American Latin Crisis, Default, and Controls

AmericanLatin: Crisis, Default, and Controls

AmericanLatin: Crisis, Default, and Controls

Reading1:

Question1: Do exporter firms have a higher productivity premiums thannon-exporting firms?

Mostof the Latin American business firms have underestimated the exportopportunities at their disposal and focused more on domestic market.This creates a situation in which local firms compete with foreigncompanies that for the domestic market, which in turn reduces theproductivity and profitability of the local companies. From the casestudy of a few Latin American firms that are already engaged in theexport business, it is possible for business to enhance theirproductivity premiums by exporting to foreign markets.

Exportbusinesses have higher chances of becoming more productive andprofitable than those that sell in the local market only. This isbecause an exporting firm is able to increase its market segment andsell to a larger population. 1An increase in productivity of exporting firms can also be attributedto the fact that these firms get the opportunity to learn from theirforeign buyers about the quality standards required in theinternational markets. A local company that manages to enhance thequality of its products is able to increase its competitiveness bothin the local market and in the foreign markets.

Inaddition, studies have shown that companies that operate in smallcountries are

1.Casacuberta, C., Gandelman, N., Olarreaga, M., Porto, G. &ampRubiano, E. (2009). Exportpremiums.Washington, DC: Palgrave MacMillan &amp World Bank.

inducedby export opportunities to adopt new technology. 2The tendency of exporting businesses to adopt new technology may beattributed to two major factors, including the demand for quality byforeign buyers the need for efficiency in production.

Inconclusion, exporting firms are in a better position to enhance theirproductivity as well as profitability. This is because these firmsare able to focus on a wider market and adopt technologies thatenhance their efficiency.

Question2: What is the difference between exporting firms and firms that selllocally in terms of their capacity to contribute towards the GDPgrowth?

Althoughall business firms make some contribution towards the growth of thenational economy, exporting firms may have a bigger contribution. Asmall country that seeks to expand its export orientation creates aplatform for the emergence of more productive and larger firms. 3These firms tend to have a larger share in the national output, whichleads to re-allocation of resources to larger firms from small ones.The differences in the share of the national output suggest thatexport business has a bigger contribution to the GDP.

Inaddition, export companies employ more people and tend to pay higherwages compared to firms that sell in the local markets. Given theirefficiency and a higher profitability, exporting

2.Lopez, J. &amp Shankar, R. (2011). Gettingthe most out of free trade agreement in Central America.Washington, DC: World Bank Publications.

3.Casacuberta, C., Gandelman, N., Olarreaga, M., Porto, G. &ampRubiano, E. (2009). Exportpremiums.Washington, DC: Palgrave MacMillan &amp World Bank.

firmshave the capacity to compensate the employees better than those thatfocus on the domestic market. 4By employing more people and paying higher wages, exporting firmsreduce the number of people living below the poverty line, which is akey indicator of an increase in the growth of the national economy.

Inconclusion, exporting firms have a bigger contrition towards thegrowth of the national economy. This because they have a high inflowof foreign currency, employs more people, and pay higher wages.

Reading2

Question1: Why has the market liberalization approach failed to enhance thedistribution of resources in Latin America?

Marketliberation is an economic growth approach that is highly appreciatedin capitalist economies. It involves the relaxation of the policiesmade by the government in order to create a platform for business tooperate and be regulated by the market forces. 5Although this approach has contributed towards economic growth in theU.S., it has failed to deliver in Latin American for two majorreasons.

First,Latin America’s economy is not innovation-driven, which means thatboth the large and small firms do not invest in research.Consequently, the lack of innovation and learning coupled with weaklabor unions reduces the capacity of these companies to bring

4.Casacuberta,C., Gandelman, N., Olarreaga, M., Porto, G. &amp Rubiano, E. (2009).Exportpremiums.Washington, DC: Palgrave MacMillan &amp World Bank.

5.Martinez, J., Molyneux, M., &amp Sanchez, D. (2009). Latin Americancapitalism: Economic and social policy in transition. Economyand Society,38 (1), 1-16.

realeconomic change and the anticipated growth in wages. 6Consequently, the market liberalization approach fails to enhanceredistribution of resources.

Secondly,Latin American economies are based on a hierarchical market economyHME) model. Under the HME model, large and transitional companiesdetermine the direction of the national economy and control the entryof other firms into the market. 7This implies that the wealthy class continues to accumulate wealth,even after the adoption of market liberalization strategies.

Inconclusion, market liberation can be an effective strategy forboosting economic growth and a fair distribution of resources, butits effectiveness depends on the market model of a given economy.Liberalization has failed to deliver in Latin America because thesecountries use HME model where large and transition corporationsregulate the direction of the national economy.

Question2: Sector-based policies are known to be effective tools forreducing, but why have they failed to work in Latin Americancountries?

