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Editor
Carlos Henrique Cardim
Correspondence address:
Revista DEP
P.O. Box 2431
Brasilia, DF – Brasil
CEP 70842-970
revistadep@yahoo.com.br
www.funag.gov.br/dep
International Cataloguing in Publication Data
DEP: Diplomacy, Strategy & Politics / Raúl Prebisch Project no. 7 (july/september
2007). Brasília : Raúl Prebisch Project, 2007.
Three–monthly
Published in portuguese, spanish and english.
ISSN 1808-0499
1. South America. 2. Argentine, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana,
Paraguay, Peru, Suriname, Uruguay, Venezuela. I. Raúl Prebisch Project.
CDU 327(05)
The DEP Diplomacy, Strategy & Politics Review is a three–monthly periodical on
South American affairs published in Portuguese, Spanish and English. It comprises
the Raúl Prebisch Project and is sponsored by the Brazilian Ministry of Foreign
Relations (MRE/Funag – Alexandre de Gusmão Foundation/Ipri – International
Relations Research Institute), Construtora Norberto Odebrecht S. A., Andrade
Gutierrez S. A. and Embraer – Empresa Brasileira de Aeronáutica S. A.
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The recovery of Argentina’s economy
Aldo Ferrer
The Bolivian economy: diagnosis and plans for 2008
Luís Alberto Arce Catacora
A qualitative approach of the Brazilian economy
João Paulo de Almeida Magalhães
Chile’s economy and development challenges
Mauricio Jelvez M.
The Colombian economy: a critical approach
Darío Germán Umaña Mendoza
The Ecuadorian economy: overview and a new concept
of development
Fander Falconí Benítez
The Guyana economy, review and prospect
Rajendra Rampersaud
D E P
DIPLOMACIA ESTRATÉGIA POLÍTICA
Number 7 July / September 2007
Summary
156
171
192
206
217
235
Paraguayan economy at a slow pace: current situation
and outlook
Dionisio Borda
The Peruvian economy and the challenge of growth with
social inclusion
Enrique Cornejo Ramírez
Surinam: macroeconomic evolution
André E. Telting
The Uruguayan economy: an entrepreneurial standpoint
Jorge Abuchalja
The present growth period of the Venezuelan economy
Nelson Merentes
Philip Moore: an ancient soul in a modern body
Agnes Jones
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
5
Encounter of South
American Economists
T
he Alexandre de Gusmão Foundation and the International Relations
Research Institute-IPRI, in cooperation with Construtora Camargo Correa,
held a First Encounter of South American Economists on November 7, 2007,
at the Itamaraty Palace in Rio de Janeiro.
The encounter was attended by outstanding specialists of the regions’
twelve countries, who were invited to submit their reections or summaries
about their national economies. The full text of their presentations is presented
in this issue of Diplomacy Strategy Politics – DEP magazine.
The reports on each country fueled a meaningful debate among
participants, during which it became clear that, in addition to a valuable
exchange of views and information about the countries’ internal situation
and prospects, there is a greater sense of belonging to the region and a keener
awareness of a shared history.
Worthy special mention was the signicant Construtora Camargo Correa’s
contribution, which made possible this First Encounter of South American
Economists and testied to that enterprise’s enlightened understanding of the
importance of an ongoing dialogue involving the academic and diplomatic
worlds as well as the private sector.
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
7
The recovery of
Argentina’s
economy
Aldo Ferrer*
S
ince mid-2002, Argentina’s economy has grown at an annual rate
of over 8 percent under conditions of macroeconomic governability and
improved social indicators. This performance contrasts with its course over
a long period, particularly with the period that began in 1998 and culminated
in the crisis of 2001 and early 2002, when GDP sustained a cumulative 20-
percent drop, the unemployment rate reached 25 percent, and the proportion
of people living under the poverty line exceeded 50 percent. Ultimately, the
convertibility regime and the peso-dollar parity collapsed, bank deposits were
frozen to prevent the ight of capital, and the government declared default
on the foreign public debt. This disarray was reected in the impossibility of
honoring contracts, particularly those denominated in dollars, as well as in the
circulation of sixteen currencies issued by the provinces in face of the collapse
of the monetary system and of public nances.
The crisis was the epilogue to an economic strategy based on a model that
proved incompatible with Argentina’s economic growth and social welfare, and
* Buenos Aires University
The recovery of Argentina’s economy
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
8
with the elementary equilibriums required for the functioning of an economic
system. This strategy led to an unprecedented deterioration of the country’s
social fabric and productive apparatus, and ended up by playing havoc with
the three fundamental axes that keep a modern economy in order, namely, the
budget, international payments, and the currency.
At the same time it was submerged in this economic crisis and social
convulsion, Argentina also faced a serious political crisis. The Vice-President’s
resignation in 2001, followed by that of the Nation’s President, signaled a
state of institutional instability and impotence. By mid-2002, prospects for
Argentina’s future were the worst possible: hyperination, social chaos, and
an undeniable need for international rescue.
Now, ve years later, reality is totally different from what was then
envisioned. Argentine democracy has survived the crisis. In 2003, the country
peacefully elected new authorities and is now approaching new elections, all in
accordance with the Constitution. The economy experiences unprecedented
growth. Macroeconomic foundations, under favorable international conditions,
are sufciently solid to propel Argentina’s vast growth potential. The nancial
crisis, now encapsulated within its own limits, has not hindered the growth
of the real economy or the investment rate, which rose from 12 percent in
early 2002 to 23 percent today, nanced by domestic savings. Recovery has
been achieved with internal resources, without the need to ask anything from
anyone, and debts have been paid.
Serious problems persist, particularly in the social area. Unemployment
has declined but still holds at about 10 percent, poverty still affects one third
of the population, informal labor without social welfare coverage accounts
for 40 percent of the labor force, and income is still extremely concentrated.
Economic policy faces other challenges, such as the need to make a high
growth rate consistent with reasonable price stability. Be as it may, the change
of course has been so radical that it deserves an interpretative study and an
exploration of future prospects. This is the aim of this essay.
1. The economic policy model
The Argentine economy’s remarkable recovery in the last three years reects
the convergence of new circumstances brought about by the crisis itself and the
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Aldo Ferrer
9
management of these new circumstances through political and economic action.
These two factors have permitted the recovery of economic governability.
In early 2002, the depth of recession had widened by 30 percent the gap
between real and potential GDP. Idle resources were available, which permitted
the recovery of production and employment, while demand expanded and
economic governability was established. The crisis also caused a marked decline in
imports, which, combined with exports’ considerable growth, led to a 60-billion
dollar trade balance surplus in the last ve years. In turn, it was possible to recover
tax collections, nance public spending, and generate in 2004 a consolidated
primary surplus of the State and the Provinces of about 6 percent of GDP.
Although this surplus declined thereafter, it has remained over 3 percent of GDP.
Lastly, devaluation and a domestic prices’ increase equivalent to just one third
of the exchange adjustment improved the competitiveness of the production
of internationally traded goods and services. This extraordinary change in
circumstances has strengthened the current conduction of the economy, which,
after dropping convertibility, regained the command of monetary policy and
resumed the administration of the exchange rate.
Economic policy responded effectively to the challenges and the new
circumstances brought about by the 2001-2002 crisis. Here lies the main cause
of the Argentine economy’s current recovery and growth.
This made it possible to recover the command of the economic policy
instruments and to apply a shock to the returns of activities, particularly of
manufacturers and of small and medium enterprises, which had been castigated
by the exchange overvaluation and by other elements of the previous policy.
It was at this point that the recovery of Argentina’s economy started.
The main features of the current economic policy are as follows:
• Maintenance of an exchange rate that is consistent with the competi-
tiveness of the production of tradable goods;
• Reemergence of the State as arbiter of the conicts inherent in a
market economy and a pluralist society;
• Consolidation of the macroeconomic equilibriums in the budget, the
currency, and the balance of payments, so as to ensure the proper
functioning of the economy and the nourishing of the economic
agents’ expectations;
The recovery of Argentina’s economy
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
10
• Gradual reduction of foreign indebtedness of both the public and the
private sectors, so as to consolidate macroeconomic equilibriums and
doing away with the private sector’s nancial exposure; and
• Use of the income policy as a complementary instrument to macro-
economic equilibriums to guide the evolution of prices and manage
inationary pressures without depressing the level of economic activity
and employment.
Various elements of the current model of Argentina’s economic policy are
to be found, both in the past and now, in the countries that have achieved high
levels of development, mobilization of their productive potential, symmetrical
participation in the international system, as well raising the welfare of their
societies. None of these countries has maintained exchange rates adverse
to the competitiveness of their production, or unsustainable indebtedness
levels. In this sense, it may be said that Argentina is moving toward normalcy
and, even more important, the same thing seems to be happening to public
opinion’s prevailing criteria.
Because abnormal policies were applied in Argentina for so long, the country
failed to arrive at a basic long-term consensus about the economic policy that
was both necessary and possible for developing its productive potential. As a
matter of fact, a debate still goes on, based on complex reasons inherent in
the country’s history, as to whether a market economy is a system subject to
global norms administered from world power centers or a system capable of
deciding its own course in the context of a network of global trade relations,
investment, and nancial ows.
According to the model on which the [economic] policy of the nineties
was founded, the world order is a worldwide system under which most economic
transactions take place and decisions are made by transnational power centers,
namely, the nancial markets, the big corporations, and, to a certain extent, the
governments of a small number of highly industrialized countries, the United
States in particular. In this scenario, the other countries and their national states
seem to have lost their ability to make decisions about such fundamental issues
as production, investment, and income distribution.
Seen from this angle, the countries that are peripheral to the system’s
power centers lack the power to make their own decisions and their national
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Aldo Ferrer
11
states are unable to determine the course of events. Moreover, as the markets
know better than the State, public policies defy economic rationality. The only
possible attitude then is to go with the ow and do what the markets expect.
Economic policy’s role is thus reduced to issuing signals that are favorable
to the markets’ criteria and interests. Accordingly, the global markets will
supposedly incorporate peripheral countries into the development process
and raise the entire population’s welfare level.
This model’s foundation is awed in many ways. In the rst place, the
majority of economic transactions and capital accumulation occur mostly
within the national space. World exports account for 20 percent of gross
world product and the investments (including the reinvestment of prots) of
transnational corporations’ subsidiaries (these investments quantify the equity
contributions for expanding productive capacity) nance less than 15 percent
of the productive capital in the international economy. Thus, 80 percent of
the world’s production are sold on domestic markets, while domestic savings
nance over 80 percent of capital accumulation. As a result, the globalization of
the world order coexists with the fact that domestic markets and the countries’
domestic savings are essential as a source both of demand and of resources
for growth and cannot be ignored by a realistic strategy aimed at development
and at incorporation into the global economy.
Secondly, economic development depends on society’s capacity to set in
motion processes of accumulation in a broad sense. That is, accumulation of
capital, technology, public and private management capacity, education, economic
regulation, and creative relations between the public and the private sectors.
This accumulation process can be managed only from within each society and
cannot be transplanted from outside. Neither can it be achieved independently
from the market and from the mass of technologies and knowledge available in
the world. Accumulation and development are equally impossible if subject to
external factors that disturb a country’s social cohesion and productive apparatus,
or apart from globalization. Hence, the irrationality of the premises that inspired
the neoliberal policies that led to the Argentine crisis.
When countries manage to meet globalization’s challenges and
opportunities consistently with their national development, they open
up opportunities for all, promote investment and growth, and establish
symmetrical rather than subordinate relations with the global order. Otherwise,
The recovery of Argentina’s economy
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
12
underdevelopment, poverty, inequality, and dependence on world power centers
remain. Argentina’s history provides emblematic examples of this.
The accumulation and development capacity and the effectiveness of
responses to globalization depend on the countries’ national density, i.e., on
their social cohesion, the ability of their leadership to accumulate power and
retain control over their main resources, as well as providing employment
opportunities for the majority of their citizens, ensuring institutional stability,
and endorsing functional, appropriate ideologies for exploiting the potential
of available resources.
Historical antecedents are conclusive. A look at today’s reality shows
that what characterizes the most successful Asian countries, such as Korea,
Taiwan, and Malaysia, as well as China and India, is a national density sufcient
to set in motion processes of accumulation in a broad sense, and thus to fuel
growth and enhance their populations’ welfare. In Latin America, though,
social fractures, leaders that accumulate power subordinated to transnational
interests, fragile institutions, and the inuence of what Prebisch used to call
“centric thinking”, hinder the achievement of dynamic economies open to
the world while retaining control over their own destiny.
This dilemma regarding the nature of the Argentine economy, its
placement in the world, and its development pervades the current debate
about economic policy. Proposals on specic issues, such as the interest and
the exchange rates, the currency, public spending, and taxes, are consistently
based on one of these two views. Thus, the clarication of these issues ceases
to be a mere theoretical exercise and involves specic, punctual problems that
must be solved, so as to make the Argentine economy’s current recovery into
an accelerated, long-term process of sustainable development with equality.
2. Phases of the economy’s ongoing development
Policies under the revamped developmentist model
1
have made possible
the Argentine economy’s recovery and growth. Since when the crisis reached
bottom (end-2001 and early 2002), the economy has gone through two phases
1 L. C. Bresser Pereira calls “new developmentism” his proposed economic strategy for Brazil, which has
much in common with Argentina’s revamped developmentist model. See Microeconomia da estagnação. São Paulo:
Editora 34, 2007.
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Aldo Ferrer
13
before ending up in a new scenario in which growth and stability issues may
be raised again.
The rst phase
It extends from mid-2002 through late 2003. During this period, aggregate
demand increased owing to the considerable international payments surplus
and to the substitution of tradable goods, triggered by the change in post-
devaluation relative prices. The stimulus of aggregate demand more than offset
the contracting effect of the consolidated public sector’s primary surplus.
This aggregate demand expansion and the recovered competitiveness
of the domestic production of tradable goods widened the margin of return,
boosted private activity in the industrial sector, and allowed the reduction of the
productive apparatus’s idle capacity. It also contributed to the sustained growth
of agricultural and livestock production and, a little later, to the rebounding of
construction. The supply response reected in the remarkable GDP growth
and employment recovery.
After the initial domestic prices adjustment following the dropping of
convertibility and the subsequent stabilization of nominal parity at around three
pesos to one dollar, the increase in domestic prices ended up by representing a
real exchange rate 30 percent higher than the average of the last thirty years.
The good performance of the economy and the enterprises was made
possible by the gradual normalization of the economic and social context.
The economy’s governability thus played a fundamental role in the recovery,
which was ensured by the following:
• The balance-of-payments surplus and the Central Bank’s higher
reserves;
• Changing relative prices that favored domestic production’s competi-
tiveness;
• The monetary system’s pesication [unpegging the peso from the
dollar] and the attendant monetary authority’s recovery, as well as the
normalization of banking operations; and
• The successful operation to cease defaulting on part of the public
foreign debt’s principal, and the substantial reduction of the private
sector’s foreign exchange exposure.
The recovery of Argentina’s economy
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
14
The recovery of juridical security and of the contracts regime helped
create a scenario favorable to production, investment, and employment.
The norms in force under convertibility were unsustainable, as they were
founded on an economic and nancial regime based on a foreign currency,
increasing macroeconomic disequilibria, and impossible requirements, such
as the requirement to x the prices of public services in dollars and indexing
them to U.S. ination. After the inevitable collapse, juridical relations and the
contracts regime were gradually normalized.
The new directions of the economic policy contributed to the recovery
of the country’s self-condence and reliance on its own strengths and on its
capacity to manage itself and to exploit its productive potential.
The extraordinary dynamism of agricultural and livestock production and
of agro-industrial value inuenced the Argentine economy’s recovery process.
Another contribution came from the considerable increase in the sector’s
production, fueled by the capacity of rural entrepreneurs, who assimilated
the technological revolution caused by the new agronomic practices, such as
direct sowing, technological packets, and transgenic crops. The opening of
new markets, particularly in the Asia-Pacic region, and the higher commodity
prices have also rendered a similar contribution.
The second phase
The second phase, which started in early 2004, is now ending. During this
period, the impetus of aggregate demand was fueled by the marked increase
in consumption (owing to the recovery of employment and salaries) and
the remarkable increase in domestic investment. The consolidated primary
surplus in public accounts has slowed somewhat this expansion impetus of
consumption and investment.
This phase saw the continuing positive effects of the economy’s
governability and of the changing relative prices that favored the local
production of tradable goods. This latter factor tended to weaken, given
the peso’s progressive appreciation, and bodes future uncertainty about the
behavior of the real exchange rate in the medium and in the long term.
Supply continued to respond to the stimulus of demand. GDP
maintained growth rates close to 9 percent a year, with a sustained though
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Aldo Ferrer
15
moderate recovery of employment and real salaries. Throughout the productive
apparatus, attractive return possibilities persisted, which explains the increase
in gross domestic investment.
The current stabilization policy rests on the solidity of the system’s
macroeconomic equilibriums and on an income policy implemented through
agreements achieved in the markets and in respect of critical products,
tax withholdings on various exports, subsidies to public services of mass
consumption, control of the prices of privatized public services, and
orientation about the acceptable limits of salary increases.
The income policy is a heterodox instrument of economic policy; it is
legitimate and has many antecedents even in advanced industrial economies.
It has two main objectives: to manage the income distributive tensions and
to inuence the internal distribution of income among productive and social
sectors. This includes administrating the differences between domestic relative
prices and international market prices, so as to inuence the allocation of
resources within the national economy. This is the case of taxes (withholdings)
based on the exchange rate applied to the various commodity exports.
In Argentina, the current income policy has all these motivations. Its feasibility
depends in large measure on how uid is the dialogue between the government
and the economic players and on how consistent it is with the requisite return
possibilities that are essential to sustain the continuous growth of supply.
3. The path to future development
The completion of the two rst phases of recovery has exhausted
the growth impetus fueled by the change in the rules of the game. Also
completed is the stage at which the new economic model could function with
the relatively simple instruments of scal adjustment, the pesication of the
monetary system, the determination of the exchange rate, and the recovery
of the administrative power’s essential functions.
It is necessary to consolidate the achievements and to realize that the
fundamental challenges of development, technological changes, and the
accumulation process in all its complexity pose new challenges to the country.
It is necessary to identify the objectives to be pursued from now on, so as to
The recovery of Argentina’s economy
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
16
achieve development and welfare levels consistent with the available talent
and resources. That is, it is now the time and this is the opportunity to raise
the real country to the level of the possible country.
At this point, three fundamental issues arise, which must be addressed:
raising the level of social welfare, integration of the productive apparatus,
and the country’s assertive inclusion in the globalization process. The full
development of small and medium enterprises is a sine qua non for meeting these
challenges. Small and medium enterprises are an essential part of the country’s
productive apparatus and social fabric, the main source of employment
and thus of welfare, as well as a crucial element for the establishment of a
symmetrical, dynamic relationship with the world economy.
To hew a path to long-term growth, economic policy must perform
more complex tasks than in the two recovery phases. It must now hone is
instruments to support growth and the economy’s transformation, as well as
enhancing the country’s presence on the international scene. To this end, it
must open new opportunities for creativity, demonstrate that our country is
the most protable, safest place for investing savings, and denitively settle
the social debt.
Fundamental issues
Social development. So far, employment’s initial recovery and the various
social programs have been sufcient to alleviate in some measure the tensions
caused by the rupture of the country’s social fabric and the disruption of
the productive apparatus, as well as the attendant consequences in the form
of the poor, the indigent, and the marginalized. But the claims of a society
affected by poverty, inequality, and all the years of blunders still persist.
Quality employment, the incorporation of all workers into the formal market,
the strengthening of protection schemes, and a greater supply of public
goods (health, education, security, the environment) now come to the fore as
fundamental issues in the social eld.
Productive structure. The two phases of recovery reestablished to some
extent a more diversied and complex productive structure, with an impetus that
encompassed different regions of the vast national territory. These facts opened the
way to the building of a modern, integrated, open, and competitive economy.
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Aldo Ferrer
17
Structural diversication is crucial for allowing scientic knowledge and
technology to pervade the country’s entire productive apparatus and social
fabric, address the changes in demand and in technology, and for setting into
motion the processes geared to capital accumulation, qualication of human
resources, and resources management – the very essence of development.
A exible, evolving structure, as diversied and complex as required by the
current status of knowledge, is capable of being equal to the changes imposed
by the new technologies and the ensemble of market demands. It is also
capable of expanding innovation sources and disseminating the application
of knowledge through the entire social fabric and productive apparatus. A
modern knowledge society is unthinkable if it relies on a productive structure
supported by only one or few sectors, no matter how complex the production
process that sustains it, as such a structure would suffer from an insufcient
degree of integration into the rest of the economy.
Argentina has the good fortune of having valuable human resources
available as well as extensive and varied natural resources capable of making
it self-sufcient in food and energy. These factors, transformed and linked
to industrial development and to knowledge-bearing services, provide a
development platform.
History is conclusive: only industrial countries that value their natural
resources and establish sound national science and technology systems know
prosperity. Experience also shows that such aims are not the spontaneous result
of market forces but the outcome of the exploitation of talent and private
initiative under public policies that make use of the available potential.
International participation. A cohesive society and a diversied, complex
productive base are essential for full, dynamic, and constructive participation
in the global ows of trade, investment, nance, and knowledge. They are
equally essential for ensuring that domestic production of tradable goods
satisfy the demand for more differentiated products that involve innovation
and take into account the market’s changing tastes and preferences. The more
diversied and complex the domestic productive structure is, the greater will
be its competitiveness in the dynamic ows of international trade.
Participation in the international division of labor based on intra-
industrial specialization regarding products rather than branches is the style
adopted by countries that maintain symmetrical, not subordinate relations with
The recovery of Argentina’s economy
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
18
globalization. This is the objective to be pursued for closing the technological
content gap between exports and imports, whose asymmetry is an eloquent
indicator of the country’s relative underdevelopment.
Economic policy
The resurgence of the State as an irreplaceable protagonist in a market
economy and in a democratic society occurred in the two rst phases of
recovery, with the precarious instruments that survived the dismantling of
public policies. This was sufcient to achieve economic governability and to
produce a returns shock that changed the course of the economy.
A requirement of sustainable, long-term growth with equality is the
construction of a State as small as possible for discharging its essential functions,
an efcient, working State that is transparent and subject to the checks of a
democratic system. This is indispensable for consolidating, in the medium and
long term, the governability achieved in the economy’s fundamental variables,
for widening the margin of return throughout the national economy, and for
reinforcing the country’s self-condence and capacity to govern itself and to
build a prosperous future with opportunities for all.
At the beginning of recovery, disorder was so appalling and the loss of
economic policy instruments was so great that drastic, fundamental decisions
(pegging the peso to the dollar, exchange adjustment, increased tax collections)
managed to recover the national economy’s governability and to stand the country
on its feet. Now the demands of governability are more subtle and the scal,
monetary, and exchange instruments must be ne-tuned to ensure growth and
stability. The maintenance of a competitive parity now requires the upgrading
of a series of instruments that complement the monetary authority’s measures
to sterilize the excess of liquidity. This includes the control of speculative capital
and an appropriate complementation of monetary and scal policies.
Once the income policy has been reinstated as a legitimate instrument of
economic policy, price agreements must be gradually complemented or replaced
owing to improved competitiveness and a more uid dialogue between economic
players and the government. The agreements’ stabilization objective should make
part of a broader consensus about expanding productive capacity.
After consolidation of the rules of the game that ensure the system’s
macroeconomic governability, economic policy faces the challenge of achieving
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Aldo Ferrer
19
the fundamental objectives of social development, the transformation of the
productive structure, and full participation in the international economy.
Social initiatives cannot be a byproduct of economic policy, as was the case
under the neoliberal model, for alleviating some of the supposedly inevitable
consequences of injustice today. Quality employment, welfare, education, the
supply of various public goods must be taken into account in the formulation of
economic policy and its scal, monetary, and international payment instruments.
The economic policy’s challenge in the new phase is to include social development
in the rules of the game that govern and promote the development of the
economic system and its participation in the international scene.
It is not true that technological development and globalization inevitably
promote inequality and deprive considerable segments of the population of the
fruits of development. This happens in the lack of appropriate exchange policies
that enhance the system’s growth, expanding markets and creating new sources of
initiatives and innovation. Just as Keynes, in the thirties, found a way out of the
crisis of a system incapable of solving it with its own dynamics, a new worldwide
model is needed today to integrate both exchange and accumulation into social
development. As the world order advances in this direction, our country must
adopt, to the greatest extent possible in solidarity with the other countries of
the region, development policies that encompass social change.
Economic policy has many instruments available for impelling technical
change, the integration of value chains, the development of regions, a major
role by private initiative, the widening of the return margin throughout the
country, the qualication of human resources, the incorporation of the entire
labor force into the formal market, and quality employment with rising salaries.
The establishment of a diversied, complex, open, and competitive productive
structure based on the existence of vast natural resources and on industrial
development depends on the creative synergy of private initiative and public
policies. This is also the foundation capable of determining the country’s
participation in globalization so as to close the gap regarding the country’s
foreign trade’s aggregate value and technological content.
Ination
Price increases are a major problem today in the Argentine economy
and thus deserve special if brief consideration. It awakens past ghosts and
The recovery of Argentina’s economy
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
20
understandably raises public opinion’s concern. On the eve of elections, it
is a sensitive issue in the political debate. According to ofcial gures, the
consumer price index is rising by 10 percent a year, while according to the
harshest opposition the real gure is 15-20 percent. Experience shows that
moderate ination, of about 10 percent, is consistent with a high production
and employment growth rate.
The debate about this issue is centered on the alleged acceleration of
ination. This deserves a closer look.
To follow a pattern of constant increases at consistently higher rates, i.e., to
accelerate, ination presupposes at least one of the three following conditions:
1. Serious disequilibria in public nances, balance of payments, and the
monetary system, usually occurring in situations of heavy indebtedness
and possible insolvency. When this happens, distributive tensions
and preventive price increases aggravate. The system then becomes
extremely vulnerable to the expectations of internal operators and
to external shocks and the volatility of international nances, as
dramatically shown by the Argentine experience under convertibility
and other circumstances in the past.
2. Critical prices markedly misaligned with their equilibrium position in the
economy as a whole. The indispensable adjustment of one or various
prices, as for instance the exchange rate, salaries, or public services
tariffs, inevitably accelerates the rising of the general prices level.
3. Extreme social tensions reected, for instance, in state coups or in
continuous general or sectoral strikes that can be called wild in major
segments of the work force and are out of control of the authorities.
Massive salary increases that usually result in serious labor conicts of
this kind aggravate uncertainty, heighten expectations, and accelerate
ination as well.
Argentina’s ination history shows high average ination in the long run
(world record in the 20
th
century), with episodes of acceleration that often
culminated in hyperination. These occurrences have always resulted from
one, two, or all three of the conditions mentioned. None of these conditions
occur in the Argentine economy’s current situation.
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Aldo Ferrer
21
Indeed, the economy now operates with a twin surplus in the budget
and the balance of payments. In turn, the monetary system, now based on
the national currency, is being actually managed by the monetary authority.
Accordingly, the money supply and its incidence on prices are under control.
The fact that current turbulences have not affected Argentina’s economy,
except for changes in the pricing of securities and moderate interest rate
adjustments, shows the solidity of the macroeconomic equilibriums. It also
shows the successful resolution of the default on the public debt and the
normalization of the private debt.
With respect to the economy’s critical prices, none is particularly
misaligned as regards its equilibrium position in the system as a whole. The
exchange rate experiences pressures toward appreciation more than toward
devaluation, necessary adjustments of public services tariffs remain within the
limits of current ination, and salary increases occur within the same limits
and according to productivity’s performance. There is some tension here and
there, of course, but no extreme situations capable of destabilizing the system
and accelerating ination occur.
As regards social relations, except for notorious, partial, and geographically
localized conicts, missed hours indicators, etc., social relations unfold in a
reasonably stable environment, within a constitutionally-based institutional
framework and under prevailing democratic institutions.
In sum, no conditions exist at this time for accelerating ination. We do
have an inationary problem, regardless of the reference indicator used and
the reliability of the available indicators. An economy that has grown at more
than 8 percent a year in the last sixty months has to ensure that the general
level of prices oscillate no more than 10 percent a year.
Keeping ination at moderate levels is essential for raising the savings
and investment rate to 30 percent of GDP, which is necessary for the economy
to continue growing at rates comparable to current rates and to increase
employment, salaries and social welfare. It is thus necessary to consolidate
macroeconomic equilibriums, prevent prices from deviating from the levels
of dynamic equilibrium, and preserve social peace, as well as maintaining
rationality in the resolution of distributive tensions, which are inherent in
every pluralist, democratic society and in a market economy.
The recovery of Argentina’s economy
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
22
This poses new challenges to economic policy. It is necessary to coordinate
the scal, monetary, and exchange policies for stimulating savings and investment,
managing aggregate demand, promoting progressive income distribution, and
shielding the system from speculative attacks. Among other things, this requires
a delicate management of the sterilization of excess money supply stemming
from genuine accumulation of international reserves; the avoidance of opening
(through an effective interest rate in dollars) of opportunities favorable to short-
term nancial speculation; and the maintenance of a predictable, stable real
exchange rate in the medium and long term. The predictability of productive
investment is necessary as is the uncertainty of nancial speculation.
A primary surplus and the consolidation of scal solvency are an
indispensable anchor for such policy in a scenario in which the debt is under
control and can be administered by the instruments available to the economic
policy. Fortunately, the current international environment is also favorable –
and promises to remain so in the long term – for exploiting the Argentine
economy’s extraordinary development potential, while maintaining the general
level of prices reasonably stable.
4. Mercosur
Argentina’s development prospects are heightened in the Mercosur
scenario and in the context of South American integration. The latter is in
itself a sufciently complex undertaking but, differently from the European
experience, which provides the model for this kind of process, the Mercosur
member countries face huge simultaneous challenges: they need to go forward
with their own national development, to change the form of their participation
in a globalized world order, and to address the sharp asymmetries among
themselves, as regards both size and development stage.
This set of circumstances surrounding Mercosur’s formation (and by
extension South America’s) is specic to the region. It is thus question of
an unprecedented undertaking. At other latitudes, such as in Europe or in
the Pacic Basin, integration occurred originally among advanced industrial
or emerging economies at a comparable development stage, whose social
structures were markedly cohesive, and which maintained a symmetrical, not
subordinate relation with the world order.
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Aldo Ferrer
23
This is not the case of Mercosur, or of any previous Latin American
integration experience, for that matter. Here, integration is pursued by countries
that have not yet consolidated their national density in regard to key issues
such as social cohesion, that maintain a vulnerable position vis-à-vis the rest
of the world under the center-periphery model, and that display asymmetries
of size and development stage among themselves.
This points to the complexity of Mercosur’s formation. Here, the process
is not limited to xing norms for the integration of members and to setting
community-encompassing public policies. It encompasses and is conditioned
by the decisions of each country for promoting their national development
and by joint initiatives to change the form of the region’s participation in the
global scenario and to solve the existing asymmetries.
These circumstances, which are specic to Mercosur, do not invalidate the
project, but characterize its complexity and condition the integration strategy.
The social fragmentation and prevailing asymmetries in the region help ex-
plain the policy differences among Argentina, Brazil, Chile, Uruguay, and Venezuela,
whose current governments are driven by a renovating, progressive impetus.
Conclusions are far from being pessimistic if one compares the results
so far achieved by Mercosur and other South American types of association
with the past, i.e., with relations among our countries at the outset of the
convergence between Argentina and Brazil, and thus of Mercosur, with
the signing of the 1985 Foz do Iguaçu Act. The comparison shows that
since then notable progress has been made on many fronts, including trade,
investment, democratic solidarity, and international stance. It is thus necessary
to discard the vision of an ideal integration and above all to implement a realistic,
comprehensive, and well-rounded strategy for our countries’ integration, in
accordance with actual reality and not with fantasies.
There are currently governments in the region on whose agendas the
social issue is understandably given priority. Each country will address the
claims of its society consistently with its particular realities. This is a key
national development issue that has a bearing on regional integration but
pertains to each country’s internal affairs.
On the path toward transformation that each country must carry out in its
own way, regional integration has considerable potential for expanding markets,
The recovery of Argentina’s economy
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
24
coordinating productive complexes, developing common infrastructure, promoting
science and technology, and agreeing on common positions vis-à-vis the world
order in respect of critical issues that affect us, such as peace and security,
environmental protection, the ght against drug addiction and drug trafcking,
and international trade reform, intellectual property, and nancial regimes.
One should thus discard any pessimistic attitude based on imagined new
splits among our countries and on the failure of ideal integration projects
that have proven unfeasible from the beginning, given the region’s prevailing
realities. An objective, factual assessment shows that one cannot postpone
the construction of Mercosur and of any possible type of South American
integration in the many existing areas of convergence, which are much wider
and much more fecund than at any other point in our shared history.
References
Ferrer, A., A economia argentina. De suas origens ao início do século XXI, Rio de
Janeiro, Editora Campus, 2007.
Ferrer, A., La densidad nacional: el caso argentino, Buenos Aires, Capital Intelectual,
2004.
DEP
Translation: João Coelho.
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
25
The Bolivian
economy: diagnosis
and plans for 2008
Luís Alberto Arce Catacora*
Introduction
B
olivia, a landlocked country in central South America, is a unitary,
democratic, representative, and presidentialist Republic. It is politically and
administratively organized into nine departments. La Paz is the seat of
government. Spanish is the ofcial language, and the currency unit is the boliviano
(BOB). It covers an area of 1,098.581 sq km and has a population of 8,239,676.
The country is rich in mineral deposits, including silver, tin, iron, and zinc as
well as hydrocarbons, particularly natural gas. It produces corn, wheat, cotton,
potatoes, rice, sorghum, soybeans and timber, among other products.
The table below shows the performance of the various economic
variables since the 1970s. One can see that the Bolivian economy has
experienced major macroeconomic disequilibria over the decades, which has
affected the population’s welfare. In the last two years it has approached the
per capita GDP levels of the 1970s.
* Minister of Finance of the Republic of Bolivia
The Bolivian economy: diagnosis and plans for 2008
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
26
Major economic and social indicators
(Period averages – in percentages) 1970-2007
1970-1979 1980-1989 1990-1999 2000-2005 2006-2007
Real GDP growth rate
1
Real GNP growth rate
2
Per capita GNP (US$)
Monthly ination
3
Fiscal decit/surplus
1
(GDP %)
Current account decit (US$ millions)
1
Population
2
4.5
4.3
1,023
1.42
- 2.1
-
4,709.388
-0.4
-0.4
850
11.99
- 11.4
- 210.6
5,940.923
4.0
4.3
907
0.76
- 3.7
- 347.8
7,416.825
2.9
2.9
968
0.28
- 5.8
84.2
8,917.934
3.9
3.3
1,007
0.61
3.8
1,107,2
9,638.389
Source: National Statistics Institute-INE and Ministry of Finance Prepared by: Fiscal Analysis Network
Note: 1. First semester of 2007
2. End-2006
3. September 2007, in percentage
This articles is divided into two parts: the rst focuses on the economy’s
current situation and provides a diagnosis of the real, external, monetary, and
scal sectors and a brief description of current issues, accompanied by an
analysis of major social indicators; the second part dwells on the outlook for
the economy in 2008, in light of the National Development Plan.
I. Description of the economy
This section describes the performance of the main macroeconomic
variables in 2006 and in the rst semester of 2007.
1. The real sector
In 2006 the Bolivian economy beneted from a very favorable external
environment and by a correct administration of the economic policy, both of
which greatly inuenced its performance.
The gross domestic product in real terms grew by 4.63 percent in 2006
as compared with 2005. This was the highest growth rate recorded in the past
seven years. This growth was driven mainly by the manufacturing sector, which
contributed 1.33 percent. See Table 1 below.
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Luís Alberto Arce Catacora
27
Table 1
Gross Domestic Product by economic sectors
(In 1990-BOB millions and in percent) 2005-2006
Millions 1990-BOB Growth % Incidence %
2005 2006 2005 2006 2005 2006
GDP at market prices
Indirect taxes
GDP at basic prices
GDP Extractive
Crude oil and natural gas
Metallic and nonmetallic minerals
GDP Non-extractive
Agriculture, forestry, game and sheries
Manufacturing
Electricity, gas and water
Construction
Trade
Transport and communications
Finance, insurance, real estate
Public Administration Services
Other services
Imputed banking services
25,936
2,470
23,466
2,809
1,769
1,040
20,657
3,773
4,285
515
679
2,125
2,847
2,914
2,373
1,897
-752
27,137
2,599
24,537
2,933
1,854
1,079
21,604
3,945
4,631
534
709
2,199
2,963
3,088
2,459
1,941
-865
4.04%
7.43%
3.70%
13.0%
14.54%
10.37%
2.55%
4.82%
2.70%
2.64%
2.61%
2.70%
2.78%
0.39%
3.63%
1.20%
7.40%
4.63%
5.24%
4.57%
4.42%
4.81%
3.75%
4.59%
4.55%
8.06%
3.55%
4.48%
3.50%
4.09%
5.96%
3.65%
2.33%
15.14%
4.04%
0.69%
3.36%
1.29%
0.90%
0.39%
2.06%
0.70%
0.45%
0.05%
0.07%
0.22%
0.31%
0.05%
0.33%
0.09%
0.21%
4.63%
0.50%
4.13%
0.48%
0.33%
0.15%
3.65%
0.66%
1.33%
0.07%
0.12%
0.29%
0.45%
0.67%
0.33%
0.17%
-0.44%
Source: National Statistics Institute-INE
Compiled by: Fiscal Analysis Network
In the rst half of 2007, GDP grew nearly 3.15 percent, recording an
upsurge in nearly every sector (Chart 1), except for the agricultural and livestock
sector, which was adversely affected by El Niño. This climate phenomenon
produced a negative supply shock, thereby preventing the normal ow of food
into the economy. This put a strong pressure on the level of prices.
The Bolivian economy: diagnosis and plans for 2008
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
28
Chart 1
Real Gross Domestic Product per economic sector
(In 1990-BOB millions) 1
st
semester 2005 – 1
st
semester 2007
Source: INE
Compiled by: Fiscal Analysis Network
The growth of internal demand in 2006 had a positive effect (Table 2)
on the economy’s total expenditures, of approximately 2.63 percent of the real
GDP 4.63-percent growth. Internal demand grew 2.7 percent in respect of all
of its components. Household consumption rose 3.88 percent owing to the
income policy implemented by the government, which raised real minimum
salary by 9.7 percent since May 2006. The export sector also recorded higher
real earnings owing to the correct orientation of the exchange policy, coupled
with high external demand for raw materials and manufactures. Gross xed
capital formation grew 7.09 percent, owing to the construction sector’s greater
dynamism and to a stable political environment. Government spending grew
3.2 percent, less than in 2005, as a result of an austerity policy implemented
in 2006. External demand growth recovered from -1.27 percent in 2005 to 2
percent in 2006.
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Luís Alberto Arce Catacora
29
Table 2
Gross Domestic Product per category of spending
(In 1990-BOB millions and in percent) 2005-2006
1990-BOB
Millions
Growth % Incidence % Participation %
2005 2006 2005 2006 2005 2006 2005 2006
GDP AT MARKET PRICES
Internal demand
Public spending
Private consumption
Investment
Varex
Capital formation
NET EXPORTS
Exports of goods and services
Imports of goods and services
25,936
25,323
2,989
18,644
3,689
333
3,356
613
9,040
8,427
27,137
26,006
3,087
19,369
3,550
-44
3,594
1,131
9,909
8,778
4.04
5.51
3.36
2.72
24.78
-225.1
94.14
-33.99
9.87
15.44
4.63
2.70
3.27
3.88
-3.78
-113.25
7.09
84.61
9.61
4.16
4.04
5.31
0.39
1.98
2.94
2.40
0.54
-1.27
3.26
4.52
4.63
2.63
0.38
2.79
-0.54
-1.45
0.92
2.00
3.35
1.35
100.00
97.64
11.53
71.89
14.22
1.28
12.94
2.36
34.86
32.49
100.00
95.83
11.38
71.37
13.08
-0.16
13.24
4.17
36.52
32.35
Source: INE
Compiled by: Fiscal Analysis Network
Net exports grew 84.6 percent in 2006, thereby reversing the negative
growth of -33.9 percent in 2005. Various factors explain this positive
development, including greater demand of raw materials by India and China
and favorable international prices on the external front, as well as intense
negotiations by President Morales’s government, which ensured better prices
and a greater volume of natural gas exported to the Republic of Argentina and
the Republic of Brazil. A good example was the negotiation with Argentina,
which improved export prices by 65 percent on the average.
2. The external sector
International prices were favorable in 2006 and have remained so in the
rst half the current scal year, as shown by a monetary policy report by the
Central Bank of Bolívia-BCB.
1
An additional factor was the greater dynamism
of the Asian economies, particularly China’s and India’s, and of the euro zone,
coupled with the rebound of the United States’s economy. All these elements
led to a period of bonanza that still endures (Chart 2).
1 Informe de Política Monetária. July 2007.
The Bolivian economy: diagnosis and plans for 2008
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
30
Chart 2
Prices of major mineral exports (In US$ per unit) 2005-2007
Source: IMF
Compiled by: RAF
Exports have struck historical records: they totaled US$4.080 billion in
2006 and US$2.046 billion, a higher gure than any prior to 2003 (Chart 3).
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Luís Alberto Arce Catacora
31
Chart 3
Exports according to economic activity (In US$ millions) 1990-2007
Source: INE
Compiled by: RAF
(1) Exports from January-June 2007
The value of imports both in 2006 and in the rst half of 2007 followed
an ascending curve between 2001 and 2006. Over 50 percent of Bolivia’s
imports consist of raw materials and intermediate products. Capital goods
imports in 2006 were slightly higher than in 2005 (Chart 4).
The Bolivian economy: diagnosis and plans for 2008
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
32
Chart 4
Imports according to use or economic destination
(In US$ millions) 1990-2007
Source: INE
Compiled by: RAF
Imports from January to June 2007
The favorable external scenario combined with proper management of
the exchange policy translated into a balance of payments surplus in 2006 and
in the rst half of 2007 (Table 4), which in turn reected in current account
and capital account surpluses.
Table 4
Balance of Payments current account and capital account
(In US$ millions) 2004-2007
2004 2005 2006
1
st
semester
2006 2007
Current account
Capital and nancial account
Balance of payments
337.4
-211.5
125.9
622.5
-118.8
503.6
1,319.1
266.2
1,515.5
471.2
374.2
845.5
676.1
22.9
698.9
Source: BCB
Compiled by: RAF
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Luís Alberto Arce Catacora
33
The inow of remittances and the trade balance surplus led to a balance
of payment’s current account surplus of US$1,319.1 billion in 2006 and of
US$471.2 million in the rst half of 2007, of which US$1,054.2 billion and
US$375 million in the rst half of 2007 are attributable to the trade balance.
The positive trade balance, the signicant inow of remittances in 2006
and in the rst half of 2007, the alleviation and payment of the foreign debt,
coupled with lower nancing requirements of the scal sector are reected
in a greater accumulation of net international reserves (NIR) by the BCB and
the nancial system, which reached historical records by June 2007 (Chart 5).
This allowed the economy to ensure stability and the coverage of over 100
percent of deposits in the nancial system.
Chart 5
Consolidated international reserves of the nancial system
(In US$ millions) 2006-2007
Source: BCB
Compiled by: RAF
The Bolivian economy: diagnosis and plans for 2008
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
34
In June 2007, net international reserves totaled US$4.999 billion (79 percent
of the Consolidated Reserves of the Financial System). This impressive volume
of reserves forced the BCB to appreciate the national currency against the dollar
by 0.62 percent in 2006 and by 2.7 percent in September of the current year.
In 2006, the real effective exchange rate (REER) depreciated by 0.09
percent owing to the faster pace of appreciation and ination rates of our
trade partners. In 2007, the REER appreciated by 0.73 percent (Chart 6).
Chart 6
Nominal Exchange Rate and Real Effective Exchange Rate Index
(August 2003=100) 2006-2007
Source: BCB
Compiled by:RAF
Gross Foreign Direct Investment (GFDI) totaled US$435.1 million,
or an additional US$30.7 million over the previous year. During this period
investment favored the mining sector (56.4 percent of total investment), which
grew by 37.3 percent, owing mainly to large mining projects such as the San
Cristóbal and the San Bartolomé projects. GFDI in the hydrocarbon sector (24
percent of the total) remained at about the same level in 2005, when investment
totaled US$104.5 million (Table 5). GFDI declined in the rst half of 2007
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Luís Alberto Arce Catacora
35
as compared with US$23.9 million in the same period in the previous year.
However, disinvestment in the current year is less than in 2006.
Table 5
Foreign Direct Investment (In US$ millions) 2005-2007
Economic Sector 2005 2006(p)
January-June Ratio 1
st
semester
2006(p) 2007(p)
Absolute
Variation
Share % Growth %
GROSS FDI
Hydrocarbons
Mining
Industry
Transport and communications
Trade, electricity, and services
DISINVESTMENT
NET FDI
404.4
105
183
58.3
45
13.1
-643
-238.6
435.1
104.5
251.3
47.8
16
15.5
-195
240.1
240.8
31.3
137.1
8.9
33.6
30
-227.5
13.4
216.9
22.9
122.3
20
36.8
14.9
-119.8
97.1
-23.9
-8.4
-14.8
11.1
3.2
-15.1
-
-
100
10.6
56.4
9.2
17.0
6.9
-
-
-9.9
-26.8
-10.8
124.7
9.5
-50.3
-
-
Source: BCB Compiled by: RAF
By late December 2006, the stock of the foreign debt stood at US$3.248
billion, as a result of debt forgiveness by the World Bank and the Japanese
Government. By the end of the rst half of this year, the stock of the debt
had dropped to US$2.056 billion, thanks to debt forgiveness by the Inter-
American Development Bank (Chart 7). These events have reduced the
economy’s vulnerability to the negative effects of interest rates and to the
external sector’s foreign exchange risk.
The Bolivian economy: diagnosis and plans for 2008
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
36
Chart 7
Stock of the Foreign Debt by Creditor (In US$ millions) 2005-2007
Source: BCB
Compiled by: RAF
3. Monetary sector
Under Law 1670, the BCB is charged with ensuring the stability of the
national currency’s purchasing power. To this end, the BCB is implementing
a monetary policy that uses instruments for achieving intermediate targets (it
sets a ceiling for NIR and a threshold for net domestic credit). This allows it
to maintain and optimum NIR level consistent with an adjustable exchange
rate and a net domestic credit level that does not inate prices (Chart 8).
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Luís Alberto Arce Catacora
37
Chart 8
Monetary base net credit to public sector and credit to banks
(In BOB millions) 2005-2007
Source: BCB
Compiled by: RAF
All the monetary policy instruments used by the BCB are aimed at achieving
BCB’s main objective of controlling ination. For 2006 the BCB announced a
target ination range of 3 percent – 5 percent; by the end of the year, accumulated
ination was 4.91 percent, thus falling within the target range.
2
Since November
2006, though, supply shocks have driven prices up. These shocks associated with
the El Niño phenomenon gained force in January 2007 and extended until the
middle of the current year’s second quarter, directly affecting food prices (Chart
9). To this should be added the economic agents’ ination expectations after
a series of news items and rumors spread by many analysts who did nothing
other than prove self – fullling prophecies and put further pressure on prices.
Nevertheless, underlying ination both in December 2006 and June 2007
was lower than observed ination, which means that the higher prices can be
explained by seasonal factors and transitory shocks (Chart 10).
2 Previous administrations used to announce a specic punctual target.
The Bolivian economy: diagnosis and plans for 2008
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
38
Chart 9
Accumulated ination and food performance (In percent) 2005-2007
Source: INE
Compiled by: RAF
Chart 10
Monthly ination and underlying ination (In percent) 2005-2007
Source: INE
Compiled by: RAF
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Luís Alberto Arce Catacora
39
The reserve requirement ratio remained constant at 12 percent for
deposits in national currency and at 21.5 percent for deposits in foreign currency
throughout 2006 and the rst half of 2007. Open market operations, the main
indirect instrument utilized by the BCB allowed the withdrawal of US$248.9
million from the economy, equivalent to 173.5 percent of the balance in
December 2005. For the rst semester of the current scal year the balance is
US$498.3 million, which neutralizes the NIR’s potential impact on ination.
4. Fiscal sector
Fiscal policies implemented in 2006 permitted a nonnancial public sector
surplus of BOB 4.101,4 billion, or 4.6 of GDP – a historical gure without
precedent in over sixty years (Chart 11). The scal surplus in the rst half of 2007 is
4.3 percent, as a result of the implementation of a sovereign nancial program.
