International Journal of Political Economy ISSN 0891–1916/2009 $9.50 + 0.00.

International Journal of Political Economy, vol. 37, no. 3, Fall 2008, pp. 82–108.
© 2009 M.E. Sharpe, Inc. All rights reserved.
ISSN 0891–1916/2009 $9.50 + 0.00.
DOI 10.2753/IJP0891-1916370304
Juan Carlos Moreno-Brid and Igor Paunovic
What Is New and What Is Left of the
Economic Policies of the New Left
Governments of Latin America?
In the past ten years, a number of New Left governments have been
elected in various countries of Latin America.1 These governments offered their electorate an economic and, in some cases, a political agenda
based on the explicit rejection of the Washington Consensus approach to
economic growth and stabilization. Once in office, all are implementing
economic policies that combine orthodox and heterodox elements that,
in diverse ways and forms and to different depths and degrees, depart
from the neoliberal tool kit that had ruled the roost in the region since
the mid-1980s. To what extent do their policies and programs constitute
a new agenda, a new strategy for development? This is an open question.
In any case, perhaps its extent of novelty is not as relevant as whether the
agenda implemented is indeed helping to place the region on a path of
more robust and sustainable economic expansion with a more equitable
distribution of income and wealth. At this point, it may be too early to
answer fully these questions.
Juan Carlos Moreno-Brid is the Research Coordinator and Igor Paunovic is the
chief of the Economic Development Unit of the Regional Office in Mexico of the
Economic Commission for Latin America and the Caribbean (ECLAC). The opinions
here expressed are the authors’ and do not necessarily coincide with those of the
United Nations. A preliminary version of this paper was presented at the workshop
“Latin America’s Left Turns,” Simon Fraser University, Vancouver, Canada, April
18–19, 2008. The authors thank the participants at this seminar as well as Rolando
Cordera, Ciro Murayama, Pablo Ruiz Nápoles, Jorge Eduardo Navarrete, Esteban
Pérez, and Mario Seccareccia for their comments.
82 fall 2008 83
This paper updates and extends our previous research on economic
policies of the New Left governments in the region (see Moreno-Brid
and Paunovic 2006; Paunovic and Moreno-Brid 2007). Its main goal is to
examine the industrial policies put in place by these governments and to
identify their new elements or characteristics in comparison to the ones
previously implemented. With this, we hope to provide tools by which
to assess to what extent their industrial policies—whether fully original
or not—are meeting the challenges that these countries now face in their
quest for development.
In addition, this paper shows that, for the purposes of understanding
the economic policies of the self-proclaimed New Left governments in
Latin America, some of the traditional categories—neoliberalism, social democracy, populism, and socialism—have rather limited value as
analytical tools. To be more precise, and as will be seen in the following
pages, a category that permeates our analysis is “neoliberal,” as a characterization of policies oriented to curtail severely the role of the State
in the economy in favor of granting a fundamental role to the market in
the allocation of resources. Unfortunately, although the neoliberal agenda
can be rather neatly defined, its alternative cannot. This reflects the fact
that there in no single post neoliberal agenda for development.
“Populist” is another category that is elsewhere amply used, typically
in ideologically charged circles, in a pejorative way to refer, practically
by definition, to the economic policies of any Left wing government. This
category, however, must be clearly defined for it to have analytical value.
For us, it implies a set of policies—usually geared to improve social or
economic conditions of a majority or to boost the economy’s rate of expansion—based on (a) the surge of fiscal or external imbalances that cannot
be sustained, and (b) the persistent intervention of the government through
direct control of prices in key markets in an excessive and unsustainable
form, be it in terms of their time duration or of their magnitude.
When so defined, whether the regimes of the New Left should be
categorized as populist depends on the expected evolution of the region’s
terms of trade. If their improvement may reasonably be assumed to be
permanent, then most of these regimes in Latin America should not be
considered populist. However, if their improvement is merely a temporary
phenomenon that will soon be reversed, then the regimes could safely be
perceived as yet another set of policy experiments of a populist nature in
the sense that will end up provoking an economic crisis. Special attention should be paid to Argentina in this regard, given the government’s
84 international journal of political economy
emphasis on price and wage controls as the main tool to curtail inflation
and guarantee the domestic availability of certain grains. Our position
at the time of writing (May 2008) is that so far and with the exception
of Argentina, practically none of these governments can be described as
populist, but certainly run the risk of becoming so. Whether or not this
happens depends partly on the evolution of the terms of trade and partly
on the ability of the New Left governments to: (a) put in place sectoral
policies to build up a solid manufacturing base or a service sector able
to compete successfully in the world as well as in the domestic market,
and (b) to adequately adjust their fiscal and monetary policies in order to
face adverse external shocks and avoid overheating the economy. Finally,
we believe that the categories of social democracy and socialism do not
contribute much to an understanding of the current social and economic
transformations in the region.
Reasons for the Leftward Shift in Latin America 2
We find two economic reasons behind the recent surge of leftist governments in Latin America. The first and likely most important is the disappointing results of the reforms inspired by the Washington Consensus.
Indeed, these liberal reforms—financial liberalization, deregulation,
privatization, and opening up of the capital account—failed to trigger
a phase of high and sustained expansion. In fact, the rate of economic
growth, as well as the evolution of productivity in the region after the
liberal reforms, was highly disappointing in comparison with its performance in the four decades of import substitution industrialization and
state-led industrialization (SLI). It also pales relative to the performance
of other developing economies, particularly in East Asia.
When these reforms were fully in place—from the mid-1980s to the
late 1990s—Latin America’s growth was very slow, lagging behind that of
the developed world as well as of many developing regions. In addition,
since then its rate of expansion has been very volatile and subject to major
collapses, The Mexican financial collapse of 1995 was followed by other
crises, inter alia, in Brazil (1999), Argentina (2000–2002), Colombia
(1999), Ecuador (1999), Venezuela (2002–3), Uruguay (1999–2002), and
the Dominican Republic (2003–4). Moreover, few jobs were created in
the labor market during these years, and the vast majority of them were
in the informal, low productivity sector with scant or no social protection. Given such lackluster performance, it should come as no surprise
fall 2008 85
that, at the end of the twentieth century, 205 million people lived in
poverty in Latin America (close to 40.5 percent of the total population),
with 79 million in conditions of extreme poverty. Such proportions were
actually not very different from those registered in 1980. Not unrelated,
Latin America continued to be one of the most unequal regions in the
world (see ECLAC 2007). Indeed, its average Gini coefficient (0.55) was
higher than that of Africa and some East Asian newly industrial countries: Malaysia, the Philippines, and Thailand (with a Gini coefficient
of 0.46). Many countries in Latin America also have acute problems of
migration. In 2000–5, for example, Mexico had probably the highest rate
of emigration in the world.3
The second reason for the emergence of the New Left governments
in Latin America is the dramatic improvement that the region has experienced in its terms of trade in recent years, closely related to the
booming expansion of some Asian economies that sharply increased the
global demand for and relative prices of raw materials, energy, cereals,
and grains. This windfall gain brought about a vast increase in fiscal
revenues as well as in the supply of foreign exchange to many Latin
American countries with a comparative advantage in natural resources.
