By William PfaffInternational Herald Tribune
August 31, 2000
The weakness of theory is also its attraction: its potential for universal application. The pragmatist is skeptical of general solutions, but general ideas rule today in economics - a discipline that began, after all, among 18th century philosophers.
That was before positivism took root among the economists, encouraging them to believe that theirs is a science, not an affair of mere ideas. From this has followed the quest of official policymakers for general and objective principles to apply to the world.
It is refreshing to hear a social scientist willing to say that ''a first principle in establishing a policy agenda for the future ...is to avoid across-the-board policy recommendations.''
The source of that remark is Barbara Stallings, director of the Economic Development Division of the UN Economic Commission for Latin America and the Caribbean (UNECLAC). With Wilson Peres, she has recently published a Brookings Institution book on the impact of past Latin American economic reforms. She summarizes their findings in the current newsletter of the Social Science Research Council.
Development policy in Latin America and the Caribbean has been based on a theory that continues to be followed by most of the international development agencies and serves as a rationalization for globalism (itself a doctrine of deregulation, not of development).
The theory rests mainly on work done for the U.S. National Bureau of Economic Research, published in the late 1970s. It holds that reform requires backward economies to shift from production for domestic consumption to production for export. Trade and tariff liberalization is necessary, plus a ''competitive'' exchange rate. Domestic import-substitution industries must be eliminated.
The basic assumption made in the 1970s and early '80s was that Latin America's comparative advantage lay in unskilled labor. So the labor-intensive industries were expected to have the highest growth and most dynamic export performance, and to create the most jobs.
Export emphasis was expected to increase demand for unskilled labor, add to the demand for jobs generally and allocate resources more efficiently. Increased demand for unskilled labor has also been expected to push wages upward for the employed, improving overall income distribution. State-owed enterprises were to be eliminated and foreign direct investment promoted.
Latin American and Caribbean economies were, in short, to be globalized. That term itself awaited the 1990s, when deregulation of global finance and investment became the policy of the Clinton administration and the IMF, the OECD and other international agencies.
The policies recommended to or imposed on non-Western economies since globalization began have been those applied in Latin America 20 years earlier.
The results of Latin American development have now been given empirical, if preliminary, examination by the economic commission in a joint venture with research centers in Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Jamaica, Mexico and Peru.
Barbara Stallings reports that reform appears, in the aggregate, to have had little effect at all. There is evidence of a small positive impact, overall, on growth and investment, and of a small negative impact on employment creation. Growth is seen as having been ''disappointingly slow, slower than in the past and slower than in other world regions.''
When individual countries and sectors are examined, the findings are that the reforms fostered investment and modernization, but with complicated results. They produced large differences among individual countries and different sectors, ''a gap between large and small firms and a shift in favor of transnational corporations over domestic firms,'' with ''greater opportunities for some and greater obstacles for others.''
Liberalization brought short-term capital into internationally favored sectors of national economies, raising currency values and making imports cheaper but exports harder to sell, and thus increasing the trade deficit. Being eminently reversible, this new investment could go as rapidly as it came, depending on domestic developments or international financial trends, with disruptive effect at best and, in some cases, producing grave and lasting currency crises.
The position of foreign companies and their subsidiaries strengthened. Their investment brought in foreign materials and technologically advanced capital equipment, to the disadvantage both of local suppliers and the balance of trade.
The reforms failed to deliver the expected new employment. Activities ''that traditionally produced the most employment, such as textiles and garments, declined across the board.'' The only increase in labor-intensive job production was in assembly plants operating under ''special international regulations.''
The study concluded that significantly higher future growth in Latin America cannot be taken for granted. Lacking that, unemployment may remain high, with accompanying social problems and income inequities. The Latin American and Caribbean economies are more vulnerable today, because of globalization and trade and financial liberalization, than they were in the past.
''The vast majority of benefits that can be obtained from first-generation reforms have already materialized,'' the author writes. To go on in this way, she says, will produce diminishing returns. It is the theory itself that needs reform.
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