UNITED NATIONS

ECLAC

ECONOMIC COMMISSION f o r La t in A m e r ic a a n d

t h e C a r ib b e a n

GERT ROSENTHAL Executive Secretary

OSCAR ALTIMIR Deputy Executive Secretary

C E P H L R e v ie w

NUMBER 55 APRIL 1 995

SANTIAGO, CHILE

ANIBAL PINTO Director o f the Review

EUGENIO LAHERA Technical Secretary

UNITED NATIONS Notes and explanation of symbols The following symbols are used in tables in the Review:

(...) Three dots indicate that data are not available or are not separately reported.

(-) A dash indicates that the amount is nil or negligible.

A blank space in a table means that the item in question is not applicable.

(-) A minus sign indicates a deficit or decrease, unless otherwise specified.

(.) A point is used to indicate decimals.

(-) Use of a hyphen between years, e.g., 1971-1973, indicates reference to the complete number of calendar years involved, including the beginning and end years.

References to “tons” mean metric tons, and to “dollars”, United States dollars, unless otherwise stated. Unless otherwise stated, references to annual rates of growth or variation signify compound annual rates. Individual figures and percentages in tables do not necessarily add up to the corresponding totals, because of rounding.

CEPAL Review is prepared by the Secretariat of the Economic Commission for Latin America and the Caribbean. The views expressed in the signed articles, including the contributions of Secretariat staff members, however, represent the personal opinion of the authors and do not necessarily reflect the views of the Organization. The designations employed and the presentation of material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat concerning the legal status of any country, territory, city or area or its authorities, or concerning the delimitation of its frontiers or boundaries.

LC/G.1858-P — April 1995

United Nations Publication

ISSN 0251 -2920 / ISBN 92-1-121202-2

Applications for the right to reproduce this work or parts thereof are welcomed and should be sent to the Secretary of the Publications Board, United Nations Headquarters, New York, N.Y. 10017, U.S.A. Member States and their governmental institutions may reproduce this work without application, but are requested to mention the source and inform the United Nations of such reproduction.

Copyright © United Nations 1995 All rights reserved Printed in Chile CEPAL REVIEW 55

CONTENTS

A summary of the ECLAC proposal 7 Eugenio Lahera, Ernesto Ottone and Osvaldo Rosales

Post-confllct peace-building: a challenge for the United Nations 27 Graciana del Castillo

Decentralization and democracy: the new Latin American municipality 39 Eduardo Palma

The political economy of protection after the Uruguay Round 55 José Tavares

Trade policy and international linkages: a Latin American perspective 65 Marta Bekerman and Pablo Sirlin

Capital movements and external financing 81 Benjamin Hopenhayn

The impact of exchange-rate and trade policy on export performance in the 1980s 95 Graciela Moguillansky

The present state and future prospects of the environment in Latin America and the Caribbean 109 Nicolo Gligo

Youth expectations and rural development 127 Martine Dirven

Transnational corporations and structural changes in industry In Argentina, Brazil, Chile and Mexico 143 Ricardo Bielschowsky and Giovanni Stumpo

El Salvador: industrial policy, business attitudes and future prospects 171 Roberto Salazar

Technological change and structuralist analysis 191 Armando Kuri

Guidelines for contributors to CEPAL Review 199

APRIL 1995

CEPAL REVIEW 55

A summary of the ECLAC proposal

Eugenio Lahera Ernesto Ottone Osvaldo Rosales

Technical Secretary, There is growing consensus that although a solid, balanced CEPAL Review. macroeconomic base is a necessary condition for development, Secretary o f the it is not of itself enough to ensure that development is Commission (ECLAC). actually achieved or that its fruits will be enjoyed by the population as a whole. In a series of documents, ECLAC Economic Affairs Officer, ECLAC. has been defining a coherent agenda of public policy reforms designed to ensure a change in production patterns accompanied by greater social equity. This article seeks to present a summary of this proposal, leaving aside for this reason the underlying diagnosis of the regional situation and the general frame of the strategy. The broad lines of the proposal are set forth in section I, and the remaining five sections deal with specific aspects. Thus, section II analyses issues connected with the microeconomic setting, including production development policies, technical change and the sustainability of development. Section III deals with the macroeconomics of changing production patterns, with special attention to stability and growth, saving and investment, and public sector finance. Section IV covers social development, as part of an integrated approach, and analyses the generation of productive employment, the reform of education, social integration and ways of overcoming poverty. Section V considers various matters connected with the form of relations with the international economy, such as foreign trade, macroeconomic policy and capital movements, and open regionalism. Finally, section VI deals with political aspects and State intervention, including participative political regimes, the interaction of the various agents, and reform of the State.

APRIL 1995 8 CEPAL REVIEW 55 • APRIL 1995

I The broad lines of the ECLAC proposal1

Linking up with the international economy involves far-reaching changes in institutions at many levels: within the enterprise; in the relations between employers and workers, between government and business, and between government and workers; at the regional level of government; in the political system itself, and in overall human relations. Therefore, opening up an economy to the exterior is much more than merely lowering tariffs. It means embarking on a whole new way of functioning: economically, socially and politically. Fernando Fajnzylber

The main concepts with regard to changing produc­ intersectoral linkages and the raising of productivity tion patterns with social equity proposed by e c l a c throughout the entire system. Thus, industrialization may be summarized in the five aspects set forth must go beyond the narrow sectoral framework in below.2 which it has traditionally been approached and must Firstly, the central idea around which all the be linked up with primary-sector and services acti­ others revolve is that changing production patterns vities, so as to integrate the whole system of produc­ must be based on the systematic and deliberate incor­ tion and promote the progressive homogenization of poration of technical progress: in the current context levels of productivity. Still within the area of the of globalization the basis for the international compe­ microeconomic setting, it is held that changing pro­ titiveness of the countries of the region can only be duction patterns must be compatible with conserva­ that of achieving ever-higher levels of productivity. tion of the physical environment, and the environmental Technical progress is not restricted to the develop­ and geographico-spatial dimension must therefore be ment and adaptation of technology: it also includes fully incorporated into the development process. business management capacity and improvements Secondly, it is emphasized that coherent and stable both in general organization and in the quality of the macroeconomic management, while not a sufficient labour force. condition on its own, is of fundamental importance Changing production patterns must include the for changing production patterns with social equity, entire system within which the enterprises operate: since this demands consistent management of a whole the technological, energy and transport infrastructure; set of monetary, financial and exchange-rate instruments, the educational system; relations between workers as well as appropriate measures in terms of taxation and and employers; the whole apparatus of public and government spending. The exact content, order of ap­ private institutions, and the financial system. This is plication and graduality of adjustment programmes why the proposal stresses the systemic nature of and the links between short- and medium-term competitiveness. It also calls for the modernization of policies must be determined with particular care. systems of production as a whole, with emphasis on The challenge raised by the proposal calls for a substantial rise in the investment rate above current □ The authors wish to express their gratitude for the valuable levels, which in turn means that per capita consump­ comments offered by Renato Baumann, Mikio Kuwayama, tion must grow more slowly than the per capita pro­ Wilson Peres and Aníbal Pinto. duct, thus permitting an increase in saving. In view of 1 This section is based on Rosenthal, 1993/1994. the structure of income distribution in the region, this 2 The main documents on this subject are: ECLAC, 1990, 1991, reduction in the growth rate of consumption should 1992a, 1992b, 1993, and 1994a, 1994b and 1994c. For a general be the responsibility of the high-income strata and overview of the ECLAC strategy, see Ottone, 1992/1993; Baumann, 1994; Lahera, 1994, and Rosales, 1994. the government.

A SUMMARY OF THE ECLAC PROPOSAL • EUGENIO LAHERA, ERNESTO OTTONE AND OSVALDO ROSALES CEPAL REVIEW 55 • APRIL 1995 9

Thirdly, it is maintained that changes in produc­ decisive importance and that the links between these tion patterns cannot be sustainable over time unless elements should be strengthened within the context there is social cohesiveness, which demands greater of what has been called “open regionalism”. equity: but greater equity cannot be expected unless Fifthly and lastly, all the foregoing is based on there is economic growth, which in turn demands the recognition of the need for a democratic, pluralis­ changes in production patterns. This symbiotic rela­ tic and participative setting. It is also assumed that tion between growth and equity is feasible through the minimum platform of agreements in support of the mutual complementation between policies aimed any national effort should be reached through at greater efficiency and higher growth, on the one consensus-building and that social conflicts must be hand, and those aimed at securing greater well-being kept within limits that the democratic system can and more equitable income distribution, on the other. handle. It is proposed that there should be a new style Fourthly, the proposal assigns due importance to of State intervention, since it is important to redefine Latin American and Caribbean integration and intra­ the role of public action and ensure that it is carried regional cooperation, since these factors have a vital out in an efficient and effective manner. For this contribution to make to the consolidation of changes reason, it is held that while its actions should be in production patterns. It is considered that the inter­ concentrated on current priorities, at the same time action between greater trade openness and deregula­ the institutions should be strengthened in order to tion, on the one hand, and integration promoted through provide a stable and predictable framework for the explicit agreements and policies, on the other, is of operation of private enterprise. II The microeconomic setting

1. Production development policies between exports of primary commodities, manufac­ tures and services; the establishment of chains of pro­ One of the current challenges is that of strengthening duction based on existing comparative advantages the form of participation in the international econ­ must be promoted, and closer production linkages omy by guiding the structure of production in the must be fostered with a view to the building of same direction as the most dynamic trends in world dynamic comparative advantages in line with the trade. In order to do this, it is necessary to increase resource endowment. the proportion of knowledge and technological value Thus, for example, in the natural resources sec­ incorporated in each product by fostering the produc­ tor measures should be taken to stimulate the estab­ tion and services linkages in exports. lishment of production networks which are linked Increasing productivity and international com­ with industry and services, so as to heighten the value petitiveness does not only require suitable macro- of the resources and assist in a process of change economic and trade policies, but also appropriate which will increase their competitiveness. With re­ microeconomic and mesoeconomic policies: that is to gard to agriculture, it would be desirable to overcome say, modernization not only of the enterprise itself the urban/industrial bias in the orientation of invest­ (in technology, equipment, organization and labour ment and social expenditure, to modify the present relations), but also of its setting (factor markets bias in favour of big agricultural firms, and to favour and inter-firm coordination). the modernization of small-scale agriculture. To this The systemic nature of competitiveness means end it would be useful, for example, to explore the that prime attention must be given to integration of possibilities for complementation between agro­ the system of production and attainment of increas­ export firms and small and medium-sized farms. De­ ingly uniform levels of productivity. The develop­ veloping such links is not a task that can be left to the ment of sectors in watertight compartments must be workings of the market: it is a further example of the eschewed, seeking instead to establish closer links need to develop markets and institutions and, in this

A SUMMARY OF THE ECLAC PROPOSAL • EUGENIO LAHERA, ERNESTO OTTONE AND OSVALDO ROSALES 10 CEPAL REVIEW 55 • APRIL 1995 case, to focus the whole range of public and private responsibility to ensure that these qualities exist. instruments in the areas of coordination, training, tech­ Effective functioning of the markets involves free nical assistance, information and incentives on the prices and deregulation and, often, intervention to task of exploiting and stimulating the links between create or simulate markets which are absent, insuffi­ exporters and smaller-scale producers. cient or segmented. The sought-for competitiveness has a systemic component in that it cannot be efficient as long as 2. Technical change, training and support policies to promote competitiveness are designed and services applied in watertight compartments and thus fail to take advantage of the obvious sectoral, regional and There are three sets of related measures which are institutional relations which exist in public action. important for the development of production. The The coordination of policies on public investment, first of these covers technological development infrastructure, human resources training, export in­ policies, the second, labour training and a pro­ centives, support in the areas of technology and gramme designed to put businessmen in the region finance, and technical cooperation must be a top in contact with the best international production priority. Such coordination could be expressed in practices, and the third refers to support services. some institutional referent through which the unified management of these policies could be evaluated. a) Technological development Industrial policy requires a gradual and selective Technology policy must be designed to supple­ opening-up process, integral promotion of industrial ment and adapt the technological infrastructure in the exports, the incorporation and dissemination of tech­ priority activities which display the most serious nical progress, and support for small and medium­ lags; it must promote a greater propensity on the part sized firms. In addition to macroeconomic stability of firms to incorporate technical progress and to and a system of relative prices which is not biased make innovations, by giving government incentives against employment, the latter also require policies to embark on innovative activities and providing on technical support and infrastructural and financial support for the establishment of new enterprises of services. A component in the generation of produc­ high technological level. tive employment which is often given insufficient at­ It is also suggested that a network of linkages tention is that of labour relations. Within individual should be developed between the research system firms, vertical and hierarchical structures should and the rest of the technological infrastructure, on the gradually be replaced with more horizontal and one hand, and the production sector on the other, flexible systems which permit the intensive ex­ together with the promotion within the latter of close change of information and stimulate cooperation. contacts between the users and producers of goods Production development policies are aimed at re­ and services. This latter aim could be achieved fol­ ducing or eliminating the differences between the lowing the example of various integrated systems of average productivity levels of the region and those production where experience has already been built corresponding to the best international practice. They up and there is basic capability at the local level. seek to strengthen rather than take the place of the Selective criteria must be used, as only in this way market forces. Such incentives as are provided will it be possible to generate endogenous techno­ should be of a temporary nature, for it is important logical innovation nuclei. to seek near-optimal functioning of the key markets Mechanisms for developing the supply of tech­ -for technology, physical capital, human capital and nology must cover two areas: public and private sup­ foreign exchange. In order to achieve this, it would ply. In promoting private supply it is advisable to be desirable to use policies of a horizontal nature, emphasize development at the enterprise level and to namely, those aimed at filling the gaps in those mar­ promote closer links between firms and technology kets and overcoming the most serious bottlenecks centres. To this end, it may be appropriate to promote that occur in them. research contracts for the development and adapta­ In order for markets to operate to the full, it is tion of technologies, thereby increasing the private important that there should be adequate competition, funds available for research and development acti­ information and transparency, and it is the State’s vities, and to favour this by making outlays for

A SUMMARY OF THE ECLAC PROPOSAL • EUGENIO LAHERA, ERNESTO OTTONE AND OSVALDO ROSALES CEPAL REVIEW 55 • APRIL 1995 1 1 private projects or private contributions to technol­ the preparation of indicators which will allow train­ ogy centres tax-deductible. ing quality and results to be evaluated. As well as With regard to the public supply of technology, harmonizing training supply and demand, it should the main corrections called for are those aimed at also regulate the content, quality and appropriateness establishing a closer relationship between the resour­ of such activities and improve the incentives for the ces used and the achievement of appraisable results, training of employers and workers. These tasks can by using performance indicators. In order to strengthen be carried out at lower cost and with better results by this approach, it would be desirable to increase operating on a tripartite basis, in conjunction with private participation in the management and financ­ employers and workers. ing of technology institutes and to introduce greater In short, in view of the magnitude of the tasks flexibility in the budgetary management of such involved in improving labour quality in the region, it institutes, as well as in the rules on their operation would appear to be urgent to organize national-level and on the amounts and types of projects eligible debate on the following actions: for receiving benefits under programmes to support i) Giving incentives to firms which train their technological innovation. staff, in order to offset the negative externalities that The incentives for the promotion of technology such training usually involves for the firms. should seek to give rise to initial demand by busi­ ii) Adopting measures to promote, publicize and nesses and subsequently go along with the increasing heighten awareness of the need to incentívate train­ sophistication of such demand. International experi­ ing and introduce more efficient human resource ence shows that industrial extension activities play a management practices and more cooperative indus­ central role in inducing demand and that this task is trial relations. unavoidable for the public sector, especially as re­ iii) Reorganizing the supply of training by pro­ gards the incorporation of small and medium-sized moting greater private supply and concentrating pub­ firms into the technological development effort. lic efforts on ensuring that training and those who Demand should also be strengthened through the es­ offer it are more closely linked with the system of tablishment of technological management centres production and its future needs, as well as guaran­ which, inter alia, should promote subcontracting ar­ teeing both the quality and the appropriateness of the rangements. The vital function of ensuring proper courses offered by establishing arrangements for cer­ links between the supply and demand for technology tifying the training given and promoting and financ­ can be carried out by a variety of agents, and the ing the provision of training for such groups as extent of this variety should be fostered. marginal workers, the unemployed and small-scale It is important to improve the systems for the businesses, which are usually not covered by training dissemination of information, by strengthening programmes. the systematic follow-up of internationally available iv) Promoting special basic training programmes technologies and management methods; integrating for the large segment of labour force members (40% firms into the appropriate information networks; pro­ in the region) who have not completed their primary moting strategic alliances between national firms and education and subsidizing regular training pro­ international corporations which are leaders in terms grammes to help improve the production potential of of technology, management, quality and access to the this great mass of workers who will not be able to most important markets; simplifying administrative benefit from the educational reforms put into effect. formalities; improving the information available, and One concrete proposal for narrowing the big gap providing fiscal incentives. between the productivity of many firms in the region and that of the developed countries is to implement b) Training and extension activities large-scale extension programmes providing financial The public sector has an irreplaceable coordinat­ assistance for visits to foreign firms using the best ing role to play in the task of improving identifica­ international practices. Thus, it is suggested that ar­ tion of the training needs of the various sectors, rangements should be made and partial financing regions and scales of firms, processing and dissemi­ provided to allow managers, engineers, technicians, nating that information, stimulating and subsidizing supervisors, operatives and trade union officials from the formation of training firms, and progressing in various production subsectors to visit plants abroad

A SUMMARY OF THE ECLAC PROPOSAL • EUGENIO LAHERA, ERNESTO OTTONE AND OSVALDO ROSALES 1 2 CEPAL REVIEW 55 • APRIL 1995 which use the most advanced practices. Each of these reaches the minimum level compatible with the visitors would subsequently pass on what he had strategy in force. In addition, it is necessary to learned to other firms, as well as to the respective achieve a generalized adequate level of equipment in business and trade union organizations. The pro­ the field of data processing, to promote the spread of gramme would be open to any sector willing to pay information technologies, and to define a regulatory its share, regardless of whether it was engaged in framework for the sector. export or import-substitution activities. With regard to port modernization, it is essential to ensure free access by workers to jobs in the sector, c) Support services to permit working in three shifts during the whole As regards basic production support and liaison year, to allow free entry by private stevedoring firms services, policies are required for the modernization into the sector, to authorize marine terminals which of the electricity, water, communications, banking, currently have only a single user to handle cargo be­ insurance and transport sectors. longing to third parties, and to sell off ports directly. In the area of infrastructure, in general it would be desirable to draw a distinction between basic in­ 3. Sustainability of development frastructure -which meets the primary needs of the population, such as drinking water, local and rural Changing production patterns must be compatible roads, and health and sanitation services- and pro­ with conservation of the physical environment, to duction infrastructure, such as highways, ports and which end it is necessary to bring about the full in­ telecommunications. In the first case, social consider­ corporation of the environmental and geographico- ations should prevail, dealt with according to their spatial dimension into the development process. A level of priority in the light of given criteria. In the priority activity in this field is the formulation of a second case, it is both possible and necessary to national policy of education and social communica­ incorporate criteria based on economic return, rate tion which will heighten public awareness of the fixing and financial considerations, encouraging problems of the sustainability of development. the formation of infrastructure markets. A prior requisite for the various environmental The absence of direct links between the demand policies is greater knowledge of the existing resour­ for road facilities and their financing is a constant ces: their potential, rates of use and levels of invest­ incentive for excessive demand and an obstacle to ment. This will make it possible to improve the their efficient management. The existing road network, effectiveness of environmental and territorial plan­ and especially its maintenance, can be financed directly ning policies. Public policies must include environ­ by vehicle users. There are no economic reasons why mental standards and regulations in such areas as electricity and drinking water supply should be fin­ health, marine pollution, river basin management and anced with the charges paid by users while the road the transport and disposal of dangerous wastes. transport system is subsidized by taxpayers at large. It is essential to establish closer links between This subsidy is inequitable, because the lower-income the environment and economic policy, especially by sectors, and especially those located in isolated re­ ensuring that the prices of goods and services reflect gions, contribute proportionately more to the financ­ the effective social cost incurred by society in their ing of road facilities than the use they make of them. production. The resulting economic efficiency can Strict application of optimum scales of charges also, for example, promote greater energy efficiency for use of the infrastructure is not possible, but de­ and the use of clean technologies. The fact is that parting too far from such charges is not efficient. energy prices which reflect their effective social cost Greater use of such charges, as an index of the and take account of the externalities of pollution; willingness of users to pay, would not only make road charges which make users pay for the effective possible better estimation of the effective demand for use they make of the roads; tolls for travelling through infrastructural services but would also introduce urban areas of serious congestion; special taxes on healthy efficiency-based restrictions on resource use industries and activities which cause particularly by highlighting their implicit opportunity cost. severe pollution, etc., are all examples of environ­ In the field of information and telecommunica­ mental policies which use prices effectively to further tions, the infrastructure needs to be developed until it both economic and environmental efficiency.

A SUMMARY OF THE ECLAC PROPOSAL • EUGENIO LAHERA, ERNESTO OTTONE AND OSVALDO ROSALES CEPAL REVIEW 55 • APRIL 1»#5 13

Stronger efforts should be made to take account als begin to be transformed into viable projects of the replacement costs of natural resources and the which, when properly evaluated, link economic and cost of damage to the environment in the evaluation social profitability with preservation of the environ­ of major investment projects. In fact, as this practice ment. Likewise, explicitly incorporating territorial will become more general in international trade, it planning criteria into processes of decentralization would be desirable to anticipate these trends. This and regional development would foster a more accur­ also opens up a promising range of business oppor­ ate approach to environmental problems in every tunities, as the gradual installation of clean techno­ community, thus helping to assign infrastructural logies, proper disposal of liquid and solid wastes, projects the right priority in the light of criteria of treatment of waste water and the recycling of materi­ sustainability and social well-being.

Ill Macroeconomic aspects of changing production patterns

1. Stability and growth In order for the behaviour of the economic agents to be guided by these signals, it is necessary Achieving sustained growth of the product, subject to to make sure that the fundamental economic vari­ the constraints of the production capacity and the ables are due only to permanent changes in the fac­ sustainable availability of foreign exchange, calls for tors that determine them, filtering out those changes a form of management in keeping with the prevailing that are due to speculative movements, temporary ex­ set of monetary, financial and exchange-rate instru­ ternal shocks or very short-term situations. It ments, as well as the tax aggregates and government would help if the public sector were given the ca­ spending, and involves the pragmatic combination of pacity for fine-tuning aggregate spending by endow­ the objectives of stabilization and adjustment with ing it with institutions and flexible instruments to the aim of changing production patterns, with macro- facilitate consistency between the evolution of economic policy aimed at the objective of growth. public and private aggregate spending and that of In this way, economic policy is put on the right the potential product. track, since the condition is imposed that the preser­ Maintaining the macroeconomic balances is a vation of the macroeconomic balances should not be necessary but not of itself sufficient condition for achieved at the cost of adversely affecting investment growth, and still less for changing production pat­ decisions connected with changes in production terns. This is really just an acknowledgement of the patterns. Experience shows that some adjustment fact that the existing production capacity and the on­ or stabilization policies which appear to be success­ going availability of foreign exchange are elements ful in the short run may harm the export effort or which impose real limits on economic management. investments in infrastructure. The most favourable macroeconomic setting for the Within the current reorientation of the region’s attainment of high rates of investment and sustained development strategies in the direction of exporting increases in factor productivity is one in which there more and on better terms, economic policy must con­ is fiscal balance; low rates of inflation which are tribute to the stability of the ground rules by placing stable or on the decline; a moderate and sustainable emphasis on incentives for productive investments current account deficit, and an effective product and exports. This is where the medium-term signals which does not exceed its potential level too much. should point: towards investment in order to expand As a corollary to this, the links in terms of instrumen­ export capacity and restructure and rationalize the tation and evaluation between macroeconomic policy sectors producing importable goods, and no less im­ and production development policies must be streng­ portant, towards investment in human resources. thened.

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In view of the need to raise investment in the portable commodities so as to free macroeconomic region to an average level equivalent to not less than and fiscal policy from the vagaries of fluctuations in 22% of the product, per capita consumption must the international prices of important export products. grow more slowly than the per capita product: a mac­ The present situation of abundant capital inflows roeconomic constraint which cannot be avoided if it is a challenge to the continuation of greater export- is desired to achieve the necessary increases in sav­ oriented trade openness, so that it is essential to de­ ing and investment. At the same time, it is necessary fend a competitive level of the real exchange rate by to expand the field of action of tax and financial regulating the inflow of capital and fostering public instruments that promote saving and investment. and private domestic saving. In this respect, fiscal Likewise, until such time as growth and inflation policy would be more effective if the government remain steady around the sought-for medium-term could apply flexible taxes which could be varied in levels, real wage increases must be limited to levels line with the level of aggregate spending, increasing in keeping with the rise in productivity. the tax burden when there are excessive spending Since the concentration of income became more pressures and channelling such resources to saving, marked in the region towards the end of the 1980s, it so as to be able to use the previously saved resources, is essential to promote a recovery in the levels of when the effective product falls markedly below its consumption of those sectors of the population which potential level, in order to make up for the difference are below the poverty line. The process of changing through compensatory public expenditure. production patterns thus faces a further macroecon­ omic restriction: the need to limit the growth of the 2. Saving and investment consumption levels of the upper-income strata. The growth in government consumption, too, should be Changing production patterns requires a substantial subject to severe limitations, in view of the vital need increase in the rate of investment and, hence, in the to maintain fiscal balance and improve the low levels sources of finance for it. In order to strengthen capi­ of public investment in infrastructure and social ex­ tal formation in the region it is necessary to increase penditure. domestic saving and limit transfers of resources The task of economic stabilization must be car­ abroad; to apply economic policies which are in ried out with a minimum of recessive effects and keeping with the goals of stability and growth, and to further setbacks in income distribution, which calls favour the development of sound and competitive for policies to control aggregate demand and expec­ financial systems and capital markets which will tations and correct relative prices, compensatory extend their coverage to broad sectors which are income distribution policies, and various reforms currently on the sidelines of formal credit. in public and private institutions. In addition to increasing saving, it is necessary Among the institutional reforms pursued by to heighten the effectiveness of the intermediation economic policy, special emphasis should be placed and allocation of investment resources. For this pur­ on those designed to increase the flexibility and pose, it is important to follow a financial develop­ competitiveness of the economy: a challenge which ment policy which will make it possible to include affects the public sector just as much as private enter­ the largest possible proportion of the population in prise. Thus, for example, in countries where inflation the saving effort and open up access to the capital is going down, wage adjustments should be in line market by broad sectors of micro-entrepreneurs and with the estimates of future inflation and productiv­ small and medium-sized businesses, which account ity, thus helping to reconcile wage increases with sta­ for the bulk of employment in the region. bility and to further the incorporation in wages of a The available evidence indicates that even the variable “profit sharing” component linked with the lower-income sectors are ready to save if, in addition trading results of the firm; in order to achieve this, it to receiving attractive rates of interest, such saving will be necessary to modernize labour relations in the improves their possibilities of gaining access to direction of a form of cooperation that would favour goods and services which they prize. Examples of productive employment, competitiveness and equity. this are the possibilities of institutional saving by Measures along the same lines are those involving workers for social security purposes or for obtaining schemes for stabilizing the international prices of ex­ a dwelling through prior saving which makes them

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eligible for housing subsidies. Other policies in this execution of such functions affects public con­ same area are those aimed at creating a capital fidence, which is why the solvency or stability of market for investments in education and training by financial institutions involves considerable macro- establishing effective systems of charges and guarantees economic externalities. which make these investments attractive to the In the area of the relation between financial mar­ financial system. It is possible to take advantage of kets and capital formation for development, institu­ the existing collection arrangements of the social tions are required which supplement or improve the security system by adding to their social security operations of the market in the light of the need to: role that of compulsory saving and the deduction i) Ensure the existence of a long-term segment and automatic repayment of loans for education of dynamic financial markets for the financing of and training; similarly, in order to reduce the risks production projects. This means discouraging the of these operations still further, secondary markets speculative segments and concentrating on long-term could be generated for such instruments, thereby international capital, accompanied by access to diversifying the investments and giving them greater modern technology and export markets. liquidity. ii) Complement the capital market with a seg­ Even if the social security system is not reor­ ment for serving the investment projects of small and ganized on the basis of individual accounts (which medium-sized enterprises at market rates: a crucial tends to increase private saving), public saving can factor for promoting an increase in the productivity nevertheless be raised by reducing the deficits of and spread of capital and, ultimately, stimulating the many social security systems through the elimination linkages of the production system. Special mention of privileges, the calculation of benefits on the basis may be made in this connection of institutional inno­ of a longer working life than in the past, and the vations such as the use of leasing to finance capital adjustment of such benefits to the actuarial value of goods and new or used equipment, guarantee funds the fund in question rather than its cash flows. and collective guarantees for credits, and the granting In order to increase private saving and the pro­ of credit accompanied by technical assistance, all ductivity of capital, it is necessary to pay greater within the framework of suitable production develop­ attention to policies aimed at promoting saving by ment policies, which will be discussed below. companies and individuals. In the case of companies, iii) Recognize that, in countries with “emerging” tax policy should favour the reinvestment of profits securities markets, financial liberalization of the rather than their distribution, while in the case of capital account, involving opening-up to international individual persons, progressive income taxes should portfolio investments, raises the risk of external over­ give preferential treatment to direct or financial indebtedness and excessive stock market and ex­ investment. Likewise, tax and financial measures change rate fluctuations. It is therefore necessary to should be used to discourage excessive increases in apply various forms of regulation and supervision of consumption. financial institutions operating in the capital market, In the area of agriculture, the large-scale regular­ in order to ensure their stability. ization of title deeds would help to give rise to a land market, on the basis of which an institutional and 3. Public sector finances financial system could be designed to facilitate the purchase of land in the market, with forms of prior The stringent fiscal adjustment of the mid-1980s has saving and credit for its acquisition and specific sub­ made a decisive contribution to the reduction of in­ sidies for small farmers, accompanied by the provi­ flation in a number of countries of the region. How­ sion of technical assistance. Agricultural activities ever, this has largely been achieved at the cost of cuts could then be taxed on market bases, thus stimulating in public investment in the social areas and the infra­ the productive use of land. structure, and it has also affected the overall effi­ Prudential regulation of the financial sector, for ciency of public sector performance, through the its part, could be designed primarily to safeguard the marked deterioration in salaries in this sector. It solvency of banks, financial funds, insurance com­ would appear to be necessary to persevere with the panies and other agents who manage resources or consolidation of fiscal sector balance, but on more take risks for third parties on a major scale. The permanent bases which do not run counter to the

A SUMMARY OF THE ECLAC PROPOSAL • EUGENIO LAHERA, ERNESTO OTTONE AND OSVALDO ROSALES 1 6 CEPAL REVIEW 55 • APRIL 15S5 objectives of equity and competitiveness: that is to say, still lower: it is only half that applied in Southeast by basing it on more reasonable levels of collection of Asia and only a quarter of that prevailing in the oecd fiscal resources rather than on cuts in expenditure. In countries. The conclusion is very clear: there is ample order to do this, it will be necessary to strengthen the room for increasing taxation -especially direct taxes- public sector finances through fiscal reforms which, without affecting competitiveness. as well as recognizing the need to reorient and modern­ The dynamic restructuring of public expenditure ize public management, will also ensure the structural can be tackled by reducing the growth of some bud­ soundness of the public sector’s sources of revenue, get items in order to divert the resources thus saved the flexibility of budgetary procedures, the political to social expenditure and the furtherance of produc­ and institutional viability of the reforms, and the ad­ tive activities. A first area where additional resources ministrative feasibility of the instruments adopted. may be found is that of interest payments. There are Fiscal reform covers the areas of taxation, bud­ also extensive possibilities of cutting spending on ar­ geting and the management of public enterprises. Tax maments and defence, both in the region and in the reform is a central element in the efforts to finance world at large. Other potential savings can be made the functioning of the public sector against a back­ through the gradual suppression of public functions ground of changing production patterns. This in­ which no longer have any reason to exist and the volves, firstly, the reduction of tax evasion and the elimination of projects of low priority or low social installation of modem and effective systems of tax profitability in public investment programmes. administration, and secondly, an increase in the tax Finally, there are also other forms of raising in­ burden and greater vertical equity. The overall tax come through the restructuring of public enterprises, burden in Latin America is low compared with that of either through modernization of their management prac­ the o e c d and Asian countries. The direct tax burden is tices or, at the other extreme, through their privatization. IV Social development as part of an integrated approach

1. The generation of productive employment protecting occupational mobility by adopting measures which permit the réadaptation of labour and reduce the The backbone of an approach combining growth with costs of instability (through unemployment insurance, equity is the generation of jobs of increasing produc­ for example). It is also necessary to promote the retrain­ tivity. It will be necessary to promote a sustained ing of members of the labour force working in branches increase in investment in order to keep up high levels which are no longer capable of competing, as well as of capital formation; to develop policies for the the upgrading of workers in sectors which are lagging promotion of production and technology in a context behind but could potentially become competitive. of open economies; to boost greater investment in Raising the productivity of the informal sector human resources in order to endow them with the must be an integral part of the global development new skills required; to develop a new relation be­ strategy. It is essential to take account of their needs, tween wages and productivity which takes account particularly in rural areas, when formulating plans for not only of the results obtained but also of the sta­ developing the infrastructure, reforming education, and bility and participation of the workers; and to foster implementing an improved system of labour rela­ the changes needed in the cultural patterns of em- tions. It is also necessary to raise the quality of informal • 'oyers and workers in order to allow them to adapt jobs by improving health and safety conditions and iu the ikw ways in which firms will have to operate. strengthening the informal sector’s capacity for inde­ In view of the changes in production patterns pendent representation of its needs, in order to further now under way, it is necessary to generate ways of its incorporation in the overall development process.

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2. Reforms in the field of education 3 In order to apply such policies with the proposed objectives, the existing institutions need to be sub­ We will attain neither competitiveness nor equity jected to profound changes in two directions. On the if we fail to take care of human resources and one hand, changes are needed in order to strengthen their education, training and incorporation national integration, which is still only in its infancy into scientific and technical knowledge. in many countries of the region, or else has not yet Talking about equity, or about competitiveness, or even more so, talking about both aims at once been fully achieved. On the other hand, it is necess­ without making a consubstantial and consistent ary to further decentralization, with emphasis on the effort in this direction is nothing more than fine words. independence of educational establishments. In order No country can be competitive nor equitable for there to be modem citizenship and competitive­ unless human resources are given their due importance. ness, it is necessary in education, training and science Femando Fajnzylber and technology to develop spaces of identity, pro­ jects, initiative and the boldness needed to meet the There are two guiding objectives in the proposal for challenges of the real world in which those estab­ the reform of education: enhanced citizenship and lishments are located. Independence can spark off international competitiveness. To imagine that we creative capacity, but imagining that it can solve the can build societies in which modem citizenship fully problem of national integration on its own is not prevails without making a parallel effort to achieve borne out by experience. There must therefore be a international competitiveness is nothing but an illu­ parallel integration effort to ensure the national inte­ sion, because the aspirations of the Latin American gration of autonomous establishments with their own peoples are comparable to those of the developed projects and identity. world. Consequently, societies which appear to be What are the necessary conditions for the appli­ well advanced in the practical manifestations of mod­ cation of the proposed strategy? To begin with, the ern citizenship soon lose their strength and legitim­ starting point will vary in each country. Consequent­ acy unless they are capable of evolving in line with ly, there can be no question of a single uniform pres­ their peoples’ aspirations. There are undoubtedly cription for the whole region. As the initial situations some points of conflict between the concepts of mod­ are very different, the general proposals made above ern citizenship and competitiveness, but attempting need to be decoded, interpreted and enhanced in each to raise competitiveness at the expense of modem individual situation. citizenship is manifestly outmoded, just as the idea Secondly, the application of the proposed strat­ of giving priority to the latter at the expense of egy must necessarily involve consensus-building, competitiveness is somewhat ingenuous. because in the present situation there are various In order to progress towards the above objec­ subsystems, each of which has its own institutions, tives, two types of policy instruments are needed: on leaders, referents and forums, but very little internal the one hand, instruments to deal with lack of equity coherence and very few relations with the other sub­ in the coverage, quality and relevance of knowledge, systems. In theory, the formal educational system is and on the other, instruments to appraise the perfor­ supposed to prepare all its students for the university, but in practice many of them fall by the wayside and mance of the educational system. Seeking to solve remain without any clear destination. What is pro­ the problem of equity without ascertaining to what posed is that there should be a move towards another extent the aims of education, training or scientific scheme in which the subsystems establish and de­ and technological research are actually being fulfilled velop mutual links. This scheme is not just a theore­ would be just as illusory as trying to appraise the tical goal, but a situation towards which progress is system’s performance without taking account of being made, especially in the developed countries, whether or not it complies with the aims of equity. but also in Latin America, despite the crisis of the There is a conflict here, but it cannot be avoided. 1980s. This is reflected, for example, in the many concrete links established by enterprises with basic, secondary and higher education and with technologi­ cal research centres, as well as the links being de­ 3 This section, including the quotation below, is based on veloped between training institutes and secondary Fajnzylber, 1992. education.

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The policies for putting the proposed educational 3. Social integration strategy into effect may be grouped according to the following objectives: There are various elements that must be present in i) Making educational institutions more con­ the design of public policies aimed at heightening scious of the needs of society; that is to say, estab­ social integration. They include the organized partici­ lishing suitable institutional conditions to ensure that pation of the various actors; opportunities for social every educational, training or scientific and techno­ mobility; family cohesion; educational reform aimed logical system develops, or can develop, horizontal at raising productivity and citizen participation, and and vertical links with the others. reform of the health system with a view to securing ii) Ensuring universal access to the codes of universal coverage and giving priority to preventive modem life: this has to do with the coverage and action, primary attention and control of epidemics. quality both of basic and secondary education and of Each of the groups which are marginated or training, because to imagine that training can be victims of discrimination -on account of their ethnic, given without having made a corresponding effort age-related, social, territorial or sex-related charac­ in basic education is mere wishful thinking. teristics- must be the subject of specific initiatives. iii) Promoting both access to information and Particular attention should be given to the members its dissemination and generation. of these groups who are most vulnerable, such as iv) Fostering responsible management, because children under five, women of reproductive age, it is no longer a question of the traditional educa­ pregnant women, and mothers and children in tional system, nor traditional training, nor traditional particularly difficult circumstances. science and technology, but a complex structure with Another crucial aspect is that of policies de­ a host of actors, perceptions, forms of conduct and signed to strengthen social actors. Policies for the aspirations which will demand a system of evaluation effective integration of women, who form half the and information which does not exist at present. population, require particular attention because of the v) Raising the professional level and status of decisive contribution they can make to the democrat­ teaching, without which the proposal will remain no ization and economic development of the countries. more than a set of good intentions. It is necessary to go beyond mere legal equality, vi) Ensuring that support really is provided and seeking to correct inequalities from the root, and that it comes from all the various participants. The this raises the global challenge of eliminating all the educational system should not be financed solely by examples of sex discrimination present in public the Ministry of Finance, through a budgetary alloca­ policies. In this case, as well as in that of young tion to the Ministry of Education. Such an allocation people, policies are required which improve the should be increasingly large, but there should also be position of these members of the community in the many contributions from other sources if the question educational system, the labour force and the various of education and human resources is viewed from an channels of social and political participation. integrated standpoint. With regard to indigenous groups, it is necessary In short, it is necessary to rethink the role of the to build an effective form of cultural pluralism which State in connection with this task. Firstly, the State recognizes and respects the existence of ethnic and must be capable of guiding educational, training and cultural differences and opens up channels to facili­ scientific and technological research activities in a tate their participation in society on an equal footing. systematic and integrative manner, as well as their Important elements for the promotion of social links with the system of production. Secondly, it integration are social policies based on transfers must take a strategic view which allows it to give through the social security system, which should ex­ guidance, regulate from a distance, generate policies, pand its coverage to under-privileged groups which promote independence, and evaluate results without are currently excluded from its benefits. The starting stifling innovation through excessive centralized di­ point for this could be a “basket” of basic benefits rection. Thirdly, it must play its indispensable role of designed to favour these sectors selectively. In this correcting inequalities which the process of greater respect, it would seem desirable to give priority to autonomy may possibly accentuate and mobilizing transfers which help to increase family income, finance, including a growing proportion of private rather than that of individuals, with these benefits resources.

A SUMMARY OF THE ECLAC PROPOSAL • EUGENIO LAHERA, ERNESTO OTTONE AND OSVALDO ROSALES CEPAL REVIEW 55 • APRIL 1995 1 9 centered on allowances for the lowest-income heads population dimensions -size, growth rates, age struc­ of household. ture, mortality/morbility, fertility, international mi­ It is important to redefine the criteria on the way gration, spatial distribution, and the status of women- transfers through social security institutions should are enormously important when designing public be organized, in the light of the risks covered. On the policies aimed at securing the objectives of changing one hand, the systems could offer a form of insurance production patterns with social equity. shared between the beneficiary and the system The features of the situation in the region clearly against the risk of fluctuations in the former’s income show the need for a pragmatic approach to this issue during his lifetime, on the basis of actuarially calcu­ which eschews artificial contradictions between de­ lated payments and benefits. Examples of such bene­ velopment and birth control as alternative options for fits are old-age, disability and widows’ pensions; avoiding poverty and securing greater equity. The de­ medical and hospital attention and monetary benefits bate along these lines has been overtaken by the for maternity or sickness, and monetary unemploy­ facts. Just as the objectives of growth and equity are ment benefits. not mutually exclusive but instead complementary On the other hand, the systems should offer a aspects of the same process, likewise the relation guaranteed minimum income to all persons, but between fertility and development must be analysed especially the poor, through such means as family in the context of a global, systematic effort to attain allowances, social welfare payments (pensions) and growth with equity, increasingly dependent on a major national health systems or public health attention improvement in the quality of human resources. programmes. Placing the means of reducing fertility rates Reform of the social security system should be within the reach of the most under-privileged sectors based on a mixed system combining a universal sys­ is one way of strengthening the exercise of the rights tem of basic benefits, financed from general State of citizenship and extending them to the whole of resources and based on the principle of social soli­ the population. This is favoured by the generation of darity, and a system of public or private benefits, better conditions for the exercise of the reproductive along the lines of private provident schemes, in rights of the couple, so as to bring their effective which there is full equivalence of what the insured fertility in line with the level of fertility they really person pays in and what he receives. want, on the basis of informed and responsible In order to reduce the cost of the benefits pro­ choice. vided, it would appear to be advisable to unify the various public pension systems; to eliminate pensions 4. Overcoming poverty based on length of service but to keep those based on age, subject to some exceptions; to increase and ad­ Although overcoming poverty depends basically on just retirement age to take account of the greater life sustained economic growth which increases employ­ expectancy after the age of 65; to link pensions to the ment opportunities and raises wages, it is also necess­ contributions paid throughout the beneficiary’s work­ ary to develop compensatory policies for the most ing life, and not just the last few years; to unify the under-privileged sectors and those not benefitted by conditions for the receipt and calculation of benefits the increases in employment and wages. (especially pensions), and to give priority to primary Such policies should tend to focus social expen­ health attention rather than curative attention. diture so as to give priority attention to the most Extension of benefits to groups not covered by under-privileged sectors and thus make more effec­ the system should take place in a selective manner, tive use of the available resources. Social investment both as regards the groups covered and the type of programmes designed to stop the inter-generational services provided. In order to minimize effects which transmission of poverty are particularly important, in discourage the hiring of labour, that part of the con­ such fields as education, the establishment of condi­ tribution which is paid by the employer should be tions which favour responsible parenthood, mother calculated according to the added value of the firm and child care programmes focussed on the lowest- rather than the total payroll. income sectors, and expansion of pre-school educa­ Another important aspect in shaping integrated tion, especially in those same sectors, including food societies is that of population dynamics. The various supplementation programmes, etc.

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Increasing the productivity of the poor is essen­ for the representation of the needs of the most under­ tial in order to overcome poverty. There is therefore a privileged sectors; to take advantage of the redis­ need to develop policies aimed at expanding the fin­ tributive potential of fiscal policy, and to consolidate ancial and capital markets in order to take care of the and perfect social investment funds for the neediest. needs of viable small-scale and microenterprises by It is also important to generate social “safety generating systems of credit and technical assistance nets” capable of safeguarding social needs during adapted to their needs; to establish mass programmes stabilization processes, dealing with emergencies or for the training and upgrading of labour; to reform adverse international economic conditions, and pre­ the regulatory arrangements which hinder the forma­ venting transitory poverty situations from becoming tion of microenterprises; to adapt the social services chronic for want of timely aid. Such “safety nets” to the needs of the poorest sectors; to foster the or­ should ensure certain minimum levels of consump­ ganization of mutual aid schemes and arrangements tion and well-being for the most vulnerable groups. V Positioning inthe international economy

In order for the process of changing production pat­ only the areas of trade, exchange rates and finance, terns with equity to be sustainable, it is necessary to but also policies for the development of production, improve the position of the countries of the region in the promotion and dissemination of technology, and the international economy: that is to say, their share the training of human resources, with special atten­ in dynamic international trade flows, foreign direct tion to the interaction of these measures. In particu­ investment, technology and finance. This improved lar, if the international position is to be reflected in position should be reflected in greater capacity to faster export growth it is necessary that there should take advantage of upswings in international and re­ be suitable management of the exchange rate, a gional trade and to withstand adverse cycles and gradual approach to the reduction of protection, financial instability, by diversifying products and effective export promotion mechanisms and an markets, promoting investment and strategic allian­ appropriate production development policy. ces abroad, applying domestic stabilization mechan­ Exchange-rate policy has an irreplaceable role to isms and improving the links between exports and play in reorienting incentives towards external mar­ other production activities. kets. Avoiding exchange-rate lags is of crucial im­ portance for ensuring that greater openness is 1. External trade policy reflected in more investment in the tradeables sectors and a higher level of economic activity and employ­ The strategy for improving the countries’ place in the ment. In this respect, it is the responsibility of the world economy calls for greater openness of the authorities to defend the stability of the macroecon­ economy and special attention to exports as a means omic balances and the incentives provided, in order of inducing increases in productivity and stimulating to ensure clear signals that favour investment in the the incorporation of technical progress. Such greater production of tradeables, especially export products. openness should be gradual, in line with the availa­ With regard to anti-export bias, it is proposed bility of foreign exchange; it is necessary to har­ that this should be eliminated and replaced by a monize tariff and para-tariff protection policies, temporary bias in favour of non-traditional exports. exchange-rate policy and export promotion policies Pioneering exports require great efforts, incur high in order to ensure that the effective protection given costs and risks, but generate externalities which fa­ to export activities is no less than that afforded to vour subsequent exports that follow their example. import-substitution sectors. There is therefore ample justification for giving Positioning in the international economy is seen then! incentives and thus stimulating pioneering as a wide-ranging management task covering not efforts to win markets.

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Such incentives must be selective, of restricted fiscal, monetary and exchange-rate policies. If there scope, limited and decreasing in duration, and must are restrictions on the application of an active fiscal involve only slight deviations from a neutral approach. policy, what can be done is to simultaneously control The mechanisms for establishing and modifying them real interest rates (as a monetary policy instrument must be non-discretional and they must be designed for stabilizing and controlling domestic aggregate in consultation with exporters’ associations. spending) and the real exchange rate (as a trade pol­ A basic condition for promoting the competitive­ icy instrument for promoting increased production ness of export firms is to ensure that they have access of tradeables and influencing the composition of to the necessary inputs on competitive terms. It is aggregate spending). advisable that these firms should have access to A conflict arises when the interest rate compatible flexible facilities for the temporary importation of in­ puts for the production of export goods. Other possi­ with the aim of limiting inflation and imparting sta­ bilities are tariff exemptions or subsequent drawback bility to economic activity (by sterilizing the mon­ arrangements, subject to the simplest possible admin­ etary effects of the buildup of reserves) is higher than istrative formalities. Such mechanisms could also be the international rate adjusted for the expectations of extended to indirect exporters: that is to say, domestic devaluation; this encourages the inflow of capital and producers of inputs for exporters. heightens appreciation of the exchange rate, thus The liberalization of trade policy has increased going against the objective of protecting the tra­ the vulnerability of the Latin American economies to deables sector of the economy. If, however, the real unfair trade practices and to the instability of their domestic interest rate is allowed to go down in these trading partners. It is essential, then, that the coun­ circumstances, this runs counter to both objectives, tries of the region should adopt or improve their anti­ since the greater spending induced by the lower inter­ dumping regulations, countervailing measures and est rates exerts pressure on prices and there will be a safeguard clauses. At the same time, however, care rapid rise in the current account deficit, causing the must be taken to ensure that new provisions in these risk of an unsustainable macroeconomic imbalance. fields are not used by private interests to secure the The way to solve this conflict is to act directly or unjustified activation of regional protectionism. indirectly on capital flows. Most of the countries of The public sector can contribute to good perfor­ the region have decided at some time or another to mance in external markets by giving institutional engage in sterilizing operations when facing severe support to export activities, especially in terms of conflicts in the handling of their exchange-rate and information, financing and export insurance; man­ monetary policies. In order to reduce such conflicts, agement training to promote greater interest in ex­ complementary measures such as the following have ports among businessmen, and promotion of exportable been used: some degree of flexibility of fiscal policy supply. Furthermore, pioneering investment initia­ in order to regulate aggregate demand; stabilization tives have been taken abroad in support of the export funds for the main export commodities in order to effort: marketing chains, joint activities with firms in soften the shocks caused by the respective price the importing markets, and other forms of action cycles; income policies in order to adapt relative fac­ which are beginning to be taken into account in ex­ tor prices to changes in productivity; measures to try port promotion policies. to change the volume and composition of capital flows by providing incentives for long-term flows in 2. Macroeconomic policy and capital movements the form of compulsory reserve requirements, taxes or exchange-rate measures which subject short-term The current economic reactivation is limited by the capital flows to greater uncertainty, or even quantita­ available production capacity. As countries near their tive controls. production limits, the need arises to regulate the In order to keep the macroeconomic balances growth of aggregate demand in order to avoid the and the real exchange rate stable, the rate of opening- resurgence of inflation or excessive external sector up of the capital account must be in keeping with the deficits. There is also still a need to increase invest­ capacity of the economy in question to absorb exter­ ment in order to keep up the growth of the product. nal resources and allocate them efficiently. In­ The instruments available for trying to manage itially, it might be advisable to liberalize only the the level and composition of aggregate demand are entry of long-term capital, before giving facilities for

A SUMMARY OF THE ECLAC PROPOSAL ’ EUGENIO LAHERA, ERNESTO OTTONE AND OSVALDO ROSALES 2 2 CEPAL REVIEW 55 * APRIL 1SS5 short-term financial capital transactions. With regard non-discriminatory application of trade rules, domes­ to the outflow of capital, priority should be given tic regulations and standards. to export promotion credits and direct foreign invest­ Common external tariffs and a moderate level of ments by national firms, also as a way of improving protection against third countries are efficient means their export position. of reducing the incentives for smuggling and avoiding In the reorganization of financial systems, includ­ accusations of unfair trade practices connected with ing the liberalization of capital movements, priority the use of inputs with different degrees of protection. should be given to channelling resources to saving and In the event of temporary intra-regional imbalan­ investment, in a manner closely linked with the devel­ ces, it would be desirable to decide on the action to deal opment of production capacity. Greater attention should with them through negotiations or prior consultations, be given to the links between the national financial in order to avert the possibility of a spiral of reprisals. system and saving and investment processes, as well Regional balance-of-payments support bodies as between that system and external financial markets. should be strengthened in their legal and financial At the very least, the encouragement of Latin aspects. Payments systems could also be a fundamen­ American investment abroad calls for a policy which tal instrument for facilitating the expansion of mutual does not discriminate against investment of regional trade and investment flows. origin. The internationalization of production also calls The current limitations on the coordination of for advances in the fields of international trade and macroeconomic policies warrant the definition of a finance, as regards investment abroad and technology planned path towards their solution which could flows. It would be desirable to make progress in begin with an exchange of information and an exam­ negotiating agreements to avoid double taxation and ination of the repercussions that some economies eliminate unnecessary obstacles to such investment. could have on the others. The increasing degree of interdependence means 3. Open regionalism a greater need for cooperation and harmonization in new areas such as those of labour standards and regu­ The proposed form of open regionalism reconciles lations and migration. Policies on competition could the interdependence stemming from special pref­ complement policies aimed at greater openness and erence agreements with that which is basically due to take the place of the instruments of protection used the market signals resulting from general trade so far to deal with unfair competition in the field of liberalization. In this way, integration policies can imports. be compatible with and complementary to policies The current trend in favour of open regionalism aimed at enhancing international competitiveness. has repercussions on the expansion and adaptation of Regional integration can be perfectly in keeping the infrastructure. If this process is accompanied by with a more open and transparent world economic increasing convergence in respect of economic order. In the absence of the latter, integration is a policies, regulations and standards and a greater ef­ means of diversifying the risks in an international fort to provide an infrastructure which is functional to economy fraught with uncertainty. the process, there will be greater possibilities of height­ Unlike indiscriminate export promotion, open ening regional and even hemispheric integration. regionalism has a preferential element which is The institutions responsible for furthering the inte­ reflected in integration agreements and is further gration process must be in keeping with the degree of strengthened by the geographical proximity and progress attained by integration. At all events, it is cultural affinity of the countries of the region. necessary to avoid the adoption of rigid commitments, Open regionalism involves undertakings which favouring instead flexible schemes which allow the contribute to the gradual reduction of intra-regional dynamics of the process to define the rate of develop­ discrimination. This is achieved through the broad ment of the relevant institutions. The various integra­ liberalization of markets in terms of sectors and tion agreements and forms of integration already countries; the macroeconomic stabilization of each of reached raise the need to determine the best way to the countries; the establishment of suitable payments support the commitments already entered into and to and trade facilitation arrangements; the building-up identify the stumbling blocks and conflicts that may of infrastructure, and the harmonization or arise as a result of the large number of agreements.

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VI Political aspectsand State intervention

1. The need for a participative political system 2. Interaction of the various agents

There is a selective affinity between the formula­ Macroeconomic and sectoral policies call for a tion and application of the proposal for changing new form of interaction between the public and production patterns with equity and a democratic private agents in various fields, such as informa­ and participative environment in which the basic tion on markets and technology, reduction of trade human rights are fully guaranteed, decisions are risks, consumer protection, protection of industrial taken in a decentralized manner, participation is ac­ property and promotion of technology transfer, and tively promoted, and the main operating principle is an active strategy to improve the position in the consensus-building. Another functional proposal is world economy. that social conflicts should be kept within limits that The systematic effort to achieve changing pro­ the democratic system can handle, with priority being duction patterns with equity will require new levels given to decentralized decision-making mechanisms of concertation and consensus-building in the so­ which bring decisions closer to the grass-roots level cieties, so as to generate, along with the promotion of and avoid the buildup of discrepancies in the macro­ agreements, suitable conditions for channelling and social systems. negotiating disputes and conflicting interests and A culture based on consensus involves a signifi­ avoiding a return to populism, ungovernability or cant change from the traditional political culture of military coups. the region, since it includes at least three aspects It would seem desirable, then, to foster direct which have raised problems in the past: recognition consensus-building between employers and workers, of the diversity of the actors making up civil society limiting the State’s role to that of a mediator of last and strengthening of their role; generation of negotia­ resort. Such consensus-building would be favoured tions leading to firm commitments, and the transfor­ by strengthening the collective negotiation capacity mation of agreements and commitments into shared of the workers and ensuring respect for basic social cultural referents. and trade union rights. Strengthening participation through solid social The need to ensure real participation by the organizations capable of representing interests and groups involved once again highlights the need to acting as valid interlocutors is of fundamental im­ decentralize and deconcentrate public action and portance for strengthening the functioning of powers in order to bring them effectively closer to democracy. Priority must be given to actions which the people. The new levels of concerted action and help individuals, groups and communities to attain consensus-building involve a whole range of far- social progress through their own efforts and to par­ reaching explicit and implicit agreements between ticipate jointly in the search for solutions. A special the State and the main political and social actors effort should be made to generate spaces for real regarding the development strategy and the se­ participation by persons and groups who, because quence of policies and institutional innovations of their ethnic, age-related, social, territorial or sex- which are needed. This will also involve the nar­ related characteristics, are currently cut off from the benefits of development. This should be an all- rowing of economic policy options, thus giving pervasive element in specific policies aimed at rise to a strong tendency towards the technification promoting and organizing the participation of the of politics. In this context, it is vital to avoid a split individuals and groups to be favoured by social between the authorities and society and, in addition policy at the local, regional and national territorial to promoting agreements, to generate suitable settings levels and in such areas as information, training for the channelling and negotiation of disputes and and technical assistance. conflicting interests.

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3. Reform of the State legitimacy and operational capacity of the institutions responsible for policy design and implementation. The respective roles of the State and of the private In contrast, the greatest successes would appear to actors cannot be approached in an abstract manner: be associated with a style of intervention which is public actions take place in a given institutional, in keeping with the way the markets operate and social and political context in which the State and evolve and avoids causing major distortions in the rest of the social actors interact and influence relative prices. Where markets are weak or incom­ each other. plete, public policy should be designed to simulate In general terms, the public sector has a decisive their operation in the short term and foster their role to play in eliminating various limitations on creation or supplementation in the medium term. growth and creating and enhancing economic oppor­ In the case of public enterprises, in view of the tunities, within a context of proper resource assign­ need for governments to concentrate their organiza­ ment. There are areas which are natural candidates tional and administrative capacity on areas considered for public action: those which are designed to make to be of priority importance, the following lines of up for market flaws, such as the creation of exter­ action are suggested: nalities and the supply of public goods; science and i) Measures to reduce or eliminate deficits should technology policy; measures to overcome poverty; be taken only after accurately identifying them, thus action to ensure the rights of the individual, such as making it possible to use the most efficient means. the right to basic education and to health; and inter­ The social and development objectives of such enter­ vention in social security matters and protection of prises should be clearly identified in order to assess the environment. their importance and evaluate their effect on the At the same time, progress towards changing enterprise as a whole. production patterns with equity calls for substantial ii) The personnel policy of public enterprises restructuring of the State and of public management. should be based on reasonable levels of stability and Rather than increasing or reducing the role of public independence, as well as on competitive wages. action, what is needed is to increase its positive im­ iii) The relationship between such enterprises pact on the efficiency and efficacy of the economic and their suppliers should be perfectly transparent system as a whole. To this end, it must create better and should encourage the latter to raise their level links between the short-, medium- and long-term of technical development and increase their pro­ decision-making processes, promote intersectoral ductivity. The establishment of relationships based coordination, and provide technical backing for on favouritism should be avoided at all costs. the necessary efforts to foster social dialogue and iv) The situation of public enterprises which consensus-building, which must, of course, take ac­ were set up to make good shortcomings or absence count of the need for participation, decentralization of markets must be assessed in a realistic manner; and administrative déconcentration. if suitable conditions exist for the development of The State must renovate its style of intervention markets, then their activities could be transferred by developing greater strategic capacity both in the to the private sector. area of competitiveness and innovation and that of The relative importance of the private sector in equity. It must not seek to take the place of the econ­ the supply of goods and services can be increased by omic and social agents, but instead ensure that the deregulating activities, granting concessions, or pri­ proper rules and spaces exist for promoting stability vatizing State enterprises. With regard to the latter and growth. It must also be capable of offsetting the approach, the results obtained are decisively in­ socially negative effects of economic dynamics in fluenced by the way it is carried out; in the sequence such areas as education, health and housing, by using of operations, the change of agents must not precede means of regulation, protection and compensation to stabilization efforts but must come after them, and improve the possibilities of those who are not in a the same is true of the regulation of the sector. position to make use of the market. In some cases, excessive haste in privatization Flaws in State intervention may be just as seri­ and deregulation processes can give rise to monopo­ ous, or even more so, than market flaws, and this lies which have no justification from the technologi­ highlights the importance of the competence, social cal point of view or to information monopolies which

A SUMMARY OF THE ECLAC PROPOSAL • EUGENIO LAHERA, ERNESTO OTTONE AND OSVALDO ROSALES CEPAL REVIEW 55 • APRIL 19»5 25

reduce the transparency of the market and make it As already noted, the e c l a c proposal is a coherent more difficult to achieve efficient resource allocation. agenda for public policy reform which needs to be com­ Here, the public sector is faced with a new task: that plemented with a review of the institutional bases of the of adapting the regulatory frameworks to the new State. To this end, it is necessary to take into account institutional and technological conditions, improving such issues as the organizational scheme of the public the technical capacity of the regulatory bodies, and sector, the clarity of the procedures used, the level of strengthening their autonomy in order to ensure that training of the officials involved, the quality of the these markets are transparent and competitive. organizational leadership, the decentralization of acti­ From another standpoint, the reassignment of vities, the establishment of clear standards of conduct, resources to the social sector and to the develop­ and the organization of public action to ensure that it ment of production should be accompanied by an meets the aims of development in a coherent manner. additional effort to improve the efficacy and equity It is also necessary to review public management in of the policies applied. This involves ensuring suit­ order to ensure that the planned results of public able complementation of resources in the provision policies are achieved, to define missions and results of services, eliminating or reducing subsidies which so that they can be objectively evaluated, to assign are not destined for the poorest groups or are not responsibilities and degrees of autonomy, and to es­ consistent with the development of production, and tablish a system of incentives to encourage officials seeing that subsidies reach the desired groups as to achieve or surpass the goals set for them.4 efficiently as possible. (Original: Spanish)

Bibliography

Baumann, R. (1994): Algumas reflexões sobre a proposta (1994a): Latin America and the Caribbean: Policies da CEPAL para uma transformação produtiva com equi­ to improve linkages with the global economy, dade e sua aplicação ao Brasil, Santiago, Chile, mimeo. LC/G. 1800 (SES.25/3), Santiago, Chile. ECLAC (Economic Commission for Latin America and the (1994b): Open regionalism in Latin America and the Caribbean) (1990): Changing production patterns Caribbean, Santiago, Chile. United Nations publica­ with social equity, Santiago, Chile. United Nations tion, Sales No. E.94.1I.G.3. publication, Sales No. E.90.1I.G.6. (1994c): The Social Summit: A view from Latin (1991): Sustainable development: Changing production America and the Caribbean, LC/G.1802 (SES.25/5), patterns, equity and the environment, Santiago, Chile. Santiago, Chile. United Nations publication, Sales No. E.91.II.G.5. Fajnzylber, F. (1992): Education and changing produc­ (1992a): Social equity and changing production tion patterns, CEPAL Review, No. 47, LC/G.1739-P, patterns: An integrated approach, LC/G.1701 Santiago, Chile, United Nations, ECLAC. (SES.24/3), Santiago, Chile. Lahera, E. (1994): Políticas públicas en la propuesta de (1992b): Education and knowledge: Basic pillars of desarrollo de la CEPAL, Santiago, Chile, mimeo. changing production patterns with social equity, Ottone, E. (1992-1993): Un planteamiento renovado frente Santiago, Chile. United Nations publication, Sales a los nuevos desafíos del desarrollo, Pensamiento No. E.92.II.G.6. iberoamericano, Nos. 22/23, Vol. II, Madrid, Ibe- (1993): Population, social equity and changing pro­ roamerican Cooperation Institute (ICI)/ECLAC. duction patterns, Santiago, Chile. United Nations Rosales, O. (1994): Los rasgos centrales de una trans­ publication, Sales No. E.93.II.G.8. formación productiva con equidad, Santiago, Chile, mimeo. Rosenthal, Gert (1993-1994): Reflexiones sobre el pensa­ 4 Address delivered by Gert Rosenthal, Executive Secretary of miento económico de la Comisión Económica para ECLAC, at the Ninth Conference of Ministers and Heads of Planning of Latin America and the Caribbean, Mexico City, América Latina y el Caribe (CEPAL), Pensamiento 20 July 1994. iberoamericano, Nos. 24/25, Madrid, ICI/ECLAC.

A SUMMARY OF THE ECLAC PROPOSAL • EUGENIO LAHERA, ERNESTO OTTONE AND OSVALDO ROSALES

CEPAL REVIEW 55 2 7

Post-conflict peace-building: a challenge for the United Nations

Graciana del Castillo

Senior Officer in the Office The multidisciplinary peace-keeping and post-conflict of the Secretary-General peace-building (PCPB) operations of today have imposed on o f the United Nations and the United Nations a multifaceted and complex role, Adjunct Associate Professor of Economics at comprising both verification and good offices functions in a Columbia University. wide variety of areas. This has put tremendous pressure on the human and financial resources of the Organization. As a result, many flaws in the United Nations system have been brought to light, such as the inadequate coordination that exists between the different bodies of the Organization and its inability to address problems associated with peace and development in a rigorous, integrated, transparent, coherent and consistent way. The political and economic realities of today require what the Secretary-General has referred to as an “integrated approach to human security”. Under such an approach, humanitarian, political, military and socio-economic problems should be addressed by the various institutions jointly rather than separately, in order to avoid potential clashes of competence and waste of resources. An integrated approach to human security, which is important as a general rule, is imperative in PCPB situations and may be the only feasible way to address the sources of conflict, thus avoiding a recurrence of major crises or violence in the future. The need for the United Nations to become more immersed in the multidisciplinary aspects of PCPB requires major rethinking and an analytical and operational redefinition of relationships and comparative advantages.

APRIL 1995 28 CEPAL REVIEW 95 • APRIL 1999

I Introduction

The international community increasingly expects the analyse the challenge that this expectation raises for United Nations to play a major role in post-conflict the United Nations and the policy measures that (or post-crisis) peace-building (PCPB). This paper will should be adopted to deal more effectively with it. II Strains on the Organization

The demands on the United Nations related to mat­ Peace-keeping in its new incarnation is no longer ters of peace and security have in recent times ac­ a purely military operation with “Blue Helmets” in­ quired a growing multidisciplinary character that is terposed between former belligerent groups to deter imposing a severe strain on the Organization. This renewed strife. The nature of peace-keeping has challenge makes it necessary to conduct a rigorous evolved with the changing nature of conflict and the rethinking of issues related to humanitarian assist­ complexity of the challenges facing the international ance, rehabilitation and reconstruction, the strengthen­ community. Thus, peace-keeping is often accompa­ ing of democratic institutions and the development nied by activities relating to the provision of humani­ problématique in general, as well as the ways they tarian assistance, removal of mines, demobilization, relate with each other. It also draws attention to the the return of refugees and other displaced persons, conflicts arising from the different and sometimes the promotion of human rights, the demilitarization contradictory objectives of political and socio­ of the police and the development of civilian police economic policies and the need to address these forces, the “purification” of armed forces, strengthen­ issues in an integrated manner. It highlights the ing of the judiciary and other national institutions, essential role of the international community, the preparation and monitoring of elections, and the both in providing resources -financial and other- reintegration of ex-combatants and other estranged and in ensuring that all parties to peace agree­ groups into the civilian and productive life of the ments comply with their commitments, and it gives country. The latter is of critical importance in the the Secretary-General an opportunity to link the overall effort to ensure the peaceful resolution of main proposals in his report An Agenda for Peace 1 disputes. In addition to the role the United Nations to his other report An Agenda for Development , 2 plays in the peace-making phase -negotiating and draft­ which will hopefully set a new framework for the ing the actual peace agreements- its involvement in the activities of the Organization in the areas of peace new multidisciplinary peace-keeping operations of and development. today is likely to be multifaceted and complex, com-

□ The views expressed here are entirely those of the author and should not be attributed in any manner to the United Nations. 2 On 6 May 1994 the Secretary-General presented as a basis Comments and suggestions by A. de Soto, M. I. Goulding, P. for discussion the broad approach underlying his concept of Hansen, J. C. Milleron, G. Rosenthal and R. Srivastava are development, in his report An Agenda for Development gratefully acknowledged, as is the excellent assistance of C. (United Nations, Secretary-General, 1994a). Based on views Bustani, a graduate student at Columbia University and Summer expressed at the high-level segment of the Economic and Intern at the United Nations. Social Council and the World Hearings on Development conducted by the President of the General Assembly, on 11 1 Report of the Secretary-General pursuant to the statement November 1994 the Secretary-General submitted recommen­ adopted by the Summit Meeting of the Security Council on 31 dations on An Agenda for Development (United Nations, January 1992 (United Nations, 1992). Secretary-General, 1994b).

POST-CONFLICT PEACE-BUILDING: A CHALLENGE FOR THE UNITED NATIONS • GRACIANA DEL CASTILLO CEPAL REVIEW 55 ■ APRIL 1595 2 9 prising both verification and good offices tasks. Veri­ flaws have been brought to light, the most serious fication of the implementation of agreements that span being the inadequate coordination that exists between various disciplines requires diverse and specialized ex­ the different bodies of the Organization and its in­ pertise, not easily available in the United Nations. Good ability to address problems associated with peace and offices are required both to help the parties overcome development in a rigorous, integrated, transparent, difficulties in the implementation of the agreements coherent and consistent way. Put simply, the political and to facilitate the political and financial support of and the economic and social sides of the house barely the international community for the peace process. talk to each other; peacemakers and economists do The dramatically enlarged scope of what is ex­ not speak the same language and so find it diffi­ pected from the international community is putting cult to communicate. As a result, the concept of pcpb tremendous pressure on the human and financial re­ is not much clearer than it was in July 1992 when sources of the United Nations system. Many of its An Agenda for Peace was published. Ill Pressures on the countries involved

In its World Development Report of 1991 the World The choice between the market and the State is Bank noted the gradual formation of a consensus in not always clear and there are many alternative types favour of a “market-friendly” approach to develop­ of institutional frameworks that governments can ment. Such a consensus might have been apparent at provide. Even so, reform can be a disaster unless that time, but there has been a backlash since then.3 policies are efficiently and consistently implemented. There are great controversies, both at the academic Let us take the example of privatization. Chile, an and policy-making levels, over the policies to be early privatizer, went through two clear stages of pri­ adopted (fixed versus flexible exchange rates, the vatization: the first one was badly conceived and im­ fiscal-monetary mix), over the strategies to be used plemented, and had dire economic and social effects; (the degree of government intervention, the advant­ in the later one lessons had been learned, a number of ages of liberalization versus managed trade, the role things were done differently and the institutional of foreign investment, the need for privatization and framework had changed, so that privatization yielded deregulation), over the nature of the necessary in­ excellent results. Hence, it cannot be said that privat­ stitutional frameworks (legal, judicial, fiscal) and ization -or any other economic policy, for that matter- over the breadth, speed and sequence of the reforms is good or bad in itself: much depends on how it is to be adopted.4 designed and carried out and on the government’s ability to provide the right institutional framework. Furthermore, privatization is not always a “must”, even for countries that are transforming their econ­ 3 Even John Williamson, who coined the term “Washington omies in a market-oriented direction. There are many Consensus” to refer to this has subsequently acknowledged that such a consensus did not exist. policy alternatives, as the experiences of Uruguay and Costa Rica show (Del Castillo, in the press (b)). 4 There are also clear political signs which confirm that such consensus does not exist. To name just a few: the 1994 elections Stabilization and structural reform have proven in Russia, Poland, Venezuela and Costa Rica and the growing to be a necessary condition for development, but not acceptance of the Worker’s Party in Brazil and the Broad Front sufficient by themselves. At the same time, the ex­ in Uruguay in elections at the end of the year indicate the popu­ larity of leaders and parties that oppose market-oriented policies perience of the last decades has made it clear that and a reduced role for the Government. Already in December there can be no sustained development without peace 1993 the New York Times noted that Russia no longer necessar­ and no durable peace without development. ily seemed destined for democracy and free markets (The Week Policy choices such as the ones mentioned above in Review, 14 December 1993). If anything, political opposition and opposition to economic reform has grown since then. by way of example are more restricted in countries

POST-CONFLICT PEACE-BUILDING: A CHALLENGE FOR THE UNITED NATIONS • GRACIANA DEL CASTILLO 3 0 CEPAL REVIEW SS • APRIL 1115 coming out of conflict, which must reconcile the solidation competes with the conventional imperative often conflicting demands of peace and development. of development, putting tremendous pressure on There are four main reasons why we would argue policy decisions, especially budgetary allocations. that these situations are different and therefore Second, the lack of consensus on economic re­ deserve special treatment by the international com­ form in pcpb is often acute, after years of political munity. First, countries coming out of armed conflict polarization and opposing ideologies. or situations of extreme socio-political upheaval Third, in the early stages of pcpb the economic have, as a general rule, economies in shambles or at environment does not foster domestic savings (the least severely distorted. They face a double chal­ most important source of development finance in de­ lenge: on the one hand, they have to confront the veloping countries) or attract private capital flows normal challenge of socio-economic development (portfolio or foreign direct investment). In fact, in which often involves tough choices in terms of sta­ most pcpb situations the entrepreneurial elite has bilization and structural reform. This is particularly been the primary agent of capital flight, either mi­ difficult because most countries in pcpb conditions grating or investing its capital abroad. For these rea­ are at a low level of development and have become sons, official aid flows -mostly in the form of grants- even more impoverished by the conflict. On the other are crucial to what sometimes proves to be a long hand, they have to settle for less than optimal policies transitional period. in their economic reform efforts so as to accommo­ Finally, conflicts and other crises are related to date the additional financial burden of reconstruction the weakening of civil institutions (central govern­ and peace consolidation. The latter includes the rein­ ments, judicial systems, property rights, trade unions, tegration of former combatants and other estranged rural associations) and to the lack of a culture of groups into productive activities and the development peace and reconciliation. This makes peace negotia­ of an adequate institutional framework to foster na­ tions and the implementation of agreements particu­ tional reconciliation. The imperative of peace con­ larly difficult.

IV The need for an integrated approach to human security

The political and economic realities of today require We would argue that, to be effective, such an what the Secretary-General has referred to in An integrated approach to human security should satis­ Agenda for Peace as “an integrated approach to human fy eight basic criteria (“the eight Cs”): credibility security”. Under such an approach, humanitarian, pol­ of the organizations or bodies involved and the itical, military and socio-economic problems should be programmes undertaken; coherence!consistency addressed jointly, rather than separately as has often in the strategy followed; continuity in and conclu­ been the case. Whereas an integrated approach to sion of the process (i.e., staying the course); human security is important as a general rule, it is im­ cooperation between organizations or bodies and perative in p c p b situations. To be truly successful, coordination among programmes; consensus on the peace-making and peace-keeping operations must be policies and programmes adopted among those who complemented by efforts to consolidate peace, promote have to implement them; a constructive approach human rights and improve the socio-economic well­ based on incentives rather than penalties; measures being of the population. This may be the only feasible to build mutual confidence between previously way to address the sources of conflict, thus avoiding the warring factions; and cost-effectiveness of the over­ recurrence of major crises or violence in the future. all operation.

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The unique position of the United Nations

While a large number of programmes and agencies In practice, however, the potential of the United of the United Nations system deal purely with de­ Nations to carry out an integrated approach has not velopmental issues, the United Nations as an organ­ yet been fully developed, either within the United ization is uniquely positioned in theory to help Nations itself or with the agencies. The United Na­ countries reconcile their joint objectives of peace and tions should be prepared to play a more active and development. Many organizations inside and outside constructive role in helping countries (particularly the United Nations system, such as the Bretton those in pcpb situations) to choose development Woods institutions and the regional development strategies, especially as they affect the consolidation banks, may be in a better position to deal with strictly of peace. The United Nations should strengthen its developmental issues -at both the theoretical and analytical and operational capacity to help countries operational levels- than the United Nations. How­ in formulating policies that are well-conceived, ever, in terms of its mandate, only the United Nations transparent, credible and implementable, from both has the capacity to integrate the many political, hu­ the political and the socio-economic points of view. manitarian, military and socio-economic activities The resumption of peace negotiations in Guatemala relating to peace and development. Given the large -now led by a United Nations moderator- will be a number of countries currently in some kind of test of the Organization’s capacity in peace-making. conflict situation, the demand for such an approach Mozambique, Somalia, Angola, Haiti and the Gaza to peace-making, peace-keeping and pcpb is growing Strip and Jericho area will in turn also test its capac­ dramatically. ity in post-conflict (or post-crisis) peace-building. VI Developing a complex link

The complex link between socio-economic, humani­ ferent actors in an integrated and coherent fashion, tarian, political and military issues in pcpb situations, linking aspects relating primarily to development however, is still largely unexplored. In fact, the need with those relating primarily to the consolidation of for an integrated approach to human security -a cen­ peace. Furthermore, it is not clear where responsi­ tral idea in An Agenda for Peace- has so far been bility for developing such a global strategy lies. largely ignored. Peacemakers and economists do not Most observers agree that United Nations invol­ mingle naturally, and very little theoretical thinking vement in the humanitarian and development fields has been done on the relationship between these dis­ needs to be rethought. This becomes particularly im­ ciplines. 5 In the field, action has been disjointed and portant in cases of pcpb. In most countries there are mostly ad hoc in response to specific situations or several United Nations bodies, each with its own problems. There has not been a global strategy to programme and budget, most of which respond to address the problems of a particular country, incor­ their own board or governing council rather than to porating all variables and comprising the many dif­ the Secretary-General of the United Nations. Overall planning and coordination between these bodies is often talked about, but very little of it actually occurs. Programmes are often designed following a 5 For an analysis of the challenges to an integrated approach between the UN and the Bretton Woods institutions in El Salva­ general model, with little concern for the particular dor, see De Soto and Del Castillo (1994a). nature or idiosyncracy of the case at hand.

