Latin America Class 4

Components of New Economic Policy Packages F creating macroeconomic stability by controlling public sector deficits F opening up the external sector F reduce the role of the state in the productive process F targeted poverty-reducing packages

Opening up of Latin America F Trade Reforms include: –Reduction of coverage of non-tariff barriers –reduction of average tariff level –reduction of dispersion of tariff structure –reduction or elimination of export taxes –creation of regional trading blocs

Average protection of tariffs & paratariffs (percent)

Average coverage of NTBs (percent)

Exchange rate adjustments 1985=100

Volume of exports Annual % rate of change

Exports of manufactured goods as percent of all exports

Annual % change in export volume and value,

Impacts of opening up these economies to the global economy??? Problem: Relatively short experience

Mexico’s Maquiladora Progam F Dates back to 1960s F allows duty-free import of inputs to make products for re-export F U.S. levies tariffs on value added only F originally intended to solve development problems of northern border zone F later extended to entire country

Employment effects By 1993: >2,000 plants; > 500,000 workers

Changes in the work process

Change in sectoral composition (% of empl.)

Use of Domestic Inputs

Factors F High prices, low quality and unpredictable delivery F limited industrial history of northern region F locus of authority for purchasing inputs F tariff problems somewhat unique to this program

Impact of modest local inputs F Modest economic multiplier effects

Have post-reform growth prospects met expectations??? F One assessment. –Easterly et al Has Latin America’s post-reform growth been disappointing? Journal of International Economics 43:

Starting point

Next steps F Relate changes in growth across countries to: –changes in economic policies –controlling for: u initial per capita GDP u population growth rates u educational attainment u terms-of-trade changes

F Phase One: –examine coefficients for the policy variables u change in inflation u level of government consumption u financial reform measure u measures of trade reform u privatization of public enterprises

F Phase Two: –Create predicted change values for Latin American countries –Compare to actual growth rates F Findings. There is no Latin American growth puzzle. Latin American economies performed roughly as expected.

Phase 3 F An explicit comparison of Latin America and East and SE Asia in the early 1990s

Explaining the Difference in Growth Rate Changes between East Asia and Latin America ( compared to )

Mexican Debt Crisis of Late 1994 and the Tequila Effect (Sachs et al. 1996) F weak banking sectors F currency overvaluation F limited foreign currency reserves