FACTORS CONSTRAINING DEVELOPMENT OF LATIN AMERICA
Factors constraining development of Latin America:
- Development models
- After the war of independence was completed in the early 19th century, Latin American nations adopted what was called the development model of exporting primary products. After the Great Depression broke out in 1929, particularly after the Second World War, this model was replaced by the model of import substitution industrialization (ISI).
- In its first two decades, the ISI model made remarkable achievements. By the end of the 1960s, however, its flaws and shortcomings, combined with the unfavorable external environment, led to an unprecedented economic crisis in the 1980s. The 1980s was considered as the lost decade for Latin America.
- In order to get rid of the hardships, Latin American nations once again adjusted the development model by walking towards the road of reform and opening to the outside world. This model was mainly composed of privatization of the state-owned enterprises, trade liberalization, financial opening, and marketization of the economic system. Dubbed as the neoliberal model, these measures achieved some positive results, but the negative outcome was also very serious.
2. Political stability
- In the 1960s and 1970s, military governments dominated Latin America’s political scene. On April 2, 1982, the military junta in Argentina attempted to take over sovereignty of the disputed Malvenas Island by dispatching 4000 soldiers. Argentina was defeated, causing its domestic contradictions to turn for the worse. Its economy was also negatively affected. Faced with the political and economic problems and popular demonnstrations, the military agreed to hand over power to the civilians.
- This transfer of power represented the beginning of a democratic wave that would soon spread across Latin America. Since then most of the countries in Latin America have been successfully maintained political stability.
- At the same time, however, some countries have suffered from political turmoil, causing disarray to their political and economic development. It was estimated that, since the 1980s, there have been fourteen Latin American presidents who could not fulfill their duties as scheduled by the constitution. The reasons behind this abrupt halt include the following:
(1) Economic crisis: In November 2001, for instance, when Argentina failed to meet the target of bringing down its fiscal deficit to zero, the International Monetary Fund (IMF) decided to postpone the appropriation of a credit line to this South American country. President announced a series of strict financial regulations. These measures created wide-spread discontent among the public.Unrest broke out. President resigned. Within a short period of two weeks, Argentina witnessed four presidents.
Similar thing happened in Venezuela and Bolivia and marked the end of the days when Venezuela was seen as the “model of democracy” in Latin America.
(2) Corruption: Latin America’s corruption is notorious in the world.
(3) Lack of trust: In order to win more votes, many Latin American politicians tend to make gorgeous promises in the election campaign. After assuming power, he seldom fulfills his promises, causing a great disappointment among the constituency.
3. Comparative advantage vs. Industrial restructuring
- Latin America possesses much biodiversity, forests, mineral resources Latin America also has the best conditions for agricultural production.
- In the past, exports of primary products turned some Latin American countries into the richest nations in the world. At the end of the 19th century, for instance, demand of the European market for agricultural produce was rising rapidly. In order to expand food production, Argentina brought in foreign capital and international immigrants. Argentina shipped a large quantity of agricultural produce to Europe. As a matter of fact, economic growth rate in Argentina at that time was among the highest in world. By the early 20th century, this South American nation had been nicknamed the world’s warehouse of grain and meat. Even in 1950 Argentina was still richer than Japan and as rich as Italy, Austria and Germany.
- Only in the 1950s did Argentina start to make more efforts to develop the heavy industry and chemical industry. Therefore, Argentina had lost an opportunity to become industrialized before and during the Second World War.
4. International competitiveness
- Most of Latin American countries’ competitiveness is not strong. Many factors affect a nation’s competitiveness, and technological innovation is one of them due to lack of the capacity of research and development (R&D) mainly.
- Education in Latin America is not undeveloped. Its education system has two major flaws. First of all, higher education is given much more emphasis than on primary education. As a result, Latin American scientists can win Nobel Prizes, but ordinary workers cannot acquire enough skills, thus hindering the rise of labor productivity. Secondly, educational quality is not high.
- Latin America ranks the lowest in terms of the share of R&D expenditure in GDP.
5. Social problems
- Wide-spread poverty (almost 40% of the total population lived in poverty and 15% of the total population in extreme poverty)
- Income inequality: Gini Coefficient in Brazil and Bolivia is above 0.6, and the index for many other Latin American countries is close to 0.6.
- Public safety is worsening. Latin America, along with Africa, has registered the rapidest increase in terms of murder rates.
- Social problems have incurred immense damages to the region’s socioeconomic development.
- Lack of public safety has worsened investment environment and foreign investors have become hesitant to make investments there. Moreover, poverty and unequal income distribution have deprived people of their trust and confidence in the government.
- Burgeoning social movement in recent years has clearly jeopardized the region’s political stability.