LatinAmerican countries have been transforming their welfare programs withthe objective of reducing poverty by uplifting the living standardsof their respective populations since 1980s. This transition hasfocused on making the welfare program a liberal-informal system. 8Failure by this transition to reduce poverty and enhanceredistribution of

6.Rozenwurcel, G. (2006). Whyhas all development strategies failed in Latin America?Tokyo: United Nations University.

7.Martinez, J., Molyneux, M., &amp Sanchez, D. (2009). Latin Americancapitalism: Economic and social policy in transition. Economyand Society,38 (1), 1-16.

8.Ibid, p. 5

resourcescan be attributed to two factors.

First,reforms in Latin American countries have focused on privatization ofthe welfare programs (such as pension system), which has weakened thesocial protection for workers in the formal sector. 9This limits the capacity of the ongoing reforms to benefit allpeople.

Secondly,the investment made by the Latin American countries in theirsector-based policies is so limited to an extent that its impactcannot be felt at the national level. 10Latin American countries invest less than 1.5 % of their respectiveGDP towards their social and welfare programs, which implies that thebenefits that reach the people cannot take them out of poverty.

Inconclusion, Latin American countries have made some reforms in theirsocial welfare programs, but the effect of these changes has not beenfelt by the majority of citizens. The ineffectiveness of the policybased approaches in Latin America can be attributed to the allocationof limited resources and the failure by the welfare programs toinclude all groups that needed to be assisted in order to get out ofpoverty.

Reader3

Question1: how does the political system of a country affect its taxingpower?

Differentcountries collect different amount of tax relative to their GDP,which can

9.Martinez, J., Molyneux, M., &amp Sanchez, D. (2009). Latin Americancapitalism: Economic and social policy in transition. Economyand Society,38 (1), 1-16.

10.Ibid, p. 5.

beexplained by their differences in taxing power. The political systemaffects the taxing power in two ways. First checks and balances amongthe government institutions determines the capacity of the governmentto generate maximum revenue and control spending in order to ensurethat all monies are spent in projects or recurrent expenses thatsupport further economic growth. 11Unfortunately, checks and balances are weakest in poor and developingnations, which limit their economic development and the taxing power.Broad based spending plans are easy to develop in poor countries, buttheir implementation is affected by corruption and inefficiency. Insome states, tax revenues are embezzled before they reach thenational treasury.

Thesecond fact that limits the taxing power is the concentration ofpower. Developing countries rarely practice democracy, which is apolitical instrument that spreads power to all citizens. Instead,power is mostly concentrated in the hands of a few political elitesand the wealthy classes that are always protected by differentinstitutional mechanisms, including military government, hereditaryinstitution, or corrupt political governments. 12The protected classes push for selective tax collection and sendingthat favor them, which weakens the taxing power.

Inconclusion, the taxing power can be affected by a multiple factorsthat impart their influence jointly or singly. The common factorsinclude the level of strength of checks and balances and theconcentration of power.

11.Besley, T. &amp Persson, T. (2014). Why do developing countries taxso little? Journalof Economic Perspective,28 (4), 99-120.

12.Bahl, W. &amp Bird, M. (2008). Tax policy in developing countries:Looking back and forward. NationalTax Journal,21 (2), 279-301.

Question2: How does the economic structure of developing countries affecttheir taxing powers?

Economicstructure influences the taxing power through the proportion offormal and informal organizations and the level of dependence on aid.Developing countries are characterized by the existence of a highproportion of informal business compared to formal enterprises. 13Most of these informal businesses are operated in villages and longthe streets and their owners earn less than subsistence income. Thismakes it difficult for the government to collect taxes from suchinformal business while their owners cannot even feed their families.It would even cost more to collect revenue from small businesses thatare scattered in villages than the amount that would be collected.

Inaddition, developing countries have the tendency to depend ondonations to finance their development as well as their recurrentexpenditure. The inflow of donor funds reduces the government’sincentive to maximize revenue collection from domestic sources. Theexistence of other sources of revenue (such as donor funds) leads toa proportionate decline broad-based sources of revenue, including theincome taxes and the value added taxes.14

Inconclusion, the economic structure is among the key determinants ofthe taxing powers of developing nations. These nations arecharacterized by large informal sectors compared to the formal sectorand a high dependence on donations, which limits their taxing powers.

13.Besley, T. &amp Persson, T. (2014). Why do developing countries taxso little? Journalof Economic Perspective,28 (4), 99-120.

14.Ibid,112.

Reading4

Question1: With the continued recovery of the U.S. economy after the 2008financial crisis, one would expect the economy of the neighboringeconomies to improve. Why is this not the case for Latin America?

TheU.S. economy has been improving with time, but economy of LatinAmerican countries has been declining. This scenario can be explainedby several factors. For example, it is speculated that a rapidincrease in the yields of the U.S. bond has disrupted the LatinAmerican capital markets and currencies. 15This implies that the U.S. currency has been strengthening while thecurrencies of the Latin American countries have been weakening, whichhas made the repayment of the public debt more expensive.

