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Business in Latin America

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Business in Latin America Test Review

* Mousetrap scenario- mainly used as a metaphor for ingenuity

* "Build a better mousetrap, and the world will beat a path to your door"

Comparison development USA AND LA. And 19th century changes.-

LA

 Releasing Latin American countries from the fiscal burden of the Imperial system was probably offset by the higher costs of governing themselves

 While integrating the Latin American countries into the world economy brought net gains to their economies over the long run, although at the cost of higher internal inequality.

 Removing colonial rule eliminated the fiscal burden and, ceteris paribus, added to Latin American GDP

 first governments of independent Spanish Latin America had few resources and many obstacles. Political violence and government corruption alienated the people and politics became a quest for the personal benefits of office.

US

a) The Industrial Revolution (1820-1870) was of great importance to the economic development of the United States

b) Industrialization in America involved three important developments. First, transportation was expanded. Second, electricity was effectively harnessed. Third, improvements were made to industrial processes such as improving the refining process and accelerating production.

c) Industrialists regarded Latin America as a potential market for their manufactured goods. European and US industrial workers constituted a market for sugar and coffee grown in Latin America.

* Experience ISI, how does it work. (1930-1980)

Import substitution industrialization works on the premise of replacing imports with domestic production. ISI began when Latin America countries began to move away from the traditional neocolonialism dependence of agricultural exports and began to manufacture and substitute imported goods with domestic goods.

With the US stock market crash of 1929, LA had to adapt a ISI system because the US was not buying as many agricultural goods from LA(decreased exports) and LA suffered because of it did not have foreign sales coming in. Additionally, LA needed to import essential goods such as raw materials, machinery, and spare parts when it began ISI. dependence of US foreign goods (imports)

What killed it?

1.ISI caused chronic problems with the balance of trade and payments: Import substitution was supposed to reduce reliance on world trade, but every nation needs to import something not available locally like raw materials, machinery, spare parts. The more a country industrialized the more it needed these imports and ISI was strongly biased against exports. Trade protection and overvalued exchange rates raised domestic prices and made export less competitive, and export taxes furthermore discouraged foreign sales. So the industrializing countries were unable to export enough to buy the imports they needed.

2.deep recessions:

The faster the economy grew, the more it needed imports; but exports could not keep up with the pace of imports and so the country ran out of foreign currency. So what the governments did was to restrict import to essentials and raised interest rate to bring money into the country and keep it at home. It devalued the currency to raise the price of imports and make exports more attractive also reducing the countries purchasing power, which resulted in usually deep recessions.

3.ISI countries tended to run substantial budget deficits and inflation:

Government subsidized industrial investments gave tax breaks to industrial investors and targeted spending at politically important groups but such spending chronically outpaced government revenue , and these budget deficits were usually covered by printing more money. The result was inflation which made domestic goods more expensive which in turn reduced exports even further.

4.ISI had nasty effects on poverty and income distribution;

Masses of farmers migrated to the cities in search for jobs in the new industries. But import-substitution growth was very capital intensive. Most of the farmers who flooded into the cities found that they could not get jobs that industrialization had promised. ISI countries ended up with dual economies; * On the one hand; modern capital-intensive industries with skilled, well-organized workers earning relatively high wages * On the other hand: a mass of struggling farmers and urban poor frozen out of the modern economy given very low wages and excluded from the social protections which modern sector workers received [5]

Terms of trade, why L.A. has declining terms of trade.

THE DECLINING TERMS OF TRADE IN L.A HAPPENED BECAUSE OF LA'S DEPENDENCE ON PRIMARY COMMITIES, IN WHICH THE RELATIVE PRICE WAS FALLING STEADILY SINCE THE 19TH CENTURY.

* Prebisch (1950) on this topic. He, along with Singer (1950), argued that specialization in primary commodities, combined with a relatively slow rate of technical progress in the primary sector and an adverse trend in the commodity terms of trade, had caused developing economies to lag behind the industrialized world. Prebisch concluded that, since prices do not keep pace with productivity, industrialization is the only means by which the Latin-American countries may fully obtain the advantages of technical progress.

* They rested their case on three stylized facts: first, that developing countries were indeed highly specialized in the production and export of primary commodities; second, that technical progress was concentrated mainly in industry; and third, that the relative price of primary commodities in terms of manufactures had fallen steadily since the late 19th Century. Together these facts suggested that, because of their specialization in primary commodities, developing countries had obtained little benefit from industrial technical progress, either directly, through higher productivity, or indirectly, through improved terms of trade.

* Washington concensus:

* Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;

* Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision

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