3
Chart 11
Surplus- Decit (In percentages of GDP) 1970-2007
Source: Fiscal unit of Programming (UPF)
Compiled by: RAF
3 Under a section of the National Development Plan titled “Sovereign Bolívia,” the country completed its
stand-by program with the International Monetary Fund-IMF on March 31, 2006. The Ministry of Finance is
now implementing a sovereign nancial program without the inuence of any international organization.
The Bolivian economy: diagnosis and plans for 2008
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
40
In 2006, the tax authority adopted policies to raise revenues and optimize scal
expenditures. Some policies were implemented in combination with hydrocarbon
policies to raise revenue from the nonnancial public sector (nationalization of
the hydrocarbon sector and negotiation of better prices and larger export volumes
of natural gas). The tax base was broadened and the efciency of collections was
improved. A considerable tax pressure increase has occurred since 2005, owing
essentially to the favorable external context and the dynamism of the internal
economy (Table 6). Direct taxation of hydrocarbons produced a signicant
change in the tax system’s collections structure: in 2006, this sector’s participation
in collections was 6.1 percent, or 3 percent over the previous year.
Table 6
Tax Revenues 2004-2007
In BOB millions Percent GDP percent
2004 2005 2006 2007* 2004 2005 2006 2007* 2004 2005 2006 2007*
INTERNAL REVENUE
VAT
IUE
IT
ICE
IEHD
IDH
Other
CUSTOMS REVENUE
Tax revenue
Tax Revenue less IDH
10,571
4,411
1,122
1,567
558
1,147
0
1,766
672
11,243
11,243
10,571
4,411
1,122
1,567
558
1,147
0
1,766
672
11,243
11,243
20,376
6,405
2,311
1,812
782
2,000
5,497
1,568
921
21,297
15,799
10,960
3,465
1,286
1,007
465
1,124
2,747
865
509
11,469
8,722
94.0
39.2
10.0
13.9
5.0
10.2
0.0
15.7
6.0
100.0
100.0
95.0
33.1
11.1
10.7
4.2
11.9
14.7
9.3
5.0
100.0
85.3
95.7
30.1
10.9
8.5
3.7
9.4
25.8
7.4
4.3
100.0
74.2
95.6
30.2
11.2
8.8
4.1
9.8
24.0
7.5
4.4
100.0
76.0
15.2
6.3
1.6
2.3
0.8
1.6
0.0
2.5
1.0
16.11
6.1
19.8
6.9
2.3
2.2
0.9
2.5
3.1
1.9
1.0
20.9
17.8
22.8
7.2
2.6
2.0
0.9
2.2
6.1
1.8
1.0
23.8
17.7
22.6
7.1
2.6
2.1
1.0
2.3
5.7
1.8
1.0
23.6
18.0
Source: National Revenue Service and National Customs
Compiled by: Fiscal Analysis Network
(*): Data updated to June 2007
(1): Collections since June 2005.
(2): Annual GDP: BOB 69.626 billion in 2004; BOB 76.154 billion in 2005, BOB 89.428 billion in 2006; and
BOB 48.556 billion in the rst half of 2007.
IUE: Tax on enterprise prots
IT: Sales tax
ICE: Specic consumption tax
IDH: Direct hydrocarbons tax
IEDH: Specic tax on hydrocarbons and byproducts
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Luís Alberto Arce Catacora
41
The austerity policy implemented since 2006 aims at reallocating resources
toward social sectors that were marginalized and neglected in the past. Since
March 2006, the government has implemented an austerity, shared sacrice
policy that has set a remuneration ceiling for the Executive Branch (President
of the Republic, US$1,861; Ministers of State, US$1,737) and expenditures
with the public sector’s representation in the interior were eliminated and the
corresponding resources were channeled to new work categories in the areas
of education and health (Chart 12).
Chart 12
Austerity policy new work categories in health and education 2006
Source: Ministry of Finance
Compiled by: RAF
The scal policy aimed also at eliminating reserved expenditures and at
ensuring transparence vis-à-vis society in respect of the use of public funds.
Information about public spending by the Central, Municipal, and Local
Governments is available to the public on the internet.
The Bolivian economy: diagnosis and plans for 2008
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In 2006, a reduction of US$212 million in the internal debt service as
compared with 2005 was due in part to the cancellation of liquidity credit to
the Central Bank of Bolivia (Chart 13).
Chart 13
Balance of the internal debt (In US$ millions) 2004-2007
Source: Ministry of Finance
Compiled by: RAF
A problem associated with the growth of the internal debt in the past
was the intense dollarization. At end-2003, over 80 percent of the internal debt
was denominated in dollars, which exposed scal accounts to an exchange rate
risk. Recently, the Ministry of Finance has endeavored to reduce the dollar-
denominated debt by using debt instruments denominated in Housing Foment
Units-UFV. As UFV-denominated instruments are pegged to the Consumer
Price Index, the yield of these papers depends on price variations. To the
extent that the monetary authority is able to control ination, it is possible to
attenuate the internal debt instruments’ volatility risk.
These scal results in 2006 and part of 2007 show that the scal policy
was more contractive than in the last 16 years. In addition, a positive output
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Luís Alberto Arce Catacora
43
gap may be an indication that the 2006 scal policy was not only contractive
but also anticyclical, as can be seen from Chart 14).
Chart 14
Fiscal thrust (In percent) 1990-2006
Source: INE, Ministry of Finance
Compiled by: RAF
II. Outlook
Part I of this article expounded the Bolivian economy’s current situation.
Part II focuses on the economic outlook for 2008 and some years thereafter.
As to the real sector, productive activity should be driven by investments in
the mining, hydrocarbon, industrial and construction sectors. Private initiative is
expected to invest US$ 460 million and will thus account for 34 percent of total
investment. The public sector will account for the other 66 percent by investing
US$886 million. Table 7 shows investment in the hydrocarbon sector by the
nationalized Yacimientos Petrolíferos Fiscales Bolivianos – YPFB. Owing to this
process aimed at retaking full control of the hydrocarbon resources, which has
been under way since May 2006, it is possible that YPFB will now participate
in the country’s entire hydrocarbon productive chain.
The Bolivian economy: diagnosis and plans for 2008
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44
Table 7
Investment in strategic sectors (In US$ millions) 2008
2008 2009 2010 2011
TOTAL INVESTMENT
PRIVATE INVESTMENT
MINING
Mutún and other
COMIBOL shared risk
HYDROCARBONS
GTL plants
Gas pipelines
ELECTRICITY
PUBLIC INVESTMENT
FINANCIAL
Industry
Construction
Housing
NONFINANCIAL
HYDROCARBONS (YPFB)
Gas pipelines
Natural to liquid gas Project
CONSTRUCTION
Homes
Roads and infrastructure
1,336
450
294
271
24
106
-132
238
50
886
107
100
7
7
779
152
20
132
627
2
625
1,202
414
457
433
25
-94
-94
50
788
114
100
14
14
674
94
94
580
4
577
1,230
542
568
556
13
-92
-92
66
688
128
100
28
28
560
92
92
468
7
461
1,048
436
477
461
16
-92
-92
52
611
156
100
56
56
455
92
92
363
14
349
Source: Ministry of Finance
Compiled by: RAF
As regards the external sector, the favorable international context should
still be a determinant factor in the national economy. Evidently, the deceleration
of the real estate market in the United States poses a risk to the continuity of
the economic bonanza. However, China’s expected growth of over 10 percent
and the world economy’s dynamism are exogenous factors that should boost
the country’s exports.
In respect of the monetary policy, the Central Bank of Bolivia will steer
all its measures toward keeping ination low and stable and thereby maintain
the national currency’s internal purchasing power. In 2008 and 2009, the annual
ination rate should be around 4 percent, plus or minus on percentage point,
so as to tend toward the medium-term target of 3 percent under the National
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Luís Alberto Arce Catacora
45
Development Plan. Management of the exchange rate will also be subject to
the ultimate ination objective.
To keep ination low and stable, President Morales’s government issued
three Supreme Decrees-DS to rein in the increase in food prices, combat
speculation, and guarantee supply to the markets. The essential objective of
each of these norms is as follows:
• Temporary authorization of meat and cattle-on-the-hoof at zero tariff
(D.S. 29228);
• Temporary suspension of wheat our, wheat, and animal and vegetable
fat exports, and denition of a mechanism to curb contraband of these
products, and of the applicable sanctions (D.S. 29229);
• Authorization for the establishment of the Food Production Support
Enterprise-Emapa with initial capital being provided by the Nation’s
General Treasury-TGN (approximately US$24.8 million). In its rst
phase, Emapa will give priority to wheat and rice production.
The Nation’s General Budget for 2008 is geared to the objectives of the
National Development Plan. This should improve the capacity for formulating
policies for the rural development, production, small enterprise, and hydrocarbon
sectors. It will attach priority to programs and projects with a direct impact on
job creation, economic growth, and social protection. Work is also being done
toward the implementation of a Stabilization Fund, which would permit saving
part of hydrocarbon revenues for implementing anticyclical policies.
Also envisaged is the establishment and functioning of productive
units both in rural and urban areas, so as to encourage small enterprises. The
State will promote job creation by executing infrastructure, housing, mining
revival, and other investment projects. The social protection policy will be
consolidated through the encouragement of social investment, particularly in
the areas of health and education, so as to reduce poverty. The Government’s
scal transparence policy will be maintained. All the scal policy initiatives
undertaken by the Ministry of Finance in 2006 and in the rst half of 2007
have the main purpose of preserving the country’s macroeconomic stability. To
this end, the 2008 nancial program will be drawn by the Ministry of Finance
in collaboration with the Central Bank of Bolívia.
The Bolivian economy: diagnosis and plans for 2008
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46
As to medium- and long-term projections, the National Development
Plan is intent on introducing an alternative development model. To this end,
the following objectives have been set:
• Dignied Bolivia – free of poverty and any form of exclusion;
• Democratic, participative Bolivia – grounded on a plurinational, community-
centered society, in which the people hold the power, from the regional
level up;
• Productive Bolivia – where industrialization of the natural resources is
accomplished, accompanied by increased aggregated value of exports, all
with the backing of the State as a development promoter and actor; and
• Sovereign Bolívia – that makes its own, autonomous decisions according
to its needs, so as to maintain harmonious, balanced relations among
the countries.
Results envisaged by 2011 are as follows:
• Average GDP growth of 6.3 percent;
• Reduction of open unemployment from 8.7 percent in 2004 to 4
percent in 2011;
• Creation of 90,000 jobs per year;
• Per capita income increase from US$1,000 in 2005 to US$1,411 in 2011;
• Change in the energy matrix of 50 percent of the automotive sector,
and reforestation of half a million hectares;
• Industrialization of nonrenewable natural resources;
• Annual ination under 5 percent; and
• Public debt sustainability.
DEP
Translation: João Coelho.
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
47
A qualitative approach
of the Brazilian
economy
João Paulo de Almeida Magalhães*
Introduction
I
n addressing this article’s topic, it would be natural to start with a
descriptive and quantitative exposition of the Brazilian experience. We have
chosen another approach for two reasons. First, because data on the country’s
reality are readily and widely available in a score of sources accessible via
Internet. Second, because, despite conditions that are extremely favorable to
development, Brazil currently nds itself in its third decade of semi-stagnation.
This is why an analytical and qualitative approach has been chosen, capable
of allowing the identication of the causes of the problem and a description
of possible solutions.
An American development bank has made a list of countries that, given
their potential growth, should wield great weight in the world economy in a
not-too-distant future. The list includes countries such as the BRIC countries
– Brazil, India, China, and Russia. The conditions usually deemed favorable to
* President of the Regional Council of Economy – Rio de Janeiro
A qualitative approach of the Brazilian economy
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
48
development are a large domestic market, an abundance of natural resources,
a favorable population/land ratio, linguistic and cultural unity, absence of
internal ethnic and religious conicts, and good relations with neighbors. None
of the other three BRIC countries meets all of these favorable conditions as
Brazil does.
As it happens, in the last twenty years China grew at an average annual
rate of 9 percent, while India grew at 7 percent a year. In the last ten years,
Russia also grew at 7 percent a year. In contrast, in the last twenty years Brazil
raised its GDP by only slightly over 2 percent a year.
Armínio Fraga (2006) has precisely summed up the problem in the
introduction of a recent book showing that in the rst eighty years of the
last century Brazil recorded a 3.1-percent yearly growth of its per capita
GDP, second only to Japan’s 3.2 percent. In the 1980s, that rate fell to 0.5
percent, rising to 1 percent in the following decade, when Asian countries were
recording a 6-percent increase in their per capita GDP. Available data show in
addition that in recent times Brazil not only grew much less than the emerging
economies but also a little less than mature economies. As development is
measured by the difference between developed and lagging economies, it can
be said that Brazil not only failed to develop but also became immersed in a
process of increasing underdevelopment. This is the paradoxical situation this
article purports to analyze to see how it can be redressed and to what extent
the requisite measures are politically and economically feasible.
This article is divided into four sections: diagnosis, current situation,
possible solutions, and outlook.
Diagnosis
1 – In the thirty-ve years following World War II, Brazil grew at an
average annual rate of 7 percent, based on the import substitution model. Then,
it entered a semi-stagnation period that extends to today. The rst question is
thus: What caused this model’s collapse and what should be made to counter
this situation? Specialists agree that the cause stemmed from insufcient
markets, or, specically, that the dynamic process ceased because the stock
of substitutable exports was exhausted.
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João Paulo de Almeida Magalhães
49
The two interpretations suggested ways to solve the problem: one was
based on the expansion of the domestic market and the other on recourse to
the external market. Each had its own explanation for the failure of the import
substitution model. According to Celso Furtado, whose analysis is clearly
Marxist, the problem was congenital to underdeveloped economies. Mature
economies have a feedback mechanism, whereby GDP’s increase determines
a proportionate increase in the salary mass, automatically guaranteeing the
market necessary to absorb excess production. This does not happen with
underdeveloped countries because, although their economies are characterized
by an overabundance of labor, they are forced to resort to labor-saving
technology imported from the developed countries. This perpetuates a kind
of “reserve industrial army”, which keeps salaries low, thereby preventing
the emergence of a demand proportionate to increased production. This was
allegedly the reason why the country did not automatically move from the
import substitution model to self-sustained growth based on an internal market.
The way to overcome this impasse would be a far-reaching income distribution
policy to correct the market insufciency stemming from the absence of the
feedback loop. Income redistribution would expand the internal market to
the extent needed to offset the loss caused by the exhaustion of the stock of
substitutable imports.
The second interpretation was propounded by Magalhães (2005) and
was based on the analysis by Rosenstein-Rodan (1961) and Nurkse (1955).
These two authors studied the problem of market insufciency as an obstacle
to development policies. The difculty stemmed from the technologically-
determined diminutive size of productive units. According to Magalhães, the
market created by GDP’s increase, complemented by the stock of substitutable
imports, was sufcient to counter the problem of the diminutive size of
productive units. The problem arose when the opportunities for import
substitution were exhausted. The solution would be to complement the internal
market with exports.
Two interpretations, accompanied by proposals for maintaining a high
growth rate, were then presented. In the 1980s, little could have been done. The
entire Brazilian economy was geared to the task of producing the trade balance
surpluses required by the servicing of the external debt incurred through loans
taken out in the previous decade to overcome the difculties created by the
A qualitative approach of the Brazilian economy
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
50
oil shocks. In the 1990s, though, the issue had been solved, owing in part to
the Brady Plan. At that time, however, the Brazilian Government had opted
for the neoliberalism of the Washington Consensus, which rejected any State
intervention. Economic strategies were considered not only unnecessary but
also harmful. The consequence was the chronic semi-stagnation that victimized
the Brazilian economy. The responsibility of the Washington Consensus for the
problem (admitted today by their very champions, for that matter) is indirectly
conrmed by the success of the Asian countries that ignored it.
2 – In this context, two questions ought to be answered. First, why did
not only Brazil but also the Latin American countries in general accept the
neoliberal formula, while the Asian countries rejected it, preferring what the
World Bank had recognized in the report titled “The East Asian Miracle” (1993)
as a “market-friendly intervention”? The answer suggested by Magalhães is
that this was due to the difference between the mimetic patterns that inspired
each region.
Underdeveloped countries do not create models or theories capable of
guiding their economic policies. They simply copy known successful cases
that become their mimetic patterns, and these are always countries with a
history and culture similar to theirs, in addition to geographic proximity.
The Asian countries’ mimetic pattern was Japan, a country that as late as the
mid-19
th
century not only was underdeveloped but also retained medieval
characteristics. Its success in terms of growth resulted from systematic action
by the State, which created enterprises that were later transferred to the private
sector, invested in the training of qualied labor, sponsored technological
modernization, created a modern infrastructure, and so on. Japan did exactly
what any nation willing to come out of its economic backwardness should do.
All of this was just the opposite of the recommendations of the Washington
Consensus. This explains the Asian countries’s resistance to adopting the
latter’s neoliberal formula.
Latin America’s mimetic pattern was the United States, a country that
never knew underdevelopment and, like Germany, only made part of the
second industrialization wave. Its growth was based on private initiative and
market mechanisms. Government action was restricted to protectionism, an
instrument which mainstream economics seek to underestimate today. It was
only natural, then, that Brazil and the other countries of Latin America in
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
João Paulo de Almeida Magalhães
51
general should accept the Washington Consensus primer, not only readily but
even with eagerness.
This explains the different behavior between the newly industrialized
Asian countries and the Latin American countries. How can one explain the
Japanese case, though? Japan did not take as its base the economic policies
implemented by other countries; it copied directly from what was happening in
the American and the European economies. Commodore Perry, who bore to
Japan the request for the opening of its ports to Western countries failed when,
with the display of military power, he intended to elicit from that country the
same behavior as China and India. He might have succeeded if, instead of a
display of force, he had presented local authorities with a copy of Adam Smith’s
An Inquiry into the Nature and Causes of the Wealth of Nations, introducing it as
the Bible that had ensured the prosperity of Western economies. Emulating
Smith’s formula of the invisible hand, Japan would have opened up its economy
and rejected any State intervention in economic activities. It would then have
remained underdeveloped, dragging in its wake the rest of Asia.
3 – The second question is why the Washington Consensus’s neoliberalism
did not yield the announced results, particularly if one considers that its proposals
were based on what was most advanced in terms of the economic science.
Before World War II, Economics was seen as any other science, of
assuredly general applicability. This science knew nothing of underdeveloped
countries. There were simply economies that had not had time to achieve
full development or that were poor because they were implementing wrong
economic policies. Once the conict was over, though, the awareness arose that
not only there were underdeveloped economies but also that their backwardness
was steadily aggravating. The general applicability of the conclusions of any
science depends in each case on the validity of the premises on which they are
based. In the 1950s it began to be accepted that the premises differed between
developed and underdeveloped countries.
At rst, an optimistic perception of the problem prevailed. It was thought
that worldwide development was both desirable and possible. Those were
the United Nations development decades. That was also the golden age of
Development Economics that even earned two of its specialists the Nobel
Prize, namely, Gunar Myrdal (1974) and Arthur Lewis (1979), both from
developed countries.
A qualitative approach of the Brazilian economy
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
52
Development Economics was born, in the nal analysis, of the recognition
that lagging growth did not replicate the historic experience of the currently
developed countries. There is thus no sense in applying to the underdeveloped
countries the conclusions accepted and championed by mainstream
economics. Development policies involving systematic State intervention in
the economy were essential for overcoming economic underdevelopment, as
underdevelopment was but the result of a serious market aw.
It did not take developed economies long to realize that worldwide
development policies would entail a heavy burden on themselves in terms of
higher prices of nonrenewable natural resources and of investment to reduce
environmental aggression perpetrated by their economic activities. Support
for policies aimed at overcoming economic backwardness lost impetus and
grants extended for Development Economics research dried up or were
drastically reduced. This discipline (at least as formulator of paradigms or
theories adapted to lagging economies) fell into decline or practically dried up.
Major contributions such as Arthur Lewis’s on development under conditions
of unlimited labor supply, and Rosenstein-Rodan’s on market insufciency as
a handicap to development, were simply discarded, instead of being carried
further. The formulas and interpretations of mainstream economics once
again were deemed to be of worldwide application.
Dutt and Ros (2003) correctly define the problem, asserting that
mainstream economics rarely recognizes the existence of other than its
approaches. Mainstream economics is now called neoclassical economics
(see p.7). They further assert that although there had been various competing
schools at rst, by mid-20
th
century neoclassical economics had become
relatively standard and established its dominion over the profession (despite
the growth of Keynesian economic that became increasingly ‘neoclassical’).
This neoclassical economics tendency to dominate the economist’s profession
reached such a point that most economists, particularly in the United States,
would dene economics as neoclassical economics (see p.8).
Thus was born what has become known as the monolithic thinking,
which has given rise to what could be called ideological barrier. Owing to
this barrier, analyses such as Prebisch’s protectionism theory (1949) and the
heterodox ination theory of Brazilian economists have been rejected without
being effectively refuted (in the former case) or have been ignored in major
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
João Paulo de Almeida Magalhães
53
debates, such as that on Central Bank independence (in the latter case). This
deserves further examination.
Before World War II, industrial countries ensured their monopoly on
production of manufactures through instruments such as the colonial pact
imposed on a major part of Africa and Asia. In the case of independent
countries, such as Latin American countries, other types of pressure were
used. In Brazil, there was England’s imposition of a maximum customs duty
of 15 percent on its products, when products from Portugal were subject to a
16-percent tariff. This lasted until the mid-19
th
century, precluding the merest
pretension of protectionist policy in that critical period. As these instruments
ceased to be used after the conict, their role was taken over by the monolithic
thinking and by the ideological barrier, of which the Washington Consensus
became the principle vehicle.
Imposition of the monolithic thinking was facilitated by the fact that,
although they had not created the science, the underdeveloped countries
imported it. And under mainstream economics, the neoliberal prescription was
presented as a guarantor of maximum efciency. There is no doubt about the
importance, for the operation of the monolithic thinking and the ideological
barrier, of the fact that international nancial organizations, such as the IMF
and the World Bank, condition their assistance to the acceptance of the dictates
of the Washington Consensus. In truth, though, the main strength of these
two instruments of domination comes from the fact that the underdeveloped
countries’ leadership is convinced that by accepting neoliberalism they are
acting in their countries’ best interest. This did not happen in respect of the
policies imposed before World War II, as those who subjected themselves to
them were fully aware of their negative aspects.
Since the 1950s, there is no longer the idea of maintaining the agricultural
specialization of underdeveloped economies; it has been replaced by that of
preventing them from going beyond the production of industrial commodities. Or,
in the case of countries such as Brazil, which had already started the production
of more sophisticated manufactures, the intention now is to reverse this condition
through instruments such as the FTAA and WTO’s Doha Round.
Lastly, it should be noted that the monolithic thinking had two basic
consequences. The rst consisted in the abandonment of studies and research
work on the specicity of laggard growth. The second was preventing the
A qualitative approach of the Brazilian economy
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
54
scientic justication of policies favorable to development. To underline
the importance of this second consequence, it is worth recalling what
happened in the 19
th
century with the protectionism that made possible the
industrialization of the United States and Germany. Alexander Hamilton,
taking into account his country’s reality, already preached the protection of
the American manufacturing sector against foreign competition. But his
preaching would hardly have succeeded against the liberalism sustained by
mainstream economics, had it not been provided a theoretical foundation by
List’s protectionist theory.
In brief, the analyst of Brazilian economy is not called to propose this or
that economic policy to redress the country’s long period of semi-stagnation.
What is important today is to overcome the monolithic thinking and to
eliminate the ideological barrier, for as long as they persist they will pose an
obstacle to the adoption of any economic strategy capable of putting the
country again on the track of accelerated growth.
Current situation
1 – Let us now look at how the monolithic thinking and the ideological
barrier are affecting the conduction of economic policy in Brazil.
Mainstream economics, based on the experience of mature economies
with no economic lag to overcome, value the short term. The Government’s
role is restricted to guaranteeing the fundamental exchange, scal, and monetary
equilibriums; economic growth will occur by the mere action of the markets.
This short-term view has dominated the conduction of economic policy in
Brazil. This was clearly shown by a survey done under the sponsorship of
Cepal and IPEA by Bielschwosky and Mussi (2002), who interviewed forty-
three of the country’s most outstanding economists. These were asked about
their proposals to put Brazil back on the track of accelerated development.
The survey authors’ opinion was that the issue was not part of the analyses
and studies of the interviewees and that their concern over the short term
seriously distorted their perception of the problem. This explains to certain
extent how the country’s economic situation was viewed until then.
As ination is low, the public debt is under control, and the trade
balance shows surpluses that are not only positive but substantial and growing,
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fundamental equilibriums are also under control. Thus, the economy “is doing
well”. This view has been subscribed fully and without restrictions not only
by experts but also by public opinion makers (political and social leaders,
economic commentators of major newspapers, et al.). So, despite the serious
political crisis that occurred during President Luiz Inácio Lula da Silva’s rst
term, it was asserted that his reelection was assured because the Brazilian
economy “was doing well”.
No one was concerned over the fact that the country was growing only
a little over 2 percent a year, when estimates indicate that just to absorb the
annual increase of labor entering the market, GDP should grow between
4 percent (Saboia 2005) and 6 percent (Rocha and Albuquerque 2006). In
addition, no notice was taken of the fact that Asian and neighbor countries,
such as Venezuela and Argentina, were growing three times as fast as Brazil,
or that Brazil itself had grown without any problem 7 percent a year in the
three decades following World War II.
No consideration was given to the fact that monetary stability was
being achieved on the basis of one of the highest interest rates in the world,
which discouraged private investment, or that public debt control was based
on primary surpluses that destroyed the Government’s investment capacity,
or yet that in the area of foreign trade the overvaluation of the currency
discouraged exports with a high technology content and high added value
per worker (thereby encouraging imports with equal characteristics). This
process was identied by IEDI, a major research institute, as the country’s
relative de-industrialization. Such optimism was shaken only by an episode
that, paradoxically, serves to underscore the ideological barrier’s strength.
2 – In August 2005, the Sixteenth Congress of Brazilian Economists was
held in Florianópolis, state of Santa Catarina. It approved a widely disseminated
Florianópolis Charter, titled “Need for a long-term view of the Brazilian
economic policy”. Although it addressed an issue of utmost importance for
the country, that document had no repercussion.
This situation changed only when a major paper, commenting on newly
released statistics on Latin America, in a typical journalistic maneuver, headlined
the information that, in terms of GDP growth, Brazil ranked only above
Haiti. The impact of the news on public opinion led those responsible for the
Brazilian economy to admit for the rst time that the “spectacle of growth” so
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insistently announced by the President of the Republic early in his rst term
was far from happening. It was nally perceived that the economy “was not
going well”. As a result, early in 2007, the rst year of President Lula’s second
term, a Growth Acceleration Plan (PAC) was introduced. There is no doubt
about the importance of this initiative, which expresses the recognition that
the achievement of the three fundamental equilibriums (exchange, scal, and
monetary) is not sufcient for resuming accelerated growth, and that GDP’s
growth rate is the crucial criterion for assessing economic policies. Among
other initiatives, the Plan calls for doubling public investment (even though
this would mean only an increase from 0.5 percent to 1 percent), increased
private investment, and other measures to stimulate development. But the
truth is that PAC has not managed to look beyond the short term.
Between 1850 and 1930, Brazil experienced accelerated growth based
on the primary exports model. Between 1930 and 1980, even better results
were achieved on the basis of import substitution. What was expected now
from PAC was the denition of a new strategy to allow the country to grow
again, at least over the next fty years, at a rate no lower than the 7 percent a
year maintained for a long period in the past. However, PAC covers only four
years; in practical terms, what can be expected from it is nothing more than
the achievement of better economic results in the current President’s second
term than in his rst.
Investments under PAC are concentrated basically on infrastructure,
as is the case of policies adopted to correct short-term recessive trends.
According to Hirschman (1959), investment on infrastructure only permits
but does not determine development. There is no point in building roads if
there are no trucks to use them, or in building hydroelectric plants if there are
no enterprises to benet from them. Development programs, still according
to Hirschman, should be based on directly productive activities, which is not
the case with PAC, as from this point of view it failed once again to look
beyond the short term.
Analysts of Brazil’s semi-stagnation point to the extremely high
interest rates prevailing in the country and to the currency’s overvaluation as
distortions that must be corrected for restarting economic development. PAC
has not done anything in this respect, as this would disturb the fundamental
equilibriums. Low interest rates might lead to the ight of foreign capital and
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increase inationary pressures. Currency devaluation would raise the prices of
imported goods and thus have an inationary impact also. From a short-term
perspective, these are unacceptable corollaries.
Lastly, PAC has set a ceiling for GDP growth at 5 percent a year. The
explanation is simple. It is feared that growth at a higher rate than 5 percent
might trigger inationary pressures and possible negative exchange and scal
consequences. Thus, maintenance of fundamental equilibriums continues to
have priority over accelerated growth.
3 – To round off this analysis, one may speculate about what PAC could
or should be from a clearly developmentist perspective. This is important
because, among other things, the economic authorities often claim that critics
do not present alternatives.
The document titled “A development strategy for Brazil” (2006)
published by the Development Studies Center-CED of the Rio de Janeiro
Regional Council on Economy shows that there are at least two proposals for
a new economic strategy for Brazil. It should be noted that in general they
take up the proposals put forth by Furtado and Magalhães in the eighties. In
a way, this indicates the potential efcacy of the document’s suggestions for
preventing another long period of semi-stagnation such as the one that has
victimized the country.
A rst point to be established is that economic strategies are formulated
and adopted in function of the market on which they are based. Thus, we
have had the primary exports strategy, based on the external market for
primary goods, and the import substitution strategy, based on the internal
manufactures market. The market’s central role has been conrmed by the
experience of the Asian countries, which demonstrated that the development
policies’ success does not depend on an adequate savings level, as was believed
until recently, but on the existence of a market of adequate size and endowed
with adequate dynamism.
In the last analysis, this perception resulted from the conclusions of the
World Bank’s 1993 report on The Asian Miracle. According to this report, growth
acceleration in the Asian countries preceded, not followed, increased savings.
Analysts showed that in the face of investment or development opportunities,
savings grew endogenously. Now, such opportunities do nothing other than
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signal the existence of a market, available and guaranteed, which is the main
conditioner of development policies’ success.
According to CED, the rst proposal of a new development strategy for
Brazil comes from the Instituto de Cidadania, connected with the Workers’ Party
(PT), to which the current President of the Republic belongs. The Instituto
de Cidadania advocates the resumption of accelerated growth on the basis of
the internal market. It proposes that, by correcting the high levels of income
concentration prevailing in Brazil, the country be transformed into a mass
consumption society. This would ensure an internal market of sufcient size
to provide the basis for a new, successful development model.
The alternative to this proposal, put forth basically by the academic
community, is growth based on exports. Not on external sales of agricultural and
industrial commodities, as occurs today in Brazil. The idea is to base the new phase
of growth on the international competitiveness of high-technology products and
high added value per worker. This would be a replication of the model adopted
by Asian countries, such as South Korea, Taiwan, Hong Kong, and Singapore.
CED has shown that, because the country is in a semi-recessive situation
or because the assets of high-income groups are xed assets, any sort of income
redistribution of the magnitude required for resumption of growth would be
economically and politically unfeasible. This makes also unfeasible the strategy
of inward growth of a successful type under the import substitution model.
As regards the strategy of outward growth, its success would depend
on the exports’ multiplying effect on the internal market. Now, given the high
import content of consumption among high-income groups and the latter’s
participation in Brazil’s GDP, the multiplying effect would be necessarily low.
This conclusion is conrmed by the reduced effect, in terms of growth, of
the recent increase in Brazilian exports.
Thus, still according to CED, the two proposals are naturally
complementary. Outward growth, based on dynamic, high added-value sectors,
would accelerate the product’s growth and any additional growth could be
used to reduce income concentration, thereby raising the exports’ multiplying
effect. A virtuous circle would thus be created, capable of pulling Brazil out
of its prolonged period of semi-stagnation.
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These are just the main lineaments of a new strategy combining the two
alternatives proposed. Some of its other characteristics can also be pointed
out. In terms of outward growth, the process should be spearheaded by
domestic capital enterprises, because multinationals may face restrictions
for entry into the large world markets, which are already controlled by their
headquarters, or because the effort for creating international competitive
capacity to be sponsored by the Government should naturally aim at beneting
domestic enterprises. On the other hand, the priority to be assigned to the
high technology sector should not imply disregarding the agricultural and
industrial commodities segment, in respect of which the country enjoys natural
comparative advantages. Support for this sector should aim at increasing the
added value content of its exports.
As regards the internal market, redistributive measures would be
complemented by protectionism for the time needed to prevent imports
originating in recently industrialized countries with low labor cost from
hindering the viability of important sectors of the national economy. Defensive
measures should also be adopted on behalf of high technology sectors for as
long as they need to become internationally competitive.
In respect of international institutions, Mercosur would be redened so
as to advance beyond mere trade opening and eventual creation of instruments
of the kind already existing in the European Union. Denition of a joint
development program would be an important part of the program. The
FTAA, which owing to American competition would inevitably lead to Brazil’s
specialization in commodities, should be rejected outright. The same applies
to the Doha Round, in which the exchange of advantages in the agricultural
sector for the opening up of the manufacturing and services sectors would
lead to the same result.
In brief, recognition of the negative results of neoliberalism has not
yet proven to be sufcient for the thorough elimination of the tendency to
think only of the short term in Brazil. To get rid of it and thus open the
way for the adoption of long-term strategies, it is essential to eliminate the
monolithic thinking that shores up the ideological barrier. This can be done,
as will be seen.
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A possible solution
1 – The rst question to be asked is whether the monolithic thinking
that underpins the ideological barrier is the result of an anti-developmentist
conspiracy sponsored by the mature economies.
H.J. Chang (2002), professor at Cambridge University, answers this
question in the afrmative. In his Kicking away the ladder, he takes up List’s
thesis, according to which the developed countries are indeed consciously and
systematically sponsoring policies aimed at preventing the access of lagging
economies to full development. In contrast, it might be recalled that the decline
of the Development Economics and the attendant emergence of the monolithic
thinking did not result from the setting of any insurmountable obstacle on the
way of the experts in the matter. What occurred was simply the lack of interest
in the subject on the part of the rich countries, with the natural drying up of the
funds that nanced research on underdevelopment. In his speech of acceptance
of the Nobel Prize, Myrdal already manifested his concern over the fact that the
economists from underdeveloped countries were not adequately contributing to
the study of their economies. Had they taken up the research abandoned by the
First World’s academe, there would have been no room for the predominance
of the monolithic thinking. Without taking sides on this debate, let us simply
look at the reasons for the persistence of the monolithic thinking.
Specialists in the Philosophy of Science show that one theory can only
be defeated by another theory, because it is the theory that indicates to the
scientists what should be researched, how to carry out the research, and how
to interpret the results obtained. In the specic case of Economics, Blaug
(1979) showed that although the American institutionalist school had raised
serious objections to the neoclassical vision, the latter was never defeated. Its
persistence was due simply to the fact that the institutionalists proved incapable
of presenting an alternative theory.
When a theory fails in is predictions or comes into shock with observed
reality, it is simply subjected to ad hoc modications so that it can continue to
be used pending the emergence of a better theory. The Washington Consensus,
inspired on the neoliberal views, has met with a resounding failure throughout
Latin America. As no alternative has yet been presented to the neoclassical
theory that underpins it, it simply was subjected to an ad hoc modication
represented by the Augmented Washington Consensus.
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According to the latter, the original Washington Consensus remains
perfectly valid. It needs only to add to its proposals the requirement of
institutional adjustments, i.e., the adoption by the underdeveloped countries
of rules of the game consistent with economic growth. In the last analysis, it
requires the countries to implement legislation guaranteeing property rights,
ensuring jurisdictional security, exibilizing labor advantages, defending
shareholders, regulating the bankruptcy process, and so on.
To be defeated, the Washington Consensus would have to be confronted
with another theory or model based on the specic characteristics of laggard
growth. This did not happen. Let us look at how this could be corrected.
2 – There are in Brazil today rst-rate economic research centers.
Consistently with South Hemisphere tradition, though (and this applies to all
scientic branches, not only to Economics), they are, with rare exceptions,
applicators rather than creators. This does not have much importance in the
case of exact sciences but has highly negative consequences in the area of
social sciences, and of Economics in particular.
To counter this problem, CED has proposed the setting up of a critical
thinking nucleus with the following basic characteristics:
a) A technical team consisting of researchers selected from among the
most qualied in the country, and foreign specialists working on
Development Economics;
b) Research geared to the creation of a model adjusted to laggard growth
and capable of providing scientic inputs for economic policies, taking
into account the specicity of this growth; and
c) Work done along the lines of scientic research programs as dened
by Lakatos.
The last item is extremely important and should be made more explicit.
Scientic research programs concentrate, on a permanent, uninterrupted
basis, on a given, previously dened aspect, discussing and deepening the
results obtained, confronting them with the results of alternative programs,
and advocating or modifying them as needed. We have mentioned Prebisch’s
protectionist theory, which was rejected without being effectively refuted.
This happened because his proposal was not part of a scientic research
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program, under which it would have been worked out in greater depth and
defended against criticism that was not directed at its fundamental postulates.
The situation was different with the heterodox ination theory developed by
economists at the Rio de Janeiro Pontical Catholic University. It was conceived
under a scientic research program carried out by the University and the
validity of its conclusions was conrmed by Plano Real’s success, which put an
end to the Brazilian hyperination process. Soon after, though, the Program
was dismantled and abandoned, with the result that the orthodox monetary
stabilization formulas once again were applied in Brazil.
In brief, topic contributions, no matter how high their level, are not
sufcient for Development Economics. Contributions must be part of steady,
uninterrupted work in the context of a scientic research program.
3 – Overcoming monolithic thinking will not be an easy task, as one
runs against myths engendered by it and that must be rst dispelled. The rst
myth is found in the Augmented Washington Consensus, as it afrms that
the inadequacy of institutions is the root cause of underdevelopment. The
second myth refers to the relationship between development and inationary
upsurge. Let us start by the rst.
H. J. Chang, himself an institutionalist, refutes the allegation that the original
version of the Washington Consensus failed because it did not propose the
establishment of institutions adjusted to development. Chang shows that many
of the currently underdeveloped countries have more advanced institutions than
those of currently mature economies had in their phase of accelerated expansion.
He also says that great many of the existing institutions in the developed countries
are the result of, not the cause of economic growth.
More important, though, is Brazil’s own historical experience. In the
thirty-ve years that followed World War II, the country achieved one of the
highest growth rates in the world. According to the Augmented Washington
Consensus, this could only have happened if institutions had been perfectly
adjusted to that dynamic process. The fact, though, is that in the eighties,
Brazil fell into semi-stagnation, which has gone on for three decades already.
Again, according to the Augmented Washington Consensus, this could have
happened only as the result of a serious institutional collapse. The case was
just the opposite. Not only there was no collapse, but also Brazilian institutions
have steadily improved since then.
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Such facts did not keep the World Bank from devoting its 2002 report
to the thesis on the need of institutional change to ensure development. The
report even adopts as a superscription a quote by D. North (1993), who in his
major work pronounces the bankruptcy of Development Economics.
As regards ination, two myths have seriously hindered a correct interpretation
of the process. The rst asserts that any price increase tends to accelerate, while
the second posits that ination is highly damaging to lower-income groups.
The rst myth took hold in Brazil under specic circumstances. The
Fernando Henrique Government managed, as of 1994, to curb hyperination on
the basis of the Plano Real. As he adhered to the Washington Consensus, though,
he was unable to put the country back on the track of accelerated growth as he
expected, and thus began to value a conservative policy, which was adopted by
his government, saying that its objective was to preserve the monetary stability
achieved by the Plano Real. To reinforce this justication, he created the myth
that any price acceleration, no matter how small, would fast escape control.
His argument lacks any factual fundament. In the seventies, on the
occasion of the two oil shocks, Asian countries, including South Korea, accepted
inationary acceleration as a way of preserving their development. In that
period, South Korea lived with ination at an average yearly rate of 20 percent.
In the following decade, ination dropped to 5 percent, without any intervening
hyperination episode. Other Asian countries had a similar experience.
In the rst thirty years after World War II, Brazil experienced an average
yearly price increase of about 20 percent (while GDP was growing at 7 percent a
year), without any tendency toward uncontrollable acceleration. Hyperination
at the end of the period resulted from avoidable mistakes, such as the military
Government’s refusal to correctly adapt itself to the oil shocks and failure to
adopt a strategy capable of maintaining the economy’s accelerated growth.
Another contributing factor was the adoption of indexation without control.
The fact is that neither Brazil’s prolonged experience with ination under
control nor facts observed in other countries warrant the myth that any
inationary surge tends inevitably to accelerate.
The myth that ination inicts serious, irreparable damage on the lower-
income groups had possibly in Franco (1998) its main disseminator. According
to him, “ination and scal decits proved fundamental as mechanisms to
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make possible, through forced savings, the maintenance of high levels of public
investment, signicantly contributing to holding investment aggregate rates around
25 percent of GDP. Growth could be sustained at higher rates for many years,
owing to this high pace of capital formation, but at the cost of increasing difculties.
The impact on income distribution of growth heavily and increasingly dependent
on ination was the worst possible. Brazil grew, but became industrialized at the
expense of an extraordinary increase in the levels of inequality.” (pp. 59-60).
Franco thus asserts (a) that ination kept the country’s savings at 25
percent of GDP; (b) that this permitted high growth rates for many years;
and (c) that this was how Brazil was able to become an industrial country. The
objection has to do with income concentration, which must be examined.
Obviously, one cannot think on the basis of uncontrolled ination that
is observed after oil shocks, as it is incompatible with development. According
to Franco, the price spiral that ensured Brazil a long period of accelerated
growth, savings rates close to 25 percent, and an accelerated industrialization
process, was the one that held at about 20 percent a year in the three decades
following World War II. Let us now look at its distributive impact.
With this level of ination, a salary of 1,000 reais dropped by the end
of twelve months (i.e., by the eve of a new readjustment) to 830 reais, with
an average of 900 reais and a 10-percent loss of purchasing power. With
stable ination, the loss would be limited to this percentage. It should be
noted, though, that under an accelerated growth process, salaries increase
proportionately to the per capita product. Accordingly, with GDP growing
at 7 percent a year, as was the case in the period analyzed by Franco, this loss
would have been offset in two or three years.
Another important consideration is that for the Brazilian economy to
be able to provide jobs for about 1.5 million new workers ready to enter the
labor market each year, GDP should grow 4-6 percent annually, according to
estimates already mentioned. This was the case in the two and a half decades
after World War II. In Franco’s bona de opinion, that was made possible
by the ination surge at that time. So, why see ination as completely and
necessarily unfavorable to workers?
A possible way of heeding Franco’s social concern might be to ask labor
unions if they would accept a 10-percent salary reduction to allow the job supply
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to rise to 1.5 million work posts a year, making it clear that this salary decrease
would be offset within three years at the most. There is no denying ination’s
negative impact on salaries’ purchasing power, but the contention is that the issue
should be looked at in the global context of development policies. From Franco’s
perspective, ination would probably be seen as favorable to workers.
A last observation is appropriate. During the fties and sixties, a group of
outstanding Brazilian economists advocated the idea that moderate, controlled
ination was important for ensuring the economy’s accelerated growth. As prices
steadily rise and salaries are periodically adjusted, prots also rise and so do savings.
Now, however, the Asian countries’ experience shows that if correct development
strategies are adopted, savings will endogenously rise. Thus, there is no sense in
positing ination as an acceptable instrument of development policies.
The problem is that owing to the Brazilian economy’s protracted period of
semi-stagnation and its attendant distortions, growth can hardly be re-accelerated
without the emergence of inationary tensions susceptible of evolving into
full-blown ination. This would mean a strictly temporary, rapidly controllable
disequilibrium. The myths of the unstoppable acceleration of the prices spiral
and of its evil social consequences prevent the acceptance of such disequilibrium;
this is why it is extremely difcult to introduce economic strategies capable of
putting the country back on the track of accelerated development.
The Asian countries’ experience shows that accelerated growth may be
achieved with a 5-percent ceiling to prices’ yearly increase. But it also shows
that in special situations moderate, controlled ination must be accepted for
maintaining or resuming development. These are the lessons that should be
heeded by any rationally conducted economic policy.
Ultimately, the basic objective of the Critical Thinking Nucleus is to
dene, on the basis of rigorous scientic analysis, the specic characteristics
of laggard growth, describe germane economic policies, and prevent the
proliferation of myths such as the ones mentioned.
Outlook
1 – The preceding analysis showed the Brazilian economy’s complex
situation. The negative results stem from psychological, social, and political rather
than economic factors. Any forecasting should take this into consideration.
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A determinant factor for the future of the Brazilian economy is the fact
that it is currently commanded by the Central Bank.
After 1994, owing to the success of the Plano Real aimed at monetary
stabilization, the rate of ination dropped to one digit. In 2002, when it became
clear that the next President of the Republic would be a leftist leader, prices
rose by 12 -17 percent. The nancial advisors to the Government inaugurated
in 2003, moved by an exaggerated fear of the problem coddled by Fernando
Henrique Cardoso’s Administration, convinced the political top leadership
that the country was on the brink of hyperination. The task of preventing
it both in the short and in the long term was assigned to the Central Bank,
which then started dictating the rules of the national economic policy.
There are serious reasons to believe that the alleged hyperination risk
never existed. In the last year of the Kubistchek Government (1960) the annual
price increase rate reached 30 percent. In the following period, the chaos
created by the resignation of a President of the Republic and resistance to the
inauguration of his legal successor, caused prices to increase by as much as
60 percent a year. After the situation was normalized in 1974, the price spiral
returned to its historical level, without any threat of hyperination. Such facts
were not taken into account and, as a consequence, the management of the
economy has been driven since then by the need to maintain price stability.
This means that ination targets, administered by the Central Bank, have taken
absolute precedence over the objective of resuming accelerated growth.
In this context, an average annual GDP growth rate of 4.5-5 percent is
to be expected, as envisioned under PAC. A 5-percent rate is seen as a ceiling,
as any “threat” of a higher growth rate will be stopped to prevent a possible
aggravation of inationary pressures. In this connection, the Brazilian Central
Bank does nothing more than imitate the U.S. Federal Reserve that, so as not
to jeopardize monetary stability, adopts measures to restrict GDP growth
tending to exceed the yearly rate of 4 percent.
A 4.5-percent rate is also a minimum, because under PAC, the GDP
growth rate is also, together with fundamental equilibriums, one of the criteria
to measure economic success. Any lower growth rate will be considered
insufcient. And as the ofcial economic team’s developmentist faction has
recently gained force, helped by the setting up of an Extraordinary Ministry
for Long-Term Policies, any lower rate will be promptly combated. Because
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long experience shows that Brazil has no difculty in growing as much as 7
percent a year, corrective measures will be immediately adopted in such a case.
In sum, the Brazilian economy will most likely grow at a rate of 5 percent,
owing less to economic motives than to political dictates.
What is to be expected in the long term, though? This question can be
approached two ways. The rst is by asking whether if current conditions are
maintained, a 4.5-5 percent rate can be indenitely maintained. A major group
of Brazilian economists do not think so, as fundamental problems have not
been solved yet, such as a high interest rate, exchange overvaluation, a heavy and
rising tax burden, public spending increase above GDP’s, and so on. Probably,
though, the most objective, pessimistic assessment of long-term prospects
stems from the lack of a strategy for the Brazilian economy. The contemplated
infrastructure investments will create jobs and accelerate GDP growth for
the duration of the scheduled public works. Once these are completed,
semi-stagnation will recur, unless a development strategy is adopted, based
on activities aimed at creating dynamic markets. The alleviation period may
even have the negative effect of leading to the assumption that the economic
problem has been solved and that any strategy is thus unnecessary.
The second approach to the long-term issue is as follows: Brazil has
conditions that are exceptionally favorable to development, and numerous
countries with less favorable conditions are growing at a much higher rate than
5 percent. Why then consider this rate as acceptable or as a ceiling to GDP
growth? Awareness of this fact will not ultimately lead to the elimination of
the monolithic thinking and the ideological barrier?
The advocates of maintaining the 5-percent ceiling argue that as
the demographic growth rate is now lower in Brazil, a 5-percent growth
corresponds, in per capita terms, to the 7-percent rate of the past. They argue
that there is no sense in running the risk of a recurrence of disequilibria, such
as ination, by further accelerating growth.
But if the purpose of development policies is to eliminate economic lag
as quickly as possible, a growth rate of 5 percent – far beneath the country’s
actual capacity – is unacceptable. Rapid GDP growth does entail exchange,
scal, and monetary tensions, but this is a normal, integral part of any
accelerated growth process. Dening the means and ways of keeping these
tensions under control is part of development policies.
