The Crossroads of Globalization

A Latin American View

Alfredo Toro Hardy

• Publisher: WSPC
• Year: 2018
• ISBN:
  9789813277328
• Topic: Business
• Subtopic: Business generale
• Index: Business

Two powerful forces measure their strength by acting upon globalization. One of them pushes globalization forward, while the other hinders its advance and promotes its decline.

In which of those directions should Latin America move? Uncertainty hinders the region's strategic vision. If the future entails re-launching of globalization, it seems obvious that Latin America should follow along its lines. However, if globalization were to embark on a declining phase and an endangered future, the region would need to look at other options.

Latin America, therefore, faces not only a dramatic uncertainty as a result of forces beyond its control, but also needs to anticipate unforeseen events to the best of its abilities, and react to or act upon them. Strategic reflection becomes imperative to manage both uncertainty and the possibility of rapid change.

This exercise in strategic reflection implies an immersion in fraught international surroundings, analyzing the forces that push for and against globalization, trying to measure their respective strength, convergence capacity, and potential impact. At the same time, it requires looking into the flaws, weaknesses and contradictions of such forces. With these elements in hand, it will be easier to envisage where the trends are leading to, and by extension, where Latin America may end up standing and which goals it should follow.

Contents:

• Latin America: A Background
• The Pro-Globalization Coalition
• China: Globalization's Driving Force
• The Anti-Globalizers
• Technology: Making Globalization Redundant
• The Consistency of Both Sides
• Latin America's Route Map

Readership: Business professionals, researchers, undergraduate and graduate students interested in knowing more about Latin America and Latin American Economic Growth; business and trade federations; institutes or centers for Latin American studies in universities.Globalization;Latin America;Indo-Pacific Area;China;India;East Asia;South China Sea;Supply Chains;Global Chains of Value;Global Cities;Maritime Routes;United States0 Key Features:

• Interrelates a group of subjects that are normally treated independently. In doing so, it allows to have a much better perspective of the global forces in play
• Traces a route map for Latin American countries in the decades ahead, amid the challenges posed by global forces that are contradictory in nature. This represents a novel approach to the region's challenges
• Analyzes in deep a group of current issues that have become increasingly relevant for the region and that have attracted the attention of both specialists and the general public

CHAPTER ONE

LATIN AMERICA: A BACKGROUND

Since the beginning of their independent life, Latin American countries opted for free trade and access to international capital markets. As the new states began to stabilize, the ruling elites decided that the future development of the region was to be linked to the export of natural resources and the import of needed capital goods. From the mid-nineteenth century onwards, Latin American exports began to expand, bringing with them economic growth. Between the 1860s and the 1910s, Latin American grew more than other peripheral regions and kept pace with European growth, even though at a lesser pace than the United States or Germany.

Raw Materials Bonanza

According to Victor Bulmer-Thomas et al.: “The integration of the Latin American economies between 1850 and World War I was unprecedented in scale and complexity. The fall in transportation costs attributable to technological innovations was the key factor in Latin American exports reaching the European and North American markets … This became possible through the dramatic fall in ocean freight rates and land transportation costs from the interior to the ports made possible by the construction of a very wide railway network.”¹

Not surprisingly, some of the countries of the region were among the richest of the world at the time. Between 1870 and 1913, Latin American GDP grew 3.5 percent while the world GDP grew 2.1 percent.² Brazil generated 70 percent of the planet’s coffee exports, while in terms of meat, cereal and wool, Argentinean exports had very few competitors worldwide. Uruguay, a much smaller country than Argentina, was also booming with the same export commodities.

With the introduction of cold storage, during the first decade of the century, profits from meat exports multiplied by fourfold. On the other hand, silver export booms in Mexico, Peru and Bolivia had their equivalent in copper export booms in Chile and Peru. But there was also saltpeter in Chile and Peru. The latter also exported sugar and guano. Sugar was also prevalent in the tropical countries in the northern part of the region, as was also the case of bananas.³

World War I, though, interrupted the bonanza brought up by this first era of globalization, both in Latin America and elsewhere. However, at the end of the 1920s, Latin American countries had been able to reestablish the primacy of their export sector. Capital streams began flowing again into Latin America, but this time not so much from Great Britain, as had been the case since Independence, but mainly from the United States.