- U.S. economic situation
- The region’s deepening reforms have made it more integrated with the outside world. Close integration with the world economy also means that Latin America has become more dependent upon it. When the U.S. sneezes, Latin American countries would catch a cold.
- Apparently, of the external factors that can affect Latin America’s development prospects, the U.S. factor is the most important. The U.S. is not only the largest trade partner for Latin America, but also the major provider of capital and technology. Most of the remittance Latin American countries can receive regularly comes from the U.S.
2. China and India
- In recent years China and India have also become an important factor influencing Latin American economic development. China and India’s growth has not been a zero-sum game for LAC [Latin America and the Caribbean], but the potential benefits are not being fully realized. It is crucial that LAC countries take full advantage of the growing presence of China and India in world markets by adopting offensive strategies that facilitate both the participation of LAC firms in global production networks and their commercial presence in the two Asian economies’ markets.
- The World Bank report mentioned three reasons why Latin America can benefit from the economic rise of China and India. First, the two Asian nations can offer large markets for Latin America. Second, China and India can be important sources of capital for Latin America. With the opening of the financial market in China. Third, there is great scope of cooperation in the field of science and technology.
- Latin America’s trade with China is more asymmetrical. Latin America have been building up a growing trade deficit with China.
3. Prices for the primary products
- Movement of prices for the primary products (oil,grain etc) in the world market would also be an important factor that determines Latin America’s development prospects as it is major commodity producer.
4. Foreign capital
- Inflow of foreign capital will play a pivotal role in Latin America’s future of development as well. The region’s long-standing low capacity of capital accumulation means it has been heavily dependent upon the use of foreign capital.
- Globalization has incurred a heavy cost for Latin America. With the opening of the market, foreign competition has closed down many of the region’s small- and medium-sized enterprises. At the same time, short-term capital inflow, closely associated with the development of financial globalization, has created greater uncertainty for Latin America’s financial system.
- Latin American economy has become all the more dependent upon the developed countries’ economic situation.
6. Political and Economic Interference by USA (Neo-Imperialism)
A Bright Future for Latin America
- Though the region will continue to face great challenges in the social arena, it is likely to maintain political stability, sustain sound economic development and uphold multilateral foreign diplomacy.
- New development model
- Countries like Venezuela, Bolivia and Ecuador under the leadership of the left-wing presidents, have put forward the notion of 21st century socialism. Development model under this label is greatly different from the neoliberal model pursued by Latin America in the 1990s.
- Three major characteristics of the new model can be summarized as the following. (1) Based on economic nationalism, the state maintains a dominant position over the economic life. They welcome foreign capital but it should not make extravagant profits. (2) Governments have been attempting to take advantage of the oil windfall to increase social expenditures. (3) Presidential power has been enormously strengthened so that the presidents can order such measures as re-writing the constitution and promulgating decrees.
2. Continued political stability
- Mechanism of Latin America’s party politics has been improved so that there is a whole set of fair, transparent and free “rules of the game” guiding competition among the parties.
- The military has been highly professionalized and its desire to intervene in politics is becoming weak and weak.
- In a globalized world, political democracy is proceeding smoothly in other regions and this external factor has been quite positive in promoting Latin American democracy.
- For its own sake, the U.S. does not wish to see unrest in its backyard of Latin America.
3. Development of science and technology
- More and more Latin American countries have realized the importance of reinforcing international competitiveness through the promotion of science and technology.
4. Social cohesion
- The notion of social cohesion was put forward by ECLAC (Economic Commission for Latin America and the Caribbean) in 2006. Social cohesion can help ease the serious social problems in Latin America.
- In order to consolidate social cohesion, ECLAC suggested three types of policies: (1) To generate more employment (2) To promote education (3) To reinforce social protection.
- Latin America has become increasingly aware of the need to strengthen social cohesion.
- The anti-poverty program in Venezuela and the “zero-hunger plan” in Brazil have accomplished remarkable achievements.
5. External conditions
- On the whole, Latin America is faced with quite favorable external conditions.
- Despite the sub-prime crisis, the long-term prospects of the U.S. economy are promising.
- In the world market, Analysis of the supply and demand conditions can prove that long-term price rise for primary products.
- Having recognized the importance of improving the investment environment, strengthening institutional building and developing infrastructures, Latin American countries will be in a better position to attract more foreign capital.
6. Opportunities of globalization
- Since the 1990s, Latin American countries have adjusted their development models to take the good opportunities from globalization.
- They have benefited greatly from market opening and inflow of foreign capital.Globalization has made it possible for international capital to move swiftly across borders and in larger volumes.
- Large inflow of external resources has enabled them to increase investment and finance current account deficit.
- Rapid movement of goods across borders has offered Latin America a chance to increase international trade.