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World Development Vol. 31, No. 12, pp. 1977 1995, 2003 . 2003 Elsevier Ltd.

All rights reserved Printed in Great Britain www.elsevier.com/locate/worlddev 0305-750X/$ -see front matter doi:10.1016/j.worlddev.2003.09.002 Globalization as a Development Strategy in Latin America? OMAR SANCHEZ * University of Oxford, UK Summary. The swinging of the pendulum

toward policies that enhance Latin America s insertion into the world economy diverted attention from domestic policies that continue to be essential for growth and development broadly defined. Six domestic policy areas are identified here: increasing domestic savings, implementing countercyclical fiscal policies, mobilizing public resources, investing in education, promoting employment, and reducing income inequality. The opportunity cost of not having devoted

due attention to these issues throughout the 1990s is surely enormous, and for those countries still underplaying domestic variables, the longer the delay the greater the costs. The imperative of devoting more political capital to domestic strategies of development cannot be overstated whether international financial institutions choose to emphasize them or not. . 2003 Elsevier Ltd. All rights reserved.

Key words globalization, Latin America, development strategies, education, fiscal policy, inequality, employment, taxation, savings The bad road is that which explains the national state of affairs purely in terms of the dependency with respect to an international order which must be completely overhauled; the good road, on the other hand, is that which leads to a greater

capability for action and analysis of those forces that need to be mobilized, the obstacles to be overcome, and the strategies to be adopted. The shape these roads take on in Latin America shows that they lead to opposite directions (Alain Touraine). 1 1. INTRODUCTION Globalization is viewed as a reliable substitute for a domestic development strategy. That

is the conclusion any casual observer can come to by hearing the policy advice of the world s major international development organizations and mainstream economists. Combining integration into the world economy and good governance will deliver the fruits of development, the underdeveloped world is told. When it comes to economic policy advice, that is today s zeitgeist. Some have called this a

Washington Consensus-plus formula, as it is presumably a modified version of John Wil liamson s original consensus: an indispensable complement to economic liberalization is a state that performs certain essential tasks effectively and matches its actions to its capabilities (World Bank, 1997). The question remains: is this a genuinely new development agenda or simply the same neoliberal prescription in

new clothes? Whatever the case, Latin America has wholeheartedly embraced the faith in open trade and freer capital markets and yet, subsequent growth is well short of expectations. The exuberant optimism that the reform agenda generated a decade ago has given way to a more cautious, subdued mood. The stylized facts explain this new mood. After 10 15 years

of reform experience, Latin American economic performance leaves much to be desired. GDP growth throughout the 1990s for the region as a whole has averaged 3.2% a year, not nearly enough to make, by itself, a dent on poverty. When population growth is factored in, it means that regional per capita annual incomes have increased by a paltry 1.1%. World

Bank figures show that 36% of 500 million Latin Americans were poor in 1998 (i.e., earned less than $2 a day), compared with 38% in 1989. Those in extreme poverty *Final revision accepted: 16 June 2003. 1977

WORLD DEVELOPMENT (i.e., living on less than $1) were 16%, barely down from 18% ten years earlier (The Economist, 2000). In sum, the devastating effects of the debt crisis have not been significantly redressed by the performance of the subsequent decade. Poverty figures, both relative and absolute, are worse today than they were 30 or 40 years

ago. Although both poverty (less than $2 a day) and absolute poverty (less than $1 a day) levels decreased throughout the 1990s, progress has been halted in the last few years. Furthermore, the aforementioned 3.2% average growth for the 1990s hides high-growth volatility throughout the decade. This makes for much poorer economic outcomes (including employment, income distribution, savings, investment and

others) than if that growth had been reasonably steady. In a recent authoritative assessment of the reforms, the Economic Commission for Latin America (ECLA) is forced to conclude with an apparent paradox: the biggest policy changes in a generation... resulted in fairly modest changes in performance at the aggregate level (Stallings & Peres, 2000, p. 203). The upshot is that

Latin America is steadily falling behind other countries which were once at similar levels of development (measured as GDP per capita). Whether globalization understood in this article as the increased integration of trade, foreign direct investment, and openness to international capital markets is leading to increased or decreased inequality, increased or decreased poverty worldwide, depends on whether we use countries

or individuals, and purchasing power parity or exchange rates measures, as our units of analysis. Asking about the relationship between globalization and growth, income distribution, or volatility on a global scale is interesting, but it hides more information that it reveals for there is no such thing as a typical country in the world economy. To probe deeper, a more sensible

approach to measure the effects of worldwide economic integration is in relation to the development position of countries in the international economy. Is the impact of increased trade and financial openness on growth and inequality similar in Ethiopia and Chile? Is it similar in Chile and France? General and specialized media commentary on globalization often conveys the idea that the

impact, whatever it is alleged to be, is more or less uniform across countries. Reality, however, often defies easy characterizations. The differential effects of increased integration (meaning openness to trade, Foreign Direct Investment, and capital flows) on groups of countries at different developmental stages can be readily discerned by simply using three income categories (highincome, middle-income, and low-income).

Yale scholar Geoffrey Garrett adopts this very approach and finds interesting results (Garrett, 2001). His regressions show that integration into the global economy has had deleterious consequences for low-income countries. Within these, more open ones have experienced increased inequality and lower growth. Amid middle-income countries, more integration is associated with increased growth and lower inequality, so increasing links with the

global economy has been a winning formula. Among rich countries, more integrated countries have experienced increased inequality but enhanced growth, a mixed picture. 2 These findings should not however create the impression that fortunes are fixed according to a country s GDP per capita or relative position in the international development ranking. The forces of globalization as such are

not inherently beneficial or deleterious for development prospects. As has been remarked by many prominent voices before, they carry risks and opportunities and it is up to developing countries to minimize the former and maximize the latter via their own domestic policies. What increased economic integration does is to place a premium on some variables (say, education) and enhance the

risks on others (say, fiscal irresponsibility). The process of development (or lack thereof) is endogenously driven: it rests largely upon domestic policies over which developing country governments have control. It is on the basis of this knowledge that less developed countries should act. This paper proceeds as follows. First, some of the deficiencies of the globalization-asdevelopment blueprint are

briefly addressed. Then, in what constitutes the bulk of the paper, some of the tasks that have been underplayed in the rush to open trade, capital, and direct investment barriers, are considered. These include: the need to increase domestic savings to enhance domestic economic autonomy and stability, the need to introduce countercyclical policies in the volatile Latin American economic context,

the need to actively promote employment rather than passively waiting for growth to deliver new and better jobs, and the need to mobilize public resources more aggressively in order to address all manner of urgent social and economic needs. Finally, re

GLOBALIZATION AS A DEVELOPMENT STRATEGY cent economic research lends added importance to two intimately linked issues that, it is reckoned, need to acquire much more attention from politicians and policymakers than has been the case in recent years: the region s educational quantity and quality deficit and the scourge of income inequality. Their interrelationship also considered. In the

conclusion, a plea to redirect political capital toward these domestic areas of policy is made. 2. GLOBAL INTEGRATION AS PANACEA? The static benefits of free trade are well established. Paul Samuelson has famously remarked that comparative advantage is the only concept in economics that is both true and nontrivial. But what can one say about the dynamic benefits?

The answer hinges on whether the forces of comparative advantage push a particular economy in the direction of activities that generate long run growth. As a matter of fact, the causality link between trade openness and long-run growth, contrary to popular wisdom, is not engraved in stone. There are two chief problems encountered in the empirical literature on this topic.

