Introduction
Latin America has moved from export-led growth to import substitution policies and then back to export-led growth, which is regarded to have enabled many countries to sustain economic growth and development. There has been widespread adoption of development policies in the Latin America, in an effort to precipitate economic development.
Export-led growth and import substitution policies have been put in place interchangeably to stimulate economic growth where one policy has failed. Moreover, Latin America has been able to sustain its economic growth through export-led growth policies after adoption of import substitution policies failed to realize or sustain economic growth.
Export Led Growth Policies
Export-led growth has been facilitated by a number of countries such as Chile, although its overdependence has resulted in low economic growth rates in a number of countries. Chile undertook radical liberalization since the year 1973 where import substitution policies were abandoned for implementation of export-led growth.
The adoption of export-led growth strategies has put Chile far much ahead of other Latin American countries, despite having common economic weaknesses.
A number of countries have lost confidence with regards to the advantages of export-led growth strategies even in countries where export-led growth policies have been successful. This is because there have been financial constraints and recession in countries that have adopted export-led growth policies, considering the global economic crisis.
Export-led growth policies have been widely pursued be Latin American countries since1980s, which has facilitated economic growth successfully. Expanding export goods out of the Latin American region has not generated the huge increases in growth of output. Global financial crisis has in the past affected global trade and it has further led to the downfall of growth potential.
This is because price variations of export commodities in the international and foreign markets lead to negative impacts on economic growth.
Global financial crisis in trade and capital markets has facilitated foreign direct investment and remittance, leading to a decreased economic growth of countries that are dependent on export cash flows. Chile, being an export-led growth country, has undertaken strategies for implementation of fiscal policies such as cyclic counter policy in an effort to prevent economic downfall.
The theory of export expansion to stimulate economic growth is based on the openness of trade where economic goods and services are shifted to sectors of economy where there is efficiency and comparative advantage. Sectors where there is comparative advantage and economic efficiency are expanded to accommodate skilled, semi skilled, and unskilled labor.
The sectors also facilitate technology transfer and foreign direct investment for economic growth through trade liberalization. There is empirical evidence that exports tend to stimulate economic growth, as they increase although this stimulation trends vary among different countries irrespective of export rate similarity.
Different countries achieve different results, since overdependence on exports by a country leads to price volatility of particular commodities in the country while skilled labor in this economy leads to inequality.
Import Substitution Policies
Before radical liberalization of economic policies in Chile, its economy was characterized by import substitution policy for development, although it was proved as a failed strategy. The failures of the import substitution policy have emerged over time with regards to the reactions of the international financial crisis alongside local political and socio-economic crisis.
In addition, the domestic and global socio-economic and political crisis has been as a result of governments attempts to restructure and restore order in politics and economic growth. However, import substitution policies had previously led to significant economic growth and political order for decades.
The situation of Latin American countries such as Chile, which had significantly high dependence on imports from the international markets, was impacted by the world war economic crisis. Capitalist economies that emerged after the financial crisis and before World War II had significant effect on the emergence of import substitution policies.
However, considerable differences in the sequence and the period with which capitalist economies have impacted import substitution policies exist. Differences in sequence and periods of import substitution policies arose due to political party and social systems differences
Economic policies of Chile between the periods of the year 1950 and 1973 had focused on the import substitution policies. Import substitution policy that was used in the Chilean economy is based on two assumptions of the closed economy and the role of the government.
The closed economy assumption is described with strict tariff barriers, trade controls and the quota system, while the government’s role is based on more state-owned companies, the government expenditure with regards to huge gross domestic products share and regulations.
The Chilean government at that time was able to sustain the import substitution strategy and later on enacted political measures to liberalize its economy. The Chilean government had the mandate of enacting and leading the nation towards endogenous reforms to restore political order and economic growth, which had been severely affected by the endogenous policy.
Many factors are considerable with regards to the success of liberalization reforms strategies in stimulating economic growth and political order. The liberalization strategy involves the announcement of a variety of incentives to key players in the political and socio-economic arenas.
The incentives go a long way in boosting a country’s gross domestic product in cases where both foreign and domestic investors believe in the liberalization reforms and undertake to invest in the economic sectors with comparative advantage and potential. Incentives may, however, fail to achieve the expected results in case investors do not commit themselves to invest in the market.
Chile and other Latin countries have similar labor and market structure, which was characterized by the copper mines under the non-liberal governance. Owing to the liberalization of Chilean economy, the copper mines were nationalized in a bid to encourage participation of capital market as a free market.
The government undertook to nationalize factories, farms and factories to stimulate export-led growth and abandon import substitution policy. Economic liberalization in Latin America led to economic growth and the development of a free-market economy, where there was free creation of wealth and free enterprise operation.
Chilean liberalization shifted the economy from price-fixing, market interventions, and macroeconomic instability to free capital flows and trade where cross-boarder markets and prices are liberal. Before liberalization, the economy experienced closed trade to international markets and financial flows.
The liberalization policies were enacted to reduce government intervention, promote factor market competition, and promote privatization. Previously, Chile was characterized by low economic and employment growth rates, inadequate investment, public sector inefficiency, industry protective policies, and macroeconomic imbalances.
Since liberalization of the Chilean economy, there have been tremendous developments, both politically and economically.
The investor’s financial incentives play a significant role in the process of liberalization reforms, but the government needs to put into consideration the amounts of loans offered to investors; indeed, the conditions levels and regulations are important for successful and credible liberalization process.
In case the amounts of loans offered to investors are not enough or the conditions are not enough, then the government takes the blame of acquiring investments from both local and domestic investors with full market liberalization.
Investors who have experience with this moral hazard challenge the government to undertake minimum investment than intended and expected by the government to avoid government investor conflict.
Moreover, the aspect of assurance and creation of commitment is important to stimulate and instill confidence for investment.
Investor financial incentives can be positively used to solve variations in time with regards to government inconsistency in inadequate economic investment, although if the institution offering loans are not reliable in ensuring it upholds the necessary conditions, it may result to the government strategies losing credibility and thus low growth rates despite liberalization.
Conclusion
The Chilean economy has moved from export-led growth to import substitution industrialization strategies and then back to export-led growth. This strategy has enabled Chile to sustain economic growth and development. Chile undertook to adopt development policies in a bid to stimulate economic growth and stabilize political structures governing the country.
Moreover, export-led growth and import substitution industrialization strategies were adopted interchangeably by the Chilean government to facilitate development where there was development stagnation. However, Chile has been able to sustain rapid industrialization since it abandoned the import substitution strategy for the export-led growth policy.
Bibliography
Allende, Isabelle. My Invented Country: A Memoir. New York: Harper Collins, 2003.
Buitelaar, Ruud and Dijck, Pitou. Latin America’s New Insertions in the world economy: Towards systematic competitiveness in small Economy. New Delhi: Palgrave Macmillan, 1996.
Dabir-Alai, Parviz and Odekon, Mehmet. Economic Liberalization and Labor Markets. CT: Greenwood Publishing Group, 1998.
Green, Steven. Faces of Latin America. CA: Monthly Review Press, 2006.
Thomas, Victor. The Political Economy of Central America since 1920. NY: CUP Archive, 1987.
Winn, Peter. Victims of the Chilean Miracle: Workers and Neoliberalism of Pinochet era 1973-2002. NY: Duke University Press, 2004.