Such phenomenon drastically lifted two key constraints historically
binding economic growth in these countries: the fiscal and the balance of
payments constraints. And, in turn, they widened the room to maneuver,
the degree of freedom available for governments to implement heterodox
economic policies, thereby freeing them from the conditionality imposed
by international financial institutions.
Although the Chinese–Latin American and Indian–Latin American
flows of trade and foreign investment are still relatively small (US$40
billion and US$6 billion, respectively), their increasing trends announce
a change for our region that reflects a more multipolar world economic
order. The surge in South–South foreign direct investment (FDI) is an
important element in this regard. Economic ties with China, India, and
other Asian countries may become more important for some South
American countries given the U.S. economic slowdown and the continued
need of Asian countries to tap key natural resources worldwide in order
to sustain their own economic expansion.
Other than the two economic factors identified here, there are also
political considerations that played a role in the shift toward the left in
Latin America. On the one hand, many traditional conservative political
parties were seen as unable to respond to the growing need of the elec-
86 international journal of political economy
torate to address the increasingly worrying job and economic situation
of the majority of Latin Americans.4 Another political element behind
the shift to the left is the radical change in the geopolitical priorities of
the U.S. government after the 9/11 attacks. Indeed, after that date, Latin
America appeared to swiftly fade away from the U.S. government’s list
of priorities. One indicator of this loss is the weakening of all efforts to
establish the Free Trade Area of the Americas (FTAA). This goal, once
the flagship project to strengthen the economic ties between the United
States and Latin America, has practically been abandoned. Recently,
in the process leading up to the U.S. presidential elections, there have
been some signs of a revived interest in Latin America, as free trade and
migration have been topics in the debates among potential candidates.
Notwithstanding this, Latin America does not seem to be a center of
political concern to the United States.
In any case, the aforementioned factors favored and allowed the resurgence of heterodox policies in Latin America advocating, in particular, a
larger role for the state in the economy. This included a critical view of
privatization and of the role of certain international financial institutions.
Not surprisingly, the left-of-center parties strongly advanced in electoral
preferences in Latin America. In the past ten years, self-proclaimed leftist
governments were elected in Argentina, Bolivia, Brazil, Chile, Costa Rica,
Ecuador, Nicaragua, Panama, Peru, Uruguay, and Venezuela. Such a political
shift has been accompanied by a drastic reduction in the use of International
Monetary Fund financial resources in the region, as countries are benefiting
from windfall gains due to favorable terms of trade and the tapping of other
sources of funds with no policy conditionality attached to them.
Industrial Policies in Latin America: Then and Now
A number of differences exist between the industrial policies implemented in Latin America’s era of import substitution and those implemented
during the neoliberal reforms. Their objectives are not the same:: the
international and national contexts for policy-making have changed in
the region; there are conceptual differences in their perspectives ; and the
instruments used are different. Finally, there are now certain restrictions,
some of which were not present in the past, that constrain the policymakers’ room to maneuver.
The liberal reforms phased out the inward-oriented industrialization
strategies and eliminated their key policy instruments, whether fiscal,
fall 2008 87
commercial, or financial. In addition, fundamental institutions—such as
development banks—were dismantled or radically modified. Indeed, in
the SLI phase, sectoral policies had as their top priority the promotion
of manufacturing activities. The neoliberal reforms shifted their orientation toward a horizontal approach in which incentives were geared
towards small and medium enterprises (SMEs) with scant attention to
their specific activity. In fact similar incentives were granted to SMEs
of any sector—primary, secondary or tertiary (i.e., mining/extractive
industries, services sectors, and, in particular, tourism). In brief, with
the neoliberal reforms, manufacturing lost the priority it had in the SLI
agenda for development.
The Context for Policy-making
When we compare the context in which the industrial policy was implemented from the 1950s to the beginning of the 1980s with that of the
present day, we notice important differences. The end of the Bretton
Woods system brought about the elimination of global public goods in
the macroeconomic sense, so now each country individually must take
care of its own economic stability and bear the burden of adjustment to
external shocks. In the past twenty years, such shift of national macroeconomic policies has resulted in the abandonment of growth and employment as key policy targets and has brought about deflationary policies.
At the same time, globalization has increased the connectedness and
interdependence of the world economy. International trade and finance
have made the individual economies much more dependent on what is
happening in the world economy.
In the realm of ideas, there was a strong shift from the mid-1980s to
the late 1990s to a “free market as a panacea” attitude, at the same time
that the state’s intervention in the economy came to be associated with
inefficiencies. Moreover, combating inflation and fiscal deficits became
the main objectives of macroeconomic policy, while growth and employment lost prominence under the assumption that they would reach their
potential automatically with the unrestricted operation of market forces.
Industrial Policies
If we define an industrial policy in a broad sense as a deliberate strategy
to create new sectors or strengthen the existing ones in order to diversify
88 international journal of political economy
and transform the productive structure, boost economic growth, accumulate technological capabilities and increase productivity, then industrial
policies have not disappeared in Latin America. They are still present but
in a different form. The neoliberal reforms changed their emphasis and
characteristics and came to be known and accepted under the name of
competitiveness policies. Another characterization concerns the issue of
implicit industrial policies; this includes structural reforms such as trade
liberalization, privatization, and financial reforms. Certainly monetary
and exchange-rate policies influence the microeconomic conditions in
which manufacturing and other firms operate. In fact, in our view the real
exchange rate and the availability of credit are likely the most important
policy variables that affect the evolution of the productive sectors. These,
at times, have created sharp contrasts in the evolution and economic outlook of tradable versus nontradable sectors or firms as well as between
firms that are credit rationed and those that are not, for example due to
their access to external capital markets.