First, it is difficult to find an adequate way to quantify trade regimes. 3 Second, it is difficult to disentangle the simultaneous causality between trade and growth. Rodriguez and Rodrik (1999) survey the extensive academic literature on the subject, and find it wanting. Studies have yet to produce convincing econometric research not plagued by misspecification or inadequate instrumental variables (in

this case, proxies of openness that are uncorrelated to other policy or institutional variables that have a detrimental effect on growth). In short, there is an important gap between the policy prescriptions that are usually derived from research and what that research has actually shown. There are reasons to think, Rodrik argues, that the question of whether trade promotes growth

is likely to be a contingent one, dependent on a number of country and external characteristics. In any case, whatever the relative merits of export promotion as an engine of growth, it is clear that there are diminishing returns to such a strategy given the context of diminishing world demand over the long run: the world economy grew

at 4.9% per annum during the 1960s, at 3.8% during the 1970s, and at 2.9% during the 1980s. World growth during the 1990s also hovers around a disappointing 3% a year. Easy exhortations for Latin America to strive to reproduce Asian-style export-led growth are misguided for this and other reasons. What authoritative studies of Latin America s economic development

in the 1990s show is that, contrary to received wisdom, the region s comparative advantage in a world setting rests not so much in its low-skilled labor force, but in its vast natural resources (Stallings & Peres, 2000). This worries some long-standing observers of the region. Indeed, there may well be grounds to voice today some of the same concerns expressed

by economist Raul Presbisch half a century ago. Gert Rosenthal, a former chief of the Economic Commission for Latin America (ECLA), explains such concern as follows: There exists some similarities [today] to the international division of labor... in 1949; it would be an irony if we came full circle to the realization that, in the global economy, Latin

American countries are to specialize in commodities subject to a low elasticity of demand on world markets and therefore are to be caught once again in a low-productivity trap. One of the main objectives of what we call transformacion productiva [change in production patterns] is to move in the direction of economic activities with a higher value added and a

higher growth potential (Rosenthal, 1997, p. 202). In other words, if indeed many Latin American countries are stuck in the production of tradables whose demand does not grow at least at the same pace as world income and if technical progress is inherently commodity-saving, then specializing in these goods is already and will increasingly be a losing proposition.

That, of course, is the idea behind the Presbisch Singer thesis. 4 Further, if Latin America is simply not as labor-intensive in its production patterns as Asia was when it pursued its export-oriented policies from the 1960s onward, then the benefits of openness will not accrue to labor to the same extent, as predicted by the Stolper Samuelson theorem, the equalization

of the prices of factors of production. To be sure, the role played by the external sector in economic development has been overemphasized worldwide, but perhaps nowhere as much as in Latin America. This disproportionate attention given to trade and financial flows has been particularly pronounced in recent years. But it is by no means novel. The Latin

American obsession with the external determinants of development has

WORLD DEVELOPMENT clouded good judgment throughout the 20th century. Consider what prominent economist Carlos Diaz Alejandro writes: It does appear possible to argue that the role of the foreign sector in Latin American development has [historically] been exaggerated and indeed mythologized ... Even in a small country the foreign sector will influence only indirectly many

key developmental variables, such as productivity in non-export agriculture, willingness to save and decisions to invest in human capital. Income distribution and political participation will be more influenced by these and other domestic variables than by whether effective rates of protection are 10% or 150% (Diaz Alejandro, 1996, p. 46). The idea to inculcate here is not that

trade protection is preferable no country in the last half-century has achieved higher long-term growth from a closed economy model. It is simply to point out that trade openness is being oversold by the international development community as a road to prosperity and that, as a consequence, precious political capital and time is being diverted from other, more pressing issues i.e., the

fostering of domestic savings/ investment, the enhancement of tax bases and revenues, or the increase in human capital investment. The issue areas that follow are by no means mysterious factors as contributors to economic prosperity. They are all too familiar, but an enhanced growth agenda that devotes political capital into purely domestic issues has yet to be nationalized that is, internalized

by Latin American policymaking elites. Although some of these domestic issues do indeed adorn the pages of World Development Reports and international development organization publications, they have not been internalized by a significant mass of the region s political class. 5 Until that happens, no significant change in policy priorities shall be forthcoming. Domestic political consensus at he highest levels of

policymaking is essential. As political scientist Rajni Kothari has put it: History has shown very clearly that one cannot constructively transform a society from the outside. All genuine transformations have been initiated from within the society, even though in many cases the genesis for such transformations lay in the cross-fertilization of ideas and experiences from different countries (Khotari,

1993, p. 152). This crossfertilization of experiences and ideas often acts with a significant lag. Many Latin American countries have been slow to respond to pressure to carry out fundamental reform based only on the evidence from neighboring countries. The international economic environment of recent years illustrates perfectly well the perils that accompany a

strategy that relies on enticing foreign investors while not working to enhance economies freedom of movement. After a decade in which, notwithstanding a couple of drought periods, capital inflows were generously coming into Latin America, convincing foreign investors to come in is becoming harder. Dornbush offers three reasons for it: First and most important, the notion that emerging

markets represent an asset class that deserves its own allocation has disappeared ... Next, the world money glut, in which just about anyone can get access to funds, has passed ... Lastly a weak center from the US to Europe and Japan limits Latin America s export opportunities and hence its easy growth scenarios ...All this puts the onus on Latin America to

generate messages that might entice investors back (Dornbush, 2001, p. 19). Needless to say, the region would be much better off if growth was self-generated and selfsustained to a greater degree that is, not nearly so dependent on economic growth elsewhere and on the sentiments and decisions of foreign investors. 3. THE CENTRALITY OF DOMESTIC SAVINGS: ENHANCING

ECONOMIC AUTONOMY A first victim of the single-minded drive to integrate economies with the outside world has been the crucial task of mobilizing domestic savings. Latin America has historically had a low rate of domestic savings. But, besides the low level, most troubling of all is its evolution: the level has remained stubbornly stagnant, suggesting that powerful structural

factors operate to keep savings low. The process by which a given economy that is saving a low percentage of its income increases savings dramatically over the long haul has been (and remains) one of the central tasks for economic development theory to explain. Savings (and accompanying investment possibilities) lie at the heart of economic growth. Economic theory posits that

savings can be enhanced by frugal consumption patterns, efficient financial intermediaries, positive real interest rates, and by an attractive investment climate in the domestic economy

GLOBALIZATION AS A DEVELOPMENT STRATEGY (Edwards, 1995). Empirical studies reveal that, as regards developing countries, high real interest rates do not have a long-term impact on savings. Out of the mentioned channels, the most feasible is that of restrained aggregate consumption. The East Asian experience strongly indicates that important increases in private savings stem from two factors:

macroeconomic stability and institutions that instill confidence in small savers (World Bank, 1993). These are obviously factors that are absent in Latin America and can only be expected to arise over a long time horizon. A noted expert on the region, Chilean economist Sebastian Edwards, points to four macroeconomic issues that will be pivotal for Latin America in

the near future: first, monitoring capital movements and avoiding over borrowing; second policies that foster domestic savings, particularly private kind; third, investment in infrastructure that is high enough to spur rapid growth; and fourth, the development of institutions that add transparency to macroeconomic policy and isolates it from political influences (Edwards, 1995, p. 306). All these policy areas have one

important thread that unites them, as Edwards points out: the need for fiscal discipline. Significant progress has been made in this area. The main thrust of fiscal adjustment took place in the first half of the 1990s. Although the budgetary deficit is an imperfect measure to gauge fiscal discipline, it is useful to note that the average public deficit has

