ECONOMIC COMM ISSION LATIN FOR AMERICA AND THE CAR IBB E AN R e v i e w m ab iH f U n i t e d N a t i o n s /■pp'" îk j U n i t e d N a t i o n s ECLAC E C O N O M IC for C O M M ISSIO N L a t in A m e r i c a a n d THE CARIBBEAN GERT RO SEN T H A L Executive Secretary O S C A R ALTIMIR D eputy Executive S ec re ta ry i C E P R L R e v i e w NUMBER DECEMBER SANTIAGO, 54 1994 CHILE ANIBAL PINTO Director o f the Review EUGENIO LAHERA Technical Secretary UNITED NATIONS CEPAL Review is prepared by the Secretariat of the Economic Commission for Latin America and the Caribbean. The views expressed in the signed articles, including the contributions of Secretariat staff members, however, represent the personal opinion of the authors and do not necessarily reflect the views of the Organization. The designations employed and the presentation of material in this publication do not imply the expression of any opinion whatsoever on the part of the Secretariat concerning the legal status of any country, territory, city or area or its authorities, or concerning the delimitation of its frontiers or boundaries. Notes and explanation of symbols T h e fo llo w in g s y m b o ls a r e u s e d in ta b le s in th e R e v ie w : (...) Three dots indicate that data are not available or are not separately reported. (-) A dash indicates that the amount is nil or negligible. A blank space in a table means that the item in question is not applicable. (-) A minus sign indicates a deficit or decrease, unless otherwise specified. (•) A point is used to indicate decimals. (/) A slash indicates a crop year or fiscal year, e.g., 1970/1971. (-) Use of a hyphen between years, e.g., 1971-1973, indicates reference to the complete number of calendar years involved, including the beginning and end years. References to “tons” mean metric tons, and to “dollars”, United States dollars, unless otherwise stated. Unless otherwise stated, references to annual rates of growth or variation signify compound annual rates. Individual figures and percentages in tables do not necessarily add up to the corresponding totals, because of rounding. LC/G.1845-P December 1994 United Nations Publication ISSN 0251 - 2920 ISBN 92-1-121198-0 Applications for the right to reproduce this work or parts thereof are welcomed and should be sent to the Secretary of the Publications Board, United Nations Headquarters, New York, N.Y. 10017, U.S.A. Member States and their governmental institutions may reproduce this work without application, but are requested to mention the source and inform the United Nations of such reproduction. Copyright © United Nations 1994 All rights reserved Printed in Chile CEPAL REVIEW 54 CONTENTS H ealth c are m arkets: th eir m orp h o lo g y, b e h a vio u r and regulation 7 Jorge Katz and Ernesto Miranda L ib era liza tio n o r fin an cial d e ve lo p m e n t? 27 Giinther Held Fiscal a d ju s tm e n t and social spen d in g 47 Rossella Cominetti W o m e n ’s fo rm a l ed ucation: a ch iev e m e n ts and obstacles 61 Diane Alméras L a b o u r m arke t fle xib ility: w h a t d o e s it rea lly m ean? 81 Ricardo A. Lagos 97 T h e m o d ern izatio n o f bank su p ervisio n Christian Larrain C e n tral A m e rica n in tegration: its co sts a n d benefits 111 Luis Cdceres S o m e lesso n s o f th e A rg e n tin e p riv atizatio n process 129 Daniel Azpiazu and Adolfo Vispo E xtraord inary c om p arative ad van tag e and long-run growth: th e c as e of E cu ad o r 149 André A. Hofman and Rudolf Buitelaar T h e c u ltu ral in d u s try and new co d e s o f m o dernity 167 Martin Hopenhayn G u id e lin e s fo r co n trib u to rs to CEPAL R eview 181 R e c e n t E C L A C p u b licatio n s 183 D E C E M B E R 1994 CEPAL REVIEW 54 Health care markets: their morphology, behaviour and regulation Jorge M. Katz Ernesto Miranda R. ECLAC Division o f This article analyses the markets for health care-related Production, Productivity and Management. goods and services. Particular attention is devoted to three School o f Economics, University o f Chile. of those markets: medical services, public and private hospital services, and pharmaceuticals. These three markets -which, taken together, account for between 70% and 80% of total health-care operating expenditures- have structures that are characterized by imperfect competition, marked externalities in terms of the consumption of health care, and a high degree of interdependence. As a consequence of the first two of these traits, if these markets are left to their own devices they will not generate optimal solutions in terms of resource allocation or the maximization of well-being. By the same token, their interdependence leads to the transmission of distortions from one health-care market to the next and, in most cases, also tends to magnify those distortions that already exist in any one of these markets. This state of affairs has crucial implications for public policy-making, which, of course, must also take into account the particular economic, social and political conditions existing in each country. The authors therefore identify and analyse a number of regulatory measures which would appear to be advisable for each of these markets and which -if bolstered by the type of institutional, legal and regulatory retooling called for in each case- would diminish, if not eliminate altogether, their incompatibilities with the deregulatory and free-market theories that are now seen as appropriate in other spheres of economic activity. DECEMBER 1994 8 C E P A L R E V I E W 54 • D E C E M B E R 1994 I Introduction The members of any given society care for, maintain and regain their health through the use of human resources (doctors, other health-care professionals and other types of personnel), equipment and in­ struments, public and private hospital services, vac­ cines and pharmaceuticals, and other health-care and general-purpose inputs. These resources are used in varying proportions and combinations, which are normally determined by health-care professionals, since they are generally the ones who decide which examinations and tests are necessary, assume respon­ sibility for the clinical diagnosis of any pathologies that are detected, and decide what types of treat­ ment are to be given. 1 Each of these services and inputs has a market of its own made up of a variety of suppliers (public as well as private, national as well as foreign) and users (of final or intermediate, consumer or capital goods and services). These markets all have a going price (or, more accurately, price range) at which the rele­ vant agents -suppliers (i.e., health-care providers) and users (i.e., patients)- have arrived in accordance with certain rules of conduct that are observed within the framework of more or less competitive markets. □ This article contains a portion of the material prepared by the authors for the ECLAC/PAHO study entitled Health, social equity and changing production patterns in Latin America and the Caribbean (document LC/G.1813 (SES.25/18)), which was presented at the twenty-fifth session of ECLAC (Cartagena de Indias, April 1994). The opinions expressed here are those of the authors and do not necessarily reflect the views of the above organizations. The ideas set forth in this article were discussed on various occasions with R. Franco, J. Ramos, F. León and M. Boyer, whom the authors wish to thank for their many contribu­ tions, while at the same time emphasizing that they bear no responsibility for the contents of this article. 1 In a study conducted in the late 1970s, Blumberg estimated that nearly 70% of a community’s total expenditure on health services is determined by the decisions taken by medical professionals. 2 The interdependence of supply and demand which stems from the ability of the former to influence or shape the latter is a hallmark of health-care markets. This influences the behaviour of suppliers of goods and services and, hence, the nature and mode of operation of the regulatory apparatus that needs to be established in order to induce the sort of microeconomic beha­ viour that will lead to a socially optimal outcome. The final section of this article presents a more detailed discussion of public policy issues relating to the regulation of health care. For the most part, these are imperfect markets in which supply is to some extent capable of creating its own demand.2 The variations in the prices of goods and services that are either identical or similar enough to serve as substitutes for one another are generally considerable, since the standards by which quality and therapeutic value should be measured are hazy even for suppliers themselves. Owing to the phenomenon known as “information asymmetry”, consumers do not have a clear picture of exactly what is required to meet their needs or of how much better one expenditure option might be than another, and the sovereignty of the consumer can therefore be exercised only in a highly imperfect manner. The random nature of disease, the variability of diagnoses and therapies, and the uncertainty that exists in re­ gard to technological development in the health field and its cost frequently complicate risk management efforts, thereby giving rise to instances of risk selection or risk avoidance. Three of these markets -the markets for medical services, hospitalization services and pharmaceuti­ cals- absorb between 70% and 80% of the total re­ sources expended by society on the care and restoration of its members’ health.3 Each of these markets raises specific issues in terms of their or­ ganization and behaviour; here, we will first look at these issues individually and will then go on to consider the question of their interdependence. Any analysis of the model used by a given so­ ciety to organize its health care services must necess­ arily take the interdependence of the relevant markets into consideration, because of the impact it has on the way in which resources are distributed among the various suppliers of goods and services who interact within this sector. Our argument in this paper is that the way in which the health care system oper­ ates is strongly influenced by the changes under­ gone by that resource distribution over time. 3 For example, in the United States medical services take up 20% of total expenditures on health care, hospitalization costs account for 40% and medicines for 10% of total expenditure (Feldstein, 1983, pp. 33). In Argentina, however, medical services absorb 28%, hospitalization 22% and medicines 30% of total expenditure (Katz and Muñoz, 1988). H E A L T H C A R E M A R K E T S : TH E IR M O R P H O L O G Y , B E H A V IO U R A N D R E G U L A T IO N • J O R G E M . K A T Z A N D E R N E S T O M IR A N D A R. C E P A L R E V I E W 54 To the extent that each cluster or group of ser­ vice providers is capable of adjusting the quantity or quality of supply in response to reductions in the relative prices of the goods or services they have to offer, the behaviour of each market and the interde­ pendence among them play a crucial role in account­ ing for the way in which the system evolves as a whole and for the nature of its predominant traits in • D E C E M B E R 1994 9 terms of microeconomic effectiveness and efficiency and distributive equity. The following section (section II) deals with the morphological features and interdependence of health care markets. In section III, we will briefly explore the public-policy implications of the analysis of health sector organization presented here. Concluding remarks and comments are set forth in section IV. II The morphology and interdependence of health-care markets The growth of health-care markets is primarily a function of the medical-services market, since medi­ cal professionals are the crucial factor in the process of production of health services. Medical practices dictate the nature of the technologies to be used and thus determine the relative proportions of other factors of production to be used. To a large extent, the demand for instruments and equipment, inputs, pharmaceuticals and hospitalization services is a derived demand. Although possibilities of com­ plementarity and product substitution among these factors do exist, the extent to which they are used is none the less determined by doctors and, to a lesser degree, by other health-care professionals. 1. The medical services m arket The supply of medical services varies markedly from one Latin American country to the next, as well as from one area to another within each country (see table 1). This fact is reflected in the differences in the index of the number of persons per doctor (see table 2), since this index is similar to the European average in some countries but is only a fraction of that figure in others. Thus, in Argentina, Uruguay and Cuba the average index is roughly one doctor for every 300 persons; in Chile, Colombia and Peru, it is one doctor for every 900 inhabitants; and in a number of other countries, the average figure is just one doctor for over 2 000 persons. “This undoubtedly influences the per capita rate of medical consultations, an indicator which likewise exhibits sharp differences between countries and between regions within each country. Aside from the doctor/population ratio, the beha­ viour of the medical services market is also in­ fluenced by three major sets of variables. The first of these has to do with the growth rate, degree of spe­ cialization and breakdown by sex of the supply of new graduates in medicine, dentistry, nursing and other health-care professions, and their geographic location. These variables influence both the shape of the ser­ vices supply curve and the way it shifts over time, thereby affecting the price (fees charged for medical services), quality and form of organization of medi­ cal care. Relevant factors in this regard include the university entrance requirements (entrance examin­ ations or other forms of screening university appli­ cants), the accreditation requirements for practicing medical professions established by the institutional and regulatory organizations operating in each society, the mechanisms for specialization existing in the medi­ cal and other health-care professions, and the percent­ age of female graduates (since young female doctors display a greater propensity than their male counterparts to work part time and to work under someone else). 4 The average index for the countries of the Organization for Economic Cooperation and Development (OECD ) is 2.3 doctors for every 1 000 persons (Schieber and others, 1991). Thus, in countries such as Argentina, Uruguay and Cuba, the medical services market is substantially more saturated than it is, on average, in the industrialized countries, with a heavy concentra­ tion of these professionals in urban centres and large metropoli­ tan areas. Montevideo, for example, has one doctor for every 200 inhabitants, and the city of La Plata (capital of the Province of Buenos Aires, Argentina) has the remarkably high rate of one doctor for every 120 people, which is virtually unheard-of anywhere else in the world. Regarding the indexes for Europe, see Schieber and Poullier (1989) and Greenwald (1991). H E A L T H C A R E M A R K E T S : TH E IR M O R P H O L O G Y , B E H A V IO U R A N D R E G U L A T IO N • JO R G E M . K A T Z A N D E R N E S T O M IR A N D A R. 10 C E P A L R E V I E W 54 • D E C E M B E R 1994 TABLE 1 Latin America and the Caribbean (29 countries): Human resources in the field of health care, around 1990 Professional nurses Nursing auxiliaries and other personnel 21 900 58 18 0 00 2 6 0 00 682 1 0 00 294 33 8 36 502 71 27 27 523 Population (thousands) Country Argentina Bahamas Barbados Bermuda Bolivia Brazil Colombia Costa Rica Cuba Chile Dominica Ecuador El Salvador Guatemala Guyana Haiti Honduras Virgin Islands Jamaica Mexico Montserrat Nicaragua Panama Paraguay Peru Dominican Republic Trinidad and Tobago Uruguay Venezuela Doctors Dentists 32 700 88 800 259 373 258 61 7 300 3 392 333 1 869 4 713 151 4 0 0 2 08 9 66 5 7 047 205 110 3 2 800 3 6 551 118 609 19 498 15 251 31 125 3 100 4 0 27 1 200 3 021 4 0 00 10 7 4 0 4 6 860 8 057 5 4 74 68 469 13 4 0 0 15 015 7000 5 653 28 794 72 38 6 233 10 800 15 737 4 847 5 0 45 11 384 5 300 9 500 800 4 525 7 601 138 1 182 251 11 2 655 3 120 708 11 281 83 6 600 5 300 564 3 803 81 622 728 1 352 1 761 4 9 36 99 2 400 83 3 0 0 21 338 149 4 32 1 54 48 2 130 1 355 8 0 760 61 54 0 38 2 200 18 2 569 2 630 1 375 19 612 3 183 14.4 3 800 5 1 723 1 183 2 500 4 400 4 131 2 9 24 957 1 160 21 9 0 0 2 3 771 6 259 7 200 1 300 11 130 1 898 911 3 100 19 8 0 0 11 5 30 3 2 6 16 2 4 39 27 3 341 109 1 36 0 2 0 37 38 850 4 675 1 438 3 512 7 945 1 71 0 15 0 26 1 500 4 0 324 Source-. Population figures: World Bank, World Development Report, 1993, Washington D.C., 1993; all other statistics: Pan-American Health Organization (PAHO)/World Health Organization (WHO), Las condiciones de salud en las Américas 1994 (in the press). In analysing the educational system, it is import­ ant to take into account both quantitative factors -medical-school entrance requirements, enrolment, the amount of time required for the completion of medical school and its cost, the nature of medical residencies, rates of specialization, attrition rates, etcand qualitative aspects having to do with the greater or lesser amount of “biologistic” or “social” content in the training imparted to medical students. In dis­ cussing the undergraduate educational system, Belmartino and others (1990) have stated that: “The current situation may be described as follows: (a) Special em­ phasis is given to the type of practice conducted in hospitals devoted to the treatment of rare, acute dis­ eases; (b) Health-care functions corresponding to the most active phases of a disease are stressed, while such aspects as rehabilitation, re-entry into everyday life, follow-up on chronic diseases, etc., are relegated to a position of secondary importance; (c) The focus is on the curative aspects of health care, while pro­ motion and prevention are neglected; (d) The psycho­ logical, social and environmental factors involved in the health/sickness situation are disregarded, and the contributions that could be made by the social scien­ ces, human sciences and epidemiology have not been effectively integrated into the curriculum; (e) Rote learning is emphasized, while not enough attention is paid to reasoning ability and the development of sound clinical judgement in evaluating the condition of the patient”. These authors conclude that: “the educational system lays the intellectual groundwork for the reproduction of the dominant medical model”. H E A L T H C A R E M A R K E T S : TH E IR M O R P H O L O G Y , B E H A V IO U R A N D R E G U L A T IO N • JO R G E M . K A T Z A N D E R N E S T O M IR A N D A R. CEPAL REVIEW 54 • DECEMBER 1994 11 CUADRO 2 Latin America and the Caribbean (29 countries): Ratio between population and human resources in the field of health care, around 1990 Number of persons per doctor Country Argentina Bahamas Barbados Bermuda Bolivia Brazil Colombia Costa Rica Cuba Chile Dominica Ecuador El Salvador Guatemala Guyana Haiti Honduras Virgin Islands Jamaica Mexico Montserrat Nicaragua Panama Paraguay Peru Dominican Republic Trinidad and Tobago Uruguay Venezuela 368 694 878 859 2 152 725 897 770 229 892 1 895 Number of persons per dentist Number of persons per nurse Number of persons per other type of health personnel 1 493 4 466 7 818 2 259 21922 1 276 1 682 2 583 1 333 1914 1 817 380 309 2 259 3 906 2 654 2 151 1 026 1 962 2 370 309 2 141 1 996 3 045 1 130 9 066 3 920 2 063 1 127 1 354 379 1 727 951 3 200 1 117 5 294 638 1 813 1 318 1 258 259 514 117 1 549 738 1 054 775 157 465 686 12 000 2 228 1 171 1 250 5 797 11 702 1 394 4 714 7 101 557 2 880 2 205 605 1 505 921 647 1 427 269 607 4 484 37 849 72 727 81 481 8 521 99 000 44 444 1 031 14 400 20 765 2 612 3 793 3 499 3 793 11 927 883 2 492 949 2 173 842 9 639 3 748 1 074 3 667 1 771 800 1 479 748 1 382 564 1 540 904 2 067 491 Source: Population figures: World Bank, World Development Report, 1993, Washington D.C., 1993; all other statistics: Pan-American Health Organization (PAHO)/World Health Organization (WHO), Las condiciones de salud en las Américas 1994 (in the press). In other words, in a system where medicine is oriented towards a high degree of complexity, “overmedicalization” and ex post reparatory treatment, the training imparted by medical schools -because they need to turn out doctors who will be able to fit in efficiently into the existing system- ends up accentuating those traits by pushing new graduates in the direction of rapid specialization, the use of highly sophisticated techno­ logies, and increasing fragmentation of medical care. The second set of variables that influences the medical services market is the form of sectoral or­ ganization -i.e., wholly public or private- used by the society in question for the financing, management and provision of these services. Thus, in systems where the public sector is responsible for the provi­ sion and financing of health care, doctors are salaried officials of the State, whereas in a mixed system -in which the public sector, social security institutions and the private sector share the task of financing and providing health care- differing forms of market be­ haviour and types of transfers come into play which are virtually alien to primarily public systems. In mixed systems, the earnings of members of the medical profession -and of other health-care professions too, although to a lesser degree- do not come only from the salaries paid to them for func­ tions they perform as public servants. Instead, in­ creasingly significant portions of their earnings take the form of professional fees charged in pri­ vate practice and profits derived from the owner­ ship of instruments, equipment and hospital infrastructure. Through their ownership of such capital goods, medical professionals operate as subcontractors of social security institutions, pri­ vately-owned companies that provide health-care services and, on occasion, government bodies. HEALTH CARE MARKETS: THEIR MORPHOLOGY, BEHAVIOUR AND REGULATION • JORGE M. KATZ AND ERNESTO MIRANDA R. 12 C E P A L R E V I E W 54 The way in which this public/private mix grad­ ually shifts towards a greater role for the private sec­ tor is closely associated with the development and formalization of health-care markets. As these mar­ kets develop, the economic rents afforded by owner­ ship of capital goods and infrastructure come to represent a growing percentage of health-care profes­ sionals’ total income, and as this process proceeds, these economic rents are increasingly a function of the profits associated with the introduction of highly sophisticated electronic medical equipment (CAT scanners, echograph machines, gammagraphs, etc.). In such situations, efforts to capture and increase the demand for health-care services move away from competition based on prices and reductions in pro­ duction costs and instead become focused on product differentiation based on an increasing degree of tech­ nological sophistication. This motivates professionals to become more specialized (i.e., to invest in human capital), to acquire instruments and equipment, and to employ diagnostic and therapeutic methods that involve the use of leading-edge technology. Conse­ quently, a growing share of their income will come from investment and technological innovation. In an associated phenomenon, increases and changes are seen in the types of demands faced by the system as regards the training of health-care professionals (combined with increasing restrictions on market entry in the form of specialization requirements) and in the demands that must be met by producers of instruments, equipment and infrastructure. The most dynamic sector will thus be the one that has the greatest concentration of state-of-the-art technology, which is more profitable than traditional technologies. The third and last set of variables influencing the operation of the medical services market have to do with the payment arrangements used in each organiz­ ational model, i.e., flat-rate salaries, payment for each consultation or visit, payment on a per-patient basis, payment for an entire course of treatment, pay­ ment on the basis of the results achieved, etc. In mixed public/private models, the practice of making payments for each consultation or visit has been ob­ served to lead to over-numerous visits and treatments and to an increase in costs. It also seems clear that in cases where both private and public health-care sys­ tems are in operation, the differential between the salaries paid to health care professionals in the public and private systems will prompt a shift in these human resources towards the private sector, thereby • D E C E M B E R 1994 driving up costs5 (WHO, 1993; Miranda, 1993b). The available data also indicate that contracts on a perpatient basis, “all-in” fees or “diagnosis groups” -unlike payments per consultation or visit- transfer the risk of rising costs from the financing agencies to the service providers, thereby obliging the latter to manage their resources more carefully. In such cases, incentives are generated for the control of any over­ treatment or overbilling through the establishment, of technical standards for medical/health-care functions, as well as the use of auditing and other ex post systems for monitoring results. The quality and organization of medical care also appear to be associated with the three sets of variables discussed above. Unless appropriate health­ care standards are established and treatment results are properly monitored, per-patient contracts, for example, when used solely as a mechanism for curb­ ing costs, may lead to the under-provision of services and a deterioration in the quality of medical care.6 In a system where the public sector has prime responsibility for financing and providing health care, this line of reasoning suggests that whenever budgetary constraints become serious, wages decline and waiting times grow longer, informal markets are likely to emerge within public health-care agencies. In such cases, some members of the community -whether by virtue of their greater economic power or because of their urgent need for health care- will secure atten­ tion on a preferential basis in exchange for payments in kind or some sort of under-the-counter payment.7 The issues that arise in regard to microeconomic behaviour are of a different nature in mixed models of sectoral organization that are more open and plu­ ralistic than their wholly public counterparts. In mixed models, members of the medical community may be expected to behave in ways that will in­ fluence, inter alia, the cost of services, the rate at which new technologies are introduced, the quality of medical care, and the way in which it is organized, and their influence may be stronger and more diffi­ cult to regulate than in a wholly public system. 5 Recent studies in Chile have brought to light situations of this sort. See, for example, Oyarzo (1992 and 1993). 6 This may take the form, for example, of a reduction in the time devoted to each patient or in the number post-operatory examinations. 7 Examples of this type of informal market have been identified in studies on the health-care sector in the former socialist-bloc countries and, more recently, in countries such as Cuba and Costa Rica, to name only a few. H E A L T H C A R E M A R K E T S : T H E IR M O R P H O L O G Y , B E H A V IO U R A N D R E G U L A T IO N • JO R G E M . K A TZ A N D E R N E S T O M IR A N D A R. C E P A L R E V I E W 54 These three sets of variables -the rate of increase in the supply of new graduates and their make-up in terms of sex, location, degree of specialization, etc.; the nature of the health care sector’s organizational model; and the payment procedures for medical services- will help to determine the size of the medi­ cal community’s share in the total resources ex­ pended by society on health care. Moreover, they will also promote -or hinder- certain types of reac­ tions on the part of that community. In summary, the interaction of the abovementioned variables and types of behaviour will determine what share of total income is received by health-care professionals. These types of behaviour are going to reflect idiosyncratic traits of each society, and each specific case will therefore have to be examined individually when designing and imple­ menting public policy in this field. Thus, each country will need to address these complex issues • D E C E M B E R 13 1994 when seeking to design an institutional and regula­ tory framework that will reconcile doctors’ and other health-care professionals’ legitimate economic rights with the overall interests of society. The microecon­ omic effectiveness and efficiency of the health-care system will hinge upon the successful completion of this task. 2. The public and private h o spital-services m arket The supply of public and private hospital services also exhibits enormous differences in the various countries of the region (see table 3). In Argentina, Barbados, Cuba and Uruguay, there are about 6 hos­ pital beds per 1 000 persons, while the figure is be­ tween 3.5 and 4.3 in Brazil, Chile and Venezuela and between 2 and 3 per 1 000 inhabitants in Honduras, Paraguay, Mexico and Colombia. TABLE 3 Latin America and the Caribbean: Hospital beds per thousand persons, 1964-1991 Latin America Andean area Bolivia (1991)° Colombia (1989) Ecuador(1991) Peru (1992) b Venezuela (1992)c 1964 1967 1974 1978 1984 1991 1.8 1.8 1.3 1.4 2.9 1.9 1.7 2.7 1.6 2.9 2.7 5.4 3.6 1.5 5.2 5.4 2.9 1.4 5 4.4 2.1 2.2 1.8 1.8 2.7 1.9 2.5 3.3 2.4 2.4 2.4 3.2 1.9 1.7 6 6.3 4.4 2.1 2 2 1.5 2.6 Southern Cone Argentina (1992) Chile (1991)e Paraguay (1991)f Uruguay (1991)g 4.3 2.2 2 6.4 6.4 5.4 3.6 1.5 5.7 Brazil h 3.4 3.8 3.8 3.8 3.6 3.5 4.9 4.5 2.3 4.9 3.8 4.6 3.8 3.2 3.1 2.2 1.8 2 1.8 1.6 2.5 2.9 1.3 1.7 1.3 2.2 2.2 1.6 1.6 1.1 1.2 Central America and Mexico Belize (1989) 1 Costa Rica (1991) El Salvador (1992) s Guatemala (1989) k Honduras (1992) Nicaragua (1991) Panama (1991) Mexico (1991) 1 “Latin” Caribbean Cuba (1991) Haiti (1992) Dominican Republic (1992)m 2.6 2 2.3 3.2 2.5 1.7 2.3 3.3 2.2 2 1.2 5.5 0.7 2.7 4.8 0.7 4.2 0.7 2.8 2.8 1.6 0.9 4.4 3.2 1.2 2.2 1.6 1.6 3.2 3.9 0.9 3.6 2.7 0.8 0.8 6.1 1 1.2 6 0.8 H E A L T H C A R E M A R K E T S : T H E IR M O R P H O L O G Y , B E H A V IO U R A N D R E G U L A T IO N 4 0.8 2 • J O R G E M . K A T Z A N D E R N E S T O M IR A N D A R. 1.9 14 C E P A L R E V I E W 54 • D E C E M B E R 1994 T A B L E 3 (c o n tin u e d ) Latin America Rest o f Caribbean Anguilla (1 9 9 1 ) Antigua and Barbuda Netherlands Antilles and Aruba (1992) ” Bahamas (1 9 9 1 ) ° Barbados (1 9 9 0 ) p Dominica (1 9 9 2 ) q Grenada (1 9 9 1 ) r Guadeloupe French Guiana Guyanas Cayman Islands (1 9 9 1 ) Turks and Caicos Islands (1 9 9 2 ) U . S. Virgin Islands British Virgin Islands ( 1 9 9 1 ) 1 Jamaica (1 9 9 1 ) “ Martinique Montserrat (1 9 9 0 ) St. Kitts and Nevis ( 1 9 9 2 ) v St. Vincent and the Grenadines (1 9 9 1 ) w St. Lucia (1 9 9 2 ) * Suriname (1 9 8 9 ) y Trinidad and Tobago (1 9 9 2 ) 1 1964 1967 1974 1978 1984 7.2 7 5.8 6.3 5.8 5.5 4.9 3.9 4.3 4.1 4 5.8 10.4 8.7 8.7 8 8.1 1991 2.7 7.6 4.9 4.5 4.3 3 3 3.3 6.9 6.9 7.5 8.6 9 6.6 5.4 4.6 4.3 4.5 1.5 2.6 2.9 4.3 4.3 3.6 3.5 4.7 3.5 4 3.7 3.8 2.4 2.6 2.2 5.3 4.9 4.7 5.1 5.7 4.8 3.4 4 4.3 5.6 5.8 6.6 4 .4 4.4 5.4 5.1 4.9 4.4 4.7 4.8 5.2 4.4 3.8 3.7 5.2 5.3 5.4 5.8 5.4 3.2 5.3 5.1 4.5 4.1 4.8 3.3 Source: Country reports, Pan-American Health Organization (PAHO)/World Health Organization (WHO), Health Conditions in the Ameri­ cas, 1969-1972, Scientific Publication No. 287,1974; Health Conditions in the Americas, 1973-1976, Scientific Publication No. 364,1978; Health Conditions in the Americas, 1977-1980, Scientific Publication No. 427, 1982; and Health Conditions in the Americas, 1981-1984, vols. I and II, Scientific Publication No. 500,1986, Washington, D.C. a Beds in all facilities (Directorio Nacional de Hospitales de Bolivia). Figures for the Ministry of Health and the Social Security system only (5 096 and 2 591 beds, respectively). b Data for the Ministry of Health and the Social Security system only (26 012 and 6 929 beds, respectively). c Beds in all facilities. Data for the Ministry of Health only (26 867 beds). d Total number of beds according to 1980 census. Data for government subsector only (75 822 available beds, on average) (Boletín del Pro­ grama Nacional de Estadísticas de Salud, No. 67,1993). e Beds in all facilities (Anuario de Atenciones y Recursos, 1991; Anuario de Egresos Hospitalarios, 1991). f Beds in all facilities (Anuario Estadístico del Paraguay, 1991). 8 Beds in all facilities. Figures for short-stay beds in the public sector only. h Beds in all public and private facilities, 1989 (11 530 in public sector and 403 365 in private sector). \ Does not include data for two private hospitals. J Beds in all facilities. Use shown for Medical Service. J. Beds in all facilities at third level only. 1 Data for National Health System only. m Beds in all facilities. Data for public sector only (301 beds). " Data for general-purpose beds only. Data for Aruba only (301 beds). 0 Beds in all hospitals. Data for short-stay hospitals in the public sector only (540 beds). p Beds in all facilities. Data for Queen Elizabeth Hospital only (539 beds). q Beds in all facilities. Data for Princess Margaret Hospital only (195 beds). r Beds in all hospitals. Data for three general hospitals only (349 beds). s Only reports that the country has 24 hospitals. * Data for public and private hospitals. Use shown for public hospital only (50 beds). “ Beds in all facilities. Data for government-run hospitals only (5 078 beds). v Beds in all hospitals. Data for J.N. France and Pogson hospitals only (174 and 38 beds, respectively). w Beds in all hospitals. Data for Kingston General Hospital only (207 beds). 1 Beds in all facilities. Data for Victoria and St. Jude hospitals only (184 and 114 beds, respectively). y Beds in all facilities. Data for the four general hospitals in Paramaribo only (1 213 beds). 1 Beds in all facilities. Data for public general hospitals only (1 936 beds). Provisional data. H E A L T H C A R E M A R K E T S : T H E IR M O R P H O L O G Y , B E H A V IO U R A N D R E G U L A T IO N • J O R G E M . K A T Z A N D E R N E S T O M IR A N D A R. C E P A L R E V I E W 54 There is no doubt about the fact that most of the available hospital infrastructure in the region is government-owned (see table 4), but private-sector infrastructure is growing the fastest in the majority of the countries. In more than a few cases, in fact, it is the only segment that is growing at all, given the serious financial crisis that has hit both central gov­ ernments and social security institutions during the past 10 years.8 The share of total hospital infrastruc­ ture owned by the private sector varies sharply from one country to the next, ranging from a negligible proportion in, for example, Costa Rica, the Englishspeaking Caribbean countries and Cuba all the way up to nearly 75% of the total number of available beds in Brazil. The average is around 24% in Chile, 32% in Argentina, 20% in Peru and 21% of total hospital beds in Venezuela. In Costa Rica, Mexico and, to a lesser extent, Colombia, the social security system administers a significant share of the available hospital capacity. Even though they offer services which in many ways could be substituted for one another, private and public hospitals exhibit very different organiza­ tional models as regards medical attention and health care. In mixed sectoral organization models, there is a tendency towards the consolidation of two largely separate structural frameworks that offer services of different quality and technical complexity. In such cases, public hospitals take care of most of the chronic pathologies (which give little or no profit) while private hospitals tend to specialize in acute pathologies and to use highly complex techno­ logies, such as c a t scanners, gammagraphs, nuclear magnetic resonance imaging, etc. This gradually gives rise to a dual model of pub­ lic and private hospital care whereby doctors work in both systems but do so in accordance with two very different codes of conduct. Whereas in public hospi­ tals the main priorities are research, teaching and cur­ ricular development, in private hospitals pecuniary considerations are clearly the chief motive. These two spheres of action also interact in some respects, of course. It is not uncommon for patients to consult doctors on a private basis, with the corresponding fees being paid by the social security system or health 8 During the 1970s and 1980s, the number of hospital beds in government-owned institutions fell from 100 000 to 93 000 in Argentina and from 14 000 to slightly over 8 000 in Uruguay (PAHO, 1993). • D E C E M B E R 1994 15 TABLE 4 Latin America and the Caribbean (18 countries): Hospital beds in the public and private sectors, around 1990 (Percentages) Country Public sector Argentina Bahamas Barbados a Bolivia Brazil Colombiaa Costa R icaa C ubaa Chile Ecuadora Guatemala Honduras a Jamaicaa Panamaa Peru b Dominican Republic Uruguay c Venezuela Private sector 68 32 89 98 84 25 80 98 11 2 100 76 70.4 82 76 94 87.2 80.4 63 72.3 79.48 16 75 20 2 - 24 29.6 18 24 6 12.8 19.6 37 27.7 20.52 Source: Pan-American Health Organization (PAHO)/World Health Organization (WHO), Health Conditions in the Americas, 19851989, Washington D.C. and data from lists compiled by health-care systems in Latin America and the Caribbean. “ Data for 1991. b Data for 1992. c Data for 1989. insurance policies or simply coming out of the patient’s own pocket, but if those patients need hospitaliza­ tion, then their treatment and stay in hospital are covered by the public system free of charge. These forms of public-sector subsidization of private health care represent a substantial sum. Chile and Argentina provide clear examples of this phenomenon. Another example of the interconnections be­ tween these dual models is when doctors refer pa­ tients in the public system to private health-care institutions. This practice enables medical profes­ sionals to expand the demand for their services in the case of patients who can afford to pay for more con­ venient and efficient care in more comfortable sur­ roundings. The frequency of this practice appears to coincide with the amount of private hospital in­ frastructure that is owned by medical professionals or with their involvement in other types of commer­ cial arrangements which enable them to share in the income thus generated. In addition to the obvious conflicts of interest existing in such a situation, this H E A L T H C A R E M A R K E T S : T H E IR M O R P H O L O G Y , B E H A V IO U R A N D R E G U L A T IO N • J O R G E M . K A T Z A N D E R N E S T O M IR A N D A R. 16 CEPAL REVIEW 54 practice also interferes with any cost-recovery measures or redistributive mechanisms implemented in the public sector. Cost-recovery mechanisms are coming into in­ creasing use in the region’s public sectors as a means of obtaining financing directly from users and, in some cases, for redistributive purposes.9 The medical profession has not always welcomed these types of measures, since they raise greater administrative de­ mands and make it necessary to improve record­ keeping and monitoring systems. Indeed, because they do not always afford benefits -pecuniary or otherwise- to the medical professionals involved, the disincentives for such professionals to cooperate with these schemes are so great that they are often difficult to surmount and may ultimately block efforts to im­ plement cost-recovery policies in the public sector. Payment procedures, which may take any of the forms discussed earlier, have a significant influence on the conduct of health-care providers, just as they do in the case of the medical-services market. In most of the countries’ public health care systems, the pre­ dominant modes of payment are still based on ex post budgetary transfers. Some use has been made, how­ ever, of partial transfers based on per-visit payments in Chile (both in public institutions and those that have been transferred over to the municipalities) and in Brazil, where comprehensive tariffs have been em­ ployed. It could be argued that the influence exerted by payment procedures in these cases does not differ in any substantial way from what it is in the private sector, although it will be less marked, since produc­ tion efficiency and the generation of surpluses are generally not prime objectives of the public health care system. The effect of the contractual payment arrange­ ments made between funding agencies and private health establishments is a more complex question. Obviously, the types of arrangements used will have a strong influence on the cost and quality of health care, on the pace of technological change and on whether or not health-care providers will be inclined to engage in product-differentiating practices and to introduce highly complex medical technologies. These practices and the use of such technologies are the most obviously profitable activities, and this fact 9 Redistributive aims are served when the percentage of the benefits paid for by the user is determined by the user’s income level. • DECEMBER 1994 tends to promote the consolidation of an increasingly “medicalized” health-care model which is broken up into many different clinical specialities and sub-specialities. 3. The pharm aceutical market The region’s pharmaceutical market exhibits striking variations in terms of both supply -production plus imports of pharmaceuticals- and demand. Let us first consider the question of demand. At one extreme, there is the case of Argentina, where consumption of medicines amounts to around US$80 per person annually, based on retail (phar­ macy) prices. This is close to the figure registered for countries such as Spain or Portugal and is in marked contrast to the US$12 or 14 spent in Peru, Mexico or Costa Rica or the US$7 spent in Guatemala.1 0 Theoretically, the demand for pharmaceuticals is determined by their prices and the regulatory model used by a given society, by the population’s epidemi­ ological profile, by the prevailing financing models used in the society in question (i.e., how much of the cost is covered by social security and how much is an out-of-pocket expense), by cultural factors (e.g., the population’s attitude towards the use of “self­ prescribed” medicines), etc. Thus, with regard to just one of the abovementioned variables, recent studies conducted in Eu­ rope have shown that the financing mechanisms prevailing in a given society have a significant im­ pact on the level and composition of the demand for pharmaceuticals. In some countries of the European Community, social security covers up to 100% of the cost of medicines that appear on what is known as a “positive list” of items which are reimbursable to the purchaser. In other cases, a “negative list” is used instead, which indicates those items (treatment ca­ tegories or specific products) for which no reimbur­ sement will be made. There are in fact a great variety of different types of arrangements in use in Europe (see table 5). 10 These figures should be regarded with some reservations, however, since they are based on very different prices in differ­ ent countries, even in the case of similar medicines. A more accurate measurement might be the actual number of units sold annually. In Argentina -where the physical volume sold per year totals about 400 million units- the average consumer has access to approximately 15 units per year. Using the same methodo­ logy, we find that physical consumption amounts to between seven and nine physical units per year in Chile, Venezuela, Brazil and Colombia. HEALTH CARE MARKETS: THEIR MORPHOLOGY, BEHAVIOUR AND REGULATION • JORGE M. KATZ AND ERNESTO MIRANDA R. CEPAL REVIEW 54 • DECEMBER 17 1994 TABLE 5 European Community: Financing mechanisms for pharmaceuticals, and co-payment percentages Positive list of medicinesa Germany Denmark France Belgium Greece Ireland Italy Netherlands Portugal Spain United Kingdom Negative list of medicinesb Prevailing co-payment system (% of pharmacy price) Percentage covered by patient Use of generics encouraged No Yes Yes Yes Yes No Yes No Yes Yes No Yes No No Yes No Yes No Yes No Yes Yes Flat charge 25/50/100 0/30/60/100 0/25/50/60 25 33 30 35 Strongly Yes Yes a Yes a Yes Yes Yes c Strongly Yes Yes Strongly 20 Varies by type of patient 30 or 40 Fiat charge 0/20/50 40 Fiat charge 32 20 25 25 10 Source: M. L. Burstall, Europe after 1992. Implications for pharmaceuticals, Health Affairs, Washington, D.C., Fall 1991, p. 157. a Medicines which are reimbursable. b Medicines which are not reimbursable. c With some reservations. The existence or absence of officially control­ led pharmaceutical prices also influences demand. Until lately, the prices of pharmaceuticals were controlled in many Latin American countries; re­ cently, however, drug prices have been deregulated in Argentina and Mexico, among other countries. In the last few years the prices of pharmaceuticals have risen sharply in real terms in the various countries that have deregulated this market (see table 6), and the amount spent on this item has therefore come to represent a considerably larger share of household expenditure and total health­ care expenditure.1 1 Social security institutions’ reaction to this trend has been to try to curb the growth in pharma­ ceutical costs as a percentage of total health-care expenditure by lowering the percentage of such ex­ penses that they will reimburse, reducing their coverage of expenditures on pharmaceuticals, or drawing up special pharmacopoeias or basic lists of generic medicines for which the patient will be reimbursed. 11 In a recent study of the Mexican pharmaceutical market, Brodosky indicates that the average consumer price was $0.92 in 1988 and US$2.60 in 1993, which is a real increase of over 200%. The same thing has occurred in Argentina, where the price jumped from US$2.50 in 1984 to nearly US $6 per unit in 1992 (see Brodosky, 1994; Katz and Burachik, 1992). Turning now to the subject of supply, at least three main types of situations may be identified in the region (see table 7). First, there are countries such as Mexico, Argentina or Brazil, where almost all final pharmaceutical products consumed in the country and between 10% and 40%, approximately, of the main active ingredients or raw materials used by the pharmaceutical industry are manufactured lo­ cally. A second group of countries (Chile, Colombia) manufacture a large percentage of the remedies sold on the domestic market but as yet have virtually no local manufacturers of pharmaceutical raw materials, almost all of which must therefore be imported. Finally, the third group is made up of the smaller or less developed countries in which a very consider­ able portion of final pharmaceutical products are di­ rect imports and raw materials for this industry are not produced locally. These three types of situations obviously raise very different sorts of public-policy issues. In the first of these three cases, in addition to the question of consumer protection (the prices and quality of the pharmaceuticals sold on the local mar­ ket), industrial-policy issues must also be addressed, since it has to be determined whether or not it is in the country’s interest to develop a local pharmaceuti­ cal chemicals industry and, if so, how much support should be given to that industry until it can attain a competitive position in the international market. HEALTH CARE MARKETS: THEIR MORPHOLOGY, BEHAVIOUR AND REGULATION • JORGE M. KATZ AND ERNESTO MIRANDA R. 18 CEPAL REVIEW 54 • DECEMBER 1994 Latin America (selected countries): Average price per unit3 of medicine, 1988-1992 (US dollars) 1988 Argentina Dominican Republic Central America Uruguay Peru Chile Mexico Ecuador Brazil Colombia Venezuela Average Increase (%) 1989 1990 1991 1992 2.71 2.41 2.98 1.70 0.96 1.56 1.39 0.74 2.26 2.87 3.01 1.73 1.24 1.75 1.50 3.71 2.97 2.82 5.34 4.03 3.26 3.04 2.89 2.51 2.41 2.27 1.22 1.32 1.47 4.58 3.79 3.00 2.43 2.55 2.19 1.94 1.64 1.46 1.71 1.63 2.14 9.2 1.30 0.62 1.44 9.1 2.00 2.21 1.99 1.62 1.09 1.00 1.86 1.57 1.43 1.96 29.8 1.01 1.51 4.9 2.11 2.07 1.81 2.73 27.6 Source : IMS AG, PM Reports, Switzerland, International Medical Statistics, 1993. 3 Box or other equivalent container. Latin America (12 countries): Structure of the supply of pharmaceuticals, around 1987 (In thousands o f dollars and percentages) Share6 (percentages) Total market3 Country (thousands o f current dollars) Argentina Brazil Colombia Costa Rica Chile El Salvador Mexico Panama Paraguay Peru Uruguay Venezuela 1 038 878 1 977 878 482 000 51 000 132 000 45 000 1 277 000 58 000 75 000 179 072 Local output as a percentage of the total market Relative share of locallyowned laboratories 95.0 83.2 56.6 24.5 25.0 26.0 51.0 96.7 25.5 85.6 102 000 206 684 95.5 20.0 43.0 24.0 9.5 63.4 27.0 48.4 23.0 Source: Pan-American Health Organization (PAHO/WHO), Informe de la Conferencia latinoamericana sobre aspectos económicos y finan­ cieros de los medicamentos esenciales, Caracas, March 1992. a At Wholesale ex-factory prices. b Percentages of total value. Two crucial factors in determining the viability of any effort to develop such an industry are the type of industrial property legislation which a country decides to adopt -laws that allow or prohibit the patenting of pharmaceutical products, that introduce or preclude the compulsory licensing of newly discovered molecules of pharmaceutical value, that permit or ban the import­ ation of finished products or of the raw materials used to make the corresponding active ingredients, that pre­ cisely specify what constitutes “sufficient” use of a pat­ ent, etc.- and the issues inherent in the training of the skilled human resources (biologists, pharmacologists, virologists, etc.) needed in order to develop a local in­ dustry to produce active pharmaceutical ingredients.1 2 12 It is interesting to recall that for many years countries such as Switzerland, Japan and Italy did not allow pharmaceuticals to be patented, in order to protect their national chemical industries. It was not until these industries had become internationally com­ petitive that the above countries signed the 1883 Paris Conven­ tion for the Protection of Industrial Property and began to abide by internationally-accepted norms regarding industrial property (Katz, 1972 and 1974). HEALTH CARE MARKETS: THEIR MORPHOLOGY, BEHAVIOUR AND REGULATION • JORGE M. KATZ AND ERNESTO MIRANDA R. CEPAL REVIEW 54 With the exception of countries such as Argenti­ na and Chile, where locally-owned companies con­ trol a substantial portion of the local pharmaceuticals market, transnational corporations dominate the pharmaceutical industry; in fact, they hold nearly 80% of the total market in Brazil, Mexico, Peru and Venezuela. The combined effect of the decontrol of drug prices, the tariff roll-backs now being implemented and the modifications being made in the laws regard­ ing the patenting of pharmaceuticals is bringing about a radical change in the environment for the pharmaceuticals market in many countries of the re­ gion. These countries have once again become ex­ tremely attractive to foreign-owned firms which had lost interest in them during the past two decades (Brodosky, 1994; Katz and Burachik, 1992). Meanwhile, the new institutional and regulatory framework is diminishing the incentives for the inde­ pendent development of locally-owned pharmaceuti­ cal companies; as the situation stands now, it is in their interests to operate as local licensees of large transnational conglomerates while taking advantage of their own firmly-established distribution channels in the markets of the region and their expertise in working with the local medical community. The in­ dustry’s modus operandi is undergoing thorough­ going changes and the position of the region’s major pharmaceutical laboratories is being redefined under new cooperation agreements with transnational firms. The situation is somewhat different in the case of the production of pharmaceutical raw materials -a field in which local entrepreneurs in Mexico, Brazil and Argentina had, until recently, made major inroads by swiftly copying newly discovered molecules of pharmaceutical value. They were able to do so be­ cause of the existence of weak patent laws that did not protect the patent rights to new products, protec­ tive tariffs that made it possible for these entrepre­ neurs to manufacture active ingredients in small-scale plants, and a system of granting permits for the marketing of new medicines which was strongly biased in their favour. The core group of locally-owned firms that man­ aged to establish their position during the past three decades thanks to the nature of the prevailing regula­ tory apparatus now appear to be facing a serious threat to their survival. Given the programmes now being pursued in an effort to open up and liberalize the countries’ economies and the new views concern­ • DECEMBER 1994 19 ing industrial property that are gaining sway in the region as a result of the strong pressure being brought to bear by developed countries within the framework of GATT (Reichman, 1993), it has become doubtful whether national entrepreneurs will be able to con­ tinue developing this industry by quickly producing copies of molecules of pharmaceutical value that have recently been discovered in advanced countries and then manufacturing these substances locally in small, multi-purpose chemical plants. The very high research and development costs associated with the search for new active ingredients, the possibility of patenting new products, the reduc­ tion of tariff barriers which until recently had made it profitable to produce pharmaceutical raw materials locally and, finally, the discontinuation of the privileges that local health authorities often used to grant to local manufacturers (whereby the latter were given preferential access to marketing permits) are now raising some doubts about the future of local pharmaceutical-chemicals industries. Thus, the newly-established institutional and regulatory struc­ ture is virtually eliminating the very pillars upon which the development of locally-owned firms was founded in past decades and is thereby bringing about deep-seated changes in the long-term pattern of sectoral behaviour. Having thus far examined some of the microeconomic characteristics affecting the performance of the markets for the main types of goods and ser­ vices used in the health-care sector, the next step is to consider the way in which these markets fit in with each other and the implications of that interdepend­ ence in terms of the sector’s overall performance, its efficiency and effectiveness, and the chances of en­ suring equitable access to that sector. 4. M a rk e t in te rd e p e n d e n c e The markets for the goods and services required for the care and restoration of a given population’s health exhibit many complex forms of interdepend­ ence. For example, childbirth may involve a smaller hospital bill if the patient has received adequate pre­ natal care on an outpatient basis, or alternatively -if the attending physician decides to perform a cesarean delivery- may occasion a higher level of expenditure for hospitalization and medicines. Such a decision may be taken for therapeutic reasons, but it may also, for example, be adopted because doctors feel that this HEALTH CARE MARKETS: THEIR MORPHOLOGY, BEHAVIOUR AND REGULATION • JORGE M. KATZ AND ERNESTO MIRANDA R. 20 CEPAL REVIEW 54 procedure will allow them to optimize their use of their workday by avoiding long waiting periods. It may also be taken because the standard tee for a cesarean delivery is higher than for a normal vaginal delivery. Examples of this sort abound, and there is no need to give a long list of such cases here. The foregoing considerations make it clear that many of the goods and services traded in the health­ care sector can be substituted for one another to varying degrees; therefore, the relative price structure works as a powerful mechanism for the redistribution of the available pool of resources among suppliers. Thus, for example, the ratio between doctors’ fees and hospital fees as well as between hospital fees and the price of medicines should be viewed as channels for income transfers among the various markets and, within those markets, among the various suppliers. It is therefore not surprising that these issues play a central role in the negotiations conducted among ministries of public health, social security systems, professional associations, business associations representing pharmaceutical laboratories, health schemes, etc. The structure established by each society for regulating health care must naturally address these questions, because they are of crucial importance in determining the performance of the model used for • DECEMBER 1994 the provision of health care services; indeed, they are the main determinants of the system’s efficiency, effectiveness and social equity. There is also another area in which market inter­ dependence is very noteworthy. Recent studies ap­ pear to indicate that a given consumer of health-care services will not always behave solely as either a patient under the social security system or a patient under the public sector’s health-care system. Instead, patients will tend to mix and match their various op­ tions in this regard in order to maximize the level of goods and services they receive from the system (as noted by Lastiri in a personal letter to J. Katz on the subject). For example, people who belong to one of Chile’s private health insurance schemes may pay for outpatient care through their private insurance plan but may opt for hospitalization under the public health system (concealing their membership in a pri­ vate insurance plan) in order to obtain this more complex and costly type of care and the correspond­ ing prescription medicines free of charge.1 This 3 points up the existence of interdependence and cross­ subsidization between the public and private sectors; therefore, in order to gain a full understanding of how the sector functions, we must form an overall picture that takes in both subsectors, rather than treating them as entirely distinct entities. I ll Future strategies and regulatory policies 1. Active and passive health-care policies There are two very different approaches to public policy-making in the field of health care today. On the one hand, there is what might be called active policies for altering the public/private financing and service mix. On the other, there are innumerable cases in which the sector has been “passively” re­ structured as a result of the absence of any explicit public policies regarding the organization and beha­ viour of suppliers of goods and services in health­ care markets. In the latter case, the restructuring and organiza­ tion of these markets is an autonomous market re­ sponse, 1 and these phenomena are bringing about 4 sweeping changes in the workings of the pharmaceu­ ticals market, the rate at which medical professionals and other agents are switching from the public to the private sector, growth rates, the private health-care infrastructure’s level of complexity, etc. 13 Interviews conducted in public hospitals in Chile and Argen­ tina indicate that between 20% and 25% of the patients receiv­ ing care under the public health-care system (which requires an extremely small co-payment) are covered by private health in­ surance plans (IS APRES), in the case of Chile, or by the National Social Security System, in the case of Argentina. These people simply decide not to reveal their membership in such plans in order to obtain free of charge inputs or services not covered by their private or quasi-State health plans. This practice clearly involves a sizeable hidden subsidy for the private sector. 14 This type of market development has given rise to what the recent literature refers to as new organizational forms (see PAHO/ECLAC, 1994, pp. 39-51). HEALTH CARE MARKETS: THEIR MORPHOLOGY, BEHAVIOUR AND REGULATION • JORGE M. KATZ AND ERNESTO MIRANDA R. CEPAL REVIEW 54 Since this restructuring of the sector’s organiza­ tional model is taking place under highly imperfect market conditions, it should come as no surprise that it is creating many new problems in terms of microeconomic efficiency and distributive equity of the type discussed earlier. These problems tend to arise even in countries that have pursued an active sectoral restructuring process, such as Chile (Miranda, 1993a and 1990), so it is even more likely that they will arise in situations where the State adopts a passive attitude. Rising costs, inequitable access, the consoli­ dation of a model that concentrates too much on the individual and curative aspects of health care to the detriment of a community-based, preventive ap­ proach, the dualization of the model for the provision of services, etc. are some of the hazards that will almost surely arise in the course of the passive type of sectoral reorganization process that occurs in situ­ ations where no appropriate programme is being fol­ lowed by health-care authorities or the authorities responsible for the overall operation of the economy. In order to counter these “natural” tendencies, governmental authorities need to pursue an active, consistent health-care policy that is attuned to the particular features of each society and the determi­ nants that arise out of its past evolution. Such an active health-care policy must address the issues posed by the existence of these different markets, as noted in the foregoing discussion. In the following section we will identify some of the main issues that will need to be confronted by health-care policy in the coming years. 2. Health-care policy in the area of medical services As explained in section 1 of part II, the way in which the medical-services market works is heavily in­ fluenced by both supply- and demand-side variables. In relation to supply, one particularly important ques­ tion is how the market’s operation is affected by the rate at which new professionals enter the market and the differing degrees of saturation, in relative terms, exhibited by these markets in the various countries of the region. In turn, the entry of new professionals into the market is determined by the growth rate of university enrolment, the degree of specialization, the location and sex of the human resources involved, and the nature of the educational system in which health-care professionals are trained. • DECEMBER 1994 21 In practice, the educational system plays a fun­ damental role by determining how many students will enter a formal course of instruction from year to year, the quality of the education provided, and the nature of the attitudes and ideologies regarding medi­ cal and other forms of health care which these new graduates bring with them as they embark upon their careers. On the demand side, the market is becoming populated by a vast and growing array of user institu­ tions, which may be public, private or part of the social security system. This fragmentation and the failure to coordinate services within a unified health­ care system are leading to the increasing consolida­ tion of a dual model for the organization of medical and health-care services which is ridden with flaws and glaring disparities between the various occupa­ tional categories in terms of quality, microeconomic efficiency and social equity. This fragmentation and lack of coordination among the public, private and social-security sectors is one of the main issues which health-care policy needs to address. From this standpoint, there is an evident need for some sort of explicit programming of the sector as a whole by the central authority. Accordingly, in relation to both the supply and the demand for health-care professionals, public pol­ icy should address the issues entailed in respect of the rate of entry, qualifications and geographic loca­ tion of new graduates as well as all the questions that have to do with the conditions under which these professionals enter into the three occupational spheres mentioned above. Thus, university entrance examinations, the nature and duration of medical residencies, and requirements as regards specializa­ tion and professional accreditation should all be adapted to conform to projected needs in terms of public, private and social-security health-care infra­ structure in each country. The establishment of regulatory guidelines for health-care services, quality standards and payments procedures based on results rather than the number of consultations should help to reduce the blatant dis­ parities to be observed today in the health-care model in each of the three above-mentioned spheres. The development of family-centered medical programmes, together with an increase in primary health care in general, could serve as a means of rationalizing access to the health care system in order to make better use of available resources and to alter HEALTH CARE MARKETS: THEIR MORPHOLOGY, BEHAVIOUR AND REGULATION • JORGE M. KATZ AND ERNESTO MIRANDA R. 22 CEPAL REVIEW 54 the strong trend towards curative (as opposed to preventive) medicine and towards the “medicalization” of services. 3. H ealth-care p o lic y regarding public and private hospital services The need to counteract the trends observed in this area and their harmful effects, as well as to miti­ gate and correct the increasing “dualization” of the hospital services provided in the public and private systems, points up the advisability of establishing guidelines for hospitalization in public and private health-care systems and clear-cut procedures for cross-referencing patients in public and private in­ stitutions in order to avoid the duplication of ex­ pensive equipment and the inefficient use of complex technologies requiring large investments. Existing budgetary mechanisms for financial trans­ fers also need to be evaluated, as do the relative merits of per-visit payment modalities versus results-based payment procedures (e.g., payments per patient, comprehensive tariffs or payment based on “diagnosis groups”) .1 5 In short, in order to create a true network of public/private hospital services, hospital infrastruc­ ture in both sectors needs to be programmed and pa­ tient cross-referral procedures need to be set up in order to avoid the unnecessary duplication of sophis­ ticated instruments and equipment, inefficient use of hospital beds, etc. The administrative decentralization of public health care should be an important component of the programme for linking up existing public and private hospital infrastructure. There also appears to be a need for the wider spread of administrative and management technologies for optimizing the use of that infrastructure. The anarchic manner in which the incorporation of expensive, highly sophisticated technology has taken place in many countries of the region shows up the need for the establishment of nation-wide mech­ anisms and standards for controlling the pace at which such equipment is brought into a country, 15 Data for the United States show that the change in payment procedures has had two main effects: a reduction in the average hospital stay per patient and a decrease in admission rates. The latter is attributable to an increase in outpatient care, for which Medicare continued to pay on a per-visit basis (Pauly, 1987). • DECEMBER 1994 achieving its balanced distribution in the public and private systems, ensuring its proper maintenance and regulating its use. It may be instructive to compare the tight controls used by health-care authorities in many developed countries1 with the random, so­ 6 cially costly nature of this process in many countries of the region. This situation raises questions as to the true regulatory capacity of the typical Latin American State and the extent to which it is actually capable of performing this task. It is not simply a matter of the State’s ability to regulate these activities, but also involves the broader issues posed by an institutional, legal and regulatory overhaul of the entire health­ care system. This is an issue that affects each and every country in the region. 