And then, unexpectedly, the Great Depression of the 1930s hit the region. The fragility of the economic world order to which Latin America had pledged itself, not only as a reliable commodities supplier but also as a relevant importer of manufactured goods, was becoming too evident. Indebted and in bad economic situation as a result of the global crisis, the primary productive sector had to be subsidized by the State. Predictably, industrialization began to be seen as the appropriate medicine to provide more stability and a firmer economic ground. A light industry thus began to take shape in the region, in order to compensate for the import needs left uncovered by the international crisis.

The Import-Substituting Industrialization

World War II gave new impetus to this industrialization process, which, even if relevant for Latin American standards, was still modest for international ones. Especially so in view of the limitations for importing capital goods. The aim was to manufacture goods that could no longer be imported. Compensating for the shortcomings of its primary industry was no longer necessary as, due to the war, the export of commodities began to boom again.

Argentina, which took the lead in this area, attained impressive results. In 1947, its industrial sector showed a bigger percentage of the country’s GDP than its primary sector. At the end of the war, what was already a fact — the import-substituting industrialization process — began to be conceptualized. In 1948, indeed, the theoretical framework for this process began to take shape. Two economists and one organization were ultimately responsible for it. Raul Prebisch and Sir Hans Wolfang Singer were the economists. The organization entrusted with this endeavor was the Economic Commission for Latin America (ECLA), an institution born in 1948 under the umbrella of the United Nations.

Prebisch, a well-known Argentinean economist, had been the first General Director of the Argentinean Central Bank. In 1949, while working for ECLA, the Secretary General of this organization asked him to write an analysis on the deterioration of the terms of trade of raw materials. Soon after he had written the first draft of a long text, he came to read Singer’s recent paper “Post-war relations between under-developed and industrialized countries”. This paper complemented his own ideas.

As a result, Prebisch changed his first version and introduced fresh material in which he extensively quoted Singer in his conclusions. The latter, a German, had been a protégé and a pupil of both Schumpeter and Keynes and was one of the first economists at the new Economics Department of the United Nations. The result was a 1949 book entitled The Economic Development of Latin America and Some of its Main Problems. Without collaborating directly, and having arrived to similar conclusions separately, both economists gave birth to what was to be called the Prebisch–Singer hypothesis.

The above proposal was to be extensively spread throughout the region by ECLA. Not surprisingly, given that between 1950 and 1963 its Secretary General would be Prebisch himself. Under the auspices of this institution, a group of outstanding Latin American economists would follow suit, elaborating on the need of developing a substitutive manufacturing base for the region.

The so-called “hypothesis” was made up of two sub-hypotheses. The first had to do with the fact that the prices of primary products had a declining tendency in time. Countries specialized in their production were thus condemned to lag behind the industrial ones, and the terms of trade between them would be detrimental to raw material producers. As for the second one, as Daniel Yergin and Joseph Stanislaw point out: “They argued that the world economy was divided into the industrial ‘center’ — the United States and Western Europe — and the commodity producing ‘periphery’. The terms of trade would always work against the periphery”.⁴

In order to face this double-negative situation ECLA’s economists, with Prebisch at their helm, argued that the answer was to create a substitutive manufacturing base. In Daniel Yergin and Joseph Stanislaw words: “So instead, the periphery would go its own way. Rather than exporting commodities and importing finished goods, these countries would move as rapidly as possible towards what was called ‘import-substituting’ industrialization. This would be achieved by breaking the links to world trade through high tariffs and other forms of protectionism…Currencies were overvalued, which cheapened equipment imports needed for industrialization; all other imports were tightly rationed through permits and licenses”.⁵

Unlike Asia, where an “outward-oriented industrial growth” would be emphasized since the 1960s, Latin America visualized industrialization as an “inward-oriented process”. The region would manufacture products domestically instead of importing them. “By 1955 the contribution of manufacturing to real GDP had overtaken agriculture”.⁶

Two Big Flaws

The import-substituting industrialization presented two important flaws, which in time would prove to be very costly to the region. The first was to visualize this process as permanent in nature. In doing so, they did not proceed like all major developed economies have done, that is, using its interventionist economic policies to promote industrialization and protect national companies until they were prepared to compete internationally.

Thus, domestic industries were indefinitely isolated from international competition. The “industries in their infancy” — a protectionist thesis developed by Alexander Hamilton at the end of the eighteenth century — assumed a permanent character in the Latin America of the twentieth century. This implied creating a gap between highly competitive companies abroad and highly protected ones inside. As long as domestic companies were cut off from the outside world by thick walls, there was no problem. Nonetheless, if those walls were ever to suddenly fall, industrial massacre would follow.

