East Asia and Latin America as Contrasting Models

Abstract

This paper examines how the Latin American countries can break out of their present predicament and establish a sustainable pattern of economic growth. With inflation running at several 10s or 100s of percent per annum and with the overhang of heavy debt burdens the tasks of stabilization and adjustment facing the national authorities are difficult indeed. It will be a miracle if these tasks are accomplished without incurring the heavy costs of economic slowdown or higher unemployment. In order to soften the adverse impacts of the stabilization and adjustment policies it will be necessary to restructure and reschedule the Latin American countries external debts in order to maintain the necessary imports. To not continue the vicious circle of balance of payments crises persistent inflation and sluggish economic growth the Latin American authorities need to undertake a thorough reexamination of their basic policy approaches to economic development and price stabilization. This comparative review of the development and stabilization experiences in East Asian and Latin America suggests that the differences in export expansion and price stabilization contributed crucially to the divergence of their economic performances both before and after the first oil shock. In the East Asian countries the control of hyperinflation in the early postwar years and subsequent policy reforms in favor of export activity enabled them to take advantage of the favorable external environment in the 1960s to attain rapid export growth and establish a sustainable pattern of economic growth. The faster export growth enabled higher investment and the attainment of economies of scale. The stabilization of domestic prices and the faster growth of per capita income facilitated the growth of domestic financial intermediation thereby improving resource allocation and strengthening domestic price stability. By contrast the failure to control inflation and attain rapid export growth confined several Latin American countries to a vicious circle of balance of payments crises persistent inflation and sluggish economic growth even during the 1960s when the global environment was favorable.