Introduction
This essay aims to compare the effects of the economic reforms that were taken up by numerous developing counties in Latin America and Eastern Europe at the beginning of the 1990s. In this work, we are going to examine the techniques used by the Governments of different countries in order to overcome the economic crises they experienced during the period of transition towards the market economy. The essay is going to deal with such notions as globalization, transnational organizations, International Monetary Fund, and economic reforms, so to make the work more specific let us first go into details of these notions. Then we will see the background of the problem, reasons for the crises, and the ways countries wanted to fight them.
Globalization
The economy of countries is one of the phenomena that should be considered as a global one. This is so due to the fact that in the modern world the process of globalization acquires more and more importance and influence.
Let us say that this very process is much more beneficial for the highly-developed countries and rather disadvantageous for the developing countries economies of which do not have stable positions yet and are subject to all the problems on the international market. Nevertheless, developing countries consider globalization to be a positive phenomenon for their development and in some cases, they turn out to be right. In any case, the state of ordinary people worsens more often with the implementation of globalization because of the number of factors (Heilbroner, 2007).
Effects of Globalization
First of all, globalization opens markets of all countries and allows those who possess more money and power to start businesses in those developing countries using cheaper labor force and taking advantage of much lower taxes than in their own countries, which are already developed. Secondly, the expansion of foreign enterprises does not let domestic ones develop and damages the economy of this or that country. This leads to the state when rich people from these countries can become richer and the poor people become even poorer, thus the gap between the layers of the population becomes bigger and the economic state of the whole country demands constant urgent improvements.
The regions that we are going to talk about in the current essay are good examples of the effect of globalization and other economic and geopolitical phenomena that have been touched upon above. The countries of Latin America, such as Mexico, Chile, etc., as well as the eastern European countries, a present wide range of information to be analyzed in this essay which concerns the effects of the economic reforms carried out in these countries in the 1990s. So, let us start with considering the background information about both Latin America and Eastern Europe so that to understand as good as possible the reasons for the above-mentioned reforms and trace their consequences.
Latin America
The background of the economic reforms that followed in the countries of Latin America at the end of the 1980s – at the beginning of the 1990s was the situation that was formed in the economies of those countries by that period.
The situation was really dreadful and needed some decisions to be made by the officials in order to improve the life of people. The plot of the problem consisted of the decline of the economy and the growth of poverty and unemployment. The great crises of 1992 – 1994 made the governments of those countries pay more attention to the economy and take certain steps in order to stop the falling of all economic factors. Fighting with high levels of poverty was indicated as one of the most important objectives of the governments of Latin American countries (Economic Reform in Latin America, 2007).
Almost all countries of this region, except Columbia and Chile, experienced great declines in their GDP (Gross Domestic Product) levels at the beginning of the 1990s. It was from about 1, 5% up to 3% that was one of the highest levels of GDP decline in the world. The tax system also needed considerable improvements, because it was one of the issues that did not let the economy develop in the right direction. Domestic investors were afraid to invest their money and they had opportunities to invest money into other economies where their businesses had more chances for development.
Foreign investors, who knew about high taxes and corrupted officials in the majority of the Latin American countries did not want to invest their money because it would have brought no profit to them. They also wanted the Latin American markets to be open for international trade so that they could not only invest their money but make a profit out of it. Rates of inflation were constantly growing. Here is the graph that shows how fast the inflation in Peru grew in the indicated period:
All these factors and events were impacts for officials of many Latin American countries, such as Peru, Argentina, Mexico, and others, to start thinking over and implementing new policies in economies that could improve the situation. Transnational organizations like International Monetary Fund and World Bank offered their help and Latin American countries had to agree on it because they saw no other way out. The help by those organizations involved financial aid for developing countries, advice as for certain helpful policies, as well as demands to liberalize trade, taxes, markets, and forms of property ownership in those countries. Below, we are going to trace the economic reforms carried out by those Latin American countries and see their results.
Eastern Europe
The background of the situation in the countries of Eastern Europe was somewhat different from what was going on in Latin America at the same period of time. The main reason for the financial and economic decline of the countries of this region was the breakdown of the USSR in 1991 – 1992. All the countries that either participated in the USSR or were the members of the so-called “Socialist Camp”, i. e. developed together with the USSR and under its constant control.