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Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
68
Another major argument put forth by the developmentist current is
that, given the imitation or emulation effect, laggard economies do not have
the option of growing rapidly or slowly. The lower-income segments in these
countries become aware of the high living standards of the mature economies,
which are copied by the richer segments of their own countries, forcing the
Government into expenditures that lower its savings level. The private sector
savings’ level is also lowered as the Government, to counter claims, raises taxes
and the minimum salary, extends the vacation period, reduces the allowed
number of working hours, and so on.
In Brazil, this type of problem is evident, for instance, in the fact that
in the past Government savings amounted to 4 percent of GDP, while today
savings are negative. Pension payments account for 7 percent of GDP today,
which some analysts consider excessive for an underdeveloped country. If,
after 1980, GDP had continued to grow at 7 percent as in the previous year,
the savings rate would be three times as high, while pension payments would
amount to a third of the current rate. Here again, it is a case of insufcient
economic growth to meet the demands of better living conditions.
Phenomena of this sort illustrate the imitation effect, which makes
development into a race between the pressure of the demands for higher living
standards and the Government’s capacity to meet them without compromising
the savings margin required for maintaining growth.
In sum, from a long-term perspective, there are reasons to believe that
a break with the monolithic thinking and the ideological barrier will at last
occur, which will nally allow Brazil to grow at the pace indicated as possible
and normal by its favorable economic conditions and historical experience.
Explanation as to if, how, and when this will happen is up to political scientists
and sociologists rather than to economists.
Conclusion
As Brazil has conditions that are extremely favorable to development,
the nearly thirty years of semi-stagnation since 1980 can only be explained by
fundamental mistakes in economic policy. These mistakes consist essentially
in the lack of a development strategy, which in turn is a consequence of the
adoption of the neoliberalism championed by the Washington Consensus.
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João Paulo de Almeida Magalhães
69
Ignoring attempts to perpetuate it under the Augmented Washington
Consensus, PAC has taken the rst step toward pulling the country out of
semi-stagnation. This initiative should be complemented by the denition of
a new development strategy, which would do away with short-termism, the
monolithic thinking’s basic corollary.
To this end, it is necessary to establish a paradigm for laggard growth,
capable of providing an alternative to mainstream economics and a high-level
scientic foundation for the new strategy proposed. Some steps are being
taken in this direction, based on a long-term version of Keynesian theses.
A rst contribution to this new focus is found in a theoretical appendix to
Unctad’s 2006 report, which prescribes autonomous investments whose nal
result would be a corresponding increase in savings.
In Brazil, João Sicsú (2005) argues that the neo-Keynesians have distorted
Keynes’s own contributions, and innovates by asserting, with Philips and against
the neoclassical theory of rational expectations, the possibility of reducing
unemployment through new investments. With Bresser Pereira, Sicsú proposes
what he calls a new-developmentism, whose theoretical justication is now
being outlined.
Mention has been made of the importance of expanding and
consolidating this effort through a critical thinking nucleus. Its establishment
will be important not only for Brazil but for all of Latin America, which did not
have, as the Asian countries did, the benet of a mimetic pattern adjusted to
their respective reality. Hence, the convenience of joint work by the countries
of the region toward the establishment of such a nucleus.
Cristina Kirchner (2007) backs this position, saying that “it is a good
thing (…) provides critical thinking to the region’s governments, which for so
long have adopted modes of thinking often contrary to the interests of their
countries, a product of other intellectual plants, which do not exactly serve
the interests of the region. I thus believe that new winds are nally blowing
in the Latin American region.” (p. 5).
A qualitative approach of the Brazilian economy
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
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Appendix
Introductory note
This note sums up the analysis offered in a lecture to be published soon. As
the exposition was directed at nonspecialists, a less technical language was used.
Impact of the monolithic thinking on economic theories
1
1 – In other works we have had the opportunity of showing how
Prebisch’s protectionist theory and the Brazilian economists’ heterodox
ination theory were put aside without having been effectively refuted or
replaced. Something similar happened to Development Economics. We now
intend to show how the maintenance of Development Economics and the
deepening of its analyses could have pointed different directions for the
economic policies implemented in Brazil, thereby entailing major benets for
the country. Curiously enough, these policies would have been very close to
those implemented by the countries of East and South Asia.
Our analysis will concentrate on the contribution of W. A. Lewis,
certainly the most important in this eld, which earned him the Nobel Prize
in Economics.
According to Lewis, laggard growth, differently from what happens in
developed economies, occurs under conditions of unlimited supplies of labor. This
simple fact has important corollaries for the denition of development policies.
The main consequence of an unlimited supply of labor is the generalized
occurrence of disguised unemployment. For example: in family farming,
children are automatically incorporated into the economic activity, without
any increase in production. Thus, there will be no reduction in production if
these children are shifted to another activity. Hence, it is proper to say that they
are technically in an unemployment situation, although this unemployment is
disguised by an activity, without any effective result.
This simple fact points to the utmost importance of this for
underdeveloped economies, and to the difference between real costs and
1 The negative impact of the monolithic thinking is also examined in CED- Economia brasileira, do pensamento
único a vinte e cinco anos de semi-estagnação (chap. V).
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João Paulo de Almeida Magalhães
71
opportunity costs. Real costs are given by the totality of inputs incorporated
into each product. The opportunity cost of product A is measured by the
value of product B that is not produced, so as to make possible the production
of product A. The approach to real costs is essentially microeconomic and
is the only one taken into consideration by the market for the enterprises’
decision-making. The approach to opportunity costs is macroeconomic, as
it takes into account a global view of the economy, and implicitly takes also
into consideration the existence of idle factors that can make feasible the
production of a good without reducing the supply of other goods.
In the case of underdeveloped countries, where there is widespread
disguised unemployment, labor’s opportunity costs are zero. However, any
enterprise hiring a worker in a situation of disguised unemployment must pay
him a salary, which creates a difference between the real cost and the opportunity
cost. As decisions based on the price mechanism consider only real costs,
i.e., decisions based strictly on market price indicators, as required under the
neoliberal view proposed by the monolithic thinking, these decisions are less than
optimal in underdeveloped countries. The way to correct this distortion consists
in systematic State action in the economy, based on a development policy.
A simple arithmetic example could serve as an illustration. A hypothetical
underdeveloped country is considering the possibility of investing in an
industrial activity that will produce an item whose value is 100. Estimated costs
are 30 in salaries and 70 in other inputs, totaling 100. Under the strict terms
of market indicators, the production of such an item should be considered
antieconomic, as its price is lower than its cost. In terms of the opportunity
cost, though, the value of labor is zero and thus the total cost of the item is
70, a level perfectly consistent with the 100 price. That is, we are in the face of
a market aw that in underdeveloped economies puts into doubt the efcacy
of the price mechanism. The rst consequence of Lewis’s analysis is that in
underdeveloped countries the price mechanism functions inadequately, which
makes systematic action by the State in the economy of crucial importance.
2 – We have seen that development policy’s main conditioning factor is
the assurance of a market. Now, as the investment decision takes into account
real costs and not opportunity costs, this unwarrantedly reduces the internal
market that is of great importance at the initial stages of development policies.
This must be corrected through protectionist measures adopted by the State.
A qualitative approach of the Brazilian economy
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72
An important illustration of the negative consequences of this market aw
can be found in international economic relations. Brazil’s industrialization
provides a good example.
Orthodox thinking, based on the propositions of mainstream economics,
rule out the adoption of any protectionist measure by a country, as this would
result in the local production of goods whose real cost would exceed the cost of
the equivalent imported products. One of the allegations was that it made no sense
to stop producing coffee, in which we were efcient, so as to produce industrial
goods that were expensive and of poor quality. This reasoning was correct in
terms of real costs but wrong for an underdeveloped country, as it did not take
into account the zero value of labor’s opportunity costs. In terms of opportunity
costs, the Brazilian product was perfectly competitive. That is, we were faced with
a market aw that had to be corrected by a protectionist measure.
Had market mechanisms been strictly observed, Brazil’s industrialization
would never have occurred. It happened only as a result of the Great
Depression in the 1930s, which, by knocking down the price of coffee,
drastically reduced the country’s capacity to import foreign-made manufactures.
The low opportunity cost of Brazilian industrial products was conrmed by
the fact that, contrary to orthodox expectations, the manufacturing activity
grew rapidly without any decline in agricultural crops. The second corollary
of the deepening of Lewis’s analysis is thus that the guaranteed share of the
internal market required by development policies depends on protectionist
measures implemented by the State. This protectionism is technically justiable
because it corrects a serious market aw.
3 – So much for the internal market. A similar problem occurs in respect
of foreign trade and involves the denition of the exchange rate. From a long-
term perspective, the only one that is relevant in terms of development policy,
the exchange rate between two countries is determined by the parity of the
purchasing power of their respective currencies. If a basket of goods in the
United States is worth 100 dollars and the same basket is sold in Brazil for 200
reais at the natural rate of exchange between the two countries, which results
from the free action of the price mechanism, the exchange rate tendency will
be toward a 2 reais/1 dollar ratio. This would be the natural rate of exchange
determined by the prices prevailing in the two countries’ respective markets
– prices determined by the goods’ real costs.
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
João Paulo de Almeida Magalhães
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It happens, though, that in terms of the price mechanism, only real costs
are considered.
Supposing that labor’s opportunity cost in Brazil is zero and is equivalent
to 50 percent of the cost, the Brazilian basket will be quoted by twice its
real value. With two dollars, Americans should be obtaining two baskets and
not only one, i.e., the Brazilian product is too expensive for them, and this
explains the low volume of Brazilian exports to the Americans. Conversely,
the American goods would be cheap for Brazilians exchanging only one of
their baskets instead of two for one American basket. This leads Brazil to
import much from the United States.
The solution for a return to balanced exchange would be if the Brazilian
Government, devaluing its currency, set the exchange rate as 4 reais/1 dollar.
Americans would then be able to buy two Brazilian baskets for one American
basket, while Brazilians would have to give two of their baskets for one American
basket. Along the analytical line proposed by Lewis, the devaluation of the
national currency is necessary and justiable in developing countries as a way of
winning external markets, which is necessary for their development policies.
4 – Another case in which the discarding of Lewis’s theory meant actual
or potential loss to underdeveloped countries was the anti-inationary policy.
To conrm this we should begin by recalling the two explanations proposed
for ination. According to the rst, ination results from excess money, which
leads to cost or demand increases. Another explanation claims that the price
spiral results from the economic agents’ dispute over the GDP, when the sum
of their claims exceeds GDP. This is the heterodox theory of inertial ination
that provided the basis for Plano Real, which put a stop to hyperination in
Brazil. This issue deserves a further look.
For the purpose of simplication, if we assume that there are only
two economic agents – workers and entrepreneurs – this dispute translates
into successive salary and price increases. An important point that helps one
to understand the difference between the two approaches is that while an
increase in the money supply may be considered the main cause of ination
according to the rst concept of ination surge, according to the second
concept it is seen as its effect. Thus, in view of the successive salary and
price increases, the Government is forced to increase the money supply to
prevent a liquidity crisis.
A qualitative approach of the Brazilian economy
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74
In developed economies, there can be no dispute over GDP because
if it happens it is usually when salaries decline as a consequence of price
increases by the enterprises’ intention of raising their prot margin. In such
countries, labor is scarce and the unions have strong bargaining power. When
they see that salary adjustments are neutralized by a new price increase, they
impose a sliding pay-scale whereby any price increase is promptly offset by a
proportionate salary increase. This precludes any dispute over GDP.
In underdeveloped countries, where labor is overabundant, as shown by
Lewis, the unions have little bargaining power and are thus unable to effectively
protect their remuneration’s purchasing power through effective measures such as
the sliding pay-scale. In Brazil, for instance, despite a 20-percent average annual
ination in the thirty years following World War II, unions were never able to
impose a sliding pay-scale. This conrms the view that ination results from a
dispute over GDP, a view accepted by the proponents of the heterodox ination
theory, whose validity has been corroborated by Plano Real’s success.
Another simple example may illustrate the procedure adopted by the
Plano Real. With a 20-percent annual ination, a real salary of 1,000, which
is readjusted every twelve months, declines to 800 by the end of the period,
thus averaging at 900. Prots’ behavior is exactly the opposite, dropping to
their minimum level with 1,000 salaries, and reaching their maximum level
with salaries at 800. The heterodox ination control formula sets salaries at
their 900 real average level and does the same to the prices that determine
total prots. As the sum of the real average remuneration of the economic
agents is by denition equal to GDP, this procedure eliminates the main cause
of the price spiral.
What is important from the standpoint of development policies, is that
ination in underdeveloped countries being the outcome of an economic
agents’ dispute over GDP, it should be controlled by income policies, not by
monetary policies.
The extremely high interest rates prevailing in Brazil, which have seriously
prevented or hampered resumption of development, are justied by the
Central Bank as a form of containing ination, when the correct thing to do
would be the adoption of an income policy. This is a fundamental mistake
that would not happen if the corollaries of Lewis’s contribution were taken
into account.
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João Paulo de Almeida Magalhães
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5 – The preceding analysis also solves the paradox that puts into question
the very validity of economic sciences. The Latin American countries that, based
on the Washington Consensus, strictly followed the mainstream economics
prescription have met with resounding failure. The Asian countries that ignored
the prescription and often did exactly the opposite of its recommendations, met
with exceptional success. This seriously compromises Economics as a science.
The preceding analysis, which explores the corollaries of the main
theoretical contribution to the analysis of laggard growth, permits addressing
the issue in more favorable terms for the discipline. As a matter of fact,
the basic lineaments of the development policy implemented by the Asian
countries essentially followed the four corollaries proposed in the preceding
for Lewis’s contribution: (a) the countries of the region experienced extensive,
systematic action by the State to stimulate and guide their economies; (b)
through protectionist measures, they protected domestic activities until they
could achieve international competitiveness; (c) they facilitated the entry of
their products in the external market through exchange rates that devalued
their currencies; and (d) they maintained price stability not through monetary
policies such as higher interest rates but through income policies.
What is actually in question is not the validity of Economics as a science,
but the unacceptable attempt to apply the theorizations of mainstream
economics to contexts in which the preconditions on which these theorizations
are based are not valid – such, as for example, the relative labor scarcity,
typical of mature economies, while the underdeveloped countries have an
unlimited labor supply, as asserted by Lewis. The problem does not lie in the
shortcomings of Economics as a science but in the unwarranted persistence
of the monolithic thinking.
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Translation: João Coelho.
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Chile’s economy
and development
challenges
Mauricio Jelvez M.*
I. The chilean economy under democracy
T
he “Chilean model” has been presented in the international concert in
recent decades as a successful example for achieving a combination of macroeco-
nomic equilibriums, high growth rates, and effective combat against hunger.
This assertion suffers from two aws that may induce one into error.
First, the experience of the extreme neoliberalism implemented under the
dictatorship (1973-1989) differs substantially from the experience of growth
with equality implemented under democracy (1990-2007).
In the rst case the objective was to establish the primacy of the market
system through the application of the prescriptions of orthodox economists,
which consisted in the liberalization and deregulation of the markets, the
unilateral opening of the economy to international trade, and a policy favorable
to foreign capital, re-privatization and privatization of public enterprises,
reduction of public spending, and a new tax structure that lost is progressive
* Executive Director – Development Studies Center (CED)
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Mauricio Jelvez M.
79
character. In the second case, impetus was given to reforming the previous
reforms, so as to correct the inherited model, with the injection of a major
dose of pragmatism and progressiveness. To this end, the exchange authority
proceeded to raise the investment rate, adopt a macroeconomic management
conducive to sustainable nancial and real economy equilibrium, reduce
vulnerability to external shocks, and meet the most pressing social demands.
The purpose was to reconcile macro-social and macroeconomic equilibriums
and introduce an economic policy consistent with the new democratic scenario.
Accordingly, at the outset of the democratic transition government in 1990, two
projects signaled a rupture with the previous model: one project called for tax
reform to raise scal revenues and modify the composition of public spending,
by increasing social outlays; the other project called for labor reform, one of
whose objectives was to strike a negotiating power balance between employers
and workers and endow the labor legislation with greater legitimacy.
Manuel Castells has thus summed up the difference between the two
experiences: “We have moved from a development model that was liberal
in economics, authoritarian in politics, and socially exclusive to a model that
is politically democratic and socially inclusive, while maintaining its liberal
economic matrix.”
Secondly, differences are not limited to each model’s policy focus; they
extend to the sharp contrast between the results achieved by the two models.
In this regard, gures speak for themselves:
Results during the government of:
Pinochet
1974-1989
Concertación
1990-2006
Effective GDP growth (%) 2,9 5,5
Per capita GDP growth (%) 1,3 4,2
Exports growth (%) 10,7 8
Ination (%) 79,9 7,5
Unemployment (%) 18 8,3
Real salary (1970=100) 81,8 125,2
Gross xed investment (% of GDP) in pesos 2003 13,6 20,6
General government surplus (% of GDP) 0,3 1,6
Structural surplus (% of GDP) n.d 0,7
Population living in poverty (1989 vs. 2006) 38,7 13,7
Income distribution (Q5/Q1) 18,5 14,8
Demographic growth (%) 1,6 1,4
Chile’s economy and development challenges
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
80
Although comparison between the dictatorship and the democracy
periods show an overwhelmingly higher balance for the latter, the average
gures for the democratic period mask a more nuanced reality. If we separate
the two periods of Concertación governments, we nd that the strictly
economic results between 1990 and 1998 were better than those achieved
between 1999 and 2006. A look at key macroeconomic indicators in the two
periods shows that results were better in the rst period. These are the averages:
Effective GDP growth, 7.1 percent vs. 3.6 percent; exports growth, 9.9 percent
vs. 5.8 percent; unemployment, 7 percent vs. 10 percent; and ination, 11.7
percent vs. 2.9 percent, respectively.
The gap between the two periods evidenced failures and contradictions,
as well as the lack of a more thorough reform of the reforms.
Owing to the contagion of the Asian crisis, the nal stage of President
Frei Ruiz-Tagle’s term (1999) and the rst quadrennial of President Lagos’s
(2000-2003) unfolded in a depressed economic environment. In 1999, effective
GDP had declined by 0.8 percent and the subsequent stagnation affected
mostly the nonexport sectors, which accounted for about 70 percent of GDP.
This stagnation had also a negative impact on small and medium enterprises
(SMEs) and on employment.
Although external circumstances affected the expansion of the exports
volume, which was accompanied by deterioration in the terms of trade, the
domestic market accounted for about 80 percent of the loss of dynamism.
This lays the responsibility directly on our macroeconomic policy.
Had our economy been burdened with a heavy foreign debt, without
international reserves and without external credit, and with high scal liabilities,
the internal propagation of the external shock would have been understandable.
Bu none of these limiting conditions prevailed in Chile at the time. A luster
of recession was the consequence of the decision not to counter a negative
external shock with a positive internal shock.
The Asian crisis’ contagion in Chile spread through two channels:
serious deterioration of the terms of trade, of about 3 percent of GDP;
and a generalized reduction in capital ows toward emerging countries.
Thus, beginning in late 1997, strong depreciation expectations arose, which
the Central Bank combated with determination in the course of 1998, as it
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Mauricio Jelvez M.
81
feared an inationary upsurge in an already overheated economy, and had
the explicit intent of facilitating the amortization of the dollar debt of the
national economic groups.
First, massive foreign exchange sales took place, at an articially low
market price. Then, in mid-1998, the Bank drastically reduced the amplitude of
the exchange band to send a signal of stability in the dollar’s nominal quotation,
combined with a monetary policy’s higher real interest rate, which reached
14.5 percent. In this critical context, there occurred not only a reduction in
external credit but also a ight of capital and residents. Beginning in January
1998, the exit of a tremendous volume of resources took place, particularly
from pension funds – which had speculated against the peso – totaling nearly
5 percent of GDP in 18 months. This, of course, had a contraction effect
on monetary liquidity and on aggregate demand, entailing a costly, recessive
adjustment in terms of growth and equality.
The gap between effective GDP and production was followed by a
drop in productive investment. Just as in Mexico and Argentina in 1995 and
in Korea in 1998, investment in Chile suffered an abrupt drop in 1999, and
in 2004 it had not yet recovered its 1998 level.
The wide gap between effective GDP and potential GDP pointed
to an underutilization of capital and labor in the 1999-2003 period. These
factors kept the Chilean economy from maintaining the 7-percent yearly
rate of expansion of the productive sector in the nineties, bringing it down
to just 4 percent.
But the sound macroeconomic groundwork laid down in previous years
allowed the authority, with political determination, to further intensity social
spending after the crisis. Comprehensive support programs for the poorest
were introduced: (Chile Solidario) [Chile in Solidarity] and the Programa Salud
Auge [Maximum Health Program]. This was made possible in part by a new
structural scal policy scheme that prevents cycle-prone reactions of the scal
policy, all of which led to further poverty reduction.
Since 2003, international markets have experienced a signicant increase
in the price of raw materials, which has applied a strong, positive shock on
economies that are intensive in the production of these resources. Chile
recorded a remarkable increase in its terms of trade, equivalent to 10 per cent of
Chile’s economy and development challenges
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
82
GDP between the 1999-2003 recessive period and in 2004-2005. This positive
exogenous shock raised aggregate demand and thus the average growth rate
of the effective product rose from 2.6 percent to 5.8 percent, respectively.
Naturally, the intensity of recovery was also based on the own merits the
national economy had accumulated in the preceding years, but the predominant
force was the external shock. The improved terms of trade also increased
the private sector’s spending capacity, and economic expectations for 2006
became more optimistic.
Various projections had estimated a GDP growth rate close to 6 percent
in 2006, but they were not conrmed, as the growth rate did not exceed 4
percent. The main reasons, other than punctual situations, may have been
as follows: (i) premature application of a break to the monetary policy, with
successive rate increases, particularly in 2005 and 2006; (ii) excessive exchange
appreciation and its negative impact on the production of tradable goods, as
shown by a sharp increase in imports demand and a decline in the demand for
internal production; (iii) despite the sterilization of a substantial part of the
expansive effect of copper’s high price, the major part of the recessive effect
of the increase in oil prices was not countered; and (iv) insufcient force of
the scal policy aimed at structural equilibrium, which moved from a cycle-
prone to a neutral position, without advancing to a counter-cyclical position,
as stabilization of spending is neutral, not countercyclical.
These circumstances and a favorable international scenario and of a
signicant scal thrust – the 2007 budget calls for a 9-percent increase in public
spending – warrant the projection of a growth of economic activity in the
range of 5.75-6.23 percent a year, while internal demand is expected to grow
at 7 percent a year, helped by a similar expansion in private consumption, and
investment is expected to grow more that 8 percent a year.
As regards the labor market, unemployment should continue to decline
in 2007, maintaining an annual average rate of about 7 percent.
Moreover, the outlook for the external sector also remains favorable for
2007. Copper has not been the only export to gain from the sound dynamism
displayed by China, India, and other commodity-importing economies; other
primary products, such as metals, raw materials, and foodstuffs have also
beneted from this greater economic dynamism. Commodity prices have
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Mauricio Jelvez M.
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far exceeded their long-standing levels; since early-2004, they have risen 100
percent, measured in dollars. Exports of goods should total about US$65
billion, while total imports should level at about US$39 billion. A current
account surplus of about 4.5 percent of GDP is thus expected for 2007.
Only ination has not behaved as expected: for ofcial purposes, it
has been situated by the Central bank within a range of 2-4 percent. Cur-
rent projections, though, estimate an ination rate of over 6 percent by the
year’s end.
The main causes of higher ination are associated with external and
exogenous factors, such as the steady increase in the prices of oil, milk products,
and meat and a harsh winter that considerably affected the production of fruit
and vegetables, which impacted on ination, owing to their relative weight in
the latter’s calculation basket.
Be as it may, our economy’s situation shows signicant improvement as
compared with 2006. This bonanza has led to an unprecedented consensus
among economists, from both the most orthodox and the heterodox schools,
who agree that the higher growth rates expected for this year are largely
explained by a reactivating internal shock imparted by a more expansive budget,
reected in an 1l-percent increase in social spending.
The overall picture thus described has produced an unexpected “col-
lateral effect” in Chilean society. To wit, the exceptional conditions stemming
from the high price of copper, which warrant projecting an accumulation
of scal surpluses of US$30 billion in 2008, not to speak of Central Bank
reserves projected at an additional US$15 billion, have injected into the pub-
lic debate the feeling that we face a historic opportunity for determinedly
meeting the challenge of a successful journey on the second half of our
path toward development.
There has been an unquestionable upward movement on the curve of
Chileans’ expectations. These expectations are closely associated with the
need to construct a country project that would signal a turning point in our
development strategy, which admits without qualms the need to have a more
pro-active State in the construction of a more equitable society and in the
thrust toward productive development with higher levels of innovation and
competitive capacity.
Chile’s economy and development challenges
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II. Chile’s development challenges
Progress achieved under Concertación’s rule provides the foundation
on which to base a new development strategy for Bicentenary Chile (2010).
Rather than a feeling of discomfort over the past, the demand for exchange is
associated with certain fear that we may have introduced an economic system
that threatens to fall into a phase of “insufcient returns,” particularly if one
considers that the Chilean economy continues to display potential growth
rates close the 5 percent a year.
We have spoken of another country project, but in reality, the need is
for reforms of greater density and complexity.
In this connection, the continuity and change line nds expression in reforms
undertaken in many areas and which are being carried out simultaneously.
Obviously, these considerations reect to a lesser or greater extent the
political and ideological stand of their proponents.
For the purposes of illustration, their structure may be reected in the
following innovation elements of some public policies. Regarding social policy:
move from a scheme centered on poverty eradication that privileges social spending
toward one that addresses inequality and privileges the construction of a State
that guarantees social and economic rights for the entire population. Regarding
educational policy: move from the achievement of 12 years of compulsory
schooling, extended school hours, wider pre-school, secondary, and college
coverage, and access to new educational goods and instruments, toward a policy
that directly intervenes in the conditions affecting quality and ensures a more
equitable distribution of learning opportunities. Regarding productive-economic
policy: move from a view that privileges the strict management of macroeconomic
equilibriums and emphasizes the exploitation of natural resources so as to take
advantage of external markets opened up by Free Trade Agreements toward a
policy that backs and monitors small and medium enterprises, with a view to
incorporating them into the benets of new markets, by improving their capabilities
regarding competitiveness, innovation, knowledge generation, and adaptation of
technological change, and assurance of environmental sustainability. Regarding
housing policy: move from a policy centered on solving and overcoming the
housing decit toward one geared to quality of life, which presupposes quality
housing and an urban policy capable of integrating, instead of segregating the
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Mauricio Jelvez M.
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population. Regarding political and institutional policy: move from a policy bent on
limited, circumscribed improvements of our democratic system that has sought to
maximize governability, toward a policy that deepens our democracy, strengthens
our civil society, and encourages citizen participation in life in society.
The country has become increasingly aware – even though the process
is still incomplete – of the need for a common understanding of an integral
development project for Chile. This in turn presupposes the recognition of
the interdependence between the management of an economic development
policy and the need to expand the political capital (institutional development),
and the social and human capital available in society. The sum of these three
kinds of capital can generate a synergy that could allow our country to pursue
development beyond the mere accumulation of wealth and GDP growth, and
to ensure quality of life and the expansion of human liberties.
1. Strengthening of the political capital
A new Constitution for Bicentenary Chile. The axis of this reform should
be the constitutional afrmation of our Democratic and Social Rule of Law. This
afrmation is not purely a semantic question; it is the springboard for a dialogue
of utmost importance aimed at breaking away from an individualistic logic
bent solely on the protection of private interests, and at reviving the concept
of community as the propeller of our society and institutions. The purpose is
not to restrict but rather to expand individual freedom, particularly as regards
those that are strictly limited for economic and social reasons.
It is necessary to proceed with decentralization, ensuring a wider
distribution of responsibilities and powers from the State to intermediate
bodies, privileging rst the regions and municipalities. The objective is better
distribution of resources countrywide and stimulus for regional forces, greater
direct contribution to social equality, a reduction of the territorial component
of poverty, a more efcient, focused application of social policies, and the
promotion of new channels of political inuence for the marginalized.
2. Strengthening of the social capital
Society’s organization has a bearing on development’s economic and
political processes. It is thus necessary to promote greater social cohesion to
Chile’s economy and development challenges
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
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counter any model that favors individual action by rational egotists, as is the
case with the market economy alone.
Thus, the strengthening of civil society as a mechanism to facilitate
economic transactions, reduce risk and opportunism, and encourage special-
ization, creativity, and collective action contributes to society’s own growth
and development.
It is also necessary to encourage the resurgence of a major labor
movement to help balance the social actors’ power, which is alarmingly
biased in favor of the entrepreneurial sector, and as an essential element for
the construction of a labor relations system based on dialogue, cooperation,
and negotiation. This would ensure a democratically rather than a unilaterally
imposed recognition of the need for exibility.
Also necessary is political will to legislate and implement public policies
aimed at strengthening our intermediary organizations and intensifying the
capacity for association.
Thus, to strengthen the links between civil society and the State, at
least three things are required: (i) to raise the expectations of the poor so as
to strengthen condence in social change and reduce aversion to risk; (ii) to
empower civil society organizations for setting rules and sanctions to ensure
compliance with the rules and the rule of law; and (iii) to establish a vertical
interlinking of base organizations and the rest of society for ensuring better
distribution of available recourses, guaranteeing their sustainability, and making
opportunities accessible to all social segments.
3. The State as a strategic leader of Chile’s development
Chile needs more State and a better State for formulating a country vision
and a development strategy susceptible of rallying and mobilizing the main
social actors capable of taking the lead in their implementation.
Chile must demand that the State play its irreplaceable role in the building
of a society ready to expand liberties and opportunities for its people. It is also
necessary to recognize the State’s importance for doing at least the following:
guaranteeing political stability and macroeconomic equilibriums; ensuring a
sustainable system of social promotion and full protection, not only focusing
the poorer segment but also creating conditions for the social mobility of the
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Mauricio Jelvez M.
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middle segments; regulating the markets and ensuring their proper and correct
functioning; providing with efciency the goods and services demanded by
society; and encouraging the accumulation of social and human capital.
The State must also play a more active role in the coordination of public
and private cooperation for boosting Chile’s competitiveness and exporting
capacity. It should be more aggressive in calling upon each economic sector
and cluster, in working with them in the identication of the main obstacles
pertaining to norms, technology, international commercial networks, human
capital, and country brand. Joint work is also needed for co-nancing the
elimination of obstacles to our productive progress. This policy should be
applied particularly to small and medium enterprises, as the only way of
lifting them out of their precarious condition and extending to them the
opportunities that ensure Chile’s participation in world trade through the Free
Trade Agreements celebrated in the last ten years.
4. An economy for people’s development
An economy at people’s service presupposes a preferential concern for
the real and the productive economy and not only for the nancial area, the
pursuit of low ination, and a balanced budget. With a balanced budget, there is
a tendency to maintain the economy behind what is called the productive frontier;
the country’s growth potential is thus wasted, owing to the underutilization
of available human, material, and technological resources. This means the
underutilization of the creativity and capacity of Chilean men and women.
It is thus necessary to improve the functioning of the markets by
stressing the importance of longer-term planning and of production factors.
The objective is to ensure a process of endogenous development and of
cooperation among all the actors directed, from the inside, at winning world
markets. It is essential to regulate capital movements, exchange rates, and trade
policy, as is the implementation of productive development policy, which
should include the systematic improvement of the factors’ markets and the
allocation of resources for investment in physical and human capital, so as
to substantially improve the distribution of productivity and opportunities
throughout society, and to promote the acquisition of comparative and
competitive advantages.
Chile’s economy and development challenges
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88
The economy must be managed in such a way as to foster innovation,
technological change, production diversication, and investment in capital,
particularly in human capital, so as to ensure sustained economic growth and
to narrow the gap with the developed world.
5. An economy to address the country’s excessively heteroge-
neous productivity
The persistently precarious income distribution cannot be corrected
unless the extreme productive heterogeneity of the economy is addressed. This
heterogeneity is reected in signicant productivity gaps between enterprises
of different sectors, size, and regions, which lead to salary inequalities and
employment quality disparities.
We need a productive development policy capable of rendering
technological support to lagging enterprises in sectors with great competitive
potential, so as to increase the average productivity of our economy and,
at the same time, of creating public policy mechanisms to raise the level of
accumulation, innovation, and of access to training and nancing opportunities
characteristic of certain activities with extremely low labor productivity.
A comprehensive policy to foster production should potentiate innovation
and entrepreneurship, focusing on small and medium enterprises, which offer
more room for producing positive externalities and creating new sources of
employment in the quantity and of the quality needed for extending to large
sectors the benets of economic progress and the opportunities provided by
the globalized markets.
6. A new scal pact for a new social pact
Our country must still meet many challenges to become a development
society. The construction of an increasingly more humanized society requires
not only a comprehensive country project but also the decision to advance
together as a community bound by shared ideas, values, and objectives and
engaged in common efforts. In sum, it must see that the values of equality,
solidarity, and community nd real expression in society, so that Chile may be a
nation where rights and opportunities are accessible to all, without distinction
based on gender, age, race, origin, or economic status.
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Mauricio Jelvez M.
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Such dreams cannot materialize unless we earnestly and responsibly
admit the need for more public resources to discharge these tasks. If we
want to narrow the technological gap, improve the quality of education,
have a world-class labor force, and expand the opportunities for young
people, women, and the elderly, we must gradually increase public spending,
so as to reach at least the average level of developed countries. This cannot
be done without increasing the tax burden to nance public spending and
prevent scal decits.
In this respect, countries such as ours provide a window of opportunity
to proceed gradually and steadily on the route toward closer alignment with
the developed countries regarding the tax revenues needed to boost productive
development and equality.
Naturally, the pursuit of this convergence should first consider
measures to reduce tax breaks and evasion, and design a progressive, instead
of regressive tax structure conducive to raising collections while exerting a
low impact on growth.
Chile must thus adjust its tax burden upward as its per capita product
consolidates a convergence trend, so as to transform the State into an agent
that promotes equal opportunities and ensures an efcient redistribution,
which are necessary for implementing sounder public policies to stimulate
growth and reduce inequality and poverty.
DEP
Translation: João Coelho.
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The Colombian
economy: a critical
approach
Darío Germán Umaña Mendoza*
Summary
T
his essay was presented at the First South American Economists
Encounter, held in Rio de Janeiro, Brazil. It describes the Colombian economy’s
current situation and its relation with integration and globalization, starting from
the assumption that we are today experiencing a cutoff point in growth owing
to the country’s nancial fragility in both the external and internal accounts, as
evidenced by higher interest rates, exchange rate volatility, inationary are-ups,
and less optimistic expectations about the level of macroeconomic gains.
In general, economic agents as well as the government are excessively
burdened with indebtedness, which so far has been met owing to the continuing
stability of current revenue balances. Should these ows change, there would
be the risk of a recession, whose duration and extent would depend on the
internal measures adopted in relation to liquidity and on a possible recession
in the United States and its effects on the world economy.
* Director of the Development Research Center (CID) at the National University of Colombia
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Darío Germán Umaña Mendoza
91
1. Description
Colombian GDP should grow over 6 percent in 2007, signaling the
consolidation of a growth trend that started in 2000, the year in which a severe
recession was overcome, seemingly creating external and internal conditions
to ensure a positive, sustained development of the Colombian economy.
The facts pointed out by establishment economic analysts to substantiate
these assertions include the nancial sector’s strong indicators, the monetary policy’s
positive results, a modest negative balance in the current account, a one-digit ination
target, higher international reserves, the recovery of investment, the stability of
exchange and interest rates, the consolidated public sector’s positive scal indicators,
the nancial sector’s greater opening and deepening, better terms of trade owing
to higher international prices of primary and agricultural and livestock products,
the abundance of external nancing, and favorable GDP growth rates.
1
Table 1
Total GDP and annual growth rates 1999-2006
(In millions of constant 1994 dollars)
Year Yearly variation % US$ millions
1999
2000
2001
2002
2003
2004
2005(p)
2006(p)
-4.20
2.92
1.47
1.93
3.86
4.87
4.72
6.79
87,411
89,968
91,292
93,057
96,647
101,351
106,136
113,338
(p) = Provisional
Note: GDP in 1994 dollars = GDP in millions of 1994 pesos at the 1994 average nominal exchange rate
Source: Dirección Nacional de Síntesis y Cuentas Nacionales-DANE and Banco de la República, Estudios
Económicos – Estadística.
With respect to the growth of the GDP per capita, it has evolved at
important rates since the year 2003, but at lower rates than the growth of the
total GDP.
1 Banco de la República. Grupo de Macroeconomia. 2006. La economía colombiana: Situación actual frente a
los noventa y perspectivas.
The Colombian economy: a critical approach
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
92
Table 2
GDP per capita and annual variations 1999-2006
(In millions of constant 1994 dollars)
Year Yearly variation % US$ millions
1999
2000
2001
2002
2003
2004
2005(p)
2006(p)
-5.96
1.14
-0.29
0.16
2.11
3.15
3.10
5.11
2,102
2,126
2,120
2,123
2,168
2,236
2,305
2,423
(p) = Provisional
Note: GDP in 1994 dollars = GDP in millions of 1994 pesos at the 194 average nominal exchange rate
Source: Dirección Nacional de Síntesis y Cuentas Nacionales-DANE and Banco de la República, Estudios
Económicos – Estadística
However, the income concentration GINI index measured up to 2004
shows that capital concentration and centralization does not help improve income
distribution. GINI indicators are not available for the last two years, but all seems
to indicate that, as a result of the tax and scal measures adopted, capital rather
than labor will be favored and that increased gains will not be accompanied by
better income distribution.
Table 3
GINI coefcient 1991-2004
Year
National total
People Households
Total Capital Rest Total Capital Rest
1991
1993
1996
1997
1998
1999
2000
2001
2002
2003
2004
0.55
0.56
0.54
0.56
0.56
0.56
0.57
0.56
0.58
0.55
0.56
0.53
0.53
0.50
0.52
0.52
0.52
0.54
0.54
0.57
0.54
0.54
0.50
0.51
0.50
0.50
0.57
0.54
0.51
0.49
0.53
0.45
0.46
0.54
0.55
0.53
0.54
0.55
0.54
0.58
0.58
0.60
0.58
0.58
0.52
0.53
0.49
0.52
0.51
0.51
0.55
0.56
0.59
0.56
0.56
0.52
0.51
0.50
0.49
0.57
0.55
0.53
0.53
0.57
0.50
0.51
Source: Sistema de Información Estadística. CID. Universidad Nacional de Colombia
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Darío Germán Umaña Mendoza
93
For the analysts that believe that the crisis has been denitively overcome,
the change occurred as of 2002 in both the structural and the institutional
areas. However, some say that risks persist, as evidenced by a signicant central
government structural decit as compared with the regional surplus; the high,
persistent levels of external and internal debt; the weakness and fragility from
the nancial system to the public debt securities (TES); the unprecedented
excess of consumption expenditures; the deterioration of short-term bank
portfolios; the inated price of assets; and the currency revaluation, coupled
with competitiveness problems and the instability of interest rates owing to
changes in the world nancial and economic environment.
Many of these current characteristics of the Colombian economy are similar
to those of the crisis in the late nineties. The salient features then were the interna-
tional turbulence that caused the accelerated ight of short-term capital; excessive
spending; lack of foresight and of prudence in portfolio management on the part
of the nancial sector; higher prices; the housing sector bubble; and the nancial
markets’ irrational behavior. With this behavior and the increased nancial ows,
consumption expenditure accelerated, affecting the revaluation of the exchange
rate, which, coupled with deregulation, hindered the adoption of timely corrective
measures and a proper identication of the economic agents’ behavior.
2. Financial interpretation
I do not mean that the current situation is similar to the past in every
respect. But the current symptoms point to a series of factors that were
common to the end of the nineties’ boom, especially if one looks at the
real, nancial, and monetary variables. According to Minsky’s “Financial
deregulation: fragility and instability” (1986) and Arestis and Glickman’s “Open
Economy” (2002), disequilibria have their origin in good times when, with the
economic agents’ short-term balances in order and reliable signs of economic
activity, the monetary authority and discipline become lax.
2
Currently in the Colombian economy, investment by the economic
agents is levered by debt; households are optimistic about lasting consumption
2 Moreno, Álvaro and Gustavo, Junca. “Las consecuencias económicas de Mr. Uribe. ¿Otra vez los felices
noventa?” Bien-Estar y Macronconomía. 2007. Más allá de la retórica.” CID. Universidad Nacional de Colombia. This
characterization receives a more thorough treatment in the chapter of the work, whose reading is recommended.
The Colombian economy: a critical approach
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
94
patterns; banks and businesses, particularly large ones, have devised innovative
borrowing and credit mechanisms for consumers; nancial sector gains are
on the rise; and so far there has been abundant supply of external nancing
at low interest rates.
Thus, short-term obligations are met and, according to the entrepreneurs’
perception, the economy and the productive activities will continue to grow,
the exchange rate will remain revalued and interest rates low, and the price of
assets will grow exponentially as will the price of securities (the nineties’ crisis
lacked this last component).
The expectations of agents, the government, and the Central Bank are
optimistic and the current favorable situation tends toward continuation. However,
the markets give signs of deterioration or at least of a slowdown of the world
economy, and the housing crisis in the United States seems to be worsening and
to be signicantly affecting the nancial and real sector of the economy.
It would sufce a simple look at Minsky’s equation of how the aggregate
benets of an economy stem from the economic agents’ spending and from
autonomous demand, which is the source of capital return:
B = I + (G-T) + (X-M) + C (K) – S (W)
Where B stands for aggregate benets, I for investment, G-T for scal
behavior, X-M for trade balance, CK for autonomous capitalist consumption,
and S (W) for workers’ savings. Let us look briey at what could be expected
from the economy’s aggregate benets, taking into account the current
situation of the internal and external accounts and the characteristics of the
international environment.
3. External accounts
3.1 Trade balance
The trade balance became negative in 2006 and by the second quarter
of 2007 it had approached -US$1.1 billion and by the end of the year it
should fall further to -US$2 billion, which can be attributed mainly to the
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Darío Germán Umaña Mendoza
95
peso’s revaluation, as the prices of raw materials and agricultural products
have maintained their rising trend. Imports are explained essentially by the
higher demand for raw materials and inputs and for superuous and durable
consumer goods, especially for transport material.
Table 4
Trade Balance 2000-2007 (In US$ millions)
2000 2001 2002 2003 2004 2005 2006
Acum
2007-II
Exports
Imports
Trade balance
13,099
10,655
2,444
12,233
11,826
407
11,794
11,653
141
12,933
12,792
141
16,442
15,324
1,119
20,818
19,431
1,387
23,930
23,976
-47
12,938
14,007
-1,069
Source: Banco de la República
Exports consist essentially of primary and traditional products, which
account for 65 percent of the total, while the share of goods with aggregated value
or industrial and nontraditional products is declining (35 percent of the total).
3
3.2 Services balance
The services balance in the period under scrutiny has recorded signicant
decits in the last three years. The 2007 decit should be similar to the 2006
one: more or less – 2.1 billion dollars.
Table 5
Services balance 2000-2007 (In US$ millions)
2000 2001 2002 2003 2004 2005 2006
Acum
2007-II
Exports
Imports
Services balance
2,049
3,308
-1,259
2,190
3,602
-1,412
1,867
3,302
-1,435
1,921
3,360
-1,439
2,255
3,935
-1,680
2,664
4,766
-2,102
3,373
5,493
-2,120
1,645
2,727
-1,082
Source: Banco de la República
3 Umaña, Germán Mendoza. “Política comercial, bilateralismo y sector externo.” In Bien-Estar y Macroeconomía. Más allá de
la retórica. 2007. CID, Universidad Nacional de Colombia. See p. 205 for a table showing the exports’ performance.
The Colombian economy: a critical approach
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
96
Services exports are limited to transport, travel, communications,
information, and data processing and, to a lesser degree, entrepreneurial and
construction services, which accounts for our exports’ low aggregated value.
However, if remittances from Colombians living abroad are taken into account,
the minus sign changes to a plus sign, as these remittances may be statistically
considered services exports.
Imports consist mainly of transport and tourism but the aggregated
value of these items is signicant, which points to a sharp asymmetry in the
composition of our trade with third countries.
4
3.3 Current account balance
As a result, the current account balance tends to a major decit in 2007,
when it should total -6.5 billion, equivalent to more or less 4 percent of this
year’s GDP.
Table 6
Current account balance 2000-2007 (In US$ millions)
2000 2001 2002 2003 2004 2005 2006
Acum
2007-II
Goods
Services
Factors income
Current transfers
Current account
2,633
-1,259
-2,277
1,673
770
579
-1,412
-2,609
2,354
-1,088
239
-1,435
-2,867
2,706
-1,357
555
-1,439
-3,398
3,309
-974
1,346
-1,680
-4,297
3,724
-906
1,595
-2,102
-5,456
4,082
-1,881
322
-2,120
-6,003
4,743
-3,057
-986
-1,082
-3,508
2,365
-3,211
Source: Banco de la República
The growing current account decit can be maintained only if the exports
of goods and services rise more than imports, which does not seem likely, unless
there is a structural change in the supply of exportable goods and services.
This current account decit is owed in large measure to the factors
income, as expenditure ows have trebled in the last four years, and should
approach US$7 billion in 2007.
4 Umaña, Germán Mendoza. “Política comercial, bilateralismo y sector externo.” In Bien-Estar y Macroeconomía.
Más allá de la retórica. 2007. CID, Universidad Nacional de Colombia.
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
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It is determined also by current transfers, especially remittances from
workers abroad, whose growing net balance is positive. Thus, the current
account balance is in a less chaotic situation owing to the departure of nationals
for foreign countries and the transfers they send their families. However,
various studies alert that these remittances may be contaminated by drug trafc
money, while other transfers come from illegal immigrants. So, this is in part
an economy of poverty and illegality.
3.4 Capital account
Table 7
Capital account balance 2000-2007 (In US$ millions)
2000 2001 2002 2003 2004 2005 2006
Acum
2007-II
Long-term nancial ows
Short-term nancial ows
Capital account
2,077
-2,019
59
5,035
-2,588
2,447
-1,391
2,695
1,304
966
-309
657
2,624
581
3,205
4,361
-1,130
3,230
6,861
-4,062
2,799
4,249
3,136
7,385
Source: Banco de la República
The capital account, consisting of foreign direct investment, should be
divided into foreign direct and portfolio investment. Foreign direct investment
is growing only in the already known primary product sectors and owing above
all to privatizations and the acquisition of existing enterprises. Investment
in new productive sectors is less signicant. Short-term nancial ows are
increasing in 2007, but given the unstable performance of the international
economy, their continuance is uncertain. Right now, internal interest rates are
rising, while international rates are declining.
The Colombian economy: a critical approach
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3.5 Balance of payments
Table 8
Balance of payments 2000-2007 (In US$ millions)
2000 2001 2002 2003 2004 2005 2006
Acum
2007-II
Current account
Capital & nancial account
Net errors & omissions
Net international reserves
International Net
770
59
41
869
-1,088
2,447
-140
1,167
-1,357
1,304
191
188
-974
657
133
-186
-906
3,205
242
2,543
-1,881
3,230
380
1,723
-3,057
2,799
280
23
-3,211
7,385
227
4,400
Source: Banco da República
International reserves have risen, particularly in 2007. In relation to the debt
service obligations, though, they represent only a ve – or six month – cushion.
In brief, the goods and services balances are increasingly showing decits
and this is aggravated by increased transfers of multinational subsidiaries
in Colombia to their parent companies abroad. Only the remittances of
Colombians abroad help moderate this trend. So far, the capital account shows
a surplus, but maintaining this surplus will depend on the outcome of the
privatization of regional enterprises, which is opposed by local players, and
of the new merges with and acquisitions by multinational enterprises at the
expense of national capital enterprises, not many of which are left.
Expectations of future macroeconomic benets should thus take into
account the possibility that the deterioration of the current account balance
and the instability of capital ows may change medium-term expectations of
the economy and the economic agents, particularly if the real estate crisis in
the United States worsens.
4. Fiscal accounts
In the 2000-2006 period, the central government’s scal accounts
showed an average decit of 5 percent, except for 2006. In 2007 and 2008
the spending tendency does not seem to decline, especially if one considers
military and democratic security expenditures. A reduction of U.S. resources
provided under the Colombia Plan and their diversion to more institutional
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
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ends such as the strengthening of justice and human rights rather than their
use for armament procurement would force the country to allocate greater,
more permanent resources to defense. Some analysts estimate that to ensure
sustainable military spending, GDP should grow an additional 2 percentage
points, and taxes should be raised, or spending with other items, such as social
spending (health or education) should be slashed.
5
Table 9
Central Government’s scal accounts 2000-2006 (In percentage of GDP)
Year With privatization Without privatization
2000
2001
2002
2003
2004
2005
2006
-5.49
-5.83
-5.47
-4.81
-4.44
-4.78
-3.66
-5.91
-5.92
-5.47
-4.87
-4.45
-5.00
-3.69
Source: CONFIS, Ministerio de Hacienda y Crédito Público
Note: Since 1994, it was used the GDP according to the methodology from SCN93.