Export Promotion as the Neoliberal Mantra
Industrial policy was an integral part of the import substitution that became SLI. The objective was to build the industrial sector of the economy
to produce domestically most of the products needed and thus alleviate the
external constraint on the economy. As a consequence, policies were restricted to those that promote manufacturing, in particular the production
of capital goods. Such interpretation has changed, not in small measure
because of shortcomings of the SLI strategy and of the successes of the
export-led strategy of the Asian countries. The predominant view today
is that promoting exports is necessary for any economy that aspires to
develop in the current international context of globalized markets. This
has far-reaching consequences for the type of industrial policy, the constraints placed on policymakers, and the instruments that may be used in
the process. Sectoral policy today must be an integral part of any strategy
for enhancing a country’s international competitiveness and its dynamic
integration within the global economy.
Recent Industrial Policies
The first group of policies refers to efforts to expand and strengthen a
particular existing sector. The classic example is the auto industry, which
fall 2008 89
even today has a special status. To that sector we could add textiles, confection, shoes, electronics, and some agricultural and mineral products.
The policy instruments are fiscal and financial incentives and provide
trade protection. The second group refers to policies to enhance agricultural production. The intervention in that sector has been maintained
in different forms, including price controls, an anathema to neoliberal
economists. However, the emphasis has changed toward instruments of
a more horizontal nature and a more complex set of policies stimulating
rural development. A third set of policies has developed in sectors in
which externalities are known to be pervasive or of special importance
for the economy as a whole. Examples include sectors that have high
potential for technological innovation, such as telecommunications and
electricity, and oil and gas. The policy orientation has been to develop
efficient regulatory systems and institutions and to try to strengthen the
links between dominant players—mostly foreign ones—and domestic
firms in these sectors. Finally, the fourth set comprises policies to help
SMEs. In many cases, they consist of efforts to form clusters around
a large company. The shoe industry, electronics, pharmaceuticals, and
informatics are examples from different Latin American countries.
Legitimacy of Policies
Paradoxically, all four groups of policies are seen as legitimate to varying
degrees but are not considered industrial policies. Some, especially the
policies to develop the SMEs, have even been favored by the international
financial institutions, otherwise strongly opposed to State intervention in
the economy, on the grounds that they would help create employment.
The paradox is that any intervention in the economy to change the rules
of the game and thus favor one sector over the rest, or one group of enterprises over others, is indeed a form of industrial policy. Perhaps the
most obvious example is the favoritism with which governments have
treated investments in the in-bond offshore assembly industry (maquila).
To attract the investment in certain sectors, governments have offered
numerous incentives, including exemptions from import duties, valueadded tax, corporate tax, and so on. These measures are perceived as
“neutral,” although they radically change the cost structure in certain
sectors, giving them advantage over others. Apart from maquila, other
sectors such as tourism, forestry, mining, and others have received lavish
exemptions from paying taxes, which has helped convert them into the
90 international journal of political economy
most dynamic sectors of the economy. In essence, these are all forms of
industrial policy in its broad definition, and their effects are no different
from the effects of the industrial policies of the past.
Creation of New Sectors
Perhaps the most significant difference between the industrial policy of
the SLI period and of the neoliberal perspective is the latter’s explicit
rejection of the goal of creating new sectors and activities. Whereas the
purpose and ultimate goal of industrial policy in the past was to create
new sectors in the economy, today this is not on the agenda. With the
neoliberal reforms, the creation or build up of new sectors through policy
measures was restricted to attracting FDI. Transnational corporations
were thought to bring in new products and methods of production to a
host country, formally leading to a more diversified economic structure.
However, the country may not necessarily acquire the knowledge of the
production process and thus may find itself unable to replicate it in case
the foreign company leaves. This phenomenon occurs particularly when
FDI lead merely to the creation of enclaves in the host economy, with
scant connections with the local firms. In such cases, there is a tendency
to petrify the structure of the economy based on low technological content
and low value-added in most of its production. The challenge is still to
allow for a transition toward a structure technologically more complex
with more value-added type of production.
State Enterprises Lose Their Functions with the Neoliberal
Reforms
In the past, state enterprises were one of the main vehicles to advance
industrialization. Not only were they crucial to the adoption of new
technological processes, but they also had an important social function,
namely to absorb the surplus labor coming from rural to urban areas. As
we now know, this social function has also been one of the reasons for
their demise, elevating the costs of production to unsustainable levels.
The divestiture process in the 1980s and 1990s has changed the landscape
drastically. Most public firms have been closed down or privatized. In
the latter case, however, public monopoly has frequently been turned
into a private one, with benefits accruing neither to government nor to
consumers. The state enterprises that survived the privatization wave have
fall 2008 91
been considered strategic, mostly in the energy cluster or in minerals,
including oil, gas, copper, and electricity.
Instruments Different from the Past
Although tariff and nontariff protection were the cornerstones of the SLI
type of industrial policy, up until very recently they have hardly been used
in Latin America. This is surprising given that developed countries rely on
them without hesitation, especially where agriculture is concerned. Instead,
the focus has shifted to policies of attraction of Federal Direct Investment
(FDI) and export promotion. Three groups of instruments have been used
to attract foreign investment. The first is based on incentives, fiscal and financial, of the free economic zones type. The second is the attempt to create
an efficient environment for investment with quality infrastructure, rule of
law, access to foreign markets, transparency, and so on. The third is the attraction of foreign investment on the basis of qualified personnel, a scarcity
in a resource-abundant region. Other instruments utilized widely, mainly of
the fiscal and/or financial nature, are those that favor exporters or certain
sectors. Public investment, although lower as a percentage of the gross
domestic product (GDP) than before, is used to connect the more backward
rural areas with prosperous urban centers, and public social expenditure is
used to mitigate the worst effects of poverty and inequality. Subsidies to
agriculture have survived the structural reforms period, although to a much
lesser extent than before. On the contrary, different types of instruments,
including subsidies, to promote SMEs have been on the rise.
