COURSE : Winners & Losers in the Global Economy: From Developmental Nationalism to Neo-liberalism The Second World War and the new international economic order April 6th - CLASS 7

SECOND WORLD WAR 1939-1945 : 3rd major external shock to strike LA in twenty-five years 1. WWII: more devastating for Latin America in terms of disruption to its traditional markets. By 1940 the Axis powers controlled much of the European coastline from northern Norway to the Mediterranean Sea. 2. The war erupted after nearly a decade of growing disillusionment with the traditional export-led model in Latin America. There was a growing sense of NATIONALISM, which looked at DEVELOPMENT and INDUSTRIALIZATION as an alternative model.

SECOND WORLD WAR- IMPLICATIONS NATIONALISM: These changes in the intellectual and policy climate had begun to manifest in the 1930s. Eg. Expropiation of foreing oil interests in Bolivia (1937), and Mexico (1938) and in the commitment to support industry through the creation of new institutions –such as the Corporacion de Fomento de la Producciòn (CORFO) in Chile- to promote investment in manufacturing. THE WAR YEARS ACCELERATED THE PROCESS. STATE INTERVENTION : in support of a more complex industrial system, particularly in the larger republics, with important investments in basic commodities as well as in the infraestructure needed.

NATIONALISM: These changes in the intellectual and policy climate had begun to manifest in the 1930s. Eg. Expropiation of foreing oil interests in Bolivia (1937), and Mexico (1938) and in the commitment to support industry through the creation of new institutions –such as the Corporacion de Fomento de la Producciòn (CORFO) in Chile- to promote investment in manufacturing.

THE WAR YEARS ACCELERATED THE PROCESS.

STATE INTERVENTION : in support of a more complex industrial system, particularly in the larger republics, with important investments in basic commodities as well as in the infraestructure needed.

TRADE AND INDUSTRY IN THE SECOND WORLD WAR Latin America was extremely vulnerable to the outbreak of hostilities in Europe because it had increased its market to German, Italian and Japanese markets. Great Britain could not compensate Latin America for the loss of the continental market. Inevitably, the only economy large enough to absorb commodities previously destined for Europe was the U.S. The Roosevelt administration –more sensitive to Latin American needs than its predecessors- was aware of the importance of avoiding economic collapse in the region. Inter-American economic cooperation: September 1939 Panamanian Conference. Creation of the Inter-American Financial and Economic Advisory Commission (IADC): to stimulate trade in noncompetitive goods between Latin America and U.S., to promote intra –Latin American trade, and to encourage industrialization.

Latin America was extremely vulnerable to the outbreak of hostilities in Europe

because it had increased its market to German, Italian and Japanese markets.

Great Britain could not compensate Latin America for the loss of the continental market. Inevitably, the only economy large enough to absorb commodities previously destined for Europe was the U.S.

The Roosevelt administration –more sensitive to Latin American needs than its predecessors- was aware of the importance of avoiding economic collapse in the region.

Inter-American economic cooperation: September 1939 Panamanian Conference.

Creation of the Inter-American Financial and Economic Advisory Commission (IADC): to stimulate trade in noncompetitive goods between Latin America and U.S., to promote intra –Latin American trade, and to encourage industrialization.

TRADE AND INDUSTRY IN THE SECOND WORLD WAR LA was the main raw-material-exporting region not directly affected by hostilities. After Japan occupied many parts of Asia, LA bacema an alternative source of supply for certain commodities. U.S. direct foreign investment in Latin America increased in strategic materials, and loans became increasingly important. Nevertheless, US trade compensation did not balance the loss with European markets, so trade increased within LA republics (6% of the region’s exports in 1938). WAR AND THE SYSTEM OF INTER-AMERICAN ECONOMIC COOPERATION

LA was the main raw-material-exporting region not directly affected by hostilities.

After Japan occupied many parts of Asia, LA bacema an alternative source of supply for certain commodities.

U.S. direct foreign investment in Latin America increased in strategic materials, and loans became increasingly important.

Nevertheless, US trade compensation did not balance the loss with European markets, so trade increased within LA republics (6% of the region’s exports in 1938).

LATIN AMERICAN MARKET In 1940: Argentine Plan to establish a customs union for the southern republics. In the end, intra Latin American trade was promoted through a multitude of BILATERAL AGREEMENTS that provided tariff and nontariff concessions for pairs of neighboring countries. The result was an increase in the share of exports going to other LA republics to 16.6% in 1945. BUT: Inter-American cooperation could not fully compensate Argentina and Uruguay for the shrinking of the British market, or Brazil`s loss of coffee sales.

