 97% in 1973; the government deficit had averaged a relatively modest 3.2% of GDP over the previous several years (table 1); and partly because of severe restrictions on trade and international capital flows, there was no immediate crisis of Central Bank reserves. Nonetheless, the economy was suffering from widespread microeconomic distortions and had registered almost zero growth for 20 years.

The first task facing the economic teams in each country was to restore macroeconomic stability. But these teams also diagnosed excessive government intervention as the fundamental cause of inefficient resource allocation and low growth. In their view, the cure called for a deregulation of commodity and factor markets, including the removal of barriers to free trade and capital flows. Such measures would improve resource allocation, eliminate recurrent bottlenecks, and lead to higher growth.

A. Liberalization Policies

With different timing and intensity, all three countries removed price controls, liberalized interest rates, decentralized intermediation, and partly deregulated labor markets. All three countries also relaxed restrictions on international trade and liberalized capital inflows. But with the exception of domestic financial market deregulation, which proceeded rapidly in all cases, the sequencing of reforms was different in each country. Early on, Uruguay removed all controls on capital flows and many commodity price controls, but it progressed more slowly toward liberalizing foreign trade. Chile, on the other hand, went the furthest in eliminating domestic price controls, the endemic fiscal budget deficit, and trade barriers, but it kept controls on short-term capital flows for a long time and maintained important labor market regulations. Argentina also eliminated price controls and removed most restrictions on short-term capital flows before implementing a tariff reform. Below, we review the major features of each country’s policies.

1. Commodity market deregulation. Two kinds of reforms were implemented in commodity markets: deregulating domestic prices and reducing tariff and nontariff barriers to trade. Chile went furthest on both counts. In the early stages of implementation, prices in the domestic commodity market were deregulated, and subsidies were practically eliminated. Most nontariff restrictions to trade were eliminated, and the commodity market was indirectly deregulated by privatizing over 500 enterprises that had been seized or nationalized during the Allende years. The multiple exchange rate system was unified with an initial large devaluation. All nontariff restrictions were lifted, and the tariff structure was also reformed. Over 5 years, starting in 1974, the average tariff was brought down from 90% to a uniform 10% (except for automobiles over 850 cubic centimeters).

In Argentina, after a substantial price deregulation, price controls were reinstated as part of the stabilization effort in 1977 but abandoned thereafter. Initially, the liberalization also included the unification of the exchange rate with a sharp real devaluation (close to 25%), some reduction in tariffs, and a substantial reduction of taxes on traditional exports. Furthermore, most nontariff barriers were eliminated except for basic metals. Redundant protection nonetheless remained until late in 1979, and the peso appreciation of 1979 and 1980 provided a de facto trade liberalization.

TABLE 1 MACROECONOMIC PERFORMANCE IN THE SOUTHERN CONE

SOURCES.—National accounts and papers mentioned in n. 1.

NOTE.—Averages for the period 1965–70 were estimated by fitting lnx = a + bT; T = time trend; for the other periods a compounded average is used.

* Until October 1980, the index reflects only legislated increases in wages.

In Uruguay, price controls were nearly eliminated by the end of 1979. But from 1974 to 1980, commercial policy reforms were much less pronounced than in the other two countries. However, import quotas that were widespread in the early seventies were eliminated in 1975, and taxes on traditional exports were removed. Unlike Chile and Argentina, until early 1979, Ur...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Credits
• About the Author
• Preface and Acknowledgments
• Introduction
• Part I: Reforms, Adjustment and Growth
• Part II: Trade Policies, Market Structure and Market Access
• Part III: Political Economy
• Part IV: Challenges Ahead — An Inclusive Globalization and Environmental Policies