Lecture 1: phases of economic development in LA
Volatility: Subject to rapid change.
Many LA economies are volatile because they depend on a single product
(export) and are susceptible to the changing world prices of those products ->
Oil in Venezuela
High volatile nature of LA’s economic growth
- Declining terms of trade, due to reliance on one commodity
- Business cycles (booms of economic growth, followed by recession, followed
by recovery)
- External financial flows
- Population shifts
- -Instability; Economic structures translate into political outcomes -> political landscape
changes rapidly
- International migration
Extratavism: Extraction of natural resources: Prices of natural resources rise and fall, an
economy dependent on this does not have stability
Socialismo del siglo XXI (socialism of the 21th century)
- Dieterich argued in 1996 that both free-market industrial capitalism and 20th-
century socialism have failed to solve urgent problems of humanity like
poverty, hunger, exploitation, economic oppression, sexism, racism, the destruction
of natural resources and the absence of a truly participative democracy. Socialism
of the 21st century is often contrasted with previous applications of socialism in
other countries, with a major difference being the effort towards a more
decentralised and participatory planning process
Latin American countries have primarily financed their social programs with extractive
exports like petroleum, natural gas and minerals, creating a dependency that some
economists claim has caused inflation and slowed growth.
Comparative advantage: by specialising in the product you make best and engaging in
free trade you can benefit even if other people make the products better than you do.
- When one country can produce a good at a lower relative opportunity cost than
- another country.
- luxury (n>1) vs. basic (n<1) vs. inferior (n<0) goods
- Inferior goods have a negative income elasticity of demand; as consumers'
income rises, they buy fewer inferior goods. A typical example of such type of
product is margarine, which is much cheaper than butter.
- Luxury goods represent normal goods associated with income elasticities of
demand greater than one. Consumers will buy proportionately more of a particular
good compared to a percentage change in their income. Vacations
, - Basic goods whose income elasticity of demand is between zero and one are
typically referred to as necessity goods, which are products and services that
consumers will buy regardless of changes in their income levels. Examples of
basic goods and services include tobacco products, haircuts, water and electricity.
Terms of Trade= represent the ratio between a country's export prices and its import prices.
- When more capital is leaving the country then is entering into the country then the
country’s TOT is less than 100%. When the TOT is greater than 100%, the country
is accumulating more capital from exports than it is spending on imports.
- ToT = (index export prices / index import prices) x 100
- Declining ToT
• Cheaper exports
• Expensive imports
• Trade deficit
- When more capital is leaving the country than is entering into the country,
then a country’s TOT is less than 100%.
- Increasing ToT; exporting really expensive watches and importing cheap fruit.
• Expensive exports
• Cheaper imports
• Trade surplus
Gastronomic transitions (coffee: from luxury to normal good). Coffee went from a luxury to
a normal good and therefore there is less profit to make of it.
It is difficult to earn a lot of bananas, but easier on expensive Watches. Also has to do
with income elasticity (bananas have a lower income elasticity). And it is difficult to add
value to for example fruit.
- Trade (im)balance
- - A problem of commodity exporters: no matter how much effort they devote to export
promotion, the income elasticity of the demand for imports will inevitably be
higher than the income elasticity of the demand for their exports
A commodity is a raw material used to manufacture a finished good. A product, on the
other hand, is the finished good sold to consumers
Most Latin American countries have a trade deficit, because they do not earn a lot on the
commodity export. So they need to attract foreign direct investment. To compensate for the
trade deficit.
Structuralism (1940 and 1950s in Argentine): look at how Latin american countries
engage in international trade.
- Structuralism: late industrialisation involves discontinuous processes that are
constrained by ‘structural impediments (belemmeringen)’
- What the mean with impediments is that LA countries want to industrialize. But
because they are late, they run into problems (it’s really expensive to industrialize
late). They are forced by external forces that pushes them into commodity raw
material export.
, - Internally from the process of structural transformation itself. So structuralist do not
put the blame on the external (western market) but also look internal to their own
problems. Rules of the game are not fare and we LA do not know how to play the
game.
- Structuralist Idea that LA has autonomy to change their policy and also become
industrialised.
Structuralist came up with the idea of Centre-Periphery CEPAL/ECLAC (1950):
- The centre–periphery model thus suggests that the global economy is
characterized by a structured relationship between economic centres which, by
using military, political, and trade power, extract an economic surplus from the
subordinate peripheral countries.
- Periphery (outward countries) try to engage in the world economy but struggle.
Understanding periphery:
• Centre emits (Western countries);
- they set the rules of the game and prices. And the periphery receives.
• articulated, divers, integrated, diverse economy, not focussed on just one or
two products.
- • relatively homogenous productivity in the economy, every sector is quite
developed.
- • moderate range of wage labour incomes, people earn roughly the same
wage.
- • Generates technology and consumption style
- • Generates business cycles
Periphery receives;
• disarticulated, fragmented, some sectors are very developed and others not at
all! Venezuela 92% of economy focussed on oil not divers at all!
• high productivity in a sea of low productivity - heterogenous
• large spread between highest and lowest wage labour income
• Imitates consumption style, cannot afford technology
• receives external shocks (follows business cycles of the West) or oil price in
the west goes up and also hurts the peripheral.
Result: peripheral capitalism -> a type of capitalism that lacked the structural and
technological forcefulness of the central economies.
Furtado: technological dependence (1973) The periphery is dependent on the center in
technological access and innovation.
• Technological dependence leads to:
• Dualism and polarisation in the periphery
• A synergy of internal processes of exploitation (within the country there is
exploitation
• With external processes of dependence (because they are dependent on
imports and foreign direct investment which makes them dependent)
, Four characteristics of peripheral capitalist economies:
• Declining terms of trade;
• Marginalisation of disadvantaged populations in the peripheries (inherited from
Hacienda system), a lot of poor people also hits businesses (because who is going
to buy your products?)
• Imitative metropolitan consumption patterns of periphery elites (buying a lot of
expensive things, and to try to pay them by selling cheap export products)
• Macroeconomic instability
Dependency theory: Describes a certain structure of differential of power in the
economic domain. The notion that resources flow from a “periphery” of poor,
underdeveloped states to a “core” of wealthy states, enriching the latter at the expense of
the former.
Lecture 2:
Taxonomy (general) is the practice and science of classification of things or concepts, including
the principles that underlie such classification
Impact of colonisation is still very present, if you like for example at land distribution (still
distributed according to people that owned it during or shortly after colonisation)
Why is LA lacking behind economically?
- LA countries specialise in just one or two goods, based on the exploitation of
natural resources. While the west have really diverse economies.
- Capital intensive (is expensive, good machinery and not a lot of labourers)
- Labour intensive (is few machinery, bad machinery and a lot of labourers)
- It’s difficult to go from labour intensive to capital intensive (industrialize) people lose
their jobs or you have to lend money (to educate people or innovate)
Phases of economic development:
Little Divergence 1500-1820:
- Growth pattern of ‘the rest of the world’ (including LA) slower than the pace of ‘the West’
Great Divergence 1820-present:
- Growth of ‘the rest of the world’ rose but not as much as that achieved by ‘the West’
- Differences in productivity gains - Industrial Revolution
- Main driver of economic growth in LA since independence; population growth (60%)
1500-1870:
- Long-run deterioration
- Missed opportunities: exports natural resources
1870-1980:
- Ups and downs
- Outpaced Africa and Asia
- State-led industrialisation
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