In 1940: Argentine Plan to establish a customs union for the southern republics.

In the end, intra Latin American trade was promoted through a multitude of BILATERAL AGREEMENTS that provided tariff and nontariff concessions for pairs of neighboring countries.

The result was an increase in the share of exports going to other LA republics to 16.6% in 1945.

INDUSTRIALIZATION FACTORS THAT DETERMINED INDUSTRIALIZATION IN LA: The sharp DECLINE in the volume of IMPORTS after 1933 allowed domestic manufacturers to expand production even with an unchanged level of real consumption. The rise of INTRA-Latin American TRADE made it possible for manufacturers to sell their output in neighboring countries: Brazilian textile exports soared, and Argentina exported nearly 20% of all its manufacturing production in 1943. Indeed, Latin America`s manufactured exports even penetrated markets outside the region like South Africa. The RISE OF FIRMS not dependent on consumer demand, which produced mainly intermediate goods but also some capital goods, looked to productive sectors and state, rather than households for their markets.

FACTORS THAT DETERMINED INDUSTRIALIZATION IN LA:

The sharp DECLINE in the volume of IMPORTS after 1933 allowed domestic manufacturers to expand production even with an unchanged level of real consumption.

The rise of INTRA-Latin American TRADE made it possible for manufacturers to sell their output in neighboring countries: Brazilian textile exports soared, and Argentina exported nearly 20% of all its manufacturing production in 1943.

Indeed, Latin America`s manufactured exports even penetrated markets outside the region like South Africa.

The RISE OF FIRMS not dependent on consumer demand, which produced mainly intermediate goods but also some capital goods, looked to productive sectors and state, rather than households for their markets.

SOME EXAMPLES 1. Volta Redonda integrated steel mill in Brazil, financed in part by the US, which sold its output mainly to construction firms and manufacturing enterprises. 2. Cement factories, basic chemical plants, oil refineries, plastics, rayons, and machinery These industries represented a new stage that transformed the structure of manufacturing, By 1946 less than half of all industrial output in Argentina was destinated for households- down from nearly 75% in 1937- and nearly one third consisted of intermediate goods sold to productive sectors.

THE ROLE OF THE STATE The change in the industrial structure and the emergence of new industries was linked to the rise of a more interventionist state in Latin America. WHY? ï€ Free markets could not handle the problems posed by dollar inflation, import shortages, and unsold agricultural surpluses. Prices could not be used exclusively to clear markets, price control was endemic and rationing by the state was essential in the alocation of foreign exchange. Inter-American cooperation placed additional demands on the state through the need for infrastructure improvements and public works. As a result: Construction grew at an annual rate of 7 % percent for the region as a whole between1939 and 1945. Transport, public utilities, and public administration also grew rapidly in most republics .

ï€ Free markets could not handle the problems posed by dollar inflation, import shortages, and unsold agricultural surpluses.

Prices could not be used exclusively to clear markets, price control was endemic and rationing by the state was essential in the alocation of foreign exchange.

Inter-American cooperation placed additional demands on the state through the need for infrastructure improvements and public works.

As a result: Construction grew at an annual rate of 7 % percent for the region as a whole between1939 and 1945. Transport, public utilities, and public administration also grew rapidly in most republics .

AGRICULTURE Agriculture: Its export component was depressed by the problems of expanding volumes under wartime conditions; and agriculture for domestic use was constrained by the slow growth of real consumption. EVERYWHERE INDUSTRIAL GROWTH EXCEEDED AGRICULTURAL GROWTH THE WAR MARKED A FURTHER TRANSITION FROM TRADITIONAL EXPORT-LED GROWTH TOWARD AN INWARD-LOOKING MODEL BASED ON IMPORT SUBSTITUTION INDUSTRIALIZATION

Agriculture: Its export component was depressed by the problems of expanding volumes under wartime conditions; and agriculture for domestic use was constrained by the slow growth of real consumption.

EVERYWHERE INDUSTRIAL GROWTH EXCEEDED AGRICULTURAL GROWTH

THE WAR MARKED A FURTHER TRANSITION FROM TRADITIONAL EXPORT-LED GROWTH TOWARD AN INWARD-LOOKING MODEL BASED ON IMPORT SUBSTITUTION INDUSTRIALIZATION

INMIGRATION and new firms Many new manufacturing establishments were established in the war years despite the unfavorable external environment. Refugees from Europe brought their skills and capital to Argentina, Brazil, Chile, and Uruguay, and many highly qualified Spaniards fled to Mexico to escape living in Franco`s Spain. Argentina: nearly 30% of all firms in existence at the end of the war had been established between 1941 and 1946.

