Summary
The economic growth of any country depends on how well that country allocates and utilizes its scarce resources, the rate at which the population is growing as well as the technological and institutional organizations of that country. Different countries vary in their resource endowments and this brings out the different trade relationships. The issue of diversity in economic growth performance has attracted arguments among economics scholars with some indicating that aspects of government economic policies, particularly the trading policies generate the growth rate dispersion. Trade liberalization is the free movement of goods and services between countries. It refers to the lifting of market barriers and opening up to free flows of goods and services across borders. Most proponents of trade liberalization argue that opening up of industries and markets will enhance the economic growth of developing economies through export demand; also produce positive effects on domestic employment. Critics against trade liberalization, on the other hand, argue that it serves to the advantage of the developed economies while the less developed economies continue to suffer as they are likely to lose out in the global market competition. There is a third side to the debate; those who argue that free trade might be beneficial for developing economies if the opening up is well-managed and strategized by the developing economy’s government policies.
The protectionist years, called the ‘lost decade’ by the defenders of free trade, were characterized by a deficit in budgetary allocation which was aggravated by the high level of inflation. This hard economic time adversely impacted Latin American citizens both in terms of political stability and standards of living. Proponents of free trade called the policymakers to integrate into global markets and warned that otherwise they would soon be facing an economic collapse. This was the actual reason why, throughout the nineties, most Latin American countries had set themselves on the path of trade liberalization.
The critics of free trade suggest that while high-performing economies benefit from the liberalization of trade, countries which are import-oriented have been trapped in the cycle of inflation, stagnant exports, a slowdown in productivity growth and unemployment. This is due to the fact that the developed economies can most of the time flood the market with cheap products and services which have been enabled by their superior technologies which aid them in achieving economies of scale faster than the less developed economies. Some of the factors which have been attributed to criticizing liberalization of trade is the fact that with the removal of trade barriers, unemployment occurs because in the long run, most people lose their jobs since most of the industries in the less developed economies are unable to compete with similar industries in developed economies especially those found in Africa, Asia, and Latin America. Liberalization of trade also leads to overdependence on international markets. As a result, this makes businesses and employees of the industries in Latin America and other less developed economies become more vulnerable to the downturn of the trading partners. In contrast to how the proponents argue, trade liberalization does not offer a level playing ground between the developed and the less developed economies. This is due to the fact that most developed countries produce in excess due to their advanced technologies and thus, most of the time they tend to dump their surplus productions in world markets at very low prices and this leads to losses for the home industries. In this paper, I shall explore how trade liberalization has changed business opportunities and affected economic development and growth in Latin America. With barriers to trade having been reduced as a result of trade liberalization, the less developed economies within the Latin American region have struggled to stay afloat.
Theoretical Framework
When it comes to discussing the qualitative effects of a particular socio-political or economic policy (in our case, the effects of trade liberalization in Latin America), it represents a matter of crucial importance to be able to define such policy’s dialectically predetermined essence. Nevertheless, within the context of indulging in the discussion, it is equally important to be able to remain on the lookout for the inconsistencies in how a particular theory addresses the discussed subject matter.
Proponents of trade liberalization argue that, in countries of Latin America, trade liberalization combined with outsourcing, also results in increasing the overall rate of local populations’ buying power, which in turn, stimulates domestic economies. Schmidt (1994) points out Mexico in support of this argument: “As recently as 1985, import licenses protected more than 90 percent of Mexico’s domestic production from competing imports… (country) methodically reduced import licensing to only 19 percent of domestic production by 1990” (p. 74). This has immediately been followed by a drastic increase in the number of foreign investments into Mexico’s economy – thus, resulting in the creation of new jobs and in improving the extent of the country’s competitiveness on global markets: Pantojas and Garcia(2001) state that “In the short run, Mexico’s low wages and proximity to the United States, combined with NAFTA’s duty-free treatment, seemed to provide a nearly insurmountable competitive advantage for Mexico over Caribbean production locations” (Pantojas-Garcia 2001,p. 61). What it means is that people’s popular discontent with trade liberalization in Latin America, which came to public prominence during the course of the 21st century’s first decade, was essentially irrational.