Constraints on Policy-making
Constraints on policy-making were transformed as the instruments of the
public sector were curtailed in scope and number. Indeed, the variety and
scope of policy instruments, both microeconomic and macroeconomic,
that are available today to policymakers was cut short as a consequence
of the structural reforms in the 1990s and the restrictions imposed by
multilateral and bilateral agreements. In a world dominated by a freeflowing financial capital and with capital accounts with the balance
of payments totally opened, the exchange rate could scarcely be used
for industrial policy purposes. Multiple exchange rates, once used frequently, have completely disappeared. Monetary policy has a mandate
focused exclusively on ensuring stability of prices, and, coupled with
92 international journal of political economy
the autonomy of central banks, this goal is unlikely to be changed in the
near future. Fiscal policy, under pressure to reduce the deficit, has less
room for subsidies than before. Moreover, it has been crippled on the
revenue side by the policy of giving fiscal incentives to FDI and by the
trade liberalization that has taken away a large part of the tariff revenues.
Development banks, subsidized credits, and export targets have also all
but been eliminated. In sum, open economies today face much stronger
constraints than the rather closed economies of the past.
The Role of the State in the Development Process
The role of the state in the development process has been weakened. This
loss of the maneuvering space of economic policy with the neoliberal
reforms was accompanied by the downsizing of the public sector, both
in institutional terms and in terms of its scope of intervention in the
economy. In this process the state’s functions and their new role caused it
to be a rather passive spectator of the process of economic development.
Predictably, the implementation of policies in Latin America continues
to be a fundamental problem. Another problem is the scarcity of fiscal
resources, which has roots not only in trade liberalization processes and
the “race to the bottom” to attract FDI but also in political economy considerations that result in a widespread inability to collect taxes and impose
penalties on tax evaders. Moreover, exemptions are pervasive; in some
countries they are estimated to be larger than the total tax intake. A lack
of strong civil service systems and the noncompetitive salaries that they
receive have created severe problems in some countries. This situation
tends to reflect a low level of education and skill of public employees,
thereby contributing to the inefficiency of public policies.
Distinct Dynamics in the Latin American Region
Under the neoliberal reforms, Latin America did manage to register a
boom in exports, but it failed to pull the rest of the economy toward a path
of high growth of value-added or employment either for the manufacturing sectors or for the economy as a whole. Indeed, as Table 1 shows, the
region in general had remarkable success in penetrating international
markets for manufactured products but not in increasing its aggregate
share in the world’s manufacturing value added (MVA). On the other
hand, the share of developing countries in world exports fell, but their
64.5
16.6
7.1
0.9
2.9
0.2
1.9
7.4
0.6
0.7
1.2
0.4
0.2
0.3
0.3
3.3
1.1
0.9
Developed countries
Developing countries
Latin American and the Caribbean
Argentina
Brazil
Chile
México
South and East Asia
China, Taiwan Province of
Republic of Korea
ASEAN-4
Indonesia
Malaysia
Philippines
Thailand
China
India
Africa
17.0
5.6
0.8
2.2
0.1
1.1
8.7
1.1
1.4
1.5
0.5
0.2
0.2
0.5
2.6
1.1
0.9
74.1
1990
22.8
5.4
0.8
1.1
0.2
2
15.2
1.3
2.2
2.4
0.9
0.5
0.3
0.7
6.6
1.2
0.8
74.9
2000
28.7
4.4
0.5
0.9
0.2
1.7
17.2
1.1
2.3
2.8
1.1
0.5
0.3
0.5
8.5
1.4
0.8
73.3
2003
18.9
4.3
0.2
0.8
0.2
0.8
7.6
1.3
1.1
1
0.2
0.4
0.2
0.2
1.0
0.3
5.4
74.1
1980
18.3
2.4
0.3
0.6
0.2
0.5
18.6
2.3
2.2
2
0.4
0.7
0.2
0.6
1.7
0.5
2.6
77.9
1990
28.9
4.7
0.3
0.8
0.2
2.7
21.7
2.7
3.1
4.2
0.8
1.6
0.7
1.1
4.3
0.7
1.8
67.3
2000
Source: United Nations Conference on Trade and Development, Trade and Development Report (Geneva: United Nations, 2006).
1980
Region/economy
Table 1
Share of Selected Developing Economies and Regional Groups in World Manufacturing Value Added and
Manufactured Exports, 1980–2003 (in percent)
29.7
4.1
0.3
0.8
0.2
2.2
22.7
2.3
3.0
3.7
0.6
1.5
0.5
1.1
6.5
0.9
2.0
65.4
2003
fall 2008 93
94 international journal of political economy
share in world MVA rose significantly. In this regard, Latin America’s
performance has been appalling. Internationally, it is the region showing
the sharpest contraction in its share of the world’s MVA, most of it happening not only in the 1980s but also in the early 2000s. In contrast, South
and East Asia more than doubled their combined share in total world MVA
since 1990 to exceed 17 percent in recent years, and China’s share tripled
(United Nations Conference on Trade and Development 2006).
This distinct dynamism is highly correlated with the composition of
the countries’ industrial structure. Countries whose industries are marked
by technological upgrading tend to have a more dynamic industrial sector
than countries whose industrial activities tend to be concentrated in either
resource and/or labor-intensive products. The problem is that, in general,
the neoliberal reforms have led to a new pattern of domestic output and
export that is concentrated more on natural resource based products at
the expense of sectors that have the greatest potential for productivity
growth and technological upgrading, in particular the high technology
intensive manufactures. As we have mentioned, in the past twenty years
there has been a change from an active industrial policy to a more passive one. Have there appeared any new elements in the industrial policy
due to the leftward shift in the past couple of years? How are individual
countries positioned to benefit from more active industrial policy?
Economic Development: Back on the Agenda
One of the palpable changes in Latin America is the fact that economic
development has returned to the center of discussion in intellectual
circles and policymaking concerns. It had also gained presence in the
agendas of governments as the region searches for a new developmental
paradigm. Although it is still early for a firm conclusion, it seems that the
new strategy of development will be based on macroeconomic stability
combined with social policies geared to address the high levels of poverty
and inequality. Stimulating economic growth and job creation is now
seen as a necessary but insufficient step to address economic and social
inequalities. However, two other indispensable topics, the modernization
of the state and industrial policy, are still relatively low on the practical policy agenda of the New Left. Consequently, there is not much to
show in these two important areas, although the word industrialization
has begun its slow return into the vocabulary of some policymakers, and
more proactive public policies have started to appear.
fall 2008 95
No Creation of New Sectors
Although the agenda of the leftist governments in Latin America has
slowly changed toward more active developmental policies, the creation
of new sectors is still pending. This shortcoming is even more striking on
industrial activities. Initially it could be explained as the result of the need
of the governments to address pressing imbalances on the macroeconomic
front, including crises management due to external shocks. However, even
when such hurdles were successfully removed, governments in general
are not putting in place policies to build up or create new manufacturing or industrial activities. In part this situation is linked to the fact that,
although in theory manufacturing was to be the engine of growth, in
practice the boom in mineral resources and agricultural products have
been the most dynamic forces pulling the economies toward a strong
expansion path in the last five or six years. Paradoxically, the expansion
and technological sophistication of the industrial sector becomes a more
and more pressing need—that is perennially postponed—to be able to
drive the economy if and when the boom in raw materials loses steam.