In the regional accounts and in the consolidated accounts of the territorial
governments, scal balances show surpluses in an inverse proportion of the
central government’s imbalances, which points to a signicant degree of discipline
in decentralized governments’ spending and at the same time to the central
government’s voracity and delusions of political and economic centralization.
5 See Moreno and Junca. Op. cit.
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Table 10
Territorial Governments’ consolidate scal balance 2000-2005
(In billions of pesos)
Year Tax
Non
tax
Transfers
Capital
income
Total
income
Operating
current
expenditure
Interest Transfers
Capital
expenditure
Total
expenditure
Net
borrowing
Fiscal
balance
2000
2001
2002
2003
2004
2005
4,695
5,030
5,737
6,854
7,933
8,950
955
675
953
1,215
1,241
1,576
7,300
8,851
10,453
12,425
14,136
15,513
348
190
276
126
91
166
13,297
14,747
17,419
20,621
23,400
26,205
8,753
10,061
11,543
13,685
15,656
18,483
787
608
638
599
620
602
1,482
1,752
1,575
1,597
1,751
1,984
3,583
2,330
3,436
3,958
3,298
4,984
14,606
14,751
17,192
19,839
21,325
26,054
-239
-4
8
4
7
-423
-1,070
-0
220
778
2,068
574
Source: Subgerencia de Estudios Económicos, Banco de la República
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Evidently, this situation has created tensions between the central and the
regional governments. In 2006, the Congress of the Republic of Colombia
approved a reform of National Government transfers to the regions for the
areas of health, education, and potable water, which signicantly reduced
the resources expected from the previous legislature. This has accentuated
tensions, which has led the Liberal Party to collect signatures to submit this
decision to a repeal referendum.
6
In brief, scal risks persist and a contraction of spending would be
needed now that the economy seems to tend to lower GDP growth rates; this
would diminish the economic agents’ positive perception of the performance
of future macroeconomic benets and would possibly further aggravate
recession. All of this is a question of economic policy and sound nances.
5. Macroeconomic prices, employment, and ination
The money supply has been slack in recent years. This, coupled with
a large volume of both formal and informal foreign exchange entering the
country, has triggered a consumption boom. Owing to the inuence of
signicant imports growth at a revalued exchange rate, this has prevented
ination growth; thus, up to 2006, the Central Bank of the Republic has been
able to achieve the ination targets.
6 For further information on transfers reform, see: Rodríguez, Oscar. “Las transferencias: entre el sistema de
protección social, la gobernabilidad macro y la construcción social del Estado.” In Bien-Estar y Macroeconomía,
2007, Más allá de la Retórica. CID, Universidad Nacional de Colombia.
The Colombian economy: a critical approach
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Chart 1
Consumer Price Index -Yearly Variation 1999-2007
[Accumulated up to November]
[Source: DANE]
In 2007, though, inationary trends ared up and by November it became
clear that the ination target set by the Bank of the Republic would not be met. It is
also clear that the growing delinquent consumer credit and mortgage portfolio has
reduced liquidity, leading the Central Bank to raise its interest rates, and private banks
to raise their rates even higher, while the exchange rate constantly uctuates.
Table 11
Consumer prices index 1999-2007 (In percent)
Month 1999 2000 2001 2002 2004 2004
Base December 1998 = 100
2005 2006 2007
January
February
March
April
May
June
July
August
September
October
November
December
Full year
2.21
1.70
0.94
0.78
0.48
0.28
0.31
0.50
0.33
0.35
0.48
0.53
9.23
1.29
2.30
1.71
1.00
0.52
-0.02
-0.04
0.32
0.43
0.15
0.33
0.46
8.75
1.05
1.89
1.48
1.15
0.42
0.04
0.11
0.26
0.37
0.19
0.12
0.34
7.65
0.80
1.26
0.71
0.92
0.60
0.43
0.02
0.09
0.36
0.56
0.78
0.27
6.99
1.17
1.11
1.05
1.15
0.49
-0.05
-0.14
0.31
0.22
0.06
0.35
0.61
6.49
0.89
1.20
0.98
0.46
0.38
0.60
-0.03
0.03
0.30
-0.01
0.28
0.30
5.50
0.82
1.02
0.77
0.44
0.41
0.40
0.05
0.00
0.43
0.23
0.11
0.07
4.85
0.54
0.66
0.70
0.45
0.33
0.30
0.41
0.39
0.29
-0.14
0.24
0.23
4.48
0.77
1.17
1.21
0.90
0.30
0.12
0.17
-0.13
0.08
0.01
0.47
–
5.17
Source: DANE
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
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Chart 2
Interest rates on 90-day term deposit certicates-DTF
[Source: Banco de la República; data provided by Superintendencia Financiera de Colombia.]
As to unemployment, it shows a positive trend; in the rst quarter of
2007, it stood at 12 percent of the economically active population and fell to
close to 10 percent in the following quarters. The unemployment rate remains
constant, though, and informality exceeds 40 percent of the economically active
population, which keeps unemployment at the center of attention, as growth
does not necessarily lead to better employment and income conditions.
Table 12
Employment, unemployment, and informality 2001-2007
Year Employment Unemployment Informality
2001
2002
2003
2004
2005
2006
Sem I
Sem I
Sem I
Sem I
Sem I
Sem I
51.73
51.56
52.63
52.05
51.87
52.36
15.71
16.12
14.61
14.74
12.70
12.01
39.50
38.72
39.39
41.37
41.29
41.51
Source: DANE – Households Permanent Survey
The Colombian economy: a critical approach
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The exchange rate moved from a sharp devaluation in 2004 to a
revaluation of equal proportions, which lasted till 2006. It recovered slightly in
2006 and has shown signs of instability and uncertainty in these last months of
2007, an indication that the international market is feeling jittery and awaiting
to see what will be the effects of the subprime crisis in the U.S. economy and
international liquidity.
Table 13
Representative market rate 2000-2007 (Pesos per dollar)
Period Average
2000
2001
2002
2003
2004
2005
2006
2007
2,087.42
2,299.77
2,507.96
2,877.79
2,626.22
2,320.77
2,357.98
Fluctuating, uncertain
Source: Banco de la República
Chart 3
Representative market rate (Yearly average)
[Source: Banco de la República]
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6. Globalization and integration
This section summarizes the main aspects of Colombia’s experience
of globalization and economic integration in recent years. A more extensive
treatment of this issue is found in the previously mentioned chapter of Bien-
Estar y Macroeconomía.
Since the past decade, Colombia has endeavored to form part of the
unstoppable internationalization of the economy and trade. As part of the
World Trade Organization, it has abided by the consolidated, maximum limits
of the application of its trade policy as regards the liberalization of trade in
goods and services as well as of capital, and has entrusted to the WTO the
solution of the differences in respect of the matters negotiated under its
auspices, including intellectual property. The difference in respect of intellectual
property is that greater liberalization of the knowledge capital is not happening;
on the contrary, only a minimum of liberalization is being achieved, which
can be modied by higher levels of protection under subsequent bilateral or
multilateral agreements.
We will not undertake here a detailed analysis of what our country
negotiates at the different international forums. We will simply present a map
of our commitments under integration agreements, without making any value
judgments.
If a deep integration scheme is understood as one that implies the
increasing cession of national sovereignty in political, economic, social, and
commercial matters, it should be noted that Colombia does not participate in
any scheme of this kind.
The closest to this description is the Andean Community, which has
managed to establish not only a free trade zone (goods and services) but also a
partial Customs Union, including common trade policies, such as those related
to unfair competition and abuse of dominant market position, pricing tiers,
sanitary norms, third party safeguards, etc.
Progress has also been made with respect to the free movement of people
and the recognition of professional titles among the Cartagena Agreement’s
signatory countries, including as yet incomplete proposals for the development
of integration’s social component and draft policies on migrations and social
protection in the Andean Community.
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There is also a common policy on intellectual property and a less
comprehensive policy on investment, all of which is currently under threat
owing to the trade promotion agreements celebrated by Colombia and Peru
with the United States, Venezuela’s withdrawal from the Andean Community,
and the elimination of commitments to a Common External Tariff.
In the nancial area, a relatively stable institutional framework has been
created with the Andean Promotion Corporation, the Latin American Reserve
Fund (FLAR); an independent technical Secretariat that has played a major
role in ensuring compliance with provisions of the founding Treaty, such as
early dispute solution; an Inter-State Andean Court of Justice, institutionally
strong but weak in enforcing its decisions; and a sort of Andean Parliament.
Civil society’s participation has been limited to the labor and entrepreneurial
areas, through consultative bodies that unfortunately never materialized as
signicant counterparts to the government and whose participation was a
bureaucratic rather than a real alternative for enhancing Andean integration.
The Andean Community is losing its relevance: Venezuela, one of its
major members, withdrew in 2006, while Peru and Colombia are relegating it
to a second plane by adopting an open integration scheme and especially by
their bilateral negotiations with the United States, and Ecuador and Bolívia are
embroiled in political differences. In sum, the Andean Community is so far an
important though failed integration alternative, in which Colombia plays no
role today, except for advocating a free trade zone, which, after Venezuela’s
withdrawal, faces serious difculties regarding the future.
As it was superseded by the Latin American Integration Association-Aladi,
and with the practical disappearance of the Most Favored Nation Treatment owing
to Mexico’s integration into Nafta, the Latin American Free Trade Association-
Lafta, having also failed to extend to the other member countries the preferences
it granted the United States and Canada, shows how progress in Latin American
integration has been restricted in economic and trade matters to a series of bilateral
agreements with other integration zones, such as Mercosur and CAN, in which
Colombia participates, or to Colombia’s agreements with the northern Central
American triangle or partial agreements with Caricom.
In general, these agreements’ characteristic is their tendency toward full
or partial free trade zones, with lower tariffs, denition of rules of origin to
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take advantage of preferential treatment, and other issues devoid of practical
relevance. These agreements are also decient in respect of dispute settlement,
clear objectives for advancing toward greater integration, lack of an institutional
structure, and failure to include the social issue as part of integration.
There is also a new generation of agreements, such as the ones celebrated
by Colombia and Chile with Central America’s northern triangle, aimed
principally at the liberalization of trade in services, government procurement
norms, investment protection, and dispute settlement. As regards binding
provisions, though, they are lacking.
The so-called Free Trade Treaties-FTT with developed countries
ignore the principle of shared responsibility in the ght against the universal
scourge of drugs, the disappearance of unilateral preferences, and the jump
to investment protection bilateral treaties.
In fact, a review of the Cooperation Agreement celebrated with the United
States but not yet in force shows that Colombia’s major gain in trade in goods
was the maintenance, with very small additions, of the Andean Promotion
Treaty and Drug Eradication Act-Aptdea; it has obtained nothing or very little
in respect of the dismantling of subsidies, internal assistance or other equivalent
measures in the agricultural sector, or of antidumping, safeguards, integration
zone norms related to control and abuse of dominant market position, or the
elimination of technical obstacles other than tariff barriers.
On the contrary, Colombia adopts a unilateral opening policy, reinforced
by the fact that Colombian norms for controlling unfair competition are quite
weak, and are more concerned with opening up the economy rather than
protecting local production, as the United States does.
As regards investment, the FTT provides not only for prior protection
of foreign investment but even for indirect expropriation; and as to knowledge
capital, it neglects or cancels benets. All the preceding is aimed at preventing
the implementation of policies that might affect American investors and
tends to ensure nearly unlimited protection of foreign investment, which
some see as a symbol of stability, while to others this means an outright
surrender of sovereignty.
With respect to dispute settlement, the FTT provides that not only
conicts between Sates but also divergences between investors and the State
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may be subjected to international courts (particularly the International Center
for the Settlement of Investment Disputes-Icsid).
The FTT’s coverage is wider than any multilateral or any other integration
agreement signed by Colombia, as it includes foreign direct investment not
only in goods but also in services, capital portfolio (capital control measures
adopted by the government or the Bank of the Republic can be claimed only
one year after they enter into force), foreign debt, knowledge capital, and it
is – surprise! – the only scheme that does not envisage a safeguard clause in
case of a balance of payments crisis.
In brief, the FTT is the realization of the American investor’s dream
that not even the failed Multilateral Agreement on Investment-MAI, proposed
by the OECD could make into a reality, as it was attacked around the world
by developing countries and even by the Catholic Church – the reason why
it was never approved. It exceeds in every respect what had been decided by
the Andean Community of Nations-CAN.
As to intellectual property, little or next to nothing has been accomplished
in matters of biopiracy control, traditional knowledge, and exceptions in the
cultural industries; on the contrary, extension of patentability was accepted,
similarly to the protection of reserved information, author’s rights, particularly
copyright (enterprises that purchase author’s rights from their proprietors),
piracy control, connections between intellectual property and approval of
sanitary registration and longer terms for author’s rights, and the automatic
incorporation, apart from the WTO, of some aspects negotiated at the WIPO,
particularly those pertaining to reinforcement of administrative and coercive
controls to enforce respect for intellectual property.
In addition, the population’s health is not assigned priority over the
monopolistic interests of multinationals and intellectual property norms.
Likewise, there is no reinforcement of effective control, pursuant to Colombian
legislation, of anticompetitive practices resulting from the monopolistic control
based on patents or author’s rights.
As regards public sector procurement and services, the crucial fact is
that no real, unrestricted access to the markets of the two countries has been
achieved, as the United States endorses many geographical and administrative
exceptions. The United States excludes the states (about 45) from the FTT
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and maintains its exceptions, while Colombia negotiates as a single State. The
government procurement liberalization list is thus signicantly asymmetric,
to Colombia’s disadvantage.
In the chapters on services, the FTT does not address the investment
issue, which is restricted to the chapter on investment, thereby waiving to
a large extent the application of public policies. Mode 4 of the rendering
of services (personal services) is not liberalized, nor are migration policies
claried and so far little or nothing has been negotiated in respect of rec-
ognition of educational titles or the granting of visas for the rendering of
professional services; neither has a mechanism for solving differences in this
matter been established.
As to telecommunications services, the main risk lies in the decision on
access to public networks based solely on technical rather than economic consid-
erations, and in the private networks’ freedom do render services, which might
threaten the nancial viability of public telecommunications enterprises.
With respect to labor and environmental issues, the FTT does not address
the social dimension of integration or respect for the workers’ fundamental
rights, or adherence to the Kyoto Protocol on gas emissions or to the Amazon
Cooperation Treaty. It limits itself to national legislation, the application of
nes and eventually of trade sanctions, which implies essentially the application
of the social and environmental dumping concepts. Dispute settlement is
brought under the FTT, thereby dismissing multilateral forums such as ILO
and environmental treaties sponsored by the United Nations.
Although the FTT was signed by the two governments, the Democratic
Party has proposed its reopening in regard to labor and environmental matters.
This resulted in the unilateral establishment of new conditionalities and
sanctions, as the United States was not included in the decisions. We shall see.
Meanwhile, the Colombian government is a mere spectator at the negotiations
between the major parties and the U.S. Congress.
The dispute settlement system is two-sided. In matters such as trade
liberalization, the general mechanism is weak and has little binding force;
in relation to investment and intellectual property, it is strong and denitely
binding. This is another asymmetry favorable to investors, and these are
basically Americans.
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Finally, the negotiation of a possible association agreement between the
Andean Community of Nations and the European Union is currently in limbo.
However, it is realistic to think that in trade matters, Colombia will negotiate with
the European Union under similar conditions as it did with the United States.
In sum, as to the liberalization of goods and services that are a priority
for Colombia, progress has been minimal under multilateral agreements, and
the dispute settlement mechanisms are weak. As to investments, the opposite
is true – there has been substantial progress. Thus, it is not inappropriate to
say that we do not have a free trade agreement but essentially an investment
protection treaty. This is the bilateralism paradise – we are turning our back
to Latin American integration and no short-term results are to be expected to
change the current account balance’s negative sign nor investments to reinforce
the capital account. So far everything is changing for the worse.
Conclusion
The preceding presentation of the Colombian economy shows that the
recent years have witnessed relative stability and growth, as well as accumulated
financial risks in the external accounts – current and capital accounts,
balance of payments – and in the internal accounts, the scal decit of the
central government, the sustainability of defense spending and democratic
security expenditures; all this, combined with the excess of consumption
based on credit, which has led to higher interest rates and mild inationary
manifestations, sounds an alert about future performance.
When to this one adds the situation of the U.S. economy and the
uncertainty and weakness of the economic and trade integration strategy, it
can be said that we face a change of course in economic policy, under risk of
a crisis similar to the one in the late ‘happy nineties.’
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Arestis and Glickman. Economía abierta. 2002
Banco de la República. La economía colombiana: Situación actual frente a los noventa
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Banco de la República. Statistical Series.
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Departamento Administrativo Nacional de Estadística. Statistical Series.
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Universidad Nacional de Colombia, Bogotá, 2007.
Rodríguez Oscar “Las transferencias: Entre el sistema de protección social,
la gobernabilidad macro y la construcción social del Estado.” In Bien-Estar
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DEP
Translation: João Coelho.
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
112
The Ecuadorian
economy: overview
and a new concept of
development
Fander Falconí Benítez*
Overview of the neoliberal policy in Ecuador
T
he growth model followed in Ecuador in the last fteen years has
simplied national production owing to the predominance of productive
sectors that yield returns aided by favorable international prices. At the same
time, the foundations of a national, autonomous productive structure have
been undermined by an imports model that benets high-income consumers
and a few importers.
This reprimarization of the economy, scarce productive investment,
and the emphasis on nancial capital have hindered the reactivation of the
national productive structure – after the 1998-1999 nancial crisis – and its
diversication, which would have supported a more balanced growth.
* National Planning Secretary of the Republic of Ecuador
acordova@senplades.gov.ec
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Competitiveness was based on the reduction of labor costs and on income
from extractive activities at the expense of the ecosystems, in the course of a
disorderly market deregulation process, coupled with a tax system incapable of
regulating higher-income taxpayers. These factors had serious consequences, as they
weakened the role of the State as guarantor of rights, producer of quality public
goods, and efcient promoter of stable, sovereign, and human development.
Table 1
Evolution of poverty and extreme poverty, 1995-2006
(As percentage of the population)
ECV
1995 1998 1999 2006
Poverty
Extreme
Poverty
Poverty
Extreme
Poverty
Poverty
Extreme
Poverty
Poverty
Extreme
Poverty
Region
Coast 36.07 9.06 46.44 16.30 52.85 15.98 40.31 10.85
Sierra 41.73 18.53 42.15 21.77 51.44 24.65 33.75 12.20
Amazon 60.57 23.80 50.04 22.25 n.d. n.d. 59.74 39.60
Área
Rural 63.00 27.37 66.75 33.91 75.05 37.68 61.54 26.88
Urban 23.02 4.11 28.72 7.80 36.39 7.99 24.88 4.78
National 39.34 13.60 44.75 18.81 52.18 20.12 38.28 12.86
Source: Siise-INEC based on INEC, ECV. Several years.
Prepared by: Senplades
The political environment under the model just described was characterized
by continuation of the power relations, with the dominating classes apparently
being the only beneciaries of the fruits of growth. Economic power had great
political inuence on decisions. The frailty of institutions and the productive
apparatus became evident late in the last century, when they proved unable to
counter the adverse effects of the El Niño phenomenon (1998) and the banking
crisis (1999), which increased poverty from 12.84 percent in 1995 to 52.18 percent
in 1999 (Table 1). Owing to the nominal stability achieved by dollarization, poverty
and extreme poverty slid back six years later, in 2006, to the levels of a decade
ago. Given the demographic growth and the fact that the fertility rate among the
poorest is higher than in the rest of the population, it can be said that in the past
ten years the number of people living in absolute poverty has increased.
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The problems caused by natural disasters, the nancial crisis, and
the currency change have not affected the entire population the same way.
According to SIEH-Enemdu, between 1990 and 2006, only the higher-income
households did not see their per capita income drop, while the rst eight deciles
of the population saw their income steadily decline. In the sixteen years under
consideration, the ninth decile maintained its share of income at 16.2 percent,
while the more privileged decile increased their share from 35.5 percent to
41.8 percent (Chart 1). In the period under review, a polarization occurred,
so that while in 1990 the richest 10 percent’s income was 18.6 times that of
the poorest 10 percent, in 2006 the difference was 38 times.
Chart 1
Concentration of household per capita income
Source: SIEH-Enemdu, 1990-2006
Prepared by: Senplades
Contrary to neoclassical theory, the opening of the Ecuadorian economy
did not increase demand for the most abundant factor, namely, little qualied
labor. It did just the opposite, by increasing the demand for highly qualied
labor. This widened the salary gap between qualied and unqualied labor,
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Fander Falconí Benítez
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thereby contributing to higher income concentration and greater inequality.
1
Poverty reduction between 1999 and 2006 (Table 1) was not associated
with structural changes, jobs creation, and control of inequality. “Focused”
social policies continue to see a poor person as “the other,” who needs
assistance but whose social inclusion is left to the improbable reaction of a
market that directs investors to the assimilation of labor-saving technologies.
Poverty is rather associated with economic cycles, particularly with international
oil prices and remittances.
Accordingly, growth understood in an abstract sense
2
and macroeconomic
stability are necessary but not sufcient for reducing poverty. In addition, they
are not values in themselves but instruments that must be wielded to the benet
of all and of the poor in particular.
Table 2
Industrial concentration 2005*: Gini coefcient **
Beverages
1
Milk
products
2
Commerce
3
Hotels
4
Construction
5
Sales 0,9651 0,9507 0,9411 0,8828 0,8015
Assets 0,9519 0,9434 0,9412 0,9211 0,8948
* Randomly chosen sectors.
** The consumption Gini coefcient is a statistical measure of unequal per capita household consumption,
which ranges from 0 to 1. Fully equitable distribution is indicated by 0.
(1) Thirty-one enterprises, seven of which did not report sales
(2) Ninety-seven enterprises, 46 of which did not report sales
(3) Eighty enterprises, 18 of which did not report sales
(4) Top 100 enterprises according to sales
(5) Top 100 enterprises according to sales
Source: Producto Indicador, 2005
Prepared by: Senplades
The unequal distribution of household income and consumption
hampers the growth of aggregated demand and the expansion of the economy.
1 No change seems to have occurred. It is not a simple coincidence that average schooling of workers in export
activities (the so-called tradable sector) is four times that of workers in sectors geared to the internal market
(the so-called nontradable sector of the economy).
2 Abstract because it does not create a productive structure capable of integrating national labor and promoting
national sovereignty in the face of variable external factors.
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Production has been concentrated in favor of price-forming enterprises at the
expense of price-taking enterprises;
3
this limits real competitiveness conditions,
hinders transparent market practices, and prevents the expansion of the
demand for formal, well-remunerated, and inclusive employment (Table 2).
The inequalities consolidated by this growth pattern are not limited
to income distribution or the concentration of private ownership of the
productive apparatus (by both nationals and foreigners). The primacy of
the external sector as a guide of economic growth inhibits balanced human
development nationwide, as it impedes the regions’ integration under a
harmonious process susceptible of reducing disparities.
Despite the emphasis accorded it over the past decade, the tradable sector
experienced little productivity increase. Between 1992 and 1997, it increased
2.4 percent, or only 1.3 percent if oil is excluded. Capital-intensive sectors
(oil, tradable goods), energy, and water (previously nontradable), recorded
signicant productivity increases (8.5 percent and 13 percent, respectively), but
labor demand in these sectors accounted for only 0.7 percent of total labor
demand in the agricultural sectors. Meantime, nontradable, nonagricultural
sectors, which accounted for 82.7 percent of total nonagricultural labor,
experienced a 0.9-percent drop in productivity.
4
These gures point to development’s lost decade, whose meager growth
was reversed by the 1999 bank rescue operation, which nevertheless beneted a
sector with serious management shortcomings and a wide discretionary margin,
in addition to interests linked to the management of popular savings.
3 Price-forming enterprises are the few monopolistic ones that can raise the price of their products without
experiencing a signicant decline in demand. Price-taking enterprises are small enterprises that do not have
much inuence in the denition of market prices.
4 Vos, Rob. “Ecuador: economic liberalization, adjustment, and poverty, 1988-99” in Vos, Rob, Taylor, Lance
and Paes de Barros, Ricardo. Economic Liberalization, Distribution, and Poverty. Latin America in the 1990s. UK: Edgar
Elgar Publishing Limited.
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Chart 2
Exports and imports, 1993-2006
Source: Central Bank of Ecuador
Prepared by: Senplades
Since 2000 the main argument for maintaining dollarization has been
the need to export increasingly more for nancing the external balance in a
general context of economic constraint. Although between 2000 and 2005
the Ecuadorian economy’s degree of opening rose from 0.748 to 0.812, which
orthodoxy would consider adequate, the trade balance deteriorated. The degree
of opening was higher owing to a real growth of 45.1 percent in imports, while
exports grew only 34.1 percent, particularly because of the international oil
prices, an exogenous variable we cannot control (Charter 4).
Increased imports did not lower the costs of national production or raised
its degree of competitiveness, as the latter depends on other factors.
5
On the
contrary, increased exports entailed the conversion of a production-oriented
sector into an intermediating or speculative sector (nancial, real estate), in
unfair competition (social dumping) with the popular economy, which was also
downgraded into an intermediating condition or jettisoned from the market
5 Major factors include institutional credibility, social peace based on actual justice for all, educational quality
and pertinence, an adequate science and technology apparatus, market regulations, and so on.
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(small agricultural production). Security and food self-sufciency quickly
deteriorated and, to offset the foreign trade decit, exports were privileged at
the expense of workers’ life and of irreversible environmental damage, which
caused ecological imbalances that will have grave repercussions in the future.
The accelerated growth of imports and the slow growth of non-oil
exports explain the reduced possibility of creating worthy employment. This
has helped worsen the population’s living conditions because of unemployment,
underemployment, precarious employment and low real salaries.
Although it helps to sustain scal expenditures, the upsurge of oil
exports does not really provide a means of spurring employment growth, given
this capital-intensive branch of activity’s small capacity for absorbing labor.
Ultimately, the opening of the economy, whose results have been negative since
2001, is maintained by foreign remittances from Ecuadorian workers forced
to leave a country that does not invest sufciently in sectors with greater labor
absorption capacity (Chart 5).
Chart 3
Income from remittances and migration, 1990-2006
Source: Central Bank of Ecuador and National Migration Directorate, National Statistics and Census Institute
* 2006 data on migration ows are updated to September.
Prepared by: Senplades
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In brief, Ecuadorian society has suffered the consequences of the
structural adjustment imposed by a coalition of external political and economic
forces and by the national elites without a project of their own, in addition
to a [wealth] accumulation based on privileged positions. Political ‘turmoil’
and increasing mistrust of institutions prove what the Washington Consensus
policies had already anticipated: an ostentatious, unjust society, prone to
continuous instability and political conict.
A new concept of development
The 1990s saw a predominance of stabilization and structural
adjustment policies aimed at promoting economic development on the basis
of indiscriminate participation in the global market. Economic growth is
preferable to stagnation, of course, and it provides a foundation for generating
the requisite resources for achieving better living standards, but the possibility
of having additional resources does not guarantee that these will ensure human
development. The growth model was important. Certain forms of growth
may even hinder development, aggravate poverty, worsen the impact on the
environment, and ultimately fail to democratize benets. This has happened in
Ecuador and in nearly all other countries of the region in the last decades.
Traditionally, there has been a tendency to confuse means and ends.
Economic growth, modernization, and technological change are means for
development, and the purpose of development is to expand the capabilities or
liberties of human beings. These liberties are essential as values in themselves.
Every human being has a right to enjoy these liberties and by doing so he
contributes to quality economic growth, society’s democratization, and the
establishment of smoother, equalitarian social relations.
Thus, growth ceases to be an end in itself and becomes a means to
facilitate the achievement of development in all its aspects: enhancement and
potentiation of human capabilities, including good health and adequate access
to knowledge and particular skills; and the use each individual makes of these
capabilities for self-realization and satisfactory living (at work and leisure, and
in productive as well as in social, cultural, artistic, and political activities).
A broader denition of development is needed, as development’s ultimate
objective is to replace the quantitative concept of economic growth by a
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qualitative one. We thus need a vision that will impel us to strengthen our efforts
for achieving more ambitious national goals. We understand development as the
achievement of the general welfare, so that all can live in peace and in harmony
with nature and thus ensure the survival of cultures. Welfare presupposes the
expansion of liberties, opportunities, capabilities and individual potential, to
ensure the simultaneous achievement of what society, nations, and the various
collective identities and individuals – seen as both universal and particular human
beings – value as a desirable life objective. Our development concept forces us
to recognize, understand, and value each other so as to make possible everyone’s
self-realization and the building of a shared future.
Development is more than greater wealth; it is also the expansion of
capabilities (cognitive, emotional, and imaginative
6
) and the blossoming of
our faculties, thereby guaranteeing the satisfaction of human beings’ inherent
needs. The satisfaction of needs, equal opportunities, and encouragement
for the use of one’s capacities are essential to endogenous development and
economic growth.
Human development also takes into consideration environmental
protection as a fundamental concern. So that they will not destroy the diversity
and complexity of the ecological systems, human activities must abide by
certain minimum precaution criteria and by certain physical limits.
Sustainability provides the link between economic and ecological systems
for indenitely maintaining life and for implementing the many economic and
cultural strategies whereby the various groups, peoples, and nationalities in
the country have historically related to nature.
This is not an isolated proposal by the Ecuadorian Government. I believe
we are taking a huge step toward a worldwide proposal that will allow us to
change course, calling upon the international community to recognize the
value of things and actions. This implies a radical turnaround, owing to the
realization that there are things that are not necessarily sold or bought on the
market but that have no less cultural, aesthetic, or environmental value. One
must also realize that there are world public goods and that there is possibility
of a development mode conducive to worldwide collective welfare.
6 We refer principally to health and physical integrity, the senses, imagination, thinking, practical reason, liation,
respect, play, and control of one’s own physical and political environment.
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In consonance with these seminal principles, the Government of Ecuador
has presented Ecuadorian with a new political, social, economic, environmental,
and cultural contract in the form of a National Development Plan geared to the
achievement of twelve human development objectives, as follows:
1. To ensure social and territorial equality, cohesion, and integration;
2. To enhance the citizenry’s capabilities and potential;
3. To nourish the population’s hope and improve its quality of life;
4. To promote a healthy, sustainable environment and to guarantee access
to safe water, air, and soil;
5. To guarantee national sovereignty and peace and to contribute to Latin
American integration;
6. To guarantee stable, fair, and decent employment;
7. To create and strengthen a public, common meeting space;
8. To assert national identity and to reinforce the different identities and
cultural interaction;
9. To foster access to justice;
10. To guarantee access to social and political participation;
11. To establish a sustainable economic system marked by solidarity;
12. To reform the State for the common welfare.
The national development strategy
The promotion of economic and political equality leads to an entirely free
society, which is born of full-edged democracy, the expression of strong social
organization and of the full realization of citizenship. As this process’s promoter,
the State guarantees the universal exercise of civil, political, economic, social,
cultural, and environmental rights, which are crucial for eliminating domination
and subordination personal relations and creating social and political conditions
conducive to personal emancipation and self-realization.
Every citizen’s unimpeded development is essential to the unimpeded
development of the entire citizenry. Thus, the development strategy’s objective
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is the enhancement of the capabilities of all individuals to endow them with
autonomy for choosing their vital objectives, whether individually or in association
with others. Access to a minimum of goods and services is not enough; living
conditions must be equally apportioned, so as to potentiate the conversion of
the consumption of goods and services into actual human capacities.
As this process rests on the observance of universal human rights, this new
development strategy’s main lineaments cannot be based on selective policies.
The objective of producing and distributing public goods presupposes universal
coverage and improved provision, just as the objective of the production of
marketable goods and services is to improve the citizens’ quality of life.
Thus, the eight general strategies for achieving the National Development
Plan’s objectives encompass social, economic, cultural, and political aspects that
are the essence of man’s life in society. The challenge of human development
is qualitatively superior to the challenge of economic development. While
the former envisages the individual’s full realization, the latter limits itself to
optimizing the conditions of the market in which consumers and producers
meet, the latter is only a subset of the larger, more complex set that is society.
1. Internal development, social inclusion, and real
competitiveness
The provision of free, universal public services such as education and
health, access to housing and to ongoing training is an appropriate way of to
expanding the citizenry’s capabilities. Full exercise and development of these
capabilities is made possible through the generation of productive employment
and the decisive, continuous support of small and medium enterprises,
access to productive resources, and promotion of solidarity-based economic
organizations (cooperatives and other kinds of association).
Small-scale peasant producers’ access to productive assets (land,
machinery, tools, fertilizers, selected seeds, and water) is a factor of inclusive
development and contributes directly to food security, conservation of
agricultural biodiversity, and the full exercise of the right to produce and
consume healthy, sufcient, and culturally appropriate foods.
Alternative forms of economic organization and production raise the
income level of the country’s marginal rural and urban populations, diversify
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income sources, and make possible a fair distribution of aggregated value.
Some of these alternatives are projects that include the objectives of access
to basic services, housing, health, quality education, and greater opportunities;
strategic production systems (combining crops such as maize, cocoa, coffee,
and rice and the production of meat and dairy products with small-scale cattle-
raising) that take into consideration each region’s geographical characteristics,
production appropriateness, and the population’s basic needs; and the social
housing plans that ensure a decent life quality for all.
Expanded internal demand for goods and services through government
procurement programs and projects to supply government food and education
programs and to supply public administration with goods and services
boosts production by micro and small enterprises. Similarly, the participative
organization of fairs links producers directly to consumers, thereby improving
income distribution and product quality.
The State protects the indigenous peoples who live in voluntary isolation,
guaranteeing their territories, dening their boundaries, and solving border
conicts so that their efforts to preserve their physical and cultural heritage
are not wasted in opportunist adventures. The State also maintains the right
to consultation to safeguard the continuity of these peoples’ social, cultural,
and nature-related processes.
Investment in science and technology is essential to human development
when channeled to directly or indirectly meeting basic needs through production
support, consumption rationalization, and improvement of the quality of life
for all Ecuadorians, together with the interaction of knowledge and worldviews
that respect cultural, social, economic, and geographical differences.
This new view of development requires a sufcient underpinning of
economic growth driven by uninterrupted productivity gains under conditions of
social, economic, and environmental efciency in the use of resources. Competitive
participation in the world market depends on harmonious regional and local
development based on integrated productive, social, and environmental policies.
In addition to external demand, the promotion of demand on the internal markets
heightens the possibilities of integral development, narrows productivity gaps,
and helps increase the supply of better products with greater aggregated value.
As markets lack self-regulation, the redressing of their imperfections requires a
cooperative, independent, and technical institutional structure.
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To increase the production of goods and services it is necessary to
attach priority to the appropriation and domestic reinvestment of economic
surplus, rationalization of resources, improvement of productivity, product
diversication and improved quality, public and private entrepreneurial
management, and more effective self-management activities. Equally necessary
are decent salaries (consistent with the net result of the production of
communities and workers’ associations), without neglecting any other factor
involved. This virtuous process requires goods, services, and factor markets
conducive to a fair distribution and use of resources.
As energy, water and other natural resources are nite, they must be used
in a responsible, democratic, and rational manner. If possible, the environmental
impact of productive processes should be imputed to production costs. If
their effects are socially or ecologically destructive, they should be avoided at
any economic cost. The productivity of the entire economy, spread out among
various independent sectors, subject to physical limitations and viewed from
a social effectiveness perspective and not only from a material production
standpoint, provides a foundation for sovereign, harmonious, comprehensive
development, which in turn is the foundation for real competitiveness.
To redress the sectoral productivity imbalances stemming from exports-
fueled growth, an aggressive, ongoing, and generalized strategy is necessary,
aimed at strengthening and upgrading the work force’s skills and capacities in
every branch of activity, particularly in activities with greater labor absorption
capacity, such as agriculture, tourism, agroindustry, and tourism. A better
qualied labor force makes it easier to raise income, which helps mitigate
some secondary aspects of social conicts.
Sectoral imbalances can also be redressed by local development programs
and projects supported by consolidated productive chains dened under
agreements involving associations, communities, cooperatives, and individuals.
Co-management; nancial, technological, and political support; and the
organization of the markets that coordinate these chains are State priorities.
The market is a resource allocation mechanism that can be a tool of
human development when used in conjunction with a cooperative institutional
structure geared to the achievement of the envisaged development objectives.
Such is the case, for example, of the State promotion of government
procurement systems for the execution of its social policies and discharge
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of its basic functions, which at the same time injects dynamism into internal
demand. On the supply side, the productive systems thus reinforced help
reverse the economic exclusion that affects major portions of the country.
It is incumbent upon the State to maintain and expand an efcient,
competitive transport, ports, and airports system, integrating internal trade
circuits and facilitating the exportation of goods from every region of the
country. It is also responsible for providing speedy, transparent customs services
to facilitate, at the lowest cost, export and import activities, improve the control
of trade ows and the customs authority, as well as eliminating contraband.
An ethical development process repels any illegal prot-seeking behavior
connected with public goods and services, particularly those associated with the
use of energy and oil resources. The Government has the obligation to correct
such behavior by enforcing the norms issued by independent, professional
control bodies. By the same token, the producers of goods and services should
demand that corruption and contraband are relentless combated, so as to
foster open and fair competition.
The new productivity impetus encompasses social, economic, and
productive strategies as well as those aimed at protecting the environment
and ensuring the sustainability of the natural assets. Production-oriented
policies involve environment considerations and diversication, including
the promotion of alternatives to extractive activities or the traditional use of
natural resources, such as sustainable tourism in protected areas and community
tourism – activities that create many jobs and intersectoral links.
2. Sovereign international relations and active, intelligent
participation in the world market
Endogenous development requires a sovereign foreign policy
implemented through practical international trade and nancial policies that
support countrywide, harmonious development. This is the purpose of
promoting multilateralism and bloc negotiations and of rejecting unilateral,
nonegotiated concessions. Priority is attached to international negotiation of
issues related to the environment and to climate change; to the need to negotiate
compensation with industrialized countries for environmental damage; to the
establishment of global mechanisms for settling the ecological debt; and to
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promotion of a worldwide stance on the management of water resources,
based on regional and worldwide arrangements and agreements.
Subregional integration and the strengthening of South-South markets
are a priority. Foreign trade policy aims at an intelligent participation in world
markets, subordinated to the country’s internal productive development strategy.
To promote economic growth, trade policy must support the improvement of
productivity nationwide, the establishment of productive chains, the advantages
of economies of scale, and the reduction of internal inequalities.
Trade policy is a prime element of intersectoral and territorial
coordination for facilitating agreements involving the State, entrepreneurs,
workers, small urban and rural producers, associations, cooperatives, and
other forms of individual or collective economic organization. It is also an
appropriate instrument for promoting strategic sectors, on the basis of their
actual and potential capabilities. The State shall prevent the creation of enclaves
under foreign control.
Diligently implemented, trade policy is an instrument for changing
the model for the country’s production and exports specialization and for
diversifying markets and the range of exports. Unilateral trade liberalization
is not benecial when trade is carried out principally with countries with
productive structures quite different from Ecuador’s. An active trade
policy should take advantage of the possibilities open by the World Trade
Organization’s normative framework, through the use of subsidies, selective
tariffs, exports promotion, etc.
The intellectual trade policy is tied to the science, technology, and applied
research policy and to the strategies aimed at environmental sustainability and
conservation and at the exploitation of biodiversity resources.
International nancial ows and the foreign banking system should be
subordinated to the development strategy and trade policy, and are instruments
for accelerating productive development. Capital inows are encouraged if
they are directed at investment in and the nancing of long-term productive
activities. Capital controls are appropriate mechanisms for reducing speculation
and the risk of banking, nancial, and monetary crises, and for controlling
private borrowings, favoring the local nancial sector in its relation with
strategic productive sectors.
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Foreign direct investment is encouraged as a channel for the transfer
of technology and knowledge in key sectors, and is promoted through trade
policy as a support for internal innovation. International cooperation is also
encouraged for speeding up social, economic, and political changes deemed
indispensable for achieving development’s objectives.
3. Productive diversication
Inclusive human development requires higher levels of aggregated value
to increase income from the exploitation of primary goods, the production
of agricultural goods for processing by the food industry, and the production
of intermediary goods and of high-technology goods and services.
Priority is attached to the recovery of the installed capacity of the State
oil rening enterprise and to additional investment in high technology to
process heavy crude oil and oil with higher sulphur content. The prospects
for this type of investment are not determined by the relation between proven
deposits and exploitation but rather by the long-term development of a post-
oil country, which will continue to need this kind of energy. This decision
will alleviate the acute pressures of the balance of payments on the current
account, which have suffered from the lack of industrial policies.
To incorporate the extractive sectors into the inclusive human
development process, their natural tendency to operate as enclaves disconnected
from the rest of the economy will be countered, as will the negative effects
that compromise environment sustainability. The country’s promising mining
undertakings should abide by these criteria. Fiscal measures do not ensure
actual social inclusion and the establishment of environmental standards
should take into consideration the local communities’ opinion.
The coordinated efforts of the State and the small and medium
enterprises are directed at stopping the reprimarization of the economy by
diversifying the supply of goods and services with higher aggregated value.
To this end, the generic drugs chemical industries, tourism, and community
tourism will be encouraged as an alternative for exporting conservation, and
the petrochemical industry and other strategic sectors will be overhauled. These
efforts should consolidate a renewed, practical substitutive industrialization as
a mechanism for expanding employment demand and strengthen the balance
of payment’s current account.
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The combination of climate and natural factors that favor Ecuador’s
physical environment is the ideal platform for planning a highly competitive,
inclusive food industry capable of regenerating the social fabric, which has
deteriorated over the last decades, and of intensifying the labor demand, not in
an attempt to replicate Northern industrial processes, but in an intelligent effort
to participate in world markets. This requires a long-term nancing strategy,
investment in science and technology, training of the work force, coordination of
value chains, establishment of minimum sanitary and phytosanitary standards and
quality norms, public support for opening markets, and associative schemes, so
as to generate economies of scale and rein in enterprises interested in restricting
competition. Food self-sufciency implies food security, which has to do with
the regions’ food production for their own consumption, even at higher costs
(market fragmentation), the strategic denition of technologies and products
to meet national demand, and interest in exporting to the country’s advantage
without depleting the nonrenewable natural resources.
The need to boost employment demand and to diversify the exportable
supply of goods and services may be met in part by promoting the production
of intermediary goods capable of incorporating aggregated value, based on
technologies that are more easily assimilated in an economy with serious
competitiveness problems. It is also possible to reverse de-industrialization by
promoting the supply of goods and services in activities that incorporate major
high-technology components, such as pharmaceutics, biochemistry, and the
software industry, which have both static and dynamic comparative advantages
and which can be fostered under strict, long-term protection programs.
4. Territorial integration and rural development
Territorial development’s challenge is to pursue a balanced, sustainable
advance of all the country’s regions, so as to improve the living conditions
of the entire population, redistribute wealth, and potentiate the citizens’
development, on which should be based the public agents’ and the citizens’
decisions and actions with major territorial implications.
Territorial development (understood as an ongoing process) should be
planned according to technical and participative criteria, so as to achieve a balance
among the subnational territorial units. It should be based on coordination,
concurrence, complementariness, subsidiary factors, decentralization, and
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productivity. It should also emphasize equality and inclusion, ecological
sustainability, economic stability, precaution and prevention, transparence,
solidarity, and shared responsibility.
Territorial development seeks to establish a gradual equilibrium among
the regions to ensure a better geographical distribution of growth between
provinces and municipalities and between urban and rural areas. This requires
a national covenant to enable the regions to take advantage of economies
of scale, improve the coverage of infrastructure and services, execute joint
infrastructure and equipment projects, consolidate subsystems of coordinated
urban centers to facilitate the country’s regional reordering, as well as improving
the administration’s structure and management, productivity, and efcient
political action by the Parliament in respect of the territory.
This new territorial organization is to be consolidated through three basic
policy proposals: development of a balanced polycentric system of cities and
new functional relations between the countryside and the city; guaranteed,
equal access to infrastructure, public services, and knowledge; and rational,
responsible management to ensure that nature, productive resources, and the
cultural legacy are protected.
The territorial strategy objectives will be pursued by all public initiatives.
The national administration will strengthen the intermediary administrations to
enable them to generate the endogenous development of their territories.
The combined objectives of development, equilibrium, and conservation
in the different regions will provide a foundation for the balanced, sustainable
development of the entire country. This requires the strengthening of the
structurally weaker zones and the promotion of better living and working
conditions in them. Under this process, the already consolidated urban centers
can count on a rmer social base to participate in the globalization of capital.
5. Sustainability of natural assets
Development’s objective – the continuous improvement of the quality
of life – requires respect for the natural assets, strategic management of
natural resources, and better environmental planning in urban centers.
This forms part of a new development ethics and is the foundation of
intergenerational justice.
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The protection and conservation areas established by the State are subject
to many social pressures and should be consolidated through biodiversity
programs and projects capable of ensuring the ecosystems’ viability and
integrity. To include the natural assets in national planning it is necessary rst
to improve the State’s capacity for planning the use of space.
Activities related to oil exploitation, mining, sheries, forestry as well as
industry and agriculture should be subject to the State’s environmental control
and supervision. This presupposes the recovery of public authority and the
strengthening of local institutions to enable them to manage environmental
resources and to formulate and implement policies and strategies. The complex,
fragmented, and superimposed responsibilities of public agencies for the
management of natural resources can be addressed by the establishment of
a national body charged with environmental programs and projects, norms
and standards, and control and supervision of natural resources.
New institutions will facilitate the regulation of biosecurity (including the
control of genetically modied organisms and the introduction of exotic species),
the access to genetic resources, and the protection of the traditional knowledge
of indigenous peoples, Afro-Ecuadorians, and other local communities.
Water is a public good and its use, quality, and conservation is incumbent
upon the State, which can grant usufruct rights or decentralize its management
without thereby resigning its responsibility as the custodian of its sources and
rational use. The state must plan the use of this resource, guarantee its sanitary
conditions and its appropriateness for consumption by every household in the
country, expand the irrigated cultivation area, and devise regulatory instruments
and models for water conservation and water quality certication. This requires
closer coordination between national and local authorities in charge of water
resources and their distribution, as well as their management for human
consumption and sanitation, all under a rational, decentralized plan. This
presupposes a consistent legal and institutional framework for strengthening
the regulatory role of the national water resources authority.
Limits must be set to deforestation and sustainable alternative activities
must be implemented, geared to external, internal, and local markets, and control
instruments must be used, with the support of the affected communities, in
accordance with the principles of sustainable production, maintenance of the
forest cover, biodiversity conservation, shared responsibility, and reduction
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of the negative environmental and social effects. Valorization of native
and planted forests help their sustainable management, as do institutional
modernization and the legal framework, the qualication of all those involved,
and sufcient funding for the system’s operation.
The participation of rural populations, indigenous peoples, and Afro-
Ecuadorians in decision-making and in the planning, execution, and monitoring
of forestry and conservation programs is a factor of social inclusion and a
form of indispensable responsibility-sharing.
The extractive economy is moved by enterprises driven by boundless
greed, which often forget their environmental responsibilities. Their concessions
and operations should be subject to effective regulation that goes beyond
the formal licensing requirement and is capable of mitigating the attendant
environmental, economic, and cultural consequences. Local development
depends on efcient projects based on renewable sources of energy.
Climate change has reached such a magnitude that its social, economic,
and environmental effects must be monitored and prudently managed.
Public policies must guide the citizens’ behavior and forms of productive
organization, so as to halt this change tendency. Risk management must be
strengthened by technical civil defense.
The right to preserve natural and cultural riches takes precedence over
economic growth. The impact of productive activities in fragile areas of the
natural patrimony requires more efcacious control. The capabilities of local
and sectoral bodies must be enhanced, so that they can effectively nonitor
activities that are potentially harmful to the environment and to biodiversity
conservation, as well as performing audits and assessment of the environmental
impact of industrial and energetic development projects, particularly in the
oil, mining, sheries, and forestry sectors.
The quality of urban environment planning is decient and heterogeneous.
It should be improved in coordination with the municipalities, with a view to
implementing initiatives aimed at air decontamination and air quality recovery.
General policies must be formulated and norms must be ne-tuned for
managing emissions and solid and liquid waste (both domestic and industrial) as
a preventive, precautious measure to ensure the quality objectives. Preservation
of the landscape and quality of life in human settlements, particularly in
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peripheral areas and risk zones, require norms set and enforced by the different
levels of government in coordination.
6. A State with real planning, regulating, and managing
capabilities
Ecuador’s balanced, inclusive development requires a State characterized
by equitable allocation of territorial competences (decentralized and
autonomous) and this territorial organization must be complemented by long-
term economic, social, and environmental planning.