Many new manufacturing establishments

were established in the war years despite the unfavorable external environment.

Refugees from Europe brought their skills and capital to Argentina, Brazil, Chile, and

Uruguay, and many highly qualified Spaniards fled to Mexico to escape living in Franco`s Spain.

TRADE SURPLUSES, FISCAL POLICY AND INFLATION Price deflation of the 1930s Price inflation in the war economy For those republics that exported products which could be consumed locally (e.g. Argentina), the rise in export prices had a direct and immediate impact on the cost of living. Countries that previously relied on the US for imports and in which transport costs were modest (e.g.Mexico) faced the smallest increases; those republics far away and previously supplied from Europe (e.g. Argentina) suffered the biggest rise.

For those republics that exported products which could be consumed locally (e.g. Argentina), the rise in export prices had a direct and immediate impact on the cost of living.

Countries that previously relied on the US for imports and in which transport costs were modest (e.g.Mexico) faced the smallest increases; those

republics far away and previously supplied from Europe (e.g. Argentina) suffered the biggest rise.

TRADE SURPLUSES, FISCAL POLICY AND INFLATION Under the abnormal wartime conditions: the decline in import supply as a result of the war effort in the industrializaded countries and to the shortage of international shipping, so import demand far exceeded available supply, provinding innumerable opportunities to windfall profits of those lucky enough to be allocated licenses. Again, the republics traditionally supplied from Europe suffered the worst, with Argentina seeing a two-thirds drop in the volume of its imports between 1939-1943 . Mexico was able to take advantage of its geographical position and its improved relationship with te US to increase the volume of its imports rapidly

TRADE SURPLUSES, FISCAL POLICY AND INFLATION The fiscal problem resulted in LARGE DEFICITS in a number of countries. The most appropiate taxes to use under wartime conditions were direct. These had two advantages: they did not necessarily provoke price rises, and they reduced disposable income and purchasing power, thereby bringing nominal demand more into line with available supply. Many countries made a major effort to raise revenue from direct taxes, and progress was not negligible. The Vargas administration in Brazil increased their yield from 8.5 % of all revenue in 1939 to 26.5% in 1945. Generally, governments chose to expand their activities in the war years even if this implied a further increase in nominal demand and an addition to inflationary pressures.

The fiscal problem resulted in LARGE DEFICITS in a number of countries.

The most appropiate taxes to use under wartime conditions were direct. These had two advantages: they did not necessarily provoke price rises, and they reduced disposable income and purchasing power, thereby bringing nominal demand more into line with available supply.

Many countries made a major effort to raise revenue from direct taxes, and progress was not negligible. The Vargas administration in Brazil increased their yield from 8.5 % of all revenue in 1939 to 26.5% in 1945.

Generally, governments chose to expand their activities in the war years even if this implied a further increase in nominal demand and an addition to inflationary pressures.

TRADE SURPLUSES, FISCAL POLICY AND INFLATION IN THIS CONTEXT GOVERNMENTS: INCREASED PUBLIC EXPENDITURES in some countries, like Colombia, for counter-cyclical purposes. The first months of the war brought real hardship for some branches of the export sector, and unemployment was widespread. Public works, were seen as an appropriate policy response. 2. INVESTMENTS IN SOCIAL INFRASTRUCTURE in order to increase domestic supply. With the fall in imports the need for an increase in domestic supply had to be accompanied by transport and energy facilities to expand domestic producers’ output. 3. INCREASE MILITARY SPENDING during the war: Ecuador and Peru Had a still-unresolved border dispute in the Amazon jungle. Many of the Caribbean basin dictators (Nicaragua) used the war as a cover for strengthening their mechanisms of internal repression. In Argentina Peron was not slow to reward the armed forces, whose military intervention had made it possible for him to rise to power.

INCREASED PUBLIC EXPENDITURES in some countries, like Colombia,

for counter-cyclical purposes. The first months of the war brought real hardship for some branches of the export sector, and unemployment was widespread. Public works, were seen as an appropriate policy response.

THE POSTWAR DILEMMA CRUCIAL DILEMMA: HOW TO SPEND THE ACCUMULATED BALANCES BEFORE THEIR REAL VALUE ERODED BY INFLATION As Asian supplies returned to the market, the U.S. decreased its primary product purchases from Latin America. At the inter-Amercian conference held in 1945 at Chapultepec, the U.S. reaffirmed its belief in free trade, and all wartime commodity agreements came to an end. The main priority for the US became the reconstruction of Europe. Latin Amercia therefore saw its share of the market for U.S. imports decline at the same time as the US took a smaller share of Latin American exports. Under such circumstances, exporters of manufactured goods could not compete in price; and price competition was essential to compensate for inferior quality.