4. Health-care policy and industrial policy as it relates to pharm aceuticals What is the “proper” level of pharmaceutical con­ sumption which a society should seek to reach? How much of that demand should be covered by brand-name products and how much by generics? What percentage of that demand can locally-owned companies reasonably be expected to meet, and how much needs to be supplied by transnational corporations? And at what prices? How much fin­ ancing should be provided by the social security system, the State or private insurance plans as opposed to direct payments out of the patient’s own pocket? These questions have to be answered by the health-care and economic authorities of each of our countries, just as each country is also faced with the task of designing and implementing a national policy on pharmaceuticals which is in keeping with the con­ ditions peculiar to each country’s situation. So far, before a new pharmaceutical drug can be marketed, the company holding the rights to the drug has been required to prove the safety and effective­ ness of its active ingredient in order to obtain the necessary permit from the relevant health-care authority. The current advocacy of measures for holding down costs has prompted a number of Gov­ ernments to speed up the procedures for authorizing 16 Regarding the situation in seven European countries, see Miranda (1993c). HEALTH CARE MARKETS: THEIR MORPHOLOGY, BEHAVIOUR AND REGULATION • JORGE M. KATZ AND ERNESTO MIRANDA R. CEPAL REVIEW 54 the sale of generic drugs and to add in the require­ ment that proof be provided of the active ingre­ dients’ cost effectiveness before their sale will be permitted. Australia, for example, recently estab­ lished a mechanism of this type, and its experience suggests that consideration might be given to the in­ troduction of a similar scheme in the region at some future date.1 7 Expanding the supply of generics is another ef­ fective way of holding down costs. To this end, an information campaign aimed at doctors, pharmacists and consumers should be mounted and regulatory provisions should be established that will authorize pharmacists to substitute generics for brand-name products when their prices and the patient’s charac­ teristics so permit. Legislation passed in the United States in 1984 represented quite a substantial step in this direction. The social security system as well as finance and insurance institutions also need to adopt financial protocols that will give priority to and increase re­ imbursements for the use of generic medicines. The more rapid issue of certificates authorizing the sale of these types of products is another kind of public policy measure which health authorities in a number of developed countries have implemented in recent years with a fair degree of success but which has not yet been used to any significant extent in the region.1 8 The pharmaceuticals market also raises a num­ ber of other issues, however, that go beyond the question of the price and quality of the products sold. These include the complicated issues of industrial property and patents, as well as those having to do with the dynamic comparative advantages that may be associated with the development of a sizeable 17 Since January 1993, any application for the authorization of a new drug has to be accompanied not only by the results of clini­ cal pharmacological tests — prove its safety and effectivenessto but also by an assessment of its economic impact. This assess­ ment must be based on comparisons with alternative treatments and must not only cover the price of the drug itself, but also contain a comparison of its effects with those of other proce­ dures for resolving the same clinical condition, including lengths of hospital stays and other complementary services entailed in the alternative therapies to be evaluated (Financial Times, 1994). 18 See the case of the United States in Olson (1991a). • DECEMBER 1994 23 local pharmaceutical chemicals industry. This area also involves a number of complex questions in the sphere of international relations which are raised by the 1883 Paris Convention’s provisions regarding patent protection and the equal treatment of nationals and foreigners, since many countries of the region are signatories of that treaty. In this respect the countries are faced with a variety of political issues which will not be easy to solve. One of these issues has to do with the pressure which the Department of State and the Department of Commerce of the United States have been bringing to bear on a number of countries in the region (Argenti­ na, Brazil, Chile and Mexico, among others) and in international forums such as UNCTAD and GATT throughout the last ten years in order to convince them to strengthen their patent laws. The objectives here are to enforce international patent provisions re­ lating to pharmaceuticals -which affect the very process of innovation, i.e., the innovative pipelineand, more generally, to fortify the market position of transnational laboratories, which in the past have faced competition from local companies in the mar­ kets for both finished pharmaceutical products and pharmaceutical raw materials. Countries that now have mature pharmaceutical and pharmaceutical chemicals industries, such as Switzerland, Japan and Italy, chose not to comply with demands for patent enforcement for many de­ cades; it was not until they felt that their local firms had reached a point in their development where they could compete on the international market that they decided to become a party to international treaties on the subject (Penrose, 1951). Today, however, a simi­ lar course of action is a very remote possibility in­ deed, given the contemporary international scene and the conditionality associated with the international financing of many Latin American countries’ macroeconomic adjustment programmes. It would therefore appear that the privileges once enjoyed by local pharmaceutical-chemicals and phar­ maceutical industries in the region have become un­ tenable. Therefore, the possibility of implementing an industrial policy aimed at generating dynamic comparative advantages in these areas warrants, at the very least, explicit discussion by technical and political experts in each society. HEALTH CARE MARKETS: THEIR MORPHOLOGY, BEHAVIOUR AND REGULATION • JORGE M. KATZ AND ERNESTO MIRANDA R. 24 CEPAL REVIEW 54 • DECEMBER 1994 IV Concluding remarks Within the overall context of the liberalization and privatization of economic activity that have taken place in the past decade, there would appear to be little question but that the deregulation of health­ care markets, the extension of the use of patents to pharmaceuticals and the gradual privatization of the financing and provision of health-care services are the desideratum of economic policy in the health-care sector. It is taken for granted that free markets and freedom of choice for consumers will inevitably lead to greater microeconomic effi­ ciency, more effective services and improved ac­ cess to health care. In the area of pharmaceuticals, however, empiri­ cal evidence indicates that the elimination of price controls has been associated with sharp price in­ creases in recent years. The reduction of tariffs and the establishment of new ground rales regarding pat­ ents have prompted many Argentine, Brazilian and Mexican firms to suspend local production -even of products that they had been exporting- and to become local licensees of transnational corporations. This has also led to the abandonment of research and development efforts and of work in the area of pro­ cess adaptation and improvement. In the field of medical and hospital services, the deregulation and the gradual formalization and devel­ opment of these markets have encouraged medical professionals to switch from the public to the private sector, and this shift has been associated with sky­ rocketing prices. Furthermore, these changes have brought out the potential flaws of health-care markets by setting the stage for forms of behaviour that per­ mit providers to boost the demand for their own ser­ vices, perform unnecessary health-care services and induce overconsumption. In addition, the expansion of supply has tended to be concentrated in the sphere of technological innovation and in the most profitable areas of health care, and these phenomena have been accompanied by a move towards product differentiation and price discrimination. The inter­ play of these trends is heightening the dualism of the health-care model and is leading both to increased costs and to greater social inequity. All of these effects are, of course, among the unlooked-for consequences and costs of the recent economic liberalization and deregulation policies, and have thus far received very little attention. In view of the various health-care markets’ very marked interdependence, it is clear that the effect that these phenomena have had on the system as a whole is far from neutral. Indeed, the pressures at work in each of these markets have spread to and reinforced the pressures affecting the others, thereby gradually undermining the financial position of social security institutions and the State. The deregulatory and free-market theories that seem appropriate in other fields of economic activity are not necessarily the most suitable ones in this sphere of community life, especially when such prin­ ciples are applied in an indiscriminate manner with­ out due consideration for the particular features and the institutional and cultural aspects of the health­ care sector in each country. This sector, which is fraught with its own very special features, does not appear to lend itself to the application of conven­ tional or universal formulas. Hence the need for the design and implementation of an appropriate regula­ tory model consonant with the institutional, legal and regulatory retooling called for in the case of each individual country. (Original: Spanish) Bibliography Belm artino S., C. Bloch, I. Luppi, Z. Q uinteros and M.C. Troncoso (1990): M ercado de trabajo y médicos de reciente graduación, Publicación No. 14, Buenos Aires, Pan-A m erican Health O rganization (PAHO), Office in A rgentina. Brodosky, J. (1994): La industria farm acéutica y farm oquím ica mexicana en el marco regulatorio de los años 1990, M exico City, mimeo. Burstall, M. L. (1991): Europe after 1992. Im plications for pharmaceuticals, Health Affairs, Washington, D.C., Fall. HEALTH CARE MARKETS: THEIR MORPHOLOGY, BEHAVIOUR AND REGULATION • JORGE M. KATZ AND ERNESTO MIRANDA R. CEPAL REVIEW 54 Feldstein, P. (1983): H ealth Care Economics, New York, J. W iley & Sons. Financial Tim es (1994): D rug d evelopm ent costs, L ondon, 23 M arch. Greenwald, L. (1991): H ealth care expenditure in twentyfour countries, H ealth A ffairs, vol. 10, No. 3, W ashington, D .C., Fall. IMS A.G. (1993): P M Reports, Switzerland, International M edical Statistics. Katz, J. (1972): Legislación internacional de patentes, ac­ tividad inventiva local y corporaciones multinacionales, Buenos Aires, Instituto Torcuata di Telia, mimeo. (1974): M edicamentos, empresas nacionales y cor­ poraciones m ultinacionales, Buenos Aires, Editorial Siglo XXI. Katz. J. and A. M uñoz (1988): Organización del sector salud y p u ja distributiva (LC/BUE/G.102), Buenos Aires, C entro Editor para A m érica Latina (CEAL)/ ECLAC. Katz, J. and G. B urachik (1992): La industria farm acéu­ tica y farm oquím ica argentina en la década de los años 1990, B uenos Aires, mimeo. Lastiri (1993): Private letter. M iranda, E. (1988): Econom ía y salud: ¿Conflicto o co­ operación?, Revista adm inistración en salud, No. 4, Santiago, C hile, U niversity o f Chile, Programa Interfacultades en A dm inistración de Salud (PIAS), September. (1990): D escentralización y privatización del sistem a de salud chileno, Estudios públicos, No. 39, Santiago, Chile, C entro de Estudios Públicos (CEP), W inter. (1993a): Evaluación de la experiencia chilena con las ISAPRES, in M. V irgolini and G. G onzález (eds.), Tendencias económ icas de los sistemas de salud, Buenos Aires, A sociación de Economía de la Salud de A rgentina/W orld Bank. (1993b): Sistem as de sa lu d en el mundo. Parte I: Un marco conceptual p ara el análisis, Serie documentos de trabajo, No. 203, Santiago, Chile, CEP, November. (1993c): Sistem as de salud en el mundo. Parte II: Casos seleccionados y sus lecciones para Chile, Serie docum entos de trabajo, No. 203, Santiago, Chile, CEP, Novem ber. Olson, M. (1991a): Political Influence and the D evelop­ m ent o f U.S. R egulatory Policy: The 1984 Drug Legislation, D iscussion Paper Series, No. 249, Stan­ ford, C alifornia, Stanford University, Center for Economic Policy Research (CERP). (1991b): The U.K. Pharm aceutical Industry and the NHS, D iscussion Paper Series, No. 250, Stanford, California, Stanford University, CERP. Oyarzo, C. (1992): Financiamíento del sector salud en una situación de crisis : el caso chileno, Serie In ­ vestigación, 1-58, Program a Post-grado de Economía, Santiago, ChileAVashington, D.C., Latín American • DECEMBER 1994 25 Institute o f Social Theory and Social Studies (ILADES)/Georgetown University. (1993): La m ezcla público-privada: Una reforma pendiente, Santiago, C hile, m imeo. PAHO (Pan-Am erican H ealth O rganization)(1993): E s­ tructura y com portam iento del sector salud en Argentina, Chile y el Uruguay. Estudios de casos y modelo histórico-evolutivo de organización y com ­ portam iento sectorial, C uaderno técnico, No. 36, W ashington, D.C. PAHO/ECLAC (1994): Health, Social Equity a n d Chang­ ing Production Patterns in Latin A m erica a nd the Caribbean (LC/G. 1813 (SES.25/18)), W ashington, D.C./Santiago, Chile, March. PAHO/WHO (1974): H ealth C onditions in the A m ericas 1969-1972, Scientific Publication No. 287, W ashing­ ton, D.C. (1978): H ealth Conditions in the A m ericas 19731976, Scientific Publication No. 364, Washington, D.C. (1982): H ealth C onditions in the A m ericas 19771980, Scientific Publication No. 427, Washington, D.C. (1986): H ealth C onditions in the A m ericas 19811984, Scientific Publication No. 500, Washington, D.C. (1991) H ealth C onditions in the Am ericas 19851989, 1991 Edition, W ashington, D.C. (1992): Inform e de la C onferencia Latinoamericana sobre aspectos económ icos y financieros de los m edicamentos esenciales, Caracas, March. (in the press): H ealth C onditions in the Am ericas 1994, W ashington, D.C. Pauly, M.V. (1987): H ospital fin a n ce and the behaviour o f the Am erican fo r-p ro fit a n d not-for-profit hospi­ tals: H ospital fin a n ce under the perspective o f the N ew Institutional Econom ics, C enter for the Study o f the New Institutional Economics, U niversity o f Saarbriicken, July, mimeo. Penrose, E. (1951): The Econom ics o f the International P atent System, B altim ore, The Johns Hopkins Press. Reichm an, J. H. (1993): Im plications o f the D raft TRIPS A greem ent fo r D eveloping C ountries as Competitors in an Integrated W orld M arket, Discussion Papers, No. 73, G eneva, United N ations Conference on Trade and D evelopm ent (UNCTAD). Schieber, G. J., J. P. Poullier and L. Greenwald (1991): Health care system s in tw enty-four countries, Health A ffairs, W ashington, D.C., Fall. Schieber, G. J. and J. P. P oullier (1989): International health care expenditure trends: 1987, H ealth Affairs, W ashington, D.C., Fall. WHO (W orld H ealth O rganization) (1993): Evaluation o f R ecent Changes in the Financing o f H ealth Services, Geneva, Report o f a WHO Study Group. W orld Bank (1993): W orld D evelopm ent R eport 1993, W ashington, D.C. HEALTH CARE MARKETS: THEIR MORPHOLOGY, BEHAVIOUR AND REGULATION • JORGE M. KATZ AND ERNESTO MIRANDA R. CEPAL REVIEW 27 54 Liberalization or financial development? Günther Held Coordinator, ECLAC Finance Unit. The Latin American countries’ reorientation towards market economies and their efforts to open their economies up to the international market since the 1970s have given rise to various sorts o f financial policies. This article reviews some selected experiences in three areas o f the financial sector: i) in the area of banking, eight different cases are examined in which financial liberalization measures led to various problems in terms o f bank solvency during the past 20 years; ii) in respect o f the capital market, the rapid developm ent o f this market in Chile since the start o f the 1980s is analysed; and iii) with regard to inflows o f private external financial capital, the M exico since the late high rates exhibited by 1980s are evaluated. B asing his approach on concepts that place financial liberalization within the context o f the types of regulatory systems that establish the ground rules in this sector, the author em phasizes the need to develop the institutional structure o f the financial system in a carefully planned manner in order to ensure the solvency and efficiency of financial institutions. Thus, a sharp distinction is made between financial deregulation and controlled financial development. DECEMBER 1994 28 CEPAL REVIEW 54 • DECEMBER 1994 I Introduction Financial liberalization forms a part of the economic policy reforms being carried forward by a growing number of countries since the mid-1970s in an effort to establish open, market-oriented economies. This article seeks to demonstrate the decisive role played by the institutional structure -i.e., the system of regulations and standards that estab­ lish the “ground rules” for financial institutions- in the attraction and allocation of funds by these institu­ tions in the credit and capital markets. In order to substantiate this assertion, a number of experiences with financial reforms or liberalization in the countries of the region are analysed. There are at least two other factors that also have a strong influence on the part played by financial markets in the capital-formation process. One is the supply of funds, since the role of financial institu­ tions is to attract funds and allocate them to invest­ ment and other socially profitable uses. The second is a macroeconomic environment which sends out correct resource-allocation signals to financial in­ stitutions and economic agents, primarily in the form of a real exchange rate and real interest rates that are in line with medium- and long-term conditions. In the following discussion, these factors are regarded as forming part of the overall environment within which financial reforms or liberalization measures are adopted. The article first addresses a number of concep­ tual questions, placing financial liberalization within the context of the types of regulations to which finan­ cial institutions are subject (section II) and outlining some alternative systems for the prudential regulation and supervision of the banking sector (section III). Some noteworthy experiences relating to the role of the institutional structure in the credit and capital markets of the countries of the region are then re­ viewed. The significance of flaws in the system of regulation and supervision of the banking sector is illustrated through an analysis of a sample group of countries in which financial liberalization measures have created problems in terms of institutional sol­ vency during the past 20 years (section IV). The 1981 reform of Chile’s pension system based on the capitalization of pension funds is examined as an out­ standing example of an effort to stimulate the capital market’s growth through forced saving and vigorous institution-building (section V). The article also ex­ plores the development of Mexico’s capital market since the late 1980s on the basis of domestic finan­ cial reforms and the planned introduction of an array of bonds and other securities which, together with strong incentives for foreign portfolio investment, have made Mexico the leading destination for exter­ nal funds in the region (section VI). Finally, a num­ ber of conclusions are presented (section VII). II Types of regulations applying to financial institutions There are basically three types of regulations which, in combination with one another, dictate the ground rules for financial institutions and agents involved in credit and capital markets: financial regulations, regulations governing the way in which the finance “industry” is organized, and prudential regulations designed to safeguard such institutions’ financial stability. 1. Financial regulation Financial regulations are designed to contribute to macroeconomic stability and secure more efficient resource allocation to production and capital forma­ tion through the maintenance of positive (but moderate) real interest rates and a realistic, credible exchange rate. LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GUNTHER HELD CEPAL REVIEW 54 • DECEMBER 1994 29 TABLE 1 Latin America: Regulation of financial institutions Type of regulation Main objectives Deregulation policies Policies for reinforcing regulation Financial Efficiency in resource allocation Macroeconomic stability Financial liberalization: broadening of financial markets’ role in attracting and allocating funds The role of financial markets is restricted Intervention may lead to financial repression Financial-institution operating efficiency Organizational deregulation: the range of financial services which financial institutions may offer is broadened The range of financial services which financial institutions may offer is reduced Financial-market efficiency Institution-building: new financial instruments and institutions are introduced Specialized financial institutions are created Solvency of financial institutions Prudential deregulation: rules governing the solvency of financial institutions are relaxed The absence of prudential regulations leads to the “decontrol” of solvency Rules governing the solvency of financial institutions are strengthened Organizational Prudential Financial regulations influence interest and ex­ change rates by officially setting them, by estab­ lishing bands or ceilings, or by permitting the monetary authority to participate in the money and foreign-exchange markets. Such regulations may also establish restrictions, reserve requirements and taxes on foreign investors’ access to domestic financial markets and on national financial institutions’ access to third-party funds, whether in local or foreign cur­ rency, thereby influencing these key financial prices. Primarily with a view to enhancing the financial system’s efficiency, financial deregulation seeks tò broaden the market’s range of action in determining interest and exchange rates and to reduce the restric­ tions on the attraction and allocation of funds, including credit. Seen from this vantage point, financial liberali­ zation is a wide-ranging policy of deregulation which is generally one of the components of broader marketeconomy reforms. In contrast, the tightening of finan­ cial regulations typically involves measures by the authorities to limit the action of the market.1When, in taking such measures, the authorities set interest or ex­ change rates too low or establish high reserve require­ ments and harsh restrictions on the attraction of funds, a situation of “financial repression” is created.2 1 Regulations are sometimes tightened in order to preserve mac­ roeconomic stability; at other times, such a step is prompted by movements of funds that may cause interest rates or the ex­ change rate to veer away from their medium- and long-term equilibrium levels. 2 “Financial repression” reduces the volume and real growth rate of funds and results in a backward type of financial system composed of a handful of oligopolistic banks. 2. Organizational regulation The regulations governing the way in which the fin­ ance “industry” is organized are chiefly aimed at in­ creasing the efficiency of financial institutions and of the credit and capital markets. In order to boost financial institutions’ opera­ ting efficiency,3 these types of regulations should allow such firms to make full use of their installed capacity, available economies of scale and the cost advantages afforded by the provision of com­ plementary financial services; at the same time, they should encourage competition by reducing entry barriers to the various segments of the credit and capital markets. In order for financial markets to be efficient, these regulations should promote full disclosure of the financial standing of participating agents (this subject will be explored further in the discussion on prudential regulations), should avert conflicts of in­ terest among them arising out of zero-sum transac­ tions which increase one agent’s assets at the expense of others (through, for example, the use of inside information or information that is not available to the 3 Operating efficiency is denoted by a minimal spread between the rates on loans and deposits in the case of banks and other financial intermediaries that operate as lending institutions and by minimal commissions in the case of institutions and agents offering financial services. LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GUNTHER HELD 30 CEPAL REVIEW 54 general public4), and should permit the entry of new financial instruments and institutions to an extent commensurate with the amount of funds channeled through the credit and capital markets. Within this context, the aim of organizational de­ regulation is to broaden the range of financial services which financial institutions can offer, thus bringing into play the advantages of diversification and the trend to­ wards de-specialization to be observed in today’s finan­ cial markets. One typical example is that of specialized commercial banks that have expanded their business activities and become full-service banks (“multibanks”) or even universal banks offering the entire gamut of financial services. When organizational regulations are tightened, on the other hand, the range of services that financial institutions may offer is restricted as a means of inducing them to specialize (for example, as savings and loan institutions or agricultural banks). 3. Prudential regulation Financial institutions manage a huge volume of other people’s funds, assuming varying degrees of risk in the process, or they may put financial investors in contact with companies in the real sector of the economy which issue listed stock in order to obtain medium- and long­ term financing. These institutions’ ability to perform these functions is founded upon public confidence, and their solvency (i.e., their ability to service their debts and obligations with third parties under pre-arranged terms and conditions) therefore has very substantial macroeconomic externalities.5 Hence, the prime ob­ jective of prudential regulations is to maintain the solvency or financial stability of these institutions. 4 The following are some examples of conflicts of interest: the granting of high-risk loans by banks to their proprietors (“related-party” loans), the subsequent settlement of which en­ tails a loss of deposits; a bank’s expansion of its operations to include the management of third-party funds which it then uses for its own benefit at low interest rates, to the detriment of the parties supplying the funds; and situations where banks are allowed to hold stock in production firms as part of their assets and, by using the inside information contained in the corporate loan and project portfolios to which they have access, are in a position to make an unfair profit in the stock market. 5 A failure on the part of banks or other financial institutions to pay out deposits or discharge other obligations may trigger a largescale run on their resources, a loss of confidence in the financial system and a decrease in credit and other financial claims. In con­ trast, the perceived solvency of financial institutions gives solidity to the payments system, reduces financial institutions’ transaction costs and permits the attraction of domestic and external funds that would otherwise not be made available. • DECEMBER 1994 To this end (and in order to enhance the effi­ ciency of financial markets), prudential regulations work in two main ways. First, they seek to ensure transparency with regard to the solvency of financial institutions and stock companies by requiring them to provide full, accurate information on a timely basis regarding their exposure, financial performance, as­ sets and other matters that have a bearing on their ability to meet their payments under the agreed terms and conditions on any bonds or other securities they may have issued. This type of disclosure enables fin­ ancial investors (depositors, savers, etc.) to arrive at informed decisions based on the yield, level of risk and liquidity of the various bonds and other securities offered on financial markets. Second, they seek to maintain financial institutions’ stock of assets or capi­ tal at adequate levels by requiring the measurement of their exposure, full loss provisioning (through the use of profits to establish the corresponding reserves) and the prompt replenishment of capital in the event of un­ expected losses (due to macroeconomic disturbances or other events that generate system-wide risk). This pro­ vides incentives for financial institutions to make sure, on their own initiative, that their level of exposure is in keeping with the size of their capital reserves. In this context, deregulation involves the relaxa­ tion of controls designed to safeguard financial in­ stitutions’ solvency. If this process is carried too far, it results in “decontrol”, i.e., a conspicuous lack of disclosure requirements and of limitations on the level of risk which financial institutions are permitted to assume. The reinforcement of prudential regula­ tions, on the other hand, refines or strengthens provi­ sions designed to maintain the solvency of financial institutions and encourages depositors, savers and financial investors to play an active part in control­ ling the level of risk that can be assumed by financial institutions and stock companies, in order to prevent the loss of the funds they have put into those firms. 4. Supervision Effective supervision of financial institutions is es­ sential in order to ensure their compliance with the financial, organizational and prudential regulations to which they are subject. Depending on the stage of maturity reached by the relevant credit and capital markets and the policy being used to further their development, such supervision may involve one or more specialized authorities in the public sector. LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GUNTHER HELD CEPAL REVIEW 54 How well these agencies do their job will be deter­ mined primarily by their degree of autonomy, then: powers of enforcement and the amount of govern­ mental backing they enjoy, by the extent of their supply of highly skilled personnel (to ensure that regulations and their enforcement are based on sound technical grounds), and by the establishment of clear-cut regulations and carefully calibrated penal­ ties in the event of non-compliance. • DECEMBER 1994 31 Within this context, the central components of the prudential supervision of financial institutions are the regular monitoring of these institutions to ensure that their portfolios (of loans or financial invest­ ments, as the case may be) have been correctly ap­ praised on the basis of their varying degrees of exposure and, on that basis, the publication of simple solvency indicators that are readily understandable by depositors and financial investors. Ill Prudential regulation and supervision of the banking system In view of the financial fragility of the banking sys­ tem, the regulatory and supervisory apparatus that safeguards its solvency are of prime importance. This fragility is a result of two of the characteristic fea­ tures of banks. The first is the highly leveraged na­ ture of their financial structures: their financial liabilities (deposits plus other obligations) or their financial claims (loans and financial investments) are customarily equivalent to more than ten times their capital. Second, banks receive resources from third parties and then loan out those funds in their own name and, in so doing, assume various levels of risk which they cover with their own capital and other assets. Consequently, the loss or decline in value of even a fraction of their loan and investment portfo­ lios may seriously jeopardize their solvency. 1. R egulatory safeguards for the banking system ’s solvency A prudential regulatory system for the banking sector includes the following components: (a) Banking-system entry requirements: (i) The minimum amount of capital necessary for incorporation; (ii) Qualifications required of principal sharehol­ ders, directors and chief executive officers. (ii) Limits on excessive imbalances between as­ sets and liabilities. (c) Full loss provisioning by banks: (i) Careful measurement of exposure; (ii) Immediate establishment of reserves to cover all risks. (d) Maintenance o f bank capital on a sound footing: (i) Suspension of interest on high-risk loans; (ii) Prompt replenishment of capital following unprovisioned losses; (iii) Capital requirements in line with asset risk. (e) Transparency in respect of banks’ financial status: provision of information (presented in the form o f easily-understood indicators) to deposi­ tors on a regular basis regarding banks’ expo­ sure and assets. (f) Mechanisms for orderly exiting from the banking system: (i) Insolvency of a bank and liquidation pro­ ceedings; (ii) Establishment of the order in which pay­ ments on deposits and other obligations must be made out of the bank’s remaining assets. The effectiveness of these standards and regula­ tions will depend on the effectiveness of their en­ forcement, the regular publication of indicators of (b) Levels of exposure in keeping with banks’ highly bank solvency, and full awareness by depositors and leve raged financial structures: (i) Widely diversified loan and investment port­ investors that they may lose their funds in the event folios, and restrictions on “related-party lending”; of bank financial problems. LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GUNTHER HELD 32 CEPAL REVIEW 54 If transparency in respect of the banks’ financial position is not maintained, depositors and investors will be unable to bring “market discipline” to bear on these institutions by choosing banks on the basis of tbe inter­ est rates they offer on deposits and the level of risk associated with their assets. At the same time, insuffi­ cient transparency will foster the idea among depositors and investors that their funds are covered by some sort of “implicit” government guarantee or, in other words, that the public sector will cover their losses in the event of a bank failure even if no written guarantee to that effect exists. Naturally, if deposits and other obligations are in fact covered by an explicit guarantee or form of insurance, then the extent of depositors’ and investors’ control over a bank’s solvency will be limited in direct relation to the proportion of such funds thus covered. 2. Alternative system s of prudential regulation and supervision The above-mentioned safeguards of bank solvency and insurance or guarantees of deposits are the two main components of an institutional system or mech­ anism for regulating and supervising banks to ensure their financial soundness. The different possible com­ binations of these two components yield four types of alternative systems (see table 2): a completely free or unregulated banking system, a banking system con­ trolled by the public sector, a dual-control banking system, and a decontrolled system or one which has no solvency safeguards. (a) Free or unregulated banking systems In a free or unregulated banking system, there are no government guarantees or deposit insurance, nor are there regulations to ensure bank solvency, or any other regulations, for that matter. Inasmuch as depositors have to assume a high degree of risk, they will demand full disclosure regarding the banks’ fin­ ancial standing and will take great care in choosing a financial institution or may be willing to make de­ posits only at very high real interest rates. (b) Banking systems controlled by the public sector The existence of explicit or implicit State guarantees or insurance on deposits and other obli­ gations eliminates the need to weight profit/risk considerations against each other, by inducing de­ positors and investors to make funds available to • DECEMBER 1994 banks without taking into account the risk of bank failure. Under these conditions, the primary, if not the only, motivation of depositors and investors is to determine which banks are offering the highest inter­ est rates on deposits. Consequently, the responsibility for ensuring bank solvency rests entirely with the public sector’s arrangements for prudential regulation and supervision of the system. Carrying out this task will demand very precise definition of the above-mentioned safeguards and stringent enforcement of them (c) Dual-control banking systems The absence of any explicit guarantees or insur­ ance on deposits and other obligations, when com­ bined with regular reporting on banks’ financial standing, encourages depositors and financial inves­ tors -especially those dealing in large sums of money- to play an active part in bringing the disci­ pline of the market to bear on the system. They will gauge the level of risk affecting the banks’ assets (since this risk also extends to their own funds) and will weigh this against the interest rates being offered on deposits. At the same time, under these systems the authorities enact prudential regulations and super­ visory measures will limit bank exposure and will establish requirements in regard to loan-loss reserves and capital. Since in this case both the agents sup­ plying funds and the public authorities are taking steps to ensure bank solvency, the system can be de­ scribed as being based on a dual-control institutional structure. (d) Decontrolled banking systems or systems having no solvency safeguards In this case, broad explicit or implicit govern­ ment guarantees on deposits and other obligations in­ duce depositors and other bank creditors to make funds available to banks solely on the basis of the interest rates they are offering on deposits, with no consideration being given to their risk of failure. At the same time, prudential regulation and supervision exhibit serious shortcomings or are virtually non­ existent, and banking regulations and supervision are limited to the observance and enforcement of ac­ counting procedures and financial regulations. In these circumstances, neither depositors and other bank creditors nor any government authorities are concerned with the banks’ exposure, and safeguards for bank solvency are therefore lacking under this type of institutional arrangement. LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GÜNTHER HELD CEPAL REVIEW 54 • DECEMBER 1994 33 TABLE 2 System s for regulating and supervising bank solvency X. X. Solvency regulations Without solvency controls Banks are subject to control by depositors and government financial regulators Decontrolled banking system: Banking system controlled by public sector: Banks are not subject to control by depositors or government financial regulators With guarantiees on deposits Dual control of banking system: Banks are subject to control by depositors Without guarantees on deposits With solvency controls Free or unregulated banking system: b Guarantees X . on deposits and X. other obligations a x. Banks are subject to control by government financial regulators Source: Adapted from Feller (1989). a The table is based on the assumption that, if deposit insurance does exist, premiums are uniform and the insurance therefore has effects similar to those of a partial guarantee on deposits (depositors tend to focus their attention on interest rates and to ignore the level of risk to which their deposits are subject). b Strictly speaking, a “free” banking system would exist only in the absence of any sort of regulation whatsoever, rather than simply a lack of prudential regulations. IV Problems of insolvency registered in the course of financial liberalization programmes in the region 1. Shortcom ings in prudential regulation and supervision as a factor in a banking system ’s financial instability Table 3 lists eight financial liberalization programmes which led to problems in regard to bank solvency in the past 20 years. Two factors played an especially important role in this respect. First, the systems’ prudential regulation and supervisory apparatus suf­ fered from serious shortcomings due to defects in the system for controlling risks, inadequate regulations concerning reserves and capital, feeble supervision or supervision limited to accounting procedures and fin­ ancial aspects, and the presence of explicit or implicit government guarantees on deposits and other obliga­ tions. Almost all of these problems arose in systems having precisely the type of institutional structure most likely to generate problems of insolvency: i.e., decontrolled banking systems or systems lacking sol­ vency safeguards (see table 2). Second, in many of these cases the macroecon­ omic environment generated high levels of systemic risk owing to unstable conditions or the impact of radical adjustments that gave rise to major changes in the levels of economic activity, relative prices, and corporate and personal income. By affecting the “primary” source of loan payments or the value of guarantees (the “secondary” source of payment), these factors themselves reduced the quality of the banks’ loan portfolios (see the annex for a summary of these liberalization experiences). 2. Recent reform s in bank regulation The instances of financial instability seen in the re­ gion over the past 20 years (including those listed in table 3) and the spread of financial liberalization and reform policies have led to a generalized tendency to strengthen prudential regulation and supervision of the banking system, particularly since the mid-1980s. LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GUNTHER HELD > TABLE 3 r r a Latin America (8 countries): Problem s with bank solvency in the past 20 years Country Period Financial regulation Macroeconomic conditions Prudential regulation and supervision “ Results Stability of financial system Financial prices • GUNTHER HELD 1974-1981 Liberalization of interest rates and credit; early opening of capital account Fiscal deficit and high inflation; stabilization based on exchange rate (1978-1981) Serious shortcomings Financial crisis in banking system High real interest rates; exchange-rate lags Chile 1974-1982 Liberalization of interest rates and credit Structural reforms and financial adjustment of public sector; stabilization based on exchange rate (1978-1982) Serious shortcomings Widespread banking crisis High real interest rates; exchange-rate lags Uruguay 1974-1982 Liberalization of interest rates and credit; early opening of capital account Trade deficit; stabilization based on exchange rate (1979-1982) Serious shortcomings Financial crisis in banking system High real interest rates; exchange-rate lags Colombia 1979-1982 Sectoral credit limits; cautious management of external debt Relatively stable Serious shortcomings Financial crisis in banking system Fragmented interest rate structure Costa Rica 1983-1987 Gradual liberalization of interest rates and credit Stabilization and adjustment of balance of payments Substantial improvements in prudential regulation and supervision Financial crisis in unregulated finance houses High real interest rates; in unregulated financial sector Bolivia 1985-1990 Liberalization of interest rates and credit Stabilization and structural adjustment following large fiscal deficits and hyperinflation Serious shortcomings Isolated cases of bank failures Decline in very high levels of real interest rates Peru 1990-1992 Liberalization of interest rates and credit Stabilization and structural adjustment following large fiscal deficits and hyperinflation Flaws in regulations on loan-loss reserves and capital Problems with bank solvency Slow decline in very high levels of real interest rates Venezuela 1989-1994 Liberalization of interest rates and credit Stabilization and adjustment in the presence of public-sector deficit Serious shortcomings Financial crisis in banking system High real interest rates DECEMBER LIBERALIZATION O FINANCIAL DEVELOPMENT? R Argentina CEPAL REVIEW 54 The reforms made in these regulatory systems have emphasized solvency safeguards and the role of supervisory authorities, together with the importance of defining and limiting government guarantees or deposit insurance. The first course of action has led to a restriction of portfolio risk, especially in connec­ tion with related-party loans, and to the rating of loan portfolios on the basis of the debtors’ risk categories, as well as to the establishment of stricter loan-loss reserve requirements and, increasingly, to the practice of setting capital requirements according to the level of risk associated with different categories of assets, in keeping with the recommendations set forth in the Basle Accord. 6 As regards the second course of action, most of the countries have chosen to establish explicit but limited guarantees on deposits, while a few have decided to dispense with this sort of protection.7 Little progress has been made, however, in im­ proving the provision of information to depositors and the general public regarding the risk involved in bank investments and credit. This has tended to sus­ tain the belief that there is an implicit governmental guarantee on deposits, even though in fact limits have been placed on such guarantees. Even in Chile, -where, since 1987, relatively simple indicators of these risks and of the financial position of banks have been published and where depositors have been warned of the risk of losing part of their money, since government guarantees are limited to certain • DECEMBER 1994 35 amounts- a considerable percentage of depositors continue to behave as if their funds were actually covered by some sort of implicit guarantee (Valdés and Lomakin, 1988). So long as this belief persists, the responsibility for regulating and supervising the banking system’s solvency will continue to be shoul­ dered primarily by the public authorities (see table 2). The organizational reforms carried out over the past 20 years have often included authorization of the expansion of commercial banks’ business activities so that they can become multibanks or even, as oc­ curred in Mexico, universal banks through the estab­ lishment of corresponding regulations on financial conglomerates (see section VI). Meanwhile, in those countries of the region which already have fairly well-developed financial systems, there has been a tendency towards the formation of de facto financial conglomerates, through the interrelated ownership and management of banks and other financial institu­ tions. This process has raised a number of complex issues in relation to organizational and prudential regulatory systems’ effectiveness in achieving the ob­ jective of transparency with regard to reporting on the performance and financial status of the relevant institutions and of the conglomerate to which they belong and in forestalling conflicts of interest which may benefit some member firms of the conglomerate at the expense of other economic agents (Morandé and Sánchez, 1992). V Pension system reform and development of the capital market in Chile At the end of 1980, the Chilean authorities chose to replace the existing shared-benefit pension system with an individually funded pension scheme. Pay­ ments into the system are mandatory for all persons receiving salaries or wages, and these compulsory 6 In order to determine a bank’s capital requirements, the Basle Accord assigns a weighting, from 0% to 100%, to various types of assets in the light of the level of credit risk involved. For example, funds on hand carry a weighting of zero while credits are assigned a weighting of 1. In order to bring the capital re­ quirements of banks in different countries in line with one an­ other, the ratio between their capital and the various categories of risk-weighted assets was to amount to 8% by the end of 1992. payments are made by the employees themselves in the form of a 10% deduction from their earnings (subject to a ceiling, above which the individual may voluntarily make payments in excess of that level). Thus, this new pension system is based on an institutionally-organized form of forced saving. 7 National Banking Commission of Mexico, report on the results of a survey on deposit insurance presented at the tenth assembly of the Association of Banking Supervisory Organizations of Latin America and the Caribbean (Santiago, Chile, 1993). LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GÜNTHER HELD 36 CEPAL REVIEW 54 These newly-established pension funds have quickly become the nation’s leading institutional in­ vestors and have played a pivotal role in the swift development of Chile’s capital market.8 As of late 1992 -one decade after they had entered into oper­ ation- pension funds had amassed the equivalent of 34.5% of g d p (while insurance companies, mutual funds and foreign investment funds possessed re­ sources equivalent to 9.2%, 2.6% and 3% of GDP, respectively). As of that date, pension funds held approximately 60% of the securities issued by large firms, around 60% of the mortgage bonds in circula­ tion, and over 20% of the shares which they were eligible to purchase. The growing presence of these pension funds is illustrated by the projections which indicate that these funds’ resources are expected to equal the country’s GDP by 2015-2020 (Iglesias, Acuña and Villagrán, 1988). 1. In stitution-buildin g in th e capital m arket Because of the rapid growth of Chile’s pension funds, its capital market needs a sturdy institutional structure capable of channeling those resources to­ wards socially profitable uses via an array of finan­ cial institutions and instruments that are subject to a prudential regulatory system. Institution-building efforts are felt to have played a decisive role in the achievements of the new pension system to date (re­ garded as being confined, for our purposes here, to the accumulation of funds and savings) and in its consolidation over time (Arrau, 1993). Table 4 outlines the institution-building process that has taken place in the securities and insurance mar­ ket since the end of 1980, when the laws were promul­ gated which created Chile’s new pension system and its basic institutions: pension funds, pension-fund man­ agement firms (AFPs) and the superintendency that is in charge of regulating and supervising the latter (the SAFP). The table shows that the country’s financial authorities have made an ongoing effort to update and refine the regulations and standards applying to various aspects of the burgeoning capital market (open-ended corporations, securities trading, market transparency, the rating of listed securities, gradual expansion of investment options for pension funds, 8 Their position in this respect is due both to the long payment periods that elapse between the time when an individual enters and withdraws from the workforce (usually between 30 and 40 years) and to the capitalization of those funds throughout that period. « D E C E M B E R 1994 redefinition of the role to be played by the Superin­ tendency of Securities and Insurance, etc.). A bill is currently under consideration by Congress that would make major changes in the regulations applying to the capital market (see table 4) in view of the concentration of pension-fund investments in the stocks of public utilities and the present shortage of financial instruments. Yet new needs for institutional regulation are already in the offing in such areas as overseas investments by pen­ sion funds, the further development of the life insur­ ance industry (which pays out pensions in the form of annuities) and the regulation of financial conglom­ erates as banks expand their activities and move into various segments of the credit and capital markets. Pension funds and their management firms (AFPs) are subject to extremely stringent prudential regulations and supervision because of the fact that they are made up of workers’ forced savings (which will be those workers’ main source of income after they retire) (see table 5). The equity capital of the AFPs is completely separate from that of the pension funds; an AFP may administer only one fund at a time and must guarantee a minimum return on the assets it manages. The statutes governing the funds’ portfolios stipulate that all bonds and securities must meet rigo­ rous risk-evaluation standards and must carry high ratings; these portfolios must also be widely diversi­ fied in terms of both financial instruments and issuers, and the bonds and other securities they contain are sub­ ject to an ongoing appraisal at market prices and must be held in safe-keeping by the Central Bank. 2. Pension reform and national saving The savings generated by the reform of the pension system have also made a large direct contribution to national savings, although the net effect on the latter is difficult to ascertain due to substitution of or com­ plementarity with other forms of saving. We do know, however, that gross national saving (at current prices) jumped by 11 points from a pre-reform aver­ age of 12.5% of GDP in 1976-1979 to an average level of 23.5% in 1990-1992. Pension-based saving directly accounted for slightly more than three points of GDP in that substantial increase.9 9 According to data from the national accounts and the Ministry of Finance of Chile. LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GÜNTHER HELD CEPAL REVIEW 54 • DECEMBER 1994 37 T A B LE 4 Chile: Development of institutional and regulatory apparatus for pension funds and the stock marketa Nov. 1980 D.L. 3.500 Creates private pension systems which include pension-fund management firms (AFPs) and the Superintendency for Pension-Fund Management Firms (SAFP) Dec. 1980 D.L. 3.538 Basic Act for the Superintendency of Securities and Insurance (SVS) Oct. 1981 Act 18.045 Stock Market Act Oct. 1981 Act 18.046 Companies Act Dec. 1985 SVS circular 574 Defines “related parties” Jan. 1986 SVS circular 585 Establishes compulsory disclosure of stock transactions conducted by majority stockholders, directors and executives March 1986 SVS circular 601 Establishes compulsory disclosure of any event that may significantly affect the business interests of open-end corporations Oct. 1987 Act 18.660 Requires ongoing rating of stocks on public offer according to their level of risk July 1989 Act 18.815 Investment Funds Act: permits pension funds to invest in real estate, bearer securities and venture capital Dec. 1989 Act 18.876 Establishes regulations governing the formation and operation of private securities custodians May 1992 Rating Commission Agreement Authorizes AFPs to invest in “greenfield” projects May 1993 SAFP circular 776 Makes it compulsory to provide standardized information concerning the rate of return on individual accounts according to fund members’ income brackets 1993 Bill before Congress Proposes substantial changes in Stock Market Act: Creates securitization firms Introduces more precise regulations for the rating “industry” Defines responsibilities of bond brokers Creates company development investment funds (FIDEs) Strengthens regulations regarding the solvency of insurance companies Introduces greater flexibility with regard to AFP investment ceilings Regulates risk factors for AFPs’ overseas investments Source: Arrau (1993). a Does not include amendments to the laws and regulations governing the activities of banks and financial corporations or of the Superintendency of Banks and Financial Institutions. The fact that public saving has been positive since 1987 has played a pivotal role in ensuring that the net effect of pension-based saving on national saving has also been a positive one. This indicates that public finances have absorbed the pension- system deficit that was created when workers’ pay­ ments were channeled into the new system while the public sector paid the pensions of institutions belong­ ing to the old system (which was plagued with seri­ ous financial imbalances of various origins). LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GÜNTHER HELD 38 CEPAL REVIEW 54 • DECEMBER 1994 TABLES Chile: Prudential regulations applying to pension funds Contents of regulations A. Pension-fund management firm s (AFPs) 1. The assets of an AFP must be entirely separate from those of the corresponding pension fund 2. An AFP may manage one fund only 3. B. An AFP must ensure a basic minimum rate of return to the fund; in order to do so it shall, if necessary, draw on reserves established by the AFP in question, which are to be held in safe-keeping by the Central Bank. Pension-fund investment portfolios 1. Pension funds may invest only in those securities and ftnacial instruments which are authorized by law 2. Any security or financial instrument in which a pension fund invests must be rated as an acceptable investment by the 3. 4. 5. 6. Rating Commission Strict rules govern the diversification of portfolios by type of financial instrument and issuer with the object of maintaining a low-risk profile As a general rule, all such securities and financial instruments must be traded on a commercial exchange or other established secondary market An appraisal of such investment portfolios is to be conducted as a routine procedure on a daily basis using prices furnished by the Superintendency for Pension-Fund Management Firms (SAFP). At least 85% of the portfolio must be appraised at market prices At least 90% of the securities and instruments making up a pension fund’s investment portfolio shall be held in the custody of the Central Bank. Source: Iglesias and Acuña (1991). VI Development of the financial system and the attraction of private external financial capital in Mexico Two interrelated factors -out of a number of different domestic and external elements- have played a de­ cisive part in attracting private external financial capital to Mexico since 1989: the institution-building and reforms that have taken place in the domestic financial system, and the strong incentives existing for inflows of financial capital. The main financial reforms adopted in Mexico since 19891 have included the deregulation of credit and 0 interest rates, a far-reaching liberalization of the balance-of-payments capital account, and provisions granting foreign investors access to Mexican finan­ cial markets and to stock in non-financial corpora­ tions (see table 6). The liberalization of the financial system was undertaken in conjunction with the banking system’s return to private ownership and a broad definition of the activities of multibanks; the adoption of regula­ tions on financial conglomerates headed by a holding company and composed of at least three financial institutions (conglomerates may not hold equity in­ vestments in production firms);1 changes in the 1 10 The chief elements that set the stage for this financial reform programme were the nationalization of the banking system in 1982 in response to the external debt crisis, and the rules that allowed foreign agents, within certain limits, to acquire stock in Mexican corporations under the terms of the regulations govern­ ing the application of the 1973 legislation designed to promote Mexican investment and regulate foreign investment. 1 A financial conglomerate must include at least three of the 1 following institutions: a multipurpose bank, a leasing company, a factorage agency, a stockbroking firm, a currency broking firm, a general-purpose bonded warehouse, an insurance com­ pany, a bonding company or an investment company. 1. In stitution-building and reform in the dom estic financial system LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GUNTHER HELD CEPAL REVIEW 54 • DECEMBER 1994 39 TABLEÓ Mexico: Reforms implemented in the financial system, 1989-1992 Type of regulation Principal measures Financial liberalization Deregulation of interest rates Elimination of selective controls on credit Elimination of reserve requirements, although the assets of multipurpose banks must be maintained at a predetermined liquidity coefficient Modifications in the regulations applying to foreign investment aimed at facilitating the entry of external financial capital Organizational development and deregulation Privatization of the commercial banking system New law governing lending institutions having as their basis private banks established as multiputpose banks Regulation of financial conglomerates based on a system of holding companies Reforms and/or additions and adjustments to the laws governing insurance, bonding and securities markets Strengthening of prudential regulation and supervision of banks and financial conglomerates Rating of loan portfolios based on risk category and reserves to cover the level of exposure in question Capital requirement equivalent to 8% of risk-weighted assets (to be met by 1993) Advances in the regulation and supervision of financial conglomerates Advances in the regulation of the overseas operations of Mexican banks Source: Martinez (1992); Caro (1994). structure of the securities and insurance markets with a view to their internationalization; and the adoption of new safeguards to ensure the solvency of banks and financial conglomerates (Martinez, 1992). Nevertheless, the Nacional Financiera, S.N.C ( n a f in ) and the Banco de Comercio Exterior, S.N.C. (BANCOMEXT) have continued to operate as public development finance institutions (DFis) in which second-tier banking represents a substantial compo­ nent. One of the main functions of n a f in is to support investment and small-business financing, while BANCOMEXT supplements the financing of export activities of firms of various sizes. At the same time, the financial authorities intro­ duced a number of domestic securities designed to attract international portfolio investment and auth­ orized the trading of Mexican securities on interna­ tional capital markets, creating a special section in national securities listings for that purpose. The op­ tions for stock transactions thus made available in­ cluded the sale of shares in Mexican corporations on the United States market via A D R s; 1 the purchase of 2 freely available (series B) shares -shares conferring full pecuniary and equity rights- by foreign investors on the domestic stock exchange; the purchase by such investors of shares that had formerly been reserved for Mexican nationals (series A stock) on the condition that they belong to a mutual fund that grants pecuniary rights (through share certificates) but not equity rights, such as the neutral fund admin­ istered by NAFIN; and the establishment of “country funds” (such as the Mexico Fund, which is one of the oldest and largest) through which such investors could acquire shares and other securities on local exchanges. Foreign investors have also been given access to domestic debt paper through the use of short-term treasury bills denominated in pesos (CETES), ad­ justable bonds (“Ajustabonos”) and other mediumterm government securities. Both State and private Mexican firms and banks as well as other publicsector institutions have also been able to secure overseas funds through the sale of bonds, commercial paper and certificates of deposit, primarily in the Euromarket. 2. 12 ADRs (American Depositary Receipts) are stock certificates issued by a United States bank on foreign-company shares or other securities; these certificates can be traded on the stock market in the United States. Incentives fo r financial capital inflow s Three factors have helped to draw capital to Mexico since 1989: (i) a notable decrease in its country risk and in the exposure of Mexican issuers; (ii) high LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GÜNTHER HELD 40 CEPAL REVIEW 54 domestic interest rates coupled with low exchange risk (thanks to the pre-established and progressively smaller adjustments being made in the nominal ex­ change rate with a view to price stabilization), con­ trasting with low interest rates in the United States and other industrialized countries; and (iii) the marked undervaluation of Mexican stocks in the light of the economic prospects opened up by the reforms under way. A number of economic policy results played a part in reducing the perceived risk of investing in Mexican securities: the completion of the country’s external debt renegotiations in 1989, the country’s success in putting its public finances back on a sound footing (transforming the consolidated public sector’s deficit, which amounted to 6% of GDP in 1989, into a 1.5% surplus by 1992) and the slowing of inflation, which -as measured by the variation in the consumer price index- fell from 30% to 15% during the same period. In 1992, two well-known international rating agencies put Mexico in a country-risk category that brings offerings of Mexican securities on interna­ tional capital markets very close to “investmentgrade” levels. In the case of securities that are negotiable on the local market, one of those agencies gave Mexico’s peso-denominated treasury bills (CETES) the highest possible investment rating for short-term debt paper and rated the Mexican long­ term public debt as being of investment grade. The deregulation of domestic interest rates and bank credit (in the midst of the implementation of stabilization and adjustment policies) opened up a large spread between national and international inter­ est rates. In 1989-1992, the average annual rate for domestic deposits hovered at between 11 and 14 points above short-term annual interest rates in the United States (adjusted for exchange-rate variations in Mexico), and the difference was calculated to have been more than 20 points per year in the case of the average domestic lending rate, owing to the wide spread used by local banks. These differentials -together with a low exchange risk (the nominal ex­ change rate climbed by 4.3% and 1.4% per year in 1991 and 1992 compared with 18.8% and 11.9% in­ creases in the consumer price index for those years, respectively) and the decreasing risk associated with investments in Mexican securities- generated strong incentives for inflows of external capital through the purchase of domestic debt paper (CETES and others) and overseas sales of securities (bonds and other instruments). • DECEMBER 1994 The total value of Mexican corporate stock on the exchange was equivalent to only 11% of GDP in 1989. This undervaluation triggered a large inflow of foreign capital to the stock market, contributing to its sub­ sequent boom. The price index for listed shares leaped by 133% in real terms between 1989 and 1992, while the average annual rate of return, in dollars, on invest­ ments in the stock market stood at around 60% during this period (due, in part, to the slow rise in the exchange rate). By late 1992, the value of Mexican corporate stock had risen to nearly 50% of GDP. Table 7 gives a list of floating- and fixed-rate financial instruments traded in the external and local capital markets, together with the capital flows re­ ceived during the period 1989-1992 and/or the mar­ ket value of those funds as of the end of 1992. 