The Brazilian industry has been deeply changed during the nineties although it is not easy to have a synthetic and encompassing view of the transformation occurred. ln order to have such a view one has to take into account the heavy influence of the years of high inflation (until mid 1994). Stabilization and overvaluation (of the real) in the years following the launching of the Real Plan were another decisive influence. The article argues that submitted to this set of conditioning events, industry in Brazil went through a (limited) catch up during the nineties. It also tries to show how progress has been mainly concentrated at the plane level - both in multinational and in domestic industrial firms.
JEL Classification: L11; L16; L20.
This paper, written as a keynote speech, is divided in two parts. The first part reviews the literature on industrial clustering focusing on policy implications. It argues that the theoretical complexity, which renders the subject difficult to formalize, and the want of empirical work do not authorize simplistic arguments pro or against policy interventions. For these reasons, policy implications are not yet fully explored in the literature. The second part of the paper suggests a research agenda for studying industrial clusters in Brazil, including the production of statistical evidence, empirical work and case studies as bases for designing policy guidelines.
JEL Classification: L60; O33; R23; R32.
The implicit assumption that governments will bailout financial institutions under distress can generate negative incentives for the development of a sound financial system. This paper begins from the premise that these negative incentives, which create a situation of moral hazard, is essentially a political problem rather than a technical problem over generating correct institutional incentives. In the Brazilian case, we argue the current administration of Fernando Henrique Cardoso was only able to significantly reduce its moral hazard problem in the financial sector through distancing its political relationship with two important political actors: the private financial sector and state governors. The ability of the government to eliminate the implicit assumption of an eventual Central Bank bailout over public and private commercial banks was only made possible through a series of political conditions, which includes the end of hyper-inflation under the Real Plan, that reduced the government’s dependence upon those two important political actors.
JEL Classification: E58; E44; G21; G28.
A pure capitalist system has private ownership of wealth and administration of the economy via markets. As pure socialist system has stare ownership and administration by a bureaucracy. One offers growth and insecurity, and the other offers security and stagnation. In reality, neither has existed nor can exist for long. The feasible alternatives are welfare capitalism and market socialism. Over the last fifty years, the transition from welfare to corporate capitalism has taken place in the West under U. S. leadership. It has resulted in increasing insecurity and inequality within rich countries and between rich and poor countries. The transition from bureaucratic to market socialism in China over the last twenty years has brought to its people amazing growth and prosperity- and many of the ills of a market economy. It remains to be seen whether market socialism in China is an attractive alternative to welfare capitalism, or is no more than a transition to corporate capitalism.
JEL Classification: P51.
Despite the widespread adoption of market reforms in Latin America over the past decade, there is still no consensus about the type of exchange rate regime that would best complement a liberal economic model. While there has been a distinct shift from fixed to floating rates since the Mexican peso crisis of 1994, the empirical evidence is ambivalent when it comes to measuring policy success under any one regime. ln light of this empirical ambivalence, this introductory article argues that a more fruitful line of research lies in understanding the political economy lessons that can be gleaned from the standpoint of exchange rate management. These entails, first, an examination of the conflicting pressures that special interests exert on policy officials to maintain the exchange rate at a certain level; and second, it requires analysis of the broader institutional mechanisms through which monetary policy is mediated. The article suggests that policy “success” or “failure” can depend as much of policymakers’ tenacity and statecraft as of the technicalities of macroeconomic policymaking.
JEL Classification: F31; F32; E60.
This article lays out the general economic principles of exchange rate policy and provides an overview of the four country cases that have been included in this special edition of the journal: Mexico, Brazil, Argentina, and Venezuela. Three main currency regimes are discussed – the fixed but adjustable regime (FBAR), the firmly fixed rate, and the floating rate regime. At the same time, the article distinguishes between two main approaches to exchange rate policy: the nominal anchor approach and the real targets approach. The author identifies the costs and benefits of implementing these various exchange rate regimes through the different phases of macroeconomic stabilization and structural adjustment. Although dollarization has become increasingly discussed as another monetary policy option in Latin America, the author notes that this trend is still too incipient to address at any length in this article.
