Patterns of immiserizing growth within South American economies

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THE mechanisms of economic development and long-run growth have always been a central concern to development economists; several studies on international trade have come to the fore in recent years, considering it as an important subfield of economic growth. However, there have been a few questions in the history of economic, although right now one of the central themes is the vast literature on trade and developments, which are the channels through globalization in general works on growth, why outward-oriented economies consistently performed better and achieved high growth rates, these are questions that have been relatively resolved, but with not conclusive answers. At the same time, countries have become increasingly vulnerable to forces emanating from outside their borders. The fact that they have responded so differently is evidence to show that national policy choices are one important determinant of economic growth

In that way, economic welfare in the long-run has also been an essential focus of the Latin American historiography; where slow growth, relative economic retardation and inequality have been seen as having important implications for institutional, social, and economic development in the region. It is reasonable to say; that recent investigations have come close to point out that the region's failure to achieve economic growth may be attributable to an array of economic distortions deriving from unfortunate policy choices. During the postwar period, the development strategies pursued by Latin America differed substantially from other developing regions (East Asia), thereafter; Latin American economies were on divergent paths.

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While the region followed inward-looking policies in the 1950s and early 1960s, East Asia introduced export-oriented strategies in the mid 1960s but most Latin American economies continued to pursue import substitution until the early 1980s. Even though, economic performance of the region was seen as disappointing since the 1960s, but deeper into the 1970s and 1980s distortions persisted and even worsened (Elias, 1992; Diaz Alejandro, 1984; Cardoso and Fishlow, 1992). In that way, it is clear that these distortions had institutional roots and that these allowed its marked inefficiency and their survival over the years. The two main pillars of the inward strategy were emphasis upon industrialization through governmental intervention and barriers to trade.

During the 1980s, against a background of global recession, Latin America switched from inward to more outward-oriented policies, on spite of greater openness during the last two decades, GDP growth rates have not converged compared to other world regions, indeed, in some economies poverty remains and inequality has been accompanied by rising rather than decreasing wage differentials, Wood (1997), Rodrick (1997).

Economic literature on international trade and economic growth have considered and studied in detail possible trade effects that hurt growth, such as: exogenous shocks over economy and suboptimal policies as "increased efficiency policies" on industrial sectors that actually reduced the country's real income. Following this line, our research is partly based on the seminal works of Bhagwati (1958, 1968, and 1969) and Johnson (1967) that point out that external shocks and bad policies could have adverse effects on growth.

In the other hand, the abundance of natural resources in the region, has been playing an influential factor of income dependence, government revenues and public finance through history, these revenues represent an important vast source of money for government, mainly for public spending. In that way, the dependence on exports and prices of commodities present important risks -prices lack in trends, but they make up in variance- because, they heavily rely on favorable external conditions, like the demand for raw materials by major developing and industrial countries. Therefore, developing countries that depend on these revenues face risk and uncertainty by the volatility of prices that affects government expenditure and other important macroeconomic variables, mainly, growth and consumption (Mendoza 1995).

On the other hand, the most recent economic literature has considered in detail the role of institutions for Latin American backwardness and traced the differences within the region. Although conventional economic factors have not been ignored, the new literature has most focused on institutions and highlighted significant conditions for economic growth such as: property rights, the financial sector structure, investment in public infrastructure and human capital (North 1981). However, these institutional characteristics are difficult to change, because government policies and institutions tend to reproduce them; for example, in those societies that began high inequality, elites were established legal frameworks that warranted them disproportionate shares of political power and revenues (Acemoglu, Johnson and Robinson, 2000, 2003).

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ASSUMPTIONS

All theory depends on assumptions which are not quite true or that perfectly adjust in the real economy. However, the inevitable assumptions must not be quite sensitive to abrupt changes in factors or variables. The bulk of this dissertation is devoted to a long-run growth model based on the Harrod-Domar assumptions except that productive factors are fixed proportions trough time, since we consider that the economic structure could fluctuate by the appearance of exogenous shocks and mainly by economic policies.