3. Macroeconomic effects and regulation of financial capital inflows Thanks to the exceptionally attractive conditions which Mexico has been able to offer overseas invest­ ment, since the late 1980s the country has quickly become one of the region’s foremost destinations for external funds. Between 1989 and 1992 the balance on the nation’s capital account soared from 1.5% to 7.9% of GDP. Foreign portfolio investment repre­ sented 15.5% of this amount in 1989, but by 1992 its share had skyrocketed to 52% (Caro, 1994). The massive inflow of external financial capital has had macroeconomic impacts that run counter to other economic-policy objectives. The Mexican peso appreciated by 17.6% in real terms between 1989 and 1992, which handicapped the export strategy laun­ ched by the country in the 1980s. External saving at current prices (measured as the balance on current account, of reverse sign) climbed by 3.9 points from 2.6% of GDP in 1989 to about 6.5% in 1992. How­ ever, gross domestic investment at current prices for that period only rose from 21.4% to 23.3% of GDP: an increase of 1.9%.1 Thus, national saving at cur­ 3 rent prices is estimated to have fallen from 18.8% to around 16.8% of GDP during that period, which sug­ 13 Gross domestic investment at constant prices, however, ex­ panded from 17.3% of GDP in 1989 to 21.7% in 1992 -an in­ crease of 4.4% of GDP. The striking difference between the figures for investment at current and constant prices is mainly attributable to the drop in the relative price of capital formation associated with the local currency’s steep rise in value and the opening up of the economy to external markets. LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GÜNTHER HELD CEPAL REVIEW 54 • DECEMBER 1994 41 TABLE 7 Mexico: Instruments used to attract external financial capital (In millions o f dollars) 1989 Placements in international market Total floating-rate portfolio International share issues (ADRs) Country funds 1990 1991 1992 Gross flows 1989-1992 Value of capital stock at end of 1992 - Instrument 563 4 404 4 333 71 5 365 5 077 - 10 332 9 410 263 21 773 21 154 619 4 074 3444 50 580 6 052 13 174 10 767 - 697 570 Total fixed-rate portfolio Bonds Certificates of deposit Commercial paper 192 2 351 2 351 - - 127 - Placements in domestic market Total floating-rate portfolio a Series B shares Series A shares (neutral fund) Total fixed-rate portfolio Treasury Certificates (CETES) Floating-rate bonds (“Ajustabonos”) Other instruments - 371 - - - 4 403 1 050 600 - - 2 287 1 100 1 307 2 658 5 100 1 800 - - 1 J 14 400 Source: World Bank, statistics on portfolio investment flows, several years; Gurria (1993). a Direct stock purchase. b Estimate. gests that external saving was being substituted for national saving, to the extent of about half of the 1992 figure. The wealth effect associated with the revaluation of financial assets (and other non­ tradable goods) occasioned by the inflow of capital, along with the resulting increase in aggregate con­ sumption at current prices (3.5 points of GDP) during that period, appears to have played an important part in this outcome. The above-mentioned macroeconomic effects raise the question of whether it would not be advisable to have financial and prudential regulations designed to curb the inflow of volatile short-term or speculative external financial capital.1 Advocates of 4 such regulations argue that the incentives for finan­ cial capital inflows are excessive and that, in the event of a rapid accumulation of external debt paper, there is a risk that domestic interest rates will be raised in an effort to attract or hold on to these funds. This over-incentive stems from the State guarantee on government securities (CETES and others) and the temporary nature both of low short-term interest rates in the United States (an annual 3.7% in 1992) and of the undervaluation of Mexican stocks. VII Conclusions The financial policy initiatives examined in this article demonstrate that the liberalization of financial variables (interest rates, credit, access to external funds, etc.) is only one of the elements involved in applying market-economy principles to the financial system. There are at least two other types of regula­ tions which -along with the necessary supervision and enforcement- also play a part in laying down the ground rules for financial institutions in credit and capital markets: regulations that shape the organiza­ 14 At the start of 1992 the Banco de México put a cap on banks’ external borrowing equivalent to 10% of their liabilities. LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GUNTHER HELD 42 CEPAL REVIEW 54 tional model of the finance “industry” (primarily with a view to increasing the efficiency of financial institutions and markets), and prudential regulations, which are designed to keep financial institutions and stock companies on an even financial keel. Financial liberalization can bring about a consid­ erable increase in the volume of funds handled by financial institutions and may expose them to varying risks in a more open environment where they are free to take their own decisions. This type of policy, how­ ever, does not of itself establish adequate ground rules as regards the solvency and efficiency of such institutions, owing to the problems concerning dis­ closure, externalities and conflicts of interest that are characteristic of credit and capital markets. Specific types of financial institutions and instruments do not come into being spontaneously, partly because of the highly regulated nature of financial transactions. This makes it all the more important for the financial authorities to make a systematic, deliberate effort to build up such institutions in order to strengthen the sector’s prudential regulation and supervision and to promote the creation of new institutions and instruments or the expansion of existing institu­ tions’ operational scope. The financial crises and difficulties experienced by banks in the region (see table 3) support the asser­ tion that programmes which simply deregulate inter­ est rates, credit and other financial variables without effectively reinforcing the prudential regulatory sys­ tem are actually instances of financial decontrol rather than the practical expression of a policy of financial liberalization. The behaviour of decon­ trolled banks, or banks that are not subject to adequ­ ate prudential controls, has given rise to financial instability. Apart from this, however, portfolio-related difficulties have also arisen in unstable macroecon­ omic environments or ones that are undergoing dras­ tic adjustments. The progress made to date in the prudential regulation and supervision of the banking system in the countries of the region has mainly taken the form of the implementation by specialized public-sector authorities of rules and standards designed to main­ tain that system’s solvency. Thus far, however, the flow of information to depositors and the general public regarding asset risk and banks’ financial stand­ ing has been very meagre indeed. This has helped to perpetuate the idea that deposits and other obliga­ tions are covered by an implicit government guaran­ • DECEMBER 1994 tee, even though explicit guarantees may have been officially withdrawn or limited. Moreover, not even proper, timely disclosure -as in the case of Chile, for example- seems to have altered this impression for many depositors. It is therefore important for the coun­ tries to continue their efforts to improve and refine the regulations that limit and control banks’ exposure, espe­ cially in cases where financial reforms are allowing them to expand the scope of their activities. Chile’s 1981 reform of its pension system con­ stitutes an outstanding example of a controlled process of financial development as opposed to mere financial liberalization. This reform entails forced institutional saving, strict regulations governing the organization of the pension “industry” as such, and close prudential supervision and regulation of pension-fund portfolios. It is this combination of factors, in large measure, which has permitted the build-up of funds and the development of the capital market observed to date. Institution-building -including that of the relevant public regulatory and supervisory agencieshas played an essential role in this regard. Indeed, this type of institutional development is what has made it possible to continue broadening the spectrum of profitable, safe and liquid investment options open to pension funds so that the rapid build-up of resour­ ces may be channeled towards real capital formation and other socially profitable uses. Institution-building is regarded as being of pivotal importance in con­ solidating the new pension system over time since -within a regulatory framework that greatly limits the level of risk associated with the bonds and other securities eligible for inclusion in pension-fund port­ folios- the management firms handling these funds compete freely with one another to achieve the best financial performance and to attract members. The case of Chile’s pension-system reform can be highly instructive for financial policy-makers in developing countries because it is based on an ap­ proach that offers an alternative to financial liberali­ zation. This reform underscores the importance of having sufficient savings or funds as well as the need for financial authorities to make a deliberate effort to “develop” the financial market and to provide for stringent regulations and close supervision to ensure that financial institutions properly perform their role in capital formation processes; at the same time, it also points up the limitations of policies that are con­ fined to the liberalization of interest rates, credit and other financial variables, since they simply liberalize LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GUNTHER HELD CEPAL REVIEW 54 what already exists while introducing a high degree of risk as regards the subsequent misuse of funds. The influx of external capital into Mexico in the form of international portfolio investment since 1989 also provides an excellent example of broadbased institution-building in a domestic financial system. The country’s financial reform process has been far-reaching, the financial authorities have in­ troduced a whole array of instruments for overseas investors, and the way has been paved for the sale of Mexican securities on international capital mar­ kets. It is also true, however, that this incoming stream of private external capital has occurred in response to excessive incentives for financial capi­ • DECEMBER 1994 43 tal (generated mainly by the guarantee provided by the State on government securities, by low short­ term interest rates in the United States and by the low domestic level of exchange risk). All these factors soon pushed foreign portfolio investment up to ex­ tremely high levels. This has raised the question of the advisability of establishing prudential and finan­ cial regulations to stem the inflow of volatile, short­ term or speculative external financial capital in order to forestall any adverse macroeconomic impacts on the real exchange rate and national saving and to make more room for medium- and long-term external financial flows. (Original: Spanish) Bibliography Afcha de la Parra, G. (1990): Desintermediación y liberalización financiera en B olivia, 1980-88, in G. H eld and R. Szalachman (eds.), Ahorro y asignación de recur­ sos financieros. Experiencias latinoamericanas, Buenos Aires, G rupo Editor Latinoam ericano S.R.L. (GEL). Arrau, P. (1993): Reforma al sistema de pensiones y de­ sarrollo del mercado de capitales en Chile, 1980-93, Feller, A. (1989): Supervisión, regulación y riesgos bancarios, Información financiera, Santiago, Chile, Superintendency of Banks and Financial Institutions, May. G onzález Arrieta, G . (1992): R egulación y supervisión de la solvencia del sistem a financiero en el Perú, in G. Held and R. Szalachman (eds.), Regulación y Super­ Joint ECLAC/UNDP R egional Project “Financial Policies for D evelopm ent”, Santiago, Chile, October, vision de la Banca. Experiencias de América Latina y el Caribe, vol. 2, Joint ECLAC/UNDP Regional mimeo. (1994): Fondos de pensiones y desarrollo del mer­ cado de capitales en Chile, 1980-1993, Serie financiam iento del desarrollo, No. 19 (LC/L. 839), Santiago, C hile, Econom ic Com m ission for Latin A m erica and the C aribbean (ECLAC). Banda, A. (1990): R egulación bancaria, crisis financiera y políticas consecuentes: el caso uruguayo, in G. Held and R. Szalachman (eds.), Ahorro y asignación de recursos financieros. Experiencias latinoamerica­ nas, Buenos Aires, GEL. Caro, E. (1994): Acceso a los mercados internacionales de capital y desarrollo de instrumentos financieros: el caso de México, Serie financiam iento del de­ sarrollo, No. 18, Santiago, Chile, ECLAC. De Paula, F. (1990): C osta Rica: interm ediación financiera y asignación de recursos, in C. M assad and G. Held (eds.), Sistema financiero y asignación de recursos. Experiencias latinoamericanas y del Caribe, Buenos Aires, GEL. Díaz, R. (1991): Regulación y supervisión de la solvencia bancaria en C osta Rica, in G. Held and R. Szalach­ man (eds.), Regulación y Supervision de la Banca. Experiencias de América Latina y el Caribe, Joint ECLAC/UNDP Regional Project “Financial Policies for Development”, Santiago, Chile, S.R.V. Impresos S.A. Project “Financial Policies for Developm ent” , San­ tiago, C hile, S.R.V. Im presos S.A. Gurria, J.A. (1993): Capital Inflows: The Mexican Case, Regional Project on New Capital Flow s, Santiago, C hile, December. H ausm ann, R., C. Jaramillo and R. R igobón (1992): R egulación y supervisión de la solvencia de la banca en Venezuela, in G. Held and R. Szalachm an (eds.), Regulación y Supervision de la Banca. Experiencias de América Latina y el Caribe, vol. 2, Joint ECLAC/ UNDP R egional Project “Financial Policies for De­ velopm ent” , Santiago, Chile, S.R.V. Im presos S.A. H eld, G. and R. Szalachman (1989): Regulación y super­ vision de la banca en la experiencia de liberalización financiera en Chile (1974-1988) (LC/R. 758), San­ tiago, C hile, ECLAC. Iglesias, A., R. A cuña and J. Villagrán (1988): Proyección de los fondos de pensiones, in S. B aeza and R. M anubens (eds.), Sistema privado de pensiones en Chile, Santiago, Chile, Centre for Public Studies (CEP). M artínez, A. (1992): Regulación y supervisión de la banca en M éxico, in G. Held and R. Szalachman (eds.), Regulación y Supervision de la Banca. Experiencias de América Latina y el Caribe, vol. 2, Joint ECLAC/UNDP Regional Project “Financial Policies for Development”, Santiago, Chile, S.R.V. Impresos S A LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GÜNTHER HELD 44 CEPAL REVIEW 54 M orandé, F. and J.M. Sánchez (1992): La expansión del giro bancario tradicional a los negocios no bancarios, in La banca ante nuevos negocios y mercados, San­ tiago, C hile, Superintendency o f Banks and Financial Institutions. Salama, E. (1991): R egulación y supervisión de la banca e instituciones financieras en A rgentina, in G. Held and R. Szalachman (eds.), Regulación y Supervision de la Banca. Experiencias de A m érica Latina y el Caribe, Joint ECLAC/UNDP Regional Project “Finan­ • DECEMBER 1994 cial Policies for Development”, Santiago, Chile, S.R.V. Impresos S.A. V aldés, S. and A. Lomakin (1988): Percepción sobre la garantía estatal a los depósitos durante 1987 en Chile, Cuadernos de economía, año 25, No. 75, Santiago, Chile, Catholic University o f Chile. Zuleta, L.A. (1990): Estructura del crédito para proyectos de inversión en Colombia, in C. M assad and G. Held (eds.), Sistema financiero y asignación de recursos. Experiencias latinoamericanas y del Caribe, Buenos Aires, GEL. ANNEX Financial liberalizatiori and problems with regard to solvency in Latin America In the mid-1970s Argentina, Chile and Uruguay began to liberalize interest rates, credit and other fin­ ancial variables, as well as adopting policies that pro­ vided for a broader definition of the activities that banks could perform or the financial services they could offer. These measures were implemented at a time of highly adverse conditions in terms of the fin­ ancial institutions’ continued solvency. The simulta­ neous application of ambitious stabilization measures -particularly the adoption, in 1978, of the nominal exchange rate as an anchor to stabilize the currency in these three countries- and of reforms designed to open up trade and the capital account led to incon­ sistencies in economic policy and macroeconomic in­ stability. Overly low exchange rates, high real interest rates and major shifts in the profitability of various economic activities undermined the quality of the banks’ loan portfolios. The programmes for the financial liberalization of the banking system in these countries during the 1970s also failed to provide proper safeguards for these institutions’ solvency; explicit or implicit gov­ ernment guarantees on deposits and other obligations were prevalent, and both the standards used for limi­ ting risk and reserve requirements suffered from seri­ ous shortcomings. In Uruguay, there were no “minimum” rules; in Chile, loan portfolios did not begin to be rated on the basis of their level of risk until the early 1980s, just before many banks’ finan­ cial problems surfaced; in Argentina, the banking system operated with virtually no supervision, and the rating of bank portfolios was not initiated until after the Government stepped in during the early 1980s (Banda, 1990; Held and Szalachman, 1989; Salama, 1991). In all three countries, the liberaliza­ tion of credit and interest rates sparked a sharp rise in high-risk lending at rates from three to five times higher than the growth rate of GDP. These loans in­ cluded: credit extended to non-tradable activities (in­ cluding real estate and speculative operations) which was financed in large part with external debt; wide­ spread rollovers of bad debts, whereby interest was compounded at high real rates (producing income that was never actually paid); and excessive credit to related-party companies or individuals for which very little real collateral was put up. Implicit govern­ ment guarantees on deposits facilitated the domestic and external borrowing by the banks which sustained this process. It is difficult to determine how far macroecon­ omic imbalances or the shortcomings of prudential regulatory and supervisory systems had to do with the far-reaching financial crises that erupted in these countries during the early 1980s. It is clear, however, that the second factor did play a major role. It is significant that in both Argentina and Chile and, in part, in Uruguay as well, the banking system’s seri­ ous financial problems surfaced before the balanceof-payments and external debt crises of 1982-1983 had brought about sharp downturns in these coun­ tries’ levels of economic activity. The crisis that hit Colombian banking in the early 1980s illustrates how a system whose financial standing is not subject to any controls can, within a context of financial liberalization, assume a high level of credit risk and unsustainable portfolio losses even in a fairly stable macroeconomic environment and despite a conservative policy on external borrow­ ing by banks. In 1980-1981, bank loans jumped by over 40% in real terms. Following the widespread intervention in the banking sector that began in 1982, it became clear that high-risk related-party loans to conglomerates -including the use of bank credit to buy stock in firms in the production sector- had LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GÜNTHER HELD CEPAL REVIEW 54 accounted for a substantial part of the abnormal in­ crease in lending activity. Credit limits and standards had been greatly exceeded, and the sector’s supervi­ sory authority had lagged far behind in checking the quality of loan portfolios (Zuleta, 1990). Costa Rica embarked upon a stabilization and economic reform effort in 1983 following a severe balance-of-payments crisis and its declaration in 1981 of a moratorium on external debt payments. Financial reforms broadened the private banking sys­ tem’s role in credit allocation and deregulated inter­ est rates in a three-stage process aimed at achieving positive yet moderate real interest rates in the super­ vised banking system. Headway was also made in the area of prudential regulation and supervision through the use of a system for rating the level of risk associ­ ated with banks’ loan portfolios, the establishment of stricter standards for provisions and the introduction of a set of bank performance indicators as a means of furnishing information to depositors and the general public. At the same time, however, the door was left open for “free” or unregulated financial companies. These institutions quickly increased in number and began to operate in higher-risk segments of the mar­ ket at high real interest rates. The adoption of a tight monetary policy in late 1987 led to a liquidity crunch in the financial system and to the bankruptcy of all of the unregulated financial companies in existence. Not a single supervised bank failed during this financial disaster, however (De Paula, 1990; Diaz, 1991). Bolivia and Peru (in 1985 and 1990, respective­ ly) liberalized interest rates and credit in the midst of a situation marked by severe inflationary turbulence and harsh stabilization policies and economic re­ forms. Real interest rates on loans were extremely high -even after several years had passed, they were still around 40% annually- and both relative prices and the profitability of economic activities fluctuated sharply as the economy was rapidly opened up and steep adjustments were made in aggregate expendi­ ture. These factors were apparently what triggered the banking system’s financial troubles in both coun­ tries, but flaws in the regulatory and supervisory pro­ visions for safeguarding the system’s solvency also played a part. In Bolivia, the closure of four banks in 1987 brought to light the lack of adequate controls on solvency: the limits on exposure were faulty, there was too much related-party lending, supervision was weak and there were implicit government guarantees on deposits. In Peru, the failure of a number of banks • DECEMBER 1994 45 and mutual funds starting in 1991 depleted the de­ posit insurance fund, and the State had to make up the difference; in March 1993, overdue loans repre­ sented 22% of the commercial banks’ loan portfolios but their loan-loss provisions totalled only 12%, which pointed up the insufficiency of reserves and the presence of lags in bank recapitalization (Afcha de la Parra, 1990; González Airieta, 1992). In Venezuela, the authorities’ intervention in a commercial bank in February 1994 marked the start of a financial crisis in the banking system. Midway through the year, eight more banks became subject to government intervention; these banks had received financial assistance in the preceding months and together had about 50 subsidiaries, almost all of which were financial institutions. Serious shortcom­ ings in the regulation and supervision of the financial system appear to have been what set off this crisis. The Superintendency of Banks and the Deposit Guarantee Fund (FOGADE) have been given very little operational autonomy, narrow terms of reference and insufficient regulatory powers to deal with difficult financial situations; their control over financial in­ stitutions’ solvency has been faulty, and a clear separ­ ation between their functions has been lacking. In its rating of loan portfolios, the Superintendency has not given enough weight to the risk represented by pro­ jected losses or, in particular, to the consolidated ana­ lysis of related-party loans made to companies belonging to the same economic group as the lending bank or of the concentration of loans in groups of firms that act as de facto conglomerates in the finan­ cial market. For the above reasons, delays arose in the establishment of reserves to cover these risks. In the case of FOGADE, the premiums or contributions which the banks have paid into the Fund have not been differentiated by level of risk, and the Fund’s existence appears to have prompted a lack of concern on the part of depositors about their banks’ financial standing (Hausmann, Jaramillo and Rigobón, 1992). The macroeconomic situation also played a role in the Venezuelan banking crisis. The stabilization and adjustment policy introduced in 1989 did not strengthen the public sector’s financial status, and indeed, the non-financial public sector’s deficit amounted to nearly 6% of GDP in 1992-1993, which, given the country’s tight monetary policy, pushed interest rates to high levels. In 1993, real rates on loans were around 30% and themselves led to a deterioration in the quality of bank loan portfolios. LIBERALIZATION OR FINANCIAL DEVELOPMENT? • GÜNTHER HELD CEPAL REVIEW 54 47 Fiscal adjustment and social spending Rossella Com inetti Consultant, ECLAC The external and internal im balances that appeared in the Economic Development Division. early 1980s, together with the adjustment and stabilization policies applied throughout that decade in Latin America, juxtaposed the need to reduce the fiscal deficit with the need to make up for the loss of income sustained by the most vulnerable groups o f the population as a consequence o f the external debt crisis. This article examines patterns o f social expenditure in a number o f countries in the region, in an effort to determine how these policies affected the level and com position o f social spending and, hence, influenced social policy. As a method o f analysis, the author reviews patterns o f social spending during various episodes of fiscal adjustment and maladjustm ent in each o f these countries and compares them with the trends observed in those countries’ public-sector finances. The data suggest that social expenditure was used chiefly as an instrum ent of fiscal adjustm ent, which would account for the widespread deterioration seen in this variable during the 1980s. In addition, the im pact of this policy was not evenly distributed among the various social sectors but instead had a particularly strong effect on housing and education. DECEMBER 1994 48 CEPAL REVIEW 54 • DECEMBER 1994 I Introduction In the course of the 1980s, Latin America underwent a number of costly adjustments in an effort to restore domestic and external equilibria in the wake of the financing crisis which had erupted in the region at the start of that decade. The net result of this process was negative in terms of both growth and social equity. Given the nature of the crisis, the incomesupplementation function of social expenditure proved to be at odds with the role it was called on to play in reducing the fiscal deficit. During the crisis, the groups which were espe­ cially at risk within the population expanded, mainly as a result of rising unemployment levels. In addition, inflation and the adjustment programmes implemented during that period eroded the working population’s buying power. From a social policy perspective, so­ cial spending should have been increased during this process in order to make up for the population’s loss of income. The economic adjustment exerted press­ ure in the opposite direction, however. At the time the crisis hit, the Latin American economies were suffering from large external and internal deficits and had sustained a sudden loss of financing capacity. The chances of eliminating the public sector’s grow­ ing deficit without cutting government spending were greatly reduced by the impossibility of increasing real receipts at a time when the region’s economies were plagued by recession and inflation, as well as by their loss of external borrowing power. As a result, the burden of the fiscal adjustment was shouldered primarily by non-financial government expenditure, one of whose components is social spending. The 1980s have been analysed extensively in the literature from a macro-fiscal standpoint, and this has taught us some new lessons about the role of fiscal policy in stabilization and adjustment processes.1 The literature has also devoted a great deal of atten­ tion to the social costs of these processes, which have sharply lowered the living standards of much of the population, as is indicated by the increase in the per­ centage of the population living in poverty and the deterioration observed in income distribution be­ tween 1980 and 1990.2 Indeed, studies attempting to assess the impact of stabilization and adjustment policies on social programmes generally highlight these policies’ effects on the level and composition of social expenditure.3 Although it is generally believed that the econ­ omic policies applied in the region during the 1980s reduced social spending without doing anything to mitigate the deterioration in the living standards of the most vulnerable groups in the population, no studies have been carried out which focus explicitly on how social expenditure patterns compare with trends in public finances during this period. Those studies that do look at trends in social spending in the 1980s tend to take a piecemeal approach in terms of both the periods and the countries they analyse. Moreover, most of them concentrate on periods dur­ ing which total public expenditure was reduced. This unnecessarily limits the episodes of fiscal adjustment that are examined; furthermore, reductions in fiscal spending may not necessarily reflect an adjustment of public finances. A more appropriate approach would be to analyse trends in social spending in relation to trends in the non-financial public sector’s deficit, while also taking a look at the behaviour of the various levels of government that make up the public sector. This article seeks to evaluate the role of social expenditure, both at the general and sectoral levels, during the various phases of fiscal adjustment and maladjustment observed in Latin America in the course of the 1980s and to determine the priorities assigned to social spending as a tool of social policy and as a tool for the adjustment of fiscal deficits. This evaluation will be based on an analysis of trends in social spending and in public finances in the region. 2 See, for example, Altimir (1993), Comia, Jolly and Stewart (1987), Figueroa (1992), Lustig (1991), Mujica and Larrañaga (1992), Pfeffermann (1987) and Grosh (1990). 3 See, for example, Hicks and Kubish (1984), Comia, Jolly and 1 See, for example, Marfán (1986), ECLAC (1989), Frenkel (1990), and Fanelli and Frenkel (1990). Stewart (1987), Grosh (1990), Ebel (1991), and Carciofi and Beccaria (1993). FISCAL ADJUSTMENT AND SOCIAL SPENDING • ROSSELLA COMINETTI CEPAL REVIEW 54 * DECEMBER 1994 49 II The fiscal adjustment process in Latin America As a consequence of the external events associated with the deterioration of the region’s terms of trade, the increase in interest rates and the sudden curtail­ ment of its inflows of external resources, most of the Latin American countries’ external sectors began to run up large deficits which later spread to their fiscal sectors. These countries were therefore obliged to implement stabilization and adjustment programmes, coupled in some cases with more radical reforms that actually altered the role of the State. The trends in public finances seen in Latin America in the 1980s were in large measure a reflec­ tion of the adjustment process undertaken in the aftermath of the external debt crisis that broke out in 1982. The duration and intensity of the fiscal adjust­ ment process in each country were determined by the initial status of its public finances, external events and the nature of subsequent adjustment policies. The crisis had an impact on the public finances everywhere in the region, but its effects varied in both intensity and duration from one country to the next; these differing situations, in turn, gave rise to fiscal adjustment processes of varying degrees of in­ tensity and effectiveness. In most cases, the deterior­ ation of public finances took place within an extremely tight domestic and external financing envi­ ronment and affected both the sources and uses of public funds at the various levels of government. Public-sector revenues shrank, mainly as a result of a slump in domestic economic activity, the nature of exchange policy and the erosion of tax receipts by the inflationary processes that came into play in the early 1980s. In terms of resource use, the main im­ pact of the crisis was an increase in the region’s out­ ward transfer of resources owing to the deterioration of its terms of trade and to the rising finance charges associated with the countries’ external debt service. Any reduction in government spending inevit­ ably has an economic and social cost, since, in the short run, it is extremely difficult to offset the impact of a reduction or postponement of government ex­ penditure through an increase in the public sector’s efficiency. Furthermore, the existence of obligated funds endows some components of this variable with a high degree of rigidity, and any reductions that are to be made will therefore be primarily in deferrable items of expenditure. Consequently, capital and so­ cial expenditures are usually the first to be cut in the event of a fiscal emergency. In terms of government expenditure, the fiscal policy tools usually employed in Latin America for purposes of fiscal adjustment have been the adjustment of public-sector wages at a below-inflation rate, the suspension or postponement of public investment projects, and the delay of pay­ ments owed to the private sector or external agents. 1. The size and causes of the fiscal deficit The countries of the region varied significantly in terms of their fiscal status at the outset of the 1980s. Some countries which had pursued expansionary fis­ cal policies -Argentina, Costa Rica and Mexico- had large deficits, while others -such as Chile, Paraguay, Uruguay and Venezuela- had balanced fiscal ac­ counts. These differences largely determined the ef­ fectiveness of the adjustment policies implemented by the various countries during the decade. In order to ascertain the level and source of these fiscal disequilibria, the severity of the fiscal malad­ justment, its fluctuations and the main causes of the deterioration seen in the fiscal accounts were ana­ lysed for a number of countries (see table 1). The severity of the fiscal maladjustments was measured as the peak deficit recorded by the non-fin­ ancial public sector ( n f p s ) during a period of fiscal disequilibrium. The trend in the public-sector deficit -represented by the variation in the non-financial public sector’s financing requirements (NFPSFR)— shows the presence of phases of fiscal maladjustment or adjustment. A phase of fiscal maladjustment is a period in which the n f p s f r is on the rise, while a phase of fiscal adjustment is one in which the NFPSFR is shrinking. The variation in NFPSFR is an indicator of the severity of a fiscal crisis, regardless of the public sector's initial financial position, since it can just as well illustrate the extent of the downturn oc­ curring in a country which has moved from a fiscal surplus to a moderate or small deficit. FISCAL ADJUSTMENT AND SOCIAL SPENDING • ROSSELLA COMINETTI 50 CEPAL REVIEW 54 • DECEMBER 1994 TABLE I Latin America (12 countries): Size and origin of fiscal maladjustment (Percentages o f GDP) Extent of fiscal imbal­ ance a Variation in fiscal imbal­ ance b Varia­ tion in SEFR c Variation in GGFRd Total TI T PE GGi SE -4.3 2.9 -2.1 7.4 1.5 - 1.0 -2.1 -0.8 First phase o f fiscal imbalance Argentina (1980-1982) 10.2 4.7 1.4 3.3 -4.7 -2.3 Bolivia (1980-1984) 26.6 18.8 2.8 16.1 -7.1 -5.9 Brazil (1980-1985) Mexico (1980-1982) 12.9 15.6 9.9 9.0 0.9 0.5 9.0 8.5 -1.9 1.3 Peru (1980-1983) 10.2 6.4 0.9 5.5 -4.8 Uruguay (1980-1982) 10.4 11.8 3.0 8.8 0.9 6.3 9.2 3.5 -0.3 1.0 -0.6 -0.6 -5.0 -1.5 7.6 0.7 5.8 -0.8 1.4 1.1 Venezuela (1980-1983) 17.2 11.3 6.4 -3.0 3.6 0.2 8.2 5.1 3.5 4.9 1.7 - 1.1 Colombia (1980-1983) - 1.1 - 1.2 0.4 0.2 Costa Rica (1985-1988) 6.7 5.6 Ecuador (1980-1982) 6.3 3.1 0.1 3.0 -1.7 -1.3 - 1.0 2.4 0.2 Chile (1980-1984) 4.6 5.4 10.0 9.3 - 1.2 0.2 4.8 3.2e 4.2 5.8 3.1 2.7 -0.8 -1.7 1.8 0.1 1.7 11.2 7.9 2.1 5.9 -2.3 - 1.8 1.6 2.1 0.8 8.3 8.3 4.8 5.2 1.5 5.1 3.3 -3.9 -2.5 -2.9 -2.6 0.3 - 1.1 4.4 -0.9 - 1.2 -0.8 2.3 5.1 2.2 5.6 -3.4 -0.1 Paraguay (1980-1984) Regional average f 0.2 Second phase o f fiscal imbalance Argentina (1987-1988) Bolivia (1986-1987) 0.1 Brazil (1988-1990) 24.3 2.1 -2.1 4.2 5.3 Mexico (1985-1986) 14.5 7.3 0.9 6.4 -0.4 -0.7 0.4 Venezuela (1986-1987) 7.5 9.7 2.9 7.4 6.3 -3.0 -3.4 10.4 -8.3 -5.9 - 11.6 4.0 Colombia (1987-1989) Ecuador(1986-1987) 3.5 3.3 1.9 8.7 0.2 1.8 -11.7 -6.3 -1.4 -0.9 0.1 0.4 8.2 0.5 0.2 -0.1 1.7 - 1.0 -0.5 1.3 Regional average 9.9 5.0 2.1 2.9 -2.6 -3.0 -0.2 0.6 0.1 Peru (1986-1989) 0.1 -0.6 -2.8 Source: Cominetti (1994). Data on social expenditure: Vargas de Flood and Harriague (1993), UDAPSO (1993), Macedo and Piola (1993), Chile, Budget Department (1993), Carciofi and Beccaria (1993), IMF (several years), Central Bank of Ecuador (1993), Universidad del Pacífico (1993). a Corresponds to the peak level of the non-financial public sector’s finance requirements (NFPSFR) during the fiscal imbalance. b Corresponds to the variation in NFPSFR. c SEFR: State enterprises’ finance requirements. d GGFR: General government’s finance requirements; TI: total income; T: tax revenues; PE; primary expenditures (total expenditure minus interest payments); GGi: general government interest payments; SE: social expenditure. e Interest payments by State enterprises are included under general government interest payments (GGi). f Simple average. In order to pinpoint the sectoral origin of an im­ balance, table 1 also shows the trends in the financial positions (financial requirements) of State enterprises (SEFR) and the general government (GGFR). Vari­ ations in general-govemment deficits are further dis­ aggregated according to the main sources of public revenues (tax receipts) and the uses made of those revenues (primary expenditure, social expenditure and interest payments). The table indicates that many countries suffered from severe domestic disequilibria during the first half of the 1980s. This group includes Argentina, FISCAL ADJUSTMENT AND SOCIAL SPENDING • ROSSELLA COMINETTI CEPAL REVIEW 54 Bolivia, Brazil, Mexico, Peru, Uruguay and Venezue­ la, whose fiscal deficits rose to over 10% of GDP. Somewhat smaller fiscal deficits were registered by Colombia, Costa Rica, Ecuador, Paraguay and Chile; in Chile, however, the shift from a surplus equivalent to 5.4% of GDP in 1980 to a deficit amounting to 4.6% of GDP in 1984 none the less signalled the presence of a major fiscal imbalance, since the change was equal to 10% of GDP. The table also shows that most of the countries whose public finan­ ces reflected a major imbalance at the outset of the crisis relapsed -following an initial adjustment ef­ fort- into a deteriorating trend as regards those finan­ ces which was similar in intensity to the first, although somewhat shorter in duration. In the majority of the countries, the deteriora­ tion of their fiscal standing during the various epi­ sodes of fiscal disequilibrium was chiefly associated with changes in the financial position of general government. On average, this sector gener­ ated around three-quarters of the total downturn in a country’s overall financial position, whereas State enterprises were a major factor in the dete­ rioration of the overall public finances only in Venezuela, Colombia and Paraguay during the first episode of fiscal disequilibrium and in Bolivia, Peru and Ecuador during the second. The general-government fiscal imbalances ob­ served during the decade stemmed primarily from a loss of fiscal revenues (Tl) and higher debt service (GGi). The fiscal situation was exacerbated in a few countries by an expansion of primary expenditure (PE); in others, government spending cuts prevented the public sector’s financial status from taking an even sharper turn for the worse. This was the case, for example, in Argentina (1980-1982), Brazil (19801985 and 1986-1989) and Peru (1986-1989). The reappearance of fiscal deficits in some countries after the implementation of adjustment and stabilization programmes had less to do with debt servicing than in the initial periods; instead, these deficits were brought on by external factors such as falling oil prices and by factors associ­ ated with the implementation of reactivation policies or, in some cases, the outbreak of bouts of hyperinflation. In short, the fiscal imbalances analysed in this study appear to be linked primarily to the presence of domestic and external macroeconomic disequilibria • DECEMBER 1994 51 caused by the economic crisis rather than being due to deliberately expansionary policies.4 2. Fiscal adjustm ent The fiscal adjustment processes which were im­ plemented varied in intensity and effectiveness, as is suggested by the reappearance of imbalances in a number of countries towards the end of the 1980s. It has often been argued that during fiscal emer­ gencies, adjustments should be made mainly on the side of demand (use) rather than supply (sources), because the fiscal impact of reforms or changes in the tax system has a long lead time or time lag, and public-sector rates and charges are difficult to correct during economic slumps. Moreover, when spending cuts are made during times of economic crisis, they tend to be concentrated in the capital account rather than current expenditure, due to the unpopularity and higher political cost of reductions in the latter. Table 2 provides an idea of the scope of the fis­ cal adjustments made in various countries of the re­ gion and of the factors that played a part in balancing the public sector’s finances in the course of these countries’ fiscal adjustment efforts; as in table 1, the figures are broken down to distinguish between the contributions of State enterprises and those of general government. In most of the countries studied, fiscal austerity measures were adopted, and both State enterprises and general government made a determined effort to shoulder the weight of the debt burden and to correct overall fiscal imbalances. Table 2 also shows that, except in Brazil, the scope of the adjustment was very considerable in relation to the levels of the orig­ inal imbalances; Bolivia, in particular, carried out an extraordinary adjustment (23.6% of GDP) within a very short time. It may also be seen that, as in the case of fiscal disequilibria, the input of general gov­ ernment was greater than that of State enterprises. 4 There are, however, some exceptions, including Bolivia (1980- 1984), Mexico (1980-1982), Uruguay (1980-1982) and Chile (1980-1984), where a substantial increase was seen in primary expenditure. In Uruguay and Chile, however, the increase in public-sector expenditure was in large measure a reflection of changes in the social security system rather than of an expan­ sionary fiscal policy. FISCAL ADJUSTMENT AND SOCIAL SPENDING • ROSSELLA COMINETTI 52 CEPAL REVIEW 54 • DECEMBER 1994 TABLE 2 Latin America (12 countries): Size and origin of fiscal adjustment (Percentages o f GDP) Fiscal adjust­ ment a Varia­ tion in Variation in GGFR c SEFR b Total TI T -6.7 -23.6 -1.5 -8.4 -7.7 -9.8 - 12.8 -6.9 - 12.2 - 11.8 -4.3 -4.6 -3.2 -0.4 -2.2 -3.8 -2.2 -5.3 -2.8 -5.9 -8.1 4.6 14.9 3.4 1.3 3.8 2.5 14.3 1.2 1.1 4.6 2.3 4.8 1.1 3.6 0.4 0.4 1.6 -1.7 -3.5 -23.6 - 1.1 -6.2 -3.9 -7.6 -7.5 -4.1 -6.4 -3.7 -3.0 -2.8 0.2 0.5 -7.0 -3.6 -2.1 -5.2 -2.7 -3.5 -3.0 -8.2 -3.1 -6.1 3.2 3.2 -3.7 -14.4 -2.6 -9.1 -0.2 -3.5 1.1 -1.4 -7.7 2.8 PE GGi SE 3.6 11.0 3.5 -7.7 -2.5 2.3 - 1.2 1.4 -3.1 2.8 0.3 -2.4 -0.3 -3.7 0.4 -1.1 -1.9 -1.5 -4.6 - 1.6 -3.2 0.2 -1.4 0.4 -3.1 0.6 -0.2 -0.4 1.2 0.5 -2.9 -7.1 0.3 0.3 First phase o f fiscal adjustment Regional averagee 2.3 2.9 1.8 - - -0.1 0.6 0.7 0.3 -0.1 -0.6 o V © Û . Argentina (1983-1986) Bolivia (1985-1986) Brazil (1986-1987) Mexico (1983-1984) Peru (1984-1985) Uruguay (1983-1987) Venezuela (1984-1985) Colombia (1984-1986) Costa Rica (1980-1984) Ecuador(1983-1985) Chile (1985-1987) Paraguay (1985-1987) 1.2 Second phase o f fiscal adjustment Argentina (1989-1990) Bolivia (1988-1989) Costa Rica (1989-1990) Mexico (1987-1989) Regional averagee 1.2 Source: Cominetti (1994). Data on social expenditure: Vargas de Flood and Harriague (1993), UDAPSO (1993), Macedo and Piola (1993), Chile, Budget Department (1993), Carciofi and Beccaria (1993), IMF (several years), Central Bank of Ecuador (1993), Universidad del Pacífico (1993). a Corresponds to the variation in the non-financial public sector’s finance requirements (NFPSFR). b SEFR: State enterprises’ finance requirements. 0GGFR: General government’s finance requirements; TI: total income; T : tax revenues; PE: primary expenditures (total expenditure minus interest payments); GGi: general government interest payments; SE: social expenditure. d Interest payments by State enterprises are included under general government interest payments (GGi). e Simple average. The main adjustment mechanism used by State enterprises was the reduction of allocations for fixed capital formation.5 General government, on the other hand, took a number of different steps to boost revenues, such as correcting the prices charged by State enterprises,6 instituting tax reforms 7 and 5 Devlin and Cominetti (1994) show that the adjustment carried out by State enterprises in Latin America during the 1980s was achieved by reducing investment levels. 6 This was done, for example, in Costa Rica in 1982 and Mexico in 1983. In many of the countries, however, public-sector rates and charges were also used at one time or another as an anti-in­ flationary policy tool. raising fuel prices and fuel taxes.8 At the same time, the easing of inflationary pressures helped to boost tax revenues in some cases, while rebounding petro­ leum prices helped along the adjustment process in the oil-producing countries. On the expenditure side, the contribution made by general-govemment primary expenditure to the fiscal adjustment effort was, on average, just as im­ portant as that made by tax revenues (see table 2). Financial expenditure continued to exert some pressure in most of the countries during the fiscal adjustment phase, with an increase being seen, 7 This step was taken in, for example, Colombia (1984), Mexico 8 Such measures were implemented in, for example, Argentina, (1983), Bolivia (1986), Brazil (1986) and Venezuela (1985). Bolivia and Peru. FISCAL ADJUSTMENT AND SOCIAL SPENDING • ROSSELLA COMINETTI CEPAL REVIEW 54 overall, in general government interest payments, but general government primary expenditure contributed to the restoration of fiscal equilibrium, with this con­ tribution being quite substantial in such countries as Bolivia, Mexico, Uruguay and Costa Rica. In most cases, the countries’ adjustment programmes called for drastic reductions in general government spend­ ing, especially in public-sector wages and capital ex­ penditure. These two items exhibit a relative degree of flexibility in fiscal emergency situations, but re­ ductions in these areas may also have serious short­ term social implications as well as generating severe growth constraints in the long run. • DECEMBER 1994 53 In summary, the data examined here suggest that, generally speaking, primary expenditure was not a significant factor in the region’s bouts of fiscal ma­ ladjustment during the 1980s but on the contrary made an important contribution to the restoration of fiscal equilibria. Within this context, it may be in­ structive to look at social expenditure patterns during phases of disequilibrium and fiscal adjustment and, in particular, to determine whether the trends in so­ cial and primary expenditure were similar or whether social spending helped to make up for the loss of income experienced by the population as a result of the debt crisis. I ll The role of social expenditure in fiscal adjustment and maladjustment An analysis of the performance of the Latin Ameri­ can economies in the area of public finances during this period inevitably raises a number of questions about the role of social policy. Did social spending help trigger the fiscal crisis? How did social spending contribute to the fiscal adjustment process? How much did social policy help to make up for the loss of income sustained by the most vulnerable groups in the population? An attempt will be made to answer these ques­ tions on the basis of a simple exercise involving an analysis of social expenditure patterns during periods in which the non-financial public sector’s financial standing deteriorated and during periods when ad­ justments were made to improve its financial status. 1. Social spending and fiscal deficits The pattern of social spending observed during each episode of fiscal adjustment and maladjustment may be described as being pro-adjustment if social expen­ diture decreases or pro-maladjustment if it increases. Thus, during episodes of fiscal maladjustment, social spending may have helped to deepen the imbalance by exhibiting a pro-maladjustment pattern or may have helped to mitigate the imbalance and forestall even greater disequilibria, in which case it would have dis­ played a pro-adjustment pattern. By the same token, during phases of fiscal adjustment, the pattern of so­ cial spending may have followed a pro-adjustment trajectory and thus helped to reduce the imbalance, or may have hindered efforts to reduce that imbalance by displaying a pro-maladjustment trend.9 Table 3 provides an overview (in terms of numbers of cases) of the patterns of social spending observed during the period in question by breaking them down into the categories of “pro-adjustment” or “pro­ maladjustment” trends during episodes of both fiscal adjustment and maladjustment. It shows that, in terms of frequency, social spending during the 1980s was a strongly pro-adjustment factor in the region during epi­ sodes of fiscal adjustment as well as maladjustment. Specifically, out of 21 episodes of fiscal maladjustment, social expenditure was a mitigating factor in 11 cases, while it helped to increase the imbalance in the other 10 cases. Likewise, in 12 of the 16 episodes of fiscal adjustment for which information is available, social expenditure exerted a pro-adjustment influence, work­ ing against adjustment efforts in only four cases. 9 Depending on the definition and unit of measurement (units of GDP) adopted, a pro-adjustment pattern may reflect a situation in which social spending is reduced or one in which social spending increases but does so at a proportionally slower rate than GDP. By the same token, a pro-maladjustment pattern may reflect a situation in which social spending rises or one in which it decreases but does so at a slower pace than GDP. FISCAL ADJUSTMENT AND SOCIAL SPENDING • ROSSELLA COMINETTI 54 CEPAL REVIEW 54 (Number o f cases) Episodes of fiscal adjustment 12 Pro­ maladjustment 4 Average variation in social expenditure (as a percentage of gdp ) Episodes of fiscal maladjustment 1.8 11 1.1 10 Average variation in social expenditure (as a percentage o f GDP) Total 1.2 23 DECEMBER 2. Latin America: The role of social expenditure during episodes of fiscal adjustment and maladjustment Proadjustment • 2.0 14 Source: Table 2. In terms of magnitude, it may be seen that although the average increase in social expenditure during times of fiscal maladjustment outweighed the average re­ duction made in this variable when it was performing a pro-adjustment function, just the opposite was true during episodes of fiscal adjustment. In such situ­ ations, not only did the number of pro-adjustment patterns far exceed the number of pro-maladjustment patterns, but the size of the contribution made to fis­ cal equilibrium was, on average, greater than that observed in those cases where social spending rose. The cases of Chile (1980-1984) and Uruguay (1980-1982) stand out by virtue of the extent of the change observed in their social expenditure levels during episodes of disequilibrium, inasmuch as in these two countries this factor accounted for nearly 50% of the total imbalance. This was a consequence of special circumstances in both cases (the im­ plementation of a new social security system and of special welfare programmes in Chile, and the reor­ ganization of the social security system in Uruguay). As regards the significance of social spending as a mitigating factor during episodes of maladjustment, it is to be noted that the contribution made by this category of expenditure was quite substantial in per­ centage terms, considering its relatively small share of the non-financial public sector’s total budget. In addition, trends in social spending during episodes of fiscal adjustment had a pro-adjustment influence in a majority of cases (see table 2); the deep cuts made in social expenditure in Chile during the second half of the 1980s constitute a particularly notable case. 1994 Social spending and the level of economic activity: pro-cyclical or counter-cyclical?10 A social policy intended to play a compensatory role with regard to income levels under recessionary circumstances should call for an increase in social expenditure when the level of economic activity declines; in other words, in the context of such a policy, social expenditure should be counter-cyclical. If, on the other hand, social spending behaves procyclically under such circumstances, then the most vulnerable segments of the population will probably see a further deterioration in their economic position. An analysis of social spending and of the trends ob­ served in the level of economic activity during peri­ ods of fiscal adjustment and maladjustment may reveal any of the following types of social expendi­ ture patterns: (i) Pro-cyclical and pro-adjustment social spend­ ing: this social expenditure pattern is observed when the level of activity is moving downward and the level of social spending falls by a greater proportion than GDP, or when GDP is growing and social spend­ ing tends to rise, but more slowly than GDP. (ii) Pro-cyclical and pro-maladjustment social spending: this type of pattern emerges when the level of activity is declining and the reduction made in social spending is smaller than the drop in GDP, or when social spending increases by a proportionately greater amount than g d p at a time when the level of economic activity is on the rise. (iii) Counter-cyclical and pro-adjustment social spending: this pattern is found when social spending is being reduced while the level of activity is moving upward. (iv) Counter-cyclical and pro-maladjustment so­ cial spending: this pattern is seen when the level of economic activity falls while social expenditure rises. A pro-cyclical, pro-adjustment pattern reflects a social expenditure policy that places a higher priority on fiscal adjustment than on income supplementa­ tion, whereas a counter-cyclical, pro-maladjustment pattern reflects a fiscal policy that places priority on the compensatory role of social spending and thus increases such spending when the population’s in­ come levels fall. 10 The author is grateful for the contributions made by Emanuela Di Gropello to this section. FISCAL ADJUSTMENT AND SOCIAL SPENDING • ROSSELLA COMINETTI CEPAL REVIEW 54 If, when analysing the situation in the region during phases of fiscal adjustment and maladjust­ ment, a comparison is made between the trends in real social expenditure and in real GDP, then the role of social spending in Latin America is seen to be as shown in table 4. The figures refer to only 25 cases because in another 12 instances the trend in the level of activity was quite irregular. In those cases that did lend themselves to classification, social spending was primarily used as a tool of fiscal adjustment while its income-supplementation role was secondary. This is demonstrated by the predominance of situ­ ations in which the pattern of social spending was pro-adjustment and pro-cyclical, inasmuch as there were only three cases in which a counter-cyclical and pro-maladjustment pattern was observed. Thus far, our analysis of the role of social expen­ diture suffers from a limitation: it does not tell us anything about changes in the sectoral composition of social expenditure during the period in question, which may have helped to offset short-term decreases in household income. In fact, a number of countries did implement special temporary programmes to aid • DECEMBER 1994 55 TABLE 4 Latin America: Social expenditure patterns in relation to n fp s fiscal deficit and gd p Role of social expenditure Pro-adjustment Pro-maladjustment Pro­ cyclical Counter­ cyclical 13 5 4 3 Source: ECLAC, in the press. the most vulnerable segments of the population. Examples include Chile’s employment programme for heads of household (1982-1985), Mexico’s Na­ tional Solidarity Programme, the Emergency Social Welfare Fund created by Bolivia in 1986, Costa Rica’s compensatory social programme (1983-1984) and others. In order to detect changes in the inter-sec­ toral allocation of social funds during the 1980s which may have shielded some sectors at the expense of others, we will now turn to an analysis of the vulnerability of the various social sectors based on a comparison of sectoral expenditure patterns with the changes seen in total real social expenditure. IV The sectoral dimension of the adjustment The fiscal adjustment carried out in the 1980s had an uneven impact on the various social sectors; this was, in part, a reflection of each sector’s relative ability to reduce or defer expenditures and of the diversion of a portion of the demand for social services from the private to the public sector. In order to determine the extent of the protection given to, or the vulnerability of, these social sectors during the many fiscal adjust­ ment processes pursued in the region, an analysis was made of trends in the sectoral components of social policy during the implementation of the various fis­ cal adjustment programmes. Table 5 shows the number of cases in which the percentage variation in sectoral expenditure was greater (>) or less (<) than the variation in total real social expenditure or moved in the opposite direction (c). The figures indicate that the contributions made to the adjustment effort and the benefits obtained during periods of rising social expenditure were not distributed evenly among the various social sectors. Instead, the most vulnerable sector during periods when adjustments were being made in social spend­ ing levels was housing and the second most vulner­ able was education, with social expenditure in these sectors falling more steeply than total social expendi­ ture in 14 out of 22 cases and in 10 out of 23 cases, respectively. During these phases of pro-adjustment social spending, the social-security and health sectors contributed less than total social spending did to the fiscal adjustment and actually moved in the opposite direction in a substantial number of cases, i.e., spend­ ing levels in these sectors rose, and the brunt of the adjustment was therefore borne by education and housing. Likewise, during times when social spend­ ing was on the rise, the most favourably positioned sectors were social security and, in second place, health, while housing and education benefited the least. In a significant number of cases, in fact, spend­ ing levels in these latter sectors actually continued to decline even when social expenditure was expanding. FISCAL ADJUSTMENT AND SOCIAL SPENDING • ROSSELLA COMINETTI 56 CEPAL REVIEW 54 • DECEMBER 1994 TABLE 5 Latin America: Real social expenditure patterns, by social sector (Number o f cases) Education Health Social security Housing Pro-adjustment social spending a Episodes of adjustment > < c Episodes o f maladjustment > < c 5 5 5 4 6 2 2 2 5 2 2 5 2 3 8 1 2 1 1 5 7 5 2 3 Pro-maladjustment social spending b Episodes o f adjustment > < c Episodes of maladjustment > < c 2 1 3 2 0 1 1 1 1 1 1 2 4 4 4 5 3 1 2 4 2 0 1 6 Source: ECLAC, in the press. a Under the heading of pro-adjustment social expenditure (SE): > signifies that the percentage decrease in real sectoral SE is greater than the reduction in real aggregate SE; < signifies that the percentage decrease in real sectoral SE is less than the reduction in real aggregate SE; and “c” signifies that the pattern of real sectoral SE is counter-cyclical with respect to real total SE. b Under the heading of pro-maladjustment social expenditure: > signifies that the percentage increase in real sectoral SE is greater than the increase in real aggregate SE; < signifies that the percentage increase in real sectoral SE is less than the increase in real aggregate SE; and “c” signifies that the pattern of real sectoral SE is counter-cyclical with respect to real total SE. The social security sector consistently con­ tributed to fiscal imbalances whenever social spend­ ing exhibited a pro-maladjustment pattern. However, the pro-maladjustment role played by this sector was also a factor with regard to fiscal revenues. The evi­ dence points to a steep drop in the funds of a number of social security institutions in the region as a conse­ quence of a drop in the level of payments made into the social security system during the economic crisis, due to higher unemployment and the inflation regis­ tered during that period. In summary, a review of the various upturns and downturns in social expenditure in Latin America indi­ cates that the housing sector has been highly vulnerable during periods when adjustments were being made in social spending levels and has also been the sector that has benefited the least during periods when those levels were moving back up. Social security expendi­ ture, on the other hand, has tended to counterbalance downward trends in aggregate social spending during periods of adjustment and has also been the sector that has contributed the most to the expansion of so­ cial expenditure during times when it has played a pro-maladjustment role. This pattern demonstrates that even though social policy as a whole has not placed priority on social spending’s income-supplementation function, changes in the sectoral alloca­ tion of social expenditure have partially offset this low priority, thus reflecting, to some extent, the wel­ fare orientation of social policy in the 1980s. FISCAL ADJUSTMENT AND SOCIAL SPENDING • ROSSELLA COMINETTI CEPAL REVIEW 54 • DECEMBER 1994 57 v Social spending in the 1980s The strongly pro-adjustment behaviour of social spending during the various periods o f fiscal adjust­ ment and maladjustment accounts for much of the fairly widespread deterioration seen in this fiscal budget item in the countries o f the region. Table 6 illustrates the trend in real per capita social expenditure and its relation to GDP and total public expenditure in three different periods: 19801981, 1982-1989 and 1990-1991. The object is to assess the relevant expenditure patterns during the pre-crisis period, the crisis and adjustment phase, and the post-crisis stage.1 Throughout the 1980s, a 1 widespread decline was observed in social expendi­ ture; this is true regardless o f which form of measure­ ment is chosen, although, because o f the sharp swings in the level o f economic activity registered during this period, the downturn appears less striking for some countries when the social expenditure/GDP indicator is used. Nevertheless, in real per capita terms, the trend in the level o f social spending was clearly negative. In fact, in 1982-1989, real per capita allocations for social programmes fell in all the coun­ tries except Uruguay, and in most cases had still not regained their pre-crisis levels as o f the early 1990s.1 2 This situation, in the absence o f radical institutional changes (with the exception o f isolated social re­ forms in some countries) that might help to make up for the loss of resources through greater efficiency, indicates that there was probably a decrease in the population’s access to State-run social services or in the quality of such services.1 Finally, it should be 3 11 This chronological scheme has been chosen for purposes of simplicity; the actual time-frame of the crisis varied from one country to the next. For example, due to circumstances peculiar to that country, Peru did not embark upon an adjustment effort until the late 1980s. 12 A country-by-country analysis of this variable for the entire period in question indicates that, except in Ecuador and Peru, social spending was moving upward again by the end of the decade, but this ceases to be the case when the analysis is based on averages (ECLAC, in the press). 