While evaluating the impact of trade liberalization in the LAC region, there are three important approaches that are worth considering. Firstly, assessing the competitiveness of the region is significant. Secondly, using a partial equilibrium approach and finally applying the GCE models. The application of the first approach entails the identification of threats and opportunities that accompany trade liberalization in the LAC region. When threats and opportunities are clearly identified, it becomes possible to assess the comparative advantage of each country participating in the trade. Trade liberalization would only be beneficial to a region if a strong comparative advantage exists. Additionally, market growth and protectionist policies in place should be assessed to determine if the recipient country is benefiting from the liberalization process or not.
The second most important variable worth considering is the competitiveness of the trading partners. Hence, a country will only experience economic growth resulting from trade liberalization if the respective trade partners are competitive enough. This can be categorized as either low, medium, or high. Some of the variables that can be considered include but are not limited to the use of the latest technology, nature of the workforce, access to trade incentives as well as human capital. For instance, it has been found that although USA and Ecuador exercise trade liberalization, equilibrium analysis between the two countries reveals that the latter does not accrue the full benefits of this bilateral trade relationship in spite of the fact that it has experienced economic growth largely occasioned by the comparative advantage that exists between the two countries (Cypher & Dietz, 2009).
The ongoing debate on trade liberalization in Latin American countries
It is a well-known fact that, while announcing their intention to proceed with relaxing trade tariffs in the late eighties, the leaders of Latin American countries used to justify their intention by suggesting that eventually, the implementation of trade liberalization policies would improve citizens’ living standards. In other words, it is the consideration of ensuring citizens’ continuous well-being, which had prompted Latin American politicians to open up regional markets to the world. Nevertheless, as practice shows, the very concept of people’s ‘well-being’ is something that can be interpreted from a variety of different perspectives.
According to Cypher and Dietz (2009), well-organized trade liberalization especially for the recipient country is highly likely to boost economic growth. The earlier trade agreements between the LAC region and other partner countries proved to be effective in accelerating economic growth since there were stricter and well-defined rules and regulations governing the management of such bilateral trade agreements. This is a similar approach that was applied in East Asian countries.
Whereas; for the liberally minded individual, the quality of one’s ‘well-being’ is reflective of his or her ability to indulge in the consumerist mode of existence (goods and services is the source of happiness), for the Socialist-minded individual, the concept of one’s ‘well-being’ is synonymous of such person’s ability enjoy ineffective but free Medicare, for example (equality is the source of happiness). This is exactly the reason why, while assessing the effects of trade liberalization in South America, different authors often adopt a diametrically opposite view on these effects’ actual significance. For example, Berry (1997) suggests that the foremost consequence of trade liberalization in Latin America was a ‘crisis of distribution’. According to the author, due to the institutionalization of trade liberalization policies in the region, throughout the late eighties and nineties, the gap between rich and poor citizens has grown considerably wider: “Striking increases in inequality have occurred concurrently with market-oriented policy packages in seven (Latin American) countries” (p. 7). In their study, Huber et al. (2006) have come to essentially the same conclusion, regarding the societal effects of Latin American trade liberalization. Nevertheless, unlike Berry, the authors point out the increased levels of inequality, due to neoliberal reforms, as having been objectively predetermined by the fact that, in smaller Latin American countries, the economy’s agrarian sector has traditionally been hypertrophied. In its turn, this created a situation when, after the tariff rates were lowered, many region’s agricultural enterprises have realized themselves standing on the brink of bankruptcy. In turn, this contributed to the rise of poverty. As the authors had rightly pointed out, “the coexistence of a high-productivity modern and a low-productivity traditional agrarian sector increases inequality” (p. 95). Due to the realities of globalization, the profitability of extensively functioning agrarian farms naturally declines.
