pa. 0 n;i s Public Disclosure Authorized Fir Public Disclosure Authorized -, 4 ,_ r) ' '41 A dK Public Disclosure Authorized Public Disclosure Authorized Latin America and the Carlbbec i A decade after the debt crisis World Bank Lan Americaand the Caribbean RegionalOffice Washington,D.C. September1993 Cow Th iusafio on the cover by JoequinTions.Gmrdm The painti £50w14, Pe y O* Is upodumd here cotey of ChrlW New Yob it I partof a pvate coecion In NewYor. Contents Prefce vl Inital Rtson the DebtCsis I TheEconomic Rebom: CGontent and Rcsults 2 The Pafth ead $ Nrote S Mef Hisial Bacround 8 re forfm 9 Notes 10 2 WdNTbm"k_AdPwt1 I=1t2a 1 f11 xemal and DomesticOdris of the Crlsls 12 The!Adjutment 3 FailedHetedox Staition Attmpts In the Mld-1980t 18 Notes 22 5. A NeWCu.Sm mmImunie ftlqam St_ctwd Re_in * The Crsis of TraditonalBoonomic Thinking In lati Ametica 24 Factoksbehind the Emeng Co _ns 27 lbe MainEtements of the EmeqgngCons and the Refom 34 Notes 34 4. _1- X DebtR c DebtReIlef, and tcrnomicAudment 37 Flsc Pol1cand Wc Equlbuum 42 EvchangeRates, Inflation, and Disinflation SO Notes S3 S urnOpmbugof la*Amuks 54 Fm P i toIaon a"ia Apecs 54 RecentTrade Liberation RefomsIn LatinAmeica SO TheEffects of TkadeLiberalization 60 Rea xche RateBehavlor, Capital Iows, and the Futre of hde om in aAme 63 RegkonalTing Blocsin LatinAmedca 67 Appendix 72 Notes 74 Iv laWnAmwk ond theOiCbbea: A Decodeafte theDebt Crisis 6. pet; tI. mi 7 AnalyticalIssues and PolicyOptions 78 PrivatizadonIn Chie, Mexico,and Argentina 84 LaborMae Regulaton in Latin Ameica 92 Notes 97 7. CapI Maet D Shs, and 19stuent HistoricalBadWound 100 FinancialDeregulatlon in LatinAmerIca 103 Savingsand Investment III Notes 116 L Povrt InK DIb on, aid Hum Reae s 118 Povt and Income Dstibution 119 Human Developmentin Latin America 124 Education,Human Capital,and Socal Conditions 127 The Reductionof Poverty PolicyOptions and Priorities 130 Appendix 135 Notes 136 9. The PathAhead 138 Consolidatingthe Reforms 138 MaintainingPrudent MacroeoDnomic Management 139 Deepeni the Strtudal and InstitutionalReforms 141 AlleviatingPoverty 142 Assung EnvironmentallySusanable Policdes 142 Notes 143 on llegraphy 145 1.1 Selectedmacweconomic indicators In selectedLatin American countries 7 1.2 Evolutionof foreignindebtedness in selectedLatin American countries, 1975-92 9 2.1 Estimatesof capital flight fromselected Latin American countries, 197984 12 2.2 Capitalinflows and net resourcetansfers, LatinAmerica, 1975-87 13 2.3 Macoeconomicindicators in selectedLatin American countries, selected years, 1975487 14 2.4 Changein real averagewages in selectedLatin American countries, 198147 1S 2.5 Changein real domesticcredit In selectedLatin American countries, 1975-90 IS 2.6 Nominaland real devaluationIn 9?IectedLatin American countries, 1982-87 16 2.7 Emergencyadjustment and Ineffl ent allocationsin selectedLatin American countries,1987.87 17 2.8 Heterodoxplans in LatinAmerica Main fatures 19 3.1 Generaloverview of structuralreforms In selectedLatin American countries, 1965-92 32 4.1 Annualinflation rates in selectedLatin American countdrs, 1984-92 37 4.2 Debtconversion In Chile 39 4.3 Debt reducdionin selectedLatin American countdes, 1989-92 41 4.4 Inflationand seignorageIn selectedLatin American countries, annual averages,1971482 43 4.5 Publicsector bahnce as a percentageof GDPIn selectedLatin Amedcan countries, 1986-91 44 4.6 lbtal and capitalexpenditures of the public sectoras a percentageof GDPin selected latin Americancountries, 1987,1989, and 1991 45 4.7 Taxrevenues as a pecentage of GDPin selectedLatin American countries, 1987-91 45 4.8 Financialpublic sector quasi-fiscadeficit as a percentageof GDPin selectedLatin American countries, 1986-91 45 Contet v 4.9 latIn Amerian conmtrieswith fixedexchange rates, selectedyeas 51 S.1 Import protection in the developingworld, 198S 55 5.2 The opetAngof LatinAmerica, selected comtries and years,1985-92 59 5.3 Realexdcage rates in selectedlatin Americancountries, 1980, 1987,and 1992 60 5.4 Change In tol factor productivitygrowth in selectedLatin Amedcan countries, 197882 to 1987-91 61 5.5 TotaLfactor productivitygrwth in man ing n Mexdco,1940-90 62 5.6 Growthin value of exportsof goodsand nonfactorservices in selectedlatin American countries, 1970-92 62 5.7 Growth In volumeof exportsof goodsIn selectedLatin American countries, 1970-92 62 5.8 Nontraditionalexpors as a shareof aU exportsIn selectedLatin Amerc countries and years, 1980-91 63 5.9 Exportsof manufacturedgoods as a shareof al exportsin selectedLatin American countriesand years, 1970-91 63 5.10 Capitalinflows and net resourcetransfers, Latin America, 1982-92 65 5.11 Net capital Inflowsas a percentageof GDPIn selectedLatin American countries, 1982-92 66 5.12 Economicindicators for selectedLatin