13 The available data indicate that in a number of countries in the region, such as Peru and Mexico, the reduction of social expen­ diture in the education sector primarily affected the quality of instruction. noted that in 1982-1989 the share of total public ex­ penditure represented by social spending also shrank on a widespread basis; thus, the decrease in social spending can be said to reflect a fiscal policy that placed priority on non-social sectors. The unevenness of sectoral trends in social spending shaped a sectoral pattern of expenditure in the 1980s that tended to mirror the various sectors’ relative degrees of protection and vulnerability dur­ ing phases of fiscal adjustment and maladjustment (see table 7). The widespread drop in social spending in the health sector indicates that, despite its relative degree of protection during the decade, the spending cuts made in this sector during downturns in social expenditure outpaced the increases made during up­ turns. The greater dispersion seen in the case of the housing sector is due to the fact that this sector’s share of social expenditure is very small. In the case of edu­ cation, the general drop in real per capita expenditure is attributable to the vulnerability of this sector, in which wages represent a very large component of social spending (as noted earlier, wages were a widely-used policy tool during the various adjustment and stabili­ zation programmes applied in the region). The sector that suffered the least in 1982-1989 was social se­ curity, which is in keeping with the degree of protec­ tion afforded this sector during the various phases of fiscal adjustment and maladjustment. As a result, in the early 1990s the indicators for the social security sector were better than they had been at the start of the 1980s in almost all the coun­ tries studied. This finding, which tallies with the re­ sults of other studies on social expenditure, may be attributed to differing factors (e.g., the reorganization of the social security system in Uruguay, the in­ creased transfers made in Chile in order to ensure the viability of its new social security system and in­ creases in the welfare component of social security expenditures). In the health sector, the higher real per capita levels of social expenditure observed in some coun­ tries are due to a shift in demand from private health care to free health care services as a result of the crisis. Generally speaking, there are signs of a sharp FISCAL ADJUSTMENT AND SOCIAL SPENDING • ROSSELLA COMINETTI 58 CEPAL REVIEW 54 • deterioration in the quality of education provided by the public sector as well as in health care. The fact that the education and housing sectors were in a weaker position in 1990-1991 than at the start of the DECEMBER 1994 crisis gives cause for concern in view of this situ­ ation’s possible adverse effects in terms of growth potential and the countries’ chances of putting an end to poverty and marginality. TABLEÓ Latin America: Social expenditure Real per capita social expenditure (1985 dollars; 1980-1981 = 100) Social expenditure/GDP 1980-1981 1982-1989 1990-1991 1982-1989 1990-1991 16.8 5.7 9.7 17.7 7.8 15.2 10.3 15.1 4.7 9.4 18.7 116.0 4.5 8.6 6.8 14.2 7.7 15.9 6.4 7.1 80.4 61.0 111.1 90.0 114.4 103.9 60.2 74.5 3.9 4.6 14.9 11.5 11.2 4.2 a 3.6 16.3 9.5 10.6 17.5 8.5 10.2 82.6 67.5 98.7 96.8 107.1 91.9 82.0 72.5 100.0 c 87.0 99.7 72.9 87.1 Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador Mexico Paraguay Peru Uruguay Venezuela Regional average d 10.8 8.1 15.2 8.9 b 2.0 b 35.8 118.5 64.4a 83.0 Source: Prepared by the author. jJ990. b These figures are not comparable. c 1980-1987. d Simple average; does not include Paraguay due to a change in institutional coverage dating from 1988. TABLE 7 Latin America: Patterns of real per capita social expenditure (1985 dollars; 1980-1981 = 100) Education Health 1982-1989 Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador Mexico Paraguay Perub Uruguay Venezuela 1990-1991 86.1 73.0 59.8 120.7 74.1 103.3 85.5 54.0 76.7 76.2 143.3 85.2 109.3 75.1 80.0 78.4 81.7 92.0 88.5 79.9 77.6 100.5 58.7c 1982-1989 Social security 1990-1991 91.1 51.3a 116.0 90.5 98.6 78.4 90.2 75.4 a 95.4 88.1 1982-1989 1990-1991 1982-1989 1990-1991 76.8 78.8 133.5 37.7 58.9 87.2 109.2 191.6 61.9 27.3 53.1 119.6 50.7 43.8 48.3 42.3 32.6 117.4 51.1 35.1 90.0 71.2a 127.4 94.5 123.6 108.2 73.3 85.3 a 75.8 129.2 79.2 e 97.0 85.1 Housing 95.1 119.2 102.1 102.8 107.6 153.3 81.1 136.9 168.0 63.5 125.6 102.0 71.7 121.7 83.6 e Source: Prepared by the author. a Includes social security. b Central government budget. c 1990. FISCAL ADJUSTMENT AND SOCIAL SPENDING • ROSSELLA COMINETTI 7.4 209.1 44.4 CEPAL REVIEW 54 • DECEMBER 1994 59 VI Summary and conclusions In the wake of the debt crisis that hit the region in the early 1980s, a conflict of objectives arose in relation to the use of social expenditure as a tool of fiscal policy: on the one hand, there was the aim of offset­ ting the loss of income experienced during economic downturns; on the other, there was the goal of help­ ing to restore fiscal equilibrium in order to eliminate a major source of macroeconomic instability. An analysis of the available information on a number of Latin American countries reveals that during the 1980s priority was given to social expenditure’s role as an instrument of fiscal adjustment. This led to such a sharp and widespread decrease in social spending that as of the early 1990s the great majority of the countries studied had still not managed to bring real social expenditure back up to the levels registered in the early 1980s. The data indicate that, in general, social spend­ ing was not a significant factor in the generation of fiscal deficits but did make a significant contribution to fiscal adjustment processes. The reductions made in social spending during these adjustment processes were not evenly dis­ tributed among the various social sectors. The most favourable treatment appears to have been given to the social security sector, followed by the health sec­ tor, but this was to the detriment of the housing and education sectors, which proved to be highly vulner­ able. As a rule, the increases made in social spending were largest in the social security sector, Which regis­ tered quite a widespread rise in real per capita terms during the decade. This growth was partly a reflec­ tion of the increasing welfare orientation of social policy, as opposed to a longer-term approach aimed at furthering equality of opportunity. This latter pol­ icy was promoted less vigorously during the period in question, as is demonstrated by the generalized decline in indicators of real per capita social expendi­ ture in the education and health sectors. While it is true that social spending Was riot an important factor of fiscal disequilibrium, an import­ ant lesson regarding social spending as a component of the fiscal budget is to be learned from Latin America’s experiences: a lesson which has to do with the macroeconomic constraints.associated with social policy. An expansionary social policy that does not ensure reliable financing for social programmes may jeopardize a country’s macroeconomic stability by occasioning the implementation of adjustment plans that may well prove to be very costly in social terms. At the same time, the high social cost of the mounting'poverty and social inequity seen in the 1980s within a context òf limited social expenditure underscores the need for the countries to rework their social programmes so that public resources will be used more effectively to improve the status of the most vulnerable groups in the population and to re­ duce inequalities on a permanent basis. These two considerations -the macroeconomic constraints of social policy and the decline in social equity- dem­ onstrate the importance of shaping a new paradigm that will stress the efficiency, quality and precise tar­ geting of social expenditure. (Original: Spanish) Bibliography Altimir, O scar (1993): Incom e D istribution and Poverty Through C risis a n d Adjustm ent, W orking Paper No. 15, Santiago, C hile, Econom ic Comm ission for Latin A m erica and the C aribbean (ECLAC), September. Carciofi, Ricardo and Luis B eccaria (1993): Provision y regulación pública en los sectores sociales. Lec­ ciones de la experiencia latinoamericana en la década del ochenta, ECLAC/UNICEF workshop on public policy reform and social spending, Santiago, Chile, 14-15 June 1993. C entral Bank o f Ecuador (1993): Cuentas N acionales del Ecuador 1969-1992, C uentas nacionales, No. 16, Quito, D ivisión Técnica. Chile, B udget D epartm ent (1993): E sta d ística s de las f i ­ n anzas p ú b lic a s 1989-1992, Santiago, Chile, M inistry o f Finance, June. FISCAL ADJUSTMENT AND SOCIAL SPENDING ‘ ROSSELLA COMINETTI 60 CEPAL REVIEW 54 C om inetti, R ossella (1994): G asto social y ajuste fisc a l en Am érica Latina, “Reform as de política pública” series, No. 20 (LC/L. 819), Santiago, Chile, ECLAC/Govemment o f the Netherlands. C ornia, G iovanni A ndrea, R ichard Jolly and Frances Stewart (1987): A djustm ent with a H uman Face. P ro­ tecting the Vulnerable a n d Prom oting G rowth, New York, Oxford U niversity Press. D evlin, R. and R. C om inetti (1994): La crisis de la em­ presa pública, las privatizaciones y la equidad social, “Reform as de política pública” series, N o. 26 (LC/L. 832), Santiago, C hile, ECLAC/Govemment of the Netherlands. Ebel, B eth (1991): Patterns o f G overnm ent Expenditure in D eveloping Countries during the 1980s: The Im ­ p a ct on Social Services, Innocenti Occasional Papers, Economic Policy Series, No. 18, Florence, Italy, United N ations C hildren’s Fund (UNICEF). ECLAC (1989): A m érica Latina: La política fisc a l de los años ochenta, “Política fiscal” series, No. 2 (LC/L. 490), Santiago, Chile, ECLAC/UNDP (United N ations D evelopm ent Program m e) R egional Project on Fiscal Policy. (in the press): E l gasto social en Am érica Latina: Un examen cuantitativo y cualitativo, “C uadernos de la CEPAL” series, Santiago, C hile, ECLAC. Fanelli, J.M . and R. Frenkel (1990): Un m arco m acro­ econôm ico de consistencia pa ra el análisis del ajuste y el cambio estructural en A m érica Latina: M etodo­ logía y hechos estilizados, CEDES docum ent No. 44, Buenos A ires, Centre for Studies on the State and Society (CEDES). Figueroa, Adolfo (1992): Social policy a n d econom ic ad­ justm ent in Peru, paper presented at the C onference on Poverty and Inequality in Latin A merica, The B ro o k in g s In stitu tio n /In te r-A m e ric a n D ialo g u e , W ashington D .C., 16-17 July. Frenkel, R. (1990): A juste y estabilización: revisión de algunas experiencias latinoam ericanas, CEDES do­ cum ent No. 45, Buenos Aires, Centre for Studies on the State and Society (CEDES). G rosh, M argareth (1990): Social Spending in Latin A m eri­ ca. The Story o f the 1980s, W orld Bank D iscussion Papers, No. 106, W ashington, D.C., W orld Bank. H icks, N. and A. K ubish (1984): C utting governm ent expenditures in LDCs, Finance a n d D evelopm ent, • DECEMBER 1994 vol. 21, No. 3, W ashington, D .C., International M on­ etary Fund (IMF)/World Bank. IMF (International M onetary Fund) (several numbers): G overnment Finance Statistics Yearbook, W ashing­ ton, D.C. Lustig, Nora (1991): Mexico: The social im pact o f ad­ justm ent, paper presented at the workshop on M acroeconomic Crises, Policy Reform and the Poor in Latin A m erica (Cali, Colom bia, 1-4 October) or­ ganized by the Cornell Food and Nutrition Policy P ro g r a m /I n te r -A m e ric a n C e n tre fo r L a b o u r A dm inistration (CIAT)/Ford Foundation/UNICEF. M acedo, José R. and Francisco Piola (1993): Consolida­ ción del gasto público social en Brasil, docum ent No. 6, W orkshop on M ethodological Problems of the M easurem ent o f Public Social Spending and its Re­ distributive Im pact, Santiago, Chile, ECLAC/UNDP/ Latin A m erican and Caribbean Institute for Econ­ omic and Social Planning (ILPES). M arfán, M. (1986): L a política fiscal macroeconômica, in R. Cortázar (éd.), Políticas macroeconômicas: una perspectiva latinoamericana, Santiago, Chile, Econ­ omie Research Corporation for Latin A m erica (CIEPLAN). M ujica, Patricio and Osvaldo Larrañaga (1992): Social policies and incom e distribution in Chile, in R. H ausmann and R. R igobón (eds.), G overnment Spending a n d Incom e D istribution in Latin America, W ashington, D .C., Inter-American Development B ank (1DB), D epartm ent o f Economic and Social De­ velopm ent Pfefferm ann, G uy (1987): Public Expenditure in Latin America. Effects on Poverty, W orld Bank Discussion Papers, No. 5, W ashington, D.C., W orld Bank. UDAPSO (Social Policy Analysis Unit) (1993): Indica­ dores sociales, Bolivia. U niversidad del Pacífico, Centro de Investigación (CIUP) (1993): Políticas sociales en el Perú: una agenda para la investigación, Interim Report, Peru, First Semester. V argas de Flood, M aria C ristina and M arcela H arriague (1993): M edición del gasto publico social, W orkshop D ocum ent No. 1, W orkshop on M ethodological Problem s o f the M easurement of Public Social Spending and its Redistributive Impact, Santiago, Chile, ECLAC/UNDP/ILPES. FISCAL ADJUSTMENT AND SOCIAL SPENDING • ROSSELLA COMINETTI CEPAL REVIEW 54 61 Women’s formal education: achievements and obstacles D iane A lm é ra s Social Affairs Officer, An exam ination of women’s education in the region leads to Women and Development Unit, ECLAC. apparently contradictory conclusions: on the one hand, genuine progress has been made in terms o f coverage and perform ance, justifying the assertion that the region is m aking headway towards achieving equal opportunities of access where they do not already exist and that the situation will continue to improve. On the other hand, however, an analysis of the data also brings out less positive factors that w arrant continued concern about this issue. In addition to persistent structural problems in most of the region’s formal educational systems (which limit the expansio, f educational coverage for both men and women), for nearly two decades now various studies and other analyses have been pointing out that the educational process for women is closely linked to the gender discrim ination with regard to educational content and professional opportunities that is part o f Latin A m erica’s cultural ethos. This article seeks to w eigh the latest quantitative data on w om en’s access to form al education against the obstacles to genuine equality of opportunity that women encounter in the educational system. DECEMBER 1994 62 CEPAL REVIEW 54 • DECEMBER 1994 I Introduction For many years now, studies on formal education in Latin America have underscored the significant ad­ vances being made by the countries of the region in their fight against illiteracy and in their drive to boost school enrolment rates at all levels; indeed, the rates for women have been climbing so steadily (ECLAC 1984, 1988 and 1991b) that they have actually moved ahead of male enrolment rates in some coun­ tries. Despite this generally bright picture, however, the educational process continues to suffer from seri­ ous structural problems; the situation in the different countries varies a great deal and, within those coun­ tries, highly stratified socio-educational pyramids have taken shape on the basis of ethnic, regional and socioeconomic differences (Valdés and Gomariz, 1992 and 1993). For the women of the region, all this translates into the continuation of high illiteracy rates among the inhabitants of rural areas, indigenous women and older cohorts.1 In the past, the types of gaps or shortcomings existing in the region’s educational systems have been due to the global development strategies adopted by the countries and the differing oppor­ □ The author is grateful for the assistance provided by MariaLuisa Jáuregui (UNESCO) in compiling data on illiteracy, pre­ school and primary education, intercultural bilingualism and technology. Invaluable comments were also made by Miriam Krawczyk, Irma Arriagada, Molly Pollack, Nieves Rico, Pauline van der Aa and Maria Rebecca Yáñez, colleagues of the author who are closely involved in the work of the ECLAC Women and Development Unit. 1 Mention should be made here of a widely-recognized problem in the region: the lack of comparability between data drawn from censuses conducted in different years, inasmuch as these data correspond to populations of differing ages and refer to a formal educational structure that divides up grade levels in different ways from one country to the next. In many cases it was necess­ ary to make use of both national household surveys and census data; this limits the usefulness of the tables, since they thus provide no more than an approximate, descriptive context and cannot be used as a tool for “evaluation” in the strict sense of the term. However, even though the data are neither entirely com­ parable nor completely accurate in a statistical sense, they are none the less representative of the actual situation and afford a better understanding of the direction in which the educational status of women is heading, as well as of the social, political and cultural implications of the situation. tunities open to the various social groups as they seek to find a place in those systems and, having done so, to hold on to that position (ECLAC, 1990). Since, given their traditionally subordinate position in so­ ciety, women have been excluded from the circles of power that would have enabled them to exert an in­ fluence over these development strategies, their inte­ gration into the formal educational process has given rise to an array of complex situations created by the interplay of the different variables of gender, age, social class, ethnic identity and geographic area. Although equality of access to the educational system appears to be a reality for men and women under the age of 25 today, discrimination against women persists in the qualitative aspects of educa­ tion. In the 1980s people were already denouncing the limitations on women’s integration into the edu­ cational process, which had led to their concentration (especially at the level of higher education) in spheres that have come to be thought of as “women’s areas”, such as education, the social sciences, fine arts and certain fields of medicine (ECLAC 1984, 1988 and 1991b). Today, the effects of sexual stereo­ types on the content of instruction and the impact of discriminatory bias in vocational counselling on women’s lifetime goals have also become recognized subjects for discussion and, increasingly, for analysis. In other words, as the obstacles that once prevented women from obtaining an education are overcome, the issue ceases to be “how many women are in school” and instead becomes one of “what are women studying and how good is the education they are receiving and the academic environment they are receiving it in?” (Bonilla Castro, 1991). It is therefore necessary to look beyond the quantitative aspects of women’s access to the formal educational system in order to examine the nature of the structural problems affecting the male/female enrolment ratio, the socio-cultural elements incorpor­ ated into teaching materials, the role played by teachers in constructing and reproducing gender identities, and the impact of the sexual division of labour on job opportunities. WOMEN'S FORMAL EDUCATION: ACHIEVEMENTS AND OBSTACLES • DIANE ALMERAS Exclusionary factors affecting women in the region Within the above context of notable differences among the countries of the region and shortcomings in the quality of education, and with a view to arriving at a fuller understanding of the significance of the advances made by younger generations of women in gaining greater access to education, we will first consider the factors that work to exclude women in particular while at the same time posing for­ midable challenges to the educational system as a whole: the isolation of rural areas, the generation gap that exists in terms of education, discrimination based on ethnic identity, and the persistence of illiteracy. 1. The isolation of rural areas The most recent Social Panorama o f Latin America published by ECLAC (1993) reports that the educa­ tional levels of the rural population remain low and continue to be far below those found in urban areas. Illiteracy rates in rural areas also continue to be notably higher, as do differences between men and women, which are much greater than in urban areas (see table 1). Moreover, unlike the situation in most of the countries’ urban areas, women in rural areas tend to share the high repetition and drop-out rates which, at the regional level, are recognized as being a typically male problem (Valdés and Gomariz, 1992 and 1993). The differences are all the more striking when we take the quality of education into account; the “obligatory primary curriculum is designed in cities and is totally unadapted to rural children, especially those of indigenous origin with little or no knowl­ edge of Spanish” (ECLAC/UNESCO-OREALC, 1992). This situation is compounded by the lack of corre­ spondence between school vacations and the seasonal demand for labour and by the lack of qualified teachers. Such shortcomings have additional implications for girls, since they are confronted with the discrimi­ natory stereotypes which are incorporated in the in­ struction provided by teachers who have not been properly prepared to transmit new educational models. Furthermore, their lifetime goals are also limited by the lack of job opportunities existing in societies such as those of rural Latin America, in which the traditional sexual division of labour is deeply ingrained, and by the shortage of job opportunities in rural areas. 2. The generation gap The wide generation gap to be observed today in terms of educational levels is the direct result of the growth of school enrolment in the region over the past few decades, which has primarily benefited younger generations. When enrolment figures are broken down and analysed by gender, geographic area and income level, it turns out that the “greatest differences are between age groups” (UNICEF/Chile, MIDEPLAN, 1993). For women, this situation is the clearest indica­ tor of the amount of progress made in terms of access to formal education. In fact, the differences between the educational status of young women between the ages of 15 and 24 and women aged 50 or over are so great that in describing them it may be appropriate to talk about different “social biographies” (ECLAC, 1994c). For example, the illiteracy rate in Bolivia as of 1988 was 3.5% for women between the ages of 15 and 19 but 66.8% for women over 50, and the latter rate rose to 85.9% in the case of rural areas (Bolivia, Coordinadora de la Mujer, 1990). In Chile, the aver­ age level of educational attainment for women over 64 years of age as of 1990 was six years of schooling in urban areas but less than three years in rural zones, while for those in the 15-24 age group, the average was 11 and eight years, respectively (UNICEF/Chile, MIDEPLAN, 1993). Obviously, the problem is not the existence of such a gap per se, but rather the fact that these une­ ducated older women are living in a society that de­ mands an ever-greater level of efficiency in terms of reading, writing and arithmetic. When their situation WOMEN’S FORMAL EDUCATION: ACHIEVEMENTS AND OBSTACLES • DIANE ALMERAS 64 CEPAL REVIEW 54 • DECEMBER 1994 TABLE 1 Latin America (13 countries): Illiteracy rates in urban and rural zones, by gender9 (Percentages) Urban zones Total Women Rural zones Men Women Men Women Men Bolivia 1976 1992 48.6 27.7 24.2 20.0 11.8 23.3 15.5 6.2 3.8 68.5 49.9 37.3 23.1 Brazil 1980 1988 25.5 18.5 26.5 18.6 24.4 18.4 18.3 13.6 14.5 11.5 46.9 34.7 45.6 37.5 19.4 17.4 11.5 12.0 b 7.8 b 8.6 b 6.2 b 34.8 c 23.2 c 30.6c 22.2 c 10.3 7.4 10.2 5.1 3.8 3.7 3.7 14.8 7.3 11.0 14.6 10.9 8.9 5.9 9.2 8.5 5.7 6.8 6.1 4.4 5.5 3.6 23.2 17.5 20.9 16.3 16.5 11.4 19.6 13.5 13.2 9.1 7.9 6.5 4.3 3.6 33.4 25.1 22.4 15.5 44.0 40.7 50.7 47.8 37.2 34.2 28.2 27.0 16.5 16.5 62.5 60.0 47.3 45.6 13.2 10.7 13.7 11.1 12.7 10.3 19.9 21.2 24.5 23.7 15.0 18.6 14.7 9.1 7.4 13.6 32.2 26.4 19.8 33.5 18.1 10.7 26.1 17.4 9.9 4.1 12.5 6.3 3.6 2.2 55.8 45.6 23.2 10.4 27.7 17.7 28.2 17.9 27.2 17.5 10.8 8.7 31.4 29.7 5.6 4.6 5.2 5.1 4.1 4.1 3.8 10.4 6.2 14.1 9.3 15.3 9.9 12.8 11.7 8.6 38.2 34.5 (19.4) 36.8 Colombia 1973 1985 Costa Rica 1973 1984 Cuba 1981 Chile 1982 1989 Ecuador 1982 1990 Guatemala 1981 1989 Panama 1980 1990 Paraguay 1972 1982 e Peru 1981 1991 Dominican Republic 1981 1991 Uruguay 1975 1985 Venezuela 1981 1990 12.0 10.2 7.3 1.9 5.0 d 4.1 d 26.8 d 23.6 d 6.1 8.7 (5.2) Source: Valdés and Gomariz (1992 and 1993). a Refers to the population aged 15 and over, except in Brazil (10 years and over), Colombia in 1985 (12 and over), Costa Rica in 1973 (10 and over), Cuba (10 to 49 years of age) and Panama (10 and over). b District capitals. c Rest of country. d Men and women. e The general increase in illiteracy shown for this year is attributable to the use of a different recording procedure for the 1982 census. The increase in the rate for men may be due to a higher drop-out rate for boys and shortcomings in the educational system that prompt a large number of male migrants to seek work “on the agricultural frontier or in the construction of hydroelectric plants” (Vaidés and Gomariz, 1993). WOMEN’S FORMAL EDUCATION: ACHIEVEMENTS AND OBSTACLES • DIANE ALMERAS CEPAL REVIEW 54 is compared with that of men, it becomes quite clear that the older generations of women have remained on the sidelines of the drive towards greater equality of opportunity from which younger women are bene­ fiting today. If we look at the cases of Bolivia and Chile once again, we find that, in Bolivia, 40% of men over the age of 50 were illiterate in 1988 as compared to 66.8% of women in that age group; in Chile, as of 1990 men over the age of 65 had, on average, 6.9 years of schooling in urban areas and 3.2 years in rural zones, whereas the averages for women in those same groups were 6.0 and 2.7, respectively (see table 2). 3. Ethnic discrimination (a) The educational situation of indigenous women For obvious reasons having to do with communi­ cation and co-existence, the difficulties encountered by indigenous women in their daily fives are further exacerbated by language differences. For women, • DECEMBER 1994 65 this situation translates into illiteracy rates that in some cases reach dramatic proportions. In Bolivia as of 1988, for example, 95.6% of the women who spoke only Aymara and 94.7% of those who spoke only Quechua had received no formal education whatsoever; only 4.4% and 5.1% of them, respective­ ly, had had access to primary education. On the one hand, illiteracy is the major factor in indigenous women’s isolation, since it sets them apart from the national culture and helps to keep them in a position of extreme poverty. On the other hand, it is thanks to their relative lack of integration into Latin American society and their absence from the educational system that they have been able to preserve some portion of their traditional culture. The dilemma with which these women are faced is made all the more difficult to resolve by their in­ digenous tradition itsejf, according to which the preservation of the culture is a task that falls within the sphere of women’s powers and responsibilities (D’Emilio, 1989). TABLE 2 Latin America (10 countries): Illiteracy rates among the population aged 15 and over, by age group and gender (Percentages) Women Country Bolivia (1988) Brazil (1989) a Colombia (1985)b Ecuador(1990) Guatemala (1989) Honduras (1988) Mexico (1990) Nicaragua (1985) Panama (1990)c Venezuela (1990)d Men Ages 15-19 Ages 20-24 65 and over Ages 15-19 3.5 7.7 9.4 5.4 5.0 38.9 66.5 50.1 34.4 40.6 74.9 66.3 43.2 51.1 26.3 46.0 1.5 13.2 7.8 3.0 16.9 23.1 3.7 11.3 2.7 3.2 8.0 5.5 3.5 29.2 18.7 4.1 13.1 3.9 2.1 21.8 6.2 11.3 4.2 Ages 20-24 65 and over 2.0 43.2 40.4 26.9 29.3 64.6 61.1 30.6 56.0 25.3 35.1 12.1 7.0 3.9 20.3 24.0 4.4 15.6 3.0 Source: Data from the following censuses: Bolivia, INE (1989), Encuesta nacional de población y vivienda, 1988. Resultados finales; Brazil, IBGE (1989), Anuario estadístico do Brasil; Colombia, DANE (1986), Censo 1985; Ecuador, INEC (1991), V Censo de población y IV de vivienda, 1990. Resultados definitivos. Resumen nacional; Guatemala, INE (1989), Encuesta nacional sociodemográfica; Honduras, Secretariat of Planning, Coordination and the Budget (1988), Censo nacional de población, vol. I; Mexico, INEGI (1990), Resumen general. XI Censo general de población y vivienda; Nicaragua, INEC (1989), ESDENIC 85. Tabulaciones básicas, vol. I. Características generales de la población; Panama, Department of Statistics and Censuses (1990), Censos nacionales de población y vivienda. Resultados finales básicos; Venezuela, Central Statistics and Information Office, Office of the President (1990), Anuario estadístico. a The data for the oldest age group refer to persons aged 60 or over. b In the case of Colombia, the age groups used were 12-17,18-24 and 60 years or over. 0These data correspond to the category of “No grade successfully completed” in the 1990 census. d Because other data are unavailable, the figures given for the 15-19 age group actually correspond to the age bracket of 15-24 years. WOMEN’S FORMAL EDUCATION: ACHIEVEMENTS AND OBSTACLES " DIANE ALMERAS 66 C E P A L R E V I E W 54 Although it is still too early to pass judgement on its actual impact, virtually all the countries with a significant percentage of indigenous peoples are in the process of institutionalizing intercultural, bilingual education in an effort to address this issue. There is a greater awareness of the complex and heterogeneous nature of linguistic and cultural real­ ities, of the importance of the mother tongue and culture as tools of educational progress, and of the need to rescue the indigenous population from its current marginalization. Despite all these efforts, however, because the majority of the indigenous population resides in rural areas, indigenous boys and girls often do not have access to complete schools, do not have teachers who are trained in intercultural bilingual education, lack bilingual textbooks and suffer from a shortage of re­ sources in general. Nor is the integration of girls fa­ cilitated by the traditional role of women in rural areas or by the fact that their socialization as part of the labour supply begins very early on; within this environment, their parents resist their regular at­ tendance at school because it distances them from that socialization process and prevents them from “contributing with their labour to the agricultural out­ put and reproductive functions of their mother” (Zúñiga, 1989). (b) The educational situation o f black women Here, a distinction needs to be made between countries having a black majority, such as many Caribbean nations, and those in which black women are a minority group. The position of Caribbean women is notable for the important role they play in their societies -as has been noted in many of the anthropological studies conducted in the Carib­ bean (Rivera, 1993)- and for the degree of their inte­ gration into the formal educational system. In 1990 -with the exception of Haiti, where the rate of illite­ racy among women (52.6%) was second only to that of Guatemala (52.9%) (see table 3)- the majority of Caribbean countries had female enrolment rates near or above the regional average (see table 4),2 and in 2 In 1988, according to data compiled by UNESCO and CELADE (ECLAC/UNESCO-OREALC, 1992), the net school enrolment rate was 87.6% for the population between 6 and 11 years of age (primary education), 71.6% for young people between the ages of 12 and 17 (secondary education), and 27.2% for those be­ tween the ages of 18 and 23 (higher education). • D E C E M B E R 1994 many cases they exceeded the rates for males at the secondary and higher-education levels (ECLAC, 1991a; United Nations, 1992). According to reports presented at the first Meeting of Black Latin American and Caribbean Women, which was held in July 1992 in the Do­ minican Republic and attended by over 300 repre­ sentatives from 32 countries (León, 1992), in the other countries of the region black women’s access to formal education is limited by both ethnic dis­ crimination and their socioeconomic position. The latter factor has this effect because the black popu­ lation in these countries is concentrated in the poorer sectors that have the least access to services and to the power structure. According to data cited at that conference, the Haitian women living in the sugar mill camps of the Dominican Republic, for example, have no chance of obtaining an education because there are no schools and no funds to pay for any; in Honduras, 48.3% of black women have not finished elementary school; in Uruguay, their level of education is low and 75% of those who work are employed as domestic servants; and in Brazil, only 11% of these women go on to second­ ary school (León, 1992). The foregoing corroborates the findings of a study conducted by the Carlos Chagas Foundation on race and educational opportunities in Brazil, which states that the percentage of black and mu­ latto children who have never had access to the school system is three times as great as the per­ centage of white children in that position; the study also found that a larger proportion of non-white children enter school late and have to fepeat grades or fall behind once they are in school (Hasenbalg and Do Valle Silva, 1990). It is noteworthy that, even under these conditions of glaring inequality, non-white Brazilian women’s levels of educational attainment are slightly higher than those of their male counterparts.3 3 According to data from Brazil’s 1982 national household sur­ vey, which was the last such survey in which the data are broken down by race and gender, the illiteracy rate among black and mulatto women was 38.3% versus a rate of 39.4% for men; 55.5% of these women had completed elementary school (as compared to 55.2% of the men) and 6.2% had a secondary edu­ cation (5.4% of the men) (Valdés and Gomariz, 1992). WOMEN’S FORMAL EDUCATION: ACHIEVEMENTS AND OBSTACLES • DIANE ALMERAS CEPAL REVIEW 54 • DECEMBER 67 1994 TABLE 3 Latin America and the Caribbean (22 countries): Illiteracy rates and number of illiterates, by gender, 1990 a (Percentages and thousands) Illiteracy rates (%) Number of illiterates Country Total Argentina Bolivia Brazil Colombia Costa Rica Cuba Chile Ecuador El Salvador Guatemala Guyana Haiti Honduras Jamaica Mexico Panama Paraguay Peru Dominican Republic Suriname Uruguay Venezuela Women 4.7 22.5 18.9 13.3 7.2 4.9 29.3 Thousands (1990) Men 6.8 4.5 15.3 17.5 12.5 7.4 5.0 6.5 14.2 27.0 44.9 3.6 47.0 26.9 16.2 30.0 52.9 4.6 52.6 29.4 23.8 36.9 2.5 40.9 24.5 1.6 1.4 14.9 6.0 6.6 12.7 11.9 9.9 14.9 16.7 5.1 3.8 11.9 20.2 14.1 6.9 7.0 1 065 923 18 407 2 702 139 484 603 909 787 2 253 25 1 858 766 1.8 10.5 11.9 7.9 8.5 15.2 4.9 3.4 13.3 11.9 21.3 18.2 5.3 4.1 10.4 - 12.6 -16.5 26 7 066 187 252 2 025 744 13 12.2 11.8 Variation (%) 1970-1990 -31.6 88 1 450 6.6 2.5 15.8 -36.3 -15.3 0.3 -6.4 39.3 -34.7 -9.9 16.6 2.2 6.8 4.3 -8.0 0.1 -45.3 -43.0 0.3 Source: UNESCO, World Education Report 1991, Paris. a Refers to the population aged 15 or over. Even in those countries of the region where the proportion of black women and men who have access to the educational system is larger, the women who gathered at the 1992 conference drew attention to the racist content of what is taught (in addition to the already acknowledged gender discrimination incor­ porated in the instruction given), which denies their ethnic and cultural identity and thus bars their access to an equitable education. This bias is reinforced by the stereotypes used in the media, which associate black women almost exclusively with servile or sexual roles. Thus, like indigenous women, black women are oppressed on the basis of three different attributes -their poverty, their race and their gender- (León, 1992) and these various forms of oppression influence their educational process. 4. Illiteracy Despite the substantial progress that has been made in raising literacy rates, sharp differences still exist in the region between countries and, within any given country, among women in different sociooccupational categories (Schiefelbein and Peruzzi, 1991). At the regional level, the rates range all the way from a level of absolute illiteracy among women of 1.4% in Jamaica to 52.9% in Guatemala (see table 3). At the country level, cases may be found WOMEN’S FORMAL EDUCATION: ACHIEVEMENTS AND OBSTACLES • DIANE ALMERAS 68 CEPAL REVIEW 54 • DECEMBER 1994 TABLE 4 Latin America and the Caribbean (24 countries): Enrolment rates, by age group and by gender, 1990 6-11 years 12-17 years 18-23 years Country Total Female Male Total Female Male Total Female Male Argentina Barbados 97.2 97.0 97.3 79.4 89.4 82.5 76.4 90.8 56.9 28.4 61.5 27.4 52.3 87.9 Bolivia 87.9 85.7 90.1 54.2 48.3 60.1 27.8 21.3 34.5 Brazil 77.9 75.8 79.9 74.9 72.6 77.1 22.8 24.9 20.6 Colombia 80.4 81.6 79.2 71.1 71.9 70.3 26.2 24.1 28.3 Costa Rica 87.1 87.6 86.7 47.7 47.7 47.8 20.5 18.4 22.6 Cuba Chile 97.4 97.6 91.5 80.2 91.2 80.8 79.7 38.0 Ecuador 92.2 92.8 91.5 75.5 90.8 73.9 91.7 77.0 29.0 48.7 40.8 27.7 35.3 90.5 97.3 89.5 47.6 49.7 El Salvador 70.8 72.0 Guatemala Guyana 56.9 69.7 59.3 86.1 54.3 85.0 59.7 82.3 Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Pem Suriname Trinidad and Tobago Uruguay Venezuela 28.8 30.2 53.8 55.0 52.6 21.2 21.8 20.5 38.9 55.9 47.6 52.4 15.3 7.0 10.3 20.1 87.2 43.4 54.2 7.1 6.9 58.7 83.7 60.7 80.9 55.0 55.2 52.3 57.2 13.7 100.0 100.0 100.0 82.7 21.3 7.2 12.4 23.4 7.0 14.9 19.2 7.4 100.0 100.0 100.0 68.1 83.3 66.3 57.8 53.2 82.2 69.8 51.8 23.4 27.8 26.8 74.2 91.4 69.9 43.0 20.0 72.0 91.6 36.7 19.0 66.3 50.2 81.0 66.4 35.4 47.3 78.3 53.0 83.6 15.3 31.6 38.9 14.3 32.1 16.2 93.9 93.9 14.2 25.5 14.1 37.6 14.3 65.2 62.5 78.2 5.6 68.6 61.1 5.3 61.6 26.4 5.1 81.9 65.6 27.6 57.7 25.2 80.1 80.4 91.8 79.8 98.9 97.5 100.0 99.4 99.0 99.7 100.0 100.0 100.0 93.9 63.8 94.6 93.7 91.3 95.5 90.7 80.0 64.8 91.0 60.8 66.3 Source: UNESCO estimates cited in ECLAC (1994b). where illiteracy rates among women are twice as high as among men (e.g., the urban areas of Bolivia, Guate­ mala and Haiti); in other instances, they are nearly double or even higher than that (e.g., in the rural areas, populated mainly by indigenous peoples, of Bolivia, Guatemala, Mexico and Pem) (see table 1). In addition to the above-mentioned effects of the generation gap in terms of illiteracy rates, the situation in these countries lends strength to the conclusion that female illiteracy tends to be greater among the lower strata of the popula­ tion in both urban and rural areas (Letelier Gálvez, 1993). Illiteracy has extremely serious consequences in terms of the status of women in society, not only because it prevents them from participating as ac­ tive citizens in their groups and communities (which greatly restricts their access to development projects and renders women within such projects’ target groups less able to take advantage of them) but also because their inability to read the laws and thus know their rights keeps them “trapped in the sexist canons” of the Latin American culture (Braslavsky, 1984). WOMEN’S FORMAL EDUCATION: ACHIEVEMENTS AND OBSTACLES • DIANE ALMERAS CEPAL REVIEW 54 « D E C E M B E R 1994 69 m The expansion of educational coverage Despite the structural problems affecting education in Latin America and the Caribbean, women’s educa­ tional status has improved significantly in recent de­ cades thanks to both an overall improvement in theneducational level and an increase in female enrol­ ment in relation to male enrolment. In the 1980s population censuses were already showing up “not only the disappearance of the sharp differences in enrolment rates by gender that were seen in the 1950s, but also a reversal of the situation in half of the countries, where women have gained the advant­ age in access to primary and secondary education” (Schiefelbein and Peruzzi, 1991). Today, in the ma­ jority of the countries of the region, women are on an equal footing with men at the basic and secondary levels, and in a number of countries female enrol­ ment rates in higher education are moving ahead of male enrolment rates (Valdés and Gomariz, 1992 and 1993; United Nations, 1992; e c l a c , 1994b). 1. Preschool education According to figures compiled by UNESCO (1992b) and FLACSO (Valdés and Gomariz, 1992 and 1993), in the 1980s pre-primary schools were serving a broadly equal number of boys and girls, with vari­ ations from one country to the next of one or two percentage points on one side or the other. A study conducted in Chile on the basis o f the 1990 house­ hold surveys found that “at this level, gender-based differences are not observed, but income-based dif­ ferences are in evidence, with attendance rising as one moves up the scale from one income quintile to the next” (UNICEF/Chile, MIDEPLAN, 1993). In fact, the private sector has played an important part in the education o f those sectors which can afford to pay for preschool instruction, and its contribution in rural zones has therefore been limited. Consequently, the supply o f pre-primary education favours the middleand upper-income segments of the population, al­ though some headway has been made in marginal areas through non-formal programmes. The proposal put forward by ECLAC and UNESCO for improving the region’s educational systems places emphasis on preschool education as a means of resolving many problems that may arise later on in a child’s education (ECLAC/UNESCO-OREALC, 1992). In view of the importance of getting women and men off to an equal start in the formal educational system, it is to be hoped that instruction at this level will be promoted by the Governments and made available to all social sectors once their countries reach the point where they can begin to seek out means of consoli­ dating national educational coverage. 2. Primary education In respect of the status of women in primary educa­ tion, data made available by the United Nations Divi­ sion for the Advancement of Women indicate that in 1990 there were 96 women enrolled for every 100 men in the region; this average is on a par with the figures for the countries of Western and Eastern Europe, which have yet to be surpassed by any world region.4 At the country level, this average reflects first-grade enrolment rates ranging from 54.3% of women between the ages of 6 and 11 (90 for every 100 men) in Guatemala up to 100% in Jamaica, Mexico and Trinidad and Tobago. The problems that still stand in the way of ef­ forts to make universal primary education a reality affect girls and boys alike. The main problems ident­ ified by UNESCO studies are the difficulty of serving boys and girls who live in the streets or in isolated zones (between 3% and 15% in most of the countries in the region); the absence of intercultural bilingual education programmes at the primary level in areas having large indigenous populations; delayed entry, which is particularly common among students from households at the lower socioeconomic levels; high temporary drop-out rates during harvest-time in rural areas; and the high rates of repetition resulting both from the above problems and from the poor quality of the education provided and the failure to gear the 4 According to calculations by the Division, based on tables 2 .3 , and 2 .5 of the third version of the W IS T A T database (indica­ tors and statistics on women) maintained by the United Nations. 2 .4 WOMEN’S FORMAL EDUCATION: ACHIEVEMENTS AND OBSTACLES • DIANE ALMERAS 70 CEPAL REVIEW 54 curriculum to the students’ real-world environment (UNESCO, 1992a). Although they may exhibit high repetition and drop-out rates in marginal urban and rural areas, women’s academic performance is better than men’s in all the countries for which figures that are broken down by gender can be obtained (Valdés and Gomariz, 1992 and 1993). The available data’s lack of com­ parability does not permit the calculation of accurate regional rates, however. According to information compiled by e c l a c / u n e s c o (1992), the rate of repe­ tition is under 10% in only five countries, and it is only in another three countries that 80% of all students actually complete their primary schooling. 3. Secondary education Women have greatly benefited from the expansion of secondary education in the region: not only have they reached enrolment rates similar to those of men, but they have actually surpassed those rates in 11 Latin American and several Caribbean countries, marking up a regional average of 109 women for every 100 men (see table 4). Although the coverage in rural areas is much lower for both sexes, the ratio between male and female enrolment rates at the secondary level has remained the same (see table 5). In other words, apart from indigenous populations -where the exclusion of women is an even more complex issuewomen have held on to the progress they have made in secondary education in relative terms despite the structural problems existing within the educational system in the various countries. There is, however, one exception to this rule: the enrolment of women in technical secondary schools (especially in industrial subject areas) remains low “even in those countries which have opened up this type of instruction to women” (Schiefelbein and Peruzzi, 1991). Although academic performance -measured in terms of drop-out and repeater rates, postponement of studies and the proportion of over-age students- is lower at the secondary level, women continue to outperform men in all the countries for which the relevant information is broken down by gender, re­ gardless of the socioeconomic level or area of residence involved (Valdés and Gomariz, 1992 and 1993). It should be noted that the main reasons why women drop out of school appear to bè economic demands and early pregnancy, but -pardy because of the lack of data disaggregated by sex- the number of • DECEMBER 1994 young women who have dropped out of the formal school system in Latin America and the Caribbean is unknown. Another factor to be taken into consideration is that the serious deterioration in the social situation in the region has had numerous manifestations, includ­ ing an increase in the percentage of young people who neither study nor work (e c l a c , 1994a). 4. Higher education Although the expansion of higher education has been more limited than at the lower levels, higher educa­ tion has also made considerable and quite rapid pro­ gress in the region,5 though the extent to which women have shared in these advances varies sharply from country to country. Thus, the regional rate calculated by the United Nations of 106 women for every 100 men enrolled in institutions of higher learning as of 1990 -the highest proportion in the world- masks widely differing rates, ranging from 50 women for every 100 men in Guatemala to 200 women or more per 100 men in some of the small Caribbean countries (United Na­ tions, 1992; ECLAC, 1994b). The differences are all the more striking when they are cross-classified with the differences found from one country to the next in the level of post-secondary studies attained by the population and the differences between urban and rural zones in a given country (see table 6). When we look at students’ selections of their main subject or area of specialization, we find that the percentage of women choosing to specialize in what have traditionally been thought of as “masculine” fields has increased, especially in coun­ tries suffering from severe educational shortcomings (Valdés and Gomariz, 1992 and 1993). This shift has still not been extensive enough to do away with the segmentation of women’s career choices, however. The real problem here is a form of sex-based dis­ crimination, and the situation is quite similar to what occurs in industrialized countries, where a large per­ centage of women are concentrated in courses of study leading to careers that have more flexible working hours or that are more compatible with a greater commitment to domestic tasks, and in which 5 Gross enrolment rates at the tertiary level (higher education) climbed from an average of 3% in 1960 to 19% in 1990. WOMEN’S FORMAL EDUCATION: ACHIEVEMENTS AND OBSTACLES • DIANE ALMERAS CEPAL REVIEW 54 • DECEMBER 71 1994 TABLE 5 Latin America (12 countries): Levels of schooling of rural population, by gender Country None or less than 1 year Primary level Secondary level Higher education Women Bolivia (1992) Brazil (1988) Colombia (1985) Costa Rica (1992) Cuba (1981) Chile (1989) Ecuador(1990) Paraguay (1982) Peru (1991-1992) Dominican Republic (1991) Uruguay (1985) Venezuela (1981) Men Women Men Women Men Women Men 40.0 32.6 21.3 7.9 5.9 0.6 24.0 18.7 21.8 18.1 37.7 21.1 8.2 5.1 0.8 16.2 11.4 8.3 44.7 55.0 62.8 66.4 67.5 63.5 51.2 71.7 60.9 61.4 52.6 64.1 67.3 61.2 66.6 56.2 76.7 64.5 5.4 9.7 11.9 21.7 25.9 17.0 15.0 6.4 14.4 12.2 7.1 10.7 20.2 32.8 14.8 17.2 9.3 23.3 0.3 2.5 0.4 3.5 0.7 0.9 2.9 1.0 2.4 0.8 2.5 0.5 3.5 1.0 1.1 3.6 0.8 3.2 29.8 7.6 37.9 29.4 9.0 25.2 57.4 70.6 54.4 56.4 72.5 67.9 10.7 19.6 7.5 11.9 16.2 6.5 1.5 0.9 0.3 2.1 1.0 0.4 Source: Valdés and Gomariz (1992 and 1993). TABLEÓ Latin America (12 countries): Level of schooling of population in urban (U) and rural (R) zones of each country a None or less than 1 year Primary level Secondary level Higher education Country U Bolivia Brazil Colombia Costa Rica Cuba Chile Ecuador Paraguay Peru Dominican Republic Uruguay Venezuela R U R U R U R 17.4 12.3 7.2 5.8 3.5 0.5 5.3 10.6 6.8 17.5 5.0 15.1 29.0 35.1 21.2 8.1 5.6 0.7 20.0 14.9 15.0 29.6 8.5 31.1 43.4 66.9 42.5 55.0 43.3 41.8 31.5 63.5 42.8 49.5 51.9 56.8 53.1 53.7 63.5 66.8 64.0 65.2 53.7 74.3 62.7 57.0 71.8 61.6 24.6 13.3 41.2 29.1 47.6 41.6 41.3 18.2 33.3 22.9 37.3 23.4 8.9 8.5 11.3 20.9 29.6 15.8 16.1 7.9 18.9 11.3 17.5 7.0 6.7 7.4 7.6 9.3 5.6 7.9 17.7 5.6 16.7 10.0 5.0 4.7 0.5 2.5 0.4 3.5 0.8 1.1 3.2 0.9 2.8 2.1 1.0 0.3 Source: Valdés and Gomariz (1992 and 1993). a Brazil: the urban population corresponds to the south-eastern region, while the rural population corresponds to the north-eastern region; Bolivia, Chile, Costa Rica, Paraguay, Peru, Dominican Republic, Uruguay and Venezuela: total urban population. there is less risk of sex-based wage discrimination (ECLAC/UNESCO-OREALC, 1992). Thus, the source of discrimination is not so much an effort on the part of the educational system to make distinctions as a means of openly putting women at a disadvantage, but rather the fact that this system is part of a larger society, and the opportunities it offers are therefore used differently by women and men in accordance with the dominant values and beliefs of that society (Varela, 1991). WOMEN’S FORMAL EDUCATION: ACHIEVEMENTS AND OBSTACLES • DIANE ALMERAS Socio-cultural obstacles faced by women in the educational system These sexist traits are connected with the tendency in Western thinking to divide up and classify people, capacities and activities by gender, as part of an atti­ tude that “diminishes, excludes, under-represents and stereotypes people on the basis of their sex” (Abu Nasr, Lorfmg and Mikati, 1983, cited by Michel, 1989). This is the source of the overvaluation of “masculine” views and outlooks and of the silencing of the “feminine” perspective in academia, and it is subsequently reproduced in the stereotypical content of instruction, in the failure to pay an equal amount of attention to girl students in the classroom, and in fewer job opportunities for women. In the following section we will see how sexual stereotypes, teachers’ attitudes and gender segregation in labour-market orientation may help to distort girls’ individual op­ portunities and to oblige them to internalize their subordinate position in society (Subirats, 1990). 1. Sexual stereotypes in education A careful examination of the studies that have been carried out in the region on the content of teaching materials -textbooks, illustrations, films- used at the elementary and secondary levels of instruction in the vast majority of the Latin American and Caribbean countries confirms the existence of gender discrimi­ nation. The point of departure for a study focusing on this type of discrimination may be such indicators of sexism as the frequency of the presence of females and males, their participation in work-related acti­ vities and in domestic and household activities, the descriptive adjectives used to refer to one or the other sex, and leadership situations (Chile, National Women’s Service (SERNAM), 1992). According to an analysis of school textbooks in Belize (Laaksonen, 1991), Chile (Chile, National Women’s Service, 1992), Costa Rica (Costa Rica, Ministry of Culture, Youth and Sports/Ministry of Public Education, 1991), El Salvador, Guatemala and Panama (Caldera, 1990), Peru (Valdés and Gomariz, 1993) and Uru­ guay (Piotti Núñez, 1990; Valdés and Gomariz, 1992), the texts and other books that were examined referred to women in fewer than 30% of the leader­ ship situations mentioned and depicted them as occu­ pying socially inferior, weak or subordinate positions (Caldera, 1990). In Venezuela, a study of sexual stereotypes in school textbooks used at the preschool and basic levels classified such stereotypes as be­ longing to one of three categories: the exaggeration of behavioural traits, household or professional roles, and group relationships. Thus, a glaring mismatch was observed between Venezuelan society as it ac­ tually is and the models presented in the texts, which were constructs corresponding to “social situations of the past” (Montero, 1993). This discrepancy between reality and models is precisely what stereotypes are -i.e., “rigid, anonymous models which serve as the basis for the reproduction, in a mechanical manner, of images and forms of behaviour” (Dunningan, cited by Michel, 1989). This may be expressed openly, as in the case of school curricula that guide boys and girls towards typically “masculine” or “feminine” disciplines, or in a veiled manner, as in the omission of certain qualities or roles from among the options presented to girls and boys (Michel, 1989). For example, the textbooks used in the various countries of the region primarily depict women as idealized versions of mothers and housewives (Piotti Núñez, 1990; Torres, 1993) and lead the reader to believe that men play the important roles in both the public and private spheres of life. When women are presented as taking public action, they are usually shown to be engaging in activities that have traditionally been regarded as feminine. Dynamic forms of action that demand ef­ fectiveness and productivity or that have to do with guidance or leadership are attributed almost exclu­ sively to men (Valdés and Gomariz, 1992). These stereotypes do harm to girls’ self-image and identity, and perpetuate the beliefs underlying gender dis­ crimination (Rico, 1994). In the wake of these studies on the content of teaching materials in the above-mentioned countries, WOMEN’S FORMAL EDUCATION: ACHIEVEMENTS AND OBSTACLES • DIANE ALMERAS CEPAL REVIEW 54 a number of Governments have begun to modify the textbooks now in use and to present models of women in the region that are more in line with re­ ality. As a result, the types of images of women that are being presented are somewhat more numerous, although they are still in a minority. Greater flexi­ bility is also beginning to be introduced in the char­ acterization of traditional roles, and women may now be depicted as being more active in the public sphere, while men may be shown as participating in household chores and child-rearing. However, school curricula have yet to be reformulated in such a way as to ac­ knowledge the value of the contributions made by each of the sexes and to present a balanced picture of both. The problems involved in designing teaching materials that reflect what are as yet incomplete socio-cultural changes are certainly formidable, and it should therefore come as no surprise that edu­ cational authorities have difficulty in producing textbooks that are in keeping with the times. At pres­ ent, this has led to the use of ambiguous materials in which contradictory models overlap one another and which do not help students to arrive at a clear idea of what direction they wish to take in life. In the place of the old stereotypes, there is an accumula­ tion of “models, modes of behaviour and attitudes that do not necessarily provide a broader range of options or new horizons, since the assignment of priority to reproductive roles within the family still appears to be inevitable. At the same time, men’s models are changing more slowly, and this means that the context for any innovations that arise will be an unbalanced process of change in gender images” (Rico, 1994). One approach to the problem that has sparked a great deal of interest in the region is the integration of women’s issues and the gender perspective into the teaching of history at all levels of the formal edu­ cational system. The incorporation of women’s his­ tory into academic culture would reaffirm women’s leadership roles in society and thereby help young girls to develop an identity and a feeling of selfworth. By promoting a more complex and modem view of history, it would also help to democratize the educational system and introduce the study of the black and indigenous cultures (León, 1992). In order to accomplish this, historical research will have to be undertaken and the cooperation of both educa­ tional authorities and academic institutions will be required. The challenge being confronted here is • DECEMBER 1994 73 how to go about shaping a common societal agenda in which all citizens -both women and men- can participate and which makes room for diversity and different identities. 2. The role of teachers Another fundamental factor in the democratization of the formal educational system is the role played by teachers; this is because a student and his or her teacher form a power relationship involving peda­ gogic elements, social aspects, communication and the transmission of skills and knowledge, and this relationship constitutes the most decisive element in the learning process within the school (Labourdette, 1989). For these same reasons, teachers “may play a very important role either in the perpetuation of sexist stereotypes and prejudices or in their refuta­ tion and elimination” (Rico, 1994). Thanks to the contributions made by a number of studies on the presence of gender discrimination in the educational system, there is a growing awareness in the region of just how important the teacherstudent relationship is in the transmission of sexual stereotypes. Second only to the family, the classroom is where young girls and boys experience the hierarchization of the social roles and models which so­ ciety is going to impose upon them in the form of attitudes and modes of behaviour. The way in which teachers support, encourage or ignore the demands for attention made upon them by the girls and boys in class sends implicit messages to those children about the norms of the society that surrounds them and pre­ pares them to adapt to those norms. For example, a study conducted in Chile has demonstrated that both male and female teachers pay more attention to boys in class in terms of going over their homework, asking them questions and disciplining them. Be­ cause girls tend to be better students and to observe institutional rules more readily, their teachers per­ ceive them as being less creative and less capable of acting as leaders than boys (Rossetti, 1988 and 1992). Another study on teachers of both sexes in Ecuador found that 72% of them felt that women had less of an aptitude for technology-related subjects and three out of ten of these teachers felt it was their obligation to guide students towards careers that were “appropriate for their sex” (Robalino, Villanue­ va and Isch, cited in Rico, 1994). Training teachers -both men and women- in such a way as to sensitize them to the consequences WOMEN’S FORMAL EDUCATION: ACHIEVEMENTS AND OBSTACLES • DIANE ALMERAS 74 CEPAL REVIEW 54 of their conduct and encourage them to transform their classrooms into a place where students can learn about the cultural changes occurring in the outside world is all the more important in view of the fact that the majority of the teachers in the educational systems of the region are women. According to figures gathered by FLACSO throughout the region for its statistical compendium Mujeres latinoamericanas en cifras (Valdés and Gomariz, 1992 and 1993), in the vast majority of the countries in the region, al­ most all the teachers at the preschool level, threequarters of those at the elementary level and half of the teachers in secondary schools are women. Women are in the minority, however, in higher edu­ cation. 6 Teacher training colleges are the only ex­ ception, where women are in the majority in both the faculty and the student body. Women are not a major presence in senior executive or administra­ tive posts either, and little effort has been made to train teachers to adopt a proper gender perspective; this situation tends to perpetuate a vicious circle between their own situation and the reproduction of a gender-based discriminatory bias within the educational process. The implications of this state of affairs were dis­ cussed by women teachers in Paraguay in July 1991 when the Public Educators’ Network organized a campaign “for non-sexist education”. At seminars at­ tended by teachers from both public and private schools, these educators stated quite clearly that “they felt they were not held in high regard and were not considered to be direct agents of educational reform” (ECLAC, 1992). 3. Gender segregation in vocational guidance In order to do away with gender-based discrimination in the formal educational system, it is important not only to take action within the educational process as such but also to look at that system from the stand­ point of labour and of the demands generated by pro­ duction processes. Steps need to be taken to rectify the inequality of educational opportunities for women that stems from the role they are assigned in • DECEMBER 1994 the social development process, where they are re­ garded as factors of reproduction rather than social actors in full possession of their rights (Dasso and Montaflo, cited in ECLAC, 1991b). Given the ways in which production patterns are now changing in the region and the new types of demands that this process is generating in the labour market, women’s participation in scientific and tech­ nological progress and in the production of knowl­ edge in general needs to be significantly increased; this will, in turn, influence the definition of produc­ tion, the sexual division of labour and the cultural values of society; in addition, a determined effort to increase the level of activity in the area of technical education is needed in all the countries. Furthermore, at a time when the region is beginning to address the urgent need to update the way in which management principles are being taught and adapt them to the requirements of modern-day enterprise, it is also im­ portant for women to be initiated into new forms of leadership, management and decision-making. In many countries of the region, the advances made by women in the field of education in the past three decades have enabled the women in the econ­ omically active population (e a p ) to attain a higher level of education than their male counterparts (see table 7). It has also been estimated that in most of the countries in the region, women who hold skilled jobs have an average of two more years of formal training than men who hold equivalent jobs (ECLAC, 1991b; Psacharopoulos and Tzannatos, 1992). Even though women make up about 50% of the student body in secondary schools and institutions of higher learning, however, “a clear difference exists in terms of the type of training selected by men and women, with a number of cases where the percentage of women is smaller in vocational schools than in normal schools” (Parada, 1991). The resulting segmentation as between men and women affects the development potential of society as a whole as well as of women themselves. For example, at the close of the 1980s, fewer than 35% of engineering graduates were women in four countries in which the development of the production sector is a key factor of economic and social progress.7 This 6 22.6% in Colombia, 34.2% in Costa Rica, 45.0% in Cuba, 17.8% in Ecuador, 19.0% in Guatemala, 33.9% in Panama, 15.2% in Paraguay, 21.7% in Peru, 34.0% in Uruguay and 37.4% in Venezuela. 7 Brazil: 15.2% in 1988; Colombia: 27.1% in 1986; Cuba: 34.8% in 1989; Venezuela: 34.6% in 1988 (Valdés and Gomariz, 1992 and 1993). WOMEN’S FORMAL EDUCATION: ACHIEVEMENTS AND OBSTACLES • DIANE ALMERAS CEPAL REVIEW 54 • DECEMBER 1994 75 Latin America (12 countries): Economically active population, by gender and by years of schooling Country None or less than 1 year Primary school Secondary school Women Brazil 1988 Colombia 1985 1989 Costa Rica 1990 Cuba 8 1980 1986 Chile 1989 Men Women Men Women Men 14.1 18.8 56.5 61.3 29.1 19.7 10.4 2.8 12.0 1.8 44.9 32.8 51.4 32.4 33.9 49.2 3.1 5.4 43.3 57.3 35.9 18.6 Higher education Women Men 27.8 46.9 7.7 15.1 18.9 34.5 26.6 18.0 9.7 51.0 26.5 47.8 57.1 36.7 55.4 16.3 24.3 12.3 18.1 8.8 0.3 0.4 35.7 45.9 45.3 38.1 13.2 9.1 Ecuador 1982 1990 13.8 10.4 15.1 9.8 35.2 32.2 53.1 45.9 28.6 31.9 16.7 27.5 14.1 20.6 7.1 11.9 Panama 1991 2.4 6.6 23.1 41.8 46.5 36.5 28.0 15.1 Paraguay 1982 6.1 7.7 56.1 68.7 29.6 18.7 6.3 3.1 20.8 10.5 3.3 0.8 34.5 25.9 49.1 19.7 24.5 51.8 28.2 55.4 16.8 19.0 24.1 10.5 16.9 42.9 48.4 25.5 19.3 18.1 9.6 Uruguay 1985 1.9 3.3 40.5 52.9 47.7 37.5 9.0 5.9 Venezuela 1987 6.4 10.9 34.8 46.7 44.7 33.4 14.1 8.8 Peru 1981 1987 b Dominican Republic 1991 10.2 Source: Valdés and Gomariz (1992 and 1993). a Civilians in State sector. b Population of the Lima metropolitan area. state of affairs is even more ominous over the long term because the most conspicuous feature of the current occupational cycle is not a decline in the number of jobs, but rather the fact that the swift pace of technological innovation is rapidly outmoding cer­ tain skills and areas of expertise (ECLAC, 1994a), as a result of which women are being left further and fur­ ther behind. According to studies sponsored by the World Bank in 15 Latin American and Caribbean countries concerning the relationship between women’s partici­ pation in the labour force and their level of education and pay rates, career choice is also a very influential factor in wage discrimination against women. These studies have found that women’s participation in the labour market rises sharply as their number of years WOMEN'S FORMAL EDUCATION: ACHIEVEMENTS AND OBSTACLES • DIANE ALMERAS 76 CEPAL REVIEW 54 of formal schooling increases, especially at the levels of technical secondary and post-secondary training, and that education is a factor of overriding import­ ance in determining the income levels of women as well as men. Nevertheless, education’s “rate of re­ turn” in terms of income has remained lower for women in all 15 of these countries. According to the authors of these studies, this fact cannot be accounted for by shortcomings in human resources development but is instead due primarily to discrimination in the labour market and to occupational choice (Psacharo­ poulos and Tzannatos, 1992). Thus, career choice is not only a crucial element in terms of an individual’s development; it also has a strong influence on people’s opportunities for partici­ pating in society and, by determining their income level, on the quality of their living conditions. Taking these findings into consideration, an analysis of the segmentation characterizing women’s enrolment in secondary and higher education indicates that women’s increased presence at these levels does not necessarily mean that “a change is taking place in the social status of each sex, although there may be some redefinition of occupational roles together with a qualitative change which as yet is difficult to evalu­ ate” (Rico, 1994). Whether at the level of secondary-school voca­ tional training or higher education, a large majority of women choose to study subjects that are an exten­ sion of their traditional roles and that “do not alter the sexual division of labour from a symbolic stand­ point or have any real influence on inter-gender hierarchies” (Rico, 1994). For example, in such dis­ parate countries as Cuba and Paraguay, in secondary vocational and technical schools, women are in the majority in those courses of study having to do with public health, economics and art; they are on a par with men in subjects dealing with the chemical and food industries; they are in the minority in tradition­ ally masculine fields such as metallurgy, construction and agriculture; and they are entirely absent from others, such as mechanics, carpentry and graphic arts (Valdés and Gomariz, 1992 and 1993). Research has also confirmed that in higher edu­ cation, despite the changes that have taken place and the increasing redistribution of women students among a broader range of career possibilities, women tend to congregate in the fields of education, the hu­ manities, the arts, social science and certain disci­ • DECEMBER 1994 plines in the health sciences, such as nursing, obste­ trics, nutrition and dentistry. There are promising signs that women may soon be on an equal footing with men in the fields of management, economics, architecture, urban planning, law and chemistry, which have until now been regarded as prestigious, traditionally masculine careers.8 Meanwhile, engin­ eering and the natural and exact sciences continue to be a male preserve; this state of affairs, which is par­ ticularly notable when the percentages of women stu­ dents in these fields are disaggregated by discipline,9 leads to the exclusion of women from activities in­ volving technological innovation and the generation of knowledge. The enrolment figures for vocational schools reveal a close correlation between the proportion of women students and the types of specializations offered, with the percentage of women falling to negligible levels in occupational fields traditionally associated with men. In view of these factors, a recent study on women’s contributions to economic growth in Latin America and the Caribbean con­ cluded that training in this field has not opened up new vistas or income-earning opportunities for women but has instead guided them towards tradi­ tional, low-income occupations, thereby perpetuating the differences in the opportunities open to men and women in the production sector (Buvinic and Ly cette, 1994). 8 Recent studies suggest, however, that these careers are begin­ ning to be thought of as “options for women” (Varela, 1991), which would seem to be leading to “a steady decline in their status based on impressions of what is going on in the labour market” (Rico, 1994). 