Macroeconomics as taught in North American and European universities does not reflect the particular set of problems faced by most developing countries. Indeed, more than simply reflecting different stages of industrialization, underdeveloped—or developing—countries followed very different development paths altogether, characterized by foreign technology, independently of their production factors (excess workforce), structural heterogonous domestic production, and structural inflation. Structuralist macroeconomics in contrast addresses specifically the economic development of Latin America. Incidentally, “underdeveloped economies” is a term coined by dependendist theorists such as Mauro Marini (1975) and Dos Santos (1978), who were largely influenced by the work of Andre Gunder Frank. This theory states that backward countries could never fully develop since they lack a national bourgeoisie class that could lead the industrialization process. The Economic Commission for Latin America and the Caribbean (ECLAC), however, took a softer view, coining the term “developing countries,” which eventually could “catch up” with industrial countries (Amsden 1989).
Structuralism finds its roots in ECLAC, a United Nations institution created soon after World War II to compensate Latin American countries for being left out of the Marshall Plan. One of the founding fathers of structuralism is Raúl Prebisch, an Argentinean who was executive director of ECLAC from 1950 to 1963. Prebisch was critical of various economic doctrines, including the critical views advocated by Keynes and Kalecki, that failed to consider the particularities of developing countries.
Prebisch was a university professor in Buenos Aires and a founding member and first governor of the Central Bank of Argentina, a post he held until 1943. Perhaps his most famous book, The Economic Development of Latin American and Its Principal Problems (1949), often referred to as the “manifesto” of Latin American development, propelled him into the position of ECLAC executive secretary. Prebisch held considerable influence over economists and policy makers. After leaving ECLAC, Prebisch became the first director of the United Nations Conference on Trade and Development (UNCTAD).
After the demise of the Bretton Woods system, there was an ideological movement in academic circles toward neoliberal ideology. This intellectual shift can be characterized by three principal ideas. (1) Public deficits were seen as the main cause of inflation because they increase demand over supply. As such, there was a movement against state intervention in the product and financial markets (Bielschowsky 1998). (2) Expansionary credit policies were seen as the main cause of interest rate increases. (3) Structural trade imbalances were considered to be the result of limited savings. Therefore, the principal way to eliminate the discrepancy is by opening up the financial markets to external finance.
This ideology, advocated in particular by the International Monetary Fund and the World Bank, spread through academic and policy circles in Latin America. These policies, known today as the Washington Consensus, were adopted by most governments with disastrous consequences, since they did not take into consideration the specific set of economic problems facing Latin American countries.
Latin American economies are characterized by two overall macroeconomic problems: dependence on the external sector and technological backwardness. In turn, these can be expanded into the following six stylized facts (Pinto 1973):
- Having been colonies, Latin American countries were open economies: They were subjected to certain external markets for which they produced specialized goods and services based on their comparative (absolute or relative) advantage: They supplied raw materials to capitalist economies and imported manufactured goods. They were prices takers, with terms favorable to industrialized countries, for which overvalued exchange rates are an important instrument (Kregel 2004).
- Exports are not linked to the structure of domestic production. As a result, developing countries are highly dependent on imports according to the dominant mode of production (the primary export model before World War II; the import substitution model from the 1950s to the 1970s; the secondary export mode from 1980 until now).
- There exists an imbalance in the structure of production: Industrial participation increased rapidly without a corresponding change in the agricultural sector or in the production of knowhow and technology suitable for their factors of production.
- There exists an imbalance between the productive sector and other substructures of the economy. The infrastructure was inadequate for industrialization, and the process of finance switched from the external to the internal markets, without developing a deep financial system.
- The external dependence on imports induced higher income elasticities of imports and exports, and a highly price-inelastic demand for imports and exports, requiring overvalued exchange rates to reduce costs.
- Exchange rate devaluations are an important transmission mechanism that induces inflationary pressures via magnified exchange-rate pass-through effects to prices, along with unequal income distribution that undermines the purchasing power of workers. Devaluations come with reductions in nominal wages (Noyola 1957).
Another important structuralist is Lance Taylor (1979, 1983, 1991), who believed that institutions and their behavior were the main determinants of resource allocation. Influenced largely by ECLAC, he approached development by first identifying stylized facts. First, “sectoral distinctions” are required in any analysis of development. In particular, Taylor argues that we must distinguish on the one hand between traded and homegoods production sectors, both highly dependent on imports, and between the agricultural (or traditional) and industrial sectors on the other. Second, financial markets tend to be underdeveloped. Third, distribution and class struggles are key components of the story of underdevelopment. In turn, these “centers of power” (Taylor 1991, p. 5) influence pricing and production decisions. Fourth, “unresolved distributional conflicts” are the source of inflationary pressures. Fifth, dependency on imports makes the economy dependent on foreign exchange.
Given these facts, macroeconomic structuralists developed two important concepts. The first is “structural inflation” caused by factors unrelated to demand. In particular, given the openness of Latin American countries, there is a magnified pass-through effect from variations in the exchange rate to domestic prices. Latin American countries historically have had external current account deficits requiring external finance to cover the balance-of-payments deficit. External public borrowing, however, shifted toward external private borrowing (debt) and bond and shares issuance in the 1980s and 1990s.
The second concept concerned the unequal terms of trade, based on the price inelasticity of demand for imports and exports, and income inelasticity of demand. As a result, exchange rate movements do not induce equilibrium in the current account, which can be attained only through economic stagnation.
With respect to external financing, Prebisch and other structuralists were against relying on foreign direct investment (FDI) as well as foreign private credits, for two important reasons. First, while it is true that initially FDI was an important source of external capital (1940–1960), capital outflows soon were much higher than capital inflows, thereby exacerbating the existing fragile balance of payments. Second, while foreign investment increased, the imported technology was largely unsuitable for Latin America. Fajnzylber (1990) argued that FDI was less of a black box than an “empty hole.”
As for external debt, there was not much concern in the 1970s when interest rates were kept low. However, once interest rates were pushed up in 1979, it had dramatic implications for Latin American countries. Initially, capital movements reversed (1980s) and exchange rates devalued, preventing Latin American countries from financing their balance-of-payments account. In the late 1980s, financial markets were liberalized, a process that continued through the early 1990s. External financing shifted to the bond market, which induced the 1994 crisis and the Tequila effect, which increased foreign direct investment importance, although these were of a different nature. Now, foreign direct investments are principally in the form of cross-border acquisitions and mergers, proving equally as unstable as movements in the bond market.
Given the above discussion, what are the principal structuralist policy proposals? While we can identify several, the more relevant and important ones include the following.
- Following Keynesians, structuralists believe that the emphasis of policy should be output, growth, and employment. To achieve growth, however, structuralists believe that the state should play a vital role.
- Growth can result only from placing the emphasis on the domestic, internal industrial economy rather than relying on the export sector. As such, policies aim at eliminating the countries’ reliance on foreign demand for their primary exports (especially raw materials). As a result, import-substitution policies, such as government-imposed tariffs on imports, are seen as important policy elements.
- Because of the technological backwardness of many sectors, an industrial policy of improving production technologies in lagging sectors is crucial.
- End the perception of “old colonies” and reevaluate the role of developing countries and their relationship with other countries.
SEE ALSO Balance of Payments; Development Economics; Economic Commission for Latin America and the Caribbean (ECLAC); Exchange Rates; Income Distribution; Interest Rates; Macroeconomics; Markup Pricing; North-South Models; Prebisch, Raúl; Prebisch-Singer Hypothesis; Singer, Hans; Taylor, Lance
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