This technological development has yet to be seen as an explicit public
policy decision.
Highly Successful Initiatives
Some initiatives are highly successful and represent a stepping-stone for
a more comprehensive industrial policy. Even though creation of new
sectors is not present as a policy goal, there are some more limited initiatives that have proven to be highly successful. One of the most important
is the production of ethanol in Brazil. The endogenously developed
technology to produce the biofuel has converted the country into the
most advanced and largest producer in the world. This has acquired an
additional strategic importance with the decision of the United States to
reduce its dependence on the sources of energy from hydrocarbon. The
other example also relates to energy, with Brazil. Brazil has managed to
reach the point of near self-sufficiency in oil production, even though
quite recently it was a large net importer. In the process, Petrobras, Brazil’s state-owned oil company, has become a global leader in deep-water
oil exploration. This opens up not only economic opportunities but also a
huge potential for expansion of South–South cooperation, which is one
of the pillars of Brazil’s foreign policy.
96 international journal of political economy
Changes in the Energy/Mineral Sectors
A profound change has been taking place in Latin America in the redefinition of the conditions of distribution of rents in the cases of natural
resources. Several countries have renegotiated contracts with transnational corporations in order to obtain more revenue from the exploitation
of natural resources. Some countries have increased taxes and royalties
on natural resources, and the most radical ones have nationalized some
sectors such as hydrocarbons in Bolivia and Venezuela and mining and
telecommunications in Bolivia. This has drastically increased the fiscal
revenues of these nations. For example, Bolivia has increased government
revenue from hydrocarbons from US$250 million annually to US$1.4
billion in one year (ECLAC 2008). However, these changes have so far
not had any decisive impact on the level of production, technological
advances, or movement toward the more processed products, which
would increase the value added. Thus the risk is that, if and when the
mineral boom collapses, the domestic economy’s dynamic growth path
could be derailed.
Agriculture’s Importance
In the past twenty years, agricultural policy has moved from being sectoral
to having a more horizontal character, and from existing in isolation from
other policies to a more integrated framework. Left-of center governments have until very recently not changed that basic setup. However,
the surge of supply bottlenecks and shortages in key cereals has brought
to the forefront concerns about the issue of “food security.” The uncertain effects of climate change on the food supply, the increased demand
of such primary production for fuel oil, and the recent riots in some
countries due to the increase in food prices are making the issue of food
availability a crucial one for policymakers. With its vast territory suitable
for agricultural production and top-of-the-line producers, countries such
as Argentina, Brazil, and Chile are in a very good position to capitalize
on those developments. An important indicator of the renewed interest
of the leftist Latin American governments for agriculture has been their
participation in bilateral and multilateral trade negotiations. In contrast
with the passivity in the previous period, when trade agreements that
did not favor domestic agricultural production were signed, there has
recently been a shift to more emphasis on this issue. The unwillingness
fall 2008 97
of developed countries to reduce or eliminate trade protection and subsidies for agriculture and the asymmetry of trade liberalization proposals
have met with stiff opposition from developing countries, with Brazil
assuming the role of leader.
Lack of Science and Technology
The areas of science and technology are very much neglected. Latin
American economies today are characterized by a simple production
structure that is fragmented and disarticulated with respect to local technological capabilities and has very little endogenous capability to generate
knowledge or foster technological innovation and diffusion. The increased
participation in international trade has come to be considered the main
source of technological modernization, so imported components, FDI,
and technology licensing have become a basic source of technological
upgrading. The regional expenditure on research and development (R&D)
amounted to only 1.6 percent of world expenditures in 2002, superior
only to that of Africa and Oceania. Its share of R&D expenditure out of
GDP in the region is constant at 0.5 percent, compared to an average of
2.3 percent of GDP in OECD countries, or 3 percent in Japan (ECLAC
2008). As a result, local companies are forced to rely heavily on foreign
sources of knowledge and technology. In addition, the recent trend of
outsourcing R&D to emerging markets has, with very few exceptions, not
included Latin American countries. Brazil is perhaps the only country in
the region that has launched a massive program to improve the scientific
skills of its young population.
ECLAC’s recent comparative study of international competitiveness of
Asian and European countries concluded that innovation is only in part a
function of the amount spent on R&D. Such expenditure must certainly be
increased in most Latin American countries. What is perhaps most urgently
required is to implement policies that induce scientific and technological
innovation and that allow human capital formation to respond to the needs
of the local industrial sector, thus increasing Latin America’s competitiveness in foreign as well as domestic markets (ECLAC 2008).
Translatinas
A phenomenon that has appeared recently is the expansion of transnational corporations of Latin American origin that invest in this and
98 international journal of political economy
other regions of the world. This process, which produces what is known
as translatinas, has mainly occurred in Argentina, Brazil, Chile, and
Mexico. Sectors affected include hydrocarbons, mining, iron and steel,
paper, cement, beer, food, telecommunications, air transport, retail, and
electricity. The main objective has been to expand markets, and the main
vehicle has been the acquisition of existing local enterprises. So far,
the process has been carried out without much help from governments.
However, this will have to change in the future if the translatinas are
to enter into competition on a worldwide scale on sound footing. Even
to maintain their present position in the region and be able to withstand
the power of transnational corporations (TNCs) that are increasingly
vying for their assets and regional presence, the translatinas will have
to strengthen considerably.
Integration Processes
The process of integration is a road—recently rather bumpy—to join
efforts to enhance the region’s potential for development. In the past
couple of years, there has been a flurry of activity in relation to integration processes in Latin America. The most active region has been South
America, where most of the governments are leaning to the left. Old
integration schemes such as Mercosur (the Southern Cone Common
Market) and the Andean Community of Nations (CAN) have undergone
major changes and, to some extent, have given way to new initiatives,
the most recent being the Union of South American Nations (UNASUR).
