Latin America & East Asia Compared Lecture # 12 Week 6

Structure of this lecture Development model adopted by Asian NICs How does it compare to ISI in Latin America Economic performance compared Case Study: Brazil Automobile Industry With hindsight: ISI in Brazil?

Development model adopted by Asian NICs In a nutshell: high tariff barriers Focus subsidies and investment  industries which would make goods for export Not to attempt to undervalue the local currency Boost competitiveness, particularly in the 1970s E.g., South Korea made large investments into heavy and chemical industries, such as shipbuilding, steel and petrochemicals. This focus on export markets allowed them to create competitive industries.

Main difference according to several economists (e.g., Rodrik) Twofold: a)Budget deficits were low relative to those of Latin America, and b)Exchange rates were not overvalued Total Factor productivity : 1960 – East Asia Latin America

Economic performance compared Source: World Bank Statistics

Case study: Brazil Largest country in Latin America Fifth largest in the world About 160 million inhabitants Highest income inequality Primary commodities: -Sugar (16 th C) -Minerals (18 th C) -Coffee (mid-19 th C) -Rubber (19 th C to 20thC) ISI Policies 1945 – 1980: One of the fastest growing economies Diversified industrial base under ISI

The automobile industry Dates back to 1916 assembly plants created by Ford Propelled by the expansion of roads in the region World War II: Propelled locally produced parts 1950s: ISI policies impose restrictions on imports of finished cars, and local production by foreign firms has to meet a required 90% local manufacturing content Attraction of foreign capital to foreign manufactures: 89 cents subsidies for every dollar invested in industry Production increased from 110,000 in 1951 to 191,194 in 1962, but domestic content was far greater

1970s: Export promotion prompted with fiscal benefits to those firms that met “targets” Exports increased from 2.2% in 1979 to 27.3% in 1981 As of 1981 production fell drastically due to declining domestic demand (debt crisis- lost decade) Brighter prospects with trade integration (MERCOSUR) and decreasing tariffs under trade integration trends

Contributing to “sophisticated” exports (Stage II Industrialization) Source: UN Statistics

South Korea Small domestic demand Production for export market Imported technology (avoided R&D investments) Like Brazil, imports of finished cars was banned Unlike Brazil, South Korea limited production to domestic ownership Sales to the US increased rapidly in the 1970s, but have recently declined

#1 Japan:8,618,730 #2 Germany:5,123,240 #3 United States:5,016,310 #4 France:3,283,780 #5 Korea, South:2,651,270 #6 Spain:2,266,900 #7 United Kingdom:1,628,020 #8 Brazil:1,521,430 #9 Canada:1,369,000 #10 Italy:1,125,770 #11 China:1,090,820 #12 Russia:980,736 #13 Mexico:960,896 Main differences: a) S. Korea continues to compete in the world markets, and b) Car industry in Brazil financed with FDI ----  Next Class: Topic 13, Stabilization and Adjustment. Have a nice weekend - Comparable performance Automobile production 2005