POST-CONFLICT PEACE-BUILDING: A CHALLENGE FOR THE UNITED NATIONS • ORACIANA DEL CASTILLO 3 2 CEPAL REVIEW SS • APRIL 1995

VII Making the linkoperational

In order to succeed in securing an integrated ap­ vided by different bodies of the United Nations sys­ proach by the United Nations system as a whole to tem to development activities of the country. the problems of p c p b it is first necessary to achieve Third, to deal with and support p c p b activities an integrated approach within the United Nations it­ both in the peace-making and peace-keeping phases self. We would argue that three things are critical in as well as in the pc pb phase itself, responsibilities this regard. First, peacemakers should start early on need to clearly assigned at Headquarters. Within the in the peace process to think about and plan for the Secretariat’s present structure, there is no self-evident requirements and constraints of p c p b . Thus, peace place for such activities. The political department negotiators should always be supported by a high- would probably have to play a prominent role, level advisor (or team, depending on the case) on particularly at the planning stage, since the central p c p b , particularly as it refers to socio-economic is­ purpose is the consolidation of peace, which is inher­ sues. Experience has shown (particularly in relation ently political. The department of peace-keeping to the case of El Salvador) that stipulations in a peace operations would need to be strongly involved given agreement relating to these issues are likely to have its own responsibilities during the implementation an important effect on its implementation, either by phase. It would also make eminent sense to draw from facilitating it or making it more difficult. the staff of the economics departments and the regional Second, multidisciplinary peace-keeping missions economic commissions. Furthermore, if the required withpc pb responsibilities should have a unit headed by expertise were not available within the United Na­ an official of high level to deal solely with these mat­ tions, the Secretary-General should have the flexi­ ters. Such a unit will in most cases outlast the peace­ bility to request that experts be seconded from the keeping operation itself and could be an important various agencies, including the Bretton Woods in­ factor in facilitating the transition from the strict sur­ stitutions. This would be a first step towards an inte­ veillance by the Security Council of the peace-keeping grated approach to the problem of human security mission in particular to the more general support pro- encompassing the United Nations system as a whole. VIII PCPB activities under the aegis of the United Nations

An integrated approach to p c p b would entail the 1. Emergency humanitarian assistance difficult task of reconciling the many demands, ob­ jectives and constraints arising from the provision a) Relief in general of emergency humanitarian assistance; the demobili­ In some instances it has been necessary to ensure zation and reintegration of former combatants; the the delivery of humanitarian relief by resorting to transition to democracy; the building of national operations involving military force. These operations institutions and the promotion of human rights; may create dangers for relief workers. At the same the reconstruction of infrastructure and the rebuild­ time, the growing demand for relief in Africa, the ing of the national economy; and the creation of former Soviet Union and the former Republic of confidence-building measures. These activities are Yugoslavia has not always been matched by a pro­ briefly discussed below. portional increase in resources from the international

POST-CONFLICT PEACE-BUILDING: A CHALLENGE FOR THE UNITED NATIONS • GRACIANA DEL CASTILLO CEPAL REVIEW 95 • APRIL 1»»5 3 3 community. On the contrary, “donor fatigue” has Rehabilitation also includes the short-run repair made them more selective in terms of how they allo­ of roads, bridges, railroads and schools; the im­ cate their resources. Competition and “turf battles” provement of health services; the creation of em­ over spheres of influence among relief organizations ployment; and the reactivation of agricultural have led to inefficiency and waste of resources. production to allow for the rapid resumption of basic services and productive activities. Rehabilita­ b) Food aid tion often involves labour-intensive community pro­ Countries in p c p b situations are likely to rely jects that can utilize former combatants as they on food aid for some time; the United Nations, disarm and demobilize until they can be reintegrated mainly through the World Food Programme (w f p ), into society through longer-term productive acti­ has significant experience in providing it. Food aid vities. These programmes can be important in help­ is particularly important to countries that have lost ing to maintain a cease-fire and avoiding the high their capacity to produce or acquire food as a result delinquency rate that can result if demobilized sol­ of war or natural disaster, or to those in which a diers are idle. The United Nations has the institu­ significant proportion of the population has been tional capacity to deal with rehabilitation, mainly uprooted, internally displaced or forced to seek re­ through the United Nations Development Pro­ fuge elsewhere. gramme (UNDP), the International Labour Organisa­ But food aid can create dependence and distor­ tion (il o ), the World Health Organization (w h o ), the tions which need to be carefully analysed and whose United Nations Children’s Fund (u n ic e f ), the De­ phasing out needs to be well planned. By affecting partment of Humanitarian Affairs (d h a ), the United local prices, food aid often interferes with or distorts Nations High Commissioner for Refugees (u n h c r ), domestic food production. The transition from food and the f a o . aid to reliance on domestic food production must be encouraged through the provision of essential inputs d) Removal of mines such as seeds, fertilizers and pesticides. Technical as­ The clearance of mines is frequently a prereq­ sistance and credit are essential elements in this tran­ uisite for many other p c p b activities. It is a very cost­ sition, and the United Nations system -mainly ly operation and it can involve ecological considera­ through the Food and Agriculture Organization (fa o ) tions, since mines can often be eliminated only by and the International Fund for Agricultural Develop­ burning large stretches of forest. Mines are not only a ment (IFAD)- can play an important role in providing danger to the safety of the population but can also or facilitating both. seriously impede agricultural production. Because the clearance of mines is of such criti­ c) Short-run rehabilitation cal importance to p c p b , the United Nations is be­ The rehabilitation of basic infrastructure and ser­ coming more involved in this area. There are three vices is critical for countries in p c p b situations. The possible ways in which thfe United Nations can in­ return to democracy or the signing of a peace agree­ tervene: i) by increasing mine awareness in the ment should not bring only elections, a cease-fire or population and advising governments accordingly; freedom of the press. It is important that there be a ii) by training soldiers and others in mine removal, rapid improvement in the well-being of the popula­ and iii) by organizing an international military unit tion through programmes that have an immediate im­ to do the job. pact, such as the restoration of power generation, the The last of these options, however, is not gener­ collection of garbage and the provision of safe water ally feasible since countries are not usually willing to and adequate sanitation to as large a segment of the send their soldiers to demine other countries. In some population as possible. This last programme would cases, as in El Salvador, demining was carried out by also reduce the burden on overextended health ser­ private companies that rely on the parties in conflict vices, as wars, sanctions and other disasters often for guidance in locating the mines. In other cases, as cause epidemics and diseases as well as physical and in Nicaragua, demining is carried out under the aus­ psychological disabilities that require specific drugs, pices of regional organizations such as the Organiza­ nutrition and medical treatment. tion of American States (o a s ).

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2. Demobilization and reintegration 6 p c p b requires special efforts to satisfy the needs of other vulnerable groups, including children, women a) Disarmament and demobilization and the elderly. Children suffering from the devas­ More and more the United Nations has been tating impact of war or other disasters require a wide called on to facilitate and verify the disarming and variety of special services relating to health, educa­ demobilization of combatants. This has often in­ tion, training and rehabilitation. Policies should volved their cantonment, the storage, custody and foster the reinstitution of family life, after years of disposal of their arms and the provision of short-term conflict during which families often drift apart. Par­ emergency programmes to satisfy their immediate ticular attention should be given to women who are needs in terms of food, documentation, tools and forced to redefine their position in society by accept­ training. ing new roles and responsibilities. In such circum­ stances, women are especially vulnerable and require b) Reintegration support in terms of social services, access to credit, The reintegration of ex-combatants, refugees, in­ training, education and technical assistance. ternally displaced persons and other groups margi­ 3. Building institutions and promoting human nalized during the years of conflict is often the most rights complex and challenging of the p c p b activities that the United Nations is asked to supervise. Success in A very important activity that the United Nations is this effort becomes particularly difficult in stagnant asked to perform in pc pb situations is the building or economies and in countries undergoing rigorous strengthening of national institutions and the promo­ economic stabilization and structural reforms. The re­ tion of human rights. This often requires major re­ integration of these groups often makes it imperative forms in the constitution, the judiciary, the electoral to solve critical problems relating to the non-existence system, the armed forces and the police. The United of property rights and the provision of credit, housing Nations has been involved not only in the design of and technical assistance. such reforms but also in their implementation and Reintegration often takes place through the agri­ verification, to ensure that they are carried out as cultural sector, micro-enterprises, fellowships for agreed to by the parties and to facilitate the transition technical and university training and even through to democracy. the incorporation of former combatants into new police forces. Reintegration programmes for the dis­ a) Participatory system of government abled are of crucial importance. These involve not One of the principles of PCPB is that all members only short-run emergency medical rehabilitation (in­ of society should be able to participate fully and free­ cluding the provision of artificial limbs, hearing aids, ly in the civil, political, socio-economic and cultural wheelchairs and specialized vehicles) but also pro­ life of the country in accordance with national stand­ grammes to reintegrate as many as possible into the ards. To this end it is essential to encourage freedom productive life of the country, with financial support of expression; the right to vote, to participate in for those who are not able to support themselves as a government, to organize political parties and to cre­ result of their disabilities. ate trade unions; and good governance and account­ ability of public office. Since 1990, the United Nations has been more and more involved in the pro­ vision of technical assistance and supervision to en­ sure free and fair elections.

6 For a detailed analysis of the issues involved and the particular experience of different countries, see World Bank (1993) and b) Promotion of human rights Srivastava (1994). See also Del Castillo (in the press (a)) and This is one of the main building blocks of pc pb the forthcoming studies carried out under the Overseas Develop­ activities. One of the principal objectives of all in­ ment Corporation project on “Development Assistance in War to stitutional reforms carried out, including the drafting Peace Transitions”, which looks at the cases of El Salvador, Mozambique, Nicaragua and Cambodia. For a review of the of new national legislation, should be the re­ literature, see Weiss-Fagen (1994). establishment of law and order in a framework which

POST-CONFLICT PEACE-BUILDINQ: A CHALLENGE FOR THE UNITED NATIONS • GRACIANA DEL CASTILLO CEPAL REVIEW 55 • APRIL 1995 3 5 will guarantee strict respect for human rights. In this countries to carry out longer-term reconstruction in a area the United Nations has not only been asked to reasonable period of time and with a reasonable participate actively in the design of institutional and chance of success. legal reforms, including the establishment of a na­ Reconstruction activities can often provide pro­ tional human rights commission and/or ombudsman, ductive employment for demobilized soldiers and but also in tracing disappeared persons and assisting other groups, but this employment should be on an victims of human rights violations. ad hoc and transitory basis only. Giving these people official employment on a permanent basis could 4. Longer-term reconstruction mean a bloated public service with a corresponding burden on public finances and efficiency. The reconstruction of physical infrastructure, includ­ ing damaged bridges, roads, railways and power 5. Confidence-building measures utilities, and development of human resources and employment possibilities are of fundamental import­ Confidence-building measures (c b m s) between or ance in the p c p b period, as efforts are made not only within States are a mechanism through which better to recover the productive capacity of the country but relations and economic ties can be built, c b m s can be also to restore access to former areas of conflict. The used to prevent conflict, but they are particularly im­ United Nations programmes and agencies, particular­ portant in p c p b . They can be used in the humanita­ ly the World Bank, u n d p , il o and f a o , have the rian, military, political, socio-economic or cultural technical capability to play a leading role in this re­ fields. The United Nations could encourage their use, gard. However, the financial resources needed are both as part of its preventive diplomacy policy and as not always available on preferential terms to allow part of its involvement in p c p b .

IX Financing of PCPB

The international community can play an important their financial support and shift their attention else­ role in the negotiation, implementation and verifica­ where as soon as the conflict winds down.7 Because tion of peace agreements by focusing world attention foreign financing is such an essential element of on the problems of the countries in question, facilitat­ p c p b , the international community should realize ing agreement between the parties and pressuring that, by not supporting a particular country in this them to comply with their commitments. However, critical transition, it may lose the investment it has p c p b would not be possible without foreign financ­ made over the years. The international community ing. As we mentioned earlier, countries coming out should also realize that in the end the cost of p c p b is of armed conflict or socio-political upheaval find it but a fraction of what it would cost in terms of particularly difficult to foster domestic savings or to humanitarian assistance and future peace-keeping attract private foreign capital in the short run. It is for operations if the country ever reverted to war. A lack this reason that countries in p c p b situations rely pri­ of adequate foreign financing can be devastating for marily on official aid flows (both bilateral and multi­ a country in a p c p b transition, particularly since the lateral). Financing is unquestionably a most critical so-called “peace dividend” is usually not very large ingredient of and constraint on p c p b . Foreign govern­ where conflict was largely foreign-financed. ments often spend large amounts of money to support one side or another during a conflict, but because of the increasingly high demand for official aid flows and the serious fiscal constraints faced by many 7 For a fuller analysis of the danger of this trend see De Soto and donor countries, they are more likely than ever to cut Del Castillo (1994b).

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Emphasis on the role and responsibility of the straint in the short run. In addition to such political international community in supporting p c p b should conditionality, countries in p c p b have to bear the not, however, detract from the responsibility of economic conditionality imposed by the financial in­ governments and other domestic actors to provide stitutions and bilateral donors. Assistance from these appropriate legal, fiscal, judicial and institutional institutions ideally should be on concessional terms, frameworks which are essential in order to foster do­ and the conditionality imposed by them should take mestic savings and to attract private capital flows into account the peculiarities of p c p b ; it is not rea­ from abroad. Although such frameworks take time to sonable, for example, to demand the same level of develop, without them a country will be unable to macroeconomic adjustment from countries in p c p b as reintegrate large numbers of people into productive is demanded from other countries. The experience of activities, let alone move into a development path, no the United Nations with pc p b indicates that economic matter how much foreign money is poured into its conditionality often interferes with the ability of economy. The experiences of Nicaragua and Zaire governments to finance peace-related programmes bear witness to this. On the other hand, the experi­ through domestic means such as deficit financing, or ence of Bolivia, to which donor countries have to provide preferential terms to particular domestic pledged US$1 billion in 1994, attests to the willing­ groups.8 ness of the international community to help countries Finally, it is a fact that the demand for foreign that help themselves by following sensible domestic aid and financing has greatly increased as poverty, policies. environmental degradation and natural and man- The experience of the United Nations with bilat­ made disasters have resulted in increasing numbers eral foreign financing of p c p b allows us to make the of refugees, displaced persons and infrastructural following points. First, donors are much more in­ damage. Where are the necessary resources going to clined to finance infrastructural and environmental come from? Today’s reality is that foreign aid to de­ programmes than programmes directly related to veloping countries is shrinking rather than expan­ peace consolidation. In fact, the international com­ ding. The supply of aid is inelastic, as opposed to munity in general is reluctant to finance some peace- private flows whose supply expands easily in the related programmes, particularly the creation of new presence of profitable opportunities. Furthermore, police forces and political parties and the transfer of donor country governments are increasingly ques­ land to ex-combatants. While they fall outside tradi­ tioned on the use of their aid budgets, particularly by tional areas of foreign assistance, these programmes opposition parties within their own political systems. are often essential to the success of the peace pro­ The slow growth, or even stagnation, and the high cess, although they may be politically sensitive in unemployment in many of the donor countries gives donor countries. Because of this reluctance the rise to constant pressure for selectivity and account­ United Nations has to make a special effort to facili­ ability in aid flows. For all these reasons, a country in tate foreign financing. Since this type of foreign fin­ a pc pb situation must make special efforts to reacti­ ancing is largely decided at consultative group vate its own productive capacity and foster domestic meetings, sponsored by the World Bank and with savings as quickly as possible to reconstruct its the participation of other financial institutions and economy and reintegrate marginalized groups bilateral donors, the United Nations can play a into productive activities. catalytic role in convincing donors of the critical importance of p c p b development programmes for the peace process. Second, bilateral donors are increasingly impos­ ing political conditionality, tying their aid to govern­ 8 For a description of the conflicts that may arise from the sim­ ments’ compliance with peace agreements. Although ultaneous implementation of a peace process, sponsored by the United Nations, and a stabilization and structural adjustment this may eventually be a boost to compliance with programme, sponsored by the Bretton Woods institutions, see the agreements, it may not ease the financial con­ De Soto and Del Castillo (1994a).

POST-CONFUCT PEACE-BUILDING: A CHALLENGE FOR THE UNITED NATIONS • GRACIANA DEL CASTILLO Concluding remarks

The need for the United Nations to become more ticularly the Bretton Woods institutions and the re­ immersed in the multidisciplinary aspects of pc pb re­ gional development banks, thus enabling it to draw quires major rethinking and an analytical and oper­ upon their human and financial resources in all ational redefinition of relationships and comparative matters of peace and security. advantages, not only between the United Nations and We are not proposing that the financial institu­ the many bodies within the United Nations system, but tions should finance p c p b . Neither are we disregard­ also between the United Nations and those outside the ing the restrictions on financing imposed by the system, such as the development banks and other re­ by-laws and regulations of these institutions. The gional organizations. In order to ensure an integrated need to maintain the creditworthiness of the World approach, while acknowledging the importance of fin­ Bank and the regional development banks must be ancing in p c p b , cooperation and a common agenda be­ respected. Furthermore, economic stabilization and tween the United Nations, the Bretton Woods institutions structural reform are crucial ingredients of p c p b , and and the regional development banks is imperative. the consolidation of peace cannot take place without economic stability. However, it is important to dis­ Our experiences with p c p b in Namibia, Cambo­ dia, El Salvador and Mozambique have allowed us to play flexibility and pragmatism in the treatment of collect a body of evidence and experience -both these ingredients when they may affect or endanger good and bad- from which we can draw in the future, human security. The financial institutions need to ac­ both in replicating policies and programmes that cept that pc pb situations are unique and as such have worked and in avoiding situations and confron­ deserve as much concessional treatment as the regu­ tations that have been counterproductive. This ex­ lations of these institutions allow. So far, these in­ perience could be of value in post-conflict or other stitutions have not succeeded in moving away from extreme situations of socio-political unrest such as their pattern of “business as usual” when dealing those existing in Somalia, Angola, Guatemala, Haiti with the unique conditions of p c p b - but unfortunate­ and the Gaza Strip and Jericho area. To this end, a ly the same can be said of u n d p and other pro­ grammes and agencies of the United Nations system. Secretariat Task Force on p c p b , created by the Secretary-General in 1993 and chaired by Under- In the negotiation of peace agreements, the Secretary-General J. C. Milleron, was charged with United Nations should work closely with other multi­ compiling a catalogue of services which the United lateral, regional and bilateral bodies, particularly the Nations can provide and concerns which the United Bretton Woods institutions, to ensure that the peace accords are consistent with countries’ financial ca­ Nations should bear in mind in pc pb situations. The Task Force was probably the first systematic effort at pacity; that programmes directly related to the peace examining these experiences, but it was only a first step. process are adequately financed; and that govern­ Only an integrated approach can avert the poten­ ments do not use economic conditions imposed by tial clashes of command and waste of resources that the financial institutions as an excuse to avoid the occur when various institutions carry out their spe­ politically difficult but crucial responsibilities of p c p b . cific mandates independently and without a common It must be determined which countries emerging purpose. But in order to follow a truly integrated ap­ from war or other crisis situations need special treat­ proach, it is essential first to build the necessary in­ ment. These countries face the double burden of im­ ternal bridges between the political and economic plementing peace-related programmes in addition to sides of the United Nations Secretariat, including the normal development challenges. In these special economic commissions, so that they can join hands cases, where human security is at risk, it should ulti­ in pursuit of peace - or, more specifically, the con­ mately be up to the Security Council to call for “spe­ solidation of peace. Once this common approach is cial treatment”, a fully coordinated approach and the ingrained, the United Nations should work more pooling of resources from the different institutions. closely with all of its programmes and agencies, par­ (Original: English)

POST-CONFLICT PEACE-BUILDINQ: A CHALLENGE FOR THE UNITED NATIONS • GRACIANA DEL CASTILLO 3 8 CEPAL REVIEW 55 • APRIL 1SS5

Bibliography

Del Castillo, G. (in the press (a)): Arms-for-land deal: United Nations (1992): Report of the Secretary General Lessons from El Salvador, in M. Doyle and I. pursuant to the statement adopted by the Security Johnstone (eds.), Multidimensional Peacekeeping: Council Summit Meeting, New York, Security Coun­ Lessons from Cambodia and El Salvador. cil, 13 January. (in the press (b)): Privatization in Latin America: United Nations, Secretary-General (1994a): An Agenda From myth to reality, Public Policy Reform Series, for Development, Notes on the economy and devel­ Santiago, Chile, Economic Commission for Latin opment, Nos. 559/560 (A/48/935), New York, America and the Caribbean (ECLAC). ECLAC. De Soto, A. and G. del Castillo (1994a): Obstacles to (1994b): An Agenda for Development (A/49/665), peacebuilding, Foreign Policy, No. 94, New York, New York, ECLAC. Carnegie Endowment for International Peace, Spring. Weiss-Fagen, P. (1994): Research and sources: A bibli­ (1994b): Implementation of comprehensive peace ographic essay (State of the Art Review), paper agreements: Staying the course in El Salvador, in presented at the United Nations Research Institute for Global Governance (in the press). Social Development Working Seminar on the Chal­ Srivastava, R. (1994): Reintegrating Demobilized Comba­ lenge of Rebuilding War-Torn Societies, Geneva, tants: A Report Exploring Options and Strategies for United Nations Research Institute for Social Devel­ Training-Related Interventions, Vocational Training opment (UNRISD), 29 November, mimeo. Management Studies, Geneva, International Labour World Bank (1993): Demobilization and Reintegration of Organisation (ILO). Military Personnel in Africa: The Evidence from The New York Times (1993): The week in review, New Seven Case Studies, Discussion Paper Series, No. York, 14 December. IDP-130, Washington, D. C., October.

POST-CONFUCT PEACE-BUILDING: A CHALLENGE FOR THE UNITED NATIONS • GRACIANA DEL CASTILLO CEPAL REVIEW 55 3 9

Decentralization and democracy: the new Latin American municipality

Eduardo Palma Carvajal

Principal Technical Adviser After a brief introduction (section I), this article takes up to the “Governance and the question of reform of the State, within the context of the Development“ project ECLAC proposal for changing production patterns with of the United Nations special emphasis on equity, its dimensions and its demands. Development Programme (UNDP). It notes that for a full understanding of this approach it is necessary to take account of the new institutional trends which are now so widespread in the social sciences and mentions in this respect the process of decentralization which is under way in Latin America, thus setting the stage for the question of the implications of this at the municipal level (section II). It goes on to analyse the question of democracy and the municipality (section III) from two standpoints: the first of these, which is of a more traditional nature and deals with social and political participation, gives rise to some considerations reflecting theoretical and practical experience in this field and explores some ideas for changing the structure of opportunities for participation with a view to strengthening and expanding them, while the second standpoint focuses on the less familiar question of intersectoral aspects and qualitative selectivity, which offer great promise in terms of decentralized social development. In the final considerations of the article (section IV), the type of changes which are taking place in most of the countries of the region are noted, and a warning is given against the most common mistakes, the most frequently- recurring types of improvisation, and the difficulties which are inherent in a process which takes a long time to reach fruition.

APRIL 1995 4 0 CEPAL REVIEW 5S • APRIL 1995

I Introduction

Reform of the State also includes reform at the level In more general terms, democratic development of the commune or municipality. When speaking of of a territory or other spatial unit involves at least reform of the State, reform at the level of the region three levels: the national level, the intermediate level or commune is sometimes overlooked, more because (region, province, department), and the level of the of arbitrary use of the term “State” than because of commune or municipality. Without an intermediate any clear, considered views on the matter. level, which is provided in federal countries by the In reality, political decentralization is a priority various states or provinces of the federation, it is im­ aspect of reform of the State in Latin America. The possible to link together in a suitable manner the na­ broad coverage of this process, which extends to al­ tional systems responsible for implementing certain most all the countries of the region, is clear, as is the public policies, especially those in the social field. manifest presence of this phenomenon in the current Decentralization involves big changes for the re­ decade and the intensity of the changes which have gions (provinces and departments) and the communal already taken place or are on the point of occurring. or municipal subdivisions. The end of centralization A significant feature of decentralization in Latin means that they must take on functions, capacities America is its association with the democratization and areas of competence which have already been process. Decentralization is, of course, the vehicle transferred to them or are in the process of transfer. for a number of different economic, political and cul­ The demands of the new forms of management thus tural trends. In Latin America, however, its most become a leading item on the agenda of the regions or promising feature is its potential for consolidating communes. At the same time, the need for more effective democracy by providing it with a broader and more and efficient forms of management and, more generally, diversified social base and the fact that it is constant­ for the rationalization of the whole process of the provi­ ly being enriched by theory and practice which are sion of services at the community or municipal level the subject of unceasing reflection and experience. calls for new forms of training of the human resources Within the decentralization process, the new role of involved at this level. It is naturally necessary to raise the municipalities is of decisive importance. There can be the management capacity of the technical and adminis­ no decentralization without the strengthening of life at the trative staff of the regions and communes, but there is community level, nor can regional development be suc­ also a need to change the conduct and outlook of the cessful unless it is based on a set of municipalities whose public, users in general, social leaders and politicians, at mutual cohesion reflects a true community of interests. both the regional and the commune or municipal level. II Reform of the State in the ECLAC proposal

1. The question of equity in the process of referring only to the general thrust and context of changing production patterns their view of reform of the State. The following paragraphs seek to provide an inter­ a) Equity and changing production patterns pretation of ec la c ’s most recent contributions in this Equity is an essential factor in guiding the path field,1 without of course trying to give a complete of Latin American society through the different summary of the documents in question but instead phases of its process of changing production patterns. 1 See in particular ECLAC, 1990 and 1992. It is a permanent and global value which must be

DECENTRALIZATION AND DEMOCRACY: THE NEW LATIN AMERICAN MUNICIPALITY • EDUARDO PALMA CARVAJAL CEPAL REVIEW SS • APRIL 1»CS 41 expressed in objective indicators throughout the pro­ These sociopolitical dimensions of equity can cess of change. Its global nature is reflected in its translate into a variety of political systems: equity is dual significance of the need for fair economic and a common requirement for the widest possible range social rewards for groups and individuals in keeping of regimes, forms of government and different types with the growth attained through the new develop­ of political institutions. ment strategy and for equitable political values Within the democratic tradition of the region which safeguard inalienable human rights and pro­ there is great democratic potential which has not mote the various dimensions of the development of been used to the full because of the marginalization democracy. of great segments of the population. In most coun­ As a constituent part of the proposal for chang­ tries, the democratic regimes -be they transitory or ing production patterns put forward by eclac , how­ long-lasting, consolidated or fragile- have neglected ever, equity is not just a common programme or a the task of giving the marginalized sectors justice, limited set of policies to be applied mechanically by security and an identity of their own. These needs, the countries of the region. As already noted, this which are clearly felt by the whole population, make proposal is a set of guidelines whose adaptation to the life of the poor still harder, for disputes over ma­ each country’s situation involves a special effort of terial assets among members of the marginalized sec­ analysis, but the definition of equity as a strategy to tor of the population are of crucial importance to foster a particular trend does not mean that it can be them, as also are their needs of security to protect watered down into vague lines of thinking that would both their personal integrity and their scanty assets. turn it into a more or less empty declaration of intent. With regard to the identity of the population, the ad­ Like the proposal of which it is an integral part, ministrative formalities whereby official recognition equity must be understood in global or systemic is given to the various events in people’s lives (birth, terms. The most direct and complete way of unfold­ marriage, death) have differential costs and inequit­ ing the different dimensions of equity is to assimilate able conditions of access for the different social stra­ them to the various dimensions making up the demo­ ta. Thus, for dwellers in marginal urban areas, and cratic system itself. Indeed, from its earliest formula­ especially for peasants, administrative obstacles are tion the ecla c proposal clearly stated that its still further barriers which increase their marginality. institutional context must be one of “pluralistic and All in all, the security of the population and ac­ participative democracy”, and as the main means of cess to justice and administrative processes referred handling public action in order to achieve efficient to above are inherent features of any modem political democracy without denaturing its essential bases it regime, but the expansion of democracy with a view prescribed strategic consensus-building. This in­ to their consolidation in the whole of society is the cludes, inter alia , such aspects as the relations be­ best and most reasonable way to attain such objec­ tween the State and society, the public economic tives. order, and government capacity and leadership. The region has a considerable stock of experi­ ence -successful, unsuccessful or of critical value- in b) Equity and democracy the development of democracy in conditions of struc­ Equity is a requisite for democracy which in­ tural heterogeneity. More specifically, it has a history cludes, as a bare minimum, the safeguarding of of democratic endeavours within the framework of fundamental human rights and, as a basic requisite the particular form of relations between the State and for the legitimacy of the governing authorities, the society at large in each country. holding of fair and honest elections. As the devel­ Here, the equivalence perceived between equity opment of democracy progresses, equity raises new and democracy is by no means an ahistorical or emu­ and more complex demands. It also requires plu­ lative proposal in the present circumstances. On the ralism in all fields -political, ideological, cultural, contrary, a fresh boost for equity as an imperative religious, ethnic, territorial, etc.- whereby civil and need with historical roots is sought for in the as yet political society may be independent of the State. At unused potential represented by the democratic herit­ the same time, political, economic and social partici­ age of the region. Nor is there any attempt to cast a pation involves citizens in decision-making and futile mantle of oblivion over the formidable ob­ complements the various forms of representation. stacles to the development of democracy encountered

DECENTRALIZATION AND DEMOCRACY: THE NEW LATIN AMERICAN MUNICIPALITY • EDUARDO PALMA CARVAJAL 4 2 CEPAL REVIEW 55 • APRIL 1955 in the recent and more distant past. The conflicts over stores of experience which should be borne in mind distribution, redistribution and the formation of stable when preparing an agenda of social and political re­ policies are a constant threat. What is sought, within forms for the purpose of changing production pat­ the narrow leeway available, is the complete redefini­ terns with equity. This is not an appropriate place to tion of past conflicts which caused losses to the par­ summarize the evolution of ec la c ’s thinking on so­ ties involved and to society as a whole, in order to cial issues, but it should be recalled that, starting make way for new, cooperative encounters which, from the structuralist approach, a more precise idea over varying lengths of time, will bring benefits to was formed of the special features of the Latin both individual interests and to society at large. Any American State and society, social movements, and attempt to regulate the interests of the different social the characteristics of the social and political actors groups, to harmonize ideas through practical agree­ and agents of development in the region. This con­ ments and to calm passions is always extremely diffi­ tribution highlighted the formidable obstacles to cult and complex. However, it appears necessary to democracy and equity which arise in conditions of carry out a change in production patterns because it structural heterogeneity, the types of social conflicts is becoming unavoidable. registered in the past and, in particular, the charac­ In the 1990s we are witnessing a new democratic teristic features of the distributive struggle. cycle on a universal scale -probably the broadest, The foregoing recognition of ec la c ’s contribu­ deepest-seated and most intensive such trend in the tion is not just a ceremonial tribute. On the contrary, entire twentieth century. Democratic legitimacy is it aims to enrich and enhance the analysis of strategic transforming political regimes, forms of government consensus-building, which is the main method of and party systems in all the continents, but most promoting changing production patterns with equity. dramatically in Eastern Europe. It would appear Out of the total range of structural conflicts, special that the democratic pleas against the violation of mention should be made of the difficulty of building human rights are about to complete a civilizing strategic consensuses which include the marginal stage of worldwide scope. sectors. In Latin America this worldwide trend has taken Clearly, political consensus-building must in­ the specific form of a transition from authoritarian clude broad consensuses between the State, em­ regimes to new democratic systems. This is its most ployers and unionized workers. Both the need for evident and best-known expression. such consensuses in order to achieve systemic devel­ Beneath the surface of the more transparent opment and the existence of institutionalized chan­ political phenomena and processes there is now a nels for negotiation among the agents in question reappraisal of social and political participation in mean that the presence of labour unions in these con­ novel forms. In every country it is now understood sensuses can be maintained and strengthened in that there cannot be equity without social and politi­ keeping with the process of modernization and in­ cal participation. creased international competitiveness. This syn­ The new way of defining this participation is chronization between the improvement of real wages associated with the political and administrative and the building of consensuses among the actors decentralization of the State. As we shall see later on, involved in the modernization of production is a the aim is to link the new development strategy with necessary condition for national development in the decentralized forms of distribution of power. Beyond medium term. Tripartite agreements will be the any doubt, postulating the elective affinity between political foundations for coordinated strategies for changing production patterns with equity and such a new form of participation in world markets on decentralization opens up prospects for a new demo­ the basis of enhanced comparative advantages. cratic potential in favour of equity. The implications of consensus-building are less predictable when it is a question of incorporating the 2. The Institutional resource demands of the excluded sectors in political negotia­ tions and policy decisions, however. These sectors’ a) Structural lessons and experience triple problems of economic, territorial and political e c l a c ’s contributions to the question of the so­ marginality keep them dispersed and atomized. Their cial development of Latin America offer lessons and incorporation into political consensus-building de­

DECENTRAUZATION AND DEMOCRACY: THE NEW LATIN AMERICAN MUNICIPALITY • EDUARDO PALMA CARVAJAL CEPAL REVIEW S3 • APRIL 1»»3 4 3 mands the establishment of new channels of repre­ ous fields of development policy. Thus, as we shall sentation and new forms of links between the politi­ see below, the trend towards decentralization in­ cal system and the “popular sectors”. There are a cludes the examination or review of the form of State great many challenges in this field, and it is necess­ (federal or unitary). Critical analysis of the prevailing ary to reject out of hand many actions whose conse­ political system is common in academic debate or quences could affect the political stability needed in even in the agenda of political discussions in some order to achieve changes in production patterns ac­ countries; both the semi-Presidential system of gov­ companied by greater opening-up to international ernment and the parliamentary system now have their markets. supporters in the region. The review is very compre­ A suitable means of facing such challenges is hensive, ranging from the regulation of the party sys­ greater diversification of the political and State tem to electoral systems. Furthermore, such issues as agents who can act as recipients of these social de­ reform of the State, government capacity and govern­ mands and can translate them into decisions on the ance are giving rise to new attitudes to the bureau­ reallocation of resources for the benefit of the poorest cracy, the top government authorities, and public sectors. This diversification of the political and in­ management. stitutional spaces which can channel the pressures of For the purposes of this article, it is particularly the excluded sectors would make it possible to in­ interesting to consider the “consociational” ap­ crease the number of means of promoting a redis­ proaches, that is to say, those which seek to institu­ tributive effort which seeks greater equity but does tionalize, and hence tone down, the great inequalities not have serious destabilizing effects. in societies. Indeed, the strategic consensus-building All in all, in more general terms, new institutions which is inherent in changing production patterns re­ are needed in order to deal with the actual or poten­ quires a more “consociational” or, if it is preferred, tial conflicts due to heterogeneous and biased econ­ more cooperative intellectual and social climate. In omic and social structures. The design of institutions view of the prevailing structural heterogeneity and thus assumes fresh importance for the development its potential for giving rise to conflict, it is necessary theory on which the concept of changing production to institutionalize cooperation among the agents of patterns is based. development through various mechanisms and proce­ dures for regulation, deregulation, arbitration, repre­ b) Measures to improve institutions sentation, supervision, etc. These new institutions The merits of structural analysis must not lead to place emphasis on various means for reformulating a tendency to overlook its shortcomings. Nor should conflicts, such as modifications in the spatial setting, there be to-and-fro swings between “socio-centered” different time horizons, new corporative bodies and approaches and the new “multi-centered” outlook. In new mechanisms for consultation. reality, development theories must necessarily take account of all the social sciences. Be that as it may, c) The trend towards decentralization however, in the past the contributions in the institu­ Centralism is now questioned as an institutional tional field in the region were very scarce. There are and cultural model in the region. This legacy from many reasons for this, including the insufficient level Spain, which was based in turn on the French con­ of development of these disciplines, mistrust regard­ ception of the centralized State, has now completed ing the value of legal institutions, and the dominance its cycle of unquestioning acceptance. This is not the of various types of structuralism. A particularly ap­ place to make a historical review of its achievements propriate place for observing the institutional short­ and limitations, but in order to gain a proper under­ comings is the treatment given to the State: standing of the reasons for the shift in preferences paradoxically, although little was known about the State it was usually entrusted with colossal tasks. 2 “Without denying the importance of the social context of pol­ Approaches and needs have changed. For a start, the icy or of the motives of the individual actors, the new institution­ rebirth of institutional analysis is a general trend.2 In alism lays emphasis on a more independent role for political Latin America, the climate of mistrust or lack of in­ institutions. The State is not only affected by society, but also affects it... Political democracy does not only depend on the terest in the treatment of institutional forms has now economic and social conditions, but also on the design of the disappeared. The review of institutions covers vari­ political institutions” (March and Olsen, 1993).

DECENTRALIZATION AND DEMOCRACY: THE NEW LATIN AMERICAN MUNICIPALITY • EDUARDO PALMA CARVAJAL 4 4 CEPAL REVIEW 55 • APRIL 1»55 from the centralized to the decentralized option it is the first election was carried out in December 1989. necessary to note on the one hand the success of the Likewise, the new Basic Act on Municipalities intro­ centralized State in the past in shaping each national duced new types of municipalities, with expanded society, but on the other hand the subsequent declin­ functions, as from January 1990. Finally, in Argenti­ ing capacity of the centralized model to deal with na the Federal Reaffirmation Accord of 25 May 1990 present-day challenges. was designed to correct the shortcomings of the It is asserted that there are universal tendencies national federal system. in favour of decentralization. These are called Among the unitary countries, special mention “megatrends”, and prominent among them is the new may be made of the reforms carried out in Colombia, scientific and technological revolution, which, it is Peru, Chile and Bolivia. In Colombia, the Act on considered, will affect the spheres of production, in­ fiscal decentralization (an increased share for the mu­ formation and transport and is likely to give rise to a nicipalities in national tax revenue) and the Act on new kind of industrial geography which will have the election of Mayors by popular vote (both enacted some of the following characteristics: replacement of in 1986) have meant substantial changes in the politi­ the Fordist model, the end of the trade union system cal system. In Peru, the 1979 Constitution introduced based on the unionization of big companies, replace­ the Regional State (i.e., a State made up of regions), ment of traditional material inputs with inputs con­ which is a blend of the unitary and federal systems. sisting basically of knowledge, and the emergence of In Chile, the November 1991 reform of the Constitu­ industrial structures in which location and concentra­ tion, the Basic Acts on regions and municipalities, tion are no longer so important, resulting ultimately and the forthcoming Act on Municipal Revenues in decentralization. mark the beginning of a far-reaching process of Decentralizing trends of a political nature affect decentralization. Finally, in Bolivia the 1985 Basic the various regions of the world differently. In the Act on Municipalities has also meant a process of face of the new democratic cycle, the reformulation decentralization, which was demanded by regional of the tasks of the State and the demands for partici­ movements and endorsed by local elections. The pation on the part of the new and diversified types of new government is currently preparing an Act to society, both the changes in the State and centralized strengthen the municipalities. society itself take different forms. However, the process of decentralization has In Latin America, decentralization is mainly seen currently been halted in Peru to make room for other in terms of democratic reforms, reform of the State reforms considered to be of higher priority. and reform of territorial social participation. In all the countries of the region, albeit to differ­ This analytical differentiation into three types of ent extents, the question of decentralization has reforms is not so clear when looking at each national begun to form part of the political agenda, even in case, which naturally reflects special historical vari­ geographically small States. The municipalities are ables. Nevertheless, the common lines of the reforms also being strengthened in Central America, espe­ stand out over the variety of different features. cially in Guatemala and El Salvador. In the case of the great federal countries of the The reforms do not only affect the political sys­ region, it could be said that the main current tend­ tem, in its capacity of the matrix of public policies, ency in them is to review the federal system so that it but also a significant number of the latter. In the past, can really act as a decentralizing model. In its 1988 social policies were centralized, but today there are Constitution, Brazil introduced a notably decen­ incentives to decentralize or deconcentrate social ser­ tralized system which includes direct participation by vices and thus adapt their supply to local conditions the population through popular initiatives and ref­ and bring them closer to the community. Generally erendums. In Venezuela, the review of the function­ speaking, the idea behind all formulas aimed at ing of the State, the democratic system and social decentralizing and deconcentrating social policies is participation has given rise to a national debate. This to improve their effectiveness and efficiency and to review has imparted a new value to federalism enhance their intersectoral nature, the degree of par­ through the Act on the Election and Removal from ticipation of their beneficiaries and the level of Office of State Governors, which was enacted in equity. It is considered that in this way decentralized 1988 and reformed in April 1989, and under which and deconcentrated authorities will be in a better po­

DECENTRAUZATION AND DEMOCRACY: THE NEW LATIN AMERICAN MUNICIPALITY • EDUARDO PALMA CARVAJAL CEPAL REVIEW 5S * APRIL 1*»S 4 5 sition to take account of local heterogeneity and will d) The implicit elective affinity between changing be able to take more equitable decisions, giving production patterns with equity and decentra­ suitable special treatment to different situations. lization In the 1990s, the health sector has a decen­ Changing production patterns with equity is a tralized or deconcentrated system of organization systemic proposal. Even when this proposal is not yet which brings health problems in line with the rele­ an effectively functioning system, it is still at least an vant spatial dimensions. The Pan-American Health integrative approach, given the minimum assumption Organization (pa h o ) has noted that nearly 90% of its of elective affinity between its basic components. member countries are preparing or implementing In Latin America, the idea of decentralization is policies aimed at developing local health systems, as directed mainly, although not exclusively, at the terri­ an operational tactic within the Primary Health Care torial or geographical distribution of power. Every Strategy which is considered to be of key importance finite physical space must shape its own identity for for attaining the goal of Health for All by the year the establishment within it of the process of changing 2000. production patterns, through the building of consen­ The scale of these local health systems varies suses among its social actors who are linked by a according to the conditions in each country; normally, it common identity. Such territories, which were in­ would be desirable to have a decision-making level itially of natural origin but were subsequently of at least a second degree of complexity, together equipped and finally organized, are regions in a with suitable efficiency in resource use. general sense. The positive effects expected to result Generally speaking, the education sector in the from decentralization with a view to greater equity region has been organized on a centralized basis. are due to various factors: the more prominent role This is now being criticised, however, and the decen­ played by the regions will tend to correct interre­ tralization and déconcentration of the sector is being gional inequalities; social participation will be able to proposed. The criticisms of the centralized manage­ take account of the variety of different demands; in­ ment of education are based on the fact that marginal tersectoral links between policies will be facilitated sectors are still excluded, despite the quantitative ex­ when they are implemented at the local level, and the pansion of the sector; on the insufficient adaptation closer relation between the supply of services and the of the educational system to the real social situation, demand for them will facilitate the selectivity and and on its poor management capacity. targeting of compensatory policies. In short, the main Decentralization processes can assume three method of securing changing production patterns forms: regionalization, municipalization and the for­ with equity is strategic consensus-building. Decen­ mation of educational focal points. Regionalization tralization is therefore by its very nature a system of processes are under way in Argentina, Brazil, Chile, shared authorities: in reality, it is the highest institu­ Colombia, Costa Rica, Ecuador, Mexico, Nicaragua, tional and organic expression of ongoing consensus- Panama, Peru and Venezuela, with the aim of pro­ building. moting the internal management of education or the However, decentralization is not a simple, linear preparation of programmes and methods with a or rapid process. In order for there to be decentraliz­ greater local content. Municipalization has been put ation, it is necessary that the bodies given areas of into effect in Brazil, Chile and Colombia by linking competence under it should have legal status, that schools to municipalities and municipal authorities, their authorities should be democratically elected, and as well as with the local community, sometimes as a that they should be able to act independently of the means of decentralization and in other cases as a central administration. Déconcentration is the transfer form of déconcentration. The policy of seeking to of authority from the State to lower-level bodies which create educational focal points, which originated in come under the central administration. If there is politi­ Peru and has spread to Argentina, Brazil, Colombia, cal will to do this, as seems to be the case in almost all Costa Rica, Ecuador, Guatemala, Honduras, Nica­ the governments of the region, déconcentration can ragua, Panama and Venezuela, aims to form educa­ pave the way for subsequent decentralization. tional focal points grouping together several schools In short, the elective affinity between changing in the same district, one of which acts as a model and production patterns and the decentralization process is centre of coordination. connected with common elements in their own nature.

DECENTRALIZATION AND DEMOCRACY: THE NEW LATIN AMERICAN MUNICIPALITY • EDUARDO PALMA CARVAJAL 46 CEPAL REVIEW 5S • APRIL 1»»S e) The State, rural poverty and equity pality for every 26 km2 of territory, and in Eastern The social effects of the hacienda system on the Europe, one every 39 km2. The region is also seen to formation of the Latin American State and society lag behind in terms of the ratio of municipalities to have been the subject of studies which are of fun­ the population (table 1). damental importance for understanding the conti­ The rural societies of Latin America and the nent’s social history. Caribbean are thus suffering from a lack of public The decline of the hacienda system caused authorities capable of expressing the desires and various social vacuums. One of them, which is of aspirations of rural dwellers and furthering local particular importance at the present time, is the rural progress. This weakness also prevents them from weakness of the regional and local public institu­ channelling their initiatives and contributions in tions inherited from that system. terms of resources, labour and projects when there As rural society was in the past an area reserved are conditions which permit participation. In rural areas for control by the hacienda owners, this led to a there is a lack of authorities to watch over public marked insufficiency of public authorities and local welfare and progress, and the existing local adminis­ administrative mechanisms. This is why -with a few trations do not reach the rural environment. exceptions- Latin America and the Caribbean suffers The weakness or absence of authorities in rural from what has been called “under-municipalization”: communities possibly militates more than any other that is to say, a very low density of local public auth­ factor against the development options of rural orities, with serious limitations on their functions. society. Furthermore, this situation encourages inertia, Generally speaking, Latin American rural dwellers a passive attitude, and domination by caudillos or have virtually no institutions, and their access to the local leaders, which can result in arbitrary actions decision-making centres, central public services and in extreme cases. There are grounds for believing even social benefits is extremely limited. In the re­ that there is a definite correlation between a lack gion, there is a municipality for every 1 338 km2 of of institutionally channelled participation and extra­ national territory, every 1 098 km2 of agricultural political forms of action. Violence in rural areas may land, and every 482 km2 of arable or grazing land. In well be related with the weakness of the institutions Western Europe, in contrast, the ratio is one munici­ observed there.

TABLE 1 World: Density of municipalities in relation to area and population, around 1990

Land area (thousands of km2) Density of municipalities Population Number of Suitable Arable (millions of municipal­ (4/5) Total for agri­ land and inhabitants) ities (thousands (1) culture* pastures (4) (5) (1/5) (2/5) (3/5) o f inhabi­ (2) (3) tants)

Latin America 20 877 17 134 7 518 439.3 15 600 1 338 1 098 482 28.2 Western Europe b 1 639 1 373 929 229.3 63 086 26 22 15 3.6 Eastern Europe c 441 389 256 53.5 11 300 39 34 23 4.7 Soviet Union 22 402 15 492 6 042 288.7 48 296 466 321 125 5.9 Canada d 6 052 4 344 785 26.2 4 657 1 299 933 168 5.6 United States 9 372 6 965 4 313 248.0 19 200 488 363 224 12.9

Source: ECLAC/FAO Joint Agriculture Division, on the basis of population censuses and statistical yearbooks of the various countries; and ECLAC, 1992, p. 247. a Including woods and forests. b Includes only the former Federal Republic of Germany, Spain, France, the Netherlands and Italy. c Includes only Czechoslovakia and Poland. d Excludes the Yukon and the North-West Territory.

DECENTRALIZATION AND DEMOCRACY: THE NEW LATIN AMERICAN MUNICIPALITY • EDUARDO PALMA CARVAJAL Ill Democracy and the municipality

1. Social and political participation government elected through citizen participation. Nor is its quality of community-level government contra­ a) Participation in democratic municipalities dicted by low levels of participation, apathy among The idea of community government obviously the citizens or abstention in elections, although natu­ includes some form of citizen participation. Indeed, it rally these shortcomings basically weaken its demo­ could be argued that the oldest examples of participa­ cratic character. tion are connected with the history of town meetings, To sum up, a clear distinction must be drawn civic councils and municipalities, although this is not between community-level services and community- the place to go into the Latin American and Spanish level government, and the key element for distin­ history of community participation, which describes guishing between them is citizen participation. the progress and setbacks in the prevailing concepts However, the theory and practice of democratic of participation. municipal government necessarily involve a variety However, excessive nostalgia in this respect of recognized actors and mechanisms. To begin with, should be avoided. The truth is that in almost all they require the existence of political parties and, Latin American countries the role of the municipality hence, of multiple candidates for elective community suffered a serious decline as from the eighteenth cen­ posts, which means political participation through tury. In some extreme cases -including that of Chile- various organizational forms. Party political struggles the municipality practically disappeared as an organ usually lead to some loss of confidence in these of democracy in the nineteenth century (through the channels, at least at the community level. Frequent 1854 and 1864 Basic Acts on the status of the mu­ pleas are made for the de-politicization of com­ nicipality). munity life, and support is often expressed for tend­ Centralization is usually accompanied by various encies favouring more corporative forms of grass-roots forms of nominal déconcentration, as a technique for social organizations and a more prominent role for transferring central government resources to a local them. It is proposed that community-level elections agency which comes under the higher level of gov­ should be de-politicized through mechanisms to re­ ernment and has very little freedom of action. In this place the parties with territorial neighbourhood case, it is really a question of a local-level public groups and corporative organizations. The fact is that service. Naturally, within its own area of provision of from a democratic standpoint it is absurd to see a goods and services such a community-level agency contradiction between society at large and politics. can secure the support or acceptance of the popula­ On the contrary, if what is sought is to make society tion or even give rise to limited forms of social acti­ at large more independent and diversify and vation among the users of public services, but no strengthen the groups which make it up, it is essential municipal service, no matter how much support it that there should be a system of parties with solid receives from its users, can describe itself as a true roots at the community level. In practice, the moral­ form of community government. istic pleas for the de-politicization of community life, What really determines the existence of community- which are sometimes encouraged by party political level government is decentralization: i.e., recognition shortcomings, are doomed to failure or, sometimes, of the areas of competence of a body which is are used to bolster up the arguments of those in not administratively subordinate to a higher level and favour of authoritarian regimes. Participation in whose real independence comes from its type of elections is the prime form of political participation mandate: election by the people. Neither the limited and, indeed, of participation in general. extent of its competence or resources nor the control Another rather ingenuous way of viewing mu­ of some of its decisions by a higher-level authority nicipal policy is to seek to enhance it without pro­ detract from its character of a community-level moting various forms of individual and collective

DECENTRALIZATION AND DEMOCRACY: THE NEW LATIN AMERICAN MUNICIPALITY • EDUARDO PALMA CARVAJAL 4 8 CEPAL REVIEW 55 > APRIL 1555 training in public participation and management. mulation of political activities, for what is changing Every political system has fairly well-defined chan­ and, ultimately, will be completely transformed is the nels for a career in politics, and these often begin, as agenda of items under debate and, hence, political is only logical, in the municipal field. The real prob­ activities themselves. This agenda will be increasing­ lem in terms of this political career is connected with ly multifarious, specific and global. Very few areas of the importance of the municipality. This should not competence will be reserved for the national level: be just a starting-point for such a career, but should defence, external relations and macroeconomic also be an area which is interesting in itself and a policy. All the rest will become a local and regional source of permanent motivation for politicians, espe­ matter (though this does not and should not mean cially those with more experience and prestige in that the agenda will be divided up into rigidly- public affairs, to strengthen the work of the organs defined areas of competence). operating at the community level. In order to achieve At the same time, changes in the scale of prob­ this aim it is necessary to provide the municipality lems also change their nature and the way of dealing with substantial areas of responsibility and resources. with them. The same is true of opportunities for learning public Under centralism, the political activities of both affairs and participation, which demand new institu­ leaders and supporters take place between the two tional channels for community participation. extremes of a single continuum: revolutionary Jaco­ Another important element in the machinery of binism and dependent and subordinate clientage. democracy is the existence of a local government Linking up politics with the vast range of concerns of subsystem within the national system of government, daily life becomes almost impossible in a centralized both enjoying the same popular legitimacy. It is not party which is both the creator and the creation of the just a question of respecting the limits of their respec­ process of centralization. tive fields of competence, but of making it clear that In decentralized communities, in contrast, politi­ the legitimacy of both levels of government has the cal activity inevitably takes the form of service. Ob­ same origin, even though their political inclinations viously, it is possible that in certain communities may be divergent or even diametrically opposed. populist leaders with a client-like following may This quality is consubstantial with democracy, as come into power, but in the long run such deviations the political order whereby power is shared out. In will be corrected through the example of other com­ this respect, a Peruvian analyst maintains that: “What munities. is really involved, perhaps, is the assimilation of a The recruitment and circulation of elite elements concept which is familiar to all, but nevertheless not is a central element in successful decentraliza­ sufficiently understood: that fact that every political tion. It is worth recalling that one of the features of system which calls itself democratic must start from centralization -and perhaps its most harmful feature- the idea that the relative difference between what it is is the relocation of the best human resources in the offering and what is offered by other systems is the centre or capital. Thus, the periphery suffers a decline possibility it proposes that power can be split up into in the quality of its leaders and in the management of shares and areas of competence which can be given its socio-economic and politico-cultural develop­ to different levels and organs, even though this may ment. It is necessary to encourage the return of elite mean its simultaneous use by political agents of dif­ elements to such peripheral areas in order to lead ferent, multiple or even opposing persuasions, be­ their communities. cause this is an effective guarantee that the use of The political activity of the elites should be such power cannot be concentrated in the hands of marked by new characteristics: competence, special­ one or a few individuals. The idea is that this frag­ ization and horizontal mobility. It is necessary to mentation and sharing of power must not only be eliminate restrictions on the fields of competence and possible, but desirable, even though, according to horizontal mobility of the political and administrative certain narrow criteria, this may be ‘inefficient’” elites so that the various lower-level territorial com­ (Bustamante Belaúnde, 1983, pp. 12-13). munities (regions and communes) can have a chance New decision-making agents mean the formation of obtaining the best leaders. As a source of legitim­ of new political spaces. This is obvious, but its con­ acy of the leadership, legitimacy based on effective­ sequences are less predictable and involve the refor­ ness and achievements should be added to that based

DECENTRALIZATION AND DEMOCRACY: THE NEW LATIN AMERICAN MUNICIPALITY • EDUARDO PALMA CARVAJAL CEPAL REVIEW 55 • APRIL 1555 4 9 on place of residence or birth. Specialization would parture from the homogenization of the services of­ be indispensable and could help to further the virtu­ fered. This is a foreseeable effect which can have ous circle of decentralization through the spreading good or bad consequences depending on the level of and copying of results in keeping with local needs in development, the resources and the perceived needs specific areas. of the community. The very heart of political activity is changed The positions of those participating in the formu­ through decentralization. The party as an instrument lation and execution of public policy can also be of service to the community ceases to be a mere affected by decentralization. For example, the cor­ figure of speech and becomes an indispensable porative interests of the participating groups (users necessity. In this way, the act of bringing politics and suppliers) may be contradictory. closer to the needs of society at large changes the In short, community participation in the formula­ forms of political action. Political assemblies -be tion and execution of social policy changes the ad­ they large or small- in which manipulation, trickery vantages or expectations which existed under the and at best empty oratory prevail must be replaced previous pattern of opportunities for participation. with the capacity to generate solutions for increasing­ ly varied problems. The great issues of the present b) Changes in the pattern of opportunities for -the environment, the struggle to do away with dis­ community participation crimination against women, defence of young people, Paradoxically, until recently in Latin America etc.- take on a more concrete, special and readily constitutions used to be changed more frequently appreciated nature when they are located at the local than the laws governing the municipalities, which are and regional level. those that define the patterns of opportunities for Another important change is taking place in pol­ citizen participation. itical culture. The need to strengthen mutual civic Some forms of changes in these patterns at the understanding also ceases to be a mere demagogic community level are already under way, others have invocation and becomes instead an inherent requisite been formally proposed, while yet others are the sub­ of public action, for shared areas of competence and ject of technical and political controversy. The list the need to promote solutions based on consensus given below does not pretend to be a precise enumer­ make it essential to pursue a policy of cooperation ation of changes in the pattern of opportunities. There and mutual agreement. It is necessary to beware of is room for many perfectly legitimate opinions in this moralistic over-optimism, however. In processes of area: it is an open field for reasoned opinions. At the social change -in this case, change in the political same time, it should be borne in mind that any reform space- it often happens that political leaders antici­ in one part of the system modifies the whole. Coher­ pate the changes with rhetorical speeches in favour of ent exercises of political engineering and architecture decentralization which are not accompanied by actual are therefore necessary. deeds (J. J. Dayries and M. Dayries, 1978, p. 109). Furthermore, for a democratic process of shap­ i) The need for a number of different types of ing public policy in the spatial field it is very import­ municipalities. Centralization implies a standardized ant to recognize that in the stage of policy form of municipal organization, subject to estab­ formulation, and especially in the phase of its execu­ lished rules. As Varas so rightly notes: “The isomor­ tion, there is room for various different forms of ac­ phic tendency generated by the established institutions tion. A single set of general rules can give rise to means that, due to this legalistic emphasis, municipal various different approaches, various priorities as re­ systems adopt the same political and administrative gards public action, and a number of different forms structures all over the country. A kind of standardized of social participation by the population. Community municipality is created which has to fulfil the same management and leadership can give rise to various objectives in different places. This tends to facilitate degrees of support for public policy and particular the establishment and implementation of new mu­ forms of social mobilization, in line with the com­ nicipalities, as well as the evaluation of their achieve­ munity’s needs and perceptions. This why, in the case ments, through the easy comparability thus attained.” of public social policy, execution through com­ He goes on to add: “A negative aspect, however, is munity-level governments leads, in principle, to a de­ that in some places with special needs and problems,

DECENTRALIZATION AND DEMOCRACY: THE NEW LATIN AMERICAN MUNICIPALITY * EDUARDO PALMA CARVAJAL 5 0 CEPAL REVIEW SS > APRIL 1#»5 the politico-administrative structure which has to be ticipative institutions for taking the various com­ applied as the local government is not the most suitable munity decisions. Participation may of course be one, and may even become a problem rather than the compulsory or binding, or it may simply be of a con­ means of solving problems” (Varas, 1984, p. 119). sultative nature. Likewise, the institutions may be As far as opportunities for participation are con­ purely territorial, purely corporative, or a combina­ cerned, the single standard type of municipality is a tion of the two. Neighbourhood associations are serious institutional obstacle. It is difficult for such a typical examples of territorial organizations, while standard institution to serve the many different as­ trade unions and business or employers’ associations pects of participation, located as it is in such varied are typical corporative bodies. social contexts. Obviously, there is a difference be­ Territorial or corporative interests are by no means tween the needs of rural and urban local authorities the only ones represented by the wide range of social and, within the latter, between the needs of metro­ organizations of the most diverse types which can take politan and other authorities, and the needs of rural part in the community decision-making process. A authorities differ among themselves also. This is not multitude of different types of organizations rise and fall the place to list different types of municipalities with in their efforts to reflect cultural, artistic, ecological, a view to facilitating participation. Each national sys­ sporting and many other concerns, and all or some of tem probably requires such a special list of its own. them can play a recognized part in the taking of com­ What is worth noting is that one of the criteria for munity decisions on their respective fields of activity. preparing such lists is that the support of the popula­ v) Execution of social programmes. Strictly tion is needed in order to carry forward public policies speaking, execution is the last stage in the decision­ which will satisfy their real, deeply felt needs. making process. Here, however, it is mentioned ii) Popular election of the Mayor. Such popular separately because it can involve the transfer of re­ election seeks to gain mass endorsement for the com­ sources to the organizations responsible for executing munity leadership and its binding programme of ac­ projects. Transfers and subsidies usually supplement tion. In this way, the community can get to know the the organizations’ own resources, which can include different alternatives among which it must choose. labour, saving or production equipment. Furthermore, in countries with markedly Presidential vi) Administration of community services. The regimes it may be assumed that the idea of a ongoing provision of community services may be en­ President-like figure at the community level has trusted to voluntary social organizations. This often already gained social acceptance. happens in the case of selective services aimed at iii) The introduction of compulsory consult­ very specific groups: undernourished children, old ations. Through this means, the idea is that the com­ people’s homes, rehabilitation centres for the dis­ munity itself should evaluate investment projects by abled, etc. Voluntary social organizations may also be choosing between two or more which are proposed to entrusted with the administration of certain community it by the political authorities, along with the respec­ facilities (sports grounds, cinemas, theatres, etc.). tive technical background data. vii) Promotion of microenterprises. In promoting Some authors have suggested that such consult­ microenterprises for the production of goods and ser­ ations could represent the introduction of the crite­ vices, it must be borne in mind that the effectiveness rion of positive discrimination to benefit population and efficiency of the production process are essential groups with unsatisfied basic needs whose only ef­ in order to attain the sought-for economic and social fective resource is their numerical magnitude. In this objectives: the satisfaction of needs and especially way, positive discrimination would cease to be a mere the creation of new jobs. technocratic recommendation and would instead become a criterion for voting in democratic elections. 2. The intersectoral community environment Be that as it may, binding consultations can un­ doubtedly be a suitable means of settling various a) Shortcomings of the centralized form of intersec­ local-level controversies. toral coordination of official activities iv) Institutionalization of channels of community As is well known, the expansion of Latin Ameri­ participation. Theoretical proposals and Latin Ameri­ can social development, especially since the end of ca’s practical experience offer a wide range of par­ the war, has followed a centralized pattern: i.e., the

DECENTRALIZATION AND DEMOCRACY: THE NEW LATIN AMERICAN MUNICIPALITY • EDUARDO PALMA CARVAJAL CEPAL REVIEW 5S • APRIL 1995 51 use of big national-scale official organizations to ex­ grammes at the local level. At the operational level, tend the coverage of social services. there is a form of de facto intersectoral action, due This form of social development has undoubted­ partly to the restrictions in terms of material and ly registered successes in expanding the supply of human resources, but especially because of the fact services. However, according to some analysts this that the inherent nature of social problems does not centralized bureaucratic network has reached a point permit sectoral distinctions. Such problems can be of diminishing returns and therefore needs a com­ dealt with only through intersectoral policies which plete review. Basically, centralized policy is criticised not only involve institutional coordination but also for its constant tendency towards sectoral fragmenta­ the practical integration of concepts and resources tion, with the consequent disappearance, or at least and, above all, a great capacity of adaptation on the severe deterioration, of a unified approach to social part of regional and local authorities and officials in matters as a single whole. order to reconcile the restrictions of their faculties Decentralization, however, represents a means with the extent of the problems they have to face. whereby it could be possible to overcome the im­ When the participation dimension is added to the in­ paired coordination of official services in the social stitutional factor, it becomes obvious that not only field. In other words, the region and the commune institutional adaptation is required, but also the ca­ could be suitable areas for the integration of social pacity to integrate the community in order to formu­ policy, through more or less unified social services. late its demands. This is a promising aspect of this decentralized man­ The practical problems raised by the intersecto­ ner of providing social services, in view of the failure ral approach are extensive and varied. What is essen­ of the usual solution of setting up committees to co­ tial in order to cope with the main obstacles, however, ordinate the activities of official bodies. is to have a thorough knowledge of the complexity of the intersectoral links of each problem that the b) Intersectoral aspects policies seek to deal with, and to promote the special­ i) The intersectoral concept. The intersectoral ization of the staff responsible both for taking deci­ concept is not just a theoretical criticism of individ­ sions and for implementing them. There is very little ual social policies, but a pattern of action for their theoretical and practical specialization of an intersec­ implementation. Thus, one speaks of intersectoral ac­ toral nature among those responsible for taking pol­ tion or intersectoral development, which are under­ icy decisions and executing them. For example, there stood respectively as the broader set of relations is an identification between the social sector and the between the different economic and social sectors corporative professional ethos, so that the technicians in and as the process in which the objectives, strategies, each sector perceive and approach social problems activities and resources of each sector are considered from their own viewpoint, both methodological and as a function of their repercussions and effects on the practical, and assign them importance in line with objectives, strategies, activities and resources of the other these criteria. (Although this problem is not expressed sectors (the approach normally used by the pa h o ). explicitly, it can be seen from the slowness with which From the conceptual point of view, the intersec­ educators, doctors, urban experts or planners have toral approach surpasses the segmented approach in expanded the spectrum of disciplines in Ministries terms of the formulation of social policies and the and other bodies and have recognized the need for institutions available for the decision-making pro­ interdisciplinary approaches and collaboration). cess. It questions the wisdom of administrative struc­ ii) Intersectoral action as a response to needs. In tures made up of the Ministries of each sector and practice, the needs and demands are such that they resource allocation mechanisms operating on the make it impossible to simply wait for a new social basis of sectoral categories or items, and instead es­ theory on intersectoral aspects to arise, for in all tablishes an integrated criterion for social planning. areas -but especially that of community affairs- the From the operational standpoint of the policies, the authorities are faced with urgent problems and must intersectoral approach not only affects the horizontal explicitly or implicitly tackle them in an intuitive decision-making structure (the relations between manner. The well-known techniques of project evalu­ Ministries, for example) but also the vertical dimen­ ation do not offer methodologies which will allow them sion, especially as regards social projects or pro­ to set about intersectoral action in a rational manner.

DECENTRALIZATION AND DEMOCRACY: THE NEW LATIN AMERICAN MUNICIPALITY • EDUARDO PALMA CARVAJAL 52 CEPAL REVIEW 55 • APRIL 1»»5

These practical responses, which are sometimes the successful implementation of certain policies is quite intuitive, are not necessarily doomed to failure, particularly likely at the spatial level of the munici­ however. On the contrary, a trial and error approach pality, but in contrast, this level is quite inappropriate often leads to programmes which are very successful as a space for the development of certain other issues because they stick to the logic of satisfying needs. and policies. The value of such examples often passes unnoticed Generally speaking, the policies whose most simply because of the failure to collect and analyse suitable context is the commune are those which give their results. cultural identity in the broad sense and those which try to grasp the needs of the populations they are c) Qualitative selectivity designed to serve or encourage them to organize Within the limited space of a commune, social themselves in line with selective types of motivation. analysis and statistics can be highly detailed. The Programmes and services designed to promote general purposes of social strategies are always sub­ culture (libraries, nature parks, museums, etc.) should ject to the need to be adapted to special social prob­ also be under municipal supervision, perhaps with lems. Families and different social groups are the contributions from the user groups themselves. users of social policy, but they are not statistically Among social welfare policies, those which are average families or statistical cross-sectional groups. designed to meet dynamic local needs are also suit­ Instead, they have all the special features which able for implementation at the community level. It is make them concrete and specific. Because of its rela­ the responsibility of the municipality to be sensitive tively smaller size, the municipality facilitates this to the evolution of these needs in contexts of both detailed type of study and its processing for inclusion social progress and decline. Each of these contexts in national-level social strategies. will call for the implementation of very different pro­ It is necessary to accept one or another type of grammes and different scales of priorities which must general strategy, and its adaptation to a particular be respected. In communes where there is growth municipality will therefore be a democratic decision. and social progress, programmes are needed which Obviously, the risk of populist policies designed to tend towards the technical upgrading, even at the serve the clientage interests of the local notables can­ most sophisticated level, of persons and social organ­ not be ruled out. It often happens that scarce local izations. In contrast, if the municipality is in a state resources are used for non-essential projects designed of social decline, programmes and projects for com­ to maintain the domination or prestige of small-time batting anomy and delinquency will have high local politicians. Such wasteful projects are one of priority. Even civil security policies take on local the costs of local democracy; only the organizational slants and characteristics. capacity and leadership of the social movements and In short, the commune is a suitable place for all political forces can correct decisions which are con­ policies, programmes and projects of a selective na­ sidered to be wrong through persuasion and the vote. ture mainly marked by their need for services requir­ As a general observation, it may be noted in re­ ing attention to detail and full adaptation to the spect of local-level social policy that on the one hand manifold and changing needs of the groups involved.

IV Final remarks

The process of decentralization implies changes in The changes generated by the transition from the municipality and in the forms of democracy. centralism to decentralization are not changes of Today, in Latin America, we are witnessing the scale, for the local scene is not just the micro version emergence of a new type of municipality set within a of macrocentralism. If it were, there would be a seri­ new form of democracy. ous risk of giving rise to extreme situations simulta­

DECENTRALIZATION AND DEMOCRACY: THE NEW LATIN AMERICAN MUNICIPALITY • EDUARDO PALMA CARVAJAL CEPAL REVIEW S5 • APRIL lit ! 53 neously expressing both the worst of centralization therefore a complex transition for both the authorities and the worst of decentralization. and the citizens. The old paradigm of centralization is What these changes really mean is the reinven­ exhausted, but the new decentralizing approach has tion of the concept of government, both by the still to emerge. In order to make possible this new authorities and by the citizens. As well as signi­ form of management, a wide field is opening up for fying democratic legitimacy, this reinvention of the training or recycling of authorities, technicians government means a new form of management and common citizens. through the integral rationalization of the supply and demand for municipal goods and services. It is (Original: Spanish)

Bibliography

Bustamante Belaúnde, L. (1983): Costos y beneficios de (1992): Social Equity and Changing Production Pat­ la descentralización: algunas consideraciones meto­ terns: An Integrated Approach (LC/G.1701/Rev.l-P), dológicas, paper presented at the Third Latin Santiago, Chile. United Nations publication, Sales American Seminar on Regional and State Planning: No. E.92.II.G.5. Decentralization and Déconcentration, Brasilia, March, James G. and Johan P. Olsen (1993): El nuevo Brazil, 15 December, mimeo. institucionalismo: factores organizativos de la vida Dayries, Jean-Jacques and Michèle Dayries (1978): La política, Zona abierta, No. 63/64, Madrid, Editorial régionalisation, Presses Universitaires de France. Pablo Iglesias. ECLAC (Economic Commission for Latin America and the Varas, Carlos (1984): Teoría del gobierno municipal, Caribbean) (1990): Changing Production Patterns Santiago, Chile, University of Chile, Faculty of with Social Equity (LC/G.1601-P), Santiago, Chile. Economics and Management Sciences. United Nations publication, Sales No. E.90.II.G.6.

DECENTRALIZATION AND DEMOCRACY: THE NEW LATIN AMERICAN MUNICIPALITY • EDUARDO PALMA CARVAJAL

The political economy of protection after the Uruguay Round

José Tavares de Araujo Jr.

Staff member o f the This paper discusses the interplay between domestic policies Inter-American Development Bank, and foreign interests under the institutional framework Washington, D.C. to be administered by' the World Trade Organization

(WTO). It presents a theoretical model that treats the WTO

as the forum for an overlapping game which provides the

rules for the maintenance of an open trading system among

economies that are periodically submitted to protectionist

pressures. Overlapping games occur when a particular

player is engaged at the same time in games against distinct

opponents, and when the strategy pursued in one game

limits strategies available in the other. The basic rule

provided by the model is that protection costs should be

kept entirely within national borders, and the proper

instrument to enforce this rule is the Agreement on

Safeguards. Two main points are argued here. First, the

effort to keep protection costs inside national borders

improves the consistency of domestic policies. Second,

although developing economies are expected to play an

active part in the new trading system, most Latin American

countries are not yet prepared for playing that role. 5 6 CEPAL REVIEW 9! • APRIL 1SS5

I Introduction

The conclusion of the Uruguay Round of Multilateral innovating firms can extract Schumpeterian rents Trade Negotiations signified a watershed in the his­ from their new technologies. It is thus an impediment tory of the General Agreement on Tariffs and Trade to potential competition in frontier technology in­ ( g a t t ), now transformed into the World Trade Or­ dustries. In this case, the w t o ’s main role would be ganization (w t o ). This new institution is expected to keeping up to date the norms that protect the inter­ enforce the appropriate framework for reconciling ests of those who create technical progress, but conflicts between domestic policies and foreign inter­ without artificially raising the entry barriers into ests stemming from competition in a globalized high-technology industries. economy. The w t o will be able to deal with a series A key instrument for monitoring protectionism of themes that remained beyond g a t t ’s control, such will be the Agreement on Safeguards, a major inno­ as agricultural protectionism, the Multifibre Arrange­ vation produced by the Uruguay Round. This agree­ ment, voluntary export restraints, the abuse of anti­ ment admits the possibility of allocating export dumping measures, services, intellectual property quotas among supplier countries, which was the trait rights, and investment rules. common to all managed trade practices invented by During the g a t t era, the main negotiating issues o e c d countries in recent decades: the so-called were easily settled whenever the United States, the “gray-area” measures. Export quotas have an interes­ European Community and Japan had convergent ting peculiarity: the rents they generate are shared views. Under the w t o regime, the rules of the game between the domestic industry and the foreign sup­ include active participation by the developing pliers. Depending upon the characteristics of the pro­ countries, since the basic issue is no longer trade lib­ ducts concerned and the criteria used in the eralization among the OECD countries, but the estab­ distribution of the protection rents, it is possible to lishment of a normative framework for the global reach a situation where all costs of protection are competition process. exclusively paid by local consumers, without any This paper discusses a topic of special concern harmful impact on international interests. This out­ for all of the w t o ’s members: the forms of protection come can also be produced by other means. For in­ that will be sanctioned by the new trading system. stance, a subsidy that equalizes domestic prices with The w t o will have several instruments to monitor international price levels will do the same. What is selective protection. For instance, the legislation on important, however, is that measures of this kind intellectual property rights (ip r ) is a protectionist have two virtues: i) they do not create trade disputes, mechanism for innovative industries. It plays exactly and ii) they leave the government with an instrument the same role that conventional instruments like ta­ -i.e., the explicit and segregative burden on local riffs, quotas and subsidies play for infant or senile society- for shrinking the power of the protected industries, since all of them create special conditions industries and enforcing a reasonable expiration for capital accumulation. The only difference is that term for the benefits. IPRS seldom imply explicit barriers to merchandise The interplay between domestic policies and trade, but merely extend the period during which foreign interests implies two interdependent bargain­ ing processes, as many analysts have already noted. According to Robert Putnam, for instance, it should be conceived as a two-level game: “At the national level, domestic groups pursue their interests by press­ □ I am grateful to Sheila Najberg for sharing with me her uring the government to adopt favorable policies, and expertise on game theory, and to Richard Blackhurst, Eliana politicians seek power by constructing coalitions Cardoso, Robert Devlin, José Alfredo Graça Lima, Daniel Robinson, Diana Tussie and Sergio Werlang for helpful criticism among those groups. At the international level, na­ and advice. tional governments seek to maximize their own

THE POLITICAL ECONOMY OF PROTECTION AFTER THE URUGUAY ROUND • JOSE TAVARES DE ARAUJO JR. CEPAL REVIEW 55 • APRIL 1555 57 ability to satisfy domestic pressures, while minimiz­ This paper uses the above concepts to introduce ing the adverse consequences of foreign develop­ a new approach that could be adopted by the w t o for ments. Neither of the two games can be ignored by controlling protectionism. Section II below presents a central decision-makers, so long as their countries theoretical model that treats the w t o as the forum for remain interdependent, yet sovereign” (Putnam, an overlapping game which provides the rules for the 1988, p. 434). In a similar vein, James Alt and Barry maintenance of an open trading system among econ­ Eichengreen use the notion of overlapping games: omies that are periodically submitted to protectionist “Overlapping games arise when a particular player is pressures. Section III shows how the Agreement on engaged at the same time in games against distinct Safeguards can enforce those rules, while section IV opponents, and when the strategy pursued in one argues that Latin American countries are not prepared game limits strategies available in the other” (Alt and for taking part in this game. Finally, section V sum­ Eichengreen, 1990, p. 76). marizes the main conclusions. II Free trade and protection: an overlappinggame

In the following pages, we assume that all govern­ 1. Import substitution ments are implementing sound macroeconomic policies and that the international monetary system Let us imagine that during the period [o,n] the gov­ is able to keep steady exchange rates. Thus, there ernment of the home country enacts a tariff (ti) in will be no protectionist pressures arising from order to establish a new industry through import sub­ macroeconomic disturbances such as recessions or stitution. This measure will have the following con­ exchange rate appreciation, but only those gener­ sequences. ated by technical progress or industrial policies, Equation [1] indicates the welfare losses (L) which can be classified into three stylized cases: suffered by domestic consumers during the period.1 import substitution industrialization, restructuring They result from the difference between domestic of declining industries, and promotion of high- (Pi) and international prices (Pwi), plus the additional technology industries. amount of local demand (Di) that would exist if Each of these policies creates a vector of local domestic and international prices were the same. and foreign interests that can identified by answering four questions: [1] L = 2 [ (Pi-Pwi) • Di + Pwi ■ A • Di ] i) Who are the losers? In other words, how are the costs of protection distributed among domestic consumers and exporters from the rest of the world? The amount of rents (R) received by domestic producers is described by equation [2], where V’i is ii) Who are the winners? How are protection the value added per unit made possible by protection, rents shared between domestic industry and foreign Vi is the value added per unit in absence of protec­ suppliers? tion, and a is the share of local firms in domestic production (Qi). iii) Should any additional compensation be paid to the trading partners? 1 The domestic consumption includes both intermediate and final iv) From the national interest viewpoint, is it goods. The welfare losses (L) therefore contain the anti-exporting worthwhile to provoke all these distortions? bias created by the tariff.

THE POLITICAL ECONOMY OF PROTECTION AFTER THE URUGUAY ROUND • JOSE TAVARES DE ARAUJO JR. 5 8 CEPAL REVIEW 55 APRIL 1995

This situation is frequent when protection is being [2] = 2 (V’i - Vi) aQi used to promote the restructuring of declining indus­ o tries. Such payment can be made by transforming the tariff into a Voluntary Export Restraint Agreement The government’s revenues (G) originated by (v e r ) to be signed with the trading partners. the tariff (ti) will depend on the amount of imports Figure 1 describes the mechanism for the transfer (Mi), as equation [3] shows. of protection rents to foreign firms.2 MM’ is the home country’s demand for imports. The v e r will

[3] G = 2 tiMi FIGURE 1 Protection rents transferred to the rest of the world

The amount of rents (F) received by foreign firms is described by equation [4], where M’i are the potential imports in absence of protection, and p is the share of foreign subsidiaries in domestic production.

[4] F=2[ (M’i - Mi) + (V’i - Vi) $Qi ]

By definition, a + P = 1 and Di = Qi + Mi

If F a 0, no additional compensation to the rest raise domestic prices from oc to oa. The exporters of the world is needed. In the home country, the gov­ from the rest of the world will lose the amount equi­ ernment should gradually reduce the tariff to zero as valent to the rectangle edfg, but will receive new soon as the learning process in the import substitut­ rents equivalent to abdc. Thus, as equation [6] and ing industry allows convergence between domestic condition [7] demonstrate, if the demand elasticity and international prices. In this case, the only press­ for imports does not exceed unity, the rents captured ure to stop protectionism comes from consumers, by the rest of the world (abdc) are superior to their since the government, domestic producers and the forgone sales (edfg), and no additional compensation rest of the world have non-negative payoffs. How­ is needed. ever, this is just a temporary situation that can be dM/M dM P dffg changed by the policies implemented by the rest of [6] q = ------= • — = ------the world, as we will see later. dP/P dP M ac ■ ca From the perspective of the national interest, the above policy is rational if the amount of domestic [7] q <. 1 df ■ fg <.ac- cd production created by protection compensates the losses inflicted on consumers. In other words, when 3. High-tech industries the economy returns to free trade at the moment n, condition [5] should hold. The promotion of high-technology industries creates a vector of interests which is rather different from the two preceding cases, but the interplay between do­ [5] L * 2 Q i mestic and foreign interests remains essentially the same. Table 1 presents a partial list of the costs and benefits involved. It shows that, even when only one 2. Declining industries

If F < 0, the government may use its revenue to pay 2 For a careful analysis of the general effects of VERs, including additional compensation to the rest of the world, in the transfer of protection rents to foreign firms, see Melo and order to avoid trade disputes and possible retaliation. Tarr (1992).