come down from about 6.5% in 1980 90 to about 1.2% in 1991 96 (Burki & Perry, 1997). But the regional context of slow growth since 1998 has had a as correlate a resurgence of fiscal deficits in many countries. Although further fiscal tightening is unwarranted in this stage of the business cycle, fiscal consolidation (cyclically adjusted) must not be abandoned over

the medium and long haul. Governments must maintain a stable macro environment for economic agents, and that is why fiscal slippage should not be allowed to sneak in when the business cycle turns positive. Further, governments should instinctively contribute to total savings insofar as conditions allow them. Yet, generating public savings cannot be done at any cost. In Latin America

fiscal adjustment has all too often taken the form of sizable cuts in infrastructure investment, maintenance expenditure, public spending in education and health, and other social services. Needless to say, such cutbacks in physical and human capital undermine long-term growth. Empirically speaking, just how important is to increase savings and investment throughout the region? The World Bank estimates

that a continuous economic expansion on the order of 6% a year for any given Latin American country will require a minimum investment rate hovering around 25% of GDP. Domestic savings rates currently stand at 15 20% of gross product in the typical Latin American economy, comparing very unfavorable to the 30% and higher observed in Asian economies. Currently, only Chile

posts an investment rate above 20% in the region. This deficient state of affairs renders the region highly vulnerable. The reason being that to rely on foreign investment for more than 2% or 3% of GDP is to expose the economy to much greater dependence on external circumstance than is necessary (Emmerij, 1997). In short, there is little alternative but

to upgrade efforts to reduce the post-war period dependence on foreign investment. Quite simply, a savings mix that relies heavily on the domestic sort will make for a less volatile economy (due to the volatility of capital markets) and one less prone to crises undermining stability and sustainable economic growth. Some reckon that to boost savings Latin America must

adopt yet more stringent fiscal discipline preferably even generating budget surpluses over the long run. This is mistaken. The significant progress in fiscal belt-tightening achieved in the past decade has had important positive consequences for Latin economies notably, winning the battle against inflation. Persistently high inflation was clearly undermining savings and investment in many countries. But with inflation rates brought down

to reasonably low levels, there is little further benefit to be gained from this effect (Stiglitz, 1998). Unlike some analysts predicted (or hoped for), significantly higher fiscal discipline has not brought about a meaningful increase in the level of aggregate savings and investment. Further fiscal austerity is not the easy solution to inadequate savings in the long term.

To attempt to boost domestic savings over the long run, more and more economists are proposing two types of policy reform: first, financial sector reforms with the ability to attract savings from a broad base of the population; second, policies that foster private sector investment in particular, export promotion, technological development, competitiveness policies, and assistance to Small and Medium Enterprises

(Ramos, 2000; Rosenthal, 1997; Stiglitz, 1998). In addition to providing macroeconomic

WORLD DEVELOPMENT stability, East Asian economies boosted savings rates via a variety of institutional measures. They attached great importance to promoting savers confidence in financial institutions, notably strengthening bank systems via more effective prudential regulation and other measures. Although progress has been made in the 1990s, more remains to be done in Latin America in this regard.

An important policy proposal to boost savings is the advent of government-run postal savings to attract smaller savers, offering low-income households greater security and lower transaction costs than private banks as was successfully done in many East Asian Countries (Birdsall & Jaspersen, 1997). Specific measures aside, economic history indicates that savings rates increase only gradually over a long period. Chile s long

period of rising savings rates since the early 1980s indicates that there are no fast, immediate magic bullets; but more happily, it also tells us that a stable macro environment along with decisive and steady reform on all areas of economic and institutional life spurring high, sustained growth can work wonders for savings. In the final analysis, the basic fact remains that

unless growth is boosted (upward from a mediocre level of around 3% in 1990s) Latin American aggregate savings will not rise to required levels. Both private and government savings are affected by real growth. Gavin, Hausmann, and Talvi (1997) have even maintained that a fresh look at the stylized facts on saving reveals that growth precedes saving, rather than the

reverse, and that policies should therefore aim to aggressively boost general growth and savings will follow. The empirical evidence in favor of this assertion, however, remains controversial. Latin American countries must, of course, adopt progrowth policies more aggressively, but it is hard to think that promoting saving will harm capital formation and growth as long as countries provide a context of favorable

investment opportunities. Savings should be more strongly emphasized as an intermediate policy target. But such intermediate policies will do little if Latin America does not generally move toward more robust and predictable economies and sturdier institutional settings. The importance of foreign capital flows to the region during the 1990s is unmistakable. It is readily observed by simply looking

at a graph showing concurrently net capital inflows and GDP growth rates. As one goes, so does the other. The lack of availability of foreign capital immediately following the Mexican (1995) and Asian (1997) financial crises has seriously restricted growth at those times. Whereas Latin America will have negligible say in what a new international financial architecture will

look like, if it ever takes shape, it does have leeway in taking measures to reduce its vulnerability to outside shocks and also to partially counter their damaging effect when they occur, as they inevitably will. (What is more worrying, the origin of these shocks is often obscure, with weak links to economic fundamentals.) This is all the more so

because the prospect of more stable environment in international capital markets in the future is unlikely; rather, the opposite is true. Given present trends, argues CEPAL s Ricardo Ffrench-Davis, international markets may become even more volatile (Emmerij, 1997, p. 474). Argentine economist Aldo Ferrer throws light on the coming dangers inherent in the wobbling situation in which the region finds itself.

If current trends continue, ...stability will become increasingly dependent on the expectations of financial markets. The external debt and the dependency of public finances on short-term capital will tend to subordinate economic policy to market decisions: the success or failure of economic policy will come to be measured by a policy s influence on access to financial markets rather

than by its impact on production, exports, or jobs (Ferrer, 1997, p. 184). Indeed, some voices have decried that the virtual economy has substituted the real economy. This is only somewhat of an exaggeration; it certainly captures an important kernel of truth. It is therefore urgent that Latin American economies find ways to steadily diminish their extravagant dependence

on foreign savings and here is yet another reason why the mobilization of domestic savings is crucial. In short, they are not only crucial for growth, but also to reduce economic volatility and gain more leverage over one s own economic fortunes. Some may well put forth a general objection: the very process of globalization means that national policies

are forced to dovetail with market expectations. In other words, there is virtually no scope for discretion in fiscal, monetary, taxation, and other policy areas. The straightjacket imposed by global markets means that every policy decision (especially those on the macroeconomic front) is scrutinized carefully by international capital markets that is, markets vote for policies on a

