Thu, Nov 01, 2001 page9

• Searching for strategies

  Asia and Latin America are looking for new ways to boost their struggling economies

  • By Victor Bulmer-Thomas
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  In these early days of the current crisis, economics may take a back seat to military and strategic issues, but worries about the world economy abound. Restoring growth, indeed, will become an ever more vital issue. Of course, the need for growth had been questioned of late in developed countries as some people increasingly feared environmental damage, and others sought more leisure time instead of higher wages. In developing countries, however, doubts about growth were always more muted.

  Growth remains an imperative for them because, despite lower birth rates, populations are expanding, so jobs must be found for new workers. Real wages for many workers are pitifully low and can only be addressed through the higher productivity that growth usually entails. Moreover, governments need the extra resources that growth generates so as to tackle social deficits in health, education and social security. Lip service is paid to the concept of "sustainable development;" yet in most conflicts between growth and the environment, the latter is sacrificed.

  

  ILLUSTRATION: MOUNTAIN PEOPLE

  Latin America's growth experience has been a play in two acts. Until the early 1980s, economic growth in most of its countries was driven by an import-substituting industrialization supported by high tariffs, quotas, licenses and, at times, outright prohibitions on imports. Only three Latin American countries joined the General Agreement on Tariffs and Trade (GATT) at its creation in 1947. Currency controls often created a strong bias against exports. Moves away from import substitution regimes began before the 1980s, but many failed. Latin America's share of world trade collapsed in the three decades after 1950.

  Despite hostility toward trade, Latin American growth averaged 5 percent a year in the 30 years before 1980, with Brazil briefly enjoying growth in excess of 10 percent after 1967. Income per head more than doubled and Latin America -- with a few exceptions -- was seen as one of the world's fastest growing regions.

  Although the import substitution model became exhausted long before the 1980s, it took the debt crisis of 1982 to kill it off. Throughout the rest of the decade, Latin America struggled to establish a new economic model that would renew growth. Indeed, adjusting from one model to another imposed a heavy toll on growth throughout the 1980s.

  The new model emphasized trade liberalization, markets, and foreign investment. All Latin American and Caribbean countries (except the Bahamas) joined the WTO (GATT's successor). Most also participate in regional integration schemes such as NAFTA and MERCOSUR. The share of world trade began to increase. Yet growth disappointed. Only a few countries -- notably Chile -- achieved growth rates in the 1990s as fast as before 1980.

  Compared with Latin America, Asia's growth in the 1950s was disappointing, save for Japan. Import substitution was used, but did not deliver the same benefits as in Latin America. In the 1960s a handful of countries began to emphasize exports and generated rapid export-led growth. South Korea, Taiwan, Hong Kong and Singapore became models for Indonesia, Malaysia, the Philippines and Thailand.

  Until Mao's death in 1976, China dismissed all this change. But within two years economic reform liberalized rural and urban markets, encouraged foreign investment in export enclaves and permitted a greater degree of income inequality. The result was one of the most spectacular spurts of growth ever seen, rivaling if not yet exceeding Japan between 1950 and the mid-1980s.

  Where Latin America's growth was halted by the debt crisis of 1982, growth in many Asian countries was stopped cold by the 1997 financial crisis. Growth in China -- and to a lesser extent Taiwan -- survived, but the rest of the region suffered grievously. Adjustment has been painful and has not been helped by stagnation in Japan.

  Growth in Latin America has often suffered from a shortage of domestic savings, leading to the need for foreign capital to sustain an adequate rate of investment. Foreign capital inflows led to an accumulation of debt, which on numerous occasions provoked financial crises. Thus, the key to sustainable long-run growth in Latin America is higher domestic savings.

  Some steps have been taken to improve this situation. Fiscal deficits are much smaller now that inflation is under control. Pension systems have been privatized, or at least partially privatized, in most countries. Loss-making state-owned enterprises have been closed or sold to the private sector. However, extreme income inequality in the region has not produced high rates of savings by wealthy households, as their liquid assets are often held abroad.

  Asia's problems have been the opposite. High domestic savings encouraged financial institutions to lend beyond the limits of prudence. Non-performing loans acted as a break on growth, as in Japan, or required adjustment measures that incite recession. Thus, the key to sustainable long-run growth in Asia may be lower domestic savings or a greater willingness on the part of banks to lend to the rest of the world.

  Asia has made only limited progress in addressing this problem. Reform of the financial system has been timid and banks still carry a large proportion of non-performing loans in their portfolios. Close ties between business and government ("crony capitalism" in the worst cases) linger and there remains a reluctance to let large firms go bust or be taken over by foreign companies. This makes it hard for domestic savings to be channeled to where they are most needed.

  As both Latin America and Asia became more open, their vulnerability to external shocks increased. Slow or no growth in Japan, the economic engine for many of its neighbors before 1990, is a negative factor across Asia. Today's difficulties in the US have exacted a heavy toll on growth in Latin America. Mexico, with most of its exports destined for North America, is now in recession. Thus, growth in Asia and Latin America depends not only on sound domestic policies, but also on what happens elsewhere.

  Victor Bulmer-Thomas is the director of the Royal Institute of International Affairs, London.

  Copyright: Project Syndicate
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