THE POLITICAL ECONOMY OF PROTECTION AFTER THE URUGUAY ROUND • JOSE TAVARES DE ARAUJO JR. CEPAL REVIEW 55 • APRIL 1995 5 9 country is protecting this type of industry, there is The effort of adjusting domestic objectives to room for conflict and convergence at home and international conditions can be described as a game abroad. As Laura Tyson commented: “Technology­ between two players, the “home country” and the intensive industries violate the assumptions of free “rest of the world”, that may use two strategies, “free trade theory and static economic concepts that are the trade” (F) or “protection” (P), and receive the follow­ traditional basis for U.S. trade policy. In such indus­ ing matrix of payoffs (table 2): tries, costs fall and product quality improves as the scale of production increases, the returns to techno­ TABLE 2 logical advance create beneficial spillovers for other Matrix of payoffs economic activities, and barriers to entry generate Rest of the world market structures rife with first-mover advantages and strategic behavior. A nation’s competitive posi­ Free trade Protection tion in industries with these characteristics is less a Home country Free trade 0 ,0 0 , Br function of its national factor endowments and more Protection Bh , 0 Bh* , Br* a function of strategic interactions between its firms and government, and between them and the firms and governments of other nations” (Tyson, 1992, p. 3). If both players choose free trade, they get noth­ ing but the standard outcomes of that strategy. Con­ sumers will enjoy unrestricted access to goods and TABLE 1 services, paying just the international prices, and Costs and benefits of promoting only global competitors will survive in each econ­ high-technology industries omy. If one player chooses protection, his payoff is B Costs Benefits (Bh for the home country and Br for the rest of the Home Tax expenditures Productivity growth world), which is the net benefit he is expecting from Country on R&D his industrial policy, and the other player gets noth­ Technological New goods and services ing, since all adverse effects on his economy will be unemployment New professions duly repaired by the trading partner. If both players Rest of Possible loss of New trade flows prefer protection, each one gets B*, which is, in prin­ the world market share in Secondary innovations ciple, smaller than B, due to the greater number of certain industries Productivity growth, etc. distortions introduced in the economic system and the corresponding compensations to be paid. The game repeats infinitely and overlaps another one that is played domestically, among the govern­ 4. The overlapping game ment, local firms and consumers. Suppose that the international game starts just after the first round of the domestic game, when protectionist strategies In the foregoing description of domestic policies, the have been approved in both countries and ratified by assessment of the national interest was made without multilateral negotiations. So, the initial Nash equili­ considering the policies being followed by the brium is PP. But the payoffs B and B* depend on the country’s trading partners. However, the net benefits duration of the domestic policies, since longer pro­ any country can extract from its governmental ac­ tection periods imply costly reparations. Moreover, tions are obviously constrained by the contemporary the difference between B and B* may be large and, international circumstances. If free trade conditions eventually, the rationale for protection may disap­ are dominant in the world trading system, most gov­ pear.3 Hence, at each round of the domestic game, ernments will refrain from being the first to erode the players take notice of the new restrictions im­ them, unless the expected gains are truly rewarding. posed by the international situation and review their On the other hand, if several other countries are al­ ready protecting a certain industry, the domestic country may prefer to ignore the free trade fashion 3 The Nash equilibrium is FF whenever B and B* are negative. and just collect the protection rents from its trading If only B* is negative, one player will choose protection and the partners. other free trade.

THE POLITICAL ECONOMY OF PROTECTION AFTER THE URUQUAY ROUND * JOSE TAVARES DE ARAUJO JR. 60 CEPAL REVIEW SS • APRIL H IS strategies. Similarly, each round of the international may be applying protection without paying due game has a transitory Nash equilibrium that reflects reparations to the partner, or claiming excessive com­ the momentary values of B and B*. And so on. The pensation. The second function is to indicate the international game fulfills two functions. The first is correct amounts of costs and benefits generated to ensure the correct payoff to every player. Someone by national policies. III The Agreement on Safeguards

The basic rule of the overlapping game presented domestic policies that did not provoke trade disputes.4 in section II is that protection costs should be These rents should be credited as partial compensa­ kept entirely inside national borders. The w t o w ill tions to be used in cases when the products con­ have a special instrument to enforce this rule, cerned have an import-demand elasticity higher than namely, the Agreement on Safeguards, which unity. states that: “A Member proposing to apply a safe­ Since the agreement allows “any adequate means guard measure (...) shall endeavour to maintain a of trade compensation”, one obvious possibility is substantially equivalent level of concessions and simply to pay cash for the damages inflicted on the other obligations to that existing between it and the trading partners. This idea was submitted to g a t t in exporting Members which would be affected by the 1960s by the Uruguay-Brazil Plan.5 In many such a measure (...). To achieve this objective, the cases, this is the least expensive solution. According Members concerned may agree on any adequate to Melo and Tarr (1992, p. 193), “the United States means of trade compensation for the adverse ef­ could achieve the same degree of protection as under fects of the measure on their trade” (paragraph 16). the current system of quantitative restrictions at Moreover, it admits that: “In cases in which a about one-third the cost by shifting to a system that quota is allocated among supplying countries, the transfers the quota rights to domestic firms”. Indeed, Member applying the restrictions may seek agree­ as we have seen in section II above, whenever the ment with respect to the allocation of shares in the import-demand elasticity is strictly inferior to unity, quota with all other Members having a substantial the use of export quotas is a bad policy, due to the interest in supplying the product concerned” (para­ excessive amount of rents transferred to the rest of g ra p h 9). the w orld. To improve the transparency of these proce­ The payment of financial compensation has an­ dures, two minor amendments should be introduced other merit: it improves the fairness of domestic in the Agreement. First, it should be clarified that policies. Our discussion of the three stylized cases of export quotas have been legitimized precisely be­ industrial policies showed that, from the national in­ cause they facilitate the payment of compensations terest viewpoint, protectionist strategies may be ra­ and that this form of protection may provide fair tional under certain circumstances. But the historical compensation to all trading partners when the pro­ evidence shows that, in the absence of political press­ ducts under safeguard have an import-demand ure, those circumstances are seldom obeyed and elasticity that does not exceed unity. Since this char­ superfluous protection is rather frequent. By making acteristic is not exceptional, as table 2 shows, a num­ ber of trade disputes could be avoided. Second, it should be mandatory that every country applying a 4 The WTO can easily define a standard methodology for these reports, since there is an extensive literature on the measurement safeguard measure publish a report on the protection of protection costs. See, inter alia, Cline (1987), Corden (1957), costs created by that measure, indicating the distribu­ Dinopoulos and Kreinin (1988), Feenstra (1985), Hufbauer and tion of such costs at home and abroad. The report Elliott (1994), Melo and Tarr (1992), and OECD (1985). should also include all protection rents that might be 5 For a discussion of this plan, see Dam (1970) and Abreu transferred to the rest of the world by other recent (1990).

THE POLITICAL ECONOMY OF PROTECTION AFTER THE URUGUAY ROUND • JOSE TAVARES DE ARAUJO JR. CEPAL REVIEW 59 • APRIL 1»»5 61 entirely explicit the international component of the The Agreement on Safeguards caused such a protection costs, financial compensation becomes a revolution. political issue that helps the government to reduce the power of protected industries and extinguish their TABLE 3 privileges when necessary. United States: Estimated price elasticities of import demand for selected industries, 1962/1978 Despite these virtues, the Uruguay-Brazil Plan Industry was not approved by the g a t t members. As Kenneth Demand elasticity Dam (1970, p. 371) well explained: “Whatever may Food products -0.21 be one’s views on the relative superiority of the Beverages -0.70 financial-liability and private-compensation systems, Textiles -1.41 Wearing apparel -0.52 one is led to suspect that the determinative argument Footwear -2.42 leading the g a t t to reject the Uruguay-Brazil Plan Paper products -1.80 was the traditionalist argument that financial liability Petroleum refineries -0.79 was an ‘entirely new concept’ which was out of har­ Rubber products -1.32 Pottery -1.37 mony with the traditional g a t t system. To adopt a Glass -2.86 financial liability system would require a revolution Iron and steel -2.28 in attitudes toward the function of the g a t t , a rev o l­ Non-ferrous metals -0.67 ution that would be unacceptable to those contracting Metal products (excluding machinery) -0.94 Machinery (excluding electric) -0.88 parties -a clear majority- that have preferred to pur­ Electrical machinery -3.08 sue their national interest in trade matters without too Transport equipment -1.26 many scruples concerning the effects on other con­ Optical and photographic -0.44 tracting parties”. Source: Shiells, Stem and Deardorff (1986), p. 515.

IV The role of the developing countries

It is generally agreed that the developing countries corresponding adverse effects on the diffusion of have played a marginal role in the g a t t sy stem innovations (see articles 40 and 41). However, the (Tussie, 1987; Abreu, 1990). But it is unlikely that the achievement of this goal may depend on the same will happen under the w ro system. To begin pressures exerted by the developing countries, be­ with, governments no longer have the “partial member­ cause the interests of the o e c d countries are often ship” option available after the Tokyo Round that biased toward the supply side of innovations. allowed selective adoption of the Round’s results. Paradoxically, an active presence in the w ro im­ Furthermore, the participation of developing coun­ plies a major domestic challenge for most developing tries as demandeurs will improve the scope of the countries. In the overlapping game described in sec­ new set of instruments to regulate services, invest­ tion II, one standard assumption is that players act in ments and intellectual property rights. For instance, their own best interest under all circumstances. Since the agreement on t r i p s (trade-related aspects of in­ our “players” are, in fact, governments, they must fulfill tellectual property rights) is fairly comprehensive three basic requirements before entering that game. First, (Low, 1993; u n c t a d , 1994), since it covers such areas the country’s trade regime must include a coherent tariff as copyright, trade marks, geographical indications, structure and transparent procedures. Second, the do­ industrial designs, patents, layouts of integrated cir­ mestic legislation, at least in the areas of foreign in­ cuits, confidential information, and anti-competitive vestment, subsidies, labour market and intellectual practices in contractual licenses. The agreement also property rights, should be in line with the w t o ’s attempts to avoid the creation of artificial barriers to rules. TTiird, national institutions must have sufficient entry into high-technology industries, with their capacity to administer the above instruments.

THE POLITICAL ECONOMY OF PROTECTION AFTER THE URUGUAY ROUND ' JOSE TAVARES DE ARAUJO JR. 62 CEPAL REVIEW 55 • APRIL 1»«5

The current situation in Latin America well illus­ Ecuador is a textbook example of a small de­ trates that challenge. In the 1980s, the region passed veloping economy that exports food and raw materi­ through a radical experience of trade liberalization als, imports manufactured goods, and has an which is only comparable to the shift made in the industrial structure centered on light consumer 1930s, when many countries initiated their import goods. Despite the ambitions created by the oil boom substitution strategies. In 1986, Chile was the only of the 1970s, there was no significant diversification open economy in the region, but by 1993 only Pana­ of the export profile, the composition of imports re­ ma had an average tariff above 20%. The idea of mained essentially unchanged from 1970 to 1990, regional integration, which had remained a rhetorical and the share of foreign trade in g d p has been over project for decades, suddenly became a serious 50% for several years (Tavares de Araujo, 1994). priority. Nevertheless, in most countries, the co­ After the trade reform, most industries that compete herence of the trade regime and the enforcement ca­ with imported goods are receiving an effective pro­ pabilities of national institutions are still distant tection rate of approximately 20%. Automobiles, targets that are yet to be attained. however, receive very different treatment: an effec­ One very common flaw is tariff escalation: a tive rate of 247%.6 It is hard to find any reasonable mechanism that has been remarkably popular in explanation for this privilege, considering that the Latin America during the last 30 years. It consists of transport equipment industry, which includes other establishing low import duties for raw materials and activities besides automobile assembly, generated other inputs, and high duties for final goods. In Co­ less than 2% of total employment in the Ecuadorian lombia, for example, that procedure survived as an manufacturing sector during the last 20 years. explicit policy instrument even after the 1991 trade Let us now take Brazil, a successful story of im­ reform (Gómez, Moreira and Santa Maria, 1994). port substitution industrialization from 1930 to 1979, The lasting appeal of tariff escalation has a well- and a radical case of useless protectionism in the known origin: Albert Hirschman’s 1958 classic The 1980s. Its trade reform, started in 1987 and con­ strategy of economic development, which contains cluded in 1993, was not far removed from the re­ the seminal ideas on “linkage effects” and “key sec­ gional pattern. Quantitative import controls were tors”. In the 1960s and 1970s, these ideas were over­ abolished, most sectors now have 20% of effective whelmingly dominant, not only among academics protection, some basic and intermediate goods have but also -and especially- among politicians and en­ less, and a few privileged sectors, like cars, fine trepreneurs. In the 1980s, they were served up once chemicals and electronics, have more. Here again, again under the concept of industrial targeting, which the first prize went to the automobile industry: 62.5% stresses the point that promoting a key sector may be (Carvalho and Machado, 1994). a relevant step towards building up a new industrial Besides tariff escalation, the Brazilian trade pol­ system. Despite the undeniable merits of these con­ icy has another deficiency that is frequent in Latin cepts, they are useless when the problem is not to America: the lack of explicit rules for future changes establish new industries, but to correct the disequili­ in the tariff structure, which leaves the door open for bria of economies which have been subjected to new forms of disguised protectionism such as the decades of inconsistent policies and superfluous abuse of antidumping and countervailing actions. As protectionism. Nora Lustig and Primo Braga (1994) documented, Although not always officially endorsed, tariff such protection is already fashionable in the region. escalation is quite widespread in the region. Let us These distortions do not imply a return to inward- take one revealing case: Ecuador. Until 1990, its oriented policies: they merely doom Latin American trade policy still had all the typical mechanisms of governments to recurrent poor performances at both indiscriminate protection: high and redundant tariffs levels of the overlapping game between free trade ranging up to 290%, generalized administrative con­ and protection. trols, ad-hoc tax exceptions, quotas, and the like. These trade barriers began to be demolished in June 6 The tariff rate for assembled vehicles is 37%, and for CKD 1990. Nowadays, the average tariff is only 9.3%, the vehicles, ,0%. Assuming that the value added per unit in the import procedures have been simplified, and the automobile assembly industry is 15%, the conventional country is about to join g a t t . Corden’s formula indicates that G = 37/0.15 = 247.

THE POLITICAL ECONOMY OF PROTECTION AFTER THE URUGUAY ROUND • JOSE TAVARES DE ARAUJO JR. CEPAL REVIEW 55 • APRIL 1*15 63

V Conclusions

At first sight, the maintenance of an open trading ing on themselves. The main virtues of this proposal system among economies that are periodically are simplicity and flexibility” (p. 63). under protectionist pressures is a contradiction in In practical terms, Tumlir suggests the substitu­ terms. This paper has shown, however, that the tion of auction quotas for voluntary export restric­ WTO will be able to fulfill this task by enforcing tions: “If quantitative restrictions had to be administered the rule that all protection costs should be kept in a strictly nondiscriminatory manner, that is, by entirely inside national borders. As we have seen, public auctioning of import licenses, the margin of this is a feasible rule that improves the consistency protection afforded would become clearly visible in of domestic policies. It is interesting to compare the auction prices, and that could be counted on to this rule with other approaches to protectionism, reduce the demand for this form of protection. At the such as those advocated by Jan Tumlir and Jagdish same time the protection rents would become public B h a g w a ti. revenue, a fact that could not but increase political Tumlir (1985) does not use the concept of over­ opposition to quantitative restrictions by the impor­ lapping games but starts from the same idea: “A mo­ ters. The public discussion about protection would ment’s reflection on the nature of international trade become better balanced and thus better informed” policy conflicts leads to the realization that they are (Tumlir, 1985, p. 65). mere epiphenomena, overspills, of domestic politics Bhagwati’s proposal is more conventional: “(1) in the main countries (p. 13). [...] Negotiations con­ Instead of voluntary export restrictions, the safeguard cerned with preventing the recurrence of conflicts action would use the nondiscriminatory tariff as con­ should therefore try to articulate or reaffirm trade templated in Article XIX. (2) The revenues generated rules that will have a chance of reforming not just the by the tariff would be used to finance adjustment conduct of trade policy but also the domestic politics assistance, possibly through a common fund receiv­ that determine that conduct” (pp. 61-62). ing all such tariff revenues. (3) The protective tariff In order to achieve this goal he recommends the would be explicitly set on a declining time-bound strengthening of the unconditional most-favoured­ schedule” (Bhagwati, 1988, p. 119). nation principle: “We now understand enough about When applied to small countries, both proposals the political dynamics of protectionism to see that its are equivalent to the rule discussed here, since the expansion cannot be arrested unless the legal force of international effects of protectionism are negligible the nondiscrimination clause is restored. The coun­ in this case. However, the rule of full compensation tries concerned with and mainly responsible for the not only preserves the unconditional most-favoured­ state of the international trading order could simply nation principle but also keeps the world trading sys­ agree to make the unconditional most-favoured­ tem away from conflicts among large countries. nation principle a requirement of national law, bind­ (Original: English)

Bibliography

Abreu, Marcelo de Paiva (1990): Developing countries European gas trade, in John S. Odell and Thomas D. and the Uruguay Round of trade negotiations, P ro­ Willet (eds.), International Trade Policies, Michigan, ceedings of the World Bank Annual Conference on United States, Michigan University Press. Development Economics 1989, Washington, D. C., Bhagwati, Jagdish (1988): Protectionism, Cambridge, MA, World Bank. The MIT Press. Alt, James E. and Barry Eichengreen(1990): Parallel and Carvalho, Mario and João Bosco Machado (1994): A es­ overlapping games: Theory and an application to the calada tarifária na reforma aduaneira, R evista

THE POLITICAL ECONOMY OF PROTECTION AFTER THE URUGUAY ROUND • JOSE TAVARES DE ARAUJO JR. 64 CEPAL REVIEW 55 • APRIL 1*85

brasileira de comércio exterior, No. 38, Rio de Janei­ Economic Integration, Washington, D. C., Intera- ro, Centre for Foreign Trade Studies Foundation merican Dialogue, March. (FUNCEX), March. Melo, Jaime and David Tarr (1992): A General Equili­ Cline, William (1987): The Future of World Trade in Tex­ brium Analysis of U.S. Foreign Trade Policy, tiles, Washington, D. C., Institute for International Cambridge, MA, The MIT Press. Economics. OECD (Organization for Economic Cooperation and De­ Corden, W. Max (1957): The calculation of the cost of velopment) (1985): Costs and Benefits o f Protection, protection, The Economic Record, Sydney, Univer­ Paris. sity of Sydney, May. Putnam, Robert (1988): Diplomacy and domestic politics: Dam, Kenneth (1970): The GATT, Chicago, IL, Chicago the logic of two-level games, International Organiz­ University Press. ation, vol. 42, No. 3, Cambridge, MA, World Peace Dinopoulos, Elias and Mordechaie Kreinin (1988): Effects Foundation/Massachusetts Institute of Technology of the U.S.-Japan auto VER on European prices and (MIT). U.S. welfare, Review of Economics and Statistics, Shiells, Clinton, Robert Stern and Alan Deardorff (1986): No. 70, Cambridge, MA, Harvard University Press. Estimates of the elasticities of substitution between Feenstra, Robert (1985): Automobile prices and protec­ imports and home goods for the United States, tion: The U.S.-Japan Trade Restraint, Jo u rn a l o f Weltwirtschaftliches Archiv, Band 122, Heft 3, Policy Modeling, vol. 7, No. 1, New York, Society Tübingen, Christian-Albrechts-UniversitSt, Institut for Policy Modeling. für Weltwirtschaft Kiel. Gómez, Ignacio, Rodrigo Moreira and Mauricio Santa Tavares de Araujo, José (1994): A note on Ecuador’s cur­ Maria (1994): Los viejos criterios del nuevo arancel, rent trade policy, Washington, D. C., Inter-American Bogotá, National Planning Department, March. Development Bank (IDB), mimeo. Hirschman, Albert (1958): The Strategy of Economic De­ Tumlir, Jan (1985): Protectionism: Trade Policy in velopm ent, New Haven, CT, Yale University Press. Democratic Societies, Washington, D.C., American Hufbauer, Gary and Kimberly Elliot (1994): M easuring Enterprise Institute for Policy Research. the Costs of Protection in the United States, Wash­ Tussie, Diana (1987): The Less Developed Countries and ington, D.C., Institute for International Economics. the World Trading System, London, Frances Pinter. Low, Patrick (1993): Trading Free: The GATT and US Tyson, Laura D’Andrea (1992): Who's Bashing Whom?: Trade Policy, New York, The Twentieth Century Trade Conflict in High-Technology Industries, W ash­ Fund Press. ington, D. C., Institute for International Economics. Lustig, Nora and Carlos Primo Braga (1994): The future UNCTAD (U nited N ations C onference on T rade and of trade policy in Latin America, paper presented at Development) (1994): Liberalizing International the Conference on the Future of Western Hemisphere Transactions in Services: A Handbook, Geneva.

THE POLITICAL ECONOMY OF PROTECTION AFTER THE URUGUAY ROUND • JOSE TAVARES DE ARAUJO JR. CEPAL REVIEW SS 65

Trade policy and international linkages: a Latin American perspective

Marta Bekerman Pablo Sirlin

Researchers o f the This article looks at the trade policy guidelines that the Centre for the Study of . „ region should follow in order to achieve dynamic tconomic Structures (CENbS), University o f Buenos Aires. international economic linkages, in the light of the

international context, the main normative conclusions that

could be drawn from the theoretical debates on this subject,

and some lessons that may be learnt from the study of

successful cases. It is posited that in the countries of the

region, trade policy can be an instrument for

macroeconomic management, fiscal management and, at the

microeconomic level, resource allocation; its use as a

second-best instrument is justified when there are

constraints on the use of the best possible solutions (in

exchange rate policy, for example). It is also held that there

must be close coordination of the policies applied in the

fields of trade, industry and technology in order to ensure

high levels of investment in the tradeable sectors of the

economy, a form of competitiveness based on constant

increases in productivity, and an improvement in the

region’s specialization profile. Finally, emphasis is placed

on the need to strengthen the institutions of Latin American

States in order to ensure that their interventions in the

economy have a suitable level of effectiveness.

APRIL 1 *»5 66 CEPAL REVIEW 35 • APRIL 1»»5

I Introduction

The consolidation of a long-term growth process in where public intervention can help to improve Latin America is closely linked with the achievement Latin America’s international economic linkages. To of dynamic linkages with the international economy. this end, we begin by looking at the international It is therefore important to define a trade policy ca­ context and the prospects opened up by the recently pable of meeting the challenges faced by the region. completed Uruguay Round of GATT (section II).1 An At the same time, the specialized literature emphas­ evaluation is made of the role of trade policy as a izes that knowledge and scientific and technical pro­ means of macroeconomic management (section III) gress are factors which determine the development of and as an element affecting horizontal and specific new comparative advantages. This means that the microeconomic policies (section IV). The article then limits between policies in the fields of trade, industry goes on to deal with the restrictions arising from the and technology are increasingly vague. In other limited capacity of public institutions to effectively words, talking about trade policy in the limited sense apply active policies (section V). Finally, in the (tariffs, non-tariff barriers, export drawback arrange­ light of the broad theoretical lines sketched in the ments, etc.) can only give us an incomplete idea of article and the internal and external constraints due the restructuring strategy applied by a country. to the actual economic conditions prevailing in the The aim of this article, then, is to make an ana­ countries of the region, an attempt is made to for­ lysis -in the light of the various contributions offered mulate some recommendations with regard to the by the theoretical literature and by international ex­ trade policies that should be applied in coming perience- of the role of trade policy in those fields years (section VI). II The international context and the prospects opened up by GATT

In the 1980s, the processes of globalization and re­ The big increase in world trade began after the gionalization became more deeply rooted in the inter­ war, when a process of trade liberalization through national economy. successive tariff reductions agreed upon at the vari­ Globalization of the economy, in the sense of the o us g a t t negotiation rounds was begun. The growth growing interdependence of the various nations, was o f fd i, for its part, was stimulated by the efforts to avert reflected in that fact that the growth rate of interna­ potential protectionist measures and the need to build tional trade, and especially of foreign direct invest­ stronger bases for competition (both in the area of mar­ m ent (fd i) and financial flows, considerably exceeded keting and in terms of the incorporation of techno­ the growth of the world’s gross product.2 logical progress). Finally, the increase in financial globalization was spurred by the growing trade im­ balances, technological advances in the areas of in­ 1 The Appendix to this article describes the new instruments recently incorporated by the Uruguay Round in order to increase formation and communications, and the worldwide the level of discipline in the implementation of trade policies. trend towards the deregulation of financial operations. In this context, which has also been marked by 2 Thus, between 1983 and 1989 direct investments grew three times faster than the increase in world exports and four times the increasing pace of technological innovation, it is faster than the growth of world GDP (Guerra Borges, 1993). generally agreed that an export-oriented strategy will

TRADE POLICY AND INTERNATIONAL LINKAGES: A LATIN AMERICAN PERSPECTIVE • MARTA BEKERMAN AND PABLO SIRLIN CEPAL REVIEW 55 • APRIL 1995 67 favour the absorption and adaptation of technology ii) The shortcomings of the international mon­ and, hence, economic development, more than etary system, which make it more difficult to correct policies aimed exclusively at the domestic market. -as for example by exchange rate adjustments- the Thus, this growing economic interdependence big trade imbalances registered between countries. underlines the advisability of improving economic iii) The absence of a clear leading power in in­ linkages with the international market, while at the ternational trade policy. The authority and leadership same time redefining the degrees of freedom avail­ in trade matters exercised by the United States after able to national policies. the war were gradually eroded by that country’s in­ It is necessary at this point to highlight two char­ creasingly protectionist stance as from the mid-1970s.6 acteristics of this globalization process: the asymme­ According to Grimwade (1989), a further expla­ trical way it affects the peripheral countries, and the nation for the increase in protectionism lies in the contradictions it involves. shortcomings in the g a t t rules and mechanisms.7 Its asymmetrical nature is reflected in the fact Because of the decisions adopted in 1979 at the that two-thirds of world trade is currently accounted Tokyo Round, g a t t has been ineffective in checking for by the United States, the e e c and Japan. In the the proliferation of non-tariff barriers. In our view, second half of the 1980s, these countries together how ever, g a t t ’s lack of disciplinary capacity during received over 80% of total world fd i, whereas the this period was not the cause of the increase in pro­ developing countries received only 17%, and two- tectionist pressures, bot rather its reflection. thirds of that share went to only 10 countries. The laborious negotiations at the Uruguay The contradictions of the globalization process, Round represented an effort to negotiate global rules for their part, are reflected in the considerable in­ to deal with these protectionist pressures. Their re­ crease in new types of protectionist pressures exerted sults display the same asymmetrical features referred by the industrialized countries.3 Thus, since the to earlier. There is stiffer discipline for the peripheral 1970s there has been a big increase in non-tariff countries (through the limits placed on certain sub­ barriers (voluntary export restriction agreements, sidies used by them), but at the same time the indus­ countervailing duties, antidumping clauses, etc.)4 trialized countries have tried not to lose their freedom whose spread -especially to mature sectors such as to protect certain non-competitive sectors of their iron and steel, textiles and agricultural products- has economies and to preserve their existing comparative hit trade with peripheral countries particularly hard advantages in the technologically most advanced (Laird and Nogués, 1989).5 sectors (see Appendix). The reasons for these new outbreaks of protec­ g a t t ’s effectiveness in the future will depend on tionism include the following: whether the root causes which gave rise to the grow­ i) The big increase in exports from Japan and the ing protectionist pressures in the North can be newly-industrialized Asian countries to the indus­ reversed. For this reason, even the most enthusiastic trialized nations, which began to register low growth supporters of such measures admit that their success rates as from the 1970s. The consequent higher levels is still far from being definitive or that it may only of unemployment and idle capacity mean that it is all prove to be partial. the more difficult to adjust to the penetration by im­ ports (there are fewer new jobs to offset the jobs lost 6 Motta Veiga (1988) notes that, in seeking to regain its lost in declining sectors) and there is a lower degree of trade leadership, the United States is carrying out two strategies: social tolerance. one defensive and the other offensive. The first of these is ap­ plied in the sectors in course of restructuring, through trade pro­ 3 In striking contrast to this, since the 1980s the developing tection instruments. The second, which it is applying in the countries have been displaying a marked tendency to open up industrial and services sectors linked with new technologies -in their economies. which it defends the principle of free trade- seeks to maintain its 4 According to some estimates, in 1980 or thereabouts 48% of existing comparative advantages and is being implemented through world trade was managed (subject to some form of non-tariff multilateral negotiations within GATT (on free trade in services, barrier), compared with 40% in 1974 (Grimwade, 1989). intellectual property rights, etc.) and also through bilateral nego­ tiations, by means of pressures and reciprocity clauses. 5 In the 1980s, for example, 44% of the antidumping actions and 61% of the countervailing duties applied by the United States, 7 Especially the safeguard clauses of article 19, adopted at the the European Economic Community, Australia and Canada were Tokyo Round, which have allowed that article to be circum­ aimed at restricting exports from developing countries (Funda­ vented by many countries through the establishment of non­ ción U.I.A., Consejo Académico, 1994). tariff barriers.

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Some authors hold that the agreements reached diversion of trade and f d i to countries which form at the Uruguay Round are a necessary but not in part of such blocs. themselves sufficient condition for the attainment by In other words, market access will be more se­ the world economic system of the “in-depth integra­ cure for countries which have a chance of joining tion” called for by the globalization process.8 Indeed, regional blocs. Even the less efficient firms of such they go so far as to maintain that, to begin with, such countries may be able to spoil the export markets of integration can only take place at the level of regional more efficient producers through the greater econ­ trade agreements, which are therefore bound to in­ omies of scale made possible by the expansion of the crease at least during the 1990s (Lawrence, 1993).9 market (Hughes Hallets and Primo Braga, 1994). The regionalization of markets -the other major The asymmetrical features of the globalization trend in the international econom y- is a further factor process, against the background of the climate of un­ which could hinder the success of g a t t and favour a certainty prevailing with regard to GATT’s future e f­ further increase in the existing asymmetrical aspects. fectiveness and the strong progress being made in the For the countries forming part of the main trade regionalization processes, highlight the importance of blocs which already exist or are in course of for­ promoting closer regional links among the Southern mation (the European Union, n a f t a , th e A s ia - Cone countries of Latin America.10 In addition to the Pacific area), economic integration ensures greater potential economic benefits that may be derived from competitiveness, a broader scale of production, and broader markets, the consolidation of these regional greater market access. The countries which do not spaces can help to increase the bargaining power of form part of these groupings, however, may be even the area both with other countries and trade blocs and more vulnerable to possible trade conflicts or to w ith in g a t t itself. Ill Macroeconomic policy, investment in tradeable sectors and trade policy

The first condition which must be satisfied in order to relative prices offers the information and incentives achieve suitable international economic linkages is to needed to take fullest advantage of comparative ad­ reach appropriate levels of investment in the sectors vantages.11 Equally important are public policies in which the economy is to specialize internationally. which affect the parameters of the saving and invest­ This opens up fields of action for macroeconomic ment functions and efficient organization of the fin­ policy which range from investment incentives in ancial system which makes it possible to channel general to specific incentives for investment in tra­ savings to productive projects.12 In its macroecon­ deable or non-tradeable sectors. omic dimension, trade policy can play at least two In order to achieve a favourable climate for in­ important roles: as an instrument for the generation vestment it is above all necessary to ensure a stable global setting which makes it possible to plan in the 10 Wonaccot and Wonaccot (1981) give a theoretical demonstra­ longer term, and to make sure that the system of tion of the superiority of regional integration over trade openness in cases where countries face protectionist barriers in world markets. 8 According to Lawrence (1993), in-depth integration means 11 Macroeconomic stability is also a necessary prior condition going beyond the elimination of frontier barriers and moving for ensuring the effectiveness of microeconomic policies towards the harmonization of all policies which can discrimi­ (Rodrik, 1993). nate, albeit invisibly, against other countries. 12 These aspects -especially the existence of arrangements for 9 Hughes Hallets and Primo Braga (1994) hold that it is easier to short- and long-term financing at suitable rates- are essential meet policy coordination aims at the regional than at the multi­ factors for building up a truly competitive production system. lateral level, because in the latter case it is hard to demonstrate a Since this is a very well-known issue, we will not go into it in credible level of commitment by all the participants. greater detail here.

TRADE POUCY AND INTERNATIONAL LINKAGES: A LATIN AMERICAN PERSPECTIVE • MARTA BEKERMAN AND PABLO SIRUN CEPAL REVIEW 53 • APRIL 1995 69 and distribution of fiscal resources, and as one of the advantages implicitly assumes, the real exchange rate decisive elements in the real effective exchange rate. does not adjust automatically to its equilibrium level The first of these roles is important because (or at least to that level which ensures trade balance consolidation on the fiscal front is an essential con­ equilibrium in conditions of full employment). dition for macroeconomic stability. On the basis of Both the theoretical literature and the experience the neoclassical theory of domestic distortions it of the Asian countries highlight the importance of a may be concluded t hat, in the absence of “non- high, stable real exchange rate (with the same theore­ distortionary” taxes (the mythical fixed-total tax) and tical justification as macroeconomic stability in the presence of serious costs and limitations on the general). In a process of increasing trade openness capacity for fiscal revenue collection, trade policy such as that being experienced by many countries of may present itself as a second-best fiscal instru­ the region, the real exchange rate which is capable of ment (Corden, 1974).13 The extent to which it is bringing the trade balance into equilibrium may be advisable to use trade policy as a revenue-raising in­ higher, because of the need to promote the realloca­ strument, however, must be weighed against the tion of resources to the tradeables sector ( e c l a c , possible costs in terms of distortion deriving from 1990; Fritsch and Franco, 1992).14 Successful cases this management of tariff policy. Moreover, the in­ of export-oriented openness (such as that of South crease in revenue may be neutralized if, in order to Korea) are examples of the application of policies avoid an anti-export bias, fiscal export incentives are which simultaneously combined trade openness with increased at the same time. devaluation in terms of the real exchange rate (Amsden, The second role is of fundamental importance be­ 1986). cause, in addition to ensuring a sound macroeconomic When a country loses the capacity to fix the real setting which will promote investment in general, it is exchange rate in the midst of a stabilization process,15 essential to make sure that an adequate proportion of this external adjustment processes can become extremely investment goes to the tradeable goods sector. The key costly, since the level of activity then becomes the price determining the incentives to invest in the tradeable main adjustment variable. In this context, trade pol­ or non-tradeable sectors is the real effective exchange rate icy -acting as a purely macroeconomic instrument- (for exports or imports). There is a problem here, how­ can be used to make up for possible deviations in the ever: in contrast with what the theory of comparative real exchange rate.16 IV Microeconomic policies and trade policy

As the process of macroeconomic stabilization is 1. Horizontal policies consolidated, the need begins to arise to carry out a number of additional policies of a markedly different a) Doing away with anti-export bias nature from those aimed at securing adjustment. These The existence of tradeable goods sectors with policies can have various names: microeconomic or adequate levels of productivity does not necessarily mesoeconomic policies, policies aimed at securing sys­ temic competitiveness, etc. For simplicity’s sake, in this 14 This is because the improvements in efficiency deriving from article we will give the name of microeconomic policies this are not usually -at least in the short term- big enough to to all those which, by their nature or objectives, are offset the initial negative effect on the trade balance. aimed fundamentally at improving the productivity and 15 Because of the use of an exchange rate anchor in a context of pattern of international specialization of the economy. downward rigidity of nominal prices (absence of deflation), be­ cause of a dollarized form of price formation, or because of the impact of capital inflows from abroad. 13 If, for example, we analyse the frequent changes in Argenti­ 16 The same function is served by all measures (in the area of na’s tariff structure since the late 1980s, we see that in many trade policies or not) which seek to reduce the costs of the export cases the decisions to raise the level of protection were moti­ vated by fiscal considerations. sector.

TRADE POLICY AND INTERNATIONAL LINKAGES: A LATIN AMERICAN PERSPECTIVE • MARTA BEKERMAN AND PABLO SIRLIN 70 CEPAL REVIEW 5S • APRIL 1»»5 mean that their output is directed to the international new products. In view of the world situation de­ market, for apart from the absolute profitability of scribed in section II of this article, public policies export operations (which is determined basically by designed to overcome such flaws are increasingly the comparative efficiency of the sectors and the ex­ important when it is desired to move into new niches change rate) it is also necessary to take into account in foreign markets and improve a country’s interna­ their relative profitability compared with that of sales tional specialization profile. on the domestic market. Trade policy plays a decisive The successful experience of Southeast Asia role in this respect. shows that big efforts have been made in each of As noted in the previous section, in certain con­ these areas. In the opinion of several authors, the texts trade policy can be used to compensate for de­ system of export financing applied by South Korea viations in the real exchange rate. In order to fulfil was the instrument which contributed most to the this purpose without causing fresh distortions, how­ success of that country’s export strategy (Rhee, 1989). ever, the barriers to imports and the incentives for This system was channelled through the banks, by exports must move simultaneously and proportion­ rediscounting and automatic financing mechanisms ately to each other. Otherwise, tariff barriers which set up by the Bank of Korea. Likewise, both Korea are not offset by export incentives lead to a general and Taiwan have tackled the problem of the econ­ disincentive to trade known as an anti-export or anti­ omies of scale involved in international marketing. trade bias.17 South Korea was successful in stimulating the devel­ The main argument in favour of applying opment of big private marketing firms, from which it policies with an anti-export bias (the argument of the demanded specific minimum levels of capital, export optimum tariff whereby a large country can use its volume and number of offices abroad. Taiwan, for its monopolistic or monopsonic power to improve its part, whose export potential is based on small and terms of trade) is hardly applicable to the countries of medium-sized enterprises, applied an active interna­ the region, except in a few isolated cases concerning tional marketing policy through trade offices set up certain scarce natural resources. in the main world trading centres. The experience of Southeast Asia (especially At all events, the policy recommendations de­ South Korea and Taiwan), however, shows that it is signed to deal with these market flaws are very well not necessary to apply a system of total trade openness known and, in the final analysis, all countries apply in order to avoid anti-export bias. The same result can them to some extent. The differences lie rather in the be obtained through administrative mechanisms (ar­ intensity with which they put them into effect. Inter­ rangements for export drawbacks, temporary import­ national experience shows us that it is precisely the ation, export processing zones, etc.), which, if used countries which have gone furthest in the develop­ efficiently, provide virtually free-trade conditions for ment and application of these policies which have producers of exportable goods (Wade, 1990). achieved the most substantial improvements in their An anti-export bias is not only induced by trade international trade linkages. policies, however. It also occurs when certain market flaws have a bigger impact on external trade oper­ b ) Negotiating access to foreign markets ations than on domestic sales. Three of these flaws According to the traditional neo-classical ap­ are worthy of special mention: insufficient informa­ proach, trade openness is the best option, even when tion on foreign markets, inability of the capital mar­ other countries apply distortionary trade policies (ta­ ket to provide finance for exports, and the economies riffs, export subsidies, etc.). In that case, it is held, of scale required for the international marketing of the right approach is to use the international forums in order to negotiate the wider spread of such open­ 17 In such a case, firms in tradeable goods sectors estimate that it ness at the multilateral level (Krueger, 1990). is better to sell on the protected domestic market than to face the The rejection of some simplifying assumptions lower prices prevailing on the international market. In turn, trade (perfect competition in international markets, protection makes imported goods more expensive and thus dis­ constant yields, etc.) has caused some theoretical torts demand in favour of locally-made goods. There is thus a simultaneous reduction in the incentives to export and to import, approaches (including the new international trade which leads to a decline in levels of trade. theory) to depart radically from neo-classical

TRADE POUCY AND INTERNATIONAL LINKAGES: A LATIN AMERICAN PERSPECTIVE • MARTA BEKERMAN AND PABLO SIRLIN CEPAL REVIEW 55 • APRIL 1995 71 theory.18 Basically, they question whether it is really goods, firms should make suitable changes in their best, in situations of strong foreign interventionism, production organization techniques to fit in with the to apply a policy of indiscriminate free trade. In such new technological paradigms, through the introduc­ circumstances, it is suggested that trade policy -or tion of total quality control, “just in time” production, the threat to use trade policy- should be employed as etc. (Kaplinsky, 1988). This is why it is so important a means of furthering negotiations aimed at facilitat­ that the State, through specialized bodies, should ing access to markets which are protected or sub­ help the private sector (and especially small and sidized by other nations (Tyson, 1990; Dombusch, medium-sized firms) in this restructuring process. 1990).19 In this context, as already noted in section Trade policy instruments can play an indirect but II, regional integration processes such as m e r c o s u r important role in this. Firstly, policies aimed at offer potential advantages in terms of strengthening lowering the cost of buying capital goods (through the bargaining power of their member countries to tariff reduction or elimination)20 undoubtedly favour deal with the biases and imbalances that exist in in­ the modernization of industrial facilities. When fix­ ternational trade relations. ing the tariffs on capital goods, however, it is necess­ ary to take into account not only their incidence on c) Policies in support of productivity and industrial costs but also the opportunity costs of the trade policy fiscal resources thus committed and the possible effects In order to consolidate a dynamic export sector it on local capital goods producers, since the latter sector is necessary not only to ensure suitable levels of in­ can be an important vehicle of technological progress. vestment in tradeable goods sectors but also to make Secondly, mention should be made of the special ongoing efforts to improve their productivity. It is arrangements sometimes used to promote specialization true that competitiveness can be increased at certain in production, such as the Industrial Specialization times through macroeconomic variables (such as the Scheme in Argentina, since in many cases these can exchange rate) or by the reduction of certain costs give rise to a pro-export bias. Within the context of a (such as direct or indirect wage costs, taxes, etc.) static analysis, such a bias is just as negative as the which affect the export sector, but in order to ensure corresponding anti-export situation, but in the early a sustained process of export growth which is com­ stages of a restructuring process high incentives for spe­ patible with improvements in the population’s stand­ cialization can be an effective means of overcoming the ard of living -that is to say, in order to achieve high inertia caused by the high costs of industrial conversion. levels of true competitiveness- it is necessary to pro­ Thirdly, it may be noted that many countries mote higher productivity (Fajnzylber, 1988). have successfully used export behaviour as a means The main role in this field is played by policies of evaluating the effectiveness of various types of on industry and technology which are aimed, among incentives for investment and technological develop­ other things, at ensuring that there is a “critical mass” ment. This approach -which gives such instruments a of skilled labour, developing a suitable physical in­ trade policy dimension- is based on the idea that in frastructure and network of suppliers, and promoting some production sectors effective access to interna­ technological research and development. tional markets is fairly convincing proof that those A similar role is played by policies aimed at sectors have developed the capacity to produce goods making up for market information shortcomings, with acceptable levels of price and quality. Although such as policies in the fields of industrial extension these are not necessarily the best instruments from services, prqvision of advice to small and medium­ the point of view of economic theory, they can be sized firms, improvements in coordination among the second-best mechanisms when limited public moni­ agents of production, etc. Some authors stress that it toring capacity or the technological complexity of the is important that, before incorporating new capital goods in question make it too difficult to monitor the attainment of given price and quality goals. In any 18 For a collection of articles on strategic trade policy, for example, see Krugman, 1987.

19 This approach has had a lot of influence on current United 20 This policy may be seen as a microeconomic instrument States trade policy. We have already referred to the bilateral aimed at raising the productivity of the economy or, in more negotiations -through reciprocity clauses- which that country general terms, as an indirect way of raising the real exchange carries on in segments connected with new technologies. rate.

TRADE POLICY AND INTERNATIONAL LINKAGES: A LATIN AMERICAN PERSPECTIVE • MARTA BEKERMAN AND PABLO SIRLIN 72 CEPAL REVIEW 55 • APRIL 1««S case, the possibility of using trade policy in this way different ways, the pattern of international specializa­ will be increasingly restricted by the new g a t t rules tion resulting from the application of free trade pol­ (see Appendix). icy may not be optimal. In most cases, the market Finally, the formation of regional trade blocs is distortions are of a domestic nature, and the best another trade-related policy which can have a big policies for correcting them do not involve the use of impact on production efficiency. When local produ­ trade policy. In the absence of first-best instruments, cers are exposed to greater competition but at the however, such policy may have a role to play as a same time given preferential access to a broader mar­ second-best solution.22 While the first-best policies ket, this can give a big boost to the conversion pro­ may be formally neutral (as for example in the case cess and to economies of scale and specialization. of measures to overcome flaws in capital markets), Trade among similar types of countries can also help second-best trade policy probably has to take on a to raise workers’ skills (Amsden, 1986) and to pro­ selective character (higher protection for sectors mote innovation (Rodrik, 1993). which, because of the predominance of small and medium-sized firms, higher technological risks, or 2. Specific policies and trade policy other reasons, are more sensitive to lack of credit). It may be inferred from the foregoing that if So far, we have looked at macroeconomic or micro- policies of trade openness are not accompanied by economic policy instruments which affect competi­ optimal policies designed to overcome the existing tiveness in general, without limiting ourselves (at least market flaws, they will probably not lead to an in­ explicitly) to certain types of industries or activities. We crease in well-being. At the same time, if the distribu­ shall now take up a different problem: that of decid­ tion of the optimal subsidies involves costs, selective ing whether the economic authorities should remain trade protection may become the best policy alterna­ neutral with regard to the types of sectors in which tive (Corden, 1974). the nation is to specialize, or whether there are sound Another very well-known and well-worn ar­ reasons for giving special incentives to certain sectors. gument is that of infant industries. The strictest In the simplest version of neo-classical theory, neo-classical theory severely restricted the va­ all sectors are considered equal. On the basis of lidity of this argument, linking it with the existence this assumption, the best policy is free trade, which of certain market flaws basically associated with makes it possible to take the fullest advantage of the shortcomings in capital markets (Martirena-Mantel, possible benefits of international specialization. Se­ 1988).23 Here, once again, trade policy can only be lective policies, in contrast, are held to distort the used as a second-best instrument. pattern of comparative advantages and to reduce The formulation of assumptions which simplify well-being. traditional theory has given rise to other lines of the­ More sophisticated analyses, however, have ory which have taken up once again, in a streng­ given rise to various theoretical arguments in favour thened form, the line of thinking implicit in the infant of the formulation of selective policies, even in the industry argument, to which we will briefly refer case of trade policy. below . In neo-classical theory, it is recognized that the existence of market flaws may give rise to arguments in favour of the formulation of trade policies of a 22 This use of trade policy as a second-best instrument plays a selective nature.21 Since many market flaws (exter­ leading role in the theoretical justification of tariffs which are nalities, indivisibilities, distortionary regulations or graduated, rather than having a uniform level, in the light of the taxes, etc.) affect different production activities in degree of processing of goods. The argument would appear to be that the various distortions which affect the production of goods (transport costs of raw materials, distortionary taxes, etc.) increase their incidence with each stage in production. Thus, it is proposed that a graduated tariff structure may serve to restore a neutral scheme of incentives (Fundación U.L.A., Consejo Académico, 1994). ‘ A great deal has been written on the theory of internal distor­ tions analysed here. See, for example, the enlightening work by 23 At the empirical level, the various experiences in the promo­ Corden (1974) and the analytical summary by Martirena-Mantel tion of infant industries display very disparate levels of effec­ (1988). tiveness (Bell, Ross-Larson and Westphal, 1984).

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The New International Trade Theory starts by Other schools of thought have highlighted the rejecting the assumptions of perfect competition and role of technological change, notably the neo-1 constant returns to scale.24 This means that there are Schumpeterian authors and those linked with the new clear differences between sectors of production in in­ theories on economic growth.26 These lines of ternational trade, as some sectors give only normal thought (especially the neo-Schumpeterian ones) yields, whereas others give monopoly rents. It is also identify a new source of heterogeneity between posited that the main source of relative productivity sectors, noting that technological development is in the sectors with monopoly rents is not the factor neither exogenous nor homogeneous among them. endowment of the country but the capacity of its in­ Some sectors display greater capacity for technologi­ habitants to install certain industries and reach the cal innovation, which allows them to attain higher most desirable scales in their operation. The pattern rates of productivity growth and enables them to win of specialization thus includes a random or arbitrary Schumpeterian rents in international trade. Others element (Krugman, 1988). This may be linked to the take on the role of strategic sectors because of the existence of trade policies (tariff protection, export strong externalities they transmit to the rest of the subsidies, etc.) which favour national monopoly production system through the spread of technologi­ firms (Brander, 1986). cal innovations. In countries with small markets (without firms In terms of policy connotations, these con­ which are big enough to alter the rules of interna­ tributions can be interpreted in two different ways. tional strategic competition), there is still room for Firstly, from the standpoint of neo-classical theory the application of trade policies in sectors with nor­ it may be concluded from the above arguments that mal yields which can use indirect economies of scale the technologically more advanced sectors display linked, for example, to transport and international more pronounced market flaws than the rest of the marketing (Krugman, 1988). Likewise, regional inte­ e c o n o m y .27 gration processes (with the consequent increase in The second possible reading highlights the fact market size) also increase the possibility of making that, as in other sectors with growing yields, the effective use of strategic policies that permit the comparative advantages of the technologically ad­ achievement of economies of scale. It is also necess­ vanced sectors do not derive solely from the factor ary to coordinate industrial and trade policies, since endowment but from public and private efforts to these can affect the form assumed by the intra­ develop capacity for technological innovation in regional specialization pattern (Ocampo, 1993). specific areas. Public industrial and trade policies Although pro-interventionist deviations have aimed at the spearhead sectors thus take on a been widely criticized by various authors (many of strategic character, since they make it possible to them belonging to the same school of thought), there secure the extraordinary benefits generated by is a tendency to accept the fact that strategic trade those sectors.28 policies can affect the pattern of international trade, and as we have already seen, this has important im­ plications for international negotiations.25

26 For an instructive summary of the ideas of the first group of authors, see Dosi, Freeman, Nelson, Silverberg and Soete 24 See, inter alia, Brander and Spencer (1981), Helpman and (1988). Among the best-known works of the second group are Krugman (1985), Brander (1986) and Grossman (1986). the pioneering studies by Romer (1986) and Lucas (1988). 25 The main lines of such criticisms are: the impossibility of 27 Examples of such flaws include those connected with the knowing for sure which policies are best; the possibility of formation of human capital (which is used to different extents reprisals (either unilateral or resulting from the application of by the different sectors) and relations with the capital market the GATT rules) which can lead to a worse situation than in (which is biased against projects involving technological risks the beginning, and governments’ lack of freedom to withstand and long lead times). corporate lobbying (Grossman, 1986). It is also argued that 28 Indeed, the authors of the New International Trade Theory strategic policies aimed at certain firms (in order to create themselves have been shifting their interest from static econ­ “national champions”) may help to aggravate market flaws in omies of scale to economies based on technological learning and the area of competition (Richardson, 1993). innovation. See for example Grossman and Helpman, 1991,

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V Institutional limitations

Although the theoretical analyses discussed above jus­ sponsible for policy in the areas of trade, industry tify the use of active trade and industrial policies, in and technology in order to turn them into satisfactory practice there is no general agreement on their advisa­ means of intervention, even though they may not be bility. The various arguments levelled against them are ideal solutions ( o t a , 1990; Najmabadi, Baneiji and based mainly on doubts about whether the public auth­ Lall, 1992; ECLAC, 1990). orities are fitted to effectively design, apply and monitor The fact that there are a number of cases of suc­ policies which in theory appear to be optimal (espe­ cessful intervention suggests that it is possible to cially when such policies are of a selective nature). considerably reduce the negative effect of bureau­ Three types of problems are generally mentioned: the cratic shortcomings. The strengthening of public in­ inability of the public sector to obtain all the necessary stitutions not only partly explains the marked information, the inefficiency which is typical of pub­ differences between the results obtained in the past lic administrative mechanisms, and the generation of by the Asian countries, on the one hand, and the perverse forms of business behaviour in the private Latin American nations on the other, but would also sector in an effort to seek non-productive rents.29 appear to be a necessary condition and challenge for Although this is not the place to go into such the future performance of the latter. problems in detail, there are some elements that must Secondly, the obstacles standing in the way of be taken into account when weighing the advisability effective public intervention are not the same in all of applying active trade policies. fields of action. It is generally accepted that horizon­ Firstly, one should not take extreme positions tal microeconomic policies give rise to fewer diffi­ such as assuming that the State can do everything or, culties than selective ones as regards the problems of alternatively, that bureaucratic shortcomings are obtaining the necessary information and avoiding the worse than flaws in the market, so that no action risk of the seduction of public agencies by private should be taken at all. The administrative capacity interests. Likewise, specific policies applied in sec­ and autonomy of the State are not exogenous data, tors with a more competitive market structure (espe­ but can be modified by public policies. Thus, various cially those where small and medium-sized firms studies by international organizations are beginning predominate) would appear to be easier to keep under to reflect the need to strengthen (in both administra­ control than those applied in highly concentrated tive and budgetary terms) the public institutions re­ sectors with strong lobbying power. VI Conclusions and policy recommendations

In an international setting marked by increasing glo­ endeavour is inevitably linked to industrial conver­ balization and, at the same time, heightened trade sion processes which will increase production effi­ friction, the countries of the region need to ciency and make possible the incorporation of new strengthen their place in the international economy comparative advantages. In this context, regional in­ by improving their export profile. Success in such an tegration can act as a catalytic element which will facilitate and strengthen the conversion process. This conversion will have to take place, in some 29 With regard to these types of arguments, see Grossman (1986), Porter (1990) and the studies on corporate rent-seeking countries, in the midst of exchange policy constraints behaviour by such authors as Krueger (1974). which mean that there is no easy solution. In this

TRADE POLICY AND INTERNATIONAL LINKAGES: A LATIN AMERICAN PERSPECTIVE • MARTA BEKERMAN AND PABLO SIRUN CEPAL REVIEW SS • APRIL 1»»S 75 case, it will be necessary to emphasize the applica­ regional integration processes. These offer the possi­ tion of policies which foster the other basic means bility of increasing productivity (by taking advantage of increasing exports: improvements in the levels of economies of scale and specialization) and im­ of productivity and comparative efficiency. Until proving bargaining power in international forums. In such measures bear fruit, the use of trade policy as order for regional integration processes to bear fruit a second-best macroeconomic strategy -in order to to the full, however, there must be broad coordination offset possible deviations in the real exchange rate or of macroeconomic and microeconomic policies with­ as a supporting instrument on the fiscal front- should in them. The absence of such coordination and the not be ruled out. It should be noted in this respect, persistence of certain imbalances at the microecon­ however, that when trade policy is used for this pur­ omic level may lead to the consolidation in the re­ pose its purely macroeconomic dimension must be gion of intersectoral specialization patterns (of the respected. This means that sectoral differences must North-South type) which will prevent some countries not be established (since these must be based on from gaining full benefit from integration. other criteria), nor must the anti-export bias of the As regards the use of selective trade policies (such economy be increased. as protection for certain sectors which are in the Macroeconomic stability is a necessary condition course of retooling), the experience of the Asian for the development of new comparative advantages, countries shows that such measures must be of a tem­ but it cannot of itself guarantee such advantages.30 porary nature and must be subject -as g a t t requires As the successful countries of Asia have shown, a in these cases in the recently adopted Code on Safe­ guards- to the fulfilment of certain goals by the sec­ dynamic place in the world economy also requires tors given protection. Thus, the application of selective more intensive application of horizontal microecon­ trade policies in sectors which are highly concen­ omic policies designed to increase productivity and trated and have strong lobbying power requires, at consolidate market positions abroad. the very least, that the State should have the necess­ In the field of productivity, it is necessary to ary institutional capacity to ensure proper monitoring define a rational strategy of optimal policies in the of the fulfilment of private sector commitments. areas of trade, industry and technology aimed at deal­ This means that there is a pressing need to carry ing with the major market flaws which, in the coun­ out institutional reconstruction measures which will tries of the periphery, hit the technologically most ensure that in the future countries will have public advanced sectors particularly hard. These policies authorities capable of applying more effectively pol­ should include industrial extension measures for icy instruments which, although more complex, may small and medium-sized firms (especially in the field be closer to the optimum. Meanwhile, it would seem of modernization of the organization of labour), pro­ advisable to limit selective policies, as far as possible, motion of research and development activities, incen­ to sectors where small and medium-sized firms pre­ tives for the training of human resources, etc. dominate and there may be greater capacity to im­ One of the areas where most remains to be done is pose discipline on the private sector.32 It should also that of public policies to improve the supply of informa­ be noted that, as selective promotion instruments, ta­ tion on foreign markets and to promote marketing riff barriers or systems of tariff-based quotas awarded enterprises to increase in particular the viability of by competitive bidding are superior to straightfor­ the exports of small and medium-sized firms. An­ ward quotas or other non-tariff barriers because they other aspect of fundamental importance is the provi­ are more transparent (they clearly show what degree sion of export financing at reasonable interest rates.31 of protection is being given to a sector) and because Another aspect of trade policy which is worth they increase fiscal revenue instead of generating highlighting in this context is the progress made by rents which are hardly ever passed on to consumers.

30 Some authors are highly critical of what they describe as “the short-sighted attitude of macroeconomic adjustment schemes, which ignore the more distant horizons that should guide the 32 When applying selective trade policies it is also necessary to strategic decisions of public and private agents” (Tavares, 1990). bear in mind the need to avoid giving rise to an anti-export bias 31 Subsidies for interest rates on export credits do not form part in the sector in question and an undesirable burden of effective of the list of subsidies prohibited by GATT (Fundación U.I.A., negative protection on export sectors which use the goods thus Consejo Académico, 1994). protected.

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These policy strategies must be seen within the export bias, it will be necessary to use other forms of context of the new patterns created by the Uruguay export incentives which are not prohibited in order to Round. As we noted in section II, the agreements reduce that bias, such as the provision of export cre­ reached at that Round will very likely give rise to dits on favourable terms. various forms of friction because of the strong pro­ Second, even though the g a t t rules may impose tectionist pressures in the countries of the North. certain restrictions, there are deadlines for complying Even in that case, however, the biased situation with them, and it is extremely important to take ad­ which we noted to be one of the features of the vantage of this breathing space (see Appendix). Thus, international setting may oblige the countries of since these deadlines exist, it will be necessary to the periphery to accept the effects of the new rules. make the fullest possible use, before they have to be Assuming that this takes place, two strategies may be eliminated, of whatever industrial and trade policies p ro p osed. may be considered appropriate for consolidating the First, in the event that theg a t t rules limit the retooling process. use of certain instruments designed to eliminate anti­ (Original: Spanish)

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APPENDIX New instruments adopted the Uruguay Round of GATT

Among the main results of the Uruguay Round are promote small and medium-sized firms, or provide the establishment of the World Trade Organization funds for research and development. This category (w to ) , with a General Council responsible for super­ also extends to specific subsidies when they are ap­ vising the fulfilment of the various agreements plied in order to promote industrial research acti­ reached and settling trade disputes among member vities, provide support for under-privileged areas, or countries, and the negotiation of sectoral agreements carry out environmental programmes. A member for agriculture and the textile sector, plus the inclu­ country can appeal for GATT’s intervention, however, sion of services and intellectual property in the multi­ if it considers that a subsidy which is in principle not lateral negotiations. actionable is seriously harming one of its production What we wish to do here is to refer in particular sectors. to the new instruments designed to increase disci­ iii) Actionable subsidies. This category covers pline in the field of trade. These include new rules on the cases of other types of subsidies which can adver­ trade-related investments; subsidies and countervail­ sely affect the interests of other countries and can be ing duties; safeguard clauses, and anti-dumping shown to have caused actual damage. In order for a m easures. subsidy to be actionable it is considered a necessary (although not of itself sufficient) condition that the a) Trade-related, investment measures (TRIMS) total a d v a lo rem subsidy should be equivalent to The existence of investment measures which can more than 5% of the value of the product in question. affect trade led g a t t to prohibit a number of prac­ Members affected by actionable subsidies can submit tices in this respect. Particularly relevant in this con­ the matter to the g a t t dispute settlement body. If it is nection is the prohibition of the adoption of rules on found that the subsidies did indeed have harmful ef­ national content and measures tending to the levell­ fects, the country applying them must withdraw them ing of trade (for example, measures linking the or make good the harmful effects ( g a t t , 1993). For amount or value of the imports that a firm can make developing countries with a per capita income over to the level of its exports). The developing countries US$1 000, the prohibition of export subsidies will were given a deadline of five years for the elimina­ come into effect eight years after the coming into tion of policies of this type. force of the agreement setting up the World Trade Organization (GATT, 1993). b ) Subsidies and countervailing duties The agreement also lays down more transparent Stricter discipline was provided for with respect procedures for the application of countervailing to subsidies, which were classified into three ca­ duties to imported products which are subsidized by tegories: third countries. The rules for opening an investiga­ i) Prohibited subsidies. These are subsidies tion are stricter, and it has now been made necessary linked with the use of domestic inputs or the fulfil­ to show a direct causal relation between such imports ment of export goals. In order to avoid double taxa­ and the effective harm being suffered by the industry tion, however, it was agreed that exemptions from affected. Such investigations will be terminated when indirect taxes on inputs incorporated in export pro­ the amount of the subsidy is very small (less than 2% ducts and the use of drawback mechanisms could a d v a lo rem ) or the real or potential volume of the continue. In these cases, the amounts of the exemp­ subsidized imports is not significant (less than 4% of tions or drawbacks must not exceed the value of the the total imports of similar products by the importing taxes effectively payable. country). ii) Non-actionable subsidies (permissible sub­ sid ie s ). These subsidies are at the other extreme. c) Agreement on Safeguards They include horizontal or non-specific subsidies: This Agreement, which is included in the Final i.e., those which are not limited to particular types of Act of the Uruguay Round, makes some very import­ industries or activities. Non-actionable subsidies, for ant changes in the rules on the defence of domestic example, are those designed to increase employment, industrial sectors which have lost competitiveness.

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In order to limit unfair trade practices which could foreign producers without demanding anything from conceal arbitrary protectionist actions, clearer rules the local producer, whereas the application of safe­ have been established regarding the application of guard clauses -since it lays down a time limit for the th e C o d e o n S a fe g u a rd s. S u ch sa fe g u a rd s can b e used protection- implies a demand that the affected sector to p ro te c t lo ca l in d u stry w h e n an u n fo re se e n in crease should carry out an adjustment process. In this sense, in imports threatens to cause serious harm to local this instrument can be even more beneficial for the producers. In such cases, governments are authorized country applying it (Guimarães and Naidin, 1994). to temporarily suspend their commitments under Furthermore, the new g a t t rules prohibit the es­ g a t t and to establish trade barriers for a maximum tablishment of voluntary export restraint agreements period of four years (which can be extended in or managed trade arrangements between countries. certain circumstances to a maximum of eight Measures of this type which were in force when the y e a r s ) .33 Agreement on Safeguards was signed must be grad­ W hen an increase in protection is strictly due to ually eliminated over a period of four years. the lower efficiency of the local industry, the applica­ tion of safeguard clauses is obviously a more appro­ d) The anti-dumping agreement priate instrument than anti-dumping measures or This agreement aims to secure more transpar­ countervailing duties. The latter tend to penalize ent rules on the use of this mechanism. It seeks to define more clearly and in greater detail the method for determining whether there is dumping or not and calculating its true magnitude. The im­ 33 In order to facilitate the adjustment of the affected sector, the porting country must prove more strictly that there Agreement on Safeguards provides that if the planned period is is a causal relation between the imports accused of more than one year, the safeguard measures must be gradually representing dumping and the harm caused to na­ relaxed at regular intervals during the period of application. If tional industry. New rules have also been estab­ the measures are scheduled to last more than three years, the situation of the industry in question must be periodically re­ lished on the initiation and conduct of actions in viewed so that the measures may be lifted or the rate of relaxa­ this respect and on the facilities for the countries tion speeded up, if necessary. involved to defend their actions.

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CEPAL REVIEW 55 81

Capital movements and external financing

Benjamín Hopenhayn

Economic Research This article explores the causes, consequences, magnitude Institute, Faculty of and forms of a phenomenon which is of fundamental Economic Sciences, importance in the current scene and has enormous University of implications for the Latin American economies: the growing Buenos Aires. pace of international capital movements. Many billions of dollars are shifted across national borders by satellite, and a small part of this amount has become the basic element in Latin America’s external financing. This financial globalization has its roots in the accumulation of enormous tied liquid surpluses, the generalized liberalization of capital accounts after the collapse of the Bretton Woods frontiers, and the impact of the technological revolution in the fields of informatics and communications. The growing size and importance of the financial markets and external imbalances of the main countries makes necessary a new international monetary system which is not yet clearly defined but undoubtedly involves the free circulation of great masses of liquid assets of increasingly diverse forms: the financial “products” which are traded on the transnational money markets. In recent years, these resources have helped to relieve the Latin American external sector and to supplement the region’s domestic saving. The unpredictable and precarious nature of these capital flows, however, makes it advisable to take advantage of the current availability of these funds in order to effect changes which will increase national saving and to use it to raise the productivity and competitiveness of the economies of the region.

APRIL 1995 Cross-border capital movements

In recent decades cross-border capital movements The Bretton Woods agreements sought to lay the have grown with the same dazzling speed of the sat­ bases for a system of international economic rela­ ellites that transport them. They amount to hundreds tions that would effectively further world economic of billions of dollars per day and trillions of dollars development after the war. The personalities with per year, registered by the electronic language they real bargaining power who sat down at the Bretton are expressed in as purchases and sales of increasing­ Woods negotiating table had vivid memories of two ly diverse financial assets. They are financial “pro­ traumatic experiences that took place in the first half ducts”, as the market operators like to call them, and of the century. On the one hand, there was the devas­ just as in the trading of physical goods these products tating crisis caused by the sudden bursting of an are made increasingly differentiated in order to keep enormous financial bubble and its rapid transmission up the competitiveness of their “producers” in the from one country to another, partly because of the money markets. lack of orderly international monetary safeguards. On Dizzy though the magnitude and abstract the other, there were the disastrous political and diversity of their forms may make us, we must do economic consequences of the war reparations im­ all we can to understand the causes and consequen­ posed on the losers. In order to solve these two short­ ces, the magnitude and the different forms of this comings the International Monetary Fund (im f) and fundamental element in the functioning of today’s the International Bank for Reconstruction and Devel­ eco n o m y . opment (the World Bank) were set up. Because of the Let us begin with a brief look at the past. How opposition of the U.S. Senate, it did not prove did we arrive at the great international mobility of possible to establish the third leg of the tripod: i.e., a capital which is the basis for the growing trend world trade organization (subsequently imitated to towards financial globalization? We see that the some extent by g a t t and revived in a different form main causes are the accumulation of big surpluses in the Uruguay Round). of liquid assets, the generalized relaxation of con­ The most novel and important body set up at trols over capital, and the impact of the technologi­ Bretton Woods was undoubtedly the International cal revolution in informatics and communications. Monetary Fund. Among the main objectives of the This process has led a group o f distinguished Articles of Agreement setting up the Fund was that of French economists of the regulationist school (the furthering favourable conditions for full employment “interventionist” school, Latin American neocon­ by promoting the non-inflationary growth of the servatives would say) to describe financial global­ world economy and trade through a multilateral in­ ization as “the obligatory adventure” (Aglietta and ternational payments system and strong restrictions others, 1990): an adventure which leads both pri­ on exchange rate freedom. (The World Bank was vate and public agents to do their best to enjoy its to provide resources for the reconstruction of advantages and steer clear of its risks, competing war-devastated countries, especially in Europe, in the short term for high returns and opportunities without distinction between victors and van­ for obtaining capital inflows. quished, in parallel with the M arshall Plan). The recent history of international capital The power relations prevailing at the end of the movements and their relation with the financing of war and the rules laid down at Bretton Woods led to balance-of-payments deficits begins with the Bretton the de facto and de jure establishment of a hege­ Woods Conference, held even before the end of the monic type of international monetary system: hege­ Second World War. We may recall in passing that monic because in that system the United States the fiftieth anniversary of this momentous meeting economy acted as the driving force for the capitalist took place just a few months ago, strangely enough half of the world and the U.S. dollar was the interna­ without much celebration. tional exchange and reserve currency.

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It is an unquestionable fact that during the and structural circumstances, subject to the prior quarter of a century after the Second World War agreement of the fund. the world experienced the longest period of A small digression is in order here with respect growth with stability registered in modern his­ to Keynes. An economist of the time (see Davidson, tory. The economic evolution of that quarter-century 1991, pp. 85-104) recalled that in 1941 -the year of is reflected in an average cumulative annual g d p the Atlantic Charter- Keynes had written that to growth rate of nearly 5%, with international trade believe in the existence of some automatic adjust­ growing at a rate of around 8% and annual rates of ment mechanism which would maintain equilibrium inflation below 2 - 3%, while economic cycles were if only faith were placed in laissez-faire m eth o ds smoothed out by Keynesian-type policies. These con­ would be a doctrinaire illusion that ignored the ditions -as we know from the lessons of real life and lessons of past experience and was not supported the interpretation of them given by Raúl Prebisch- by any sound theory. prevailed in the industrialized countries of the centre The international monetary system which was but trickled down only very meagrely to the under­ finally established did in fact have the U.S. dollar, developed countries on the periphery. tied to a certain weight in gold, as its central cur­ Be that as it may, these growth rates made rency, with the exchange rates of all the other curren­ possible the accumulation of formidable physical and cies tied to parity with the dollar. For a long time, this financial resources which changed the face of the made possible a hegemonic and hence stable system: central market economies (it may be noted in passing hegemonic, because it was organized on the basis of that the socialist countries also seemed to grow con­ a single country with the privileges (including siderably during this quarter-century). Side by side seigniorage) and responsibilities of the leader and with production and trade, the accumulation of finan­ centre of the system; stable, as long as that country cial surpluses also grew, and capital markets de­ had a strong and dynamic economy and acted respon­ veloped at both the national (in the central countries, sibly by applying a prudent and anti-cyclical mon­ of course) and international level. etary policy. As the size of the financial markets grew, how­ It is worth recalling that it was also agreed at ever, there was also increased tension on various Bretton Woods to allow the maintenance of restric­ links of the systems that regulated them, and para­ tions on capital movements, for fear of the imbalan­ doxically, one of the links that was weakening was ces they could cause. As we shall see, with the the U.S. dollar itself, on which the whole system set passage of time these restrictions were gradually re­ up at Bretton Woods was based. laxed by governments or were simply overtaken by With regard to this systemic weakening process market developments. and the dangers it involved, mention must be made of The second warning was the far-sighted percep­ two serious warnings given by mature and far-sighted tion of Robert Triffin, who warned as from the early economists. The first was the proposal, made by 1960s that the established system would inevitably Keynes at the Bretton Woods Conference, to anchor end in a crisis, since the dollar standard would face a the system to a non-national means of payment, dilemma similar to that suffered by the pound ster­ itself anchored to gold, which would be traded ling when it was the leading currency: i) domestic among governments through an international pay­ inflation (due to excessive currency issue in order to ments union or clearing house. As we all know, this meet demand from the rest of the world), which proposal was not accepted at Bretton Woods. Instead, would then spread internationally; or ii) deflation in the members of the Conference adopted the proposal order to avoid a payments deficit through a mechan­ put forward by Mr. White, the United States repre­ ism similar to the gold standard, which would also sentative, to set up an international stabilization fund spread internationally, with the danger of setting with foreign exchange and gold contributed by its off a crisis involving competitive devaluations, as members. This fund would grant short-term credits to in earlier traumatic episodes. countries which had temporary payments deficits in This warning by Triffin, which was widely ac­ return for general undertakings to move towards cepted in academic circles with influence on the U.S. monetary convertibility and free trade, and more spe­ Government of the time, soon coincided with other cific undertakings not to devalue save in exceptional phenomena in the real world. On the one hand, in

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Europe (which had by now been reconstructed and of the U.S. dollar in terms of gold -an obligation was on the way to economic union) there was press­ assumed by the United States in the Bretton Woods ure for an end to the hegemony of the U.S. dollar, agreements- and to devalue the central currency of from which the U.S. transnationals were deriving the system. Even these momentous measures did not benefits. We may recall De Gaulle’s demands for a satisfy the market, however, and it was finally return to the neutral discipline of the gold standard, necessary to knock down the wall against competi­ at a time when Europe was growing rapidly and tive devaluations which had been erected at Bretton the share of the United States in the world product Woods, thus passing from an era of fixed or semi­ and international trade was markedly declining, al­ fixed parities to one of flexible exchange rates, which though it continued to be the most powerful econ­ the following two decades were to place on record as omy in the world. a period of tremendous exchange rate volatility. On the other hand, since the early 1960s offshore Indeed, once the wall of fixed parities and financial markets had been arising which offered not the Bretton Woods agreements themselves had only tax havens but also havens for capital which been demolished at the beginning of the 1970s, were free from regulations and from the control of the lack of a new order was of fundamental im­ national monetary authorities. portance in allowing the oil crisis to have such a Among these financial markets, a prominent damaging effect on the world economy. This op­ place began to be occupied by what were to become ened up a long cycle of serious external imbalan­ known as the “Euromarkets”. The story is that these ces and of stagflation in the central countries originally arose in London, thanks to the ingenuity of which lasted until the early 1980s. City bankers who wanted to “launder” Soviet foreign The central countries then began to restore the exchange. Because of the British reputation for seri­ balance of their economies after a severe recession ousness and good management, these markets at­ and to bring down inflation, but growth rates were tracted financial capital from other countries, since much slower than in the golden age of the post-war they offered higher interest rates, did not demand period. Nor was the new stability very reliable, as identification from depositors, and there was no regu­ was shown, among other indicators, by the vola­ lation in them as regards assets and liabilities. Quite apart from the tax advantages, the more tility of exchange parities and international interest rates. As for that far-off objective of full employ­ favourable rate represented by the l i b o r , the co n ­ fidential way in which transactions were carried out ment, which initially formed part of the basic ar­ and the lack of regulations began to attract funds ticles of the Fund, the central countries seemed to from investors and intermediaries of the most diverse have lost the battle in view of the apparently com­ origins and locations (including the big United States plete validity of the Philips curve, since high banks) to the Euromarkets. To the U.S. Government, “natural” unemployment coincided with the this represented incipient capital flight. From that “monetarist” response to inflation. time of the mid-1960s onwards, a little-remembered Today, the level of unemployment is one of the period began which was a kind of rehearsal for the main concerns of the developed countries, to such an great surge that was to come later. The big banks extent that in its latest assessment of the world econ­ -i.e., the m arket- sought to extend their frontiers by omic outlook (IMF, 1994) the IMF itself wonders means of their London branches, taking advantage of whether the increase in unemployment is really re­ the permeable nature of national financial borders. versible, because it considers that the economic and The U.S. Government, for its part, struggled to con­ social costs of the present levels of unemployment, trol these movements, which were difficult to ident­ whether structural or cyclical, are enormous (Ibid., ify and supervise. p. 39). Our own view is that the current unemploy­ These tensions, together with the changes occur­ ment problem is basically of a structural and micro- ring in the fields of production and trade, led to economic or technological nature, and there is no pressures (many of them speculative) for the devalu­ way that it can be solved -either in those countries or ation of the U.S. dollar with respect to the strong in our own region- by monetarist-type policies, even European currencies. As we all know, the decision with well-aimed fiscal corrections. But that is another was finally taken to do away with the convertibility m atter.

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Looking at the 1970s and 1980s from our stand­ order were first weakened and then demolished. point (that of Latin America and Argentina) gives a Balance of payments and current account imbal­ clearer idea of the origin and outcome of the debt ances became more marked and took on the form crisis. Thus, as from 1973 this continent of variable of a veritable shock with the sudden rise in oil prices. and volatile exchange rates, with financial markets Thus, major institutional changes in international fin­ free of all regulation and supervision (the Euromar­ ancial markets coincided with rapidly increasing kets, now extra-territorial entities), began to receive amounts of liquid resources available for intermedia­ the enormous surpluses produced by the oil price tion. At the same time, the world economy entered shock, which gave rise to fabulous amounts of re­ into a period of high volatility as regards the two sources in countries with very little capacity to main international money prices: interest rates and absorb them. The petrodollars thus swelled the inter­ exchange rates. national liquidity flows at a time when the central In order for this explosive growth of the funds in countries were in the midst of long years of stagfla­ increasingly unfettered international circulation to tion. There was a glut of liquidity, and this naturally become a real revolution, all that was needed was a threatened world stability. technological ingredient, and this appeared with the In this period the international banks -praised by great leap forward in informatics and communica­ the IMF in its official reports and also by the interna­ tions. These funds could now circulate worldwide in tional economic press- helped to solve the difficult their most abstract form -almost without metals, problem of recycling the petrodollars in the form of physical currency or papers- in real time, through the cheap, easy loans which, among other things, led to satellites linking the financial markets of the world the over-indebtedness of almost all the countries of 24 hours a day. Latin America. Not all the blame attaches to the sup­ Parallel with the above phenomena, all over the ply side, of course: blissfully irresponsible demand world the capital accounts controlling the movement also contributed to the debt overhang. of foreign exchange across national borders were In the Latin American setting, the debt crisis had gradually being deregulated. We may recall that a its roots both in the great disorder reigning in the number of important countries -such as France, international monetary system in the 1970s and in the Japan and others- freed their capital accounts only short-sighted or irresponsible attitudes of some bor­ half a decade or so ago. Today, however, the liberali­ rowers. This is the root cause of the inequitable treat­ zation of capital movements is practically complete, ment meted out in respect of the debt problem, which at least in the market economies. was finally settled in practice with the “lost decade” Here we end this rapid review of the events lead­ and the cleaning-up of the balance sheets of the big ing up to the present-day international monetary and transnational banks. This is an important matter, as financial system. This system -still in course of for­ we shall see, because just as in the second half of the mation, to be sure- is increasingly based on free 1970s there was an abundance of foreign capital foreign exchange markets, with floating less and less available to Latin America, so now in the early 1990s strictly applied. The fact is that it is difficult to im­ there is also an abundance of foreign capital, al­ pose prudential limits in a huge market where there though it may take a different form. This latter fea­ are private actors so powerful that they often twist ture may be very important, so while it may be bold the arms of the strongest Central Banks. This capital to draw analogies, it would be equally imprudent not is largely moved through banks or in association with to draw them. them -leverage- and the diversification of the instru­ To sum up: Big financial surpluses were built up ments involved keeps them out of reach of national during the two decades of rapid world economic monetary authorities, as is shown by the evolution of growth. The capital markets became stronger, just the banking supervision agreements of the Basle like the other markets. International financial markets Committee.1 sprang up which were free from regulations and con­ trols. The “walls” set up at Bretton Woods to main­ tain a more or less regulated international monetary 1 On this subject, see Cornford, 1993.