GLOBALIZATION AS A DEVELOPMENT STRATEGY daily basis. Those policy moves that are not to the liking of investors will be penalized, and sometimes severely. While this picture of reality has gained credence in recent years, asserting that there is reduced scope for action is not the same as saying that there is no scope. The bottom line

is that there exist ways in which Latin American governments can slowly but steadily enhance their room of maneuver if they make a conscious decision to do so. Given recent (and not so recent) historical economic experience this pivotal objective (i.e., the steady enhancement of economic autonomy) should command agreement across the political spectrum and become a politica de estado

in all Latin countries particularly in smaller, more vulnerable ones. 4. THE BENEFITS OF COUNTERCYCLICAL POLICY: REDUCING VOLATILITY A longstanding problem in the region is that posed by pro-cyclical fiscal behavior i.e., the conduct of expansionary fiscal policy during economic booms and restrictive fiscal policy during recessions. Such fiscal conduct only exacerbates a region already highly vulnerable to external shocks

and attendant interruptions in economic growth. Gavin and Hausmann (1998) find that Latin American macroeconomic volatility (yearly swings in GDP growth rates) is three times as high as that observed in OECD countries and more volatile than any region other than Africa and the Middle East. Half of that volatility springs from capital market instability, as Latin America s access to

international financial markets is sporadic and often disappears when it would be most valuable. But a sizable addition to that volatility (about 30%) comes from the fact that fiscal and monetary policies in Latin America aggravate, rather than smooth, economic cycles (De Ferranti & Perry, 2000). In particular, Gavin and Perotti (1997) show that this pro-cyclicality comes from highly pro-cyclical

government expenditure patterns. It is on the basis of this knowledge that both politicians and policymakers should act upon and take decisive steps to reverse intertemporal fiscal behavior. In Latin America, the tug-of-war between congress and the executive branch historically tends to magnify the effects of recessions by increasing taxes and reducing spending at those times, while also

magnifying the effects of boom periods with larger-than-normal spending and lower taxation levels. On their part, finance ministers, as far as their powers have allowed them, have strived to substitute the classical role of fiscal policy that is, to maintain a high level of aggregate demand when private investment or private consumption declines by a restrictive fiscal policy oriented toward

gaining credibility vis-a aa-vis the markets in hopes of reactivating private spending. They are often forced to adopt pro-cyclical policies to adjust to economic contractions because Latin countries abruptly loose access to international credit markets at those times. Such drastic loss of access during hard times is partly due to the fickle and herd-type behavior of international investors and partly

due to irresponsible domestic economic management (i.e., overspending and overborrowing) during periods of favorable external economic environments, especially times of widespread foreign capital availability. That is why the timely application standard Keynesian fiscal policy to smooth the effects of what have traditionally been rough and accentuated business cycles would serve Latin America well. (As regards monetary policy, it has become

much more circumscribed by the markets and so there is less scope of maneuver in this area.) One of the main recommendations of the 1995 Inter-American Bank Development Report Overcoming Volatility was that Latin American governments must live within their means during times of easy money in order to survive rainy days (IADB, 1995). After almost a decade since such

a public warning was issued, there is little sign of improvement on this score. There is no doubt that globalization has brought about a depolitization of economic policy that is, economic policymaking is less of a political instrument than used to be the case, and politicians have less discretion over fiscal and monetary policy management. Many economists welcome this

trend. It is they that push for fiscal policy to be further away from the hands of politicians in order for economies to gain more credibility vis-a aa-vis the markets, attain temporal consistency, and thereby foster long-term investment. 6 Following this line of reasoning, Chief Economist of the IADB Ricardo Hausmann publicly proposed in the mid-1990s the establishment of independent

national fiscal councils throughout Latin America to set budget targets that would help overcome excessive volatility. This institution would set countercyclical budget targets that

WORLD DEVELOPMENT would build budget surpluses during boom periods that could later be tapped to maintain investor confidence and market credibility during recessions (Eichengreen, Hausmann, & Von Hagen, 1999). For governments that have truly made a disaster out of macroeconomic policy discretion, this may be a sensible shortterm option, for they may desperately need to buttress their

credibility. But in general, serious objections can be raised against the fiscal council proposal on democratic grounds: with monetary policy already out of the hands of elected governments, if fiscal policy were to follow the same route, then elected officials would have virtually no degrees of freedom in managing economic policy, severely undermining democratic accountability. This inescapable reality makes fiscal

council-type proposals politically unviable. What is more sensible is to strive toward building a social consensus as a framework for sound fiscal policy, which necessarily involves reworking and rebuilding the entire fiscal pact between state and society. Discretion over fiscal affairs can be very valuable if spending and taxation tools are used responsibly by the political class, in line with

domestic and external economic conditions. At the end of the day, there is no substitute for the arduous task of building a political culture that fosters fiscal responsibility ala Chile. Chile is the only Latin American country that has truly managed to conduct a countercyclical fiscal policy during the past decade. The administration of Ricardo Lagos, all too aware of

the benefits hitherto derived from the use of countercyclical policy, took pains to consolidate the countercyclicality implemented in previous Concertacion governments by introducing a policy of structural fiscal surplus of 1% over the course of its administration. 7 5. MOBILIZATION OF PUBLIC RESOURCES: THE PERENNIAL TAXATION QUANDARY A second underemphasized area in the road to development is the

mobilization of public revenue resources. Are states that command a mere 10 15% of their national incomes viable economically? Can they build the basis of a risk-reducing welfare state? Do they have the resources to deliver income redistribution? The answer is, probably not. Perhaps no other economic reform issue is as eminently political as tax reform. That characteristically Latin

American saying, inflation is more politically acceptable than taxation, speaks volumes. Changing taxation systems is a daunting task for policymakers to undertake, for politically powerful constituencies defend ferociously the socially unjust status quo. During the 1980s it was recognized that the traditional obsession with progressivity in the design of tax codes had the perverse effect of resulting in significantly reduced

receipts for the typical Latin American state. This led to a new orthodoxy pushed by the International Monetary Fund (IMF), World Bank and the Inter-American Development Bank which urges countries to simplify convoluted tax norms, reduce marginal tax rates, expand the tax base, and rely on more easily collectable forms of taxation chiefly the Value Added Tax (VAT). The underlying idea was

that the reduction in receipts brought about by reduced marginal rates and diminished trade taxes would be made up (or exceeded) by the expansion of the tax base and better administration and enforcement of tax collection. In general, there has been a marked shift from taxing income to taxing consumption. The tax system been eschewed as a means of correcting

inequality. The reasons are well known. One has been the recognition that serious deficiencies in tax administration render redistribution via taxation a chimera; second, there was in the late 1980s a downgrading of the equity relative to efficiency objective. Although some improvement in revenue intakes has taken place during the 1990s, there is a long road to travel.

Two important issues need to be borne in mind: the new tax structures are unnecessarily downplaying the importance of distributive criteria, and second, not nearly enough has been done to enhance the administrative capacity of states. Given the known practical limitations of redistributing income via spending, the other half of fiscal policy cannot be simply laid aside as an instrument

in the war against inequality in the most unequal region in the globe. The importance of undertaking far-reaching administrative reform cannot be emphasized enough. As Richard Bird and Guillermo Perry, two distinguished fiscal experts, have written: the secret in raising and sustaining fiscal revenues often lies not in the adoption of fancy new policies, but in the

more mundane task of establishing a more credible and effective tax administration (Bird & Perry, 1994, p. 176).