This dissertation departs from a double point-of-view considering trade and growth theories (Baghwati and Johnson). The first one allows that exogenous effects could have positive and negative effects on economic growth, specifically; it is associated with the adverse effects of the terms of trade volatility. The second point is associated with the presence of trade protection, under conditions in which any terms-of-trade effects of growth are excluded; by assumption protection policies have a more preponderant effect on economic growth in the long-run.

The chapters following cover a wide range of economic topics-growth, institutions, globalization-but they advance under a unified framework motivated by a number of common predilections and preoccupations. Consequently, the study will try to show a macroeconomic focus to pinpoint certain aspects of the political economy of Latin American development as it affected prices; both in levels and volatility, by looking at exchange rates, black-market prices, tariffs, and capital prices; and finally to trace out the economic implications on economic factors and growth.

In the 1980s, Latin American economies suffered a debt crisis and a deep decline in economic growth and, were forced to make economic and institutional reforms, though, many reforms were not developed correctly; given the institutional legacy, some of the distortions still exist today. Therefore, that is the importance of keeping studying the effects of sub-optimal policies and commodity revenues turmoil in the 1990s and the twenty-first century, where currently the global recession is increasing the risks of a slowdown in global trade and protectionism.

MAIN OBJECTIVES

The main objective of the thesis is to develop an additional empirical extension about "immiserazing growth theory" on international trade for the South American economies; looking for the long-run determinants of growth, to study the impacts of policy-imposed distortions and exogenous shocks on growth. In that way, we propose to achieve the following objectives, that latter will be developed in the structure of academic documents.

To seek for the long-run determinants of economic growth.

To measure the effects of increments of the terms of trade and its volatility on main economic variables.

To account for the cost of ISI policies on South American economic growth.

These are the questions that we are entrusted to answer in the study: Which and how were the institutional structures that affect regional economic policy? Which have been the distortions that ISI and primary-producing dependence had on growth? Are some questions that this document will try to respond over the curse of the main chapters.

METHODOLOGY SORTS

First, this research document is strictly grounded in the neoclassical economic analysis. The neoclassical economics considers social phenomena as an aggregation of individuals and decisions -as consumer, producer, investor, politician, and so on- interacting with each other and acting under the constraints that their environment ordains. We follow and find this analytical framework as a powerful discipline for organizing our thoughts on economic affairs.

Second, we remark in the importance of a careful reading of the empirical results. In particular, our interpretations need to be based on a solid understanding of historical and recent experience. In that way, econometricians are still working hard looking for the growth-determinants and policy effects in Latin America and elsewhere after the reforms applied a quarter century ago. It is necessary to remind that this research project is not purist when it comes to the kind of evidence that matters when we deal with historical data. In particular, given data restrictions and other empirical evidence on the theme, we believe in using pooled regressions since the empirical results are more reliable when we consider the region as a whole.

Third, government policy has an important role in stimulating economic development beyond enabling markets to function well; however, mistaken policies could negatively affect economic growth. This view is to be contrasted with an alternative perspective, the choice of protectionist policies and rent-seeking behavior related in the Import substitution industrialization (ISI).

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Finally, we believe that appropriate growth policies are almost always context specific, because the environments in which economic actors operate differ in terms of favorable circumstances and constraints. In that way, seeking for the long-run growth determinants is important when we try to learn from other countries' experiences, since it is always useful-indeed, it is indispensable for policy-markers.

This study intends to use the modern literature of development economy international economy, and economic history. Furthermore, it will make use of quantitative and econometric methods. Aggregate data provide useful information on which this kind of analysis can be based on. However, the macroeconomic focus of the econometric analysis allows identifying certain aspects of the institutional and political economy that affect other structural factors and growth.