9 If, for example, the figures on the women students specializing in these fields in the public and private universities of Peru are broken down by area of study, the situation was as follows in 1986: chemistry: 23.9%; fisheries: 22.8%; industrial engineer­ ing; 17.1%; civil engineering: 11.2%; geology: 4.4%; electro­ nics: 2.8%; mining: 2.2%; and mechanical engineering: 0.9%. If the same sort of disaggregation is performed for the natural and exact sciences, the results indicate that there are clear-cut dif­ ferences underlying the nearly equal proportions of men and women in these fields and that those differences correlate with the status of the various disciplines. Thus, in Peru, as of 1986 the percentages of female enrolment in each area of study were as follows: 53.1% in chemistry, 43.8% in biology, 31.4% in zoology, 15.6% in agronomy, and 8.8% in physics (Valdés and Gomariz, 1992 and 1993). WOMEN’S FORMAL EDUCATION: ACHIEVEMENTS AND OBSTACLES • DIANE ALMERAS CEPAL REVIEW 54 • DECEMBER 1994 77 V Some final thoughts Just as the educational system permits the reproduc­ tion of traditional models, this system’s structure can also spur the development of new models. In order for this to happen, however, a country must have the political will to question the cultural content of edu­ cation and must be able to elicit the participation of all the social agents positioned within the system’s structure: national and educational authorities; educa­ tors; textbook authors, illustrators and publishers; employers; society at large; and women’s organiza­ tions. Along these same lines, in their proposal for upgrading the educational systems of Latin America and the Caribbean, e c l a c and UNESCO emphasize that a multi-faceted effort will be needed in order to change the pattern of education in the region (ECLAC/UNESCO-OREALC, 1992). In practical terms, the aim is to modify a social­ ization process -which begins in the home, continues in the schools and is reaffirmed by the social environ­ ment- which currently defines gender identities that stress differences and breed subordination and asym­ metrical power relationships. The objective is to overhaul these inter-gender referential and relational patterns with a view to fostering a different kind of environment in which roles will be more flexible and both men and women can develop their potential as individuals and citizens. As applied to the design of a proposed curriculum, this would involve rectifying the androcentric biases underlying the theory and praxis of education and identifying their repercus­ sions in terms of the living conditions, growth, per­ sonal development, integration into the workforce and social participation of students of both sexes. In sum, public policies aimed at increasing the benefits of formal education for women should, first and foremost, be directed towards assisting women in all social sectors of the region to become fullyfledged citizens of modem society who enjoy equal opportunities in both education and the labour mar­ ket. The strategies to be proposed should also lead to the elimination of sexual stereotypes from the educa­ tional process, improvement of the status of girls and women at all levels of formal and non-formal educa­ tion, and the furtherance of research on the reciprocal relationships existing between culture and education, inasmuch as culture is both the matrix and the out­ come of the educational process. (Original: Spanish) Bibliography A bu Nasr, J., I. Lorfing and J. Mikati' (1983): Identifica­ tion and elimination o f sex stereotypes in and fro m school textbooks. Some suggestions fo r action in the A rab world, Paris, U nited N ations Educational, Scientific and Cultural O rganization (UNESCO). Bolivia, Coordinadora de la M ujer (1990): Políticas para la incorporación de la m ujer en la estrategia de de­ sarrollo, L a Paz. Bolivia, National Institute of Statistics (INE) (1989): En­ cuesta nacional de población y vivienda, 1988. Resultados finales. Bonilla Castro, Elssy (1991): La m ujer colombiana en el contexto de la apertura económ ica (LC/R. 1091), Santiago, Chile, Econom ic Com m ission for Latin Am erica and the Caribbean (ECLAC). Braslavsky, C. (1984): M ujer y educación. Desigualdades educativas en América Latina y el Caribe, Santiago, Chile, UNESCO Regional Office for Education in Latin A m erica and the Caribbean (OREALC). Brazil, Brazilian Geographical and Statistical Institute (IBGE) (1989): A nuario estatístico do Brasil. Buvinic, M ayra and M argaret Lycette (1994): W om en’s contributions to economic grow th in Latin A m erica and the Caribbean: Facts, experience, and options, in Women in the Americas: Participation and D evel­ opment, B ackground papers of the regional forum (G u ad alajara, 5-7 A pril). M exico C ity , InterAm erican Developm ent Bank (IDB)/ECLAC/United Nations D evelopm ent Fund for W om en (UNIFEM). Caldera, Rosa (coord.) (1990): Estudio comparativo de la revisión de textos escolares de m ayor uso en p la n ­ teles públicos y privados de Guatemala, Panam á y E l Salvador, G uatem ala C ity, U nited N ations C hildren’s Fund (UNICEF)/UNIFEM. WOMEN’S FORMAL EDUCATION: ACHIEVEMENTS AND OBSTACLES • DIANE ALMERAS 78 C E P A L RE VIEW 54 Chile, N ational W om en’s Service (SERNAM) (1992): A nálisis de roles y estereotipos sexuales en los textos escolares chilenos, Documentos de trabajo, No. 8, Santiago, Chile. Colombia, DANE (1986): Censo 1985, Bogotá, National Statistical Department. C osta Rica, M inistry of Culture, Youth and Sports/ M inistry o f Education (1991): A nálisis de roles y estereotipos sexuales en textos escolares en Costa Rica, San José, UNICEF/UNIFEM. D ’Emilio, Anna Lucía (ed.) (1989): M ujer indígena y educación en Am érica Latina, Santiago, Chile, UNESCO/in. 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W OMEN’S FO RM AL EDUCATION: ACHIEVEMENTS AND O B ST A CLES • DIANE A LM ERA S C E P A L R E V IEW 54 Rivera, Marcia (1993): El Caribe, los movimientos de mu­ jeres y los estudios de género, in Claudia Serrano (coord.), La investigación sobre la m ujer en Am érica Latina, Santo Domingo, Dominican Republic, Inter­ national Research and Training Institute for the Advancement of Women (INSTRAW)/UNESCO/ Centre for Women’s Research and Action (CIPAF). Rossetti, Josefina (1988): La educación de las mujeres en Chile contemporáneo, in CEM (Centre for Women’s Studies), M undo de mujer: continuidad y cambio, Santiago, Chile, Ediciones OEM. —— (1992): Educación y empleo: ayudar a las mujeres a formular un buen proyecto vocacional y laboral, in María Antonia Gallart (ed.), Educación y trabajo: de­ safíos y perspectivas de investigación y políticas pa ra la década de los noventa, vol. II, Montevideo, Red Latinoamericana de Educación y Trabajo, Inter­ national Development Research Centre (IDRC)/ Centre for Population Studies (CENEPyinter-American Research and Documentation Centre on Vocational Training (CINTERFOR). Schiefelbein, E. and S. Peruzzi (1991): Oportunidades de educación para la mujer. El caso de América Latina y el Caribe, Boletín del proyecto principal de edu­ cación en A m érica Latina y el Caribe, No. 24, Santiago, Chile, UNESCO-OREALC. Subirats, Marina (1990): La construcción de una educa­ ción no sexista, paper presented at the Seminar on Educational Reform in the Transition to Democracy, Inform e, Santiago, Chile, PIIE/ICI, 6-8 November. Torres, Rosa Maria (1993): La madre en los textos esco­ lares, E nfoques de mujer, No. 28, Asunción, GEMPA. UNESCO (1991): W orld Education Report 1991, Paris. (1992a): Situación educativa de Am érica Latina y el Caribe, 1980-1989, Santiago, Chile, UNESCO-OREALC. • D E C E M B E R 1994 79 (1992b): Statistical Yearbook 1992, Paris. UNICEF/Chile, MIDEPLAN (Ministry of Planning and Cooperation) (1993): La impresión de las cifras. Niños, mujeres, jóvenes y adultos m ayores, Santiago, Chile, UNICEF Area Office for Argentina, Chile and Uruguay. United Nations (1992): The w o rld ’s women 1970-1990: trends and statistics. Social Statistics and Indicators. Series K, No. 8, New York, Statistical Office. United Nations publication, Sales No. 92.XVÜ.3. Valdés, Teresa and Enrique Gomariz (coords.) (1992): M ujeres latinoam ericanas en cifras, 6 vols. (Brazil, Chile, Costa Rica, Cuba, Ecuador, Guatemala), Madrid/ Santiago, Chile, Ministerio de Asuntos Sociales de España, Instituto de la M ujer/Latin A m eri­ can Faculty of Social Sciences (FLACSO-Chile). (1993): M ujeres latinoamericanas en cifras, 8 vols., (Bolivia, Colombia, Dominican Republic, Panama, Paraguay, Peru, Uruguay, Venezuela), M adrid/ Santiago, Chile, Ministerio de Asuntos Sociales de España, Instituto de la Mujer/FLACSO-Chile. Varela, Carmen (1991): Las mujeres en la universidad uruguaya de los ’80: una reflexión a p a rtir de la fem inización de su matrícula, Montevideo, Study Group on the Status of Women in Uruguay (GRECMU), mimeo. Venezuela, Oficina Central de Estadística e Informática de la Presidencia de la República (1990): A nuario estadístico. Zúñiga, Madeleine (1989): Situación educativa de la mujer indígena. Caso de Perú, in Anna Lucía D’Emilio (ed.), M ujer indígena y educación en A m érica Latina, Santiago, Chile, UNESCO/in. W OM EN’S FORMAL EDUCARO N: ACHIEVEMENTS AND O B ST A C LE S • DIANE A LM ERA S CEPAL REVIEW 81 54 Labour market flexibility: what does it really mean ? Ricardo A. Lagos Consultant to the international Labour Office and Coordinator of the ILO/UNFPA Regional Project on Population, Poverty and the Labour Market in Latin America. The 1980s witnessed the emergence of the concept “labour market flexibility” (LMF) in industrialized countries as well as in some developing countries. As a consequence of poor economic performance in the early 1980s, the view that the way in which labour markets operated constituted a significant obstacle to economic growth gained support at the level of policy makers, employers in general and, not least, in part of the academic establishment. The problems with the labour market were blamed on its “rigidity” in terms of the price of labour, conditions of employment and the quantity and quality of manpower, and this rigidity was blamed in turn on institutional constraints, social policies, legislation and collective bargaining, trade union agreements, action and/or centralized governmental guidelines. The focus, then, was on eliminating a variety of rules and regulations which were felt to make the labour market rigid and thus prevent it on the one hand from absorbing the labour supply, and on the other from adapting to the requirements imposed by technological change and external competition. This paper therefore reviews the meaning of the concept “labour market flexibility” and identifies the various forms which it may assume and their rationale, noting that labour markets in Latin America have undergone substantial flexibilization but there have not been any substantial changes on the institutional side. D E C E M B E R 1994 82 C E P A L REVIEW 54 • D E C E M B E R 1994 I Introduction T h e 1980s w itne sse d the em ergence o f the concept “ la b o u r m a rk e t fle x ib ility ” (LMF), in in d u s tria liz e d c o un trie s as w e ll as in som e d e v e lo p in g countries, togethe r w ith th e a c co m pa nyin g debate. A s a consequence o f p o o r e c o n o m ic p e rfo rm a n ce in the e a rly 1980s -m a rk e d b y s ta g n a tio n o f g ro w th , r is ­ in g le v e ls o f u n e m p lo y m e n t a nd in f la t io n - the v ie w th a t th e w a y in w h ic h la b o u r m a rk e ts o p e r­ ated c o n s titu te d a s ig n ific a n t o b s ta c le to e c o n o m ic g ro w th g a in e d s u p p o rt a m o n g p o lic y m akers, e m p lo y e rs in g e n e ra l and, n o t least, p a rt o f the a ca d e m ic e s ta b lis h m e n t. T h e p e rc e p tio n th a t tra d i­ tio n a l m eans o f c o n tro llin g u n e m p lo y m e n t and re ­ s u m in g e c o n o m ic g ro w th h a d fa ile d (i.e ., the b re a k d o w n o f th e K e y n e s ia n consensus), the c o n ­ tra s t b e tw e e n th e e c o n o m ic p e rfo rm a n c e o f the U n ite d States a n d Japan in te rm s o f e m p lo y m e n t c re a tio n a n d th e m e d io c re s h o w in g o f W e ste rn E u ro p e in th a t re sp e ct, and the pressu re o f e x te rn a l c o m p e titio n b o th fro m o th e r d e v e lo p e d c o u n trie s and fr o m th e n e w ly -in d u s tria liz e d A s ia n c o u n trie s (N ics), le d to th e b e lie f th a t th e p ro b le m s la y at le a st p a r tly in the fu n c tio n in g o f th e la b o u r m a rk e t: s p e c ific a lly , in its “ r ig id it y ” in te rm s o f th e p ric e o f la b o u r, c o n d itio n s o f e m p lo y m e n t a n d the q u a n tity a n d q u a lity o f m a n p o w e r. T h is r ig id ity o r la c k o f fle x ib ility w as seen as a consequence o f in s titu tio n a l constraints, social p o lic ie s , le g is la tio n and c o lle c tiv e agreem ents, cen­ tra liz e d b a rg a in in g , trad e u n io n a c tio n a n d /o r g o v e rn ­ m e nta l g u id eline s. T h e focus, then, was on e lim in a tin g a v a rie ty o f rules and re g u la tio n s w h ic h m ade th e la b o u r m a rk e t rig id , o n the grounds that such rules prevented the la b o u r m arket fro m , on the one hand, absorbing the la b o u r supply, and, on the other, adapting to the requirem ents im posed b y tech­ n o lo g ic a l change and ad ju stin g to external c o m p e ti­ tio n . F ro m th is v ie w p o in t, la b o u r m arkets n o t o n ly becam e p a rt o f the diagnosis o f the e c o n o m ic d if f i­ cu ltie s b u t also o f the rem edies fo r o v e rc o m in g them . S ta rtin g fro m this basic and sim p le diagnosis that there w as a need fo r less rig id e m p lo y m e n t relations, the co n ce p tu a liza tio n o f w h a t is understood b y LMF has le d to various and m ore co m p le x form s o f fle x ib ility -fo rm s w h ic h re fle c t the d iffe re n t types o f f l e x i b il i t y dem a n d e d o r re q u ire d in c e rta in e c o n o m ie s a n d th e d iffe r e n t a pproa che s o r v ie w s on f le x ib ilit y its e lf. T h e purpose o f th is paper, then, is to re v ie w the m eaning o f the concept “ la b o u r m a rk e t fle x ib ility ” and to id e n tify the various fo rm s it can assume and th e ir ra tio n a le . In order to do this, section I I discusses the concept o f fle x ib ility . S ection I I goes on to ana­ ly se the d iffe re n t fo rm s o f LMF, w h ile section IV deals w ith the issue o f LMF in L a tin A m e ric a , n o tin g that la b o u r m arkets have undergone substantial fle x ib iliz a tio n b u t there have n o t been any substantial changes on the in s titu tio n a l side. F in a lly , section V presents som e c o n c lu d in g rem arks. I t m ust be p o in te d o u t th a t th is a rtic le does n o t discuss w hether (greater) fle x ib ility is desirable o r w h e th e r i t is a w e l­ com e c o n trib u tio n to la b o u r econom ics. T h o u g h the interest o f these la tte r topics cannot be denied, the scope o f th is paper is m uch n a rro w e r (and, ce rta in ly, less e x c itin g ). □ This study is based substantially on an earlier paper com­ pleted in March 1992 at the Faculty of Economics and Politics, University of Cambridge, United Kingdom. The author wishes to acknowledge the valuable comments made on an earlier draft by Dr. Gabriel Palma and Dr. Paul Ryan. The usual disclaimers apply. LABOUR M ARKET FLEXIBILITY: WHAT DO ES IT REALLY M EA N ? • RICARDO A. LAGOS C E P A L RE VIEW 54 * D E C E M B E R 1994 83 II The concept of flexibility A s o fte n happens w ith w id e ly and e x te n s iv e ly used term s, LMF has p ro v e d to be d iff ic u lt to d e fin e . E c o n ­ om ists have tra d itio n a lly a p p lie d the w o rd fle x ib ility to the “ c a p a c ity o f [n o m in a l] wages to ris e and fa ll w ith the state o f the la b o u r m a rke t” (P iore, 1986, p. 146). H o w e v e r, as the debate on LMF has p ro ­ gressed, th e concept o f fle x ib ility has been extended to the p o in t th a t now ad ays i t im p lie s th e idea o f a ca p a c ity fo r adaptation. In fa ct, now adays i t is th is la tte r aspect w h ic h has becom e m o re re le v a n t w h e n re fe rrin g to the issue o f LMF. F o r exam ple, a cco rd in g to th e O rg a n iz a tio n fo r E c o n o m ic C o o p e ra tio n and D e ve lo p m e n t (OECD), fle x ib ility refers to “ ...the a b ility o f in d iv id u a ls and in s titu tio n s to abandon established w ays and adapt to n ew circum sta nces...” (OECD, 1986a and 1986b, p. 7). F o r M ic h o n , “ fle x ib ility becom es im p e ra tiv e in a co n te x t o f ra p id change: it s ig n ifie s an a p titu d e fo r change” (M ic h o n , 1987, p. 154). A tk in s o n m aintains th a t f le x ib ility alludes to “ ...changes to in s titu tio n a l, c u ltu ra l and o th e r social o r e co n o m ic re g u la tio n s and practices w h ic h p e rm a n e n tly increase the ca p a city to respond to change...” (A tk in s o n , 1987, p. 88). Stand­ in g argues th a t at an abstract le v e l “ fle x ib ility ... means responsiveness to pressure” and th a t “ to be fle x ib le is to be responsive to pressures and incen­ tive s and to be able to adapt to th e m ” (S tanding, 1986a, p. 6 ). F o r B o yer, fle x ib ility refers to “ the a b ility o f a system o r subsystem to re a ct to various disturbances” (B oye r, 1987, p. 113). T h e above d e fin itio n s have the c h aracteristic o f b e in g u n c o m m itte d w ith re g a rd to the actual content o f LMF, fo r th e y do n o t sp e c ify the m eans th ro u g h w h ic h the ad aptation to th e ne w circum stances sh ou ld be m ade - w h ic h is p re c is e ly the contested issue c o n c e rn in g LMF. Besides, th is n e u tra lity n o t o n ly does n o t p re jud ge o n the m eans b u t also leaves the d o o r open to the p o s s ib ility th a t “ th e same need to adapt m a y be sa tisfie d b y v e ry d iffe re n t fo rm s o f fle x ib ility ” (M e u ld e rs and W ilk in , 1987, p. 5). N evertheless, the discussion on lm f ra re ly takes place on the basis o f these general concepts. In m ore s p e c ific a nd n a rro w term s LMF expresses the n o tio n th a t e m p lo y m e n t practices should be adaptable to changes in the e c o n o m ic c y c le and te c h n o lo g ic a l change. F o r instance, the In te rn a tio n a l L a b o u r O ffic e (ILO) v ie w s LMF as “ the ca p a city o f the la b o u r m a rk e t to be adapted to eco n o m ic, social and te c h n o lo g ic a l circum stances” (ILO, 1986a, pp. 4-7). T h e OECD un ­ derstands LMF as an adjustm ent o f a ll re a l costs o f la b o u r to v a ria tio n s in e c o n o m ic c o n d itio n s (OECD, 1986a). F o r the In te rn a tio n a l O rg a n isa tio n o f E m ­ ployers, LMF m eans the ca p a c ity to adapt re la tiv e la ­ b o u r costs betw een enterprises and occupations o r adaptation o f the costs o f factors o f p ro d u c tio n to m a rk e t c o n d itio n s (In te rn a tio n a l O rg a n is a tio n o f E m ployers, 1985). L a s tly , fo r A m e ric a n businessm en fle x ib ility is associated w ith “ e ffo rts to c o n v e rt the tra d itio n a l h ig h ly integrated, h ie ra rc h ic a l corporate structure in to a m o re supple o rg a n iz a tio n a l fo rm ca­ pable o f re sp o n d in g q u ic k ly to s h iftin g m a rk e t c o n d i­ tio n s and p ro d u c t dem and” (P iore, 1986, p. 146). I t is a t th is m o re s p e c ific and n a rro w le v e l th a t the concept o f fle x ib ility becom es b o th m ore diverse and m ore loaded, since the d e fin itio n s tend to con­ centrate o n th e s p e c ific m eans fo r a c h ie v in g the a d a p ta b ility o f e m p lo y m e n t practices to p a rtic u la r conditions. T h e d iv e rs ity is seen in d iffe re n t em phasis. F o r instance, despite the c o m m o n em phasis in b o th the U n ite d States and E urope on seeking less r ig id em ­ p lo y m e n t re la tio n s, the concept o f LMF has progress­ iv e ly taken on d iffe re n t m eanings as a consequence o f the d iffe re n t system s o f in d u s tria l re la tio n s pre­ v a ilin g in each c ountry, and thus d iffe re n t e m p lo y e r’s needs. T hus, in the U n ite d States the fle x ib ility de­ bate has been m a in ly re lated to the fre e d o m to d e p lo y la b o u r w ith in the enterprise, whereas in E uropean countries the m a in concern in the firs t h a lf o f the 1980s was w ith the fre e d o m o f e m ployers to la y o f f and discharge w o rke rs in response to e co n o m ic co n ­ ditio n s , w h ile b y the second h a lf o f the decade the debate also centered on m a k in g fle x ib ility m o re c o m ­ p a tib le w ith e m p lo y m e n t security. M o re o v e r, the fle x ib ility issue has also been present in som e de­ v e lo p in g countries, w here em phasis has been on the re fo rm o f la b o u r law s w h ic h a ffe ct jo b se cu rity and lo w e r in d ire c t la b o u r costs (T okm an, 1989, p. 39). LABOUR M A RKET FLEXIBILITY: WHAT DO ES IT REALLY M EA N ? • RICARDO A. LA G O S 84 C E P A L REVIEW 54 • M o re o v e r, on lo o k in g m o re c lo s e ly at the d iffe r­ e n t v ie w s on LMF one notices th a t the concept has becom e loa de d o r bia sed in ce rta in d ire ctions. O ne v ie w m a in ta in s th a t fle x ib ility is m e re ly the ra tio n a l response, at the la b o u r m a rk e t le v e l, to changes in the e c o n o m ic e n v iro n m e n t. F le x ib ility , i t is held, consists o f adjustm ents o f the la b o u r fo rc e and hours o f w o rk an d /o r the w age stru ctu re to unstable and flu c tu a tin g e c o n o m ic c o n d itio n s . I t is argued th a t adjustm ent to changes is s lo w and in s u ffic ie n t due to in s titu tio n a l rig id itie s - a circum sta nce th a t ca lls fo r the in tro d u c ­ tio n o f m o re fle x ib le e m p lo y m e n t re la tio n sh ip s (OECD, 1986b). A n o th e r v ie w m a in ta in s th a t fle x ib ility is a e u ­ p h e m is m fo r ch a n g in g p o w e r re la tio n sh ip s in the p ro d u c tio n process and fo r g ro w in g la b o u r inse­ c u rity : i t is o n ly a fa sh io n a b le ca tc h w o rd d is g u isin g attem pts to reverse the gains m ade b y w orkers d u rin g the p o s t-w a r y e a rs .1 F le x ib ility conceals the e m ­ p lo y e rs ’ desire to becom e m ore c o m p e titiv e b y m a k ­ in g c o n d itio n s o f e m p lo y m e n t less secure rather than b y in tro d u c in g advanced te c h n o lo g y o r p ro m o tin g a D E C E M B E R 1994 b e tter-trained w o rk fo rc e . I t is argued th a t fle x ib ility has the h id d e n purpose o f depressing real wages, en­ d in g the p ro te c tio n o f w orkers, and speeding up the pace o f w o rk (European Trade U n io n Institute, 1985). W ith o u t e n te rin g in to the ab o ve d is c u ss io n , su ffic e i t to say th a t b o th v ie w s stress m e a n in g fu l aspects o f the debate. O n the one hand, the need to in tro d u c e changes in la b o u r in s titu tio n s does seem to be necessary as a consequence o f changes in econ­ o m ic c o n d itio n s , expressed in greater trade lib e ra liz a ­ tio n and the g lo b a liz a tio n o f m arkets, te ch n o lo g ica l change, changes in the org a n iza tio n o f p ro d u c tio n , and new patterns o f in te rn a tio n a l la b o u r flo w s . O n the o th e r hand, the in tro d u c tio n o f greater fle x ib ility has been associated w ith negative effects fo r w o r­ kers: in c o m e in e q u a lity, loss o f jo b s , and the various w ays in w h ic h w o rk e rs ’ co n d itio n s becam e m ore pre­ carious (H a rris o n and B luestone, 1987; D e B andt, 1991). T hese tw o aspects re q u ire the c o n s tru c tio n o f fo rm a l m e chanism s (i.e ., n e w re g u la tio n s ) w h ic h re d u c e th e costs o f f le x ib ilit y and a t the sam e tim e p ro m o te changes in la b o u r in s titu tio n s . Ill Different forms of labour market flexibility A s m e n tio n e d above, th e co n ce p tu a liza tio n o f LMF assumes d iffe re n t fo rm s , d ep en d ing on the p a rtic u la r aspects w h ic h are em phasized as w ays o f a ch ie vin g g re a te r degrees o f f le x ib ilit y . In the fo llo w in g pages, an a tte m p t is m a de to id e n tify these fo rm s and e x p la in th e ir ra tio n a le . W ith th is in m in d , three d iffe re n t type s o f f le x ib ilit y are re v ie w e d : la b o u r co st f le x ib ilit y , n u m e ric a l f le x ib ilit y a nd fu n c tio n a l fle x ib ilit y . 1It is argued that the expression “labour flexibility” is in itself a loaded term. The term “flexibility” bears a positive connotation, the ability to adapt to circumstances, whereas its opposites “in­ flexibility” or “rigidity” have clear pejorative connotations. In this context, if labour or labour markets are becoming more flex­ ible, then that must be socially and economically desirable (Standing, 1986a, p. 2). 1. Labour cost flexibility O f the m a n y fo rm s o f rig id itie s lik e ly to im pede the sm ooth w o rk in g o f la b o u r m arkets, rig id ity o f la b o u r costs is the m o st debated. “ L a b o u r cost fle x ib ility ” is understood to m ean the degree o f responsiveness o f n o m in a l w age and n on-w age costs to changes in e co n o m ic co n d itio n s in general (e.g., in fla tio n , p ro ­ d u c tiv ity , term s o f trade, dem and) an d /o r the p e rfo r­ m ance o f in d iv id u a l firm s . L a b o u r cost fle x ib ility , therefore, in v o lve s tw o elem ents: w age and n o n ­ w age costs. T h e firs t refers to the gross rem uneratio n p a id to the w age earners. N o n -w a g e o r in d ire c t costs re fe r to m a n d a to ry costs and charges p a id b y the em ­ p lo y e r (e.g., frin g e b e n e fits, p a y ro ll taxes, w o rk e rs ’ com pensation insurance, etc.). T h e c la im m ade b y advocates o f th is fo rm o f fle x ib ility is th a t an im p o rta n t elem ent -th o u g h n o t the o n ly o n e - b e h in d h ig h levels o f u n e m p lo y m e n t is LA BO U R MARKET FLEXIBILITY: WHAT D O E S IT REALLY M EA N ? • RICARDO A. LAGOS C E P A L REVIEW 54 the d o w n w a rd r ig id ity o f w age costs.2 In fa c t, a w id e ­ ly disse m in a ted v ie w argues that the absence o f this type o f fle x ib ility e xp la in s to a large e x te n t the d iffe r­ e nt e m p lo y m e n t p e rfo rm a n c e o f the U n ite d States and E u ro p e a fte r th e tw o o il shocks. I t is argued th a t in m a n y E u ro pe a n c o u n trie s , u n lik e the U n ite d States, real la b o u r co st in e rtia caused th e m a in ad­ ju s tm e n t to the o il sho ck and the p ro d u c tiv ity s lo w ­ d o w n to take the fo rm o f q u a n tity adjustm ents (i.e ., d e c lin e s in e m p lo y m e n t) ra th e r th a n p ric e a d ju s t­ m en ts (i.e ., w a g e a d ju s tm e n ts ) (OECD, 1986b, pp. 9 -1 0 ; Sachs, 1983). M o re o v e r, n o n -w a g e costs - w h ic h have in ­ creased faster th a n w ages th e m s e lv e s - also bear som e re s p o n s ib ility fo r the h ig h leve ls o f u n e m p lo y ­ m ent. S ince th e ir c o n trib u tio n to to ta l la b o u r costs is s ig n ific a n t, th e y p r o v id e an in c e n tiv e to re p la c e la b o u r b y c a p ita l (S a rfa ti and K o b rin , 1988, p. 8 ) . 3 I n th is analysis, one w a y o f re d u c in g u n e m p lo y ­ m e n t and in tro d u c in g w age fle x ib ilit y is to re m o v e o r re la x the va rio u s b a rrie rs that p re v e n t w ages fro m ad ap ting . T h e m o s t fre q u e n tly c ite d b a rrie rs in c lu d e w a g e -in d e x in g , guaran teed m in im u m w ages, h ig h le v e ls o f u n e m p lo y m e n t b e n e fits , and h ig h n o n ­ w age costs. I t is m a in ta in e d th a t th e ty p e o f fle x i­ b ilit y thus o b ta in e d co n s titu te s a source o f jo b c re a tio n and reduces u n e m p lo y m e n t. T h e ra tio n a le is th a t th e d ro p in w a g e cost s h o uld increase p ro fits and s tim u la te in ve stm e n ts, re s u ltin g in m o re jo b s . M o re o v e r, as the cost o f la b o u r fa lls re la tiv e to the cost o f o th e r fa cto rs o f p ro d u c tio n the c a p ita l/la b o u r s u b s titu tio n ra tio s h o u ld be m o d ifie d in fa v o u r o f labour. T h e v ie w fa v o u rin g th e re m o va l o r re la x a tio n o f m in im u m wages relates to tw o aspects. F irs tly , to the e xte n t th a t wages re fle c t in d iv id u a l p ro d u c tiv ity m ore a ccurately (due to the re d u c tio n o r re m o v a l o f m in i­ m u m s ta tu to ry w ages), som e p o te n tia l lo w -w a g e jo b s m ay be generated and thus e m p lo y m e n t o p p o rtu n itie s w il l in c re a s e fo r th o s e p ric e d o u t o f th e la b o u r m a rk e t b y h ig h and r ig id w ages. 2 Freeman finds, for a given output performance, a significant real wage/employment trade-off across OECD countries and across industries within countries (Freeman, 1988, p. 77). 3 These authors also noted that high non-wage costs “discourage the recruitment of certain categories of workers in respect of which they are relatively high (young workers in particular)”. • D E C E M B E R 1994 85 S econdly, b y a b o lis h in g o r re la x in g statutory m in im u m w age requirem ents i t is b e lie v e d th a t u n ­ e m p lo y m e n t o f yo u n g people c o u ld be reduced (C la rke , 1985). I t is argued th a t in general yo u n g w o rke rs have fe w s k ills d ire c tly o f va lu e to an e m ­ p lo y e r; th a t they are unused to w o rk d is c ip lin e ; and that th e y have little fir m c o m m itm e n t to a p a rtic u la r o c c u p a tio n o r in d u s try , thus g iv in g ris e to h ig h tu rn o v e r rates. U n d e r these circum stances, yo u n g w o rk e rs present h ig h e r re c ru itm e n t, screening and tra in in g costs fo r em p lo ye rs and, i t is argued, th e ir wages should re fle c t these differences in costs and p ro d u c tiv e value in re la tio n to those o f a d u lt w orkers. I f not, em ployers w ill p re fe r to h ire adults. T h e above re asoning has been questioned on several grounds. F irs tly , i t is o fte n d isputed th a t greater degrees o f w age fle x ib ility w ill lead to lo w e r levels o f unem ploym ent. Som e studies in d ic a te th a t a sharp general fa ll in wages w o u ld do little to reduce un e m p lo ym e n t (B o ye r, 1988, pp. 237-23 9). Secondly, i t is p o in te d o u t that the th e o re tica l fra m e w o rk u n d e rly in g the c a ll fo r greater w age fle x ­ ib ility (i.e., the neoclassical analysis o f la b o u r de­ m and) is open to question (Rosenberg, 1989b, p. 396). R osenberg refers to a study b y B o w le s and B o y e r w here a m acroeconom ic m o d e l is developed “ th a t takes account o f the in flu e n c e o f the w age on b o th aggregate dem and and the endogenous d e te rm in a tio n o f o u tp u t per la b o u r hour, and fin d s th a t the le v e l o f e m p lo y m e n t m ay respond e ither p o s itiv e ly o r nega­ tiv e ly to p a rtic u la r changes in the real w age rate” . 4 M o re o ve r, R osenberg states th a t e m p iric a l w o rk on the b e h a v io u r o f real wages over the business c y cle also does n o t support the neoclassical th e o ry o f la ­ b o u r dem and. R esearch b y M ic h o n on “ ...c y c lic a l m ovem ents in real w ages o v e r 1950-1982 fo r the U n ite d States, Canada, Japan, France, the [fo rm e r] F ederal R e p u b lic o f G erm a n y and the U n ite d K in g ­ dom ... dem onstrates th a t there is no necessary c y c li­ c al w age b e h a vio u r co m m o n to these s ix c o untries” . 5 T h ird ly , i t has been p o in te d o u t that, in some cases, in spite o f the in tro d u c tio n o f greater fle x ib ility wages m a y n o t fa ll acco rd in g to s upply and dem and, and d iffe re n t w age levels m ay p re v a il fo r w h a t ap­ pears to be the same o ccupational category. W h a t 4 Rosenberg (1989b), p. 396, based on Bowles and Boyer (1988). 5 Rosenberg (1989b), p. 396, based on Michon (1987). LABOUR MARKET FLEXIBILITY: WHAT D O E S IT REALLY MEANT • RICARDO A. LAG OS 86 C E P A L REVIEW 54 m a y be seen as a d is to rtio n o f the la b o u r m a rke t m ay be considered p e rfe c tly ra tio n a l b y those in v o lv e d in e m p lo y m e n t re la tio n sh ip s, how ever. T h is is the case, fo r e xam ple , w h e n em p lo ye rs in c u r la b o u r costs in h irin g , te stin g and tra in in g w o rke rs and w is h to re ta in the tra in e d w o rk e rs so th a t the y can recover th e ir in ve s tm e n t in th e m , fo r w h ic h purpose they are p re ­ p ared to p a y th e w o rk e rs h ig h e r wages th a t they c o u ld o b ta in elsew here. T h e greate r the e x te n t o f firm -s p e c ific s k ills , the m o re d iffic u lt i t is to expand e m p lo y m e n t th ro u g h re d u c tio n o f wages (ILO, 1989, pp. 7 -8 ). In th is case i t is in the e m p lo ye rs’ o w n in te re st to p a y w ages above th e m a rke t cle a rin g le v e l. T h e re are tw o o th e r cases w he re la b o u r m a rke t d is to rtio n s m a y p ro v e b e n e fic ia l fo r em ployers. Since re la tiv e ly h ig h e r w ages m a y v e ry lik e ly increase the cho ice o f a p p lica n ts fo r jo b s the q u a lity o f the w o rk ­ fo rc e is im p ro v e d . Besides, h ig h e r wages p ro v id e an in c e n tiv e fo r h ig h e r p ro d u c tiv ity fro m the e x is tin g w o rk fo rc e , thus lo w e rin g u n it la b o u r costs (ILO, 1989, p p . 7 -8 ). F o u rth ly , i t has been argued th a t the re m o va l o f m in im u m w age m echanism s w o u ld im pede te ch n ica l progress b y re d u c in g pressure to m o de rnize fa c to ry m achine ry. T h is c o u ld c o n trib u te to reduced c o m p e ti­ tiveness, the clo sure o f firm s , and thus m ore u nem ­ p lo y m e n t (S ta nd ing , 1986b, p. 14). F ifth ly , th e c la im that u n e m p lo ym e n t benefits in som e cou ntries are a fa c to r in p re ve n tin g wages fro m fa llin g s u ffic ie n tly to generate additional e m ploym ent is n o t co n clu sive . R esearch on the effects o f u n e m p lo y ­ m e n t b e n e fits o n u n e m p lo y m e n t show s th a t cross­ c o u n try d iffe re n ce s in u n e m p lo y m e n t com pensation c an no t e x p la in the “ larg e rise in u n e m p lo ym e n t d ura­ tio n in E u ro pe , o r the enorm ous rise o f u n e m p lo y ­ m e n t le ve ls in the U n ite d K in g d o m , France, and the [fo rm e r] F e de ral R e p u b lic o f G e rm a ny com pared w ith those in S w eden and the U n ite d States” . 6 T h o u g h the d iscussion on w age fle x ib ility is fa r fro m settled, som e trends tow ards fin d in g w ays to o ve rco m e w age r ig id ity can be detected. O ne such tre n d is th e bypa ssin g o f m in im u m w age regulations and o th e r sta tu to ry w age agreem ents, e ith e r th ro u g h le g is la tiv e re fo rm , n o n -im p le m e n ta tio n o f la w s o r th ro u g h the use o f w o rk arrangem ents th a t escape th e ir ju ris d ic tio n s (e.g., hom e w o rk and subcontract­ in g ) (S tanding, 1986a, p. 31). 6 Burtless (1987), p. 155. Quoted by Rosenberg (1989b). • D E C E M B E R 1994 T h e tendency tow ards w age c o n tro l is also seen in the e ffo rts o f several countries to secure agree­ m ents p ro v id in g fo r w age m o d e ra tio n and d e in d e x ­ a tion. 7 T h e m a in g oal o f these e ffo rts is th a t w age increases m u st depend o n p ro d u c tiv ity gains. T here seems to be a strengthening o f trends to ­ w ards “ tw o -tie r” o r “ m u ltip le -tie r” wages structures. In A u s tra lia a tw o -tie r w age fix in g system w as in tro ­ duced in 1987 in w h ic h w age increases u p to a c e il­ in g o f 4% c o u ld be gained i f in d u s try p ro d u c tiv ity and e ffic ie n c y are enhanced (R im m e r and Zappala, 1988). V arious fo rm s o f tw o -tie r p a y structures have em erged in C anada and the U n ite d States in w h ic h new em ployees are taken o n at lo w e r wages o r bene­ fits than established em ployees d o in g the same w o rk (W a lker, 1987). F urth erm ore, e xp e rim e n ta l fo rm s o f “ p a rtic ip a ­ tio n w ages” are b e c o m in g m o re popular. T h e y in ­ clude schemes o f paym ents b y results, sh ifts tow ards the use o f bonus system s instead o f p a rt o f the m on e y w age, o r conversion o f p a rt o f the to ta l re m u n e ra tio n in to a fle x ib le co m ponent lin k e d to the perform ance and characteristics o f f ir m s .8 In some cases the p a y m e n t system has becom e m o re fle x ib le th ro u g h w age re d u ctio n s o r freezes (n o m in a l w age red u ctio n s), in re tu rn fo r som e in ­ crease in e m p lo y m e n t s e cu rity (“ concession bargain­ in g ” ). In this regard, i t is n o te w o rth y th a t a ccording to a E uropean survey b y the E uropean C o m m u n ity a s ig n ific a n t share (5 1 % ) o f w o rk e rs w ere w illin g to accept a te m p o ra ry w age cu t i f th e ir fir m w e re in d iffic u ltie s -p ro v id e d that, once the fir m recovers, the w o rk e rs re ce ive a co rresponding share o f the p ro fits (C o m m is s io n o f the E uropean C o m m u n itie s, 1985, pp. 1-6). 2. Numerical flexibility N u m e ric a l fle x ib ility refers to tw o aspects: adjust­ m ent o f the w o rk fo rc e and a d ju stm e n t o f w o rk in g hours. T h e firs t aspect is k n o w n as “ e xte rn a l n u m e ri­ cal fle x ib ility ” and m eans the a b ility o f firm s to in ­ crease o r decrease the num bers o f w o rk e rs in 7 Evidence of trends in deindexation policies for Australia, Bel­ gium, Denmark, Italy and Spain is given by Sarfati and Kobrin (1988). 8 This approach reflects the ideas put forward by Weitzmann (1984) whereby wage increases are linked not only to individual productivity but also to the overall performance of the enterprise and its workforce. LABOUR M ARKET FLEXIBILITY: WHAT D O E S IT REALLY M E A N ? • RICA RD O A. LA G O S C E P A L R E V IEW 54 response to v a ria tio n s in dem and a n d /o r te c h n o lo g i­ cal changes. T h e second aspect is re fe rre d to as “ in ­ te rna l n u m e ric a l fle x ib ility ” and relates to the fre e d o m th a t firm s h ave fo r m o d ify in g the n u m b e r o f w o rk in g hours w ith o u t ch a n g in g the n u m b e r o f em ­ ployees. a) External numerical flexibility T h e argum ents fo r increased exte rn al n u m e ric a l fle x ib ility (o r e m p lo y m e n t fle x ib ility ) are c lo s e ly re ­ la te d to th a t fo r w age fle x ib ility . I t is m a in ta in e d th a t the re g u la tio n s fo r p ro te c tin g e m p lo y m e n t are too re ­ s tric tiv e and thus im pe d e th e adaptation o f m an p o w e r resources to m a rke t co n d itio n s . T h is v ie w is also g re a tly in flu e n c e d b y the o b se rvatio n o f the p e rfo r­ m ance o f e m p lo y m e n t a nd u n e m p lo ym e n t betw een the U n ite d States and E u ropean countries. I t is argued th a t th e re la tiv e ly lo w u n e m p lo y m e n t le ve ls in the U n ite d States are, to an im p o rta n t exte nt, a conse­ quence o f A m e ric a n e m p lo y e rs ’ fre e d o m to la y o f f o r discharge w o rke rs in response to e co no m ic changes. I t is h eld th a t enhanced e m p lo y m e n t fle x ib ility w ill lead to increased e m p lo y m e n t and a lo w e rin g o f u n e m p lo y m e n t. T h e ra tio n a le b e h in d the c a ll fo r g reate r e m p lo y m e n t fle x ib ilit y stresses th a t law s w h ic h p ro te c t e m p lo y m e n t b y m a k in g dism issals d iffic u lt and expensive p re v e n t firm s fro m re c ru itin g e x tra w o rke rs as needed, because firm s k n o w th a t they w ill n o t be able to dism iss th e m ea sily i f c ir­ cum stances change (In te rn a tio n a l O rg anisation o f E m p lo ye rs, 1985; OECD, 1986a; ILO, 1986b). F u rth e r­ m o re , firm s face d iffic u ltie s in esta blishin g m o re fle x ib le and d iv e rs ifie d fo rm s o f c o n tractual re la tio n ­ ships (so -ca lle d “ a ty p ic a l fo rm s o f e m p lo y m e n t” ) . 9 These circum sta nces encourage the su b stitu tio n o f c a p ita l fo r labour. I t is th e re fo re co nsidered th a t m easures w h ic h d im in is h rig id itie s re g a rd in g d is ­ m issal (i.e ., measures to m ake dism issals cheaper and easier) w ill lo w e r la b o u r costs, w ith tw o effects: firs t, th ey w ill encourage s u b s titu tio n o f la b o u r fo r ca pital, thereb y fo s te rin g e m p lo y m e n t g ro w th , and second, easier and less c o s tly arrangem ents fo r dism issals sho uld in c e n tív a te e m p loye rs to h ire e xtra w o rk e rs in p eriod s o f g ro w th (R osenberg, 1989a, p. 11). M o re ­ over, i f firm s are a llo w e d to re ly m ore on a ty p ic a l fo rm s o f em p lo ym e n t, th e y w o u ld be able to o ffe r m o re jo b s . 9 There is a call for more intensive use of fixed-term contracts, part-time work and temporary work. • D E C E M B E R 1994 87 T h e w a y to enhance e m p lo y m e n t fle x ib ility is m a in ly th ro u g h the re la x a tio n o f d ism issal law s o r in d u s tria l re la tio n s agreem ents w h ic h regulate them , and, to a lesser e xte n t, th ro u g h th e extension o f fix e d te rm contracts, te m p o ra ry w o rk and p a rt-tim e w o rk . In fact, a g o o d d eal o f the discussion is centered on re g u la tio n s g o v e rn in g d ism issals -a d v a n c e notice, amounts o f compensation, pre-eminence o f the seniority ru le , p rio r agreem ents o f v arious bodies, etc. C ritic is m s c oncerning this ty p e o f fle x ib ility have questioned its a lle g e d ly p o s itiv e e ffe c t on u n ­ e m p lo y m e n t. A lth o u g h studies are n o t conclusive, there is evidence w h ic h suggests th a t the effects o f “ la b o u r fle x ib ility measures in term s o f jo b s are...m eagre and the m o s t th o ro u g h analysis o f n u ­ m e ric a l fle x ib ility even reveals an increase rather than a decrease in u n e m p lo y m e n t” (M e u ld e rs and W ilk in , 1987, p. 1 5 ) .10 M o re o v e r, the w id e ly dissem inated v ie w about E u ro p e ’ s s tric te r re g u la tio n s c o ncerning dism issals has also been questioned. F irs t, the co rre la tio n be­ tw een h ig h u n e m p lo y m e n t rates and r ig id la b o u r m arkets does n o t a p p ly to a ll cases. T h e N o rd ic coun­ tries and A u s tria have k e p t lo w levels o f u n e m p lo y ­ m e n t in spite o f h a v in g “ rig id ” la b o u r m arkets. Second, i t has been argued th a t the degree o f fle x i­ b ility a v a ila b le to e m p lo ye rs in E urope has been u n ­ derstated, w h ile th a t a v a ila b le in the U n ite d States has been e xa g g e ra te d .11 A lth o u g h A m e ric a n em ­ plo ye rs are free to cause e m p lo y m e n t le ve ls to va ry w ith m a rk e t requirem en ts, they are re q u ire d to re ­ spect rules and p ro c e d u re s 12 w h ic h m ake dism issals v e ry expensive, and thus in h ib it new hires. In the case o f E uropean re g u la tio n s g o verning jo b security, a lthough there is s ig n ific a n t v a ria tio n am ong coun­ tries these rules are c o n sid e ra b ly less r ig id than is claim e d, th e ir m a in e ffects being to d elay e m p lo y ­ m e n t adjustm ent and m ake i t m ore costly. F u rth e rm o re , it has been argued th a t the re la xa ­ tio n o f rules g o v e rn in g dism issals encourages a s h ift o f e m p lo y m e n t patterns fro m fu ll-tim e , lo n g -te rm w o rk e rs to w a rd s m o re p a rt-tim e , te m p o ra ry and 10 Other studies which refute the positive effects of external numerical flexibility on employment are those by Boyer (1987) and Michon (1987). 1 See Piore (1986), p. 155; Flanagan (1987), p. 164 (reference 1 taken from Rosenberg (1989b), p. 396); Emmerson (1988), p. 777; and Rosenberg (1989a), p. 10, note 10. 12 On such matters as employees’ seniority, allocation of work in the enterprise, and the distribution of tasks. LABOUR MARKET FLEXIBILITY: WHAT D O E S IT REALLY M EA N ? • RICA RD O A. LA G O S 88 C E PA L R E V IEW 54 fix e d -te rm w o rk e rs , n o t co vere d b y e m p lo y m e n t p ro ­ te c tio n le g is la tio n .13 T h is m a y lead to the creation o f a category o f w o rke rs w h ose co n d itio n s o f e m p lo y ­ m e n t are g e n e ra lly in fe r io r to those e n jo ye d b y fu ll­ tim e w o rk e rs .14 In tu rn , it is argued th a t this w o u ld lead to the in s titu tio n a liz a tio n o f a d ua l la b o u r m a rke t c o m p ris in g on one side p o o rly p a id and unstable jo b s and on the o th e r side stable and w e ll-p a id occupa­ tion s (C la rke , 1985; P io re , 1986; S ta nding, 1986b; M eu ld e rs and W ilk in , 1987, and ILO, 1989). b) Internal numerical flexibility Increased f le x ib ilit y o f w o rk in g tim e arrange­ m ents (i.e., re d u c tio n a nd re s tru c tu rin g o f w o rk in g tim e ) is considered as a p o ssib le a lte rn a tiv e to w age o r e m p lo y m e n t adjustm ents in the face o f changing e co n o m ic co n d itio n s. T h e v a rie ty o f aspects covered b y th is fo rm o f f le x ib ility is w id e : fix in g o f n o rm a l o r m a x im u m w e e k ly (m o n th ly , y e a rly ) hours o f w o rk , v a rio u s fo rm s o f staggered w o rk , o rg a n iz a tio n o f o v e rtim e and com pe nsa tory leave, w o rk outside a uth o rize d hours (w e e ke n d w o rk ), and e n try in to o r re tire m e n t fro m the la b o u r fo rce (M e u ld e rs and W ilk in , 1987, p. 9; il o , 1989, p. 18; o e c d , 1989, p. 15; R osenberg, 1989a, p. 9). T h e discussion on in te rn a l n u m e ric a l fle x ib ility (o r fle x ib ility o f w o rk in g tim e ) is less contested than th a t on w age a nd e m p lo y m e n t fle x ib ility . In p rin ­ cip le , th is fo rm o f f le x ib ility is seen as an area o f p o te n tia l m u tu a l b e n e fit fo r w orke rs and em ployers and one w h ic h m ay h e lp to re co n cile p a rt o f th e ir c o n flic tin g interests (M e u ld e rs and W ilk in , 1987, p. 9; ILO, 1989, p. 18). R e d u ctio n o f w o rk in g hours has been the fo rm o f fle x ib ility w h ic h has h ad the greatest acceptance. F o r trade unions, it “ fits th e idea o f s o lid a rity b e ­ tw e en w o rk e rs in th e fig h t against u n e m p lo y m e n t and w ith a c e rta in fairness in the sharing o f e m p lo y ­ m e nt” (S a rfa ti and K o b rin , 1988, p. 26). Besides, 13 According to some studies, the development of these em­ ployment patterns gives grounds for maintaining that these forms of LMF should be seen as a cause of unemployment rather than a solution to it. This assertion is based on the ob­ servation that chronically high and rising unemployment has coincided with these growing forms of LM F (casual and tem­ porary forms of work, shift from collective bargaining to indi­ vidual settlements, etc) (Standing, 1986a, and Rodgers and Rodgers, 1989). 14 Workers whose hours of work or incomes do not reach certain thresholds may be excluded from many of the basic provisions of protective legislation or benefits (ILO, 1989, p. 19). • D E C E M B E R 1994 in te rn a l n u m e ric a l fle x ib ility fits in w ith the changing attitudes tow ards w o rk and leisu re, w here w orkers seek m ore freedo m to organize th e ir p riv a te liv e s .15 E m p lo ye rs are p a rtic u la rly interested in the e x ­ tension o f operating hours b eyond the n o rm a l w o rk ­ in g day. Because o f the h ig h cost o f new equipm ent, em ployers seek to operate i t as lo n g as p o s s ib le ,16 and thus w a n t to in tro d u ce u p to three o r even fo u r w o rk in g sh ifts (OECD, 1989, p. 15). In a d d itio n , it is argued th a t increased in te rn a l n u m e ric a l fle x ib ility c o u ld help to achieve m ore e ffic ie n t use o f w o rk in g tim e b y a llo w in g closer adaptation o f w o rk in g tim e to flu c tu a tio n s in d e m a n d .17 W ith regard to the e m p lo y m e n t effects o f this fo rm o f fle x ib ility , it is m a in ta in e d that these “ depend on the p o litic a l and social ob je ctive s w ith in w h ic h i t is set” (M e u ld e rs and W ilk in , 1987, p. 9 ) and thus on the nature o f the w o rk in g tim e fle x ib ility b e in g d is ­ cussed. F o r exam ple, the shortening o f the w o rk in g w eek m ay create jo b s o r at least m a in ta in jo b s th a t w o u ld o therw ise disappear, b y sharing the a va ila b le jo b s am ong a greater nu m b e r o f w orkers. R e d u ctio n o f the re tire m e n t age, in contrast, substitutes y o unger w orkers fo r o ld e r ones and m a y lo w e r u n e m p lo y m e n t b y s h rin k in g the la b o u r fo rc e ra th e r than b y creating jo b s (R osenberg, 1989a, p. 12). In spite o f the p o s itiv e m o o d concerning fle x ib le hours o f w o rk , som e c ritic is m s have been m ade. I t is argued th a t there is a danger o f m a rg in a liz in g various categories o f w orkers and th a t c o n flic ts m ay arise betw een n ew styles o f w o rk and the tra d itio n a l rh y th m o f fa m ily , social and school life , o r betw een w o rk in g tim e and le isu re tim e (G audier, G reve, G rootings and H ethy, 1986, and OECD, 1986a). Trade unions have objected th a t social se cu rity and re tire m e n t schemes s till operate on the basis o f f u ll­ tim e e m p lo y m e n t fo r fix e d hours and are in c o m ­ p a tib le w ith fle x ib le hours o f w o rk (E uropean Trade U n io n In stitu te , 1985). 15 This support is partly reflected in the results of a survey among employees carried out by the European Community. Most of the workers covered by the survey would accept hours of work fixed monthly (39%) or even annually (16%), and one in three would be willing to work evenings and Saturdays in exchange for reduced annual hours of work (Commission of the European Communities, 1985, pp. 1-6. 16 In this way fixed capital costs can be distributed over a greater number of hours and units of output. 17 Business intensity may vary during the hours of the day or on certain days of the week or the month, as in the case of retail stores, or over longer seasonal periods, as is frequent in manu­ facturing (ILO, 1989, p. 18). LABO U R MARKET FLEXIBILITY: WHAT D O E S IT REALLY M EA N ? • RICARDO A. LA G O S C E P A L 3. RE VIEW 54 Functional fle xib ility F u n c tio n a l f le x ib ility concerns the a b ility o f a fir m to use its w o rk fo rc e m o re e ffe c tiv e ly b y v a ry in g the w o rk p e rfo rm e d in response to ch an ging w o rklo a d s and the p o s s ib ilitie s o ffe re d b y n e w technologies. T h is fo rm o f fle x ib ility relates to the m o b ility o f w o r­ kers w ith in th e fir m ; i t in v o lv e s the ca p a city o f firm s to re o rg a n ize jo b s , w h ic h req u ire s access to a w o rk ­ fo rc e capable o f c a rry in g o u t d iffe re n t tasks o f the p ro d u c tio n process; i t ca lls fo r operatives able to adapt to a v a rie ty o f tasks o f va ryin g levels o f com plex­ ity and in volve s such aspects as m u ltis k illin g , jo b rota­ tion, w o rk units, changes in the fun ction al d iv is io n o f labour, re train in g and upgrading (M e u ld e rs and W ilk in , 1987, p. 8). T o sum up , fu n c tio n a l fle x ib ility “ appeals to the k n o w -h o w and s k ills o f w o rke rs and... to th e ir a b ility to m aster va rio u s segm ents o f the same p ro d u c tiv e process” (B o ye r, 1987, p. 109). F ro m the w o rk e rs ’ v ie w p o in t, fu n c tio n a l fle x i­ b ility is p re fe ra b le to w age a n d /o r e m p lo y m e n t fle x i­ b ility , since i t is n o t based o n w age re ductions o r re stric tio n s on w o rk e rs ’ rig h ts . T h is ty p e o f fle x ib ility enables th e m to m ake b etter use o f th e ir k n o w -h o w and s k ills , ge t m o re in v o lv e d w ith the p ro d u c tio n process, and e ve n tu a lly , p la y a m ore a c tiv e ro le in the m anagem ent o f firm s . I t is seen as one o f the w ays o f re sponding to w o rk e rs ’ aspirations and at the same tim e as one o f the to o ls en a b lin g the la b o u r m arket to respond to the re o rg a n iza tio n o f p ro d u c tiv e systems (OECD, 1990, p. 24). T h e s tim u lu s fo r seeking increased fu n c tio n a l fle x ib ility has been m a in ly the in tro d u c tio n o f new technology. S ince n e w e q u ip m e n t tends to reduce jo b b ound a rie s, firm s are fo rc e d to seek m u lti-s k ille d w o rke rs w h o can adapt to d iffe re n t fu n c tio n s w ith in the labour process. In some cases, however, the stim u­ lus emanates fro m the need to cut costs: sig nificant cost savings m ay result fro m reorganizing the existing pro­ duction process and m a kin g the corresponding changes in the w a y la b o u r is used (ILO, 1989, p. 19). M o re o v e r, fu n c tio n a l fle x ib ility is p u t fo rw a rd as a w a y to han dle an in c re a s in g ly un ce rta in business e n v iro n m e n t (R osenberg, 1989a, p. 12). A s in certain sectors dem and has becom e m ore va ria b le , due to the em ergence o f m o re d iv e rs ifie d and specialized pat­ terns o f c o n su m ptio n , a nd firm s are fo rce d to respond to m a rke t signals in sho rte r p eriods o f tim e , resources m u st be able to be s h ifte d to new uses. T h is is m ade possible b y th e e xistence o f b o th m o d e m and m ore • D E C E M B E R 1994 89 fle x ib le te c h n o lo g y and a p o ly v a le n t m u lti-s k ille d w o rk fo rc e . These elem ents enhance e m p lo y e rs ’ c a p a c ity “ to h a n d le b o ttle n e c k s o r slackness in p ro d u c tio n b y m o v in g la b o u r ra th e r th a n h irin g and fir in g ” (R im m e r a n d Z a p p a la , 1988, p. 5 6 8 ). A central e lem ent c o n c e rn in g fu n c tio n a l fle x i­ b ility , then, is the presence o f w orkers w ith several s k ills w h ic h a llo w th e m to s w itc h fro m one a c tiv ity o r jo b to another. T h is is the reason w h y tra in in g p rogram m es are in c re a s in g ly in co rp o ra te d in to the fo rm a l re la tio n sh ip s o f e m p lo ye rs and trade unions. W h ile advances have been m ade in the w a y tra in in g is p erceived b y b o th e m p lo y e rs and w orkers, p ro b ­ lem s rem ain. F o r e xa m p le , n o t a ll w o rke rs b e n e fit e q u a lly fro m new tra in in g program m es. Som e em ­ p lo y e rs m a y be re lu c ta n t to “ in v e s t resources on tra in in g o ld e r w o rk e rs , on the grounds th a t there is a shorter expected p a y -b a c k p e rio d o r th a t i t is m ore exp e n sive and c o n sequently m a y p re fe r re c ru itin g yo u n g w o rke rs” (ILO, 1989, p. 21). A n o th e r p ro b le m th a t has been h ig h lig h te d refers to the la c k o f p o lic ie s c o n c e rn in g anti-p o a ch in g regu­ la tio n s (i.e., p re v e n tin g o th e r enterprises fro m attract­ in g n e w ly -tra in e d w o rk e rs w ith o u t bearing the costs o f tra in in g )- a circum stance that m ay reduce em ­ ployers’ interest in p ro v id in g tra in in g (ELO, 1989, p. 21). F u n c tio n a l fle x ib ility depends h e a v ily o n the re ­ d u c tio n o f jo b d e m arcation barriers. H o w e v e r, e x ­ p lic it o r im p lic it rules a b o u t m anning requirem ents and the types o f w o rk th a t d iffe re n t occu p a tio n a l cla ssifica tio n s can undertake are com m on and thus h in d e r the d e v e lo p m e n t o f th is ty p e o f fle x ib ility . T h is is e s p e c ia lly so in the U n ite d States, w h e re i t constitutes the m a in c oncern am ong A m e ric a n em ­ p loyers. In the U n ite d States, m anagem ent is re la tiv e ­ ly fre e to v a ry the le v e l o f e m p lo y m e n t b u t n o t the a llo c a tio n o f w o rk w ith in the enterprise, and A m e ri­ can e m ployers m a in ta in th a t in respect o f this fo rm o f LMF, E uropean la b o u r m arkets are m ore fle x ib le than th e ir o w n and th a t th is circum sta nce goes a lo n g w a y tow ards e x p la in in g w h y la b o u r p ro d u c tiv ity in the U n ite d States is stagnating (P io re , 1986, p. 149). Y e t trade u n io n s are o fte n suspicious o f m anage­ m e n t’s attem pts to reduce dem arcation barriers. T he re o rg a n iz a tio n o f p ro d u c tio n and the in tro d u c tio n o f n e w technologies m a y serve to in te n s ify the pace o f w o rk and increase m a n a g e ria l c o n tro l o v e r the p ro ­ d u c tio n process. U n io n s also fe a r th a t the fle x ib le d e p lo y m e n t o f la b o u r w ill increase in te rn a l la b o u r m a rk e t segm entation b e tw e e n a s k ille d “ core” w o rk ­ fo rc e and an u n s k ille d “ p e rip h e ra l” w o rk fo rc e . LABOUR M ARKET FLEXIBILITY: WHAT DO ES IT REA LLY M EA N ? • RICA RD O A. L A G O S 90 C E P A L REVIEW 54 • D E C E M B E R 1994 IV The Latin American labour market and LM F A s p o in te d o u t at the b e g in n in g o f th is a rtic le , d u rin g the 1980s substantial s u p p o rt arose fo r the v ie w that the in tro d u c tio n o f gre a te r f le x ib ility in to the la b o u r m a rk e t th ro u g h d e re g u la tio n w o u ld fa c ilita te the a daptation o f th a t m a rk e t to the n e w requirem ents im p o se d b y stru c tu ra l a djustm e nt. In the in d u s ­ tria liz e d cou ntries th is v ie w has le d to a process o f d e re g u la tio n concerned w ith the e lim in a tio n o f in ­ s titu tio n a l obstacles w h ic h p re v e n t the la b o u r m arket fro m ad apting to n e w c o n d itio n s o f p ro d u c tio n and in te rn a tio n a l co m p e titive ne ss. In less de veloped re­ gions, h o w e ve r, the la b o u r m a rk e t is n o t so exten­ s iv e ly re gu late d, and w h e re such re g u la tio n s d o ex is t, in s titu tio n s are o fte n un a b le to e n fo rc e them . W h ere th is is th e case, i t is lik e ly th a t th e f le x ib ility re q uired fo r th e purposes o f s tru c tu ra l a d ju stm e n t w ill n o t necessarily e n ta il a process o f d e re g u la tio n . I t is argued here th a t to an im p o rta n t e xte n t L a tin A m e ric a is n o e x c e p tio n to th is phenom enon. In fact, i t is p o ssib le to sustain th a t the la b o u r m a rke t in the re g io n has d is p la ye d su b sta n tia l f le x ib ility b u t th is has n o t been accom panied, n o r m u ch less prom oted , b y m a jo r in s titu tio n a l re fo rm s . I t has been a process o f f le x ib ility w ith o u t d e re g u la tio n . In these c irc u m ­ stances, the recipe fo r se curing greate r fle x ib ility th ro u g h d e re g u la tio n is n o t a t a ll clear. In the fo llo w ­ in g paragraphs, re fe re n ce is m ade b o th to the process o f de fa c to o r “ u n d e rg ro u n d ” fle x ib iliz a tio n and the in s titu tio n a l la g . 18 A g lo b a l analysis o f d e velo p m en ts in the L a tin A m e ric a n la b o u r m a rk e t in the 1980s indicates that the m a jo r trends p o in t in the d ire c tio n o f greater fle x ­ ib ility . T h is is con siste n t w ith the c on clusion s d ra w n b y PREALC (1990) to the e ffe c t th a t betw een 1980 and 1989 the L a tin A m e ric a n la b o u r m a rk e t was characterized b y lo w e r jo b se curity, the replacem ent o f fu ll-tim e e m p lo y m e n t b y p a rt-tim e em p lo ym e n t, and g ro w in g recourse to subcontracting. O ne in d ic a to r o f th is process is the h ig h annual g ro w th rate o f the in fo rm a l sector (6.7% , o r m ore than d o u b le the 3.0% g ro w th rate o f the fo rm a l sec­ to r), w h ic h caused the p ro p o rtio n o f the p o p u la tio n engaged in in fo rm a l a c tiv itie s to ris e fro m 16% o f the n o n -a g ric u ltu ra l e a p in 1980 to 22% in 1989. A second in d ic a to r o f the increase in fle x ib ility is the e x tra o rd in a ry expansion o f e m p lo y m e n t in sm a ll enterprises (those w ith fe w e r than ten em ­ ployees), w h ic h are concentrated in services and in ­ dustry. W ith in the fo rm a l sector, the rate o f g ro w th o f e m p lo y m e n t in sm all enterprises w as 7.5% , as co m ­ pared w ith o n ly 0.5% in m e d iu m and large enter­ prises. F u lly 40% o f a ll jo b s created in urban areas betw een 1980 and 1989 re sulted fro m the d yn a m is m o f sm a ll enterprises, w hose share o f the e c o n o m ic a lly a ctive p o p u la tio n (e a p ) rose fro m 15% in 1980 to 21% in 1 9 8 9 .19 A th ird in d ic a to r is the trend - also n oted b y PREALC - fo r large enterprises to subcontract the p ro ­ d u c tio n o f certain basic com ponents o f th e ir o w n p ro ­ d u c tiv e processes, as w e ll as c ertain essential services (such as transport, cleaning, m aintenance and s e cu rity), to sm all enterprises o r even to som e o f the m o re m o d e m u n its in the in fo rm a l sector (PREALC, 1990). A fo u rth in d ic a to r o f the greater fle x ib ility o f the la b o u r m a rke t is the d ro p in the le v e l o r g ro w th rate o f p u b lic sector e m ploym ent. T h is phenom enon is re levant, since th is is a sector w h ic h is characterized b y considerable rig id ity . F o r the 1980-1989 p e rio d as 18 The remainder of this section is partly based on an earlier work (mimeo), co-authored with Eugenio Tironi, which was en­ titled Flexibilisation and regulation of the labour market and was written for the Employment and Development Department, International Labour Office (EMPLOI/ILO), Geneva. 19 The rate of growth of small enterprises must be viewed with circumspection, however, inasmuch as the total calculated by P R E A L C (1990) for the region as a whole is strongly influenced by estimates of great expansion in Brazil. 1. Underground flexibilization LA BO U R M ARKET FLEXIBILITY: WHAT D O E S IT REALLY M EA N ? • RICARDO A. LA G O S C E P A L REVIEW 54 • D E C E M B E R 1994 91 a w h o le , th e re d u c tio n o f p u b lic sector e m p lo y m e n t is n o t re a lly substantial, since i t o n ly w e n t d o w n fro m 15% to 14% o f the EAP (p r e a l c , 1990). I f one con­ siders th e annual g ro w th rate o f p u b lic sector em ­ p lo y m e n t in rece n t decades, how ever, i t is evid e n t th a t the re has been a d ra s tic dece leratio n. Thus, its annual ra te o f g ro w th , w h ic h averaged 4.5% in the p e rio d 1950-1 980, fe ll to 3.7% betw een 1980 and 1989. T h is d e c e le ra tio n is e v e n m o re s trik in g w h e n i t is c o n s id e re d th a t b e tw e e n 1980 a nd 1983 p u b lic e m p lo y m e n t w as s t ill g ro w in g at th e h ig h rate o f 4 .7 % p e r ye ar, b u t s lo w e d to an a n n u a l ra te o f o n ly 2 % in th e p e rio d 1 9 8 6 -1 9 8 9 . T h e tre n d to w a rd s lo w e r a b so rp tio n o f la b o u r b y the State has ta ke n p la ce at d iffe re n t rates in d iffe re n t cou n trie s. N evertheless, v irtu a lly a ll cou ntries in the re g io n have adopted progra m m e s to reduce p u b lic em p lo ym e n t. I t is to o e a rly to te ll w h a t the outcom e o f these p ro g ra m m e s w il l be, b u t i t is lik e ly th a t th e y w il l re d u c e som e o f th e rig id itie s in the la b o u r m a rk e t. A f if t h in d ic a to r w h ic h h ig h lig h ts the extent o f the LMF w h ic h has taken p lace in the re g io n relates to la b o u r-c o s t fle x ib ility . B o th le g a l m in im u m wages and re a l average w ages have d e te riora ted in the 1980s, sh o w in g substantial d o w n w a rd fle x ib ility . In the e a rly 1990s average m in im u m wages in L a tin A m e ric a fe ll b y a ro u n d 3 5 % .20 In the case o f real wages, w h e n the average actual real w ages in d iffe r­ en t re g io n a l sectors o f a c tiv ity (a g ric u ltu re , construc­ tio n , in d u s try ) are co n sid e re d as a w h o le , i t is n o tic e a b le th a t in 1992 a ll o f th e m w e re lo w e r than a t th e b e g in n in g o f th e 1980s (PREALC, 1993). There are other im p o rta n t indicators o f the process o f fle x ib iliz a tio n w h ic h is ta k in g place in L a tin A m erica. F o r exam ple, there is evidence in nearly all countries o f a s h ift tow ards piece-rates and away fro m tim e-based wages, as w e ll as an increase in home w o rk as a substitu te fo r the c o n c e n tra tio n o f w o rke rs in fa c to rie s o r enterprises. T h is coin cid e s w ith the g ro w in g in te g ra tio n o f w o m e n in to the la b o u r m a r­ ket, w h ic h w as the m o s t s ig n ific a n t d e velopm ent in the s u p p ly o f la b o u r in the 1980s (PREALC, 1993). T h e in e sca p a b le c o n c lu s io n is th a t m a n y o f the changes w h ic h c h a ra c te riz e fle x ib iliz a tio n o f the la b o u r m a rk e t have indeed taken p la ce in L a tin A m e ric a and the C aribbean in the 1980s. A s th is phe­ nom enon has n o t been accom panied, n o r m u c h less p ro m o te d , b y m a jo r in s titu tio n a l re fo rm s , in m ost cases (w ith som e n otable exce p tio n s) i t is an “ u nder­ g ro u n d ” process, stim u la te d b y the in te rn a l dynam ics o f the la b o u r m arket in response to c ertain m acroeco n o m ic factors (lib e ra liz a tio n o f fo re ig n trade, the re d u c tio n o f State subsidies, p riv a tiz a tio n ), b u t w ith ­ o u t the S tate’s a ctive leadership. In o th e r w o rd s , this tre n d tow ards fle x ib ility is a de facto phenom enon w h ic h has o fte n taken place in spite o f, ra th e r than th ro u g h , e x is tin g in s titu tio n s . T h is h e lp s to e x p la in its fre q u e n tly u n o rg a n iz e d n a tu re , its p a rtia l and u n e ve n scope, and the h ig h costs a sso cia te d w ith it, e s p e c ia lly as re g a rd s u n e m p lo y m e n t. 20 Exceptions to this trend were Colombia, Costa Rica and Paraguay, where real urban minimum wages were higher in 1992 than in 1980 (PREALC, 1993). 21 There are exceptions. Chile, Colombia, Panama and Venezue­ la, for example, have amended their labour codes, and other countries (such as Argentina) are currently discussing reforms. 