GLOBALIZATION AS A DEVELOPMENT STRATEGY Indeed, fiscal reforms matter little if taxes cannot de facto be collected. The larger goal must not however be forgotten: if Latin Americans want their governments to have a role that is somewhat more akin to that in developed countries, current levels of tax revenues (as a percentage of GDP)

will not do. Recent developments suggest that some countries have taken note. Mexico is a notable example. Conscious of the limitations posed by a public budget that stands at a paltry 12% of GDP, Vicente Fox s government devised the most radical and ambitious fiscal reform in the country s history, intending to increase fiscal revenue to $14 billion (about 15% of

GDP) by the year 2006 (El Pais, 2001). A combination of governmental ineptitude and the PRI s obstructionist strategy in Congress, however, led to the proposal s failure. In a country of 100 million inhabitants, and a workforce of 40 million, only 10 million regularly pay taxes. This situation mirrors that of other neighbors. Yet, in spite of all their buildup and

notoriety, tax reforms currently underway in many countries do not go nearly far enough. As tax expert Richard Bird has noted, as concerns the developing world, reforms that appear on paper to restructure substantially the tax system may have little effect on revenues (Bird & Perry, 1994, p. 4). Latin American experience in this area is vivid proof of this

statement. That is why bolder and more ambitious proposals are needed on this front. One such proposal was put forth by John Williamson as part of his famous (or infamous) Washington consensus: subjecting interest income on assets held abroad (flight capital) to taxation. This would require a shift in tax principles in many countries and the negotiation of bilateral agreements

for sharing tax information with the major destination countries (principally, the United States). Latin American governments need to begin taking this and similar initiatives much more seriously if they are to make more progress on fiscal matters. In attempts to raise revenues, there are two potentially taxable areas that have not been seriously considered yet (Shome, 1995). They are agriculture

and property. These taxes, along with an increased emphasis on personal income tax would help countries adopt more progressive tax structures and help reclaim fiscal policy as a means of redistribution. Expanding the tax base and increasing government revenues is a challenging and long term task, but it is not intractable. But, until the true magnitude

of the problem is more aggressively voiced within the region and by Washington institutions, it can be expected that little will be done. It is, much like the low domestic savings, a structural tax on growth and on better distributional outcomes. Perhaps the relevant but often unstated question remains: when will the region s upper class deem it worthwhile to pay

taxes in their own countries? The short answer is that it shall happen if and when a stable and prosperous macroeconomic environment is attained. There is certainly something of vicious circle in this; no shortcuts are likely. Some may raise a reasonable objection at this point: isn t one of the fiscal consequences of globalization itself a decline in

public resources? In trying to increase the tax effort, are not governments swimming against the tide? Many argue that world economic integration entails both declining resources for public budgets and increased demands on those same public finances the double jeopardy of the socalled fiscal squeeze. The liberalization policies that underpin globalization, the story goes, lead to a declining public resources via

trade liberalization (resulting in loss of revenue from tariffs), financial liberalization (loss of revenue from financial repression) and investment liberalization (posing challenges to tax collection). The increased demands for public spending are said to arise out of the increased income uncertainty that global integration brings (Grunberg, 1998). In the final analysis, to conclude that globalization leads to declining public resources,

the immediate effects of liberalization would have to be compared to the indirect, longer-term contributions to economic growth (and thus enhanced public resources). This is extremely difficult to assess empirically. Therefore, the hypothesis of the fiscal squeeze remains only speculative, formulated on the basis of ad hoc evidence. 6. DEFICIENT EDUCATIONAL LEVELS AND INCOME INEQUALITY AS IMPEDIMENTS TO

GROWTH Improving the quality of macroeconomic management and the implementation of structural policies can only take Latin America so far. A serious constraint on the region s growth rate is the meager education level of the workforce, whose current level of schooling stands at around 5.3 years on average.

WORLD DEVELOPMENT According to world schooling patterns and its level of development, the region s workforce has two years less of schooling than it should, or stated otherwise, around 40% less schooling than other similarly developed areas of the globe (Londono, 1996). Education works to spur economic growth in two ways: first, by raising the rate of accumulation

of human capital, and second, by increasing the rate of productivity growth via enhancing labor productivity and the generation of externalities favorable to overall productivity. Of course, the effects of a more educated populace reach every conceivable aspect of a society. It has been said that if the new global economy had a magic bullet for growth, competitiveness and an improved

social and political environment, it would be education. The economic theory underlying the importance of education is well known. But empirically speaking, just how much can education contribute to GDP growth? Economists at the Inter-American Development Bank (IDB) have calculated that if governments education effort increased schooling by one year above current trends, potential growth could be raised

one percentage point a year, or about half the estimated effect of all structural reforms to date! (IADB, 1997). Lora and Barrera (1997) estimate that a 2% increase in annual growth rates would be attained if that enhanced educational effort interacted with deepened first-generation reforms. These calculations are sobering and should give much pause for thought. 8 The

costs of inaction are also readily quantifiable. The IDB estimates that if current Latin American education policies continue into the future, the gap with the rest of the world, now at two years, will be over three years during this decade. The Bank concludes that, under such conditions, the overall indicators of inequality will not change significantly. But path dependency

is not destiny. Notwithstanding all the talk about the structural noneconomic conditions that allegedly condemn the region to permanent inequality, the possibilities for policy to effect improvements on this score are staggering: [If] the governments of the region were to reorganize education systems with a view to closing the educational gap with the rest of the world by

the year 2020 ...The average education of the Latin American workforce would then reach nine years of schooling ... This means that, combined with macro and structural policies, the reduction of the coefficients of inequality would be around 8 or 10 points [in the Gini scale], and the extra inequality that Latin America displays vis-a aa-vis world patterns

would therefore be eliminated (IADB, 1997, p. 76). To be sure, raising the overall quantity of education means little if quality improvements do not go hand in hand. By all accounts, the quality of education in Latin America is low. This common observation is confirmed by empirical evidence from national tests and international comparisons of student learning (UNESCO,

1995). Most troubling of all is that, according to many experts, the quality of education has declined (Corbo, 2000). Team after team of experts on the issue insists that the quality of education in the continent cannot be improved without raising the (currently inadequate) number of hours of instruction. To be sure, there are many other dimensions to the problem.

The issue of improving quality is multifaceted and somewhat complex, but by no means obscure or mysterious (Cohen, 1999). As in many areas, Chile became a vanguard in educational reform. In 1996, Chile announced a major initiative to address the country s educational deficiencies with the aim to increase productivity, reduce inequality, and augment instruction time by one-third, among others. The

reform affected no less than 9,000 public schools and came at a cost of about 3% of government expenditures (Edwards, 1997). Chile has already made important strides in educational coverage, its focus now is on raising quality. But even in Chile, there remain enormous unresolved problems in the education agenda to tackle; furthermore, the reformist effort has stagnated since the

mid-1990s and does not look so promising nowadays. Experience shows that the social forces arrayed against policy and administrative reform in the educational sector are politically formidable. To overcome it will take nothing short of decisive, concerted, and sustained efforts on the part of the political class across the sub-continent. What accounts for Latin America s unenviable educational record,

especially when compared to that of other developing regions? Unlike it is sometimes contended, it has little to do with low public expenditures. Expenditure on education stands at 3.7% of GDP, similar to other developing regions. The efficiency of that expenditure, however, is appalling. There are two other important culprits for the educational deficit: the institutional organization of

GLOBALIZATION AS A DEVELOPMENT STRATEGY the public education sector (insulation from accountability on the part of teachers, administrators and managers, lack of autonomy for education providers, unempowered consumers, etc.) and the unequal incidence of public spending (i.e., its regressive nature) (IADB, 1997, pp. 129 132). Some timid reforms to address a few of these deficiencies have been launched

in the 1990s. But the region s educational landscape remains depressingly familiar: Misallocation of resources, inefficiencies, and lack of accountability are still predominant attributes of the organizational structure of education in Latin America. Parents are still not demanding better performance from public schools, schools lack capacity and resources to respond to new institutional environments, and clientelistic practices continue to

dominate the decision making in several countries (Burki & Perry, 1998, p. 97). Behind the impasse often stands a powerful actor: national teachers unions. Almost no serious reform can take place until unions acquiescence is gained a formidable task. It is for this reason that education experts often point out that rather than increase social spending, what governments really

need to do is to spend more political capital to overcome unions. Latin America continues to exhibit a poorly distributed and low-quality human capital. While providing quality and extensive education to all socioeconomic groups of society is a matter of social justice, the issue of education distribution is also one of crucial economic implications. As Birdsall and Londono