As Asian supplies returned to the market, the U.S. decreased its primary product purchases from Latin America.

At the inter-Amercian conference held in 1945 at Chapultepec, the U.S. reaffirmed its belief in free trade, and all wartime commodity agreements came to an end. The main priority for the US became the reconstruction of Europe.

Latin Amercia therefore saw its share of the market for U.S. imports decline at the same time as the US took a smaller share of Latin American exports.

Under such circumstances, exporters of manufactured goods could not

compete in price; and price competition was essential to compensate for inferior

quality.

INWARD-LOOKING DEVELOPMENT Inward-looking development and import restrictions as the best policy ï€ NATIONALISM was one of the factors: hopes that the wartime cooperation with the U.S. would lead to a fairer post war division of labor. Nationalism gave way to models of development which reduced dependence on foreign powers. EXPORT pessimism: CEPAL’s work. The most compelling argument in favor of import restrictions was a shortage of foreign exchange. A few republics –Argentina, Brazil, Chile and Uruguay- adopted the new model consistently and enthusiastically, but a number of others –including Colombia and Mexico- tried to combine the inward-looking model with policies that would also promote exports. ï€

ï€ NATIONALISM was one of the factors: hopes that the wartime cooperation with the U.S. would lead to a fairer post war division of labor.

Nationalism gave way to models of development which reduced dependence on foreign powers.

EXPORT pessimism: CEPAL’s work.

The most compelling argument in favor of import restrictions was a shortage of foreign exchange.

A few republics –Argentina, Brazil, Chile and Uruguay- adopted the new model consistently and enthusiastically, but a number of others –including Colombia and Mexico- tried to combine the inward-looking model with policies that would also promote exports. ï€

THE NEW INTERNATIONAL ECONOMIC ORDER Recognition of the need for international supervision of balance-of-payments corrections. Mechanims to promote exchange-rate stability New instruments to promote international capital flows. Global organization’s elimination of barriers to international trade First real progress Bretton Woods Conference, in July 1944. Bretton Woods therefore reflected U.S. preferences and priorities, including the creation of the Internacional Monetary Found (IMF) and the International Bank for Reconstruction and Development (IBRD), with base in Washington DC (a reflection of the new global balance of power). Both the IMF and the World Bank, with voting power determined by share ownership gave a much higher priority to Europe than to Latin America.

Recognition of the need for international supervision of balance-of-payments corrections.

Mechanims to promote exchange-rate stability

New instruments to promote international capital flows.

Global organization’s elimination of barriers to international trade

INTERNATIONAL TRADE BOOM Factors: By the end of the 1940s Marshall Plan aid eased the balance-of-payments problem in Europe, had helped to raise the rate of capital acumulation, and accelerate the process of reconstruction. 1947: the signing in Switzerland of a General Agreement on Tariffs and Trade (GATT) reduced the barriers to trade faced by manufactured goods. GATT negotiations reflected the interests of developed countries The reduction in the barriers to trade produced an unprecedent increase in world exports and imports. The new international economic order therefore benefited primarily the developed countries.

Factors:

By the end of the 1940s Marshall Plan aid eased the balance-of-payments problem

in Europe, had helped to raise the rate of capital acumulation, and accelerate

the process of reconstruction.

1947: the signing in Switzerland of a General Agreement on Tariffs and Trade (GATT) reduced the barriers to trade faced by manufactured goods. GATT negotiations reflected the interests of developed countries

The reduction in the barriers to trade produced an unprecedent increase in world

exports and imports.

The new international economic order therefore benefited primarily the developed countries.

LATIN AMERICAN PROBLEMS Part of the problem was the concentration of Latin American exports in primary products at a time when primary-product trade was growing less rapidly than world trade. An additional problem faced by Latin America primary-product exports was protection for agriculture in the developed countries and the discrimination of European powers in favor of former colonies The most dynamic branches of world trade were found in manufactured goods. Latin America therefore lost the opportunities created by the postwar boom in international trade. The region as a whole had lost market share after the war.

Part of the problem was the concentration of Latin American exports in primary products at a time when primary-product trade was growing less rapidly than world trade.

An additional problem faced by Latin America primary-product exports was protection for agriculture in the developed countries and the discrimination of European powers in favor of former colonies

The most dynamic branches of world trade were found in manufactured goods.

Latin America therefore lost the opportunities created by the postwar boom in international trade. The region as a whole had lost market share after the war.

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