Whatever happened to Latin American Structuralism or memories of underdevelopment

I was at a conference organized by Luis Bértola (November 5 and 6) on the relevance of the economic ideas of Raúl Prebisch at the Economic Commission for Latin America and the Caribbean (ECLAC, pictured above), and the launch of a new website (in Spanish here; the Spanish version is for now more developed, and soon there will be a Portuguese version too) with resources (e.g. this paper on Prebisch's views on central banking and monetary policy, co-authored with Esteban Pérez) on the second (not first) Executive Secretary of that venerable Latin American institution.

In my view, ECLAC has evolved, like most institutions, partly reflecting its internal dynamics, but also reflecting the evolution of the societies in which they are inserted. In that sense, if Prebisch and the push for Import Substitution Industrialization, and also the overcoming of structural heterogeneity (the fact that the structure of production, and the patterns of consumption and exports are not in sync), dominated the first three decades of the institution, Fernando Fajnzylber (classic book here) and the need for external competitiveness were, and to some extent still are, ubiquitous in the subsequent period. The theoretical basis of his ideas, and of a lot of what is done at ECLAC, is heavily influenced by the neo-Schumpeterian School, but some elements of structuralist/post-Keynesian economics, in particular in what respects to the role of the external constraint remains an essential part of the way of thinking in Santiago.

I'll leave for another post the discussion of the problems that I see in the post-Fajnzylber ECLAC and about some of the limitations of neo-Schumpeterian analysis. I want to concentrate on a few points raised by Mario Cimoli, Ricardo French-Davis, Gabriel Porcile and Osvaldo Sunkel. Cimoli and Porcile (with Verónica Amarante) presented the document Structural Change for Equality. Cimoli suggested that this document goes a long way, even if more work needs to be done, to present a coherent view of development, and emphasized that the ideas are not old, démodé (in his own terms). In part, the ideas are fashionable, according to him, because they follow modern approaches, in particular Schumpterian ones. I find that preoccupation and line of discussion to be a feeble defense of scientific value. Theories should not be measured by their popularity. Sure enough there are fashions in science, as in many other fields, but the ultimate criteria for scientific demarcation is logical consistency and supportive empirical evidence.

Other than that Cimoli suggested that the problems of structural heterogeneity are still with us. Gabriel Porcile presented the macro part, and emphasized the limits associated to the balance of payments, which are to some extent related to the real exchange rate (in this part Amarante presented the numbers on income distribution, including functional income distribution, which I shall comment on another post). He also suggested, I think quite correctly, that Thirlwall's Law, had been in many respects anticipated by Raúl Prebisch.

As the title shows, there is not much that is new in the new report (the 1990 report, based on Fajnzylber ideas, was called Changing Production Patterns with Social Equity). The idea is that external competitiveness (the changing productive patterns and the structural change in both titles) could be achieved without reducing wages (the equity and equality in the titles), and that industrial policy is essential for that goal. What is worrisome to me is that on macroeconomic issues the document seems to be a bit too conventional.

Back in 1990, ECLAC argued for:

"Financing changes in the production patterns naturally calls for some reorganization of fiscal policy in order to increase, public savings that can be used for investment. Every effort should be made to prove the allocation of expenditure, but it seems clear that most of the fiscal adjustment must be through tax reform."

In other words, fiscal adjustment. Now (p. 169 in the current Report) they suggest:

"Implementing a countercyclical fiscal policy involves two major challenges. The first is to create enough fiscal space to undertake the extra spending necessary to boost aggregate demand and economic growth during the contractionary phase of the cycle. This extra fiscal space can be generated by increasing public saving during the boom phase so that the impact of adverse shocks can be absorbed without jeopardizing the financial sustainability of the State."

So now they only ask for fiscal adjustment during the boom phase, moderating the growth in that part of the cycle, but admit that counter-cyclical policies have been effective in the recessive phase. Note that this conclusion might conflict with the ideas put forward on chapter 3 on the business cycle in the region. The document (p. 100) says that:

"It shows that the Latin American and Caribbean region tends to have truncated expansion phases and that they tend to be shorter than in other regions."

But it does not suggest that the causes might be related to macroeconomic policies, including overly restrictive fiscal policies in the boom. It rather suggests that:

"Short expansion cycles reflect the inability of the production structure to transform the momentum of demand growth into sustained endogenous economic growth (through linkages, spillover effects and virtuous circles)."

The paper by Pérez and Pineda (2010), which I had discussed here before, seems to suggest that macroeconomic policies (and the demand side) might be more important than supply side conditions in explaining the poor Latin American performance during booms. Finally, two brief comments about French-Davis and Sunkel's talks. French-Davis noted that the region is extremely vulnerable to a collapse of the terms of trade and thought that there are no structural causes for higher commodity prices. Sunkel suggested that in some countries, and he presented some data on Chile, there is a consumption boom, based on credit, which also puts at risk the expansion in the region. More on those two propositions on another post.