(1998, p. 115) have shown, the low rate of overall accumulation (an average of healthy increases in years of school completed for a small number, and very limited increases for the great majority) is due in part to its unequal nature. While modest gains have been made in increasing average education levels, they have not been accompanied by

a better distribution of education. This comes with an expensive price tag. Econometric studies show that the degree of unevenness in the distribution of education has a strong and robust negative effect on growth. Latin America s poor educational distribution is not attributable to the lack of initial access to schools, but to high and more rapid dropout rates among the

poor. 9 The result is that school systems are highly stratified and are not, as is true in other parts of the world, a mechanism of social mobility. Rather, they act to perpetuate current socioeconomic structures. The numbers speak volumes as to the importance of human capital in explaining income distribution. Latin America displays a Gini coefficient that is 15

points above the average for the rest of the world. Londono and Szekely (1997) show that differences in human capital account for 10 points in that gap (five due to the lower level of accumulation and the other five to the inequality of human capital). 10 The fiscal policy implication of all the evidence to date is thus

rather straightforward: additional financial resources for public primary and secondary schools from outside the education sector must be found. One is hard-pressed to find another issue area where relatively modest changes in the distribution of public expenditure could have such a far-reaching impact on economic and social outcomes. Reordering priorities in national public budgets is therefore imperative. Chile has provided

a powerful example to neighboring countries by raising its expenditure on education from 4.5% to 7% of GDP during 1994 2000 amounting to $2.2 billion a year, or about one-seventh of the total adjusted national budget (Solimano, Aninat, & Birdsall, 2000, p. 124). Brazil s Ignacio Lula Da Silva, Peru s Alejandro Toledo and Ecuador s Lucio Gutierrez are some among a new batch of

Latin American presidents purportedly passionate about the issue of education. Time will tell whether they actually spend the necessary political capital on the issue that it urgently deserves. Yet education, health, poverty, and inequality are not merely a function of governments social service budgets. Reordering spending allocations is of little or no use in the absence of effective

institutions. Institutions in Latin America more often than not yield obscenely low returns to society. The diagnosis of institutional failure is easy to make. Malfunctions include: chronic congestion; poor or inadequate inputs; concentration of funding on personnel costs; politization; corruption; volatility in political priorities; goal multiplicities; monopoly/ monopsony control over institutions, etc. (Graham & Naim, 1998). Unfortunately, the prescription to

address such ills is anything but straightforward. On the political front, there are entrenched vested interests with a stake in maintaining current institutional structures, and unfortunately, there are serious questions as to how much political capital governments are ready to devote to the issue. The last impediment to growth considered here is intimately tied to education: colossal

WORLD DEVELOPMENT inequality in income distribution. In the subcontinent, the top 10% of income earners account for about 40% of national income, while the poorest 30% account for less than 8% of total income. As ex-President Fernando H. Cardoso is fond of saying about Brazil, Latin America is not so much poor as it is unjust that

is, unequal in the sharing of income and wealth (IADB, 1998). It is sobering to realize that if Latin America had an income distribution such as the average observed in countries at the same level of development poverty levels in the region would be half of what they are. Moreover, the nefarious consequences of income inequality for building robust, highquality

democracies in the hemisphere are unmistakable. The worsening regional performance on inequality has sparked increased academic interest in the analysis of the phenomenon in recent years. But policy has yet to accord it the relevance that it deserves. In addition to the already acknowledged benefits associated with relative income equality (social cohesiveness, higher quality of democratic governance) we now know

from recent economic research that, ceteris paribus, the more egalitarian a society, the better its growth record and growth potential. 11 We also know that the 1990s and its attendant liberalization policies have not stopped the trend toward a more skewed distribution of income in the region except for a couple of countries. In light of these findings, no serious

policymaker can ever again resort to grow first, distribute later arguments. First, high growth by itself often does not deliver lower Gini coefficients; second, we now know that there need not be tradeoffs between growth-promoting and inequalityreducing policies that is, between efficiency and equity (Birdsall & Londono, 1998). Intelligent policies can simultaneously promote both aims. Indeed, tradeoffs are not inevitable

in the development process; many are the outcome of poor policy decisions and inappropriate institutional arrangements (Birdsall & Londono, 1998, p. 140). Therefore, there is no good reason to wait for the Promised Land of Asian-type GNP growth rates to make headway on inequality. Recent economic history demonstrates that, contrary to common wisdom, significant progress in educational standards can be

had in the absence of brisk economic growth. 12 To tackle income inequality is to tackle one structural impediment to an increased trend rate of growth. But this goal will not be reached unless serious political initiatives to reorganize public spending priorities and to work on institutional reform are taken. After the relative success of first-generation

reforms, the dilemma of inequality is only recently receiving renewed attention, but it has been neglected for a good part of the last two decades. Political economist Robert Wade has drawn attention to the fact that neither the World Bank nor the IMF has devoted significant resources to studying the phenomenon of growing income disparities. Further, the reduction of inequality

per se has never been an explicit objective of these institutions (Wade, 2001). The unstated premise underlying this egregious neglect of inequality is that a focus on poverty is sufficient. This is myopic, for there is a crucial link, as economist Nancy Birdsall has noted, that must be more widely acknowledged and publicized: inequality as such contributes to low growth,

which in turn perpetuates poverty. Various ways have been posited in which low levels of inequality can stimulate growth: by inducing large increases in the savings and investments of the poor; by raising rural incomes which limits intersectoral income gaps and the rent-seeking associated with such gaps; by contributing to political and macroeconomic stability (through various channels); by reducing the

need for institutions, regulatory and otherwise, that are intended to benefit the poor but have the effect of reducing output and employment, and others. 13 If the rich shareholders that exert control over these international institutions do not yet deem it necessary to focus on income disparities, Latin American governments should lead by example. The societal payoff to

public investment in human capital will be particularly handsome in the coming years, for the region approaches a demographic window of opportunity: the combined rates of dependence that the working age population will have to support will fall for approximately two decades before rising steadily until after the middle of the next decade. Thus, if policies exploit the

opportunity, more work, greater savings and more education can be generated, and therefore the mechanisms that perpetuate current inequality can be attenuated (IADB, 1998, p. 116). At the dawn of the 1990s, the neoliberal reforms sweeping the region promised to tackle poverty via the trickle down effects of robust economic growth. A decade later, robust

