Liberalization in the Developing World

Alex E. Fernandez Jilberto, Andre Mommen, Alex E. Fernandez Jilberto, Andre Mommen

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781134825820
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Business allgemein

Liberalization in the Developing World compares the success of liberalization strategies in Asia, Africa and Latin America over the past decade. Three models emerge, corresponding to the three continents covered, which reflect the degree of state intervention in the economy and the success of the liberalization policies adopted.
The conclusions drawn demonstrate that economic and political liberalization do not have to go hand in hand. On the contrary, the case studies presented in this volume show that the role of the state can be crucial in mobilizing both the human and capital investment needed to be able to compete in international economy.

1
SETTING THE NEOLIBERAL DEVELOPMENT AGENDA

Structural adjustment and export-led industrialization

Alex E. Fernández Jilberto and André Mommen

Protectionism is considered by neoliberals as a threat to economic progress and trade barriers may reduce real incomes of consumers when increasing the prices of both imported goods and the domestically manufactured products with which they compete. Protectionism reduces incentives for local firms to operate more efficiently, to hold down costs, and to develop new technologies or products and to conquer new markets. Protectionism leads to retaliation by trading partners, which provokes a downward spiral and a weakening of the international banking system.

But the transition to free trade has its costs. Liberalization means that countries that do not enjoy a comparative advantage have to move resources to more productive sectors or activities, which is usually a painful process. The benefits of liberalized trade are equally distributed among all consumers, but categories of producers suffering from cheap imports may oblige the state to intervene. So many governments are tempted during recessions to slow the adoption of open trading policies in order to secure national independence. Where production is essential for national defence, it may be supported directly through procurement practices rather than indirectly by protection. In other sectors of the economy, tariffs and contigents are still powerful instruments of the state when the national interest requires the survival of inefficiently operating firms or sectors.

However, advocates of pure free trade are rather limited in number and influence. These neoliberals believe that the government does not have to take special measures to protect domestic producers against foreign competition, because they are sceptical that government intervention can effectively cure market failures. That the neoliberals succeeded in acquiring a large audience and significant influence in governmental circles has much to do with their ability to present their policies as practical solutions to the difficulties governments have in balancing their budgets or fostering economic growth. So market-oriented reforms managed to gain the favours of politicians and technocrats looking for a way out of the economic crisis and financial problems.

The neoliberals blame governments who finance their activities by creating deficits and unbalanced economic growth. Moreover, balance-of-trade problems may result from a succession of state budget deficits that drain private savings and generate rising volumes of imports to meet domestic demands for consumption and investment. High borrowing from foreign lenders helps to finance the trade deficit and combined with increases in debt finally leads to impoverishment, because increased exports of goods decrease the living standard of the local population.

In order to combat these distortions, the neoliberals have put forward rigorous measures against the protectionist threat. The neoliberals believe that all nations will benefit from multilateral liberalization as well as from trading patterns consistent with the laws of comparative advantage. They believe that free-trade areas or common markets offer new perspectives and that free-trade arrangements enable participating countries to accept common regulations of behind-the-border practices. But the danger of freetrade areas or common markets is that they may fragment the world trading system into regional blocs. The net result of such efforts might be freer trade within the areas but also greater divisions between the competing trade blocs. Behind-the-border barriers (different technical standards, different safety and environmental regulations, different antitrust policies, different tax systems, different restrictive national procurement practices) exist within the trade blocs and common markets and continue to thwart foreign supplies. Therefore the neoliberals are pleading for the creation of a global trade regime that may foster export-led economic growth in the developing economies. Export-led economic growth supposes qualitative and quantitative transformations with rising savings rates and falling marginal capital/output ratios in combination with a slowing down of inflation and unproductive imports. Tax and government expenditure reforms, interest rate reforms, exchange rate reforms, and a general emphasis on export promotion and reliance on international prices complete the menu of neoliberal incentives. In this case the export bias allows efficient industries to establish themselves without being limited in size by the domestic market; also the export bias leads to an increasingly open economy, generating a growing share of the foreign exchange that lessens the economy’s dependence on foreign capital inputs.

