Bureaucratic Authoritarianism, Foreign Investment, and Debt Crisis

1
Bureaucratic Authoritarianism, Foreign
Investment, and Debt Crisis

• Hichol Cho

2
The New Authoritarianism in Latin America- David
Collier

• The industrialization in Latin America resulted
  in emergence of the Bureaucratic
  Authoritarianism. The gov. is ruled by the
  military as the institution rather than by
  individual military rulers.
• - The relationship b/w democracy and industrial
  modernization does not always exist.
• - Political economic model by the bureaucratic
  authoritarian countries is often inconsistent and
  involves corruption and income inequality.
• - Latin American countries are generally
  characterized by late industrialization, and
  reliance on foreign investment and technology.

3
The Bureaucratic Authoritarianism

• -- Hirschman argues that understanding the
  different phase of industrialization and its
  important consequences can help us understand the
  emergence of the Bureaucratic Authoritarianism.
• -- Jose Serra states that there is a relationship
  b/w the economic development and emergence of the
  Bureaucratic Authoritarianism. He argues that it
  will result in 1)the exploitation of working
  class, 2)deepening of the industrial production,
  and 3)economic rationality.

4
Three distinct political phases in Latin
America-- ODonnell

• 1. Oligarchy the political competition is
  limited. The elite of the primary product export
  sectors dominates the state.
• 2. Populist it is based on multi-class
  coalition of urban-industrial interests,
  including the industrial elites and the urban
  popular sector. The state promotes the initial
  phase of industrialization focused on consumer
  goods.

5

• 3. Bureaucratic Authoritarianism This
  non-democratic system excludes the popular
  sector. The state is controlled by the
  technocrats. They perceive the popular sector as
  an obstacle to the economic development. This
  model promotes the advance industrialization.
• This system was seen in
• -- Brazil (post-1964)
• -- Argentine(1966-1970, 1976)
• -- Chile and Uruguay(post-1973)

6
Economic and Social Change

• The three main factors influenced the transition
  from one system to another, which are
  Industrialization, Activation of the popular
  sector, and Technocratic role.

7

• 1. Industrialization,
• 
  
• -- The domestic firms begin to produce for
  the local markets previously supplied by imports.
  These firms are protected by tariff and
  subsidies.
• -- The cost of importing the intermediate
  inputs is high, and it leads to the deficit and
  inflation. The gov tries to solve this problem by
  deepening the industrialization through domestic
  manufacturing of intermediate inputs.
• --This would require the foreign
  investment. The gov would make a new policy to
  draw the foreign investment.

8

• 2. Activation of the Popular Sector,
• -- The popular sector becomes increasingly
  powerful after the initial phase of
  industrialization. They will oppose the new
  fiscal policy. This would result in political and
  economic crisis.
• 3. Technocratic Role,
• -- The industrialization enlarges technocratic
  society. They perceive the popular sector as an
  obstacle to the economic growth. As a result,
  they would make the intervention in politics,
  economy, and social life. They would gradually
  form the bureaucratic Authoritarianism.

9
External Debt and Macro Economic Performance in
Latin America and East Asia,- Jeffrey Sachs

• Why East Asia performed better than Latin
  America?
• -- External shocks in Asia were less severe than
  those in Latin America.
• -- Latin America over-borrowed.
• -- Latin America mismanaged the exchange rate
  and trade.
• -- While Asian economies are market oriented,
  Latin America is not.
• -- Compare to Asia, trade in Latin America
  deteriorated more sharply. Also, Latin America
  was more affected by the higher interest rate.

10
The Role of External Shocks

• Was the external shock accountable for the
  economic crisis in Latin America?
• -- The sustained rise in the U.S. interest rate
  after 1979 deteriorated Latin Americas existing
  debt because their currencies were pegged to
  dollars.
• -- Asian countries debt was non-banking
  borrowing, originating from export credit agent.
• -- HOWEVER, the real interest rate shock was
  large and negative only for Brazil, Korea and
  Chile. This implies that Latin Americas poor
  economic performance was not linked to the
  external shocks. In fact, Korea and Thailand had
  larger negative shock.

11
Comparing the debt service to export ratio.

• -- Latin Americas debt was higher as proportion
  of export. This made them vulnerable to the
  shocks.
• -- In Latin America, the debt servicing
  requirements exceeded total export in 1980-1983,
  while East Asias debt was below the export.

12
Trade Policies and Exchange Rate Management

• Latin Americas Trade failed due to the two main
  failures.
• 1) As debt is accumulated, the price of tradable
  goods should rise to encourage the movement of
  resources into the tradable goods sectors.
  However, it did not happen in Latin America.
• 2) Investment in tradable should be in sectors
  that are profitable when outputs and inputs are
  evaluated at the world price, rather than the
  tariff distorted price. However, they failed to
  do so.

13
Three sectors approach the importable,
exportable, and non-tradable

• The author argues that two sectors approach (only
  the importable and exportable) can be misleading.
  Three sector approach can better explain the
  trade problem in Latin America.
• -- The protectionist policy does not hurt export
  when resources are drawn from the non-tradable
  into the tradable. This is the case in Japan and
  Korea, where they maintain the rapid export
  growth with the protected import.
• -- On contrary, Latin Americas over-valuation
  benefited the import at expense of the export.

14
Political Economy of export led growth

• -- There is the link b/w the shift to ISI and
  decline of the agricultural sector. In Latin
  America, urban workers and capitalists are
  important constituents. Thus, their interests
  were served first. In Asia, the rural sectors
  have more power.
• -- Since the urban workers prefer the
  over-valuation, Latin American currencies will
  appreciate to meet the interest of urban workers.
  
• -- In Asia, once the export promotion begins, the
  industrial exporters gain the power and continue
  the undervalued exchange rate. In Latin America,
  the exporters will eventually grow weak under the
  influence of over-valuation.

15
Latin Americas Debt Crisis- Franko

• -- The borrowing to support ISI becomes an
  unstable foundation for growth because the
  borrowing might outpace the payment ability of
  the country.
• -- ISI is driven by the failure of private
  sectors to provide critical goods and services in
  the economy. As a result, the state invests in
  sectors with huge capital requirement for entry.
  However, this state owned firms are generally
  inefficient.

16
External Shocks

• -- The real interest rate was negative from 1974
  until 1977. This gave the strong incentive for
  Latin America to borrow. In addition, banks were
  willing to lend to the state-owned firms.
• --However, the external condition radically
  changed in 1979. The interest rate increased
  rapidly. Consequently, Latin America fell into
  debt.
• --The value of the currency began to fall and
  this encouraged people to invest outside of their
  country Capital Flight.
• --Overvaluation of currency caused the further
  capital flight. It further increased the deficit.

17
Why would a country allow overvaluation?

• 1. Strong currency value allows companies to buy
  the intermediate inputs at lower cost, which is
  good for ISI.
• 2. When countries peg their currencies to the
  strong foreign currency, overvaluation may
  happen.
• 3. When countries tries to depreciate their
  currency after noticing the overvaluation, it
  might cause the additional inflationary shock.

18
Questions

• 1. Which factor was most accountable for
  creating the economic crisis?
• 2. What lessons can be learned from the economic
  crisis in Latin America?
• 3. Were internal or external causes more to blame
  in the Latin American debt crisis?