CAPITAL MOVEMENTS AND EXTERNAL FINANCING • BENJAMIN HOPENHAYN 86 CEPAL REVIEW 55 • APRIL 1995

II The forms and magnitude of international capital movements

We shall now try to outline the forms and magnitude The measurement of international capital flows of international capital movements, before dealing raises very complex problems which are reflected with the systemic consequences of their liberalization in the well-known statistical discrepancies of the and expansion in the present-day world. balance of payments figures registered and published The first thing that strikes one when looking at by the International Monetary Fund. These discrep­ the evolution of these markets is that in only a couple ancies reflect the growing stock of external financial of decades international capital movements have in­ assets recognized by the issuing countries but not creasingly begun to go beyond the limits of interna­ registered in the statistics of the countries whose tional trade, foreign direct investment and the residents acquire them. In order to get an idea of the traditional bank deposits and loans. The capital mar­ volume of resources which are not registered or kets -national and international- now cover an ex­ measured, it may be noted that in the last decade tremely wide and growing range of financial assets. the statistical discrepancy has averaged some Analytically, these can be divided into five main US$50 billion per year. groups: trade-related operations, foreign direct in­ The difficulties in measuring and balancing the vestments, bank loans, portfolio investments, and capital accounts led the Board of the IMF to set up a miscellaneous other operations. Working Group, headed by Baron Godeaux, to assess Operations connected with the financing of in­ the statistical practices relating to the measurement ternational trade naturally develop in line with the of international capital flows and, in particular, the evolution of trade in goods and services, which has main sources of the statistical discrepancy. The report grown only slowly in recent years: only a little more presented by this group notes that the liberalization than world output. Over this same period, foreign of capital markets, financial innovations and changes direct investment -which was concentrated among in investors’ preferences have made it very difficult the countries of the North in the 1980s- has increased to measure portfolio investments; that full informa­ in the case of some developing countries, both in tion is not available on offshore financial centres, and Asia and Latin America. As is well known, in recent that there are big concealed capital flows connected times foreign direct investment in Argentina has been with the traffic in drugs and arms. closely linked with the privatization process. These observations not only mean that these data There has also been an increase in recent years in on capital movements should be viewed with caution, sales of bonds and securities guaranteed by the State although they are the only ones we have: they also or backed up by more or less “gilt-edged” assets; in give an idea of the difficulties that governments face portfolio investments in shares or other high-liquidity in trying to supervise such movements. assets; and in speculative inward and outward move­ In spite of the difficulties of measurement, how­ ments having no connection with any operations in ever, there are other data which enable us to get an the fields of production, investment or trade. idea of the magnitude of international capital flows. There has been a striking proliferation of “finan­ Let us begin with the most conventional movements: cial products”, especially futures, options and all those of private bank credit. In the 1980s, total world sorts of derivations of them. Sophisticated financial cross-border bank loans grew by 280% to over engineering is used to take advantage of institutional US$8 trillion. During this period, the total assets of and technological changes. Competitiveness causes United States banks doubled, while those of Japanese the operators to be measured by the yardstick of their banks trebled. For purposes of comparison, it may be ingenuity in devising new “products” to be traded on noted that over the same period the world g d p at international financial markets. current prices grew by 120% (but only by 35% at

CAPITAL MOVEMENTS AND EXTERNAL FINANCING • BENJAMIN HOPENHAYN CEPAL REVIEW 55 • APRIL 1#»5 87

constant prices), and at the end of the decade world from the equivalent of 35% of the United States g d p trade amounted to US$3.6 trillion: i.e., less than half to the equivalent of 140% of it. the amount of cross-border bank loans, which in turn An interesting example of the complexity of formed only a part of total international capital these derived products is that of futures contracts on m ov em en ts. interest rates. In 1987, these amounted to US$500 For Latin America and the Caribbean, foreign million in respect of contracts in U.S. dollars and loans grew much less than these amounts during the US$141 million in other currencies, but in 1991 the 1980s (only 45%), and they were concentrated in the figures were US$1.5 billion in U.S. dollars and a later years of the decade. It may be recalled that similar amount in other currencies. The important during the “lost decade” the banks practically made points to note are the size of the increase and the loans only to refinance arrears of interest: that is to change in the composition by currencies. As Carlos say, to improve the appearance of their own balance- Garcia Tudero noted, these resources have ceased to sheets. Moreover, in recent years their voluntary play their original role of hedging risks and have in­ loans have not been significant in absolute terms or creasingly come to play a speculative role. in comparison with other items on the capital inflow In the face of the soaring growth rate of the fin­ account. ancial dérivâtes market, the im f technicians reflect Let us go on to look at another traditional mar­ the concern felt by the monetary authorities of the ket: that of bond sales. Here, a striking feature is the developed world. In the report already referred to increase in the share of the developing countries in international bond issues. Developing country bond (im f, 1993b) they note that although the participants issues increased practically seven-fold over the last in dérivâtes markets are exposed to the same kinds of five years, amounting to over US$30 billion in 1993, risks as in other financial markets -credit, market, although even so they represented only 10% of total liquidity, legal and political risks- there is concern world international bond issues in that year. Latin that the speed at which these markets have developed America, however, which had sold only US$830 mil­ and the complexity of many of the instruments traded lion in bonds in 1989, sold over US$20 billion in may have increased the management risk: that is to 1993. say, the risk of speculative diversions of funds by A great deal has been said about the really as­ operators (as in the recent crisis of the tradition- tounding growth of one sector of the international steeped Barings Bank), which have given rise recent­ capital market: that of foreign exchange transactions. ly to various novels and films. Figures have been mentioned in this respect which Let us now move on to another important indica­ leave one’s head reeling, both because of their mag­ tor on the current nature and dimension of the capital nitude and the vast differences they reflect: thus, they markets. As is well known, institutional investors are are estimated at between fifty and a hundred times among the most important sources supplying these the total value of world trade in goods and real ser­ markets with funds. One of the main groups among vices. Even so, a recent IMF rep o rt (im f, 1993a) notes these investors is that made up of the pension funds that although both the size of the foreign exchange of various developed countries. According to a World market and the number of private operators capable Bank expert (Davis, 1993), in 1988 the total net in­ of injecting very large sums into it are obviously vestments of United States pension funds came to much greater now than in the past, both of them have US$726 billion. This represented nearly 50% of total probably been underestimated. personal saving in that country and 35% of its g d p . By way of example, another segment of the capi­ The corresponding figures for the United kingdom tal market provides a good illustration of the specula­ were 71% and 41%, respectively. tive ingredients which characterize it. This segment In the same year, the total assets invested by is the market for “derived” products (futures, options, United States pension funds amounted to the dandy swaps), which has registered explosive growth. Ac­ little sum of US$16.5 trillion, representing 13.5% of cording to estimates given in another im f report (im f, total personal U.S. assets. Although at that time only 1993b) this market grew from US$1.6 trillion in 1987 4% of that total was invested abroad, it should be to US$8 trillion in 1991 (i.e., as much as the entire noted that in 1980 the corresponding figure was only international banking market). Thus, it increased 1%. This points to a tendency among institutional

CAPITAL MOVEMENTS AND EXTERNAL FINANCING • BENJAMIN HOPENHAYN 88 CEPAL REVIEW SS • APRIL 1S»S investors which may be very important for the coun­ This is what Lucas says. Latin American experi­ tries of the region. ence shows that either the theory is faulty or freedom Although the speculative ingredient in invest­ of the market is a mere utopia, however, because the ments cannot be precisely measured, some econo­ truth is that capital tends to circulate preferentially mists have tried to make an estimate, if only by among the richest countries, regions and agents, and indirect means. Thus, Tesar and Werner (1993, p. 20) only trickles down to the poorer countries or regions found that the gross volume of share investment for speculative reasons or in search of higher yields. flows was much greater than the net flows, and this We have had this experience in recent times in difference was greater in United States foreign in­ Argentina, both internally and externally: internally vestments than in that country’s domestic invest­ in the case of the regional promotion efforts and ex­ ments. In other words, in the portfolios of United ternally in most of the privatization operations. States investors, their investments on foreign stock I should like to make a slight digression at this exchanges are less stable -more speculative?- than point. Capital that brings us external savings on terms their investments inside their own country. in keeping with our investment needs is always wel­ This feature should serve as a warning in respect come. But we must leam to grow thanks to our own of the nature of the foreign capital flows which have resources, as Ferrer would say. The most recent neo­ contributed so much to the booming emerging stock classical theories on economic growth -from Solow markets, including those of several Latin American to Romer- hold that the accumulation of physical countries. It probably also helps to explain why these flows go down in line with increases in short-term capital is not of itself sufficient to ensure the long­ interest rates in the United States. The boom in these term growth of an economy. Solow gave emphasis to flows coincided with a downward trend in interest an unexplained “residue”, after studying the growth rates in that country, while their stagnation or decline of the United States economy over a century. Romer fitted in with policies of higher interest rates on the brought in the concept of endogenous growth, em­ part of the Federal Reserve. phasizing above all the role played by the accumula­ The behaviour of those responsible for channell­ tion of human capital (a term which humanist Raúl ing savings towards domestic or foreign investments Prebisch found repugnant). confirms the propensity of savers, except in unusual Other highly respected economists of the circumstances, to invest within their own countries Northern school (Barro, Mankiw and Sala-i-Martin, rather than actively seeking higher returns abroad. 1992) maintain that capital is only partially mobile, Indeed, this raises a paradox with regard to the inter­ since it can finance “accumulation of physical but not national transmission of savings, which is a central human capital”. In the same study, they develop a issue in international monetary theory, the traditional model whose application leads them to conclude that assumption of which is that international capital the main message in their work is that the quantita­ flows reflect the efficient reallocation of savings and tive impact of the [international, interregional, inter­ the rational diversification of portfolios among op­ personal] mobility of capital is only slight; if there portunities and locations offering different risks and are certain types of capital, such as human capital, yields. which cannot be financed with resources from world In an effort to avoid over-simplifications which markets, then open economies will converge only a can be very costly in real life, and from an indisput­ little faster than closed ones. ably neoclassical and conventional viewpoint, Lucas This is just one result, which can in no way be (1990) points out that the followers of the equalizing interpreted as an invitation -on the part of those theory of the simplest trade and growth models apply authors or the person quoting them - to adopt strategies the law of diminishing returns to infer that the margi­ based on closed economies. From the highest theore­ nal product of capital is greatest in the poorest econ­ tical level, however, it does take away some qualms omies. Thus, he says, conventional neoclassical about the seriousness of the sins of trade protection theory holds that if the market forces are allowed to (when applied in a measured and harmonious man­ operate freely, new investments will go preferentially ner, of course). Proof of this are the cases of Japan to the poorest countries (or regions), until wages and and the new little “Asian tigers” or the great capital yields equalize. Chinese “tiger”.

CAPITAL MOVEMENTS AND EXTERNAL FINANCING • BENJAMIN HOPENHAYN CEPAL REVIEW 95 • APRIL 1995 89 m The causes and systemic consequences of international capital movements

Let us now return to the main line of reasoning of theory of individual consumption and saving to the these paragraphs by looking first at the causes and economy as a whole. This approach represents the systemic consequences of international capital application of the theory of the primary function of movements and their relation with current account national and international financial markets, which is or saving/investment imbalances or gaps and then to channel the resources of agents possessing a sur­ going on to examine the recent experience of Latin plus -families, firms and governments which spend A m e ric a . less than they earn: i.e., save-, to agents who do not As we have already seen, the main causes of the have a surplus because they spend more than they extraordinary growth and rapid global integration of receive: i.e., who dissave. international capital markets as a system in the recent Naturally, the consequences are very different, history of the world economy are basically: i) the depending on whether the use made of the external rapid accumulation of surpluses in the first quarter of savings is efficient or not: in other words, whether a century after the war; ii) the collapse of the “wall” they are used for reproductive investment which will erected at Bretton Woods and the generalized remo­ generate future compensatory income, or for present val of exchange controls and other impediments to consumption. This is why there are danger signs in movements of capital among market economies;2 many of the Latin American countries -and espe­ and iii) the technological advances made in the fields cially in Argentina- on account of the high propens­ of informatics and computation. ity to consumption displayed in two recent periods of Another systemic approach to the growth of in­ abundant inflows of external capital: bank capital in ternational capital markets is to be seen in balance of the second half of the 1970s and mainly non-bank payments theory. It is well known that there is a mac­ capital in more recent years. roeconomic accounting identity between the current We have our own view of the present financial account and capital account balances. In other words, world, both inside and across national frontiers. a current account surplus or deficit is balanced with a Whatever the validity of neoclassical balance-of- capital account deficit or surplus in the balance of payments theory or of the identity of total saving and payments (with an “Errors and omissions” item to total investment, in actual fact for some time now the cover statistical discrepancies). Another theoretical world has been witnessing a process of growing and approach to the interpretation of these external in­ dizzyingly fast financial mobility, with a high propor­ flow and outflow accounts identifies the current ac­ tion of speculative capital whose connection with count balance as the difference between the total real investment may be weak or distant. It is a kind of saving of a nation and its rate of investment. process of collective saving which operates at a very An interesting observation is made in a study on high speed, like the communications satellites that the spread of global financial integration and its con­ transmit the capital, practically without having any sequences (Artis and Bayoumi, 1989). These authors contact with the Earth, and whose profits swell a suggest that modem theory on the balance of pay­ form of saving which is not channelled to reproduc­ ments in integrated capital markets should extend the tive investments. Various authors have found that the correlations between saving and investment become less marked when fixed investment is used instead of total invest­ 2 Frenkel (1989) considers that the barriers to international capi­ ment. There are any number of empirical studies tal flows are so low that it can be said that financial markets are virtually completely integrated not only among the great indus­ which show that, despite the high international mo­ trial countries but among smaller countries too. bility of capital, total net saving and investment

CAPITAL MOVEMENTS AND EXTERNAL FINANCING » BENJAMIN HOPENHAYN 90 CEPAL REVIEW SS • APRIL 1995 flows continue to be markedly insular: that is to say, the above-mentioned study so rightly called the inter­ they stay within the borders of each country, espe­ national public good of world economic stability, cially in the case of the most industrialized countries. which, by the very fact of being an international pub­ This is the same analytical conclusion that had been lic good, raises the need for policy coordination reached by Tobin (1981). among the countries whose domestic policies most Let us now look at some of the main systemic affect the behaviour of the international economy. consequences of international capital movements, as Let us now look at another source of systemic reflected in a very interesting im f study (Goldstein, shock. Fundamental changes in interest rates and ex­ Mathieson and Lane, 1991). Although its analytical change rates affect the investment decisions and port­ bases correspond, as might be expected, to a view of folio preferences of the operators with the greatest the world from the North, this study nevertheless influence on the movement of national savings across contains items applicable to the experience of Latin frontiers. As the im f technicians note, this gives rise America and Argentina. to legitimate concern among the monetary authorities According to conventional theory, the integra­ of the central countries as to whether the existing tion of capital markets generates gains in terms of institutional arrangements can cope efficiently with efficiency because it facilitates the transmission of the new volume of transactions and effectively saving to the most profitable or productive invest­ handle the risks created by crises of liquidity or sol­ ments. In practice, however, the structural changes in vency. We became familiar with these concerns in the international financial markets, while undoubtedly protracted debt renegotiations, and they have facilitating the circulation of savings, have proved to emerged once again in the North with respect to the be an additional source of uncertainty, not only as possibility that speculative operators may come to regards the links between the financial markets of the dominate transactions in the foreign exchange and various countries, but also regarding their effects on securities markets, thus fostering a perilous increase monetary and fiscal policies. in the price volatility of a wide range of financial These consequences of the international mobility assets. of capital occur in different ways, depending on Another systemic risk is the possibility that a whether the countries have a leading or subordinate financial crisis may be sparked off due to “conta­ position in the world economy. Thus, the United gion” with fears of dubious validity. Money -espe­ States has been able to finance heavy fiscal and cur­ cially speculative money- is at once bold yet easily rent account deficits for a long time now -over ten scared. The perception that the liquidity or solvency years-, absorbing endogenous and exogenous shocks of an important borrower has deteriorated can set off in this way. We will merely note that among the en­ a domino effect in international financial circles. This dogenous shocks of a financial nature were a number already happened with the Latin American debt of generalized bank upsets such as those generated crisis, and it is one of the interpretations of the Great by the debt crisis, the portfolios of bad debts of petro­ Crisis of the 1930s, which is remembered as being leum and other firms, and the real estate crisis of the like a powder train running from Wall Street to al­ late 1980s, with its sequel of widespread bankrupt­ most every comer of the world. cies of savings and loan institutions. Among the main Finally, we would like to refer to a view ex­ exogenous shocks is the climate of highly volatile pressed in the study in question which deserves to be exchange rates and interest rates which has prevailed taken into account when analysing the medium-term during the last few years. prospects for international capital flows. The long­ In contrast -to take an example which we all standing decline in rates of saving in both indus­ know very w ell- almost all the Latin American coun­ trialized and developing countries (where net saving tries have been obliged to make violent recessionary went down from 17% to 10% of g d p between 1973 adjustments to deal with systemic shocks such as and 1988), together with the growing demand for those experienced in the early 1980s due to the rise in world savings (due to the recovery of the central real international interest rates and the decline in economies and developing countries, the retooling of commodity prices. the Eastern European economies, the great Chinese To take a more global view, it may be said that and Indian market, etc.), suggest that if there is not the central countries take better advantage of what a significant increase in rates of saving, one of the

CAPITAL MOVEMENTS AND EXTERNAL FINANCINQ • BENJAMIN HOPENHAYN CEPAL REVIEW 55 • APRIL 1«I9 91 features of the 1990s may be high interest rates, espe­ persisting- the exchange rate risk premium (with cially for the long-term instruments most closely which we are all too familiar in Argentina) will be linked with investment demand. We may recall the an important source of differences in real interest difficulties of the U.S. Federal Reserve in bringing rates on financial markets. This means that it would down long-term interest rates and the need to resort not be prudent to underestimate the real cost of to substantial increases in short-term rates. capital inflows in these and coming years, nor the We may add that as long as international ex­ level of profitability it is necessary to attain in change rate volatility continues -and it seems to be order to pay them. IV The external financing of the region

Let us now move on to the external financing of Latin duction in these deficits, however. In 1983 the total America. As we all know, the region has suffered from deficit dropped to only a fifth of the year before, and a chronic problem of external finance constraints, whose with some fluctuations this level was maintained up structural roots were clearly and perceptively described to 1990. In 1990, however, the deficit jumped back to by Raúl Prebisch, J think, however, that Prebisch nearly US$20 billion, and by 1993 it was more than himself would correct that part of his diagnosis deal­ twice this figure. ing with the behaviour of trade and investment -i.e., The mirror image of these current account move­ the real economy- by adding to it the features or ments was to be seen in the capital account, which distortions of financial globalization which we have was strongly positive up to 1981, negative up to 1990, tried to set forth in the preceding pages. and markedly positive since then. We may recall that in Even though some countries of the region have 1976 the net capital inflow was US$16 billion but rose gradually been overcoming their disadvantageous to US$37 billion by 1981 (although this latter figure place in world trade as commodity exporters, the ex­ already included debt rollovers). Two years later, the ternal sector continues to be the soft underbelly of account registered a deficit of nearly US$24 billion, and our economies. This situation has been aggravated in this phenomenon lasted eight years before it was recent years by the sharp fluctuations in international reversed. In 1991 there was a net inflow of US$25 financial flows. Generally speaking, at least since the billion, rising to nearly US$50 billion in 1992, and it mid-1970s, the evolution of the Latin American was only slightly less in 1993. Thus, in the second half economies has been dictated not only by the terms of of the 1970s (thanks to abundant bank credit) and again trade and world economic activity but also by the in the last two years (this time thanks to non-bank fin­ abundance or scarcity of external capital. ancing) inflows on the capital account exceeded the Before trying to make an analysis of this situ­ current account deficits and permitted the accumula­ ation -w hich must necessarily be an interim analysis, tion of reserves and an increase in expenditure. for history continues to be full of surprises- let us Another way of getting an idea of these changes recall some numerical data on three aspects: i) the is to use the well-known concept of net resource balance of payments, and especially its current and transfers, defined as the net capital inflow (short- and capital accounts; ii) net resource transfers, and iii) net long-term capital, unrequited official transfers, and capital movements. errors and omissions), less payments of profits and Between 1976 and 1982 -the years of indebted­ interest.3 For Latin America as a whole, this transfer ness, due at first to the receipt of net loans but later to credits that merely served to stave off the crisis for a 3 For the World Bank (1993, p. 25), total net transfers are calcu­ while- the region had heavy and rapidly growing lated by deducting from total net resource flows the total amount current account deficits (soaring from over US$11 of interest payments, reinvested profits and remittances of billion in 1976 to over US$40 billion in 1982). The profits, with the use made of IMF credits being excluded from the total net resource flows. In this article, however, the ECLAC crisis and subsequent adjustment caused a rapid re­ definition and estimates are used.

CAPITAL MOVEMENTS AND EXTERNAL FINANCING • BENJAMIN HOPENHAYN J

92 CEPAL REVIEW 55 * APRIL 1995 was positive during the years of true indebtedness, It is not that we are pessimistic, by temperament averaging US$15.8 billion per year between 1974 or by ideology. We are merely following the lessons and 1981. It became markedly negative in 1982, of recent experience and the definition given by the however, and remained so through 1989 (at around orthodox economist Lucas (1990), for whom capital US$23 billion per year). In 1990 the negative balance flows are simply loan contracts or ious: a poor went down to US$9 billion, and since then transfers country acquires capital from a rich one in return for have been very positive: US$5 billion in 1991, a promise to establish a flow of goods in the opposite US$20 billion in 1992, and US$15 billion in 1993.4 direction for a time (which may be eternal), in the Let us continue to look at the figures reflecting form of payments of interest or remittances of profits. the position of the Latin American external sector In the years of the adjustment, interest payments during the last twenty erratic years, when it has been (both actually paid and merely due) were the slipknot so dependent on capital inflows and outflows. In this of the external noose around the region’s head. We exercise, we shall base ourselves on an excellent should therefore make sure this time that the new e c l a c study on international financial flows, which capital flows we are now receiving are used to trans­ we shall also use freely in our analysis ( e c l a c , form our economies and make it possible to generate 1994).5 We shall look this time at net capital move­ surpluses to cover future payments of profits and in­ ments. Between 1977 and 1981 there was an average terest, so as to form a virtuous circle of rewarding capital inflow of US$30 billion per year, with a peak of over US$40 billion in 1981. The figure dropped indebtedness and not sink into another long and cruel abruptly to half this level the following year and adjustment crisis. averaged only a little over US$8 billion between Capital inflows are not unalloyed elements of 1983 and 1989. Thereafter, however, inflows -and gain and advantage for those who receive them. We returns- rose rapidly from US$21.5 billion in 1990 to have already seen that they very often have unwanted over US$62 billion in 1992. macroeconomic effects, such as forcing up the real exchange rate, with its contrasting effects on imports A s th e e c l a c study in question notes, over the last two years net resource transfers represented 2.7% and exports, leading to a big rise in the trade deficit. This happened in the earlier years of indebtedness, and 1.9% of the regional g d p , respectively, after hav­ ing registered an average negative level of 3.7% dur­ and it is beginning to happen again now. When a ing the period of crisis and adjustment (1983-1989). country finances its trade or current account deficit The recent history of the region tells us that in with inflows of foreign capital, it runs the risk that a the second half of the 1970s most of the Latin Ameri­ significant reduction in those inflows can set off a can countries failed to take advantage of the availa­ speculative attack on its currency which may lead to bility of external financing to increase their total rates a balance of payments crisis. of saving and to channel such saving towards invest­ Another macroeconomic danger has been identi­ ments in the production of tradeable goods. If this fied by two authors who could never be accused of new wave of capital inflows is not used either in following a heterodox line: Cavallo and Cottani. In order to promote domestic saving, increase reproduc­ an analysis which seems highly justified, they wrote tive investment and retool the economy in order to that when a country accumulates reserves, the gov­ make it more internationally competitive, then it is ernment usually allows the currency to appreciate, likely that just around the next comer lies a further thereby reducing the fiscal impact of its own debt rude awakening: a fresh hangover from a new finan­ service commitments. This appreciation also incenti- cial bender. vates private agents to offer credits or deposits in dollars. If external problems arise, the government puts off adjustment of the exchange rate because of its own exchange rate exposure and that of the pri­ 4 Data based on ECLAC figures (ECLAC, 1993a and 1993b) in vate sector. When it finally devalues, the government constant 1987 dollars. has to deal with its own losses and those of the pri­ 5 We also took advantage of the excellent study by Devlin, vate banks of the country. The result is greater infla­ Ffrench-Davis and Griffith-Jones (1994), which we were able to tion, fed by the expansion of the money supply, and read in manuscript form through the kindness of one of the authors. less economic stability (Cavallo and Cottani, 1989).

CAPITAL MOVEMENTS AND EXTERNAL FINANCING • BENJAMIN HOPENHAYN CEPAL REVIEW SS • APRIL 1»»5 93

History and theory both teach us that economies To sum up, then: the illusion or monetary mir­ which want to grow and develop must take advantage age of easy external financing had a disastrous out­ of moments of abundant capital inflows in order to come with the debt crisis of the 1980s. In order to improve their international specialization. This is par­ make sure that something similar does not occur ticularly true of developing countries, which, in order with the abundant financial resources that the re­ to grow, must improve their unfavourable place in gion has been receiving from abroad in recent the international economy and reverse the conse­ years, and in order to ensure that they do indeed quences of what Prebisch called the unequal distribu­ make an effective contribution to the development tion of the fruits of technical progress. of the various countries of the region, two essential Countries which do not export the products of conditions must be fulfilled. their industrial capacity -an industrial capacity which First, the level of those resources must be must be increasingly technified and diversified- not maintained for as long as is necessary to avoid the only lose out in the distribution of the benefits of generation of premature balance of payments prob­ international trade, due to the well-known phenome­ lems. Second, the use made of them must be so­ non of the ongoing decline in the terms of trade, but cially efficient: that is to say, a bigger domestic also run into periodic bouts of external bottlenecks in saving effort must be made in order to increase the their economies. A fundamental element for judging range and quality of our countries’ production and the advantages and disadvantages of the exogenous improve their place in the international economy. and endogenous factors which attract abundant capi­ Present-day history shows that this is a viable and tal over short spaces of time is therefore the extent to successful strategic option. Countries which do not which these factors help to meet the true challenge of pursue it vigorously and tenaciously will continue, development: that of creating a solid virtuous circle with greater or lesser ups and downs, to be bogged which will make it possible to increase saving, invest down in the long-standing crisis of peripheral capi­ it in activities of high economic and social productiv­ talism analysed in the last works of Raul Prebisch. ity, and improve the external competitiveness of the (Original: Spanish) economies concerned.

Bibliography

Aglietta, M., A. Brender and V. Coudert (1990): Globali­ tury?, in P. Davidson and J. A. Kregel (eds.), E conom ic sation financière. L ’aventure obligée, Paris, E conom ica. Problems of the 1990s, England, E. Elgar Publishers. Artis, M. and T. Bayoumi (1989): Saving, Investment, Davis, E. P. (1993): The Structure, Regulation, and Per­ Financial Integration and the Balance of Payments, formance of Pension Funds in Nine Industrial IMF Working Paper No. 102, Washington, D. C., In­ C ountries, Policy Research Working Paper No. 1229, ternational Monetary Fund (IMF). Washington, D. C., World Bank. Barro, R. J., N. G. Mankiw and X. Sala-i-Martin (1992): Devlin, R., R. Ffrench-Davis and S. Griffith-Jones (1994): Capital Mobility in Neoclassical Models of Growth, Surges in capital flows and development: An over­ NBER Working Paper No. 4206, Cambridge, MA. view of policy issues, Santiago, Chile, m im eo. Cavallo, D. and J. Cottani (1989): Financial reform and ECLAC (Economic Commission for Latin America and the liberalization, in R. Dornbusch (ed.), Policy Making Caribbean) (1993a): Economic Survey of Latin in the Open Economy, Washington, D. C., World America and the Caribbean 1991 (LC/G.1741/ Bank/Oxford University Press. Add.l-P), vol. I, Santiago, Chile. United Nations Cornford, A. (1993): The Role of the Basle Committee publication, Sales No. E.92.II.G.2. on Banking Supervision in the Regulation of Inter­ (1993b): Preliminary Overview of Latin America and national Banking, Discussion Papers, No. 68, the Caribbean 1993 (LC/G.1794), Santiago, Chile. Geneva, United Nations Conference on Trade and (1994): Macroeconomic stability and international Development (UNCTAD). financial flows, in Latin America and the Caribbean: Davidson, Paul (1991): What international payment schemes Policies to Improve Linkages with the Global Economy would Keynes have suggested for the twenty-first cen­ (LC/G. 1800 (SES.25/3)), Part Three, Santiago, Chile.

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Frenkel, J. A. (1989): Quantifying International Capital Lucas, R. (1990): Why doesn’t capital flow from rich to Mobility in the 1980’s, NBER W orking Paper No. poor countries?, A m erican E conom ic R eview , vol. 80, 2856, NBER, Cambridge, MA. No. 2, Nashville, TN, American Economic Associ­ Goldstein, M., D. J. Mathieson and T. Lane (1991): D eter­ ation, May. minants and systemic consequences of international Tesar, L. and I. M. Werner (1993): International equity capital flows, Occasional Paper No. 77, Washington, transactions and U.S. portfolio choice, NBER Repor­ D. C., IMF. ter, Cambridge, MA, National Bureau of Economic IMF (1993a): World Economic Outlook. Interim Assess­ Research, Inc., Fall, p. 20. m ent, Washington, D.C. Tobin, J. (1981): Domestic saving and international capi­ (1993b): Systemic issues in international finance, in tal movements, American Economic Review, vol. 71, International Capital Markets, Part II, Washington, No. 6, Nashville, TN, American Economic Associ­ D. C. ation. (1994): World Economic Outlook, Washington, D.C., World Bank (1993): Financial Flows to Developing May. C ountries, Washington, D. C.

CAPITAL MOVEMENTS AND EXTERNAL FINANCING • BENJAMIN HOPENHAYN CEPAL REVIEW S5 95

The impact of exchange-rate and trade policy on export performance in the 1980s

Graciela Mogulllansky

Economic Affairs Officer, The region’s changeover from a shortage of external funds Economic Development to a relatively plentiful supply of such resources at a time Division, ECLAC. when an effort is being made to liberalize its trade and financial sectors raises a number of questions regarding the effect of this phenomenon on the growth of Latin American exports. In an effort to answer these questions, the author examines a number of different attempts to arrive at a quantitative evaluation of the relationship between exchange and trade policies and the region’s export performance in the 1980s. The main conclusions drawn from this analysis are that, in the aggregate, exports are not very sensitive to long-term variations in exchange rates, since only rarely are their elasticities greater than unity. When broken down by branch of activity, however, the effects of exchange policy are not homogeneous, with some branches exhibiting very high elasticities in both the long and short terms; this suggests that the greater the level of diversification and installed capacity, the greater the impact of variations in the real exchange rate will be. The studies examined here also lead to the conclusion that volatile real exchange rates and unstable trade policies discourage investment in the export sector, while it is found that the tariff reforms instituted by the countries have had a positive influence on the development of their exports but cease to be a decisive factor in that development once their implementation is completed.

APRIL 1 9 s 5 96 CEPAL REVIEW 55 • APRIL 1995

I Introduction

The question of how exchange rates affect the growth ii) What types of policies might offset the disin­ of Latin America’s exports has taken on added im­ centives generated by a revaluation? portance due to the changes seen in the region’s net iii) In what ways have overall trade liberalization flows of foreign capital during the 1990s. These and tariff rollbacks affected external supply? changes have helped put an end to the severe con­ iv) How do economic instability, in general, and straints that affected the region’s economies in the exchange-rate volatility, in particular, influence the 1980s and, as a result, most of the countries have behaviour of economic agents? witnessed a rise in their real exchange rate; this re­ In order to find answers to these questions, econ­ valuation has not always, however, been accompa­ ometric studies having a similar focus and dealing nied by a countervailing trade policy. with a number of different countries in the region In view of the changed circumstances confronting were examined. The findings of these studies should the countries of the region as they strive to increase be viewed in the light of the historical period in their exports, the following questions need to be asked: which they were conducted, since not enough infor­ i) What kind of an impact would a sustained mation has yet been compiled to allow an evaluation drop in the real exchange rate be likely to have on of the impacts of recent structural reforms that might export growth in the short and long terms? alter the continued validity of their results. II The impact of exchange policy on the growth of exportable supply

Exchange policy is one of the main instruments in­ through tariff rollbacks for the imported inputs fluencing the expansion of exportable supply. De­ needed to produce exportable goods or through direct valuations boost exporters’ net returns in local subsidies for this sector. currency and therefore stimulate export activity. It Table 1 illustrates trends in the volume of selected has been established, however, that sporadic devalu­ countries’ industrial or non-traditional exports1 (which ations do not serve to produce this effect. In order for showed the fastest growth in the 1980s), exchange the export sector to move forward in its development, rates and some trade-policy indicators. During the it needs lasting incentives, particularly because this second half of that decade, the volume of exports calls for a shift in investment funds from one sector climbed steadily in Argentina, Brazil, Chile, Colom­ to another. bia and Mexico, while real exchange rates fell and Heavy inflows of external capital -a phenome­ the sector’s subsidies were reduced. A clear trend to- non seen at the end of the 1970s and again in recent years- have led to a revaluation of many countries’ currencies, and although this may have helped them 1 The countries selected were those for which deflators for ex­ to stabilize their inflation rates, in some cases it has ports of industrial or non-traditional products were available. also discouraged the allocation of resources to the Such deflators have been developed by statistical agencies, in some cases, and by commerce departments or in Central Bank production of exportables. In many cases, however, studies, in others. When such deflators are available, it becomes recent trade policy reforms have helped to mitigate possible to construct quantum and unit-value indexes which can the effect of revaluations on the export sector, either then be used to prepare econometric estimates.

THE IMPACT OF EXCHANGE-RATE AND TRADE POLICY ON EXPORT PERFORMANCE IN THE 1980» • GRACIELA MOGUILLANSKY CEPAL REVIEW 55 • APRIL 1»#5 97

TABLE 1 Latin America (five countries): Volume of exports, real exchange rate and trade policy (Indexes: 1985 = 100) 8

1980 1985 1986 1987 1988 1989 1990 1991 1992 1993

Argentina Industrial exports 84.8 100.0 82.1 82.3 111.5 139.2 184.4 157.2 162.2 193.6 Real exchange rate 62.0 100.0 105.8 129.3 137.0 151.1 105.6 88.2 81.5 77.1 Drawbacks 116.0 100.0 104.0 110.0 106.0 103.0 105.0 111.0 115.0

Brazil Industrial exports 40.9 100.0 87.3 91.6 114.1 111.9 101.0 107.2 130.1 141.8 Real exchange rate 94.5 100.0 107.2 104.6 95.5 72.3 66.7 78.4 85.8 76.8 Subsidies 91.6 100.0 109.3 111.9 108.9 98.0 88.2 92.6

Chile Exports other than copper 66.7 100.0 113.3 112.2 125.5 144.4 142.6 146.0 180.2 180.7 Real exchange rate 71.0 100.0 124.2 135.3 143.3 135.5 140.5 139.3 133.9 133.9 Tariff index 39.1 100.0 77.9 77.5 58.5 58.5 58.5 50.7

Colombia Non-traditional exports 99.3 100.0 126.0 142.0 176.7 214.2 265.6 336.7 347.9 387.1 Real exchange rate 87.7 100.0 129.2 143.0 145.3 149.1 167.9 168.4 150.7 141.7 Subsidies 57.2 100.0 69.7 59.1 53.4 56.1 48.1 40.2 Tariff index 73.3 100.0 94.0 97.7 95.6 93.5 68.0 64.4

Mexico Industrial exports 51.1 100.0 123.9 146.7 174.0 179.9 193.6 209.3 240.5 281.3 Real exchange rate 80.0 100.0 136.9 142.0 115.5 108.4 105.0 95.9 88.3 82.3 Source: ECLAC, on the basis of official figures. a The export indexes shown are indexes of volume. The real exchange rate was calculated by ECLAC; the procedure used for this purpose involved inflating the nominal exchange rate by the external price index for the country’s main trading partners and deflating it by the consumer price index. Indexes of tariffs and subsidies were computed on the basis of nominal averages.

wards a revaluation of the currency is to be observed region, have been in existence for several decades. in Argentina from 1989 on, in Brazil between 1987 The general model, which is not always very explicit and 1990, in Chile since 1990 and in Mexico starting as regards the estimation of export supply and de­ in 1988. In all of these countries, however, the re­ mand functions, is as follows: valuation followed substantial devaluations in the preceding years which were associated with the ex­ a) Demand for exports ternal debt crisis and not only had short-term impli­ cations but also influenced long-term export trends. a . P r - a , . - a , Xd = A(t) + Y* + (—!-) 2 + Y 3 In the case of Brazil, the real exchange rate had been ' ' v p * ' p rising since the mid-1970s, and exchange policy had therefore been having a favourable impact on the The external demand for a country’s export pro­ export sector for quite a long period of time. ducts (Xd) depends on the relevant external purcha­ In order to determine how variations in the ex­ sers’ degree of openness (A(t)): a variable that seeks change rate and modifications in quasi-exchange in­ to represent such structural effects as the growing struments affect short- and long-term export trends, internationalization of national economies and the we need to ascertain exporters’ response level and rising degree of international specialization. External speed of adjustment to changes in the relevant demand is determined by the purchasing countries’ policies. This information is provided by econometric income level (Y*) and the comparison made by ex­ studies which, in the case of some countries of the ternal consumers between the asking price (Px, in

THE IMPACT OF EXCHANGE-RATE AND TRADE POLICY ON EXPORT PERFORMANCE IN THE 1980» • GRACIELA MOGUILLANSKY 98 CEPAL REVIEW 55 APRIL 1 » 9 5 foreign currency) and the going price on their own liberalization, tariff rollbacks or promotion instru­ local market (P*). Overseas production capacity ments; and iii) the econometric methods or models (Y *) is yet another factor. When this capacity in­ that have been applied are not the same,3 so that the creases, the demand for imported goods (i.e., exports results are not entirely comparable and may in some from the country in question) will shrink in the cases be considered weak. Nevertheless, an examin­ purchasing countries. This variable is meant to ation of these models does provide some idea of how pick up the effect of import-substitution policies these variables affect export growth. abroad. In empirical studies, it is usually assumed Table 2 shows the results of recent studies that this variable does not influence the volume of (conducted in the 1980s) regarding the short- and export demand. long-term price elasticities of aggregate exports (elasticities for the real exchange rate, as measured in b ) Supply of exports terms of the definitions set forth in footnote 3, calcu­ lated on the basis of estimates of the supply function E .p p , y -6 , for the non-traditional exports of selected countries). X°=B(t) + Yp^1+ <-“ ) + (-7) One of the first things to be noted here is the difference between the short- and long-term implica­ Supply is determined by the national economy’s tions of exchange policy.4 The elasticity of supply in degree of openness (B(t)), its production capacity relation to a change in the exchange rate in the short (Yp), the rate of utilization of that production capac­ run is substantially less than unity in all the countries. ity (Yp/Y), and the export market’s level of profita­ This indicates that supply is somewhat inelastic, or bility as compared to that of the domestic market, as fairly unresponsive to short-term devaluations or re­ measured by the ratio between the export price, in valuations. The response is much stronger, however, local currency (E.Px), and the producer price (P). in the long term; indeed, over the long run, the elas­ In this review of empirical studies, we will ticity of supply is close to or slightly higher than concentrate on the results for coefficients 62 and a2, unity. This indicates that, over the period of time re­ i.e., the price elasticities of supply and demand, quired by economic agents to take investment deci­ which are related, in the one case, to exporters’ profit sions, profitability is an important variable, with a ratios and, in the other, to the exports’ competitive­ 1% variation in the real exchange rate generating an ness in the international marketplace. equal or slightly greater change in the supply of In dynamic models that allow for disequilibria export products. If, in addition to the elasticities in the export market stemming from relative rig­ found to exist for exports, the impact of exchange idities in prices and/or quantities, price- and quantity- policy on imports is taken into account, then it may adjustment mechanisms are added to the above­ be seen that the overall effect on the trade balance is even greater. defined structure in order to fashion partial-fit and error-correction models that enable us to differentiate The observed trend in export performance as it relates to exchange policy within the region differs between short- and long-term elasticities. An analysis of these studies shows up a number from the trends seen in a number of South-East Asian of limitations: i) there is no common methodology economies, such as those of South Korea and Hong for measuring the relevant real exchange rate for the export sector, i.e., the rate that determines how profit­ 3 The model used for purposes of estimation in Latin American able exports are;2 ii) there is no standard profit countries (assuming that the relevant country is small in size) is a partial fit for a supply equation, while ordinary least squares index for use in measuring the consequences of procedures are used as the method of estimation. This assump­ tion is discarded in the case of Brazil, however: supply and demand equations are estimated using a two- or three-stage least 2 A number of different exchange rates have been used in these squares model and, lately, estimated error correction models studies: the nominal exchange rate for the dollar, deflated by a have been applied using the full-information maximum likeli­ domestic price index; the average of the exchange rates for the hood method. currencies of the export-purchasing countries, which may then be inflated either by an index of external prices or by the unit value 4 A short-term response is defined as a response that manifests of exports; and, finally, some studies have used real effective itself during the same period (quarter or year) in which the exchange rates, adjusted on the basis of an index of subsidies and policy was altered. A long-term elasticity is one in which the other export incentives. effects of the change in the variable have reached completion.

THE IMPACT OF EXCHANQE-RATE AND TRADE POUCY ON EXPORT PERFORMANCE IN THE 1*80» • GRACIELA MOGUILLANSKY CEPAL REVIEW SS • APRIL 1995 99

TABLE 2 Latin America (seven countries): Real exchange-rate elasticities of aggregate export supply Short-term elasticity Long-term elasticity Estimation period

Argentina 0.39a 1970-1992b Brazil 0.38 0.91 1970-1986c Bolivia 0.39 0.81 1980-1990b Chile d 0.32 1.26 1963-1990b Colombia * 0.51 0.93 1967-1991b Costa Ricaf 0.30 0.54 1970-1990' h Mexico 8 0.12 1982-1987' Source-. For Argentina, Navajas (1993); for Brazil, Zini (1988); for Bolivia, Ferrufino (1993); for Colombia, Villar Gómez (1992); for Costa Rica, Gaba and Araya (1993); for Chile, Moguillansky and Titelman (1993); for Mexico, Peñaloza Webb (1988). * The effect has a one-period lag. b Annual. ' Quarterly. d Total exports other than copper. ' Total exports other than coffee, petroleum, ferronickel and gold. f Non-traditional exports. 8 Exports other than oil. h No estimate available.

Kong, where the growth of exportable supply be­ various countries (with some exceptions), regardless tween the late 1960s and mid-1980s was coupled of the composition of the export basket. Nonetheless, with stable, competitive real exchange rates as an examination of the relevant sectoral studies re­ compared to those of Latin America (Balassa and veals just how important it is to distinguish the differ­ Williamson, 1987). The studies conducted on these ent impacts of changes in profitability, depending on economies have found very high short-term elas­ the type of activity. ticities for the aggregate supply of exports, with In fact, comparison of the data in tables 2 and 3 Balassa’s estimates (1991) for South Korea ranging shows that, in all the countries studied, short- and from 1.9 to 2.2 for the period 1965-1987 and Riedel’s long-term elasticities in the manufacturing sector are estimates (1986) for Hong Kong showing an elas­ higher than those of aggregate exports; the speed of ticity of 5 in relation to the real exchange rate for the adjustment also differs from one type of product to period 1972-1984. the next and is manifested more swiftly in the case of The first conclusion that may be drawn from the manufactures. In addition, an analysis of the results data presented thus far is that an exchange policy’s for the different branches of industry shows that impact is greater over the long term and that, since some branches are highly responsive to exchange the level of response is not very high (in most cases policy (elasticities far above unity) even in the short the elasticity is less than unity), additional instru­ run, which indicates that these export activities may ments will be needed in order to foster a rapid rate of be seriously harmed by a drop in the real exchange growth. Furthermore, when we find that the ex­ rate. This is the case, for example, in the food, textile change-rate elasticity of exports is not very high, and chemical industries in Colombia and in the tex­ what we are actually detecting are the shortcomings tile, metal products, electrical machinery and auto­ in terms of finance, technology, human resources and motive industries in M exico.5 infrastructure which make it difficult for exporters to take advantage of improvements in relative prices. Hence, the focus of a system-wide effort to achieve 5 The study conducted by Cohen (1989) in Mexico at the indus­ trial branch level, disaggregated to four digits, found significant­ competitiveness should be precisely that of gradually ly positive price elasticities for 23 of the 28 sectors analysed. raising those elasticities. These results are in line with those obtained for the aggregate The long-term elasticity of exports in relation to manufacturing sector by Mendoza (1993), but contrast with the unresponsiveness of non-oil exports estimated by Peñaloza the real exchange rate appears to be similar in the Webb (1988) for Mexico’s aggregate non-oil exports.

THE IMPACT OF EXCHANOE-RATE AND TRADE POLICY ON EXPORT PERFORMANCE IN THE 1980* • GRACIELA MOGUILLANSKY 100 CEPAL REVIEW SS • APRIL 1995

TABLE 3 Latin America (five countries): Real exchange-rate elasticities and average lags for exports, by sector

Short-term Long-term Average Period elasticity elasticity lag

Brazil Industrial products 0.58 1.39 1.72 a 1970-1986 a Manufactures 0.47 b 1.16 2.10 a 1980-1991“ Semi-manufactures 0.81 - - 1980-1991a

Colombia Agricultural products 0.86 3.7 2.00 ' 1970-1992c Manufactures 0.80 1.1 2.00 ' 1970-1992 c d Foodstuffs 1.17 - d Textiles 2.20 - Chemicals 2.40 d d

Chile Fresh fruit 0.18 b 1.80 10 c 1963-1990' Other farm products 0.33 * 0.58 1.78 c Manufactures 0.65 1.93 0.52 c

Mexico Manufactures f d Textiles 1.64 d 1982-1988“ Petrochemicals 0.48 d d Metal products 1.53 d d Electrical machinery 1.54 d d Motor vehicles 2.54 d d

Peru d Manufactures 3.68 d 1963-1983' Source-. For Brazil, Moguillansky (1994) and Zini (1988); for Colombia, Alonso (1993); for Chile, Moguillansky and Titelman (1993); for Mexico, Cohen (1989); for Peru, Paredes (1992). a Quarterly. b The effect has a one-period lag. c Annual. d No estimate available. ' The effect has a three-period lag. f Selected branches of industry were used in order to illustrate the range of variation among the various branches’ elasticities.

Chile’s exports of fresh fruit and farm produce The results of the study on Brazilian industry exhibit a lagged response to short-run changes in the indicate that the effect of changes in the exchange exchange rate, and both the impact of such changes rate is lagged in the case of manufactures but is im­ and the speed of adjustment are well below those mediate in the case of semi-manufactures. These observed in the manufacturing sector. This result is to sectors’ long-term elasticities also differ, since manu­ be expected, given the characteristics of investment factures exhibit an elasticity greater than unity in the fruit industry and the number of years it takes whereas no relationship was found to exist in the for fruit plantations to enter into production. This long term between the activity of exporters of semi­ means that if, in the midst of a crisis situation, gov­ manufactures and the real exchange rate. The charac­ ernmental authorities use exchange policy in an at­ teristics of these natural resource-based intermediate tempt to stimulate this sector, the results will not goods and the point in time when the large-scale in­ become evident in the short term; in the manufactur­ vestments undertaken in the mid-1970s have come ing sector, on the other hand, the response to an on stream are factors in this result. In this case, exter­ exchange-policy stimulus will be more marked. nal sales have been more heavily influenced by the

THE IMPACT OF EXCHANQE-RATE AND TRADE POLICY ON EXPORT PERFORMANCE IN THE 1990* • GRACIELA MOGUILLANSKY CEPAL REVIEW SS • APRIL 199S 101 need to cover the costs associated with such invest­ permit stronger, more immediate responses to ments in the context of a domestic recession than by changes in exchange policy. the price ratio between the domestic and external Finally, since the measurement of the real ex­ m arkets. change rate applying to exports is corrected on the The above analysis points to the conclusion that basis of their unit values (which implicitly include a exports’ responsiveness to variations in the real ex­ weighted average of external prices), policies invol­ change rate differs by sector or type of product and ving adjustments in the exchange rate should use a that the repercussions of such changes may also vary. basket composed of the currencies of the Latin In addition, the relevant estimates indicate that the American and Caribbean countries’ main trading degree of elasticity rises as the value added during partners as a frame of reference. This is an important the production process increases. It may also be con­ point, since the countries of the region have often cluded that the exports of more highly developed, looked only at variations in the United States dollar more industrially diversified countries are such as to when designing their exchange policies. Ill Exchange policy, competitiveness and trade policy

An improvement in a country’s competitive position was increased labour productivity. In the more back­ will lower the cost of its export products relative to ward sectors, on the other hand, competitiveness was the cost of the same products on the international associated more closely with low wages and the level market. A country’s competitive position will depend of the real exchange rate. upon how its wage levels, rates and charges, and Few attempts have been made in the region to other domestic costs compare with external ones, on gauge the extent to which competitiveness (i.e., the the exchange rate and, in particular, on the productiv­ ratio between the relative export price of a given pro­ ity of local industry (which is, in turn, a function of duct and the price it brings on the international mar­ innovation, organizational improvements and techno­ ket) influences the development of the export sector. logical development). The question, then, is which of Econometric estimates of the demand functions of all these variables has played the greatest role in Brazil’s industrial exports (which have historically determining the competitiveness of the export sector. been the most highly developed ones in the region) Research aimed at answering this question has reveal a high short-term elasticity -far greater than been undertaken in at least Brazil and Mexico. In the the profit ratio’s effect on the supply of exportables- case of Brazil, Bonelli (1992) has found that the for both manufactures and semi-manufactures. competitiveness of the country’s industrial exports Hence, if a revaluation of the currency becomes ine­ increased significantly during the first half of the vitable, then the only ways to maintain the export 1980s thanks to rising productivity and variations in sector’s competitive position -in the absence of fiscal exchange rates and wages. During the second half of or financial incentives- are to boost productivity or that decade, however, a deterioration in the exchange accept a reduction in profit margins. This is apparent­ rate/wage ratio clearly played a role in the fact that ly what occurred in Brazil during the second half of the competitiveness of exports of manufactures grew the 1980s when the country’s fiscal crisis made it much less than it had during the first half, thus impossible to continue to finance the same level of reflecting the importance of this ratio. incentives as before. Casar’s study (Casar, 1993) of Mexican industry In general, trade reforms have led to substantial leads to the conclusion that, in most of the branches cost reductions, especially in cases where the export of industry which saw an improvement in their com­ sector has not been given tax exemptions for im­ petitive position in 1980-1989, the decisive factor ported inputs. In addition, the liberalization of trade

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FIGURE 1 FIGURE 2 Argentina: Real exchange rate and trade policy, Brazil: Real exchange rate and Incentives, 1980-1991 1980-1991

Real exchange rate 3K Incentives has permitted the entry of a wider variety of higher the trade reforms that began to be phased in as quality inputs, and this, in turn, has often raised the from 1987, which included a shortening of the list level of profitability and helped to stimulate the sup­ of prohibited imports, streamlining of administra­ ply of exportables. In other cases, liberalization or tive formalities and tariff rollbacks (average import tariff exemptions have partly offset declines in profit duties were cut from 51% in 1987 to 14% by the levels attributable to the increases in a currency’s real end of 1993). parity that have been brought about by stabilization In Colombia (see figure 3), steep cuts in sub­ policies. sidies for non-traditional exports were offset by a ris­ With regard to this last phenomenon, figures 1 ing real exchange rate and a gradual reduction of through 4 illustrate trends in the real exchange rate tariff rates. In Chile (see figure 4), the trend in ex­ and in an index of tariffs on imported inputs and change policy from 1985 on was rather similar and incentive arrangements for four countries.6 In Argen­ was accompanied by a gradual decrease in the aver­ tina (see figure 1), the duties and taxes levied on age tariff rate from the higher levels that had been set exports of manufactures remained constant, but the in 1982 and the following years in response to the real exchange rate began to plummet in 1989, and the external debt crisis. two policies did not counterbalance each other’s ef­ A number of econometric studies focusing on fects. From 1985 onward in Brazil (see figure 2), Brazil, Chile, Colombia, Costa Rica and Mexico have export subsidies and benefits moved in the same di­ assessed the impact of these instruments. In the cases rection as exchange policy did, and the export sector of Brazil and Costa Rica, attempts have been made to therefore did not have the benefit of any compensat­ evaluate the differing impacts of incentives and of ory incentives in the course of the country’s currency variations in the exchange rate, but the results have revaluation. Producers did benefit, however, from not been satisfactory; in both cases, it proved to be more relevant to look at the combined impact of the real effective exchange rate as corrected to take exist­ 6 Just as in the case of measurements of the real exchange ing incentives into account (Zini, 1988; Hoffmaister, rate, the indexes for tariffs and incentives are not comparable for all countries. In the case of tariffs, nominal averages have 1992). been used. In the case of incentives, the index includes sub­ The estimates prepared by Lora (1985) and sidies, drawbacks, tax exemptions, etc. For Brazil and Colom­ Alonso (1993) regarding Colombia’s non-traditional bia, export incentives represent total potential participation, exports suggest that the effect of direct stimuli is pro­ i.e., what would happen if all exporters could take advantage of all incentives. portionally less than the impact of the real exchange

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FIGURE 3 FIGURE 4 Colombia: Real exchange rate and trade policy, Chile: Real exchange rate and tariffs, 1980-1991 1980-1991

Real exchange rate 4 Tariffs

rate or of the external prices of exported goods. Lora In the case of Colombia, this finding is of inter­ contends that this may be due to the uncertainty est because it indicates that the trade liberalization generated by the variability of such incentives, which process pursued in recent years has, in and of itself, causes exporters to mistrust this kind of policy. This had a positive impact which has made a reduction in hypothesis could explain why entrepreneurs respond export subsidies possible. less strongly to subsidies and other direct benefits for Cohen (1989) has analysed M exico’s overhaul of export activity than they do to exchange policy, even its trade regime since 1985. In almost all the bran­ though a devaluation -while it does boost foreign ches of industry that were examined, this author de­ exchange earnings- also pushes up the cost of the tected a statistically significant structural change and imported inputs used in the production of export was able to link these changes to the trade liberaliza­ goods. tion process by constructing an index capable of The studies conducted by Villar Gómez (1992) measuring the degree of liberalization applying to in Colombia and by Moguillansky and Titelman imported inputs in each branch. The estimates (1993) in Chile have demonstrated that the impact of pointed to a significant inverse relationship, and the the import barriers faced by producers of exportables reduction of tariffs on imported inputs was found to (measured on the basis of an index of average nomi­ have made a major contribution to the expansion of nal tariffs) is significantly negative. They also found exports in the vast majority of these branches. that the reduction of tariff rates had a positive impact The above findings attest to the positive impact on non-traditional exports in one case and on manu­ of tariff reforms on industrial and non-traditional ex­ factured exports in the other. This result was obtained ports in a number of countries, notwithstanding the despite the existence of drawbacks, which suggests prior existence of instruments (e.g., drawbacks) bene­ that the effect detected in these studies is not con­ fiting producers of exportable goods. Incentives were fined to cost reductions for imported inputs but in­ also found to have a substantial effect, of lesser or stead also includes, on the one hand, producers’ equal significance to that of exchange-rate variations. access to a wider range of higher-quality, less ex­ Reducing the tariffs applying to the imported pensive inputs (leading to improvements in the components of exports would appear to be com­ quality and price of exported products) and, on the patible with a decrease in subsidies in countries hav­ other, the possibility of achieving better integration ing an established production capacity. It should be of production for the domestic and external markets, borne in mind, however, that this finding cannot thereby reducing firms’ administrative costs. be extrapolated to include infant industries or

THE IMPACT OF EXCHANQE-RATE AND TRADE POLICY ON EXPORT PERFORMANCE IN THE 1980s • GRACIELA MOGUILLANSKY 104 CEPAL REVIEW S5 • APRIL 1995 non-traditional exports in those same countries, as ity is as yet relatively underdeveloped. In fact, the incentives may be needed in order to trigger the countries displaying the greatest sensitivity to ex­ changeover from potentially exportable products to change- and trade-policy stimuli are those that have actual exports; nor can this finding be extrapolated to already moved beyond the stages of import substitu­ include countries whose industrial production capac­ tion and of local-industry protection and stimulation.

IV Exchange uncertainty and export growth

Uncertainty concerning exchange policy and its The elasticities computed in a number of differ­ stability influences export-oriented production ac­ ent studies are highly negative in the short term. This tivities. If entrepreneurs are unsure about the fu­ is because increasing instability leads to higher costs ture real exchange rate or its possible range of which cannot be passed along in the form of higher variation (which, in turn, determines their profit prices for exportable items, thus discouraging sales expectations), they are unlikely to invest in the ex­ on external markets. port sector. Exchange-rate instability also often As noted earlier, long-term instability hurts in­ goes hand in hand with short-lived trade policies vestment and reduces exportable supply. The strong lacking in credibility, and these types of circum­ impact detected in the case of Peru (an estimated stances will nullify the incentives for economic -4.7) is in keeping with measurements of the degree agents which the authorities are seeking to generate. of instability existing in that country based on Since exchange policy is not applied in isolation the coefficient of real exchange-rate variability in from other economic policies focusing on such areas 1960-1985.8 In contrast, this variable does not appear as monetary and fiscal matters, it is often subject to a to have had any significant effect on exports in certain degree of instability. For example, the im­ Colombia and Chile because of the lower degree of plementation of a devaluation in a situation marked exchange instability existing in these countries. In by a serious fiscal imbalance that forces the Govern­ the case of Chile, the lower short-term elasticity ment to undertake unplanned currency issues will found to exist in Paredes’ study (1989) for the period soon trigger a rise in inflation which will counteract 1963-1983 tallies with the exchange rate’s greater the authorities’ efforts to raise or maintain the level degree of stability throughout the 1960s; the study of the real exchange rate. The uncertainty which this by Caballero and Corbo (1989), on the other hand, will create regarding exchange-rate trends will in­ covers a period that includes some years of marked fluence the country’s export performance. instability. One way of arriving at an empirical measure­ These findings, in conjunction with those discussed ment of the impact of exchange-rate instability is to in the preceding section, support the conclusion that use an indicator of real exchange-rate variance7 (see exchange-policy stability needs to be ensured in order table 4). to sustain the long-term growth of the export sector.

7 Since the mid-1970s, empirical studies have pointed to the existence of a significantly negative relationship between real exchange-rate volatility and exports. In this connection, see Diaz-Alejandro (1976) regarding Colombia and Coes (1979) concerning Brazil. Noteworthy analyses focusing on the 1980s 8 In this regard, see Paredes (1989) and Alonso (1993). The include those of Paredes (1989), Caballero and Corbo (1989) average annual standard deviation was divided by the mean, and Alonso (1993). which was calculated from monthly data.

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Latin America (six countries): Elasticity of exports in relation to Instability of the real exchange rate Short-term elasticity Long-term elasticity Period

b Chile -1.9 1963-1983 Perua -4.3 b b b Colombia 1970-1985 Chile -5.4 b

Peru - 1.1 -4.7

Colombia

Agricultural sector -0.3 - 0.6 1970-1992

Industrial sector - 0.2 - 0.2

Source : For Colombia, Alonso (1993); for Chile, Caballero and COrbo (1989); for Peru, Paredes (1989). * The Paredes study actually found high elasticities (-1.5 in the short run and -3.6 in the long term) for Brazil as well, but these results were distorted by the period of analysis involved. The reader may, for example, compare these data with those presented by Nogués (1990), who found that, of the eight Latin American countries covered by his study for the period 1978-1987, Brazil was the country with the least vari­ ation in its real exchange rate. Nogués agrees with the argument advanced here, i.e., that stabilizing the real exchange rate is more important than providing export incentives. k No estimate available.

Other determinants of export performance

In addition to exchange policy, tariff reforms and production capacity and industrial exports (Zini, 1988; direct benefits that influence the export sector’s Moguillansky, 1994). These results indicate that en­ level of profitability, other factors have also played trepreneurs have turned to the external market more a role in the expansion of sales on the external as a means of defending themselves against domestic market. Two of these factors are domestic demand recessions than as part of a deliberate effort to develop pressures on available supply and changes in exter­ export activity as such. This has been corroborated by nal demand (including the role played by regional surveys of the industrial export sector (Baumann, integration efforts). 1993). The estimates of the long-term elasticities in Some econometric studies have attempted to respect of the rate of utilization of production capac­ determine just how strong an influence domestic de­ ity were actually higher than those calculated for mand pressures have on the channeling of products to potential output; this suggests that, in an expanding the external sector. The indicator they have used for economy, exports of manufactures will be limited by cyclical domestic demand pressures is the rate of the need to meet domestic demand unless invest­ utilization of production capacity, which measures ments are undertaken to boost production capacity. the differential between actual and potential output. The strength of external demand’s impact on ex­ Of the studies done on this subject, only those ports differs depending on the type of product con­ focusing on Brazil have substantiated the hypothesis cerned. The income elasticity of commodity exports that fluctuations in demand strongly influence ex­ has traditionally been low when measured in relation portable supply. Brazil has traditionally displayed a to the level of activity in industrialized countries; the significantly negative correlation, involving very income elasticities of industrial exports, on the other high elasticities, between the rate of utilization of hand, depend upon the type of product being exported.

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Estimates of manufactured export functions in which caused Colombia’s exports to its neighbour to the region have been based on the “small-country skyrocket by 152% in 1991 and helped maintain that assumption”,9 which posits that exporters can sell upswing in 1992. A similar effect has been observed as much of their output on the external market as in trade flows between Argentina and Brazil, Bolivia they wish. Consequently, export prices would not and Ecuador, and Chile and Peru. be affected by the volume of exports because they These trends bring out another factor -also asso­ are determined on the international market. ciated with regional integration processes- that has It has been found, however, that this assumption had a decisive influence on recent export performance. is not valid for some countries. For^xample, in the The available data on a number of countries in the case of Brazil’s exports of manufactures, the best fit region demonstrate that a certain level of com­ was obtained from estimates based on simultaneous plementarity does in fact exist between a strong per­ export supply and demand models. Demand equa­ formance in the area of intraregional exports and tions yield significantly high income elasticities,10 exports to countries outside the region. A significant­ indicating that exports of manufactures are affected ly positive correlation exists between the coefficient by trends in the external market. for intraregional industrial exports and the proportion The estimates prepared by Villar Gómez (1992) of domestic demand that is met by imports from other for Colombia indicate that in the short run this elas­ regions; this attests to the fact that a readily available ticity is high in relation to an index of the real gross supply of high-quality, competitively-priced inputs domestic products of the countries buying Colombian plays a pivotal role in determining the level of pro­ exports. TTiis author also suggests that the underesti­ ductivity attained in the production of non-traditional mation of non-traditional exports generated by the exportables. Furthermore, the empirical data show econometric model for 1991 may be partially ac­ that exporting to markets within the same region can counted for by the swiftly-paced trade integration provide learning opportunities for exporters before process entered into by Colombia and Venezuela, they move into extraregional markets. VI Conclusions

Despite the fact that some of the countries analysed unity at the sectoral level, indicating that the aggre­ in this article underwent thorough-going structural gate figure is influenced by the more inelastic pro­ reforms during the late 1980s and early 1990s that ducts, which tend to skew the results. This leads us to affected their export sectors in ways which the conclude that other incentives should be brought into studies reviewed here have not been able to evaluate, play in order to achieve rapid development of the the data presented in the course of this essay provide export sector. The progressive elimination of anti­ a basis for the formulation of a number of general export biases and of shortcomings in terms of infra­ observations. First, an examination of how a change structure, technology, finance, human resources and in the real exchange rate affects aggregate exports external promotion ought to bring about a gradual shows that, except in a few countries, the long-term increase in the responsiveness of exports to the ex­ elasticity is less than unity: i.e., the influence exerted change rate. Such an effect is to be observed even in by exchange policy is not very great. However, the the short-term exchange-rate elasticity of exports in coefficient of elasticity is substantially greater than many Asian countries. Second, both the real exchange rate and other incentives need to be stable. Uncertainty regarding 9 In other words, it is assumed that the countries enjoy infinitely exchange policy discourages the allocation of invest­ elastic demand and that the only constraints affecting them are those relating to supply. ment resources to the export sector, while the insta­ bility of incentives renders them unreliable, and 10 The GDP of the countries purchasing the exports, or an index of those countries’ imports, were used as indicators of external economic agents therefore fail to respond to those demand. instruments.

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Third, when we carry the analysis to a more An evaluation of the impact of exchange policy detailed level by breaking down the export sector on individual branches of industry reveals very high by type of product, we see that the effects of ex­ elasticities in both the short and long terms in certain change policy are not homogeneous. We discover cases, which means that some export activities could that the greater the industry’s degree of diversifica­ be seriously hurt by a drop in the real exchange rate. tion and level of production capacity, the more re­ Fourth, the tariff reforms undertaken in the sponsive to exchange policy it will be. countries covered by this study have had a positive Furthermore, it can be established that the exports effect on the development of the export sector, but of more highly developed, industrially diversified once they have been completed -i.e., when no further countries respond more strongly and immediately modifications are to be m ade- they cease to act as a to exchange policy. determinant of that development process. In every case, the manufacturing sector’s elas­ Fifth, the impact of domestic demand is quite strong ticity is higher than that of aggregate exports, both in in branches of industry that are not specifically oriented the short and long terms; its speed of response is also towards exports. In order to maintain the supply of greater. This is especially true in countries where the exportables in these cases, fresh investment funds diversification of industrial output and the develop­ will have to be obtained or the allocation of such ment of production capacity have traditionally been funds to export activities will need to be encouraged. more advanced. The short-term response of agricultu­ Finally, external demand has a very substantial ral activities to exchange policy is very weak; thus, in effect on the performance of commodity exports, but the event of a temporary crisis, efforts to stimulate it may act as a limiting factor in the case of some this sector will not be effective if exchange policy is countries’ industrial exports. the sole instrument used for that purpose. (Original: Spanish)

Bibliography

Alonso, G. (1993): Determinantes de la oferta de las ex­ m ico, vol. LX (1), No. 237, Mexico City, Fondo de portaciones menores colombianas, Santafe de Cultura Económica, January-March. Bogotá, Banco de la República, (BRC), May, mimeo. Coes, D. (1979): The Impact of Price Uncertainty: A Balassa, B. (1991): Exchange Rates and Foreign Trade Study of Brazilian Exchange Rate Policy, New York, in K orea, Policy, Research and External Affairs Garland. Working Papers, No. 635, Washington, D. C., World Cohen, A. (1989): Trade policy in Mexico: An analysis Bank, March. of structural change, Master thesis, Berkeley, United Balassa, B. and J. Williamson (1987): Adjusting to Suc­ States, University of California, mim eo. cess: Balance of Payments Policy in the East Asian Díaz-Alejandro, C. (1976): Foreign Trade Regimes and NICs, Policy Analyses in International Economics, Economic Development: Colombia, New York, Col­ No. 17, Washington, D. C., Institute for International umbia University Press. Economics (IIE). Ferrufino, R. (1993): El tipo de cambio y la balanza Baumann, R. (1993): Exporting and the saga for compe­ comercial en Bolivia durante el período de titiveness of Brazilian industry, 1992, Santiago, post-estabilización, Análisis económico, vol. 6, La Chile, m im eo. Paz, Economic Policy Analysis Unit (UDAPE). Bonelli, R. (1992): Fontes de crescimento e competitivi­ Gaba, F. and R. Araya (1993): Determinantes de las ex­ dade das exportações brasileiras na década de 1980, portaciones globales de Costa Rica, Comentarios Revista brasileira de comércio exterior, ano VIII, sobre asuntos económicos, No. 111, Costa Rica, No. 31, Rio de Janeiro, Centre for Foreign Trade Central Bank of Costa Rica. Studies Foundation (FUNCEX), April-June. Hoffmaister, A. (1992): The cost of export subsidies: Evi­ Caballero, R. J. and V. Corbo (1989): The effect of real dence from Costa Rica, Staff Papers, vol. 39, No. 1, exchange rate uncertainty on exports: empirical evi­ Washington, D. C., International Monetary Fund dence, The World Bank Economic Review, vol. 3, (IMF). No. 2, Washington, D.C., World Bank, May. Lora, E. (1985): Los sistemas de incentivos, el financia­ Casar, J. (1993): La competitividad de la industria manu­ miento y el comportamiento de las exportaciones facturera mexicana, 1980-1990, El trimestre econó­ m enores, Santafe de Bogotá, Fundación para la Edu­

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cación Superior y el Desarrollo (FEDESARROLLO), A m erica, Brookings Discussion Papers in Interna­ m im eo. tional Economics, No. 77, Washington, D. C., The Mendoza, M. A. (1993): Efecto del tipo de cambio sobre Brookings Institution. las exportaciones manufactureras de México, Mexico (1992): Trade Policy, Industrialization and Produc­ City, Universidad del Estado de México, Facultad de tivity Growth: The Case of Peru, Brookings Economía, m im eo. Discussion Papers in International Economics, No. Moguillansky, G. (1994): Factores determinantes de las 94, Washington, D. C., The Brookings Institution. exportaciones industriales brasileñas durante la Peñaloza Webb, R. (1988): Elasticidad de la demanda de década de 1980, Cuadernos de Economía, año 31, las exportaciones: la experiencia mexicana, C om ercio No. 92, Santiago, Chile, Catholic University of Chile, exterior, vol. 38, No. 5, Mexico City, Banco Nacio­ Instituto de Economía. nal de Comercio Exterior, May. Moguillansky, G. and D. Titelman (1993): Análisis em­ Riedel, J. (1986): Price and income elasticities of demand pírico del comportamiento de las exportaciones no for LDC exports o f manufactures re-examined, W ash­ cobre en Chile: 1963-1990, Documento de trabajo ington, D. C., Johns Hopkins University, School of No. 17, Santiago, Chile, Economic Commission for Advanced International Studies, mim eo. Latin America and the Caribbean (ECLAC), Econ­ Villar Gómez, L. (1992): Política cambiaria y estrategia omic Development Division. exportadora, document presented at the Thirteenth Navajas, F. (1993): Una estimación de la función agre­ Symposium on the Capital Market, Santafe de Bogotá, gada de exportaciones. Argentina: 1970-92, Buenos Asociación Bancaria de Colombia (ASOBANCARIA), Aires, ECLAC Office in Buenos Aires, m im eo. m im eo. Nogués, J. (1990), The experience of Latin America with Zini, A. (1988): Funções de exportação e de importação export subsidies, Weltwirtschaftliches Archiv, vol. para o Brasil, Pesquisa e planejamento econômico, 126, No. 1, Tübingen, Institut für Weltwirtschaft. vol. 18, No. 3, Rio de Janeiro, Institute of Economic Paredes, C. (1989): Exchange Rate Regimes, the Real Ex­ and Social Planning (IPEA). change Rate and Export Performance in Latin

THE IMPACT OF EXCHANQE-RATE AND TRADE POLICY ON EXPORT PERFORMANCE IN THE 1980* • GRACIELA MOGUILLANSKY CEPAL REVIEW 5S 109

The present state and future prospects of the environment in Latin America and the Caribbean

Nicolo Gligo

Coordinator, Joint Most studies of the region’s economy say little or nothing ECLAC/UNEP about the status of its environment and natural resources; Development and Environment Unit. few references are made to the environmental quality of

population centres or to fluctuations in natural resource

stocks, especially of renewable resources, despite their

crucial importance for the region’s development options.

The no more than moderate pace of the region’s absorption

of technical progress, the intensification of its international

trade and the declining value of the region’s products in

the international marketplace have all brought increased

pressure to bear on its resources. Consideration of these

phenomena, in conjunction with the growth of the region’s

population and the expansion of domestic demand, leads

to the conclusion that the region’s environment and natural

resources constitute the weakest link in its development

strategies. These ideas are explored in detail in the

following essay, together with statistical data and

conceptual analyses which may help to explain why the

region’s prevailing development modality is so

environmentally unsustainable.

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I The present status of the environment and of natural resource stocks in the region

An assessment of the overall environmental situation TABLE 1 South America: Erosion, 1980-1989 leads to the very definite conclusion that the modes (Millions o f hectares) of development pursued thus far by the countries of Water Wind the region are, for the most part, highly unsustainable Total erosion erosion in environmental terms. This is not to ignore all the efforts made over the past two decades to alleviate Loss of soil 95.1 22.7 117.8 this situation. Specific policies and strategies have in Land deformation 18.1 18.4 36.5 some respects helped to reverse processes that cause Soil blown away - 0.8 0.8 environmental deterioration and to promote systems Total 113.2 41.9 155.1 and technologies that minimize environmental im­ pacts. Nevertheless, virtually throughout the region, Source'. Latin American and Caribbean Commission on Develop­ ment and Environment, 1991, table 19.3. the balance between environmental degradation and environmentally appropriate changes has tipped to­ wards the former. The current status and trends of TABLE 2 the region’s major environmental processes will be Argentina: Erosion, 1986 analysed below. 1 (Millions of hectares) Slight/ Severe/very % of Total 1. Rural areas moderate severe total a) Soil erosion Water erosion 15.4 9.6 25.0 11.0 In a region where most of the countries’ econ­ Wind erosion 7.0 14.4 21.4 20.0 omies have an agricultural and agro-industrial base, Total 22.4 24.0 46.4 31.0 erosion is one of the greatest scourges of all. It is therefore somewhat surprising that fewer Source : Argentina, 1991, table 6. and fewer comprehensive studies on soil erosion are being conducted in the countries of the region; per­ haps the experts are simply shying away from the Almost all the available data on the countries of appalling figures. The most widely used figure puts the region come from studies conducted 30 or 40 the amount of land subject to anything from moder­ years ago. In 1957, 61.1% of Chile’s farmland ex­ ate to very severe erosion at approximately 210 hibited some form of erosion, and 13.2% of it suf­ million hectares, or 10% of the region’s territory. fered from moderate to severe deterioration in this Table 1 provides a summary of what little infor­ respect, while in 1965, 35% of Uruguay’s farmland mation there is on erosion in South America. It shows that, in the 1980s, 155.1 million hectares of South suffered from moderate to severe erosion, and in American land were subject to erosion and that, with 1976, 45% of the land in El Salvador was eroded few exceptions, these processes were growing more (Gligo, 1986). severe. Among the few up-to-date country studies in ex­ istence, the study on the Argentine Republic is per­ 1 The arguments presented here are based on the assumption that haps the most thorough (Argentina, 1991); the the reader is familiar with the main documents issued by ECLAC figures it cites, which attest to the extremely serious over the past decade concerning the relationship between nature of the problem (see table 2), are from 1986 development and the environment: Sunkel and Gligo, 1980; and cover an area of 229 million hectares (80% of the UNEP/MOPU, General Secretariat for the Environment, 1990; and ECLAC, 1990. country’s total territory). Water erosion affects 11%

THE PRESENT STATE AND FUTURE PROSPECTS OF THE ENVIRONMENT IN LATIN AMERICA AND THE CARIBBEAN • NICOLO QUQO CEPAL REVIEW SS • APRIL 1S»S 111 of this land and wind erosion another 20%. The total frontier, which is itself the outcome of a number of of 31% illustrates just how disastrous this process is, factors. One such factor is the expulsion of peasant although it should be noted that the figures vary farmers from traditional farming areas as the modern­ widely from one region to another, depending on ization of agriculture brings about marked changes in how prone to erosion the different types of soil are the demand for manpower. Another has to do with and on the production systems in use. large-scale settlement programmes (Rondonia, for A recent study on Mexico indicates that, accord­ example, in Brazil), some of which are very ambi­ ing to data obtained using a makeshift methodology tious. Most of these programmes have been oriented for evaluating soil degradation, water erosion affects towards agricultural production and have thus led to 85% of the country’s territory, to differing degrees. the deforestation of vast tracts of land. A third factor This is the most serious problem in terms of soil has been the use of tax exemptions to promote the conservation. Wind erosion, for its part, ranging from expansion of stock-raising activities in the “legal” moderate to very severe, affects 80% of the national areas of the Amazon region, which has entailed the territory. conversion of forests into rangeland (Brazil, c im a , The acceleration of erosive processes in Latin 1991). America and the Caribbean is attributable to the phe­ Logging continues to be a major cause of defore­ nomena mentioned earlier, especially the expansion station, due to the extraction of biomass to fuel in­ of the agricultural frontier and the overuse of land. dustrial processes and the gathering of firewood for The expansion of this frontier, especially in the An­ household use. Timber logged from native forests dean highlands, has led to the use of ecosystems supplies a significant percentage of the fuel used by whose altitude and gradient render them particularly industry in the larger countries, while peasant far­ fragile. The overuse of land, especially in the form of mers and the inhabitants of rural settlements use fire­ single-crop farming, has damaged the soil structure wood gathered from the forests to cook their food. and left the land vulnerable during periods when it The planting of stands of fuelwood trees has been lacks plant cover. minimal and has been of almost no help in mitigating Erosion has been closely associated with defore­ the effects of such actions. station, especially along the fringes of the rain forest Finally, road construction has also contributed to in tropical zones. deforestation, especially because it triggers the spon­ taneous arrival of settlers. This phenomenon has been b ) Deforestation quite intense in the rain forests, where it has been Since 1960 more than 200 million hectares of precipitated by the establishment of access routes as forests have been destroyed. According to f a o esti­ part of settlement programmes or by the construction mates, the region’s rate of deforestation during the of roads for oil drilling operations (as in Ecuador). 1980s was 5.9 million hectares of dense forest per year and 1.1 million hectares of other types of wood­ c) Loss of biodiversity lands and shrublands. In addition, another 3 million Latin America is the most richly endowed area hectares of timberland are harvested annually. This in the world in terms of biodiversity. The Latin means that a total of 10 million hectares of wood­ American tropics, in particular, contain an incom­ lands are being altered each year ( f a o , 1988). This parable variety of flora and fauna. figure has been on the rise but may begin to decline We still have a great deal to learn about bio­ in the future, not as the result of specific policies but diversity. The data we have at present are no more rather as a consequence of the depletion of some than estimates of the animal and plant species in ex­ areas and the inaccessibility of others. istence. Relatively little is known about the former, The amount of land that is being deforested but zoologists’ estimates regarding vertebrates sug­ varies greatly from one country to the next. The gest that their diversity is directly related to the strik­ countries of the Amazon basin and Argentina are, in ing figures we have on the wealth of plant life. Latin absolute terms, the ones with the highest figures (see America has the most varied range of mammals, am­ table 3). phibians and reptiles of any continent in the world In most of the countries, deforestation is primar­ and shares with Central Asia the distinction of having ily caused by the expansion of the agricultural the greatest variety of birds.

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Latin America and the Caribbean: Forestry resources and deforestation, 1980 and 1990 (Thousands of hectares) Native forest (total area) Deforestation, 1981-1990 Country 1990 1980 Annual area Annual rate (%)

Costa Rica 1 428 1923 50 2.6 El Salvador 123 155 3 2.1 Guatemala 4 225 5 038 81 1.6 Honduras 4 505 5 720 112 1.9 Mexico 48 586 55 366 678 1.2 Nicaragua 8 013 7 264 124 1.7 Panama 3 117 3 761 64 1.7 Belize 1 996 2 046 5 0.2 Cuba 1 716 1 888 17 0.9 Guyana 18 416 18 597 18 0.1 Haiti 23 38 2 3.9 Jamaica 239 507 27 5.3 Dominican Republic 629 1 426 35 2.5 Suriname 14 768 14 895 13 0.1 Trinidad and Tobago 155 192 4 1.9 Argentina - 44 500 -- Bolivia 49 317 55 564 625 0.1 Brazil 561 107 597 816 3 671 0.6 Chile - 7 550 -- Colombia 54 064 57 374 367 0.6 Ecuador 14 250 14 342 238 1.7 Paraguay 12 859 16 884 403 2.4 Peru 67 906 70 618 271 0.4 Uruguay - 490 - - Venezuela 45 690 51 681 599 1.2 Total 918 US ‘ 1 042 638 7 408 1 0.4 Source: World Resources Institute, 1994, table 19.1, and World Resources Institute, 1992, table 19.1. a Does not include Argentina, Chile or Uruguay.

There are a large number of estimates on the erosion, this lack of information would appear to re­ varieties of plants which exist, including those pre­ flect some sort of tactic, whether conscious or uncon­ pared by Thome, who puts the number of species in scious, to shy away from recognition of the true the 50 000 to 60 000 range; by Raven (1976), who dimensions of this process, which are alarming in estimates the number to be in the region of 90 000; some countries and downright catastrophic in others. and by Gentry (1982), who gives a figure of 86 000 (cited in Toledo, 1985). The most recent study is that d) Soil depletion of Toledo, who arrived at a figure of 120 000 species; Farming activities, which have been pursued if ferns, mosses and lichens are counted as well, then since colonial times but have not included adequate the number climbs to 180 000. replacement of nutrients in the form of fertilizers, The most important point, however, is not the have diminished the soil’s productiveness and led to level of biodiversity which exists in the region, but its degradation (see table 4). rather how much of it is being lost. The shrinkage of Because it is not readily perceptible, chemical habitats -mainly as a result of deforestation, coastal soil depletion has not been accorded due importance, pollution, the alteration and drying up of wetlands but the figures indicate that it is a problem in 68.2 and various other processes- has played an important million hectares in the region, or 28% of all its de­ role in the reduction of the region’s biodiversity and graded areas and 3.9% of the land under cultivation continues to do so. Assessments of biodiversity or with natural plant cover; on 43.7 million hectares, losses are few in number, inadequate and confined to chemical soil depletion is rated as being from moder­ very small areas. As in the case of evaluations of soil ate to severe.

