All carrots, no sticks?

by March 25, 2011

Eva Paus

It is received wisdom by now that Latin America’s economies have thrived under the application of free-market (or “neoliberal”) policies over the past twenty years or so–at least in comparison with performance under the import-substitution policies of the decades before that. But Eva Paus, professor of economics at Mount Holyoke College, argues in an essay for Americas Quarterly that the region has in fact fallen into a trap: by initially offering protection to industries without requiring export improvements from them, policymakers encouraged the development of weak and inefficient companies, and by then opening their economies to global competition, they exposed these same companies to the rigors of the international marketplace prematurely. As a result, she argues, economic growth between 1980 and 2008 has been lower than in any other developing country group.

It is well known where industrial policies under [import substitution industrialization] went awry in Latin America. The Asian Tiger governments combined public support to companies with performance requirements, which often meant that firms had to export a growing share of their output during the learning process. Latin American governments provided only the carrots without the sticks. They did not use disciplining mechanisms to ensure that firms would turn public support to help them learn to become internationally competitive. The public coddling created widespread inefficiencies.

Some East Asian governments formed deliberative committees to bring companies together with public officials to explore possible new comparative advantages. In Latin America, by contrast, there was little consultation between governments and the private sector. The lack of serious coordination produced many projects with no foreseeable comparative advantage.

Though Paus’s entire essay is not available without a subscription to AQ, the excerpt provided on the site is lengthy and thought-provoking. Go here to read it.