Nevertheless, as it appears from Fridell’s (2006) article, the implementation of trade liberalization policies by Argentina and Brazil’s governments in the late eighties had resulted in something rather unexpected – revitalizing national economies’ coffee-oriented agricultural sector. According to the author, as of 2002, there were 670.000 Argentinean and Brazilian coffee farmers on FLO’s (Fair Trade Labeling Organizations International) list, as opposed to only 410.000 privately owned and commercially successful coffee-producing enterprises in 1990. The explanation for this seeming paradox is rather banal – trade liberalization allowed both countries’ coffee farmers to take advantage of global demand for their products. Yet, before they were able to do it, they had to restructure the functioning of their farms, in order to make them much more cost-effective and technologically advanced.
Effects on competitiveness
As I have suggested in the hypothesis, the implementation of trade liberalization policies in Latin America should have contributed to improving regional economies’ overall rate of competitiveness. I was able to find plenty of supporting evidence in Walton’s (2004) article. According to the author, “With respect to aggregate growth, the overall performance of the region was significantly better in the 1990s than in the ‘lost decade’ of the 1980s” (p.168). In support of his claim, Walton refers to statistical data that shows the effects of trade liberalization on the growth and volatility of output per capita in Latin America. Even a brief glance at this data leaves very little doubt as to the fact that the implementation of trade liberalization policies had stimulated rather a substantial revitalization of regional economies. Whereas; through the years 1981-1990, median growth in output per capita in Latin America was negative (-0.02), through 1990-1999, when trade liberalization started to take an effect, median growth had attained clearly defined positive subtleties (1.76).
To date, there is an assumption that regional economists have conceptualized the ‘inward’ model of Latin American countries in the sense that even those who are less privileged in society can enjoy fairly higher standards of living. Nonetheless, Abu-El-Haj (2007) tends to differ with this concept arguing that the poor masses that lived during the ‘lost decade’ did not benefit at all in spite of the protectionist measures that had been imposed by the government.
For example, in Brazil, it was named the representatives of the regional bourgeoisie, who benefited from the fact that through the years 1980-1990, the country’s economy functioned in essentially Socialist mode – however improbable it might sound. The reason for this is simple – government-sponsored protectionism had artificially increased the extent of many local enterprises’ sustainability. This, however, had simultaneously resulted in Brazil’s economy losing its competitive edge, on the global level: “The local (Brazilian) bourgeoisie, favored by protectionism, had expanded its domain without securing the technological sustainability capable of conserving its advantage relative to international competitors” (p. 95). Therefore, the author refers to the effects of trade liberalization policies, employed during the ‘Cardoso era’ (1995-2003), as being essentially positive, as they provided incentives for the country’s economy to become increasingly technology-friendly and globally competitive: “As import-substitution mechanisms were abandoned by the state, the local bourgeoisie was forced to adopt a new logic based on increases in productivity, competitiveness, and strategic positioning in the internal market” (p. 110). And, as rationally minded economists are being well aware, people’s well-being derives from a properly functioning economy and not vice versa. In other words, the argument put forward in Abu-El-Haj’s article does endorse the view on trade liberalization in South America as such that has been instigated by the objective laws of the economy.
It is widely agreed that import competition was one of the greatest economic gains experienced by LAC regions following trade liberalization pacts that took effect during the last 30 years or so. However, Raja (2005) argues that a competitive environment cannot be created out of trade policies per se. for most Latin American countries, competitive policies have not been a common trade experience bearing in mind that liberalization was ushered in at a later date. Most of the domestic markets in the LAC region have often suffered from monopolistic trade practices with limited competition coupled with restrictive policies in trade. Besides, a significant decline in growth rates has also been aggravated by an unfavorable balance of payments. This paper attempts to analyze the extent of trade competitiveness and bearing in mind that much of the competition in trade has largely depended on regional or global prices of commodities and not merely trade liberalization.