A National Planning System has been set up to overcome the limitations
of sectoral plans based on disconnected ministerial initiatives and interventions,
and to coordinate public policies. This planning system’s implementation hub
is the central government with the compulsory participation of provincial
governments. Its design, perspective, and obligatory character are the base for
coordination among the different development actors: collective movements,
ethnic communities, proprietors and workers associations, nongovernmental
organizations, international agencies, and economic groups.
The National Planning System prepares national plans that emphasize the
importance of public investment in the full development of human capabilities,
without neglecting investment in physical capital, energy, and connectivity. This
new priority scale ts in with the new distributive criteria that are essential
for expanding the citizens’ capabilities and liberties; with the need to correct
income disparities and unequal access to public services and national assets;
and with the respect for the limits set by environmental sustainability.
After the serious crises of the last decade of the 20
th
century, a minimum
consensus has been achieved on sustaining economic growth. But this is not
sufcient to give impetus to human development. A new form of regulation
of the goods and services market as well as of the nancial market is essential,
as is a public authority with sufcient capability to execute social programs
geared to income redistribution in accordance with equitable, inclusive income
and spending policies.
Markets are not self-regulating. A secure, agile, and competitive business
environment needs a uid, transparent institutional structure designed to
attenuate the uncertainty every productive enterprise has to face. Autonomous
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technical entities charged with regulation, standardization, information, and
control reduce transaction costs, democratize the use of information, and set
norms for curbing practices contrary to competition.
The recovery of the State’s regulatory capacity requires an independent,
autonomous, and effective Judiciary committed to the fundamental values
of human development and grounded on universal access to justice. An
independent, technical justice administrating system consolidates juridical
security, reduces transaction costs, overcomes uncertainty, and enforces the
fulllment of contracts.
Macroeconomic stability is fundamental to security in daily life, for
providing minimum certainty referral points for decision-making (investment,
borrowing, production, consumption, qualication, and apprenticeship) and in
general for enhancing the citizens’ capabilities. In the short term, this means
price stability, scal prudence and discipline, and balance of payments viability.
It also means other equilibriums in the economy’s real sector, particularly in
the employment of the work force and in investment in human resources
and physical capital. In the long term, it means sustainability based on
renovation and on the equilibrium of natural systems. The objectives of human
development demand that the stability of all these factors be ensured.
Economic power cannot be counterbalanced only by civil society. To
ensure a more democratic allocation of resources, the State’s capacity to regulate
the economy must be expanded. This requires a series of interventions aimed
at regulating the labor market and the quality of production, ensuring better
workers’ health and security, curbing environmental deterioration, preventing
monopolies, and stimulating competitiveness. The crucial thing is that the State’s
regulatory activities take fully into consideration the needs of civil society.
The economy’s fundamental factor is labor. Social peace rests on fair
remuneration based on employment policies that include the setting of
minimum salaries and the elimination of any form of precarious jobs, the
universalization of social security, and ongoing training programs to improve
productivity. The State encourages unionization and the unions’ freedom
of action as long as it does not interfere with national assets or the quality
of the services provided. The insufcient dynamism of public and private
investment makes it necessary to counter social exclusion and precarious labor
practices stemming from the deregulation of the labor market, by means of
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government-sponsored alternative forms of productive organization, such as
social and solidarity economy, and cooperatives in particular.
Because it takes place outside the market, work done at home, which is
vital for the functioning of the entire economic system, has remained invisible
owing to the predominant means of production. It must be recognized and
its rights must be guaranteed to conform to the principle of equality.
The competitive production of goods and services must increase its quality
through productivity gains. Good corporate management raises productivity in
accordance with internationally accepted or internally dened quality standards
and with a transparent, agile corporative legislation. This legislation should set
minimum conditions for entering and exiting markets, establish the statute of
corporate minorities, provide facilities for open investment in shares, and set
norms for the professionalization of entrepreneurial management, treatment
of foreign capital, corporate responsibility, taxation, and obligations related
to the environment and to the provision of truthful, timely, and transparent
information. Entrepreneurial productivity in particular benefits from
competition rules and the control of monopolistic practices.
Economic growth depends heavily on the rate of productive investment,
which in turn is sensitive to nancial market and juridical security conditions.
Despite its owners’ eagerness for prot, the nancial system must perform its
fundamental social role – to foment savings and efciently allocate credit so
as to promote the expansion of productive capacity on the basis of equality.
The banking system’s limitations should be offset by the recovery of the
public nancial system’s capacity, thereby expanding the eld of action of
the securities market and incorporating social security’s long-term savings
into the supply of nancial resources channeled to investment. Financing
should give priority consideration to mechanisms of access to credit by small
and medium enterprises, through solidarity nance systems that offer real
solutions to family or community production and to economic organizations
that incorporate social components into their projects.
Strategic areas for potentiating economic growth to support human
development (energy, oil, telecommunications, science and technology, mining,
water resources, and rural development) deserve special attention from the State.
To manage them, public enterprises deemed necessary will be established by
legislation; these enterprises should be capable of administering strategic resources
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under the responsibility of the State, in an independent, protable, transparent,
and sustainable manner, in accordance with the proposed objectives.
This new model of State is geared to the achievement of results and to
greater efciency and efcacy of public policies, simplied and transparent
procedures, improving public services, combating corruption, and recovering
public authority.
To this end, the national territory must be reorganized according to a new
political and administrative division that will act as a catalyst of decentralization
and deconcentration. The purpose is to transfer central government attributions
and functions to provincial and municipal governments, pursuant to the latter’s
capacity to assume new management functions, administer resources, and render
accounts to the citizenry. This transformation should take place over the medium
and long term, ending up with the establishment of autonomous regions capable
of assuming ever more important attributions and functions.
This new political division should bring citizens closer to their governments,
providing them with more opportunities for expressing their will to them and to
demand from them a rendering of accounts. Overcoming poverty and social and
territorial disparities and achieving the population’s welfare are a cogent reason
for this change toward a State model that is decentralized in administrative and
scal matters and accompanied by regional autonomy, which is indispensable
for fully achieving the collective objectives of human development.
7. Economic democratization and society’s major role
The citizenry’s needs and demands must guide the development of the
State and the market in the pursuit of the objectives of human development.
Organized civil society should guide economic activities and the distribution,
use, and control of public goods and services. This requires institutional
channels to allow associations and individuals a greater role and power in
decisions about political processes and criteria to govern the production and
distribution of society’s wealth. There is a great distance between this model
and the statist, free-exchange model of growth and human development.
An active, vigorous civil society must inject dynamism into its forms of
collective, voluntary organization, beginning with social networks, associations,
social movements, cooperatives, etc. so as to enhance its social power and
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exercise effective inuence on the organization of production and the
allocation of collective resources.
To strengthen civil society, it is necessary to encourage its organizations to
assume greater control of state initiatives that condition economic activity and
to expand the room for its direct and indirect inuence on economic power.
A civil society fortied by the promotion of associative action can cement
autonomous social powers capable of counterbalancing the powers that be,
and of building a society free of exclusion. More and better association forms
in the various spheres of life, with a sound balance between community and
individual interests provide a foundation for a new form of State and new
market structures, in which autonomous, well-informed collective players
deepen and expand democracy and generate social power.
The rst factor to enhance social power is the State’s thorough democratization,
which also offsets the enormous inuence of the large economic power groups
on State decisions. This inuence has thwarted the ends of economic activities
into the satisfaction of capital accumulation imperatives, neglecting the satisfaction
of human needs. In modern societies, the thorough democratization of the State
is both an end in itself and a process whereby the provision of public goods and
services and the wealth distribution schemes are oriented toward civil society. This
is why public services should be democratized, not privatized.
The innovative planning of participative democracy’s institutions is
important for identifying the population’s preferences. Participative budgets lead
to more efcient public services, direct public spending toward the less privileged
segments, and make control and accountability possible. The participation of
civil society organizations and mobilized citizens in decisions about the use and
channeling of public resources endows democracy with genuine content.
The process of democratization of the State’s ordering is rounded off
by close cooperation between State agencies and social associations in various
government initiatives, and by the strengthening of representative democracy
mechanisms and the promotion of new forms of social control and oversight.
This collaboration may take the form of corporative covenants between the
State and the entrepreneurial and labor associations to establish different
forms of salary regulation and to determine, by consensus, adequate working
conditions in specic sectors of the economy.
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These cooperation schemes may be extended to other aspects of social
life, such as environmental issues, the use of natural resources, and the
functioning of public health services and education, so that the various civil
society organizations and the State may jointly regulate the use and allocation
of collective resources. This implies the promotion of public networks
jointly operated by public and private players, and of associative democracy
mechanisms for government administration.
Associative democracy’s networks and mechanisms must ensure that civil
society organizations do indeed represent civil society and that their decisions
result from careful deliberation and are transparent and subject to the control
of social and political players. The deprivatization of the State requires that the
councils and boards in which civil society is represented and which have great
weight in public administration be really pluralist, inclusive, and democratic in
their makeup and operations. This does not mean detraction from the power
of organized civil society groups but rather its proper channeling to ensure that
it is a true instrument of democratic citizens’ participation in and collective
inuence on economic life.
The democratic regulation of economic activity is also helped by the joint
participation of workers, users, and consumers in the regulation of working
conditions and in the quality control of services and goods produced by
the enterprises. This generates new social norms for increasing the workers’
participation and decision power in the enterprises’ administrative councils,
with a view to including both workers and clients in these councils and to
encouraging the control of entrepreneurial activities by social movements
that promote respect for the rights of workers and consumers. To this end, it
is necessary to strengthen the collective organization of workers – who have
been harmed by the exibilization of labor – and of users and consumers.
Another way of enhancing organized civil society’s power is by
strengthening social or solidarity economy through civil society’s direct
participation in the organization of different aspects of economic activity.
Social economy seeks, on a priority basis, to meet human needs rather than
the maximization of prots. To promote social economy, the State should
fund certain types of socially organized production (art associations, fair trade
cooperatives, networks for the care of the elderly and children, etc.) so that
those engaged in such activities may enjoy adequate living conditions.
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The economic and material deprivation of a large percentage of the
population sets serious limits to the strengthening of social power. The
organization of this power requires that each citizen devote at lest a minimum
of time to the task, although this is often impossible for subsistence reasons. In
addition, scarce resources force many social organizations to establish a client
relationship with political or State entities or to depend on private charity or on
groups maintained by foreign funding. This detracts from the organizational
autonomy of collective players. It is thus necessary to establish an unconditioned
basic income or a universal citizen’s income consistent with equalitarian social
justice, which is the foundation for civil society’s genuine empowerment.
8. Rights guarantee
The Ecuadorian State promotes the full exercise of its citizens’ rights
– it guarantees their civil, political, economic, social, cultural, and collective
rights, as well as their participation in a political community, while requiring
that they exercise their responsibility as citizens.
As a county that endeavors to guarantee full citizenship, it incorporates,
expands, and maximizes citizenship’s intrinsic rights, consistently with its laic
nature. This presupposes a public education system that promotes values such
as respect, tolerance, recognition of diversity and differences, and freedom
of conscience and worship. Full citizenship also presupposes gender equality
and the guarantee of sexual and reproductive rights, free of any kind of
discrimination, coercion, or violence.
Full, active citizenship is possible solely in the framework of absolute
democracy, in which the laws and the Constitution stress the citizenry’s role
and social power in constructing democracy and its forms of expression.
Promotion the participation of all those that belong to this political
community ensures universal citizenship, differentiated and diverse, founded
not only on nationality but also on the collective idea of nation, regardless of
whether a person is native born or not.
Genuine citizen participation begins with the promotion of mechanisms
and instruments of direct democracy, in which the legislative initiative,
the freedom of expression, the binding consultation capacity, and social
participation, public deliberation, access to information, social control, and
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co-management by the citizens are key values of a democracy that combines
representativeness and participation.
Full citizenship is not achieved solely on the basis of respect for individual
freedoms and political rights, if the State is absent. It presupposes above all an
active role by the State in guaranteeing economic, social, and cultural rights.
The guarantee of these rights requires that the State play an active, major
role in providing basic social services and in assuring the universal character of
essential public policies (health and education, for instance). The model of State
consolidated in the sixties and seventies of the last century was characterized by
intervention, promotion of rights, and construction of a social citizenry; under
the new model, the State has a key role in guaranteeing third-generation rights
through an agile, polycentric, decentralized and deconcentrated government
apparatus, closer to the citizens and more capable of addressing the problems
and the social and local demands.
As provider of health and education services and guarantor of the
right to property, work, and worthy housing, the State acts to implement
those rights that require specic public action and not only passive respect
for individual liberty.
The right to property must be broadened and radicalized so that Ecuador
may, in the medium term, become a country of proprietors and producers.
In a democracy that prizes itself, no form of property ought to become a
monopoly or violate the constitutional principles of environmental protection
and integrity of the public space and its destination for common use.
The right to work must maintain the guarantees proper to social rights,
such as the freedom of association, the right to unionization, the unrestricted
right to strike, the principle of correspondence between salary and work, and
so on. The appropriate exercise of these rights is characteristic of a society
determined to eliminate all forms of precarious employment and to guarantee
a normative and institutional framework that contemplates the right to stability
on the job, a just salary, and gender equality in respect of salary.
As what concerns collective rights, of ethnic e cultural nature, the country
commits itself to plainly assimilate the international norm, recognizing,
for instance, the ILO 169 agreement, that guarantees the indigenous and
afroequatorian peoples’ rights.
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The advocacy of full citizenship should discard the vulnerable groups
label that has guided public policy in previous decades and applied to people
targeted by special protection by the State. The current constitutional denition
of vulnerable groups must be modied, as it states that children, adolescents,
expecting mothers, the handicapped and the elderly are beneciaries of special
public policies and object of the State’s and society’s priority attention. These
social groups cannot be treated as mere objects of a welfare public policy; they
must become directly entitled to rights that are guaranteed by differentiated
and universal public policies.
Full citizenship encompasses respect for differences, as different cultural
groups have particular needs that must be recognized, so as to ensure a
multicultural citizenry that fully respects different identities.
DEP
Translation: João Coelho
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The Guyana economy,
review and prospect
Rajendra Rampersaud*
1. Introduction
G
uyana is the only English speaking economy in South America, has an
area of 83,000 square miles or 215,000 square kilometers, is located on the
northern coast of the continent. It is bounded on the north by the Atlantic
Ocean, on the east by Suriname, on the south by Brazil and on the west by
Venezuela. Guyana is almost the size of Britain but more than 80 percent of
the country is covered by forest. Only 10 percent of the land mainly along
the coast is inhabited by the population.
Guyana is physically divided into four types of land forms (1) a at
coastal and clay belt that is some six to eight feet below sea level where most
of the country agricultural activity occurs. (2) A sand belt which includes the
Intermediate Savannahs. (3) A central peneplain which comprises the lush,
pristine tropical forests and extensive mineral deposits. (4) The highlands that
include the high mountains range.
Guyana is also blessed with a plentitude of natural resources, fertile
land for agriculture, a wide variety of minerals that included gold, diamond,
* Vice-President of the Bank of Guyana
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bauxite, manganese, other precious and semi precious stones, a multitude of
livestocks, sh and shrimp. There are indications of reserves of oil and natural
gas that are now being explored.
The country has a multiracial population that totaled 740,000 people
with six different races. The country’s per capita income is just around US$
1,200 which is far below its economic potential. The lower per capita can be
attributed to periods of uneven growth and progress since independence.
2. Economic and social performance
Guyana is characterized as a small open economy; that is market oriented
and very vulnerable to both endogenous and exogenous shocks. Having gone
through a period of uctuating growth since the late nineties the economy
returned to a high level of economic growth estimated at 4.5 percent in 2006.
The country continues to depend on sugar, rice, bauxite and gold for its export
earnings, which form the main pillars of the economic activities. As a result
growth patterns tends to be very cyclical and very much inuenced by the
vagaries of the prices of commodities in the International Market. Economic
activities are also very vulnerable to both domestic and external shocks.
3. Production and exports
In the past, Guyana depended very much on the European Union/ACP
preferential arrangements for its export of sugar and rice. Total exports ranges
from US$ 550 millions to US$ 600 millions in the last three years with sugar
(US$ 137 millions) and gold (US$ 114 millions) being the largest contributor in
2006. The export performance was buoyed by the very favorable international
prices for both sugar and gold in the world market. The current price for sugar
is nearly US$650 per metric tonnes in the EU while the price of gold topped
the US$765 per oz mark in 2007. Bauxite, rice and timber are the other exports
that contribute substantially to the economy’s export earning. The bulk of the
country’s export earnings are primary commodities whose prices have been
at the mercy and vagaries of International Commodities prices.
Apart from the downside risks of the vagaries of commodity prices, the
EU is currently negotiating a new Economic Partnership Agreement (EPA)
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with the African, Caribbean and Pacic (ACP) group of countries to replace
the Cotonou Agreement. The EPA agreement is not expected to be completed
within the time frame as a result there are fears that the EU might opt for the
imposition of the General System of Preference (GSP) if there is no trade
deal by the end of 2007. This outcome might not be favorable for Guyana.
The Guyanese economy is already reeling from the unilateral imposition
of a thirty seven percent price cuts by the EU on sugar beginning this year while
the rice price had already suffered from a reduction in prices. The devastation
of the price cuts on both rice and sugar has had a serious impact on a large
segment of the population that depends both directly and indirectly on sugar
and rice. As a result, the preferential erosion will impact negatively on income
in agriculture and the economy as a whole.
The gold and bauxite industries have been experiencing better world market
prices with gold prices hitting its highest level in the last 15 years. However,
mineral prices have been on a roller coaster in the last decade and the windfall
gains from higher than expected mineral prices have to manage prudently.
Despite enormous potential Guyana had not been able to fully exploit lucrative
opportunities in the export of fruits and vegetables to the North American
Market especially USA and Canada that boast a large West Indian population.
This group has a preference for nostalgia products from the Caribbean. Further,
there are greater opportunities for the export of higher value added packaged
rice and sugar to Caribbean countries that were not fully exploited in the past.
The manufacturing sector grew by 4 percent in 2006 however; given
Guyana natural resource base one would have expected a more dynamic
manufacturing sector over the years. There have been some notable
achievements in the furniture sub-sector and the bottled rum in the export
markets. Despite this, the large raw material base provides ample opportunities
for greater diversication of production and exports. The increase in private
sector credit by 36.4% in 2006 was a welcomed sign that investment in the
manufacturing sector is now taking off in the right direction.
The service sector exhibited strong growth pattern in recent times driven by
the hospitality industry especially after Guyana successfully hosted six of the super
eight matches in the Cricket World Cup (2007). This was followed by the hosting of
other international conferences for instance the Rio Heads of Government meeting
and the recently concluded Commonwealth Finance Ministerial Conferences.
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These events have led to showcasing of Guyana to the outer world and should
contribute to greater interest in Guyana ecotourism drive in the future.
Despite the improvement in commodity prices and the favorable weather,
the economy has to be adjusting to the external shocks of the oil prices that rose to
its highest level at US$88 per barrel presently. The higher than usual price of oil is
having a negative impact on the Guyana Terms of Trade. The higher oil prices are
having ination spikes that are presenting an unusual challenge for the monetary
authorities. Oil imports represent over 25%-28% of Guyana GDP. The prospect
of oil exploration in Guyana and the country’s hydro power potential are now
being fully exploited to mitigate future downside risk of high energy prices.
4. Balance of payments, exchange rate and ination
The current favorable prices for commodities is expected to dampen
the overall impact of higher oil prices thereby reducing the current account
decit to US$ 475 millions in 2007, an improvement on the 2006 level. This
decit will be further reduced with a net inow of medium and long term
capital of US$ 173 millions in 2007.
The favorable balance of payments position will have a positive impact
on the stability of the exchange rate. Guyana currently operates a oating
exchange rate regime that in the past ve years has been fairly stable at GY$200
Vis a Vis the US dollar. However, the economy experiences a rapid spike in
ination over the last few years due to the rapid increase in oil prices. This
along with the increase cost in other imports has led to a rapid increase in
ination estimated at 12 percent in June 2007. However, it is expected that
with the tightening of monetary and scal policies the end of year ination
is likely to decline to the targeted 8% at the end of 2007.
5. External debt and Hipic initiative
Guyana was considered a highly indebted country in the early nineties
with a total external debt of US$2.1 billion that was 675 percent of GDP and
consumed over ninety percent of the country’s export earning. However, due
to the Highly Indebted Poor Country Initiative (Hipic) the current external
debt has been severely reduced.
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The recent Multilateral Debt Relief Initiative (MDRI) that provided
addition debt write off to the original Highly Indebted Poor Country Initiative
(Hipic) has returned the Guyanese economy to the debt sustainable level ratio.
As a result of the MDRI initiative, Guyana external debt servicing ratio has
been reduced to a sustainable 5-7% of export ratio over the next ve years.
Total external debt stock is expected to be reduced to US$ 625.6 millions at
the end of 2007. Most of these represent debt on concessional terms.
Even though the main macroeconomic variables over the medium term
look rather stable, the main challenges ahead are to increase the per capita
income GDP at a more rapid rate. Guyana has been able in the decade of the
nineties to ignite growth after suffering from the lost decade of the eighties.
After growing at a rapid pace at 7% per annum for most of the nineties, the
economy lost its way and experienced a period of low and negative growth
early in the new millennium. This bring to fore the issue of not only igniting
growth but to sustain growth and development over the longer term period.
6. Social sector and the Millennium Development Goals
Guyana has made signicant progress in implementing strategies and
interventions aimed at achieving the eight Millennium Development Goals
(MDG’S) but much more is still to be done in order for the country to meet
the MDG’s 2015 targets. In many case delays had been due to external and
nancial constrains.
The eight goals of the MDG’s are as follows: 1) the eradication of extreme
poverty and hunger 2) universal primary education, 3) promotion of gender equality
and empower women 4) to reduce child mortality 5) to improve maternal health, 6)
to combat HIV/AIDS, malaria and other diseases, 7) environmental sustainability
and 8) to develop a global partnership for development. Each of these goals has
targets totaling eighteen to be met within a designated time frame.
The latest review of these goals shows that Guyana has made substantial
progress towards reducing poverty as well as eradication of poverty. Latest data
shows that there is a decline of children under ve suffering from malnutrition
when compared with the base line in 1995; Guyana has already met the target
in 2007. In an effort to combat hunger; the government is targeting schools
and health clinics in nutritional programmes.
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Guyana is also on track for meeting the goal on universal primary
education. Recent statistics have shown that the rate of children repeating
classes has declined from 4% in 1996 to 1% in 2002. The gures reect changes
in the school curriculum, higher teacher to student ratio as well as targeted
programmed for needy children. The main focus is to ensure universal primary
education by 2009 as there is a large percentage of children in school.
In order to promote gender equality and the empowerment of women,
Guyana has signed on to the convention for the elimination of all forms of
discrimination against women and the Inter-American Convention for the
prevention and eradication of violence against women.
Guyana is on its way to meeting if not surpassing the target on the
reduction of child mortality. However, there are some conicting views on
the data between the Ministry of Health and World Health Organisation but
there is no doubt that rapid progress has been made on this issue. Progress has
also been made regarding improvement in health care provided to pregnant
women; there has been a close monitoring in place on the prevention of
mother to child transmission of HIV/AIDS and other sexually transmitted
infection through intensive training sessions.
The policy to aggressively combat HIV/AIDS, malaria and other diseases
is progressing well. The rate of HIV/AIDS in pregnant women dropped from
5.6% in 2004 to 2.6% in 2006. Pregnant women are currently being tested at
prenatal clinics, the provision of maternal support to orphans and vulnerable
children and the deployment of mobile treatment team of technical personnel
to the hinterland and outlying regions augurs well for health care.
Guyana has made signicant progress on the implementation of the
MDG’s eight and progress towards achieving most of the targets by 2015.
However, a main constraint has been the availability of domestic resources
and the long bureaucratic delays in realizing the much touted aid from the
international donors despite completing half of time towards achieving the
MDG’s by 2015. Despite the progress on MDG’s eight, the main challenge
is to implement the institutional capacity to sustain the rapid progress in the
social sector. The Social Sector Investment has ensured that the progress in
the last decade is distributed in an equitable manner however there is a need
to sustain institutional capacity for the longer term.
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Despite stable macroeconomic environment and the progress in eight of
the MDG’s, these advancements alone cannot sustain Guyana rapid economic
progress. As a result, given the current world environment the government has
moved towards the restructuring of the traditional sectors such as sugar, rice
and bauxite and encourages the rise and development of the non traditional
and emerging sectors.
7. Challenges of the future: diversication of output
and markets
The world sugar market is going through major reform as large importers
such as the European Union and the United States are forced to remove their
subsidies that distorted the market and make their trade regime more W.T.O
compatible. The European Union had to cut their subsidies prices by 37% over
the period 2006-2007. This price cut will impact on ACP exporters, however,
it might be better in the long term as countries are forced to restructure to
higher value added sugar.
The Government along with Guysuco has prepared a Strategic Action
Plan for the sugar industry some ve years ago to meet the challenges of the
decline in preferences in sugar. The Action Plan is regarded as a medium term
plan to enhance agricultural productivity, diversication based on cane sugar,
increased investment in research and development and the building of new
processing facilities. The main strategies for diversication are adding greater
value to sugar through the development of rening capacity, development of
packaging of a brand name Guyana sugar and diversication into the energy
sector such as the cogeneration of electricity.
The cogeneration of electricity is a huge project that is looking at replacing
some of the high cost fossil fuel with bio fuel. An international conference
was held in Guyana this year by the Caribbean Countries, the Inter-American
Development Bank, and Inter-American Institute for Agriculture, the Caribbean
Development Bank and Caricom that agreed to begin studies to implement the
process of the production of Bio fuel. In this regard, Guyana and the Caribbean
Countries expected to draw on the experience of Brazil in the production of
ethanol. There is also the plan for the construction of a large distillery facility
for the production of bottle rum that is a nal product at the Skeldon Estate.
The Guyana economy, review and prospect
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However, the main project that is geared towards the complete
restructuring of the sugar industry is a US$169 million Skeldon Modernisation
Project, which is expected to be completed in the next few years. The new sugar
factory is expected to produce 110,000 tonnes of sugar annually at a cost of
8US cent per pound. This will make production of sugar in Guyana be very
cost competitive internationally. The project is also expected to contribute
signicantly to increasing in sugar production to 450,000 tonnes annually.
There will also be rehabilitation of other sugar factories such as Albion to
make them more cost efcient.
A major development is the opportunities for downstream rened sugar.
The Caricom region provides a lucrative market for rened sugar. The pack-
age sugar also has a ready market in Caricom and North America. Bagasse
will be used to produce electricity to supply the national grid with some 10
megawatts of power in Berbice. Rum is another by product of sugar that
has very good potential. Guyana rum is noted to be consistent winners in
the International Rum Fair. A joint venture for the new distilling plant with a
large regional private sector company is on the way at the new Skeldon Sugar
factory and with Caricom tourism the potential for this rum market will be
lucrative for Guyana.
Rice has also suffered as a result of the loss of the preferential market
in Europe. However, that loss that occurred since the late nineties is being
mitigated by the fact that there is a competitiveness strategy in place to allow
the industry to survive outside the walls of protection. Major investments in
drainage and irrigation and water control have led to increase in yields. The
Research Institute has invested in quality control and tropical varieties that
will see the doubling of rice yields. A major restructuring of the Guyana Rice
Development Board is now on the way to lead the search for exports market.
A large potential of untapped market remains in the Latin American Region
which Guyana is expected to explore.
The demand for Guyana’s bauxite is once again reaching full potential
with major investment by Russal of Russia. Private sector investments of some
US$150 million are expected over the next few years. The main industries in
Linden and Everton are expected to be retooled. A plan for an integrated
bauxite alumina complex with a feasibility study for a new alumina plant with
a capacity of at least one million tonnes per year is now being completed.
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Having revived the traditional sectors that formed the main pillars of the
economy for over two centuries, attention has now being turned to developing
the non traditional and emerging sector of the economy. This diversication of
the economic base and the reduction of the country’s dependence on commodity
exports that is extremely vulnerable to external shocks is the way forward.
8. Manufacturing sector
The manufacturing sector possessed enormous potential but continued
to trade below its capacity. The pharmaceutical sub-sector is now growing
steadily in both production and exports and it is the leading sub-sector with
new products, innovation and research. Exports of pharmaceutical products
from Guyana have now penetrated the North American and European markets.
The rise of construction has led to an increase in demand for engineering and
construction products however; this sub-sector is only at its incipient stage
of development.
In the past few years, there are indications of a growing light
manufacturing and agro-processing industries. These industrials have utilized
raw material and inputs from the domestic economy. It is evident that these
higher value added products will stimulate both the upstream and downstream
manufacturing industries in Guyana.
The sub-sector that showed good results in the export market has been
the livestock, sea food, aqua culture, forestry and fresh fruit and vegetable. Non
traditional agricultural exports have been growing consistently at 6 per cent
per annum in the last two decades. Guyana is well placed to tap in on a large
scale in the Caricom market with a US$3 billion food import bill. However, a
major constrain in the inadequate infrastructure to facilitate rapid export in a
timely and adequate manner.
Guyana is now one of the Caribbean Seafood hubs of the North
American market and was recently recertied for shrimp export to the United
States for the sixth consecutive year. While fresh fruit and vegetable from
Guyana are in great demand, its potential is being limited with the export
infrastructure. The infrastructure for the preservation of the products that
will increase their shelf life is limited. As a result, it has not been able to meet
an increase in demand for its products in the export market.
The Guyana economy, review and prospect
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The tropical forest in Guyana provides the furniture sector with different
species of wood to satisfy a growing furniture industry. Again the rapid growing
housing sector has placed great demand on local furniture. More recently the
Cricket World Cup 2007, and the large amount of new hotels have resulted
in a larger than expected demand for furniture. The export market was under
supplied in the last two years. The manufacturing capacity in furniture is now
adjusting to the large demand.
9. ICT sector
Perhaps, the greatest untapped economic potential is in the area of the
Information, Communication and Technology (ICT). Guyana geographic
location as a continental hub with English as its native language, a highly educated
population provides all prerequisite for a dynamic ICT sector. There are certain
infrastructure constrains that are now being addressed such as the high cost of
international bandwidth and unreliable supply of electricity when corrected will
facilitate the rise of the ICT sub-sector. The ICT sub-sector with knowledge based
product will provide for high paying job and an acceleration of per capita GDP.
The review of the different sub-sectors in the Guyanese economy is
a clear indication of underutilized capacity. The full capacity utilization will
contribute to Guyana more than doubling its per capita GDP growth in the
next decade. However, for such capacity utilization to be fully harnessed the
infrastructural bottlenecks will have to be removed to facilitate sustainable
economic growth.
10. Recent infrastructure developments
The existing physical infrastructure is incapable of providing the
necessary support for Guyana to take its rightful place in a globalized
environment. Moreover, having been unable to access credit in the lost decade
of the eighties, the physical infrastructure became seriously dilapidated. The
challenge of this period is not only to rehabilitate the existing but the creation
of new infrastructure that will stimulate output and exports. This is a very costly
exercise that will have to be done systematically given budgetary constrains.
The next section will highlight some of these developments.
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a) Roads and bridges
One of the most important projects that would link Guyana to Brazil
is the construction of a highway from Bom Fim Brazil to Linden in Guyana.
Work is in progress on the Takutu River Bridge that will link Brazil and Guyana,
a most important continental link. The government of Guyana is investing in
a GY $28 million complex at Linden to provide services such as immigration,
customs, police and health. This is one of the innovative infrastructure projects
to integrate Guyana more fully with its South American Partner Countries.
It will also be opportunity for trade, tourism and transportation network in
South American.
There is another large Investment Road Project for the New Amsterdam
– Moleson Creek Highway at a total cost of over US$ 5 millions. This will
provide easy access for Guyana to its other South American neighbours
thereby increasing market opportunities, exchange of cultures and facilitate
free movement of people across the continent.
Apart from the rehabilitation of the existing roadway, the construction of
new roads will create the available network that will facilitate communications
in the non-traditional regions and the larger continental links. The present
road network only links the coast and as such has not facilitated developments
to the wider regions. The building of the Berbice River Bridge currently in
progress by the private sector is another large infrastructure initiative that will
link two counties Berbice and Demerara and speed up economic progress in
both counties concurrently. This is expected to be the fth longest oating
bridge in the world upon completion. The bridge will replace an outdated river
transportation system linking two of the most densely populated territories
in Guyana.
The Berbice River Bridge project will coincide with the plans for the
construction of a deep water Harbour in the Berbice River. Presently, only small
ships can come into Guyana due to the shallowness of the Demerara River
where most of the ports are located, as such that the costs of trade almost
doubled in Guyana. With the dredging and desalting of the Berbice River, large
ships can arrive in Guyana and storage of larger containers can be facilitated
more easily. The harbor would provide the opportunity for more modern and
upgrade port facilities of international standard. Better port facilities will go
a long way in improving Guyana export competitiveness.
The Guyana economy, review and prospect
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b) Electricity and energy supplies
The power supplies in Guyana for more than four decades continued to
rely on electricity from an old Guyana Power and Light Company (GPL) of
the fties that continues to use fossil fuel that is rather expensive. The cost and
limited supply of Guyana Power and Light Company has been identied as a
major constrain for the development of a vibrant manufacturing sector. The
Guyana Power and Light Company have been trying to improve efciency by
its plan to improve generations and delivery, reduce commercial and technical
loss that is now estimated at over 30 percent. These improvements will enhance
Guyana’s competitiveness in the manufacturing sector since the cost of energy
is a major input in the value of the product.
Guyana’s huge potential in hydro power has remained untapped energy
potential despite several previous attempts. A private sector company Synergy
Holding Inc. is currently securing the nancing to develop a hydro power
project at Amelia Falls on the Pataro River. This project has the potential to
produce 100 MW of electricity for the next 100 years. Commercial operations
are expected to come fully on stream by 2010. This is expected to be a large
and cheap source of energy that can power Guyana’s manufacturing drive.
c) Air transportation
The development of the air transportation sector is now evolving.
There were improvements to the Cheddi Jagan International Airport for the
Cricket World Cup (2007) and the domestic Ogle Airport that offer ights
to the interior of Guyana and the Caribbean Countries that can offer a big
boast to tourism. However, the cargo facilities at the airport are still limited. It
would be necessary to modernize the cargo and storage facility with improved
refrigeration and packing facilities that can boost export of fruits, vegetable,
meat and other perishable products.
11. Conclusion
Guyana’s economy made good progress over the last decade in achieving
macroeconomic stability. The economy achieved positive growth most of the
time, ination was kept under control despite domestic and external shocks. The
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macroeconomic foundation is now more resilient to domestic and external shocks.
The growth and development in Guyana was more equitable and the economy was
able to achieve most of its Millennium Development Goals targets set for 2007.
However, despite its abundance of resources and macroeconomic
stability, the economy has not kept pace with a more rapid improvement
in per capita GDP. These constraints can be found in the level of physical
infrastructure to facilitate growth and development at a faster pace. The
rehabilitation of the infrastructure such as communications, powerplants and
machinery will contribute to overall acceleration of growth and development
and an improvement in the standard of living.
I. Selected economic indicators
Indicators 2002 2003 2004 2005 2006
1.0 National accounts aggregates
1.1 Growth rate of real GDP 1.1 -0.6 1.6 1.9 4.7
1.2 GDP at factor cost (US$M) 617.8 631.0 652.7 683.6 741.2
1.3 GNP at factor cost (US$M) 562.7 588.4 621.7 663.5 698.1
1.4 per capita GDP (US$) 829.2 840.2 864.4 902.6 974.9
1.5 per capita GNP (US$) 755.4 783.5 822.5 875.6 918.2
1.6 Gross national disposal income
(US$M)
705.2 763.7 781.5 931.6 1,032.0
1.7 Private consumption as % of gross
domestic expenditure
45.1 44.8 49.2 55.3 47.5
1.8 Public consumption as % of gross
domestic expenditure
21.1 23.7 21.8 20.3 18.2
2.0 External trade and nance (US$M)
2.1 BOP current account balance -106.7 -60.6 -70.0 -167.1 -181.4
2.2 Imports of goods and non-factor
services (G&NFS)
-758.9 -743.8 -854.5 -984.5 -1,103.2
2.3 Exports of goods and non-factor
services (G&NFS)
667.2 669.6 749.9 698.9 748.8
2.4 Resource balance -91.7 -74.2 -104.6 -285.7 -354.4
2.5 Imports of G&NFS/GDP (%) 122.8 117.9 130.9 144.0 148.8
2.6 Exports of G&NFS/GDP (%) 108.0 106.1 114.9 103.2 101.0
2.7 Net international reserves of Bank
of Guyana
183.2 176.2 136.6 160.5 222.3
2.8 External public debt outstanding 1,246.7 1,084.5 1,071.1 1,094.0 920.6
The Guyana economy, review and prospect
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Indicators 2002 2003 2004 2005 2006
3.0 Prices, wages & output
3.1 Rate of ination (% changed in
urban CPI)
7.1 4.9 7.2 8.3 *4.2
3.2 Public sector monthly minimum
wage in G$(e.o.p)
21,047.3 22,099.0 23,204.0 24,828.3 26,069.0
3.3 % Growth rate 5.0 5.0 5.0 7.0 5.0
3.4 Electricity generation (in M.W.H) 512.7 488.9 514.9 528.4 534.6
Source: Bureau of Statistics and Ministry of Finance
II. Selected social indicators
Indicators 2002 2003 2004 2005 2006
4.0 Population & vital statistics
4.1 Mid-year population (‘000) 747.7 752.5 755.1 757.6 760.2
4.2 Population growth rate (e.o.p) 0.9 0.3 0.3 0.3 0.3
4.3 Net migration (‘000) N.D N.D N.D N.D N.D
4.4 Visitors arrivals (‘000) 104.3 100.9 121.9 116.6 113.5
4.5 Crude birth rate (per 1,000 persons) 23.5 25.8 23.1 N.D N.D
4.6 Crude death rate (per 1,000 persons) 7.3 7.3 6.8 N.D N.D
4.7 Crude marriage rate (per 1,000 persons) 7.3 6.4 5.9 4.8 6.1
4.8 Infant mortality rate (per 1,000 persons) 20.3 17.0 20.7 22.8 18.4
4.9 Under 5 mortality rate (per 1,000 live births) 24.9 21.2 26.0 N.D N.D
5.0 Health and education
5.1 Public expenditure on:
5.1.1 Education as % of national budget 18.2 14.4 15.5 13.7 13.0
5.1.2 Health as % of national budget 8.8 8.9 9.5 7.5 9.0
5.2 Number of physicians per ten thousand
population
4.6 4.1 4.2 4.3 4.9
5.3 Number of nurses per ten thousand
population
10.5 14.0 34.0 34.0 13.1
5.4 Number of hospital beds per ten thousand
population
42.4 43.6 43.6 43.5 24.8
5.5 Low birth-weight babies (<2500g.) as a %
of live births
11.5 11.9 11.8 11.8 N.D
5.6 Severely malnourished 0.7 0.6 1.0 0.6 N.D
5.7 Moderately malnourished 9.3 8.8 9.3 7.0 N.D
5.8 Overweight 3.9 4.7 5.2 4.7 N.D
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Indicators 2002 2003 2004 2005 2006
6.0 Immunization coverage
6.1 1 year olds immunized against DPT/
(pentavalent) (%)
85.0 91.0 92.0 92.0 92.0
6.2 1 year olds immunized against MMR,
yellow fever (%)
93.0 90.0 90.0 92.0 92.0
6.3 1 year olds immunized against polio (%) 93.0 90.0 90.0 93.0 92.0
6.4 1 year olds immunized against TB, BCG (%) 95.0 94.0 94.0 96.0 96.0
7.0 Crimen
7.1 Reported serious crimes 3,470.0 2,941.0 3,450.0 2,808.0 2,376.0
7.2 Of which: homicides 142.0 206.0 131.0 125.0 153.0
Source: Bureau of Statistics and Ministry of Finance
.
DEP
Translation: Soledad Rojas
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Paraguayan economy
at a slow pace: current
situation and outlook
Dionisio Borda*
P
araguay’s main problem is slow economic growth and the persistence
of poverty and inequality. These obstacles stem from limited development
of State institutions, which is responsible for a high incidence of informality
and lack of an expressive market economy. The discretionary, arbitrary
exercise of power slows down the construction of an efcient State, a market
economy, and the equalitarian apportioning of opportunities and resources.
Contemplated institutional reforms are not sustainable in such a context and
economic policies produce only short-term results. On the political scene, no
effort is seen for establishing a medium-term strategy capable of reversing
the economic and social conditions.
1
1 This article is based on the author’s previous works, including “Paraguay: resultados de las reformas (2003-
2005) y sus perspectivas.” Serie Informes y estudios especiales. Cepal, Chile, 2007. Economía y empleo en el Paraguay.
Ed. Cadep, Paraguay, 2007. “Paraguay, crecimiento y progreso social” (draft), KAS, Paraguay, 2007. Borda, D. and
Richards, D. “The Predatory State and Economic Reform: an Examination of Paraguay’s Potential Economic
Transition” in J. M. Fanelli, Understanding Market Reforms in Latin America: Similar Reform, Diverse Constituencies,
Varied Results. Palgrave, 2007.
* Director of the Paraguayan Economic Analysis and Studies Center (Cadep)
borda@isugw.indstate.edu
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Dionisio Borda
157
1. Institutional and economic background
The Paraguayan economy, differently from the economy of the other
Latin American countries, has managed to maintain relative macroeconomic
stability, a low indebtedness level, and commercial opening since the sixties.
In the institutional area, the country has not been able to forge efcient,
credible public institutions. Development of three branches of government
has been weak, at rst as a consequence of dictatorship (1954-1989); thereafter,
during transition, the government was unable to overcome sectarianism and
to this day continues to be subjected to partisan political interests. This form
of administering the State has been responsible for slow growth and high
levels of poverty and inequality. Institutional inefciencies and insufciencies
are reflected in the low indicators of transparence, governability, and
competitiveness at world level.
2
Dictatorship created a power relation based on the State, the single party,
and the armed forces, which hindered the development of a professional
bureaucracy and of opposition parties, and the formation of an active citizenry.
Transition to democracy began with a coup d’état staged by the armed forces
(February 1989). This military action, aided by the one political party, opened
the doors to democracy after 35 years of dictatorship; to this day, though,
consolidation of democracy and the development of the State have not been
accomplished. The current Administration was preceded by three elected
presidents.
3
Before completing one year in ofce, the last one was replaced by
a government designated by Parliament,
4
as he was about to be unseated by a
political trial for the assassination of the vice-president (March 1999). In the
sixteen years of democracy, there have been three failed coups,
5
an indication
of society’s feeble democratic tradition, particularly as regards the political
class, and of the State’s weak institutional development.
2 Transparency International’s Corruption Perceptions Index has ranked Paraguay 98
th
of 102 countries (2005);
123
rd
of 133; 140
th
of 145 (2004); and 144
th
of 158. According to Latinobarómetro, in 1996, 59 percent of
Paraguayans preferred a democratic government, and only 26 percent preferred a dictatorial regime; in 2005,
though, only 32 percent still believed in a democratic government, while 44 percent favored dictatorship. The
World Economic Forum’s Competitiveness Index has ranked Paraguay 76
th
among 80 countries (2002-2003);
95
th
among 101 (2003-2004); and 113
th
among 177 (2005-2006).
3 N. Duarte F. (2003-2008); A. Rodríguez (1989-1993); J.C. Wasmosy (1993-1998); and R. Cubas (1998-2003).
4 L.A. González M., 1999-2003.
5 December 1995, April 1996, and December 2001.
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Such a political context necessarily entailed economic consequences.
Economic growth in 1981-2005 averaged only 2 percent, while demographic
growth was about 2.8 percent. Per-capita growth in this period dropped 16
percent, one of the region’s worst indexes. This economic retrocession had
various causes. Unfavorable external factors have been recurrent. Economic
volatility in neighboring countries, such as Brazil and Argentina, Paraguay’s
major trade partners, has dealt a recent blow to the economy. Drought and the
fall of international prices, particularly of cotton, also contributed to economic
stagnation. Mercosur’s creation in 1991 reduced triangulation trade (importation
and reexportation), especially with Brazil, which adversely affected the internal
economy. Internal factors have also been little favorable to the creation of
better conditions for market development and private investment in the last
two decades. Corruption and the informal economy have put a break on major
private investment. High demographic indices, inefcient investment allocation,
and the nineties’ nancial crises did not help economic development. The lack
of a strategy for upgrading the quality or human resources, attaching priority to
public investment in infrastructure, and achieving institutional development raises
a serious obstacle to growth and to the reduction of poverty and inequality.
6
2. Reforms implemented
In Paraguay, reforms have been partial and discontinuous, and have often
been reversed. Neither have they been sequential. There are explanations for
this situation, which deserve a closer look as a starting point: macroeconomic
instability has never reached the point of hyperination, scal decit over 5
percent of GDP, indebtedness over 45 percent of GDP at the worst moments, no
delay in debt payment that might have put a stop to external transfers. Differently
from other countries, Paraguay had an open economy. The importation and
reexportation of goods has been one of the strategies for penetrating the
protected Brazilian and Argentine economies, whose adverse effect is reected
in a powerful underground or informal domestic economy, which weakened
the exercise of State control and generated corruption. In addition, State
intervention has been centered predominantly on the management of State
6 Borda, D. “La Economía y el Empleo en Paraguay,” in Borda, D. (Ed.), Economía y Empleo en el Paraguay.
Asunción: Cadep, 2007, pp. 1-13.
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enterprises – public utilities (electricity, water, and telephone); production of
goods (cement, steel, alcohol, and sugarcane); and services (ports, airports, navy,
airlines, rst-tier nancial institutions) – rather than on the control of prices on
regulated markets. The xing of family basket prices has not been effective, as
the government lacks the capability for exercising such control. It has had more
control over interest and exchange rates. The two types of intervention – in
public enterprises and in price control – have reinforced corruption and failed
to fully ensure the achievement of the respective policies’ objectives.
Another peculiarity is that the Paraguayan government, without undertaking
an agrarian reform, distributed public lands to small farmers in the sixties and
seventies, and was the major employment provider, given the absence of
sizable enterprises. Land distribution and the provision of public employment
strengthened political loyalties, further hindering the State’s development, the
emergence of a professional bureaucracy and of a more autonomous citizenry, as
well as hampering market development. Power in the hands of the only political
party prevented the development of State institutions, market competitiveness,
and the functioning of political parties susceptible of assuming power. The State-
party relation gave rise to an entrepreneurial class that was strongly dependent
on the government and on patronage in connection with the creation of direct
and indirect jobs in the bureaucracy and the allotment of public lands. Under this
peculiar concept, it is possible to understand the macroeconomic policy’s reform
initiatives and the liberalization of Paraguay’s markets and foreign trade.
Macroeconomic policy
Economic policy reforms have gone through two stages. The rst took
place in early-1989, when the government faced an ination surge, scal debt,
and overdue debt payments. The second took place in early-2003, when the
government had to face the same problems, which had recurred.
In the rst stage, the new 1991 tax law was enacted, which simplied the
tax collections system, broadened the taxpayer base, and made the allocation
of resources efcient and neutral, as well as modifying the customs tariff
system. The new taxation regime replaced over thirty taxes, in addition to
the simplifying and modernizing Paraguay’s tax system. The same law called
for reforming internal taxes and custom duties, aimed at drastically reducing
custom duties to an average of 10 percent.
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Another important measure introduced in 1989 was the adoption of a new
exchange rate system. The multiple exchange rate system under which different
exchange rates were set for the dollar
7
was abandoned. As of February 1989,
the single, free exchange rate was introduced under the oating administration
system, under which the market determines the price of foreign exchange,
according to a band established by the Central Bank of Paraguay, consistently
with the monetary program for controlling ination. The new system corrected
the distortions created by the multiple rates system, but excessively absorbed the
cost of ination control, expressed in terms of an exchange lag.
8
This rst wave of reforms lost momentum because of regulatory decrees
that introduced new loopholes in the tax reform and the lack of spending control.
By 2002, the scal decit conrmed an expansive trend that started in 1995, with
an average annual decit of 2.5 percent of GDP; it was 3.57 percent in 1999; 4.27
percent in 2000; and 2.95 percent in 2002. This situation reected in part the modest
increase in revenues despite the reform, as collections did not exceed 10.5 percent
of GDP, owing to the many exemptions and exceptions to the 1991 tax reform
law (Shome et al., 1999), to administrative weakness, and to rampant corruption
in the Subdepartment of Taxation and in the Customs Directorate.
This upsurge of disequilibrium began to propagate in the early 21
st
century.