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TABLE 4 River Plate basin and some of the smaller Pacific South America: Amount of land affected by nutrient loss between 1945 and the late 1980s basins, exhibit severe salinization due to lack of natu­ (Millions of hectares and percentages) ral drainage and changes in plant cover. The soil map Millions of published by f a o an d U n e sc o in 1964 showed 130 Area degraded (%) hectares million hectares in South America with problems of this sort. Slight loss 24.5 10 Moderate loss 31.1 13 f) Silting of watercourses Severe loss 12.6 5 Total 68.2 28 Latin America’s watercourses have undergone significant changes, primarily as a result of erosion. Source: World Resources Institute, 1992, table 19.3. Deforestation has diminished the water retention capacity of highland river basins, leading to sharper fluctuations in stream flows. The region suffers from a chronic shortage of Many watercourses and other bodies of water research in the field of agriculture. Many of the for­ have also been affected by silting; this is especially mulas used for fertilization are not the outcome of true of the Atlantic and Caribbean basins, due to their scientific research but are instead drawn from esti­ extremely slight gradients. A striking increase has mates based on the components of the technological been seen in the amount of silt flowing into naturally package in use and on a number of visual indicators sedimentary areas, such as the Mato Grosso marsh­ or deductions regarding the geology and geomorpho­ lands, as a consequence of the establishment of farms logy of the areas concerned. and ranches in upland basins. Despite increased use of fertilizers, the depletion Hydrographic systems have also been altered by of the region’s soils has continued. Fertilizer use has the construction of large dams; the most notable been very selective and has been concentrated in cer­ changes of this type are to be seen in the River Plate tain traditional crops, such as cotton, coffee, wheat, basin. These investments run a serious risk of having maize, soybeans, bananas and fruit orchards. In con­ their useful life curtailed by the rapid inflow of silt. trast, nutrient replacement has been insufficient in the region’s vast tracts of annual field crops and artificial 2. Urban areas p astures. The environmental problems facing the region’s e ) Soil salinization urban centres have a direct bearing on the popula­ About 11% of the region’s farmland is under ir­ tion’s quality of life. Nevertheless, the assertion that rigation; if fallow land is included in the total, then the urban environment is deteriorating is not a gener­ the figure drops to 8%. Much of this area suffers ally applicable statement, since the majority of the from serious problems of salinization as a conse­ urban population settled in the cities under substan­ quence of the use of unsuitable technologies or faulty dard conditions and never did have a suitable envi­ drainage. It is estimated that around 40% of the irrig­ ronment in the first place. There are, however, ated land suffers from some degree of salinization. segments of the urban population (mainly in middle- According to the Ministry of Agriculture and Water income strata) that have indeed witnessed a deterior­ Resources of Mexico, in 1980 a total of 560 000 ation. Moreover, some processes -such as air and hectares (12.4% of the irrigated land area) in Mexico water pollution and traffic congestion- affect all were partially or totally salinized (Gligo, 1986; Mexico, urban residents alike. Comisión Nacional de Zonas Aridas, 1994). In Peru, the National Office for the Evaluation of Natural a) The growth of poor, substandard settlements R eso u rces ( o n e r n ) surveyed 750 000 hectares in 52 around urban areas and water pollution coastal valleys and 200 flat plains, and found The spontaneous growth of fringe settlements 306 000 hectares affected by salinization and 150 000 around large and medium-sized cities in the region as hectares with drainage problems (Peru, 1992). a result of rural-urban and inter-urban migration has Salinization is not a problem only on irrigated been -and to some extent continues to be- a notable land. Many areas in the region, especially in the feature of the region.

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Two aspects of this phenomenon are especially Honduras’s 762 000 housing units had water hook­ noteworthy. The first is that new settlements often ups. Haiti represents the most dramatic case, how­ lack even the most rudimentary basic services. They ever: according to data for 1971, out of a total of have no sewerage systems, and the population does not 864 000 dwellings, slightly less than 3% had have ready access to drinking water but must instead piped-in water (Beccaria, Boltvinik, Feres, Fresneda, obtain it from community outlets or fountains or, in León and Sen, 1992). extreme cases, must buy it from tank trucks. Most of If piped water supplies are inadequate, sewerage these settlements lack roads and sidewalks, during systems are even more so. Although information on the rainy season their thoroughfares turn into quag­ the region is incomplete, it is enough to provide a mires, and the usual way of obtaining electricity is by clear picture of the situation. The statistics show that tapping into transmission lines via illegal hook-ups. in Brazil in the mid-1980s, out of a total of 25.2 This pathetic situation is common in all the re­ million dwellings, 14 million had piped-in water gion’s capital cities and large urban centres. The but fewer than 7 million had sewerage connections. figures are dramatic. In some cities, the people living The corresponding figures for other countries were: under these types of conditions outnumber those who Mexico, 10.2 million out of 16 million dwellings enjoy decent living standards; in such urban centres, (1990); Bolivia, only 300 000 out of 1.3 million groups living under second-rate conditions actually (1988); Costa Rica, 328 000 out of 500 000 (1984); seem to be doing quite well, by comparison. Ecuador, 716 000 out of 2 million (1990); and Para­ In the majority of the region’s cities, piped guay, 55 000 out of 579 000 (1982). It can be de­ drinking water supply is not available to 100% of the duced from these data that the region’s indexes of population (see table 5), and the mounting demand water pollution must be very high indeed. The tend­ for drinking water has transformed its supply into a ency for malaria to become endemic is an outcome of serious problem. Lima, for example, which is situ­ this state of affairs ( e c l a c , 1993a, table 374). ated on the Pacific coast, has to go all the way to the Amazon basin for drinking water. b) Air pollution In some large urban centres, water is obtained by Thus far, air pollution is a problem only in large tapping into local aquifers. Buenos Aires and Mexico cities and in industrial and mining centres and there­ City take the water for their populations from surface fore does not yet affect a majority of the population. aquifers. In the Buenos Aires metropolitan area, However, the region’s high urban growth rates, in around 55% of the population draws water from conjunction with its continuing industrialization, these strata, and those closest to the surface are be­ pose an increasingly serious threat in this regard. lieved to be heavily polluted with both organic matter Two main factors are causing an increase in and chemicals. Two- thirds of Mexico City’s water urban air pollution: the mounting number of motor comes from wells drilled into surrounding aquifers. vehicles in operation, and the expansion of industrial The chief problem at present is that there is a 40% activity. In some cities, an increase in intra-urban deficit in the recharge of these aquifers, since the rate power generation is another factor. of water extraction for urban use is 40 m3/second The number of motor vehicles has climbed while the recharge rate is estimated to be 23 steadily in almost all the countries of the region. The m3/second. The cost of supplying water to Mexico use of hydrocarbon fuels rose by 5.8% per year be­ City is soaring as it becomes necessary to draw water tween 1970 and 1980, and by 3.6% per year between from distant basins such as those of the Amacuzac 1980 and 1990, since when it has continued to ex­ w atersh ed . pand at the latter annual rate (ECLAC, 1993a, table 53). The supply of drinking water continues to be a The growth of industrial activity has been espe­ financial and technological challenge for the coun­ cially marked in the larger countries and major cities. tries of the region. In Brazil, fewer than 14 million The manufacturing sector expanded at a rate of 5.7% out of 25.2 million dwellings had piped-in water in between 1970 and 1980; its growth rate dipped to 1980. According to data for 1988, less than 50% of only 0.3% between 1980 and 1990, but since 1991 Bolivia’s 1.3 million dwellings and only 480 000 of has shown clear signs of recovering ( e c l a c , 1992).

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TABLES Latin America and the Caribbean: Drinking water and eewerage services in selected cities

% of population % of population Country City Population (millions) with drinking with sewerage water service

Argentina Córdoba 1.1 69 19 Buenos Aires 11.5 66 55 Bolivia La Paz 1.2 75 29 Brazil Rio de Janeiro 10.7 83 30 Sao Paulo 17.4 83 30 Chile Santiago 4.7 98 92 Colombia Bogotá 4.8 96 84 Cali 1.6 96 76 Costa Rica San José 1.0 100 69 Cuba Havana 2.1 83 39 Ecuador Guayaquil 1.7 58 48 Quito 1.2 62 - Haiti Port-au-Prince 1.0 15 82 Mexico Guadalajara 3.2 92 41 Mexico City 20.2 97 59 Nicaragua Managua 1.0 86 12 Peru Lima 6.2 60 39 Dominican Republic Santo Domingo 2.2 27 76 Uruguay Montevideo 1.2 99 68 Venezuela Caracas 4.1 78

Source: ECLAC, 1992.

Total energy inputs rose by an annual rate of umes of pollutants that are emitted into the air, espe­ 9.5% between 1970 and 1980 and 5.1% between cially during the dry season. Ozone levels are far 1980 and 1990, and have continued to expand stead­ higher than in most cities of the world, and are in ily since that time ( e c l a c , 1993a, table 55). fact comparable only to the concentrations seen in The lack of urban planning -or, more accurately, Los Angeles and Athens. The following data serve the chaotic growth of the large cities- has resulted in to illustrate the situation: in 1988, between January extremely high levels of air pollution. Mexico City, and October, concentrations exceeded existing stand­ Sao Paulo and Santiago, Chile -whose metropolitan ards 62% of the time; 2.8 million automobiles circu­ areas, taken together, are home to almost 40 million late in the city and consume 80% of the gasoline used people- have astronomical pollution indexes. Buenos in the urban area but carry only 18% of all passen­ Aires, Bogotá, Rio de Janeiro and Caracas are not gers, and this already difficult situation is exacer­ free of this problem either, although, thanks to their bated by industrial pollution, especially from sulphur geographic locations and climatic conditions, they dioxide. are less seriously affected. Other cities, some of Although thorough measurements of other pollu­ which are not so large but are poorly located, are tants have not been taken, some of the major con­ following in the polluted footsteps of the above- taminants, in addition to ozone, are particulate matter, mentioned centres: La Paz, Quito, Minas Gerais, Sal­ lead, cadmium, aerosols, acids, hydrocarbons and vador de Bahia, Córdoba, Medellin, Cali, Rio sulphur oxide. Mexico City’s air pollution also includes Grande, Rosario, Guayaquil, Concepción, Montevi­ organic substances, including wind-borne fecal matter deo, Guatemala City, Guadalajara and others are reg­ from open-air latrines. istering disturbingly high levels ( e c l a c , 1993b). The severity of this problem has led to the adop­ In Mexico City, both the weather and the topo­ tion of drastic measures in recent years. The massive graphy hamper the dispersion of the enormous vol­ elimination of polluting industries, large-scale invest­

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ments in road infrastructure and strict controls on c) Refuse disposal motor vehicles have brought down pollution levels in This problem, which generates land, water arid recent years, especially of sulphur, carbon monoxide air pollution, is found in all Latin American and and nitrogen oxide. Caribbean cities and is mainly attributable to their In Sao Paulo, vigorous efforts have been made to inability to dispose properly of urban, industrial, combat pollution, but the situation is still well-nigh hospital and other waste. catastrophic. Between March and August, stationary- This problem has various causes. One is the in­ source emissions fill the air, and carbon monoxide ability of municipal bodies to dispose of the garbage regularly exceeds the permissible levels. Cubatao, a that is generated or to create (and strictly supervise) a municipality located within the Sao Paulo metropoli­ privatized system to do so. Another is the absence in the tan area, provides an example of the extremes that region of a general awareness of the need for waste can be reached, but it also serves to illustrate the management; instead, the tendency is for people to viability of appropriate problem-solving techniques. just learn to live with it, as part of the landscape. Because of the effects of this municipality’s pollution The most common waste-disposal procedure is to pick up garbage in special trucks but then dump it levels on human health, it had been nicknamed in an open waste-disposal site, which adds to the “Death Valley”. Fortunately, however, by 1988 it was existing pollution. Some cities in the region do have able to bring 78% of its pollution sources under con­ sanitary landfills, but unfortunately this practice has trol and, as compared to 1984 levels, suspended par­ not become as widespread as one might hope. ticles had decreased by 70%, nitrogen oxide by 14% Few cities have organized recycling systems. and sulphuric anhydride by 37%. Accomplishing The most common recycling method in use is to these reductions cost US$220 million. The challenges allow poor people to simply enter the dumps and sort yet to be overcome in order to rehabilitate the valley through the garbage. Some pilot projects involving continue to be formidable, however. differentiated classification of garbage in the home In Santiago, Chile, a threefold increase in the have yielded excellent results. In Santiago, Chile, number of motor vehicles in operation in the space of considerable use is made of household garbage to just 15 years, the intensive development of industry, generate gas: indeed, 38% of the city’s piped gas is and problems of urban management -in combination produced by this means. with adverse weather and orographic conditions- have all contributed to the metropolitan area’s high d ) Hazardous wastes air pollution indexes. Particulate matter and carbon Only the largest countries in the region -Brazil, monoxide levels frequently exceed acceptable stand­ Mexico and Argentina- have industrial waste man­ ards. Chemical contamination is less of a problem agement policies in place and have undertaken the but, given the rapid growth of the city’s industrial corresponding investments. A number of Brazilian sector, the trends in this regard are disturbing (see cities (particularly Sao Paulo, Rio de Janeiro, Minas ECLAC, 1991). Gerais and Salvador de Bahia) maintain supervised A requirement that all new motor vehicles oper­ industrial waste dumps. In fact, Brazil is by far the ating within the city must be fitted with three-way most advanced country in this respect. Similar initia­ catalytic converters, the auctioning of bus route per­ tives are being launched, although less aggressively, mits and the reorganization of the mass transit sys­ in Argentina and Mexico. tem, the expansion of the subway system and the The problem of hazardous wastes continues to application of exceedingly strict emission controls to cause great concern. Day in and day out, new and public transport vehicles give some reason for optim­ highly active chemicals are being developed, and no­ ism. Nevertheless, the city’s rapid economic growth body knows where they will eventually end up. rate means more motor vehicles, more power use and Many of these chemical wastes wind up in the sewer­ more industrial investment. According to the experts, age system; others are dumped on the ground, where the ground won by means of these measures has been they break down and seep into the soil and water cancelled out by the ground lost as a result of the table or evaporate into the air. city’s vigorous economic expansion during the past Pollution from hazardous wastes is increasing at three years. an alarming rate in the region. In rural zones, and

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particularly in the case of the more “industrialized” e) Disasters associated with urban sprawl crops, pesticides do serious harm to the peasant High urban growth rates, in combination with populations living in the vicinity. Pesticide use is es­ the failure to institute proper management of the pecially heavy in the case of cotton-growing, where areas around cities, have triggered catastrophic pesticides may sometimes be applied as often as once events in the region, and will continue to do so in the a w eek. future. The pollution caused by pesticide use in rural The high cost of land in many cities and the areas is compounded by the effects of mine tailings absence, in many cases, of a transparent real estate and the contaminants given off by the smokestacks of market have often led to the use of unsafe areas and, blast furnaces and similar installations. The pollution consequently, to large numbers of casualties when in the coastal valleys of Peru, the impacts of the natural disasters occur, the most common such disas­ tailings generated in Bolivia and Chile and the severe ters being landslides caused by heavy rains in steeply pollution associated with gold mining activities in sloping areas and the flooding of low-lying areas. Brazil and Ecuador all deserve special mention in The expansion of poor urban sectors has led to this connection. the settlement of hillsides (Bogotá, Quito, Rio de In urban areas, a variety of hazardous wastes Janeiro, Caracas, Mérida, Medellin, Guatemala City, impact the population. In addition to industrial Tegucigalpa and a great many Andean cities) or wastes, there are the wastes generated by hospitals floodplains (Belén, Manaos, Guayaquil, Resistencia, and clinics, old engine oil from motor vehicles, Asunción, Formosa, Buenos Aires). The spontaneous and domestic articles such as batteries. These types nature of these new human settlements (as in Rondo- of waste are not separated out or treated in any nia and Acre in Brazil) highlights the serious lack of special way. There have also been many instances urban planning in the region. of contamination from the radioactive materials used in medical facilities. One such episode that 3. Mining and power generation received a great deal of attention occurred in 1983 in the city of Juárez, Mexico, where the use of a dis­ Although mining and power generation activities are carded X-ray machine as scrap iron caused the direct undertaken in rural and urban areas alike and are contamination of 200 people. In 1987, a similar event therefore a factor in both types of zones, their envi­ occurred in Brazil, where four people died and an­ ronmental impacts are highly localized; these acti­ other six were seriously injured by discarded radio­ vities are very costly from an ecological perspective logical materials. but are also highly productive in economic terms. The transborder movement of hazardous wastes Notwithstanding the recognized need to invest in into the region is a disturbing development, espe­ these sectors, many of the investments made in the cially because the region lacks systems for monitor­ region’s mining and energy sectors could have been ing and assessing the impacts of such materials. The done in such a way as to mitigate these activities’ most frequently advanced argument for the introduc­ adverse impacts. tion of such wastes is their potential for use as raw Copper, tin, gold and iron-ore mining operations m aterial. are major sources of pollution. Chile, for example, The largest proportion of hazardous wastes com­ has serious difficulties in connection with its copper ing into the region does so under the terms of agree­ mines because of the arsenic content of the ore (be­ ments entered into by the United States and Mexico; tween 0.2% and 0.8%). Based on this percentage, it in fact, as of 1988 Mexico had accepted 30 000 tons is estimated that Chile’s smelting plants release of such waste for industrial recycling ( e c l a c , around 12 000 tons of arsenic trioxide each year. 1993c). Bolivia’s tin mines and Peru’s copper mines are Fortunately, the implementation of the Basle also faced with similar problems in terms of their Convention on the Control of Transboundary Move­ emissions of contaminants. ments of Hazardous Wastes and their Disposal, together Gold mining, especially in cases where non­ with initiatives undertaken by the countries of the industrial systems are employed that involve the use region to prohibit the entry of hazardous wastes, of mercury, is polluting many of the region’s rivers. make for a more promising outlook in this field. These types of gold mines are found in various loca­

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tions in the Amazon basin. Severely impacted areas which then drain into the sea (one well-known also exist in southern Ecuador and in the Orinoco indicator being the measurements ofddt found in river basin in the eastern plains of Venezuela. the bodies of seals and sea lions). One process that has been studied very little but All the above-mentioned impacts of petroleum has had a strong impact ever since colonial times is processing and transport also do severe harm to the the use of firewood to fuel smelting plants and foun­ marine environment. dries. During the colonial period, the mining industry A great many of the region’s oil refineries do not devastated entire ecosystems by stripping them of practice proper waste management, and the pollu­ firewood for use in smelting processes; overgrazing tants they generate end up in the sea as well. Despite by the mule and horse teams used for transport was the fact that, on paper (or even judging from the in­ another factor. With the advent of the railroad, much frastructure they possess), oil refineries appear to be of the industry’s transport needs were shifted to this meeting international standards, the majority of them mode, which also contributed to the area’s defore­ pollute the environment, whether due to cost con­ station. Although this type of activity appears to siderations or poor maintenance. have diminished, new mines in the Amazon basin are The most severe impacts are seen in the more endangering the rain forest. A major ironworks pro­ closed-in areas, such as the Caribbean Sea and the ject that should theoretically be using plantations of region’s numerous bays. eucalyptus trees (which, however, have proved to be The wastes generated by oil refineries are not the of doubtful sustainability) appears to pose a threat to only pollutants in this sector. The transport of petro­ the rain forest, since it requires between 90 000 and leum is another very significant source of pollution. 120 000 hectares of forest each year to produce the charcoal it uses. In all the countries of the region, the management of Because of the energy problems they face, the the ports where petroleum is loaded and unloaded countries of the region give high priority to the pro­ exhibits anomalies due to faulty maintenance and duction of petroleum, with little regard for its impact. operational systems. There is not a single petroleum Oilfields located in tropical rain forest areas -in handling facility in the region that does not suffer Ecuador, Colombia, Bolivia or Mexico- have even from some degree of pollution. more serious indirect effects than their direct impact. Disasters associated with the sinking of oil tan­ This is because the penetration of the interior by oil kers have not been so frequent an occurrence as in companies entails the construction of access roads Europe and Asia, but there have been some oil spills which are then used by settlers who move into such in Latin America and the Caribbean which have cre­ areas on their own initiative and begin to push back ated major ecological disasters. the agricultural frontier. The first thing these settlers The situation with regard to the biomass of the do is to clear the land for farming. As a result, exten­ region’s marine ecosystems is also a cause of con­ sive tracts of land not included in settlement pro­ cern, even though catches are said to be below their grammes have been incorporated into highly unstable potential levels. Currently, the region’s total catch production systems. amounts to 10.5 million tons, whereas the potential catch is estimated at between 16.4 and 23.7 million 4. The marine environment tons (Latin American and Caribbean Commission on Development and Environment, 1991). Neverthe­ Most of the waste generated by human activity in less, there are signs that some species of great Latin America and the Caribbean ultimately drains economic importance, such as anchovetas and tuna, into the sea, which is therefore the place where all are being overfished. Specialization leads to what the above-mentioned processes of environmental are usually defined as “incidental takes” or “by- deterioration converge. No city on the Pacific has a catches”, which fishermen discard because they have water treatment plant. Industrial and hazardous no commercial value. As a consequence of this prac­ wastes flow straight into the ocean, while the river tice, numerous non-commercial species and dolphins basins act as catchment areas for agricultural wastes, are killed.

THE PRESENT STATE AND FUTURE PROSPECTS OF THE ENVIRONMENT IN LATIN AMERICA AND THE CARIBBEAN • NICOLO GMJQO CEPAL REVIEW 55 • APRIL 199$ 119

II The environmental outlook for the end of the century

remained constant in percentage terms, however, 1. Environmental deficits in macroeconomic which -given the increase in the total population- management means that they actually rose in absolute terms. Based on the trends in macroeconomic parame­ The region’s current economic outlook includes ters, over the past two years some experts have struck some signs of a recovery. The gross domestic product a triumphant note in their analyses of the type of (g d p ) grew by 3.8% in 1991, 3.0% in 1992 and 3.2% future that awaits the region. For the vast majority of in 1993, while per capita GDP was up by 1.8%, 1.1% these experts, the region’s endowment of natural re­ and 1.3% in those same years. Urban unemployment, sources and its environmental situation are merely which had climbed alarmingly during the second half statistical data which have in general remained con­ of the 1980s, exhibited a slight downward trend and stant. It seems somewhat illogical, however, that then levelled off in 1991 and 1992. The region’s in­ they should disregard the year-to-year fluctuations flation rate plunged from its 1990 level of 1185.2% in the region’s stock of natural capital when annual to 198.7% in 1991, rebounded to 410.7% in 1992 and fluctuations provide the basis for all their econ­ then rose further in 1993, reaching 796.6%. The ma­ omic analyses. jority of the countries actually managed to hold infla­ If trends relating to natural resources and the en­ tion below 20%, but the strong influence of Brazil’s vironment are taken into consideration, then a num­ inflation rate (475.8% in 1991,1 131.5% in 1992 and ber of questions arise regarding the region’s future 2 244.0% in 1993) pushed up the regional average development. The fact that, at the present point in sharply. time, structural changes appear to be something akin The volume of exports climbed by 6.3% in 1991, to a challenge -and that, in those areas of the econ­ 9.3% in 1992 and 8.7% in 1993, while the cumula­ omy where such changes have been made, they do tive change in the terms of trade was -28.3% for the not seem to have contributed to an increase in envi­ period 1981-1992. ronmental sustainability- would seem to indicate that The transfer of resources -defined as capital in­ the factors responsible for the decline in the region’s flows less net payments of profits and interest- had supply of natural resources and the deterioration of been negative up to 1990, but yielded a positive bal­ the environment are still at work. ance of US$8.4 billion in 1991, US$32.8 billion in The objective of changing production patterns 1992 and US$25.7 billion in 1993. The ratio between while at the same time fulfilling the imperative of total interest payments due and exports of goods and social equity in the region cannot be achieved if the services, which had reached 36.6% in 1986, dropped region depletes or degrades the underlying sources of to 22.6% in 1991,19.2% in 1992 and 17.6% in 1993. such changes: the environment and its endowment of Likewise, the region’s total external indebtedness, natural resources. The region’s much-heralded tech­ which had been equivalent to 427% of its exports in nical progress is far from becoming a factor in the 1986, had fallen to 294% by 1992 and held to structural change of its economies. Technological in­ virtually the same level (293%) in 1993. novations have helped lessen some types of deterior­ Some of the region’s social indicators are in line ation, but they have not succeeded in reversing the with its economic indexes. The variation in per capita process of degradation; they have formed part of consumption, which had been negative almost every some highly dynamic production processes, but have year during the 1980s, was 2.2% in 1991 and failed to have any influence on others. Virtually the amounted to around 1.3% annually in the succeeding whole of the agricultural sector, small and medium- years. Indexes of poverty and extreme poverty have scale industry, small-scale mining and most marine-

THE PRESENT STATE AND FUTURE PROSPECTS OF THE ENVIRONMENT IN LATIN AMERICA AND THE CARIBBEAN • NICOLO QUQO 120 CEPAL REVIEW 55 • APRIL 1SSS based operations are lagging far behind, not only in the kingpin in their efforts to launch a process of terms of state-of-the-art technology, but even in what changing production patterns. Nevertheless, we also are thought of as traditional technologies. The ques­ need to look at how this strategy will affect the envi­ tion as to how to achieve an environmentally sound ronment and our natural resources. form of management in the region therefore involves The first consideration is the fact that the region much more than purely technological issues, since, is almost exclusively a producer of raw materials. simply by applying technologies that are widely in The product categories that generate the most foreign use today, a vastly improved form of environmental exchange earnings are, first of all, petroleum and, management could be achieved right now. second, petroleum products. The other major export items are: green or roasted coffee and coffee sub­ 2. Demographic trends, food demand and stitutes; refined copper (including re-smelted copper); consumption oil-seed cake and meal and other vegetable oil by­ products; motor vehicles; iron ore and concentrates; Despite the fact that the region’s rate of population internal combustion engines; soya (except soybean growth places it in what is commonly known as a flour and meal); crustaceans and molluscs; unmilled stage of demographic transition, the simple fact that wheat; unmilled maize; bananas; unrefined beet and its annual population growth rate stands at 1.5% de­ cane sugar; unginned cotton; fuels; fuel-oil distil­ mands a greater volume of food production. The dif­ lates; fuel oil; lubricants with a petroleum content of ficulty of supplying the populations of the large cities 70% or more by weight; natural gas; blister copper with drinking water has already been discussed. This and other unrefined copper; footwear; and beef situation is compounded by the demand for fuelwood (fresh, chilled or frozen). and the general urban encroachment on rural areas. It All the products on this list except for motor should be borne in mind that most of the region’s vehicles and internal combustion engines, which are cities are located on fertile land and that urban ex­ exported intraregionally, are raw materials obtained pansion has occasioned the loss of substantial by tapping the region’s natural resources, agroindus­ amounts of valuable farmland. trial products or products of the mining industry. As noted earlier, private per capita consumption Efforts to lessen the environmental impact of the rose at an annual rate of 2.2% during the 1980s and region’s production activities have had some effect in 1.3% in the early 1990s. If the latter rate holds the industrial and mining sectors. However, the re­ steady, then we will see an increase in per capita food gion’s metal products and machinery industries, tan­ consumption, which competes, to some extent, with neries and some segments of its petrochemicals export crops in terms of land use. industry have neither modified their production sys­ Improving the population’s food intake, espe­ tems nor introduced any significant innovations in cially in terms of the calorie- and protein-content of the area of waste management. Nor have small and people’s diets, is an urgent need that must not be medium-scale mining concerns made any major deferred for the sake of other sorts of accomplish­ changes in their approach to environmental manage­ ments. Social pressures for a higher level of income ment, all of which has been a factor in the failure to focus, first and foremost, on an improved food sup­ reduce the sector’s pollution levels. ply; this influences the way in which farmland is In the agricultural sector, no substantive modifi­ used, since it calls for the allocation of less farmland cations have taken place in the land tenure system, for export crops and more for food production. and the principal factors underlying this sector’s often environmentally unfriendly production system 3. The globalization of markets and remain unchanged. Consequently, the intensification intensification of export activity of crop-farming and of the production of agroindus­ trial goods for export, coupled with domestic consu­ The countries of the region appear to be competing mers’ increased food demand, will hasten the with each other to speed up their incorporation into deterioration of the agricultural sector’s natural re­ world markets by sharply increasing their interna­ sources. Moreover, a sizeable portion of this sector’s tional trade in terms of both physical volume and output is based on the expansion of the agricultural value. All the countries have adopted this strategy as frontier -particularly in countries located in humid

THE PRESENT STATE AND FUTURE PROSPECTS OF THE ENVIRONMENT IN LATIN AMERICA AND THE CARIBBEAN • NICOLO QLIQO CEPAL REVIEW 55 • APRIL 1555 121 tropical zones- and any increase in agricultural pro­ The amount of land used for wheat and maize duction will therefore result in further deforestation. production has not changed significantly and is not The region’s farmland, expanded by 18% (23.7 expected to do so in the future either. The yield of million hectares) between 1980 and 1990, and is ex­ maize crops has been raised through the use of hy­ pected to grow at a slightly slower rate during the brids in the place of local varieties. This trend is ex­ 1990s. Nearly all of this increase in area has been at pected to continue, thereby jeopardizing the rich the expense of forested land. No major changes in diversity of Mexico’s and Central America’s maize this trend are foreseen, except those that may be varieties. caused by a lack of access roads into the rain forests, The amount of land used for plantain and banana which could slow the pace of their destruction. cultivation and these crops’ level of output are on the Special mention should be made of the livestock rise. Unfortunately, the boom in the banana industry industry and of some of the crops that serve as the -traditionally a crop produced by transnational en­ production base for agroindustrial exports. The claves- is leading to an expansion of the amount of amount of land devoted to pastures and permanent land devoted to this crop on steeply sloping terrain, rangelands has risen by an average of slightly over particularly in Caribbean countries. As a conse­ two million hectares per year (0.5%), and no signifi­ quence of increased pesticide use, cases have oc­ cant change in this rate is expected. The ecological curred (and will continue to occur) in which people cost of the expansion of stock-raising activities in the have suffered serious harm from exposure to these region is generally quite high due to deforestation chemicals. An additional factor is that plantain and and the rapid depletion and deterioration of over- banana crops are very vulnerable to hurricanes, and grazed pastures. There is no reason to believe that many of the programmes now in effect may therefore this situation is going to change. On the contrary, the prove to be unsustainable. use of increasingly fragile and vulnerable land for The amount of land devoted to sugar cane such activities suggests that in the 1990s the expan­ swelled by more than 30% between 1980 and 1990 sion of stock-raising activities may generate even despite a sharp drop in international prices for this more side effects. In other words, when land of this product, but this expansion is not expected to con­ type is brought into use, an intensification may be tinue in the 1990s. This increase in land area was due seen of such environmentally harmful processes as almost entirely to the steady expansion of this crop in erosion, the depletion or exhaustion of the soil, the Brazil, particularly for use as a source of energy. encroachment of weeds and harmful plants, an in­ Thus, future trends in regard to this crop in the region crease in the amount of land covered by sand dunes, will largely be determined by Brazil’s energy policy. alteration of watercourses due to silting, and loss of w ildlife. Cotton is the most environmentally costly crop The land area devoted to coffee production of all, in comparative terms, because it calls for the will surely continue to edge upward, especially in use of insecticides whose adverse effects on the ex­ the medium-sized and smaller producer countries. posed population in the region have been well do­ The problems associated with this crop have to do cumented. The land area devoted to its cultivation with the introduction of new systems which have dis­ has decreased considerably, however, and is very un­ placed shaded cluster crops, which are of great value likely to return to its former levels. It may be noted in agro-ecological terms because of the stability they that cotton is probably one of the crops that has boosted its yields the most, since even though the p rovide. area devoted to this crop shrank by 34% between The region’s 18 million hectares of soybeans and 2.5 million hectares of sunflowers also supply basic 1980 and 1991 (from 5.6 to 3.7 million hectares), export components. Inasmuch as no changes in the output rose by 5%. production systems for these crops are planned, they Temperate-climate fruit crops, especially in the can be expected to continue to cause erosion and Southern Cone, have been steadily winning new mar­ pollution. Pesticide use will tend to increase as these kets, but in most cases their environmental impact is crops become increasingly artificialized and, as the m inim al. expansion of the agricultural frontier for soybean cul­ In short, the prospects for the expansion of crop- tivation slows, single-crop farming may become the farming production in Latin America and the Carib­ predominant system used on many farms. bean are limited because most crops have already

THE PRESENT STATE AND FUTURE PROSPECTS OF THE ENVIRONMENT IN LATIN AMERICA AND THE CARIBBEAN • NICOLO QLIQO 122 CEPAL REVIEW 55 • APRIL 1»»5 registered the jumps in output made possible by in­ Crustaceans and molluscs are being overhar­ tensive use of agrochemicals. Future increases are vested in most cases as well. In both the Pacific and thus expected to be smaller. Barring any major tech­ the Atlantic oceans, many species have become en­ nological changes, the adverse effects of pollution dangered and are now protected by strictly-applied from pesticides will grow worse and may eventually closed seasons. It is therefore considered likely that act as a severe constraint on exports. The land will the expansion of these types of exports will probably probably continue to be abused as seriously as it al­ be based on shrimp cultivation and on aquiculture, ways has been. The rate at which farmland is being particularly of mussels. destroyed by erosion, pollution, plant disease and soil Shrimp farming is a very important activity for depletion will remain more or less constant. In con­ some countries and is gradually on the rise. In Ecua­ trast to what has occurred in recent decades, it is dor, for example, shrimp sales provide approximately unlikely that these losses of cropland will be offset 15% of the country’s foreign-exchange export earn­ by increased productivity or the expansion of the ings. Shrimp cultivation is a controversial issue, how­ agricultural frontier. Both of these processes are ever, because of the high ecological cost of its impact clearly entering into a stage of diminishing returns due, on the biodiversity of the wetlands that are used as in the first case, to agronomic factors and, in the hatcheries. second, to physical limitations. In sum, everything seems to indicate that The outlook for exports of forestry products will strategies based on expansion of the region’s exports continue to grow more and more promising, while to the First World will not be successful unless they the logging of fíne hardwoods will continue to im­ break out of the trap which the region has created for poverish the region’s forests. Changing export trends itself by relying on the spurious comparative advant­ appear to pose a very serious threat to forests in tem­ ages of cheap labour and undervalued natural resour­ perate and cold-to-temperate climates, as the demand ces. If the poverty that underlies the first of these for chips has sparked high extraction rates in native advantages (i.e., inexpensive labour) is not signifi­ forests of short-fibre species. cantly reduced, it will continue to act as the basic Although the region does not export wood for structural cause of the region’s inadequate environ­ use in the generation of power, the rise in mineral mental management and overuse of natural resour­ exports will lead to increased use of forest resources ces. And if the region, in its capacity as a for energy-production purposes. natural-resource supplier, does not change its produc­ As the region’s main export, petroleum will con­ tion patterns in a way that gradually incorporates tinue to occupy a priority position in its export more value added and stresses policies designed to strategies, and this will spur on increased prospecting promote social equity, its position in the international and drilling efforts. However, except in Mexico and marketplace will continue to be weakened by the Venezuela, the region’s proven reserves are consider­ deterioration of its terms of trade and serious ably more limited than is often claimed. The Latin American and Caribbean countries’ strategies do not, problems will arise due to the exhaustion of its non­ for the most part, stress overall energy efficiency; renewable natural resources and the degradation of instead, they place emphasis on increased oil exports. its renewable ones. The fact that the public and even A real danger therefore exists that a portion of do­ the State authorities themselves are generally unaware mestic energy use will switch over to firewood, coal of how flimsy the countries’ development strategies and nuclear energy. It must not be forgotten that none and policies are and of the potentially critical situ­ of today’s techniques for the confinement of nuclear ation of many export sectors could well exacerbate wastes offer an acceptable level of safety, and that the situation and accelerate the loss of resources. the economic and technological resources of the Unfortunately, the basic economic decisions of countries of the region are far inferior to those of the countries of the region are taken -within the developed countries; this undoubtedly constitutes a framework of the broad political positions adopted risk factor. by each country- by the technocrats of their minis­ Marine products warrant special mention. The tries of economic affairs or finance or other economic overharvesting of basic species, such as anchoveta planning agencies. According to the short-sighted ap­ and tuna, poses an ongoing threat to the sustainability proaches employed by these decision-makers, envi­ of the region’s fisheries. ronmental issues and natural resource-related problems

THE PRESENT STATE AND FUTURE PROSPECTS OF THE ENVIRONMENT IN LATIN AMERICA AND THE CARIBBEAN • NICOLO QLIQO CEPAL REVIEW 55 • APRIL 1995 123 are bothersome externalities that must somehow be and restrictions applying to investment as they relate overcome without “getting in the way” of their man­ to environmental issues. agement of the economy. Their failure to evaluate Although it is often proudly declared that this or these factors could push these countries’ economies that investment safeguards the environment, the fact over the edge as well as jeopardizing important pro­ is that environmental restrictions placed on investors duction processes. by the Latin American and Caribbean countries are The region’s current “export-at-any-cost” strate­ minimal. Indeed, some countries appear to view the gy will accelerate the environmental crisis affecting non-imposition of such restrictions as an advantage the countries of the region. Nothing is gained by con­ in attracting investment. Fortunately, some subre­ tinuing to analyse the region’s development in terms gional accords -such as the agreement existing of gdp growth or increases in per capita income if we among the Central American countries, the Treaty say nothing about the status of its natural resource for Amazonian Cooperation2 and, more recently, endowment, which is the foundation for that strategy. m ercosur - appear to be working towards the elimi­ nation of these types of advantages and disadvant­ 4. Investment policy ages through the establishment of common standards. Such agreements may not be so easy to reach in other Within the context of the region’s current develop­ subregions, however, and the urge to attract invest­ ment patterns, export efforts are closely associated ment can thus be expected to lead to further assaults with policies designed to boost each country’s invest­ upon the environment in the future. Two areas are ment rate. The idea here, more or less, is for each likely sources of conflict: the chemical industry and country to achieve an investment rate that will bring investments in the energy sector. about an overall improvement in its economy, and this calls for the creation of incentives to attract capi­ 5. Technology transfer tal, primarily from developed countries. Herein, however, lies yet another trap that works It is often asserted that the region’s environmental to the detriment of the region’s natural resources and problems can be solved through technology transfer. environment. This claim is strongly endorsed by the advocates Developed countries are interested in investing of the new development modality. Supporters of this where the social and political situation is stable and, view contend that the intensification of world trade, of course, where the returns on investments are high. pressure from developed countries and today’s tech­ To ensure this high rate of return, the countries rely on nological breakthroughs will make it possible to re­ the second spurious comparative advantage referred solve any environmental problem that arises. to earlier: the undervaluation of natural resources and Where this position is in error is in confusing the absence of any environmental commitments. overall environmental issues with environmental Accordingly, the countries of the region offer all questions as they relate to industrial development, sorts of inducements to investors by, for example, thus lapsing into a reductionist view that tends to giving away the right to use certain renewable re­ equate the region’s development problems with prob­ sources. There are any number of instances of this: lems of industrial development. the decision to hand over a sizeable percentage of the There are many environmental problems that do power generated by a given dam, exclusive rights to call for a technological solution, and technology trans­ the use of wetlands, in-kind payments made in the fer to deal with environmental variables is of fundamental form of timber by settlement programmes, the sale of importance in leading-edge industries. Nevertheless, public land at reduced prices to attract investment in to believe that environmental problems are simply tech­ the exploitation of forestry resources, the leasing of nological problems is to ignore the realities of the re­ government land for n years for the establishment of gion or to regard Latin America and the Caribbean as if agroindustrial concerns, and the award of rights to it were part of the developed world. irrigated land in exchange for the construction of canals. Although serious difficulties exist in respect of 2 The Treaty for Amazonian Cooperation was signed in Brasilia the undervaluation of labour, the problems appear to (1978) by Bolivia, Brazil, Colombia, Ecuador, Guyana, Peru, be even greater when we analyse the inducements Suriname and Venezuela.

THE PRESENT STATE AND FUTURE PROSPECTS OF THE ENVIRONMENT IN LATIN AMERICA AND THE CARIBBEAN • NICOLO QLIQO 124 CEPAL REVIEW 55 • APRIL 1SS5

The region’s environmental problems can defi­ They know how to treat urban wastes. They nitely not be solved simply through technology trans­ know how to create sanitary landfills and how to fer; they are much more complex than that, and their treat hazardous wastes. All these techniques are fam­ solution calls for a whole array of different ap­ iliar to them. Nevertheless, the cities are surrounded proaches: political, social, economic, anthropologi­ by mountains of untreated garbage, and tragedies cal, scientific and technological. caused by the improper management of hazardous Experts in the region are fully aware of existing wastes are a daily occurrence. technologies that would permit the implementation of The state of scientific and technological research environmental measures diametrically opposed to in the region is more than sufficient to permit a far those now in place, but technological innovations re­ better form of environmental management than is lating to resource use and pollution control need to currently practised. be studied on an ongoing basis, and the search for In the coming years, however, it is more than such technologies should be a matter of policy. likely that technological reductionism will be her­ alded as the solution to the region’s environmental The relevant experts in Latin America and the problems, thus sidetracking the debate from the true Caribbean have a full understanding of the available causes of the environmental situation as it now techniques for preventing soil erosion through the stands. use of contouring, terracing or retaining systems. They also have a mastery of all sorts of irrigation 6. The new role of the State techniques that will not produce erosion. They know what types of crops will hold the soil in place, when The role of the State in the region is viewed differ­ to let the land lie fallow, and how to practise crop ently today than in the past. Along with its downsiz­ rotation. Interesting experiments concerning the ing as a strategy for cutting the fiscal deficit, the retention of sand dunes have been conducted. They State has been assigned an important role in macro- fully understand the role played by forests and their economic management, while at the same time its ecosystemic functions as they relate to the soil. They control functions have been reduced. have studied the role played by microfauna and the With regard to environmental issues, the State cultivation procedures called for in order to prevent must undoubtedly establish its position as the only its elimination. Yet despite the possession of all this entity capable of resolving conflicts between the in­ knowledge, the land continues to be eroded. terests of individuals and of society as a whole and The region has access to the necessary technol­ between short- and long-term benefits. It must also ogy to stop polluting its bodies of water and to clean serve as the representative for its citizens’ concerns up existing pollution. Its experts are familiar with regarding the preservation of their natural and cultu­ secondary and tertiary water-treatment techniques for ral heritage. In other words, the State is expected to eliminating organic pollution. They have mastered be strong and to be capable of exercising control, the proper techniques for treating industrial and min­ enforcement and leadership functions. The fact of the ing effluents. They know the exact causes of eutro­ matter, however, is that it is moving in quite the op­ phication.3 They have studied the disequilibria that posite direction. Many public goods have passed into may occur among microfauna. private hands and are used for personal gain by their They do not lack the know-how needed to halt owners without regard for any social repercussions, deforestation, either, and they have studied all the and the countries of the region are increasingly run­ various technologies of forest management in depth. ning their economies on the basis of a short-term Even so, however, the forests continue to shrink and view while neglecting long-term considerations al­ most entirely. Thus, either environmental concerns deteriorate. are simply being left out of decision-making pro­ cesses, or else a political decision is being taken to ignore environmental issues. The urgent need to attract investment, create 3 Eutrophication is understood as the abnormally rapid growth of more jobs, increase exports and provide a sufficient aquatic plants due to the presence of excess fertilizers in the food supply have filled up the countries’ political water.

THE PRESENT STATE AND FUTURE PROSPECTS OF THE ENVIRONMENT IN LATIN AMERICA AND THE CARIBBEAN • NICOLO QLIQO CEPAL REVIEW S5 • APRIL 1»»5 125 agenda. The consideration of environmental issues It is not reasonable to expect a confrontation, for if has therefore been deferred, since thus far these is­ one were to occur, the lives of these new institutions sues have not been regarded as an integral compo­ would surely be cut short. It is foreseeable, however, nent of the countries’ urgent matters. If this situation that they will be given the authority to practise environ­ continues and environmental issues do not come to mental management in the less conflictive areas of na­ be seen as matters linked to the question of the popu­ tional affairs. Environmental agencies will not interfere lation’s survival and quality of life, then it is quite with economic policy, which will continue to be for­ unlikely that proper environmental management will mulated by the relevant ministries -ministries which be practised, and the region’s environmental prob­ pay little heed to environmental considerations now lems will consequently grow worse. and are unlikely to do so in the future. All of this notwithstanding, a number of coun­ Progress may be made in urban areas in connec­ tries in the region are strengthening the environmen­ tion with the various elements involved in the man­ tal component of their institutional structures by agement of household and industrial wastes, the using innovative legal provisions to endow new reduction of water pollution and, in some cities, the agencies with different types of resources and abatement of air pollution. Advances in these areas powers. These new laws establish, inter alia, the con­ will be achieved through increased consensus- cept of environmental offences, the principle that building with the business sector, especially in rela­ “the polluter must pay”, and the concept of an envi­ tion to industrial activities. It may thus become ronmental system. possible to “negotiate” permissible levels of pollution In the coming years, how will these institutions and establish monitoring and supervisory systems. In deal with the challenges posed by efforts to achieve view of the power of that sector and the problems it the continuing expansion of exports, the quest to at­ habitually faces in terms of profitability, however, it tract investment at any cost, and the need to persuade may be supposed that such advances will be only local businesses to reinvest? How will they handle modest in nature. the conflicts that will surely arise? (Original: Spanish)

Bibliography

Argentina (1991): Informe nacional a la Conferencia de Elementos para la discusión. El caso de Chile (LC/R. las Naciones Unidas sobre Medio Ambiente y De­ 983 (Sem. 61/5)), Santiago, Chile. sarrollo, Buenos Aires, Presidencia de la República, (1992): Water Management in Metropolitan Areas of Secretaría General, Comisión Nacional de Política Latin America (LC/R.1156), Santiago, Chile. Ambiental. (1993a): Statistical Yearbook for Latin America and Beccaria, L. A., J. Boltvinik, J.C. Feres, O. Fresneda, A. the Caribbean. 1992 Edition (LC/G.1747-P), Santia­ León and A. K. Sen (1992): América Latina: el reto go, Chile. United Nations publication, Sales No. de la pobreza. Conceptos, métodos, magnitud, ca­ E.93.II.G.1. racterísticas y evolución, Regional Project to (1993b): Ciudades medianas y gestion urbana en Alleviate Critical Poverty in Latin America and the América Latina (LC/L.747), Santiago, Chile. Caribbean (UNDP/RLA/86/004), Bogotá, United Na­ (1993c): Hazardous Products and Wastes: Impact of tions Development Programme (UNDP). Transboundary Movement Towards the Latin Ameri­ Brazil, CIMA (1991): Sobdidios técnicos para elaboração can and Caribbean Region and Possibilities for do relatório nacional do Brasil para a CNUMAD, Preventing and Controlling It (LC/R.1303), Santiago, Brasilia, CIMA. Chile. ECLAC (Economic Commission for Latin America and the FAO (Food and Agriculture Organization of the United Caribbean) (1990): Changing Production Patterns Nations) (1988): Potentials for Agricultural and Rural with Social Equity (LC/G.1601-P),- Santiago, Chile. Development in Latin America and the Caribbean, United Nations publication, Sales No E.90.II.G.6. Natural Resources and the Environment, Annex IV, (1991): Principales emisiones de contaminantes at­ Rome. mosféricos y algunos medios para su control. Gligo, N. (1986): Agricultura y medio ambiente en Améri­ ca Latina, San José, Costa Rica, Inter-American

THE PRESENT STATE AND FUTURE PROSPECTS OF THE ENVIRONMENT IN LATIN AMERICA AND THE CARIBBEAN ' NICOLO OLIOO 1 2 6 CEPAL REVIEW 55 * APRIL 1895

Planning Society (SIAP)/Editorial Universitaria Cen­ Sunkei, O. and N. Gligo (1980): Estilos de desarrollo y troamericana (EDUCA). medio ambiente en la América Latina, Lecturas, No. Latin American and Caribbean Commission on Develop­ 36, Mexico City, Fondo de Cultura Económica. ment and Environment (1991): Our own Agenda, Toledo, V. (1985): A Critical Evaluation of the Floristic Washington, D. C., Inter-American Development Knowledge in Latin America and the Caribbean, Bank (IDB)/UNDP. Washington, D. C., Report to the Nature Conser­ Mexico, Comisión Nacional de Zonas Aridas (1994): Plan vancy Program. de acción para combatir la desertiflcación en México UNEP (United Nations Environment Programme)/Spanish (PACD-México), Mexico City, Comisión Nacional de Agency for International Co-operation (AECI)/ Zonas Aridas/Secretaría de Desarrollo Social. Ministerio de Obras Públicas y Urbanismo (MOPU), Peru (1992): Perú: Conferencia de las Naciones Unidas Secretaría General de Medio Ambiente (1990): De­ sobre Medio Ambiente y el Desarrollo. Informe na­ sarrollo y medio ambiente en América Latina y el cional, Lima, Comisión Nacional CNUMAD 92. Caribe. Una visión evolutiva, Madrid, MOPU. Raven, P. H. (1976): Ethics and attitudes, in J. Simons World Resources Institute (1992): World Resources 1992- et al. (eds.), Conservation and Threatened Plants, 93, New York, Oxford University Press. New York, Plenum. (1994): World Resources 1994-95, New York, Oxford University Press.

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CEPAL REVIEW 55 127

Youth expectations and rural development

Martine Dirven

Economic Affairs The greater openness to the outside world exhibited today Officer, ECLAC by rural, peasant and indigenous groups is particularly Agricultural notable among the young people in those populations, Development Unit. whose behavioural patterns, referents and expectations differ from those of preceding generations. At the same time, living conditions in the farming sector have improved very little, and agricultural producers’ self-images have worsened; both of these factors prompt young people to leave the sector. Today, only half the people born in rural areas in the 1960s still live there. Not enough attention has been devoted to this situation, which leads, among other things, to the types of problems associated with lack of preparation and difficulties of adaptation on the part of migrants. In those areas from which emigration is the heaviest, the ageing of the population is quite marked; this hampers any attempt to pursue a dynamic form of development and in some cases even leads to the dismantling of existing infrastructure and services (and, hence, an even greater loss of population). Those young people who do wish to remain in rural areas have not received sufficient attention either. In order to utilize the potential they represent, this segment of the population needs to be taken into account by policy makers and has to be provided with channels for active participation in production activities and community affairs -not so that they may attain what their parents achieved, but rather so that they may take a substantive leap forward in terms of both their incorpe and quality of life. It is also necessary to eliminate the many market imperfections existing in the rural sector and to enable each individual agricultural unit to approach its optimal production frontier.

APRIL 1995 Introduction

In order for policies to have any sort of positive impact, we must look at what the actors who are the “objects" of public policy have as their own objectives and what kinds of strategies they use to achieve those ends. John Durston1

The above observation seems so logical and so obvious The community to which she refers is not an that there would seem to be little reason to draw attention isolated case, but is quite representative of regions to it, much less quote it at the very start of this article. that are losing a sizeable portion of their population. Nevertheless, although one of the recurring This article will focus largely on youth, for the themes in the papers presented at the Expert Seminar following reason: “Young people, especially in rural on Rural Youth, Modernity and Democracy (which areas, are at the stage of life in which strategic was attended almost exclusively by social scientists) thinking is most marked and during which they was rural youth’s aspirations, which are -almost will take many of the decisions and actions that without exception- to find a better future for them­ will exert the greatest influence over the type of selves away from the farm and, ideally, outside the rural life strategy they will follow. This sets them apart sector altogether, the focus in seminars on agricultural from childhood, when the future is something to development (which are attended, with few exceptions, fantasize about, as well as from the succeeding almost entirely by economists or agricultural and stages of full adulthood, when the irreversible de­ business experts) is on the growth of the sector, pro­ cisions already taken and the progressive narrow­ ductivity, innovation and modernization, but very ing of options cause the development of life little is said about the aspirations of the population. strategies to gradually decline in importance as the Before delving further into this subject and individual’s life cycle draws closer to its end. The trying to bring the findings of the two disciplines strategies developed by rural youth are oriented es­ together, I would like to recall the words of sentially towards individual goals, although they Marguerite Bey (1993, p. 24): “...one may well won­ may be pursued in partnership with other people and der about the future of the community when one although all the young people concerned may also be learns, for example, that 80% of the farmers in contributing to the reproduction of the parental Casinta2 were over 50 years of age in 1988”. household” (ec la c , 1993a).

II Migration or thedesire to migrate

The study conducted by eclac (1993a) on the life 1980s which differentiated between young men’s and strategies of rural youth cites a number of examples young women’s ambitions and their strategies for drawn from studies and interviews conducted in the realizing those aspirations. Men and women have dif­ ferent expectations about inheriting land, moving up 1 Expert Seminar on Rural Youth, Modernity and Democracy in in society, attaining a respected position in the com­ Latin America, cited in ECLAC (1993a). munity, forming an identity of their own, and earning 2 A community in the Cañete valley, approximately 150 kilome­ an income of their own. These differences, along tres south of Lima. with the fact that different sets of options are open to

YOUTH EXPECTATIONS AND RURAL DEVELOPMENT • MARTINE DIRVEN CEPAL REVIEW S5 • APRIL D I S 1 2 9 them, cause young men and women to formulate dif­ able to fit into urban environments. Parental opposi­ ferent strategies for their studies, their search for a tion -at least in the beginning- to the introduction of partner, their place in the family, their place in the bilingual education in Guatemala is one example of labour market and migration. Some of their aspira­ how the desire to better one’s position by moving tions are endorsed and others are opposed by their outside the agricultural and rural sectors may be parents, who have their own plans for their children’s manifested.3 Frequently, parents want their children future and their own ideas about the roles their to emigrate not only so that the young people them­ children will play in caring for them in their old selves will be better off, but also as part of their own age and in preserving their birthright and cultural rural survival strategy, since they hope the children will heritage (or failing to do so). send back money and thus raise their own income. In contrast with the views of many authors, the It is often felt that the dearth of services (educa­ above-mentioned ECLAC study stresses that the quali­ tion, health, infrastructure, entertainment) is one of tative evidence suggests that many young people, es­ the main reasons for rural-urban migration. Cuba has pecially males, would prefer to stay in agriculture made a determined effort to lessen the differences in rather than move into other fields of endeavour, so service levels between the countryside and the cities long as it will enable them to earn enough to avoid and to raise rural inhabitants’ living standards; it also living in poverty. This preference is associated, offers its young people (in both rural and urban among other things, with the value placed on blood areas) more opportunities for social participation than ties and relationships of compadrazgo, cultural tradi­ do the rest of the countries in the region. Further­ tions, forms of mutual aid and the chances of estab­ more, in order to deal with manpower shortages in lishing a respected position within the community. the agricultural sector, since the mid-1980s Cuba has Even landless youths have some chance of gaining formulated explicit objectives in terms of the popula­ access to land by marrying a woman who will inherit tion’s territorial distribution, and it has made an effort property, sharing land with a brother, brother-in-law to reach those targets by, among other things, dif­ or other relative, or leasing land or sharecropping. On ferentiating housing availability and wage levels on a the other hand, it frequently happens that the child territorial basis. Rural-urban migration has indeed who ends up staying on the family farm is the one slowed and, due to the deep economic crisis in which who “doesn’t have the head for anything else”. In Cuba is currently immersed, some urban youths Spain the current tendency is for the youngest in the agree to go to the countryside for short (two weeks) family to shoulder the “obligation” of staying behind or somewhat longer (two years) periods to work in to take care of the family’s assets and the parents the agricultural sector in exchange for a dwelling of (González, 1990), because the older siblings tend to their own. Nevertheless, the main ambition of most have already emigrated. This runs counter to the of Cuba’s young population still appears to be to traditional ways of the past, when it was the custom work in non-agricultural activities and to move to an for the eldest son to inherit the land. urban centre, especially the capital (Morejón, 1993).4 Although many young people do not emigrate It is worth recalling that, with few exceptions, the and have no wish to do so, the figures on rural-urban population density of Latin America’s rural areas is migration clearly show that nearly half of them do low, and investments in rural infrastructure and ser­ choose (or find it necessary) to emigrate. Some rural vices are therefore an especially heavy burden. areas lose more of their young people than others. In Colombia, emigration is greatest among the “scat­ tered rural population”, i.e., people who do not live in the district capitals, or “ cabeceras ” (Colombia, Ministry of Agriculture, 1994, p. 87). As we will see 3 See, inter alia, Barrera de Martínez (1985); Matos Mar and later on, poverty indexes are even higher in these Alberti (1980); and Vecino, Tedesco and Hernández (1980). sparsely populated zones than in other rural areas. 4 This last assertion does not appear in the study by Morejón Young people are not the only ones who want to cited above; the point was made quite forcefully, however, in Morejón’s contributions to the discussions at the Expert Seminar emigrate; many parents want to get their children into on Rural Youth, Modernity and Democracy in Latin America, decent primary schools so that they will be better organized by ECLAC (Santiago, 1993).

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Another reason why young people want to emi­ guay, for example, experienced mass migrations in grate, apart from seeking a more promising economic 1993, when the cotton harvest was particularly poor environment, is to escape from parental control and (cotton being a crop that is mainly grown by peasant the social pressures put upon them by their home farmers). Caputo and Palau Viladesau (1994, p. 26) community. The image of a “good” (i.e., obedient, quiet state that in the first nine months of 1993, approxi­ and submissive) son or daughter or member of the mately 100 000 Paraguayan emigrants arrived in Ar­ community is still the rule in many indigenous or gentina to swell the ranks of the 360 000 Paraguayans farming communities, and this runs counter to “mod­ already living in that country in 1992. It may be as­ em” attitudes (and current educational theories) sumed that in 1993 -as in 1992- the majority of these about the virtues of encouraging curiosity, creativity, new arrivals were young.5 a questioning attitude, an inquiring mind, and indi­ Migratory flows (sometimes sparked off by forc­ vidualism. While it is true that rural-urban migration ible evictions) are sometimes prompted by changes and the undermining of the social mores of the past in land use that entail a reduced demand for labour or jeopardize peasant or indigenous communities’ ability temporary labour. The large-scale conversion of to survive in some cases, it is also true that these com­ non-irrigated farming areas into industrial forestry munities have ways of adapting and that the remittances plantations, as has occurred in southern Chile,6 is one sent by family members living in uiban areas (or abroad), example. as well as these urban family members’ (sometimes quite There are also other factors which have not yet active) participation in community affairs (e.g., as inter­ been analysed thoroughly enough to determine mediaries who can intercede with the authorities), whether or not they may intensify migratory flows. also contribute to their survival, at least in the short We will mention three such factors here: liberaliza­ and medium terms (Dirven, 1993; Bey, 1993). tion policies and free trade agreements, which may Emigration sometimes becomes an option at open the economy up to imports of items that are in quite an early age. In the south of Chile, for example, direct competition with traditional agricultural pro­ young Mapuche girls may start thinking about mov­ ducts (Levy and van Wijnbergen, 1992); a shift in ing to the city to seek work as domestic servants consumer habits in favour of prepared foods or foods when they are as little as 12 years old (Cecilia Diaz, having a better or more homogeneous appearance, cited in ec la c , 1993a). which increases the market share of more heavily Some types of events -such as natural disasters, capitalized agricultural activities at the expense of one or more years of bad weather, a serious attack on peasant farmers’ produce; and the liberalization of crops by some sort of insect or disease, violent land markets when no specific provision is made for guerrilla activity or civil war- may hasten people’s credit schemes designed, for example, to make land decision to emigrate temporarily or permanently. Para- accessible to small-scale producers. III The figures

There are three phenomena underlying current diminished in absolute -as well as relative- terms rural/urban population figures and trends: migration since the start of the 1990s. from the countryside to the cities, the rural and urban populations’ differing rates of change (fertility/ mortality), and the changes that some countries7 have made in how they define “rural” and “urban” 5 About 80% of them were under 25 years of age, according to Informativo Campesino, 1992. from one census to the next. Interpreting these 6 For an in-depth analysis from a historical perspective taking figures is therefore no simple matter. What is not in account of similar processes in Europe, see Mazoyer, 1981. doubt, however, is that the population is ageing and 7 Brazil, Chile, Colombia, Costa Rica, El Salvador and Nica­ that the number of young people in rural areas has ragua, among others (Klein, 1992, annex).

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TABLE 1 Latin America: Rural and urban population, by age groups, 1970-2000 Growth (%) Age 1970 1980 1990 2000 (years) 1970- 1980- 1990- 1980 1990 2000 Rural population (thousands) 0-9 39 960 38 187 36 774 34 389 -4.4 -3.7 -6.5 10-19 27 021 28 776 28 386 27 432 6.5 -1.4 -3.4 20-29 16 920 18 594 20 298 20 152 9.9 9.2 -0.7 30-39 12 112 12 605 14 929 16 723 4.1 18.4 12.0 40-49 9 056 9 359 10 370 12 638 3.3 10.8 21.9 50-59 6 256 6 910 7 375 8 368 10.5 6.7 13.5 60 and over 6 253 7 437 8 538 9 673 18.9 14.8 13.3 Total 117579 121 868 126 670 129 375 3.6 3.9 2.1

Urban population (thousands) 0-9 44 026 58 244 71 697 82 334 32.3 23.1 14.8 10-19 35 682 52 776 66 011 79 230 47.9 25.1 20.0 20-29 25 774 42 049 58 754 72 014 63.1 39.7 22.6 30-39 18 950 28 285 43 332 59 938 49.3 53.2 38.3 40-49 14 467 19 953 28 543 43 336 37.9 43.0 51.8 50-59 10 083 14 500 19 639 27 925 43.8 35.4 42.2 60 and over 10 425 15 262 22 389 31 434 46.4 46.7 40.4 Total 159 406 231 068 310 366 396 211 45.0 34.3 27.7 Source: CELADE, 1991.

The figures for Latin America as a whole mask still be living in the countryside by the year 2000, the existence of sharp differences between one and of the 27 million adolescents living in rural areas country and another and between one area and an­ in 1970, only 12.6 million (who will by then be in other within each country. Some projections (fao , their 40s) will still be living there by the year 2000. 1993a, pp. A-10 and A -ll) indicate that the Latin The difference between the decrease in these popula­ American agricultural sector’s economically active tion segments in rural areas and the increase regis­ population (EAP) will decline between the years 2000 tered for urban zones is accounted for by deaths and and 2010 for the first time in several centuries. emigration from the region. The projections of the total population, by coun­ The overall population figures for Latin America tries, shown in table 1 were prepared jointly by the conceal the fact that in a majority of the countries -as Latin American Demographic Centre (celade ) and suggested in our earlier discussion of people’s aspira­ national institutions; the urban-rural projections were tion to migrate- rural men seem to have stronger ties developed by cela d e on the basis of data from the to the countryside than rural women do, and this latest population censuses (prior to 1990) and the trends leads to striking imbalances between the sexes. Thus, observed over a period of time in the urban population in 1990 there were 5.2 million more men than as a percentage of the total. The definition of “uiban women in rural zones. Among children and young population” used by each country in its census has people up to the age of 30, this difference amounted been maintained in the cela d e projections. to 3.2 million (7% more young men than young An examination of table 2 indicates that, accord­ women), which may well create difficulties for ing to cela d e estimates, of the nearly 40 million young people seeking to find a partner and have an children between the ages of 0 and 9 living in rural active social life. The situation in the cities is just the areas in 1970, only 16.7 million of those persons will opposite, of course, although the imbalance is rela-

YOUTH EXPECTATIONS AND RURAL DEVELOPMENT • MARTINE DIRVEN 132 CEPAL REVIEW SS • APRIL 1»»5

TABLE 2 Latin America: Changes in the population, by age groups and decades a (Thousands of persons) Age in the 1970-1980 1980-1990 1990-2000 Total year 2000

Rural population 0-9 -11 184 -8 479 -3 575 -23 237 30-39 10-19 -8 427 -3 665 -2 292 -14 383 40-49 20-29 in 1970 -4 315 -2 235 -2 002 -8 552 50-59 30-39 -2 754 -1 983 -4 737 60-69 40-49 -2 146 -2 146 70-79

Urban population 0-9 8 749 5 978 1 184 15 912 30-39 10-19 6 367 1 283 4 7 654 40-49 20-29 in 1970 2 511 258 -618 2 151 50-59 30-39 1 003 -314 689 60-69 40-49 33 33 70-79 Source: CELADE, 1991. a This table was compiled by reading table 1 diagonally (i.e., taking the first line of the age groups for 1970, the second line for 1980 and so on) in order to see what happened in the succeeding decades to the groups that were children, adolescents, etc. in 1970.

tively smaller and its effects are therefore not felt as regression of some areas, and to the lack of prepared­ strongly. There is also a growing number of women ness and difficulties in adapting to a different envi­ (widows, women who are divorced or separated, or ronment experienced by the people involved (Dirven, women whose husbands work elsewhere) who are 1993). On the other side of the coin, the areas that are acting as heads of household and agricultural produ­ receiving this migrant population are unprepared or cers, often with even less access than their male unable to receive them properly. The urban centres of counterparts to credit, legal title to their land, etc. the region suffer from a great many problems, and (Muriedas, 1988). the increases seen in urban poverty and urban infor­ In the past, however, migration was not a prob­ mal employment would appear to indicate that these lem in and of itself. In fact, if none of the rural child­ centres have not been able to absorb earlier rural- ren bom between 1960 and 1990 had migrated (or urban migratory flows adequately; instead, many died), there would have been 115 million rural child­ problems have simply been carried over from the ren and young people between the ages of 0 and 30 countryside to the cities. as of 1990 instead of the current 85.5 million (in According to figures compiled by eclac (1993b, 1970 there were 84 million). The worrisome facet of p. 45), the percentage of indigent households in the this situation is the failure to pay due attention to the region dropped from 34% to 30% between 1970 and foreseeable decline in the young population in the 1990 in rural areas but climbed from 10% to 13% in future,8 to the aspirations of today’s youth and the urban areas. Similarly, the percentage of poor house­ resulting development outlook for the future, or to holds declined during that same period from 62% to the situation as it stood in the recent past, to existing 53% in rural areas but rose from 26% to 34% in demographic disequilibria, to the de-population and urban zones. If all households are taken together, then the percentage of poor and indigent households appears to have gone down by 1% between 1970 8 A simple calculation -assuming that the percentage change in and 1990. Meanwhile, non-agricultural informal em­ projected births between 1990 and 2000 and in migration, by age ployment rose from 26.1% to 30.7% of total non- group, will remain constant- shows that in 2010 there will be 78 agricultural employment between 1980 and 1985 million young people between the ages of 0 and 30 in rural areas and 72 million in 2020 (CELADE projects a figure of 82 million (o ecd , 1990, p. 22) and apparently held steady at that for the year 2000). figure in 1989 (ILO, 1992, p. 44).

YOUTH EXPECTATIONS AND RURAL DEVELOPMENT • MARTINE DIRVEN CEPAL REVIEW 55 • APRIL 1995 133

IV Self-image and feelings about the future

Being a “peasant”, someone who “works on the TABLE 3 land” or a member of an “indigenous” group carries Paraguay: Young peasants’ vision of the future, 1993 a very low status in society in general. This low (Percentages of total responses, by sex) status -which is indirectly propagated by the mass Male Female Total media (to which rural inhabitants have increasing ac­ cess),9 by the schools and by the various sorts of Future of country messages that are sent out about “urban life” or Better 36.8 38.1 37.5 “modernity”- is reflected in a deteriorating self- Same 39.7 27.4 32.9 Worse 23.5 34.5 29.6 image. In a survey of 500 peasant farmers throughout Chile, it was found that the interviewees were very Future of peasant sensitive about the fact that they are never given farm population much importance in television programmes and that Good 12.1 33.7 24.2 Fair 75.8 50.6 61.7 when, for example, the boom in fruit exports is dis­ Poor 12.1 15.7 14.1 cussed, mention is made only of the experiences of exporters and agro-industrialists, while nothing is Source: Caputo and Palau Viladesau, 1994, pp. 23 and 24. said about those of the peasants or their group repre­ sentatives. The failure to depict these groups as per­ forming an important role is regarded as an implicit In Paraguay, despite this negative image and the disparagement of peasant farmers and of their role as mass migration of young members of the country’s significant economic and social actors. peasant population in 1992 and 1993, as mentioned One of the consequences of the negative self- earlier, the responses of 152 young people (68 males image of people who “work on the land” is their and 84 females) between 14 and 23 years of age from reluctance to do that kind of work. A household sur­ typical peasant families in seven of Paraguay’s 17 vey conducted in 1988 in marginal districts of Mani- departments reflected a relatively optimistic view of zales and Chinchiná (both in the Department of the peasant population’s future prospects (see table 3). Caldas, Colombia) showed that a large percentage of Is there any need to reiterate that young people workers (41.5%) were employed in the agricultural represent a great potential force for rural develop­ sector. Follow-up interviews revealed that none of ment because they are more educated (although the interviewees actually wanted to work in that sec­ much remains to be done in terms of the quality, tor but that, given their lack of qualifications and of content and duration of formal education and train­ the documentation required for entry into the formal ing), more receptive to “modern” ideas, and have the labour market -together with the absence of other full- or part-time job opportunities- the coffee- enthusiasm of youth on their side? In order to take growing industry was the simplest option. All the advantage of their energy and potential, they must be persons interviewed felt that their living standards given an opportunity to participate in the life of the had improved since moving to the city (Hataya, 1992). community and -via access to markets, information This view is corroborated by the poverty indexes and technology, land and other means of production, based on unmet needs, as will be seen in table 5. credit, etc.- to make a productive contribution, not so that they may simply attain what their parents 9 To cite but one example, a survey of 80 households living in achieved or make some marginal improvement there­ extreme poverty in the Province of Osorno, Chile, showed that on, but so that they may take a substantive leap 28.7% had access to radio and television and that 60.1% had forward in terms of both income and quality of access to radio. Of this total, 46.3% also had access to a news­ paper, while only 8.7% did not have access to (or interest in) life. Otherwise, as the talents and energy of youth any mass medium (Bastias Urra, 1983). continue to be siphoned off, certain zones or areas

YOUTH EXPECTATIONS AND RURAL • MARTINE DIRVEN 134 CEPAL REVIEW 55 • APRIL 1995 will continue to regress. Times have changed, and Participatory decentralization as it is currently many young people have different frames of refer­ being implemented in, for example, Colombia, coupled ence and expectations than preceding generations. with the creation of specific channels for the partici­ They no longer migrate or leave the farm solely be­ pation of young people, can cause rural inhabitants to cause their family can no longer survive there; they perceive themselves as performing a new and import­ leave because they have a positive desire to improve ant role which, in the long run, is bound to boost their their station in life. self-image and their hopes for a better future.10 V Rural poverty and the /¡m lnneeihilih/ nf acrai

The data on poverty levels and trends differ depend­ In order to improve the rural population’s living ing on which source is consulted. For example, the standards by increasing its income levels, it is necess­ International Fund for Agricultural Development ary to create more productive jobs, whether in agri­ (ifa d , 1993) gives much more discouraging figures culture, in agriculture-related activities or in other than ec la c does, with its statistics indicating an sectors. Although it is estimated that something over overall increase in rural poverty between 1965 and 30% of the economically active rural population cur­ 1988. Regardless of any differences which may exist rently works in some activity other than agriculture between statistical sources, however, there is no doubt proper (Klein, 1992), the following considerations about the fact that the level of rural poverty was high in relate exclusively to agriculture itself. the past and was still high as of 1990 (see table 4). Certainly, one way of increasing the incomes of A recent study on rural poverty in Colombia (see people employed in agricultural activities is to raise table 5) clearly established, first, that the levels of the sector’s factor productivity and to step up the use rural poverty are generally high; second, that poverty of high-yield technologies. A series of empirical -whether measured by income or by the level of studies (including those of Cotlear, 1989; Lockheed, unmet needs- is much more severe in the Atlantic Jamison and Lau, 1980; Phillips, 1987; Figueroa, zone than in other areas of the country; and, third, 1986; and Inkeles and Smith, 1974) corroborate the that the differences between the poverty levels found importance of formal education in determining the in district capitals and in sparsely settled areas are individual’s ability and willingness to adopt new greater when poverty is measured in terms of unmet technologies and adapt them to his or her farm’s or needs than when measurements are based on income. land’s specific requirements. In more specific terms, The gap between the extent to which basic needs Figueroa (1986) relates a mastery of the four basic are satisfied in district capitals and in sparsely popu­ arithmetical operations, the rule of three, and the cal­ lated areas is considerable; it should therefore come culation of percentages, along with the ability to as no surprise that many young people choose to leave utilize one unit of measurement as a ratio of another sparsely settled areas, as indicated by the figures (grams per litre, kilograms per hectare, centilitres per cited in the preceding section. litre, etc.), with the ability to apply the inputs re­ Rural inhabitants’ living standards might be raised by satisfying their needs more fully in either of two ways: encouraging migration to district capitals while making it easier to commute to places of work, 10 See Machado (1994) for an analysis of Colombia’s recent or facilitating access to infrastructure and services participatory decentralization process (through laws and execu­ tive orders, as well as the joint identification by the local com­ in sparsely populated areas in order to help meet the munity and municipality of the projects and programmes the inhabitants’ needs, provided that cost/benefit and community wants to pursue and the way they want to finance opportunity-cost analyses yield positive results. and execute those initiatives).

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TABLE 4 Latin America:a Extent of poverty, 1970-1990 (Percentages) Poor households b Indigent households c Year Total Urban Rural Total Urban Rural 1970 40 26 62 19 10 34 1980 35 25 54 15 9 28 1986 37 30 53 17 11 30 1990 39 34 53 18 13 30 Source-. ECLAC, 1993b. a Includes 19 countries; separate figures are given for 14 of those countries in ECLAC, 1993b. b Percentage of households whose income is less than twice the cost of a basket of staple foods. Includes indigent households. c Percentage of households whose income is less than the cost of a basket of staple foods.

TABLE 5 Colombia: Percentage of poor persons in the rural sector, 1988 Sparsely Towns other National District Atlantic Eastern Central Pacific settled than dis­ total capitals region region region region areas trict capital

Based on levels of unmet needs Critical poverty 35.7 43.4 36.3 17.6 57.0 28.3 28.9 30.1 Non-critical poverty 26.9 36.8 29.6 21.4 21.8 26.4 29.3 30.2 Total poor 62.6 80.2 65.9 39.0 78.8 54.7 58.2 60.3 Not poor 47.4 19.8 34.1 61.0 21.2 45.3 41.8 39.7 Based on income Critical poverty 34.8 38.6 32.2 28.3 45.3 41.4 25.7 27.4 Non-critical poverty 30.4 30.7 32.1 28.3 30.5 26.8 34.6 28.7 Total poor 65.2 69.3 64.3 56.6 75.8 68.2 60.3 56.1 Not poor 34.8 30.7 35.7 43.4 24.2 31.8 39.7 43.9 Source : Ayala Oramas, 1994, p. 99, based on a rural household survey conducted by the National Bureau of Statistics (DANE) of Colombia.

quired by modem technology properly. The schools lower than those of other continents, however, espe­ usually do not begin to teach these operations until cially in the case of the more traditional crops (maize, the fourth grade and students do not really begin to beans, potatoes, yucca) that are grown primarily by perform them well until the sixth grade (eclac , 1991a). peasant farmers and indigenous groups on small In these terms, the quality of rural education continues holdings. An even more serious feature -especially to be deplorable, even though it has improved quite a in a world that has embraced the concepts of a free bit if we compare the achievement levels of people market and economic liberalization- is that Latin under the age of 30 with those of people who are now America is losing ground in relative terms with re­ over 30 (actually, closer to 40) (see table 6). It is of gard to the productivity level of most of its crops, interest to note that, except in Guatemala, a larger pro­ since it has increased its yields less, on average, than portion of young rural women have completed more those yields have risen worldwide or in the develo­ years of formal education than their male counterparts. ping countries as a whole. Latin America has an abundant endowment of In the following discussion we will look at the agricultural resources (land per inhabitant, soil quality, value added per hectare and per person employed in water supply) in comparison with other regions (fao , agriculture rather than at yields in physical quantities 1993a). Its yields (kilograms per hectare) are often per hectare; this means that we will be discounting

YOUTH EXPECTATIONS AND RURAL DEVELOPMENT • MARTINE DIRVEN 1 3 6 CEPAL REVIEW 55 • APRIL 1 1 1 5

TABLE 6 Latin America (five countriee): Years of formal education completed by rural males as of the mid-1980s (As percentages of age group) Between 15 and 19 years of age Over 30 years of age

Up to 3 years of Up to 6 years of Up to 3 years of Up to 6 years of formal education formal education formal education formal education

Guatemala (1986) 60.3 91.0 88.9 97.9 Brazil (1987) 55.6 90.4 77.0 95.8 Venezuela (1986) 25.5 73.2 -- Costa Rica (1988) 11.5 71.2 44.0 84.5 Panama (1986) 8.2 56.6 48.0 87.3 Source'. Various tables based on household surveys, taken from ECLAC, 1991b.

the cost of the inputs used to arrive at a more intens­ proved access to land, credit, inputs, irrigation, tech­ ive type of farming and, hence, higher yields (see nology, information, insurance and markets: it would table 7). also be necessary to reduce the number of economi­ This analysis shows us that, in some countries, cally active persons in the agricultural sector and the amount of value that is actually added by agricul­ boost labour productivity. ture is not enough to provide the sector’s economi­ However, fao projections up to the year 2010 cally active population with a “decent” income (i.e., foresee an increase in the economically active popu­ an income above the poverty line set for each lation in the agricultural sector in several of the coun­ country) even if that income were to be divided tries in which the amount of value added per member equally among all the members of that e a p . There are of the sector’s eap is too low, even after making the two possible ways of resolving this situation: we can correction needed to arrive at a level of value added increase the amount of value added or reduce the per hectare that would position it “on the frontier”.12 number of people employed in agriculture. If we take the current figures on the amount of In view of the differences that exist between value added in agriculture and factor in the inequit­ countries, it would appear possible to increase the able pattern of land distribution, we can gauge amount of value added per hectare by changing crops -although only very roughly, of course- the income- and improving the production function through generation possibilities for small holdings. the use of a more suitable flow of information, the The estimated income levels for small agricultu­ creation or stimulation of markets, the introduction of ral holdings shown here (see table 8) are based on the technologies, etc. assumption that the average amount of value added is If we consider the value added per hectare in valid in the case of small-scale producers, that the Costa Rica as a kind of near-optimum technological latest data on the average size of small holdings were frontier, then we can recalculate the value added per still valid as of 1990 (despite the trends in this regard, economically active person in the agricultural sector, which indicate that in most cases such holdings are assuming that all the countries’ output places them on shrinking) and that these small-scale producers’ aver­ their production frontier. On performing this calcula­ age household size is five persons. tion, however, we find that “decent” income levels cannot be attained in a number of countries 11 even if 11 Including Colombia, Dominican Republic, Guatemala, Jamai­ we assume that the value added per hectare is near ca and Peru. the “optimum”, that the total value added is dis­ 12 The agricultural EAP is expected to increase between 1980 tributed equitably among all economically active per­ and 2010 in Bolivia, El Salvador, Guatemala, Haiti, Honduras, sons, and that each agricultural worker has only two Nicaragua, Paraguay, Peru, Jamaica and Mexico (up to the year 2000 in the case of the last two countries listed), while it is dependents. In order to deal with rural poverty in expected to decrease in the other countries of the region (FAO, these cases, it would not be enough to provide im­ 1993a, pp. A-10 and A-ll).

