Resume chapter 15 (trade and policy reform in latin america) Essay

Resume chapter 15 (trade and policy reform in latin america) - Essay Example The ISI saw its end during the crisis of the 80’s and the vision that it can create long term economic inefficiencies. For many years, the region relied much on exports of agricultural commodities to earn foreign revenue but most of the export sectors were often owned and controlled by foreign capitalists. However, during World War 1 and the Great Depression of the thirties, the flow of Latin American exports was disrupted reducing their export earnings. Although World War 2 increased the demand for their minerals and foodstuffs, it nevertheless dropped again after the war ended. Trade analysis or the ratio of average export prices to average import prices or terms of trade (TOT) reported an export pessimism as the prices for the raw materials Latin America exported fell. This was why the head of the UN Economic Commission on Latin America (ECLA), Prebisch, ruled that the region veer away from their dependence on raw material exports and concentrate on industrial development b y replacing imported manufactured goods with domestic ones. This was his idea of â€Å"import substitution industrialization†. ... It was criticized that governments misallocated resources when they got too involved in production decisions of companies. Other criticisms included the overvaluation of exchange rates; policies being biased in favour of urban areas; the inequality of income worsened and the controversy of widespread rent-seeking. ISI did not succeed in furthering the region’s economy, but it had less of an effect in creating the economic crisis of the 80’s than misguided macroeconomic policies of the countries in Latin America. Economic populism or the acquisition of support from labor and domestically oriented business has been blamed for such faulty macroeconomic policies. This was triggered by the deep satisfaction with the status quo due to slow growth or recession; the rejection of policy makers of traditional constraints on macro policy such as the justification of printing money due to the existence of high unemployment and idle factories offering its space without inflation. Po licy makers vowed to raise wages while freezing prices and restructure the economy by expanding the domestic production of imported goods. Still, in reality, wages were lower than before and international interventions led by IMF were implemented to stop high inflation and to end a balance of payment crisis. Being sunk in debt was blamed on the collapse of oil prices in the early eighties as well as the fact that the foreign currency owed was dollars, which had variable interest rates. The faulty macroeconomic policies of Latin America left national expenditure much higher than the national income, hence a return to growth was not very likely. In an attempt to keep government expenditures higher than warranted, many Latin American countries