The study covers the period from 1950 to 2008 in great part of the analysis, and the regional economic space of the most important countries on South America: Argentina, Bolivia, Brazil, Colombia, Chile, Ecuador, Paraguay, Peru, Uruguay and Venezuela. This period is essential, because it covers the main stage of the Inward-Looking Development; the wide coverage of the data period also considers the most striking variations on raw material exports and political cycles in the region. The results will be corroborated with growth and international trade theories, and contrasted with specific information from other empirical studies; therefore, these different sources will allow reconstructing the facts for the analyzed periods.

Viability and sources

This research is partly based on the seminal works of Bhagwati (1958, 1968, and 1969) and Johnson (1967), where external shocks and mistaken policies could have adverse effects on growth. The primary sources of this study are historical series of South America, books and Journals of international trade, Journals of development economic, and economic history. The project is feasible, since we have already collected and studied part of the sources in earlier investigations.

A long-term data set

Analyzing the impact of institutional factors, physical capital accumulation, investment, growth and other indicators of economic performance, it is important to consider a lengthy time period. As a fact, by looking at changes over a long time period, short-term effects -business cycles or shocks- that disproportionately affect economies will be minimized; on the other hand, changes in the institutional framework are likely to have lagged effects due to the response of sociocultural variables. In that way, the yearly-period utilized here allows a deeper examination of the long-run between institutions and economic indicators.

In the long-run, one can certainly think macroeconomic policies as endogenous and reflections of the underlying institutions. However, in the short-run, macroeconomic policies show considerable variability that may not be explained by institutional changes, since the real economy takes some time to adjust to any institutional change that take place, the long-term data is able to distinguish such changes be permanent or temporal. For example, countries that went through a period of about 2-5 years of high inflation or overvalued exchange rates had major economic crises, but during other periods they had low inflation and undervalued exchange rates that offset the previous effects, since such examples were real in some South American economies we can distinguish between policies and growth rates in those countries.

Measuring Institutions

When we are looking at the alternative growth theories, one factor that has hindered a better development of the institutional approach is the difficulty of measuring institutions; in that way, many researchers have expressed concern that institutions are actually endogenous reflecting various historical or cultural influences [1] over time. However, one of the problems using a data panel is the lack of historical information which obviously does change over time, in that way, we show that other variables of interest -growth, trade, and institutions- do exhibit patterns of variability over time, this suggests that considering the within-country estimation may provide some lights on the relative importance of these factors on the econometric model. Since we expect sufficient variation measuring institutions, the data panel regressions are potentially informative about the partial effects of these variables.

A ROAD MAP OF THE BOOK

The first part will be dedicated to sum up the state of the art "the immiserizing growth theory". A second part of this chapter analyzes the main sources for economic growth within the region, mainly, to draw the important role of institutions on growth and other fundamental growth variables. Our diagnostic revolves around growth determinants which are constrained by inadequate social returns and the lack physical and human capital, differences in the institutional framework, the presence of distortions in investment that affect its role on income growth etc.

The second chapter studies the effect of sub-optimal policies on growth. In that way, Taylor (1998) and other economic historians consider that Inward-looking Strategy was determinant as a response for economic shocks from the post-war period, which was greatly influenced by the institutional heritage; however it changed during decades until earlier 1980s. In order to account for the economic costs of ISI policies in the region, we will construct an index of macroeconomic disturbances using the methodology of the Pena Distance index, employing a group of determinant macroeconomic variables (inflation, exchange rates, black market premium, tariffs, interest rates and the price of capital), finally, we estimate the index of macroeconomic distortions (IMD) on investment and physical capital accumulation as determinants of growth.

In chapter 3 we will develop a model where terms of trade variability causes instability problems for primary producing and developing countries, the effects of price uncertainty (volatility) can increase the risk of slowdown in economic output and especially on investment. In this way, we underline the assumption that government revenues are scarce and, commodities production has an exogenous influence on South American's economic failure.

Finally, chapter 4 returns on the main topics of this study. Considering the question of whether we can find a pattern of immiserizing growth within South American economies, and how big were the economic costs of imposed-policies and exogenous shocks in the region. After showing the most important conclusions of this document, briefly, we will develop a section related to economic and policy implications.