2. The institutional lag T here have been v irtu a lly n o changes in the past de­ cade in the standards and in s titu tio n s w h ic h g overn the la b o u r m a rk e t in L a tin A m e ric a n c o u n trie s .21 T hus, even th ough the in s titu tio n a l arrangem ents in fo rc e have n e ith e r s tim u la te d n o r ch a n n e lle d the p ro ­ cess o f fle x ib iliz a tio n , th e y do n o t appear to have raised a n y obstacles to it. T h is can be exp la in e d e ith e r b y the fa c t th a t these arrangem ents w e re a l­ ready ra th e r la x , so th a t there w as c o nsequen tly no p ra c tic a l need fo r d e re g u la tio n , o r because general standards fo r the p ro te c tio n o f w o rk e rs w h ic h e n ta il ce rta in rig id itie s w ere u s u a lly o v e rw h e lm e d b y the la b o u r m a rk e t’ s o w n dyn a m ics. T h is second situ a tio n seems to f i t the c o n te x t o f L a tin A m e ric a , and is re sponsible fo r th is u n d e rg ro u n d fle x ib iliz a tio n . T h e la b o u r m a rke t in L a tin A m e ric a is regulated b y the State, and there have been v irtu a lly no m o d ifi­ cations in th is situation. T h e p ro te c tio n o f w o rke rs is based on la b o u r le g is la tio n o f u n ive rsa l ap p lica tio n , ra th e r than on enterprise o r b ra n c h -le v e l c o lle c tiv e agreem ents o r in d iv id u a l e m p lo y m e n t contracts (B ro n s te in , 1990). F o r exam ple, as regards dism issal (a c ru c ia l area o f fle x ib ility ) , the le g is la tio n estab­ lishes m a n y c o n d itio n s o r re q u ire m e n ts: in some LABOUR M ARKET FLEXIBILITY: WHAT DO ES IT REALLY M E A N ? • RICARDO A. LA G O S 92 C E P A L REVIEW 54 cases, a w o rk e r m ay n o t be d ism issed w ith o u t a p rio r in q u iry in to the facts on w h ic h the d ism issa l is based; in others, dism issals m u s t be a u th o riz e d b y the ad­ m in is tra tiv e a u th o rity o r th e d ism issa l m u s t be n o ti­ fie d to a trip a rtite co m m itte e w h ic h ru le s w h ether the d ism issa l is fa ir o r u n fa ir. S om e le g is la tio n s establish that fo r w o rk e rs w hose le n g th o f service exceeds ten years, the d ism issal m u s t be a pp ro ve d b y a la b o u r court. W h e n e ve r dism issals are a ttrib u te d to fin a n c ia l reasons, m a n y cou ntries re q u ire th a t the dism issal be a p p ro v e d b y th e a d m in is tra tiv e a u th o rity , o r b y c o n c ilia tio n a n d a rb itra tio n c o m m itte e s o r trip a rtite c o m m iss io n s . In e ve ry co u n try th ro u g h o u t the re g io n the em ­ p lo y e r bears the b u rde n o f p ro o f fo r s h o w in g th a t there are v a lid reasons fo r d ism issa l. In som e coun­ tries, i f th e e m p lo y e r can n o t fu rn is h th is p ro o f, the d ism issa l is a u to m a tic a lly a n n u lle d ; in others, the e m p lo y e r is re q u ire d to p a y an in d e m n ity . T here is also a th ird g ro u p o f c o un trie s in w h ic h the e m p lo y e r m ay u n ila te ra lly te rm in a te an e m p lo y m e n t c ontract w ith o u t h a v in g to show ju s t cause, b u t he is none the less re q u ire d to pay an in d e m n ity w h ic h m a y v a ry a ccordin g to the cause fo r dism issal. T h e m o st e x c e p tio n a l situ a tio n s are those o f C h ile and B ra z il. In C h ile , fo llo w in g c ertain la b o u r re fo rm s enacted in the e a rly 1980s, there are no re ­ strictio n s on d ism issa l o th e r than the cost w h ic h i t e ntails fo r the e m p lo yer, w h ic h w as increased b y la ­ b o u r re fo rm s enacted in la te 1990 and e a rly 1991. In B ra z il, w o rk e rs are p ro te cte d b y a “ L e n g th o f S ervice G uarantee F u n d ” (FGTS), w h ic h is fin a n ce d b y the em p lo yer. T h is fu nd , set u p in 1966, protects w orkers in the e ve n t o f dism issal, b u t gives the e m p lo y e r fle x ­ ib ilit y as regards the w o rk fo rc e . R ecently, how ever, le g is la tio n has been passed w h ic h , th o u g h i t does n o t p r o h ib it d is m is s a l, re n d e rs i t s u b s ta n tia lly m o re e x p e n s iv e fo r th e e m p lo y e r. R ece nt changes in tro d u c e d in som e countries, as w e ll as p la n n e d re fo rm s u n de r co n sideration in others, seek in d ire c tly to fa c ilita te d ism issal. T h e y do so, fo r e xam ple, b y in tro d u c in g va rio u s p o ss ib ilitie s fo r te m p o ra ry co ntracts, thus g iv in g greater fle x i­ b ility fo r sig n in g and te rm in a tin g e m p lo y m e n t contracts. S im ila rly , enterprises are in c re a s in g ly re ­ s o rtin g to te m p o ra ry e m p lo y m e n t agencies o r te m ­ p o ra ry service enterprises, fo r w h ic h le g a l p ro visio n s have o n ly re c e n tly been in tro d u c e d in som e countries o r are envisaged in the re fo rm s u nd er consideration in others. B o th m echanism s fa c ilita te te m p o ra ry o r • D E C E M B E R 199 4 fix e d -te rm contracts w h ic h fa ll outside the scope o f jo b s e c u rity standards. R ecent le g is la tiv e reform s also seek to fa c ilita te c o lle c tiv e dism issals based on e c o n o m ic o r te ch n o lo g ica l reasons o r force majeure. W ith the e xce p tio n o f C h ile , how ever, there have been n o d ire c t re fo rm s o r changes in le g is la tio n c o n c e rn in g jo b security. T hus, fro m a fo rm a l standpoint the L a tin A m e ri­ can la b o u r m a rke t seems to be h ig h ly regulated. In a d d itio n to establishin g stringent requirem ents fo r d ism issal, the le g is la tio n lim its te m p o ra ry e m p lo y ­ m ent, re stricts perform ance-based pay systems, and discourages la b o u r subcontracting. W ith the excep­ tio n o f a fe w countries, the re g io n has n o t undertaken a system atic re fo rm o f la b o u r m arket in s titu tio n s in the d ire c tio n o f deregulation. N evertheless, the pre­ e x is tin g in s titu tio n a l fra m e w o rk has been unable to p re v e n t the process o f fle x ib iliz a tio n w h ic h , as noted above, has u n fo ld e d as an underground phenom enon. 3. Re-regulation of the labour market In e v ita b ly , the underground fle x ib iliz a tio n m entioned above, w h ic h has n o t been guided b y the State o r c h a nnelled in s titu tio n a lly , and w h ic h has o fte n s k irte d le g is la tio n and responded to d ire c t s tim u li fro m e c o n o m ic re stru ctu rin g , has assum ed certain features th a t m a y g iv e rise to concern. T h e m ost seri­ ous o f these, w ith o u t a doubt, is its p a rtia l nature, fo r w h ile ce rta in segments o f the la b o u r m a rk e t have been subjected to a v io le n t increase in fle x ib ility , others have m anaged to “ p rotect” them selves fa irly e ffe c tiv e ly fro m this tendency. T h is is the case, fo r exam ple, o f large enterprises w h ic h , in a d d itio n to the p ro te c tiv e regulations o f u n iv e rs a lly ap p lica b le le g is la tio n (although, as noted, these have p roved w e a k ), also e n jo y the safety in h erent in c o lle c tiv e agreem ents. In contrast, greater fle x ib ility has in ­ vaded a ll o th e r segments, w here the ineffectiveness o f la b o u r in s titu tio n s has le ft a lle g e d ly “ protected” w o rk e rs exposed to the m ost unrestrained fo rm s o f fle x ib ility . T h e shortcom ings o f L a tin A m e ric a n la b o u r m a rke t in s titu tio n s in respect o f the d yn a m ics w h ic h have arisen as a result o f structural a d justm ent and new requirem ents fo r com petitiveness and the organ­ iz a tio n o f p ro d u c tio n , have c ertain serious im p lic a ­ tions. F o r one th ing, these shortcom ings have stim u la te d a g ro w in g d u a liz a tio n o f the la b o u r m a rke t th ro u g h o u t the re gion, and th e y m ust be LA BO U R M ARKET FLEXIBILITY: WHAT D O E S IT REALLY M E A N ? • RICARDO A. LAGOS C E P A L REVIEW 54 overcom e in o rd e r to stem th is trend, b o th in order to address the pro blem s posed b y segm ents o f the la ­ b o u r m a rk e t w here c o rp o ra tiv e rig id itie s persist and present obstacles to increased p ro d u c tiv ity , as w e ll as to re g u la te th e fle x ib ility w h ic h has d eveloped in o th e r segm ents and le ft w o rk e rs unprotected. O v e rc o m in g the fla w s in la b o u r m a rke t in s titu ­ tio n s in L a tin A m e ric a does n o t necessa rily m ean en­ d o rsin g d e re g u la tio n theories. S uch an approach is m e a n in g fu l o n ly w h ere e x is tin g re g u la tio n s are tru ly an obstacle to fle x ib ility , and it is b y no m eans clear • D E C E M B E R 1994 93 th a t th is is th e case in L a tin A m e ric a . T h u s , the c h a lle n g e fa ce d b y the re g io n is q u ite d iffe re n t: the re-regulation of the labour market, in other w ords, an overhaul o f la b o u r in s titu tio n s w h ic h , in a d d itio n to e x te n d in g fle x ib ility to a ll segments o f the la b o u r m arket, w ill also guarantee to a ll segments a basic le v e l o f p ro te c tio n . E sse n tia lly, th is e n ta ils ensuring c o n d itio n s to boost p ro d u c tiv ity w h ile at the same tim e m a in ta in in g certain m in im u m levels o f p ro te c­ tio n w h ic h w ill establish acceptable social lim its fo r e conom ic re fo rm . y Concluding remarks T h e d iffe re n t fo rm s o f f le x ib ilit y e x a m in e d above re­ fle c t the d iffe re n t approaches o r v ie w s tow ards the issue o f la b o u r m a rke t fle x ib ility . In fa c t, the debate has re v o lv e d aro un d tw o d iffe re n t v ie w s . O ne v ie w , re fe rre d to as d e fen sive o r passive, places em phasis m a in ly on lo w e rin g w age and n o n -w a g e costs (la b o u r cost fle x ib ility ) and m a k in g i t easier to adjust the w o rk fo rc e to flu c tu a tio n s in m a rk e t co n d itio n s and te ch n ica l change (e x te rn a l n u m e ric a l fle x ib ility ) . A s a re a ctio n to this approach to fle x ib ility , the idea o f o ffe n s iv e o r a ctive fle x ib ilit y has p ro g re ssive ly g ained grou nd . T h is o ffe n s iv e o r a c tiv e approach, w h ile n o t d is m is s in g the need to in tro d u c e h ig h e r de­ grees o f fle x ib ility in to th e la b o u r m a rke t, questions m an y o f the “ r ig id ity ” - based assum ptions and stresses the need to p ro v id e the w o rk fo rc e w ith tra in in g a n d n e w s k ills in o rd e r to fa c ilita te th e ir a d a p ta b ility to changes in th e p ro d u c tio n process. T h e defe nsive approach is based on the v ie w that la b o u r m arkets are e xce ssive ly regula ted , and there­ fo re d isto rte d , so th a t there is a need to deregulate them . T h e o ffe n s iv e o r a c tiv e approa ch recognises the need to in tro d u ce m o re fle x ib ility in to la b o u r re ­ la tio n s , b u t w ith o u t re d u c in g e m p lo y m e n t security and w ith em phasis on fo rm s o f fle x ib ility w h ic h the s o c ia l p a rtn e rs id e n tify as less c o n flic tiv e o r n o n c o n flic tiv e (in te rn a l n u m e ric a l f le x ib ility and fu n c ­ tio n a l fle x ib ility ). I t is inte re stin g to note, h ow e ve r, th a t as the de­ bate has progressed the d is tin c tio n b e tw ee n d efensive and o ffe n s iv e fle x ib ility has been su b s ta n tia lly o v e r­ com e as som e consensus has been reached on certain issues. Thus, the approaches to fle x ib ility have tended to m ove fro m v e ry re a ctive and sh o rt-te rm v ie w s to ­ w ards lo n g e r-te rm (and less c o n flic tiv e ) solutions. T here is a p e rc e p tio n th a t the stru ctu ra l problem s w h ic h , am ong oth e r things, caused h ig h le ve ls o f un ­ e m p lo y m e n t cannot be overcom e b y re ly in g on measures th a t a lle v ia te a d justm ent in a m e re ly te m ­ p o ra ry w a y (e.g., w age fle x ib ility , external n u m e ric a l fle x ib ility ). T w o quotations fro m the OECD - a n en­ thusiastic supporter o f defensive fo rm s o f fle x ib ility d u rin g the m id -1 9 8 0 s - illu s tra te this p o in t: “ T h e greater the fle x ib ility o f the la b o u r m arket, the lo w e r the e conom ic costs o f adjustm ent: there w ill be less u n e m p lo ym e n t and less loss o f output. Standard m ic ro -e c o n o m ic th e o ry postulates that, in a p e rfe c tly fre e la b o u r m arket, w ages and u n e m p lo y ­ m ent a d ju st to re c tify im balances betw een s u p p ly and dem and. In the real w o rld , how ever, there are o b ­ stacles to adjustm ent. These m ake re le va n t p o lic ie s that n o t o n ly assist those m o s t a ffected b u t p rom ote the fle x ib ility o f salary structures and the adjustm ent o f m a n p o w e r” (OECD, 1984, p. 29). “ T h e n ew p o lic y fra m e w o rk d eveloped b y the OECD requires a s h ift fro m a co n ce n tra tio n o n short­ te rm problem s to one on the stru ctu ra l re quirem en t that la b o u r m arkets should be able to react e ffic ie n tly to e conom ic and social c h a n g e ...E ffic ie n t la b o u r m a r­ kets are to be fostered th ro u g h im p ro v in g the q u a lity o f the la b o u r fo rc e [and] re d u c in g in e q u a litie s in ac­ cess to jo b s and tra in in g ... P ro m o tin g the e ffic ie n t fu n c tio n in g o f the m a rk e t does n o t m ean s im p ly le ttin g lo o s e m a rk e t fo rc e s b y in d is c r im inate LABOUR M A RKET FLEXIBILITY: WHAT DO ES IT REALLY M E A N ? • RICARDO A. LA G O S 94 CE P A L REVIEW 54 d e re g u la tio n o r a n a rro w focus o n w age fle x ib ility ” (OECD, 1992, p. 12). F in a lly , i t seems a pp ro p ria te to p o in t o u t th a t the issue o f LMF is also re le v a n t in d e ve lo p in g countries. In an in te rn a tio n a l c o n te xt, the scope and nature o f th e in tro d u c tio n o f la b o u r m a rke t fle x ib ility w ill d if ­ fe r fro m c o u n try to c o u n try a cco rd in g to the structure o f th e econom y, the p re v a ilin g in s titu tio n a l arrange­ m ents fo r in d u s tria l relatio ns and the degree o f d ia ­ lo g u e b e tw e e n s o c ia l partners. Since the debate s u rro u n d in g LMF has taken place a lm ost e x c lu s iv e ly in and a b ou t in d u s tria liz e d countries, it is p robab le th a t som e ( i f n o t m a n y ) o f its analyses and p re s c rip ­ tio n s m a y n o t adequa tely take in to account o r re fle c t • D E C E M B E R 1994 d e v e lo p in g c o u n trie s’ stru ctu ra l differences: espe­ c ia lly such aspects as w e a k trade unions, lo w rates o f u n io n iz a tio n , the existence o f a la rg e p ro p o rtio n o f the la b o u r fo rc e in v o lv e d in in fo rm a l a c tiv itie s and thus located outside the in s titu tio n a l u m b re lla , h ig h rates o f u n dere m plo ym ent, and la b o u r m arkets p o o r­ ly reg u la te d re la tiv e to those o f in d u s tria liz e d c o u n ­ tries. T h e e x a m in a tio n m ade o f the L a tin A m e ric a n s itu a tio n p a rtly suggests this. 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T his article analyses the m ain c h allen g es invo lv ed in m odernizing bank su p erv isio n in the lig h t o f recent b anking crises and the changes c u rre n tly taking place in the fin an c ia l system a t th e intern atio n al level. W ith in a h ig h ly dyn am ic e nvironm ent -ra p id tec h n o lo g ic al develo p m en t in the field o f in fo rm atics, s tiff co m p etitio n w ithin th e cap ital m arket as a result o f lib eralizatio n , th e in cre asin g ly p ro m in en t roles being assum ed by fin an cial c o n g lo m e ra tes in an e ffo rt to achieve econom ies of scope, and th e high d eg ree of volatility o f the m ain e co n o m ic va ria b le s, w hich sharply increases the level o f fin an c ia l r i s k - the su p erv isio n o f the banking system needs to be flex ib le in o rd e r to perm it fin an c ia l in stitu tio n s to tak e ad vantage o f o p p o rtu n ities for increasin g th e ir p ro fita b ility and effic ie n c y . A t th e sam e tim e, how ever, it m ust be g eared to the ach iev em en t o f its strateg ic objectives, w hich are to give the sy ste m stab ility , ensure its tran sp aren cy and safeguard the governm ent g uarantees th a t have been ex ten d ed . W ith in this co n tex t, the m ajor issues involved in the su p erv isio n o f banks in L atin A m erica are the follow ing: c ap ital solvency stan d ard s and th eir role in supervision; m ech an ism s fo r a p p raisin g the book or m ark et value of a b an k ’s econom ic capital; supervisory m ethods fo r im p ro v in g the c o v erag e o f fin an c ia l risk; m eans o f in corporating the re g u la tio n o f fin an c ia l conglom erates, and the im p o rtan ce o f tak in g an integral approach to su p erv isio n of the b a n k in g em phasis on th e quality o f m anagem ent. D E C E M B E R 1994 system , w ith 98 CE P A L R E V IEW 54 • D E C E M B E R 1994 I Introduction In th e s p e cia lize d fin a n c ia l lite ra tu re , i t is argued th a t, because o f the special features o f banks, g o ve rn ­ m e n t re g u la tio n and s u p e rvisio n o f th e ir a c tiv itie s are necessary. T h e re g u la tio n o f banks is d ire c te d to ­ w a rd s the stra te g ic o b je c tiv e o f e n su rin g the b a n k in g syste m ’ s tran spa re n cy and s ta b ility w ith in a fra m e ­ w o rk o f e ffic ie n t a llo c a tio n o f fin a n c ia l resources. T h e re g u la tio n o f th is sector s h o u ld be based on a d y n a m ic app ro a ch and s ho uld c o n s ta n tly be adapting to an y changes th a t o ccu r in the w a y the system fu n c ­ tio n s , in o rd e r to ensure the a ch ie vem ent o f these s tra te g ic o b je ctive s. T h e fin a n c ia l crises th a t eru p te d in va rio u s L a tin A m e ric a n c o u n trie s d u rin g the 1980s p ro m p te d m a jo r changes in the s u p e rviso ry approaches e m p lo y e d b y b a n k re g u la to rs (H e ld and S zalachm an, 1992). N eve rth eless, n ew challenges are s till e m erging now in the m id -1 9 9 0 s as a re s u lt o f the b a n k in g system ’s h ig h ly d y n a m ic m od e o f o p e ra tio n at the in te rn a ­ tio n a l le v e l and the experience gain ed fro m recent b a n k in g crises, such as those in v o lv in g the B anco E spañ ol de C ré d ito (BANESTO) and B a n co L a tin o . Factors such as the fie rc e c o m p e titio n betw een b a n k­ in g and n o n -b a n kin g in s titu tio n s in the c a p ita l m a r­ ke t, the s w ift pace o f progress in the fie ld o f in fo rm a tio n te c h n o lo g y and the g lo b a liz a tio n process are o p e ning up business o p p o rtu n itie s and possible avenues fo r im p ro v in g the e ffic ie n c y and p ro fita b ility o f fin a n c ia l in s titu tio n s , b u t they also m ean th a t b a n k sup e rvisio n m u st be ready to deal w ith the sector’s increasing c o m p le x ity . T h is a rtic le w ill seek to id e n tify the d iffe re n t p o lic y o ptions a v a ila b le to b a n k regulators fo r m eet­ in g to d a y ’s challenges and to o u tlin e the m a in c o m ­ ponents o f each. O n m any issues, i t is n o t possible to take d e fin itiv e p o sitio n s, and the fo llo w in g discus­ sion w ill th e re fo re be aim ed at id e n tify in g the term s o f the debate and p ro v id in g a n u m b e r o f p o lic y g u i­ delines ra th e r than m a k in g an exhaustive analysis o r setting fo rth d e fin ite proposals. II The work of supervisory bodies Because m a n y o f th e cla im s on banks are liq u id at p a r, any d istu rb a n ce in a b a n k th a t shakes the co n ­ fid e n c e o f its de positors m a y lea d to m assive w ith ­ d ra w a l o f fu n d s. Because o f th e special features e x h ib ite d b y banks, the risks associated w ith s p e c ifi­ c a lly b a n k in g a c tiv itie s m ay je o p a rd iz e the p o s itio n n o t o n ly o f the ba n ks’ o w n stockh o lde rs b u t also o f th e re st o f th e system and, indeed, the w h o le o f so­ c ie ty (s y s te m -w id e ris k ). W h e n a b a n k in g in s titu ­ tio n ’ s fin a n c ia l standing becom es shaky, the p u b lic pe rce ives its d iffic u ltie s as p o te n tia lly a ffe c tin g other in s titu tio n s , even th o u g h the la tte r m a y be e c o n o m i­ c a lly sound. T h is m a y spark ru n s o n banks th a t h u rt th e e c o n o m y as a w h o le , th e re b y g enera ting w h a t e c o n o m ic th e o re ticia n s re fe r to as a n e gative e xte r­ n a lity . T h is is a ll the m o re serious in the case o f large banks, w hose fa ilu re c o u ld have disastrous conse­ quences fo r the rest o f the s y s te m .1 I t is because o f the need to u p h o ld the p u b lic ’s fa ith in the b a n k in g system, to shore up confidence and to a ve rt runs on banks that (e x p lic it and im p lic it) d e p o sit insurance is provided. T h e m o st serious p ro b le m associated w ith this sort o f insurance is w h a t is k n o w n as “ m o ra l hazard” , i.e., the fa c t th a t the existence o f such insurance in ­ creases the in c e n tiv e to take ris k s, w h ic h in tu rn in ­ creases the chances th a t the insurance w ill have to be used. S ince depositors covered b y such insurance 1 In other words, they are too big to be allowed to fail. THE MODERNIZATION OF BA N K SUPERVISION • CHRISTIAN LARRAIN P. C E P A L R E V IEW 54 • D E C E M B E R 1994 99 k n o w th ey w ill n o t lose th e ir m o n e y i f th e b a n k fa ils , th e y w ill n e ith e r keep a c a re fu l w a tc h on its a c tiv itie s n o r d is c ip lin e i t b y w ith d ra w in g th e ir deposits o r d e m a nd in g a h ig h e r ris k p re m iu m i f the in s titu tio n runs to o m a n y risks (M is h k in , 1992). C onsequently, banks that have deposit insurance can assume m ore risks than they otherwise w o u ld (unless the prem ium fo r such insurance is differentiated as a function o f risk). A n o th e r p ro b le m w ith d e p o sit insurance is the perverse se le ctio n e ffe c t it has in term s o f the ty p e o f entrepreneurs w h o are attracted b y the p o s s ib ility o f in v e s tin g in the b a n k in g s e c to r.2 F o r a b a n k , the b e n e fit o f d e p o s it insurance w ill increase a long w ith th e le v e l o f ris k i t assumes, since u s u a lly the cost o f such insurance is n o t adjusted fo r changes in th a t le v e l, and this ty p e o f b e n e fit is th e re fo re m o re v a lu ­ able to risk -ta k e rs than to m o re co n se rvative in ve s­ tors. S ince in su re d depositors have little reason to im p o s e any so rt o f d is c ip lin e on the banks, this m eans th a t entrepreneurs w h o are w illin g to ru n risks w il l be attracted to the b a n k in g in d ustry. T h e ro le p la y e d b y in fo rm a tio n is another im ­ p o rta n t aspect o f th e b a n kin g m a rke t. F o r exam ple, s m a ll savers c a n n o t a ffo rd to analyse (o r th e sums th e y handle are to o s m all to ju s tify the cost o f analys­ in g ) the large v o lu m e o f in fo rm a tio n re q u ire d fo r a th o ro u g h e v a lu a tio n o f the e n tire array o f a va ila b le in s titu tio n s . U nless there is som e e n tity th a t can guar­ antee the re lia b ility o f the system , o r th a t can at least fu rn is h in fo rm a tio n in a som ew h at m o re h ig h ly p ro ­ cessed fo rm so th a t i t w ill be re a d ily understandable, these d epositors w ill n o t p a rtic ip a te in th is m a rk e t b u t w ill instead p u t th e ir resources to o th e r uses w h ic h , in a ll lik e lih o o d , w ill n o t be the best ones fo r the co u n try. A p ro p e r fo rm o f re g u la tio n that prom otes tran spa re n cy w il l g iv e these d epositors co n fid e n ce and fo re s ta ll th e need to re so rt to the extrem e m easure o f p ro v id in g State backing. Thus, because the supply o f in fo rm a tio n is v e ry u neven w ith in the c a p ita l m a rke t, pro p e r re g u la tio n and su p e rvisio n o f a c tiv ity in th is sector are needed to p re v e n t the m isuse o f in fo rm a tio n and c o n flic ts o f interest w ith in the fin a n c ia l system . In a d d itio n to b eing u n fa ir, these types o f b e h a v io u r m a y u n d e r­ m in e the p u b lic ’s fa ith in these m arkets and th e re b y create disturbances that w ill im p a ir th e ir e ffic ie n c y and sta b ility. In sum m ary, the special c haracteristics o f the w a y in w h ic h th e b a n k in g system w o rk s genera te c e rta in types o f fla w s o r im p e rfe c tio n s , such as e x ­ te rn a litie s o r a s y m m e trie s in th e s u p p ly o f in fo rm a ­ tio n , th a t p o in t u p th e need fo r g o v e rn m e n t re g u la tio n and s u p e rv is io n in o rd e r to m in im iz e th e ir p o te n tia l im p a c ts o n d e p o s it in s u ra n c e a r­ rangem e nts an d a v o id th e c o n flic ts o f in te re s t asso­ c ia te d w ith such a sym m e trie s. T h is s h o u ld be done w ith in a fra m e w o rk o f e ffi­ c ie n t fin a n c ia l-re s o u rc e a llo c a tio n , w h ic h requires that c o m p e titio n w ith in the c a p ita l m a rke t be c o n ­ ducted fa irly and n o t be d is to rte d b y cross-subsidiza­ tio n . In the case o f banks, care m u st be taken to ensure that the prero gatives th e y e n jo y b y v irtu e o f th e ir access to the “ safety net” 3 w ill n o t be extended to subsidiaries o r a ffilia te s in v o lv e d in areas o f a c tiv ­ ity other than b a n k in g . In a d y n a m ic e n v iro n m e n t, the above represents a fo rm id a b le c h allenge fo r p u b lic p o lic y -m a k e rs in the area o f b a n k in g re g u la tio n because i t n o t o n ly c alls fo r State in te rv e n tio n b u t also requires the o p ­ tim iz a tio n o f th a t in te rv e n tio n . T h e re g u la tio n o f b a n k in g a c tiv ity and the a p p lic a tio n o f p ro h ib itio n s have e x p lic it and im p lic it costs associated b o th w ith the use o f the resources needed fo r th e ir im p le m e n ta ­ tio n and w ith the o p p o rtu n ity cost o f d iv e rtin g re ­ sources to in e ffic ie n t a c tiv itie s . I f those costs rise b eyond the le v e l re q u ire d to ensure the b a n k in g sys­ te m ’s s ta b ility and to m in im iz e the im p a c t on d e p o sit insurance, u n fa ir c o m p e titio n m a y take place in c o n ­ n e ctio n w ith other, n o n -b a n kin g in s titu tio n s , thereb y engendering a process o f “ a rtific ia l” d is in te rm e d ia ­ tio n (Federal R eserve B a n k o f C le ve la n d , 1993). In ord e r to achieve an o p tim u m re g u la to ry sys­ tem , new approaches and p o lic ie s th a t c o m p le m e n t c o n ve n tio n a l m ethods o f re g u la tio n w ill be needed. 2 A perverse selection effect is also generated in respect of clients, as a result of asymmetries in the supply of information in the banking system. 3 The English-language financial literature defines “safety net” as the set of regulatory mechanisms which give financial institu­ tions access to the Central Bank as a lender of last resort and to the backing provided by government deposit insurance. THE MODERNIZATION OF BAN K SUPERVISION • CHRISTIAN LARRAIN P. 100 C E P A L RE VIEW 54 • D E C E M B E R 1994 III The international experience A t the in te rn a tio n a l le v e l, there are fo u r m a in trends th a t are a ffe c tin g th e b a n k in g system : the d is in te r­ m e d ia tio n p ro ce ss e n g e n d e re d b y te c h n o lo g ic a l deve lo pm e nts, increased c o m p e titio n in response to lib e ra liz a tio n m easures, the m o re p ro m in e n t ro le b e in g p la y e d b y fin a n c ia l c o n g lo m e ra te s , a n d th e u p w a rd tre n d in le v e ls o f fin a n c ia l ris k . T h a n ks to advances in the fie ld o f te le c o m m u n i­ cations, transactions are b e c o m in g less expensive, ea­ sier to c a rry o u t and b ro a d e r in scope as new m arkets are opened up at the in te rn a tio n a l le v e l. C om puters m ake i t possible to store and process huge vo lum es o f in fo rm a tio n w h ic h m ake the rew ards and ris k s o f the v a rio u s sorts o f in vestm en ts m ore im m e d ia te , w h ile the progress b e in g m ade in the area o f c o m ­ m u n ic a tio n s helps to keep m a rk e t agents w e ll in ­ fo rm e d . T h is process has g iven rise to an e ffic ie n t fo rm o f n o n -b a n k in te rm e d ia tio n based on reductions in in fo rm a tio n processing costs and, consequently, to a m a rk e d s h ift a w a y fro m b a n k in te rm e d ia tio n (M o o d y ’s In ve sto rs S e rvice, 1992). In a d d itio n , the re are m a n y lib e ra liz a tio n measures th a t fo rm p a rt o f the m o ve to w ards a sys­ te m o f u n ive rsa l b a n k in g ; n o n -b a n k fin a n c ia l in s titu ­ tio ns have been a llo w e d to engage in a c tiv itie s th a t had tra d itio n a lly been p e rfo rm e d b y banks, and banks have been p e rm itte d to e n te r in to n o n -tra d itio n a l fin a n c ia l a c tiv itie s such as s to c k b ro k in g , fin a n c ia l c o n s u ltin g services, p o rtfo lio m anagem ent, the m an­ agem ent o f m u tu a l fu n d s, life insurance and others (C o rb o , D o no so, H e rn á n d e z, R osende and Valdés, 1993). T h is , to o , has h e lp ed to h eigh ten c o m p e titio n in the c a p ita l m arket. T e c h n o lo g ic a l changes and lib e ra liz a tio n p ro ­ cesses have set the stage fo r fin a n c ia l conglom erates to m o v e to the fo re fro n t o f the c a p ita l m a rke t as th e y striv e to take advantage o f econom ies o f scale and o f s c o p e .4 A lth o u g h the w o rld m a rk e t is m o v in g in the 4 Supply-side economies of scope arise when the cost of joint production efforts is lower than individual production costs. Demand-side economies of scope occur when joint consumption generates a higher level of well-being for the consumer than consumption on an individual basis would. d ire c tio n o f a broadened spectrum o f b a n kin g a c ti­ v itie s, there is no consensus as to the new types o f a c tiv itie s th a t should be undertaken n o r the types o f in s titu tio n a l arrangem ents upon w h ic h such a m ove should be based. F ro m an o rg a n iza tio n a l standpoint, the pre d o m in a n t scheme has in v o lv e d the use o f fin ­ ancial h o ld in g com panies, w ith new a c tiv itie s b e ing launched th ro u g h a ffilia te s o r subsidiaries rather than th roug h a u thorization fo r banks to set up th e ir o w n in-house d iv is io n s to c onduct such a c tiv itie s . A n o th e r p h e n o m e n o n o f th e 1980s w as th e in c re a s in g im p o rta n c e o f m a n a g in g w h a t has co m e to be k n o w n as “ fin a n c ia l r is k ” , o w in g to th e g re a te r v o la t ilit y e x h ib ite d b y e x c h a n g e rates, in te re s t rates and in fla tio n . In th e m a rk e tp la c e , this tre n d prom pted the appearance o f a broad array o f d e riv a tiv e s th a t can be used to he d g e a g a in s t such ris k s ( O ’ C o n n o r, 1993). In a d d itio n to the fo re g o in g , som e o f the aspects o f recent ba n k crises also need to be taken in to con­ sideration in the design o f a m o re m o d e m system o f supervisio n because they shed lig h t o n va rio u s gaps in ris k coverage to w h ic h regulators should devote m ore attention. In the case o f the B anco L a tin o in Venezuela, although fir m data are n o t a va ilable, the p re lim in a ry fig u re s in d ic a te that the losses m a y am ount to as m uch as U S $3 b illio n , and the rush b y depositors to w ith d ra w th e ir funds threatened n in e other banks as w e ll. In o rd e r to stave o f f a d o m in o e ffe ct, the C en­ tra l B a n k o f Venezuela had to soften its a n tiin fla tio n a ry m onetary p o lic y . N o t o n ly d id it lo w e r the reserve requirem en t fro m 15% to 12% b u t, in c o n ju n c tio n w ith the D e p o s it G uarantee F und, i t also had to in je c t some U S $3.5 b illio n in to the b a n kin g system in ord e r to cover the lia b ilitie s o f the B a nco L a tin o its e lf and to b a il o u t the o th e r banks that w ere in trouble. T he problem s encountered b y this bank underscore the extent to w h ic h fin a n c ia l ris k and the c o n ce n tra tio n o f le n d in g operations in flu e n c e a b a n k ’s fin a n c ia l perform ance, as w e ll as the d e fin ite presence o f fla w s in the in te rn a l c o n tro ls and lim its needed to keep such in s titu tio n s on a s o lid fo o tin g , p a rtic u la rly w ith regard to th e ir exte rn a l operations. THE MODERNIZATION OF BA N K SUPERVISIO N • CHRISTIAN LARRAIN P. CE P A L REVIEW 54 In th e case o f th e B a n c o E s p a ñ o l de C ré d ito (BANESTO), p re lim in a ry re po rts fro m the B anco de España in d ic a te th a t th e b a ilo u t w ill cost about U S $3.5 b illio n . T h e source o f the tro u b le was the excessive e xpansion o f operations, accom panied b y • D E C E M B E R 1994 101 the la c k o f approp ria te h e d g in g p o lic ie s and the presence o f serious defects in the b a n k ’ s in fo rm a tio n system s and in te rn a l c o n tro ls . T h e in fo rm a tio n b ro u g h t to lig h t thus fa r p o in ts to shortcom ings in term s o f the q u a lity o f m anagem ent in b o th banks. IV The modernization of supervision: the current debate T h e tre n d s a sso cia te d w ith th e d y n a m ic s o f the f in ­ a n c ia l s y ste m - p r in c ip a lly the in te n s ific a tio n o f c o m p e titio n , te c h n o lo g ic a l d e v e lo p m e n t, the in ­ crease in fin a n c ia l r is k and the m o re p ro m in e n t ro le o f fin a n c ia l c o n g lo m e ra te s - are w h a t are g e n e ra lly c a lle d “ h e a v y ” o r s tru c tu ra l trends. These tre n d s are o p e n in g u p a w o rld o f o p p o r­ tu n itie s , and u n d e r such circ u m sta n c e s re g u la to ry p ro v is io n s nee d to b e fle x ib le so th a t fin a n c ia l in ­ s titu tio n s w il l be a b le to take ad vantage o f the h ig h e r re tu rn s , o n b o th th e in te rn a l a n d e xte rn a l fro n ts , a ffo rd e d b y n e w lin e s o f business; o f the e c o n o m ie s o f scope m a d e p o s s ib le b y the c o m ­ b in e d s u p p ly and c o n s u m p tio n o f fin a n c ia l ser­ v ic e s ; o f n e w , e ffic ie n c y - b o o s tin g te c h n o lo g ie s ; a nd o f th e h e d g in g p o s s ib ilitie s p ro v id e d b y the use o f d e riv a tiv e s . R a th e r tha n o p p o s in g these trends, re g u la to ry a n d s u p e rv is o ry system s s h o u ld adapt to these re a litie s in o rd e r to ensure the a c h ie v e m e n t o f th e ir s tra te g ic o b je c tiv e s o f sta­ b ilit y , tra n s p a re n c y a n d th e p ro te c tio n o f d e p o s it insu ra n ce . I t m a y be added th a t c o m p e titio n and the expan­ sion o f the b a n ks’ ra n ge o f business a c tiv itie s co n fe r s ig n ific a n t so cia l b e n e fits b y c o n trib u tin g to the p ro ­ v is io n o f m o re and b e tte r fin a n c ia l services at lo w e r cost and p e rm ittin g the u tiliz a tio n o f the fin a n c ia l system ’s p o te n tia l econom ies o f scale and o f scope. T h e g u id in g p rin c ip le fo r the re g u la tio n o f the b a n k in g system s h o u ld be one o f p ru d e n tia l supervi­ sion a im e d at n ip p in g p ro b le m s in the bud, before they a c tu a lly surface and le ad to a p ossible ru n on the banks th a t c o u ld je o p a rd iz e the s ta b ility o f the entire system and the g o v e rn m e n t guarantees u n d e rly in g d e p o sit insurance arrangem ents, w h e th e r im p lic it or e x p lic it. 1. The requirements of prudential supervision T h e w a y in w h ic h fa lte rin g fin a n c ia l in s titu tio n s are handled w h e n they are on the verge o f fa ilu re has m a jo r im p lic a tio n s fo r the lo n g -te rm soundness and v ia b ility o f deposit insurance and fo r the s ta b ility o f the b a n k in g system as such. A s banks approach the p o in t o f in so lve n cy, they have less and less to lose i f th e y adopt an aggressive strategy in v o lv in g h ig h -ris k investm ents as a means o f h o p e fu lly p u ttin g them selves b a ck on a p ro fita b le fo o tin g . T h u s , s u p e rv is io n is a p o w e rfu l to o l fo r c o n tro llin g the p e rve rse in c e n tiv e s th a t in flu e n c e u n d e rc a p ita liz e d banks. G e n e ra lly speaking, a sup e rviso ry b o d y ’s a b ility to take e a rly and e ffe c tiv e c o rre c tiv e a c tio n w ill de­ pend o n three factors (U n ite d States D e p a rtm e n t o f the Treasury, 1991). F irs t, i t m ust be able to id e n tify p o te n tia l problem s before th e y result in a loss th a t m ust be covered b y d e p o s it insurance. Second, once the p ro b le m has been id e n tifie d , the supervisory b o d y m ust have the a u th o rity to enforce c o rre c tiv e measures o r to p re v e n t the situ a tio n fro m de te rio ra ­ tin g further. T h ird , once i t has id e n tifie d the p ro b le m and has the necessary re g u la to ry pow ers, i t m u s t n o t hesitate to use its a u th o rity as appropriate. A s a ru le , the su p e rv is o ry process makes it possible fo r regulators to id e n tify banks th a t c o u ld in c u r deposit-insurance losses. H o w e v e r, in some cases such problem s - i n the le v e l o f c a p ita l reserves o r ra tin g s - are n o t fu lly detected. In a d d itio n , banks, fo r th e ir part, m ay “ e rr” w hen setting th e ir le v e l o f loan-loss p ro v is io n s , th ro u g h e ith e r excessive o p tim ­ is m o r d e liberate m isrepresentation. T here are three reasons w h y the a u d itin g process m ay n o t alw ays de te rm in e a b a n k ’s tru e fin a n c ia l THE MODERNIZATION OF BANK SUPERVISIO N • CHRISTIAN LARRAIN P. 102 C E P A L REVIEW 54 status. F irs t, som e types o f pro ble m s m a y arise sud­ d en ly. Second, som e banks m a y n o t have been a ud ited o fte n enough. I f a b a n k has in itia lly been c la s sifie d s im p ly as a “ tro u b le d ” o r “ p ro b le m ” b a n k 5 and the n fa ils w ith in s ix m on ths, i t m a y be th a t i t was n o t a u d ite d w ith s u ffic ie n t frequency. T h ird , audits m a y s im p ly fa il to b rin g to lig h t the f u ll m agnitude o f the p ro b le m . U nless th e p ro b le m s th a t e x is t are p ro p e rly id e n tifie d , the p o s s ib ilitie s o f ta k in g e a rly actio n to a p p ly c o rre c tiv e m easures to u n de rca p ita lize d banks are v e ry lim ite d indeed. F u rth e rm o re , s u p e rv is o ry b o d ie s ’ p ro b le m id e n tific a tio n ca p a b ilitie s are o f lim ite d usefulness unless th e y also have s u ffic ie n t a u th o rity to enforce c o rre c tiv e measures. U su a lly , w h e n a b a n k ’s fin a n c ia l standing begins to deteriora te, supervisory agencies have a range o f o p tion s to choose fro m in ord e r to rem edy the p ro b le m . F o r exam ple, fo llo w in g each in s p e c tio n , a b a n k ’ s e x a m in e rs m a y m e e t w ith m a n ag em en t, in c lu d in g th e b o a rd o f d ire c to rs , to discuss the b a n k ’ s o p e ra tio n s . These in fo rm a l d is ­ cussion s are o fte n e n o u g h to r e c tify th e less serious sorts o f p ro b le m s . In m ore serious cases, regulators m ay have re­ course to recapitalization plans, o r they m ay b lo c k out­ w ard transfers o f funds, lim it the ba nk’s exposure in certain types o f operations, restrict the paym ent o f d iv i­ dends, lim it g ro w th , m ake s ta ff changes at m anage­ m e n t le v e ls o r im pose a freeze o n b a n k operations. I t is im p o rta n t to note th a t su pe rvisory agencies are o fte n g iv e n fo rm a l a u th o rity to take co rre c tiv e measures in respect o f fa lte rin g banks b u t the a d m in ­ is tra tiv e re qu ire m e n ts re g a rd in g the e vidence they m ust gather in ord er to d o so are so e xa ctin g th a t it is e x tre m e ly d iffic u lt fo r th e m to com pe l a b a n k that is op e ratin g w ith in the la w and m a k in g a p r o fit to in ­ crease its c a p ita l reserves o r a p p ly m o re p ru d e n t p o lic ie s in s p e c ific areas. T h e th ird re q u ire m e n t fo r p ru d e n tia l su pervisio n is the d e te rm in a tio n o f s u p e rviso ry agencies to use th e ir a u th o rity. I t is o fte n argued that these agen­ cies have the pro p e r to o ls fo r c o n tro llin g a b a n k ’s 5 In the United States, the Office of the Comptroller of the Cur­ rency (OCC) uses an internal classification system whereby banks are rated on a scale from 1 to 5. Troubled banks are given a rating of 3. Although this category does denote a faulty perfor­ mance, it does not mean that the financial institution in question may be expected to fail in the near future. • D E C E M B E R 1994 exposure b u t la c k s u ffic ie n t in centives to use those to o ls approp ria tely. V a rio us reasons fo r th is have been cited. O ne factor is that regulators tend to be co-opted b y the industry they regulate. In other w ords, the regulators are under pressure to serve and prom ote the industry they oversee. T he prospect o f obtaining a future post in the industry m ay also be a factor in the sometimes per­ m issive attitude adopted b y regulators (M is h k in , 1992). A second fa c to r th a t m ay m ake regulators u n ­ w illin g to take a ctio n is the strong p o litic a l pressure th a t m a y be b ro u g h t to bear in som e situations in ord e r to p ro te c t certain social groups w hose interests m ig h t be h u rt i f a crisis w e re to e ru p t in a g iv e n bank; th is m ay stop re g u la to ry agencies fro m ta k in g appro­ p ria te action. A th ird fa c to r is th a t sup e rviso ry bodies m ay be re lu c ta n t to step in q u ic k ly w h e n a ba n k is in d iffic u l­ ties because ba n k fa ilu re s and the re s u ltin g deposit insurance pay-outs m a y h u rt the su pervisory agency’s im age b y m a k in g i t seem th a t i t has n o t been d o in g its jo b . A c c o rd in g to th is lin e o f reasoning, bank supervisors w o u ld p re fe r n o t to a d m it h o w serious the pro b le m s re a lly are and thus p u t o f f a d e fin itiv e so lu tio n . T h is is the hypothesis advanced b y The Economist (1 9 9 4 ) re g a rd in g the B anco L a tin o . In order to co u n te r the e ffe c t o f the incentives th a t e x is t fo r supervisors to adopt a p e rm is s iv e stance reg a rd in g the need to take c o rre c tiv e a c tio n in the case o f tro u b le d banks, and in v ie w o f the h ig h cost w h ic h the d e ferral o f such actio n m a y have, some circle s have proposed th a t su pervisory actio n should be governed b y clear-cut, m a ndatory ru le s and that re g u la to ry d is c re tio n a lity s h ould be e lim in a te d . There are tw o argum ents against th is approach (S tig litz , 1993). W ith regard to the “ ru le s versus d is ­ c re tio n a lity ” debate, the firs t is that i t is im p o s s ib le to fo rm u la te rules th a t w ill f i t the p a rtic u la r circum sta n­ ces in every case. T h e second is that the use o f any set o f rules increases the lik e lih o o d o f m a k in g tw o types o f m istakes: c lo s in g d o w n banks th a t should be le ft open, and fa ilin g to close banks th a t should be p u t o u t o f action. C h a n g in g the standards in one d i­ re c tio n o r the other w o u ld p ro b a b ly increase the fre ­ quency o f one o f those types o f errors w h ile re d u cin g th a t o f the other. O ne possible s o lu tio n w o u ld be a system in w h ic h , in the n o rm a l course o f events, u n dercapi­ ta liz e d banks w o u ld be subject to a series o f pres­ u m p tio n s th a t w o u ld trig g e r the im p le m e n ta tio n o f THE MODERNIZATION OF BAN K SUPERVISIO N • CHRISTIAN LARRAIN P. C E P A L RE VIEW 54 c o rre c tiv e m easures b y the re le v a n t sup e rviso ry agency, in a cco rd a n c e w ith the s e v e rity o f the p ro b le m . D e p a rtu re s fr o m th is p a tte rn w o u ld be m ade a t th a t a g e n c y ’ s d is c re tio n b u t w o u ld be lim ite d in e x te n t b y re g u la to ry p ro v is io n s . 2. Strengthening the role of capital in institutional incentives T h e fin a n c ia l stan d ing o f b a n k in g in s titu tio n s is d e te rm in e d b y a set o f fa c to rs w h ic h are sum m ed up b y the tra d itio n a l m o d e l k n o w n as CAMEL6 (L a rra in , 1993). I t can be argued, h o w e ve r, th a t a s u ffic ie n t s u p p ly o f c a p ita l is, v ir tu a lly b y d e fin itio n , the single m o st d e c is iv e fa c to r in b a n k solven cy. T h e connec­ tio n b etw ee n an in s u ffic ie n t s u p p ly o f c a p ita l and in s o lv e n c y is o b vio u s, sin ce a b a n k is a cknow ledg ed to be in s o lv e n t o n ly w h e n its c a p ita l reserves becom e d a ng ero usly s m a ll o r d isap pe a r altogether. T h e b e n e fits o f a s u ffic ie n t s u p p ly o f c a p ita l m ay be su m m a rize d as fo llo w s :7 ( i) A lower probability o f insolvency. T he m ore c a p ital a b a n k has, the b e tte r i t w ill be able to cope w ith unexpected losses w ith o u t fe a r o f insolven cy, thus g iv in g re g u la to rs tim e to take p ru d e n tia l measures. ( ii) Fewer incentives fo r risk-taking. S to ck h o l­ ders w hose c a p ita l c o m m itm e n ts are s m a ll have m ore in ce ntive s to take ris k s (“ i f the business deal is a success, I stand to g a in a lo t; i f i t fa ils , then the bank w ill be th e loser” ). T h e clo se r a b a n k ’s c a p ita l co m ­ m itm e nts b rin g i t to in s o lve n cy , the m o re perverse the in ce n tive s w ill be. ( iii) A reduction in deposit-insurance exposure. W h e n a b a n k fa ils , each d o lla r o f the losses th a t can be cove re d b y its c a p ita l is one d o lla r less that m ust be covered w ith p u b lic assets. D e sp ite the above co nsid eratio ns, h ow ever, ca p i­ ta l req uire m e n ts sho uld n o t be ra ised so h ig h th a t th ey w o u ld p ro te c t a b a n k fro m any sort o f system w id e shock w hatsoever, because this w o u ld m ake the b a n k in g business u n v ia b le . F u rth e rm o re , th e ro le o f p ru d e n tia l s u p e rvisio n is p re c is e ly to p re ve n t such catastrophic events fro m o c c u rrin g in the firs t place. T hus, the s o lu tio n is m o re co m p lica te d than s im p ly ra is in g c a p ita l standards across the board. 6 The elements taken into account in this model are Capital, Assets, Management, Earnings and Liquidity; hence the acro­ nym CAMEL. 7 See United States Department of the Treasury (1991). • D E C E M B E R 1994 103 S trengthening the s u p e rviso ry ro le o f c a p ita l in ­ v o lve s the fo llo w in g : (i) A d a p tin g c a pital standards so that, ra th e r than b e ing m easured as a fu n c tio n o f a fix e d d ebt ra tio , c a p ita l requirem ents w il l be fle x ib le and based on ris k -w e ig h te d assets, a long the lin e s o f the B asle A c ­ c o rd (L a rra in and Z u rita , 1993; B a n k fo r In te rn a ­ tio n a l Settlem ents, 1988). T h e purpose o f a scheme o f th is sort is to m ake c a p ita l costs sensitive to the le v e l o f ris k associated w ith fin a n c ia l in s titu tio n s ’ as­ sets. T h e e m p iric a l evidence (A v e ry and Berger, 1990) show s th a t a system o f c a p ita l standards based on asset ris k is m ore e ffe c tiv e than a schem e based on fix e d requirem ents in p re v e n tin g ba n k failures. (ii) E s ta b lish in g d iffe re n tia te d le ve ls o f su p e rvi­ sion based on the am ount o f c a p ita l b a c k in g . T he idea is fo r the le v e l o f su pervisio n to increase as a b a n k ’s b a c k in g declines. T h e a im o f such a p rocedure -a s w ith the a p p lic a tio n o f c a pital “ zones” in the U n ite d S ta te s- is to m ake the e xte n t to w h ic h a b a n k ’s c a p ita l p o s itio n has w eakened the fa c to r th a t triggers the im p le m e n ta tio n o f the b a tte ry o f re g u la ­ to ry to o ls ava ila b le to b a n k supervisors (Federal R eserve B a n k o f C le ve la n d , 1993). ( iii) R a is in g c a pital requirem ents w hen types o f business operations are em barked upon w h ic h fa ll outside the sphere o f tra d itio n a l b a n k in g a c tiv itie s . T h e idea here is to raise c a p ita l standards o n ly w h e n an in s titu tio n m oves in to new te rrito ry . There are tw o m a in grounds fo r th is proposal. F irst, ris k is generated b y an in s titu tio n ’ s re la tiv e la c k o f expertise re g a rd in g n ew operations and b y a la c k o f experience w ith th e ir supervision. T h e clearest exam ple o f th is is p ro v id e d b y overseas subsidiaries. M o s t o f the L a tin A m e ric a n countries have n o tra d i­ tio n o f overseas b a n kin g , and th is creates a h ig h e r le v e l o f ris k , w h ic h m ust be taken in to account. A c c o rd in g ly , any m ove to em b a rk up o n in te rn a tio n a l a c tiv itie s s hould be based on v e ry s o lid b a n k in g in s titu tio n s th a t are b e tte r able to deal w ith the le v e l o f ris k in v o lv e d in such operations. I t is also u n lik e ly th a t the re g io n ’ s sup e rviso ry agencies can p ro v id e e ffe c tiv e s u p p o rt fo r such o p e ra tio n s, because th e y la c k e x p e rie n c e w ith th is ty p e o f a c tiv ity (u n lik e th e case o f o p e ra tio n s in ­ v o lv in g the E u ro p e a n C o m m u n ity o r th e U n ite d States). T h is , to o , increases the ris k associated w ith an in te rn a tio n a liz a tio n process, w h ic h can be reduced b y re s tric tin g these operations to m ore h e a v ily ca p ita liz e d banks. THE MODERNIZATION OF BANK SUPERVISIO N • CHRISTIAN LARRAIN P. 104 C E PA L R E V IEW 54 Second, there is the ris k generated b y an increase in s yste m -w id e ris k . S ystem ic ris k arises w h e n the fa ilu re o f a fe w la rg e debtors puts th e e n tire system in je o p a rd y. W h e n banks broade n th e ir range o f ac­ tio n b y o p e nin g up subsidia rie s, i t is possible that: (i) the le v e l o f syste m -w id e ris k w ill rise be­ cause the fa ilu re o f a n y b a n k w ill in v o lv e a larger n u m b e r o f business a c tiv itie s , and ( ii) the social cost o f m a in ta in in g the system ’s s ta b ility in the face o f d is ru p tiv e shocks w ill increase. E v e n in cases w h e re the coverage o f e x p lic it fo rm s o f g o v e rn m e n t in su ra n ce is c o n fin e d to a b a n k ’s pare nt com pany, a su b s id ia ry ’s d iffic u ltie s m ay spread to th a t co m p a n y too. I f the m arket per­ ceives the existence o f a lin k betw een a b a n k and its subsidiaries -a n d e s p e c ia lly i f there are fe w lim ita ­ tio n s on the p o o lin g o f in ta n g ib le and ta n g ib le as­ s e ts - then, cle a rly, i f one o f these subsidiaries is in tro u b le , a b a n k w ill be m o tiv a te d to b a il it out. T his increases th e exposure o f the u n d e rly in g g overnm ent guarantees and extends the scope o f the “ safety net” . T h e m a in argum ents against the idea o f ra ising c a p ita l requirem en ts w h e n banks m o ve in to new areas o f business re fe r to th e ir p o te n tia l im p a c t on the banks’ in te rn a tio n a l com petitiveness. H o w e ve r, even though h ig h e r c a p ita l req uire m en ts m a y h u rt a b a n k ’s c o m p e titiv e p o s itio n in the sh o rt ru n , the experience o f d eve lo pe d countries in d ica te s q u ite c le a rly that, in the lo n g ra n , a b a n k ’s so lv e n c y has a strong p o s itive c o rre la tio n w ith its p ro fita b ility and the va lu e o f its stock. T hus, studies o f in te rn a tio n a l banks th a t are rated b y the IBCA d em onstrate th a t a p o s itiv e s ta tisti­ c a l c o rre la tio n exists b etw een the C o o k In d e x and p ro fita b ility and betw een th a t in d e x and stock prices (K re d ie tb a n k , 1993). These sam e studies also show th a t the w a y th is e ffe c t operates is to reduce the cost o f the funds to w h ic h the strongest banks have ac­ cess. T h is is because inve sto rs assess each b a n k ’s exposure/earnings ra tio a n d dem and a sm a lle r ris k p re m iu m fro m the banks w ho se fin a n c ia l standing is the m o st so lid . T h e study p re sen ting th e Treasury D e p a rtm e n t’s pro po sal to the U n ite d States C ongress re g arding the m o d e rn iz a tio n o f the U .S . b a n k in g system arrives at the same con clu sio n . T h is stud y underscores the fa ct th a t the U n ite d States b anks th a t are m ost successful in the in te rn a tio n a l m a rke tp la ce are also the ones that are the m o st solvent. A c c o rd in g ly , the proposal calls fo r the c re a tio n o f a ca te g o ry to be ca lle d “ Z o n e 1” • D E C E M B E R 1994 fo r the m o st h e a v ily c a p ita liz e d banks, w h ic h w o u ld e n jo y greater re g u la to ry la titu d e . 3. Book or market value? A n approach th a t is based on p ru d e n tia l sup e rvisio n and places em phasis o n the ro le o f c a p ita l should ensure th a t the re le v a n t a u th o rity w ill step in b e fo re a b a n k ’ s net w o rth fa lls to zero o r less in ord e r to fo re ­ s ta ll losses th a t w o u ld u ltim a te ly be charged against gove rn m e n t d e p o sit insurance. I f this is to be done, it is essential th a t a b a n k ’ s eco n o m ic v alue o r ca p ita l should be m easured accu ra te ly (S tig litz , 1993). T here is som e co n tro v e rs y about the m easure­ m e n t o f b a n k assets and lia b ilitie s . A c c o rd in g to ge nera lly accepted a cco u n tin g p rin c ip le s, c a pital re ­ quirem ents are calcu la te d on the basis o f h is to ric a l costs. A p praisa ls based on b o o k values (o r h is to ric a l costs) generate a system atic bias, since assets w h ic h are appraised at b e lo w -m a rk e t va lu e m ay be sold o ff at a p ro fit, w h ile ove rva lu e d assets m ay be k e p t on the books in o rd e r to a v o id re c o rd in g a loss (M is h k in , 1992). A n across-the-board appraisal a t m a rke t prices w o u ld enable regulators to determ ine v e ry ra p id ly w hen a b a n k ’ s c a p ita l reserves are fa llin g b e lo w the re quired le ve ls; th is , in tu rn , w o u ld a llo w th e m to take co rre c tiv e measures b e fo re the b a n k ’s net w o rth fa lls to zero. T h is w o u ld reduce the losses th a t have to be covered b y d eposit insurance, and there w o u ld be less in c e n tiv e fo r a b a n k to adopt a h ig h -ris k strategy w hen its fin a n c ia l status is d e teriora ting . D esp ite the s u p e rio rity o f th is approach on the theore tical plane, how ever, across-the-board apprai­ sals at m arket prices pose serious problem s fro m a p ra c tic a l sta n d p o in t. S ince there are no secondary m arkets fo r m a n y o f b a n k in g in s titu tio n s ’ assets and lia b ilitie s , th e ir m a rk e t values w o u ld have to be e sti­ m ated on the basis o f som e so rt o f discounted cash flo w (DCF) analysis. T h e s u b je c tiv ity in h e re n t in such procedures w o u ld lessen the c o m p a ra b ility o f esti­ mates prepared b y d iffe re n t agencies, thereby ham ­ p e rin g the s u p e rv is o ry process. These types o f problem s w o u ld , fu rth e rm o re , open up p o ss ib ilitie s fo r increased m a n ip u la tio n , w h ic h w o u ld in tu rn spark greater u n c e rta in ty about the true fin a n c ia l status o f such in s titu tio n s , w hose v ia b ility hinges upon p u b lic c o n fid e n c e (U n ite d States D epartm ent o f the Treasury, 1991). THE MODERNIZATION OF BAN K SUPERVISIO N • CHRISTIAN LARRAIN P. C E P A L RE VIEW 54 F u rth e rm o re , the a ctu a l cost o f d e v e lo p in g and im p le m e n tin g a com prehensive system fo r appraising assets at th e ir m a rk e t v a lu e c o u ld be q u ite h ig h , and th is w o u ld h u rt sm a lle r in s titu tio n s . F o r the ab ove reasons, co n d u c tin g across-theb oa rd m a rk e t-v a lu e appraisals w o u ld be a c o m p le x p ro p o s itio n at the present tim e , b u t th is approach should nevertheless be g iv e n increasing w e ig h t. O n the one hand, m easuring va ria tio n s in m a rk e t prices b ro u g h t a bo u t b y rate changes w o u ld n o t pose any m a jo r d iffic u lty . O n the o th e r hand, h o w ever, w h e n such v a ria tio n s are th e re s u lt o f the assets’ c re d it ris k , the s itu a tio n is m ore co m p lica te d , and in th is case a schem e o f p ro v is io n s based on estim ates o f the p ro ­ je c te d decrease in the va lu e o f those assets w o u ld have to be used. T h is system w o u ld p e rm it regulators to m ake a p ro p e r assessment o f a b a n k ’s econom ic valu e w ith o u t ru n n in g u p costs that w o u ld fa r exceed th e b enefits o f such an appraisal. In a d d itio n , i t w o u ld be feasible to increase the fre qu e n cy o f sup e rviso ry a c tiv itie s so th a t a p ic tu re o f each b a n k ’s status c o u ld be p u t together and then updated on an ongoing basis. F in a lly , i t is im p o rta n t fo r regulators to be m in d ­ fu l o f the im p e rfe c tio n s in v o lv e d in m easurem ents o f a b a n k ’s n e t w o rth w h e n the tim e com es to establish re g u la to ry standards. I f a b a n k ’ s le v e l o f e conom ic ca pita l cannot be d e te rm in e d w ith a h ig h degree o f accuracy, then c a pita l requirem en ts s h o uld be s trin ­ gent enough to leave a safety m a rg in so th a t p ru d e n ­ tia l a c tio n m a y be taken even in cases w here m easurem ents are n o t e xa ct (S tig litz , 1993). 4. The management of financial risk A s a consequence o f the m o u n tin g v o la tility o f in te r­ n a tio n a l rates, since the m id -1 9 7 0 s losses caused b y unexpected changes in in te re st o r exchange rates h ave com e to be an in c re a s in g ly serious p ro b le m fo r fin a n c ia l in s titu tio n s . These k in d s o f losses are sustained, fo r exam ple, w h en an unexpected rise in inte rest rates causes the m a rke t v a lu e o f assets to decrease m ore than the m a rke t va lu e o f lia b ilitie s . T h is d iffe re n tia l change in m a rk e t values occurs w he n an in s titu tio n ’ s assets are less sensitive than its lia b ilitie s (K a u fm a n , 1984). In the fin a l analysis, any v a ria tio n in rates can have an im p a c t on a b a n k ’s net earnings and p ro fita b ility depending up o n its exposure, w h ic h , in turn, is a re fle c tio n o f h ow e ffic ie n tly i t has m anaged its assets and lia b ilitie s . • D E C E M B E R 1994 105 T h e problem s associated w ith fin a n c ia l ris k are q u ite w e ll k n o w n , b u t it is no easy task to m easure levels o f ris k accurately, and w ith o u t such m easure­ m ents ris k m anagem ent is im p o ssib le . T h is u nder­ scores the im p o rta n ce o f h a ving suitable m ethodologies fo r co ve rin g ris k . A lo n g these same lines, in te rn a tio n a l regulators w o rk in g w ith in the fra m e w o rk o f the B asle A c c o rd are considering the p o s s ib ility o f a d ding a fin a n c ia lris k c o m ponent to e x is tin g c a p ita l standards (B a n k fo r In te rn a tio n a l S ettlem ents, 1993). T his m arks a departure fro m the c u rre n t approach, w h ic h deals w ith fin a n c ia l ris k p rim a rily th ro u g h the estab­ lis h m e n t o f caps. In the pro p o sa l w h ic h is n o w b e ing fo rm u la te d , the id e a is to re q u ire a p ro g re ss iv e ly h ig h e r le v e l o f c a p ita l as fin a n c ia l ris k increases (the reader w ill re c a ll th a t in te rn a tio n a l c a p ita l standards are c u rre n tly set on the basis o f c re d it r is k ra th e r than fin a n c ia l ris k .) C a p ita l requirem ents g iv e banks greater in c e n ­ tiv e s to hedge th e ir ris k than lim its do, w h ile a t the same tim e ensuring th a t th e y have a “ cushion” o f c a p ita l to absorb unexpected losses. A lth o u g h there are d iffic u ltie s in v o lv e d in th e ir p ra c tic a l im p le m e n ­ ta tio n , advances in the a p p lic a tio n o f m odels th a t pe r­ m it m o re precise m easurem ents o f fin a n c ia l ris k w o u ld c le a rly b rin g advantages, since these p ra c tic a l problem s co u ld be surm ounted b y a p p ly in g s im p li­ fie d versions o f e x is tin g m e th odologies fo r the m eas­ u rem ent o f such ris k . I t m ay p ro v e necessary to use a c o m b in a tio n o f c a pital requirem ents and lim its in ord e r to establish absolute c e ilin g s on b a n k exposure w h ile at the same tim e re in fo rc in g in te rn a l controls. 5. The regulation of financial conglomerates A t the in te rn a tio n a l le v e l, b a n k in g a c tiv itie s are tend­ in g to expand in to areas th a t fa ll outside the in d u s ­ t r y ’ s tra d itio n a l sphere o f a ction. T h e m a in purpose fo r o ffe rin g com prehensive fin a n c ia l services is to take advantage o f econom ies o f scope. T h e expansion o f a b a n k ’ s lin e o f business does, h o w ever, in v o lv e s ig n ific a n t p o te n tia l costs: i) a p o te n tia l increase in syste m -w id e ris k ; ii) an in te n s i­ fic a tio n o f c o n flic ts o f interest; and iii) the p o s s ib ility o f u n fa ir c o m p e titio n th ro u g h cross-subsid ization (H e rrin g and S antom ero, 1990). T h e subject o f syste m -w id e ris k w as discussed in som e d e ta il in an e a rlie r section and w ill therefore n o t be de a lt w ith here. THE MODERNIZATION OF BANK SU PER VISIO N • CHRISTIAN LARRAIN P. 106 CE PA L REVIEW 54 C o n flic ts o f in te re st are a p ro b le m th a t does n o t o rig in a te in the p ro v is io n o f State b a c k in g fo r som e b a n k deposits b u t is in stea d co m m o n to the capital m a rk e t as a w h o le a n d to m a n y o th e r m arkets as w e ll (V aldés, 1989). T h e b ro a d e r the spectrum o f fin a n c ia l services that a fir m o ffe rs , the greater the lik e lih o o d th a t c o n flic ts o f in te re s t w ill arise (H e rrin g and S antom ero, 1990), and since conglom erates are in ­ v o lv e d in a bro ad e r ra ng e o f transactions, they also have a b ro a d e r in fo rm a tio n base. C o n flic ts o f in te re s t m a y em erge w hen banks en­ gage in business transactions w h ic h , b y d e fin itio n , in v o lv e m a k in g investm ents on b e h a lf o f th ird parties (M o ra n d é and Sánchez, 1992). In such cases, banks - w h ic h also in v e s t on th e ir o w n b e h a lf- c o u ld reserve the best deals fo r them selves and use the rest fo r th ird -p a rty in vestm e nts. T h e y c o u ld also use th ird -p a rty funds to m ake transactions in advance on th e ir o w n , as a m eans o f in flu e n c in g m a rket prices. C o n c e rn about the p o s s ib ility o f u n fa ir c o m p e ti­ tio n arises o u t o f th e fe a r th a t a fin a n c ia l c o n g lo m ­ erate m ig h t m ake use ( im p lic itly o r e x p lic itly ) o f its access to th e C e n tra l B a n k as its le nd er o f last resort, o r o f the lo w e r cost o f its funds due to its coverage b y g o v e rn m e n t d e p o s it insurance, to subsidize oth e r lin e s o f business. T h is m a y d is to rt c o m p e titio n w ith o th e r firm s th a t d o n o t have s im ila r sorts o f b a cking. S ince co m p re h en sive fin a n c ia l services are p ro v id e d c h ie fly b y conglom erates (V aldés, 1989), the b a n k in g system ’s in s titu tio n a l structure becom es a fu n d a m e n ta l fa c to r in re in fo rc in g the social benefits o f the process and in m in im iz in g the associated costs. In such cases, re g u la tio n is essential in order to o b ta in o p tim u m results. T h e c e ntra l a im o f b a n k re g u la tio n should be to p ro te c t banks so as: i) to ensure that the safety net - w h ic h in c lu d e s access to the C entral B a n k as a source o f liq u id ity and go vernm e n t deposit in s u r­ a n c e - is n o t e xtended to in c lu d e a c tiv itie s in w h ic h b a n k in g expe rtise is irre le v a n t; ii) to lim it cross­ s u b s id iz a tio n (w h e th e r im p lic it o r e x p lic it) b y the b a n k o f its subsidia rie s o r a ffilia te s ; and i i i) to fo re s ta ll c o n flic ts o f in te re s t and prevent in s id e r tra d ­ in g (U n ite d States D e p a rtm e n t o f the Treasury, 1991). T h is does n o t m ean th a t a ll o f a b a n k ’s n o n tra d itio n a l a c tiv itie s need to be co m p le te ly separate; th is w i l l d e p e n d o n th e n a tu re o f each a c tiv ity (i.e ., on h o w m u c h i t c o m p le m e n ts tra d itio n a l b a n k in g a c tiv itie s , o n p o s s ib le o p p o rtu n itie s fo r • D E C E M B E R 1994 th e use o f econom ies o f scope, on the p o te n tia l con­ flic ts o f interest in v o lv e d , and on the cost o f re g u la ­ tio n and supervision). A b a n k m ay undertake n e w a c tiv itie s e ith e r d i­ re c tly (th ro u g h a departm e nt o f the b a n k) o r th ro u g h a subsidia ry o r an a ffilia te th a t belongs to the same h o ld in g com pany. These various fo rm s o f organiza­ tio n generate d iffe rin g degrees o f le g a l, econom ic and m a rke tin g distance betw een the bank and these new a c tiv itie s (U n ite d States D epartm ent o f the Treasury, 1991). T h e various possible blends o f le g a l and oper­ a tio n a l separateness can be translated in to three basic organ iza tio n a l m odels fo r fin a n c ia l con g lo m e ra te s.8 Model 1 T h e c o m p le te ly in te g ra te d m o d e l -a ls o k n o w n as the G erm an m u ltib a n k m o d e l- enables a c o n g lo m ­ erate’s executives to d ire c t a ll o f its a c tiv itie s w ith in a single e n tity ; thus, w ith th is structure, any co m b in a ­ tio n w hatsoever o f fin a n c ia l products can be p ro ­ v id e d a t the lo w e s t p o ssib le cost. T h e greater op erationa l e ffic ie n c y o f th is o p tio n m ust, how ever, be w e ig h e d against its costs. T h e problem s posed b y o lig o p o lis tic practices, c o n flic ts o f interest and d is ru p tiv e shocks m a y be exacerbated in a m u ltib a n k scheme. M o re o ve r, there w o u ld p o te n tia lly be a great deal o f ro o m fo r the bank to p ro v id e im p lic it subsidies to its other lin e s o f business. I t is also m ore d iffic u lt to regulate th is type o f structure than w hen a b a n k confines its e lf to tra d i­ tio n a l b a n k in g a c tiv itie s .9 In the absence o f any oper­ ational o r le g a l separation, the c o m b in a tio n o f a w id e range o f fin a n c ia l a c tiv itie s presents regulators w ith the ch allenge o f g rasping the im p lic a tio n s o f the p ru d e n tia l sup e rvisio n o f a large num ber o f d iffe re n t fin a n c ia l p ro d u c ts . A s a re s u lt, the re g u la tio n o f th is ty p e o f o rg a n iz a tio n m a y be b o th c o s tly and im p re c ise . 8 Apart from these pure theoretical models, others can be formed from the various possible combinations of them. 9 In his analysis of the German banking model, Kregel (1992) concludes that the most significant factor in this model is not the lack of regulation, but rather a different regulatory approach. THE MODERNIZATION OF BAN K SUPERVISIO N • CHRISTIAN LARRAIN P. C E P A L R E V IEW 54 Model 2 In th is second basic type o f structure, b a n kin g a c tiv itie s are con d ucted b y the p a re n t bank w h ile n o n -b a n k in g fu n c tio n s are p e rfo rm e d b y separate co rp orate subsidiarie s. T h is structure, w h ic h c o rre ­ sponds to th e B ritis h m o d e l, is th e basis fo r the schem e c u rre n tly b e in g im p le m e n te d in C h ile . L e g a l separation has som e costs in term s o f e ffi­ cien cy, ho w e ver, and the cost o f p ro d u c in g a g iv e n m ix o f fin a n c ia l services m a y th erefo re be som ew hat h ig h e r tha n in the prece ding case, b u t th is m o d e l also has tw o c o u n te rv a ilin g advantages. F irs t, the separ­ a tio n o f b a n k in g a c tiv itie s fro m n o n -b a n kin g ones fa c ilita te s e q u ita b le sup e rvisio n o f b o th ba n k-re ­ la te d enterp rises and inde pe n de n t concerns in the same lin e o f business, w h ic h also reduces the cost o f sup ervisio n. Second, in theory, th is m o d e l shields the ba n k i f o th e r a c tiv itie s undertaken b y the c o n glom erate tu rn o u t b ad ly, y e t a llo w s it to b e n e fit fro m p o s itiv e o u t­ com es. Because th ey have lim ite d lia b ility , n on-ba nk subsidiarie s can augm ent b u t n o t d im in is h the v alue o f th e bank. T h is m a y p ro v e to be an e m p ty advantage, h o w ­ ever, i f the b a n k feels th a t its re p u ta tio n and the cost o f its funds c o u ld be adversely affe cte d b y a subsi­ d ia ry ’s b a n k ru p tc y ; in such cases, the b ank w ill have in c e n tiv e s to p ro p up th is su b sid ia ry even w hen d o in g so req uires a sum g reater than its c a p ita l in ­ vestm ent. I f the m a rke t re in fo rc e s this p e rce p tio n , the c o st o f the co n g lo m e ra te ’s fu n ds w ill be reduced, b u t c o m p e titio n w ith th e a c tiv itie s o f firm s n o t lin k e d to a fin a n c ia l c o ng lo m e ra te w ill be distorted. In o rd e r to reduce this ris k , re g u la to ry au th o ritie s m a y seek to establish o pe ra tio n a l separation in o rd e r to b a c k u p the e x is tin g le g a l separation o f a ctiv itie s . T h e cost o f such a course o f a ctio n in term s o f e ffi­ c ie n c y is clear, b u t its c o n trib u tio n to the re in fo rc e ­ m e n t o f m a rk e t d is c ip lin e fo r the s u b sid ia ry is less certain. Model 3 A th ird ty p e o f structure is the h o ld in g -c o m p a n y m o d e l, w h ic h is custo m ary in th e U n ite d States. H ere the parent c o m p a n y ow ns b o th the bank and its n o n ­ b a n k counterp a rts. S ince the le g a l separation is g reate r here than in the pre ce d in g m odel, the cost o f p ro v id in g a g iv e n c o m b in a tio n o f fin a n c ia l products is p ro b a b ly som ew h at h ig h e r w ith th is o p tio n . T h is m o d e l does, ho w e ve r, capture som e o f the social • D E C E M B E R 1994 107 be n e fits o f econom ies o f scope in the m a rk e tin g and d is trib u tio n o f fin a n c ia l p ro d u cts and presents less o f a th re a t to the safety net, since the extension o f that n e t beyond the b a n k is lim ite d . N evertheless, since op e ra tio n a l e ffic ie n c y m a y be h indered b y these “ fire b re a ks” , there m a y be som e loss o f e ffic ie n c y . F ro m a re g u la to ry standpoint, th is m o d e l has the same advantages o v e r m o d e l N o . 1 as m o d e l N o . 2, since i t fa c ilita te s e q u ita b le s u p e rvisio n and safe­ guards the bank. T h e m a in advantage o f m o d e l N o . 