YOUTH EXPECTATIONS AND RURAL DEVELOPMENT • MARTINE DIRVEN CEPAL REVIEW 55 • APRIL 1SS5 1 3 7

TABLE 7 Latin America and the Caribbean: Measurements of productivity, 1990 Value added Economically Arable Value added/ by agricul­ active land and Percentage agricultural Value ture population permanent Hectares/ of irrigated EAP added (millions (EAP) in crops EAP land (dollars / per hectare b c of current agriculture (thousands person) d (dollars/ha) dollars) a (thousands) b of ha) b

World 1 109 621 1 444 217 1.30 21.4 Latin America and the Caribbean ' 104 716 41 238 151 954 3.68 10.4 2 540 690 Argentina 12 405 1 197 27 200 22.7 6.2 10 360 460 Bolivia 1 069 949 2 308 2.43 7.1 1 130 460 Brazil 42 288 13 366 60 000 4.49 4.5 3 160 700 Chile - 585 4 526 7.74 27.9 _ Colombia 6 876 2 885 5 420 1.88 9.6 2 380 1 270 Ecuador 1 435 996 2 725 2.74 20.3 1 440 530 Peru 2 420 2 443 3 730 1.53 33.8 990 650 Costa Rica 915 251 529 2.11 22.3 3 640 1 730 Guatemala 1 978 1 346 1 885 1.40 4.1 1 470 1 050 Mexico 21 074 9 340 24 710 2.65 21.0 2 260 850 Haiti - 1 823 905 0.50 8.3 -- Jamaica 209 324 269 0.83 13.0 650 780 Dominican Republic 1 273 819 1446 1.77 15.6 1 550 880 Source'. World Bank, 1992, p. 224; FAO, 1992. a Figures compiled by World Bank. b Figures compiled by FAO. c Irrigated land as a percentage of arable land and permanent crops. d The figures for the value added per economically active person and per hectare are consistent (somewhat higher, but of the same orders of magnitude) with those given for 1985 (the only year for which data were available) in FAO, 1993b, pp. 140-141 and 143-144. e In addition to the countries shown in the table, the FAO figures for Latin America and the Caribbean cover the following countries: An­ guilla, Antigua and Barbuda, Aruba, Bahamas, Barbados, Belize, British Virgin Islands, Cayman Islands, Cuba, Dominica, El Salvador, Falkland Islands (Malvinas), French Guiana, Grenada, Guadeloupe, Guyana, Honduras, Martinique, Montserrat, Netherlands Antilles, Nicaragua, Panama, Paraguay, Puerto Rico, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, Trinidad and Tobago, Turks and Caicos Islands, United States Virgin Islands, Uruguay and Venezuela.

TABLE 8 Latin America and the Caribbean: Estimated incomes of small farms, 1990 Average farm Value added per ha Average value added on Average value added size (ha) (dollarslha) small farms (dollars) per household (1) (2) (1) X (2) membera (dollars)

Latin America and the Caribbean 2.1 690 1 449 290 Argentina 8.9 460 4 094 819 Brazil 2.1 700 1 470 294 Colombia 2.6 1 270 3 302 660 Ecuador 1,9 530 1 007 201 Peru 1.4 650 910 182 Costa Rica 3.9 1 730 6 747 1 349 Guatemala 1.8 1 050 1 890 378 Mexico 1.7 850 1 445 289 Source : Preceding table. a Assuming an average of five persons per household.

YOUTH EXPECTATIONS AND RURAL DEVELOPMENT • MARTINE DIRVEN 138 CEPAL REVIEW SS • APRIL 1S9S

The present outlook for small-scale producers is situation (and the poverty it entails), in combination by no means promising. In 1981, it was estimated with the psycho-social motivations discussed in an that nearly 70 million persons (more than half the earlier section, prompts young people to abandon region’s entire rural population) were directly in­ agricultural pursuits and emigrate from rural areas in volved with small holdings or were landless agricul­ order to seek a better future for themselves else­ tural workers (López Cordovez, 1985, p. 27). This where. VI Programmes aimed at retaining young people in the agricultural sector

In most of the Latin American countries, rural youths years after starting operations. Beneficiaries may start who have recently graduated from school are not the operations immediately by acquiring the necessary object of any special development efforts (whether land, obtaining users’ rights, renting land, etc., or on the part of the authorities, non-governmental or­ they may do so gradually through arrangements with ganizations or trade unions), and the few measures the official owner or operator under which the civil that do specifically target young people reach only a liability and administrative responsibility are as­ small fraction of them. As a rule, these initiatives take sumed by the young person in question. the form of short courses dealing with specific aspects Moyano and Fernández (1990) conclude that the of production, sometimes in conjunction with loans and ingredients needed in order for such a programme to short courses on business management. As stated have a chance of success include, on the one side, a earlier, any initiative designed to further the develop­ strong commitment on the part of government auth­ ment of the rural or farm sector (coupled with efforts orities and cooperation from the rural society in ques­ to open up the relevant markets) is laudable and may tion and, on the other, a willingness on the part of the improve the situation of the target group. Be that as it young people involved to set themselves up in an may, because the coverage of youth programmes is agricultural activity and the availability of suitable quite narrow and because they usually address no more farms (yielding an income per unit of family work than a small part of the problems that exist (whose equivalent to 100% of a benchmark income level). complexity and scope have often not been fully Such programmes cannot be expected to alter the major identified), they are necessarily limited in nature. social or economic trends existing in a country or re­ Since there are few broad-spectrum programmes gion, however. Instead, their success must be defined in for young people in the region’s agricultural sector, terms of whether or not they have helped to energize and in view of the fact that a number of rural areas in and renew the agricultural population, make farms Europe are -just as in the case of Latin America- more profitable, and lead to an improvement in the experiencing a high rate of migration by young quality of rural life and work by making agricultural activities more attractive and more rewarding. people, with consequent demographic ageing of the There are two main lines of policy regarding such remaining population, it may be instructive to present programmes: a neo-professional orientation which calls an overview of a few of the programmes that have for the incorporation of new, trained agricultural pro­ been set up by the European Community (ec) to miti­ ducers capable of practising the profession in an effi­ gate these demographic imbalances. cient manner,13 and a neo-rural orientation, whose TheEC programme designed to help young people (up to 35-40 years of age) to establish themselves in the agricultural sector requires that at least 50% of the indi­ 13 In France, in addition to having the required academic qualifi­ vidual’s income must come from agriculture and that cations, these young people must have taken a 40-hour course the person must devote 50% of his/her working hours to dealing with the formulation of their start-up plan and have com­ pleted a six-month internship on an agricultural production unit agricultural activities for at least the first five or ten other than their family-owned farm.

YOUTH EXPECTATIONS AND RURAL DEVELOPMENT • MARTINE DIRVEN CEPAL REVIEW 55 • APRIL 19S5 139

objectives are to promote a demographic balance, Nevertheless, although the nationwide average econ­ counteract desertification in rural zones and create omic size of farms in Spain is 5.3 eus , the average jobs for young people in the agrarian sector as a size of the farms on which people under 35 work is means of mitigating the adverse effects of unemploy­ much greater (14.1 eus ) and those owned by a person ment levels in other sectors of the economy. under 35 years of age average 17.9 eus , which places Each of these policy lines enjoys the support of them in the category that the European Community trade unions and associations of differing ideological defines as “large” (16-40 eus ). leanings and historical backgrounds. France was a In terms of physical size, Spanish farms average 13.9 pioneer in this field, since it launched its agricultural hectares in area, but the average size of those owned youth settlement policy in 1973, whereas we cannot or occupied by persons under 35 years of age is near­ really talk about any EC policy of this sort until 1985. ly double that figure (25.3 hectares). The fact that the González (1990) notes that in Spain in the late average economic size of young farmers’ units is ap­ 1980s, half of the farmers over 54 years of age who proximately three times the national average while owned their land had no successor. It then devolves the land area of such farms is double that average may upon the public sector, trade unions or some other largely be accounted for by the more intensive nature of sort of medium to put the outgoing generation of far­ these operations (based on the use of irrigation, intens­ mers in contact with young people who wish to be ive stock-raising, etc.). A nationwide survey of young farmers (or who feel they have no other option) and Spanish agricultural producers showed that 63.2% of are seeking access to land. their total number and 51.6% of the owners or occu­ The European Community considers farms piers would like to change their occupation if it were measuring less than four economic units (eus ) to be possible (as opposed to 49% of the participants in the “very small” or “marginal”. It may be noted that 69% settlement programme), while 82% of all these pro­ of all farms in Spain fall into this category, and one- ducers said they would prefer to stay in their own fifth of all Spanish landowners or occupiers under the habitat rather than migrating (as compared to 92% of age of 35 have plots measuring less than four eus . the settlement programme’s beneficiaries). VII Conclusions

Rural poverty in Latin America is a severe problem, things, to their increasing contact with the mass and the level of unmet needs is very high. Little media, “modern” attitudes and “urban” viewpoints. headway has been made in recent decades -far less Various studies and interviews clearly indicate than is needed in order to turn this situation around. that many young people -farmers’ sons and, even The inhabitants of rural areas therefore have little more so, daughters- not only wish to give up farming chance of attaining higher living standards or per­ and emigrate but actually do change their field of sonal advancement within the rural environment in activity and place of residence. There are also many general and agricultural activities in particular. All others, however, who do not wish to change their the indications are, however, that many of the young field of activity or leave their ancestral home, or, if people living in rural areas today have more individ­ they do desire a change, do not believe it is possible ual visions of the future and greater ambitions in to do so. terms of personal betterment than the generations Consequently, only about half of the children that went before them. bom in rural areas during the 1960s still live in those Society’s image of agricultural producers -and areas today. Although it has eased off somewhat, this especially of peasant farmers and producers from in­ trend persists. Because of this fact, together with a digenous groups- is quite negative, and the self- declining birth rate (accompanied by a decreasing in­ image of people (especially young people) who fant mortality rate as well) and rural-urban migration work the land has deteriorated due, among other by adults, it is projected that, for the first time in

YOUTH EXPECTATIONS AND RURAL DEVELOPMENT • MARTINE DIRVEN 1 4 0 CEPAL REVIEW 55 • APRIL 1995 centuries, rural youth and the total rural population added by agricultural activities would still not be will decline in absolute -rather than merely relative- enough to provide a “decent” income for the people terms during the present decade. working in the sector. A number of the countries in These circumstances and the “youth” variable itself which the rural and agricultural populations are still are rarely incorporated into analyses of what lies ahead on the increase would appear to fall into this ca­ for the rural sector. Nor do rural development policies tegory. For them, the answer is to route -at the least (relating to education, training, health, housing, infra­ possible cost to the individuals in question and to structure, services, recreation) or policies aimed at cor­ society as a whole- a sufficient number of people recting market imperfections (in the fields of credit, towards other, more productive activities; it is to be technology, land, inputs, water in the case of some hoped that this could be done without causing any countries, etc.) take into account the aspirations and major demographic imbalances, and also without ne­ strategies of the people who will be tomorrow’s glecting to take any of the steps necessary in order to adults. How, then, can we possibly expect them to be utilize the countries’ agricultural potential. valid or effective except perhaps in the short run? There are also places in Latin America -as in Young people clearly have a great potential for Europe- where the exodus of young people has been furthering rural development because they are more so great that many older farmers have no successors, educated, are more receptive to modem ideas, and although they may have heirs. Some of these areas have the enthusiasm of youth. In order for this poten­ are showing signs of regression and are either failing tial and this energy to be utilized, they must be given to maintain services and infrastructure or actually an opportunity to participate in the life of the com­ dismantling them. To counteract these situations, ag­ munity and to make a productive contribution, not so ricultural settlement programmes for young people that they may simply attain what their parents implemented with support from the European Com­ achieved but so that they may take a substantive leap munity could serve as an example of how to put young forward in terms óf both income and quality of life. people who wish to go into business in the agricultural Participatory decentralization may prove to be sector in contact with older agricultural producers who the way to offer rural inhabitants a new and import­ have no one to take over their operations. These pro­ ant role to play and, in time, to reinforce their self- grammes might or might not include start-up credits image and their hopes for a better future. or subsidies and requirements that farms be restruc­ In some countries -even with greater and more tured or be of a certain size and/or that participants equitable access to the means of production, crop possess a given level of knowledge acquired through diversification, the use of more profitable techno­ practical experience and schooling or training. logies and the opening of new markets- the value (Original: Spanish)

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La perspectiva desde una co­ E.93.II.G.1. munidad rural, Educación y sociedad, Santiago, FAO (Food and Agriculture Organization of the United Chile, UNICEF/Ed. San Jorge. Nations) (1992): Production Yearbook 1991, vol. 45, Mazoyer, Marcel L. (1981): Origines et mécanismes de FAO Collection: Statistics, No. 104, Rome. reproduction des inégalités régionales de développe­ (1993a): Agriculture towards the year 2000, Rome. ment en Europe, paper presented at the Congress of (1993b): International comparisons of agricultural the European Agronomists’ Association, Belgrade, production and productivity, FAO Economic and 11 August - 4 September 1981. Paris, mimeo. Social Development Studies, No. 112, Rome. Morejón, B. (1993): La estrategia cubana de la vuelta al Figueroa, A. (1986): Productividad y educación en la campo: anhelos y opciones de los jóvenes rurales, agricultura campesina de América Latina, Rio de Cuba, University of Havana. Janeiro, Joint Study Programme on Latin American Moyano Estrada, Eduardo and Mari Cruz Fernández Du- Economie Integration (ECIEL)/Inter-American Devel­ rántez (1990): Teoría y práctica de la instalación de opment Bank (IDB). jóvenes en la agricultura, Revista de estudios agro- González, Juan Jesús (1990): La incorporación de los sociales, No. 154, Madrid, Ministerio de Agricultura, jóvenes a la agricultura, Revista de estudios agro­ Pesca y Alimentación, Secretaría General Técnica, sociales, No. 154, Madrid, Ministerio de Agricultura, October-December. Pesca y Alimentación, Secretaría General Técnica, Muriedas, María del Pilar (1988): Familia y crisis eco­ October-December. nómica en México, Studies and Documents Series of Hataya, N. (1992): Urban-rural linkage of the labor market the Regional Human and Social Sciences Unit for in the coffee growing zone in Colombia, The De­ Latin America and the Caribbean, No. 6, Caracas, veloping Economies, vol. XXX, No. 1, Tokyo, United Nations Educational, Scientific and Cultural Institute of Developing Economies. Organization (UNESCO), September. IFAD (International Fund for Agricultural Development) OECD (Organization for Economic Cooperation and De­ (1993): El estado de la pobreza rural en el mundo velopment) (1990): The Informal Sector Revisited (D. -La situación de América Latina y el Caribe, Rome. Turnham, B. Salomé and A. Schwarz (eds.)), Paris. ILO (International Labour Organisation) (1992): The Phillips, J. M. (1987): A comment on farmer education World’s Labour, Geneva, United Nations. and farm efficiency: a survey, Economic Develop­ Informativo campesino (1992): El fenómeno de migración ment and Cultural Change, vol. 35, No. 3, Chicago, afecta con fuerza a familias campesinas, Asunción, IL, The University of Chicago Press. Centro de Documentación y Estudios, March. Vecino, S., J. C. Tedesco and I. Hernández (1980): Proce­ Inkeles, A. and D. H. Smith (1974): Becoming Modern - so pedagógico y aprendizaje en contextos de Individual Change in Six Developing Countries, heterogeneidad cultural: el caso de la sierra ecuato­ London, Heinemann Educational Books. riana, Educación y sociedad, New York, UNICEF. Klein, Emilio (1992): El empleo rural no agrícola en World Bank (1992): World Development Report 1992, América Latina, Documento de trabajo No. 364, San­ Washington, D. C., Oxford University Press.

YOUTH EXPECTATIONS AND RURAL DEVELOPMENT • MARTINE DIRVEN

CEPAL REVIEW 55 1 4 3

Transnational corporations and structural changes in industry in Argentina, Brazil, Chile and Mexico

Ricardo A. Bielschowsky Giovanni Stumpo

Transnational Corporations The central focus of this article is on the role played by Officer, Joint transnational corporations in the industrial realignment of ECLAC/UNCTAD Unit on Transnational Corporations. Argentina, Brazil, Chile and Mexico between the end of the import substitution stage and the early 1990s. Based on Associate Expert, recently published studies dealing with the sweeping ECLAC Division changes occurring in Latin America’s manufacturing sector of Production, Productivity and Management. following the region’s economic crisis and liberalization process, a computer programme developed by the ECLAC Division of Production, Productivity and Management has been used to examine the changes that have taken place in the sector’s production structure (sectoral composition and efficiency) and its linkages with the global economy. In order to bring out the influence of the role played by transnational corporations in these processes, manufacturing activities have been classified and analysed on the basis of whether these corporations have played a “leading”, “supporting” or “marginal” part in those processes. Using this classification of industrial sectors, the authors were able to demonstrate that the transnational corporations’ reactions and the industrial realignment process exhibited quite different modalities in each of the countries studied. These modalities or “styles” have been shaped by a combination of three groups of factors which are specific to each country: structural aspects, macroeconomic variables and institutional elements.

APRIL i « « 5 144 CEPAL REVIEW SS • APRIL 1995

I Introduction

This article examines the role played by transna­ First: These four countries’ realignment pro­ tional corporations (tn cs ) in the structural realign­ cesses exhibited very different modalities or styles. ment of the manufacturing sector in Argentina Their main differences lie in what happened to their since 1978, in Brazil since 1981, in Chile since capital goods and consumer durables industries, 1973 and in Mexico since 1982. The different which are precisely the sectors in which foreign capi­ years given for these countries correspond to the tal has predominated. In very broad terms, the argu­ first year following the stagnation of industrial ac­ ment made here is that Chile underwent a process of tivity in each country under the import substitution de-industrialization together with an intense, out­ “model”. 1 ward-oriented re-specialization effort (skyrocketing Almost all the big tncs currently in operation imports and exports); Argentina embarked upon a ra­ in the region’s manufacturing sector were founded tionalization and re-specialization process entailing during the import substitution stage. The presence the “de-sophistication” of its manufacturing complex of foreign capital on a very large scale in the and a steep rise in imports (all this also led to de­ course of that process facilitates a combined ana­ industrialization, of course: the term “de-sophistication” lysis of the structural changes occurring in the re­ will be used here to differentiate the Argentine case gion’s industries and the part played by tncs in from that of Chile, in view of the greater size and bringing about those changes. The cases of adjust­ complexity of the surviving industrial complex in Ar­ ment or retooling within the context of crisis situ­ gentina); Mexico’s realignment took the form of a ations and trade liberalization processes coincide radical “northward” integration of its manufacturing with the broader history of the realignment of these sector; while Brazil’s adjustment has thus far been of countries’ manufacturing systems. Indeed, they ac­ a rather “defensive” nature, with the tendency being tually define many of the central features of that for it to preserve the production matrix left over from realignment.2 the import substitution model (although with some The article is based on five fully complementary loss of technological density). premises: Second: Transnational corporations have played a leading role, in all four of the countries examined, in bringing about many of the changes that have □ The authors wish to thank Alejandro Vera Vassallo, João shaped the manufacturing sectors’ four different Carlos Ferraz, Jorge Katz and Wilson Peres for their valuable styles of realignment following the crisis of the im­ comments. The views expressed in this article do not necessarily port substitution model. They behaved differently in coincide with those of the Organization. each of these four countries, and this is what deter­ 1 This article was written prior to the crisis that swept over Mexico in December 1994, and it therefore analyses the trends mined the countries’ different styles of industrial rea­ observed in the economies in question only up to 1993. This lignment. consideration also applies in the case of Brazil, since the article Third: The relative importance of tncs can be does not cover the possible influence of the Cardoso Plan (July 1994) on the manufacturing sector’s international competitive­ determined in each case by looking at their sectoral ness, particularly as regards the effects of trends in the exchange placement. They played a major role in shaping these rate. styles through the actions they took in the sectors in 2 From an analytical standpoint, TNCs stand apart from other which they were most heavily involved during the Latin American industrial firms primarily because of two char­ period of import-substitution industrialization (isi) acteristics. The first of these is their sectoral placement (in the more technologically intensive branches that enjoy the most (capital goods, “modem” consumer durables, chemicals/ rapid growth in the world economy); the second is the readiness pharmaceuticals), whose adaptation to the changing with which they tend to respond to abrupt changes in the macro- times generated sweeping -though not always fa­ economic and institutional environment by abandoning or cut­ vourable- transformations. They played a supporting ting back on their production activities, moving back into those activities or changing their production functions. role in reinforcing major changes in the food industry

TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANGES IN INDUSTRY IN ARGENTINA, BRAZIL, CHILE AND MEXICO • RICARDO A. BIELSCHOWSKY AND GIOVANNI STUMPO CEPAL REVIEW 35 • APRIL 1995 1 4 5 and in branches producing intermediate commodities of basic traits that are shared by the principal coun­ (basic chemicals/petrochemicals, metallurgy/iron and tries of the region, i.e., relative weakening of the in­ steel, paper and pulp), most of which have expanded dustrial complexes in the metal products and very swiftly. Their involvement in the (often adverse) machinery, electrical and electronics, and textile sec­ changes experienced by traditional sectors (construc­ tors together with a relative strengthening of natural tion materials, textiles, wearing apparel, wood and resource-based branches of industry (Katz, 1994); a furniture), however, was almost always of a marginal low level of physical investment and intensive nature. streamlining of production activities; and a sharp rise Fourth: The more general aspects of the ways in in export and import coefficients. All these simi­ whichTNCs have influenced these four national styles larities notwithstanding, the specific ways in which can be gleaned from an examination of the extent to the above trends have unfolded in each country have which they continued their production activities in been so distinct in terms of their intensity, timing, each country and the ways in which they did so. In speed, future prospects and determinants that these broad outline, the four cases may be summarized as four cases can justifiably be described as clearly follows: in Chile, tn c s abandoned most of their for­ differentiated “styles” of adjustment. mer production activities in the metal products and The fact that more than twelve years have passed machinery and the electrical equipment and electro­ since the end of the import substitution-based stage nics industries; Argentina also witnessed a reduction of growth provides us with an opportunity to adopt a in t n c production activities in these areas, either be­ structuralist approach in analysing the changes that cause they were abandoned or because their import have occurred in each country since that time. Within coefficients rose steeply; in Mexico, tn c s served as this structuralist framework, in this article we will key agents for the country’s integration with the place priority on the analysis of processes of change United States by expanding or reducing the size of in the composition and degree of modernity of the these branches of industry as needed and boosting various production systems as well as in their styles their import and export levels sharply; and in Brazil, of linkage with the global economy. tn c s took a basic strategic decision to carry out an Certainly, the time is ripe for such an analysis. adjustment that would allow them to maintain their First, over the last 15 or 20 years there has been no production units’ strong presence in those branches’ lack of major changes in Latin America in the econ­ large local markets, thus opening up the economy to omic dimensions on which the structuralist approach a lesser extent than in the other cases. focuses. These changes have given rise to a thorough­ Important differences between countries are also going reorientation of these economies’ modes of be­ to be observed in those sectors where the tn c s have haviour and of the development modalities charac­ played a “supporting” role. One such difference has terizing their manufacturing systems. Second, it is to do with the intensities and degrees of sectoral not difficult to identify historical determinants of diversification of the chemicals and petrochemicals, this reorientation, since this was a time of persistent wood pulp, iron and steel, basic metallurgy and non- macroeconomic disturbances during which the regu­ traditional food sectors in each country; another re­ latory framework of the region’s economies under­ lates to the differing extents to which tn c s have went a veritable revolution. A third set of ingredients taken part in the development of these branches of present during this period which acted as a catalyst production in each country. for change was added by the world economy, i.e., the Fifth : The mode (or style) of response of tn c s in swift pace of world technical progress and the general each country and each style of industrial realignment trends towards regionalization and globalization. are the result of a combination of three groups of This article draws upon two types of sources. factors within each country: structural aspects, First, it takes advantage of the fact that, unlike the macroeconomic variables and institutional elements. situation just a few years ago, individual research It is important to make the point, from the very papers are becoming available in a number of Latin start, that the premise of four different styles does not American countries that provide an overall picture of mean overlooking another central element in the re­ the radical changes occurring in the manufacturing cent changes seen in Latin America’s manufacturing sector in the wake of the economic crisis and the sector as a whole, namely, the existence of a number move towards liberalization. In some cases, this new

TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANGES IN INDUSTRY IN ARGENTINA, BRAZIL, CHILE AND MEXICO • RICARDO A. BIELSCHOWSKY AND GIOVANNI STUMPO 1 4 6 CEPAL REVIEW 55 • APRIL 1955 body of knowledge covers the role of transnational Second, the article concentrates on the behaviour corporations quite well.3 of foreign subsidiaries founded during the import Second, for the first time ever, the padi computer substitution phase, i.e., enterprises that were already programme for the analysis of industrial dynamics in operation before the economic crisis hit the region. -software written by the ecla c Division of Produc­ It is important to recall that during the 1980s, direct tion, Productivity and Management- has been used foreign capital flows into the manufacturing sector here to analyse Latin American industry. Given the were primarily associated with these firms; in other scarcity of region-wide data, padi represents an im­ words, they were related to the continuation and ex­ portant new tool for analysing structural changes in pansion of these companies’ activities in the region. Latin America’s manufacturing sector. Foreign investment channeled into the region through The present article is divided into four sections. wholly new business enterprises during that period The first describes the analytical tools that were used. was heavily concentrated in the natural resources and The second gives a comparative overview of the four services sectors, and was the result of a decision to different adjustment paths taken by the countries, based open up these sectors to foreign capital; in almost all on a series of indicators of changes in the structure and cases, these types of liberalization initiatives were in the international linkages of their manufacturing buttressed by privatization processes.4 sectors. The third section presents an analysis of Third, in addition to the fact that foreign direct these sectors in the four countries selected for this investment (non-financial fd i ) was primarily being study. The fourth and concluding section offers an channeled into natural resources and services, the fol­ overall picture of the changes that have taken place. lowing circumstances -which will be presented in At this point, three introductory observations are o utline form only- have constituted significant features called for: of the four countries’ fdi inflows since the early 1980s First, the period on which this article focuses was (see table 1): obviously a difficult one for the manufacturing sector in • Taken together, the countries’ share of world FDI these four countries. After decades of rapid growth, flows has shrunk, especially during the sharp up­ manufacturing activities in these four countries lapsed into a long recession (starting in the 1970s in Argentina turn in such flows in 1985-1990; since 1991, and Chile and in the early 1980s in Brazil and Mexi­ however, their share has begun to expand once co). Furthermore, except in Chile, the sector’s sub­ again. sequent recovery will only have brought output up to • Mexico and Chile are set apart from Argentina about where it was in absolute terms before the crisis. and Brazil by their ability to attract increasing If the last year of growth prior to the crisis is used amounts of foreign direct investment (fdi ). Inter­ as the base year for each country (Chile: 1972 = estingly enough, Mexico is the only country that 100; Argentina: 1977 = 100; Brazil: 1980 = 100; and managed to attract fdi during times of crisis (the Mexico: 1981 = 100), then the physical output in­ mid-1980s), since when Chile has done so it has dexes as of 1993 were 140 for Chile, 96 for Argenti­ been experiencing a full-blown recovery. Argentina na, 100 for Brazil and 114 for Mexico. has only recently regained its ability to attract in­ vestment (chiefly to services sectors via privatiza­ 3 At the individual country level, the recent literature on the tions), also during an economic recovery phase. manufacturing sector as a whole and on transnational corpora­ • A decreasing portion of investment has gone to tions in that sector, in particular, includes the following: Argen­ the manufacturing sector (unfortunately, no stat­ tina: the compilation of texts made by Kosacoff (1993), istics on this subject are available for Argentina). especially chapters I and V; Aspiazu (in press); Katz (1994); ECLAC (1993c); Chudnovski, López and Porta (1993 and 1994); In absolute terms, however, the sums channeled and Beccaria and Kosacoff (1994). Brazil: the final report of a into this sector in Mexico mounted sharply in the project on the competitive status of Brazilian industry, organized second half of the 1980s and remained high dur­ by IEI/UNICAMP (1993); Fritsch and Franco (1991); ECLAC ing the early 1990s. (1993a and 1993b); Erber and Vermulm (1992); Barros (1993); Coutinho and Ferraz (1994); and Suzigan (1991). Chile: Rozas (1992); Diaz (1994); Agacino, Rivas and Román (1992); Castillo, Dini and Maggi (1994); Calderón (1994b); and Aguilera and Becar 4 Research on this subject is being conducted in a number of (1991). Mexico: Casar and others (1989); Casar (1993 and 1994); countries under a project set up by the Inter-American Develop­ ECLAC (1991); CTC (1992); Peres (1990); Unger, Saldana, Jasso ment Bank and coordinated by Manuel Agosin of the University and Durand (1992); Dussel Peters (1993); and Ros (1991). of Chile.

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TABLE 1 Foreign direct investment flows, 1977-1992

(1) (2) (3) (4) FDI flows FDI flows in the (millions of manufacturing sector (2)/(l) in % (1) as a % of 1992 dollars; (millions o f1992 dollars; FDI worldwide annual averages ) annual averages)

Argentina * 1977-1980 537 0.72 1981-1985 565 0.98 1986-1989 966 0.58 1990-1992 3 316 2.11 Brazil 1976-1980 3 354 2 474 73.7 5.18 1981-1985 1 899 1 430 75.3 3.31 1986-1990 2 508 1 446 57.7 1.51 1991-1992 1 420 78 (5.5) 0.91 Chile 1976-1980 257 80 31.3 0.40 1981-1985 344 79 23.0 0.60 1986-1990 839 70 8.3 0.51 1991-1992 973 153 15.8 0.62 Mexico 1976-1980 1 202 945 78.6 1.86 1981-1985 1428 1 116 78.1 2.49 1986-1990 3 416 1666 48.8 2.06 1991-1992 6 382 1 448 22.7 4.07 Total 1976-1980 5 530 8.26 1981-1985 4 236 7.38 1986-1990 7 729 4.65 1991-1992 2 091 7.72 Source: Joint ECLAC/UNCTAD Unit on Transnational Corporations, based on country sources. * Based on figures compiled by the International Monetary Fund (IMF).

II Methodology

In this section we will present the sectoral classifica­ nal character. This breakdown is particularly func­ tions used in the analysis, along with a brief over­ tional in terms of the analysis to be presented here, view of the analytical scheme used to describe the for two reasons. The first is that, in addition to focus­ processes of structural change in each country’s ing on the role played by transnationals, it provides a manufacturing sector. direct means of differentiating among groups of in­ dustries on the basis of another three criteria: indus­ 1. The presence of t n c s : leading, supporting or trial organization, technical progress and use marginal roles in Industry groups categories. The second is that it provides us with a picture of the general profile of the structural changes We have divided the manufacturing sector into three taking place, since the group of industries in which industry groups, according to whether the role played tncs have played a supporting role expanded in all of by tncs has been of a leading, supporting or margi­ the countries; the group in which tncs have played a

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leading role exhibited differing trends from one These industries are essentially producers of in­ country to the next; and the group in which tn c in­ termediate goods that can be described as widely- volvement has been minimal experienced, for the used industrial commodities. The term “supporting” most part, a contraction. has two meanings here, in that it indicates that trans­ national corporations have played an important but a) Industry groups in which t n c s have played a not dominant role in local markets and also that they leading role have frequently been associated with locally-owned These industries are included in the groups of firms. the International Standard Industrial Classification of The extent of the presence maintained by trans­ All Economic Activities (isic) that are shown in national corporations in the food and beverages sec­ parentheses: tor has varied a great deal. There is one group of • Mechanical capital goods (382) industries in which the participation of TNCs has • Electrical and electronic equipment/scientific in­ ranged from a marginal to a supporting role (precise­ struments (383/385) ly in that of commodities, i.e., traditional, semi­ • Transport equipment (384) processed foods) and another in which their • Fine chemicals and pharmaceuticals (352) participation has fluctuated between a supporting and • Rubber (355) a leadership role (processed foods, with some pro­ • Tobacco (314) duct differentiation, which are generally intended for • Glass (362) sale in supermarket chains). Transnational corporations predominate in these industries in almost all the countries in the world. In c) Industries in which t n c s have played a marginal Latin America, the presence of foreign capital is par­ role ticularly great in most of the countries, as is evi­ These industries belong to the ISIC groups shown denced by the fact that its share of total sales is above in parentheses. 50% in almost all cases. This group includes indus­ • Textiles/wearing apparel/leather and footwear tries that generate and/or disseminate technical pro­ (321-327) gress (capital goods/electronics/fine chemicals and • Wood and furniture (331/332) pharmaceuticals) as well as highly technology-intensive • Printing (342) oligopolistic groups undergoing a rapid process of • Non-metallic minerals, except glass (361/369) product differentiation (consumer electronics and • Metal products (381) motor vehicles). These industries are also the ones • Other manufactures (390) whose production processes are undergoing the most Foreign firms have not played a significant role intense globalization process. Here, the tn c s possess a unique asset (Hymer, 1976; Dunning, 1973) in their in these industries’ production processes or techno­ technological expertise (associated with economies logical performance. These competitive oligopolies of scale and international specialization) that places are consumers of technology, and price competition them at a huge advantage over local firms and there­ is a very important element. They vary greatly in terms by assures them of a leadership position. The two of size and technological capabilities, and often include exceptions in this regard within the above group are a few leading firms (locally owned, for the most part) rubber products (tyres) and tobacco, both of which along with many small and medium-sized companies. are highly concentrated international oligopolies. 2. The analytical scheme: the changes to be b) Industries in which TNCs have played a examined and their determinants supporting role These industries belong to the isic groups shown Figure 1 shows the scheme used for this analysis. in parentheses. The objective was to examine the changes which • Food and beverages (311-313) took place in the industrial structure and international • Pulp and paper (341) linkages between the end of the import substitution • Basic chemicals/petrochemicals, except fuels (351, phase and the early 1990s. 354, 356) The analysis consists of three parts. First, the • Iron and steel/basic metal products (371/372) structural changes that have occurred are identified.

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These changes are measured on the basis of three sets zation processes is not very consistent, except in a of indicators: sectoral composition, international very few instances, and even then only partially. linkages, and trends in labour productivity. The third step in the analysis deals with the The second step is to look at the mechanisms determinants of changes in industrial structure. Three governing changes in the composition of output and main sets of factors are of interest in this regard: productivity. These mechanisms can be broken down macroeconomic variables (growth rates, price sta­ into physical investment/disinvestment, rationalization bility, interest rates and exchange rates), structural pure and simple, and rationalization accomplished factors (the size of the domestic market, the metal through the introduction of non-embodied technologies. products and machinery industry’s level of develop­ This raises some problems. One difficulty is that no ment prior to the debt crisis, the relative significance statistics on fixed capital formation are available, of the regional market, and the frontier of exportable either for the different industries and branches of ac­ natural resources in the medium term), and institu­ tivity or for the manufacturing sector as à whole. tional elements (changes in the regulatory system, the Another is that the available information on rationali­ competitive framework and industrial policy).

FIGURE 1 Analytical scheme

THE PROCESS (end of 1ST up to 1994, sub-periods determined by macroeconomic changes)

PRIOR STRUCTURE (end of ISI) CURRENT STRUCTURE (1994)

COMPOSITION OF GDP PHYSICAL INVESTMENT/DISINVESTMENT COMPOSITION OF GDP

COEFFICIENTS OF LIBERALIZATION RATIONALIZATION COEFFICIENTS OF LIBERALIZATION

PROXIMITY TO INTERNATIONAL “NON-EMBODIED" MODERNIZATION PROXIMITY TO INTERNATIONAL PRODUCTIVITY FRONTIER PRODUCTIVITY FRONTIER

BEHAVIOUR OF TRANSNATIONAL CORPORATIONS

STRUCTURAL DETERMINANTS MACROECONOMIC INSTITUTIONAL AND DETERMINANTS EXTERNAL DETERMINANTS

Prior production/distribution base G row th Industrial policy/Market organization Size of market (domestic and regional) Price stability Worldwide trends in technology, trade Natural resource frontier Interest rates and finance Exchange rate Pace of liberalization

a ISI = Import-substitution industrialization.

TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANGES IN INDUSTRY IN ARGENTINA, BRAZIL, CHILE AND MEXICO * RICARDO A. BIELSCHOWSKY AND GIOVANNI STUMPO 150 CEPAL REVIEW 55 • APRIL 1995

III Indicators of structural change

In this section we will discuss some of the principal The second point of interest regarding changes indicators of major structural changes in the relevant in industrial structure is the increased importance of countries: the level and composition of value added, the sectors in whichtncs have played a “supporting” trends in labour productivity, and changes occurring role (“S”). This group includes industrial com­ in international linkages.5 modities (intermediate goods) and foodstuffs.6 The expansion of this group’s share of total industrial 1. Level and composition of value added output was especially great in Chile (from 35.7% in 1972 to 49.1% in 1992); in Argentina the increase Table 2 provides a summary view of our findings was also notable but less intense than in Chile and regarding the level and composition of value added. more heavily concentrated in food products,7 while The first set of results illustrates the trend observed in in Mexico and Brazil it was less heavily concentrated sectors in which transnational corporations have in commodities. In contrast, the share of output pro­ played a leading role (“L”) in the four countries. vided by industries in which tncs have played a mar­ In the case of Chile, the relative importance of ginal role declined in every case. these “L” sectors in the overall industrial structure Another frequently used method of comparing was sharply reduced (from 30.7% in 1972 to 22.5% the intensity of changes in different countries’ indus­ in 1992); it also declined in Argentina, although less trial structures is to construct a “structural change steeply. In contrast, the importance of these “L” in­ index” (sci). Here, we have used the structural dustries increased in Mexico and, to a lesser extent, change index developed by u n id o , which measures in Brazil. the intensity of variations in the composition of the If we now take a closer look at this same group value added by industry (sci, in table 2). It is import­ of industries, we see that capital goods industries were ant to note that a high index does not necessarily downsized in all the countries, especially Chile and Ar­ denote a change in direction towards more intensive gentina, and that Brazil continues to stand apart from industrialization (recent cases of this include those of the other three countries because of its greater size the Republic of Korea and Taiwan) but may instead (17.3% of total regional industry, compared with 8.8% reflect a reversion to natural resource-intensive and in Mexico, 7.7% in Argentina and 5.1% in Chile). We less technologically intensive branches of activity. also see that the automotive industry shrank a great This is precisely the reason, among the four cases deal in Chile, but expanded in the other countries, examined here, for the higher coefficient for Chile particularly in Argentina and Mexico. and the lower one for Brazil. Table 2 also illustrates the size of the gap separ­ ating the oecd countries’ industrial structures from 5 The data used for this purpose raise a number of problems (which we have attempted to solve, at least in part) in connec­ those of the four countries analysed here. If we use tion with the conversion (a necessary operation for the construc­ the average value for those developed countries as a tion of some of the indicators) of values denominated in local benchmark for a well-articulated, competitive indus­ currencies into dollars and the determination of real values for the variables used. In the first case we have used the “rf” ex­ change rates calculated by the International Monetary Fund, i.e., Despite the heterogeneity of ISIC group 311, it includes a num­ annual average exchange rates; however, any overvalu­ ber of products (e.g., fishmeal and vegetable oils) that are clearly ations/undervaluations of local currencies that may have been intermediate inputs. present during the years in question have not been corrected. 7 Actually, the 1992 data for commodities in Argentina are This means that there may be some distortions (primarily in the skewed by the fact that one of the country’s major steel produ­ case of Argentina) in export and import coefficients, although cers, SOMISA, temporarily shut down its operations during that they in no way alter the trends to be analysed here. The second year. Therefore, the (as yet unavailable) data for 1993 would move problem has been resolved by using industrial deflators to con­ Argentina closer to Chile than to the other two countries as regards vert current figures on the amount of value added (and, hence, the increase in the relative significance of intermediate goods. productivity) into constant figures.

TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANGES IN INDUSTRY IN ARGENTINA, BRAZIL, CHILE AND MEXICO • RICARDO A. BIELSCHOWSKY AND GIOVANNI STUMPO CEPAL REVIEW 55 • APRIL 1995 151

TABLE 2 Chile, Argentina, Mexico, Brazil and OECD: Level and composition of value added (Percentages) Chile Argentina Mexico Brazil OECD

COMPOSITION OF VALUE ADDED 1972 1992 1977 1992 1981 1992 1980 1993 1975 1992

Sectors where TNCs play a leading role a

Metal products and machinery/electrical and electronic goods 9.7 5.1 13.6 7.7 10.4 8.8 18.7 17.3 22.8 25.3 Transport equipment 8.0 2.4 10.8 12.5 7.9 9.6 7.8 8.3 10.7 11.5 Other 13.0 15.9 9.8 9.6 10.3 13.3 8.5 11.1 7.9 9.7 Subtotal 30.7 22.5 34.2 29.8 28.6 31.7 35.1 36.6 41.4 46.5

Sectors where TNCs play a supporting role a

Food and beverages 21.3 28.4 18.4 25.7 23.2 23.1 13.6 14.9 11.5 11.1 Commodities 14.4 20.7 14.1 15.0 16.7 20.1 19.9 23.6 18.9 17.4 Subtotal 35.7 49.1 32.5 40.7 39.9 43.2 33.5 38.5 30.4 28.5

Sectors where TNCs play a marginal role a 33.6 27.4 33.4 29.5 31.6 25.2 31.4 24.9 28.4 25.0

Total 100 100 100 100 100 100 100 100 100 100

Variation in value added 100 141 100 95 100 115 100 100 100 SCIb 0.41 0.33 0.28 0.20 0.16 Source: PADI computer programme and original compilations. a For a description of these sectors, see section II, “Methodology”, of this article. b Structural Change Index.

trial structure, then we can easily see that, in the case In the case of Chile, against the background of of the four countries of special concern to us here, the a rising level of value added, the increase in gap is not only sizeable but is also tending to widen. productivity has been quite small (only 11% in Here, too, however, it should be emphasized that 20 years), though the growth rates for this both the actual size of the gap and the speed at which variable registered by the different groups of it is widening differ from country to country, with the industries are very uneven. The gain in pro­ two variables being greatest in the case of Chile and ductivity recorded for commodities is particu­ smallest in that of Brazil, with Argentina and Mexico larly noteworthy (76%). somewhere in between the two extremes. The situation has been quite different in Ar­ gentina, where, as manufacturing output 2. Labour productivity slumped, productivity has climbed sharply (74.8% in 15 years, which works out to an An analysis of the data on labour productivity8 (see average annual rate of 3.8%). Differences be­ table 3) reveals the existence of quite dissimilar situ­ tween sectors are quite marked, although less ations: so than in Chile. Mexico and Brazil have similar productivity 8 Labour productivity has been calculated as the value added per growth rates (39.8% in one case and 36.5% in employed person. the other). These similar rates have occurred

TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANGES IN INDUSTRY IN ARGENTINA, BRAZIL, CHILE AND MEXICO • RICARDO A. BIELSCHOWSKY AND GIOVANNI STUMPO 1 5 2 CEPAL REVIEW 55 ' APRIL 1555

Chile, Argentina, Mexico and Brazil: Labour productivity (Percentages) Chile Argentina Mexico Brazil

VARIATION IN PRODUCTIVITY 1972 1992 1977 1992 1981 1992 1980 1993

Sectors where TNCs play a leading role a

Metal products and machinery/electrical and electronic goods 100 103.7 100 170.5 100 118.9 100 139.3 Transport equipment 100 88.0 100 225.5 100 151.1 100 133.7 Other 100 145.3 100 188.4 100 156.4 100 152.4 Subtotal 100 136.4 100 198.4 100 144.1 100 143.7

Sectors where TNCs play a supporting role a

Food and beverages 100 82.4 100 194.3 100 137.1 100 129.0 Commodities 100 176.0 100 149.0 100 171.2 100 147.5 Subtotal 100 106.5 100 174.7 100 150.7 100 138.5

Sectors where TNCs play a marginal role a 100 97.0 100 156.2 100 117.1 100 116.5

Total 100 110.8 100 174.8 100 139.8 100 136.5

Variation in value added 100 141 100 95 100 115 100 100 Source: PADI computer programme and original compilations. a For a description of these sectors, see section II, “Methodology’’, of this article.

within different contexts, however, since in put) and import coefficients (the ratio between im­ Mexico output has risen (moderately) and the ports and the gross value of output). rationalization of production has been coupled The largest increase in export coefficients was with heavy investment in some sectors, whereas in Chile, whose coefficient jumped from 4.3% in in Brazil the value added by industry has re­ 1970 to 17.1% in 1992; Mexico’s coefficient also mained virtually unchanged and rationalization rose steeply (from 3.1% to 10.9%). Much smaller processes have been much more intense than changes were seen in the cases of Brazil and, espe­ investment. cially, Argentina.9 Differences are also to be observed in the direc­ 3. Changes in international linkages tion of this increase in exports. In Chile, food and commodities exhibit the hig­ The changes seen in the four countries’ linkages with hest export coefficients. This is particularly so in the the international economy are summarized in tables 4 case of food products, whose coefficient soared from and 5; here, too, we see that they are similar in some 4.3% in 1972 to 21.7% in 1992. In Argentina, food respects but very different in others. exports registered the highest coefficient, but the a) Export and import coefficients Generally speaking, an increase is to be ob­ served in all four countries’ export coefficients (i.e., 9 As noted earlier, Argentina’s coefficient has probably been underestimated as a consequence of the overvaluation of its the ratio between exports and the gross value of out­ currency in 1992.

TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANDES IN INDUSTRY IN ARGENTINA, BRAZIL, CHILE AND MEXICO * RICARDO A. BIELSCHOWSKY AND GIOVANNI STUMPO CEPAL REVIEW 55 • APRIL 1595 1 5 3 steepest increase was noted in commodities. In con­ b) The trade balance trast, the growth leader for the expansion of Mexico’s These differing situations are also reflected in exports has been the automotive industry. In this the countries’ trade balances. All the countries except case, the coefficient for the “L” sectors shot up from Brazil experienced a deterioration in these balances only 3.3% in 1980 to 21.8% in 1992; the increase in (see table 4): Chile’s deficit widened from US$641 this coefficient for isic group 384 (transport equip­ million in 1970 to US$4.718 billion in 1992; Argen­ ment) was particularly steep (from 4.92% in 1980 to tina went from a US$624 million surplus in 1978 to a 35.91% in 1992). deficit of US$6.412 billion in 1992; and Mexico’s In Brazil, the largest change was in com­ deficit deepened from US$13.508 billion in 1980 to modities, whose export coefficient climbed from US$26.625 billion in 1992. 5.5% to 22.1% during the period. As may readily be seen from table 4, in every The increase in export coefficients was accom­ case the trade deficit is concentrated in the “L” sec­ panied by a rise in import coefficients as well, but tors. Brazil, on the other hand, was able to improve here again, major differences among the four coun­ its trade balance, boosting its surplus from US$2.857 tries are to be observed. billion in 1980 to US$11.822 billion in 1992. More­ In this regard, first place is held by Argentina, over, in 1992 it marked up a surplus in the two ca­ which witnessed a particularly sharp increase in this tegories in which it had run a deficit in 1980: “L” indicator10 (from 6.3% in 1978 to 16.7% in 1992). It industries and commodities. is followed by Mexico, where the rise in the indicator was smaller but its final level was higher (28.6% in c) The composition of exports and imports 1992). Import coefficients in Chile and Brazil An analysis of the countries’ trade mix (see table showed smaller increases. Chile’s coefficient was the 5) enables us to see the elements detected thus far highest of the four countries in 1970, and had from a different angle. climbed to still higher levels by 1992. Brazil has the With regard to exports, the most salient event lowest values for this indicator, but since it has only in the case of Chile was the clear shift in the export recently begun to open up its economy, it is reason­ mix towards food products. In Argentina, although able to expect a major increase in its import coeffi­ foodstuffs remained a very significant component, cients after 1992. the share of commodities expanded steadily. In In summary, in two of the countries -Chile and Mexico, on the other hand, “L” industries were the Mexico- export coefficients have risen sharply, but main source of manufactured exports, although it they have also been accompanied by high import is worth noting once again that this shift in the coefficients. Argentina registered no more than a export mix was largely accounted for by the spec­ small increase in its export coefficients, but its im­ tacular growth of the automotive industry. The port coefficients have risen substantially. Brazil relative share of food products, in contrast, con­ has followed a different path: a small increase in tracted sharply. In Brazil, the export mix shifted its import coefficients has been coupled with a rise towards commodities and, to a lesser extent, to­ in export coefficients which, although not as spec­ wards “L” industries, while the relative share of tacular as in Chile and Mexico, is at all events food products shrank considerably. much greater than the increase seen in Argentina. The most notable features of the countries’ im­ port trends were the heavy imports made by the “L” industries (at the start and, even more, at the end of the periods in question) and a tendency towards im­ 10 What was said in reference to export coefficients is applicable port substitution (except in Chile) within the category in this case as well; thus, if a correction had been made for the overvaluation of Argentina’s currency, its coefficient would of commodities. probably have been even higher.

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TABLE 4 Chile, Argentina, Mexico and Brazil: External-sector indicators Chile Argentina Mexico Brazil

EXPORT COEFFICIENTS (%) 1970 1992 1978 1992 1980 1992 1980 1992

Sectors where TNCs play a leading role 3 1.7 7.6 4.4 4.9 3.3 21.8 7.9 15.0 Food 4.3 21.7 15.5 18.4 2.0 1.8 22.1 19.7 Commodities 13.9 28.7 6.2 10.4 6.2 13.0 5.5 22.1 Sectors where TNCs play a marginal role a 2.4 10.4 2.2 4.2 1.9 6.2 5.2 10.2 Total 4.3 17.1 7.5 9.0 3.1 10.9 9.2 16.2 IMPORT COEFFICIENTS (%) Sectors where TNCs play a leading role a 61.8 122.3 12.0 33.6 37.0 59.2 11.6 14.0 Food 10.0 5.9 1.2 2.9 4.5 7.4 1.9 5.2 Commodities 39.5 46.6 13.9 25.4 25.5 27.6 12.9 11.6 Sectors where TNCs play a marginal rolea 11.4 24.2 1.8 7.3 4.9 16.1 1.3 4.2 Total 29.7 43.2 6.3 16.7 16.8 28.6 7.4 9.5 TRADE BALANCE (millions o f dollars) Sectors where TNCs play a leading role a -439 -4 359 -1 095 -7 067 -8 484 -16 506 -1 834 613 Food -36 942 1 787 3 295 -716 -2 420 5 949 4 038 Commodities -93 -641 -537 -1 863 -3 482 -4 522 -2 925 4 472 Sectors where TNCs play a marginal rolea -73 -659 468 -777 -826 -3 177 1 668 2 699 Total -641 -4 718 624 -6 412 -13 508 -26 625 2 857 11 822

Source : PADI computer programme and original compilations. a For a description of these sectors, see section II, “Methodology”, of this article.

TABLE 5 Chile, Argentina, Mexico and Brazil: Composition of exports and imports (Percentages) Chile Argentina Mexico Brazil OECD

COMPOSITION OF EXPORTS 1970 1992 1978 1992 1980 1992 1980 1992 1980 1992

Sectors where TNCs play a leading rolea 11.3 9.3 16.6 16.6 27.7 58.5 26.1 31.7 48.6 58.9 Food 25.0 41.6 51.5 52.5 18.7 4.8 44.1 19.2 7.1 6.0 Commodities 46.3 33.0 11.7 17.4 37.0 24.4 14.7 33.0 25.6 19.7 Sectors where TNCs play a marginal rolea 17.4 16.1 20.3 13.6 16.6 12.3 15.1 16.1 18.7 15.3 Total 100 100 100 100 100 100 100 100 100 100 COMPOSITION OF IMPORTS Sectors where TNCs play a leading rolea 60.3 59.4 54.9 59.8 56.4 60.7 47.8 50.5 40.4 52.4 Food 8.4 4.5 4.6 4.5 7.7 7.5 4.8 8.7 8.0 6.6 Commodities 19.1 21.3 31.2 22.8 27.8 19.8 42.8 29.5 28.8 21.7 Sectors where TNCs play a marginal role3 12.2 14.8 9.3 12.9 8.0 12.1 4.7 11.3 22.8 19.3 Total 100 100 100 100 100 100 100 100 100 100

Source-. PADI computer programme and original compilations. 3 For a description of these sectors, see section II, “Methodology”, of this article.

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IV The role of TNCs In the four different styles of industrial realignment

In this section we will undertake a general analysis of 1. Chile the role played by tncs in the different realignment processes experienced by the four countries’ manu­ The main features of the Chilean manufacturing facturing sectors since the end of the import substitu­ system’s realignment have been the TNC-led de­ tion stage of industrialization. industrialization process of the 1970s and the sub­ The four cases will be explored on the basis of sequent changeover to an outward orientation via the hypotheses and methodologies described in investments in natural resource-intensive branches of earlier sections. It is worth repeating the main activity, where thetncs have participated as suppor­ points in the organizational scheme of the analysis ting actors. that follows: • The transnational corporations reacted different­ a) Trend analysis ly in Chile, Argentina, Mexico and Brazil to the Of all the Latin American economies that were specific environments in which they were opera­ hurt by the debt crisis, Chile was the first to resolve ting and played a decisive role in generating four its macroeconomic difficulties. After a decade of different realignment styles. slow growth that culminated in the deep crisis of the • These reactions and styles were the outcome of a early 1980s, Chile found its way back to a stable combination of structural, macroeconomic and growth path. Between 1984 and 1993, its gdp climbed institutional factors specific to each country. by 7% per year and its industrial output by 7.4%. Not only did the relevant factors differ from country to country; the timing of the structu­ i) 1973-1983. Transnational manufacturing firms ral, macroeconomic and institutional changes played a pivotal role in the contraction of Chile’s that occurred differed as well. These differen­ industrial system during this period. The sectors in ces have been respected in the following ana­ which they predominated registered a steep reduction lysis. Thus, the examination of each country in their shares of manufacturing output, which then begins at a different time, since the starting remained relatively small and recovered very little date corresponds to the end of the import sub­ during the subsequent phase of rapid growth. stitution process in each country: 1973 for The most striking cases were the firms that Chile, 1978 for Argentina, 1982 for Mexico quickly abandoned their local production activities and 1981 for Brazil. Economic reforms, the in the 1970s and turned to the domestic sale of process of opening up the economy, and mac­ imported goods from their headquarters or other roeconomic stabilization all occurred at differ­ affiliates within their international network. In ent times from one country to the next as well. these cases, “retooling” essentially took the form of As a result of all these factors, these processes the development of subsidiary activities such as dis­ of change are at different stages in each tribution, marketing and technical assistance. The country at any given time. companies specializing in motor vehicle assembly • The specific nature of the tn cs ’ actions and their and consumer electronics provide classic examples of influence on the countries’ realignment styles this course of action. Corporations that abandoned or can be deduced from an examination of two cut back sharply on their local production activities items: their sectoral placement, and the readiness included Fiat, Peugeot, Renault, Citroen, General with which they withdrew (partially or com­ Motors, Ford, Philips and General Electric. pletely) from or entered into production acti­ In other cases, retooling was a slower and more vities in each country. piecemeal process, but it still involved a sharp drop

TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANQES IN INDUSTRY IN ARGENTINA, BRAZIL, CHILE AND MEXICO * RICARDO A. BIELSCHOWSKY AND GIOVANNI STUMPO 156 CEPAL REVIEW 55 • APRIL 1995 in the amount of value added domestically, due to a This behaviour is somewhat surprising, since steep rise in import coefficients which, in most cases, rapid growth usually boosts productivity (Verdoom’s was not counterbalanced by an increase in exports. Law). The subject is a controversial one and remains Despite this and the social cost it entailed, a open to further research. Doubts in this respect are number of experts on Chile’s industrial economy ac­ founded, for example, on evidence that the industrial knowledge that the manufacturing firms which sur­ system’s adjustment was continued during this phase vived this phase were in one way or another by means of such mechanisms as specialization via strengthened by it. Thus, in a sense, the period from the outsourcing of raw materials and parts and the 1973 to 1983 may be described as a time during extemalization of business support services (Diaz, 1994). which the production apparatus underwent a ration­ Second, productivity trends in the various sectors alization process involving not only a de-verticaliza- have been very uneven. In the case of the commodity- tion of production but also a reorganization of labour producing sectors (especially wood pulp and some -involving large-scale layoffs and heavy social costs- foods) there was a marked increase in productivity, and of the technical and organizational foundations associated with intensive investment activity strongly of these enterprises (Diaz, 1994; Agacino, Diaz and backed up by debt-equity swaps (Rozas, 1992). Román, 1992; Castillo, Dini and Maggi, 1994). In the new production profile taken on by the manufacturing sector over the past 20 years, the pro­ ii) 1984-1992. Starting in the mid-1980s, with cessing plants turning out wood pulp, fishmeal, the advent of macroeconomic stability and rapid tinned foods, frozen foods, etc. are the ones which growth, Chile experienced what could be called a have made the greatest contribution to the “Chilean “positive” phase. Following the deep recession of export model”. 1981-1983, those segments of the manufacturing sec­ Foreign enterprises have played a supporting or tor that had survived the earlier de-industrialization marginal role in this process. In the wood pulp indus­ process began to experience a strong recovery and try, the Shell/Scott Paper joint venture, the Swiss expansion. company Attisholz and Simpson Paper (a minority Based on the behaviour of these firms in terms shareholder in the locally-owned company cm pc) of expansion and modernization, the past 10 years have played a supporting role. In the food industry, can be divided into two phases: a recovery lasting up foreign firms’ involvement has been much more to the end of the 1980s and, since then, a phase of limited, and local capital has led the export-oriented growth. production drive (the area of the food industry in The recovery phase appears to have had two whichtncs have been the most active is in produc­ basic characteristics. tion for the domestic market; examples include First, in the majority of Chilean manufacturing Nestlé and Coca-Cola). The low level of TNC invest­ activities, firms do not appear to have retooled their ment in manufacturing contrasts with their heavy in­ plants with a view to exports or to have integrated vestment in other sectors, especially in copper and local plants into global production networks. There telecommunications -the “stars” of the Chilean pri­ was a steep rise in employment during this period, vatization and external debt conversion process. Be­ leading to a drop in average labour productivity. tween 1986 and 1992, a scant US$223 million of the All this would appear to indicate that in Chile US$1.8 billion inflow of foreign direct investment the manufacturing enterprises which survived the went to the manufacturing sector. crisis did not undergo any major realignment during With regard to the current stage, it is possible the 1980s. Most such firms seem to have relied pri­ that physical investment in the manufacturing sector marily on the use of production capacity that had lain as a whole may be rising gradually. As a share of idle during the preceding stage. This is also true of g d p , investment in machinery and equipment foreign corporations. There is no indication that the climbed from under 5% to over 9% between 1988 basic approach used by such corporations (Nestlé, and 1992, which may mean that investments are Goodyear, Ciba-Geigy, Roche, Dow Chemical, etc.) being made in modernization and expansion of pro­ differed from that of local companies in terms of in­ duction in the manufacturing sector. vestment and modernization, and they, too, adopted a This new stage may also bring major changes in very passive stance. production functions. The most recent research on

TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANGES IN INDUSTRY IN ARGENTINA, BRAZIL, CHILE AND MEXICO • RICARDO A. BIELSCHOWSKY AND GIOVANNI STUMPO CEPAL REVIEW 5S • APRIL 1995 1 5 7 the subject (e.g., Castillo, Dini and Maggi, 1994) has tion afforded by such considerations as transport detected some positive signs in this direction. One costs, perishability of goods, distribution systems, such study, conducted under the aegis of ecla c , consumer preferences, etc.). found that a large group of transnational corporations Finally, it should be noted that, in contrast to were engaged in the introduction of new organiza­ what is commonly thought, one of the reasons for the tional techniques designed to boost both productivity strong performance of some of the natural resource- and quality (Calderón, 1994b). based industries that have had the greatest success as exporters -such as wood pulp, wood products and b) Determinants some foods- is the existence of a series of govern­ The main determinants of trends in Chilean in­ ment subsidies. For example, the reforestation which dustry and in the behaviour of tncs were already made the expansion of wood and wood pulp produc­ mentioned in earlier paragraphs. tion viable has been promoted by specially targeted The first point to note is that the industrial sys­ incentives for planters, and investments in wood pulp tem was severely hurt between the mid-1970s and and food products have enjoyed the benefit of gener­ mid-1980s by the combined effect of adverse macro- ous external debt conversion schemes. These sub­ economic factors and a radical economic liberaliza­ sidies provide a stark and by no means insignificant tion programme. Between 1974 and 1980, in addition contrast to the overall “non-interventionist” approach to the fact that the economy was growing at only a supposedly pursued by Chile since 1973. modest (and, still worse, unstable) pace, the manu­ facturing sector was battered by the combined effect 2. Argentina of a radical trade liberalization policy and increasing appreciation of the currency. From then until 1983, it In Argentina, as in the other countries analysed in also suffered the serious consequences of a severe this article, a look at the behaviour of transnational financial crisis and recession, which did not abate corporations will help us form a picture of the reo­ until the currency was devalued and higher tariffs rientation of the manufacturing system following the were temporarily reintroduced. end of the import substitution phase of industrializa­ Second, there are the structural factors. Chile has tion. This reorientation has had two main features: a relatively small domestic market and is geographi­ the weakening of the dynamic elements at the heart cally remote from the world’s main import markets. of the “substitution model”, and the strengthening of In the past, this has prevented its manufacturing sec­ natural resource-intensive branches of activity, tncs tor from progressing towards a high degree of com­ have been the principal actors in the first of these plexity. Even so, under the protectionist conditions changes as they have taken the lead in downsizing that prevailed during the import substitution process the country’s metal products and machinery and (which was interrupted in the early 1970s), Chile had electrical/electronics complexes, whether by pulling managed to establish a metal products and machinery out of the country or by radically shifting their pro­ industry of some importance. In comparison to those duction functions towards high import coefficients. of the other countries examined here, however, Their involvement in the second change has been that Chile’s manufacturing sector may be said to have of a supporting actor working in partnership with been the most vulnerable to the effects of liberaliza­ local capital. tion. In the face of so many negative macroeconomic factors, it proved impossible for it to retool without a) Trend analysis 11 incurring significant losses in terms of value added. i) 1978-1990. The sequence of economic events In the absence of policies aimed at strengthening in Argentina is well known to all. In the late 1970s any dynamic comparative advantages it might have, the manufacturing sector was dealt a heavy blow by and given the structural elements existing at that the macroeconomic policy of Minister Martínez de time in Chile, the manufacturing sector’s only oppor­ tunities for success were provided by the static advantages deriving from its wealth of natural re­ 11A number of the points made here are presented in a paper by Kosacoff and Bezchinski (1993) based on research covering ap­ sources and the competitive conditions typical of proximately 60 transnational corporations in Argentina’s manu­ traditional industries in the domestic market (protec­ facturing sector.

TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANQES IN INDUSTRY IN ARGENTINA. BRAZIL, CHILE AND MEXICO • RICARDO A. BIELSCHOWSKY AND QIOVANNI STUMPO 1 5 8 CEPAL REVIEW 55 • APRIL 1555

Hoz (1978-1981). This shock was generated by the the mere elimination of overmanning and included combination of rapid trade liberalization, sharp ap­ adjustments in production lines along with the intro­ preciation of the currency, and a deep recession. duction of modem non-embodied technologies. This was the first time that the relative weak­ However, the manufacturing sector continued to nesses in the international competitive position of the suffer the consequences of extremely adverse macro- more sophisticated branches of Argentina’s manufac­ economic trends throughout the entire decade. Thus, turing complex -metal products and machinery and the necessary conditions simply did not exist for electrical/electronic equipment- had been so clearly companies to make the radical changes involved in revealed. During the import substitution process, an moving towards more modem production practices in industrial complex had been built up whose degrees line with the demands of international competitive­ of complexity and verticalization were quite high in ness. The idiosyncracies of Argentine industry (small relation to the size of Argentina’s economy. The achieve­ scales of production and a lack of specialization at ments of this complex, and especially of the tn c s within the company level) and the fact that the adjustment it, are well known, particularly as regards the adaptation had been made without sufficient replacement of out­ of operations to small scales of production, thanks to dated equipment proved to be insurmountable bar­ the technological efforts of the local engineering indus­ riers to the gains in competitiveness demanded by the try. Nevertheless, as it turned out, these advances were new model of participation in the international econ­ not enough to surmount the problems that began to omy, and this led to a sizeable contraction in the pile up in the late 1970s (Katz, 1974 and 1994). more technology-intensive sectors, especially those The country’s protracted economic crisis, which occupied by the transnational corporations. lasted from the mid-1970s until 1990, interrupted fd i Not all branches of industry fared so badly, how­ flows to Argentina and prompted the closure of a ever. As in other Latin American countries, Argentina number of major plants, along with the withdrawal or began to draw more heavily on its abundant stocks of downsizing of major manufacturing tn c s . In the met­ natural resources as a basis for expanding its produc­ al products and machinery industry, for example, the tion of intermediate commodities. Although they oc­ corporations that left the country included General cupied a subsidiary position with respect to the large Motors, Citroen, Fiat, Peugeot, dkw , m sd, Olivetti local conglomerates, transnational corporations in­ and Chrysler, while many of the remaining firms cut creased their activities in areas where they could back on their operations, including Massey-Ferguson, utilize the advantages afforded by the country’s John Deere, Torri, General Electric and Brown Bove- wealth of natural resources. By opening up new fron­ ri. The traditional consumer electronics industry, tiers in the primary sector, tn c s have stepped up their which had been dominated by local firms, virtually activities and expanded their investments, especially disappeared, and in its place an assembly enclave in petrochemicals and agribusiness. The gas/petroleum that included such major TNCs as Hitachi, Sony, sector discovered large deposits of oil and natural Sanyo and Grundig was set up in a special processing gas, and a whole new array of partnerships was zone located in Tierra del Fuego. A number of tn c s formed between local groups and major tn c s such as also pulled out of the pharmaceuticals sector (e.g., Dupont, Bayer, Hoechst and Dow Chemical. Squibb, Lilly, SKF, Upjohn and Abbott). During the initial stage of this phase, an adjust­ ii) 1991-1993. The year 1991 marked the start of ment was made via the rationalization of production a new phase in which rapid economic growth (an based primarily on mass lay-offs, and substantial average annual g d p growth rate of about 7%) was gains in labour productivity were achieved (30% be­ combined with two highly problematic factors which, tween 1975 and 1980). After 1981, in response to its once again, occurred simultaneously: the fast-paced external debt problems, Argentina reintroduced a liberalization of trade and the sharp appreciation of number of import controls, which gave the less com­ the currency (both of which were envisaged in the petitive sectors some chance of survival. Although rationale for the Cavallo Plan). Within this new envi­ physical investment levels were still very depressed ronment, the following trends have been observed: and f d i levels were low, a rationalization-based ad­ • tn c s are regaining their former level of involve­ justment continued to be made, albeit more grad­ ment in Argentine industry. There are signs that ually, during the 1980s; this adjustment went beyond foreign investment is gradually increasing in the

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manufacturing sector, especially in the food and On this basis, four different categories of tncs automotive industries. In the food industry, a can be identified according to the sectors of activity number of major international firms (Nabisco, in which they are involved and the strategies they are Parmalat, Cadbury, etc.) have recently arrived in using (Kosacoff and Bezchinski, 1993). the country and are seeking to wrest a share of First, there are thetncs that moved into the ser­ the domestic market from other international giants vices sectors mentioned earlier (in partnership with that never left it in the first place (cpc, Nestlé, local capital, and taking advantage of business oppor­ Swift, Cargill, Dreyfuss) and from the Argentine tunities opened up by the privatization process). This transnational Bunge & Bom. In the automotive category has been by far the most important source industry, Autolatina (Ford and Volkswagen) is of new fdi in Argentina in recent years.12 Second, making investments (although thus far of only tncs continue to serve as important supporting actors moderate size); GM and Chrysler are coming in natural resource-intensive manufacturing acti­ back; Toyota is entering the market; and foreign vities, which grew so rapidly during the preceding (including Brazilian) manufacturers of motor ve­ decade. Third, in the main sectors in which tncs hicle parts are setting up business in the country. have historically played a leading role, firms are The foregoing has thus far been accomplished becoming globalized, in particular through their in­ through the reactivation and adaptation of exist­ tegration into their corporations’ international pro­ ing installed capacity, rather than through any duction and distribution networks. Fourth, there are major physical investments. The largest flows of the remaining tncs , whose strategies are not aimed at fd i have been directed towards the services sec­ globalization (or have that goal in only a very partial tor (banking, commerce, telecommunications, sense) but which are none the less moving towards a airlines) and the petroleum industry (Calderón, new production function involving a rising import 1994a). coefficient and increased marketing of imported A large part of the manufacturing activities goods to local buyers. undertaken by foreign investors have come to be governed by a new type of behaviour pattern. b) Determinants Unlike what occurred during the import substitu­ As was seen in the above analysis, Argentina’s tion phase, this time investments and the realign­ industrial realignment was dictated by an adverse ment process have been shaped by strategies that combination of macroeconomic and structural fac­ are based on the concept of economic liberaliza­ tors. Among the macroeconomic factors, mention has tion and the imperative of forging a competitive already been made of the combinations of recession position within the world economy. One of the and liberalization experienced from 1978 to 1981 and implications of this new pattern is the sharp in­ of recession and de-liberalization from then until crease in import and export coefficients (the rise 1990 which caused manufacturing output to plunge being steeper for imports) occasioned by a trade by 25%. A further factor has been the recent phase of matrix in which intra-firm flows are particularly growth, stabilization, liberalization and currency ap­ large. preciation. According to Kosacoff (1993), since the liberaliza­ The appreciation of the local currency in con­ tion drive of 1991 most firms have been adopting a junction with a strong economic recovery is resulting “tripartite” production and marketing model. First, in a swift rise in imports and large deficits on the there is in-house production, which is being cut back; balance of payments, especially in the metal products second, there is a higher coefficient of imports of and machinery industry and the branches producing inputs and parts; and third, the share of total corpor­ electrical and electronic goods. ate sales represented by imports has grown, at the expense of locally-produced goods. This scheme sug­ gests that tncs are playing a more active part in the 12 Although these are not industrial activities, this trend raises a downsizing of local production than domestic firms number of questions as to what kind of effect the privatization are, since many of their imports take the form of process may have on industrial productivity in the future, first, by bringing about changes in the quality and price of services intra-firm flows, with all the advantages which may and, second, by spurring the development of networks of sup­ thereby accrue to the corporation at the world level. pliers and subcontractors within the local manufacturing sector.

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An examination of the structural factors in­ The realignment of the Mexican manufacturing volved leaves no doubt that the “negative” aspect of sector has a number of features that set it apart from Argentina’s realignment and of the behaviour of the the other cases examined here. One is the fact that tncs -i.e., the de-industrialization of the dynamic this realignment constitutes one component of a radi­ core units of import substitution-based industry- is cal “outward-looking” retooling process. This is a re­ largely a consequence of insufficient scales of pro­ sult of the drastic nature of the adjustment which the duction and the obsolescence of the industrial com­ country had to make in order to deal with the external plex set up during the import substitution phase. debt crisis. m erco su r represents a new structural factor which may have positive effects on the metal products and a) Trend analysis machinery industry (especially the automotive indus­ Mexico’s macroeconomic adjustment was car­ try), thereby blunting the de-industrialization process ried out in two phases -1982-1987 and 1987-1992- to some extent. A promising new division of labour which correspond to two stages in the manufacturing seems to be taking shape which may enable tncs to system’s realignment. reduce the loss of their enormous sunk costs thanks During the first phase (1982-1987), the adjust­ to the economies of scale now favoured by preferen­ ment initially involved a major depreciation of the tial access to the Brazilian market. currency, considerable wage cuts and a deep reces­ Among the factors exerting a positive influence sion. Up to 1985, it also entailed quantitative controls on Argentina’s industrial realignment, there is, as we on all imports. Later, between 1985 and 1987, these know, an increase in natural resource use by the pe­ controls were gradually relaxed: the potentially nega­ troleum/gas industry, the soybean industry, packing tive short-term impact of this step on the balance of plants, fruit juice processors, etc. This demonstrates payments was counteracted by the further deprecia­ once again the excellence achieved by Argentina in tion of the currency brought about by the 1985-1986 terms of its long-standing ability to use its abundant slump in oil prices. This combination of macroecon­ natural resources in a highly competitive manner. omic factors led to a spectacular increase in the ex­ Finally, among the institutional changes which port coefficient of the manufacturing sector, which have occurred, the most significant has undoubtedly burst upon the external market at a speed never be­ been the country’s radical trade, production and fin­ fore seen in the history of the world economy. In ancial liberalization process, first in the late 1970s support of this movement, the industrial policy ap­ and now again since the start of the 1990s. Neverthe­ plied to various sectors -the automotive industry, pe­ less, in each of these two periods there has been at trochemicals, computers, in-bond assembly plants least one major episode of interventionism that may (maquilas)- focused on external trade as its key ele­ have left a deep mark on the make-up of Argentina’s manufacturing sector in the mid-1990s. First, large ment. As a result, between 1981 and 1987 the manu­ subsidies were given to commodities during the time facturing sector’s trade deficit fell from US$17 when liberal policies were in full swing, and now the billion to US$1.4 billion. automotive sector remains heavily protected. During the second phase (1987-1992), a major change was seen in policies relating to the acquisition 3. Mexico13 of foreign exchange as their emphasis shifted away from the achievement of trade surpluses and towards Of the four countries examined in this article, Mexi­ the attraction of financial resources. In 1987, largely co is perhaps the one in which the importance of as a result of the currency depreciation, the Mexican tncs in the realignment of the manufacturing sector economy displayed high levels of inflation. The con­ is most immediately apparent, tncs have been the clusion of the Stabilization Pact in December 1987 central agents of Mexican industry’s retooling with a made it possible to lower inflation sharply in 1988 view to integration with the United States, and they (and halt a wave of capital flight). This achievement have taken the lead in trade between the two coun­ was partly due to appreciation of the exchange rate, tries, largely through intra-firm transactions. which has been on the rise ever since and has helped to keep prices stable. All of this set the scene for a 13 It should be recalled that this section was written before the second liberalization drive, which caused the trade December 1994 crisis. balance to deteriorate markedly. The country’s wide­

TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANQES IN INDUSTRY IN ARGENTINA, BRAZIL, CHILE AND MEXICO • RICARDO A. BIELSCHOWSKY AND GIOVANNI STUMPO CEPAL REVIEW 55 • APRIL 19*5 1 6 1 ning deficit was financed with reserves in 1988, by Some of the industries which have been growing privatizations in 1989 and 1990, and since then with within themaquila sector (e.g., consumer electronics the huge sums of capital flowing into the country in and household appliances) have suffered a sharp con­ response to the prospects opened up by n a f t a and, traction in the rest of Mexico, where, as in the maqui­ later, to the reduction of interest rates in the United la zones, they tend to take the form of assembly States. industries. The new tn c s which have set up oper­ Thanks to the stabilization of prices, the econ­ ations in the country have done so primarily in the omy began to recover in 1988, which gave the manu­ maquila zones (General Electric, Zenith, Sony, Hita­ facturing sector more strength and ability to chi), whereas pre-existing firms (both national and withstand the effects of the trade liberalization pro­ foreign) have either disappeared or converted what gramme, implemented at the same time that the value were once primarily local production operations into of the currency was climbing. The end result of all assembly activities via a sharp increase in their im­ this differed greatly from sector to sector, however. port coefficients. This has undoubtedly played a part As a consequence of the differences in the various in lowering Mexican industry’s degree of complexity sectors’ ability to face up to international competition and vertical integration. From this standpoint, these on the domestic market, along with the fact that the industries can hardly be described as “winners”. export capacity exhibited during the first phase of the Most of the activities that are definitely “losers” adjustment -and reaffirmed during the second- also are carried out by local firms (textiles, footwear, differed markedly from one sector to the next, the food, wood pulp, metallurgy). The capital goods sec­ make-up of the Mexican manufacturing system as of tor, in which t n c s maintain a vigorous presence at the early 1990s was quite different from what it had the international level, has never been very strong in been before the crisis. Foreign capital played a pivo­ Mexico, and those t n c s that did move into the tal role in all these changes. country during the import substitution phase either Mexico’s adjustment process strengthened a cut back on their production activities or simply number of branches of activity and weakened others. abandoned their local production operations al­ The main industries in the first group are the six together. “stars” of the Mexican manufacturing sector, which These differences in behaviour stem from the are very active in international trade: motor vehicles, combined effects of the two phases of the macro- telecommunications and computers, petrochemicals, economic adjustment process. During the phase in cement, glass and the maquila industry. which industry was buffeted by the recession and National capital, in the shape of the Vitro com­ stimulated by favourable conditions for “spurious pany, predominates in only one of those industries competitiveness” (a very high exchange/wage ratio (the glass industry), and even in this case, the above and import protection), the “winning” sectors mod­ company has recently undergone a notable “transna­ ernized and reinforced their integration with the tionalization” process. North by rationalizing and further modernizing their In another two of these industries, the leadership operations, whereas the other sectors remained of tn c s is absolute. These are the automotive indus­ bogged down in the conditions created by the crisis. try (General Motors, Ford, Chrysler, Volkswagen and In the succeeding period, when the economy was Nissan) and the telecommunications and computer rapidly opening up to external markets, the “winners” equipment sector (Ericsson, ATT, NEC, Panasonic, were already on their way towards improving their Alcatel, IBM, Hewlett Packard, Motorola, etc.). productivity and the quality of their products, and tn c s are also heavily involved in the remaining this was enough to enable them to continue exporting sectors, tn c s operating in the chemicals/petrochemi­ and to take advantage of the improvement of the cals industry include Dupont, Bayer, Hoechst and local market, even though the exchange rate was be­ Monsanto; the cement industry is a duopoly formed coming increasingly disadvantageous. The “losers”, by CEMEX (a Mexican firm), which controls about on the other hand, were hard hit by the economy’s 65% of the market, and Cemento Apases (a transna­ greater openness in conjunction with an appreciating tional corporation), which has the other 35%; about currency, despite the improvement in the domestic half of the maquila industry’s 2 142 enterprises are market. United States firms and another 10% are foreign Although external investors suffered failures in companies of various other nationalities. some industries, the overall performance of tn c s in

TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANGES IN INDUSTRY IN ARGENTINA, BRAZIL, CHILE AND MEXICO • RICARDO A. BIELSCHOWSKY AND GIOVANNI STUMPO 162 CEPAL REVIEW 55 • APRIL 1985 the manufacturing sector has been a positive one b) Determinants from the standpoint of modernization and the forma­ In addition to the macroeconomic determinants tion of international linkages. It is noteworthy that discussed earlier, structural factors also helped to the performance of those industries in which tncs shape the Mexican style of realignment. Some of the have maintained a major presence, taken as a whole, basic elements in this respect are the fairly sizeable has been far better than the overall performance of domestic market and the country’s shared border the industries in which TNCS have not been heavily with the United States, which has allowed Mexican involved. industry to achieve a high and increasing degree of Since the sectors in which a great deal of foreign integration with that vast market. Moreover, the fair­ capital has been invested are also the ones exhibiting ly well developed production structure which Mexico the highest growth rates, strongest international link­ possessed at the onset of the debt crisis gave the ages and fastest pace of technical progress, it may be manufacturing sector some ability to deal with the concluded that Mexico’s industrial system has moved recession and trade liberalization without suffering in a positive direction and that t n c s have played a the degree of de-industrialization observed in other crucial role in that movement. Latin American countries. A final characteristic that This bright picture cannot be presented without appears to set Mexico apart from the other three some qualifications, however. The first has to do with countries considered in this article is that its agricul­ the relative weakness of the capital goods sector tural frontiers are more limited. Generally speaking, (Casar and others, 1989). Although the performance in comparison with the other countries examined here, of the various industries within this sector has dif­ the production and exportation of natural resource­ fered -for example, the telecommunications equip­ ment industry has done well (Peres, 1990) but the intensive goods (with the exception of petrochemi­ machine-tools industry has fared badly (Unger, cals) have expanded somewhat less in Mexico. Saldaña, Jasso and Durand, 1992)- it is clear that Finally, mention should be made of the “institu­ Mexico’s industrial realignment has done nothing to tional” determinants. The case of Mexico is often strengthen the capital goods sector’s relatively cited because of the success of its reforms, which limited production capacity. revolved around the country’s economic liberaliza­ The second qualification relates to that portion tion and reduction of State regulation. It is still not of the intermediate goods industry which is very ac­ clear exactly how much of that success was the result tive in international trade. Here, too, trends have of the opening up of trade and other liberalization been quite uneven. On the one hand, the petrochemi­ measures, however, because no detailed analysis has cals industry has done very well; on the other, most been undertaken of how liberalization and deregula­ of the other natural resource-intensive branches of tion affected the manufacturing sector. Nevertheless, activity have met with much less success and have the general feeling is that the most successful adjust­ thus generated large trade deficits. ments took place precisely in those sectors in which The chief concern regarding Mexico’s industrial there was State intervention and clear-cut industrial retooling process is the lack of an adequate response policies: the automotive, computer, petrochemical to the trade deficits prompted by the country’s adjust­ and maquila industries. ment. In fact, today’s external deficits are even greater than those initially triggered by the adjust­ 4. Brazil ment. In 1991, 1992 and 1993, the manufacturing sector once again ran up enormous trade deficits In comparison with the other three cases analysed (US$26 billion in 1993, which was twice as big as here, Brazil’s manufacturing sector is notable for the the 1980 deficit). The turnaround in economic policy fact that much more of the industrial complex put seen in 1987, when price stabilization was assigned a together during the import substitution process was higher priority than previous objectives, yielded ex­ still in place after that phase ended. The sector re­ cellent results in the areas of inflation and capital tained much more of its pre-existing matrix than inflows and satisfactory results in terms of the re­ in Chile and Argentina, and its “outward-looking” sumption of growth, but it also increased the econ­ reorientation was carried out on a much smaller scale omy’s vulnerability to external variables. than in the case of Mexico.