Effects on welfare
In his article, Feinberg (2002) points out the fact that trade liberalization in Latin America had resulted in establishing objective preconditions for the consequent improvement of citizen’s quality of living, as it was able to revitalize regional economies in the most immediate manner: “Latin American economies expanded during the late 1980s and through most of the 1990s. Latin America’s weight in U.S. exports rose during the 1990s, from 17 percent in 1992 to nearly 21 percent in 1998… U.S. direct investment in Latin America increased from $71 billion in 1990 to $172 billion in 1997, or 20 percent of U.S. overseas holdings” (p. 132). According to the author, the criticism of the adoption of trade liberalization in South America, on the part of local and international advocates of a ‘welfare state’, is being largely unsubstantiated, due to these people’s lack of understanding of how the most fundamental laws of economy work. For example, as it appears from the article, it was namely due to socialist-minded politicians’ considerations of protecting the competitiveness of domestic manufacturers, that during the course of the ‘lost decade’, trade tariffs for inbounded textile imports in Argentina were particularly high. Yet, the implementation of protectionist policies through the eighties, in this particular country, had resulted in something opposite – many domestic manufacturers of textile products had simply gone out of business, due to bankruptcy. The reason for this was simple – the raising of trade tariffs had substantially increased the self-cost of imported cotton – thus, making the continuous functioning of many Argentinean manufacturers of textile products economically pointless. Therefore, in the light of this study’s initial hypothesis, the foremost idea, contained in Feinberg’s article, makes perfectly legitimate sense – the implementation of trade liberation policies in Latin American countries, in full accordance with Washington Consensus, was indeed highly beneficial for these countries’ economies. As it was rightly pointed out by the author, the fact that this implementation had resulted in producing ‘inequality’, cannot possibly be referred to as the indication of trade liberalization’s ineffectiveness. On the contrary – ‘inequality’ (dynamic potentials) is what drives the economy forward. A well-functioning economy is the actual source of citizens’ existential well-being.
Effects on inequality
Nevertheless, despite the self-evidential objectiveness of an earlier expressed idea, there still appear to be a number of ‘progressive’ economists and sociologists who seriously believe that the implementation of trade liberalization policies in Latin America should have somehow resulted in ‘fair distribution of wealth’ among the citizens. Nonetheless, this fairness does not exist and consequently, the whole concept should be referred to as ‘wicked’. Hoffman and Centeno’s (2003) article, represents a perfect example of how the effects of trade liberalization in South America can be deliberately distorted, once they are being accessed through perceptional lenses of Socialist mentality. The lessened value of the authors’ line of reasoning, as to what accounted for economic liberalization’s effects, can be explored in their argumentation-supporting remarks: “Latin Americans now live worse than they need to” (p. 365), “The percentage of housing without flush toilets (due to trade liberalization) ranges from less than 2% to nearly 17%” (p. 368), “Studies indicate that the boom of the early 1990s reduced the levels of poverty in some (but not all) countries, but also produced greater inequality” (p. 368), etc. Some of the authors’ suggestions even raise doubts as to their cognitive adequacy, especially when they embark upon discussing the significance of a number of socio-political and economic phenomena, the essence of which they simply cannot comprehend: “The integration of trade (trade liberalization) should theoretically have led to a reduction in the gap between skilled and unskilled wages (as it did in East Asia), but it failed to do so in Latin America” (p. 372). Yet, as I have mentioned earlier, within the conceptual context of the endogenous growth model, the ‘failure’ of Latin American trade liberalization to reduce the gap between skilled and unskilled wages, makes perfectly good sense: the overall market value of the region’s human capital is significantly lower than the market value of human capital in East Asia.
Therefore, there is no need to hypothesize on why trade liberalization in East Asia and South America had produced different results, in the light of vaguely defined notions of identity or ‘historical awareness’, as Palma (2010) does: “Perhaps the key difference between LA (Latin America) and Asia is that in the latter most actors ‘have a strong national identity and historical awareness, and are firmly grounded in the real world” (p. 3). This makes them be more liberal even while conducting trading activities. Just as I have implied earlier, the functioning of a free-market economy is the subject of objectively existing economic laws, regardless of whether some authors think of them as being ‘immoral’ or not. People, who represent a qualitatively defined value as ‘human capital, will be more likely to benefit from trade liberalization, as compared to those whose ‘human capital’ value has clearly defined quantitative subtleties.