In this chapter we want to examine how neoliberal policies conquered the world and changed the development agenda. Liberalization stimulated regime-transforming processes in Eastern Europe and obliged developing economies to reinvigorate their economies by adopting free-market principles. The hypothesis is that trade is an engine of growth and that there is an automatic relationship between economic development in the lessdeveloped countries along their economic growth track. Since the demand for exports from developing countries is far weaker now than in the first half of this century, and since the looking-inward solution failed to foster fast growth, the conclusion that external demand may be useful to boost economic expansion and allocate resources came to the fore. The neoliberals declare that the removal of trade protection will generate welfare gains, if welfare-reducing monopolies are eliminated, rent-seeking behaviour is prevented, and costs reductions are imposed in combination with an improvement of quality of domestically produced goods and services.

Neoliberalism and the State

Despite the tremendous growth of economic interdependence, states remain the central actors shaping the international economic order because of their control over the linkages between the international and domestic economies. Moreover, states do not respond uniformly to external pressures. In East Asia developmentalist states forged powerful alliances with business groups around an aggressive strategy of exports. In Latin America and Africa basic changes occurred in development strategies when the large economies adopted market-oriented reforms for solving the problem of backwardness. Furthermore, during the last decade many countries underwent democratic transitions and adhered to neoliberal policies in order to respond to a steep world recession and two oil price shocks that contributed to enormous debt and balance-of-payment problems. Initially, many developing countries responded to these external shocks by forestalling economic policy changes. However, foreign exchange shortages forced them to adjust (in many cases with the help of the Bretton Woods institutions) and, ultimately, many economies shifted to market- and export-oriented economic policies. The Latin American economies induced structural transformations under neoliberal military regimes and later on democratized after having completed their economic restructuring. Just like the Latin American economies, the New Industrializing Countries (NICs) of Asia shifted from import-substitution industrialization (ISI) to export-led industrialization (ELI) and recently they were also to fall prey to the demands of rising democratic coalitions.

In the eyes of the neoliberals the triumph of democracy and markets over authoritarianism and statist economies was combined with efforts to promote open economies and open polities stressing the necessity of thoroughgoing economic reforms supporting ELI policies. But those countries that failed to reform their economies were compelled by the Bretton Woods institutions to conform to Structural Adjustment Policies (SAPs).

For development economists, the rise of the East Asian economies vindicating the liberal prescriptions of market-oriented policies and participation in the world economy made obsolete policies drawn from stateinterventionist theories and protectionism. New growth trajectories stressing the importance of export-led development became widely accepted as an integral part of neoliberal ideas inspiring economic and political changes in the world. Moreover, the downfall of communism in Eastern Europe and the collapse of the apartheid regime in South Africa can be depicted as the supreme examples of ill-fated attempts to sustained economic growth within a closed economy. However, virtually all successful, export-led industrializers began to export manufactures within the confines of a state-led ISI strategy and the first stage of their ISI strategy aimed at high growth when focusing on local production for the domestic market. High growth contributed to the transformation of their agrarian sector, but, already in a very early phase, their ISI policies failed in their attempts to build up a competitive intermediate and capital goods sector; instead of industrial growth, this gave way to economic stagnation, inflationary pressures, recurrent balance-of-payments imbalances, and/or widespread urban unemployment.

In Korea and Taiwan, ISI was a response to constraints similar to those in Latin America, but in neither case did ISI last longer than ten years. The major Latin American economies (Mexico, Brazil and Argentina) adopted ISI policies during the Depression and the Second World War and beyond. In Africa, ISI projects collapsed after 1974 and were abandoned by the ruling bureaucratic bourgeoisie. In Latin America, ISI policies were frustrated by the old authoritarian coalitions of latifundistas and/or mineral exporters and the liberal elites involved in commodity-exporting activities (storage, shipping, transportation). In Asia all countries (not only India, but also the Philippines, Indonesia and communist China) embarked upon ISI policies. Finally, these policies proved to be less innovative than the authoritarian East Asian regimes who fashioned export-based growth coalitions.

East Asian regimes were not hindered by the existence of distributional coalitions and established strong regimes built on a coalition of bureaucrats and business interests. Export manufacturing instead of ISI became a priority and its implementation under authoritarian auspices achieved macroeconomic stability, trade liberalization and competitive exchange rates. Regime liberalization occurred when East Asian ELI policies had been successful and macroeconomic stabilization had been consolidated. Some ELI regimes were able to democratize their political structures. They were able to maintain competitive exchange rates and implement trade liberalization without altering their export-pushing policies. None the less, some ELI regimes had to face, when transforming their ISI economies into ELI economies, hyperinflation, distorted wages, and inefficient parastatal enterprises requiring formidable costs of adjustment. State-owned enterprises had to reduce their workforce or even to close factories. Devaluations imposed losses on those sectors depending on imports and provoked rising prices and high unemployment rates in the urban areas (Krueger 1978:277–300).

