lunes, 19 de mayo de 2008

PHILOSOPHICAL ECONOMICS

Evolution of Economic Thinking in Latin-America and its consequences on Policymaking

Conference paper presented at the Founding Meeting of Ideaz

Vienna, Austria, October 4th., 2005


By: Sergio Omar Saldaña-Zorrilla[1]

Introduction

Over the past three decades, the world economy has started a process of economic openness, increasingly based on economic models and thinking from the neo-classical economics, which has been basically designed by economists from the so-called center[2] –in line with the terminology of center-periphery. Though this process has taken place in the five continents, its implementation has varied across countries. In Europe, it has been relatively slower, especially due to the presence of strong syndicates and to the historic role of social movements. However, in some Southeast Asian and Latin-American economies, its adoption has taken place faster and sometimes encouraged by multilateral financial institutions. Markets liberalization in these economies has coincided with increasing economic crisis and development uncertainty, as evidenced with the economic crisis in Mexico, Brazil, Southeast Asia and Argentina over the past 10 years, whose spillovers have dramatically affected other developing economies. The latter provide some support to ask if one must continue implementing the same economic approach. Also, why economic approaches from Latin-America, i.e. Neo-structuralism, failed to be replaced by markets liberalization, returning to depend again from the approaches made predominantly from the center? In other words, why are we moving away from our own economic thinking and approaching the economic mainstream again?

To answer these questions, I will first describe the interpretation from Latin-American economists to the process of impoverishment and dependence in the region. Afterwards, I will briefly expound some policy decisions which have led to economic constraints, drawing a vicious cycle of poverty, long-term unsustainable industrial policy, and economic underperformance and vulnerability, which provoked Latin-American economic thinking to be less implemented in the region.

1. Poverty and Development

In Latin American countries, as in most developing countries, poverty is a complex issue with ancient causes (e.g. land tenure) but also explained by dynamic factors and processes (e.g. economic policy and extern shocks). The former corresponds to the so-called original endowment[3] in the form of initial allocation of wealth -after the Spanish conquest, in our case of study. Factors like the industrialization model undertaken during the 50s and 60s provide some insights to explain underdevelopment and poverty in Latin-America.

Historic land tenure
On the one side, initial endowment during the colonial establishment margined indigenous population of wealth property, even though some indigenous communities could work its arable land under permission and contributing to the colonial authority’s revenue. It worked in that way until the independence war (year 1810), when slavery was abolished, but even despite that fact, the most productive land were already appropriated and concentrated in very few hands. So, at this first stage of independent life, dispossessed but now free farmers had to continue being still highly exploited by semi-feudal productive systems. It was so basically because the resulting government of the independence war did not change the status quo of former wealth allocation given a sort of agreement between insurgency, Catholic Church and colonial officials as pacification and independence condition (Alamán 1968). For instance, in Mexico the Revolution of 1910 forced towards land redistribution (Aguilar & Meyer 1989), and a successful and gradual process was undertaken by the early post-revolutionary governments to improve conditions in the rural poor (Cosio 1991) and to eliminate Hacienda system. But from the end of the 1940s, industrial policy in Mexico seems to obey to other reasoning, in line with the school of economic Latin-American structuralism (Tejo 2000: 10, Saldana-Zorrilla 2000: 5).

In the framework of the Mexican Revolution of 1910, philosophers like José Vasconcelos started developing epistemological thinking towards leaving behind intellectual dependency from the center, basically identified in England and the USA (i.e. Creole Ulysses, Vasconcelos 1935). Other revolutionary philosophers pointed out the need to reduce cultural dependence from the center in concrete aspects, as Samuel Ramos in Profile of the Culture and the Man in Mexico (Ramos 1934), refreshed later in the works of Octavio Paz (1955) and other Latin-American intellectuals. In fact, Latin-America started creating its own economic thinking just after the Great Depression, with the seminal works of Daniel Cosío Villegas, criticizing that intellectual, economic and cultural dependency would be difficult to counteract as long as financial dependency from the centre continue (Cosío 1933). Further, Raúl Prebisch developed a theory of economic dependence based on structural aspects, emphasizing the role of land tenure and terms of trade as main conditionings to overcome underdevelopment. In some sense, posterior works from Amartya Sen during the 70s on entitlements keep lots of similarities with Prebish tesis (Sen 1981). During the 50s, Latin-American economic scholars like Celso Furtado, Octavio Rodríguez, Víctor Urquidi, Oscar Soberón and Adolfo Gurrieri, among others, developed a framework approaching a strategy to substitute imports, support industrialization process and give priority to domestic markets as a way of reducing economic dependence from the center.