Economic growth
The manner, in which Robinson (1999) discusses the effects of trade liberalization in Latin America, is being ideologically attuned to that of Hoffman and Centeno: “Nonmarket spheres of human activity – public spheres managed by spheres linked to community and states and private family – are being broken up, commoditized, and transferred to capital” (p. 44). It goes without saying, of course, that there is a strongly defined negative connotation to this statement. According to the author, the implementation of trade liberalization policies in the region had increased the extent of wealth’s unequal distribution even further. Even though Robinson does admit that opening up Latin American markets attracted foreign investments, he nevertheless remains skeptical as to these investments’ ability to benefit regional economies, due to their speculative (short-term) nature: “Latin America experienced renewed growth and a net capital inflow of $80 billion between 1991 and 1994. But the vast majority of the inflow of capital is not a consequence of direct foreign investment that could have helped expand the region’s productive base as much as from new loans” (p. 47). Nevertheless, as the article’s context implies, it probably never occurred to the author that, the reason why trade liberalization in South America attracted mostly short-term investments, is that the governmental endorsement of state-protectionism, during the course of previous decades, had drastically boosted the inflation rates. Nevertheless, as Latin American economies began to recover from the illness of Socialism, due to trade liberalization, foreign investors started to become increasingly focused on reaching long-term objectives. Seemingly, the author is not bothered at all as he continually exposes the evils of liberalizing trade. “Between 1980 and 1992, some 60 million new people joined the ranks of the poor…” (p. 48), and how the measures, aimed at revitalizing the economy, are being generally ‘immoral’: “The neoliberal model (associated with trade liberalization) generates social conditions and political tensions – inequality, polarization, impoverishment, marginality” (p. 60). I will dare to disagree – it is not the proper functioning market economy, which produces marginality, but the lessened value of the human capital, affected by such an economy’s functioning.
Debate on inflation and trade
In their article, where they discuss the significance of neoliberal reforms in Brazil, Kume and Piani (2005) has adopted a rational approach to underlining the actual effects of the implementation of trade liberalization in this Latin American country. According to the authors, ever since the country had adopted Mercosur common external tariff (0%-2%) in 1994, within a matter of two years, Brazil’s annual GDP growth rate has reached 21.8%. In turn, this prompted Kume and Piani to conclude that: the “Brazilian government succeeded inadequately handling the protectionist pressures exerted through requests for trade defense in an environment of macroeconomic difficulties” (p. 33). Even though, through the years 1990-2000, the Brazilian government proceeded with the implementation of anti-dumping measures in a particularly careful manner, the adoption of these measures did help to revitalize the Brazilian economy rather spectacularly.
Nevertheless, it is namely the example of Argentina’s rapid recovery from an economic crisis of 1989-1990 (when the annual inflation rate was amounting to 96.5%), as the result of President Domingo Cavallo’s decision to proceed with the implementation of neoliberal economic reforms, which appears to be the most illustrative of trade liberalization’s sheer beneficence. According to Nogués and Baracat (2005), in 1991, the government introduced a new convertibility regime by tying the Argentinean peso to the U.S. dollar in a 1:1 ratio. This had immediately brought monetary value back to the peso, which in its turn, had put an end to Argentinean hyperinflation and provided a powerful stimulus to the growth of the country’s economy – as the result of this measure, citizens had received an objective reason to be interested in earning pesos.
Cavallo’s next step was abandoning the policy of trade protectionism, which had ruined the country’s economy, during the course of a ‘lost decade’: “Argentina negotiated with the United States and in 1991 signed a bilateral agreement by which Argentina would dismantle its export subsidies” (p. 6). The figure of Argentinean trade flows, provided by Instituto Nacional de Estadisticas Censos, allows readers to gain a visual insight into the sheer economic effectiveness of trade liberalization measures, undertaken by Cavallo’s government. Whereas; in 1992, Argentinean exports/imports amounted to only $12, 000,000,000/$12, 000,000,000; by the year 1998, they amounted to US$25, 000,000,000/US$30, 000,000,000 respectively. Nevertheless, what Cavallo had failed to do, is liberalizing the country’s essentially Socialist labor laws, in order to eliminate the budget deficit. This eventually led to an acute misbalancing of the country’s budget, resulting in the economic crisis of 2001. Thus, Nogués and Baracat imply that Argentina’s economic crisis of 2001 has not been triggered by the implementation of Cavallo’s neoliberal reforms, bearing in mind that the contemporary economists who profess neo-Marxian ideologies may try to persuade and convince us to hold the same belief. However, the reforms that were undertaken did not leave much (Cypher & Dietz, 2009).