The growing scal decit and the rising public debt led the country to the brink
of defaulting on payments. The scal decit and the debt payments arrears were
addressed in 20002-2004 through a series of measures: a scal adjustment law;
reform of the National Treasury; renegotiation of the internal debt; and adoption
of a new customs code. The reform started with the enactment of the National
Treasury Law (December 29930. This reform consisted in a change in the public
sector’s retirement and pension system that created a steadily increasing operation
decit, which was nanced b y the Central Government.
9
The tax reform introduced by the scal adjustment law enacted in July 2004
called for the economy’s formalization and the correction of the tax burden,
which was very low (10 percent of GDP) owing to low tax rates; the broadening
7 The different rates were as follows: (i) for exports; (ii) for imports; (iii) preferential rate for inputs and
machinery imported for the productive sector; (iv) preferential rate for Government imports; and (v) preferential
rate for payment of the foreign public debt.
8 Accumulated ination was much higher than the increase in the quotation of the dollar in domestic currency.
9 Borda, D. Ed. (2003). Globalización y Crisis Fiscal: casos de Argentina, Brasil y Paraguay. Asunción: Cadep.
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of the tax base; and the introduction of new taxes. The previous tax legislation
had a large number of loopholes (46 exemptions), which made tax administration
difcult; it suffered from the absence of other universal taxes, such as tax on
personal income, on capital gains, or on the income of the large livestock and
agricultural enterprises.
10
The new reform simplied the system into a 10-10-10
formula: 10 percent VAT on all goods and services; 10 percent tax on personal
income; and 10 percent tax on corporate income of all enterprises (agricultural
and livestock, industrial, and services).
11
Collections after the reform law’s entry
into full force were estimated at 1.5 percent of GDP.
Because of such privileged low taxes, the country’s competitiveness
has failed to improve.
12
The large public service decits
13
and the low quality
of public spending are two serious problems that hinder development. One
limitation is the misallocation of the scarce resources for investing on human
resources and services, particularly on highways that are so important for a
landlocked country. Another limitation is the low revenues level because of
corruption and privileges. This seemed to be a functional vicious circle for
an inefcient, corrupt State and a conservative, rentier entrepreneurial class.
Paraguay is the country with the smallest allocation for infrastructure and
training of human resources in the region and, paradoxically, with the lightest
tax burden. This limits its growth possibilities in a globalized economy.
Another important reform in the scal area, associated with the two
already mentioned, was the 2004 promulgation of the new Customs Code,
which modernizes the rules consistently with international standards, permits
the administrative modernization of an institution that is the very symbol
of political schemes, and opens the possibility for the professionalizing of
human resources.
14
10 Shome, P. et al. Paraguay: Estrategia de la Reforma del Systema Tributario. Public Finance Department, IMF, 1999.
11 Three taxes are relevant: the VAT on soybeans (eliminated by Congress); the personal income tax, levied
for the rst time; and the tax on the earnings of agricultural and livestock corporations. The reduction in the
corporate income tax from 30 percent to 10 percent took into account the fact that, (i) owing to exemptions,
this tax never yielded more than 10 percent; (ii) there was a need to introduce the personal income tax (tradeoff);
and the capital-issuing rms only paid a 10-percent tax.
12 Paraguay ranks 113
th
among 117 countries (Brazil, 65
th
; Uruguay, 54
th
; and Argentina, 72
nd
), according to the
World Economic Forum’s The Global Competitiveness Report 2005-2006.
13 World Bank. The role of the State. Report No. 15044-PA. Washington, D.C., 1996.
14 According to a survey done by the World Bank and CISNI, the Customs Directorate, the Judiciary, and the
Taxation Subsecretariat are among the most corrupt State institutions.
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Market liberalization
Liberalization of interest rates and elimination of directed credit were
measures introduced in 1990.
15
In October of that year, interest rates were
liberalized and since then the market has determined the price of money. Another
aspect of the nancial reform was the elimination of directed credit.
Major progress has been achieved in respect of the nancial sector’s regulatory
framework, with the promulgation of the Central Bank of Paraguay’s Organic
Charter, the new Banking Law, and the Insurance Law. In addition, ve new laws
pertaining to capital markets have been enacted.
16
More specically in relation to the
nancial system, major changes were made in the regulatory framework during the
second transition phase. The number of regulated (legal) nancial rms rose from
29 in 1989 to 61 in 1997. The number of unregulated nancial rms, estimated
at 60 in 1989, gradually declined to 37. Easy access to the nancial rms system
and the Central Bank’s limited supervision capability helped the outbreak of the
nancial crises of 1995 and 1998.
17
In 1995 there were 34 banks and 63 nancial
rms; in 1998, after the series of banking crises, there remained 23 banks and 36
nancial rms. After 2002 and the failure of a major bank, the system was further
reduced and by 2005 there remained only 13 banks and 13 nancial rms.
18
One important lesson learned from the experience with the nancial
reform’s rst phase was recognition of the need for speed in a bank’s closing.
In the reforms’ second phase, the government managed to enact legislation
(December 2003) creating a deposit guarantee fund to protect savers in case
of a nancial institution’s failure. The weighted active interest rate of 26.8
percent in 2000 was reduced to 15 percent in 2006. Nevertheless, credits
continued to be short-term credits. The banks’ option of acquiring Central
Bank short-term papers hinders the creation of a more competitive banking
environment for extending credit.
19
In the State banking area, no changes were
15 In 1989, the interest rate ceiling was 28 percent for the active rate (commercial loans), 12 percent for the
passive rate (sight savings), and 18 percent for the passive rate for term deposits. In 1990, these ceilings xed by
Central Bank of Paraguay’s Board were 40 percent, 12 percent, and 26 percent, respectively.
16 Law on capital markets, external auditing, risk rating enterprises, commodities exchange, and securitization.
17 In 1988 there were 24 banks; by March 1995, there were 35 banks, before the rst crisis. This means that in
six transition years, eleven new banks were established.
18 Borda, D. “Políticas y Reformas Empreendidas: Resultados y Desaos para el Desarrollo” in Borda, D., Ed.
Economía y Empleo en el Paraguay. Asunción: Cadep, 2007.
19 Borda, D. “Paraguay: resultados de las reformas (2003-2005) y sus perspectivas,” Cepal: Informes y Estudios
Especiales No. 18, 2007.
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introduced during the rst reform phase. This should be done in the second
phase by the new Administration (2003-2008). A second-tier Development
Financial Agency (AFD) was established by the merge of three existing funds
and started operating in 2006, while the creation of a rst-tier bank has been
postponed owing to political interests of the government.
Under the current Administration (2003-2008), the intervention of private
capital was considered once again, in the form of capitalization, outsourcing,
or concession of some enterprises, particularly the oil-selling, cement, and
water enterprises, but nothing came of it. Many of the enterprises operate
with losses and cannot honor their debts, which are paid by the Treasury,
thus putting further pressure on the scal budget. Most of them have failed
to improve their services, except for the power enterprise. In sum, public
enterprises continue to have the same problems of coverage and decient
services and retain their autonomy, although in the end the Treasure has to
assume their foreign debt payments.
Foreign trade opening did not result from reforms. It was part of the
country’s strategy to penetrate the region’s closed economies. Paraguay’s
integration into the Southern Cone preceded even the signing of the 1991
Treaty of Asunción that created Mercosur.
20
Exports of two or three
agricultural commodities and the border triangulation trade (or re-exportation)
have allowed integration in the region. In addition, Paraguay’s extremely
porous borders (owing to a high incidence of illegal trade or contraband)
permitted the nearly unrestricted entry of goods imported from the region
and from the rest of the world. For Paraguay, the Mercosur challenge meant
integration based on greater industrialization and larger exports, particularly
of nontraditional products.
Social policies
The most important and consistent reforms have occurred in the area
of education, ensuring wider coverage, more resources, and a higher schooling
level. In the eighties, budget appropriations for the Ministry of Education did
not exceed 1 percent of GDP; in the nineties, they rose to 2.5 percent; and in
20 Borda, D. and Masi, F. Los límites de la Transición. Asunción: CIDSEP-UC, 1998.
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the 2000-2006 period they amounted to nearly 4 percent. A large portion of
these resources went to salary increases. Elementary and secondary education
coverage has widened but the average national schooling level remained low
at 7.5 years in 2005, not to mention the quality of education, which is still
unsatisfactory (Shiefelbein, 2007).
No reform has been undertaken in the area of public health, which still
suffers from a strong patronage network. However, resources for this area increased
0.3 percent of GDP in the late eighties and exceeded 1 percent in the nineties and
in the following years. Health stations have been built, but professional staff and
inputs are still scarce, particularly in the country’s interior.
One area that suffers from the lack of a strategy and policy is the ght
against poverty, despite the establishment of a series of secretariats subordinated
to the President’s Ofce. The expansion of soybeans crops and cattle raising
and the lack of job opportunities have given rise to a strong migration ow,
both internally and to other countries, as well as to unauthorized occupation
of rural and urban areas.
Institutional reforms
In general, institutional reforms have not been initiated by Paraguayan
political, social, or entrepreneurial leaders. Most of these reforms have originated
in external initiatives, without the concourse of domestic allies convinced that
such reforms were necessary, who rather saw them as required under cooperation
programs. The weakness of opposition political parties, the absence of reformist
leaders within the ranks of the ofcial party, and the little weight wielded by civil
society, have not been propitious for the gestation of ideas, except for changes
in the Constitution. The rst homespun reform introduced changes to the
Constitution in 1992, which granted wider powers to Congress to counteract
dictatorship’s extreme centralism. It established the direct vote, abolished the
reelection of the president and vice-president, and instituted municipal elections
and elections for the newly created governorships.
21
21 Previously, there were Government Delegations in charge of public security (police), appointed by t he
President of the Republic; intendants or mayors, who were not elected but appointed by the Executive, as were
the members of the Supreme Court of Justice.
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A recent publication (Abente 2007)
22
points out some government
problems. The Executive continues to abide by the patronage criterion, now
severely limited by Congress, which, among other things, can override a
presidential veto by a simple majority in the two chambers, or the request for
urgency, by one chamber. Congress can also modify the scal budget without
taking into account revenue estimates and restrictions. The Legislative has
discretionary power to control the Judiciary and the Executive in respect of
administrative matters. These attributions provide a culture broth for corruption,
which further weakens that body’s capacity to legislate on appropriate public
policies. In addition, it displays intense political fragmentation, and the yearly
elections for its leaders and commissions absorb the members’ time and
attention, leaving them no time to legislate. The Judiciary is strongly politicized,
from the Supreme Court of Justice, including the Council of Magistrates, to
trial juries to judges. The Judiciary lacks credibility before public opinion and
avails itself of various instruments (e.g., unconstitutionality) for prolonging
proceedings and negotiating sentences.
Business environment
Enterprise development is limited by various factors, beginning with
the uncertainty about public policies and the precarious judicial protection
accorded physical assets and intellectual property. This limits foreign as well
as national long-term direct investment. Another hindrance is access roads
or infrastructure for international trade and the lack of consistent human
resources training programs and of proactive public policies for promoting
investment and markets. Since the late nineties, foreign mobile phone
companies and banks have recorded high return and investment levels, the
telephone companies in particular.
Another handicap has to do with the protection of property rights,
a particularly sensitive issue in Paraguay, where the economy is essentially
agrarian, with a large rural population that depends on agriculture and, at the
same time, with a high concentration of land ownership, with a Gini coefcient
above 0.90. This family farming economy, which historically had easy access
22 Abente, D. “El malestar de la democracia o la democracia del malestar?” in Abente, D. and Masi, F., Eds.,
Estado, Economía y Sociedad: una Mirada Internacional a la Democracia Paraguaya. Asunción: Cadep, 2006.
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to public lands, has since the eighties faced the problem of the exhaustion of
public lands. The expansion of soybeans cultivation and of cattle-raising has
boosted land prices, thereby impelling part of the rural population toward
urban centers. At the same time, a sizeable segment of organized producers
began since the nineties to stage the occupation of private lands. Thus duality,
the sharp inequality in land distribution, and the lack of an agricultural policy
aimed at the consolidation of productive units of less than 20 hectares
compromise social stability and the enforcement of property rights.
Lastly, the micro, small, and medium enterprises sector, the major
generator of employment, has lost its competitiveness to the imports trade,
given the lack of appropriate sectoral policies. To survive, these micro, small,
and medium enterprises are driven into informality and the attending low
salaries, inappropriate labor conditions, and lack of social security protection.
From 1997/98 to 2005, occupation in the informal sector increased while
employment in large enterprises dropped (Berry 2007).
3. Results and outlook
The Paraguayan economy has not gone through the same experience
of other countries with sharp macroeconomic disequilibria. The scal and
monetary policies have managed to reverse the inationary situation and
the default on the debt (Table 1). Policy quality is questionable, though. The
measures adopted do not address the problems’ underlying causes. The scal
policy has led to tax reforms but there is a tendency to exibilize the legislation
through its regulation or to postpone the entry into force of some articles,
thereby weakening the reform under sectoral pressures. This happened with the
rst law in 1992 and is happening with the second, of 2004, with the difference
that in the latter case the taxpayer based has doubled and annual collections
continue to rise. The light tax pressure (11 percent of GDP) is offset by prots
transfer and the cession of power by the hydroelectric enterprises (4 percent)
of GDP. Even so, the tax burden remains light. On the other hand, increased
spending is not subject to planning so as to meet government priorities; it
continues to be subject to political criteria and sectoral pressures.
The monetary policy has been relatively effective in controlling ination
but not as effective in creating a nancial market conducive to development,
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owing to the high cost of money and short-term loans. Financial reforms
suffered from improper sequence: rst, interest rates were liberalized, then
normative changes were made, and lastly, thought was given to technical
training and equipment for discharging the nancial system’s control functions.
The liberalization of the foreign exchange regime was positive, as it eliminated
a factor of serious price distortion and a corruption mechanism. The managed
oating exchange rate was at rst used for controlling ination; then short-
term bonds became used as a monetary policy instrument and then as a policy
for xing ination targets. The system’ high interest rates are ascribed to
the monetary policy (bonds), as is the loss of competitiveness owing to the
exchange rate’s appreciation. In general, the monetary policy has been less
exposed than the scal policy to political pressures.
Table 1
Some macroeconomic variables (Average values per period in %)
Periods
Tax
Revenue/
GDP
Spending/
GDP
Surplus/
Decit/
GDP
Ination
Real
Exchange
Rate
(US$/G)
Public
Debt/
GDP
NIR/
GDP
1985-1989 7.8 8.8 0.5 24.9 n.d. n.d. 14.1
1990-1994 9.7 13.6 0.8 17.1 -8.4 24.0 13.3
1995-2000 11.2 19.8 -2.5 8.9 2.9 21.7 12.0
2001-2006 11.2 18.2 -0.2 9.8 6.7 35.1 16.4
Source: BCP
The liberalization of markets and foreign trade has not been at the
center of reforms. Foreign trade has always been open to imports from and
exports to the region (Table 2). Given the State’s high degree of corruption
and incapacity, price controls and market regulation have not actually worked;
the State enterprises’ monopoly has not been affected, and cement, steel, and
fuel contraband has been a response to such monopoly. The internal market
for agricultural products (cotton, sugarcane, etc.) is oligopolistic, owing to
problems of infrastructure, inputs supply, and transportation.
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Table 2
Growth and foreign trade (Period averages)
Periods
Constant per
capita GDP
(US$) 1994 = 100
Per capita GDP
growth (%)
GDP growth
(%)
Trade Balance/
GDP (%)
1985-1989 2,711 0.8 3.9 1.7
1990-1994 2,763 0.5 3.3 -10.9
1995-2000 2,795 -1.4 0.8 -18.2
2001-2006 2,615 0.8 2.8 -18.4
Source: BCP
The greatest hindrance to the country’s development is the precarious
institutional apparatus of the State, political parties, and entrepreneurial
associations. Attempted reforms have not worked because of the political
parties’ and economic sectors’ weakness and the lack of a tradition of efcient
civil service. The institutional reforms resulting from external cooperation
programs have been thwarted by the informality tradition in the civil service
itself. The bureaucracy’s planning mechanism and operations are weak and
subject to the inuence of political parties, while the deeply-rooted practice
of corruption survives even under the new forms of organization and rules
of the game the reforms seek to introduce.
This type of State establishes an intricate network of relations to benet
from the exercise of power. The political elite establishes personal relations
with the economic agents, based on principles that do not favor the building
of institutions conducive to the development of the State and the market, such
as inuence peddling, exemptions from taxes and from regulatory agencies’
norms, irregular awarding of government procurement contracts, and even
distortion of juridical norms, all of which detracts from market competitiveness
and compliance with the rules. The discretionary exercise of power extends
also to professional services. The political parties and civil society lack the
force to counterbalance an arbitrary, discretionary State; even the opposition
parties have fallen into the benets-seeking practice. External pressure has
managed to inuence policies and reforms but often fails to realize that the
State’s informality ends up by diluting the reforms or preventing economic
policies from being sustainable in the short term.
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Results in terms of economic growth and poverty reduction (Table 2)
have not been favorable. Growth rates in the nineties were far below those
of the sixties and seventies, and slightly lower than in the early years of this
century. Per capita income rose from 2.5 percent in the sixties to 6.8 percent
in the seventies, declining by 0.8 percent in the eighties, while in the nineties
growth was practically nil (0.1 percent). In 2003-2006 the economy recovered
again, with an average growth of 4 percent, although in 2000-2002 growth
was severely affected by a recessive phase.
23
Despite GDP’s retraction in the
nineties, the participation of agriculture (15 percent) – thanks basically to
an increase in soybean production (7.4) – and of cattle raising (5.4 percent)
exceeded that of the eighties. In 2000-2006, agriculture’s share increased (18
percent) and soybean production continued to rise (5.7 percent).
24
Social indicators have not improved according to expectations. Poverty
and employment levels are still high and inequality has practically remained
unchanged. In 1995-2001,
25
the poverty and indigence levels were 17.1 percent
and 16.1 percent, respectively; between 2002 and 2006, these levels climbed to
22.7 percent and 18.6 percent, respectively. Although the unemployment rate
declined slightly, underemployment in the two periods rose from 19.6 percent
to 23.9 percent of the labor force. The Gini coefcient for both per capita and
household income has not changed – the per capita income indicator actually
dropped 0.1 percent. Income distribution between the richest 10 percent and
the poorest 40 percent also remained unchanged.
26
Progress in the rst years of the current Administration permitted the
reestablishment of scal equilibrium, the elimination of debt payment arrears,
and the beginning of economic recovery, helped by favorable conditions in the
region. These changes did not extend to the rules of the game, though. Prot
seekers in the State or in enterprises linked to the State still are sufciently
strong to prevail upon the innovating sectors, whether in the economic eld
or in the political arena. Dispute for control of the State continues to be a
competition for the control of economic rent. This view of power hinders the
market’s and the State’s development and the exercise of democracy beyond
the mere electoral pact and the intent to implement economic reforms.
23 Calculation based on Central Bank statistics.
24 Borda, D. (2007).
25 No reliable data are available before this period; discussion is thus limited to the years mentioned.
26 Based on DGEEC and Cepal data.
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Bibliography
Borda, D. and Masi, F. “Paraguay: Estancamiento económico y desgaste político
en los años del MERCOSUR”, pp. 131-172. See also R. Bouza. Realidades
Nacionales Comparadas. Buenos Aires: Altamira Fundación, OSDE 2002.
__________. Oportunidades y Desafíos de la Reforma del Estado. Asunción: Centro
de Análisis y Difusión de Economía Paraguaya, 1999.
__________. Presupuesto, Política Fiscal y Desempeño Económico en la Transición.
Asunción: Universidad Católica, CIDSEP/Konrad Adenauer Stiftung, 2001
Borda, Dionisio. Auge y Crisis de un Modelo Económico: el Caso Paraguayo. Asunción:
Universidad Católica, 1994.
Borda, Dionísio, Comp. Globalización y Crisis Fiscal. Casos de Argentina, Brasil y
Paraguay. Políticas Públicas Series. Asunción: Centro de Análisis y Difusión de
Economía Paraguaya, 2003.
Borda, Dionisio and Richards D. “The Predatory State and Economic Reform: an
Examination of Paraguay’s Potential Economic Transition” in J. M. Fanelli.
Understanding Market Reforms in Latin America: Similar Reform, Diverse Constituencies,
Varied Results. Palgrave, 2007.
Borda, Dionisio and Masi, F. Los Límites de la Transición: Economía y Estado en el
Paraguay en los años 90. Asunción: Universidad Católica-CIDSEP, 1998.
Borda, Dionisio. “Paraguay: resultados de las reformas 2003-2005 y sus perspectivas”. Serie
Informes y Estudios Especiales, No. 18. Santiago de Chile: Cepal, 2007.
Comisión Económica para América Latina y el Caribe, Cepal. Balance Preliminar
de América Latina y el Caribe. 2005.
Dirección General de Estadística, Encuestas y Censos. “Principales resultados
de la Encuesta Permanente de Hogares 1997- 2006.”
Rodrik, Dani. “Understanding Economic Policy Reform” in Journal of Economic
Literature, Vol. XXXIV, 1996, pp 9-41.
Shome, Parthasarathi, Haindl, E. Schenone, O. and Spahn, P. B. “Paraguay:
Estrategia de la Reforma del Sistema Tributario”. Public Finance department,
IMF, 1999.
DEP
Translation: João Coelho
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
171
The Peruvian
economy and the
challenge of growth
with social inclusion
Enrique Cornejo Ramírez*
1. Introduction
T
he Peruvian economy has entered its seventh consecutive year of
growth, which together with one-digit ination, signicant growth of exports
and of net international reserves, makes it into an attractive destination for
investment. Favorable prices of basic products on international markets and
the dynamism of internal demand suggest that the economy will sustain this
vigorous growth process and that it is sufciently prepared to resist possible
external shocks.
The great challenge, though, is to ensure that the fruits of this growth
are translated also into sustained employment growth and contribute to a
substantial reduction of the poverty (particularly of extreme poverty) and
inequality that still exist in the country. Although some of the major social
* Executive President of the National Bank of Peru
The Peruvian economy and the challenge of growth with social inclusion
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
172
indicators have begun to show positive signs, how long it will take for these
changes to be perceived by the population – particularly by the lower-income
segments – and how close will be the approximation between political
timing and administrative timing will be fundamental to ensure that growth
is accompanied by social stability and democratic governability. In this
connection, a crucial issue is the necessary reform in the administration of
the State to enable it to adequately shepherd the process.
1
It is also important to take into consideration the Peruvian economy’s
peculiar characteristics and how they have a bearing on the effectiveness
of the economic policies implemented. Peru is a country of great diversity,
encompassing various races, languages, and ecosystems that make for a great
potential in areas such as agroindustry, tourism, or forestry. Its complex
geography, however, poses difculties for the physical integration of the
Peruvian peoples and tests the most sophisticated engineering. A considerable
portion of economic transactions takes place in informality and coexists with
the modernity of satellites and the Internet, the practice of barter and the use
of the traditional plow in the countryside. Enterprises are in general of small
and medium size, and dozens of thousands of so-called microbusinesses exist
throughout the country, headed by a family or by individuals that make up a
signicant share of the working age population.
Four types of economy coexist in the country: a subsistence economy (A),
which encompasses extremely poor rural sectors; an informal urban economy (I),
which encompasses about 70 percent of productive activity; a modern, industrial
economy (M), which implements competitiveness strategies; and a knowledge and
services economy (C), which as yet is not very large but has great potential.
2
Of these four, the rst two are the most important, owing to the
population and the poverty levels involved; the other two account for the
largest share of GDP, foreign exchange generation, and tax revenues, and for
most contacts with the modern world. One of the development strategy’s
objectives should be a narrowing of the gap among these different types of
economy, taking into consideration the specic characteristics of types A and I
1 See Cornejo Ramírez, Enrique. “Hacia una Transformación del Estado en América Latina” in Revista “Nueva
Sociedad.” Caracas, September-October 2005, No. 199, pp. 204-119.
2 Cornejo Ramírez, Enrique. “La Economía Peruana: balance, perspectivas y propuestas” in Diplomacia,
Estrategia y Política-DEP. Brasília, DF, Brazil, April-June 2005, No. 3, pp.119-141.
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Enrique Cornejo Ramírez
173
(to which standard policies cannot be successfully applied, as they are designed
for other contexts) and seeking to approximate them to and incorporate them
into types M and C.
There follows an analysis of Peru’s economic, social, and political aspects
and of its medium-term prospects.
2. Macroeconomic stability and growth
The Peruvian economy is currently experiencing a phase of sustained
growth. In 2002-2005, GDP grew at 5 percent; in 2006, the growth rate rose
to 8 percent; in 2007, it is holding at 7 percent. GDP is expected to grow at an
annual rate of at least 6 percent in 2008-2011. In the previous decades there
was no record of such a prolonged, substantial growth. A growth rate above
7 percent is accompanied by other major benets.
Every year, a contingent of 350,000 Peruvians reach the age of 15 and
are thus ready to form part of the economically active population (PEA).
According to the last input-product gures available, each GDP percentage
point generates 50,000 direct jobs. These gures indicate that the GDP growth
rate must be at least 7 percent a year to provide jobs for the new labor force.
After many years, Peru is now growing at a pace that generates sustained
productive employment.
In the last seven years, Peru has ranked second among other Latin
American countries in terms of per-capita GDP, as shown in Chart 1. The
sustainability of Peru’s economic growth is further seen in the fact that it is
due not only to the favorable situation of the world economy but also to the
dynamism of internal demand and of the nonprimary productive sectors that
are recording higher growth rates.
The Peruvian economy and the challenge of growth with social inclusion
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
174
Chart 1
PBI Per Cápita (Tasa de variación promedio anual: 2000-2007)
Fuente: World Economic Outlook en Evolución Macroeconómica del último año. Velarde, Julio. Banco Central
de Reserva del Perú (BCRP). 2007.
Chart 2 shows that in 2001-2005 economic growth received a strong
impetus from exports. In 2006 and 2007, though, it was internal demand that
drove growth, as it grew 9 percent and 10.6 percent, far above the GDP and
exports growth rates. Also in 2006-2007, the manufacturing sectors grew at an
average rate of 8.8 percent, while the primary sectors grew about 4 percent.
In these two years, the construction sector has recorded the highest growth
rates: 12.5 percent and 14.7 percent, respectively.
Chart 2
Crecimiento de la demanda interna (Variación porcentual)
Fuente: Velarde, Julio. Evolución Macroeconómica del último año. Banco Central de Reserva del Perú. BCRP. 2007.
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Enrique Cornejo Ramírez
175
Economic growth has translated into greater household purchasing
power. According to Peruvian Central Reserve Bank gures,
3
the Available
National Income grew 11.9 percent in 2006 and 12.7 percent between January
and June 2007.
4
The increase in the monthly household income in 2003-2007
obeyed a decentralized pattern, as follows: 53 percent in Cusco; 43 percent in
Iquitos; 34 percent in Huancayo; 30 percent in Trujillo; 25 percent in Chiclayo;
and 22 percent in Arequipa.
Greater Household purchasing power is shown also in sales gures, which
rose in nearly all economic sectors. According to Apoyo Consultoría,
5
sales
gures rose between January and July 2007, as follows: color television, 81
percent; refrigerators, 60 percent; mobile phones, 59 percent; cable television
subscriptions, 29 percent; and Internet access, 12 percent. This signicant
pattern of consumption of hard goods is noticed both in Lima and in the
major cities in the country’s interior.
As regards construction materials, 2007 gures are also eloquent: 53
percent higher cement consumption, 29 percent higher consumption of
oorings, etc. Between 2002 and 2006, the construction sector grew nearly
40 percent, owing to greater consumption of cement, iron, roong boards,
ceramics, and paints.
Table 1 shows that GDP growth per sector in 2007 was as follows:
construction (cement, 16.8 percent); trade and services (both over 7 percent);
and manufacturing (6.6 percent). These are the sectors that sustain overall
growth. Agriculture and livestock have grown 3.5 percent this year, while
mining and sheries have recorded lower gures. According to projections by
the Ministry of the Economy and Finance,
6
this sectoral performance should
continue in its essential aspects in 2008, but mining, hydrocarbons, and sheries
are expected to grow at higher rates.
3 Banco Central de Reserva del Peru-BCRP. “Evolución Macroeconómica del Último Año.” Presentation by
Dr. Julio Velarde, BCRP President at the Council of Ministers, Lima, July 2007.
4 The higher income of Peruvian families was also due to the periodical remittances by Peruvians living abroad,
which total an estimated US$3.5 billion a year; and to higher transfers from abroad, after deduction of the
corresponding prots remitted abroad.
5 For further details please check www.apoyo.com, which provides information on the ten enterprises that
make up Grupo Apoyo, including Apoyo Consultoría.
6 For further details on macroeconomic projections for the Peruvian economy please check the Ministry of the
Economy and Finance’s page on the web:
www.mef.gob.pe, particularly the information on the 2008-2010
Pluriannual Macroeconomic Framework.
The Peruvian economy and the challenge of growth with social inclusion
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
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Table 1
Global GDP and sectoral GDP (Real percent variation)
2006 2007 p/ 2008 e/
Global GDP
Agriculture and Livestock
Fisheries
Mining and hydrocarbons
Manufacturing
Construction
Trade
Services
7.6
7.4
2.4
1.4
7.4
14.8
11.1
7.0
7.2
3.5
0.4
2.3
6.6
16.8
7.4
7.9
6.2
4.1
3.2
6.4
6.3
14.0
6.5
5.4
p/ Projected
e/ Estimated
Source: Ministry of the Economy and Finance
Table 2 below shows growth projections for 2008. Analysts from various
institutions agree that GDP will grow about 7 percent by end-20007 and 6 percent
by end-2008. Projections include those by the IMF, the Reserve Central Bank,
the Ministry of the Economy and Finance, the Peruvian Economy Institute-IPE,
and two major corporate banks – Banco Continental and Scotiabank Perú.
Table 2
Projected GDP growth: 208 (in percentages)
Entity/Institution 2007 2008
International Monetary Fund-IMF
Central Reserve Bank of Peru-BCRP
Ministry of the Economy and Finance-MEF
Scotiabank Peru
BBVA Continental Bank
Peruvian Economy Institute-IPE
7.0
7.2
7.2
6.2
7.5
7.5
6.0
6.0
6.2
6.2
6.5
6.1
Source: Various institutions.
Current growth is reected in substantial scal revenues, which have
raised the available cash holdings not only of the National Government
but also of most Regional and Municipal Governments
7
that receive funds
7 Peru has 25 Regional Governments, 195 Provincial Municipalities, and more than 1,800 District Municipalities.
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Enrique Cornejo Ramírez
177
from Canon and Sobrecanon and from the Municipal Compensation Fund-
FONCOMUN
8
to nance their infrastructure projects and works.
9
The National
Government’s tax revenues have risen about 15 percent of GDP and a similar
growth is estimated for 2007 and 2008 (See Chart 3).
A scal surplus of 2 percent of GDP has been recorded in 2006 and it
is estimated that this surplus will be of 0.8 percent of GDP.
10
A look at the
structural results of the Nonnancial Public Sector (SPNF) shows a 0.2-percent
decit in 2006 and a 1.8 percent decit in 2007. In general, there is evidence of
responsible and transparent management of scal accounts, which undoubtedly
contributes to a condence-inspiring macroeconomic environment.
Table 3 shows the performance of and projection for the main
macroeconomic indicators as well as growth, according to ofcial estimates
by the Reserve Central Bank of Peru. In 2006-2007, Peru had Latin America’s
lowest average ination: 2.1 percent. Initial estimates for 2007 situate ination
at 2.5 percent, but external factors
11
could drive this rate up to about 3 percent,
which still means very low ination.
Chart 3
Resultados scales y ciclo económico
8 FONCOMUN is nanced by revenues from the Municipal Promotion Tax, which is equivalent to two percentage
points of the General Sales Tax-IGV, currently 19 percent of the sales tax (VAT in other countries).
9 One of the problems faced by scal management is the slow pace of the execution of projects at the different
levels of government. Execution of budgetary expenditures is slow owing to the valuation and inspection
procedures, which are still complicated and centralized, as well as to the precarious management capabilities of
many subnational governments.
10 According to estimates by the Peruvian Economy Institute-IPE.
11 In the second half of 2007, the Consumer Price Index rose as a result of the conuence of higher prices of
food imports (wheat, corn, milk products) and oil, all of which impacts signicantly on the family consumption
basket in Peru.
The Peruvian economy and the challenge of growth with social inclusion
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
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Table 3
Peru: main economic indicators
Year
Housing
Annual var.
Total
Exports
(US$ millions)
Total Imports
(US$ millions)
Net
International
Reserves
(US$ millions)
Outstanding
External
Public Debt
(GDP percentage)
2005 1.5 17,367.7 12,081.6 14,097.0 28.1
2006 1.1 23,800.0 14,866.0 17,275.0 23.6
2007* 2.5 27,312.0 18,114.0 22,827.0 19.2
2008** 2.0 29,470.0 21,106.0 25,939.9*** 17.4
* BCRP projections
** BCRP estimates
*** Author’s estimates
Source: BCRP. Author’s estimates
Goods exports in 2007 should total US$27 billion (a record) and
approximate US$30 billion in 2008. It is worth noting that the growth of
exports with aggregated value (nontraditional exports) has been higher is
respect of certain items than that of total exports. Imports have also steadily
increased and are expected to total a little over US$18 billion in 2007 and over
US$21 billion in 2008. In 2006, capital goods imports grew at 35 percent and,
by May 2007, they were growing at 41 percent.
The current level of international reserves in 2007 is about US$23 billion,
equivalent to more than fteen months of regular imports, and already surpasses
the stock of the external public debt. The external public debt to GDP ratio
has fallen to 19 percent as a result of a deliberate policy of the Ministry of the
Economy and Finance, which in recent years has undertaken various advance debt
payments, particularly of its debt with the Paris Club, as well as exchanging U.S.
dollar-denominated debt for new soles and improving the prole of future debt
servicing in respect of rates and schedule. Peru thus displays sufcient nancial
strength to honor its obligations and to face eventual external shocks.
12
It can be said that the Peruvian economy’s current growth is supported by
a strong impetus in internal demand, the expansion of nonprimary productive
12 The strong inow of U.S. dollars from higher exports, foreign investment, remittances, increased receptive
tourism, and even drug trafcking create a structural problem owing to the exchange rate’s declining trend. The
weakness of the U.S. dollar contrasts with the recent strengthening of the Peruvian sol, forcing the Central
Reserve Bank to intervene drastically in the foreign exchange market as a buyer so as to prevent a further
decline of the exchange rate, which could harm exporters’ returns.
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Enrique Cornejo Ramírez
179
sectors, rising investment, trade balance surplus, and responsible management
of public nances. This growth is beginning to have an impact on jobs creation
and this is happening in a decentralized way.
3. Higher investment and the determination of
country risk
The higher investment that is driving growth is clearly reected in the
indicators shown in Chart 4. Between 2002 and 2007, private investment has
steadily risen from quarter to quarter, at a 20-percent rate. It is estimated that
private investment in 2007 will reach 19 percent of GDP. National and foreign
investors have high expectations about the Peruvian economy’s future; this
leads one to believe that by 2010 investment will rise to 30 percent of GDP.
Chart 4
In 2007-2010 a total US$20 billion should be invested in major projects
in the sectors of mining, hydrocarbons, telecommunications, industry,
infrastructure, energy, and services. Table 4 lists the major projects and the
enterprises involved, indicating the estimated investment amounts.
Mining projects of great magnitude stand out, such as the Toro Mocho
or Río Blanco, each one involving an estimated investment of US$1.5 billion.
As regards hydrocarbons, the second phase of the Camisea project alone
will require an investment of US$2.2 billion, while the so-called Lote 67 may
require an investment of US$1.6 billion. The expansion of the mobile phone
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network and of the telecommunications broad band call for no less than US$1
billion in additional investment, while the construction of the South Pier at
the Callao Port will need an investment of US$600 million.
In respect of industrial projects, expansion of the Cajamarquilla Zinc
Renery and phosphate exploitation in Bayóvar (Piura) will require US$500
million each. The Brazilian Camargo Correa consortium plans to invest US$200
million in a new cement plant, and the Backus brewery has already started
expanding its plant to the tune of US$250 million. Cementos Lima intends to
invest about US$180 million in its “El Platanal” project, while major Peruvian
and Chilean business rms are planning mega shopping centers in various
cities, which will require investment of over US$250 million.
Table 4
Investment Projects: 2007-2010 (US$ millions)
Sector/Enterprise Project Amount
MINING:
• Perú Copper S.A
• Zijin Mining Group
• Minera Yanacocha
• Extrata
HYDROCARBONS:
• Perú LNG
• Barret Resources
• Petrobrás-PeroPerú
TELECOMMUNICATIONS:
• Telefónica del Perú
• América Móvil (Claro)
INDUSTRIAL:
• Votorantim Metais
• Vale do Rio Doce
• Camargo-Correa
• Backus
INFRASTRUCTURE:
• Dubai Ports World Callao
• Romero Group
ELECTRICITY:
• Cementos Lima
Tormocho
Río Blanco
Minas Conga
Las Bambas
Camisea II
Lote 67
Planta Petroquímica
Expansion mobile network/broad band
Mobil phone
Expansión Cajamarquilla
Bayóvar phosphates
Cement plant construction
Plant expansion
South Callao Pier
Ancón Port
El Platanal
9,697
1,500
1,400
935
930
5,051
2,200
1,600
800
1,993
1,000
560
2,129
500
450
200
250
1,051
617
200
245
180
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Enrique Cornejo Ramírez
181
Sector/Enterprise Project Amount
OTHER SECTOR:
• Tottus
• Casagrande
• Sodimac – Falabella Group
• Parque Arauco
• Corporación Pesquera Inca
• Parque Arauco, Gloria, Wiese
• Wong Group
• Graña y Montero
• Energo Projexp Nicogradnjo
• Agroindustrial Laredo
24 shops: Lima, Trujillo, Chiclayo
Distillery and crops
Various shops
San Isidro Shopping Complex
Vessels and plant
Mega Shopping Center Arequipa
Lima Plaza Norte Shopping Center
Road concession Coast-Sierra
Callacuyán-Huamachaco Highway
Arena Dulce Sugar Project
784
100
66
60
54
50
40
35
31
24
20
TOTAL 20,960
Source: Ination Report. Central Reserve Bank of Peru-BCRP, September 2007.
This significant demand for new investment drives the growth of
productive capacity and increased productivity, the latter of which had never
occurred. According to a study by the Groningen Growth and Development
Center, cited by the Central Reserve Bank,
13
Peru records one of the highest rates
of labor productivity in Latin America. Indeed, in 2000-2006, labor productivity
in Peru grew 2 percent, as compared with Chile, 1.8 percent; Mexico, 1.4 percent;
Brazil, 0.9 percent; and Colombia, 0.4 percent in the same period.
In addition, a survey on Peruvian enterprises’ expectations showed that
70 percent of them
14
said that they had recorded increased productivity
15
of
over 4 percent in recent years. The already mentioned higher capital goods
imports also contributed to increased productivity.
Market diversication, adoption of competitive strategies based on
differentiation or intense segmentation, and improved productivity have also
contributed to the signicant growth of exports with higher aggregate value
(about US$6 billion in 2007). A recent survey
16
shows that 26.5 percent of
166 successful enterprises considered productivity the most important factor
13 The study, done by the Groningen Growth and Development Center and The Conference Board (Total
Economy Database), was cited in Banco Central de Reserva del Peru… “Evolución Macroeconómica del
Último Año.” Op. cit., Lima, July 2007, p. 30.
14 Id. Ibidem, p. 31.
15 The interviewed enterprises’ productivity estimates took into account the different measures adopted, such
as the number of physical units produced or sold per worker, of physical units produced or sold per raw
material consumed, and so on.
16 Cornejo Ramírez, Enrique…; “El Desafío Competitivo: Estrategias de empresas exportadoras peruanas exitosas”. Lima:
Editorial San Marcos, April 2007, pp. 240-242.
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182
to explain competitiveness, while 47 percent said that to increase productivity
it is necessary to improve the yield of all productive factors.
The evaluation of a country’s risk is one of the factors of greatest weight
in the decision-making of investors, particularly of foreign investors. Every risk
classifying bank or agency has its own methodology but their common denominator
seeks to determine whether a country is in a position to honor its international
obligations and which is the “environment” for good investment performance.
This involves consideration of economic, social, political, and cultural factors.
Charts 5 and 6 show that the country risk index has steadily declined
since 2002. Over this entire period, Peru’s country risk index has remained
below the Latin American average, and by mid-2007 it hit its lowest level,
approaching Mexico’s index.
Gráco nº 5
Riesgo País: Embi + Perú (pbs) (2000-2007)
Gráco nº 6
América Latina – Spreads de Bonos Soberanos (PDI) (en puntos básicos)
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
Enrique Cornejo Ramírez
183
What is doubtlessly of most interest to international analysts is the course
of Peru’s country risk under Alan García’s social democratic government,
which began in July 2007 and runs through 2011. The particular concern
for the performance of the APRA government in its second constitutional
mandate is due to the fact that it had serious problems in the economic area
during its previous administration (1985-1990).
As Chart 7 shows, between August 9, 2006 and June 12, 2007, Peru’s
country risk declined steadily, hitting a record on various occasions. This indicates
that the international markets look favorably at the Peruvian economy’s course
and at the Peruvian government’s performance in this regard. Some have dubbed
this performance “the García effect” or “the born again García effect.
Gráco nº 7
Perú: distribución de la PEA
In October 2007, the Canadian Dominion Bond Rating Service (DBRS) rated
Peru’s country risk as low in view of the strength of its economy, scal discipline,
and adequate monetary policy being implemented by the Government.
17
DBRS is
one of the seven Nationally Recognized Statistic Rating Organizations-NRSRO
17 Ministerio de Economía e Finanzas del Perú-MEF... “Peru: Grado de Inversión.” Press notice on MEF’s
page: www.mef.gob.pe. Lima, October 19, 2007.
The Peruvian economy and the challenge of growth with social inclusion
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
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in the United States, together with Moody’s, Standard & Poor’s, Fitch Ratings, A.
M. Best Company, Japan Credit Ratings Agency, and R&I Inc. By October 2007,
Standard & Poor’s had rated Peru BB+ (one step from the investment rating), while
Moody’s rates it Ba2 (two steps from investment g). Everything seems to indicate
that in a short time these two agencies will accord Peru the investment rating, because
as analysts say: “in practice Peru already has reached investment grade.”
4. Employment and social indicators
At the beginning, this essay stressed that the main challenge before
the Peruvian economy is ensuring that the fruits of solid economic growth,
examined in detail in the preceding, are perceived as positive by major segments
of the population living in poverty or extreme poverty. This is the meaning
of “social inclusion,” “equality,” and “social justice.”
18
According to Ministry of Labor and Employment Promotion’s ofcial
gures for May 2007, urban employment in enterprises with ten or more
workers were growing 8.5 percent a year, the highest rate of recent years.
Employment growth occurs not only in the city of Lima but also in the
country’s major regions.
Between January and May 2007 – as compared with the same period of last
year – employment grew 21 percent in Trujillo; 17 percent in Talara; 12 percent in
Sullana and Arequipa; 10 percent in Piura and Cusco; 9 percent in Lima; 7 percent
in Huancayo, Ica, Chiclayo, and Tarapoto; and 6 percent in Puno. This decentralized
growth has meant that in certain months, in cities such as Trujillo and Ica, a situation
of “full local employment” occurs, in accordance with the seasonal character of
the agricultural exports business. Employment growth thus takes place essentially
in sectors such as manufacturing, agroindustry, construction, and services.
Table 5 lists a series of social indicators for 2006. It shows that although
employment gures have begun to improve in urban zones, the key problem
is underemployment, which affects more than half the economically active
population. It was estimated that 51.6 percent of the population were living
in poverty in 2006. According to these gures, ve out of ten Peruvians are
poor and two are extremely poor.
18 The main objective of the plan of the APRA government headed by Alan García is development with social
justice in the context of an economic and social democracy that victor Raúl Haya de la Torre (APRA’s founder)
called “a democracy of bread and liberty.”
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Table 5
Peru: main social indicators (2006) (In percentages)
Indicators 2006
Employment *
Unemployment*
Underemployment*
Poverty**
Extreme poverty**
Illiteracy
Birth (per 1,000)
Mortality (per 1,000)
Infant Mortality (1,000)
Demographic growth
91%
8.5%
54%
51.6%
13´830,804
11.4%
21.80
6.05
29.90
1.4%
* Percentage of economically active population – May-June-July
** 2004 gures
Source: INEI, IMF,Cepal, Author’s compilation
The illiteracy rate still holds at 11.4 percent; the gross infant mortality
rate is still 29.9 percent, while the malnutrition indicators are substantial,
particularly in the child population of lower-income segments. Achievement
of the United Nations Millennium Development Objectives is a hard task
that will take a long time.
19
Chart 8 shows a pyramid illustrating the distribution of the economically
active population in Peru. Rural micro enterprises account for 27.7 percent;
urban micro enterprises account for 24.3 percent; and 13.2 percent of the
economically active population are unqualied independent urban workers.
These three segments make up 65.2 percent of the working age population.
19 The eight millennium goals are: eradicate extreme poverty and hunger; achieve universal primary education;
promote gender equality and empower women; reduce child mortality; improve maternal health; combat HIV/
AIDS, malaria, tuberculosis, and other diseases; ensure environmental sustainability; and develop a global
partnership for development.
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Gráco nº 8
Perú: Distribución de la PEA
Small enterprises account for 7.3 percent of the economically active
population; medium and large enterprises account for another 7.3 percent;
public sector workers make up 6.5 of the total; the unemployed, 5 percent;
unqualied, independent rural workers, 4.4 percent; women working at home,
3.3 percent; and qualied independent workers, only 1 percent of the total.
Employment policies and social programs under implementation seek to
frontally attack the problem focused by the pyramid, as can be seen in Chart 9.
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Gráco nº 9
Perú: Políticas Sociales y de Empleo 2006-2011
As to the unemployed at the pyramid’s base, the Government has
launched a temporary job program titled “Construyendo Perú” [Building
Peru] and a labor training program for young people. The different types of
social assistance come under the “Crecer” [To Grow] program. There is also a
conditioned transfer program titled “Juntos” [Together], which benets some
400,000 families living in extreme poverty.
A Worker’s Grant has been established for unqualied, independent
urban workers and women that work at home. Support for micro and small
enterprises is provided under a program titled “My Enterprise” and through
initiatives implemented by Prompyme,
20
whose objective is to promote
workshops, markets, and the construction of industrial parks. As to medium
and large enterprises and qualied independent workers, the Ministry of Labor
and Employment Promotion establishes the requisite normative framework
and oversees compliance with labor rules.
Another program that is greatly emphasized by the Government provides
support to nancial institutions that extend micro credit, such as Municipal
and Rural Banks and the Enterprises for the Development of Micro and Small
20 Commission for the Promotion of Micro and Small Enterprises.
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Enterprises-Edpymes.
21
This support is administered by Banco de la Nación,
which operates as a second-tier platform, under agreements, and has extended
about 40,000 new micro credits, mainly in poor rural areas.
One of the major reasons of social exclusion is the precariousness or
inexistence of basic infrastructure (roads, bridges, water, electric power, telephone,
ports, and airports). Studies done in the country or by international organizations
show that the poor are the ones most affected by the lack of infrastructure.
Gráco nº 10
Regiones: infraestructura y apertura
Chart 10 shows that a large percentage of the Peruvian population does
not have access to basic public services, particularly in the country’s interior,
and that a signicant portion of it has not beneted from the business
opportunities opened by agreements such as the one under the U.S. Andean
Trade Preference Act.
21 By late-August 2007, outlays directed at micro enterprises exceeded US$2 billion, which were used to extend
1,119,000 small loans, each averaging 5,600 new soles. Of these micro credits, 36 percent were granted by the
Municipal Banks, 23 percent by Edpymes, and 7 percent by the Rural Banks.
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President García’s Government is determined to foster growth and promote
investment, as well as reducing poverty and inequality, which still affect millions of
Peruvians. Table 6 lists the Government’s objectives to be reached by 2011.
Cuadro n° 6
President Alan García’s Government Plan: goals until 2011
Reduction of poverty from 50 percent to
30 percent.
800,000 property deeds granted.
Peru’s output of 140 billion. Eradication of illiteracy.
Reduction of malnutrition from 25 percent to
16 percent.
Higher quality education in reading and
mathematics.
250,000 housing units for 1.2 million
Peruvians.
Reduction of informal employment from 53
percent to 35 percent.
Potable water and electricity for 90 percent
of Peruvians.
Regions and municipalities will have 66
percent of resources needed for public works.
