Saturday, September 06, 2008

Latin America and the USA economy:Looking ahead of 2009 (I)

Like most of the fellows of my generation ,I grew up with the notion that the economic condition of Latin America was strongly influenced by the USA economy outcomes, as the main engine of regional economic growth, but also as the main source of Latin America economic dependence . A big deal about it, (I mean the dependence issue ,not my belief), was the motivation of politicians and economists to pursue a different model of economic growth, the so called “Import substitution strategy”, applied since the fifties aimed at reducing that dependence. In fact, this model was targeted at getting these economies, more independent from the economics fluctuations in advanced economies, focusing strongly about supporting the domestic market and industrialization . The Argentina born economist, Raul Prebisch made the most from it, with his theory of dependence which stated that the “center” (USA economy), and the “periphery”(Latin America) were driven by opposite interaction. According to his theory, the Center benefited from cheap raw materials, such that they had no interest for these raw material exporter countries ,to get a higher stage of economic development based on higher industrialization. Therefore the States on each country, should take that objective on its own throughout industrialization programs. The result of that approach, although not that much bad in terms of economic growth, (average of 5,5% between 1950-1980) , was less decisive to solve social problems such as poverty, illiteracy, lack of good nutrition and above all, to fulfil the expectations it created among the intellectuals, policy makers and regional politicians, eager to cope with the inherent instability of the former approach. Thit growth ,was based on capital intensive industries performance.
On the other side, external debt started to accumulated since the seventies(current account deficit climbed up to 6% of GDP), reaching its peak in the following years when the international financial system , had huge amount of cash at its disposal to be lent to supposedly solvent countries . Later on (1981),because of the high interest rate applied to repay those loans, the whole continent was at the end of the eighty facing the lost decade, if not about the lost century .At that time, I realized I was wrong. The problem was not the dependence from the USA economy, but lack of comprehension about the real nature of growth. Somehow, the whole continent was trapped in its own fears, looking for State “protection” which was the real dependence problem. We really were dependent from the State, unable to cope with market forces challenges.-
At the end of eighties, the main concern was to solve the external debt problem. This meant to get support from the United States but this time ,not for social assistance (1960),or trade (1989); but to repay the debt. The “Initiative for the Americas” , of former President G.H.W Bush ,was a serious historic attempt to solve structural weakness in Latin America economies. Its main objective, was to support investment, trade and debt renegotiation (Plan Brady), such as to improve the fundamentals for economy growth, more so with the implementation of a FTA from north to south of Latin America, which was complemented in the early nineties, by the “Washington Consensus”, which made a case of financial reforms, free markets driven economies, privatizations and free trade ,as a necessary condition for growth Later it was proved not to be a sufficient condition).It is hard to find in the whole twenty century, such a kind of compromise .Some annalists wondered ,what were the gains with this “new” partnerships far beyond its historic path?. Of course there were gains for both sides: export “made in USA “to Latin America increased, investment flows also increased, as further steps were undertaken in the mid nineties with Chile on the list to become a direct commercial partner.