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The behaviour of the tncs was decisive in this Dow Chemical, Dupont, Bayer, Hoechst), regard. In essence, what the tncs tried to do was to wood pulp (Champion, Aracruz/British Tobacco, maintain the important positions they occupied in Cenibra/Mitsubishi) and iron and steel (Mannes­ the local market and protect the large-scale physi­ man and Belgo-Mineira, with Japanese investors cal investments they had already made. In contrast in Tubarao and in Usiminas). to their actions in Chile and Argentina, in Brazil • The rest of the industrial system -most of which they abandoned no more than a minimal portion of had either just been set up or had modernized their local production activities, and almost all of during the 1970s- remained relatively intact dur­ the large tncs that were at the forefront of local ing the 1980s. production at the end of the substitution process The recession, low investment levels and the were still in that position in the early 1990s. More­ rapid de-liberalization of the economy were the main over, unlike the course of action followed in Mex­ factors behind this mode of behaviour. The decade was marked by the absence of major changes in ico, in Brazil the t n c s ’ decision-making processes continued to be based primarily on their involve­ either the composition of production capacity or the ment in the domestic market.14 modernization of that capacity. The tncs adopted a fairly passive stance during that decade, despite the fact that, along with Brazilian firms, they sharply in­ a) Trend analysis creased their exports (ecla c , 1993a). A good In the 1980s, TNCs contributed not only to the example of that passivity is provided by the figures adverse trends observed in the country -low invest­ on trends in labour productivity, which showed al­ ment levels and relative technological backward­ most no change at all between 1980 and 1990, even ness- but also to the positive ones, especially those in sectors where foreign capital was heavily in­ associated with the expansion of exports. In the volved. 1990s, tncs are taking a very active part in the ad­ The sametncs that were at the forefront of local justment process and are thereby reinforcing a trend production at the end of the substitution process held that appears to be leading to the preservation and on to those leading positions throughout the 1980s. modernization of Brazil’s industrial complex. With few exceptions, they maintained a “wait and During the 1980s, when the approach taken was see” attitude. The list of companies that led the mar­ a fairly “passive” one, three basic factors were par­ ket in 1980 and are still on the leading edge in the ticularly notable: 1990s includes many of the world’s major corporations • The increase in the proportion of total output, in the metal products and machinery and electrical/ and especially of exports of manufactures, ac­ electronics industries, together with big corporations counted for by the intermediate goods sectors in the fine chemicals and pharmaceuticals industry, was largely the result of a series of investments which took a somewhat less passive stance. that were originally intended for the domestic Leading firms in the automotive industry include market. These investments formed part of an in­ General Motors, Fiat, Ford, Volkswagen, Mercedes vestment cycle which had begun in the mid- Benz, Volvo, Cummins, trw, Bosch, Krupp, etc.; ag­ 1970s and matured in the early 1980s. Foreign ricultural and cargo handling equipment are produced capital was a very active partner in these invest­ ments and played a leading role in the aluminium by Valmet, Massey-Ferguson, Ford, Caterpillar, etc; industry (Alcan, Alcoa, Billington/Shell) and a the electrical equipment industry includes such lead­ supporting one in petrochemicals (Rhone-Poulenc, ing firms as Siemens, Asea and Brown Boveri; and telecommunications systems are produced by Erics­ son, Equitel/Siemens, Alcatel and NEC. In other heavy equipment industries, leading 14 This section is based on reports and studies that pre-date the firms are Ishikawagima, Voith and c bc ; Philips, Phil- Cardoso Plan (the stabilization plan which entered into effect in July 1994). When this essay was first circulated in November co, Toshiba, Mitsubishi and Brastemp/Whirlpool are 1994, we had not considered the possibility that existing trends major operators in the field of household appliances might be reversed as a result of the probable continuation of the and consumer electronics; Unisys and Xerox are sharp appreciation of the currency that followed the implemen­ tation of the Plan. present in the computer industry; and leading firms in

TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANQES IN INDUSTRY IN ARGENTINA, BRAZIL, CHILE AND MEXICO • RICARDO A. BIELSCHOWSKY AND GIOVANNI STUMPO 164 CEPAL REVIEW 55 • APRIL 1Ü5 the fine chemicals and pharmaceuticals sector in­ is having a significant and positive influence on their clude Roche, Ciba-Geigy, Bayer, Sandoz, and others. competitive position. Although the recession has • The value of food exports dropped steeply owing prevented the adjustment from including large invest­ to a downturn in world trade (European protec­ ments in new equipment -as a consequence of which tionism). The prices of major semi-processed little headway has been made in the area of industrial food products such as coffee, soybeans and sugar automation- substantial improvements in productiv­ went down substantially; in fact, the decline ity (which jumped by 30% in 1991-1993) and quality would have been even greater if it had not been appear to be in the pipeline. for the strong expansion of non-traditional ex­ iv) The indications are that the adjustment is ports, especially orange juice. The part played by helping Brazilian firms to survive under the existing tncs (with the exception of corporations such as conditions of domestic contraction and external open­ Cargill and Bunge & Bom) in this price slump ness. It appears that, for the most part, the production was quite marginal. The large foreign companies apparatus set up during the import substitution-based in this sector in Brazil (Nestlé, Sanbra/Bunge & phase of industrialization is being preserved and Born, Coca-Cola) were mainly producing food overhauled. intended for sale in the modem segment of the v) It is nevertheless important to take special domestic market, and no significant physical in­ note of two aspects of this supposed ability to pre­ vestments or technological changes appear to vent the opening of the economy from leading to have been made in these product categories. de-industrialization. First of all, this liberalization The fairly passive attitude taken in the 1980s process is as yet too recent to permit an adequate stands in contrast to the major changes taking place evaluation of its effects, and second, the absence of in the 1990s. The Brazilian manufacturing sector is fixed capital investments indicates that productivity undergoing a substantial adjustment in which tncs levels will soon stop rising. The conclusion would are intensely involved (ec la c , 1993a and 1993b). appear to be that, in order for Brazilian industry to The chief features of this adjustment may be sum­ remain competitive, it will have to resume its growth marized as follows: and investment on a sustainable basis; and in order i) This process is quite urgent for the companies for it to do this, inflation must be controlled. involved in view of the worsening macroeconomic vi) Since the economy has started to open up, crisis and, as a complementary circumstance, the branches of activity in which the pace of technical swift liberalization of the economy that is occurring progress is very fast at the international level and in at the same time. According to a number of studies which tncs are heavily involved have begun to being conducted in Brazil, this change in direction is weaken; such branches include pharmaceuticals, also being made by national firms (see, for example, electronic components and computers. Mass-produced IEI/UNICAMP, 1993). capital goods -a sector in which tncs in Brazil have ii) The production process is being streamlined played a supporting role- appears to be another in­ with a view to cutting costs and improving quality; dustry that is downsizing. this effort has entailed the use of a variety of mech­ anisms, including de-verticalization, specialization, b) Determinants the use of more flexible procedures and the introduc­ Just as in all the other cases examined, Brazil tion of new management techniques such as total has a number of special features that set it apart from quality management (tq m ) procedures, is o 9000 the rest; these are the result of macroeconomic, compliance, just-in-time systems, etc. The novel fea­ structural and institutional factors which are highly ture of this situation is not the fact that these changes specific to the country, and it is worth describing are being made -similar processes have been under them through a comparison with the other cases way in Mexico and Argentina since the mid-1980s- studied here. but rather the speed and intensity with which they are Let us start by considering the relevant macro- taking place. economic factors. First, unlike Argentina and Mexi­ iii) The adjustment in which t n c s in Brazil’s co, Brazil did not have to deal -at least until its manufacturing sector have been involved since 1990 recent monetary reforms (the Cardoso Plan of July

TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANQES IN INDUSTRY IN ARGENTINA, BRAZIL, CHILE AND MEXICO * RICARDO A. BIELSCHOWSKY AND GIOVANNI STUMPO CEPAL REVIEW 55 • APRIL 1555 1 6 5

1994)- with the difficult combination of trade lib­ potential size makes it equally attractive (eclac , eralization and an appreciating currency.15 It is clear 1993a). that the future performance of foreign-owned and na­ Mention should also be made of the fact that tional companies alike will depend on the behaviour when the time came for thetncs in Brazil to take of the exchange rate. Second, but no less importantly, important strategic decisions regarding the adjust­ Brazil is the only one of the four countries which had ment, the country had just been given a strong boost still not achieved price stability as of mid-1994. This by the expansion of trade within the framework of is why, unlike what has occurred in Mexico, the major m erco sur . This integration scheme made it viable to microeconomic adjustment made by business enter­ increase production scales and bolstered transna­ prises in the country -including t n c s - has not been tional corporations’ resolve to maintain a solid pro­ accompanied by significant levels of fixed investment. duction base on the São Paulo- Buenos Aires The obvious implication is that, in the long run, these corridor. firms’ competitive position will continue to be jeop­ Finally, there are the institutional determinants. ardized by the glaring lack of physical investment. In contrast to the situation in the 1980s, when the Third, the debt crisis had much less of an impact basic regulatory system of the import substitution on firms in Brazil than in the other countries. The period was still in place, sweeping institutional country’s financial adjustment was made soon after changes have been made in recent years. These the crisis had broken out and without causing bank­ changes include trade liberalization, the discontinua­ ruptcies (1981-1983), and its companies were able to tion of most incentives and subsidies for industry and consolidate their financial position thanks to three exports, and the privatization of enterprises in the good business years (1984-1986). Fourth, Brazil’s manufacturing sector. These changes have clearly balance-of-payments problems have been much less been an important determinant of the adjustments serious than those of Mexico, Argentina and Chile; made by business enterprises since 1990, in addition this became clear very early on -as early as the sec­ to the crisis. ond half of 1983- when the country began to record Nevertheless, in view of the fact that the liberali­ large trade balances. Thus (unlike Mexico, for zation of the economy is a very recent process, care example) Brazil was not faced with the macroecon­ must be taken in analysing the realignment of omic imperative of carrying out a drastic reorienta­ Brazil’s manufacturing sector. As we know, it takes tion of its production system towards the external quite some time to see the results of trade liberaliza­ market in the 1980s. tion initiatives, especially in as complex an economy With regard to structural factors, Brazil differs in as Brazil’s. It is not outside the realm of possibility two basic ways from Chile and Argentina -and, in a that the extent of de-industrialization that will occur sense, from Mexico as well. The first is that Brazil’s in the next few years may be greater than what would industrial realignment had a more complex and inte­ be desirable from the standpoint of the economy’s grated (and therefore probably more solid) manufac­ ability to achieve a dynamic form of competitiveness. turing base as its starting point. The chances of this happening may increase if the The second is that Brazil has a large domestic macroeconomic crisis continues and if the exchange market. According to internal surveys conducted in rate is allowed to rise as part of the Government’s conjunction with tncs , the strategy of these corpora­ efforts to lower inflation.16 tions has been to protect the heavy investments they made during the import substitution phase and to maintain or increase their share in that market, whose 16 As stated in footnote 14, in the introduction to this sub-sec­ tion on Brazil, the analysis presented here pre-dates the appreci­ ation of the currency that followed the implementation of the Cardoso Plan. Depending on how the exchange rate behaves, 15 See footnote 14. this analysis may seem over-optimistic in the future.

TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANGES IN INDUSTRY IN ARGENTINA, BRAZIL, CHILE AND MEXICO • RICARDO A BIELSCHOWSKY AND GIOVANNI STUMPO 1 6 6 CEPAL REVIEW 55 • APRIL 1d95

V Conclusion

This article focuses on the realignment of the manu­ trade liberalization programme was launched, the facturing sector in Chile since 1973, in Argentina tncs were eventually hurt by a lack of competitive­ since 1978, in Mexico since 1982 and in Brazil since ness stemming from the flaws of the import substitu­ 1981. The different years given for each country tion model, insufficient production scales and a correspond to the first year after the discontinuation shortage of systemic resources. It was sought to add of the import-substitution growth “model”. another dimension to this analysis through the classi­ The comparative study of these four cases is fication of the structural, macroeconomic and institu­ founded upon three arguments: first, that the four tional factors that gave rise to the specific features of countries followed very different paths or styles; sec­ these processes in the different countries. ond, that these differences were largely a result of the In the case of the metal products and machinery ways in whichtn c s acted in each country, i.e., their and electrical/electronics sectors, it is clear that reaction to crisis situations and to measures aimed at when, as a result of the liberalization process, trans­ opening up the economy to external markets; and national corporations had to choose between down­ third, that both the manufacturing sector’s realign­ sizing their operations or investing in the modernization ment and the reactions of the tn c s were determined of those operations so that they might compete in the by the combined effect of three sets of factors that international marketplace, they often chose the first are specific to each country: structural aspects, mac­ of these two options. Nevertheless, inasmuch as the roeconomic variables and institutional elements. behavioural differences evidenced by tncs in the For reasons of space, we will not recapitulate four countries were quite marked, we can talk about here the analysis presented in this article regarding four very different paths or styles of industrial rea­ the changes that have occurred in the composition of lignment. the four countries’ g d p , in their linkages with the Chile’s industrial realignment style has been international economy or in labour productivity. defined in this article as one of “de-industrialization Accordingly, we will turn directly to the most combined with an outward-looking reorientation”. Its disquieting and controversial aspect of this situation, relatively simple production structure, in conjunction i.e., the role played by foreign capital in Latin Ameri­ with a fast-paced liberalization process and a low ca’s industrial realignment in response to the crisis exchange rate, led to drastic downsizing of the metal and trade liberalization or, more specifically, the way products and machinery and electrical/electronics in which it affected the metal products and ma­ complex in the 1970s; this contraction was led by a chinery and electrical/electronics complexes in these number of tncs which opted to halt their production countries. Generally speaking, despite the clear dif­ operations in the country. The domestic market was ferences observed between the countries (and exclud­ too small to permit the metal products and machinery ing the automotive industry and a few minor branches industry to regain the size it had reached in the early of activity), the changes occurring in the industrial 1970s. However, the existence of favourable macro- sector marked a reversal of its long-standing tend­ economic conditions and the fact that a rapid growth ency to become increasingly similar to the industrial rate has been sustained for an entire decade have laid profiles of the developed countries. the foundations for some sort of a recovery in techno­ At this point, in order to sum up what happened logically less sophisticated activities oriented to­ in these industries, it may be helpful to turn back to wards the domestic market. the analytical scheme used in the article to account We have described Argentina’s style of realign­ for the differences in the behaviour of the tncs from ment as one of “import-led de-sophistication”, with one country to the next. This scheme (see figure 1) reference to the combination of a contraction in the was designed to carry the analysis somewhat beyond metal products and machinery and electrical/electro­ the generic, tautological explanation that, once a nics industries and a sharp increase in the imports of

TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANQES IN INDUSTRY IN ARGENTINA, BRAZIL, CHILE AND MEXICO • RICARDO A. BIELSCHOWSKY AND GIOVANNI STUMPO CEPAL REVIEW SS • APRIL 1Ï9S 1 6 7 those same manufactures. In this case, too, a number Brazil’s style of industrial realignment has been of tncs left the country, while others cut back on described as “defensive” because of its tendency to their operations, primarily in the metal products and preserve a greater portion of the production structure machinery industry. When the import substitution inherited from the import substitution phase. In large process came to an end, the country had a medium­ part, this tendency is due to the tn cs ’ strategy of sized, somewhat diversified metal products and ma­ seeking to protect their large pre-existing investments chinery industry. The macroeconomic crisis of the and their heavy involvement in the domestic market. 1980s was so severe that it led to the continuation of The relative complexity exhibited by the metal pro­ the de-industrialization process that had been trig­ ducts and machinery and electrical/electronics indus­ gered by the crisis and the economic policy of the tries by the end of the import-substituting phase of second half of the 1970s, in which a recession and industrialization, the large size of the domestic mar­ trade liberalization were combined with appreciation ket and the de-liberalization of the economy allowed of the currency. During the current economic reacti­ heavy industry to survive the 1980s despite its stag­ vation, the household appliance and automotive in­ nation and technological passivity. Likewise, the dustries have made a very strong recovery; in the economy’s relative structural solidity and a fairly case of the automotive industry, the sectoral agree­ high, stable exchange rate made it possible to obviate ment signed within the framework of m erco sur has (up to the first half of 1994) any serious form of been a powerful stimulus in this direction. A number de-industrialization in the difficult conditions created of the tncs that had pulled out of the country are by liberalization and the macroeconomic crisis. now returning. However, for the most part the tncs At present the automotive industry is making a have sharply raised the import coefficients of their strong comeback and is receiving some major invest­ production activities, and in the household appliance ments. The recent liberalization drive has led to the and consumer electronics sectors, production acti­ downsizing of some technology-intensive industries, vities have been cut to the point where they amount however, such as computers, electronic components to little more than the assembly industries located in and some mass-produced capital goods. The present Tierra del Fuego. crisis and the low rates of investment make it diffi­ The realignment path followed by Mexico differs cult to gauge how competitive the capital goods sec­ very considerably from the others examined in this tors currently are. article; this style is defined by the country’s integra­ In summary, our analysis of the realignment of tion with the United States economy under the the manufacturing sector in the four countries studied leadership of the tncs . A fairly large production here reveals a deterioration in the complexity of these structure and domestic market, investments in pro­ industrial systems which distances them from the duction for the United States market and the mainten­ structure of the oecd countries. The intensity of this ance of a high exchange rate during the initial stage process was not the same in all the countries, with of the trade liberalization process offset the highly Brazil being notable for its greater ability to conserve negative influence of the country’s severe macro- its pre-existing structure, which was more sophisti­ economic crisis in the 1980s in some major branches cated than those of the other countries. Mexico con­ of activity (e.g., the automotive and maquila indus­ stitutes a special case because this deterioration tries). The industries most strongly affected by this occurred in parallel with the strengthening of some crisis included several segments of the capital goods sectors that have exhibited a high degree of dynam­ sector; as a result, there was a reversal of what had ism in the areas of trade and technology, particularly seemed like a move towards the formation of a heavy the automotive industry. The performances of Argen­ machinery subsector in the country. In addition, as a tina and Chile clearly failed to measure up to those of consequence of the country’s fast-paced trade lib­ Brazil and Mexico in terms of changes in the manu­ eralization process and the sharp rise in the cur­ facturing sector’s production matrix and export mix. rency’s value (both of which began in 1988), many The actions of the transnational corporations segments of the capital goods and non-durable con­ have played a pivotal role in shaping these four pro­ sumer goods industries, which had begun to weaken duction structures -through very different “styles” of as a result of the crisis of the 1980s, have continued behaviour, as we have seen. It may be concluded that to do so during the recent economic recovery. those actions have had a more favourable -or at least

TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANGES IN INDUSTRY IN ARGENTINA, BRAZIL, CHILE AND MEXICO • RICARDO A. BIELSCHOWSKY AND GIOVANNI STUMPO 1 6 8 CEPAL REVIEW IS • APRIL D IS less unfavourable- influence on the prospects for fu­ In closing, an observation may be made regard­ ture industrial development in Mexico and Brazil ing policies designed to attract foreign capital: the than in Chile and Argentina. question as to whether or not a manufacturing sector The foregoing leads to one basic conclusion. will be able to attract foreign capital hinges upon the The shift away from the more developed coun­ existence of favourable conditions for the sector’s tries’ industrial profiles, together with some degree of chief activities, which are generally technology­ de-industrialization in the metal products and ma­ intensive and heavily involved in international trade. chinery and electrical/electronics complexes, may If a Latin American government were to decide that have negative implications for the Latin American its country’s industrial system should not continue countries’ future economic development. In every to incorporate such activities and delivers a “shock case, these sectors have the greatest capacity to serve treatment” (by, for example, implementing a swiftly­ as growth leaders, as well as being the most techno­ paced trade liberalization programme in conjunction logically dynamic industries and the ones most able with appreciation of the currency) which furthers that to spread technical progress to the rest of the econ­ approach, it would implicitly be choosing to reject omy. They are also sectors in which demand is ex­ the continuation of local production activities by panding rapidly, especially in developing countries, transnational corporations and to reduce the potential and this may spark a trend that could have serious contribution they could make in absorbing and dis­ ramifications in terms of the balance of payments. seminating technology and promoting exports. (Original: Spanish)

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TRANSNATIONAL CORPORATIONS AND STRUCTURAL CHANQES IN INDUSTRY IN ARGENTINA, BRAZIL, CHILE AND MEXICO * RICARDO A. BIELSCHOWSKY AND GIOVANNI STUMPO

CEPAL REVIEW 55 171

El Salvador: industrial policy, business attitudes and future prospects

Roberto Salazar Candel

Staff member of the Latin This article analyses the interaction between changes in the American and Caribbean domestic and external economic environments, industrial Institute for Economie policies and business attitudes in El Salvador. The 1960s and Social Planning were a time of rapid import substitution-based (ILPES) and industrialization, which was spurred forward by the Coordinator of the UNDP/ECLAC/ILPES expansion of the domestic market through the creation of Project on Structural the Central American Common Market (CACM). During Adjustment executed this period, institutions devoted to the promotion and for the Ministry of support of CACM-oriented industrial activities were Economic Affairs of founded and developed, and policies on trade, tariffs, the El Salvador (ELS/901004). exchange rate and other matters were implemented that contributed to the import-substitution process. During the 1970s, the style of industrial development which had been adopted by the country began to exhibit a number of structural problems. Armed conflict with Honduras, along with a CACM-wide crisis and the oil shock, heightened the need for new markets and activities. In the 1980s, the critical situation in Central America was exacerbated by armed conflicts; in the case of El Salvador, these conditions were compounded by Statist-oriented measures and policies arising out of a polarized political-military situation which had a strong impact on business activity. The 1990s saw a change in the direction of economic policy within the context of a radically different international climate and expectations of an imminent peace settlement. The conclusions presented in the article offer a basis for examination of the industrial sector’s prospects in the new environment created by an open economy and greater social cohesiveness.

APRIL 1995 1 7 2 CEPAL REVIEW 55 • APRIL 1955

I The 1960s: The CACM and rapid industrialization based on import substitution

1. Trends in economic activity nal market at the time- jumped from US$12.7 million to US$73.6 million between 1960 and Along with the rest of the Central American coun­ 1970.2 However, this figure is a poor indicator of tries (Guatemala, Honduras, Nicaragua and Costa the growth of exports during the decade as a whole Rica), El Salvador embarked upon a rapid indus­ since, as a consequence of the country’s armed trialization process in the 1960s as a direct result conflict with Honduras (1969), manufacturing of the creation of the Central American Common firms (in particular) sustained enormous losses and Market (c a c m ). This heightened the country’s were deprived of their main (net) market in Central expectations of obtaining access to markets of a America.3 size that would allow it to produce some types of Major changes were also seen in the composi­ manufactures with a reasonable degree of efficiency. tion of industrial output (see table 2). The propor­ We will not delve into this subject here, since a tion of food products shrank, while the shares of great deal has already been written about it, both in textiles, furniture, chemicals and electrical ma­ regard to El Salvador specifically and in relation to chinery expanded. Japanese investment in the sub­ the Central American countries as a group, whose region’s largest yarn and fabric plants (iu sa and industrialization processes have been similar. It is in sin ca ) was heavy during this period, when the necessary, however, to provide some idea of the textile industry was experiencing a wave of eupho­ dimensions of this phenomenon and a number of stat­ ria thanks to the lines of credit, grace periods, pref­ istics are therefore presented below. erential interest rates, technical assistance and In the 1960s, El Salvador’s manufacturing sector other incentives provided by the Salvadorian In­ marked up a growth rate of about 1.5%,1 and this stitute for Industrial Development. Textile plants was accompanied by high rates of increase in its operating in the country included Izalco, Tazumal, gross domestic product (gd p ) as well (see table 1). La Estrella and other smaller business concerns. This rapid expansion of industrial output served to This was also the period in which Hilandería Sal­ satisfy the needs of El Salvador and the demand vadoreña (HILASAL), a spinning mill, became es­ generated by the rest of the Central American coun­ tablished. Ever since the 1970s, this firm has tries (SIECA/IDB/INTAL, 1974). maintained a leading position in the “towel niche” The value of the manufactures exported to the within the international market. ca cm -the country’s main and virtually only exter­

2 According to figures compiled by the Central Bank and the Salvadorian Foundation for Economic and Social Development (FUSADES), the average annual growth rate was 11.9% in the □ Portions of this article are based on studies prepared by na­ 1960s, 3.4% in the 1970s and 0.1% in the 1980s. This last figure tional and international experts participating in the Project on was influenced by the 1989/1990 recovery, since up to 1988 it Structural Adjustment being carried out for the Ministry of had been -0.6% (Central Bank and FUSADES). Economic Affairs of El Salvador. The author is particularly 3 For example, CAPRI, a company which exported furniture and grateful for the valuable comments made by Rudolf Buitelaar. It mattresses to all the Central American countries and which used goes without saying, however, that the opinions expressed here Honduran lumber to make its products, registered a loss of ap­ are the sole responsibility of the author. proximately US$400 000 in 1969. After losing its main supplier 1 This was the result of a cumulative annual growth rate for of raw materials and its second-largest market, it had to cease its industrial output of 11.9% versus a rate of 7.3% for the total participation in subregional trade due to the deterioration of its gross domestic product (GDP) during that decade. competitive position.

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TABLE 1 El Salvador: Laval, trand and structura of gross domestic product, 1960-1990 Sector 1960 1965 1970 1975 1980 1985 1990 Level in millions of 1962 colones Manufacturing 200.5 322.9 438.3 578.0 586.2 515.4 591.6 Agriculture 426.2 517.2 627.2 787.3 841.1 742.8 785.5 Other 756.0 1 075.5 1 328.1 1 757.6 1 862.0 1 735.4 1907.9 Total 1 382.7 1 925.6 2 393.6 3122.9 3 289.3 2 993.6 3 285.0 Structure (%) Manufacturing 14.5 17.3 18.3 18.5 17.8 17.2 18.0 Agriculture 30.8 26.9 26.2 25.2 25.6 24.8 23.9 Other 54.7 55.9 55.5 56.3 56.6 58.0 58.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Sector 1960-1965 1965-1970 1970-1975 1975-1980 1980-1985 1985-1990 Growth rates (%) Manufacturing 66.0 31.7 31.9 1.4 -12.1 14.8 Agriculture 21.4 21.3 25.5 6.8 -11.7 5.7 Total 39.3 24.3 30.5 5.3 -9.0 9.7 Sector 1960-1970 1970-1980 1980-1990 Average annual growth rate, by decade (%) Manufacturing 11.9 3.4 0.1 Agriculture 4.7 3.4 -0.7 Total 7.3 3.7 -

Source: Salvadorian Foundation for Economic and Social Development (FUSADES).

TABLE 2 El Salvador: Structure of manufacturing output, 1960-1990 (Percentages) Product category 1960 1970 1980 1990 Food products 41.3 33.7 39.9 48.3 Beverages 14.5 11.2 16.4 14.2 Tobacco 6.0 4.8 5.0 3.8 Textiles 6.1 12.2 4.5 2.9 Footwear and wearing apparel 11.9 6.8 3.7 2.8 Wood products 0.6 0.5 0.7 1.6 Metal and wooden furniture 1.0 2.4 2.3 2.7 Paper, cardboard and related products 0.2 1.7 2.0 1.1 Printing and publishing 1.9 1.9 2.0 1.1 Leather products 1.1 0.6 0.8 0.4 Rubber products 0.6 0.4 0.3 0.1 Chemicals 3.4 5.6 2.8 3.2 Petroleum products - 3.9 6.0 5.1 Non-metallic products 4.3 3.4 4.5 4.8 Basic metals industries 0.2 0.5 1.5 2.0 Metal products 1.1 1.6 0.7 0.4 Machinery other than electrical machinery 0.7 1.0 1.0 1.2 Electrical machinery 0.5 3.2 3.6 2.4 Transport equipment 2.3 0.6 0.2 0.2 Miscellaneous industries 2.2 3.9 2.0 1.6 Total 100.0 100.0 100.0 100.0 Non-durable consumer goods 75.5 59.5 68.1 73.4 Intermediate goods 13.3 26.3 18.4 13.9 Capital goods 11.2 14.2 13.6 12.7 Total 100.0 100.0 100.0 100.0 Source: Central Reserve Bank of El Salvador

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2. Business groups and development banking joint ventures on the part of Salvadorian and foreign companies (e.g., those launched by in sin ca and iu sa In the 1960s Salvadorian industrialists grouped with Japanese investors and by conelca with Phelps together to form the Salvadorian Industries Associ­ Dodge of the United States). ation (a si ). The membership base for this organiza­ In addition to the funds made available by the tion, which was founded and developed during this development banking system, represented by in sa fi , period, was made up primarily of entrepreneurs in resources were also mobilized by the commercial the textile and chemicals (pharmaceutical labora­ banking system -especially short-term funds for use tories) industries, the food, beverage, footwear and as working capital- and made available through the garment industries, and the metal products and ma­ Central Bank in the form of “lines of development chinery sector. It was a response to the CACM policy credit”. In the private sector, the Financiera de Desar­ of import substitution-based industrialization. rollo e Inversiones played an important role in the At the governmental level, the former Salvado­ provision of industrial financing. The United States rian Institute for the Development of Production Agency for International Development (usa id ) also (in safop ) was transformed into the Salvadorian In­ set up special lines of credit that were channeled stitute for Industrial Development (insafi ) and began through that development finance company; this to function as such early in 1962. This institution was served as the foundation for the creation of a highly the executing agency for the industrial policy embo­ dynamic industrial/financial group which came to be died in the Industrial Development Act enacted by known as the “development group”. the Civico-Military Council (1961-1962). insafi was created as an autonomous agency governed by an 3. Policy executive board made up of representatives of the Central Bank, Ministry of Economic Affairs, the pri­ The key policy in this industrialization process was vate banking system and the industrial sector, with a that regarding tariffs; the Standard Central Ameri­ Chairman designated by the President of El Salvador. can Tariff Nomenclature (n a u ca ) was established in sa fi , which was equipped with departments in 1964 and remained in force until 1985. In 1986, responsible for promotion, industrial services, techni­ it was modified as n a u ca II. The differences be­ cal services and credit, was entrusted with the im­ tween the two versions are irrelevant in terms of plementation of industrial policy during the decade the policy aspects of interest to us here, i.e., the and was the agency for channeling resources to in­ nomenclature’s impact on the level of effective dustry. Virtually without exception, all the country’s protection and its anti-export bias.5 Under both industrial enterprises -large and small alike- oper­ systems, the effective protection provided to ated through in sa fi . the import-substitution sector was nearly twice as In addition to the scheme of fiscal incentives for high as the average nominal level. This was accom­ industrial development (reifaldi ) established by the plished at the expense of the export sector, which Industrial Development Act -which was emulated in was subject to a negative effective level of protection a subregional version- credit incentives were pro­ that exceeded the export tax rate.6 vided in the form of special repayment periods, inter­ Another consideration is the role played by ex­ est rates and grace periods.4 in safi also provided change policy in attaining the central objective of technical assistance, especially to small and medium­ maintaining a fixed exchange rate for the dollar and sized firms, as well as aiding in the promotion of in providing preferential access to the foreign ex-

5 Genberg, Rodriguez and Sjaastad (1985) undertook a com­ parative study for the Ministry of Planning in which they ana­ lysed the nominal and effective levels of protection associated 4 El Salvador launched its fiscal incentive policy in 1952 with with each of the two nomenclatures and proved that there was no the Processing Industries Development Act, which was refor­ difference between them. mulated as the Industrial Development Act in 1961. In 1969, 6 A recent study conducted by FUSADES (1992a) clearly demon­ within the framework of the subregional integration scheme, strates that the “overprotection” of the segment of the manufac­ the Central American Agreement on Fiscal Incentives entered turing sector that was oriented towards the internal (Central into effect. American) market worked to the detriment of the export sector.

EL SALVADOR: INDUSTRIAL POLICY, BUSINESS ATTITUDES AND FUTURE PROSPECTS • ROBERTO SALAZAR CANDEL CEPAL REVIEW 55 • APRIL 1955 1 7 5 change market for industrial activities (another key for substitution. This eventually gave rise to factor in intensifying the anti-export bias of this in­ powerful business associations in the textiles, food, dustrialization process).7 chemicals (pharmaceuticals), footwear, garment, and These incentives and policies fulfilled their pur­ metal products and machinery industries, asi grew and pose of transferring resources to the manufacturing came to play a dominant role as a trade association in sector at the expense of other branches of activity the country’s economic decision-making processes. (particularly the export sector). At the same time, Meanwhile, the more dynamic entrepreneurial however, they proved to be ineffective in launching groups used their leadership position among fin­ an industrial development process, as became evident ancial institutions as a platform for the formation when these temporary measures turned into perma­ of industrial conglomerates (the above-mentioned nent policy fixtures. In 1986, when the amendments “development group” or the “Catalan group” as to the subregion’s standard nomenclature entered into La Popular called it). force (n a u ca II), these incentives were discontinued. By the end of the 1960s, the 1969 war with Hon­ We may conclude that entrepreneurs did what they duras, the continued development of business activity might be expected to do: i.e., take the greatest possible and the evident limitations of the model associated advantage of the array of perquisites and incentives with the subregional market had made the business which the import-substitution model made available community aware of the need to penetrate markets to industrial activities offering “easy” opportunities outside the Central American area. II The 1970s: the crisis in the CACM, the oil shock and the appearance of the maquila industry

The fact that the average annual growth rate of particularly noteworthy in this connection. If we manufacturing output dropped from 11.9% in the examine the manufacturing sector’s structure in 1960s to 3.4% in the 1970s (the total gdp growth rate terms of the use made of the goods produced, we find being 3.7%) signalled the deceleration and stagnation that, following a considerable expansion of the shares of the process begun in the 1960s (see table 1). accounted for by intermediate and capital goods and The structure of the manufacturing sector (see a contraction of consumer goods during the 1970s, table 2) reflected something of a turnaround in the this trend was abruptly reversed in the 1980s. (This process begun during the preceding decade, and the trend has continued, and now, in the 1990s, the situ­ sector’s composition reverted practically to what it ation is virtually identical to what it was in the 1960s; had been in the 1960s, in that most of the activities thus, after 30 years, the sector is back where it started.) that improved their position in the 1970s saw that This deceleration-stagnation-reversal process prob­ position deteriorate in the 1980s, and vice versa. The ably manifested itself earlier in El Salvador than in recovery of the food and beverage industries and the the other Central American countries as an immediate decline of the textiles and chemicals sectors were result of the country’s armed conflict with Honduras (1969). Honduras’s response was to withdraw imme­ diately from the cacm and conclude bilateral agree­ 7 The exchange rate was 2.5 colones to the dollar from 1936 until the Salvadorian currency’s first official devaluation in 1986. In ments with the other member countries. This not only other words, the same exchange rate was maintained for 49 years. caused El Salvador to lose the second-largest market This degree of exchange stability was the usual policy of the cen­ for its manufactures, but also reduced the competi­ tral banks in the subregion; in fact, it came to be regarded as a tiveness of Salvadorian products in Nicaragua, Costa national objective and mark of sovereignty, and as silch was a taboo subject that was not questioned in any shape or form. Rica and Panama, since the fact that El Salvador had

EL SALVADOR: INDUSTRIAL POLICY, BUSINESS ATTITUDES AND FUTURE PROSPECTS • ROBERTO SALAZAR CANDEL 1 7 6 CEPAL REVIEW 55 • APRIL 1»»5 to use ferries in the place of land routes through Hondu­ the areas of energy, raw materials, capital goods, ras increased its transport costs and delivery times.8 technology, finance and markets. It also demon­ The impact on Honduras was much less notice­ strated the fact that this type of industrialization pro­ able since, in addition to the fact that its transport cess had already run its course in the 1970s. This routes were unaffected (Honduras shares borders argument is reinforced by the fact that CACM-related with Guatemala, Nicaragua and El Salvador), its industry was founded, according to a survey con­ level of industrial development was substantially ducted by the Ministry of Economic Affairs in 1990, lower than those of the other cacm countries. during the period between 1960 and 1979 (Buitelaar, Ultimately, however, this deplorable conflict ad­ 1992). versely affected the entire subregion, since it con­ In the early 1970s the serious situation in which stituted the first tangible evidence of just how fragile Salvadorian industry found itself had a corollary in the subregional integration system and the cacm its first trade deficits with the cacm , which continued were. Thus, it set a dangerous precedent by revealing throughout the decade and are still being recorded the vulnerability of integration organizations and today.9 mechanisms in situations where one country (in this However, this deterioration of the sector’s com­ case, Honduras) unilaterally decides to withdraw petitive position in its principal market -the cacm - “halfway” from the system, and the other countries was counterbalanced by a renewed effort on the part (with the obvious exception of El Salvador) not only of entrepreneurs, the Government and workers to fail to oppose such a step but actually stand ready to seek out and penetrate new markets, either unilat­ sign bilateral treaties or even actively promote such a erally or by forming groups or developing joint pro­ course of action. This marked the beginning of the posals for that purpose. deterioration of the system and of its integration These efforts were reasonably successful in, for mechanisms, which have subsequently come under example, the oecd market (see table 3). The compe­ heavy fire because of their ineffectiveness in prevent­ titiveness and market shares of the more dynamic ing the breakdown of the c a cm . types of products improved substantially. An im­ The second event that dealt a blow to the Salva­ provement was also seen in the category of activities dorian manufacturing sector -and affected the rest of on the decline; although the products in this category the countries as well- was the across-the-board in­ are less dynamic, some of them have a strong secto­ crease in the prices of its imports caused by the first ral impact (e.g., coffee products) and therefore make oil shock (1973). This revealed the fragility not only an important contribution at the national level. of integration per se, but also of the development TTiese advances were made possible, on the one model then in use or, in other words, the extreme hand, by the efforts of an enterprising business com­ weakness and premature exhaustion of a (belated) munity that managed to win a foothold in this highly industrialization process based on the “easy” phase competitive market by utilizing certain comparative of import substitution. This brought out the fact that advantages (location, inexpensive labour), but on the one of the main objectives of the current model of other hand the firms within this sector were also ab­ industrialization -that of reducing the country’s de­ sorbing technical progress and incorporating training pendence on external factors as the production pro­ and efficient organizational structures. Examples in­ cess moved on from consumer goods to intermediate clude HILASAL (towels and the like), a d o c (foot­ and capital goods- had not been achieved and that wear), Productos de Café (freeze-dried and instant the country was actually more dependent than ever in coffee) and some producers of chemicals and phar­ maceuticals. This was the entrepreneurial sector 8 The Estudio Centroamericano de Transportes (BCIE/IDB/ which had begun to recognize the limitations of the UNDP/SIECA, 1976) shows how the cost involved in (and ob­ CACM and the potential of new markets as far back as stacles to) the transport of Salvadorian manufactures played a the late 1960s. substantial role in inverting its trade balances with Nicaragua and Costa Rica. Moreover, Guatemala not only covered the por­ tion of the Honduran market that had been supplied by El Salva- ujr’s manufacturing sector but also took advantage of the 9 This fact is brought out in the annual economic surveys pre­ diseconomies of scale and external problems faced by Salvado­ pared by ECLAC in the 1970s. In the 1980s, these deficits were rian firms in order to improve its position in the markets of the attributable to other reasons which will be discussed in a later other Central American countries (including El Salvador itself). section.

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TABLE 3 El Salvador: Competitive position in relation to OECD countries a (Percentages) 1963 1979 1985 1989

1. Dynamic activities Composition . 0.12 0.09 0.05 Contribution 0.02 14.13 4.40 12.08 Specialization - 1.54 1.89 2.24 Sectoral share 5.39 9.16 2.32 5.39

2 Declining activities Composition 0.57 0.76 0.12 0.04 Contribution 66.19 75.05 8.17 2.67 Specialization 4.64 10.03 2.42 1.73 Sectoral share 14.26 7.48 3.37 1.55

3 Activities with missed Composition 1.90 0.44 0.11 0.07 opportunities Contribution 3.52 2.05 12.06 13.81 Specialization 15.42 5.89 2.19 3.36 Sectoral share 0.23 0.35 5.51 4.11

4. Receding activities Composition 1.52 0.67 1.29 0.97 Contribution 28.34 8.13 74.23 68.78 Specialization 12.35 8.84 26.70 45.27 Sectoral share 2.29 0.92 2.78 1.52 Source : ECLAC, Division of Production, Productivity and Management. a The table shows the loss of competitiveness sustained by dynamic products (in the market and in terms of their share of domestic pro­ duction) and the specialization taking place in declining or receding activities.

Mention must also be made of the in-bond as­ At the same time, insafi was developing the first sembly, or maquila , industry. Ever since the late free trade zone, known as San Bartolo. This zone was 1960s, foreign business groups (especially from set up near the old Ilopango Airport, the idea being that Japan, the United States, Taiwan and South Korea) this terminal could later be used exclusively for air which had set up operations with a view to doing cargo, and especially for transporting the products business with the cacm had been aware of the fol­ assembled in the maquilas to the United States. lowing potentials: a clear comparative advantage in As textile mills oriented towards the domestic or manpower; some degree of work skills acquired dur­ Central American markets were going bankrupt (La Es­ ing the substitution-based industrialization process trella, Tazumal), maquila plants were being opened in (in the manufacture of clothing, leather products, chemicals, sporting goods), together with adequate which clothing was made up from fabric cut in the infrastructure which had also been developed during United States. One example of this type of operation that process; an enviable geographic location due to is CONVESA, a firm in which Japanese investors hold a its proximity to the United States; and the fact that majority interest which is located in the Santa Ana -owing to the disadvantageous situation of the cacm - industrial zone and employs over 2 000 workers. the Government, local entrepreneurs and workers all Ilopango and the surrounding area became the saw the need to promote the labour-absorbing home of the maquila industry. This is the site of San maquila industry. Thus began the “maquila craze” of Bartolo, whose facilities (now filled to the brim) em­ the early 1970s. ploy more than 12 000 persons. Texas Instruments, with By the late 1960s, in safi was already advocating over 3 000 workers, set up a plant in Colonia Santa the passage of the first non-traditional exports pro­ Lucia, while other factories producing gloves, baseball motion act, which, like the Industrial Development equipment, nets, etc., were set up in nearby Soyapango. Act which had led to the founding of in sa fi , pro­ In the late 1970s, when violence broke out in the vided for the creation of its own main executing cities, especially San Salvador, these firms began to agency: the Salvadorian Foreign Trade Institute move to the Dominican Republic and Haiti, and Salva­ (ISCE). dorian workers began their exodus to the United States.

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III The 1980s: the civil war and the wartime economy

The year 1979 was an extraordinarily agitated period exodus of Salvadorians from the country (including of confrontational politics. Extremely violent acts skilled workers, investors and businessmen); massive were frequent (armed confrontations, kidnappings, capital flight; and an increase in corruption. These assassinations). Business enterprises, workers and the are just some of the negative effects directly related citizenry at large began to think seriously about emi­ to the war. grating or actually to do so. The military government As for the country’s economic activity, manufac­ then in office had come to power by means of elec­ turing output dropped by something over 12% in tion fraud, while the Sandinistas had recently come 1980-1985 and total gdp was down by 9%. For the to power in Nicaragua by force, which encouraged decade as a whole, despite the recovery made during revolutionary groups within El Salvador. The United its final years, the growth rate of manufacturing out­ States was deeply concerned about the “spread of the put (0.1%) was such that it remained at virtually the Sandinista revolution” in a densely populated country same level as in 1980, while total gdp actually having a greater capability for expansion, and finally, showed a slight decline (see table 1). whether for domestic or external reasons, the military The external trade balance showed a growing saw with serious preoccupation how grassroots or­ deficit throughout the entire decade, except in 1986, ganizations expanded, the guerrilla movement conti­ when it improved considerably thanks to a steep de­ nued to make inroads, and both the military as an valuation early in that year. By 1989, the trade deficit institution and the country’s security forces were fall­ amounted to US$698 million, which was equivalent ing into discredit. This, in combination with the to nearly 80% of the country’s total exports. The situ­ country’s deepening economic and social crisis and ation in El Salvador’s trade with Central America the loss of support from (or repudiation by) the inter­ was similar, with a deficit of around US$50 million national community, including the United States, put (the equivalent of about 30% of its exports to that the military in a very difficult confrontational situ­ market).10 ation. Their response to these circumstances was to Trade in manufactures with other markets, in­ mount a coup d’état (October 1979) while calling for cluding those produced by the maquila industry, ex­ the democratization of the country and pledging to hibited a similar deterioration. The trends observed in undertake certain “revolutionary” reforms that were trade with the oecd countries (see table 3) during needed in order to transform Salvadorian society. Many people staked everything on this reformist, earlier periods changed appreciably. For example, be­ democratizing agenda for El Salvador as an answer tween 1979 and 1985 the share of dynamic product to the rise of armed insurgency and as a way of pre­ categories shrank both in the market and in terms of venting the country from following in Nicaragua’s the sectoral contribution, and yet another cause of footsteps. The opposing bands -with substantial ex­ concern is the fact that goods occupying a very im­ ternal support- chose to gain power, or hold on to it, portant place in the sector slipped into the category by force. The result was more than ten years of civil of products that are receding from the market. war; over 75 000 dead; plummeting economic and The downturn continued in 1985-1989, when the social indicators (including an increase in poverty slight increase in the sector’s share of dynamic pro­ ducts, which was due to the drop in manufacturing and extreme poverty, a steep rise in the number of refugees, displaced persons, widows and orphans, mounting unemployment and a change in the struc­ ture of the population); devastation of the environ­ 10 See the sections on El Salvador for the years 1989 and 1991 ment and the destruction of basic infrastructure; an in ECLAC (1991 and 1993).

EL SALVADOR: INDUSTRIAL POLICY, BUSINESS ATTITUDES AND FUTURE PROSPECTS ’ ROBERTO SALAZAR CANDEL CEPAL REVIEW 55 • APRIL 1*95 179 output, was more than offset by the decrease in these key sectors (foreign trade and finance), while on the products’ market share. The competitiveness of Sal­ other hand it was under pressure from international vadorian manufactures in the various markets thus agencies (International Monetary Fund, World Bank) declined even further.11 and USAID to modify its macroeconomic policies, However, the country has been able to withstand particularly in the area of finance, in order to avert this long string of deficits because of two major sour­ unmanageable imbalances in the fiscal, monetary and ces of external finance: the foreign aid received in external sectors that would call for still further exter­ connection with the war and -equally important- the nal financing. Above all, it had become clear that the private remittances sent by Salvadorians living war was having a destabilizing effect on expenditure, abroad, especially in the United States (eclac , 1991 business expectations, production costs and planning. and 1993). The outcome of this situation of diametrically The conditions that can be described as wholly opposed policies applied during a civil war with out­ attributable to the civil war were compounded by the side involvement, of forces capable of influencing policies which the authorities implemented, espe­ decisions but having different objectives and spheres cially in the economic sphere, in an attempt to deal of action, and of a manifest lack of administrative with the problem. The economic measures applied at capacity on the part of the public sector is what we the start of the decade had been of an essentially have termed a wartime economy. A typical feature political nature and were designed to score points against the “enemy”, which was identified with the of a wartime economy is that it becomes a question Left and with guerrilla groups. Accordingly, the new of merely “managing the crisis”, as some have de­ Government’s development policy focused on three scribed the efforts of the administrations of the major reforms: agrarian reform, the nationalization of 1980s (up to mid-1989): a situation which we re­ foreign trade (coffee, sugar cane) and the nationaliza­ gard as tantamount to anarchy in terms of econ­ tion of the banking system. The State thus acquired a omic rationality.12 set of tools for stimulating the country during war­ The reaction of entrepreneurs, especially those time and, as if this were not enough, it also took over with links to the industrial sector, was the same as the reform programmes which the Left had tradition­ that of most Salvadorians: those who could leave did ally advocated as being of strategic importance for so, taking their businesses or assets with them (ma­ overcoming the country’s underdevelopment and po­ quilas, Phelps Dodge, a d o c , Hilandería Salvadoreña, sition of dependency. This was the era of Statism as a etc.); those who stayed either kept the lowest strategy for coping with the war. possible profile or switched over to more speculative Paradoxically, however, in the external sector or lower-risk activities, such as commerce or ser­ public policy moved in the opposite direction, i.e., vices. Small and medium-sized businesses, which are towards economic liberalization, privatization and a the main support for employment levels during times more open economy. In this sphere, it was an era of of crisis, diversified: some firms began to export to orthodox neoliberalism. Thus, on the one hand, the other markets (handicrafts and similar products); Government of EKSalvador was applying Statist pro­ others ran their businesses at a loss, taking advantage grammes of an interventionist/populist stripe which of the fact that the nationalized banking system took involved tremendous economic costs but were not a very permissive and flexible attitude to arrears delivering the hoped-for political benefits (guerrilla (over US$1 billion in accumulated arrears); still activity was on the rise) and were producing alarm­ others went bankrupt (El Salvador, Chamber of In­ ing results in terms of inefficiency and corruption in dustry and Commerce, 1987).

12 There are a number of documents which reflect the trade associations’ views regarding this “economic policy anarchy” 11 It is worth noting once again that this group of products in­ (El Salvador, Chamber of Industry and Commerce, 1987; FUSADES, cludes goods produced by the maquila industry, which, due to 1989). In the light of these types of documents, and with the difficulties of classification, have been categorized as manufac­ direct participation of trade associations such as FUSADES, the tures (especially what we have called “dynamic” products). The party which is now in office drafted a manifesto entitled “Hacia reader will recall that the maquila industry began to be disman­ el rescate nacional: Programa económico social” (ARENA, tled at the first signs of conflict (in the late 1970s). 1989).

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According to a 1990 survey, the majority of Sal­ launched themselves into the competitive external vadorian manufacturing concerns (linked to the market, finding niches where they had some sort of cacm ) had been founded between 1960 and 1979, competitive edge or could engage in activities into and given the loss of competitiveness occasioned by which technical progress could readily be incorpor­ the above situation, most of these (small and me­ ated. Most, however, simply used a survival strategy dium-sized) industries channeled their products to the involving the diversification of their activities and domestic market. their supplementation with other businesses (ser­ In summary, the attitudes adopted by Salvado­ vices, imports) or the fullest possible utilization of rian entrepreneurs reflect the central features of their the “state of emergency” and the perquisites it af­ survival strategies. Some -the most enterprising- forded. IV The 1990s: the end of economic anarchy, the reorientation of economic policy, the reaction of the business community and the peace process

1. A brief baseline analysis of the manufacturing few links between academic or research institutions sector and the production sector, which was part of the rea­ son why businesses were not innovating or appro­ After 30 years of industrialization, it may be helpful priating new technologies. to review the status of El Salvador’s manufacturing Despite all this, the process did produce a small sector, its potentials and its limitations as they ap­ group of companies -or entrepreneurs- with a greater peared at the time the structural adjustment programme willingness to assume risks and with the kind of men­ was launched (during the second half of 1989). tality and practices needed to penetrate competitive In the preceding sections we looked at the different markets and to maintain their position in such mar­ phases of the industrialization process: rapid expansion, kets once it was established. stagnation and regression. Let us now look at the sec­ The public sector suffers from two main prob­ tor’s situation and prospects at the start of the 1990s. lems. First, the (inherited) public apparatus that takes First of all, we see a rather diversified (heteroge­ care of “uncompetitive, protected, import-substitut­ neous) manufacturing sector with few production ing industries” is too large; this is true both of the linkages (vertical integration), producing primarily portion of this apparatus located within the central for the domestic and Central American markets. government (Ministries of Economic Affairs and Manufacturing output accounted for a hefty 18% Foreign Trade, Finance, Foreign Affairs and Plan­ of gdp, but the sector’s share in employment was ning) and of its decentralized agencies (b a n a fi , small (it provided jobs for less than 5% of the econ­ corsain , cepa , cel, the Central Bank, government- omically active population), its firms lacked training run agroindustrial enterprises, etc.). Second, the pub­ programmes for their workers 13 and there were very lic sector lacks the skilled personnel and the institutional framework it needs to fulfil the new role it is called upon to play in regulating the various 13 All the reports prepared by the experts of Project ELS/90/004 agencies’ responsibilities and in helping the private on different manufacturing activities (leather and footwear, tex­ tiles and the metal products and machinery industry) identify the sector and its leadership to meet the challenge of lack of investment in human capital as one of the chief con­ changing production patterns (in this case, those of straints affecting the growth and competitiveness of these firms. the manufacturing sector) with social equity. The re­ To take just one example: a single recommendation regarding sult is obvious: if the efforts made are headed in the one aspect of the production process made it possible for a metal products and machinery factory to save US$50 000 per month. wrong direction and nothing is done to move the country

EL SALVADOR: INDUSTRIAL POLICY, BUSINESS ATTITUDES AND FUTURE PROSPECTS • ROBERTO SALAZAR CANDEL CEPAL REVIEW 55 • APRIL 1995 181 in the right direction, then government intervention is materials other than vulcanized rubber or plastic; and bound to be ineffective and inefficient.14 iv) the production of articles from pulp, paper or It is worth emphasizing that, within the new par­ paperboard not specified in another category. The ameters of authentic competitiveness, Salvadorian in­ firms that have managed to penetrate and survive in dustry generally fails to comply with minimum competitive markets belong to these groups (the standards of environmental protection. The national same situation is described by Buitelaar and Fuentes, and subregional environments have suffered a great 1991). deal of destruction and pollution as a result of the industrialization process. Because of the national and 2. The Structural Adjustment Programme: princi­ external restrictions now in place, however, it is no pal measures and results longer possible for industry to continue to plunder the environment. The Structural Adjustment Programme proposed by The pacification and democratization of the the new administration was based on two key con­ country will have a strong influence on its systemic siderations: the need to adjust income and expendi­ competitiveness. These changed circumstances will ture at the aggregate level (short-term stabilization) permit an improvement not only in the competitive­ and the need, in conjunction with the changes to be ness of individual firms, branches of activity or in­ made in the country’s economic and social structures, dustries, but in the overall competitiveness of the for measures and programmes whose results would country as well because they will facilitate consen­ make themselves felt in the medium and long terms. sus-building among the different actors (the business Naturally, some results were seen in the short community, workers and Government) involved in term. Inflation, for instance, was brought down from the various phases of production, not in respect of 23.5% in 1989 to 17.8% in 1990 and then to 9.8% in short-sighted, conflictive objectives but instead -we 1991 (although in 1992, with the application of a hope- in relation to major national goals.15 10% value added tax, the inflation rate rebounded to Finally, it should be noted that, within Project 19.8%.) els/90/004, a study on indicators of competitiveness The achievements have not been comparable in found that the activities with the highest coefficients other spheres of the economy. For example, in an of competitiveness are: i) sugar mills and refineries effort to avoid creating upsets or generating inflation­ and the processing of various food products; ii) the ary pressures, the Central Bank has interfered in the production of yams, fabrics and finished textiles; tex­ exchange market. The results are debatable: reserves tile articles other than wearing apparel; knitted have been built up, but the Bank has been unable to goods; and making-up of wearing apparel other than sterilize the heavy inflow of remittances from abroad; footwear; iii) the production of footwear made from moreover, the nominal exchange rate is stable but the real rate is not, and this has reduced the competitive­ ness of exports (fusades , 1989, chapter 2). 14 Two examples may be cited: the implementation of an 8% The results of the fiscal and monetary policies drawback for exporters fell months behind schedule and, in some applied have been even worse. In the area of fiscal cases, was never applied at all, and the formalities needed to matters, for example, efforts to lower the deficit by comply with all the legal requirements for registering a company take an average of six months or more. cutting expenditure have been unsuccessful, and it therefore became necessary to introduce the value 15 E C L A C /U N ESC O (1992) pursues the argument formulated by K. Ohmae, who contends that, following its devastation during added tax (vat ) quite suddenly -with the whole of its the Second World War, Japan became convinced that it was im­ effect being transferred over to prices- in order to possible for it to expand by means of military force and, through boost revenues. To compensate for this, a tight mon­ the basic educational system of society as a whole, has put across etary policy has been applied that keeps interest rates the message: “export value added or starve”. According to Ohmae, the society’s internalization of this value constitutes the at fairly high levels in international terms, and this, underpinnings of the system of social and commercial organiza­ together with a fixed nominal exchange rate, attracts tion which has been so successful in conquering the world mar­ inflows of speculative capital, thereby pushing the ket. In El Salvador, albeit on a smaller scale, we too are exchange rate even lower. Both of these (i.e., monetary emerging from a devastating war and are in a position to send out a similar message. We believe that all the various social and exchange) policy outcomes have affected the econ­ forces are now ready to take it to heart. omy’s reactivation, especially in the export sector.

EL SALVADOR: INDUSTRIAL POUCY, BUSINESS ATTITUDES AND FUTURE PROSPECTS • ROBERTO SALAZAR CANDEL 182 CEPAL REVIEW 55 • APRIL 1*95

This has led to another imbalance: the trade At the same time, reforms are to be made in the deficit. It must not be forgotten that El Salvador’s area of tax administration. These include the amalga­ neighbours have aggressive exchange policies de­ mation of the agencies administering direct and indi­ signed to stimulate exports. International lending rect taxes, the funding of the Government’s and agencies as well as national economic authorities quasi-autonomous State enterprises’ debts, the pro­ consider this problem of the deficit to be the most posal of measures to correct the administrative and serious of all, despite the fact that it is a consequence financial problems of State-run enterprises, and the of the country’s economic policy management.16 creation of a single nationwide taxpayers’ register. Steps have been taken to carry forward structural Reforms in the civil service include the streng­ changes, but, as noted earlier, their results will only thening of the National Public Investment System in become evident in the medium and long terms. Fur­ order to make the administration and execution of thermore, some reforms have yet to be initiated and expenditure more efficient. others need to be applied more intensively. There are In addition, programmes have been proposed for also problems of timing and of shifting priorities the privatization of State-owned enterprises and the which hamper the implementation of the Programme modernization of the civil service. Although these and its effectiveness, even in such important areas as programmes are essential for changing the country’s the conclusion of peace agreements and efforts to production patterns, they have not moved forward as formulate a national reconstruction plan. Let us take expected and are in fact the two main reforms that a moment to examine the measures provided for in still remain pending (fu sa d es , 1992b). the Programme while bearing in mind their impact on Major reforms are also proposed in the external the realignment of the manufacturing sector. sector. These include a quite ambitious (in Central Briefly, the Government has proposed the fol­ American terms) trade reform programme that would lowing measures: i) an economic liberalization pro­ cut tariffs (to rates of between 5% and 20%), reduce gramme to include tariff reductions, the elimination the number of tariff categories (from 20 to 7), eliminate of (State) export monopolies and less control of the price controls and excise taxes, do away with quantita­ exchange rate by the monetary authority; ii) the tive restrictions (tariff exemptions, advance deposits on elimination of price controls in the market for goods and services, especially agricultural products; iii) tax imports) and repeal existing promotion acts, set up reform; iv) a programme designed to modernize the Export and Investment Promotion Programme, and restructure the civil service, including those and seek the entry of El Salvador as a member of the components relating to the public investment pro­ General Agreement on Tariffs and Trade (GATT). cess; v) measures to put the financial system on a Other important modifications in this respect re­ sound footing in preparation for its privatization; and late to the area of exchange policy, which achieved a vi) a macroeconomic policy capable of holding the short-lived success by establishing a single exchange basic balances (fiscal, external and production) to rate and reducing the currency’s overvaluation. manageable levels. Foreign-currency exchange houses are to be legalized The main reforms proposed in the business sector, and their operations are being promoted as a means particularly manufacturing, are summarized below. of liberalizing the foreign exchange market and in­ First, there are the proposed changes in fiscal creasing its transparency, and a law is being promul­ management and the civil service. Tax reforms are gated that will prohibit the Central Bank from being advocated which, in broad outline, will directly setting the exchange rate. broaden the tax base, reduce the number of taxes, Another key area of reform is the financial sys­ eliminate taxes on foreign trade, create a single in­ tem. The first reform measures, which are designed come tax and permanently establish the value added to place the system on a more solid footing, include tax (vat ), which began to be applied at the rate of audits for the purpose of rating and assessing arrears, 10% in September 1992. the merging of banks and savings and loan associ­ 16 Statements made to the press by the Chairman of the Central ations (S&Ls), and a law aimed at strengthening the Bank in March 1993 indicated that existing trends in inflation financial status and reinforcing the position of banks and the exchange rate were manageable but that the same could and S&Ls. A programme is also being developed to not be said of the country’s trade balance, which even at that time had become untenable. strengthen and provide training services to the Super­

EL SALVADOR: INDUSTRIAL POLICY, BUSINESS ATTITUDES AND FUTURE PROSPECTS • ROBERTO SALAZAR CANDEL CEPAL REVIEW 55 • APRIL 1»»5 183

El Salvador: Industrial exports and annual growth rates, 1967-1968 and 1989-1990 (Thousands of dollars and percentages) Thousands of dollars Thousands of dollars Percentage Percentage variation variation 1967 1968 1989 1990

Food, beverages and tobacco 21 326 33 027 55 28 354 37 427 32 Textiles and textile manufactures 51 121 52 490 3 55 218 69 947 27 Footwear and related products 13 085 12 776 -2 12 499 15 246 22 Paper, articles made of paper and cardboard 22 159 26 350 19 31 085 33 095 9 Chemicals, rubber and plastics 35 662 37 276 5 44 537 45 302 2 Non-metallic mineral products 11 463 4 238 -63 8 218 9 044 10 Metals and metal manufactures 19 344 22 398 16 24 035 29 326 22 Machinery, electrical materials and appliances 8 948 9 483 6 12 294 14 718 20 Other products 12 628 14 880 18 21 666 20 369 -6

Total 195 734 212 919 9 237 906 275 284 16 Source: Central Reserve Bank of El Salvador.

intendency of Banks and Financial Institutions so ing minimum wages for young people and appren­ that it may become completely autonomous and de­ tices; restrictions on workers’ benefits; regulation of velop a strong capability for controlling the system. the length of strikes; and authorization to hire tem­ Measures to attract international banks are currently porary workers until labour disputes are settled. also being promoted. In order to promote the formation of appropriate On a purely sectoral level, a package of measures linkages between the manufacturing sector, the edu­ or programmes is being put into effect that will have a cational system and human resources training, the particularly appreciable effect on industry. These public sector and the rest of the production system, measures include amendments to the Export Incentives the National Council for Science and Technology Act, an overhaul of the cacm 17 (with the inclusion of (conacyt ) is being created. Panama and Belize as observers), and trade agreements Progress in the privatization of manufacturing or with Mexico, Colombia and Venezuela (the aim being agroindustrial enterprises has been negligible, but it to organize a free trade area with a population of over is reasonable to suppose that peace may bring better 170 million persons by 1995). results in this regard. Currently, efforts are being di­ Liberalization of the labour market is being pro­ rected towards the privatization not only of export posed along the following lines: productivity-linked agribusinesses (sugar, coffee) or import-substituting wage increases, the relaxation of regulations regard­ industries (textiles, cement) but also of basic services (energy, telecommunications and transport). The business community’s response, though 17 This includes, inter alia, the strengthening of the Permanent somewhat reserved, is promising in view of the wide­ Secretariat of the General Treaty on Central American Economic spread climate of uncertainty which has existed thus Integration (SIECA) and the Central American Bank for Econ­ far during the 1990s, especially before the peace set­ omic Integration (BCIE); the implementation of a regional pay­ tlement. In terms of actual results, table 4 indicates ments system; progress in the harmonization of fiscal, monetary, trade and exchange policies; advances in the elimination of bar­ that the growth rate of exports accelerated in 1989 riers to the free movement of goods and services, capital and and 1990, with annual rates of 12% and 16% respec­ individuals; and the harmonization of foreign investment regula­ tively. In addition, according to figures compiled by tions, health standards and transport and intra-customs transit ECLAC, the growth rate of manufacturing output rose regulations.

EL SALVADOR: INDUSTRIAL POLICY, BUSINESS ATTITUDES AND FUTURE PROSPECTS • ROBERTO SALAZAR CANDEL 184 CEPAL REVIEW 53 • APRIL 15S5 from 2.5% in 1989 to 3.0% in 1990 and to 4.9% in manufacturing sector’s efforts are directed towards 1991. A similar situation is reflected in surveys re­ those markets, where it has already won a share of garding the business climate (fusades, 1992b), nearly 40%. All the survey results on hand indicate whose indicators point to the existence of some degree that it is in these new markets where there is potential of optimism. for growth, and the business community sees these Business attitudes also reflect the greater relative markets as offering the only path to a sustained and importance of today’s new markets (see table 5). The sustainable form of development in the long term.

El Salvador: Value and structure of Industrial exports, by destination, 1990 (Thousands of dollars and percentages) Destination Totals ______------Central America Rest of world Value % ------Value % Value %

Food, beverages and tobacco 37 428 14 12 454 33 24 972 67 Textiles and textile manufactures 68 640 25 27 142 40 41 498 60 Footwear and related products 15 246 68 464 56 6 782 44 Paper, cardboard, and paper and cardboard products 33 905 12 28 942 85 4 963 15 Chemicals, rubber and plastics 45 302 17 36 938 82 8 364 18 Non-metallic mineral products 9 044 3 4110 45 4 934 55 Metals and metal manufactures 29 326 11 24 980 85 4 346 15 Machinery, electrical materials and appliances 14 718 5 12 181 83 2 537 17 Other products 20 369 7 14 638 72 5 731 28

Total 273 976 100 169 849 62 104 127 38

Source'. Central Reserve Bank of El Salvador.

Conclusions: a critique of what has been done so far and the outlook for the maquila industry

1. What has been done and what remains to be mechanisms, restores the preeminence of the private done sector18 and redefines the role of the public sector. At the same time, this is clearly not enough. The First of all, we must acknowledge that the current private sector must assume its responsibilities and, in administration has laid down clear-cut, credible ground rules that will permit the country to begin the 18 It may be recalled that past administrations -even as far back process of changing its production patterns; a mana­ as the 1950s, and to an extraordinary degree in the 1980s- took geable form of stabilization strengthens market a flagrantly Statist line.

EL SALVADOR: INDUSTRIAL POLICY, BUSINESS ATTITUDES AND FUTURE PROSPECTS • ROBERTO SALAZAR CANDEL CEPAL REVIEW 5 5 • APRIL H IS 185 order to do so, it will presumably expect definite sig­ In addition, for a variety of reasons (having to do nals and measures at the sectoral level.19 High- with finances, technical staff, business relations) a priority sectoral policies include: i) with regard to great deal of importance was given to the views of infrastructure, an energy plan (for the short, medium FUSADES. 20 and long terms), the upgrading of transport facilities, This mixture resulted in a package of formulas and the modernization and expansion of communica­ for xhe country’s macroeconomic management tions systems; ii) in sectors producing internationally (which was fairly successful), for institutional and tradeable goods (agriculture and manufacturing), the legal changes, for the restructuring of the civil ser­ definition of sectoral policies and programmes and vice, for the privatization process and other purposes their coordination with trade policy (microeconomic and, to a marginal extent, for the promotion of social studies); and iii) in the public sector, the programme equity. These sporadic forays into the realm of public for restructuring the civil service already mentioned policy on the part of external interests having differ­ earlier. In addition, there are programmes relating to ing objectives but no strong commitments have given subjects that are not of a sectoral nature because they rise to problems of timing and consistency in the cut across all sectors but which are clearly of high corresponding projects or programmes.21 priority: the programme on science and technology The results of the application of these formulas, and its linkages with the restructuring of the educa­ as might be expected, have been shaky in terms of tional and production systems, and an environmental economic stability (a large fiscal deficit, instability of protection and reclamation programme in keeping the real exchange rate and real interest rates -which with the process of changing production patterns are currently negative- and widening trade deficits). with social equity. Moreover, given the absence of adequate compensat­ ory social programmes, the adjustment has hit the 2. A critique for further consideration most vulnerable groups in the population hard, and this effect constitutes an obstacle to the proposal of a If the 1980s were a “lost decade” for Latin America, further adjustment. then for El Salvador they were a veritable descent into Even so, in all its documents, forums and advi­ Hell. Expectations were running high when the new Gov­ sory missions f u s a d e s advocates devaluation. If this ernment took office, and it had to act fast. Like most of proposal had been accepted, the result would prob­ the Latin American countries, El Salvador subscribes ably have been runaway inflation, without any corre­ to the orthodox views of the World Bank and IMF. sponding improvement in non-traditional exports. We Because Chile was regarded as a concrete example have already shown that as of October 1992 the ex­ of a successful country, it was felt that the most ex­ port sector had not declined in competitiveness in peditious route was to reproduce the 1980s version of terms of costs, since although the real effective ex­ the “Chilean model”. The first result of this decision change rate (considering domestic inflation as com­ was that the civil service became filled to the brim pared to international inflation) had fallen, the with Chilean advisers (followers of the above-men­ decline in real wages made up for that decrease, so tioned orthodoxy in its purest form), who found ex­ that the export sector was just as competitive as it cellent job opportunities in El Salvador just when, had been in 1980 (Mussi, 1992). with the advent of a democratic Government in Chile, they were leaving their own country’s civil service. 20 FUSADES is made up of private businessmen and receives most of its financing from the United States Agency for Inter­ national Development (USAID). Some of the technical experts 19 To make an analogy: It is not enough for the water to be calm on the Government’s economic team have ties with this or­ (i.e., that there be macroeconomic equilibrium and clear-cut ganization. rules): in order for a boat to stay on course (follow the develop­ ment path) it needs to be steered (through sectoral plans or pro­ 21 For example, following the implementation of a package of grammes). Intervention at the sectoral level helps to ensure the measures affecting consumers (deregulation, tariff reductions), a private sector’s participation, without which -under the new de­ consumer protection law was proposed. The version of this bill velopment pattern that has been adopted- the entire plan will put forward by FUSADES, which had been drafted by a Chilean fall apart. The greatest challenge is to motivate this sector to lawyer during flying visits to the country, was a transcription of take part in the (environmentally sustainable) production acti­ Chile’s consumer protection law. Fortunately, the then Minister vities that offer significant national development potential in the of Economic Affairs presented a version which was more in long run. keeping with national realities.

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The public sector, for its part, is heavily indebted objectives even when they are stepped up. For and is running a hefty deficit; a devaluation would example, the objective of privatizing the banking only exacerbate this situation. This has happened in system is to liberalize the financial market, i.e., to the majority of the countries in the region, except strengthen competition in that market in order to im­ Chile and Mexico, where a considerable portion of prove the allocation of resources, but the modality exports (copper and oil) are in the hands of the State. adopted and the pace of the process have been such Perhaps the weakest link of all is at the sectoral that it has generated a concentrated, oligopolistic sys­ level. Macroeconomic policies need to be sup­ tem. This invalidates competition as an element for plemented with sectoral policies and microeconomic optimizing resource allocation, which is the ultimate studies. Since the former policies are not enough in objective of the privatization process. (Nationalizing and of themselves, the country runs the risk of having is easy; privatizing is difficult.) its adjustment processes lose credibility and of incur­ ring larger, long-lasting deficits. (An example: al­ 3. Guidelines for changing industrial production though the manufacturing sector was affected by patterns and large-scale development of the tariff reductions, no programme was implemented to maquila industry soften their impact on employers or workers). Another important aspect that has been ne­ A review of the recent course of events at both the glected by macroeconomic policy-makers -and in the sectoral and global levels can serve as a framework policy recommendations made by f u s a d e s and for proposing a series of guidelines and measures for others- is the effect of this policy on the distribution reactivating and redirecting Salvadorian industry on of income and wealth. We should not lose sight of the the basis of a competitive form of development.22 fact that when, for purposes of stabilization, a tight Because of the lack of microeconomic studies and money policy is pursued that includes cuts in public research on specific branches of industry, the recom­ financing, the use of an exchange-rate anchor (which mendations presented below are based on studies means overvaluing the currency) and a downturn in conducted at the Ministry of Economic Affairs of real wages, this will bring about major changes in the El Salvador as part of Project els/90/004. distribution of income, property and power (Sáinz and Calcagno, 1992). Thus, for example, those a) General recommendations groups that have access to credit or that control the i) Promote the establishment of an organizational foreign exchange market will be at an advantage; the structure of the type proposed by Project els/90/004 State transfers assets (through privatization) or sets with a view to the formulation of a selective indus­ rates and charges in ways that strengthen private trial realignment programme in which industrialists, groups, and at the same time there is speculation in universities, research centres, workers, the Central financial or currency markets, services or trade which Bank and the Government would all participate works to the detriment of the manufacturing or agri­ (Salazar, 1992). cultural sector. All these effects must be taken into consider­ ation when applying such policies, especially if they hurt the weakest groups in the population or 22 In this connection, Porter (1991) defines the competitive the hardest-hit sector (in this case, manufacturing). stages of development as follows: i) factor-led development; ii) There is no doubt that in the present process small investment-led development; iii) innovation-led (intelligence- led) development; and iv) wealth-led development (decadence). and medium-scale industry has been adversely af­ If we accept this frame of reference, then El Salvador -like the fected. majority of Latin American countries (with the exception, to In reviewing the institutional reforms (deregula­ some extent, of Mexico and Brazil)- is on the verge of entering into the first stage (with the aggravating circumstance, in com­ tion, liberalization, privatization) aimed at downsiz­ parison to some other nations such as Chile, that it suffers from ing the State -reforms upon which the success of the a shortage of natural resources and skilled human resources; its structural adjustment programme hinges- we see resource endowment consists of a supply of unskilled man­ that, due to the problems of timing referred to earlier, power). Buitelaar and Fuentes (1991) arrive at the conclusion that gains in competitiveness are based on the use of existing they are falling short of their goals and that some­ sources of comparative advantages (unskilled manpower and times, paradoxically, they also fail to achieve their natural resources).

