Volume Title: Reform, Recovery, and Growth: Latin America and the Middle East Volume Author/Editor: Rudiger Dornbusch and Sebastian Edwards, eds. Volume Publisher: University of Chicago Press Volume ISBN: 0-226-15745-4 Volume URL: http://www.nber.org/books/dorn95-1 Conference Date: December 17-18, 1992 Publication Date: January 1995
Chapter Title: Trade Policy, Exchange Rates, and Growth Chapter Author: Sebastian Edwards Chapter URL: http://www.nber.org/chapters/c7649 Chapter pages in book: (p. 13 - 52)
Trade Policy, Exchange Rates, and Growth
After decades of protectionist policies, most of Latin America began to open up to the rest of the world in the late 1980s. This process, pioneered by Chile, is perhaps the most impressive achievement of the structural adjustment programs of the last decade. It has effectively put an end to more than four decades of generalized import substitution policies aimed at encouraging an industrial sector, that turned out to be largely inefficient.’ The process leading to these trade reforms has not been easy. As recently as in the mid-1980s the protectionist view was still dominant in many parts of Latin America. In fact, the debt crisis of 1982 provided a new impetus to the protectionist paradigm. Initially, many analysts interpreted the crisis as a failure of “the world economic order” and argued that the only way for Latin America to avoid the recurrence of this type of shocks was to further isolate itself from the rest of the world, through selective protectionism and government intervention. This sentiment was compounded by the fact that a number of observers considered the experiences of the Southern Cone countries-Argentina, Chile, and Uruguay-with liberalization reforms during the 1970s as Sebastian Edwards is chief economist for Latin America and the Caribbean at the World Bank. He is also the Henry Ford I1 Professor of International Business Economics at the Anderson Graduate School of Management, University of California, Los Angeles, and a research associate of the National Bureau of Economic Research. The author is grateful to discussants at the conference for helpful comments and to participants at a seminar at the Instituto Tecnologico Autonorno de Mexico (ITAM), Mexico City, for helpful discussions. He thanks Fernando Losada for excellent research assistance. 1. Even though the experiences of the individual Latin American countries varied during 195080, in the majority of them some variant of inward-looking development was the dominant policy. Since the early 1960s a number of trade liberalization attempts have taken place in the region. Almost every one of them has ended in frustration. In fact, until the late 1970s-1980s very little progress was made in this area.
a failure. This view has been clearly synthesized by Lance Taylor (1991, 119), who has argued that the “trade liberalization strategy is intellectually moribund” and that there are “no great benefits (plus some costs) in following open trade and capital market strategies” (141). From here he goes on to say that “development strategies oriented internally may be a wise choice towards the century’s end” (141). Immediately following the eruption of the debt crisis, it seemed that increased protectionism was indeed the path that Latin American countries had chosen as a possible way out of their problems. Even Chile, the strongest supporter of free trade, tripled its import tariffs.* As a result of this, in the mid1980s Latin America had one of the most distorted external sectors in the world, with extremely high import tariffs and, in some cases, quantitative restrictions that covered every single import item (see table 1.1). However, by 1987-88 it became increasingly apparent that a permanent solution to the region’s economic...