American countries, various years 67 5.13 Exportsto MERCOSURcountries as a shareof total exports,1992 68 S.14 Percentageof Importssubject to freetrade in MEIRCOSUR,June 1991to December1994 68 5.15 Exportsto AndeanPact countriesas a shareof total exports,1992 69 5.16 Tariffstutures In the CentralAmerican Commor Matket,selected yeats, 1987-95 69 SAL Total factor productivitv Cross-country results 74 SA.2Total factor productivity growth regressions 74 6.1 Prlvatizationin selectedLatin American countries, 1980-91 78 6.2 Pfrvatizationtransactions exceeding $100 million,1988-91 78 6.3 Ptivatlzationin selectedLatin American countries: A schematicview 85 6.4 Summaryof privatizationsin Chile, 1974-90 86 6.5 Pdivatizationin Chile, 198589: Methodsof paymentand buyers 87 6.6 Revenuefrom privatizationin Argentina 90 6.7 Minimumurban real wagesIn sdected LatinAmerican countries, 1984-92 93 6.8 Job proctdon legislationin selectedLatin American countries 94 6.9 Basicdcactescs of sodal secuty sstems In selectedLatin American countries 95 6.10 Labordispute resolution in selectedLatin American countries 96 7.1 FinancIaldeeping In selectedLatin American countries, 1980,1983, and 1986 100 7.2 Effectivereserve requirements on bank deposits,1971-8. Comparativehistorical evidence 101 7.3 Annualizedreal depositinterest rates, end of period,in selectedLatin American countries,1980-86 101 7.4 Realinterest rate spreadsin selectedLatin American countries, 1980-86 102 7.5 Financialrerms In selectedLatin American cauntries: A progms report 104 7.6 Regulationson direct foreigninvestment in selectedLatin American countdes 116 8.1 Shareof income receivedb; lowest20 percentof population,selected regions, 1960,1970, and 1978 118 8.2 Income distibution In selectedLatin American and Asiancountries, various years, 1970-80 118 8.3 Populationbelow the povertyline In selectedLatin American countries, 1970 and 1981 119 8.4 Sodal indicatorsfor selectedLatin Americancountries, 1970,1980, and 1990 119 8.5 Incomedistibution In selectedLatin American countries, early and late 1980s 120 8.6 Individualsin povertyand exme povertyin selectedLatin American countries, 1980and 1989 122 8.7 Utban unemploymentin selectedLatin American countries, 1984-92 123 8.8 Averagereal wagesin selectedLatin American countries, 1984-92 124 8.9 Health indicatorsfor LatinAmerican countries, various years 125 8.10 Malnutritionin sdected LatinAmerican countries, 1990 126 8.11 Socidalsecurity contdbutions and other payrolltaxes In selectedLatin American counties 128 vl Lg.th,Amwkendthme ClbewL-DcA k at. thDebtCufss L12 Iducatlo IndCMicatro selectd latin Anmiecaand East Asian count*9es 1989 129 L13 Sectd Woddank-spponted prope Intended Imptovesoal ptograms 131 LAl Word Dankedg for hm mowes, OIl 1987403 135 2.1 Mondily ndWon ate un hoeeroxplans In Agentina, Brazli,and Peru,164418 19 4.1 Seonday markt lon pdcesIn pewent of facevalue, first qut of each ye selectedLatn Amican coulntes,1990-93 43 4.2 Annual rwith ratesof domestic aedit In selcted La1t Amercan countes, 1983 a-d1991 47 4.3 Doaestc aedit to the piate sectotas a shareof tot domesticcredit In selectedLatin Amercan countIs, 190, 1985,and 199k 47 5.1 Realebctve xchangerates in sected latin Amern countries, 1977-91 64 7.1 Goss domesticlnvestmt as a pecenta of GDP,sdected latin AmedcamcouitdL and years II 7.2 Gro domestc svi as a percente of GDP,selected latin Anmicancountries and yea 112 7.3 Pvate investmenta a perentage of GDP,selected latin Americancountries and yeas 113 7.4 Publc Inestm as a perente of GDP,sdected latin Amercan countdesand yes 114 7.S Net fegn dirc Investmentas a percentageof GDP,selected latin Amedcancountries andyear 116 Preface This report provides a histoy of Latn Amenrkas ee s to analyzethei rfors-and someaspects of economicdeveopment duing the past decadeand the dynamic of dcage disusses some of the policylessons-fom the suc- in additon to documenti forms over the cessesand the failure-of t pedod. The point of deade, the eportdiscusses some of the mostImpor- depattureIs the 1982 debt aiss and the main focus tant unolved isues that Latin Americawill fceL is the relorm processthat hu sc spread apdly The report alsodescbes how the multlatera inst- acrossthe region. tutlons, especay the Wodd Bank4have attempted In many cas the rforms ae too tecnt to daw to support the tr om n. firmconclusions about thei outoomesThereis thus The analysisi rsrcted to the economiclessons aneedtobe guar&dv-offelgpreliminy rults- of the rforms, withoutanalyzing In detailthe poUt- and to focuson leadingtndicatos, such as the tewov- Ia dimenions of the ransformationprocess. This ery of productivecapadty, the behavior of pdvate dffict quesio shold be the subjectof a separate capita flows,and the resumptionof aa to inter- su*. naadonalcapital