The second flaw was that the dependency on commodities continued to be fundamental, as they were the ones generating the currency that nurtured this whole process. Indeed, while local manufactures were sold inside the protected trade area, commodities were sold abroad, thus becoming the fundamental source of currency. In this way, the whole import-substituting industrialization structure became dependent on the same commodities from which it wanted to gain independence.

Notwithstanding these flaws, the system provided important results. Some qualified opinions can attest to it. According to Kevin Gallager and Roberto Porzecanski, “It will be easy and tempting to look backward to the period roughly between 1940 and 1970. During that period Latin America was indeed able to build innovation and industrial capabilities. Indeed, that period was certainly the ‘golden age’ of economic growth in Latin America that is yet to be matched”.⁷

Joseph Stiglitz’s opinion goes in the same direction: “In earlier decades, Latin America had had notable success with strong government interventionist policies…focused more on the restriction of imports than on the expansion of exports. High tariffs were placed on certain imports, to encourage the development of local industries — a strategy often referred to as import substitution”.⁸ Greg Grandin, on his part, adds: “If we take Latin America in its entirety we find that between 1947 and 1973 (the state-dominance stage) the per capita income grew by 73% in real terms”.⁹

The success of the model, based on the Keynesian doctrine, mirrored the unprecedented prosperity that these policies brought to the Western World between 1945 and 1975. However, between 1950 and 1973 Latin America grew even faster than the world average: 5.4 percent versus 4.9 percent. Moreover, in 1981, shortly before the system began to crumble, Latin America’s share of the world's GDP was 11 percent, while its GDP per capita exceeded the world’s average by 10 percent during the third quarter of that year.¹⁰

Collapse

The collapse of the import-substituting industrialization model would be closely linked to the end of Keynesianism in Western economies, where a combination of inflation and stagnation, known as stagflation, would lift von Hayek’s neoliberal ideas from the dusted bookshelf.

The inherent vulnerabilities within the import-substituting industrialization model were ready to concatenate when the right set of international conditions appeared. And they did as a result of the debt crisis. It all began during the 1970s, when an international banking system, overflowed with petrodollars resulting from the sudden hike of oil prices, devoted itself to grant plentiful loans.

This easy access to international credits, actively promoted by lenders themselves, was seen by Latin American governments as an excellent opportunity to invest in infrastructure and the modernization of its State industries. As a consequence of these policies, the region got greatly indebted. Nonetheless, this did not seem to be a problem as the conventional wisdom of the day assured that the interest rates would remain low for the foreseeable future.

But they did not. As Joseph Stiglitz points out: “In 1980, fighting its own problem of inflation, the United States initiated interest rate increases that climbed to over 20 percent. These rates spilled over to loans to Latin America, triggering the Latin American debt crisis of the early 1980s, when Mexico, Argentina, Brazil, Costa Rica, and a host of other countries defaulted on their debt”.¹¹

The debt crisis hit Latin America very hard, and between 1975 and 1982 the regional debt increased from US$45.2 billion to US$333 billion.¹² Needless to say, this increase had much to do with the snowball effect derived from the combination of interest rates over 20 percent and short-term loans and credits needed to pay the old debt.

But at the same time that interest rates were hiking, the price of primary products was going down. The reasons behind these two phenomena were very much the same. Faced with the hike in the oil prices in 1979, the new governments of Ronald Reagan and Margaret Thatcher decided to fight inflation not only through monetary tools (such as interest rate increases) but also by reducing fiscal expenditure.

These policies resulted in a recession that increased unemployment and precipitated the fall in the demand, and by extension in the prices, of commodities. Such an unexpected downturn in the prices of primary products gravely affected the capacity of Latin American governments to meet their debts. While the sources of currency income were dropping significantly, the external debt was growing exponentially as a result of the interest rates hike.

This situation of extreme weakness was compounded by the appearance of a new economic paradigm brought in, again, by the duo Reagan–Thatcher: neoliberalism. Just when Latin American governments were in need of renegotiating their debts and acquiring fresh loans to pay for the old ones, they were confronted with this all-powerful ideology. With its negotiating leverage collapsed, the region had no other option but to bow to the...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Foreword
• About the Author
• Acknowledgments
• Contents
• Introduction
• Chapter One Latin America: A Background
• Chapter Two The Pro-Globalization Coalition
• Chapter Three China: Globalization’s Driving Force
• Chapter Four The Anti-Globalizers
• Chapter Five Technology: Making Globalization Redundant
• Chapter Six The Consistency of Both Sides
• Chapter Seven Latin America’s Route Map
• Conclusion
• Bibliography
• Index