Latin American exports have done well in terms of volume during the last quarter century. Indeed, they have exceeded the expansion of world trade. But even with the edge in trade, economic growth has been disappointing throughout the region.
Isn’t export promotion the key to growth, according to the mantra of 70’s? That’s what everyone used to believe; but time has shown clearly that stimulating growth requires much more than just increasing exports.
Chile is the only country in the region with steady and vigorous growth rates and export expansion over the past decade, although it, with similar export performance, achieved mediocre average GDP growth in the 1970s and 1980s, explained Ricardo Ffrench-Davis, principal regional advisor for the Economic Commission for Latin America and the Caribbean (ECLAC).
According to Ffrench-Davis, sound reforms to already existing reforms in the 1990s, did play a key role in the recent Chilean success story.
During a recent seminar at the IDB headquarters in Washington, D.C., Ffrench-Davis offered guidelines, many of them already implemented in Chile and East Asian countries, to achieve growth along with booming exports. He also explained the similarities in the economies of Chile and East Asia, linking macroeconomic policies and increasing exports with economic growth.
In contrast with the rest of Latin America, Chile implemented an economic system based on competition, which attracted investment as it opened new exports markets. This system afforded the country favorable interest and exchange rates.
According to Ffrench-Davis, countries should make good use of their comparative advantages when planning their exports. They should specialize in marketable products where they can build economies of scale. Finally, they should catch up with technology, invest in their people and promote savings.
Latin America’s disappointing growth rates can be attributed not to lack of reforms, but to a lack of sound pragmatic reforms, Ffrench-Davis said. Capital markets with unfavorable interest rates fail to encourage savings and to promote investment and loans. Moreover, small and medium firms are the ones most in need of infusions of capital. The lack of investment in education and research makes a country less competitive, thus less attractive to investors.
Ffrench-Davis went on to say that each reform plays a role in a country’s productivity, which could occasion either a positive or negative impact on GDP growth, defined as consumer, investment and government spending, plus net exports (exports minus imports). Exports do play a role in the overall economic performance of a country, but pragmatic reforms play a bigger role in improving economic performance and equity.