The main goals established include reduction of poverty from 50 percent
to 30 percent; reduction of child malnutrition from 25 percent to 16 percent;
construction of at least 250,000 housing units and granting of 800,000 property
deeds. The plan also calls for providing potable water and electricity for 90
percent of the Peruvian population, reducing informal employment to 35
percent, and eradicating illiteracy.
Achievement of these goals and targets will depend in large measure on
overcoming the shortcomings that now hinder public administration’s efciency.
As noted, one of the major limitations is the need of transforming the State, whose
norms, regulations, and procedures, as well as the mentality of its functionaries
prevent bureaucracy’s timing from coinciding with political timing. The population
requires a prompt answer to its demands. Thus, it is essential to agree on the need
to maintain macroeconomic stability and growth as State policies, so as to permit
the State to meet the population’s demands, while observing scal responsibility.
5. Growth, social inclusion, and governability
As mentioned, to be sustainable growth has to be accompanied by
social inclusion, which must be accomplished in a context of democratic
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governability. This is the tripod that must support the development strategy,
in which Peru is engaged, with solid macroeconomics and sustained growth,
despite major challenges related to social inclusion.
There is a further requirement: in economies such as Peru’s, economic
policies must take into account the “point of departure,” which may not be
the ideal but which determines the efcacy of the measures adopted. Table
7 schematically sums up our argument that there is a “previous competitive
phase” that is not usually taken into consideration but whose characteristics
ought to be understood and transformed into strength.
Cuadro nº 7
Modelo de explicación del “Punto de partida inicial” para el análisis
de la competitividad de en países en desarrollo*
The current situation is as follows: small and very small businesses with
low productivity, but which involve thousands and thousands of Peruvians.
How to include them? This task involves nancing, technical assistance, and
training. How to make less costly and complex the formalization of enterprises
is another problem that calls for administrative and taxation facilities. In
addition, banking regulations or the Basel norms have not been designed in
terms of micronancing, but it is the micro nancing institutions that are
making the greatest bancarization and social inclusion effort.
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The cultural diversity, geographical complexity and even the oral tradition
that characterize the majority of Peru’s population should be put to use so as to
ensure a more inclusive growth, in view of the ability and creativity Peruvians
show in addressing their most pressing needs.
Taking into account these characteristics of the “previous competitive
phase” does not mean that less emphasis should be placed on competitiveness
strategies based on increased productivity, innovation, and leadership, which
can be employed to advantage by enterprises of sufcient size and with a
modern organization. Economic policies should consider both phases and
not only the second phase, as is common. Only thus can we ensure that the
A and I economies of the model presented at the beginning of this essay may
approach the M and C economies, thereby triggering development with social
inclusion and democratic governability.
DEP
Translation: João Coelho
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Surinam:
macroeconomic
evolution
André E. Telting*
1. Introduction
S
urinam is the smallest of all the sovereign countries on the mainland of
the South American continent, both in terms of territory and population.
Surinam’s fertile land and tropical climate offer numerous possibilities
for agriculture; her freshwater rivers potentially provide for irrigation and
drainage and besides that are well suited for aquaculture projects.
Natural resources include bauxite, gold, oil, lumber, sh and shrimps.
Furthermore a vast, largely unexplored rainforest, of which a substantial part
has been set aside as a nature reserve. The main commodities for export include
alumina, gold, oil, timber, sh, shrimps, rice and bananas.
Surinam has experienced vehement political and economic instability in
the two decades following its independence in 1975. The poor condition of
the economy through the nineteen eighties and most of the nineteen nineties
arose from a combination of factors, amongst which most importantly: internal
political rule, international isolation, weakening of export commodity prices
* Governor of the Central Bank of the Republic of Surinam
atelting@cbvs.sr
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and on top of all inappropriate policy responses. Only two years, 1995 and
1996, signaled some recovery, but this was short-lived. Rapid deterioration
followed from 1997 until 2000, specically because of loose scal policy and
accommodating monetary policy. After this disastrous episode, Suriname
achieved signicant progress in the subsequent years, resulting ultimately in
sound macroeconomic stability and strengthening of the democracy.
This paper highlights the policy responses inspired by a concerted
approach to macroeconomic management beginning the last quarter of
2000. First, a brief overview of developments that lead Surinamese economy
to a dead-end by 2000. It continues with an explanation of measures taken
to address the ultra precarious nancial and economic situation; and how
the policy eventually brought about a turn around to the present stable
macroeconomic environment in Surinam.
2. Point of departure
The brutal elimination of 15 prominent citizens in 1982 by the then ruling
military regime prompted strong international condemnation and immediate
suspension of nancial assistance to the military government. The international
community, in particular the Netherlands, France and other European countries,
the United States of America, Venezuela, Brazil, instantly discontinued friendly
relations with Surinam, however without recalling their ambassadors. The resulting
fall in capital inows coincided with deteriorating export commodity prices. The
ruling military government was unable to address the suspension of nancial
assistance with adequate policy measures. The rst few civil administrations (1988-
1990) managed to re-establish friendly relations and reinstate nancial assistance
from abroad. However, they did not succeed in closing the structural gap of the
scal decits. Therefore, during eleven consecutive years (1983-1993), successive
governments resorted to nance high scal decits solely through monetization.
The outcome pictured a problematic macroeconomic scenery featuring:
• Complete exhaustion of the foreign exchange reserves;
• Parallel market in foreign currencies;
• Price distortions and rapid increasing exchange rate volatility;
• Deterioration of output of the economy, and
• Mounting ination.
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A rst attempt to address the economic difculties was made in the early
nineties with the adoption of a structural adjustment program in November
1992. This program was aimed at creation of a foundation for growth by:
• Addressing the scal problems;
• Reducing state intervention in the economy;
• Liberalizing the exchange rate regime, and
• Liberalizing external trade.
The adjustment measures initially spurred ination but eventually
brought stabilization to the economy in the mid nineteen nineties. By that time
new general elections were approaching, after which a new Administration
took ofce in September 1996. This administration reverted once again to
expansionary policies.
Four years of rapid deterioration of the economy followed from 1997
until 2000:
• Year end ination rocketed from minus 0.7% in 1996 to near 100%
in 1999;
• Fiscal balances worsened to a decit of some 12% of GDP in 2000;
• International reserves declined from US$ 177 million in 1996 to less
than a meager US$ 15 million in 2000;
• The money supply more than doubled in one year’s time, the year
2000;
• Government debt increased from 20% of GDP in 1996 to 80% of
GDP in 2000, and
• Apparent scarcity of imported goods for consumption and for
investments was evident.
3. Re-engineering of the economy
The overall economic climate gave rise to public discontent. Massive
demonstrations in 1999 against the government forced early elections in 2000.
The new administration that took ofce in August 2000 recognized the utterly bad
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André E. Telting
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shape of the economy. It called for urgent decisive action. Difcult matters rooting
from spiraling scal decits prompted the authorities to enact emergency legislation
through Parliament to get hold on crucial problems in the country’s nances:
Public nance:
• Discontinuation of the monetization of scal decits;
• Appropriate management of government expenditures, and
• Design and implement a strategy to increase government revenues.
Within one year, grip on these key problem areas opened the way to
readily withdraw the emergency legislation. Next was the necessity to address
the other urgent areas for special attention:
Debt management:
• Inventory of government debt and determination of the actual debt
level;
• Restructuring of domestic and external government debt, and
• Adoption of a new Government Debt Act in March 2002 that not only
sets a ceiling to domestic and foreign government debt but also assigns
the sole authority onto the Minister of Finance to sign debt agreements;
besides it establishes a separate Government Debt Ofce with the
assignment to manage and keep tally of the government debt.
Monetary management:
• Reconstruction of monetary reserve with the Central Bank, including
monetary gold and foreign exchange reserves;
• Imposition of reserve requirements on the banks in local as well as in
foreign currency;
• The launch of a new currency on January 1st 2004, and
• Amendment to the Central Bank Act that vests virtual independence
with the Central Bank.
Foreign exchange market:
• Removal of surrender requirements on exports proceeds, and
• Unication and stabilization of the exchange rate.
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4. Recent economic performance
Taking advantage of more favorable conditions in the international
commodity markets, measures on economic performance produced rapid
improvement. Based on our self-adoptive doctrine of “No funding, No
spending”, no new monetizing of scal decits was conceded. The government
nevertheless succeeded to narrow the scal gap between revenues and
expenditures and even to record surpluses in subsequent years. These positive
scal outturns now tend to assume a structural character. Supplementary
monetary measures aim at growth of the money supply, stabilization of the
exchange rate and lowering of ination and interest rates.
Sources: Ministry of Finance; General Bureau of Statistics and National Planning Ofce
* Preliminary gures
Over the years 2003-2006, the overall scal balance was in surplus
averaging 0.6% of GDP. Revenues exceeded expenditures in the rst half
of 2007, promising another good year with a slight scal surplus. For the
subsequent scal year expectations are that there will be some reallocation and
cuts of expenditures implemented since the 2008 budget indicates an overall
decit of 5.6% of GDP. Adherence to our doctrine of “No Funding, No
Spending” makes it unlikely that such a budgeted decit will turn out.
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Source: Ministry of Finance
* Preliminary gures
** Budgeted gure for 2007 vs rst half realizations
It is noteworthy that the exchange rate has remained fairly stable from
2004 until the present time. Since 2006 growth in the money supply originates
solely from net foreign assets inow.
Source: Central Bank and General Bureau of Statistics.
* March 2004 relative to March 2003
** Central Bank projection
The Central Bank subsequently lowered the local currency reserve
ratio to make expansion of competitive bank credit more conducive in local
currency. Implementing this prudently avoided bringing pressures to bear on
the foreign exchange market.
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Source: Central Bank
Surinam managed to contain demand pull ination, but its small wide
open economy is highly vulnerable to price shocks from abroad. Current high
world oil prices have a direct effect on the CPI. In the last quarter of 2005
the government adopted a new method to determine monthly pump prices
for fuel.
Source: Central Bank and General Bureau of Statistics.
* March 2004 relative to March 2003
** Central Bank projection
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Dollarization
Despite tendencies to settle certain transactions in hard currency, the
economy never reached the stage of full dollarization. Abolishment of
surrender requirements for export earnings in 2002 added another dimension
to growth in foreign exchange deposits of citizens with the local banks.
Resulting exposure of the banking system to foreign currency liquidity risks
prompted the Central Bank to take precautionary actions. The Central Bank
imposed reserve ratios on foreign exchange holdings, rst and foremost to
protect the banks in the event of a sudden run on them. The ratio was initially
set at 17.5%. It now stands at 33.3 % since 2005. These compulsory reserves
would be the rst to use in the event of a foreign currency run on a bank.
The Central Bank has strengthened its own capacity to bail out banks in such
a perilous circumstance.
The measure brought the dollarization ratio down from 58% in 2004
to 54% in 2007. We are condent that continuance of the macroeconomic
stability and strengthened condence in the Surinamese dollar will little by
little slow down dollarization.
Falling ination cleared the way for interest rates to decline. Lower
interest rates will stimulate growth, bank credit and investments.
Source: Central Bank
* Weighted average
Surinam: macroeconomic evolution
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Production
The economy grew at an average rate of almost 6% from 2003 to 2007.
The mining sector constituted the main driving force.
Sources: General Bureau of Statistics and National Planning Ofce
The bauxite sector continued its leading position in exports. In 2006,
exports of alumina increased by 45%. The bauxite companies are currently
engaged in negotiations with the government to acquire concessions for bauxite
mining in the west of the country. Proven bauxite deposits there amounting
to some 325 million tons are highly promising for continuity of the industry
for decades to come.
The State Oil Company recorded high prots in 2006, including a windfall
portion from rising world oil prices that came to her advantage. The company
plans for new investments in crude production and renery operations in 2008.
She signed exploration and production sharing agreements with foreign oil
companies on the sea areas within the continental shelf of Surinam. Exploration
data so far are promising. The now settled maritime dispute with neighboring
Guyana has determined the sea boundary between the two countries. Until
this settlement, the State Oil Company intentionally ommitted activities in that
area and left it aside to prevent aggravating the dispute. Exploration activity
by the State Oil Company and her foreign partners for oil and natural gas is
now imminent in that sea area as far as appropriated to Surinam.
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The gold sector continues to benet from favorable prices. The Canadian
Iamgold Company acquired the Rosebel gold mine in November 2006 after its
merger with Cambior, another Canadian Company. The Rosebel mine located
in the interior centre of the country produced around 301,000 ounces of gold
in 2006. Explorations by the Denver-based Newmont gold mining company
may also yield positive results for large scale gold mining in the east of the
country. Preliminary exploration ndings are encouraging. Small-scale mining,
amply practiced by one-man Surinamese miners and Brazilian garimpeiros,
signicantly contributes to the country’s gold exports.
Other sectors of the economy, mainly agriculture (rice, vegetables, bananas)
are also deriving impetus from the combined effect of macroeconomic stability
and rising world market prices. The rice sector is refurbishing itself. The
banana sector is expected to contribute more to exports due to the anticipated
production expansion of 35% in 2007.
Tourism is a nascent industry in Surinam. Based on its growth rate it tends
to claim its share in overall economic activity. Presently there are three new
hotels under construction in Paramaribo, one of which is wholly Surinamese
owned, another is wholly foreign owned and the third is a joint venture of
Surinamese with foreign participation.
Other ongoing activities include investments in:
Telecommunication:
• liberalization of the mobile telecom market.
Infrastructure:
• road construction and rehabilitation;
• improvement and expansion of harbor pier facilities, and
• modernization of the air trafc control system.
The health sector:
• primary health care centers in the hinterland, and
• radio therapeutic center for the Academic Hospital in Paramaribo.
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Education:
• re-opening of primary schools in the southern districts where they
had been closed since the time that the guerilla was waged during the
second part of the nineteen eighties;
• introduction of a special chair in money and credit system at the
university in Paramaribo, and
• expanding accommodation for increased numbers of students for
technical and vocational training on a secondary level.
Housing:
• special 7%-mortgage facility with local banks for middle-income groups,
launched by the Central Bank, and
• inter American Development Bank funded Low Income Shelter
Program for low-income groups.
External sector
Solid performance of export commodities as well as favorable world
market prices contributed to the swing of the balance of payments current
account from decit to a growing surplus in 2006 and so far in 2007.
Source: Central Bank
* Preliminary gures
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The balance of payments surplus more than doubled the ofcial
monetary reserves during 2006 till mid 2007. This cleared the way for
recovery of creditworthiness as it made comprehensive repayments possible
on foreign debt.
Source: Central Bank
In addition, increased international reserves positively affected the
currency and import coverage ratios. The ratio of Central Bank reserves to its
current liabilities, set by law at 50%, is now over twice that percentage (100%),
depicting a solid foundation for the currency. At the same time the import
cover ratio is well over 3 months of imports.
Source: Central Bank
Note: Import cover ratio is based on imports of goods and services
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Government debt
Government debt ratios have improved signicantly and are approaching
single digits.
Source: BSS * Preliminary gures
Since 2001, government debt has been successfully kept within the
criterion of the European Union. Currently, the debt levels are far beneath
the 60%-ceiling (Maastricht criterion).
Source: BSS
* Preliminary gures
Total government debt (% of GDP)
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The government aims at maintaining a comprehensive debt strategy in
order to duly service domestic and foreign debt. It is envisaged that ongoing
debt repayments will provide a solid record of accomplishment for regaining
sovereign reliability, creditworthiness and condence in the world as a whole.
5. Growth prospects
The President of the Republic, in his address to Parliament at the
opening of the new scal year on the rst of October 2007, announced the
government’s continued commitment to pursue prudent scal policies. The
business community received this statement with satisfaction. Apparently, local
and foreign entrepreneurs will continue to express condence in the economy
and in its growth potential through their ongoing investments.
The near term prospects are considered favorable, given private
sector investments in most every sector of the economy and especially in
new projects.
Ongoing are in the already booming mining industry:
• Negotiations for mining bauxite in the Bakhuys area in the west of
the country;
• Signicant investments intended by Repsol YPF in offshore oil explo-
ration, including drilling;
• Gold explorations by Newmont in the Nassau area in the east of the
country are yielding promising results, and
• Expansion of production and renery capacity of State Oil Company.
Private sector initiatives embrace the emergent tourism industry with
facilities for eco-tourists:
• The construction of a new four stars resort in the Berg en Dal area,
located in the centre interior of Surinam, partially nanced through
the Inter-American Development Bank, and
• The Kabalebo Resort in the interior west of the country.
DEP
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The Uruguayan
economy: an
entrepreneurial
standpoint
Jorge Abuchalja*
1. Introduction
B
efore addressing this topic from an entrepreneurial standpoint, we must rst
look at the economy’s different behavior patterns in the international and regional
context and then at our country’s specic situation and medium-term outlook.
2. International outlook and the region
a. The international scenario
As regards the outlook for the short term (one year and a half), it is expected
that the favorable conditions now prevailing in the international context will persist.
IMF projections indicate that the world product will grow by 4.9 percent both
* President of the Marketing Leaders Association (ADM), Oriental Republic of Uruguay.
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207
this year and in 2008. The world economy would thus record one of the longest
periods of growth at rates higher than the average of the last thirty years.
Despite the deceleration foreseen in the United States this year, prospects
remain favorable for the various economic zones. It is estimated that the U.S.
economy will expand by 2.1 percent this year and by 2.6 percent next year, while
the euro area is expected to grow 2.5 percent in 2007 and 2.2 percent in 2008.
Under this scenario, it is possible to anticipate that emerging economies
will experience great dynamism. According to IMF projections, they should
expand at 7.5 percent in 2007 and at 7.1 percent in 2008. This outlook is
closely associated with a good performance by the Chinese economy in the
next one year and a half; it should be recalled that the Asian giant’s economy
has grown around 11 percent this year.
In respect of nancial markets, the main scenario on which projections
are based points to the stability of short-term interest rates, in line with the
expected maintenance of the U.S. reference interest rates. The U.S. currency
is expected to continue weakening for the balance of 2007 and in the rst few
months of 2008, after which it should recover slightly.
Despite the favorable prospects just described, the existence of major
risks cannot be ignored, posed by factors susceptible of causing a poorer
performance of the world economy in the coming years. Some of the major
factors include the recessive effect a drastic readjustment in the U.S. real estate
market could entail, as well as inationary pressures in the main developed
economies, which could lead to the adoption and tightening up of restrictive
monetary policies. To this should be added the effect of high oil prices and
the volatility of the oil market. The conicting scenarios between countries
and inside some of them add to the degree of uncertainty.
b. The situation in neighboring countries
Under this currently auspicious scenario, the region’s economies should
perform well in the next one year and a half.
In Argentina’s case, favorable rates of economic growth are expected,
as well as new export records, while the Central Bank should maintain the
exchange rate at its current levels and the government should score relative
success in controlling ination (which should not exceed 15 percent).
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As regards the just described Argentine scenario, two factors could
adversely affect these projections: the expectations of the different economic
players as a result of the presidential elections in October 2007 and the
aggravation of the energy crisis.
Of these two factors, the energy issue seems to pose a more serious risk,
although the government has insisted on downplaying its importance. But
there is no doubt that if the problems persist for a few months, the growth
of the production of goods and services would naturally decelerate. Should
fuels become scarce and restrictions be imposed on the use of electric power,
industry could be the most affected sector, slowing down the growth pace,
which in turn would cause GDP growth also to decelerate, bringing down the
6.5-percent rate forecast for 2007 to 4 percent in 2008.
The Brazilian economy should experience considerable expansion in 2007
and 2008. A look at its performance suggests that internal demand is the engine
that drives the economic activity’s growth in the short run. Under this scenario,
GDP is expected to grow at 4 percent a year in the current biennial.
To maintain this growth pace, the economy must meet two major
challenges: investment and maintenance of macroeconomic equilibriums. As
to ination, it seems to be under control at around 4 percent.
3. Analysis of the Uruguayan economy and its prospects
for 2007-2008
a. Economic growth
Under very favorable international and regional circumstances, economic
activity grew 7 percent in 2006.
In respect of 2007, macroeconomic indicators suggest that the Uruguayan
economy is on the path of steady growth. This can be explained basically by
sustained external demand and more dynamic domestic spending.
b. Monetary policy’s dilemma
At end-2006, ination was below the 6.5-percent target set by the Central
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Bank of Uruguay (BCU). In the rst half of 2007, retail ination rose sharply,
reaching 8.3 percent in May.
Although the increase in some prices that are very volatile – such as
fruit and vegetables prices – has had a signicant inationary impact in recent
months, the levels of underlying ination have remained high since the early
2006. This sends an alert signal to the authorities in respect of the achievement
of the ination target for 2007. Underlying ination – which excludes the
behavior of items with more volatile prices – has consistently remained above
6 percent a year since February 2006.
If items such as fruit, vegetables, meat, and fuels are excluded,
underlying ination permits a more precise assessment of the behavior of
what is known as the inationary core, probably the best indicator for use
in monetary policy decisions.
At its last meeting, the Macroeconomic Coordination Committee, which
is made up of Central Bank and Ministry of Finance and Economy authorities,
recognized the existence of pressures that may drive ination above the last
objectively established range (4-6 percent) for June 2008 onward.
In a communiqué issued in late-March 2007, the Committee asserts that
the current inationary process is caused by a series of factors, including supply
shocks (fruit, for instance), economic growth, imported ination, and salary
increases. As regards the latter, the interaction between nominal salaries and
prices has been historically decisive in triggering ination in Uruguay.
The relation between the salary policy and the ination targets faces the
current Administration with one of its main dilemmas, as the salary recovery
objective conicts with the objective of driving down ination below the
current 5-6 percent.
Confronted with this higher-ination scenario, BCU announced a
monetary policy adjustment to be implemented through contractive measures.
But, given the delay with which the effects of monetary policy are felt, they
could impact only partially on this year’s ination.
There is no reason, though, to think that BCU will flag in its
commitment to the ination objective. On the contrary, the monetary
authority will probably continue to apply measures such as raising interest
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rates, and to strengthen its efforts to bring the domestic agents’ expectations
into line with the objective of bringing ination down to the target set by
the Macroeconomic Coordination Committee.
A more stringent monetary restriction could thus occur in the coming
months. To ensure that this would bring down ination, the monetary authority
should also allow a reduction in the exchange rate, which should be consistent
with the dollar’s decline on the international markets (although this measure
would not signicantly affect the competitiveness of national production or
lead to its recovery or real increase).
c. Fiscal policy
In the rst half of 2007, the public accounts behaved in general as
envisaged under the government’s nancial plan. The weather permitted a
signicant decrease in the cost of power generation, which in turn led to
signicantly better results by UTE, the state power enterprise.
Tax revenue continued to grow at a brisk pace, thereby offsetting
a moderate increase in the consolidated primary spending of the central
government and the Social Security Bank (BPS), which in turn ensured a
public sector primary result of 4.4 percent of GDP in the twelve-month
period ending in May.
The favorable economic conditions of recent years have allowed the
government to increase outlays for priority areas (social area, infrastructure,
and education). The government’s objective of increasing expenditures as tax
revenues rise is thus being achieved. Nevertheless, there are some questions
and uncertainties in respect of the objective of achieving scal equilibrium
(zero decit) by the end of the current administration. The improved scal
results were due in part from the expected economic growth and to higher
collections owing to less tax evasion. It should be noted, though, that the
considerable growth in tax collections owing to improvements in the internal
revenue service (DGI) may face limitations in the medium term.
On the other hand, the growth of spending has accelerated, especially
this past year, while the growth of its nancing sources (economic growth,
reduction in tax evasions, state bank earnings) faces restrictions in the coming
years. This poses another dilemma for the government, between implementing
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policies aimed at reducing “scal vulnerability” and meeting the needs in the
areas dened as priority.
4. Uruguay’s outlook
In the light of the aforementioned favorable external scenario and
considerations about economic policy, it is possible to identify the prospects
for the country.
GDP is expected to grow 5.2 percent in 2008, owing to the sustained
dynamism of investment and exports, a strong growth of private consumption, and
greater economic activity induced by the Botnia pulp plant’s entry into operation.
As regards ination, it should be noted that owing to the government’s
policy for lowering tariffs and assumption of the attending scal cost, and to
the reduction of the nominal exchange rate, ination in dollar terms may be
projected to reach 8 percent in 2007 and 8.7 percent in 2008. The resulting
reduction in the real exchange rate would be consistent with the weakening
of the dollar on the international market, which should not cause a signicant
loss of Uruguay’s competitiveness in relation to other countries.
a. Indispensable participation in the world economy
It should be born in mind that demand has historically driven Uruguay’s
economy and its participation in the international market. The entrepreneurial
sector as a whole has not made a strong effort to win international markets.
On the contrary, its endeavors have been directed preferentially at the domestic
market. As this market is small and circumscribed, participation in the
international market should be pursued as indispensable to growth and ways
should be sought to reduce the vulnerability of relations with the world.
This implies that Uruguayan entrepreneurs must unquestionably improve
their competitiveness in the economy by consistently adjusting quality to the
requirements of international demand, so as to establish their place on the
external markets and raise a barrier against the entry of goods and services
in competition with national production.
Uruguay is determined to pursue – basically through measures
implemented by the various Administrations – of new markets for a wider
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placement of its products. This effort includes also the diversication of the
supply of national products.
This can be achieved only through the adoption of specic initiatives,
participation in trade missions, introduction of our products at fairs, and
ongoing contacts at the entrepreneurial level.
This issue deserves being looked at in further detail, as it has utmost
relevance for our country’s sustained development.
It should be recalled that the Uruguayan economy’s macroeconomic
performance in the nineties could be considered satisfactory, despite the brief
1995 recession, occasioned in part by the “Tequila effect.”
The real and per-capita GDP growth rates were relatively high and
sustained until 1998, when the country entered a recession period characterized
by a marked contraction of the real economy. In 2002, this process culminated
in the worst economic crisis Uruguay had to face since the 1930s.
The 2002 crisis affected essentially the nancial system, the exchange rate,
and the country’s scal solvency. This could be explained by the conuence
of a series of negative external factors, including (a) the devaluation of the
Brazilian currency in January 1999 and the tangible pressure this had on the
bilateral exchange rates within Mercosur; (b) the Argentine crisis that broke
out in December 2001, which had a strong impact on our country, given
the Argentina’s importance for aggregate demand and relative prices, and
which was magnied by the presence of problem-ridden Argentine banks
in the Uruguayan nancial market; (c) the deterioration in the international
terms of trade and the effect of a foot-and-mouth disease outbreak on meat
exports; and (d) lack of a vision for the future, combined with the inertia of
entrepreneurial players, lulled into complacence by the bonanza derived from
Mercosur and the pallid relations with the subregion.
In 2003, the Uruguayan economy began to recover and since 2004
indicators have been highly positive.
However, a noticeable improvement in the population’s welfare requires
accelerated, sustained economic growth, based on the conditions prevailing
in the last four years.
The crisis revealed that incorporation into the world economy was a
must, given the limitations of the domestic market. The efforts made in this
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direction have permitted the country to achieve scale of production and
economic efciency that would have been impossible otherwise.
Regrettably, it took a serious crisis to internalize this lesson. Entrepreneurs
learned to go out in the world to discover new possibilities and take advantage
of them; enterprises learned to respect credit and austerity; the understanding
sank in that stocks should be maintained only at the requisite levels and that
all nonstrategic and noncritical activities and processes could be outsourced.
b. Attracting investment
Attracting investment is of utmost importance for our country, as its
positive effects go farther than the original investment, owing to its multiplying
effect in the creation of new jobs, demands, and input requirements, and in
other interrelations between the economy and society. This is why investment
is a key factor of sustained growth over time.
Our country enjoys a favorable business environment, macroeconomic
stability, and a privileged geographical situation, as well as political, institutional,
and social stability; in addition, it accords national and foreign capital equal
promotional treatment.
Uruguay applies no capital or exchange controls. Here it is possible to
celebrate and to demand the fulllment of contracts in any foreign currency.
There are no restrictions on the purchase or sale of property. There is no
discrimination between national and foreign investment, and the latter can
count on great many incentives.
This notwithstanding, investment – both national and foreign – is modest
in comparison with other countries of the region. In recent years, investment
has been channeled preferentially to the exporting sectors (forestry, food
processing, packing houses) and to services (principally software, tourism,
and banking). Lately, there has been signicant investment in infrastructure,
driven mainly by the installation in our country of a pulp plant by Botnia, a
Finnish corporation.
Uruguay offers many real advantages and tax incentives to foreign
investors interested in the production of goods and services for export. The
recent tax reform approved by Parliament contemplates various incentives to
investment, including the following:
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• Reduction of the income tax from 30 percent to 25 percent;
• Improved reinvestment benet: up to 40 percent of net taxable income;
• Extension of the deadline for tax losses, from three to ve scal years;
• Tax exoneration of income from research and development:
biotechnology, bioinformatics, and software directed abroad;
• Reduction of nancing costs for enterprises;
• Change in the contribution of public enterprises for improved
competitiveness through lower tariffs, and
• Eligibility under promotion regimes.
In addition, the Free Zone regime is a strong incentive for the country
to become a preferred market place, where transnational enterprises may
engage in service activities by setting up Shared Services Centers for the entire
region (similarly to what occurs in Costa Rica and Ireland). This system is fast
expanding and will certainly have the expected impact, as both government
and entrepreneurs are intent on publicizing its many attendant benets.
Lastly, investment must signicantly increase, so as to improve the debt/
capital ratio (still high in Uruguay), and be channeled to sectors capable of
creating jobs and generating exports, of engaging in technology transfer, and
of promoting the training of the labor force.
The changes being introduced in the legislation to eliminate discretionary
resource allocation, enhance transparence, and improve efciency, as well as
the restoration of social cohesion under the commitments undertaken by the
Government should signicantly contribute to the country’s stability, security,
and sustainable development.
c. Need to multiply business contacts
As benets under the current Mercosur are not yet those expected,
Uruguay is returning to its original objectives.
This implies the need to go on operating under bilateral treaties
(Uruguay-Mexico, for instance) and trade missions such as those the
President’s Ofce is carrying out in association with entrepreneurs. These
initiatives aim at establishing a multiplicity of contacts that can ultimately
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permit the identication of needs and thus the opening up and consolidation
of new markets.
Of course, the efforts to celebrate bilateral treaties do not mean refusal
to work toward regional productive integration according to Mercosur
postulates aimed at making its enterprises and societies more competitive,
taking advantage of the best they have, and moving forward together in an
increasingly globalized, constantly changing world, which demands an ongoing
development of innovation and knowledge.
Mercosur’s geographical situation and its existing political and juridical
agreements warrant seeing it as a powerful platform for launching the necessary
foundation and preparation to maximize Uruguay’s access to world markets.
Although this seems to be the alternative that should be contemplated by the
countries of the subregion, various aspects have come to the fore, often as a
result of the partners’ asymmetry, which have prevented the achievement of
the aforementioned objective. This has led our country to assess different ways
to achieve incorporation into the world economy. Multipolar schemes are thus
proposed, which, although they assign priority to Mercosur, encourage the
country to go on seeking integration with the rest of the world – particularly
in a multilateral context and under major multilateral agreements – in pursuit
of markets for its domestic production. One illustration of this would be the
Free Trade Agreement celebrated with Mexico.
Conclusion
Uruguay is carrying out a series of changes in all sectors, just as are
many other Latin American countries. These changes, which are part of the
Government’s Plan and are approved by Parliament, are not the only ones
that are needed or that are under way in the country.
The reforms called for at the government level are often of a structural
nature. Health reform and State reform, among others, are being done without
incurring into populism, on the basis of sound criteria, and, in respect of
fundamental matters, and focusing Uruguay’s integration into the rest of the
world for the welfare of its people.
Since the 2002 crisis, high-voltage changes are being introduced in the
entrepreneurial sector also.
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Given the premise that the development of a country’s economy
unquestionably requires entrepreneurial action in complementation of government
action, it is necessary to keep up and intensify this sector’s development.
To this end, high-quality training is essential at all levels, as is participation
with the government in trade missions, and the unceasing identication of
investment needs and business opportunities in the various countries, through
the work of Chambers of Commerce and Professional Associations.
The development of new categories of export goods and services
(including intangible and tertiary goods) will permit the country to take
advantage of the vast opportunities offered by the international market.
Uruguay has made incursions in the areas of technology, software, nancial
services, consultancy, steelwork, cultural services, cinematography, advertising,
and tourism as incremental GDP factors.
Uruguay is experiencing a good economic moment and the outlook for
the medium term, assuming that international conditions and domestic efforts
persist, are auspicious.
Recognition of and incentive for the entrepreneurial activity are
contributing factors of a perfect synergy between State reform and
entrepreneurial activity, as well as determining factors for taking advantage
of the opportunities open by the international scenario.
The preparation of new entrepreneurs from the bottom up, as made
possible by initiatives such as Desafío Sebrae (a program aimed at Uruguayan
college students) is an example of the efforts made by the country for achieving
its own development.
DEP
Sources: 2007 Delloite y Pricewaterhouse situation reports.
2005 Business Climate Initiative Report.
Translation: João Coelho.
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The present
growth period of the
Venezuelan economy
Nelson Merentes*
T
his article is based on data from the Central Bank of Venezuela,
Venezuela’s National Statistics Institute, and the United Nations Development
Program and on my own end-of-the year estimates.
Main macroeconomic variables
It should be recalled that between the sixties and the late seventies,
Venezuela grew at an annual average of 5 percent. In the eighties, the
county entered a cycle of alternating growth and decline, which was partly
responsible for gradual social sacrice, as the liberal policies implemented by
the governments in power deteriorated. The nadir of this social deterioration
was marked by the so-called carachazo
1
in 1989 and the military rebellions
in 1992, at which time a new political force emerged, led by Chávez, the
current president. Its political project proposed was based on a “three-root
1 N.T. Civilian revolt that ended with more than 1,000 deaths by police forces.
* Ex-Minister of Finance of the Bolivarian Republic of Venezuela
nmer@euler.ciens.ucv.ve
The present growth period of the Venezuelan economy
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tree,” the roots being the thinking of Simón Bolívar, Ezequiel Zamora, and
Samuel Robinson. This project’s strategic lineaments are reected in the 1999
Constitution approved by the Constituent Assembly and then by the majority
of the Venezuelan population in a referendum in the same year.
Since 2007, Venezuela has grown at an average rate of over 8 percent.
This growth period has lasted longer than in the eighties, the sixties, and the
seventies, as shown in the chart below.
Source: Central Bank of Venezuela
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In 2007 a cycle of seventeen successive quarters of GDP growth will be
completed, something that had not happened since the seventies. Quarterly
GDP growth has exceeded 8 percent, as shown in the following chart:
Source: Central Bank of Venezuela
The strongest growth occurred in the oil sector, and exceeded 10 percent.
Source: Central Bank of Venezuela
The present growth period of the Venezuelan economy
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The private sector has started on the growth path again, at over 11 per-
cent per quarter in the same period.
Central Bank of Venezuela
Nominal GDP at end-2007 will probably be twice that of 1998, totaling
US$91.2 billion. It should be noted that although the chart below shows
nominal GDP growth in periods of ve years (the duration of a president’s
term in ofce), President Hugo Chávez’s Administration is in its eight year.
Source: Central Bank of Venezuela
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Per capita GDP has risen by about 142 percent these last four years, from
US$3,258 in 2003 to US$7,997 in 2007, far above the eighties’ record.
Source: Central Bank of Venezuela
The following economic activities have experienced sustained growth:
Source: Central Bank of Venezuela
Venezuela has suffered from an inationary “arrhythmia” since the
eighties: ination was the lowest in 1985, at 9 percent and the highest in 1997, at
103 percent. In 1999-2007, average ination was 18.7 percent. Which factors are
responsible for such sharp uctuations in the consumer price index (CPI)?
The present growth period of the Venezuelan economy
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Many factors drive up prices in Venezuela, particularly expectations and
political risk (as evidenced in what happened in 2002-2003). This suggests the
need of exploring and designing an econometric model to serve as a better
instrument for formulating ination control policies. At the moment, Venezuela
lacks such a model for a proper denition of anti-ination policies.
Source: Central Bank of Venezuela
The current one-digit rate of unemployment is the lowest in twenty years (9
percent). Lower ination has been accompanied by a real salary appreciation.
Source: Central Bank of Venezuela
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Before President Chávez took ofce, urban workers earned twice as much
as rural workers, and employers of janitors and domestic servants were not
under the obligation to pay a minimum salary, as was the case of enterprises
in relation to young trainees. Today, all of these categories are entitled to a
minimum salary.
Firms that employed up to twenty workers did not have to pay a minimum
salary either. This led many entrepreneurs to set up several small enterprises
or to transfer their business to the rural sector; large numbers of workers were
thus exploited. The Venezuelans’ purchasing power has improved, particularly
in the lower-income segments (D and E classes), thereby reversing the situation
prevalent in the nineties, when salary increases did not keep up with ination.
In 1996, when ination exceeded 100 percent, the minimum salary fell to
US$36, one of the lowest in the world. In 2007, it went up to US$286. Ministry
of Labor gures show that with the minimum salary and the food grants, public
servants (at ministries and autonomous institutes) earn the equivalent or near
the equivalent to the basic basket, which includes food and services.
Source: Central Bank of Venezuela, Ministry of Labor
Main scal variables
Despite efforts to diversify its economy, the country still depends heavily
on the oil and oil byproducts market and on this sector’s economic cycles.
Nevertheless, scal revenue has increased, in both nominal and real terms. Oil
The present growth period of the Venezuelan economy
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revenues have doubled, from 6.75 percent of GDP in 1999 to 13.6 percent
in 2007. This was helped by a combination of the behavior of prices and a
drastic oil scal reform in 2005 and 2006.
Source: National Budget Ofce
The chart above shows that oil revenues rose from 9 percent of GDP
in 1999 to 16.6 in 2007 (in only eight years). This resulted mainly from a zero-
evasion and zero-contraband plan, the training of human resources, and the
modernization of customs and of the tax system.
In 2005, the Republic’s nancial ows changed under the Central Bank of
Venezuela Law. This allowed the establishment of the National Development
Fund-Fonden, which has received about US430 billion in the last two years,
US$13 billion of which, or 43.3 percent came from the oil industry. In addition,
the oil industry commits US$6 billion a year to social programs under the
strategic Siembra Petrolera [oil sowing] plan.
Fonden’s nancing comes from Petróleos de Venezuela-Pdvsa and
the Central Bank of Venezuela, which calculates the amount or scale of the
country’s adequate (optimum) reserves.
The methodology for calculating optimum reserves has been studied
by many authors. Trifn (1948) thinks in terms of month of imports. Other
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authors, including Wijnholds and Kapteyn, Heller (1996), García and Soto
(2004), Frenkel and Jovanovic (1981) have dealt with this issue from different
angles. In Venezuela, a multi-criteria method (Rojas 2005) has been used to
arrive at a single estimate of the adequate international reserves level.
Source: National Budget Ofce and the author’s calculations
Although in recent years oil revenues have attained their maximum
nominal value, it should be recalled that in real terms this growth is lower than
in the eighties, as can be seen from the chart above.
Higher oil and non-oil revenues and new nancial ows have permitted
better income distribution that accounts for an increase from 8.8 percent of
GDP in the social sector in 1998 to 18.6 percent in 2006, which represents a
9.8 percentage-point GDP increase. Forty-ve percent of the 2006 budget is
earmarked for the social sectors. The productive sector increased from 10.1 percent
of GDP in 1998 to 24.9 percent in 2006, a 14.8 percentage-point increase.
The present growth period of the Venezuelan economy
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Source: Author’s estimates
Venezuela’s current international reserves surpass US$30 billion, a level
that exceeds that of the country’s foreign debt (approximately US$26 billion).
In addition, the establishment of the National Development Fund-FONDEM
guarantees nancial ows to more than 110 productive projects in various
areas, including the social, productive, energy, communications, and science
and technology sectors.
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Source: Central Bank of Venezuela an author’s estimate
Venezuela has decelerated its borrowing pace; indebtedness declined
from 76.6 percent of GDP in 1988 to 23.2 percent in 2006. The major
reduction occurred in 2006, when approximately US$5.5 billion were paid, so
that at the end of the year the debt stood at 14.6 percent of GDP.
The internal debt stands now at 8.6 percent of GDP as a result of the
rescheduling from four to fteen years, at a lower interest and with the change
of variable- to xed-rate coupons.
Source: Central Bank of Venezuela and author’s estimates
The present growth period of the Venezuelan economy
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The liberalization of budgetary cash ows previously earmarked for
debt servicing, allowed a reduction from 74 percent in 1995 to 19 percent
in 2006, thereby freeing up resources for social and productive investment.
Basic socioeconomic recovery initiatives consist of a national strategic plan
and the so-called missions.
Source: National Budget Ofce
The social missions are a strategic instrument to address the most
extreme cases of inequality, discrimination, and poverty, which give rise to food
insufciency, lack of sanitation, illiteracy, unemployment, and the nonexistence
of citizen participation mechanisms, all of which had made the country into
a giant producer of social exclusion until 1998.
In 1998, according to Ministry of Health gures, there were 1,628
doctors providing basic health care to a population of 23.4 million. In 2006,
there were 19,571 doctors attending 27 million people.
In 1998 there were 417 emergency facilities, 74 rehabilitation centers, and
1,628 primary care centers. At end-2006, there were 8,621 basic care centers,
including 6,500 consultation points in poor neighborhoods.
Between 2004 and 2006, more than 400,000 people had had eye surgery and
recovered their vision. Before then, such people simply received no attention.
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The National Government’s development strategy attaches the highest
priority to social inclusion and to providing real opportunities for the
marginalized majority of the population, so as to incorporate it into the nation’s
productive activity.
The social inclusion policy assumes that the true mechanism for
overcoming poverty is qualication, jobs creation, defense of the real salary,
and social income generation through accessible public services to improve
the quality of life of the poorest segments of the population.
Social Missions
Source: Bolivarian Missions portal on the Web.
The purpose of the social missions is productive training, health care,
provision of basic services and in general the creation of the initial conditions
for entire population’s incorporation into a socially productive function.
As to the food situation, Food Ministry gures show that in 2006 there
were 15,726 establishments in the country selling food at subsidized prices,
which meant a difference of 27 percent and 39 percent from market prices in
The present growth period of the Venezuelan economy
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2005 and in 2006, respectively. Programs directed at people living in extreme
poverty have been expanded (such as the Food Houses and the program for
the provision of foodstuffs free of charge, known as Food Supplementation
Program), which beneted 67 percent and 43 percent of the population in
2005 and in 2006, respectively. These data do not include 1,8 million children
at school age that beneted from the school food program in 2006, in contrast
to 252 thousand children in 1999.
In the area of education, the number of students in Bolivarian primary
schools rose from 271,593 in the 1999/2000 academic year to 1,098,489 in
2005/2006. More than 1.3 million people have attended adult literacy programs
under Robinson Mission I; more than 1.5 million people have entered the
formal basic education system under Robinson Mission II; and 250,000 people
graduated from secondary school in 2006, while another 500,000 were nearing
graduation. Under the Sucre Mission, over one million students attended higher
education institutions in 2006.
In 1993, there were 5.2 million students enrolled; in 1998, there were 5.5
million, a 6-percent increase. In 2006, enrollment had risen to 9.3 million; 1.5 million
alphabetized people accounted for this 90-percent increase. Since 1992, an average
of 1.7 million people has been reincorporated into the educational system.
The historical schooling gross rate has signicantly risen. In 1993, 56
out of 100 people aged 3-24 were attending school; in 2006, the ratio was 80
out of 100.
As to the Science Mission, 435 productive innovation networks were
established in 2006 and an additional 65 are planned for 2007; these networks
provide support to 57,258 associated producers. In 2006, post-graduation
scholarships were granted to 1,022 candidates that joined the 4,986 national
recipients, 102 of whom belonged to the indigenous people. Moreover, 1,356
teachers from 347 high schools attended refresher courses. In addition, free
internet access has been extended to 9,500 monthly users at the 545 infocenters,
infomobiles or mega infocenters available to the public.
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Source: UNDP
The Venezuelan State will continue to implement its progressive social
policy even more intensively as of 2007. Forty-ve percent of the BOB 115.2
billion of the 2007 budget will be channeled exclusively to the social areas, an
unprecedented gure in the country’s socioeconomic history.
Despite the short period of its implementation, this policy’s effect can
be seen in the human development index, which has risen from 0.7370 in 1999
to 0.8144 in 2005, according to the UNDP’s methodology.
Source: National Statistics Institute, Datanálisis
A Datanálisis study updated to March 2007 shows that class E income
rose 61 percent in real terms, and according to the National Statistics Institute,
The present growth period of the Venezuelan economy
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the number of families living in extreme poverty dropped from 25 percent in
2003 to 9.1 percent in 2006.
However, we are conscious that the population faces many problems
and needs and that to move faster toward meeting the needs of our peoples
we must nd efcient mechanisms for South American integration, including
nancial integration, which will lead to a common currency.
This is why Venezuela, in conjunction with sister countries, has taken
the rst measures for fostering the development of regional capital markets.
This particular policy, exemplied by the purchase of Argentine bonds and
the issue of Bonos del Sur [Southern Bonds], has led to a US$5.5-billion
operation. This experience allowed Argentina to obtain the nancing needed
for its economy and Venezuela to specialize in the emerging bond secondary
market, thereby earning US$400 million.
History has shown that it is impossible for poor countries to consolidate their
development under prevailing international conditions. Thus, there is a pressing
need to set up a nancial development institution aimed at regional integration,
with the provision of funds for development projects among South American
countries. To date, Brazil, Argentina, Bolivia, Ecuador, Paraguay, Uruguay and
Venezuela have agreed to participate in this endeavor, while other countries,
including Colombia, are studying the possibility of joining this initiative.
The newly-established Banco del Sur is not a usual nancial institution
given to onerous loan practices; it forms part of a new strategy to give impetus
to Latin America’s development. Implementation of the new nancial integration
proposal could be gradual, in the Telesur fashion, with the participation of two
or three countries that would be joined by others in the course of time.
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Source: National Electoral College and author’s calculations
In conclusion, it is impossible not to mention the Venezuelan political
process in both the national and the international context. Between 1958 and
2006, 26 elections were held, eleven of which in the last eight years. Abstention
in the December 3, 2006 elections was the lowest since 1989 (25.3 percent) –
the last time this had occurred was in the eighties.
This indicates a strong motivation for political participation. We are now
nearing another such event to decide on a reform of the 1999 Constitution
that was approved by the people at a referendum.
The new policies have been ratied by the conrmation of President
Hugo Chávez’s leadership in four electoral processes. Between 1998 and 2006,
votes in favor of the President increased by 86.7 percent, as compared with
a 42-percent increase in contrary.
The present growth period of the Venezuelan economy
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Source: National Electoral College and author’s calculations.
DEP
Translation: João Coelho.
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Philip Moore: an
ancient soul in a
modern body
Agnes Jones*
T
o understand and appreciate Philip Moore’s work, one needs to study
his development as a person – from his birth in October, 1921 in the Central
Corentyne Region of Guyana; his schooling in the small village school,
* Burrowes School of Art.
Don’t red card the games of life (1998 World Cup)
Acrylic on canvas 20
1/2
x 29 inches
Philip Moore: an ancient soul in a modern body
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Manchester Church of Scotland School, when he was educated and encouraged
by a trained teacher, a rare being at that time, to draw, paint, sing hymns and
patriotic songs, and recite the poems in his class reading book; his association
in adolescence with the Jordanite Movement which introduced him to the
study of comparative religion and meditation techniques. All these experiences
contributed to the making of the artist Philip Moore.
Growing up in a community where African farmers lived side-by-side with
Indian businessmen and farmers, he was daily made conscious of his African
heritage. He knew who he was and at the same time appreciated the way of life
and the concerns of his Indian fellow-villagers. This urged him to delve more
deeply into African religious beliefs and practices. Life in an environment where
one lived close to nature and Mother Earth bred in him a certain independence
and freedom of spirit rarely experienced by a city dweller. His being was
surrounded by mysticism as he probed the realm of philosophy and taught
himself to create artifacts from the materials around him inspired by dreams.
Though a proud Guyanese and Caribbean man who, has never travelled
to Africa, he is sincerely African in his outlook, his way of life; the work which
he produces bears a close resemblance to that of artists in various parts of the
African continent. He spontaneously reects his beliefs in his paintings and
sculpture, unconsciously following the technological traditions of his ancestors.
Indeed, the keynote of his art is its sincerity, his determination to make his
point as a Caribbean man and not merely a copyist of African sculpture or
painting. The importance of his contribution is his conscientious desire to
reveal his ideas, he says, as “A spirit birthed in an African body in the country
of Guyana and the Universe”. He emphasizes the theory that man is more
than a body – the soul is of prime importance and God’s presence exists in
every man. To him man is “An ancient soul in a modern body”.