Perhaps it is not a coincidence that the existence of the UNASUR was
proclaimed during the First South American Energy Summit. Indeed, the
cooperation in the energy sector seems to drive the cooperation efforts
and integration processes in the region. The results so far have not been
spectacular, but the announced plans point to a much more coherent and
integrated regional energy policy in the future. It is yet to be seen if that
dynamism can be replicated in other sectors.
Moreover, in January 2007, Uruguay signed an agreement on trade
and foreign investment with the United States. This act—though not yet
launching a formal trade agreement between the two countries—has been
severely criticized by Argentina and Brazil, who consider it fundamentally incompatible with Uruguay’s stance as a member of Mercosur. The
relation between Uruguay and Argentina has been acutely strained by the
former’s decision to build two cellulose plants in the basin of a river that
fall 2008 99
runs between both countries. In addition, commercial relations between
Argentina and Brazil have seen an increasing number of conflicts. Among
these are the trade restrictions imposed by Brazil on imports of products
of polyethylene terephthalate (PET) from Argentina due to allegations
of dumping practices and those imposed by Argentina on household
appliances imported from Brazil—with the former allegedly preferring
to buy them from China or Mexico—on protectionist arguments. Brazil
has signed bilateral/commercial agreements with various partners on
selected activities, including one with the United States on biofuels and
the European Union on energy issues, as well as some with Bolivia,
Paraguay, and Venezuela.
Industrial Policies in Selected MSEs with Left-of-Center
Governments
Argentina
As in the rest of Latin America, during the SLI period, industrial policy
was marked by a conspicuous and strong intervention to promote and
protect domestic production. However, the attempts to put in place liberal reforms, first in the 1970s and later in the 1990s, pushed the region
toward more horizontal, less selective programs. In recent years the socalled Tango crisis and the subsequent response to it by the government
of Nestor Kirchner, which took office on May 25, 2003, with an explicit
commitment to leave behind the neoliberal model, brought back more
interventionist policies both at the macro- as well as at the microeconomic
level. Moreover, by 2006 Argentina had paid back all its outstanding
loans with the International Monetary Fund, thus putting an end to the
Fund’s conditionality on domestic policy-making.
In our view, the adoption of a monetary and fiscal policy oriented to
maintain an undervalued real exchange rate has been the crucial policy
shift behind the impressive dynamism that has since then characterized
the Argentinean economy. Indeed, the massive devaluation of the national
currency in 2002 detonated a quick economic recovery based both on
exports as well as import substitution in manufacturing activities such
as textiles and metal mechanics. It may be important to note that during
this recovery in 2003–7, the rate of output growth of construction and
manufacturing was substantially higher than that of agriculture. In addition, exports of manufactures solidly expanded.
100 international journal of political economy
At the micro level, policy interventions in the industrial and agricultural
sectors have been directed much more toward alleviating macroeconomic imbalances than to creating an environment conducive to invest
in new industrial activities or in technological upgrading. One example
is the imposition of temporary bans and taxes on exports of grains and
oilseeds to increase fiscal revenues that ultimately provoked acute and
prolonged protests and road blockades by farmers and, in turn, food
shortages. Another is the current attempt of the government to prevent
energy shortages through a combination of tariff controls and export
taxes on the current production of natural gas with the promise of the
exemption or tariff freezes on any new gas fields that may be discovered
by private entrepreneurs.
A social pact based on a series of wage restraints and price controls—
including electricity tariff freezes—has been put in place to try to contain
inflation and maintain a high rate of economic expansion. These polices
have so far been somewhat moderately successful in keeping inflation
under control, though not as well as the official figures indicate. In our
view, if the domestic economy keeps expanding at its extremely high
rate, it seems unlikely that the system of price and wage controls will
remain functional for much longer. In addition, it may be producing some
price distortions that, if they persist, could adversely affect fixed capital
formation and lead to supply shortages and, sooner or later, repressed
inflation.
Brazil
Brazil has historically been a leader in using industrial policy to modernize its productive structure, with remarkable results. At some point
during the 1970s there was a talk of the “Brazilian miracle,” marking it
as an experience that was to be studied and replicated in other developing
countries. During the 1980s and 1990s, as in the rest of Latin America,
macroeconomic problems cast a shadow over state intervention in economic affairs and thus on industrial policies. However, in recent years
Brazil has made a comeback, building a more promising future during the
second term of the President Luiz Inácio Lula da Silva. In fact, in early
2007, for his now-second term in office, da Silva launched the Programa
de Aceleração do Crescimento (PAC)—an economic program to boost
public and private investment and push for an accelerated growth rate.
He announced that such a growth strategy would have orthodox and
fall 2008 101
heterodox elements. On the one hand, fiscal and monetary policy would
be oriented to maintaining a low rate of inflation. In addition, private
investment would be allowed in areas traditionally in the domain of the
public sector, such as oil exploration, ports, and airports administration.
On the other hand, the program emphasized the need for more state intervention in the economy through industrial policies accompanied by the
creation of a federal fund to grant credit for selected projects (the public
sovereign fund). To the extent that the economic recovery continues, the
evolution of employment and real wages will keep improving. It should be
pointed out that the government has consistently pushed for a strong rise
in minimum wages; these increases in minimum wages directly augment
the incomes of the formal sector but also the informal sector, where these
are systematically used as a reference for wage movements.
Contrary to the exchange rate policy in Argentina, Brazil has let its
currency markedly appreciate in real terms. This measure has put increased pressure on its domestic manufacturing sector, thereby forcing it
to intensify its efforts to modernize and move forward in the value-added
chain. Whether these efforts succeed may depend to a certain extent on
the favorable effects of industrial policies. Although some firms and
industries may benefit from the sustained impulse of the Brazilian domestic market and favorable access to funds, others may face considerable
difficulties to survive the intensified pressure of imported goods. Since
January 2008, there has been a steep rise in the cost of credit due to certain
fiscal/monetary policy decisions meant to slow down monetary expansion
and inflation through an increase in tax rates on credit operations and an
increase in reserve requirements. However, so far, credit for firms has
continued to expand at a fast pace, although not as much for the personal
sector. In this regard, Brazil’s development bank, the Banco Nacional
de Desenvolvimento Econômico e Social (BNDES) has become a key
player, lending billions of U.S. dollars for industrial projects. Whether
such credit expansion will continue in the future is, at the time of writing, unclear and will depend on the government’s response to changes
in the international context.