2. The rural-urban disjunctive

Raúl Prebisch (1951), one of the initiators of economic structuralism points out that if one considers the high share of working population employed in agriculture in Latin America, one can understand that land tenure is only part of the big issue about economic development. For him, any solution about it must first take into account that there will not be any improvement on people standard of life, if exceeding workforce in agriculture is not eliminated and redirected it to higher productivity sectors.

According to that efficiency approach, the sector expected to absorb such a displaced labor force was to be the Industry[4]. So, the economic pivot would be the industry (Figueroa 1991), which would become the most dynamic sector, able even to encourage agriculture. Under these assumptions, agriculture would turn into an input provider for the Industry. Proof of that are policies to drag agricultural prices –especially primary goods- in order to encourage industry by means of making affordable industrial inputs (Montserrat and Chavez 2003). In practice, inability in sustaining such an industrial policy in the long-term in Mexico led to failing in turning theory into reality.

In addition, the first scholars of the neo-classic modern economic development, during the 50’s, identified industrialization and urbanization as the main structural change a country should undergo in order to improve welfare and for economic growth (Lewis 1954, Fei and Ranis 1961). As in David Ricardo, the core of that argument is that, historically, economic systems are composed of sectors characterized by a clear difference in factor endowments. In such case, it is possible shifting factors from less to more productive sectors. Historically, this shift has taken place from agricultural to non-agricultural activities, and labor is the most frequent factor in motion[5]. This reallocation of factors leads also to a rise in efficiency of food production, creating thus an agricultural surplus, which in turn provides the basis for fast industrialization and, further, for growth and poverty reduction.

However, the cost of urbanization is high when urban conditions are not appropriated to absorb additional workforce. Contrary to theoretical expectations, labor transfers from rural to urban areas have historically exceeded economic systems capacity of employment in Mexico (Colosio 1979) and Latin-America (Saldaña 2005).

Population in Mexico became prematurely urbanized in the sense that the share of urban population was greater than the current stage of development could support. Global crisis during the 70´s, oil crisis, high cost of public debt (due to the rise in international interest rates), along with wrong estimations on future country’s incomes, slow downed industrial production along the 1980´s, accompanied with an increasing carelessness about agriculture. In practice, the industry did not develop as expected and therefore was unable to absorb exceeding labor force, which in fact was liberated from agricultural activities. The agriculture in Latin-America is currently under a trade liberalization process, progressively implemented from 1986 and abruptly accelerated in 1994 in the case of Mexico when NAFTA started.

3. Low agricultural productivity

Relative importance of agricultural output has declined permanently along the last five decades as percentage of GDP. Average 7% in 2002 in Latin-America, while in 1950 provided about 26%. Also, agricultural productivity has dramatically declined. For instance, productivity in Mexican agriculture is so low that accounts for about 25% of national employment, producing only 4% of GDP. The mistake is probably not to be found in the theory, as Prebisch (1973) points out, but in the projecting. As in Prebisch’s view, rural poverty is finally an issue of productivity, and policy-makers should identify the reality in rural areas to allocate public investment when needed, and to expand arable areas where required (quoted in Rodriguez 1980: 326).

Finally, such failures in rural-urban projecting come out into drawing a vicious circle of public inefficiency. As migrants from rural areas do not get employed in urban industrial activities, they are forced to engage in low-productivity tertiary activities. Also, large portion of this underemployed population becomes an obstacle to an efficient allocation of public resources, since the society is forced to provide large amounts of urban social infrastructure at the expense of directly public investments. For that reason, investments in agricultural productivity as well as in improving rural income can provide valuable solutions both in fighting poverty and in allocating efficiently society’s resources.

