External Liberalization, Economic Performance, and Distribution in Latin America and Elsewhere

As seen from the year 2001, economic policy in developing and post-socialist economies during the preceding 10-15 years had one dominating theme - external 'liberalization' or the drastic lowering or removal of long-standing barriers to almost all international transactions in markets for goods and services and movements of capital. This wave of deregulation was the central feature of 'globalization' for the non-industrialized world. This paper discusses this fundamental economic policy shift in nine transition and developing countries in Latin America and elsewhere, drawing upon country studies from research projects sponsored by the United Nations. The results are sobering. At their best-and the best cases were infrequent­ liberalization packages generated modest improvements in economic growth and distributional equity; at their worst they have been associated with increasing income inequality and slower growth, even in the presence of rising capital inflows. The country studies suggest that the effects of liberalization on growth, employment, and income distribution emerge from a complex set of forces on both the supply and the demand sides of the economy. Redistribution of income and production across industries (typically from those producing traded to those producing non-traded goods) and groups within the labour force (typically from the unskilled toward the skilled) as well as adverse shifts in 'macro' prices such as the real wage, interest, and exchange rates are part and parcel of the process. This degree of complexity and most of deregulation's unfavourable effects were not anticipated by its proponents. Only now are they beginning to be widely recognized. The obvious implication is that the liberalization strategy needs to be seriously rethought.