Latin America offers important lessons for APEC Chile 2019
17 Dec 2018
Professor Alberto Posso
Principal Research Fellow
Australian APEC Study Centre at RMIT University
At a time of increased protectionism undermining the global economic system, the existence of APEC and similar organisations is vital to the survival of an integrated political and economic system.
The hosting of APEC in Chile in 2019 presents an opportunity for economies in the Pacific Rim to understand the true costs of anti-globalisation better. No other region is better placed than Latin America to shed light on the costs of de-globalisation and inward-looking development strategies.
Chile was the first nation in Latin America to emulate the East Asian policy initiative and embark upon a process of export-oriented industrialisation. In the early 1970s, the government of Chile began to liberalise domestic commodity markets and the financial market. By the early 1980s, all items, except automobiles, had a nominal import tariff of 10 per cent— down from an average of 105 per cent in the previous decade. As in East Asia, these changes resulted in an increase in total trade over GDP and real wages.
Other economies within Latin America did not emulate Chile's export-orientated industrialisation success. Most economists in East Asia would probably be surprised to hear some Latin American policymakers refer to export-oriented policy strategies, like lowering tariffs and opening to FDI, as la pesadilla neoliberal (the neo-liberal nightmare). After WWII, in East Asia, these export-oriented policy reforms resulted in high rates of economic growth that lifted entire societies out of poverty and lowered (or did not significantly raise) inequality. However, following trade liberalisation in the 1980s, the Latin American economies saw much smaller rates of economic growth and poverty alleviation, while inequality remained stagnant or, in some instances, grew.
In many Latin American countries these policies were associated with right-wing authoritarian governments. This meant that these countries often lacked the democratic institutions to ensure that opportunities and benefits from trade were widely distributed. Furthermore when these weak results were coupled with a number of financial crises and fiscal austerity packages, many concluded that free-trade policies and the Washington Consensus are indeed a ‘nightmare’.
Therefore, in the late 1990s Latin American politics saw a decisive shift toward left-wing anti-capitalism populist political movements. Beginning with Hugo Chavez’s election in Venezuela in 1998, the onset of the new millennium saw anti-capitalist populists take office in Argentina, Bolivia, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua and Paraguay.
Perhaps ironically, these movements also founded an international anti-globalisation organisation called ALBA or the Bolivarian Alliance for the Peoples of our America (Alianza Bolivariana para los Pueblos de Nuestra América). ALBA (whose membership includes Bolivia, Cuba, Ecuador, and Venezuela) focusses on an anti-trade paradigm that embraces import-substitution, large government and limited labour market mobility.
Hugo Chavez originally proposed ALBA, so it seems fitting to use Venezuela’s recent history to understand the true effects of anti-globalisation. Venezuela’s economic reforms curtailed imports, significantly raised the cost of living, and (famously) lead to a large drop in the availability of goods, many of which are essential. The gross economic mismanagement under Hugo Chavez and his successor, Nicolás Maduro, has led to food shortages, hyperinflation, medical shortages and increasing violence. This dire situation has resulted in waves of migration across the region.
To many economists, Venezuela’s tragic history is not surprising. Experiments with import substitution have never produced their desired effects and there is no reason to believe that they ever will. Indeed, most developing economies across the world have flirted with import-substitution, from Argentina to Zimbabwe these policies have never yielded the desired results. Instead, export orientation has transformed economies, such as South Korea, Taiwan, Singapore and Hong Kong, from poor to prosperous in one generation.
The failure of most of Latin America to replicate the success of the East Asian region probably has more to do with how export-orientation was implemented in Latin America, than with neoliberalism, per se. Outward orientation in East Asia and Latin America resulted in conflicting outcomes because trade reform, macroeconomic stabilisation, and labour market reforms did not go far enough in the latter. There is no reason to expect that Ecuador, Nicaragua and Venezuela would be unable to replicate the successful experiences of the Republic of Korea and Malaysia or indeed Chile and Mexico. Indeed, Chile was able to embark upon export-oriented reform successfully and has similarly transformed its economy to East Asia.
I look forward to hearing more about Chile’s economy in APEC 2019 and I look forward to also hearing about how the Latin American region can teach the rest of world about globalisation, its benefits, its costs and importantly the costs of not engaging with the world.