JEL Classification: F31; F32.
This article traces the ways in which political, economic, domestic, and international factors converged to provoke a massive financial crisis in Mexico in 1994/5, as well as the consequences of this crisis for future reform efforts. The author argues that the maintenance of an overvalued exchange rate prior to the crisis enabled the ruling PRI party to appeal to a broad range of domestic interests. International investors, who held an unprecedented $34 billion in Mexican equities in 1994, were equally adamant in defending the anchored exchange rate. However, in attempting to appease both domestic and foreign interests, the Salinas administration lost control of the macroeconomic fundamentals. While the combination of a massive multi-lateral loan and the shift to a floating exchange rate paved the way for Mexico’s rapid economic recovery, a main legacy of the crisis was the political demise of the PRI. Although political liberalization was certainly not part of the PRI’s original game plan, thanks to its own reckless policy errors, a main legacy of the peso crisis was the advent of more open politics in Mexico. Because of this, the politics of economic policymaking under the new Fox administration may not be as neatly packaged as under the PRI, but there are already unprecedented signs of debate, accountability, and compromise.
JEL Classification: F31; F32; F62.
The author begins by asking why Brazilian policymakers opted to target the exchange rate to stabilize inflation when this strategy had already failed in Mexico. The answer: it was no longer possible to accommodate the country’s high inflation rate through the pervasive use of price indexation and a competitive exchange rate policy. Under conditions of high inflation, the anchoring of the exchange rate within the Real Plan was the quickest route toward price stability. However, policy success also required deep fiscal adjustment, and traditional Brazilian politics stubbornly resisted the necessary tax reforms. In contrast to Mexico, where the peso crash was fueled by reckless private sector spending and borrowing, Brazil’s January 1999 devaluation was triggered by chronically high fiscal deficits. Brazil’s rapid recovery under a flexible currency regime suggests that the macroeconomic fundamentals are back on track; the challenge now lies in the crafting of a viable pro-reform political coalition that can cut through the numerous parochial interests that converged to provoke the 1999 devaluation.
JEL Classification: F31; F32.
As the one Latin American emerging market country that has steadfastly adhered to a fixed exchange rate for more than a decade, this article examines the economic and political trade-offs that peso-dollar parity has entailed. In economic terms, the currency board has clearly fostered macroeconomic stability and fiscal prudence. Yet, the maintenance of a fixed currency regime in the context of volatile capital flows has also contributed to the steady appreciation of the peso over time. This trend, along with certain political deals (slow labor market reform and generous government transfers to the provinces) struck at the outset of the reform program, has greatly hampered the productivity and dynamism of the Argentine economy. The country’s weak competitive position has been exacerbated by the Brazilian devaluation of 1999, and the lesson since then has been how difficult it is to craft a political coalition to tackle the formidable microeconomic tasks now at hand.
JEL Classification: F31; F33.
Having just completed its second consecutive “lost decade”, the Venezuelan case confirms that there are no short cuts to sound political economic management in the era of high capital mobility and securitized capital flows. The maintenance of a muddling-through exchange rate strategy has triumphed, at least for the time being, and enabled an elite executive-level coalition to prevail in pursuing a less than optimal macroeconomic policy. The author argues that Venezuela has avoided a full-blown Mexican or Brazilian-style devaluation by virtue of the Central Bank’s ability to effectively manage the exchange rate. However, this has been the only pocket of modernization, as policymakers throughout the rest of the state bureaucracy have rejected the kinds of market reforms that will be necessary to reverse the country’s highly mediocre performance. While high oil prices since 1999 have afforded politicians and policymakers the “luxury” of being a reform laggard, Venezuelan leaders seem determined to learn the hard way that international trends could again swing against them on a moment’s notice.
JEL Classification: F31; F32; E31.
The four countries studied in this essay present the three main options of exchange rate policy available for Latin America nations. This note concludes the studies by giving an outlook of the discussion.
JEL Classification: F31; F32.