In the course of an outstanding videograph, “An Ancient Soul” on the
art of Philip Moore, Errol G.R. Brewster the producer states:
“The principal aspect of Philip’s work is not its technical innovation this work
is evolving from the private spiritual experience and has its value spiritually and
philosophically. They are the products of his encounters with the mysterious imagery
springing from the magical world of his subconscious, his explorations of the pure
potentiality of African inspired polemics, transforming the known miraculously and
enriching all who encounter it”.
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As an intuitive and visionary artist whose work came to public notice around
1947; he had been working at sculpture based on visions he had experienced
and, as he says. “After I had the visions and understanding, I felt I should share
that joy, let the world know that man is more than a lump of dirt”. And he has
been generous in his sharing - in addition to carving, modeling and painting, he
has written poetry and songs to illuminate his work in the visual arts.
Most of his sculpture and painting tells a story and expresses deep
concern for people and existing situations. Sculpture came rst, based initially
on portraits – King George VI; self-portrait; the Shepherd; Guyanese faces,
Lance Gibbs – later showing intense social concern – over-crowded city;
standing together; The Mask of Diamonds; don’t take the thorns from
the roses. Many of his early sculptures were painted with acrylics and then
lacquered. From the mid-nineteen sixties his interest in painting increased,
giving scope to his imagination and his individualism.
A Philip Moore painting is recognizable by its play of color and the
intricate detail that portrays the quality of tapestry. Many pieces may be thought
of as designs for embroidery introducing a variety of multi-colored stitchery.
Themes centre around folk-lore, important events, outstanding persons and
places, areas of social concern – for example, Jumbie Wedding; Reincarnation
of Martin Luther King; King Sparrow; Nat King Cole; Canje Bridge;
Togetherness in Guyana; Meditation against Cigarettes; Hurricane Flora. His
approach is guileless, gures constructed in almost childlike simplicity, but he
cannot be considered a “Primitive” or “Naive” artist since he has over the
years read widely, studied and understood the nature of art. He is acquainted
with the works of European masters, but prefers to map out his own course.
He makes his own laws about painting and sculpture.
During the 1970s Philip Moore was invited to be Artist in Residence in
the United States at such prestigious universities as Princeton and Rutgers.
During this time also, between 1970 and 1975, he served as Art Director of the
Heritage Foundation, New Brunswick, New Jersey and taught at the Trenton
Central High School, Trenton, New Jersey.
His stay in North America strengthened his convictions about his art,
served as a stimulus to his work and led to the production of large canvases
such as Brooklyn Bridge; Big City Sky Seraping; Four Seasons; Architectural
Philip Moore: an ancient soul in a modern body
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Shadows. During these ve years he resisted offers of purchase of his work,
determined that the paintings and sculptures should remain in Guyana, his
homeland and inform his fellow citizens of the mysteries of life which he
felt had been revealed to him. He also had the burning desire to establish a
Meditation Museum. His feeling was that, “This show will inspire thinkers, artists
and scientists to study themselves more and try out some of the techniques I have used in my
personal achievements to try and understand that the symphony of life is always incomplete
and unnished for the individual”.
His continuing contention is that, “the Collection – I sold en bloe to the
Department of Culture, apart from what I sold and donated before needs a
special house to show them”. His more than one hundred paintings and pieces of
sculpture now form part of the National Collection and are located at Castellani
House in Georgetown. The Philip Moore collection has been on show from
August 1995 to January 1996, spread over two oors and the attic of the National
Gallery, but the artist’s ght for a Meditation Museum continues. In the interim
he operates a Cottage Museum at his home at Lancaster Village, Corentyne, but
visits Georgetown regularly to keep in touch with art and artists in the capital
city, hoping always that his plea will be heard and his dream realized.
Within recent years he has been emphasizing the need for functional
art. To him the gallery culture is somewhat irrelevant. Like the traditional
African artist he feels that art should play an important part in the decoration
of buildings, clothing household articles. He has also been advocating the
recycling of waste materials and has devoted much energy to the adorning of
barrels with intricate designs, to producing chandeliers out of calabashes, wire,
tins, and other materials. He approaches these tasks with as much verve as
he would in making a painting or a piece of sculpture. In his zeal for creating
artifacts he is an excellent role model to young artists.
For him art is a full-time occupation – everyday, every-week of every
month. An artist must nd material – commercial, man-made or discarded to
carry on his work; an artist’s hands must always be busy.
For the past six months he has been conscientiously carving out a circular
piece describing the mini-bus situation in the city of Georgetown. Patiently
he carves and paints interpreting the dilemma of living and moving about in
a city jungle.
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Philip Moore, the father of the intuitive art of the village movement
has made no effort to follow trends in Euro-centric art. He is committed to,
convinced about, his own approach to art. His busy hands carve out or paint
his ideas and his dreams, prime them his dream of a museum which would
explain to his countrymen and others, theories which this unique artist wishes
to reveal. His contribution to Guyanese art has been endorsed through the
recognition and the many awards he has gained locally as well as in England
and the United States. In 1975 his design for the 1763 MONUMENT to mark
the important Berbice Slave Rebellion, was accepted; ho proceeded in this
thoughtful and determined manner to erect a landmark which has occasioned
much controversy as it is viewed by eyes accustomed only to realistic, gurative
representation. In this regard, Philip Moore is in good company since in the
History of Art many now-renowned and revered artists have been subjected
to scorn, derision and even persecution. Philip Moore’s work needs to be
examined with an understanding based on his commitment to a message which
he feels he is inspired to impart to his fellowmen.
DEP
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Construtora
Norberto Odebrecht
Odebrecht’s 2007 highlights in South America
O
debrecht’s commitment to socioeconomic development in South
American countries goes back to 1979, when the enterprise began the
internationalization of its operations. The rst, successful projects abroad were
the construction of the Charcani V hydroelectric power plant in Peru, and the
deviation of the Maule River to the Colbún-Machicura hydroelectric system in
Chile. These rst contracts marked the beginning of Odebrecht’s interaction with
other nations, cultures, and technologies. This dynamic process has lent support
to the development of the enterprise’s workforce and yielded economic fruits for
Brazil and the client countries. In addition, these initiatives laid the groundwork
for the establishment of the trusting relationship Odebrecht maintains with its
South American clients, paved the way for long-term partnerships, and opened
up new opportunities for the enterprise and its contracting parties.
In 1987, Odebrecht started its operations in Ecuador with the
development of the Santa Elena irrigation project in the Guayaquil region.
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In 1989, it constructed the Pichi-Picún-Leufú hydroelectric power plant in
Patagonia, its rst project in Argentina. In the 1990s, Odebrecht extended
its operations to North America and Asia, expanded its presence in Africa,
and decisively increased its activity in Latin American countries. In Peru, it
implemented the second phase of the Chavimochic project, begun in 1990, for
the irrigation of desert areas. In 1992, it began operations in Venezuela with
the building of the Centro Lago Mall; in Uruguay, with the implementation
of the Montevideo sanitation system; and in Mexico, with the construction of
the multipurpose Los Huites dam. In 1993, it extended its activity to two other
countries, after its successful bid to build the La Loma-Santa Marta railway in
Colombia and the Santa Cruz de la Sierra-Trinidad highway in Bolivia.
Currently, Odebrecht operates projects on four continents, employing
46,000 people of twenty different nationalities practicing ve religion and
speaking a couple of dozen languages. In the last ve years it entered four new
markets – the Dominican Republic, the United Arab Emirates, Panama, and
Libya. Notwithstanding the enterprise’s projection overseas, South America
remains its main market, where it has consolidated its strongest bonds with clients
and the communities it serves. Consistently with the global macrotendency of
economic growth and international trade promotion, the South American region
increasingly demands that it be provided with an infrastructure grid conducive
to increased production and better transport. Demand for these essential factors
for integrating regional productive chains, creating economies of scale, and
improving the South American products’ competitiveness conditions, has opened
to Odebrecht new work opportunities in 2007 as well as further possibilities of
reafrming its leadership in the civil engineering sector in South America.
In 2007, Odebrecht completed twenty years of operations in Ecuador.
In this period, we have implemented ten large-scale projects in the areas of
transport, irrigation, energy, and sanitation. In June 2007, the Ecuadorian
government received the delivery of the San Francisco Hydroelectric Power
Plant, Odebrecht’s most recently concluded project in that country. The plant
uses the turbinated discharge from the Agoyán hydroelectric power dam and has
a 230 MW installed capacity. The two turbines are generating 1,446 GW/hour a
year, which accounts for 12 percent of all the energy available in Ecuador.
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San Francisco Hydroelectric Power in Equador
San Francisco is an impressive project, as it consists entirely of tunnels,
galleries, and underground caverns. This makes it invisible to those driving by on
the highway that follows the course of the Pastaza River, leading to the Ecuadorian
Amazon a short distance ahead. At the peak of construction, approximately one
thousand workers were local. Another 600 lived in two lodgings – one near the
worksite and one in the city of Baños de Agua Santa (pop. 10,000).
Currently, hydroelectric power accounts for 52 percent of Ecuador’s
energy matrix. To meet the remaining demand, Ecuador resorts to
thermoelectric plants, which hinders greater diversication of its energy
matrix. But even with recourse to such alternative sources, the country still
needs to import electricity from Colombia and Peru. Under this scenario,
the San Francisco Hydroelectric Power Project imposes itself as a strategic
undertaking to offset the current electric power decit in Ecuador.
In 2000, twelve South American Heads of State meeting in Brasilia
signed a commitment to build nine integration axes on the continent, under
a project known as Initiative for Regional Infrastructure Integration in South
America-IIRSA. Four of the contemplated axes cross the Peruvian territory.
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Odebrecht actively participates in this undertaking, by constructing the Inter-
Ocean Axis, the 2,603-km long South Corridor, known as IIRSA South, which
connects Urcos to Iñapari; and the Multimodal Amazon North, known as
IIRSA North, consisting of a 955-km highway linking the Paita Port on the
Peruvian coast to the Yurimaguas river port in Peru’s Amazon region, where
it connects to the waterways leading to Iquitos and Manaus.
In July, some stretches of the highways under construction were open to
the Peruvian population. On the South Inter-Ocean Corridor – an undertaking
that will benet ten Peruvian departments (30 percent of the national territory)
and six million people (20 percent of the Peruvian population) – Odebrecht
delivered part of the rst phase of stretch 2. The work consisted in paving
42 kilometers of roadway and in the construction of 42 bridges, among other
works, in the districts of Ccatca and Ocongate, in Cusco. It also concluded the
rst phase of stretch 3 on the road linking Ponte Inambari to Iñapari, which
consisted in paving 60 kilometers of roadway and in 162 meters of bridges and
retaining walls, among other works. On the North Road Corridor, work was
completed on stretch 1, between Yurimaguas and Tarapoto, and on stretches
5 and 6 on the Paita-Piura-Olmos highway.
The work under way has yielded social and environmental benets for the
population. The team working on the South Inter-Ocean Highway Corridor
has implemented the Estrategia Integral de Acción y Contribución Socio Ambiental
and designed plans of action to be implemented in 2006-2010, as follows:
(1) Social Issues Management Plan, consisting in the following programs:
“Community Relations,” “Hiring of Local Labor,” “Land Negotiations,” and
“Incentive to Local Production;” and (2) Social Responsibility Plan, consisting
in the “Tourism and Hotel Administration Training Program” and the “Mobile
Health and Education Support Program.” As a result of these initiatives, 11,500
people beneted from the mobile program, for which over 60 percent of the
hired workforce was local, and from the issuing of identity documents to over
4,000 children and young people, among other benets.
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Workmanships in execution in the South Iirsa, Stretch 2, in Peru
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In addition to these initiatives, Odebrecht is proceeding with the
implementation of the Olmos Project for irrigation and energy generation, by
building a system for siphoning water through the Transandino Tunnel into
the Limón reservoir. There is also the Pampa Melchorrita LPG Plant and the
Iquitos potable water system. Today Odebrecht is Brazil’s largest exporter
of engineering services to Peru, where it has operated for thirty years and
implemented over fty projects.
In Argentina, Odebrecht has recently begun work on the expansion
of the Argentine Gas Transportation System, under two contracts for the
construction of loops, i.e., new stretches of gas pipelines parallel to existing
ones. In connection with the Cammesa gas pipeline, 979 kilometers of pipeline
and 12 compression stations will be constructed. The Albanesi gas pipeline will
be 648-km long and will have three compression stations. The two pipelines
will cut the country from the farthest south to the north; after completion,
they will increase the capacity of the Argentine gas transportation system by
15 million cu m/day.
In Venezuela, Odebrecht has completed fteen years of operations.
In 2007, the main highlight was the construction of a third bridge over the
Orinoco River. This bridge will be 4.8-km long, with towers reaching a height
of 137 meters, and a railway running in the lower deck; it will connect the
municipalities of Caicara del Orinoco, in the state of Bolívar, and Cabruta, in
the state of Guárico. Work started in 2007 and will include one 3.5-km long
north viaduct and one 2.5-km long south viaduct.
Equally important was the successful bid for the construction of the
Manuel Piar Hydroelectric Power Plant in Tocoma; this will be Odebrecht’s rst
project in the energy sector in Venezuela. Work started also 2007, in Tocoma,
15 km downstream from the Simón Bolívar Hydroelectric Power Plant in
Guayana, the last location of exploitation of the hydroelectric complex on the
Lower Caroní, Venezuela’s second largest river. Upon completion, the Tocoma
hydroelectric power plant will have an installed capacity of 2,160 MW.
Also important was the beginning of the construction of the Caracas
Metro’s Line 5, which will extend for 7.5 km, with six new stations to be
connected to the existing two. This line will carry from 227,000 to 300,000
passengers per day; it forms part of the transportation system that begun
with the construction of Line 4 in 1998 and of Line 3 (which is under way,
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will extend for 5.9 km, with four stations, and carry 240,000 passengers per
day). Still in 2007, work has also started on the extension of the Los Teques
Metro, with the construction of a new 12.1-km line and six stations in that
municipality of Greater Caracas.
Workmanships of the Highway El Cármen – Arroyo Concepción, Two-Ocean Corridor, in Bolivia
In Bolívia, Odebrecht is building the El Cármen-Arroyo Concepción
102-km highway and working on stretch 5, which links Santa Cruz de la
Sierra to Puerto Suárez. The construction work employs of 900 people – 95
percent of them members of the local community. The nished highway will
link Brazil and Bolívia. Stretch 5, contracted out by Administradora Boliviana
de Carreteras-ABC and nanced by the Andean Development Corporation-
CAF with a total US$75 million, forms part of the Two-Ocean Corridor that
will establish a land connection between Brazilian seaports, such as Santos,
to the Peruvian and the Chilean coasts. This will facilitate transportation and
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reduce transportation costs between Mercosur and the Andean Community.
In addition, the construction will signicantly improve transport conditions
between the Brazilian border and the Santa Cruz province, bringing down the
number of hours required by train, car, or bus travel to eight hours after the
road’s completion in 2008.
Odebrecht’s undertakings in Bolivia extend to the communities adjacent to
its worksites. This is the case of the Yacuces town, which has seen its main square
reformed and provided with lighting, and beneted from a social and medical
assistance program, including free consultation with doctors. There, Odebrecht
has already helped 3,000 Bolivians through its social assistance initiatives. These
initiatives range from the hauling of tons of garbage from an empty tract of
land to doctor’s assistance to the community members at request.
These highlights illustrate South America’s relevance to Odebrecht, as
well as the contribution of infrastructure engineering services not only to South
American countries’ development but also to improving life quality for the
citizens of our continent. Since the launching of its international operations,
Odebrecht has completed over 700 projects on four continents. South America
has rendered a major contribution to these achievements.
Currently, over 65 percent of Odebrecht’s gross annual receipts come
from abroad, while in 1985 no more than 30 percent of the enterprise’s
contracts were with other countries. At end-2006, the number of its employees
abroad exceeded for the rst time the number of its employees in Brazil. Today
Odebrecht has over 26,000 employees in foreign lands and almost 20,000 in
its homeland. These gures, coupled with the above-mentioned achievements
and realizations, show that 2007 has meant another important step forward in
the enterprise’s internationalization, a dynamic process that further contributes
to the South American nations’ integrated development and inspires us to go
on serving as best as we can the communities of which we are a part.
Translation: João Coelho
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Grupo
Andrade Gutierrez
South America: the challenge of the infrastructure
U
nder the current Brazilian government’s foreign policy priority is given
to South America, whose integration is viewed as a political project that far
exceeds the notion of mere economic coordination among the countries of
the region. This emphasis on our geographical surroundings does not imply
the abandonment of the long-standing ideal of Latin American solidarity
but rather gives it a more pragmatic direction, so as to better identify what is
possible to do in each area.
This becomes clearer through the observation of our approach of
international affairs since early in the current government rather than simply
through the interpretation of the public statements of our highest authorities
during the 2002 electoral campaign or at the beginning of this Administration.
There is thus a marked interest in maintaining closer relations with Mexico
as well as with Central American and Caribbean countries, in addition to a
growing presence of Brazilian enterprises in the area. Owing to feasibility
considerations, though, the grand political integration project is seemingly
circumscribed to South America, as it would be unrealistic to extend it to
countries already bound to the United States by legal ties of an economic
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nature. But this does not mean that we are not developing or do not intend
to develop a strong Brazilian presence in those countries.
It might be said that in its basic discourse the Lula government has
seemingly embraced with even greater emphasis the regional vision of
Fernando Henrique Cardoso’s, at whose initiative the rst summit of South
American countries was convened. In an article published at that time in
Carta Internacional,
1
Luiz Felipe Lampreia, Cardoso’s Foreign Minister, made
it clear that a decision not to include countries that were “more closely and
directly linked to North America, and to the United Sates in particular” had
been made at a meeting that envisioned a “pragmatic project for organizing
the South American space.” Notwithstanding possible differences of
means and styles, continuity can be observed in connection with the
establishment on the continent of a new kind of regionalism, namely
South-Americanism, different from both Monroe’s Pan-Americanism and
the traditional Latin-Americanism of remote Bolivarian inspiration. This
new kind of regionalism can better identify the most appropriate approach
to each region without excluding but rather seeking to reinforce ties to
other countries of the Americas.
The current orientation would thus seek – without clashes or attrition with
the northern “hyperpower” – to circumvent the engulng Pan-Americanism
that can, owing to the dynamics of prevailing forces, more or less formally
draw all the countries of the continent into Washington’s orbit. The intention,
as expressed by Celso Amorim, our current Foreign Minister, is to develop
a mature, more strategic relationship with the United States, in which our
country would be seen as “a partner indispensable to the stability of South
America and even of Africa.” The objective, then, is to assert our geopolitical
position in South America, while taking a qualitative jump in our relations with
the United States, and thus avoid a more delicate management situation by
leaving in a kind of constructive indeniteness the specic form of relationship
with the area that is already de facto particularly linked to the United States.
In rather simplied terms, our geopolitical view of the continent unfolds in
concentric circles: rst comes South America, which we wish to see as a close-
knit community of democratic States; then, in terms of prior denition of
our future action, come Mexico, Central America, and the Caribbean, where
1 “Cúpula da América do Sul”, Carta Internacional, No. 87, ano VIII, May 2000.
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our capability for diplomatic action would be less signicant, not the least
because of that area’s strong ties to the United States; lastly, the United States
and Canada, with which our relations would have a clearly distinct character
from our relations with the other regions just mentioned.
Thus, instead of the more comprehensive and somewhat vague options
offered by Pan-Americanism and Latin-Americanism, which have made little
progress in the past, what the Brazilian regional policy proposes today is to
give emphasis to South American integration, based on an already existing
integration project, namely, Mercosur, despite its aws and limitations. To this
end, Mercosur must be strengthened so as to become the nucleus of a future
subcontinental, integrated bloc. The ultimate objective is thus the integration
of South America as a whole, and Mercosur would be a rst stage or a requisite
instrument for achieving this goal.
Binational Usina of Itaipu (Brazil - Paraguay)
Photo: Archive Andrade Gutierrez
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This is a highly positive project for both Brazil and all of South America,
as systematic, wide-ranging cooperation among all of our countries will make
possible the exploitation of potential, so far latent or neglected synergies. This
positive character is due not only to the clearly growing political projection of
the countries involved but also, in a more restricted, specic sense, to areas such
as environmental protection and the development of regional infrastructure,
both of which are essential to the area’s full, sustainable economic development.
It remains to be seen whether such a scheme is feasible or, more specically,
in what timeframe it could be accomplished.
The very nature of the project requires that the rst stage should be the
strengthening of the structure created under the Treaty of Asunción, as the
cornerstone of Brasilia’s South American project would be a Mercosur deserving
of its name as a Southern Common Market. As this stage would partially consist
in the fulllment of commitments already undertaken under that international
instrument, two questions immediately come up. The rst question is why, after
about seventeen years since the treaty’s signing, so few of these commitments
have been actually fullled. The second question is whether there are now
conditions to establish within a reasonable timeframe a common market and the
requisite institutional framework for its functioning. In other words, whether the
four signatories of the Treaty of Asunción believe that they can now do what
they had, in 1991, promised to do but have been unable to do so far.
In economic, demographic, and territorial terms, Brazil and Argentina
make up 95 percent of Mercosur. In this respect, the two countries practically
are Mercosur. Overall progress thus presupposes a far-reaching, stable
understanding between these two major parties about what they think this
political and economic grouping should represent for its member countries,
both at home and abroad. As long as one or both see the Treaty of Asunción
as a mere trade agreement or as just an element of their subregional policy;
as long as Brasília and Buenos Aires fail to have a common perception or at
least converging perceptions about how a genuine integration of the Mercosur
countries (and ultimately of all South America) will enhance the international
image and foster the sustainable development of each country, and that the
two countries’ must thus work in coordination and solidarity on the external
front; and as long as this situation prevails, it will be impossible to achieve
effective political commitments and institutional changes capable of making
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Mercosur into more than a mini-Aladi. And, still worse: there is the risk that –
as it is apparently happening already – that its relevance for the States Parties
themselves will decline instead of increasing.
Converging political perceptions between Brazil and Argentina are thus
crucial to Mercosur’s progress – but not enough. The advance of a political
and economic grouping presupposes equal functioning to a certain degree to
ensure that the smaller partners will wish to contribute to the progress of all.
Today, neither Paraguayans nor Uruguayans seem to believe that the integration
process in which they are participating is ensuring this equity or that Mercosur’s
current institutional framework is capable of redressing perceived injustices, or
of sufciently reducing divergences among its Member States. In Paraguay’s
case, it is quite signicant that in a recent interview to a Brazilian newspaper
2
Mrs. Bianca Ovelar, who is running for President of her country at next April
elections, referred to a pervading feeling among Paraguayans against “Brazil’s
historic unilateralism when dealing with bilateral issues.” She added that although
this feeling “has signicantly changed under President Lula’s government… we
still have a long way to go to arrive at an entirely just relationship.” This is not the
place to determine whether these claims are justied or not. The point is that if
public opinion in the neighboring country did not have such a strong perception
of injustice – whether well-grounded or not – such statements would not have
been made by someone running for President of Paraguay. As regards Uruguay,
it has clearly expressed its interest in celebrating a bilateral trade agreement
with the United States – which would certainly have a negative impact on the
system established by the Treaty of Asunción – as well as its dissatisfaction
with Mercosur as it exists today. Moreover, the controversy with Argentina over
Uruguay’s construction of a pulp plant near the Argentine border evidences a
lack of proper regulation in such a key area as environmental protection and
the ineffectiveness of common market institutions in solving divergences about
issues that are relevant to regional integration.
Such divergences and feelings of frustration are common to all
integration schemes where there are marked asymmetries among the Member
States. Accordingly, it is essential to solve them and to prevent justied or
unjustied perceptions of injustice from undermining the stability of the
desired integration. Mercosur cannot escape this rule.
2 O Globo, 10 February 2008, p. 37.
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So far we have dealt basically with issues that are directly connected to
Mercosur, although we have made it clear that Mercosur is only the rst step on
the long way toward the ultimate objective of South American integration. With
the specicities of each national situation, the problems mentioned here by way
of illustration will tend to multiply as the scope of integration widens.
In a vast integration area characterized by major internal asymmetries, as
is the case of South America, two issues inevitably come up. The rst is the
need for some degree of harmonization of the positions and perceptions of
the major partners as regards the main lineaments and objectives of integration.
This harmonization is essential for keeping at manageable levels the inevitable
differences that arise when the decision-making bodies are at work, so as to
allow the main players to act in consonance with each other, thereby ensuring the
advancement of their common project. A classical example is the cooperation
between France and Germany in building today’s Europe, which made it possible
for them to move from a past of bloody conicts to the construction of the
European Union. A second issue is the establishment of a working system
that ensures a minimum structural equity in the distribution of integration’s
benets among all participants so that even the smaller partners may feel that
the necessary punctual concessions are more than offset by the advantages of
their successful common project. Once again, the European Union provides
a cogent example, as its construction required the adoption of mechanisms
capable of promoting the prosperity of less endowed regions, without prejudice
to economic and trade integration. Such mechanisms permitted the integration
of some of the world’s most advanced economies with other economies that
were relatively poor at the time of their accession, and greatly helped expand
the Europe of Six (the signatories of the Treaty of Rome) to the twenty-seven
that comprise the European Union today.
The situations mentioned in the preceding by way of example, which
illustrate the two types of difculties pointed out in respect of Mercosur,
tend to multiply and to aggravate with the endeavor to extend the integration
process to all of South America. This is already noticeable in countries that are
only associates of or in the process of being admitted into Mercosur. Without
going deeper into an analysis or into the merit of their respective positions,
it is easy to see that the Venezuelan government’s foreign policy approach
and activism, for example, substantially differ from the stance of some other
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countries of the region while approaching or inuencing the stance of some
others. But this should not make us forget that Venezuela is a key piece in
any general scheme of South American integration. It is also equally valid to
point out that during the negotiations for full membership, a country such as
Bolivia, now a Mercosur associate, will have sound arguments for demanding
provisions aimed at offsetting some of its economic disadvantages.
The problem is particularly complex because although it may fall into one
of the general categories pointed out, each national situation has peculiarities
that make extremely difcult a satisfactory solution according to the general
formulas applicable to all Member States. It may be relatively simple to
formulate general equity or compensation principles regarding situations of
agrant asymmetry but it is much more difcult to move on to operational
formulas capable of offsetting actual or perceived equity aws. Hence, the
great difculty in making operational such a comprehensive instrument as
the Treaty of Asunción through full compliance with the commitments and
good intentions embodied in it. This would be even more difcult in relation
to a still hypothetic, similar instrument encompassing all of South America,
if and when such an instrument could be adopted.
In brief, we have a valid regional policy goal, whose achievement
could enhance the international presence of the countries involved and
lead to the solution of common regional problems, and which is accepted
by all potential participants, as no South American country is avowedly
opposed to our subcontinent’s integration. The great problem is that,
understandably, different countries have different perceptions as to what
integration should be in practice. Reconciling these differences so as to
make possible the establishment of an integration system acceptable to all
the countries of the region and which at the same time goes beyond a set
of good intentions and commitments that remain on paper will probably
be achieved only in a very long run. And to borrow Keynes dictum, in the
long run, we are all dead…
What should we do? Abandon a worthy political project only because
it cannot be fully achieved within the foreseeable future? Attempt to carry
out the premature negotiation of a grand integration scheme in a quixotic
effort likely to discredit a desirable objective? Or to move on to undertakings
of a lesser scope and thus more realistic, capable of actually bringing South
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American countries closer together and of directly or indirectly contributing
to the achievement of the ultimate objective of regional integration?
In principle, any understanding that involves more than one South
American country in the achievement of a common objective helps cultivate
cooperation habits. This in turn can facilitate, if modestly and indirectly, a
greater effort toward regional integration. Certain areas should be contemplated
in any integration scheme, in which transnational actions of a limited scope
will have a more direct effect on the nal objective. Such actions might include
arrangements aimed at facilitating trade between neighboring countries;
binational or plurinational understandings on environmental protection; or
undertakings related to regional infrastructure or even to national infrastructure
in which entities of more than one country are involved. Regional infrastructure
is of utmost relevance as it is essential for the physical integration of South
American countries, without which the wished-for political and economic
integration will be little more than a rhetorical expression. It is obvious that
without proper highways, railways, and waterways as well as an adequate
communications network, even the most carefully conceived integration treaty
will be worth little more than the paper on which it is written. Diplomacy and
civil engineering must thus walk hand in hand if we wish to make into a reality
the major objective of South American integration.
Brazil nds itself in a particularly favorable situation to carry out
such actions. As South America’s largest, most developed economy, with
a population of 180 million, it is a particularly attractive market for the
neighboring countries. It may, with greater likelihood of success than most
of the other countries, promote geographically limited arrangements that can,
even without having the substantive coverage of an integration scheme, take
into account possible asymmetries and foster its own sustained development
as well as that of its partners.
At the same time, our country’s vast territory that borders on all South
American countries except two and the advanced stage of our civil engineering
industry make it important for us to develop a regional transportation and
communications network and enable us to render a signicant contribution to
its construction. It may be recalled that the only Latin American enterprises
on a list of the world’s fty largest civil construction companies are Brazilian.
This explains the strong presence of Brazilian enterprises such as Andrade
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Gutierrez and other major companies in several South American countries,
including Argentina, Ecuador, Peru, and Venezuela. In the last analysis, the
participation of Brazilian private enterprises in the implementation of large-
scale infrastructure projects of interest to our neighbors creates cooperation
habits among countries and contributes to South America’s physical integration,
which is essential for achieving the unanimously endorsed objective of political
and economic integration.
The importance attached by the subcontinent governments to the
development of an adequate infrastructure is demonstrated by the launching
and unanimous approval of the Initiative for the Integration of Regional
Infrastructure in South America-Iirsa in Brasília in August 2000. Iirsa provides
a forum for dialogue among the authorities responsible for transportation,
communications, and energy infrastructure in the twelve South American
countries. Its objective is the development of the region’s infrastructure to
facilitate the participating countries’ physical integration and promote a model
of equitable and sustainable territorial development. Iirsa’s central body is the
Executive Steering Committee-CDE, made up of senior representatives from
national agencies deemed competent in this eld by each government. The
Technical Coordination Committee, subordinated to the CDE, consists of
representatives from the governments and from the three international nancial
organizations directly involved in the initiative, namely, the Inter-American
Development Bank-IADB, the Andean Development Corporation-CAF, and
the Fund for the Development of the River Plate Basin-Fonplata. Iirsa has
adopted a 2005-2010 Consensual Implementation Agenda consisting of a
rst set of thirty-one projects, mainly in the area of transportation, already
approved by the participating governments.
It may be too early for assessing Iirsa’s actual contribution to the
development of physical integration in South America, as by nature
infrastructure projects take a long time. But the work done so far – including
both the plurinational coordination effort and the specic projects executed by
major engineering companies such as Andrade Gutierrez – seems to reinforce
this article’s contention about the convenience of concentrating efforts
on undertakings that though substantively and geographically limited can
signicantly contribute to any more comprehensive integration scheme. This
does not mean abandoning the more ambitious idea of the South American
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countries’ political and economic integration but simply drawing practical
conclusions from facts that seem incontestable. Although desirable, the grand
project for integrating all of South America involves, by its magnitude, much
greater difculties and its realization requires much more time. Meanwhile,
competing or conicting initiatives could emerge, making the completion
of the grand subcontinental project even more problematic. In a way, this
is what happened with the Initiative for the Americas launched by President
Bush (father), which led to the much more specic proposal of a Free Trade
Area of the Americas-FTAA. The least that can be said is that this process
distracted the Latin American countries’ attention from the idea of their own
integration with the mirage of an unrestricted opening up of the immense
United States market. In the case of South America, it did even more, seducing
countries that were part or associates of an existing subregional system with the
prospect of bilateral agreements with Washington, considered more attractive
than integration with the much more modest markets of our subcontinent. A
second conclusion is that we can contribute to the success of the nal project
Interoceánica road (Iirsa)
Photo: Archive Andrade Gutierrez
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by making progress in less controversial areas with undertakings that, although
also requiring time and effort, such as the aforementioned construction of a
regional infrastructure network, must be carried out anyway before or after
the political decision on subcontinental integration is formalized.
In brief, the idea is to keep alive the objective of South American
integration but to do so realistically, attaching priority to those areas in which we
have competitive advantage and which are more relevant to the ultimate objective,
such as the building of a regional transportation and communications network,
as well as to areas in which the scale and relative development of our economy
place us in a natural, especially privileged position in South America.
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Embraer – Empresa Brasileira
de Aeronáutica S.A.
Embraer goes international
I
ntroduction
Airspace industry, of which Aeronautics is the most signicant segment,
has a wide range of highly demanding characteristics that make it special and
differentiated.
Few industries in the world are faced with such an array of awesome
challenges as aeronautics – from the simultaneous employment of multiple
advanced technologies to highly qualied manpower to the requirements
of a global industry by denition to the requisite exibility to respond to
abrupt scenario changes to the enormous amounts of capital required for
its operations.
Based on the experience amassed in over three decades of activity in
this competitive, aggressive, and sophisticated market, we at Embraer like to
say that the aeronautics business rests on ve major pillars, which in turn rest
www.embraer.com.br
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on a single foundation – our clients’ satisfaction, the source of the results
that will ensure our stakeholders’ gains and the enterprise’s continuity over
time. These pillars are as follows:
• Advanced technologies: in view of the highly demanding operational
requirements pertaining to safety, drastic environmental changes, and
weight and volume restrictions, the aeronautics industry employs a
wide range of point technologies and serves as a lab for their ne-
tuning before they are passed on to other productive segments and
activities. Complex, sophisticated technologies are involved not
only in the product but also in the development and manufacturing
methods and processes, in addition to the use of the best practices
available in nancial and human resources management.
• Highly qualied manpower: to ensure the efcient, productive, and
consistent use of these advanced technologies, it is essential
that qualied personnel be available at all levels of the industry’s
operations: computer-supported projects, relations with suppliers
and clients around the world, manufacturing using sophisticated
numerical control machines, and the devising of elaborate nancial
solutions with international institutions.
• Flexibility: abrupt scenario changes that affect the world economy
and the geopolitical order, the most recent example of which were
the terrorist attacks of September 11, 2001, have immediate impact
on the air transport industry and thus on aircraft manufacturers.
Flexibility in adapting to such changes with a minimum loss in terms
of efciency and costs is of crucial importance for ensuring survival
and preservation.
• Capital intensity: owing to the massive investment required for
developing new products and raising quality and productivity, coupled
with long development and maturation cycles, capital intensity
is another major feature of this business sector. For example: the
development of the Embraer 170/190 aircraft line required an
investment of US$1 billion and the new A350 Airbus plane should
require no less than US$15 billion!
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• Global industry: low output and the high cost of production
makes the aeronautic industry an exporting and global concern
by nature, as regards both its client and supplier base and the
nancial institutions that back it. The same Embraer 170 aircraft
that operates under the ag of Finnair, Finland’s airline, in the
severe Scandinavian winter must also stand the high humidity and
temperature levels of southern United States, where it operates
under United Express’s ag. In both cases, Embraer must be
permanently available to its clients, providing local technical
support and immediate access to parts and components, thereby
honoring its commitment to the success of their business and
aiming always at their full satisfaction, which will in turn ensure
additional orders in the future. At the same time, Embraer must
experience the different environments in which it operates, so
as to detect positive or negative tendencies and changes in the
scenarios and to be able to provide a speedy response.
Legacy 600
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All these characteristics make the aeronautic industry into a fascinating as
well as a high-risk business. Failure of a new product may make the enterprise
that developed it unviable and force it out of the market. The disappearance
of traditional enterprises, such as the Dutch Fokker’s and the Swedish Saab’s
exit from the civil aeronautic market are two examples of this harsh reality.
Notwithstanding the major risks involved, developing an autochthonous,
strong, and autonomous aeronautic industry has been part of the strategic
agenda of many nations, which invest heavily in its development over the
years, recurrently supporting it by various schemes – celebrating major
Defense systems and products contracts, nancing new aircraft development
programs under favorable terms, and providing all sorts of tax incentives.
Embraer goes international
Aware that winning new markets, which are essential for is growth and
consolidation will become effective only if backed by its physical presence
in these markets, through industrial plants or units for rendering post-sale
services and support to clients, Embraer has, since its privatization in 1994,
gradually extended its operations internationally as a strategic objective.
Far from losing its Brazilian identity and distancing itself from its origins,
Embraer will, through internationalization, ensure new business deals, the
strengthening of its trademark, and the generation of higher-qualication
jobs in Brazil, in proportionately higher numbers than in its subsidiaries and
controlling enterprises abroad.
In 1997, as it regained strength after introducing in the market its
ERJ 145 commuter jet, Embraer launched its internationalization strategy
by adopting measures that included (1) expanding or opening sales and
marketing ofces and replacement parts distribution centers; (2) participating
in joint ventures; and acquiring traditional, renowned enterprises specializing
in aeronautic services.
United States and Europe: consolidated presence
Embraer has long been active in the United States and in Europe –
since 1978 and 1983, respectively – through sales and marketing ofces and
client support units (parts and services).
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The two units have had and continue to have a vital role in the expansion
of its operations in those two main commercial aviation markets in the world.
Including Brazil, 950 commercial jets, in addition to 800 turboprop planes as
well as military planes made by Embraer are now ying. The U.S. and the
European markets account for 95 percent of its total exports.
Facilities at the U.S. unit, located in Fort Lauderdale, FLA have been
expanded to keep up with Embraer’s operation since it delivered the rst ERJ
145 commuter jet in December 1996 in that market. In November 2006 it
had 234 employees and a spare parts stock of over 50,000 items.
With the increase of its business and client base in Europe, Embraer
decided to concentrate into one place, located in Villepinte, near the Paris
Roissy-Charles de Gaulle airport, its sales and marketing and client support
units, including a major spare parts warehouse, one of which was already
located in Villepinte while the other was previously located at the Le
Bourget airport. The new integrated facilities should enhance the operational
efciency of a body of 194 employees charged with managing assets totaling
172 million euros and providing services to 37 clients.
Phenom 100 and Phenom 300
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China and Pacic-Asia: strategic markets
Given the importance of its economy, which has steadily grown at high
rates for the last two decades, as well the strategic signicance of air transport
as and integrating factor and a development engine on a continental-size
territory, China has been selected by Embraer as a strategic goal, which
requires specic, differentiated treatment in view of its cultural characteristics,
far removed from the Western world.
Embraer’s presence in China started in May 2000, with the opening of
a sales and marketing ofce in Beijing, followed soon after by the opening of
a spare parts distribution center in the same city.
In 2001 and 2002, it negotiated an agreement with Chinese authorities
under which it would be allowed to install an industrial plant to make ERJ
145 family aircraft for the Chinese market.
Finally, in December 2002, an agreement was signed with Aviation
Industry of China II (AVIC II), establishing the Harbin Embraer Aircraft
Industry (HEAI), a joint venture controlled by Embraer, which holds 51
percent of voting shares.
In February 2004, Embraer announced its rst sale in China through
HEAI: six ERJ 145 jets sold to China Southern. Other signicant sales
followed: the same number of the same model sold to China Eastern Jiangsu
in March 2005 and to China Eastern Wuhan in January 2006.
In August 2006, Embraer announced the sale of 50 WRJ 145 planes and
50 EMBRAER 190 jets to the HNA Group, China’s fourth largest air company.
This deal was the rst sales contract of an E-Jet on mainland China, with a list
price of US$2.7 billion. ERJ 145 delivery will start in September 2007. The
50-seat jet will be made by HEAI in Harbin, in the Heilongjian Province.
By end-2006, HEAI will have delivered 13 ERJ 145 planes, which,
together with the ve sold in 2000 to Szechuan before the establishment of
the joint venture, will bring to 18 the total number of these jets currently
operated by Chinese airlines.
As regards the Pacic Asian region, in December 2000 Embraer opened a
sales and marketing ofce in Singapore, entrusted with implementing the enter-
prise’s trade strategy for the region’s markets, including the Indian subcontinent.
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The Indian aeronautic market is undergoing a deregulation process
and shows bright growth prospects. In this context, Paramount, a recently
established company, has announced the start of its operations, based on the
operational leasing of two jets: Embraer 170 and Embraer 175.
Also in India, Embraer has signed a major contract with the government
for the sale of ve Legacy 500 jets, particularly adapted to meet the comfort
and safety requirements of that country’s authorities.
Expansion of Embraer’s client services and support base
Embraer plans to continue expanding its client services sector not only
to ensure that its clients will achieve excellent dispatchability rates for their
aircraft eet but also to provide them with other services, such as aircraft
maintenance and repair, to their full satisfaction, which is essential for the
achievement of our goals and the growth of our operations.
Embraer’s Headquarters. São José dos Campos
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Thus, in addition to consolidating its client services in Brazil through
the transfer of its Services Center to the Gavião Peixoto Unit, it has
expanded its services operations in the United States, with the addition of
the new facilities of the Embraer Aircraft Maintenance Services-EAMS, in
Nashville, Tennessee, and in Europe, with the acquisition of OGMA-Indústria
Aeronáutica de Portugal S.A., in Alverca, Portugal, announced in December
2004, at the completion of its privatization process.
Early in 2005, EAMS expanded its facilities at the Nashville International
Airport to raise its services capacity, in view of the growing eet of Embraer
aircraft in the United States. This major decision led to the progressive hiring,
as of 2005, of additional EAMS employees, bringing their total to 277 by
November 2006.
Since its establishment in 1918, OGMA has devoted itself to aircraft
maintenance and is today a major representative of the European aeronautic
industry, providing maintenance and repair services for civil and military
aircraft, engines and components, and modication and assembling of
structural components, as well as engineering support.
Its main clients are the Portuguese, the French, and the U.S. Air Forces
and the U.S. Navy, Nato’s Maintenance and Supply Agency, and the Dutch
and Norwegian Navies, among others. In the trade area, OGMA also provides
services to airlines such as TAP, Portugalia, British Midland, and Luxair, and
to enterprises, including Embraer and Rolls-Royce.
In addition to doing maintenance work, OGMA also manufactures
structural components and composite materials for Boeing, Airbus, Lockheed
Martin, Dassault, and Pilatus. By November 2006, its work force totaled 1,606
employees, which makes it Embraer’s largest unit and subsidiary.
Preserving culture, values, and attitudes – an enduring
challenge
The velocity of Embraer’s expansion since 1996, when its ERJ 145
aircraft went into operation, has brought with it formidable challenges in
respect of the preservation of culture, values, and attitudes, a concern that
continues to guide the enterprise’s actions.
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To illustrate the magnitude of such a challenge, sufce it to mention
that in April 1997, Embraer had only 3,200 employees scattered through ve
operational units – three in Brazil and two abroad. Today, nine years later,
it has 18,670 employees, scattered through thirteen operational units – ve
in Brazil and eight abroad. In just one of its units, located in France, 26
nationalities and 19 languages are represented in a work force of 194.
One of the managers’ top priorities is to recognize the worker’s ethnic
and cultural diversity and their different working environments, including
specic labor legislations, while developing their maximum potential by
directing their energy toward the business’s objective, in perfect consonance
with the enterprise’s ethical and moral values.
The main element for the achievement of this intent is the so-called
Management Methodology through Action Plan. Each year Embraer
prepares an Action Plan based on a ve-year perspective and follows a
strategic planning model that takes into consideration markets, competitors,
the enterprise’s capabilities, opportunities, and risks, priorities, and results,
among other factors.
EMBRAER 170/190 family
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270
The Enterprise’s Action Plan is based on the equivalent internal plans
for each corporate, functional, and business area, reaching down all the way
to the plant oor, all in accordance with the general guidelines issued by the
enterprise’s top management. The enterprise’s variable pay policy, encompassing
all employees, takes into account the targets agreed by the leaders and the led
along the entire chain of command. The Action Plan is thus the key instrument
for the management of the business, and for all the employees’ alignment with
and commitment to the agreed targets and results.
In addition to the Action Plan Methodology, Embraer maintains
a strong Internal Communication culture aimed at integration with its
employees and their families and at disseminating Embraer’s central values
and concepts.
Internal Communication works in a global, integrated manner, through
the use of tools that are both modern of highly attractive to the employees:
• Embraer’s Director and President has his own tool for communicating
with employees, called Em Tempo, issued simultaneously in Portuguese
and in English. More recently, Em Tempo has been issued in special
editions on video;
• Embraer Intranet is a tool of corporate reach and our employees’
main source of information, which is accessed an average of 24,500
times a day;
• Some 600 internal communiqués are issued annually and made
available to employees through Intranet and bulletin boards; 25
percent of these communiqués are of corporate reach;
• The Embraer Notícias [Embraer News] is devoted to issues that
are essential to Embraer’s culture: the Management Methodology
through the Action Plan, the importance of cost discernment and
contention, combating waste, team rallying around Embraer’s broad
entrepreneurial objectives, etc.;
• Interviews with Embraer’s top executives are translated and sent
to the units located abroad. As they consistently address market
evaluation and the enterprise’s strategies and objectives, they are well
heeded by employees;
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
271
• Articles published in the national and international media on themes
of interest to Embraer’s business are translated and made available
to employees.
Armed with this vision and determination, grounded on ethical and
moral values, and having integrity as the spring of it actions, Embraer
embarks upon an extremely challenging and competitive entrepreneurial
activity. And in so doing it brings to the markets the image of an efcient,
agile Brazilian enterprise known for its quality products and technological
state-of-the-art.
Translation: João Coelho
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D E P
DIPLOMACIA ESTRATÉGIA POLÍTICA
Number 6 April / June 2007
Summary
5
15
35
48
59
73
88
Reality of Argentina and the region
Cristina Fernández de Kirchner
Diplomacy for life
Pablo Solón
Brazil 2007: ready to grow again
Guido Mantega
Regional integration: factor of sustainable development
Emílio Odebrecht
The quest for development with equity
Ricardo Ffrench-Davis
Colombia: challenges until 2010
Álvaro Uribe Vélez
A plan for Ecuador
Rafael Correa Delgado
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274
Cultural identity & creolization in Guyana
Prem Misir
Paraguay: State patronage and clientelism
Milda Rivarola
Coloniality of power, globalization and democracy
Aníbal Quijano
Drug trafc combat in Suriname
Subhaas Punwasi
Mercosur: project and perspectives
Luis Alberto Lacalle de Herrera
About the utmost importance of a party
Hugo Chávez
Guayasamín by himself
94
105
127
173
186
194
221
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275
D E P
DIPLOMACIA ESTRATÉGIA POLÍTICA
Number 5 January / March 2007
Summary
5
25
35
39
54
74
82
Ideas, ideologies, and foreign policy in Argentina
José Paradiso
Infrastructure integration in South America:
stimulating sustainable development and regional
integration
Enrique García
Elections and patience
Antônio Delm Netto
The outlook for Chile-Bolivia relations
Luis Maira
Colombia’s strengths
Fernando Cepeda Ulloa
Foreign policy and democratic and human security
Diego Ribadeneira Espinosa
Cheddi Jagan’s global human order
Ralph Ramkharan
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276
88
103
123
137
171
179
Paraguay’s economic situation and prospects
Dionisio Borda
A strategic regional view of Peru’s foreign policy
José Antonio García Belaunde
Suriname by its authors
Jerome Egger
Mercosur: quo vadis?
Gerardo Caetano
Full Petroleum Sovereignty
Rafael Ramírez
Silvano Cuéllar – Allegory of the Nation
María Victoria de Robayo
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277
D E P
DIPLOMACIA ESTRATÉGIA POLÍTICA
Number 4 April / June 2006
5
16
27
44
66
84
100
Summary
Objectives and challenges of Argentina’s foreign policy
Jorge Taiana
Bolivia, a force for integration
Evo Morales
The brazilian economy’s challenges and prospects
Paulo Skaf
Program of government (2006-2010)
Michelle Bachelet
The trap of bilateralism
Germán Umaña Mendoza
The Amazonian Cooperation Treaty Organisation
(Acto): a constant challenge
Rosalía Arteaga Serrano
Guyana – linking Brazil with the Caribbean:
potential meets opportunity
Peter R. Ramsaroop
Eric M. Phillips
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278
Paraguay’s political crossroads
Pedro Fadul
The great transformation
Ollanta Humala
Suriname: macro-economic overview, challenges
and prospects
André E. Telting
Uruguay’s insertion into the world economy:
a political and strategic view
Sergio Abreu
“There is another world and it is in this one”
José Vicente Rangel
Pedro Lira
Milan Ivelic
118
131
151
164
200
226
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D E P
DIPLOMACIA ESTRATÉGIA POLÍTICA
Volume I Number 3 April / June 2005
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280
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281
D E P
DIPLOMACIA ESTRATÉGIA POLÍTICA
Volume I Number 2 January / March 2005
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282
Di p l o m a c y , St r a t e g y & po l i t i c S – Ju l y /Se p t e m b e r 2007
283
D E P
DIPLOMACIA ESTRATÉGIA POLÍTICA
Volume I Number 1 October / December 2004
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284
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