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ii) Step up the pace of the programme for the tive markets, to take advantage of the relevant coun­ modernization of the civil service. The report of Pro­ tries’ complementarity, and to improve external nego­ ject els/90/004, as well as subsequent studies con­ tiation capabilities. ducted under the same project, contain proposals for x) Implement a package of specific policy the restructuring of the Ministry of Economic Affairs. measures to boost the competitiveness of those acti­ iii) Restructure, in accordance with the proposals vities offering the greatest potential in the Central cited above, the institutions involved in the design American, Latin American or world markets (Modes, and implementation of trade policy, which needs to 1992; Pivel, 1992). - , be harmonized with industrial and agricultural policies. The form of organization should, as in the b) Specific recommendations for certain branches above cases, involve all the main actors in this area of industry (business, trade unions, professionals, etc.). i) For the metal products and machinery indus­ iv) Consolidate the National Council for Science try: Limit efforts to expand the market to the whole and Technology (conacyt). As a first step in this of Latin America; investigate and undertake the process, the Programme for Science and Technology manufacture of electrodes for use in arc welding; should be carried forward; guidelines have been set form a consortium for the importation of inputs; estab­ forth by the Project for this purpose (Hodara, 1992). lish a training and assistance centre for this sector of v) Strengthen non-formal training and instruc­ activity. tion programmes. An important step in this regard is ii) For the textile industry: Implement the propo­ the approval and establishment of the Salvadorian sal for setting up a sizing and dyeing industry and for Occupational Training Institute as an autonomous creating a technical assistance and training centre. agency that will operate in close cooperation with the iii) For the leather and footwear industry : Make business community (Macario, 1992). use of vegetable-based (non-polluting) tanning tech­ vi) Reinforce the institutional structure for ex­ niques for poor quality hides; import high-quality port promotion, with the active participation of the hides and process them into semi-finished goods; private sector, outside the bounds of the traditional create a technical assistance and training centre for bureaucratic system. To this end, the trade promotion the leather and footwear industry (or use the centre offices of the Ministry of Foreign Affairs in the coun­ in Costa Rica). tries of the subregion should also be strengthened. iv) For the pharmaceutical chemicals industry: vii) Update the legislation on company registra­ Promote the development of quality-control labora­ tion, patents, royalties and foreign investment in tories; update the legal provisions pertaining to this order to smooth the way for investors who will con­ industry; take advantage of the framework provided tribute not only capital but also technology, organiza­ by c o n a c y t to conduct long-range research into tional capabilities and markets (examples of such the agroindustrial potential for sweeteners, essential measures might include the elimination of minimum tropical oils and preservatives. capital requirements, restrictive regulations on the re­ patriation of capital or the slow, complicated proce­ v) Food : Research on the food industry was not dures involved in registering a company).23 conducted due to limitations relating to the scope of viii) Implement the programme proposed by the project, and specific recommendations concern­ ing that industry cannot therefore be presented. Project els/90/004 for the development of leasing activities in El Salvador (Shulz, 1992). Nevertheless, according to the available indicators of competitiveness, this is definitely the branch of activ­ ix) Carry forward and further intensify efforts to ity that holds out the greatest potential. promote integration. From the standpoint of competi­ tiveness, the market provided by such integration c) Recommendations for the maquila industry provides an opportunity to gain experience in certain i) An aggressive development programme should types of activities before moving into more competi­ be undertaken in this sector, with broad-based partici­ pation by the private sector. The relevant legislation 23 Willmore (1992) says that the formalities involved in reg­ istering a company take four hours in New York, six months should be flexible, should create competitive condi­ in El Salvador, four months in Costa Rica and a whole year tions and should offer clear advantages over other in Honduras. countries (temporary importation provisions, for

EL SALVADOR: INDUSTRIAL POUCY, BUSINESS ATTITUDES AND FUTURE PROSPECTS • ROBERTO SALAZAR CANDEL 188 CEPAL REVIEW 55 • APRIL 1995 example). Whereas for some countries the maquila might also enable local manufacturing concerns to industry is just one of various options to be explored, gear up as suppliers and thus find a shortcut to oper­ in the case of El Salvador, because of the country’s ating as exporters (in the textile industry, there are tremendous limitations, it is the option. To recall the already some highly developed firms which act as argument made by Porter, we should optimize our suppliers for the maquila sector).24 use of the only resource which the country has in abundance (unskilled manpower) and then use that as 4. A brief summation a platform from which to move on, over a space of time that will not necessarily be very short, to the In 1991-1992 El Salvador made substantial progress subsequent phases of the process (capital formation in relation to macroeconomic variables and made and the development of skilled human resources). some headway in improving the country’s institu­ ii) The above measures should help to attract tional framework, but a great deal remains to be done private and public investment to the maquila industry in the sectoral and microeconomic areas. It is not (the private sector is already working on the creation enough to reach financial balances or to adopt mod­ of in-bond customs-free zones). Infrastructure should els that have had good (and bad) results in other be developed for this purpose; the country’s position countries: the actual situation is much more complex in expanded regional markets should be streng­ and changeable. The challenge is a formidable one, thened; and its geographic location should be used to but by that same token, there is also a very strong advantage. Meanwhile, for its part, the Salvadorian motivation for developing the manufacturing sector manufacturing sector should give priority to develo­ of a country that has recently proven that it is capable ping and supplying these activities. In addition to the of great sacrifices and great accomplishments, of fact that such a scheme would create jobs, its financ­ withstanding a devastating war, and of undertaking ing would be viable in the short term (there is a huge an exemplary peace process. demand for facilities in customs-free zones) and it (Original: Spanish)

Bibliography

ARENA (Partido Alianza Republicana Nacionalista) (1981): Economic Survey of Latin America 1979 (1989): Hacia el rescate nacional: Programa eco­ (E/CEPAL/G.1144), Santiago, Chile. United Nations nómico social, San Salvador. publication, Sales No. E.81.II.G.1. BCIE (Central American Bank for Economic Integration)/ (1991): Economic Survey of Latin America and the IDB (Inter-American Development Bank)/UNDP Caribbean 1989 (LC/G.1635-P), Santiago, Chile. (United Nations Development Programme)/SIECA United Nations publication, Sales No. E.91.II.G.2. (Permanent Secretariat of the General Treaty on Central (1992): Social Equity and Changing Production American Economic Integration) (1976): Estudio cen­ Patterns: An Integrated Approach (LC/G.1701 troamericano de transportes (ECAT), San Salvador. (SES.24/3)), Santiago, Chile. United Nations publi­ Buitelaar, R. (1992): Ajuste estructural y reconversión in­ cation, Sales No. E.92.II.G.5. dustrial en El Salvador: resultados de una encuesta (1993): Economic Survey of Latin America and the y bases para la acción subsectorial, Ministry of Econ­ Caribbean 1991 (LC/G.1741-P), 2 vols., Santiago, omie Affairs, Proyecto Ajuste Estructural al Ministerio Chile. United Nations publication, Sales No. de Economía (ELS/90/004), San Salvador, UNDP/ E.93.II.G.2. Economic Commission for Latin America and the ECLAC/UNESCO (United Nations Educational, Scientific Caribbean (ECLAC)/Latin American and Caribbean and Cultural Organization) (1992): Education and Institute for Economic and Social Planning (ILPES). Buitelaar, R. and J. A. Fuentes (1991): The competitiveness of the small economies of the region, CEPAL Review, 24 At the behest of President Duarte, in 1984 Sergio Molina and No. 43 (LC/G.1654-P), Santiago, Chile, ECLAC, Carlos Massad prepared a confidential study in which they con­ cluded that, given the urban make-up of the country, its stocks of United Nations. human and natural resources and the tremendous pressure being ECLAC (1977): Economic Survey of Latin America 1975 exerted on the environment, the best option was to follow the (E/CEPAL/G.1014/Rev.l), Santiago, Chile. United example of Taiwan by using the maquila industry as the starting Nations publication, Sales No. E.77.II.G.1. point for a long-range initiative.

EL SALVADOR: INDUSTRIAL POLICY, BUSINESS ATTITUDES AND FUTURE PROSPECTS • ROBERTO SALAZAR CANDEL CEPAL REVIEW SS • APRIL 1««S 189

Knowledge: Basic Pillars of Changing Production Mussi, C. (1992): Informe sobre la política cambiaría en Patterns with Social Equity (LC/G.1702/Rev.l-P), El Salvador, Ministry of Economic Affairs, Proyecto Santiago, Chile. United Nations publication, Sales Ajuste Estructural al Ministerio de Economía No. E.92.II.G.6. (ELS/90/004), San Salvador, UNDP/ECLAC/ILPES. El Salvador, Cámara de Industria y Comercio (1987): La Pivel, J. (1992): Informe sobre la metal-mecánica en El verdadera situación económica y social en El Sal­ Salvador, Ministry of Economic Affairs, Proyecto vador y la nueva política de Gobierno, San Salvador, Ajuste Estructural al Ministerio de Economía June. (ELS/90/004), San Salvador, UNDP/ECLAC/ILPES. El Salvador, Ministry of Economic Affairs (1992): F orta­ Porter, M. (1990): The Competitive Advantage of Nations, lecimiento Institucional al Ministerio de Economía, New York, The Free Press. Project ELS/90/004, San Salvador, UNDP/ECLAC/ILPES. Sainz, P. and A. Calcagno (1992): In search of another FUSADES (Salvadorian Foundation for Economic and So­ form of development, CEPAL R eview , No. 48 cial Development) (1989): Hacia una economía de (LC/G.1748-P), Santiago, Chile, ECLAC, United Na­ mercado en El Salvador, San Salvador, Departamen­ tions. to de Desarrollo Económico y Social (DEES). Salazar, R. (1992): Bases para la formulación de la pol­ (1992a): Análisis de la rentabilidad privada y eco­ ítica industrial y el programa de reconversión nómica al sector industrial salvadoreño, San industrial en El Salvador, Ministry of Economic Salvador. Affairs, Proyecto Ajuste Estructural al Ministerio de (1992b): Ajuste estructural: ¿dónde estamos?, In­ Economía (ELS/90/004), San Salvador, UNDP/ forme trimestral de coyuntura, No. 2, San Salvador. ECLAQ1LPES. Genberg, Rodríguez and Sjaastad (consultants) (1985): Salinas, J. (1992): Informe sobre la industria químico- Análisis comparativo de la protección nominal y farmacéutica en El Salvador, Ministry of Economic efectiva de la NAUCA / y NAUCA II, San Salvador, Affairs, Proyecto Ajuste Estructural al Ministerio de Ministry of Planning and Co-ordination of Economie Economía (ELS/90/004), San Salvador, UNDP/ and Social Development (MIPLAN). ECLAC/ILPES. Hodara, J. (1992): Lincamientos de un programa de Shulz, H. (1992): Un programa para el desarrollo de ciencia y tecnología en El Salvador, Ministry of leasing en El Salvador, Ministry of Economic Af­ Economie Affairs, Proyecto Ajuste Estructural al fairs, Proyecto Ajuste Estructural al Ministerio de Ministerio de Economía (ELS/90/004), San Salvador, Economía (ELS/90/004), San Salvador, UNDP/ UNDP/ECLAC/ILPES. ECLAC/ILPES. Macario, C. (1992): La formación profesional en el SIECA (Permanent Secretariat of the General Treaty on proceso de reconversión industrial en El Salvador, Central American Economic Integration)/IDB/INTAL Ministry of Economic Affairs, Proyecto Ajuste Es­ (Institute for Latin American Integration) (1974): tructural al Ministerio de Economía (ELS/90/004), El desarrollo integrado de Centroamérica en la San Salvador, UNDP/ECLAC/ILPES. presente década, vol. 4, Buenos Aires, INTAL. Motles, I. (1992): Informe sobre la industria textil en El Willmore, L. (1992): Industrial policy in Central America, Salvador, Ministry of Economic Affairs, Proyecto CEPAL R eview , No. 48 (LC/G.1748-P), Santiago, Ajuste Estructural al Ministerio de Economía Chile, ECLAC, United Nations. (ELS/90/004), San Salvador, UNDP/ECLAC/ILPES.

EL SALVADOR: INDUSTRIAL POLICY, BUSINESS ATTITUDES AND FUTURE PROSPECTS • ROBERTO SALAZAR CANDEL

CEPAL REVIEW SS 191

Technological change and structuralist analysis

Dedicated to Fernando Fajnzylber In memoriam

Armando Kuri Gaytán Associate Professor, This article analyses the approach which ECLAC has taken School o f Economics, National Autonomous to the subject of technology. In this respect, the author University of Mexico identifies two different periods. The first starts with the (UNAM). inception of ECLAC and continues up to the 1970s. This

period, during which efforts focused on achieving Latin

America’s industrialization, essentially by means of import

substitution, was characterized by what the author terms

“technological passivity” on the part of the relevant agents

and of mainstream economic thought in the region. The

second period, from the 1980s to the present, is marked by

“technological activism” arising out of what has been called

the Third Industrial Revolution, with its far-reaching

ramifications in the world economy, and also out of a

substantive change in the thinking of ECLAC, whose main

concern is now with the determinants of technical progress

and competitiveness together with the achievement of social

equity in the distribution of the fruits of that progress. In

analysing this aspect, the author draws upon the ideas of

Raúl Prebisch and Aníbal Pinto.

APRIL 1995 192 CEPAL REVIEW 55 • APRIL 1955

I Introduction

ECLAC’s commitment to the analysis of matters relating to technical progress or, if you will, to science and technology, has a number of somewhat paradoxical facets. On the one hand, in terms of its research efforts and writings, it seems clear that the subject has not been one o f its primary concerns. Viewed from another vantage point, however, there is no doubt that this subject constitutes one of the main theoretical pillars o f what we refer to generically as the thinking of ECLAC. Aníbal Pinto

Just as in the classical, Marxist and Schumpeterian thinking of e c l a c has been developed, and these schools of thought, the analysis of technological stages are directly related to the subject of techno­ change made by the structuralist/ECLAC school is logical change. The first runs from the founding of closely linked to the economic and social develop­ the organization through the 1970s and is charac­ ment process, with the difference that it is based on terized by what we might call “technological passiv­ the specific features of the Latin American case be­ ity” on the part of both domestic agents (the State and tween the Second World War and the present. Far entrepreneurs) and mainstream economic thought. The from being regarded as an autonomous and inde­ second stage began in the 1980s and represents a pendent phenomenon, technological change is con­ major change in the (by then, critical) attitudes of the sidered to be a substantive part of development State and the entrepreneurial sector regarding that strategy which consequently has a strong possibility former technological passivity. This change also oc­ of influencing -along with other elements- the basic curred, and very forcefully so, in the economic lines of that strategy. thinking of e c l a c , which advocates what we might For Latin America, which is where the ideas of describe as a type of “technological activism” as the e c l a c arose and the source from which they were best way for Latin America to attain levels of produc­ propagated in the late 1940s, the objective at that tivity that will enable it to compete in an increasingly time was industrialization based on the import sub­ open and globalized world economy. stitution model, whose overall evaluation1 falls out­ In this article we will first address the traditional side the scope of this essay, except to the extent that school of e c l a c thought -developed chiefly by Raul it helps us to explain certain aspects of the main sub­ Prebisch and Aníbal Pinto- which advocated and ac­ ject under discussion: technological change. And one companied the import substitution-based industrializ­ of those aspects is undoubtedly the structural hete­ ation process and in so doing gave rise to a marked rogeneity stemming from the type of industrialization degree of structural heterogeneity and an intense pursued by the region and the technological pattern concentration of the fruits of technical progress. which accompanied it. It is precisely that striking We will then turn to contemporary e c l a c thinking heterogeneity which should serve as the starting -represented primarily by the work of Fernando point for the discussion of the technological options Fajnzylber- in which science and technology form open to Latin America in the coming years. the hub around which the other elements of the sys­ This essay refers to two clearly differentiated tem will revolve in the quest for genuine economic stages in the more than four decades over which the and social development.

□ This paper was presented at the Seminar on Innovation, Dis­ and particularly those offered by Sergio de la Peña and Miguel semination and Competitiveness held on 2 and 3 December 1993 Angel Lara, although of course the ultimate responsibility for at the Centre for Technological Innovation (CIT) of the National the views expressed here lies solely with the author. Autonomous University of Mexico (UNAM). The author is grate­ 1 An effort to make such an evaluation may be found in Kuri, ful for the comments made by all the participants in the seminar 1991.

TECHNOLOGICAL CHANGE AND STRUCTURALIST ANALYSIS ’ ARMANDO KURI GAYTAN CEPAL REVIEW 55 • APRIL 1S»5 193

II Structural heterogeneity and the concentration of the fruits of technical progress

The Latin American industrialization process had, in would have been formidable even without the harm­ one sense or another, strong repercussions on the re­ ful effects of the development measures implemented gion during the three decades following the end of during the first stage of import substitution, outstand­ the Second World War. On the positive side, major ing among which was the creation of an uncompeti­ advances were undoubtedly made which led to an tive, unintegrated industrial structure as a consequence of increase in industrial production and in per capita extreme protectionist policies that gave entrepreneurs a g d p , a decrease in infant mortality and the creation of captive market and thus spared them the trouble of infrastructure to meet the housing, education and making any effort to improve their productivity. health-care needs of the major cities, with their State support in the form of fiscal and credit sub­ emerging middle class at the fore (Hirschman, 1987). sidies and subsidized prices for public goods had much This marked a far-reaching change in the economic the same type of effect. All this resulted in higher earn­ and social structure of the region, which was swiftly ings at the cost of a growing government deficit, thus transformed from a basically agrarian society into an continually adding to a problem which eventually urban-industrial one. proved to be unsustainable and about which there has The State was not indifferent to these changes, been an intense debate in recent years: the State’s invol­ nor was the e c l a c school of thought that was begin­ vement in the economy (Ibarra, 1990). A third effect of ning to take form in the late 1940s. Indeed, the views these industrial development policies -an effect which of e c l a c became the dominant paradigm, and their is even more directly related to the subject of this ar­ influence on the future of Latin America, for better or ticle- was the configuration of a fundamentally imi­ worse, was to be decisive. Through the medium of a tative pattern of technological development in which strong State apparatus which intervened in and there was no possibility (since neither the State nor planned the development process, the ideas of ECLAC entrepreneurs even considered doing so) of adapting, about industrialization as the axis of growth began to much less creating, technology on any scale that play an important role. might afford some measure of internal control. This influence made itself felt in all fields, but Instead, the job of promoting technological de­ particularly in trade and industry. The prime objec­ velopment was assigned to foreign investment, tive was to attack the causes of the region’s back­ which was given untrammeled entry into the front­ wardness, which, according to this view, stemmed line sectors. At first, this made it seem as though from its failure to attain a level of industrial develop­ Latin America’s production structure contained an ment capable of overcoming the centre-periphery element of technological dualism. relationship, in which the terms of trade for the latter It was Aníbal Pinto (1976) who ruled out this were invariably disadvantageous. Thus arose the hypothesis, which he considered to be a better expla­ region’s zeal for industrialization, and protectionist nation for the conditions associated with the primary- and industrial development policies were to be the exporter stage than for those of the industrialization chief means of pursuing it. phase. In the latter stage, unlike the former, not only It is in this context that we should consider the did appreciable differences exist among the various importance assigned to import substitution as the most sectors of the economy (of which there were more appropriate strategy; it was thought to be the best than two), but important relationships of various policy because of the international situation at the types were established among them which influenced time and also, perhaps, because the challenges to be their development -something which was not posed later on by the more advanced stages of indus­ possible in a dualistic structure ( e c l a c , 1974). It was trialization were underestimated. These challenges in this context, in an effort to describe this more com­

TECHNOLOGICAL CHANGE AND STRUCTURALIST ANALYSIS • ARMANDO KURI GAYTAN 194 CEPAL REVIEW 55 • APRIL 1195 plex situation, that Pinto proposed the term “structu­ from being potential advantages, have clearly worked ral heterogeneity”. to our disadvantage. This term accurately describes the type of indus­ To round out this brief overview of the perspec­ trialization process that was being pursued by the re­ tive on technical change developed by e c l a c during gion, which was bound to lead to a concentration of its early years, however, it should be emphasized the fruits of technical progress if the larger gains in that, in e c l a c ’s view, it is essential not to lose sight productivity in the centres were followed by an in­ of the fact that technical progress is a subject whose crease in their income in excess of the rise in produc­ true importance becomes evident when it is analysed tivity rather than by a reduction in the prices of within a concrete social and institutional context: i.e., manufactures. This meant that the central countries when there is a clear awareness of for what purpose, would not only retain the fruits of their technical pro­ for whom and in what ways a given technological gress but would also take a portion of the benefits potential is to be used (Pinto, 1976). This approach corresponding to the periphery, since income in the seeks to guard against the kind of technological peripheral countries would rise by a smaller amount fetichism that lays all possibilities of good or evil at than productivity (Pinto, 1965). the door of technical change. It followed from the above that the increase in Thus, the results of the technological strategy domestic saving would be too small to meet the need that may be chosen at a given point in time will for investment in modem technology, which would depend upon the development style that serves as its tend to perpetuate the technological gap between the context. If this style is of a type that fosters structural central and peripheral countries. From the very be­ heterogeneity, as has been the case in Latin America ginnings o f e c la c , Prebisch recognized this fact during the past 50 years, then the use of technology when he pointed out in 1949 that although a century will heighten, rather than prevent, inter- and intra­ earlier the central countries’ income levels had been sectoral, regional and external disequilibria, thereby low, the level of capital per employed person which exacerbating problems in the areas of employment they had needed for investment in the technologically and income distribution (Pinto, 1976). modem sectors of the time had also been low. e c l a c therefore reached the conclusion that the In contrast, as early as the mid-twentieth cen­ solution was to adopt a development style in which tury, savings in the periphery were insufficient to “...the centripetal forces that drive forward the con­ cover investment in modern technology. This centration of technical progress and its benefits must situation was exacerbated in the ensuing decades be succeeded by a force that promotes the sustained by the speed of technological change, which was dissemination of such progress and benefits throughout not only not coupled with a matching rate of in­ the production system, an appreciable reduction in regional and urban/rural imbalances, greater internal crease in income, savings and investment levels integration, new, less unstable and more fertile types but was even, during what has been called the “lost of external relations and, last and most importantly, a decade” of the 1980s, accompanied by a major better distribution of income” (Pinto, 1976). downturn in those indicators. Although the role thus assigned to technological This means that although the technological wealth policy is, up to a point, a passive one2 in that it is of the advanced countries was theoretically within Latin dependent upon the development style, Pinto recog­ America’s reach, it did not have effective access to that nizes the leading role it can perform when he states wealth. In this respect the Latin American countries that “...it is clear that technological policy should not have differed from those nations which, in the past, passively await the complete or comprehensive de­ have managed to make use of the “advantages of finition of a new development path but should in­ coming from behind” to close the distance separating stead set about laying the foundations for its own them from the leading country and even to take over reformulation” (Pinto, 1976). the lead themselves, as Maddison (1986) shows in the cases of England in the eighteenth century, the 2 Technical progress, says Pinto (1976), “is a dependent variable. United States in the nineteenth and Japan in the The term is, however, somewhat inapt in that it suggests a twentieth. The backwardness of our region has un­ passive or reflectional phenomenon. It is neither one nor the other, as we well know, for the compelling reason that the devel­ doubtedly been due to much more deep-rooted -or, in opment style and technological activity influence one another, the jargon of eclac , structural- factors which, far even though the former element may be the dominant one”.

TECHNOLOGICAL CHANGE AND STRUCTURALIST ANALYSIS • ARMANDO KURI GAYTAN CEPAL REVIEW 55 • APRIL 1995 195

This last statement seems to reveal quite clearly determinants of that progress (Rodriguez, 1991)- we the ambivalence of e c l a c thinking, which I have at­ will then have a fairly comprehensive idea of the tempted to reflect throughout, starting with the epi­ strengths and weaknesses of structuralist thinking graph with which this article opens. If this trait is about technology up through the 1970s which will considered in conjunction with another highly im­ allow us to analyse, in section III, the ways in which portant characteristic -the fact that, during this initial e c l a c ’s thinking was updated during the 1980s in stage, e c l a c was more concerned about the distribu­ the light of the events of the “lost decade” and the tion of the fruits of technical progress than about the rapid advances made in new technologies. Ill Competitiveness, technical progress and social equity

If, as suggested in the preceding section, the tradi­ at the same time to improve its people’s standard of tional e c l a c school of thought focused more on the living. This requires increased productivity and there­ appropriation of the fruits of technical progress than fore the incorporation of technological advances (...) on the determinants of such progress, then the heirs differences in international engagement are due to a to that line of thought were those who developed this large extent to structural factors which also affect the latter facet during the 1980s without, however, ne­ modalities and results of the national strategies and glecting the main concern of their predecessors. the use which each country makes of specific tools of Thus, as a result of both its own evolution and economic and industrial policy” (Fajnzylber, 1988, the changing world environment, contemporary pp. 12-13). e c l a c thinking has focused on the factors that play a A basic element in the analytical scheme used by part in technological change because this element is this author is the distinction he draws between two regarded as being of key importance in shaping a types of competitiveness: spurious and authentic more integrated and competitive production struc­ competitiveness. Whereas spurious competitiveness ture. Although the emphasis is on manufacturing, may be evidenced in a situation where expenditure since it is the sector most directly linked to techno­ on technological research and development, invest­ logical development, e c l a c has not ignored other ment and per capita income are all declining, as oc­ structural components which together determine the curred in Latin America during the 1980s, authentic level of competitiveness. competitiveness entails the absorption of technical One of the authors who developed the concept of progress and thus requires an environment in which structural competitiveness in greatest depth in Latin the above-mentioned variables are positive and are America was Fernando Fajnzylber (1988 and 1989b), on the rise. This analytical scheme has two main who based his hypotheses on exhaustive comparative components: a basic core, made up of the agrarian studies of the most industrialized countries of Eu­ structure, the industrial system, consumption and in­ rope, the United States and Japan, as well as the na­ vestment patterns, and social equity; and the factors tions of South-East Asia, the Nordic countries and the that determine the dynamics of that basic core, which less industrialized countries of Europe, in an effort to include a country’s endowment of natural resources, draw lessons from their experiences that might help demographic trends, its entrepreneurial capabilities, Latin America succeed in its attempt to attain high the development of scientific and technological levels of competitiveness, technical progress and knowledge, foreign direct investment, the financial social equity. system and international consumption patterns This author wrote that “In the medium and long (Fajnzylber, 1989b). term, competitiveness is a country’s capacity to sus­ The interaction of all these elements can gener­ tain and expand its share of international markets and ate a virtuous circle of a cumulative nature which

TECHNOLOQICAL CHANGE AND STRUCTURALIST ANALYSIS • ARMANDO KURI GAYTAN 196 CEPAL REVIEW 55 • APRIL 1«»5 carries the system towards a dynamic of growth, type provided for their producers by such economies competitiveness and social equity involving increas­ as those of Japan, the Republic of Korea or Taiwan, ing absorption of technical progress, as has occurred which he termed “learning-oriented” because it pro­ in Europe, Japan and the Nordic countries. When this vided for technology transfer and the creation of a interaction is not complete, certain problems will sound production apparatus with a sizeable national arise, as they have in connection with competitive­ component. ness in the United States or with regard to social This view is borne out by comparisons based on equity in South-East Asia; but when the synergy the shares accounted for by large locally-owned breaks down almost entirely, a vicious circle is set up private enterprises, which as of the mid-1980s which prevents not only the achievement of this set amounted to a mere 6% in Brazil and 3% in Mexico, of objectives as a group but also the attainment of the region’s two largest countries. In contrast, the any one of these objectives individually. This is the corresponding figures for the Republic of Korea and situation in Latin America, whose striking heteroge­ Taiwan were 96% and 28%, respectively (Fajnzylber, neity and disjointed production structure are proof 1989a). The main difference lies, of course, in the that its achievements in this respect have been in­ types of industrial, trade and technological policies complete and have occurred only in very isolated that were applied in these countries and in the inter­ cases. The result has been Fajnzylber’s famous action among the various productive and social “empty box” or, in other words, the fact that not a agents in pursuit of a common objective -something single Latin American country has thus far managed which is non-existent in Latin America. to combine growth with social equity. The outcome of all this for the region was a very The comparisons made by Fajnzylber (1989a tenuous entrepreneurial spirit which did little or noth­ and 1989b) on the basis of per capita g d p growth ing to spur forward a search for product or process rates and trends in income concentration indexes innovations that would boost competitiveness, be­ over the past 25 years indicate that, while countries cause thanks to their captive markets and subsidies, such as Sri Lanka, Indonesia, Egypt and Thailand national producers had no need to do this. When -not to mention the economies of China, the Re­ these flaws in the industrial development style were public of Korea, Hong Kong, Israel or Spain- have compounded by the effects of the external debt crisis carried forward their development by combining and the orthodox adjustment policies that followed in growth and social equity, none of the Latin American its wake during the 1980s, the result was, at best, the countries has succeeded in doing so. stagnation of production, while in other cases actual If other types of comparisons are added to this decreases were recorded due to steep downturns in form of analysis (e.g., the metal products and ma­ investment, public expenditure, real wages and gdp. chinery and chemical industries’ share3 of the value This led to a sharp increase in poverty and extreme added by the manufacturing sector, industrial export poverty (affecting over 40% of the population) and coefficients or productivity indexes), the extent to caused this period to be termed “the lost decade” in which Latin America lags behind stands out even terms of development. more clearly. What are the reasons for such a poor The solution for this situation that has been pro­ production performance according to contemporary posed by e c l a c is to undertake a comprehensive e c l a c thought? realignment of production, with emphasis on the The main cause lies in the import-substituting manufacturing sector and, in particular, those bran­ industrialization process pursued by the region from ches of activity capable of absorbing technical pro­ the 1940s onwards, which was primarily based on the gress and disseminating it to the rest of the economy. utilization of natural resources and indiscriminate The point of departure for this proposal is the belief protection. This type of protection was branded as that during a stage such as the present one, in which “frivolous” by Fajnzylber, in contraposition to the sweeping changes in all spheres of life are being driven forward by an unceasing technological revol­ ution, countries will not be able to compete unless 3 “The paramount vehicles of technical progress -the chemicals they have an efficient production apparatus and can and capital goods sectors- are virtually absent in Brazil and offer quality products and services, which cannot be Mexico whereas they account for 73% in the Republic of Korea and 24% in Taiwan” (Fajnzylber, 1989a). attained without assigning high priority to expendi-

TECHNOLOGICAL CHANOE AND STRUCTURALIST ANALYSIS • ARMANDO KURI GAYTAN CEPAL REVIEW 55 • APRIL 1885 197 ture on research and development and, more gener­ region. These tasks should be shared between a mod­ ally, to technological, industrial and trade policy. ern, enterprising and innovative private sector and a Other factors which have a direct bearing on strong, efficient public sector which is fully aware structural competitiveness and therefore warrant spe­ that, as well as having a crucial role to play in ensur­ cial attention include the educational system, ongoing ing a stable macroeconomic environment, it must occupational training, corporate management, the serve as the central liaison among the various agents. financial system, and the establishment of an institu­ Moreover, the actions of these agents need to be in tional framework that will back up the changes in the keeping with an economic policy whose different region’s production patterns and facilitate the inter­ facets are all directed towards the ultimate objective connection of all the agents involved in order to pre­ of economic growth coupled with higher levels of vent the dispersion of effort that is so common in the competitiveness and social equity. IV Some final thoughts

In general terms, from the early days of ECLAC up to (1989), the marked structural heterogeneity of this the present time, there would appear to be a certain apparatus may jeopardize such a strategy and cause it continuity in its thinking about the role of technical to fail, as in the past when, far from lessening exist­ progress in economic development, although each ing inequalities, support for the modern sector tended stage exhibits specific features and nuances that dif­ to magnify them. ferentiate it. This is why Pinto recommends that, in addition During what we have called the traditional peri­ to promoting increased productivity in technologi­ od, for example, the main concern was over the con­ cally sophisticated sectors in order to improve the centration of the fruits of technical progress, but the region’s international trade position, support also be policies that carried the industrialization process provided for the other sectors. These sectors’ techno­ forward emphasized growth over distribution, be­ logical requirements may be much lower, but the re­ cause it was felt that wealth first of all had to be sults -in terms of greater social and productive accumulated; once that had been accomplished, it homogeneity- will probably be much more effective could be distributed more equitably. than those of the modern sector alone. As we all know, these policies led to a heavy Finally, a policy of this sort obviously requires a concentration of income which, after the “lost significant level of determined, soundly-based State decade” had further intensified it, left almost half of participation in order to balance the workings of the the Latin American population in a socially marginal market forces and ensure effective results within a position. The modem e c l a c school of thought there­ fairly short time-frame in crucial areas such as educa­ fore sees social equity as being consubstantial with tion and the scientific/technological system, as well competitiveness and postulates that the achievement as to furnish an institutional framework for the con­ of both these objectives hinges upon technical pro­ certed efforts of the various productive and social gress. agents involved. The other issue which provides a somewhat con­ What Aníbal Pinto said regarding the false dis­ tradictory link between the two stages of e c l a c tinction between the neoliberal State of the 1980s and thinking is the solution proposed by the contempor­ the State as it was in earlier times is very enlighte­ ary school of thought for the competitiveness/social ning in this respect: “What does appear to be both equity equation. As noted earlier, in principle this abundantly clear and quite disturbing is that some­ formula is based on support for the modem manufac­ thing akin to a phobia against the State has taken the turing sector, since this is the vehicle for technical place of the idolatry of the State which is said to have progress, which can then be passed on to the rest of existed in the past. It would appear to be vitally im­ the production apparatus. However, as noted by Pinto portant to lay this false distinction to rest so that

TECHNOLOGICAL CHANGE AND STRUCTURALIST ANALYSIS • ARMANDO KURI GAYTAN 198 CEPAL REVIEW 55 • APRIL 1995 measures and instruments may be delineated that will imperative need to forge a position for itself in be capable of vanquishing the forces that foster the today’s globalized world economy and deal success­ ‘concentration of technical progress and its fruits’, as fully with the urgent issues of competitiveness and e c l a c puts it” (Pinto, 1989). extreme poverty, which are perhaps the greatest chal­ Overcoming these and other false distinctions or lenges that must be met by the region as this millen­ dilemmas arising out of the conditions discussed here nium draws to a close. is a sine qua non for giving not only Mexico but all of Latin America a decent chance of fulfilling the (Original: Spanish)

Bibliography

ECLAC (Economic Commission for Latin America and the (1991): Apuntes sobre las opciones de desarrollo para Caribbean) (1974): Economic Survey of Latin Ameri­ México y América Latina, Comercio exterior, vol. 41, ca, 1973 (E/CN.12/974/Rev.l), Santiago, Chile. No. 5, Mexico City, Banco Nacional de Comercio Fajnzylber, F. (1988): International competitiveness: Exterior, S.N.C., May. Agreed goal, hard task, CEPAL Review, No. 36 Maddison, A. (1986): Las fases del desarrollo capitalista, (LC/G.1537-P), Santiago, Chile. una historia económica cuantitativa, Mexico City, El (1989a): Sobre la impostergable transformación pro­ Colegio de México/FCE. ductiva de América Latina, Pensamiento iberoameri­ Pinto, A. (1965): Concentración del progreso técnico y cano, No. 16, Madrid, Ibero-American Co-operation de sus frutos en el desarrollo latinoamericano, El tri­ Institute (ICI)/ECLAC. mestre económico, vol. XXXII, No. 125, Mexico (1989b): Industrialization in Latin America: From City, FCE. the “Black Box” to the “Empty Box", “Cuadernos (1976): La CEPAL y el problema del progreso técni­ de la CEPAL” series, No. 60 (LC/G.1534-P), Santiago, co, in América Latina: una visión estructuralista, Chile. United Nations publication, Sales No.: Mexico City, National Autonomous University of E.89.II.G.5. Mexico, Faculty of Economics. Hirschman, A. (1987): La economía política del desarrollo (1989): Notas sobre industrialización y progreso téc­ latinoamericano, El trimestre económico, No. 216, nico en la perspectiva Prebisch-CEPAL, Pensamiento Mexico City, Fondo de Cultura Económica (FCE), iberoamericano, No. 16, Madrid, Ibero-American January-March. Co-operation Institute/ECLAC. Ibarra, D. (1990): Adjusting power between the State and Prebisch, R. (1949): The economic development of Latin the market, CEPAL Review, No. 42 (LC/G.1642-P), America and its principal problems (E/CN.l 2/89/Rev. 1). Santiago, Chile. United Nations publication, Sales No. 50.II.G.2. Kuri, A. (1982): La evolución del pensamiento de la Rodríguez, E. (1991): La endogeneización del cambio tec­ CEPAL, Investigación económica, No. 162, Mexico nológico: un desafío para el desarrollo, in O. Sunkei City, National Autonomous University of Mexico, (éd.), El desarrollo desde dentro: un enfoque Faculty of Economics. neoestructuralista para la América Latina, Lecturas 71, Mexico City, FCE.

TECHNOLOGICAL CHANGE AND STRUCTURALIST ANALYSIS • ARMANDO KURI GAYTAN Guidelines for contributors to CEPAL Review

The editorial board of the Review are always interested in encouraging the publication of articles which analyse the economic and social development of Latin America and the Caribbean. With this in mind, and in order to facilitate the presentation, consideration and publication of papers, they have prepared the following information and suggestions to serve as a guide to future contributors. —The submission of an article assumes an undertaking by the author not to submit it simultaneously to other periodical publications. —Papers should be submitted in Spanish, English, French or Portuguese. They will be translated into the appropriate language by ECLAC. —Papers should not be longer than 10 000 words, including notes and bibliography, if applicable, but shorter articles will also be considered. The original and one copy should be submitted, as should the diskettes, if any (in IBM compatible Word-Perfect 5.1 format). —All contributions should be accompanied by a note clearly indicating the title of the paper, the name of the author, the institution he belongs to, and his address. Authors are also requested to send in a short summary of the article (no more than 250 words) giving a brief description of its subject matter and main conclusions. —Footnotes should be kept to the minimum, as should the number of tables and figures, which should not duplicate information given in the text. —Special attention should be paid to the bibliography, which should not be excessively long. All the necessary information must be correctly stated in each case (name of the author or authors, complete title (including any subtitle), publisher, city, month and year of publication and, in the case of a series, the title and corresponding volume number or part, etc.). —The editorial board of the Review reserve the right to make any necessary revision or editorial changes required by the articles. —Authors will receive a courtesy copy of the Review in which their article appears, plus 30 offprints of the article, both in Spanish and in English, at the time of publication in each language.

CEPAL REVIEW 55 201

ployment have not gone down in line with the higher growth rates, Recent and in some countries they have even increased despite the stimu­ ECLAC lus that should have been given by the growth of the product. In general terms, it is clear that in Latin America and the publications Caribbean growth rates below 4% are not enough to allow major advances in the fight against poverty or to prevent unemployment and underemployment from persisting at unacceptably high levels. Furthermore, although the capital inflows are welcome because of Periodical publications their positive contribution to growth and investment, they never­ theless reflect the insufficiency of domestic rates of saving and Economic Survey of Latin America and the Caribbean, 1993, may undermine efforts to expand exports. A great deal therefore vol. I. LC/G.1833-P, Santiago, Chile, December 1994, 289 pages. remains to be done if it is desired to attain simultaneously the United Nations publication, Sales No. E.94.II.G.2. objectives of increasing international competitiveness and improv­ ing equity in the coming years. Volume I of the Economic Survey of Latin America and the Carib­ A noteworthy feature in 1994 was the increasingly marked bean, 1993 analyses the economic evolution of the region in that convergence of the growth rates of the various countries of the year. Part One gives a general overview of the main features dis­ region, most of which registered moderate growth rates accompa­ played by the Latin American economy, going into greater detail nied by similarly moderate rates of inflation. Only three countries on the questions of macroeconomic policy and inflation; wage grew more than 5% (Argentina, Guyana and Peru), while there levels; public finances; foreign trade, and external financing. It were also only three countries which registered a decline (Haiti, also covers the evolution of the Caribbean economies. Honduras and Venezuela). It is interesting to speculate on the Part Two reviews the situation of the world economy. extent to which the growing importance of intra-regional trade, Volume II of the Economic Survey, due out shortly, will de­ together with greater policy convergence, has contributed to this scribe the economic evolution of the individual countries during greater uniformity of the results obtained by the different coun­ the year. tries.

Preliminary Overview of the Latin American and Caribbean Panorama social de América Latina, 1994 (Social Panorama of Economy, 1994, LC/G.1846, ECLAC, Santiago, Chile, December Latin America, 1994), LC/G.1844, ECLAC, Santiago, Chile, No­ vember 1994, 206 pages. 1994, 59 pages.

The year 1994 gave further signs of the consolidation of a more TheSocial Panorama of Latin America reflects the ongoing efforts dynamic economic performance pattern in Latin America and the made by the ECLAC Secretariat to incorporate the social dimension Caribbean. The growth rate of the regional GDP went up from an in the regional development evaluations made by the Commission average of 3.4% per year in the three-year period 1991-1993 to each year. 3.7% in 1994: a figure exceeded only once before in the last 14 In the 1994 edition, the analysis is centered on children and the family, as a result of the joint activities carried out by the years. The per capita income, for its part, increased by 1.9%. Aver­ Secretariat and the United Nations Children’s Fund (UNICEF) to age inflation (excluding Brazil) went down to 16%: the lowest level in several decades. Finally, the countries of the region conti­ obtain updated information on the opportunities for gaining access nued to attract large amounts of foreign capital, the inflow of to well-being from childhood onwards. which totalled nearly US$57 billion in 1994, making it possible to The information analysed makes it possible to draw a profile finance the growing current account deficit. of the situation in the early 1990s in such important social These achievements were possible partly because of the im­ areas as poverty, income distribution, employment, social spend­ provement in the international economy, especially in the second ing, children, the family, education and labour income, together with a social agenda of items which received public attention in half of the year. The growth rate of the industrialized countries the countries of the region during the year in question. doubled, reaching 2.7%; the rate of expansion of world trade rose This report covers the main aspects of social development in from 4% to 7% in volume terms, and commodity prices (excepting the region, but it does not aim to be exhaustive. Aspects such as fuels) increased for the first time in five years. The rise in interna­ health, housing, social security, etc. are dealt with in the analysis tional interest rates failed to offset these positive trends. Further­ of social spending and in the description of the social agenda, but more, in spite of the climate of uncertainty prevailing in some not in the other chapters. This is due to the information sources countries on account of their electoral processes, the improvement used, since most of the data come from household surveys, except in economic performance was facilitated in Latin America and the for the chapter on social spending, which takes its information Caribbean by the sustained growth of domestic investment and the from various sources, and the chapter on the social agenda, which maintenance of stabilization and structural reform policies. A fur­ is based on documentary information and follow-up of the public ther dynamic element was the fresh impetus given to regional inte­ debate in the countries. In future editions it is hoped to continue to gration measures. expand both the range of subjects covered and the basic informa­ Despite this improved performance, however, the rate of tion sources. generation of productive employment continued to be insufficient Concern for equity is the central subject of the study. With in most of the region, since there was rapid growth of the labour regard to poverty and income distribution, the report incorporates force, heightened by the higher rates of participation. In some the most recent estimates made by ECLAC, which cover a broad countries, restructuring of the economy and efforts to improve range of countries of the region and refer to the year 1992 and competitiveness have had unfavourable short-term effects on the some previous years. It also analyses some components of pro- j 1 labour. Because of this, unemployment and underem­

APRIL 1995 202 CEPAL REVIEW S) • APRIL 1«»S

cesses which have served to reduce poverty in a number of coun­ which have been taking place in the region with regard to social tries in the early 1990s, in so far as they relate to economic growth policies. and the evolution of household income distribution. ■With regard to employment, special mention is made of the increase in the number of employed persons with technical and Other publications professional qualifications, the decline in public employment, the large share of wage-earning employment accounted for by the pri­ Dirección del comercio exterior de América Latina y el Caribe vate sector, the continuing large share of low-productivity, low-in- según principales productos y grupos de productos 1970-1992 come strata in the total, and the ongoing downward trend in the (Direction of Latín American and Caribbean external trade, by relative weight of peasants in rural areas. An analysis is also made main products and product groups, 1970-1992), “Cuadernos Es­ of the links between poverty, place in the employment structure, tadísticos de la CEPAL” series, No. 20 (LC/G.1785-P), ECLAC, and unemployment, and trends in the latter are examined. Santiago, Chile, September 1994, 483 pages. In addition, trends in social spending are quantified and ana­ lysed, both in terms of their real magnitude per capita and their This further edition in the “Cuadernos Estadísticos de la CEPAL” magnitude as a proportion of GDP and total public expenditure. series presents statistical information on foreign trade designed to Their behaviour in periods of adjustment and fiscal imbalance and illustrate the direction of trade, by destination and origin, of the their relation to the level of activity are examined, as are the sec­ main products or product groups traded by the Latin American and toral structure of social spending and the changes in it, the pro­ Caribbean countries with their most important trading partners. gressive or regressive nature of the various sectoral components, The Latin American and Caribbean External Trade Data and the degree to which such spending is focussed on the poor. Bank (BADECEL), which is maintained by ECLAC, contains a wide With regard to the family and children, it is noted that invest­ range of statistics at both the country and product level, organized ment in children is usually based on criteria related with produc­ according to various international statistical classifications. In tion, citizenship and social integration. In this respect, childhood this study, the system used for classifying the information was the and adolescence are important stages in which the opportunities Standard International Trade Classification (SITC), which has been for acquiring key skills for participating in production and in so­ revised on three occasions to adapt it to the changing international ciety in general are acquired. The family contexts of the socializa­ trade conditions due to the growing number of products and var­ tion of children are therefore examined, with special emphasis on iety of countries involved in the transactions. The revisions of the the types of households and other factors which determine their SITC have maintained close correlation with the changes made in economic and social vulnerability, and an estimate is made of the the customs nomenclatures of the Customs Cooperation Council proportion of children who grow up in unfavourable socialization (CCC), so that the data in this study come from the national cus­ contexts. Among the factors analysed are the educational climate, toms authorities. the economic capacity of the households, and the housing condi­ Separate statistics are presented on the exports and imports tions. The accumulation of educational capital is reviewed, together of 21 countries of Latin America and the Caribbean, as well as for with the conditions which limit it, such as differences of oppor­ the following groups of countries: Latin America and the Carib­ tunity between the various economic and social strata and child bean (21 countries), the Latin American Integration Association labour. Consideration is also given to one of the main links in the (ALADI), and the Central American Common Market (CACM), for chain of opportunities: the amount of education young people have the years 1970, 1975, 1980, 1985, 1990, 1991 and 1992. The accumulated by the time they leave socialization environments of figures for Latin America and the Caribbean as a whole (21 different types in terms of economic, social and educational capac­ countries), however, do not include data on Belize for 1970 and ity, and the possibilities they then have for generating income and 1991, nor data on Jamaica for 1970 and 1992, because of the maintaining a basic family group above the poverty line. unavailability of such information, which naturally does not appear Analysis of the educational levels of the labour force and either in the country figures for these two nations. their importance in terms of access to well-being is another of the In the case of exports, the aim has been to show the main items analysed in this edition. products and destinations, by countries, while in the case of Finally, the examination of the social agenda of the countries imports the analysis identifies the most important countries of comprises a description of policies and programmes in the areas of origin, the corresponding divisions of the Standard International poverty, education, health, social security and some issues of rising Trade Classification (SITC, Rev. 1), and some groups of that importance, together with a summary of the institutional changes Classification.

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T h e American Sociological Review (bimonthly, ISSN 0003-1224) publishes original work of interest to the discipline in general, new theoretical developments, results of research that advance our under­ standing of fundamental social processes, and important methodological innovations. Like other ASA publications, the emphasis is on excep­ tional quality. Unlike the more specialized journals, the primary objective o f ASR is to publish work that most advances our general knowledge of society. Recent or forthcoming issues include: II Variations in Tax Progressivity in the United States, 1916 to 1986 Michael Patrick Allen and John L. Campbell Spousal Alternatives and Marital Dissolution Scott J. South and Kim M. Lloyd ■ Collective Action and Network Structure Roger Gould ■ Does Economic Growth Benefit the Masses? Glenn Firebaugh and Frank D. Beck ■ Social Networks and Organizational Dynamics J. Miller McPherson, Pamela Popielarz, and Sonja Drobnic HI The Epidemiology of Social Stress R. Jay Turner, Blair Wheaton, and Donald A. Lloyd HI Career Mobility and the Communist Political Order Andrew G . Walder ■ Habermas, Goffman, and Communicative Action James J. Chriss ■ Cohort Size and Arrest Rates Over the Life Course: Easterlin Reconsidered Darrell Steffensmeier, Cathy Streifel, and Edward Shidadeh

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Diana Tussie The policy harmonization debate: What can developing countries gain from multilateral trade negotiations? Anil Markamfya Is free trade compatible with sustainable development? Jan Kregel Capital flows: Globalization of production and financing development Gary Hufbauer, Darius Lakdawalla and Anup Malani Determinants of direct foreign investment and its connection to trade Alfred Maizels Commodity market trends and instabilities: Policy options for developing countries Sanjaya Lall Industrial policy: The role of government in promoting industrial and technological development Ajit Singh Growing independently of the world economy: Asian economic development since 1980 Ricardo Ffrench-Davis, Daniel Titelman and Andras Uthoff International competitiveness and the macroeconomics of capital account opening David Felix: Industrial development in East Asia: What are the lessons far Latin America? Gerry K. Helleiner From adjustment to development in sub-Saharan Africa Andrãs Kcrves From "great leaps forward" to normalcy: Some issues in transitional policies in Eastern Europe

The UNCTAD Revia» is an international journal which publishes scholarly articles on all aspects of international trade, finance and development of concern to the United Nations Conference on Trade and Development (UNCTAD). The journal is published once a year. It welcomes articles by scholars from all parts of the world. Papers ate selected on the basis of their intrinsic analytical value and policy relevance. Opinions and comments, as well as proposed contributions for future issues, are welcome and should be addressed to the Managing Editor, UNCTAD Review, UNCTAD, Palais des Nations, 1211 Geneva 10, Switzerland. Further information and copies of this publication may be obtained from the same address. A United Nations publication. Sales N a E.94.II.D.19. The Swiss Review of International Economic Relations ISSN «004-8216 ______Nr. 1/95 » April 1995 ______European Integration - Between Nation and Federation Heinz Hauser and Alexia Miiller Legitimacy: The Missing Link for Explaining EU-Institution Building Rudolf Hrbek Federal Balance and the Problem of Democratic Legitimacy in the EU Klaus Armingeon The Democratic Deficit of the EU Giandomenico Majone The Development of Social Regulation in the EU: Policy Externalities, Transaction Costs, Motivational Factors Roland Vaubel Social Regulation and Market Integration: A Critique and Public- Choice Analysis of the Social Chapter Jtirg Martin Gabriel The Integration of European Security: A Functionalist Analysis Richard Tibbels WEU and Future European Security Arrangements Ernst- Ulrich Petersmann How Can the EU Be Constitutionalized? The European Parliaments 1994 Proposal for a «Constitution for the EU» Martin Seidel Basic Aspects of a European Constitution Deirdre Curtin The Shaping of a European Constitution and the 1996IGC: «Flexibility» as a Key Paradigm?

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La experiencia del Perú, 1980,265 pp. Estudio Económico de Economic Survey of 4 Transnational banks and the external finance of Latin Amerlca:the experience of Peru, 1985, América Latina y el Latin America and 342 pp. Caribe the Caribbean 5 La dimension ambiental en los estilos de desarrollo de 1980, 664 pp. 1980, 629 pp. América Latina, Osvaldo Sunkel, 1981, 2nd. ed. 1981, 863 pp. 1981, 837 pp. 1984,136 pp. 1982, vol.1 693 pp. 1982, vol.1 658 pp. 6 La mujer y el desarrollo: guía para la planificación de 1982, vol. II 199 pp. 1982, vol. II 186 pp. programas y proyectos, 1984,115 pp. 1983, vol.l 694 pp. 1983, vol.1 686 pp. 6 Women and development: guidelines for programme and project planning, 1982, 3rd. ed. 1983, vol. II 179 pp. 1983, vol. II 166 pp. 1984,123 pp. 1984, vo l.l 1984, vol.l 702 pp. 685 pp. 7 Africa y América Latina: perspectivas de la 1984, vol. II 233 pp. 1984, vol. // 216 pp. cooperación interregional, 1983,286 pp. 1985, 672 pp. 1985, 660 pp. 8 Sobrevivencia campesina en ecosistemas de altura, 1986, 734 pp. 1986, 729 pp. vois. I y II, 1983,720 pp. 9 La mujer en el sector popular urbano. América 31 El desarrollo sustentable: transformación productiva, Latina y el Caribe, 1984,349 pp. equidad y medio ambiente, 1991,146 pp. 10 Avances en la interpretación ambiental del desarrollo 31 Sustainable development: changing production agrícola de América Latina, 1985,236 pp. patterns, social equity and the environment, 11 El decenio de la mujer en el escenario 1991,146 pp. latinoamericano, 1986, 216 pp. 32 Equidad y transformación productiva: un enfoque 11 The decade for women in Latín America and integrado, 1993, 254 pp. the Caribbean: background and prospecta, 1988, 33 Educación y conocimiento: eje de la transformación 215 pp. productiva con equidad, 1992, 269 pp. 12 América Latina: sistema monetario Internacional y 33 Education and knowledge: basic pillars of financiamiento externo, 1986,416 pp. changing production patterns with social equity, 12 Latín America: International monetary system and 1993, 257 pp. external financing, 1986,405 pp. 34 Ensayos sobre coordinación de políticas macro­ 13 Raúl Prebisch: Un aporte al estudio de su econômicas, 1992, 249 pp. pensamento, 1987,146 pp. 35 Población, equidad y transformación productiva, 14 Cooperativismo latinoamericano: antecedentes y 1993, 158 pp. perspectivas, 1989,371 pp. 35 Population, social equity and changing 15 CEPAL, 40 años (1948-1988), 1988,85 pp. production patterns, 1993, 153 pp. 15 ECLAC 40 Years (1948-1988), 1989,83 pp. 36 Cambios en el perfil de las familias. La experiencia 16 América Latina en la economía mundial, 1988,321 pp. regional, 1993, 434 pp. 17 Gestión para el desarrollo de cuencas de alta montaña 37 Familia y futuro: un programa regional en América en la zona andina, 1988,187 pp. Latina y el Caribe, 1994, 137 pp. 18 Políticas macroeconômicas y brecha extema: América 37 Family and future. A regional programme In Latin Latina en los años ochenta, 1989,201 pp. America and the Caribbean, 1995,123 pp. 19 CEPAL, Bibliografía, 1948-1988, 1989,648 pp. 38 Imágenes sociales de la modernización y la 20 Desarrollo agrícola y participación campesina, 1989, transformación tecnológica, 1995, 198 pp. 404 pp. 39 E regionalismo abierto en América Latina y el Caribe, 21 Planificación y gestión del desarrollo en áreas de 1994, 109 pp. expansión de la frontera agropecuaria en América 39 Open regionalism In Latin America and the Latina, 1989,113 pp. Caribbean, 1994, 103 pp. 22 Transformación ocupadonaly crisis social en América 40 Políticas para mejorar la inserción en la economia Latina, 1989,243 pp. mundial, 1995, 314 pp. 23 La crisis urbana en América Latina y el Caribe: reflexiones sobre alternativas de solución, 1990, 197 pp. MONOGRAPH SERIES 24 The environmentaldimension In development planning I, 1991, 302 pp. Cuadernos de la C E P A L 25 Transformación productiva con equidad, 1990,3rd. ed. 1 América Latina: el nuevo escenario regional y 1991,185 pp. mundial/ Latin America: the new regional and world 25 Changing production patterns with social equity, setting, (bilingual), 1975,2nd. ed. 1985,103 pp. 1990, 3rd. ed. 1991,177 pp. 2 Las evoluciones regionales de la estrategia inter­ 26 América Latina y el Caribe: opciones para reducir el nacional del desarrollo, 1975,2nd. ed. 1984,73 pp. peso de la deuda, 1990,118 pp. 2 Regional appraisals of the International 26 Latín America and the Caribbean: options to development strategy, 1975, 2nd. ed. 1985,82 pp. reduce the debt burden, 1990,110 pp. 3 Desarrollo humano, cambio social y crecimiento en 27 Los grandes cambios y la crisis. Impacto sobre la América Latina, 1975, 2nd. ed. 1984,103 pp. mujer en América Latina y el Caribe, 1991, 271 pp. 4 Relaciones comerciales, crisis monetaria e integración 27 Major changes and crisis. The Impact on women In económica en América Latina, 1975,85 pp. Latin America and the Caribbean, 1992, 279 pp. 5 Síntesis de la segunda evaluación regional déla 28 A collection of documents on economic relations estrategia internacional del desarrollo, 1975,72 pp. between the United States and Central America, 6 Dinero de vabr constante. Concepto, problemas y 1906-1956,1991,398 pp. experiencias, Jorge Rose, 1975,2nd. ed. 1984,43 pp. 29 Inventarios y cuentas del patrimonio natural en 7 La coyuntura internacional y el sector externo, 1975, América Lalinayel Caribe, 1991,335 pp. 2nd. ed. 1983, 106 pp. 30 Evaluaciones del impacto ambiental en América Latina 8 La industrialización latinoamericana en los años y el Caribe, 1991,232 pp. setenta, 1975,2nd. ed. 1984,116 pp. 9 Dos estudios sobre inflación 1972-1974. La inflación 26 Las transformaciones rurales en América Latina: en los países centrales. América Latina y la inflación ¿desarrollo social o marginadón?, 1979, 2nd. ed. importada, 1975,2nd. ed. 1984,57 pp. 1984,160 pp. 8/n Canada and the foreign firm, D. Pollock, 1976,43 pp. 27 La dimensión de la pobreza en América Latina, Oscar 10 Reactivación del mercado común centroamericano, Altimir, 1979,2nd. ed. 1983,89 pp. 1976,2nd. ed. 1984,149 pp. 28 Organizatíón institucional para el control y manejo de 11 Integración y cooperación entre paises en desarrollo la deuda externa. El caso chileno, Rodolfo Hoffman, en el ámbito agrícola, Germánico Salgado, 1976, 1979,35 pp. 2nd. ed. 1985,62 pp. 29 La política monetaria y el ajuste de la balanza de 12 Temas del nuevo orden económico internacional, pagos: tres estudios, 1979, 2nd. ed. 1984,61 pp. 1976,2nd. ed. 1984,85 pp. 29 Monetary policy and balance of payments 13 En torno a las ideas de la CEPAL desarrollo, adjustment: three studies, 1979,60 pp. industrialización y comerão exterior, 1977, 2nd. ed. 30 América Latina: las evaluaciones regionales de la estrategia internadonal del desarrollo en los años 1985,57 pp. setenta, 1979,2nd. ed. 1982,237 pp. 14 En torno a las ideas de la CEPAL problemas de la 31 Educación, imágenes y estilos de desarrollo, G. industrialización en América Latina, 1977, 2nd. ed. Rama, 1979, 2nd. ed. 1982,72 pp. 1984,46 pp. 32 Movimientos internacionales de capitales, R. H. 15 Los recursos hidráulicos de América Latina. Informe Arriazu, 1979, 2nd. ed. 1984,90 pp. regional, 1977,2nd. ed. 1984,75 pp. 33 Informe sobre las inversiones directas extranjeras en 15 The water resources of Latin America. Regional América Laflna, A. E. Calcagno, 1980,2nd. ed. 1982, report, 1977,2nd. ed. 1985,79 pp. 114 pp. 16 Desarrollo y cambio social en América Latina, 1977, 34 Las fluctuaciones de la industria manufacturera 2nd. ed. 1984,59 pp. argentina, 1950-1978, D. Heymann, 1980, 2nd. ed. 17 Estrategia internadonal de desarrollo y 1984,234 pp. establecimiento de un nuevo orden económico 35 Perspectivas de reajuste industrial: la Comunidad internacional, 1977, 3rd.ed. 1984,61 pp. Económica Europea y los países en desarrollo, 17 International development strategy and B. Evers, G. de Groot and W. Wagenmans, 1980, establishment of a new international economic 2nd. ed. 1984,69 pp. order, 1977,3rd. ed. 1985,59 pp. 36 Un análisis sobre la posibilidad de evaluar la solvencia 18 Rakes históricas de las estmcturas distributivas de crediticia de los países en desarrollo, A. Saieh, América Latina, A. di Filippo, 1977, 2nd. ed. 1983, 1980,2nd. ed. 1984,82 pp. 64 pp. 37 Hacia los censos latinoamericanos de los años 19 Dos estudios sobre endeudamiento externo, C. ochenta, 1981,146 pp. Massad and R. Zahler, 1977, 2nd. ed. 1986,66 pp. s/n The economic relations of Latín America with s/n United States - Latin American trade and Europe, 1980, 2nd. ed. 1983,156 pp. financial relations: some policy recommendations, 38 Desarrollo regional argentino: la agricultura, J. Martin, S. Weintraub, 1977,44 pp. 1981,2nd. ed. 1984,111 pp. 20 Tendendas y proyecciones a largo plazo del 39 Estratificación y movilidad ocupacional en América desarrollo económico de América Latina, 1978, Latina, C. Filgueira and C. Geneletti, 1981, 2nd. ed. 3rd. ed. 1985,134 pp. 1985,162 pp. 21 25 años en la agricultura de América Latina: rasgos 40 Programa de actíón regional para América Latina en prindpales 1950-1975, 1978,2nd. ed. 1983,124 pp. los años ochenta, 1981,2nd. ed. 1984,62 pp. 22 Notas sobre la familia como unidad socioeconómica, 40 Regional programme of action for Latin America In Carlos A. Borsotti, 1978,2nd. ed. 1984,60 pp. the 1980s, 1981, 2nd. ed. 1984, 57 pp. 23 La organización de la información para la evaluación 41 El desarrollo de América Latina y sus repercusiones del desarrollo, Juan Sourrouille, 1978,2nd. ed. 1984, en la educación. Alfabetismo y escolaridad básica, 1982, 246 pp. 61 pp. 42 América Latina y la economía mundial del café, 1982, 24 Contabilidad nadonal a pretíos constantes en América 95 pp. Laflna, 1978,2nd. ed. 1983,60 pp. 43 El tíclo ganadero y la economía argentina, 1983, s/n Energy In Latin America: The Historical Record, 160 pp. J. Mullen, 1978,66 pp. 44 Las encuestas de hogares en América Latina, 1983, 25 Ecuador: desafks y logros de la polttca económica en 122 pp. la fase de expansión petrolera, 1979,2nd. ed. 1984, 45 Las cuentas nationales en América Latina y el Caribe, 153 pp. 1983,100 pp. 45 National accounts In Latin America and the 61 Towards sustained development In Latin America Caribbean, 1983,97 pp. and the Caribbean: restrictions and requisites, 46 Demanda de equipos para generación, transmisión 1989,93 pp. y transformación eléctrica en América Latina, 1983, 62 La evoludón de la economía de América Latina en 193 pp. 1987,1989,87 pp. 47 La economía de América Latina en 1982: evolución 62 The evolution of the Latin American economy In general, política cambiarla y renegociación de la deuda 1987,1989,84 pp. externa, 1984,104 pp. 63 Elementas para el diseño de políticas industriales 48 PoiMcas de ajuste y renegociación de la deuda extema y tecnológicas en América Latina, 1990, 2nd. ed. en América Latina, 1984,102 pp. 1991,172 pp. 49 La economía de América Latina y el Caribe en 1983: 64 La Industria de transporte regular Internacional y la evolución general, crisis y procesos de ajuste, competitivídad del comercio exterior de tas países de 1985,95 pp. América Latina yel Caribe, 1989,132 pp. 49 The economy of Latín America and the Caribbean 64 The international common-carrier transportation In 1983: main trends, the Impact of the crisis and Industry and the competitiveness of the foreign the adjustment processes, 1985,93 pp. trade of the countries of Latin America and the 50 La CEPAL encamación de una esperanza de América Latina, Hernán Santa Cruz, 1985,77 pp. Caribbean, 1989,116 pp. 51 Hacia nuevas modalidades de cooperación económica 65 Cambios estructurales en tas puertos y la entre América Latina y el Japón, 1986,233 pp. competitivídad del comercio exterior de América 51 Towards new forms of economic co-operation Latina yel Caribe, 1991,141pp. between Latin America and Japan, 1987,245 pp. 65 Structural Changes In Ports and the 52 Los conceptos básicos del transporte marítimo y la Competitiveness of Latin American and Caribbean situación de la actividad en América Latina, 1986, Foreign Trade, 1990,126 pp. 112 pp. 66 The Caribbean: one and divisible, 1993, 207 pp. 52 Basic concepts of maritime transport and Its 67 La transferencia de recursos extemos de América present status In Latin America and the Caribbean, Latina en la posguerra, 1991, 92 pp. 1987,114 pp. 67 Postwar transfer of resources abroad by Latin 53 Encuestas de ingresos y gastos. Conceptos y métodos America, 1992,90 pp. en la experiencia latinoamericana. 1986,128 pp. 68 La reestwcturadón de empresas públicas: el caso 54 Crisis económica y políticas de ajuste, estabilización y de tas puertos de América Latina yel Caribe, crecimiento, 1986,123 pp. 54 The economic crisis: policies for adjustment, 1992, 148 pp. stabilization and growth, 1986,125 pp. 68 The restructuring of public-sector enterprises: 55 El desarrollo de América Latina y el Caribe: escollos, the case of Latin American and Caribbean ports, requisitos y opciones, 1987,184 pp. 1992, 129 pp. 55 Latín American and Caribbean development: 69 Las finanzas públicas de América Latina en la década obstacles, requirements and options, 1987,184 pp. de 1980,1993,100 pp. 56 Los bancos transnacionales y el endeudamiento 69 Public Finances In Latin America in the 1980s, externo en la Argentina, 1987,112 pp. 1993, 96 pp. 57 El proceso de desarrollo de la pequeña y mediana 70 Canales, cadenas, corredores y competitivídad: un empresa y su papel en el sistema Industrial: el caso de enfoque sistémico ysu aplicación a seis productos Italia, 1988,112 pp. latinoamericanos de exportación, 1993, 183 pp. 58 La evolución de la economía de América Latina en 71 Focalizadón ypobreza, 1995,249 pp. 1986,1988,99 pp. 58 The evolution of the Latin American Economy In 73 El gasto social en América Latina: un examen 1986, 1988,95 pp. cuantitativo ycualitativo, 1995,167 pp. 59 Protectionism: regional negotiation and defence strategies, 1988,261 pp. 60 Industriallzacbn en América Latina: de la “caja negra’ Cuadernos Estadísticos de la C E P A L al ‘casillero vado", F. Fajnzylber, 1989, 2nd. ed. 1 América Latina: relación de precios del intercambio, 1990,176 pp. 60 Industrialization In Latin America: from the 1976,2nd. ed. 1984,66 pp. “Black Box” to the “Empty Box”, F. Fajnzylber, 2 Indicadores del desarrollo económico y social en 1990,172 pp. América Latina, 1976,2nd. ed. 1984,179 pp. 61 Hada un desarrollo sostenido en América Latina y el 3 Series históricas del crecimiento de América Latina, Caribe: restricciones y requisitos, 1989,94 pp. 1978,2nd. ed. 1984,206 pp. 4 Estadísticas sobre la estructura del gasto de consumo Estudios e Informes de la C E P A L délos hogares según linalidad del gasto, por grupos 1 Nicaragua: el impacto de la mutación política, 1981, de Ingreso, 1978,110 pp. (Out of print; replaced by 2nd. ed. 1982,126 pp. No. 8 below) 5 El balance de pagos de América Latina, 1950-1977, 2 Perú 1968-1977:la política económica en un proceso 1979,2nd. ed. 1984,164 pp. de cambio global, 1981,2nd. ed. 1982,166 pp. 6 Distribución regional del producto interno bruto 3 La industrialización de América Latina y la cooperación sectorial en los países de América Latina, 1981, internacional, 1981,170 pp. (Out of print, will not be reprinted.) 2nd. ed. 1985,68 pp. 4 Estilos de desarrollo, modernización y medio ambiente 7 Tablas de insumo-producto en América Latina, 1983, en la agricultura latinoamericana, 1981,4th. ed. 1984, 383 pp. 130 pp. 8 Estructura del gasto de consumo de los hogares 5 El desarrollo de América Latina en los años ochenta, según finalidad del gasto, por grupos de ingreso, 1981,2nd. ed. 1982,153 pp. 1984,146 pp. 5 Latin American development in the 1980s, 1981, 9 Origen y destino del comercio exterior de los países de 2nd. ed. 1982,134 pp. la Asociación Latinoamericana de Integración y del 6 Proyecciones del desarrolb latinoamericano en bs Mercado Común Centroamericano, 1985,546 pp. años ochenta, 1981,3rd. ed. 1985,96 pp. 10 América Latina: balance de pagos, 1950-1984, 1986, 6 Latin American development projections for the 357 pp. 1980s, 1982,2nd. ed. 1983,89 pp. 11 El comercio exterior de bienes de capital en América 7 Las relaciones económicas externas de América Latina Latina, 1986,288 pp. en bs años ochenta, 1981,2nd. ed. 1982,180 pp. 12 América Latina: M ices del comercio exterior, 8 Integración y cooperación regionales en bs años 1970-1984,1987,355 pp. ochenta, 1982,2nd. ed. 1982,174 pp. 13 América Latina: comercio exterior según la 9 Estrategias de desarrollo sectorial para los años clasificación industrial internacional uniforme de ochenta: industria y agricultura, 1981, 2nd. ed. 1985, todas las actividades económicas, 1987, Vol. 1,675 100 pp. pp; Vol. II, 675 pp. 10 Dinámica del subempleo en América Latina. PREALC, 14 La distribución del Ingreso en Colombia. Antecedentes 1981,2nd. ed. 1985,101 pp. estadísticos y características socioeconómicas de los 11 Estilos de desarrolb de la industria manufacturera y receptores, 1988,156 pp. medio ambiente en América Latina, 1982, 2nd. ed. 15 América Latina y el Caribe: series regionales de 1984, 178 pp. cuentas nacionales a precios constantes de 1980, 12 Relaciones económicas de América Latina con bs 1991, 245 pp. países miembros del “Consejo de Asistencia Mutua 16 Origen y destino del comercio exterior de los países de Económica", 1982,154 pp. la Asocición Latinoamericana de Integración, 1991, 13 Campesinado y desarrollo agrboia en Bolivia, 1982, 190 pp. 175 pp. 17 Comercio intrazonal de los países de la Asociación de 14 El sector externo: indicadores y análisis de sus Integración, según capítulos de la clasificación fluctuaciones. El caso argentino, 1982,2nd. ed. 1985, uniforme para el comercio internacional, revisión 2, 216 pp. 1992, 299 pp. 15 Ingeniería y consultoria en Brasil y el Grupo Andino, 18 Clasificaciones estadísticas internacionales incorpo­ 1982,320 pp. radas en el Banco de Datos del Comercio Exterior de 16 Cinco estudios sobre la situación de la mujer en América Latina y el Caribe de la CEPAL, 1993, 313 pp. América Latina, 1982,2nd. ed. 1985,178 pp. 19 América Latina: comercio exterior según la 16 Five studies on the situation of women In Latin clasificación industrial internacional uniforme de todas America, 1983,2nd. ed. 1984,188 pp. las actividades económicas (CIIU) - Volumen I - 17 Cuentas nacionales y producto material en América Exportaciones, 1993, 285 pp. Latina, 1982,129 pp. 19 América Latina: comercio exterior según la 18 El financiamiento de las exportaciones en América clasificación industrial internacional uniforme de todas Latina, 1983,212 pp. las actividades económicas (CIIU) - Volumen II - 19 Medición del empleo y de los ingresos rurales, 1982, Importaciones, 1993, 291 pp. 2nd. ed. 1983,173 pp. 20 Dirección del comercio exterior de América Latina y el 19 Measurement of employment and Income In rural . Caribe según principales productos y grupos de areas, 1983,184 pp. productos, 1970-1992, 1994,483 pp. 20 Efectos macroeconômicos de cambios en las barreras 21 Estructura del gasto de consumo de los hogares en al comercio y al movimiento de capitales: un modelo de América Latina, 1995, 274 pp. simulación, 1982,68 pp. 21 La empresa pública en la economia: la experiencia 44 Market structure, firm size and Brazilian exports, argentina, 1982,2nd. ed. 1985,134 pp. 1985, 104 pp. 22 Las empresas transnacionales en la economía de 45 La planificación del transporte en países de América Chile, 1974-1980,1983,178 pp. Latina, 1985,247 pp. 23 La gestión y ia informática en las empresas ferroviarias 46 La crisis en América Latina: su evaluación y de América Latina y España, 1983,195 pp. perspectivas, 1985,119 pp. 24 Establecimiento de empresas de reparación y 47 La juventud en América Latina y el Caribe, 1985, mantenimiento de contenedores en América Latina y el 181 pp. Caribe, 1983,314 pp. 48 Desarrollo de los recursos mineros de América Latina, 24 Establishing container repair and maintenance 1985,145 pp. enterprises In Latin America and the Caribbean, 48 Development of the mining resources of Latin 1983,236 pp. America, 1989,160 pp. 49 Las relaciones económicas internacionales de 25 Agua potable y saneamiento ambiental en América América Latina y la cooperación regional, 1985, Latina, 1981-1990/Drinking water supply and 224 pp. sanitation In Latin America, 1981-1990 (bilingual), 50 América Latina y la economía mundial del algodón, 1983,140 pp. 1985,122 pp. 26 Los bancos transnacionales, el estado y el 51 Comercio y cooperación entre países de América endeudamiento extemo en Bolivia, 1983,282 pp. Latina y países miembros del CAME, 1985,90 pp. 27 Política económica y procesos de desarrollo. La 52 Trade relations between Brazil and the United experiencia argentina entre 1976 y 1981, 1983, States, 1985,148 pp. 157 pp. 53 Los recursos hídricos de América Latina y el Caribe y 28 Estilos de desarrollo, energía y medio ambiente: un su aprovechamiento, 1985,138 pp. estudio de caso exploratorio, 1983,129 pp. 53 The water resources of Latin America and the 29 Empresas transnationales en la industria de Caribbean and their utilization, 1985,135 pp. alimentos. El caso argentino: cereales y carne, 1983, 54 La pobreza en América Latina: dimensiones y políticas, 93 pp. 1985,155 pp. 30 Industrialización en Centroamérica, 1960-1980,1983, 55 Políticas de promoción de exportaciones en algunos 168 pp. países de América Latina, 1985,207 pp. 31 Dos estudios sobre empresas transnationales en 56 Las empresas transnationales en la Argentina, 1986, Brasil, 1983,141 pp. 222 pp. 32 La crisis económica international y su repercusión en 57 El desarrollo frutícola y forestal en Chile y sus América Latina, 1983,81 pp. derivaciones sociales, 1986,227 pp. 33 La agricultura campesina en sus relaciones con la 58 El cultivo del algodón y la soya en el Paraguay y sus industria, 1984, 120 pp. derivaciones sociales, 1986,141 pp. 34 Cooperación económica entre Brasil y el Grupo 59 Expansión del cultivo de la caña de azúcar y de la Andino: el caso de los minerales y metales no ferrosos, ganadería en el nordeste del Brasil: un examen del 1983,148 pp. papel de la política pública y de sus derivaciones 35 La agricultura campesina y el mercado de alimentos: la económicas y sociales, 1986,164 pp. dependencia externa y sus efectos en una economía 60 Las empresas transnationales en el desarrollo abierta, 1984,201 pp. colombiano, 1986,212 pp. 36 El capital extranjero en la economía peruana, 1984, 61 Las empresas transnationales en la economía del 178 pp. Paraguay, 1987,115 pp. 37 Dos estudios sobre política arancelaria, 1984,96 pp. 62 Problemas de la industria latinoamericana en la fase 38 Estabilización y liberalización económica en el Cono crítica, 1986,113 pp. Sur, 1984,193 pp. 63 Relaciones económicas internacionales y cooperación 39 La agricultura campesina y el mercado de alimentos: el regional de Amérka Latina y el Caribe, 1987,272 pp. caso de Haití y el de la República Dominicana, 1984, 63 International economic relations and regional 255 pp. co-operation In Latin America and the Caribbean, 40 La industria siderúrgica latinoamericana: tendencias y 1987,267 pp. potencial, 1984,280 pp. 64 Tres ensayos sobre inflación y políticas de 41 La presencia de las empresas transnationales en la estabilización, 1986,201 pp. economía ecuatoriana, 1984,77 pp. 65 La industria farmacéutica y farmoquímica: desarrollo 42 Precios, salarios y empleo en la Argentina: estadísticas histórico y posibilidades futuras. Argentina, Brasil y económicas de corto plazo, 1984,378 pp. México, 1987,177 pp. 43 El desarrollo de la seguridad social en América Latina, 66 Dos estudios sobre América Latina y el Caribe y la 1985,348 pp. economía internacional, 1987,125 pp. 67 Reestructuración de la industria automotriz mundial y 85 Inversión extranjera y empresas transnaclonales perspectivas para América Latina, 1987,232 pp. en la economía de Chile (1974-1989). Proyectos 68 Cooperación latinoamericana en servicios: de inversión y estrategias de las empresas antecedentes y perspectivas, 1988,155 pp. transnaclonales, 1992, 257pp. 69 Desarrollo y transformación: estrategia para superar la 86 Inversión extranjera y empresas transnaclonales en la pobreza, 1988,114 pp. economía de Chile (1974-1989). El papel del capital 69 Development and change: strategies for extranjero y la estrategia nacional de desarrollo, vanquishing poverty, 1988,114 pp. 1992, 163 pp. 70 La evolución económica del Japón y su impacto en 87 Análisis de cadenas agroindustriales en Ecuador y América Latina, 1988,88 pp. Perú, 1993, 294 pp. 70 The economic evolution of Japan and its 88 El comercio de manufacturas de América Latina. Impact on Latin America, 1990,79 pp. Evolución y estructura 1962-1989,1993,150, pp. 71 La gestión de los recursos hídricos en América Latina 89 El Impacto económico y social de las migraciones en y e l Caribe, 1989,256 pp. Centroamérica, 1993,78 pp. 72 La evolución del problema de la deuda extema en 90 El papel de las empresas transnacionales en la América Latina y el Caribe, 1988,77 pp. reestructuración industrial de Colombia: una síntesis, 72 The evolution of the external debt problem In Latin 1993,131 pp. America and the Caribbean, 1988,69 pp. 91 Las empresas transnacionales de una economía en 73 Agricultura, comercio exterior y cooperación transición: La experiencia argentina en los años Internacional, 1988,83 pp. ochenta, 1995,193 pp. 73 Agriculture, external trade and International 92 Reestructuración y desarrollo productivo: desafío y co-operation, 1989,79 pp. potencial para los años noventa, 1994, 108 pp. 74 Reestwcturación industrial y cambio tecnológico: 93 Comercio internacional y medio ambiente. La consecuencias para América Latina, 1989,105 pp. discusión actual, 1995, 112 pp. 75 El medio ambiente como factor de desarrollo, 1989, 94 Innovación en tecnologías y sistemas de gestión 2nd. ed. 1991,123 pp. ambientales en empresas lideres latinoamericanas, 76 El comportamiento de los bancos transnacionales y la crisis internacional de endeudamiento, 1989,214 pp. 1995,206 pp. 76 Transnational bank behaviour and the International debt crisis, 1989,198 pp. 77 Los recursos hídricos de América Latina y del Caribe: Serie INFOPLAN: Temas Especiales del Desarrollo planificación, desastres naturales y contaminación, 1 Resúmenes de documentos sobre deuda externa, 1990,266 pp. 1986,324 pp. 77 The water resources of Latin America and the 2 Resúmenes de documentos sobre cooperación entre Caribbean - Planning hazards and pollution, 1990, países en desarrollo, 1986,189 pp. 252 pp. 3 Resúmenes de documentos sobre recursos hídricos, 78 La apertura financiera en Chile y el comportamiento de 1987,290 pp. tos bancos iransnadonales, 1990,132 pp. 4 Resúmenes de documentos sobre planificación y 79 La Industria de bienes de capital en Amérca Latina y el medio ambiente, 1987,111 pp. Caribe: su desarrollo en un marco de cooperación 5 Resúmenes de documentos sobre integración regional, 1991,235 pp. económica en América Latina y el Caribe, 1987, 80 Impacto ambiental de la contaminación hídrica 273 pp. producida por la Refinería Estatal Esmeraldas: análisis 6 Resúmenes de documentos sobre cooperación entre técnico-económico, 1991,189 pp. países en desarrollo, II parte, 1988,146 pp. 81 Magnitud de la pobreza en América Latina en los años 7 Documentos sobre privatización con énfasis en ochenta, 1991,177 pp. América Latina, 1991, 82 pp. 82 América Latina y el Caribe: el manejo de la escasez de 8 Reseñas de documentos sobre desarrollo amblen- agua, 1991, 148 pp. talmente sustentadle, 1992, 217 pp. 83 Reestructuración y desarrollo de la Industria automotriz 9 MERCOSUR: resúmenes de documentos, 1993, mexicana en los años ochenta: evolución y perspectivas, 1992,191 pp. 119 pp. 84 La transformación de la producción en Chile: cuatro 10 Políticas sociales: resúmenes de documentos, 1995, ensayos de interpretación, 1993, 372 pp. 95 pp. iteJI r VI ol J j i * > j j — II v /

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