by Matías Vernengo, co-editor of Why Latin American Nations Fail: Development Strategies in the Twenty-First Century
Almost a decade ago, The Economist had a cover story about the Brazilian economy taking off. Everything seemed fine, with the Brazilian economy on the verge of surpassing Britain and France, and on its way to economic development. Among the reasons given for the Brazilian success was the fact that the country had “established some strong political institutions.” But many other factors were cited, like fiscal restraint, an independent central bank, openness to foreign direct investment, and the rise of local transnational corporations. The Economist essentially reproduced a few of the policies of the so-called Washington Consensus as the main driver of the Brazilian success. And institutions played a central role, in particular the institutions that allowed for the market economy to thrive.
It is painfully clear now, after two years of a collapsing economy, significant political upheaval, an impeachment that many see as a coup, and the imprisonment of an ex-president on corruption charges that many see as unfounded, that The Economist was too optimistic about Brazil. The Economist briefly suggested in that piece that the danger for the Brazilian economy was associated to the excessive dependence on commodity exports, and that a collapse of the prices of commodities could spell disaster for the Brazilian economy. The problems with the persistence of this development strategy should have been at the center of their analysis.
In a paper co-authored with Esteban Pérez Caldentey of the Economic Commission for Latin America and the Caribbean (ECLAC) we discussed the problems of the current development strategy of Latin America, and were skeptical about the possibilities for the region. We pointed out that South America was heavily dependent on commodity exports and Central America and Mexico on the exports of people, meaning that these countries were dependent on the remittances that immigrants send back home, and the cheap labor of workers in the ‘maquila’ sector of the economy. Further we argued that the pattern of specialization in Latin America, which resulted to a great extent from globalization and greater integration of production, trade and financial flows, and the rise of China as a global producer of manufactured goods, needed to be changed, and that institutions that fostered the transformation would have to be built or, when existing, strengthened.
To be fair, there has been an institutional turn in development economics. A concern with the role of institutions has become the dominant in discussions about the causes for the wealth and poverty of nations, and the work of Daron Acemoglu and James Robinson, Why Nations Fail, has become an authoritative reference in the field. Their work builds on the New Institutionalist analysis of Nobel Prize winner Douglas North and emphasizes the role of property rights and the rule of law to promote the appropriate incentives, within a market economy, and economic development. The papers in our book try to go beyond the institutions discussed by New Institutional authors, and to provide an assessment of what institutions have worked in the past, and a more balanced view in which public institutions, and not just market friendly ones, could play a relevant role in promoting economic development in the region.