The USSR’s breakdown was the result of the rise of patriotic and nationalist movements in its member countries. Nations suppressed by the communist regime started to rebel against authorities and finally managed to destroy the state. But after the decline of the USSR, all the newborn countries turned out to be unprepared for independent existence. Economies of such countries as Russia, Ukraine, Georgia, as well as Latvia, Bulgaria, Romania, Hungary, and others, could not compete with the highly-developed economies o the Western European countries and started their falls (Eggers, 1992).
In Russia, the rate of inflation was so high that the government had to borrow several loans from the International Monetary Fund and separate countries in order to pay people for their work and keep the national currency at an acceptable level. Quantities of the unemployed were constantly increasing, as well as poverty among the majority of the population of the country. The crisis in the country’s economy led to armed conflicts and a long period of instability that only the economic reforms helped to settle. Great amounts of natural minerals, oil, and gas made it easier for Russia to overcome the crisis.
Ukraine was facing the same problems at that time. The countries economy was in a terrible state, inflation was one of the highest in the world and the rate of unemployment almost reached the critical one. Ukraine’s government had to borrow money from International Monetary Fund and World Bank, as well as from different countries including the USA, Great Britain, Germany, even Russia. Ukraine had to resort to the monetary reform that helped to stop inflation for a short period of time and increased the value of the national currency.
Foreign investments were almost totally absent as the tax system and the political situation was frightening for investors. Domestic economic problems, including the absence of payments for workers of all spheres, resulted in numerous strikes and demonstrations against the government and its economic policies.
Countries of the “Socialist Camp” also experienced certain difficulties and faced economic crises during the periods of instability after the communist regimes in them were destroyed. In Romania, for instance, the state of things in the economy was especially bad. After the Ceausescu regime was removed in a violent way it was rather problematic for new authorities to transform the economy of the country into a market one.
Romania was considered to be the country affected only a little by the economic reforms and new policies. In 1991 the decline of the GDP in Romania reached the level of 13% which was the largest decline in the new-born countries of Eastern Europe. Romania, as well as almost every country in Eastern Europe, witnessed lots of workers’ strikes and demonstrations, like visits of coal mines workers to the capital of the country with demands to give them the money they did not get for their work.
In Czechoslovakia, the situation was even more difficult because the country itself was divided into two parts – the Czech Republic and Slovakia. Thus, the economy of a formerly united country was divided either and some of its branches turned out to be in one part, some others in another part. The state of the economy of the two new countries, the Czech Republic and Slovakia demanded urgent measures to be taken. The government used the method of the so-called “Shock Therapy”, the policy recommended by the International Monetary Fund, and the essence of which will be disclosed in the following paragraphs.
Poland had to resort to the help of the same method of “Shock Therapy” because the country’s economy was almost destroyed by the communist regime. The level of the Gross Domestic Product declined by 20% from 1991 to 1992, at the same time the rate of unemployment reached 25% in the majority of regions of the country, the industrial output of Poland fell by 39% which was the largest percentage in Europe at that time. All this led to the policy of the “Big Bang” being implemented in Poland in order to change the orientation of the country’s economy from Eastern Europe and the countries of the former USSR to Western Europe and the USA.
These are the factors that predetermined the necessity of the economic reforms and policy changes that were implemented by the countries of Eastern Europe and Latin America. Further, the reforms themselves and their results and effects will be discussed and analyzed (Mulleneaux, 2006).
Economic Reforms
The main objective of the economic reforms of the 1980s – 1990s in the countries of Latin America was the liberalization of the economy and trade. The whole direction of the economic development of Latin America was then called liberalism due to this reason. Before the reforms, the main part of the economy of such countries as Brazil, Peru, Bolivia, Chile, or Mexico was controlled and regulated by the state. This made the development of the economy slow and frightened foreign investors. Beginning from the late 1980s, the governments of those countries decided, according to the International Monetary Fund recommendations, to liberalize trade, make private property possible and reduce the government regulation of the trading and economic operations.
One of the greatest threats to the economies of the countries of Latin America was inflation which resulted in high rates of poverty, unemployment and high prices, and inequality of income distribution within those countries. But the reforms, and namely the stabilization policies taken up by the governments of Brazil, Mexico, Argentina, and Peru, helped to stop inflation and start the growth of the GDP in those countries. These stabilization policies consisted of monetary reforms which helped to fasten the exchange rate of the currencies on international exchange stocks and stopped the devaluation of Brazilian, Mexican, and, especially, Argentinean and Peruvian currencies.