GLOBALIZATION AS A DEVELOPMENT STRATEGY growth has proven elusive. Some will always contend that first-generation reforms have not gone far enough, and that if they had more growth would have been forthcoming. Although true, this is virtually a tautology and does not in itself provide reassurance that these reforms would have been enough to attain growth on

the order required to make a dent on poverty and inequality. 14 There is, in fact, a much more important (nonexclusive) factor: much of the answer rests on the little progress made regarding second-generation reforms. Whatever gains were made in the earlier half of the decade, the foundations of that growth proved to rest on shaky grounds, for reasons already

alluded to. But, as some analysts have pointed out, what is perhaps most remarkable is not the failure of the neoliberal economic prescription to work growth miracles, but rather why growth of 3.2% per annum, modest but not abysmal, has had almost no discernible impact on poverty reduction. To adopt the World Bank s recent language, Latin America s economic growth in

the 1990s has been growth of low quality. 7. EMPLOYMENT: THE LINK BETWEEN GROWTH, COMPARATIVE ADVANTAGE, AND INEQUALITY Vigorous employment creation is a crucial challenge for Latin American countries to address for it is a fundamental linkage between growth, comparative advantage and income distribution. Official statistics on unemployment in many countries is at unacceptably high levels and underemployment

is rampant. Recent studies (De Ferranti, Lederman, Perry, & Maloney, 2001; Gill, Montenegro, & Domeland, 2002; Weller, 2001) show that Latin American labor markets performed below expectations during the 1990s both in terms of formal employment creation and poverty reduction. In addition, most countries experienced substantial increases in job informality over the 1990s, as the quality of jobs actually created

worsened. 15 (Considering long-term trends, however, unemployment levels in the 1990s were no higher than those of the 1980s or 1970s.) The main reasons for such disappointing performance, defying early expectations, are rather clear. First and foremost, economic growth was slow and unstable. Second, most labor-intensive sectors were the least dynamic, in terms of investment and growth. Third,

in many countries the labor participation rate increased, making the battle against unemployment more difficult. Finally, the hypothesis that the comparative advantage of Latin America rested on unskilled labor proved mistaken overall, even if this may have been true for parts of the region (Stallings & Weller, 2001). In an ever-changing global economy, education must prepare workers to

adapt to different jobs involving many different tasks. The rapid pace of change means that education must be an enterprise that evolves in tandem with changing labor market needs. In the global economy, it is not only nation-states tax systems and infrastructure that compete to attract scarce investment, but also their human capital (labor force productivity). 16 In this regard,

the gigantic divide between what is actually taught in Latin American classrooms (from primary to tertiary levels) and the needs of globalized, ever-changing labor markets is not always fully grasped (and seldom truly prioritized) by presidents or even education ministers. The active promotion of employment was simply not given prominence as an instrument of development in the 1990s.

The Washington Consensus deemed that growth stemming from macro balances and the more prominent role of the market would inevitably translate into job creation. But even the brisk regional growth of the first half of the 1990s did not translate into significant employment creation, discrediting the simplistic trickle-down arguments of many economists. Consequently, it is now more widely recognized that


active production and labor market policies are needed. The current Director General of the International Labor Organization (ILO), Chilean Juan Somavia, has denounced standard, trickle down globalization development recipes as patently imprudent and foolish for employment promotion. In his opinion, the recipe Latin America has been handed is to balance her accounts, achieve low inflation, and pursue trade

opening. There is nothing wrong with this picture, particularly in a region with a history of hyperinflation. But if that is all that is done, we inevitably end up with high unemployment ... If Latin America is told that its main objective should be the pursuit of overall macroeconomic balance (conceived as financial and monetary equilibriums) and not the need

to invest in order to create enterprises and jobs, and that employment is a result of those policies, rather than an explicit objective, then the disappointing result will be the one we have nowadays (El Pais, 2002).

WORLD DEVELOPMENT The director of the ILO has publicly called for nothing less than a global political commitment to create more decent jobs in the region. Yet this lack of focus upon employment and production-driven policies cannot only be laid at the door of the IMF. As Somavia acknowledges, current employment troubles were not invented by the

IMF or Washington Consensus-type advice. The high level of political conflict permeating the internal politics of many individual countries, the lack of sufficient prioritization of employment promotion, the penetration of the state by corporatist interests, and the absence of policy coordination among countries in the region contrives against the creation of new and better jobs. The disturbing size of the

informal economy where one out of every two Latin American workers ekes out a living is the result of policies that do not take production explicitly into account, least of all in medium and small enterprises. The task of job creation has been rightly delegated (in theory, at least) to the private sector, but governments can and must offer incentives to

promote a model of growth that is more labor-intensive (i.e., raising the employment elasticity of growth). If job creation does not become something close to a politica de estado within Latin American countries, it is doubtful that poverty and inequality can be successfully tackled. One of the most constant recommendations from international financial institutions has been the liberalization

(i.e., flexibilization) of rigid Latin American labor markets. A flexible labor market allows economies to adjust more efficiently to changes in aggregate demand resulting from positive or negative shocks, and allows a more broadly based economic growth in that the increase in income is more equitably shared between capital and labor. Though a few countries have made significant strides in

liberalizing their distortive labor markets, in general progress in this area has been rather modest, not least because the political economy of reform in this area is particularly thorny (Gill et al., 2002). Yet, there is increasing recognition that liberalization has been wrongly conceptualized as something close to a panacea to cure employment problems. Although much more needs to be

done to enhance the efficiency of labor markets, it is not clear that ever-more aggressive deregulation is the simple answer. In the view of ECLA s Stallings and Weller (2001, p. 101), labor markets are already more flexible than is generally thought and there exist uncertain consequences from introducing radical [liberalizing] reforms in this area, both with respect to

new net job creation and with respect to the quality of existing ones. There is a considerable amount of debate and much to learn as to the effects of particular deregulation measures. Modesty must guide policy advice in this area. Whatever labor policies are adopted, what is clear is that employment creation primarily stems from the

whole performance of an economy. The maintenance of basic macro equilibriums is a sine qua non (though not sufficient) condition for the creation of jobs. In the words of labor economist Rene Cortazar, preserving these equilibriums is probably the most effective labor policy. If other economic policies work at cross purposes with job creation, then pro-employment legislation is likely to

be entirely futile. That is why employment should be an objective of all economic and social policies, rather than a goal sought only by a cluster of very specific governmental labor policies (Cortazar, 2002, p. 111). In addition there is agreement about the fact that there is much to be done in order to integrate and weave employment concerns into

the fabric of the overall economic agenda. 8. CONCLUSION No one today advocates a return to the lapsed policies of the past, which are clearly incongruous with the way the international economy functions today. What it is reckoned here is that the swinging of the pendulum toward globalization-minded policies is diverting attention from domestic policies that continue to

be essential for growth and development broadly defined. That is, it is diverting attention from getting things right at home. The obvious is all too often overlooked: virtuous domestic policies will encourage foreign investment in all of its forms. Many of the basics tasks of economic development have been partially laid aside and have been underplayed in the rush to

turn economies globalizationfriendly. The opportunity costs of not having devoted due attention to these issues throughout the 1990s are surely great already and for those countries still neglecting domestic variables, the longer the delay the greater the costs. The imperative of shifting much of the agenda

GLOBALIZATION AS A DEVELOPMENT STRATEGY to domestic strategies of development cannot be overstated. Many long-standing observers of the region consider the low level of domestic savings to be one of the most serious obstacles to the macroeconomic situation in Latin America. Indeed, a good number would predictably rank it as the most important structural macroeconomic

deficiency. Many other ills stem from it, in what is an unmistakable chain-link of causation: dependence on foreign savings renders policy subservient to the requirements of outside investors, which leads to pro-cyclical economic policies, sky-high macroeconomic volatility, and closing the vicious circle, reduced private domestic savings and long-term investments. The Mexican 1995 debacle showed that Latin American countries are still

tempted by capital surges in international markets, accepting large inflows, significant exchange rate appreciations, and growing deficits in current account. A large pool of local savings would obviate the need for massive quantities of foreign ones. Yet, policy measures to begin to mobilize aggregate homegrown savings have been conspicuously absent. A second domestic issue area that deserves much more attention

from governments is tax reform. Tax levels remain woefully low throughout the region. Without more resources at their disposal, the Latin American state will continue to be maimed in its ability to undertake crucial public investments, construct the foundations of a welfare state or effect income redistribution (via public spending). A third issue emphasized in this essay has been the