3 o v e r m o d e l N o. 2 is th a t the b a n k m a y have fe w e r in ce n tive s to shore up a n o n -b a n kin g u n it i f i t is an a ffilia te than i f i t is a su b sid ia ry o f the bank. In the U n ite d States, regulators have trie d to deepen this separation b y re q u irin g a n u m b e r o f w h a t are k n o w n as firebreaks: the a ffilia te m u st have a d iffe re n t nam e fro m th a t o f the bank, separate s ta ff, separate offic e s and separate d is trib u tio n n e tw o rks. T he a im o f these m easures is to s o fte n the adverse im p a c t w h ic h the b a n k ru p tc y o f an a ffilia te m a y have on a b a n k ’ s re p u ta tio n . O b v io u s ly , the p a rtic u la r co n d itio n s in each c o u n try w ill determ ine w h ic h o f the m odels is the m o s t suitable choice. I t is essential to take the super­ v is o ry c a p a b ilitie s and the a u to n o m y o f the re g u la ­ to ry agency in to account in th is connection. T he nature o f the lin k s e x is tin g am ong the various groups in the b a n k in g a n d n o n -b a n kin g industries is also an im p o rta n t consideration, as is the possible existence o f gove rn m e n t guarantees in each case. 6. The implementation of an integrated supervisory approach G iv e n the incre a sin g c o m p le x ity o f the fin a n c ia l sys­ te m ’ s m ode o f o peration, progress m u st be m ade to ­ w ards the im p le m e n ta tio n , o f an in te g ra te d fo rm o f supervisio n. In o rd e r to a p p ly a schem e o f p ru d e n tia l o v e rs ig h t, s u p e rviso ry agencies need to m ake an on ­ g o in g , system atic analysis o f the m a in determ inants o f a b a n k ’ s status. T o d o so, the su p e rv is o ry schemes c u rre n tly b e ing used in the L a tin A m e ric a n countries - w h ic h are p rim a rily based on an e x a m in a tio n o f fin ­ a n c ia l in s titu tio n s ’ assets and p ro v is io n s - w ill need to be augm ented, w ith m o re em phasis on such ele­ m ents as ensuring adequate c a p ita liz a tio n and assess­ in g the in s titu tio n ’ s m anagem ent. U ltim a te ly , this m eans th a t the c o untries w ill need to m ove tow ards the im p le m e n ta tio n o f a C AM EL-type sup e rviso ry scheme. THE MODERNIZATION OF BAN K SUPERVISIO N • CHRISTIAN LA RRA IN P. 108 CE P A L R E V IEW 54 I t is im p o rta n t to p o in t o u t th a t the a p p lic a tio n o f such an ap proach dem ands a great deal o f c o o rd in a ­ tio n and in fo rm a tio n exchange w ith in s u p e rviso ry agencies re g a rd in g the va rio u s aspects o f the banks. A lth o u g h fo r purposes o f a nalysis it m a y be possible to d iffe re n tia te be tw een ca p ita l, assets, m anagem ent, etc., in p ra c tic e a ll these aspects are c lo se ly in te rre ­ la ted : fo r exa m p le, b ad m anagem ent m a y le a d to p ro b le m s in term s o f the q u a lity o f assets o r an in s u f­ fic ie n t le v e l o f capital. O ne o f th e w eakest areas o f b a n k in g sup e rvisio n in L a tin A m e ric a is the e v a lu a tio n o f m anagem ent, d espite the fa c t th a t th is is one o f the m o s t c ru c ia l c o n s id e ra tio n s in p ro je c tin g b a n k in g in s titu tio n s ’ fu tu re status, a b o ve and b e y o n d th e X - r a y p ro v id e d b y q u a n tita tiv e fin a n c ia l in d ic a to rs . In the U n ite d States, in contrast, the relevant super­ v is o ry b o d y - th e O ffic e o f the C o m p tro lle r o f the C u rre n c y (OCC)- regards the q u a lity o f m anagem ent as a p ivota l consideration. T he prem ise underlying every aspect o f the o c c ’s w o rk is that a bank’s management and board o f directors are u ltim a te ly responsible fo r how the institution functions. In order to gain a better under­ standing o f th e re la tiv e degrees to w h ic h external econom ic conditions and internal m anagem ent-related facto rs in flu e n c e a b a n k ’s perfo rm a n ce, the OCC con­ d u cte d a study on the su bject (OCC, 1988). T h is study showed that although adverse econom ic conditions m ake it m ore d iffic u lt fo r a bank to continue to m ake a p ro fit, the policies and procedures established b y a b a n k’s m anagem ent and board o f directors p la y a m ore in flu e n tia l ro le in determ in in g w hether the in s titu ­ tio n w ill succeed o r fa il. In other w ords, poor manage­ m e n t and other internal problem s are the com m on d e n o m in a to r shared b y in s o lv e n t o r fa lte rin g banks. • D E C E M B E R 1994 T h e q u a lity o f m anagem ent appears to have p la y e d a s ig n ific a n t ro le in the d o w n w a rd path o f 90% o f the in s o lv e n t o r tro u b le d banks th a t w ere evaluated b y the OCC. M a n y o f the d iffic u ltie s e x p e ri­ enced b y these banks had to do w ith fa u lty le n d in g p o lic ie s , problem s in c re d it id e n tific a tio n system s, o r a fa ilu re to enforce in-house p o lic ie s and b a n k in g regulations. In other cases, im p ru d e n t a ctio n on the p a rt o f a b a n k ’s directors o r m anagem ent le d to the g ra n tin g o f h ig h -ris k loans and o ve rle n d in g . S e lf­ e n ric h m e n t and fra u d w ere also a s ig n ific a n t fa c to r in m ore than o n e -th ird o f the banks th a t fa ile d o r th a t w e re in trouble. T h e e conom ic slum p added to the d iffic u ltie s o f m any o f the banks th a t w ere covered b y the study; in fa c t, the econom y was a s ig n ific a n t fa c to r in oneth ird o f the cases. Y e t e conom ic factors w ere ra re ly the o n ly cause o f the p ro b le m ; o n ly 7% o f the banks th a t fa ile d o r that w ere on shaky g ro u n d w ere fre e o f serious in te rn a l m anagem ent problem s. In sum, the study shows th a t a b a n k ’ s m anage­ m e n t and board o f directors are, in the fin a l analysis, responsible fo r its success o r fa ilu re . I f a fin a n c ia l in s titu tio n sets u p w e ll-d e s ig n e d p o lic ie s , controls and system s w hen the e co n o m ic s itu a tio n is fa v o u r­ able, i t w ill increase its chances o f c o n tin u in g to m ake a p ro fit w hen e conom ic c o n d itio n s take a tu rn fo r the worse. In a p ru d e n tia l supervisory system , w h e n defects in a b a n k ’s m anagem ent are detected they serve as the basis fo r the a p p lic a tio n o f c o rre c tiv e measures designed to solve the pro b le m s i t is e xperiencing. T h is p o in ts up the need fo r b a n k supervisors in the L a tin A m e ric a n countries to e xa m in e m anagem ent issues in greater depth. V Conclusions T h e in cre asing c o m p le x ity o f the b a n k in g system ’ s c u rre n t m o de o f o p e ra tio n o ffe rs fin a n c ia l in s titu tio n s a w id e range o f o p p o rtu n itie s fo r in cre asing th e ir e f­ fic ie n c y and p ro fita b ility , b u t i t also co n fro n ts b a n k re g u la to rs w ith a series o f challenges as th e y s triv e to ensure the ach ie vem en t o f th e sup e rviso ry system ’ s strategic o b jective s. T h is is dem onstrated b y the analysis o f recent b a n k crises -s u c h as those o f the B a nco L a tin o and BANESTO- w h ic h w as undertake n w ith a v ie w to a v e rtin g o r m in im iz in g fu rth e r crises o f th is sort. In order fo r a p ru d e n tia l fo rm o f sup e rvisio n to be im plem ented, supervisory bodies m ust have the ca p a city to id e n tify problem s accurately, m u st have THE MODERNIZATION OF BA N K SUPERVISIO N • CHRISTIAN LARRAIN P. C E P A L REVIEW 54 the a u th o rity to take c o rre c tiv e actio n b e fo re the p ro b le m s m ake th e ir e ffe c ts fe lt, and m u st be w illin g to take such action. T h e fo llo w in g are the m a in issues in the c u rre n t debate re g ard in g the m o d e rn iz a tio n o f the su p e rvi­ sory system in the b a n k in g sector. F irs t, there is the q u estion o f a stron ge r ro le fo r ca p ita l. I f the ro le o f c a p ita l is to be re in fo rc e d , then c a p ita l standards based o n the w e ig h tin g o f asset ris k m u s t be adopted, levels o f s u p ervisio n w ill have to be d iffe re n tia te d on the basis o f the le v e l o f c a p ita l b a ckin g a va ilable, and reserve requirem en ts fo r th e o p e ning o f n e w lin e s o f business w ill have to be raised. Second, v a lu a tio n m echanism s need to be re fin e d , a lon g w ith a gradual • D E C E M B E R 1994 109 s h ift in em phasis aw ay fro m b o o k values and tow ards m a rk e t prices. T h ird , fin a n c ia l ris k needs to be fa c ­ to re d in to c a p ita l standards. F o u rth , re g u la to ry sys­ tem s need to take the presence o f fin a n c ia l conglom erates in to account so th a t the in d u s try can take advantage o f the be n e fits o f econom ies o f scope w h ile m in im iz in g the p o te n tia l costs o f system -w ide ris k , c o n flic ts o f in te re st and cross-subsidization. T h e fifth and fin a l issue is the c o n so lid a tio n o f a co m p re ­ hensive s u p e rv is o ry system based o n the CAMEL m o d e l w h ic h w o u ld lo o k a t a ll the various aspects th a t in flu e n c e the status o f a fin a n c ia l in s titu tio n , w ith special em phasis on m anagem ent q u a lity . (O rig in a l: Spanish) Bibliography Avery, R. and A. Berger (1990): Risk-based capital and deposit insurance reform, Journal o f Banking and Finance, No. 15. Bank for International Settlements (1988): International Convergence o f Capital Measurement and Capital Standards, Basle, Switzerland, Committee on Bank­ ing Regulations and Supervisory Practices. (1993): The Prudential Supervision o f Netting, Mar­ ket Risks and Interest Rate Risks, Basle, Switzerland, April. Corbo, V., A Donoso, L. Hernández, F. Rosende and S. Valdés (1993): El sistema bancario chileno: desarrollos re­ cientes y sus perspectivas, Santiago, Chile, Catholic University of Chile, Instituto de Economía. Federal Reserve Bank of Cleveland (1993): Economic Commentary, Cleveland, United States, March. Held, G. and R. Szalachman (eds.) (1992): Regulación y supervision de la banca, vols. 1 and 2, Santiago, Chile, United Nations Development Programme (UNDP)/Economic Commission for Latin America and the Caribbean (ECLAC). Herring, R. and A. Santomero (1990): The corporate structure of financial conglomerates, Journal o f Financial Ser­ vices Research, Kluwer Academic Publishers. Kaufman, G. (1984): Measuring and managing interest rate risk: a primer, Economic Perspectives. Federal Reserve Bank of Chicago. Kredietbank (1993): Monthly Bulletin, Brussels, Novem­ ber. Kregel, J. A. (1992): Universal banking, US banking re­ form and financial competition in the EEC, BNL Quarterly Review, No. 182, September. Larraín, C. (1993): Adecuación de capital y regulación bancaria en Chile, Información Financiera, Santiago, Chile, Superintendency of Banks and Financial In­ stitutions (SBIF), August. Larraín, C. and F. Zurita (1993): El Acuerdo de Basilea, Información Financiera, Santiago, Chile, Superintendency of Banks and Financial Institutions (SBIF), July. Mishkin, F. (1992): An evaluation of the Treasury plan for banking reform, The Journal o f Economic Per­ spectives, vol. 6, No. 1, Nashville, TN, American Economic Association, Winter. Moody’s Investors Service (1992): Global Credit Ana­ lysis, London, IFR Books. Morandé, F. and J. M. Sánchez (1992): La expansión del giro bancario tradicional a los negocios no bancarios, La banca ante nuevos negocios y mercados, Santia­ go, Chile, Asociación de Bancos e Instituciones Financieras, Instituto de Estudios Bancarios. OCC (Office of the Comptroller of the Currency) (1988): An Evaluation o f the Factors Contributing to the Failure o f the National Banks, Washington, D.C. O’Connor, S. (1993): Factores de desarrollo del mercado de derivados: la experiencia de Canadá, Monetaria, vol. XVI, No. 2, Mexico City, Centre for Latin American Monetary Studies (CEMLA). Stiglitz, J. (1993): The role of the State in financial markets, World Bank’s Annual Conference on De­ velopment Economics, vol. 2, Washington, D.C., World Bank. The Economist (1994): A stitch too late. Venezuelan banks, London, The Economist Newspaper, 12 March. United States Department of the Treasury (1991): Rec­ ommendations fo r Safer, More Competitive Banks, Washington, D.C. Valdés, S. (1989): Regulación de los bancos y de sus ser­ vicios financieros afiliados, mimeo, Santiago, Chile. THE MODERNIZATION OF BAN K SUPERVISIO N • CHRISTIAN LARRAIN P. CEPAL REVIEW 111 54 Central American integration: its costs and benefits Luis René Cáceres Principal Officer, Department of Strategic Planning and Operational Policy, Inter-American Development Bank This article sums up the benefits and costs of Central American economic integration. Increased economic growth, industrialization based on intra-industry trade, and greater competition in a broader subregional market represent significant benefits for the Central American countries, although for the most part these benefits are concentrated in the more developed countries. The costs of integration stem from the inter-country monetary flows occasioned by currency arbitrage, currency substitution, and the high transaction costs associated with inconvertibility. The elimination of these costs would have other costs, however, in the form of the reduction of national autonomy with regard to macroeconomic policy as a consequence of multilateral coordination and monitoring. The article closes with a call for the establishment of coordination schemes that reach beyond the realm of macroeconomic policy; such schemes would encompass a subregional agenda for structural change and would direct the subregion’s efforts towards policy alignment as a means of doing away with disparities and making the Central American countries better able to integrate with one another and with the international economy. D E C E M B E R 1994 112 C E P A L REVIEW 54 • D E C E M B E R 1994 I Introduction In the la s t three years, the C en tra l A m e ric a n integra­ tio n process has m ade considerable headw ay, thus p u ttin g an e nd to the stagnation o f th is process seen d u rin g the 1980s. T ra d e w ith in C e n tra l A m e ric a has been s te a d ily o n the rise since 1986, and in 1992 it to ta lle d U S $ 8 9 2 m illio n , w h ic h w as close to the 1980 re c o rd h ig h . T h e u p tu rn can be accounted fo r b y the e c o n o m ic g ro w th o f the C e ntra l A m e ric a n countries, an im p ro v e m e n t in th e ir e x terna l liq u id ity , and the m a jo r a dvances m ade in th e e lim in a tio n o f trade b a rrie rs .1 Progress has also been s ig n ific a n t on the in s titu tio n a l fr o n t M a jo r accom plishm ents in this re­ spect in c lu d e the e n try in to ope ra tion o f the secreta­ ria t o f the C e n tra l A m e ric a n In te g ra tio n System (SICA); N ic a ra g u a ’ s accession as a m em ber o f the C e n tra l A m e ric a n P a rlia m e n t; the co n c lu s io n o f trade and in v e s tm e n t agreem ents betw een the subregion and M e x ic o , V e n ezue la and C o lo m b ia ; advances in the coo rd in atio n o f econom ic p o lic y; and the approval b y the C entral A m e rica n presidents o f the P rotocol to the G eneral Trea ty on C entral A m e rica n E conom ic In ­ tegration. These events are a pro m isin g sign that Cen­ tral A m e rica n integration is entering in to w hat m ay w e ll p rove to be a n e w era o f great accom plishm ents. N eve rtheless, there is s till a great deal to be done b e fo re f u l l in te g ra tio n is a c h ie v e d , fo r e x p o rts betw een G uatem ala and E l S a lvador s till represent a f u ll 59% o f to ta l in tra -su b re g io n a l trade. M o re o ve r, in 1992 e x tra-subre gio nal trade w as b e lo w 1980 le ­ vels fo r a ll the countries except C osta R ica. Y e t an­ other fa c to r is th a t the le v e l o f in ve s tm e n t in p h y s ica l in fra s tru c tu re w h ic h is needed is considerable, as are the sh o rtco m in g s e x is tin g in the social sectors o f some countries. In v ie w o f th e p ro g re ss m ade in the p ast fe w years, th e o n g o in g process o f e c o n o m ic g lo b a liz ­ a tio n and the e n try in to fo rc e o f th e N o rth A m e r i­ can F re e T ra d e A g re e m e n t (NAFTA) b e tw e e n M e x ic o , th e U n ite d S tates a n d C anada, at th is p o in t in tim e i t w o u ld be a g o o d id e a to analyse th e c o n trib u tio n s th a t in te g ra tio n c o u ld m a ke to th e C e n tra l A m e ric a n e c o n o m ie s . T h e fo llo w in g a rtic le w i l l th e re fo re re v ie w th e b e n e fits th a t the C e n tra l A m e ric a n e c o n o m ie s c o u ld d e riv e fro m in te g ra tio n (s e c tio n I I ) , id e n tify som e o f th e o b ­ stacles th a t h a ve p re v e n te d these p o te n tia l b e n e fits fro m b e c o m in g a re a lity (s e c tio n I I I ) , d iscuss the p o s s ib le costs o f in te g ra tio n - a n d o f fa ilin g to in ­ te g ra te - an d p ro p o s e c e rta in p o lic y -c o o rd in a tio n and a lig n m e n t schem es th a t m ig h t k e e p those co sts to a m in im u m (s e c tio n I V ) a n d , fin a lly , p re s e n t a n u m b e r o f c o n c lu s io n s (s e c tio n V ). II What benefits would integration bring? 1. Domestic saving O ne p o te n tia l b e n e fit is an increase in dom estic sav­ in g as a re s u lt o f the expansion o f in tra -su b re g io n a l e x p o rts , g iv e n th e c a u s a l re la tio n s h ip b e tw e e n □ The author wishes to express his gratitude for the observations made by Iris Alvarez, Claudio Ansorena, Florencio Ballestero, Gilbero Chona, Uziel Nogueira, Oscar Núñez Sandoval, Luis Amado Sánchez and Gabriel Siri. The views expressed herein are, of course, the sole responsibility of the author. 1For a recent assessment of the Central American integration process, see ECLAC (1993). exports and saving in d e v e lo p in g countries (J.K . Lee, 1971; Laum as, 1982). B ased on annual data fo r the p e rio d 1971-1988, equations w ere estim ated fo r d o ­ m estic saving (S ) as a fu n c tio n o f exports d irected outside C e n tra l A m e ric a (X 0) and to C e n tra l A m e ric a ( X CA) an d fo r gross d o m e s tic in c o m e m in u s to ta l e x p o rts ( Y - X ) . T h e re s u lts are g iv e n in ta b ic 1. I t m a y be seen fro m th is ta b le th a t the c h ie f dete rm in a n t o f n a tio n a l saving is e xtra-subre gio nal exports. T h e c o e ffic ie n t fo r exports g o in g to C entral A m e ric a is n egative and s ta tis tic a lly s ig n ific a n t in G uatem ala and C osta R ic a and is p o s itiv e b u t n o t C E N T R A L A M ERIC A N INTEGRATION: ITS C O S T S AND B E N EF IT S • LU IS REN E C A C E R E S C E P A L RE VIEW 54 • D E C E M B E R 113 1994 TABLE 1 Central America: Saving and exports3 Equation R2 DW Guatemala 55.5801 + 0.0389 (Y-X) + 0.0732 X0 - 0.3454 XCA (1.97) (4.15) (12.57) (3.43) 0.98 1.53 El Salvador 99.5437 - 0.1915 (Y-X) + 0.8159 XQ + 0.5554 XC A (1.99) (5.65) (6.01) (1.69) 0.87 2.16 Honduras -17.8749 - 0.0285 (Y-X) + 0.5649 X0 + 0.5715 XC A (0.57) (0.94) (6.23) (6.12) 0.91 1.33 Costa Rica -101.4822 + 0.0192 (Y-X) + 1.00 X0 - 0.9359 XCA (2.61) (0.64) (11.77) (2.97) 0.96 2.02 Source: Permanent Secretariat of the General Treaty on Central American Economic Integration (SIECA), Estadísticas macroeconômicas de Centroamérica, Guatemala City, several issues. The series for Nicaragua was incomplete. a The statistical values of “t” are shown below the corresponding coefficients; R and DW stand for the coefficient of determination and the Durbin-Watson coefficient, respectively. s ig n ific a n t in the case o f E l Salvador. T h is indicates th a t e x tra -s u b re g io n a l e x p o rts d o n o t s tim u la te s a v in g , e x c e p t in H onduras. T h is m ay b e due to the fa c t th a t a la rg e p a rt o f in tra -s u b re g io n a l trade is m a d e u p o f c o n s u m e r g o o d s w h o s e p ro d u c tio n requ ire s th e im p o rta tio n o f in te rm e d ia te goods (Cáceres and Q u in ta n illa , 1990). 2. Trade creation A n o th e r p o ssib le advantage o f in te g ra tio n is th a t trade c re a tio n co u ld o u tw e ig h trade d iv e rs io n in in tra -s u b re g io n a l trade. T rade crea tion occurs w hen do m e stic p ro d u c tio n is d isplaced b y less expensive im p o rts fro m oth er m e m be r countries. T ra d e d iv e r­ sion takes place w h e n goods prod u ced a t re la tiv e ly lo w co st b y a c o u n try n o t b e lo n g in g to the in te g ra tio n schem e are replaced b y m o re e xpensive products fro m a m e m b e r c ou ntry. M easurem ents o f trade cre­ a tio n and d iv e rs io n are based on the assum ption that, in the absence o f in te g ra tio n , the in c o m e e la s tic ity o f to ta l im p o rts w o u ld re m a in constant. W h e n th e ir in c o m e e la s tic ity rises fo llo w in g in te g ra tio n , i t is d e d u ce d th a t tra de c re a tio n has o c cu rre d . In o rd e r to id e n tify the presence o f th is phe­ nom enon, an equa tio n was fo rm u la te d fo r H onduras fo r the p e rio d 1950-1969 th a t expresses to ta l im p o rts (M ) as a fu n c tio n o f gross n a tio n a l p ro d u c t (Y ), a d u m m y v a ria b le (W ) to show up the change in the in co m e c o e ffic ie n t d u rin g the p o s t-in te g ra tio n p e rio d (1 9 6 2 -1 9 6 9 ), and tim e (T ): Log M = -6.6249 + 1.8393Log Y - 0.0157 W - 0.0251 T R2= 0.97 (3.18) (5.37) (0.53) (2.88) DW = 1.68 T h e fa c t th a t the v a ria b le W is n o t s ta tis tic a lly s ig n ific a n t in d ic a te s th a t th e in c o m e e la s tic ity o f im p o rts d id n o t change. T here fore, in H onduras there was n o trade c re a tio n o r d ive rs io n . A s im ila r re s u lt was ob ta in e d w h e n an e q u a tio n was e s tim ated fo r the p e rio d 1970-1991 and an a tte m p t was m ade to detect a ch a n g e in in c o m e e la s tic ity d u rin g th e p e rio d 1 9 8 6 -1 9 9 1 u s in g th e v a ria b le W 1: Log M = -6.5357 + 2.1244Log Y + 0.0071 W1- 0.1327 T R2= 0.96 (3.34) (5.39) (0.53) (2.88) DW= 1.76 In the equations fo r th e o th e r countries d u rin g the p e rio d 1962-1991 (see ta b le 2), W 1 and W 2 show the change in the L o g Y c o e ffic ie n t d u rin g the 1970s and 1980s, respectively. I t m a y be seen fro m these equations that, w ith the e xce p tio n o f E l S alvador, the d u m m y variables are n o t s ig n ific a n t. T h e fo re g o in g in d ica te s th a t in te g ra tio n d id n o t lead to a change in resource a llo c a tio n d u rin g the p re- o r p o s t-in te g ra tio n periods except in E l Salvador, w h e re th is phenom enon m ay be a ttrib u ta b le to the fa c t th a t in tra -s u b re g io n a l trade does re p re se n t a la rg e pe rce n ta g e o f E l S a lv a d o r’ s to ta l e x p o rts , w h ic h -a c c o rd in g to B alassa (1 9 6 7 ) - is one o f the c o n d itio n s fo r the o c c u rre n c e o f tra d e c re a tio n . CE N TRA L A M ERIC A N INTEGRATION: ITS C O S T S AND B E N EF IT S • LU IS R E N E C A C E R E S 114 CE P A L RE VIEW 54 • D E C E M B E R 1994 TABLE 2 Central America (three countries): Changes in the marginal propensity to import Equation R2 DW Guatemala -3.7466 + 1.2996 Log Y - 0.0241 T + 0.0171 W1 - 0.0205 W2 (3.88) (9.08) (1.24) (1.27) (0.93) 0.99 1.48 El Salvador -1.1246 + 0.9896 Log Y - 0.0152 T + 0.0489 W1 + 0.0331 W2 (1.77) (11.17) (1.30) (5.44) (2.35) 0.99 1.56 Costa Rica -0.6180 + 0.9211 Log Y + 0.0361 T - 0.0032 W1 - 0.0201 W2 (0.78) (9.12) (2.02) (0.38) (1.50) 0.99 1.49 Source: International Monetary Fund (IMF), International Financial Statistics Yearbook, 1993, vol. XLVI, Washington, D. C., 1993. 3. In creased eco n o m ic growth Country No. 2 Cpi = (1 " S])Yj I2 = »2Y 2 -n ^ -1 -m , S j-b j+ z ^ m j Cgl + E0l Cg2 + Eo2 _ F o r the fiv e C e n tra l A m e ric a n countries, the m o d e l’s param eters w e re c a lcu la te d u sing average values fro m 1990-1992. T h e fo llo w in g m a trix o f m u ltip lie rs was obtained: CP2 = (1 -S 2)Y2 I, = b , Y, S j-b j+ Z j+ m j J Country No. 1 V t In te g ra tio n generates s p illo v e r e ffects th a t p ro p e l e c o n o m ic g ro w th in the m em b er c o u n trie s v ia the trade flo w s am ong th em . Studies have s h o w n th a t these fo rce s are q u ite p o w e rfu l, b u t in C e n tra l A m e ri­ ca th e y v a ry a great d e al fro m c o u n try to c o u n try (N u g e n t, 1974; Cáceres, 1981; Cáceres and S eninger, 1980). A q u a n tific a tio n o f th is e ffe c t can be o btained u sin g th e fo llo w in g m o d e l: fro m w h ic h the fo llo w in g can be w o rk e d o u t using the in co m e vector: V.2 - mj Y2 M, = z, Y, M2 = z2 Y2 Y , = C pl + I1 + E 01+ ( V 2 - V 1) - M 1 -tCgI Y2 = Cp2 + I2 + Eo2 + (V ,-V 2)-M 2+Cg2 w here: Y C p Cg I M V E„ = = = = = = = gross national product private consumption (exogenous) public consumption gross domestic investment extra-subregional imports intra-subregional imports (exogenous) extra-subregional exports T h e ab ove equations can be represented in the fo rm o f a m a trix , as fo llo w s : Y ,' Sj-bj+Zj+m, -n>2 Cgl + Eol y2 -mt S2"l>2+Z2+m2 Eg2 + Eo2 0.49716 0.31855 0.48916 0.10548 CgG + E og 0.21391 4.08816 0.12822 0.16093 0.06074 C g E S + ®OES 0.01681 0.03901 3.61925 0.02242 0.00218 CgH + ^OH yn Vl = mi Y( 4.19235 0.01711 0.03289 0.03796 2.40346 0.01061 *-gN + E o n ,YC r 0.04455 0.05203 0.04302 0.17542 1.62662 CgCR + E q c R 'V ^ es yh = T h is m a trix o f m u ltip lie rs indicates th a t if, fo r exam ple, E l S a lv a d o r’s e x tra-subre gio nal exports w ere to rise b y U S$100, then the co u n try’s GDP w o u ld g ro w b y U S $ 4 0 9 , w h ile th e GDPs o f G u a te m a la , H onduras, N icarag ua and C osta R ic a w o u ld increase b y U S$50, US$4, U S$3 and U S $5, respectively. T h e m u ltip lie r effects are greater fo r G uatem ala and E l S a lvador than they are fo r the o th e r countries. T h is fits in w ith the fin d in g s o f several studies w h ic h in d ica te th a t these tw o countries have re ce ive d the lio n ’s share o f the benefits o f integration (C line, 1978). Table 3 show s the m u ltip lie r e ffe c t o n each c o u n try o f a sim ultaneous U S$1 increase in exogen­ ous expenditure (p u b lic con su m p tio n o r e x p o rta tio n to the rest o f the w o rld ) on the p a rt o f the other countries. I t also gives the m u ltip lie r e ffe c t on the other countries o f a U S$1 increase in the exogenous expenditure o f each country. C E N T R A L A M E RIC A N INTEGRATION: ITS C O S T S AND BEN EFIT S • LUIS REN E C A C E R E S C E P A L RE VIEW 54 • D E C E M B E R 115 1994 TABLE 3 FIGURE 2 Central America: Multiplier effects across the econom ies of the subregion Central America: Multiplier effects received by Honduras Multiplier effect of rest of Central America on each country Guatemala El Salvador Honduras Nicaragua Costa Rica Multiplier effect of each country on rest of Central America 1.4102 0.5612 0.0794 0.0990 0.3140 0.2818 0.6210 0.5710 0.8470 0.1788 A s m a y be seen, G uatem ala receives the greatest m u ltip lie r e ffe c t fr o m the rest o f the re g io n (1.4102), fo llo w e d b y E l S a lva d o r (0.561 2) and C osta R ica (0 .3 1 4 0 ), and the s itu a tio n was the same in the 1960s and the 1970s (C áceres, 1981). T h e countries h a v in g th e greatest m u ltip lie r e ffe c t on the rest o f C entral A m e ric a , o n th e o th e r hand, are N icarag ua (0.8470), fo llo w e d b y E l S a lv a d o r and then H onduras. C osta R ic a has th e sm a lle st m u ltip lie r e ffe ct. I t is in te re s tin g to note th a t the size o f the m u lti­ p lie rs decreases w ith distance. In p a rtic u la r, the m u ltip lie r e ffe cts generated and received b y C osta R ic a - w h ic h is lo c a te d at the fa r end o f the subre­ g io n - are th e s m a lle s t o f a ll. T h is is a r e fle c tio n o f ju s t h o w in flu e n tia l tran spo rt costs are in term s o f the b e n e fits o f in te g ra tio n (see fig u res 1, 2 and 3). T h e above in d ica te s th a t the b enefits o f in te g ra ­ tio n - i n term s o f the spread o f e con om ic g ro w th m ay, in p a rt, be de te rm in e d b y the fric tio n caused b y distance. H en ce the strategic im po rtan ce o f the road system and tra n s p o rt costs in the subregion. Log. distance FIGURE 3 Central America: Multiplier effects received by Costa Rica Log. distance 4. The stabilization of economic growth FIGURE 1 Central America: Multiplier effects received by El Salvador T h e s ta b iliz in g e ffe c t th a t w o u ld arise as g ro w th spreads to the d iffe re n t c o untries depends u p o n there b e in g no synchronous flu c tu a tio n s in these c o u n trie s ’ econom ies. O ne o f the m a in determ inants o f econ­ o m ic g ro w th in th e C e n tra l A m e ric a n c o u n trie s is the tre n d in th e ir term s o f trade. H o w e v e r, since the c o rre la tio n am ong these c o u n trie s ’ term s o f trade is p o s itiv e (see ta b le 4 ), in tra -s u b re g io n a l trade c o u ld n o t be expected to have a s ta b iliz in g e ffe c t even i f trade flo w s w ere to increase. G iv e n the synchronous nature o f the trends in the exogenous variables that affect the C entral A m erican countries’ econom ies, it should com e as no surprise that fluctuations in extra- and intra-subregional trade e x h ib it a close c o rre la tio n (see fig u re s 4 and 5). CEN TRAL A M ERIC A N INTEGRATION: ITS C O ST S AND BEN EF IT S • LU IS R E N E C A C E R E S 116 C E P A L R E V IEW 54 • D E C E M B E R 1994 TABLE 4 Central America: Terms-of-trade correlation coefficients, 1981-1992 Guatemala El Salvador Honduras Nicaragua Costa Rica 1 0.69 1 0.52 0.05 1 0.74 0.37 0.30 0.81 0.95 0.08 o.59 Guatemala El Salvador Honduras Nicaragua Costa Rica 1 1 Source: Calculated on the basis of data from the International Monetary Fund (IM F), International Financial Statistics, D.C., several issues. FIGURE 4 Washington, FIGURE 5 Guatemala: Growth rates for exports inside and outside the subregion IMF, Nicaragua: Growth rates for exports inside and outside the subregion Years Years □ Exports to Centrai America 5. + Exports to rest of world Intra-industry trade O ne o f the p o te n tia l b e n efits o f in te g ra tio n is the s tim u lu s it can g iv e to in d u s tria liz a tio n based on in tra -in d u s try trade. A n u m b e r o f studies have o b ­ served th a t the s im ila rity o f consum er preferences in c o u n trie s at the same le v e l o f d e ve lo p m e n t a llo w s each c o u n try to sp e cia lize in the p ro d u c tio n o f n e a rly id e n tic a l goods w h ic h are then d iffe re n tia te d o n the basis o f m a rk e tin g , p a ckag ing , appearance, etc. T h is tw o -w a y trade in s im ila r p ro d ucts paves the w a y fo r in d u s tria liz a tio n because a c o u n try can thus focus its e ffo rts on th e e ffic ie n t m a n u fa ctu re o f a g iv e n p ro ­ d u c t, regardless o f the re la tiv e c o m p a ra tive a dvant­ ages in v o lv e d , thanks to the econom ies o f scale th a t be com e p o ssib le in the broa de r m a rk e t created b y □ Exports to Central America + Exports to rest of world in te g ra tio n .2 In o rd e r to calculate h o w m uch o f fo re ig n trade is m ade u p o f in tra -in d u s try trade, e x ­ p o rts and im p o rts m u s t be broken d o w n in to stand­ ard ize d p ro d u c t categories. T h is can be m easured b y the G ru b e l-L lo y d in d e x (1975), d e fin e d as: S ( x , + M j- S i x ,. - m i -----------------------------------I (X,. + M) B = w here X¡ and M ¡ represent exports and im p o rts o f p ro d u c t “ i ” , re sp e ctive ly. Based on the data fo r 1987 s how n in table 5, the values o f B w ere estim ated fo r in tra -in d u s try trade (see table 6). 2 See Greenaway and Milner (1990) for a summary of the literature on intra-industry trade. CE N T R A L A M E R IC A N INTEGRATION: IT S C O S T S AND B E N EF IT S • LU IS R E N E C A C E R E S C E P A L R E V IE W 54 • D E C E M B E R 117 1 9 94 TABLE 5 Central American trade,, 1987 Intra-subregional trade Extra-subregional trade ISIC1 divi­ sion EL SALVADOR Food, beverages and tobacco Textiles, leather and footwear Wood and furniture Paper, printing and publishing Chemical products derived from petroleum, rubber and plastic products Non-metallic mineral products Basic metals industries Metal products, machinery and equipment Other manufactures GUATEMALA Food, beverages and tobacco Textiles, leather and footwear Wood and furniture Paper, printing and publishing Chemical products derived from petroleum, rubber and plastic products Non-metallic mineral products Basic metals industries Metal products, machinery and equipment Other manufactures COSTA RICA Food, beverages and tobacco Textiles, leather and footwear Wood and furniture Paper, printing and publishing Chemical products derived from petroleum, rubber and plastic products Non-metallic mineral products Basic metals industries Metal products, machinery and equipment Other manufactures NICARAGUA Food, beverages and tobacco Textiles, leather and footwear Wood and furniture Paper, printing and publishing Chemical products derived from petroleum, rubber and plastic products Non-metallic mineral products Basic metals industries Metal products, machinery and equipment Other manufactures HONDURAS Food, beverages and tobacco Textiles, leather and footwear Wood and furniture Paper, printing and publishing Chemical products derived from petroleum, rubber and plastic products Non-metallic mineral products Basic metals industries Metal products, machinery and equipment Other manufactures Exports Xi Imports Mi Diff­ erence Xi-Mi Total Xi+Mi 31 32 33 34 9.80 24.60 040 19.90 27.80 13.80 9.10 6.30 -18.00 10.80 -8.70 13.60 35 36 37 35.90 0.60 13.40 60.90 9.50 18.10 38 39 12.10 2.30 31 32 33 34 (Xi-Mi) (Xi+Mi) ISIC3 divi­ sion 37.60 38.40 9.50 26.20 0.48 0.28 0.92 0.52 -25.00 -8.90 -4.70 96.80 10.10 31.50 13.60 1.40 -1.50 0.90 92.10 40.60 28.40 5.10 6.70 22.30 22.20 2.50 14.00 35 36 37 85.60 10.20 12.00 38 39 Diff­ erence Xi-Mi (Xi-Mi) Exports Xi Imports Mi 31 32 33 34 43.80 36.10 0.80 2.20 66.40 30.10 1.70 41.40 -22.60 6.00 -0.90 -39.20 110.20 66.20 2.50 43.60 0.21 0.09 0.36 0.90 0.26 0.88 0.15 35 36 37 16.50 0.10 1.20 288.60 10.40 54.50 -272.10 -10.30 -53.30 305.10 10.50 55.70 0.89 0.98 0.96 25.70 3.70 279.50 0.06 0.24 0.67 38 39 2.20 0.60 273.10 4.50 -270.90 -3.90 679.20 275.30 5.10 874.20 0.98 0.76 0.22 18.30 6.20 2.60 -7.30 62.90 50.60 7.60 20.70 0.29 0.12 0.34 0.35 31 32 33 34 127.30 14.80 5.00 0.40 97.90 54.50 3.60 56.80 29.40 -39.70 1.40 -56.40 225.20 69.30 8.60 57.20 0.13 0.57 0.16 0.99 42.70 1.30 14.60 42.90 8.90 -2.60 128.30 11.50 26.60 0.33 0.77 0.10 35 36 37 45.10 4.80 1.80 543.20 19.50 79.60 -498.10 -14.70 -77.80 588.30 24.30 81.40 0.85 0.60 0.96 10.50 2.10 12.90 1.50 -2.40 0.60 91.80 23.40 3.60 335.20 0.10 0.17 0.73 38 39 2.00 0.40 409.20 13.10 -407.20 -12.70 1 137.40 411.20 13.50 1 479.00 0.99 0.94 0.23 31 32 33 34 14.40 11.60 2.40 4.30 17.30 27.40 0.80 8.30 -2.90 -15.80 1.60 +1.00 31.70 39.00 3.20 12.60 0.09 0.41 0.50 0.32 31 32 33 34 133.00 63.20 11.10 6.20 48.10 58.50 1.80 94.60 84.90 4.70 9.30 -88.40 181.10 121.70 12.90 100.80 0.47 0.04 0.72 0.88 35 36 37 36.60 6.40 13.40 36.90 2.60 6.00 -0.30 3.80 7.40 73.50 9.00 19.40 0.42 0.38 35 36 37 64.00 6.80 5.90 440.20 19.30 93.20 -376.20 -12.50 -87.30 504.20 26.10 99.10 0.75 0.48 0.88 38 39 14.20 3.70 6.00 2.20 8.20 1.50 45.50 20.20 5.90 214.50 0.41 0.25 0.79 38 39 25.40 21.70 421.60 30.30 -396.20 -8.60 1 068.10 447.00 52.00 1 544.90 0.89 0.17 0.31 31 32 33 34 1.50 1.00 0.70 1.10 3.00 8.80 0.10 1.20 -1.50 -7.80 0.60 -0.10 4.50 9.80 0.80 2.30 0.33 0.80 0.75 0.04 31 32 33 34 52.50 1.90 1.30 0.10 36.40 49.30 6.50 21.50 16.10 -47.40 -5.20 -21.40 88.90 51.20 7.80 21.60 0.18 0.93 0.67 0.99 35 36 37 4.50 0.30 3.40 19.0 0.50 1.80 -14.50 -0.20 1.60 23.50 0.80 5.20 0.62 0.25 0.31 35 36 37 1.40 1.10 338.80 9.60 40.70 -337.40 -9.60 -39.60 340.20 9.60 41.80 0.99 1.00 0.95 38 39 2.00 0.10 5.70 0.60 -3.70 -0.50 30.50 7.70 0.70 55.30 0.48 0.71 0.45 38 39 0.50 3.60 248.60 7.40 -248.10 -3.80 728.60 249.10 11.00 821.20 1.00 0.35 0.11 31 32 33 34 4.00 3.70 3.80 0.40 6.40 2.20 4.80 -2.40 1.50 3.80 -4.40 10.40 5.90 3.80 5.20 0.23 0.25 1.00 0.85 31 32 33 34 110.20 1.90 40.20 2.60 63.40 29.50 0.80 38.50 46.80 -27.60 39.40 -35.90 173.60 31.40 41.00 41.10 0.27 0.88 0.96 0.87 35 36 37 4.60 0.30 1.50 3.50 4.60 6.30 1.10 -4.30 4 .8 0 8.10 4.90 7.80 0.14 0.88 0.62 35 36 37 4.20 2.60 0.20 329.20 14.20 40.90 -325.00 -11.60 -40.70 333.40 16.80 41.10 0.97 0.69 0.99 38 39 1.40 0.50 1.30 0.20 0.10 0.30 22.70 2.70 0.70 49.50 0.04 0.43 0.46 38 39 0.10 0.80 247.90 18.90 -247.80 -18.10 792.90 248.00 19.70 946.10 1.00 0.42 0.16 Source: Data taken from Bulmer-Thomas (1992a). a The titles of the divisions of the International Standard Industrial Classification (ISIC) have been shortened. CE N TRA L A M E R IC A N INTEGRATION: IT S C O S T S AND BEN EFIT S • LU IS R E N E C A C E R E S Total Xi+Mi (Xi+Mi) 118 C E PA L R E V IEW 54 TABLE 6 Central Am erica: Grubel-Lloyd index of intra-industry trade Intra-subregional trade Guatemala El Salvador Honduras Nicaragua Costa Rica Extra-subregional trade 0.73 0.67 0.46 0.45 0.79 0.23 0.22 0.16 0.11 0.31 T h e fig u re s show th a t in C e n tra l A m e ric a a d i­ re ct re la tio n s h ip e xists betw een a c o u n try ’s le v e l o f d e v e lo pm en t, as represented b y p e r capita incom e, and th e G ru b e l-L lo y d in d e x in b o th in tra - and e xtra su breg ion a l trade. T h e h ig h e st values are fo r C osta R ica , fo llo w e d b y those fo r G uatem ala, E l S alvador, H ond uras and N icarag ua. Indeed, 79 % o f C osta R ic a ’s subre g ion al com m erce takes the fo rm o f in tra ­ in d u s try trade: a p ro p o rtio n s im ila r to the fig u re s fo r d eve lop e d c o un trie s. T h e above indicates th a t in te ­ g ra tio n enables th e C e n tra l A m e ric a n countries to p ro d u ce and e x p o rt goods w h ic h o the rw ise w o u ld p ro b a b ly n o t be p a rt o f th e ir fo re ig n trade. C osta R ic a also has th e h ig h e st v a lu e - 0 . 3 1 - fo r e x tra -s u b re g io n a l trade, fo llo w e d b y G uatem ala (0 .2 3 ), E l S a lva d o r (0 .2 2), H onduras (0 .1 6 ) and N ic a ra g u a (0.1 1). In 1974, fo r the subregion as a w h o le , the indexes o f in tra -in d u s try trade w ith in C e n tra l A m e ric a and o u tsid e the su b re g io n w ere 0.505 a n d 0.025 (L a ird , 1981). T h e in tra -in d u s try trade in d ic a to rs proposed b y Balassa (1 9 6 6 ) w e re also ca lcu la te d fo r in d iv id u a l in d u s tria l branches. T h e y are d e fin e d as: X¡ + Mj T h is in d e x goes fro m zero, w h en a ll trade is in tra -in d u s tria l (X .j = M .) to 1, w he n there is no \ j/ tw o -w a y flo w o f such trade. T able 5 dem onstrates that in tra -in d u s try trade is an im p o rta n t co m ponent o f a ll the C e n tra l A m e ric a n c o u n trie s ’ trade flo w s in the fo llo w in g in d u strie s: basic m etals, m etal products, m a c h in e ry and e q u ip m e n t, and o th e r m anufactures. I t is also an im p o rta n t fa c to r in the te x tile and c h e m ic a l ind ustries. T h is m ig h t in d ic a te a la c k o f sp e cia liza ­ tio n at the c o u n try le v e l, w h ic h w o u ld m ean th a t a ll the co un trie s w o u ld have the same c o m ­ p a ra tiv e advantages. • D E C E M B E R 1994 In trade flo w s directed outside the region -p rim a r­ ily to the U nite d States, Japan and G e rm a n y - the intra­ industry trade indexes fo r H onduras and N icaragua are n o t s ig n ific a n t fo r an y b ranch o f in d u s try e xcept fo o d , beverages and tobacco. T h is in d u s try has h ig h e r indexes in a ll the countries, w h ic h fits in w ith the postulates re g arding co m p a ra tive advantages. T h e above results ta lly w ith those o f a n u m b e r o f other studies in th a t th e y in d ic a te th a t in tra -in d u s try trade is greatest am ong countries w ith s im ila r in co m e levels (G ray, 1988). S p e c ific a lly , Balassa and B auw ens (1987) fo u n d th a t the in tra -s u b re g io n a l trade flo w s o c c u rrin g w ith in the fra m e w o rk o f the L a tin A m e ric a n Free T rade A s s o c ia tio n (LAFTA) w ere c h ie fly o f an in tra -in d u s tria l nature, and G ree­ naw ay (1987) obtained a s im ila r re s u lt fo r the EEC. Thus, the prevalence o f in tra -in d u s try trade in the C entral A m e ric a n in te g ra tio n process fa cilita te s these c o u n trie s ’ in d u s tria liz a tio n , because th is process a llo w s s im ila r y e t d iffe re n tia te d p ro d u c ts to fin d a broader m a rke t, thus p a v in g the w a y fo r larger p ro d u c tio n series w ith consequent econom ies o f scale (Balassa, 1 9 7 9 ).3 6. Broadening th e m arket T ra d itio n a lly , analyses o f the b e n e fits o f econom ic in te g ra tio n have been based on an assum ption o f p e r­ fe c t co m p e titio n , w h ic h does n o t alw ays o cc u r in de­ v e lo p in g countries w here there is a heavy concentration o f industrial enterprises (N . Lee, 1984 and 1992). This is the case in C entral A m e ric a (R a poport, 1978). A c ­ c o rd in g ly , fo r these co untries, the im p e rfe c t c o m p e ti­ tio n m odel m ay be m o re u se fu l in illu s tra tin g the benefits o f in te g ra tio n . T h is m o d e l assumes the e x is t­ ence o f a m o n o p o lis tic fo rm o f c o m p e titio n in the in te rn a l m arket. C onsequently, prices are de te rm in e d b y the average costs o f the firm s in th e re le v a n t in d u s try rather than b y th e ir m a rg in a l costs. A s the n um ber o f firm s in th e in d u s try rises, so do average costs, since the m a rk e t fo r each in d iv id u a l fir m shrinks (H e lp m a n and K ru g m a n , 1986). 3 Bulmer-Thomas (1992a) has noted that the food, beverage and tobacco industry accounts for 50% of the subregion’s manufac­ turing output but represents only 15% of its intra-subregional exports. This author states that the expansion of trade in the products of this industry through the elimination of existing non-tariff barriers would provide a strong stimulus for trade within Central America, especially in the cases of Honduras and Nicaragua. The indexes point to the desirability of expanding trade in these products so that the countries can take advantage of the economies of scale inherent in intra-industry trade. C E N TRA L A M E RIC A N INTEGRATION: IT S C O ST S AND BEN EFITS • LUIS R E N E C A C E R E S C E P A L RE VIEW 54 In fig u re 6, ta k in g the case o f a sin g le c o u n try (H on du ra s, fo r e xa m p le ), CC represents the d ire c t re ­ la tio n s h ip b etw een th e nu m b e r o f com panies in the re le v a n t in d u s try and th e ir average costs. A s the n u m b e r o f firm s rises, the c o m p e titio n a m ong th e m increases and th e ir price s d ecline . Thus, PP denotes th e in ve rse re la tio n s h ip betw een the n u m b e r o f firm s and th e g o in g p ric e in th a t in du stry. T h e p o in t o f e q u ilib riu m is at th e in te rse ctio n o f CC and PP, w here th e p ric e (P0) is e q u al to the average cost le v e l th a t w il l n o t p ro m p t firm s to e ith e r enter o r le a v e the sector, and thus d eterm ines the n u m b e r o f n a tio n a l com panies (N °). W h e n in te g ra tio n takes place, the increase in m o n o p o lis tic c o m p e titio n that w ill re s u lt fro m the p a rtic ip a tio n o f firm s in th e oth er countries w ill cause p rices to go do w n . A t the same tim e , the firm s ’ average costs w ill n o w be in flu e n c e d b y the b ro a d e r m a rk e t and la rg e r n u m b e r o f com panies. T h e e xpa nsion o f the m a rk e t tends to push d o w n the aver­ age cost, b u t the increase in th e n u m b e r o f firm s tends to raise it. A s a re su lt, CC shifts o u tw a rd ( C 'C 1), w h ic h im p lie s lo w e r average costs and a la rg e r n u m ­ b e r o f firm s . T h e e q u ilib riu m s o lu tio n in v o lv e s h a v­ in g fe w e r com panies than the to ta l n u m b e r o f firm s e x is tin g p rio r to in te g ra tio n , and a p ric e b e lo w its p re -in te g ra tio n le v e l as a re su lt o f la rg e r sales v o l­ um es p e r fir m and m o re c o m p e titio n . F ig u re 6 show s the n e w e q u ilib riu m p ric e (P 1) and the n ew n u m b e r o f firm s ( N 1) w h ic h are the outcom e o f m o n o p o lis tic c o m p e titio n o n a su breg ion a l scale. FIGURE 6 Honduras: Market expansion and m onopolistic com petition Price Number of firms Honduran firms Other Central American firms • D E C E M B E R 1994 119 T he above shows th a t integration gives each C en­ tral A m e rica n country access to the m arkets o f the other countries in the area. T his does not occur in the case o f a general unilateral lib e ra liza tio n o f trade, w h ich does n o t guarantee the in itia tin g country access to any other m arket in exchange. In this case, the going price in the dom estic industry w o u ld be the international price. R o d rik (1988 and 1990) has show n that, once the assum ption o f p e rfe c t c o m p e titio n in the n a tio n a l m a rke t is discarded, trade re fo rm m anifests its e lf in three d iffe re n t w ays, each o f w h ic h has a p o s itiv e im p a c t w hen the s itu a tio n u nfolds as fo llo w s : ( i) an expansion o f im p o rts o f goods w h ic h had p re v io u s ly been protected and a c o n tra ctio n o f the correspond­ in g d o m e stic sectors; ( ii) an increase in the o u tp u t o f o lig o p o lis tic firm s ; and ( iii) the g ro w th o f firm s th a t take advantage o f econom ies o f scale. T h e firs t e ffe c t c o u ld ru n counter to the o th e r tw o , since protected sectors are g e n e ra lly o f an o lig o p o lis tic nature and e n jo y econom ies o f s c a le .4 In other w ords, in a m o re general analysis o f the various im p lic a tio n s o f trade re fo rm , the c o n tra c tio n o f protected industries leads to an increase in w e ll-b e in g , b u t th is e ffe c t m ig h t be cancelle d out i f these industries have an o lig o p o lis tic structure and i f the te c h n o lo g ic a l e ffic ie n c y p ro v id e d b y econom ies o f scale is lost. In such a case, the net re s u lt c o u ld be am biguous. R o d rik (1 9 8 8 ) says th a t this c o n flic t c o u ld be re solved b y an increase in the exports o f fo rm e rly pro te cte d sectors. I t s h o u ld be em phasized that in te ­ g ra tio n pro vid e s an o p p o rtu n ity to expand the exports o f these and other sectors, w h ic h w o u ld ensure th a t the b e n e fits associated w ith a u n ila te ra l lib e ra liz a tio n o f trade w o u ld a c tu a lly be received. H ence, in te g ra ­ tio n and lib e ra liz a tio n can be com plem entary. I t m a y also be seen that the assum ption o f p e rfe ct c o m p e ti­ tio n m ay be unsuitable fo r analysing the effects o f lib e ra liz a tio n and in te g ra tio n . 4 Cline (1978) has quantified the economies of scale in Central American industry. The heavy industrial concentration observed in the Central American countries has been highlighted by Rapoport (1978), who states that, at a subregional level, industrial concentra­ tion lessens in relation to the degree of national concentration, thus becoming similar to the level of concentration existing in the United States. In short, says the author, these measures exhibit an extremely high level of industrial concentration for each Central American country when considered individually but a significantly lower overall concentration -comparable to that existing in the United States- when the subregion is regarded as a single unit. He adds that the Central American Common Market probably played a substantial role in reducing monopolistic and oligopolistic power in Central America (p. 670). CE N T R A L A M ERICAN INTEGRATION: IT S C O S T S AND B E N EF IT S • LUIS R E N E C A C E R E S 120 C E P A L REVIEW 54 A lo n g these sam e line s, using a m od el o f im p e r­ fe c t c o m p e titio n , S m ith and Venables (1988) fo u n d th a t the in te g ra tio n o f m arkets w ith in the EEC has le d to an increase in e x tra -re g io n a l exports, because o f the p ric e red u ctio n s occasioned b y the econom ies o f scale m ade po ssib le b y the E u ropean m arket. O th e r studies have fo u n d th at, at the le v e l o f industries and firm s , in d u s tria l co n ce n tra tio n is in v e rs e ly related to the e xp a n s io n o f e xpo rts (G lejse r, Jacquem in and • D E C E M B E R 19 9 4 P e tit, 1980) and th a t such c o n ce n tra tio n dim inishes w ith the size o f the m a rk e t (M e lle r, 1978). I t has also been observed that Costa R ica’s in ­ creased sales o f non-tradition al exports to countries out­ side the subregion w ere preceded b y a period in w h ich it gained experience in exp o rtin g the same products to the C entral A m erican m a rk e t These findings have been interpreted as p ro o f that integration offers exporters the opportunity to “ learn b y doing” (Webb and Fackler, 1993). III Obstacles to enjoyment of the benefits of integration T h e p re ce d in g section show ed th a t in te g ra tio n has b e n e fite d the C e n tra l A m e ric a n cou ntries in term s o f e c o n o m ic g ro w th , in d u s tria liz a tio n d riv e n b y in tra ­ in d u s try trade and increased c o m p e titio n in a b roader m a rke t. I t has also been noted, ho w e ve r, th a t these b e n e fits have been concentrated in the m o re de­ v e lo p e d co u ntrie s o f the subregion. T h e data also in ­ d ica te th a t these b e n e fits have been re late d to the size o f a m e m be r c o u n try ’ s share o f trade w ith in the subre g io n . W e m a y then ask ourselves w h a t types o f fa cto rs d e te rm in e th e na tu re o f the va rio u s co u n trie s ’ in tra -s u b re g io n a l e x p o rt perform ance. T h e argum ent has also been m ade th a t the la rg e r size o f the m ore d e ve lo p e d c o u n trie s ’ econom ies has fa c ilita te d the in d u s tria liz a tio n process based on econom ies o f scale and b e tte r p h y s ic a l in fra s tru c tu re (Cáceres, 1981). In o th e r w o rd s , a h ig h e r le v e l o f a c tiv ity in the e x p o rt o f c o m m o d itie s la id the g ro u n d w o rk fo r a greater in d u s ­ tria l ca p a c ity w h e n the in te g ra tio n p ro g ra m m e began in th e 1960s. B e th is as i t m a y, an e x a m in a tio n o f the va ria b le s th a t have been seen to in flu e n c e exports w ith in the subreg io n is a m a tte r o f special interest. 1. T ran sp o rt costs T h e h ig h tra n sp o rt and insurance costs associated w ith th e exports o f C e n tra l A m e ric a n countries have gone re la tiv e ly u n n o tice d . A c c o rd in g to the In te rn a ­ tio n a l M o n e ta ry F u n d (IMF), this cost can be c a lc u ­ la te d as the d iffe re n c e betw een one c o u n try ’ s exports to a n o th e r re g io n o r c o u n try and its im p o rts fro m th a t sam e re g io n o r c o u n try . W h e n th e tra n s p o rt costs in v o lv e d in tra d e w ith d e v e lo p in g c o u n trie s -w h ic h , in th is case, w o u ld e s s e n tia lly co rrespond to in tra -s u b re g io n a l tra d e - are estim ated on th is basis, w e fin d th a t th e y are p a rtic u la rly h ig h fo r H o n d u ra s and N ic a ra g u a (see ta b le 7). TABLE 7 Central Am erica: Estim ated transport and insurance costs, 1992 (Percentages of exports) Guatemala El Salvador Honduras Nicaragua Costa Rica 6.2 0.8 52.8 14.1 2.41 Source: Calculated on the basis of figures from the International Monetary Fund (IMF), Direction of Trade Statistics Yearbook, 1993, Washington, D.C., 1993. 2. Low levels of hum an capital A m o n g the factors o f p ro d u c tio n in flu e n c in g a c o u n try ’ s e x p o rt c a p a city, the s u p p ly o f hum an capi­ ta l is o f p a rtic u la r im p o rta n ce . T h e c ru c ia l ro le p la y e d b y th is ty p e o f c a p ita l in the creation o f c o m ­ p a ra tive advantages has been q u a n tifie d fo r the EEC countries b y N eve n and R o lle r (1991). In a d d itio n , in a study on determ inants o f b ila te ra l trade that m ade use o f a sam ple com posed o f 18 developed and 20 d e v e lo p in g countries, B alassa and B auw ens (1988) fo u n d that one o f the va ria b le s in flu e n c in g exports betw een tra d in g partners w as the ra tio betw een the CE N TRA L A M ERIC AN INTEGRATION: IT S C O S T S AND BEN EFIT S • LU IS RE N E C A C E R E S C E P A L RE VIEW 54 • D E C E M B E R 121 1994 TABLE 8 Central Am erica: Hum an capital indicators, 1990 Enrolment rate Secondary level Honduras Guatemala El Salvador Nicaragua Costa Rica Index Post-secondary level 32 21 29 43 41 Exports to rest of Central America, 1992 (millions of dollars) 9 77 17 8 24 114 83 161 34.3 353.0 207.1 51.9 224.5 Source: Calculated on the basis of data from the World Bank, World Development Report, 1991, Washington, D.C., 1991. e x p o rtin g c o u n try ’ s and the im p o rtin g c o u n try ’ s sup­ p lie s o f hu m an ca p ital. A c c o rd in g to these authors, i f th is ra tio rose b y 1% , e xpo rts w o u ld expand b y be­ tw e e n 0 .12 3% and 0 .2 3 3 % , depend ing on w h e th e r th e tra de flo w was b e tw e en d e v e lo p in g o r deve lo p e d cou n tries. T h e in d ic a to r fo r hu m a n c a pita l used in the a b o v e -m e n tio n e d stu d ie s is the s e c o n d a ry -s c h o o l e n ro lm e n t ra te p lu s fiv e tim e s the le v e l o f the p o s t­ secondary e n ro lm e n t rate. T h is in d e x has been calcu­ la te d fo r the C e n tra l A m e ric a n countries as o f 1990 (see ta ble 8). T h e im p o rta n ce o f th e ro le p la ye d b y the size o f a c o u n try ’ s p o o l o f h u m an c a p ita l as a d e te rm in a n t o f trade flo w s w ith in C e n tra l A m e ric a is illu s tra te d b y the use o f an e q ua tion w h ic h expresses the exports o f c o u n try “ i ” to c o u n try “j ” (E..) as a fu n c tio n o f the hu m an c a p ita l indexes o f the e x p o rtin g (H ‘) and im ­ p o rtin g (H ) countries and th e distance (in k ilo m e tre s ) betw een the tw o (D..). T h e results o f th is estim ate ■ j -b a s e d o n a sa m p le o f th e in tra re g io n a l tra d e o f E l S a lv a d o r, H o n d u ra s , N ic a ra g u a a nd C osta R ic a in 1 9 9 2 a n d u s in g th e h u m a n c a p ita l in d e xe s s h o w n in ta b le 8 - are as f o llo w s : 5 Log (Ejj) = -4.8536 - 0.8027 Log (D;j) + 2.9216 Log (Hp (0.90) (1.48) (3.45) -0.1408 Log (Hp (0.19) R2= 0.54 DW = 1.62 5 The data on trade within Central America are taken from ECLAC (1993). T h is dem onstrates th a t the de te rm in a n t o f trade w ith in C entral A m e ric a is the e x p o rtin g c o u n try ’s le v e l o f hum an capital. A s im ila r re s u lt w as obtained u sing data fro m 1965 o n the fiv e C e n tra l A m e ric a n countries and in ­ co rp o ra tin g GDP variables fo r the e x p o rtin g (Y .) and im p o rtin g (Y .) countries: Log (E.p = -7.8331 + 1.3591 Log (Y¡) + 0.7179 Log (Yp (1.93) (4.01) (2.12) -1.1416 Log (Dy) + 0.6901 Log (Hp (4.40) (2.40) + 0.2749 Log (Hp (0.95) R2=0.71 DW = 1.94 T h e e x p o rtin g c o u n try ’ s h um an c a p ita l in d e x is s ig n ific a n t, b u t less so th a n in 1990. T h is w o u ld appear to in d ic a te th a t th e ro le o f h u m a n resources in in tra -s u b re g io n a l tra d e has been g a in in g in im ­ p o rta n ce as tim e has passed. H e n ce , th e C e n tra l A m e ric a n c o u n trie s ’ e ffo rts to p ro m o te in te g ra tio n and e c o n o m ic m o d e rn iz a tio n m a y be in v a in unless th e y can raise th e ir le v e ls o f h um an c a p ita l sub­ s ta n tia lly . A n e x a m in a tio n o f th e trends in h um an c a p ita l in d e x e s fo r the p e rio d 1 9 6 0 -1 9 9 0 (see ta b le 9 ) re ­ veals th a t C osta R ic a d is p la y s h ig h e r values than th e o th e r c o u n trie s , w h ile G u a te m a la e x h ib its a s lo w e r ra te o f im p ro v e m e n t. F u rth e rm o re , these in ­ d ic a to rs d e c lin e d d u rin g the second h a lf o f the 1980s, e x c e p t in E l S a lv a d o r, w h ic h b y 1990 had g re a tly im p ro v e d u p o n the le v e ls i t had re c o rd e d in the e a rly 1980s. CE N T R A L A M ERICAN INTEGRATION: ITS C O S T S AND BE N EF IT S • LUIS R E N E C A C E R E S 122 C E P A L RE VIEW 54 • D E C E M B E R 1994 TABLE 9 Central America: Human capital indicators Years 1960 Guatemala El Salvador Honduras Nicaragua Costa Rica 17 16 13 12 46 1975 33 58 43 51 128 1978 1983 40 63 48 81 141 1985 51 84 83 108 174 56 97 81 93 171 1990 114 77 83 161 Source: Calculated on the basis of data from the World Bank, World Development Report, Washington, D.C., several issues. In v ie w o f the d is p a ritie s e x is tin g am ong the c o u n trie s ’ le ve ls o f d e v e lo p m e n t in term s o f hum an c a p ita l, one a p p ro p ria te subre gio na l p o lic y o p tio n m ig h t be to in s titu te u n re s tric te d m o b ility fo r the la ­ b o u r force. Such a step m ig h t w e ll be m ore e ffe c tiv e o v e r tim e than an e ffo r t to achieve a ra p id increase in th e sto ck o f hu m an c a p ita l in the countries th a t have la g g e d fu rth e st b e h in d in th is respect, a lthough such an increase is at a ll events u rg e n tly needed. Indeed, a c c o rd in g to the analyses c a rrie d o u t b y D e Franco (1 9 9 3 ), the e c o n o m ic b e ne fits o f la b o u r m o b ility are considerable. 3. FIGURE 7 Central America: Dispersion of per capita income levels The absence of m easures to prom ote equity D e s p ite th e d iffe re n c e s o b se rve d in th e v a rio u s c o u n trie s ’ a b ilitie s to ta k e a dva n ta g e o f the be n e ­ fits o f in te g ra tio n , n o p o lic y has been fo rm u la te d in C e n tra l A m e ric a to p ro m o te e q u ity in th is re g a rd o r to p ro v id e th e less d e v e lo p e d c o u n trie s w ith any s o rt o f c o m p e n s a tio n . F u rth e rm o re , the e c o n o m ic d is p a ritie s a m on g th e c o u n trie s o f the s u b re g io n d ee pen ed d u rin g th e 1980s, a n d the c o e ffic ie n t o f p e r c a p ita in c o m e d is p e rs io n - i. e . , th e standard d e ­ v ia tio n d iv id e d b y the average v a lu e - has tended to m o v e u p w a rd (see fig u re 7 ). T h is c o u ld be in te r­ p re te d as an in d ic a tio n th a t th e C e n tra l A m e ric a n c o u n trie s are b e c o m in g m o re hetero geneous. In the case o f th e E u ro p e a n U n io n , th e M a a s tric h t T re a ty sets fo r th th e p r in c ip le o f co h e s io n -d e fin e d as the re d u c tio n o f re g io n a l d is p a ritie s - as the m o s t basic Years canon o f E uropean in te g ra tio n 6 (B e g g and M a y e s , 1993). I t w o u ld th e re fo re appear im p o rta n t to d e ­ v is e m easures to p ro m o te e q u ity w ith in th e c o n te x t o f C e n tra l A m e ric a n in te g ra tio n in o rd e r to m a x im iz e th e b e n e fits to be d e riv e d fro m the in te ­ g ra tio n process. 6 In the countries belonging to the Organization for Economic Cooperation and Development (O ECD ), the index of per capita income dispersion fell from 0.45 in 1950 to 0.28 in 1985 (Dowrick and Nguyen, 1989). CE N T R A L AM E R IC A N INTEGRATION: IT S C O ST S AND B E N E F IT S • LU IS R E N E C A C E R E S C E P A L RE VIEW 54 • D E C E M B E R 1994 123 IV The costs of integration In c o n sid e rin g th e costs o f in te g ra tio n , a n u m b e r o f re ce n t studies have co m p u te d the cost to the C entral A m e ric a n c o u ntrie s o f re fra in in g fro m engaging in in te g ra tio n , w ith th is "n o n -in te g ra tio n " o p tio n b e ing d e fin e d as the suspension o f in tra -s u b re g io n a l trade. In p a rtic u la r, G a lla rd o (1 9 9 2 ) has stated th a t th is cost c o u ld be s ig n ific a n t fo r a ll the countries except H onduras. T h e v a lid ity o f these studies n o tw ith s ta n d ­ in g , there are o th e r types o f costs -w h ic h m a y p ro ve to be q u ite s u b s ta n tia l- th a t have re ce ived re la tiv e ly litt le atte n tio n . These costs stem fro m a fa ilu re to c o o rd in a te the p o lic ie s th a t have a b e aring on in te g ra ­ tio n e ffo rts ; in o th e r w o rd s, even in areas w h e re in te ­ g ra tio n is a lre a d y a re a lity , the la c k o f p o lic y c o o rd in a tio n c o u ld generate s ig n ific a n t costs. These costs w ill be analysed b e lo w . FIGURE 8 Guatemala and El Salvador: Earnings from arbitrage (Colones per quetzal traded) 1. C urrency arbitrage O n e p he no m e n on th a t underscores the need fo r c o o r­ d in a tio n is c u rre n c y a rbitrag e , i.e ., the p ra ctice o f b u y in g and s e llin g a good (c u rre n c y ) th a t has d iffe r­ e n t p rices in tw o d iffe re n t m a rke ts in o rder to m ake a p ro fit. B y w a y o f e xa m ple, a person c o u ld tra v e l fro m G uatem ala to E l S a lv a d o r and exchange his quetzales fo r colones at an exchange rate o f C /Q and th en b u y d o lla rs at an exchange rate o f C /D . T h is in d iv id u a l c o u ld then re tu rn to G uatem ala, exchange th e d o lla rs fo r quetzales at an exchange ra te o f Q /D and tu rn a p ro fit. I f the g o in g exchange rate fo r co n ­ v e rtin g colones to quetzales is h ig h e r than the cross­ c u rre n c y exchange rate (c o ló n -d o lla r/q u e tz a l-d o lla r), then a p ro fit-m a k in g o p p o rtu n ity exists. In other w ords, i f C /Q > C /D /Q /D , th en the c o n d itio n s e x is t fo r the in itia tio n o f a flo w o f quetzales to E l Salvador, and the dem and fo r colones and dollars w ill therefore rise. F ig u re 8 g ive s the earnings fro m the above oper­ a tio n C /Q -C /D /Q /D , in colones p e r quetzal traded, f o r the p e rio d 1988-1990. In m o st cases, the re s u lt is p o s itiv e , w h ic h m eans th a t E l S a lvador is a source o f s u p p ly o f d o lla rs fo r G uatem ala. I t also m eans that, g iv e n th is o n g o in g in flo w o f quetzales to E l S alva­ dor, G u ate m ala’s m o n e ta ry planners s h ould seek to d e te rm in e w h a t p o rtio n o f th a t c o u n try ’s m on e y s u p p ly is flo w in g in to E l S alvador. B y the same to ke n , E l S alvador s h o u ld tr y to ascertain h o w m u ch o f the m oney s u p p ly in th a t c o u n try is m ade up o f quetzales. Thus, i t is clear th a t at least tw o currencies are in c irc u la tio n in these econom ies. T h is is an espe­ c ia lly im p o rta n t fa c to r in d e te rm in in g the degree o f p re c is io n attained b y fin a n c ia l p la n n in g and in the design o f adjustm ent p ro gram m es, and ca lls fo r an e ffo rt o n the p a rt o f the C e n tra l A m e ric a n countries to coordinate th e ir exchange p o lic ie s . 2. Currency substitution In connection w ith the subject o f the p receding sec­ tio n , i t m ay be n oted th a t som e studies have fo u n d th a t in E l S alvador and G u a te m a la the respective de­ m ands fo r those co u n trie s ’ currencies are in te rd e ­ pendent, inasm uch as the d e m and fo r colones in E l S a lvador is p a rtia lly determ in e d b y the s u p p ly o f quetzales in G uatem ala (C áceres and Suay, 1988a). T h e question then arises as to w h ic h m o n e ta ry aggre­ gate w o u ld be the m o st e ffe c tiv e to o l fo r m on e ta ry planners to use in each c o u n try . T h e re is also e m p iri­ ca l evidence that the p rin c ip a l d e te rm in a n t o f the in ­ fla tio n rate in E l S a lva d o r is a v a ria b le com posed o f the aggregation o f the m o n e y supplies o f G uatem ala C E N T R A L A M E R IC A N INTEGRATION: IT S C O S T S A ND BEN EFIT S • LU IS R E N E C A C E R E S 124 C E P A L RE VIEW 54 and C osta R ic a (Cáceres and Suay, 1988b). T h e same ty p e o f interdepen dence has also been fo u n d in the case o f the exchange rates o f these cou ntries. In fa c t, the G ra n g e r test o f c a u s a lity show s th a t G u atem ala’ s exchange rate determ ines th e ra te fo r E l S a lva d o r (Cáceres and N úñ e z-S a n d o va l, 1992). S ince these c o u n trie s ’ exchange rates are d e te rm in e d b y th e ir m o n e y su p p ly , the e xp a n sio n o f one c o u n try ’ s m o n e y s u p p ly has re pe rcu ssio n s o n th e e x c h a n g e ra te o f the o th e r. C o n s e q u e n tly , e x c h a n g e s ta b ility - w h ic h is o f p a rtic u la r im p o rta n c e fo r tra d e w ith in C e n tra l A m e r ic a - w o u ld app ea r to d e p e n d in p a rt on v a r i­ ables o u ts id e th e c o u n try in q u e s tio n . T h is p o in ts to th e ne ed fo r an o p e ra tio n a l fra m e w o rk fo r th e c o o rd in a tio n o f m o n e ta ry p o lic y , s in c e th e costs o f n o t h a v in g such a system m a y be q u ite h ig h . 3. E xchange-rate spreads A n o th e r phenom en on th a t show s up th e need fo r co ­ o rd in a tio n is the spread e x is tin g b etw een the b u y in g and s e llin g rates fo r the d o lla r in G u atem ala and E l S alvad or, w h ic h represents a s ig n ific a n t transaction cost. T h e spread is w id e r in G u a tem ala than in E l S a lva d o r because the v o lu m e o f c u rre n c y traded is g reate r in the la tte r (see fig u re 9). • D E C E M B E R 1994 M o re o v e r, the tw o spreads e x h ib it opposite trends, i.e ., w h e n the v o lu m e o f exchange operations is lo w in one country, i t is h ig h in the o th e r and v ic e versa. T h e spread in the e xchange rate fo r the quetzal against the c o ló n (see fig u re 10) is m u c h h ig h e r than fo r th e o th e r tw o c u rre n c ie s d u e to th e s m a lle r v o lu m e o f such tra n s a c tio n s . T h e above exam ples represent a g e n u in e fo rm o f “ m o n e ta ry in te g ra tio n ” ; such de facto in te g ra tio n takes p la c e due to the fo rce s o f s u p p ly and dem and fo r these currencies, w h ic h , in tu rn , re fle c t the m o n ­ e ta ry and fis c a l p o lic ie s o f these c o u n trie s . T he e xam ples also m ake i t c le a r th a t, w ith o u t p ro p e r co ­ o rd in a tio n , th is sort o f in te g ra tio n m a y be costly, thus h ig h lig h tin g the need to set up m echanism s fo r the convergence and m u ltila te ra l o v e rs ig h t o f these p o lic ie s .7 I f th e y are to e lim in a te the costs o f in te ­ g ra tio n , th e countries w il l have to p a y the “ cost” o f re d u c in g the a u to n o m y o f th e ir m o n e ta ry and fis c a l p o lic ie s . In o th e r w ords, th e c o u n trie s w o u ld n o t be a ble to establish th e ir o w n m o n e ta ry an d fis c a l p ro g ra m m e s in d e p e n d e n tly b u t w o u ld in s te a d have to d o so on a consensual basis w h e re b y such p o lic ie s w o u ld be subject to th e needs o f th e e n tire subregion. FIGURE 9 FIGURE 10 El Salvador and Guatemala: Exchange-rate spread in dollar markets Colon/Quetzal exchange-rate spread (Selling price-buying price/average price) 7 For an excellent overview of policy coordination in Central America, see López (1994). C E N T R A L A M E R IC A N INTEGRATION: IT S C O S T S A N D B E N EF IT S • LU IS REN E C A C E R E S C E P A L REVIEW 54 • D E C E M B E R 199 4 125 The need to coordinate integration efforts T h e p re c e d in g section stressed the need fo r a p o lic y coordination system w h ic h w o u ld enable the countries to elim inate the costs o f a ¿fe facto fo rm o f integration. Indeed, in orde r to take fu ll advantage o f the benefits o f integration, the C entral A m e rica n countries should adopt a broader p o licy-co o rd in a tio n system w ith a view to the harm onization o f th e ir structural re fo rm efforts. 