Economic policies
Up to this point, I have been mainly focusing on the analysis of how relevant literature tackles the issue of trade liberalization’s effects in South America’s most economically powerful countries. Nevertheless, the soundness of Finger and Nogués’s opinion, in regards to these effects’ overall effect on the South American economy, can also be explored even on the scale of such countries as Costa-Rican, Uruguay and Ecuador. The reading of Vos’s (2000) article comes in particularly handy, in this respect. According to the author, since the late eighties, one of the foremost aspects of the implementation of trade liberalization policies by the Ecuadorian government was its procedural inconsistency: “(In Ecuador) Responses to external shocks, IMF pressure and ever-returning populist tendencies determined switches between sub-periods of fiscal and monetary restraint and of macroeconomic expansion” (p. 9). Nevertheless, through the years 1987-1999, Ecuadorian promoters of economic neoliberalism did succeed in convincing the government to pass the following free-trade legislations: elimination of gasoline and wheat price subsidies, a significant reduction of trade tariffs down to 0%-25%, and flexibility of labor laws. As the result, within the matter of one year, the rate of the country’s GDP real growth was substantially increased. Another effect of trade liberalization on Ecuador’s economy is the author identifies is the increased rates of unemployment. Yet, he does not discuss it as something necessarily negative. In full accordance with the provisions of the endogenous growth model, Vos refers to increased unemployment and to what it is been triggered by from a dialectical rather than moralistic perspective: “The demand for wage labor has become more skill-intensive, giving rise to larger wage inequalities and income differentials between wages and self-employed incomes” (p. 1). The author concludes his article by stating that the overall effects of trade liberalization on the Ecuadorian economy were largely positive.
Effects on macroeconomic outcomes
The value of Ocampo’s (2004) article, within the context of conducting an analytical literature review, appears particularly high, because it author provides readers with information about the effects of trade liberalization on Latin America’s economy, as a whole. According to the author, from 1990-1997, the weighted average of the region’s GDP growth was 3.6% – a substantial improvement, as compared to what it was the case with Latin America’s GDP growth during the course of a ‘lost decade’ (1.1%). In its turn, this created preconditions for the qualitative improvement of the region’s macroeconomic functioning: “In particular, the new development strategy (trade liberalization) has been effective in generating export dynamism, attracting foreign direct investment and increasing productivity in leading firms and sectors” (p. 68). The fact that the implementation of neoliberal reforms in Latin America did not produce the whole spectrum of anticipated effects, which became particularly obvious through 1998-2002, when some Latin American countries, such as Bolivia and Venezuela, had returned back to the Socialist model of development, Ocampo subtly attributes to the lessened value of region’s human resources as market good: “Productivity growth has been poor, particularly when measured as output per worker, largely as a result of a growing underutilization of the available labor force” (p. 69). Thus, as the reading of this particular article indicates, the fact that, during the time of neoliberal reforms, the region’s rate of unemployment became substantially higher, had nothing to do with deliberately designed ‘unequal distribution of wealth’, but simply with the fact that, due to realities of globalization, the value on unskilled labor in Latin America continues to decline exponentially: “The considerable increase in the wage gap between skilled and unskilled workers – and, particularly, between college-educated workers and others – has been another widespread phenomenon” (p. 80). Therefore, even though Latin America’s trade liberalization has indeed been closely associated with ‘growing rates of poverty among citizens, it cannot be thought of as such poverty’s actual cause.
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