currently deficient intertemporal conduct of fiscal policy. It is imperative to reduce the deleterious effects of economic volatility. Building political consensus to put into operation credible countercyclical fiscal policy can do much in this regard. Fourth, this article has also emphasized the well-known need to increase schooling levels and improve the quality of education. Governments pay lip service to these

goals, but they are often slighted in practice. The average educational attainment of region s labor force remains well behind other areas around the world with equivalent levels of economic development. Current expenditures need to be redistributed toward primary and secondary levels, where the societal payoff is largest. Most troubling, the quality of education remains patently deficient. A related issue is

that of income inequality. Latin American policymakers can simply not afford to look to inequality as an afterthought, as they have done throughout the 1980s and 1990s helped by the presumed intellectual respectability lent by (simplistic) trickle down ideas advanced by many neoliberal economists. Policymakers concerned with inequality should be heartened by recent academic output showing that growth

and equity do not work at cross purposes. In turn, the persistence of high income inequality, a drag on growth and poverty reduction, cannot be meaningfully disassociated from the limited and unequal access to human capital; they are inextricably linked. Therefore, efforts to foster education accumulation, and particularly education equality, will pay off handsomely. A final area were much more

political capital needs to be devoted is that of employment. Lying at the intersection of growth, poverty and inequality, employment needs to be actively promoted, for recent experience shows that growth is a necessary but not sufficient condition to create more and higher quality jobs. Governments can take measures to change the institutional environment in which the private sector employs

workers, thus introducing a more labor-intensive pattern of growth than is currently the case. In a context of scarce political capital and administrative capabilities, as in Latin America, few things are as paramount as establishing the right policy priorities. What is increasingly being said by some reputed independent scholars, unconstrained by the politically rarefied climate of the international

financial institutions, is that the fancied benefits of economic openness per se are greatly exaggerated. It must be more widely reckoned that development begins at home. Some will retort that this is no big secret. So what then explains the relentless 1990s exhortation made to developing countries to lessen barriers to trade and capital while downplaying crucial domestic policy areas

such as the ones identified here? Moreover, why have developing countries proved so ready to buy and execute this simplistic formula? First, so called stroke-of-thepen reforms cutting tariffs and lessening capital movement barriers are among the easiest to implement. Second, they are politically less intrusive than the delicate second-stage gamut of reforms, and the economic payoffs are presumably rather immediate

(falling within the limited time horizon of politicians). Third, behind the advice lie old-fashion First World material interests, as some valiant voices have denounced. 17 The reasons are multifaceted, but these are some important factors. At the

WORLD DEVELOPMENT end of the day, most of the processes that plant the seeds of economic prosperity are endogenous in nature: institution building, social cohesion, the accumulation of human capital, technological upgrading and others. It comes closer to the truth say that development comes from within, to use the famous structuralist term, than to assert that development

will come from making the best use of opportunities provided by international markets though obviously both are true. External forces do not determine a developing country s economic future. Even an economist like G.K. Helleiner, a leading academic on the international aspects of development, is forced to admit that purely domestic events, constraints and governmental policies dominate external influences over

longer-term de velopment (Helleiner, 1990, p. 4). Latin American public policy orientation today is out of sync with this time-tested reality. The region has historically been shackled by big singleissue ideas be it capital formation, importsubstitution, or dependencia. Insofar as neoliberalism puts undue emphasis on liberalizing trade and capital and downplays other areas, it also follows this infamous tradition.

East Asia pursued its successful development path free from ideological baggage. So should Latin America, for globalization as an approach to development is at best a patently incomplete roadmap to prosperity. Harvard economist Dani Rodrik has put it well: strategic use of international trade and capital flows is part of a development strategy; it does not substitute for it (Rodrik,

2000, p. 10). NOTES 1. See Alain Touraine, Cambios en Brazil y Argentina, El Pais, July 6, 2003. 2. Note that what is measured here is not the inequality and growth performance across three income-level categories; rather, what is measured is the effect of increased openness to trade, capital flows, and FDI across three income brackets.

The threshold between low and middleincome and between middle and high-income economies is the same adopted by the World Bank. 3. Trade shares (the size of a country s commerce in relation to its GDP) and black market exchange rate premiums are inadequate proxies for trade openness. Trade shares are negatively correlated with country size. Black market premiums are not useful

variables in a crosscountry setting, as there can be two countries with zero black market premiums but very different degrees of openness, such as the United States and the United Kingdom. Other measures, such as effective rate of protection, are more difficult to calculate for a sufficiently number of countries. 4. Incidentally, Oxford scholar John Toye has recently uncovered from

archival research that Singer was the sole pioneer in the formulation of the declining terms of trade idea, though Presbisch had a crucial role in disseminating it throughout the hemisphere and in accounting for the mechanisms that led to declining terms of trade. 5. This is not to say that the main development financial institutions have hit a balance between

purely domestic factors and external sector factors in their advice. Significantly more emphasis has been given to the latter. 6. Some have taken this disciplining argument further, and argued that globalization is a force for good insofar as it obliges more open LDC economies to eschew dubious economic policies and acts as an invisible hand that, brandishing the

stick of potentially severe punishment, steers countries towards wiser economic policy stances. This, of course, obviates something that the 1990s have shown on many an occasion: the increased fracture between the financial economy and the real economy. That is, investors and other financial agents cannot be said to have been guided in the past solely by a country s economic fundamentals

and have often acted in ways that depart from country-specific objective economic analysis. Countries that did not fully deserve to be punished have suffered great economic disruption as a consequence. Therefore, the disciplining hand of financial markets hypothesis falls apart as soon as one acknowledges that this market is by no means selfregulating, and needs to be governed. 7. Structural

here means that the policy is adjusted for the business cycle and fluctuations in the price of its main export commodity (copper). Taking into consideration a standard price of copper as well as the country s potential rate of economic growth, so as to make revenue projections, policymakers then determine what level of total public expenditure is in line the 1%

surplus objective.

GLOBALIZATION AS A DEVELOPMENT STRATEGY 8. This is not to suggest that more education attainment is a sufficient condition for higher productivity or growth. An economy that does not perform satisfactorily will often be unable to make the best use of its human capital i.e., an increase in an individual s productivity is no assurance that he or she

will find a job. Investing in people is a necessary but insufficient factor for long run growth. 9. The region displays a similar proportion of primary school attendance as East Asia, and higher rates of university-educated people, but very small proportion of the population having attended secondary school. Needless to say, those that reach university are disproportionately from high socioeconomic

backgrounds. 10. Lower physical capital accumulation plays almost no part, whereas the relative abundance of natural resources and the extremely high concentration of land account for the remaining discrepancy five Gini points between the region and the rest of the world. 11. See Persson and Tabellini (1994). They find that an equality increase of one standard deviation, changing the share of the

middle quintile of the income distribution by about 3%, increases growth by 0.5%. The reader is also referred to Alesina and Rodrik (1994), who find that a reduction of one standard deviation in the Gini coefficient increases growth by more than one percentage point. 12. For an excellent analysis of the intricate relationships between social development, growth and poverty see

Jolly and Mehrotra (2000). 13. The general link between inequality and lower growth has been established in an econometric work involving a large, worldwide sample of countries, but the specific channels though which this relationship works remain to be ascertained. 14. It is estimated that more progress in first-generation reforms could have increased annual growth in Latin America by 2.5%.

See Corbo (2000). 15. The CEPAL estimates that six out of every 10 new jobs were created in the informal sector. 16. In an open economy, as most Latin nations nowadays enjoy, the demand for labor depends on the stock of capital, technology and other factors that affect productivity. Given these parameters, employment levels will depend on the relationship between

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