4. Negative terms of trade

Another argument justifying the preference for industry to agriculture (primary goods in general) might be that related to the Theory of Terms of Trade, mainly developed by a Latin-American economist, Raúl Prebisch. Incomes from exports depends both on the volume of these exports sold abroad and also on the price paid for them. The ratio between the price of a typical unit of exports and the price of a typical unit of imports is called commodity Terms of Trade. If the price of the country’s exports are falling relatively to the price of the products it imports, it should either to sell that much more of its export product (enlisting more of its scarce productive resources) or to contract debt at the amount of the net loss, merely to keep constant imported goods purchased in the past. When it succeeds, commodity terms of trade are said to deteriorate for a country. Todaro (2000: 466) conducted empirical studies about it, which suggest that relative primary-products prices have declined to manufacture goods at world level during the XX century. Between 1977 and 1994 the prices of non-oil primary products relative to those of exported manufactured declined by almost 60%. For reasons like that, countries depending on primary commodities to exports must sell greater quantities in order to purchase a given quantity of imports (generally manufactures). Given that in the short-run a quick expand of exports is usually not possible due to existing duties and other barriers to penetrate foreign markets, export amounts change only moderately, and in consequence a net loss from foreign trade appears necessarily in this kind of countries. Especially high is this risk for mono-crop countries. As Benson and Clay (2002: 23) point out, mono-crop economies like Dominica must face vulnerability from not only natural disasters, but also those associated to world trade uncertainty due to non-diversified export products of primary commodities. In addition, the Prebisch-Singer thesis (Prebish 1950, Singer 1950) argues that there was and would continue to be a secular decline in the terms of trade of primary-commodity exporters due to a combination of low income and price-elasticity of demand. This decline resulted in a long-term transfer of income from poor to rich countries, says Prebisch, which could only be combated by protecting domestic manufactures industries through the so-called process of import substitution.

In order to reduce the vulnerability associated to negative terms of trade, the Mexican economy opted for reducing the ratio agricultural/industrial products. Roughly speaking, between 1945 and 1975 the Mexican economy applied a model of import substitution, but it was no longer sustainable due to self limits of the model as well as to world economic context at the end of the 70s. However, the Mexican economy has been conducting efforts towards vulnerability reduction by improving terms of trade. By 1974, Mexico has joined the ranks of the new industrialized countries (NIC´s), with manufactured goods representing over 50% of total exports and agricultural goods falling back to 39%. In addition, whereas oil exports represented 75% of Mexico’s foreign exchange earnings in 1980, by 2000 this percentage was reduced to only 18%, decreasing thus vulnerability to sudden oil prices reductions. It is true vulnerability to terms of trade was reduced, but the traditional rural economy increased later its vulnerability to imports due to trade liberalization, natural hazards, and other contingent stressors. After the crisis of the debt affecting most Latin-American economies during the 1980s, imports substitution models were abandoned, and models based on neo-classical approaches has progressively taken its place.

5. Final remarks

Contributions from Latin-American scholars to world economic sciences have basically been centered on theories of economic development.
In the post-war, policy-makers in Latin-America implemented these ideas not always as successfully as expected. They basically failed in integrating them into a broader strategy of national development, what came out into inconsistencies.
The current lack of implementation of “region-made” approaches may be overcome through further integration of economic thinking in Latin-America, as well as increasing scientific interaction with researchers from other parts of the world and focus.

References

Notes

[1] Research Scholar at the UNAM, Centro de Ciencias de la Atmósfera, in Mexico City. Email: saldana@atmosfera.unam.mx . The present paper was presented in the IDEAS Seminar in September 2006, in Vienna, Austria.
[2] As David Ricardo (England), Jevons (England), Alfred Marshal (England), Pigou (England), etc. Also, Carl Menger (Austria), Eugen von Böhm-Bawerk (Austria), and Joseph Schumpeter (Austria) are considered main contributors to the neoclassical economics.
[3] For further details about Endowment, and Endowment Effect, see John List (University of Maryland), and Daniel Kahneman (Homo sapiens vs. Homo economicus).
[4] Industry: group of activities related to primary resources processing and manufactures.
[5] For instance, the historic process of recognizing property titles to landlords in Britain embracing communal lands during the XVII and XVIII centuries forced to displace enormous masses of rural workers to urban centers to meet the increasing workforce demand from the increasing industrialization process. David Ricardo (1817). Principles of Political Economy.
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