With its huge domestic market, its large pool of talented and skilled
labor, its relatively developed manufacturing sector, and its historically
close ties between the private and the public sector, Brazil is in the best
position of all Latin American countries to reap the benefits of more active public policies. Moreover, in contrast with the rest of Latin America,
tax revenues in Brazil are very high, close to 37 percent of GDP in 2007
102 international journal of political economy
(ECLAC 2008). Also, even though current spending has ingrained rigidities that lead it to rise at a fast pace, the public sector has persistently
been able to register significant operative surpluses.
Bolivia
Perhaps the showcase in Latin America of historically rooted structural difficulties to capitalize on its natural resources, Bolivia has been
hampered by institutional weakness, striking inequality, and political
instability. Coupled with a low level of education of the majority of its
population and the lack of investment on the part of its local entrepreneurs—both to produce for the domestic market or exports—this country
seems to be not yet sufficiently equipped to utilize the windfall gains
of the impressive increase in its terms of trade to implement proactive
policies to build up its domestic industrial sector beyond the production
of fuel products. This stands in stark contrast with its successful drive
to nationalize the hydrocarbons industry in 2006—the key source of
foreign exchange and fiscal revenues—in the country and to launch a
more interventionist development strategy, including some fiscal changes
aimed at improving the living conditions of the indigenous population.
Most important, the Central Bank’s crawling peg policy has avoided
any significant appreciation of the real exchange rate. Currently the
country is facing the surge of inflation due to certain supply shortages,
the adverse impact of floods, and the effects of rising prices of imported
foodstuffs and has launched a set of orthodox and interventionist measures to try to contain it.
The Evo Morales regime has declared its commitment to using the
windfall revenues of energy to increase public investment and rapidly
expand the economy’s output and employment. Sadly, such plans have
yet to be fulfilled, given the public sector’s historical weakness in its
capacity to implement projects.5 Thus, long-term plans may be perennially postponed by the short-term improvisation in the use of public
funds to meet short-term emergencies, economic or political. Indeed,
although public investment has underperformed, the public administration has rapidly augmented both in its wage level as well as its personnel.
However, as long as the public sector’s implementation capacity is not
strengthened, the window of opportunity provided by the sharp increase
in the terms of trade may be insufficiently utilized. Also, even if some
social programs prove to be successful in benefiting the indigenous
fall 2008 103
population, their impact and scope will fall way short of constituting a
new development agenda. Perhaps the most important measure in this
regard is, so far, the agrarian reform launched in November 2006 that
allows the State’s expropriation and redistribution to the poor of land that
is considered to be either not fully used or illegally owned. The scope
and overall socioeconomic impact of this land reform is unclear, as it
remains yet to be seen whether the producers will be supported by fresh
financial resources. So far, it seems that banks are restricting even more
their supply of funds to the rural area.
In any case, as the experience of the rest of the region has shown,
without the much-needed surge in public investment to modernize infrastructure, the private sector’s fixed capital formation will not respond in a
dynamic way. In particular, the lack of infrastructure is a major obstacle
for the development of the manufacturing sector, in addition to the lack of
bank credit and the unfair competition from smuggled merchandise. These
three major problems, though amply recognized, have not yet been tackled
by any public policy, program, or initiative of the new government.
On the other hand, the prospects for investment in the gas industry have
improved recently as Petrobras announced the resumption of investment
in the country. However, whether such projects are actually implemented
is at the moment unclear, given the still prevailing regulatory uncertainty,
as some analysts call it, in the country.
Chile
With its strong institutions, many of which were built for the purposes of
fostering industrial policy in the past, Chile has been hailed as a model
of orthodox microeconomic and macroeconomic policies. However, the
past sixteen years with four left-leaning governments have shown that
Chilean public policies have above all been pragmatic. When there was
a surge of capital inflows to Latin America in the early 1990s, Chile applied capital controls to discourage them. In the microeconomic domain,
even though the thrust of the policies have been horizontal in nature,
direct subsidies to exporters, mining, and the forestry sector have been
used during very prolonged periods. Successful experience in fomenting
its wine-producing sector, fruits and vegetables for export, or, for that
matter, the salmon industry (nonexistent twenty years ago) have proved
it capable of transforming the productive structure of the economy in a
way without precedent in Latin America.
104 international journal of political economy
Uruguay
At one point called the “Switzerland of Latin America,” Uruguay has
always had a higher standard of living than its neighbors, in no small
part because of carefully conceived and applied economic policies. The
macroeconomic problems of the past two decades have wrecked havoc
on the hitherto reasonable economic policymaking. It should be noted
that, contrary to the Argentinean experience, the liberalization process
in Uruguay was very limited and did not significantly shrink the public
sector. In fact, this sector is still large and the economy remains heavily
regulated. State enterprises have monopolistic powers in key areas of
the energy and petroleum sector, as well as in telecommunications services. As in most other countries, a more horizontal character has been
imparted on industrial policies. However, the country has a potential to
develop certain sectors and to occupy niches in the markets of its two
huge neighbors, Argentina and Brazil. Its educated and skilled workers
and a capable bureaucracy are important assets that could be used more
actively in the future.
Venezuela
Once the most developed countries in Latin America, Venezuela is a typical example of the “resource curse.” Although huge reserves of oil and
gas present a potential for economic and social development that cannot
be matched, they also bring about a social and institutional structure that
is fundamentally oriented toward rent-seeking. Incentives to develop
productive activities are so weak and so overwhelmed by the incentive
to seek rents that a diversification of the Venezuelan economy remains
a distant dream of every president in the past several decades, including
Hugo Chavez. Inefficient management of Petróleos de Venezuela, S.A.
(PDVSA), has already resulted in reduced production and decreased
investment. The policies of Venezuela could be best characterized as
“back to the future” policies that did not work in the past, and it is hard
to see how they could have any different effects today. Moreover, recent
food shortages and the rise in inflation are apparently perceived by the
government as a consequence of a private sector’s reaction, or opposition,
to its policies in favor of a socialist economy of the twenty-first century.
To this extent, the state’s intervention in the economy seems to be on
the rise with further nationalizations conceived more as a threat than as
fall 2008 105
a policy decision based on the comparative advantages of the economy.