Inaddition, a persistent weakness in commodity market has resulted inthe adjustment of corporate investment downwards in the developingcountries. This weakness, coupled with low income prospects hasreduced consumer spending and sentiment. 16The consequence of this scenario is a continuous decline ininvestment and the national economy.

Inconclusion, a decline in the economic growth in Latin America can beattributed to regional-specific and global factors. Most importantly,a general decline in commodity prices, consumer spending, and a rapidstrengthening of the U.S. currency and the stock market have hinderedeconomic recovery in Latin America.

15.International Monetary Fund (2015). Worldeconomic and financial survey: Regional economic outlook.Washington, DC: IMF.

16.Medina, L. (2010). Thedynamic effects of commodity prices on fiscal performance in LatinAmerica.Washington, DC: IMF.

Question2: What are major external adjustments that Latin American countriescan use to overcome the challenge of low commodity prices?

Thedecline in economic growth in Latin countries has been associatedwith a fall in commodity prices since the 2008 global financialcrisis. Latin American countries can use three strategies to reversethis situation. The measure should include the diversification ofexports, which include, not just an increase in the volume by alsothe range of commodities that these countries export to othercountries. 17By exporting to countries that have already recovered from thecrisis, companies operating in the Latin American countries will beable to get better commodity prices.

Secondly,Latin American governments should restrain from regulation ofexchange rates and focus on enhancing the flexibility of these rates.An increase in the flexibility of the exchange rate has been shown tobe an effective method of buffering the national economy from thenegative effects of a decline in commodity prices. 18

Thelast type of external adjustment is import compression. This shouldinvolve a reduction in the volume of commodities that these countriesimport. Compression of imports supports reduces competition fordomestic markets, which gives them the opportunity to thrive.

Inconclusion, a poor performance of economy in Latin American countriesis mainly associated with a significant decline in commodity prices.This situation can be reversed by expanding exports, enhancedflexibility of the exchange rate, and compression of imports.

17.International Monetary Fund (2015). Worldeconomic and financial survey: Regional economic outlook.Washington, DC: IMF.

18.Ibid, 17.

Summary

Economiesof the Latin American countries have been performing poorly in spiteof being close to the U.S. that has been recovering from the 2008financial crisis. Most of the companies in Latin America focus on thedomestic market while failing to take advantage of the export sector,which can make them more productive and profitable. Apart fromincreasing their own profitability, firms that engage in exportbusiness make a more significant towards the GDP growth than thosethat focus on domestic market.

TheU.S. and European nations believe in the concept of marketliberalization, but the application of this concept in Latin Americahas failed to deliver the expected results. This scenario can beattributed to multiple factors that include the use of a hierarchicalmarket model and the lack of investment in innovation by businessesthat operate in Latin American countries. In addition, an investmentin the sector-based programs has failed to reduce poverty in LatinAmerica because of the limited resources that are dedicated towardsthese sectors.

Developingcountries have a relatively lower taxing power compared to developednations. This can be attributed to the concentration of power in thehands of the rich and the ruling classes. In addition, weak checksand balances in the political system of the developing economiesreduce their taxing power in the long-run. An economic structure ofthe developing countries, which is characterized by a large informalsector compared to a formal sector, also reduce the taxing power ofthese countries.

Apersistent decline in the rate of economic growth in Latin Americacan be associated with a fall in commodity prices. Latin Americangovernments have failed to enhance the commodity price following therapid growth in the U.S. capital markets as well as the financialmarkets, which have suppressed the same markets in Latin America.However, this situation can be corrected by compressing imports,expanding imports, and flexing the exchange rates.

References

Bahl,W. &amp Bird, M. (2008). Tax policy in developing countries: Lookingback and forward. NationalTax Journal,21 (2), 279-301.

Besley,T. &amp Persson, T. (2014). Why do developing countries tax solittle? Journalof Economic Perspective,28 (4), 99-120.

Casacuberta,C., Gandelman, N., Olarreaga, M., Porto, G. &amp Rubiano, E. (2009).Exportpremiums.Washington, DC: Palgrave MacMillan &amp World Bank.

InternationalMonetary Fund (2015). Worldeconomic and financial survey: Regional economic outlook.Washington, DC: IMF.

Lopez,J. &amp Shankar, R. (2011). Gettingthe most out of free trade agreement in Central America.Washington, DC: World Bank Publications.

Martinez,J., Molyneux, M., &amp Sanchez, D. (2009). Latin Americancapitalism: Economic and social policy in transition. Economyand Society,38 (1), 1-16.

Medina,L. (2010). Thedynamic effects of commodity prices on fiscal performance in LatinAmerica.Washington, DC: IMF.

Rozenwurcel,G. (2006). Whyhas all development strategies failed in Latin America?Tokyo: United Nations University.