In Latin America, ELI reforms were carried out by military regimes. Later on, when democratic transitions opened the way for reviving popular demands, maintaining macroeconomic stability remained a major objective of all post-dictatorial regimes in the Southern Cone of Latin America (Chile, Argentina, Uruguay and Brazil).

In Africa a tradition of clientelism prevented the bureaucratic elites from breaking with authoritarian rule until the fall of communism occurred in Eastern Europe. Clientelism around directly unproductive activities and corruption were carried over into the democratic transition and some of the recently established ‘democratic’ governments even refused to cope with protectionist rents and overvalued national currencies. Liberalization meant a frontal attack on the rents of clients benefiting from protectionist ISI policies. That the state protected jobs and instituted monopolies was a widely accepted practice which the ELI countries of East Asia could even underwrite (Japan and South Korea are still protecting local rice-growers although the traditional food-exporting countries in the area were pleading for a lowering of import duties).

Structural Adjustment Programmes (SAPs)

The easy-money decade after the first oil shock (1973) led many developing countries to overborrow. In the early 1980s they were caught in the squeeze in a period when interest rates soared and debts came due. These countries had to adjust their expenditures in order to service their foreign debt when incomes were far below their outlay requirements. The International Monetary Fund (IMF) and the World Bank forced them to adjust their economies. The adjustment strategy of IMF-supported programmes underwent a major shift in the late 1970s in response to the change in economic environment arising from the sharp rise in oil prices and the associated imbalances in members’ payment positions. Structural adjustment programmes (SAPs) placed greater emphasis on structural measures to promote domestic resource mobilization, alleviate price distortions, ensure increased access to imports, and reorder investment priorities in countries looking for IMF assistance. Because the Bretton Woods institutions held the ‘seal of approval’ giving access to credit from all other sources, they could force the developing countries to comply with adjustment programmes.

Low growth, poor export performances, high debt burdens, and financial imbalances forced many developing countries on to the road of economic reforms (Thomas and Chibber 1989:28–31). A standard requirement was that the debtor state had to export at any cost and without regard to the social stability of its own economy. The ultimate goal of this strategy is to restore an excess on the balance of payments and enable the debtor state to service its foreign debt. Earning more cash through exports was an option all developing countries had to adopt no matter how poor they were.

It was by means of these programmes that the introduction of a ‘freemarket economy’ was facilitated and that market-determined prices were able to influence production levels and consumption patterns, favour exports, and reinforce the orientation of Third World economies towards external markets. Meanwhile the creditor countries were invited to reduce the outstanding debt of the poorest developing countries if the latter were willing to implement SAPs. This was necessary because reduced interest payments would relieve the miserable impoverished living conditions of countries of the south. But, in turn, debt-servicing was necessary in order to encourage these countries to export at any social cost when investing their meagre resources in the export sector.

In the free-market integrationist worldview propagated by the Bretton Woods institutions, merchandise, labour and money must be free to circulate and cross borders. Countries must trade and exchange goods and develop their sector of ‘tradeables’. This mechanism for forcing potentially reluctant participants to engage in the world market is the set of economic policies called structural adjustments and its vital component is the insistent implementation of the doctrine of export-led growth. SAPs aim to increase the role of exports in the economy and stimulate the private sector through the combination of wage and price stabilization policies and austerity programmes. SAP packages include a mix of the following measures:

1 privatization of state and parastatal enterprises in order to reduce inefficiencies and government protection (monopolies);

2 high interest rates and credit squeeze in order to reduce inflationary tendencies;

3 trade liberalization in order to open up the internal market and expose local industry to world market competition and boost foreign trade exchange;

4 domestic demand management leading to a lowering of state budgets and decreasing expenditures in the social sector;

5 currency adjustments in order to improve the balance of payments by raising import prices and making exports more competitive;

6 free-market prices in order to remove distortions resulting from subsidized food and fertilizers and from import taxes on luxury items.

Institutional reforms were introduced in combination with labour market reforms, and changes in the social security system were completed with new schemes tending to privatize social services, etc. These adjustments necessitated constitutional reforms and led to changes in juridical procedures and institutions. SAPs were based on an orthodox approach. They gave greater weight to growth objectives than to income distribution objectives and their strategy was reminiscent of the neoclassical growth strategies of the 1950s and 1960s. SAPs aimed at realigning overall domesti...