Investments also grew with the implementation of the economic reforms. Firstly, foreign firms were cautious of investments because the situation was uncertain in many Latin American countries. The governments of Brazil, Mexico, and Peru took up the gradual approach towards the reforms. Liberalization of trade and tax relaxation was allowed at the initial stages of the reforms process, while privatization of state property and the reduction of the governmental control over the privatized state property were left for the final stages of the process.
At the beginning of the reforms, this fact caused negative consequences, the investments decreased and the GDP levels fell due to this. But in a couple of years, the situation improved and foreign entrepreneurs were no more afraid of investing. This led to a considerable rise in the economy and in the levels of the GDPs of Latin American countries. In 2007 the following figures were presented by the International Monetary Fund as evidence of the effectiveness of the economic reforms taken up by Latin American countries:
From the above-presented figures, we can clearly see that the economic reforms have given positive results in respect of the Gross Domestic Product since they were implemented in the countries of Latin America. Monetary reforms, currency stabilizations, policies of liberalization of trade, and tax relaxation gave positive results.
So did the cooperation with various transnational organizations, like International Monetary Fund, World Bank, etc. Mexico, for example, takes part in North American Free Trade Agreement (NAFTA) together with the USA and Canada. Official figures give results that enable us to call this agreement productive, but the living standards of ordinary people decrease, and the gap between the rich and the poor is still growing. That is why we can not assess the economic reforms and cooperation with transnational organizations one-sidedly.
The same is true about the consequences of the 1990’s economic reforms that were taken up by the governments of the Eastern European countries. In Bulgaria, for example, the reforms touched mostly the sphere of privatization and attracting foreign investments. In 1992, foreign entrepreneurs were allowed to buy shares in Bulgarian companies and also buy or rent land in Bulgaria. Farmers, who owned the land before the communist government took power, were given their land back and could sell it or work on it themselves. Foreign investments are attracted by the privatization and tax liberalization programs.
In the Czech Republic and Slovakia, the policy of shock therapy for the economy was implemented. Czech lands took it much easier because privatization of the state property was very successful and the economy of the country became export-oriented. In Slovakia, the situation was much more difficult when it became independent from the Czech Republic. The economy was shocked by the loss of the Czech market which was the major export area for the Slovakian economic output.
Besides, the policy of price control implemented by the Czech government made it almost impossible for the Slovakian companies to make a profit out of trading with the Czech Republic. The Slovakian government seems to have found the way out of the situation and took up the policy of granting subsidies to the enterprises of large and small businesses, as well as to industrial companies for the period of time until they get stable profit and markets to export their products (Mulleneaux, 2006).
In Ukraine, the monetary reform was carried out in 1996 in order to stabilize the position and the exchange rates of the national currency on the international markets. Also, several laws were adopted by the government that allows domestic companies to have advantages before foreign ones when the matter concerns the export of goods and construction works inside the country. But, recently, the rates of inflation in Ukraine started to increase again and it demands considerable attention from the side of the government that must take new steps so that to overcome the new stage of inflation in Ukraine.
Conclusion
The information of this essay presents a clear view of the background of the problems that could be solved only by means of economic reforms. We found out that the main reasons for economic crises in the countries of Latin America and Eastern Europe in the 1990s were the state control over the property and conservative, communist, economy. The reforms gave results that can be interpreted in two ways. On the one hand, they show positive results in respect of figures of GDP and income levels, on the other hand, the actual incomes of populations of these countries are falling because prices in many of them are growing faster than people’s salaries.
Nowadays, the situation in the countries that we have compared in this essay is better than it was before the economic reforms were taken up but it still needs considerable improvements and is in a state of constant development. To complete the comparison, it would be not out of place to say that the results of the economic reforms are better in Eastern Europe because living standards in these countries are higher than in Latin America.
Works Cited
Economic Reform in Latin America. 2007. Web.
Eggers, William D. Economic Reform in Eastern Europe: A Report Card. 1992. Web.
Fraga, A. Latin America since the 1990s: Rising from the Sickbed? 2007. Web.
Heilbroner, Robert L. The Making of Economic Society, 12th Edition. Prentice Hall. 2007.
Mulleneaux, L. and Pavilionis, P. A Survey of Economic Reforms in Eastern Europe: Amidst some initial successes, the East European economies struggle to stay on the reform track. 2006. Web.