The extent to which such threats will hamper economic growth is yet
to be seen. On the one hand, the dynamism of the domestic economy is
certain to induce more investment. On the other, the uncertainty concerning future property rights may hinder it.
Conclusions: Short- and Medium-Term Prospects and
Constraints
For the left-of-center governments to continue building a new development paradigm in Latin America, one key precondition is the continuation of the relatively high rates of expansion of the world economy. This
has two positive effects on Latin American countries. On the one hand,
it maintains relatively high prices for natural resources-and a dynamic
demand for exports- their main source of dynamism for economic growth
in the past five years. On the other hand, it increases fiscal revenues and
thus the government’s potential to maintain an expansionary stance in its
expenditure, on current and hopefully on future investment/infrastructure
projects. This process, if successful, may boost the chances of reelection
of the incumbent leftist governments, thus giving them the time necessary
to carry out deeper policy changes. The alternative scenario –of a slowdown or decline in world demand- would force them again to concentrate
on crisis management, reduction of external vulnerability, and volatility
of growth, relegating the questions of technological catching up, creation
of new sectors, and transformation of the productive structure to the back
of the policymaking priority list. Moreover the urgent need to compensate
the loss of fiscal revenues may break the sociopolitical coalitions behind
them. As has been clearly illustrated by the Argentinean and, to a certain
extent, the Bolivian examples, the conflict over the redistribution of rents
between the government and the transnational corporations can be safely
managed both domestically and internationally. However, the struggle
over the redistribution of windfall gains among different local/domestic
classes or groups of producers may be explosive.
Beyond the Existing Specialization Patterns
Two decades of structural reforms and the recent boom in prices of commodities have left the region with two specialization patterns. The first,
predominant in South America, is based on exploitation of natural re-
106 international journal of political economy
sources, and the second, present mostly in Central America, is founded on
labor-intensive activities whereby these countries offer cheap, abundant,
and low-skilled labor. Mexico has elements of both patterns. The main
question of economic development in Latin America in the medium term
is how to overcome that pattern of specialization. Due to the absence of
more proactive public policies, a specialization of the region’s production structures according to static comparative advantages has occurred
in the past two decades. Latin American enterprises participate in global
production systems mostly at the lowest end of the technological complexity, performing basic assembly activities and some processing of raw
materials. The goal of economic policy in general, and of industrial policy
in particular, should be to create comparative advantages of a dynamic
nature. This could only be achieved with a technological upgrading and
with a set of much more coherent policies than in the past.
It should be noted that the dynamism of exports of the service sector
in Asia is, in general, greater than that in Latin America. Interestingly,
as Dihel and Shepherd (2005) in their study for the OECD showed, the
regulatory framework in Asia of the service sector—including banking,
insurance, fixed and mobile telephone, and engineering services—is
on average stricter than in Latin America. Moreover, the data indicates
that at least in these activities there is no strong correlation between the
scope or complexity of the regulatory framework and the ideological/
political affiliation of the government. For example, according to the
OECD data, Colombia has a more intrusive regulatory framework than
Argentina in all of the above-mentioned services, but not necessarily
more than in Brazil.
Stronger Constraints
Although the industrial policy today is much weaker and could use fewer
instruments than in the SLI phase, the task before it is more complex. The
technological gap with the more advanced economies has remained the
same, or has even widened in some cases, and could only be closed with
much more investment in science/technology and education. Moreover,
the trend toward increasing specialization in natural resources has been
strengthened by the rising prices of commodities, weakening the incentives to diversify, modernize, and climb the technological “ladder.”
In addition, how is Latin America positioned to conceive and implement selective import substitution policies with export promotion strat-
fall 2008 107
egy, the way several Asian countries have done, and continue doing so
even today? One heavy constraint is the state. As it stands now, it is in
general poorly equipped to implement more complex public policies.
The lack of resources, the lack of qualified civil servants, and corruption
are some of its main limitations. As a consequence, there are serious
obstacles to adopt the policies that were crucial in the process of Asian
industrialization, especially those monitoring the performance criteria
and enforcing discipline, and the imposition of cooperation on enterprises
in a specific sector.
A More Active Industrial Policy
The shift to a more active industrial policy of the New Left has so far
been more rhetoric than reality. In the sphere of rhetoric, the left-of-center
governments have announced some policies that represent a significant
change as compared to those of the past two decades. There is again
the notion that active policies are necessary to transform the productive
structure of the economy and to upgrade technologically. However, except for the changes in property rights in certain industries related to the
mineral/energy sectors, there is yet not much to be shown.
Especially absent have been attempts to create new industries. Initially
such absence could be explained by the urgency to face other, more
pressing needs by the governments related to macroeconomic stability.
However, in many countries today, it simply reflects the weakness of the
core of political interests that support it relative to that of other sectors
based on natural resources. Such absence is understandable in countries
such as Bolivia where there were never any significant political forces
to launch a development agenda based on industrialization. The only
significant counterexample is Brazil, where the business sector had and
continues to have considerable political power to place industrialization
as a key lynchpin of the development strategy. It remains to be seen if
the industrial policy in the future implemented by other New Left governments will effectively reverse some of the negative trends that Latin
America has been experiencing in the past two decades and at the same
time avoid the many pitfalls of the SLI period. Latin America urgently
needs to exploit better and strengthen the benefits of its comparative
advantage on natural-resource intensive products (food, minerals, and
other raw materials) and, at the same time, strengthen its manufacturing
industry and certain services to build a solid export platform able to pull
108 international journal of political economy
the economy into a long-term path of robust expansion. Whether it will
have the capacity and time to do so is an open question.
Notes
1. In this paper, the term “New Left” is not used in the European sense of the
past thirty years but only as a way to identify the left-of-center governments that
have arrived to power in the past ten years in Latin America.
2. For further analysis, see Moreno-Brid and Paunovic (2006).
3. On average, more than 400,000 Mexicans migrate abroad annually (Pardinas
2008). Today there are eleven countries in Latin America and the Caribbean with an
annual net migratory balance of at least two per thousand (United Nations Development Programme 2007).
4. Latin America has become one of the most violent regions in the world with
25 homicides per 100,000 inhabitants, much higher than the world average of 8.8
per 100,000 (United Nations Development Programme 2004).
5. For example, the Country Profile for Bolivia reported in the Economist Intelligence Unit (2008) states “Persistently weak implementation capacity means that
the budgeted 65 percent increase in spending (for 2008) will fail to materialize.
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