1. S tructural reform Taking a subregional approach to the structural reform process w o u ld A n addition to p erm itting a ll the countries to advance at a m ore even pace w h ile s till allow ing each to fo llo w its ow n tim etable and base its actions on its in dividu a l capabilities fo r im plem enting such ie fo im s perm it the identification in each country o f needs that could be m et and opportunities that could be seized more e ffectively through jo in t efforts. I t w o u ld also ensure that the results o f the process in each country w o u ld be in ke e p in g w ith those o f the o th e r c o un trie s in the subre g io n , p a rtic u la rly w ith re ga rd to e co n o m ic and sec­ to ra l p o lic ie s . In th e fo llo w in g paragraphs w e w ill see ju s t h o w a su breg io na l approach c o u ld help to fu rth e r the three com ponents o f the stru c tu ra l re fo rm process: s ta b iliz a tio n , a d ju stm e n t and re fo rm as such. (a) The subregional macroeconomic framework T he firs t com ponent o f the structural re fo rm pro­ cess is stabilization. To that end, a coordinated agenda fo r the m acroeconom ic m anagem ent o f the fiv e coun­ tries c ou ld p la y a p a rtic u la rly im p orta n t role. Such an agenda should inclu de a system fo r the coordination o f m acroeconom ic policies1-w h ic h need n o t be identical b u t should be consistent w ith one a no th e r- and should be structu re d so as to keep ce rta in m acroeconom ic va ria ble s in each c o u n try w ith in a pre-established range. I t w o u ld also le n d greater c re d ib ility to the co u n trie s ’ e co n o m ic re fo rm e ffo rts , since each o f the n a tio n a l re fo rm program m es w o u ld be p erceived as fo rm in g p a rt o f a sub re gio na l co m m itm e n t. (b ) The framework for structural adjustment T h e sub re g io n a l a lig n m e n t o f adjustm ent p ro ­ gram m es fo r s p e c ific sectors (the second com ponent) w o u ld create a ha rm o n io u s fra m e w o rk w ith in w h ic h the countries c o u ld pursue th e ir sectoral p o lic ie s , thus c o n trib u tin g to a m ore balanced fo rm o f d e velopm ent that w o u ld n o t exacerbate e x is tin g d isp a ritie s. Such an approach w o u ld be o f p a rtic u la r im p o rta n ce in the transport sector, e sp ecially w ith regard to p o lic ie s on c o m p e titio n ; in the energy sector, w here p riv a tiz a tio n and leasing arrangem ents w o u ld be advantageous fo r investors in the subregion; and in agriculture, because o f the effects it w o u ld have on trade in agricultural products. W h a t is m ore, i f the re fo rm o f the State w ere to be carried o u t on a subregional basis, it w o u ld ensure a better a rtic u la tio n o f the c o u n trie s’ p u b lic sectors and w o u ld pave the w a y fo r greater consistency in regard to la b o u r codes, the c iv il service, o ccupational and other h e a lth standards, in v e s tm e n t la w s , etc. Industrial retooling w o u ld be an extrem ely im p o rt­ ant item on this subregional agenda fo r structural ad­ justm ent. The countries need assistance in pro vid in g suitable business services o f specific types, especially in the areas o f hum an resources developm ent, quality-contro l systems, m arketing, storage and m arket in form ation (W illm o re and M áttar, 1991). Strategies fo r o p tim iz in g these services w o u ld be m ore effective w ith in the fra m e w o rk o f a subregional approach because they w o u ld then a llo w the countries to draw upon the lessons learned b y the other countries and to b u ild on the ex­ perience a lready gained in C e n tra l A m e ric a . T ra in in g is a h ig h ly im p o rta n t fa c to r in th is re g a rd .8 T h e subsectors in w h ic h in d u s tria l re to o lin g should be undertaken w o u ld have to be selected fro m a subregional vantage p o in t in order to enhance those subsectors’ c o m p le m e n ta rity and v e rtic a l in te g ra tio n . W ith in th is fra m e w o rk , each c o u n try w o u ld have access to a w h o le range o f experiences and o ppor­ tu n itie s , and firm s w o u ld fin d i t easier to w o rk together to w in new m arkets and negotiate the use o f re le va n t technologies. A study conducted by Willmore and Máttar (1991) on the need for industrial retooling in Central America concluded that the steps that would contribute the most to an increase in plant effi­ ciency were not the modernization of equipment or huge invest­ ments but rather the implementation of mechanisms for improving the quality of business administration, making the ful­ lest possible use of raw materials, improving planning and con­ trol of incentives, and improving marketing techniques, all of which involves quite a low level of costs and investments. C E N TRA L AM E RIC A N INTEGRATION: ITS C O ST S AND BE N EF IT S • LUIS REN E C A C E R E S 126 (c) C E P A L RE VIEW 54 Subregional structural change T h e th ird c o m po ne nt o f th e re fo rm process is stru c tu ra l change. W h a te ve r program m es o f this na­ tu re the co un trie s m ig h t decid e to im p le m e n t on a jo in t basis -p o lic ie s on te ch no lo gy, th e p ro m o tio n o f in n o v a tio n , the d eve lo p m e n t o f the poorest zones (es­ p e c ia lly in b o rd e r areas) and the d iv e rs ific a tio n o f in te rn a tio n a l econ om ic re la tio n s - w o u ld be streng­ thened b y th e a d o p tio n o f a subregional approach, e s p e c ia lly th ro u g h the increased access to fin a n c ia l resources and tech nica l co op e ratio n and the greater degree o f p o lic y convergence th a t w o u ld com e w ith in te g ra tio n . A subregional approach w o u ld also be a va lu a b le a id fo r governm ents in th e ir e ffo rts to rem e­ d y socia l im balances, as w e ll as h a v in g an im p o rta n t d em o n stra tio n e ffe ct. A subreg io na l agenda fo r social re fo rm s h ou ld therefore be d ra w n u p th a t c o u ld serve as a basis fo r p ro g ra m m in g the steps needed to b rin g about the convergence o f the social d e ve lo p m e n t p ro ­ cess in th e su bre g ion , p a rtic u la rly w ith regard to basic e du catio n , p rim a ry he a lth care and sanitation. F ig u re 11 p ro v id e s an e xam ple o f h o w a subregional agenda fo r stru ctu ra l re fo rm m ig h t be fo rm u la te d on the basis o f n a tio n a l program m es. A n a p pro p ria te m echanism fo r fra m in g such an agenda w o u ld be the C e n tra l A m e ric a n C a b in e t o f M in is te rs , w h ic h meets p e rio d ic a lly to analyse issues o f su b re g io n a l scope. T h e m eetings o f th is b o d y w o u ld p ro v id e an o p p o rtu n ity to id e n tify the various aspects to be covered in a g iv e n sector w h ile d if­ fe re n tia tin g betw een issues o f n a tio n a l concern and those h a v in g im p lic a tio n s fo r the e n tire subregion. T h e analysis o f the la tte r types o f questions w o u ld be d ire c te d tow ards ensuring th a t th e co un tries are tru ly p repared fo r in te g ra tio n b y m a k in g sure th a t they co n stitu te co n gru e nt com ponents o f a C e n tra l A m e ri- • D E C E M B E R 1994 can p ro d u c tio n m a trix . T h is approach w o u ld also a llo w fo r the h a rm o n iz a tio n o f the elem ents needed in ord e r to p e rm it the in te g ra tio n o f the subregion, as a b lo c , w ith the re st o f the w o rld . FIGURE 11 Subregional agenda for structural change Central American country Subregional programme VI Conclusions E c o n o m ic in te g ra tio n has b e n e fits to o ffe r the C en­ tra l A m e ric a n countries because i t can stim ula te e c o n o m ic g ro w th , p ro m o te in d u s tria liz a tio n (throu gh in tra -in d u s try trade) and h e lp boost the e ffic ie n c y o f th e p ro d u c tio n apparatus (as a re s u lt o f increased m o n o p o lis tic c o m p e titio n a t the sub re g io n a l le ve l and, in p a rtic u la r, b y guaranteeing access to other m arkets). These benefits la y a m o re s o lid fo u n d a tio n fro m w h ic h to cope w ith the c o m p e titio n fro m other parts o f the w o rld th a t w ill em erge as these econ­ om ies becom e m ore open. T h e c o u n trie s ’ a b ility to take advantage o f the o p p o rtu n itie s o ffe re d b y in te ­ CEN TRA L AM E R IC A N INTEGRATION: ITS C O ST S AND BEN EFIT S • LU IS REN E C A C E R E S C E P A L RE VIEW 54 g ra tio n w ill, h o w eve r, h in g e upon the m easures they take to strengthen th e ir sto ck o f h um an ca p ita l. In te g ra tio n a ls o has its co sts, h o w e v e r, du e to th e u n fo re s e e n re p e rc u s s io n s th a t o n e c o u n try ’ s m o n e ta ry a n d fis c a l p o lic ie s m a y h a v e o n the o th e rs (e s p e c ia lly as a re s u lt o f c u rre n c y s u b s titu ­ tio n ), w h ic h m a y m a k e i t m o re d if f ic u lt fo r the c o u n trie s to fin e -tu n e th e ir m o n e ta ry p o lic ie s . T h e c o s t a s s o c ia te d w it h d e fa c to m o n e ta ry in te ­ g ra tio n c o u ld be c a n c e lle d o u t b y th e lesser “ c o s t” o f e s ta b lis h in g a c o o rd in a tio n schem e th a t m ig h t d im in is h n a tio n a l a u th o ritie s ’ a u to n o m y in th e area o f m a c ro e c o n o m ic p o lic y m a n a g e m e n t. T h e C e n tra l A m e ric a n countries should take a su b re g io n a l approach to th e stru ctu ra l re fo rm p ro ­ cess, e s p e c ia lly as i t relates to social issues and in ­ • D E C E M B E R 1994 127 d u s tria l re to o lin g . In order to ensure th a t such re­ fo rm s fa c ilita te and encourage subregional in te g ra ­ tio n and are in keeping w ith th a t process, th e y need to be guid e d b y com m on ob je ctive s and proceed ac­ c o rd in g to a set tim etable, a lth o u g h that tim e ta b le m a y be d iffe re n t fo r each country. A subregional agenda fo r s tru ctu ra l change s h ould therefo re be fo r­ m u la te d th a t w ill p ro m o te the advancem ent o f a ll the countries and c a rry fo rw a rd the in te g ra tio n process w ith greater in s titu tio n a l and sectoral consistency and harm ony. T he im p le m e n ta tio n o f such an agenda w o u ld p e rm it the id e n tific a tio n o f o p p o rtu n itie s fo r greater e conom ic c o m p le m e n ta rity and cross-sectoral in te g ra tio n , as w e ll as p ro m o tin g a h arm onious fo rm o f in te g ra tio n w ith other regions. (O rig in a l: Spanish) Bibliography Balassa, Bela (1966): Tariff reductions and trade in manu­ factures among the industrial countries, The American Economic Review, vol. LVI, No. 3, Nash­ ville, TN, American Economic Association, June. (1967): Trade creation and trade diversion in the Euro­ pean Common Market, The Economic Journal, vol. LXXVn, No. 305, London, Macmillan (Journals) Ltd., March. 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(1992b): Regional integration in Central America: Impact of free trade in basic grains, Miami, United States, University of Miami, Graduate School of International Studies, mimeo. Cáceres, Luis René (1981): Integración económica y subdesarrollo en Centroamérica, Mexico City, Fondo de Cultura Económica. Cáceres, Luis René and Salvador Quintanilla (1990): Sector extemo y ahorro doméstico: el papel de las export­ aciones intraregionales en Centroamérica, Cuadernos de economía y finanzas, No. 11, Tegucigalpa, Central American Bank for Economic Integration (BCIE), April. Cáceres, Luis René and Oscar Núñez-Sandoval (1992): La relación de equilibrio de largo plazo entre los tipos de cambio en los mercados negros de Guate­ mala y El Salvador, El trimestre económico, vol. LIX (3), No. 235, Mexico City, Fondo de Cultura Económica, July-September. Cáceres, Luis René and Stephen Seninger (1980): En­ dogenous change in an interregional system of growth centers: An application to the Central Ameri­ can Common Market, Regional Studies, vol. 14, Oxford, United Kingdom, Regional Studies Associ­ ation, January. Cáceres, Luis René and José Roberto Suay (1988a): La sustitución entre las monedas de El Salvador y Guatemala, “Cuadernos de economía y finanzas” series, No. 4, Tegucigalpa, D. C., BCIE, Departamen­ to de Planificación, January. (1988b): La sustitución de monedas en El Salvador, R evista de la integración y el d esa rro llo de C entroam érica, No. 43, Tegucigalpa, D. C., BCIE, July-December. Cline, William R. (1978): Benefits and costs of economic integration in Central America, in William R. Cline and Enrique Delgado (eds.), Economic Integration in Central America, Washington, D.C., The Brookings Institution. De Franco, Mario (1993): Evaluación y recomendaciones sobre la nueva integración centroamericana: un en­ CE N TRA L AM E RIC A N INTEGRATION: ITS C O ST S ANO BEN EFIT S • LUIS RENE C A C E R E S 128 CE PA L REVIEW 54 foque de equilibrio general, Managua, Central American Institute of Business Administration (INCAE), December. Dowrick, Steve and Ducotho Nguyen (1989): OECD com­ parative economic growth 1950-1985: Catch-up and convergence, The American Economic Review, vol. LXXIX, No. 2, Nashville, TN, American Economic Association, December. ECLAC (Economic Commission for Latin America and the Caribbean) (1993): Evolución de la integración Centroamericana en 1992 (LC/MEX/L.225), Mexico City, ECLAC Subregional Headquarters in Mexico. Gallardo, Eugenia (1992): Centroamérica: la integración en los noventa: costos de la no integración, Miami, United States, University of Miami, Graduate School of International Studies, mimeo. Glejser, Herbert, Alexis Jacquemin and Jean Petit (1980): Exports in an imperfect competition framework: an analysis of 1 446 exporters, The Quarterly Journal o f Economics, vol. XCIV, No. 3, New York, John Wiley & Sons, May. Gray, H. Peter (1988): Intra-industry trade: An “untidy” phenomenon, Weltwirtschaftliches Archiv, Band 124, Heft 2, Tübingen, J. C. B. Mohr. Greenaway, David (1987): Inter-industry trade, inter-firm trade and European integration: Evidence, gains and policy aspects, Journal o f Common Market Studies, vol. XXVI, No. 2, Oxford, United Kingdom, Basil Blackwell, December. Greenaway, David and Chris Milner (1990): South-South trade: theory, evidence and policy, The World Bank Research Observer, vol. 5, No. 1, Washington, D.C., World Bank, January. Grubel, H. G. and P. J. Lloyd (1975): Intra-Industry Trade, London, Macmillan. Helpman, Elhanan and Paul R. Krugman (1986): Market Structure and Foreign Trade, Cambridge, MA, The MIT Press. IMF (International Monetary Fund) (1993a): International Financial Statistics Yearbook 1993, vol. XLVI, Washington, D. C. (1993b): Direction o f Trade Statistics Yearbook, 1993, Washington, D. C. Laird, Samuel (1981): Intra-industry trade and the expan­ sion, diversification and integration of the trade of the developing countries, Trade and Development. An UNCTAD Review, No. 3, New York, United Nations, Winter. United Nations publication, Sales No. E.82.II.D.3. Laumas, Prem (1982): Exports and the propensity to save, Economic Development and Cultural Change, vol. 30, No. 4, Chicago, IL, University of Chicago Press. Lee, Joong-Kong (1971): Exports and the propensity to save in L.D.C.s, The Economic Journal, vol. 81, No. 322, London, Macmillan (Journals) Ltd., June. • D E C E M B E R 1994 Lee, Norman (1984): Business concentration in LDC’s, in C. H. Kirkpatrick, N. Lee and F. I. Nixson (eds.), Industrial Structure and Policy in Less Developed Countries, London, George Allen and Unwin. (1992): Market structure and trade in developing countries, in Gerald K. Helleinen (ed.), Trade Policy, Industrialisation, and Development, Oxford, United Kingdom, Clarendon Press. López, José Roberto (1994): Informe sobre la coordina­ ción de políticas macroeconômicas en Centroamérica, San José, Costa Rica, Central American Monetary Council (CMCA), Executive Secretariat. Meller, Patricio (1978): The pattern of industrial concen­ tration in Latin America, The Journal o f Industrial Economies, vol. XXVI, No. 1, Oxford, United King­ dom, Basil Blackwell, September. Neven, Damien J. and Lars-Hendrik Roller (1991): Euro­ pean integration and trade flows, European Economic Review, vol. 35, Amsterdam, North-Holland, May. Nugent, Jeffrey (1974): Economic Integration in Central America, Baltimore, The Johns Hopkins University Press. Rapoport, Alan I. (1978): Industrial structure in Central America, in William R. Cline and E. Delgado (eds.), Economic Integration in Central America, Washing­ ton D. C., The Brookings Institution. Rodrik, Dani (1988): Imperfect competition, scale econ­ omies, and trade policy in developing countries, in Robert E. Baldwin (ed.), Trade Policy Issues and Empirical Analysis, Chicago, IL, The University of Chicago Press. (1990): Trade Policies and Development: Some New Issues, Discussion Paper No. 447, London, Centre for Economic Policy Research, August. SIECA (Permanent Secretariat of the General Treaty on Central American Economic Integration) (several numbers): Estadísticas macroeconômicas de Cen­ troamérica, Guatemala City. Smith, Alasdair and Anthony J. Venables (1988): Com­ pleting the internal market in the European Community, European Economic Review, vol. 32, Amsterdam, North-Holland, September. Webb, Michael and James Fackler (1993): Learning and the time interdependence of Costa Rican exports, Journal o f Development Economics, vol. 40, No. 2, Amsterdam, North-Holland, April. Willmore, Larry and Jorge Máttar (1991): Industrial re­ structuring, trade liberalization and the role of the State in Central America, CEPAL Review, No. 44 (LC/G. 1667-P), Santiago, Chile, United Nations, August World Bank (1991): World Development Report 1991, Washington, D. C. C E N TRA L A M ERIC AN INTEGRATION: ITS C O ST S AND BEN EF IT S • LU IS R E N E C A C E R E S CEPAL REVIEW 129 54 Some lessons o f the A rg en tin e privatization process Daniel Azpiazu Adolfo Vispo Member o f the Scientific Researcher Course of CONICET and Principal Researcher of the FLACSO Argentine Programme. External Consultant of the ECLAC Buenos Aires Office and Visiting Researcher of the FLACSO Argentine Programme. The reduction of the role of the State in the Latin American economies has become one of the central topics in the debate on the process of the economic and social restructuring of the region. Because of the magnitude and rapidity of its achievements, the programme carried out in Argentina in the early 1990s is seen as a paradigm which gives rise to reflection and offers a broad range of lessons for those countries seeking to maximize the social benefits that could be obtained from the privatization of public enterprises. From this point of view, the present article highlights some of the main macroeconomic repercussions of the privatization process (in the fiscal sphere, the external sector, the structure of relative prices, and investment), together with its effects on market formation and the strategies of the main business conglomerates o f the country, the forms of public regulation of the privatized areas, and the limitations and shortcomings observed. It is concluded that the short-term emphasis of the process probably militated against the achievement of many of the proposed objectives and departed from the criteria that could be deduced from the incipient international experience in this field. The failure of the authorities to pay much attention to certain fundamental issues (the transparency of the process, the need to take measures to put the enterprises to be privatized on a sound footing before offering them for sale, the maximization of transfer prices, the exercise of regulatory powers, the competitiveness of markets and of the economy as a whole, the consolidation of reserves in oligopolistic markets, etc.) resulted in the process making only a marginal - if not a frankly negative- contribution to social equity in Argentina. D E C E M B E R 1994 130 C E P A L REVIEW 54 • D E C E M B E R 1994 I Introduction In lin e w ith va rio u s e ffo rts b e in g m ade a t the tim e in o th e r c o u n trie s , a n e w ite m w as pla ced on the agenda o f A rg e n tin e so cie ty in th e 1980s: th e “ d en a tio n a liza ­ tio n ” o f p u b lic enterprises. S ince the la te 1970s, the in te rn a tio n a l e conom y has w itn e sse d a g ro w in g tendency to q u estion m any o f the fo rm s assum ed b y State re g u la tio n , e s p e cia lly as regards the p u b lic ow nership o f service enterprises, and above a ll such ow nership o f goods-producing entities. A rg e n tin a has n o t been u na ffe cted b y this phe­ nom enon. A s ea rly as the dem ocratic governm ent that was in o ffice fro m 1983 to 1989, the first tentative e ffo rts1 w ere m ade to p riv a tiz e som e o f the m a in p u b lic enter­ prises. These projects w ore blocked b y the members o f the m a in op position party, w ho questioned the essence and fo rm o f th e p ro p o se d p riv a tiz a tio n o p e ra tio n s .2 S h o rtly a fte r the present g ove rn m e n t to o k o ffic e in m id - 1989, ho w e ver, th a t same p a rty w o n le g is la ­ tiv e a p p ro v a l -a lm o s t w ith o u t o p p o s itio n - fo r an am ­ b itious p riv a tiz a tio n program m e w h ich was m uch w id e r and faster than the program m e it had rejected a little earlier. F ro m then on, w ith the enactm ent o f A c t N o . 23696 o n R e fo rm o f the State (A u g u s t 1989), the ro le o f the p u b lic se cto r in A rg e n tin a entered on a new phase, w ith the em ergence o f new m arkets fo r p riv a te a c tiv ity and p riv ile g e d areas w ith extraordinary quasi­ rents and reserved m a rk e t se ctors.3 W ith the ad o p tio n o f th is A c t, p ra c tic a lly a ll the enterprises p ro d u c in g □ This study was executed, with the cooperation of Dr. Klaus Esser of the German Development Institute, as a contribution to the Project on the Transition of Economic Systems which is being carried out under FLACSO’s Argentine Programme, sponsored by the Volkswagenwerk Foundation. 1 These were the abortive efforts to privatize the State airline (Aerolíneas Argentinas) and the State telecommunications com­ pany (ENTEL). 2 The Government’s intentions covered various public enter­ prises. In reality, however, the privatization operations carried out during this period were limited to the sale of the State’s share holdings in two petrochemical firms and the ex-SIAM welded pipe plant. 3 This happened during the 1980s, in a sporadic manner, through the State’s acceptance of responsibility for private external debt, industrial promotion, public-sector purchases of goods and services, etc. goods and services w h ic h belonged w h o lly o r par­ tia lly to the State becam e e lig ib le fo r p riv a tiz a tio n . G e n e ra lly speaking, th e firs t steps in this b road p riv a tiz a tio n p rogram m e s u ffered fro m various kinds o f p ro b le m s 4 w h ic h , in m a n y cases, s u b s ta n tia lly a lte re d the p la n n e d c o n d itio n s a n d the a m b itio u s o rig in a l tim etables. I f there is one feature that d is tin ­ guishes the A rg e n tin e process fro m the e ffo rts b e ing c arried o u t in o th e r countries a t m ore o r less the same tim e , how ever, it is the ra p id ity and e xte n t o f its achievem ents. Thus, b etw een 1990 and 1991 the p r i­ v a tiz a tio n process c overed the n a tio n a l te le co m m u n i­ cations and a ir tra n sp o rt com panies, the State’s share h o ldings in the p e tro c h e m ic a l in dustry, the central and secondary areas o f the p e tro le u m industry, over a th ird o f the n a tio n a l h ig h w a y system , o v e r 5 000 k i­ lom etres o f railroads, etc. In 1992 and 1993 the p ri­ v a tiz a tio n process continued, extending to im p o rta n t new sectors (e sp e cia lly in the fie ld o f energy) and c o n solid ating its progress in others. S u ffic e i t to note th a t the process covered the tra n sp o rt and d is trib u tio n o f natural gas, e le c tric p o w e r (generation, transport and d is trib u tio n ), the N a tio n a l W ater and S anita tion C om pany, various elevators in d iffe re n t ports, and the tw o integrated steelw orks (SOMISA and A lto s H om os Zapla). A t the same tim e , p riv a tiz a tio n was continued and in te n s ifie d in the ce n tra l and secondary areas o f the p e tro le u m in d u s try (spreading to the refineries, o il pipelines, tanker fle e t and o th e r assets o f Y a ci­ m ientos P e trolíferos F iscales (YPF)), w h ile YPF its e lf was p a rtia lly p riv a tiz e d , as also w ere ra ilro a d and subw ay lines, the road system and means o f access to the capital, stock h o ld in g s in petro ch e m ica l indus­ tries, enterprises in the area o f D efence, and other assets such as the m a in racetrack, the L in ie rs co m ­ m o d ity m arket, o v e r 800 u n its o f real estate, etc. U p to the end o f 1993, th is ra p id and w id e ranging privatizatio n program m e brought in resources 4 In addition to macroeconomic problems (high levels of infla­ tion, severe fiscal imbalances, widespread uncertainty) there were also the problems of the deficient regulatory conditions, the need to fit in with the parallel negotiations on the external debt, and, in general, the natural inconsistencies due to the priority given to speed in the privatization process. SO M E L E S S O N S OF THE ARG EN T IN E PRIVATIZATION P R O C E SS • DANIEL AZPIAZU A N D ADOLFO VISPO CE PA L REVIEW 54 to ta llin g o v e r U S $15 b illio n , o v e r o n e -th ird o f w h ic h corresponded to the m arke t value o f the external and domestic debt paper capitalized in the various processes. T h is s tru c tu re o f th e in c o m e fro m th e p riv a tiz ­ a tio n process d is p la y s m a rk e d d iffe re n c e s b etw een tw o c le a rly -d e fin e d stages in th e e x e c u tio n o f th e p ro g ra m m e , b o th in te rm s o f the m e th ods and m o ­ d a litie s used in each case and in re sp e ct o f th e ir fu n c tio n a lity vis-à-vis the other p u b lic policies. Thus, in the firs t o f these stages, extending up to the inception o f the C o n v e rtib ility Plan (A p ril 1991), the repurchase o f external debt paper accounted fo r m ore than 85% o f fis c a l in co m e , w hereas in the p riv a tiz a tio n operations c a rrie d o u t betw een A p r il 1991 and D ecem ber 1993 the c a p ita liz a tio n o f e x te rn a l d e b t paper d id n o t even represent 30% o f to ta l in c o m e .5 W hereas in the firs t stage p rio rity was given to global transfers, w ith ha rd ly any attention being given • D E C E M B E R 1994 131 to the fo rm u la tio n o f regulatory fram ew orks - a situ­ ation largely explained b y the urgent p o litic a l needs o f the A d m in is tra tio n -,6 in the second stage the auth­ orities also resorted, am ong other things, to the segmen­ ta tio n o f enterprises th a t w ere to be p riv a tiz e d and the p u b lic sale o f shares, w h ile at the same tim e s lo w ly progressing to w a rd s the re g u la tio n o f some o f the p u b lic services w h ic h had been p riv a tiz e d . The functionality o f the privatization process vis-àvis the stabilization program m e also to o k on a different dim ension in this latter period. The leading features o f this new functionality w ere the absorption b y the M in is ­ try o f the Econom y o f the m ission and functions o f the form er M in is try o f P ublic W orks and Services (w hich was responsible fo r m ost o f the p ublic enterprises subject to p riv a tiz a tio n ), the im p ro v e m e n t in the sh o rt-te rm fis c a l situ a tio n , the m aintenance o f a fix e d exchange rate, and the m oderate re c o v e ry in investm ent. II The main macroeconomic effects T h e im p le m e n ta tio n o f th e p riv a tiz a tio n program m e undertake n in A rg e n tin a has undergone m any changes o f d iffe re n t k in d s , thus g iv in g rise to re fle c ­ tio n a b o ut its fis c a l im p a c t and its effects on, inter alia, the e xte rn a l sector, the structure o f re la tiv e prices, c a p ita l fo rm a tio n , and the re g u la tio n o f o lig o ­ p o lie s in the absence o f a n ti-m o n o p o ly le g is la tio n . 1. Fiscal aspects T h e a p p lic a tio n o f th e p riv a tiz a tio n p rogram m e has had a su b sta ntia l o n c e -o n ly fis c a l im p a c t in the fo rm o f the cash in c o m e re ce iv e d b y the State fo r the tra n sfe r o f enterprises o r share h o ld in g s. A t the same tim e , i t has also in tro d u c e d a new ite m in the fo rm o f the fu tu re tax in c o m e th a t w ill be generated b y the p a y m e n t o f taxes -e s s e n tia lly p ro fits t a x - b y the c o n s o rtia w h ic h p u rch a se d th e p riv a tiz e d fir m s .7 O n th e o th e r hand, the S tate has ceased to re ­ c e iv e v a rio u s s p e c ific a lly assigned in te rn a l taxes -s u c h as th a t co rre spo nd in g to social s e c u rity - w h ic h were included in the prices o f certain public services. In 5 The privatization operations in the area of the petroleum indus­ try mostly fell within the second stage and in all cases consisted of transfers and concessions paid for in cash. m o st cases, these “ surcharges” w ere absorbed b y the adjustm ents in scales o f charges w h ic h accom panied the p riv a tiz a tio n operations and w ere thus u ltim a te ly transferred to the purchasers as p a rt o f th e ir new settles o f charges. F ro m the p o in t o f v ie w o f fis c a l ou tla ys, the State has ben e fite d fro m the e lim in a tio n o f the oper­ atin g d e fic its registered b y m any o f the p riv a tiz e d p u b lic enterprises, as w e ll as fro m the e lim in a tio n o f the service costs in respect o f the e x ternal d ebt c a p i­ ta liz e d in the p riv a tiz a tio n operations. O n the o th e r hand, since in m ost cases the State assumed responsi­ b ility fo r the debts o f the p riv a tiz e d e n te rp rise s,8 this in v o lv e d subsequent fis c a l outlays in respect o f paym ents o f p rin c ip a l and interest (table 1). 6 According to Gerchunoff (1992), “the changes had to be made one way or another; whether it liked it or not, the Government had to privatize”. 7 With few exceptions, the privatized public enterprises either did not pay such taxes or did not make profits subject to profits tax. 8 Although in practice the Treasury ultimately took over the debts contracted by public enterprises, the corresponding service costs and almost all the commercial debts were generally assumed by the enter­ prises themselves. In other words, instead of the previous unstable and heterogeneous situation the State simply absorbed those debts. SO M E L E S S O N S O F THE ARG ENTIN E PRIVATIZATION P R O C E S S • DANIEL AZPIAZU A N D ADOLFO VISPO 132 C E P A L RE VIEW 54 TABLE I Argentina: Indebtedness of privatized public enterprises assum ed by the National Treasury (Millions of pesos) Privatized enterprises External debt Yacimientos Petrolíferos Fiscales (Y.P.F.) 8 786.6 Ferrocarriles 1 971.8 Gas del Estado 1 892.8 Hidronor 1 485.3 Somisa 612.7 Agua y Energía Eléctrica 328.3 Segba 817.8 E.L.M.A. 406.3 Caja Nacional de Ahorro y Seguros Aerolíneas Argentinas 421.3 ENTEL 269.6 Obras Sanitarias de la Nación 86.8 Eneotesa 2.6 Total 17 081.9 Domestic debt Total 7.2 585.8 387.3 2.9 825.1 729.8 83.9 329.9 8 793.8 2 557.6 2 280.1 1 488.2 1 437.8 1 058.1 901.7 736.2 600.0 6.4 26.4 42.6 110.6 3 737.9 600.0 427.7 296.0 129.4 113.2 20 819.8 Source: Prepared on the basis of the 1994 National Budget. I t m a y be in fe rre d fro m th e above considerations that, a lth o u g h ce rta in a p p ro x im a tio n s m a y be m ade in som e concre te cases,9 i t is d iffic u lt to m ake a p re­ cise estim ate o f the o v e ra ll fis c a l im p a c t o f the p r i­ v a tiz a tio n process. A t th e aggregate le v e l, i t m a y be said th a t in the sho rt te rm th e genera lized p riv a tiz a ­ tio n process had a p o s itiv e e ffe c t o n the fis c a l ac­ counts. A fte r the e xh a u stio n o f this firs t im p a ct, due e sse n tia lly to th e cash in flo w s and the e lim in a tio n o f the se rvice costs o f the c a p ita liz e d d ebt, how ever, the p u b lic accounts have been in c re a s in g ly eroded b y the e ffe c t o f ce rta in item s -s u c h as th e service costs on the debts absorbed b y the S ta te - w h ic h tend to o u tw e ig h th is firs t p o s itiv e im p a c t in the m e d iu m and lo n g term . B e y o n d the fis c a l e ffe c t in term s o f in c o m e and o u tla y flo w s , m e n tio n s h o u ld be m ade o f o th e r as­ pects d ire c tly o r in d ire c tly re la te d to th a t im p a c t O ne o f these is the increased v a lu e o f the a c tiv itie s trans­ fe rred to the p riv a te sector, in w h ic h g e n e ra lly speak­ in g the c u rre n t va lu e o f th e fu tu re rents has p ro v e d to be s ig n ific a n tly h ig h e r than the respective tra n sfe r 9 See, for example, the estimates given by Gerchunoff (1992) regarding ENTEL, high-traffic highways, and the petroleum reser­ ves. These estimates, however, do not take account, for example, of the fiscal effect due to the State’s absorption of the liabilities of the privatized enterprises or areas. • D E C E M B E R 1994 prices o f the enterprises. In th is respect, the under­ va lu a tio n o f the p u b lic assets w h ic h w ere p riv a tiz e d 10 was due to the speed o f the processes and the la c k o f a ttention b y the authorities to the re s tru c tu rin g o f the enterprises to be p riv a tiz e d and to the need to p u t th e m on a sounder basis in te ch n ica l, p ro d u c tio n , e conom ic and fin a n c ia l respects. A t a ll events, le a v in g aside the question o f the g enera lized u n d e rv a lu a tio n o f State assets, the in ­ com e fro m the p riv a tiz a tio n process w as a k e y ele­ m e n t in changing the fin a n c ia l situ a tio n o f the p u b lic se cto r.1 Indeed, the resources fro m the p riv a tiz a tio n 1 process have p layed a le a d in g ro le in the reord ering o f the fis c a l accounts, e s p e cia lly in the e a rly m onths o f the C o n v e rtib ility P lan, w hen th e y p ro v e d to be the m a in fo u n d a tio n fo r th e necessary fis c a l balance. T hus, in the last n ine m onths o f 1991, the incom e fro m p riv a tiz a tio n operations w as n e a rly 80% o f the to ta l: a p ro p o rtio n w h ic h w e n t d o w n s ig n ific a n tly in the fo llo w in g tw o years to 4 2 .3 % in 1992 and 20.9% in 1993 (table 2). T h is sm alle r re la tiv e c o n trib u tio n b y the p riv a t­ iz a tio n process to fis ca l balance does n o t in d ica te a structural im p ro ve m e n t w h ic h m akes the fis c a l sector less dependent on w in d fa ll resources, how ever. O n the contrary, the trends in the p u b lic accounts d isplay im balances and sh o rtfa lls w h ic h raise serious doubts as to w h a t w ill happen w h e n the p riv a tiz a tio n p ro ­ gram m e com es to an end. T hus, as fro m the fo u rth quarter o f 1992 and d u rin g the w h o le o f 1993 there has been a d e fic it in th e ope ra tin g results o f the Treasury, due to the re la tiv e stagnation o f current in ­ com e and the g ro w in g in cid e n c e o f to ta l expenditure, esp e cia lly th a t in respect o f paym ents fo r goods and services. The positive o verall result has therefore been due to no n -ta x incom e: i.e ., to w in d fa ll resources. 10In the case of ENTEL, for example, the imprecise valuations of the enterprise ranged from US$1.9 billion (the price at which the company was transferred) to US$3.5 billion, while many marginal oilfields (fields with a high gas/petroleum ratio) were transferred without placing any value whatsoever on their gas content. 1 Although Decree No. 575/90 laid down that the resources 1 from the privatization operations would be used for social ex­ penditure, successive exceptions to this rule resulted, in practice, in the inoperancy of this provision. The Argentine case is a very typical example of the problem described by Devlin (1993), who, while stressing the importance of assigning the windfall resources from privatization to social expenditure, nevertheless notes that “... it may be difficult to make specific allocations in situations of generalized fiscal urgency”. SO M E L E S S O N S O F THE A RG ENTIN E PRIVATIZATION P R O C E S S • DAN IEL AZPIAZU A N D ADOLFO VISPO C E P A L REVIEW 54 • D E C E M B E R 133 1994 TABLE 2 Argentina: National Treasury. Income and outlays during the application of the Convertibility Plan, second quarter of 1991 to fourth quarter of 1993 (Millions of pesos at February 1994 prices) Percentage Privatiza­ of total tion result corres­ ponding to opera­ tions privatization operations Total income Current income Other income Total outlays 1991 2nd quarter 3rd quarter 4th quarter Last 9 months 3 094 3 866 3 469 10 429 2 508 2 579 2 868 7 955 586 1 287 601 2 474 2 547 3 497 2 865 8 909 -39 -918 3 -954 547 369 604 1 520 630 134 430 1 194 115.2 36.3 71.2 78.6 1992 1st quarter 2nd quarter 3rd quarter 4th quarter Total 3 806 3 277 3 453 3 876 14 412 2 896 3 025 3 126 2 705 11 752 910 252 327 1 171 2 660 2 830 2 769 2 752 3 367 11 718 66 256 374 -662 34 976 508 701 509 2 694 666 152 114 208 1140 68.2 29.9 16.3 40.9 42.3 1993 1st quarter 2nd quarter 3rd quarter 4th quarter Total 3 224 4015 4 315 4 116 15 670 2 488 2 991 3 312 3 131 11 922 736 1 024 1 003 985 3 748 3 038 3 253 3 395 3 160 12 846 -550 -262 -83 -29 ■924 186 762 920 956 2 824 4 226 155 204 589 2.2 29.7 16.8 21.3 20.9 Operating resulta Total resultb Source: Prepared by the authors on the basis of information from the Ministry of Finance. a Current income less operating costs. b Total income less total costs. I f these w in d fa ll resources are n o t m atched b y changes in v o lv in g a re lia b le lo n g -te rm im p ro v e m e n t in the fis c a l accounts, th e ir e ffe c tiv e im p a c t w ill tend to b e d ilu te d b y th e persistence o f s tru ctu ra l im b a la n ­ ces and even b y th e im p lic it costs o f the p riv a tiz a tio n p ro g ra m m e it s e lf . 12 2. Effects on the external sector In the sho rt te rm , th e c a p ita l in c o m e d e riv e d fro m the fu nd s w h ic h the State receives in cash fo r the sale o f its enterprises has a p o s itiv e im p a c t on the balance o f paym ents. In th e case o f A rg e n tin a , th is in c o m e was 12 This is reflected, in an as yet incipient manner, in the evol­ ution and conformation of the pattern of expenditure of the Na­ tional Treasury. Thus, for example, expenditure on goods and services doubled in only two years (1991-1993), so that its in­ cidence in the total rose from 9.0% to 15.2%, accounting for nearly 80% of the growth in total expenditure. o f d e c is iv e assistance13 in re ve rsin g a tre n d th a t had e xiste d fo r o v e r tw o decades: the perm anent net transfers o f c a p ita l to the e x te rio r. T hus, in the threeyear p e rio d 1990-1992, fo r the firs t tim e in m any years, there was a net in flo w o f fo re ig n exchange o f the o rd e r o f U S $15 b illio n (A rg e n tin a , M in is try o f the E c o n o m y and P u b lic W o rks and Services, 1993) w h ic h w as a d e cisive fa c to r in sustaining the e x­ change rate p a rity and o ffs e ttin g the trade d e fic its registered in th a t p e riod. In th is respect, in fo rm a tio n on the balance o f paym ents c a pital account show s th a t the in co m e as­ sociated w ith the p riv a tiz a tio n p rogram m e increased c o n sid e ra b ly d u rin g the p e rio d 1990-1992: according to o f f ic ia l p ro je c tio n s , th is in c o m e w il l te n d to 13 Another substantial proportion of the inflow of external re­ sources was due to short-term movements associated with the existence of domestic dollar interest rates higher than those pre­ vailing at the international level. SO M E L E S S O N S O F THE A RG EN T IN E PRIVATIZATION P R O C E S S • DAN IEL AZPIAZU A ND ADOLFO VISPO 134 CE PA L REVIEW 54 sta b iliz e at a ro un d U S $ 4 .7 b illio n in the tw o -y e a r p e rio d 1993-1994, a fte r w h ic h i t w ill b e g in to d e cline ra p id ly as fro m 1995. T h e m a in p o s itiv e e ffe c t o f the p riv a tiz a tio n p ro ­ cess - th e in flo w o f c a p ita l- is registered e x c lu s iv e ly d u rin g the process o f “ d e n a tio n a liz a tio n ” o f p u b lic enterprises. A s these are tra nsfe rred to the p riv a te sector, h o w e ve r, a n othe r e ffe c t is generated on the balance o f paym ents w h ic h is perm ane nt and oppo­ site to th e above-nam ed e ffe ct. T h is is the rem ittance o f p ro fits and d iv id e n d s abro ad b y the consortia w h ic h purchased the p riv a tiz e d enterprises. F ro m a m e d iu m -te rm sta n d p o in t, th is has g ro w n s te a d ily s in c e 1 99 0, in lin e w it h th e c o n s o lid a tio n o f the o p e ra tio n s o f th e p riv a tiz e d firm s (ta b le 3). T h is b e h a v io u r o f rem itta n ces o f p ro fits and d iv id e n d s tends to cancel o u t th e in itia l p o s itiv e e f­ fe c t o f the p riv a tiz a tio n process on the balance o f paym ents. A s i t is e xp a n d in g in a dom estic m acroe c o n o m ic and in te rn a tio n a l fin a n c ia l c o n te x t w h ic h is u n fa vo u ra b le to the re m itta n c e o f p ro fits a b ro a d ,14 its m o s t n e g ative effe cts w ill o n ly be registered in the • D E C E M B E R 1994 Source: Prepared by the authors on the basis of information from the Central Bank of the Argentine Republic and the 1994 National Budget. a The capitalization of external debt paper in the various privatiza­ tion processes is included under “Foreign direct investment”, while income from cash payments is included under “Privatization operations”. b Official projections. m e d iu m term , i f there is a change in one o r m ore o f the factors in that context. A n o th e r im p o rta n t e ffe c t o f the p riv a tiz a tio n p ro ­ cess on the balance o f paym ents is due to the e lim i­ na tio n o f the service costs in respect o f the external debt paper w h ic h w as c a p ita liz e d as p a rt o f the p a y­ m e n t fo r the enterprises transferred to th e p riv a te sec­ tor. T hus, up to the end o f 1993, the to ta l v alue o f the State-ow ned enterprises p riv a tiz e d cam e to U S $23.16 b illio n i f the repurchase o f d o m e stic and external debt bonds is calcu la te d a t th e ir n o m in a l value, b u t o n ly a little less than U S $15.5 b illio n i f they are c a l­ culated at th e ir e ffe c tiv e va lu e (i.e., 6 6 .9 % o f the firs t fig u re ). T h e n o m in a l v a lu e o f th e p u b lic debt paper repurchased under the pro g ra m m e cam e to U S $13.4 b illio n (i.e., 58.0% o f the to ta l in c o m e ), w h ile its e ffe c tiv e va lu e w as U S $ 5 .7 6 b illio n , e q u iv a le n t to 42.9% o f the n o m in a l va lu e (table 4). T h e repurchase o f e xte rn a l d e b t bonds had a sig­ n ific a n t in itia l im p a c t o n the c u m u la tiv e debt ( it is expected to exceed U S $ 2 0 b illio n b y the end o f the program m e). T he debt re d u c tio n due to the sale o f p u b lic assets (a little o v e r U S$11 b illio n ) w as e q u i­ va le n t to 19% o f the to ta l e xte rn a l d e b t as at 1989. H ow ever, th is re d u c tio n was m ore than o ffs e t b y the fresh indebtedness in c u rre d d u rin g the p e rio d , so that there was a net increase o f som e U S $ 2 .7 b illio n in the external d ebt betw een 1989 and 1 9 9 2 .15 In other w ords, in spite o f A rg e n tin a ’s in c o rp o ra tio n in to the B ra d y P lan, the e v o lu tio n o f the c o u n try ’ s external indebtedness show s th a t the e ffe c t o f the sale o f p u b lic enterprises has been w ip e d o u t (ta b le 5). U n d e rly in g this net increase in external in d e b ­ tedness is another phenom enon w h ic h w ill p ro b a b ly becom e even m ore notice a b le in the fu tu re . T h is is the change in the structure o f indebtedness w h ic h m arks the beg in n in g o f a new c y c le le d b y the p riv a te sector in general and the business groups w h ic h bought the privatized enterprises in particular. B y w ay o f example, the value o f the negotiable obligations issued b y private firm s up to late 1993 cam e to U S $3 457 m illio n , w h ic h represents an increase o f U S $ 2 701 m illio n d u rin g the year; at the same tim e , n e g o tia b le o b lig a ­ tions authorized b u t n o t y e t issued cam e to U S $705 m illio n , w h ile o b lig a tio n s requested b u t n o t yet authorized am ounted to U S$1 7 0 0 m illio n (table 6). 14 Between 1990 and 1992 the 180-day LIBOR rate fell by 57% (from 9.22% to 3.95%). 15 What is more, the public external debt, which is directly affected by the privatization operations, grew by US$900 million. TABLE 3 Argentina: Balance of Payments. Trends in foreign direct investment, a privatization operations and remittances of profits and dividends, 1988-1995 (Millions of dollars) Income Year 1988 1989 1990 1991 1992 1993 b 1994 b 1995 b Foreign direct investment Outlays Privatiza­ tion operations 1 147 1 028 333 465 2 852 1 703 1 974 1 841 4 647 4 718 3 896 (Profits and dividends) -660 -664 -716 -805 -850 -945 -1 407 -2 057 SO M E L E S S O N S O F THE ARG ENTINE PRIVATIZATION P R O C E S S • DANIEL AZPIAZU A ND ADOLFO V ISPO C E P A L R E V IEW 54 • D E C E M B E R 135 1994 Argentina: Financial results of the privatization programme, 1990-1993 (Millions of dollars) Debt paper Cash Nominal value Effective value 1 257.0 394.1 1 836.0 Telephones Airlines Electricity Ports Radio and TV Petroleum Gas Petrochemicals Shipyards Steelworks Real estate Other 2 279.0 190.1 1 283.1 13.3 13.9 4 846.8 658.0 53.3 59.8 143.3 130.9 65.2 5 029.0 1 313.8 2 543.5 12.0 2.0 Totals 9 736.7 13 425.3 5 758.3 - - - - 1 271.1 3 082.1 132.0 1 080.4 1 120.3 46.0 - - 41.8 22.5 - - Totals Liabilities transferred Aa _ - 460.7 - 1 110.0 - 1 570.7 Bb 7 308.0 1 503.9 3 826.6 13.3 13.9 6 117.9 3 740.1 185.3 59.8 185.1 130.9 77.2 3 536.0 584.2 3 579.8 13.3 13.9 5 927.2 2 888.3 99.3 59.8 165.8 130.9 67.2 23 162.0 15 495.0 Source: Prepared by the authors on the basis of information from the Ministry of the Economy and Public Works and Services. a Result of adding the nominal value of the capitalized debt paper to the cash receipts and the liabilities transferred. b Result of adding the effective value of the capitalized debt paper to the cash receipts and the liabilities transferred. TABLE 5 Argentina: Trends in the external debt and interest payments, 1986-1992 (Billions of dollars) External debt Year Total 1986 1987 1988 1989 1990 1991 1992 a Public Private 51.4 58.3 58.5 63.3 61.0 63.7 66.0 44.7 51.8 53.5 58.4 6.7 6.5 5.0 4.9 59.3 6.7 Interest paid 4.4 4.5 5.1 6.4 6.1 5.6 4.6 Source: Prepared by the authors on the basis of information from the ECLAC Office in Buenos Aires. a Provisional estimate. A n analysis o f th e enterprises w h ic h have issued o r are arran ging to issue n e g o tia b le o b lig a tio n s m akes it possible to estim ate the degree o f connec­ tio n be tw een this ty p e o f indebtedness and the p riv a t­ iz a tio n process. Thus, the c o n so rtia w h ic h purchased p riv a tiz e d enterprises (T e le fó n ic a o r Telecom , fo r exa m p le ) and the firm s w h ic h d ire c tly p a rtic ip a te in som e o f them (A stra o r Pérez C om panc) account fo r the m a jo rity o f the o b lig a tio n s issued (72% ). T h e same is true o f the negotiable o b lig a tio n s auth o rize d b u t n o t ye t issued, in the case o f w h ic h the firm s in q u estion account fo r 71% o f the to ta l am ount, and even m o re so in the case o f o b lig a tio n s n o t y e t auth­ o riz e d (9 1 % ) (B asuaido, 1994). 3. Effects on the structure of relative prices T h e e v o lu tio n o f the re a l p ric e s o f th e p u b lic ser­ v ic e s tra n s fe rre d to th e p riv a te s e c to r has g iv e n ris e to s u b s ta n tia l changes in th e s tru c tu re o f re la tiv e p ric e s o f th e e c o n o m y . T h e s e tre n d s h a v e been fu rth e r s tre n g th e n e d b y th e ir c o n v e rg e n c e w ith th e p o lic ie s o f d e re g u la tio n o f m a rk e ts and o p e n in g -u p o f th e e c o n o m y : th e e x te n t to w h ic h goods and services are tra d e a b le a b road goes a lo n g w a y tow ards e x p la in in g the b e h a v io u r o f th e ir re s p e c tiv e prices. SO M E L E S S O N S O F THE A RG EN T IN E PRIVATIZATION P R O C E S S • DANIEL AZPIAZU A ND ADOLFO V ISPO 136 C E P A L REVIEW 54 * D E C E M B E R 1994 TABLE 6 Argentina: Negotiable obligations of the private sector at the end of 1993 (Millions of dollars) Negotiable obligations Companies Total Issued Authorized Requested In connection with privatization operations: 750 600 600 TELECOM Pérez Companc Banco Galicia 300 EDESUR Astra Acindar Telefónica Comercial del Plata Siderca Loma Negra Bridas IMPSA TECPETROL Others Subtotal Others Total 500 300 200 150 85 85 60 60 86 2 486 971 3 457 500 150 100 500 205 705 1 550 150 I 700 1 250 600 600 300 300 200 650 150 100 85 85 60 60 86 4 536 1 326 5 862 Source: Prepared by the authors on the basis of information from the National Securities Commission. There are a n um ber o f cases o f adjustments w hich easily exceed the g ro w th rate o f m ost o f the other prices in the e co n o m y.16Furtherm ore, especially in the energy area, there has been a g ro w in g dispersion o f price struc­ tures, w ith considerable differences in the real evolution o f the prices o f the various se rv ice s.17 T h e e sta blishm en t o f a n ew structure o f re la tive p rice s w h ic h tends to fa v o u r th e p riv a te areas sup­ p ly in g services at the expense o f the sectors p ro d u c­ in g n o n -pro tected tra de a ble goods is re fle cte d in the patterns o f b e h a v io u r o f the va rio u s econom ic a c ti­ v itie s. In th is respect, a stu dy b y the A rg e n tin e Indus­ tria l U n io n (C o lo m a , 1993) reveals th a t b o th in term s o f the e v o lu tio n o f th e ir sales and, above a ll, the respective p ro fit m argins, the enterprises w ith the best p e rfo rm a n ce in d ic a to rs are those w h ic h have been p riv a tiz e d , w h ile th e p roducers o f non-protected tradeable goods are those w h ic h d is p la y the highest 16 In some cases (such as ENTEL or Aerolíneas Argentinas) the ad­ justment in scales of charges took place before the transfer to the private sector, as a way of attracting potential buyers, and there were even contractual guarantees in respect of real prices, while in others (electricity, gas) the biggest relative increases took place after the service enterprises in question came under private management. 17 Generally speaking (especially in the energy field), the increases in prices for big users have tended to be well below the average levels and even further below the rates for household users. levels o f re la tiv e d e te rio ra tio n , w h a te ve r the v a riable considered (the enterprises producing naturally or legally p rotected goods are in an in te rm e d ia te situation). I t should be n oted th a t in a ll the areas w here the co n so rtia w h ic h purchased the p riv a tiz e d enterprises have d e cisive p o w e r in the fix in g and u pdating o f prices, the State n o t o n ly transferred the respective assets b u t also the ca pacity to in flu e n c e the structure o f re la tiv e prices o f the econom y. In o th e r w ords, there w as a s h ift in the m arket m e ch a n ism s18 and, at the same tim e , in the o ffic ia l sid e ’s a ttitu d e to the p o s s ib ility o f a p p ly in g p u b lic p o lic ie s to regulate o r in d u ce c e rta in p riv a te a c tiv itie s . T h e tra n sfe r o f a n o rm a l econom ic p o lic y in s tru m e n t also im p lie s the tra n s fe r to certain segments o f the p riv a te sector (w h ic h e n jo y n a tu ra lly o r le g a lly pro te cte d o lig o p o l­ is tic o r m o n o p o lis tic po sitio n s th ro u g h the existence o f reserved m arkets) o f m uch o f the re g u la to ry p o w e r 18 For example, although in a few cases (gas, electricity) “cross-subsidies” are explicitly prohibited, the absence of regulatory mechanisms or at least of minimum criteria in this respect rules out all possibility of restrictive action. Indeed, the possibility of signing specific contracts between the sup­ plier enterprise and the users of the services makes it perfect­ ly feasible, when both firms belong to the same conglomerate, to resort to transfer prices. SO M E L E S S O N S O F THE A RG ENTINE PRIVATIZATION P R O C E S S • DAN IEL AZPIAZU A N D ADOLFO V ISPO CEPA L REVIEW 54 o v e r m arkets w h ic h p la y a le a d in g ro le in d e te rm in ­ in g the c o m pe titiven ess o f the e con om y as a w h o le . 4. Effects on investm ent A c c o rd in g to th e o b je c tiv e s o f the p riv a tiz a tio n p ro ­ gram m e, the s tim u la tion o f capital form ation is at once one o f its m a in foundations and one o f the basic results expected, in v ie w o f th e d isin ve stm e n t observed in m o s t o f the enterprises e lig ib le fo r p riv a tiz a tio n . T h ere are tw o m a in com ponents w h ic h s h ould be id e n tifie d here: on th e one hand the capital fo rm a tio n that the purchasing consortia w o u ld effect (p a rtly under fo rm a l u n d e rta kin g s), and on the othe r hand the p o te n tia l m u ltip lie r e ffe c t o f this capital fo rm a tio n . W ith re g a rd to the firs t o f these, the estim ates w h ic h have been m ade reveal th a t the e ffe c t on ag­ gregate in v e s tm e n t has been o n ly m odest. C onside­ rin g the capital fo rm a tio n de rivin g fro m a broad group o f p riv a tiz e d areas (gas, telephones, e le c tric ity , r a il­ w ays, subw ays, roads, ports, and w ater su p p ly and sewerage), the re s u ltin g aggregate investm ent is e s ti­ m ated at a lit t le o v e r 2 % o f g d p up to the m id-1990s, s ta b iliz in g th e re a fte r a t around 1.5% u n til the end o f the decade (FIEL, 1992). A t the same tim e , a ccording to o ffic ia l estim ates, the inve stm en t com m itm ents in p u b lic enterprises w h ic h w e re p riv a tiz e d o r granted as concessions w o u ld be around 1.0% o f GDP in 1994, g oing d o w n in 1995 to o n ly 0.8% o f GDP (A rgentina, Poder E je c u tiv o N acional, 1993). A ccord ing to o ffic ia l projections, these am ounts o f investments w o u ld am ount to an annual average o f close on U S$2.6 b illio n in the three-year p e rio d 1993-1995: a figu re equivalent to o n ly tw o-th ird s o f the average annual capital form a­ tio n o f the p u b lic enterprises d u rin g the three-year p e ri­ od 1 980-1 982 and o n ly 54.6% o f that corresponding to th e th re e -ye a r p e rio d 1986-1988 (FIEL, 1992). A lth o u g h in ve s tm e n t in the p riv a tiz e d areas was b e lo w the average le ve ls o f m ost o f the 1980s, h o w ­ ever, i t w as s lig h tly h ig h e r than the lo w levels re g is ­ tered in the years im m e d ia te ly before the process. T h is is e xp la in e d , o n th e one hand, b y the acute and g enera lized d is in ve s tm e n t o f the p u b lic enterprises in the la tte r p e rio d and, on the other, b y the need to re h a b ilita te and m a in ta in the p riv a tiz e d services. In th is sense, in the sh ort te rm there is a p o s itiv e im p a c t on aggregate inve stm e n t, b u t its lo c a l m u lti­ p lie r effects are redu ced b y the h ig h p ro p o rtio n o f e q u ip m e n t purchased abroad (as fo r exam ple in the case o f te le c o m m u n ic a tio n s ) and are restricted to a lim ite d n u m b e r o f sectors o f a ctiv ity . • D E C E M B E R 1994 137 F in a lly , since the m o st dynam ic activities in term s o f sales and p ro fita b ility are those protected fro m e xter­ nal com petition and the recently privatized service en­ terprises, capital fo rm a tio n tends to reproduce and consolidate this same co n fig u ra tio n . In this context, there is little incentive to invest in m ost o f the goodsproducing sectors in v ie w o f the options offered b y the p riva tiza tio n o f p u b lic enterprises, m uch o f the services sector, and, in general, activities associated w ith goods and services n o t tradeable abroad. Consequently, as far as the international com petitiveness o f the A rgentine econom y is concerned, it can o n ly be hoped that in the course o f tim e the im provem ents in the p ro d u c tiv ity o f the p rivatized enterprises w ill be transferred, through reductions in costs, to the rest o f the e co n o m y and e s p e c ia lly to th e sectors p ro d u c in g e x p ortable goods. 5. Effects on the oligopolization and conglom eration of the econom y A n o th e r s alie nt fe a tu re o f the p riv a tiz a tio n p ro ­ g ram m e is its ro le in p ro m o tin g the c o ncentration and c e n tra liz a tio n o f ca p ita l. In m o st o f the p riv a tiz a tio n operations ca rrie d o u t in the c o u n try , the fo rm o f the in v ita tio n to m ake b id s its e lf fa v o u re d the presence o f o n ly a fe w b id d e rs , and th is w as fu rth e r streng­ thened in m o st cases b y the c o o rd in a tio n and lo b ­ b y in g o f business groups in respect o f th e ir o w n o ffe rs . T h is le d , on th e one hand, to m arked concen­ tra tio n o f the o w n e rs h ip o f the “ d e n a tio n a lize d ” en­ terprises and areas in the hands o f a s m a ll n u m b e r o f b ig e co n o m ic a g e n ts ,19 and, on the other, to the sur­ v iv a l and strengthen ing o f legal m on o p o lie s and o lig o p o lie s , w ith th e consequent c o n s o lid a tio n o f p ro te cte d m arkets, on c o n d itio n s w h ic h ensured little o r no business ris k , and w ith b ro a d fre e d o m to f ix prices. In th is respect, co m pared w ith the experience o f o th e r countries, i t m a y be n oted th a t there was little concern b y the a u th o ritie s to p ro m o te the spread o f p ro p e rty th roug h th e c a p ita l m a rk e t.20 19 These were mostly the same conglomerates of national and foreign capital which, in previous years, had internalized the transfers in those areas sporadically favoured by public policies (industrial promotion, assumption of external indebtedness by the State, State purchases, etc.). 20 On the contrary, in most cases very high minimum levels of net worth were fixed for receiving authorization to participate in the bidding, or else similarly high levels were one of the main require­ ments for pre-qualification or purchase. In other words, the net worth of the potential buyers became the main barrier governing entry into the market for the privatization of public enterprises. SO M E L E S S O N S OF THE ARGENTINE PRIVATIZATION P R O C E S S • D A N IEL AZPIAZU A N D ADOLFO V ISPO 138 C E P A L RE VIEW 54 T h is h e ig h te n in g o f the proce ss o f c o n c e n tra ­ tio n o f c a p ita l asso cia te d w ith th e p r iv a tiz a tio n o f p u b lic e n te rp ris e s a lso re fle c ts th e c o n s o lid a tio n o f a tre n d w h ic h goes b a c k to th e m id -1 9 7 0 s : associ­ a tio n o f b ig lo c a l e c o n o m ic g ro u p s w ith fo re ig n o w n e d c o m p a n ie s . S u ch a sso c ia tio n s g e n e ra lly in c lu d e th e f o llo w in g e le m e n ts: b ig A rg e n tin e o w n e d co n g lo m e ra te s w h ic h p ro v id e m anagem ent and d o m e s tic lo b b y in g c a p a c ity ; fo re ig n o r lo c a l banks and p u b lic con tracto rs w h ic h have c a p ita liz e d e x te rn a l o r d o m estic d e b t paper, a nd c e rta in transna­ tio n a l c o rp o ra tio n s w h ic h g e n e ra lly p ro v id e techno­ lo g ic a l and m a n a g e m e n t c a p a c ity a n d e xp e rie n c e . In o th e r w ords, the fo rm s assum ed b y the v a ri­ ous p riv a tiz a tio n processes - n e t w o rth requirem ents, te c h n ic a l requ irem e n ts, ra p id ity , im p o rta n c e o f lo b ­ b y in g p o w e r, e tc .- ha ve fa c ilita te d and even caused the a do ptio n b y the m a in lo ca l conglom erates o f strategies w h ic h f i t in w ith the g ro w in g polarization o f econom ic pow er. In this respect, a b y n o means e x c lu ­ sive lis t co u ld be m ade o f the corporate strategies adopted fo r the a cquisition o f m ost p u b lic sector assets: i) T h e re w ere e co n o m ic groups w h ic h , th ro u g h one o f th e ir subsidia rie s, a cq u ire d p u b lic enterprises o r S tate share h o ld in g s in firm s o p e ra tin g in the same sector o f a c tiv ity as them selves (co n ce n tra tio n ). T h is is so, fo r exam ple, in the case o f the In d u p a group and its purchase o f shares in P etropol S .A . and In d u c lo r S .A .; th e G a ro v a g lio and Z o rra q u in g roups’ p a rtic i­ p a tio n in P o lis u r S .A ., o r the T e c h in t co n g lo m e ra te ’s p urchase o f the m a jo rity o f the shares in so m isa . The same th in g o ccu rre d in the p riv a tiz a tio n o f areas o f p e tro le u m a c tiv ity , m o s t o f w h ic h cam e in to the hands o f th e m a in firm s in this sector. i i ) T h ere w e re business conglom erates w h ic h ac­ q u ire d p u b lic enterprises o r services, o r ob ta in e d c o n ­ cessions in respect o f them , in o rd e r to achieve d ire c tly o r in d ire c tly a greate r degree o f v e rtic a l o r h o riz o n ta l in te g ra tio n . T h ere are m a n y exam ples o f th is: th e T e c h in t and A c in d a r steel com panies, w h ic h in te g ra te d the p ro d u c tio n and d is trib u tio n o f e lec­ tr ic ity and gas (fu n d a m e n ta l in p u ts fo r th e ir p ro d u c ­ tio n a c tiv itie s ); the m a in e d ib le o il com panies (B unge y B o m , C ía. C o n tin e n ta l, L a P lata C ereal, L a N eco chea Q u e q u é n , e tc .), w h ic h d id th e sam e in respect o f ra ilw a y s a nd p o rt fa c ilitie s ; th e ce m e n t o lig a r­ c h ie s , in respect o f ra ilw a y s ; th e fo rm e r suppliers o f ENTEL, w h e n th a t c om p an y w as p riv a tiz e d (the Pérez C o m p an c g rou p (PECOM-NEC) and the T e c h in t group • D E C E M B E R 1994 (Telettra and Ita lte l)); the o il com panies, w h ic h cam e in to c o n tro l o f re fineries, d is tille rie s , o il pip e lin e s, p o rt fa c ilitie s , tanker fleets, etc. i i i) There w ere e conom ic groups w h ic h w ere ac­ tiv e ly and exte n sive ly present in the various p riv a tiz ­ atio n processes (d iv e rs ific a tio n and co n g lo m e ra tio n ). T y p ic a l exam ples are the Pérez C om panc g ro u p (e le c tric ity generation and d is trib u tio n , transport and d is trib u tio n o f gas, a c tiv itie s in the p e tro le u m sector, re fin e rie s and d is tille rie s , ra ilw a y s , te le co m m u n ica ­ tions, etc .) o r the C ía. G eneral de C om bustibles g roup (e le c tric ity generation, p e tro le u m and d is tille ry a c tiv itie s , ra ilw a y s , teleco m m u n ica tio n s, w a te r sup­ p ly and sewerage, etc.). Table 7 gives a sum m ary o f the c o nsortia in w h ic h som e o f the m a in c o n g lo m ­ erates operating in the c o u n try are a c tiv e participants. T h is lis t o f corporate strategies adopted in re ­ sponse to the p riv a tiz a tio n p rogram m e c le a rly shows that the g ro w in g o lig o p o liz a tio n and co n g lo m e ra tio n o f the A rg e n tin e econom y and the c o n s o lid a tio n and preservation o f reserved m arkets w ith o lig o p o lis tic quasi-rents are am ong the m a in e ffects o f the im ­ ple m e n ta tio n o f th a t p ro g ra m m e .21 A b o v e and be yo n d its m a croeconom ic and s ocial connotations, the above phenom enon introduces ad­ d itio n a l rig id itie s and lim ita tio n s in to the sphere o f the p riv a tiz e d areas o r m arkets, such as: i) increased ris k o f capture o r coo p ta tio n o f the re g u la to ry bodies; ii) serious d is to rtio n o f s o c ia lly e ffic ie n t resource a l­ lo c a tio n throug h the in c o rp o ra tio n o f m a rke t fla w s w h ic h are reflected, fo r exam ple, in p ric e -fix in g p o lic ie s (use o f transfer prices betw een suppliers and consum ers belo n g in g to the same business g ro u p ); iii) the generation o f new barriers to e n try in to the p riv a tiz a tio n m arket, in a d d itio n to those due in m ost cases to the inherent nature o r re g u la to ry fra m e w o rks o f the p riv a tiz e d a c tiv itie s o r areas; and iv ) erosion o f already lo w levels o f c o m p e titio n . In short, the la c k o f o ffic ia l concern fo r broaden­ in g the ow nership o f p riv a tiz e d enterprises has re ­ sulted in ad d itio n a l effects o f c a p ita l co n ce n tra tio n w h ic h at the same tim e m ilita te against the c o m p e ti­ tiv e e v o lu tio n o f the m arkets affe cte d b y the p riv a tiz ­ a tio n processes. 21 This programme tends to consolidate certain patterns of cor­ porate behaviour which are increasingly at variance with risk investments, the incorporation of technical progress, innovation, improvement of management standards, etc. SO M E L E S S O N S OF THE A R G EN T IN E PRIVATIZATION P R O C E SS • DANIEL AZPIAZU AND ADOLFO VISPO Argentina: Presence of the main economic groups in the privatization programme, by sectors of activity (Millions o f dollars) Electricity Natural gas Petroleum Railways Telephone services Pérez Companc • Central Costanera (generation) 90.1 million •TRA NSEN ER (high-tension transmission) 234.1 million • EDESUR (distribution) 511.0 million • Transportadora Gas del Sur (transport) 356.2 million * Distribuidora de Gas Metropolitana (distribution) 300 million • Central Areas: Puesto Hernández (240.8 million) Santa Cruz H (141.6 million) • Secondary Areas: 11 areas (70.2 million) • Campo Duran refinery (64.1 million) • San Lorenzo distillery (12.2 million) • Patagónicas marine terminal (10.1 million) • Oleoducto del Valle (oil pipeline) (77.0 million) • Ferroexpreso Pampeano (concession of 5.287 km) •TELEC O M Argentina 677 million •E D E L A P (distribution) 139.0 million • Transportadora Gas del Norte (transport) 210.2 million • Central Areas: Tordillo (100.9 million) Aguarague (143.7 million) • Secondary Areas: 10 areas (39.5 million) • Patagónicas marine terminal (10.1 million) • Oleoducto del Valle (oil pipeline) (77.0 million) • Ferroexpreso Pampeano (concession of 5.287 km) SOME Economic groups LESSONS O THE ARGENTINE F TECHINT PRIVATIZATION PROCESS ASTRA • EDENOR (distribution) 427.9 million • Distribuidora de Gas Metropolitana (distribution) 300 million • DANIEL AZPIAZU AND ADOLFO Compañía General de Combustibles (Soldati Group) • Central Guemes (generation) 86.2 million • Central Areas: Palmar Largo (36.0 million) Santa Cmz I (55.0 million) Aguarague N.O. (143.7 million) • Secondary Areas: 3 areas (1.3 million) • Interpetrol (marketing company) 8.7 million • Distribuidora (distribution) • Distribuidora (distribution) • Central Areas: Palmar Largo (36.0 million) • Secondary Areas: 9 areas (18.5 million) • Campo Durán refinery (64.1 million) Gas del Centro 138 million Gas Cuyana 122 million Others • Telefónica Argentina 794 million • Telefónica Argentina 794 million • SOMISA (integrated steelworks) 147.2 million • Various national highways (concession) X m • Ingeniero White port grain elevator (concession) • Central Areas: Vizcacheras (174.0 million) Santa Cmz II (141.6 million) • Secondary Areas: 6 areas (24.9 million) • Oil tanker fleet (41.8 million) • Campo Durán refinery(64.1 million) • Patagónicas marine terminal (10.1 million) • Oleoducto del Valle (oil pipeline) (77.0 million) • Transportadora Gas del Norte (transport) 210.2 million ♦ Distribuidora de Gas Metropolitana (distribution) 300 million VISPO SOCMA (Macri Group) Manufacturing < S Q D m 3 • Ferroexpreso Pampeano (concession of 5.287 km) • D elta - Borges branch line (concession) • Telefónica Argentina 794 million • Dock Sur distillery 11.7 million • San Lorenzo distillery 12.2 million • Ingeniero W hite port grain elevator (concession) • National drinking water supply and sanitation services (concession) • Channel 11 TV (concession) 8.2 million • Various national highways (concession) • Northern access system (concession) 139 140 CEPAL REVIEW 54 • DECEM BER 1994 III Rationality in the privatization and regulation of public services This section will deal with two closely associated matters. On the one hand, some issues connected with the economic rationality of the privatization programme will be analysed; on the other, an assess­ ment will be made of the characteristic features of the exercise of regulatory powers over privatized public services. 1. The “limited” rationality of privatization operations Generally speaking, the arguments used to justify a privatization policy are based on the conviction that free competition is an efficient mechanism for re­ source allocation in and for markets. In the case of naturally monopolistic markets, such as the majority of public services, it is assumed that a suitable sys­ tem of regulations and/or subsidies will give rise to efficient microeconomic behaviour under a system of private ownership and management. In reality, however, the assessment of the effi­ ciency of any organization will depend essentially on the definition of the goals and restrictions governing its operations. Replacement of the goal of “social welfare” with the objective of the private maximiza­ tion of profits will bring complications, since the final results are not independent of the process of interaction of the economic agents involved (see Coloma, 1992; a more comprehensive model may be found in Piffano, 1991). Thus, for example, it is possible that in a public enterprise where decision-making power is concen­ trated in the hands of government agents seeking to maximize the surplus for consumers, the level of prices will tend to be below that of another enterprise where the managers “associate” with external sup­ pliers or syndicated authorities. From the microeconomic standpoint, it is ex­ pected that the decisions of professional managers who are encouraged to maximize the profits of pri­ vate shareholders should result in reduction of the degree of inefficiency. In fact, however, efforts to improve the productivity of organizations supplying services usually begin with staff cuts, changes in the profile of qualifications of the staff who are kept on, and the introduction of a more competitive and “client-oriented” culture. Only afterwards are invest­ ments made in fixed production assets. These changes, however, only ensure a relative improve­ ment on the previous levels of service. In order to come closer to the standards of “best international practice”, two other conditions are required: effective regulatory bodies, and investors who are willing to take the risks involved. The macroeconomic rationality of privatization operations is undoubtedly very closely linked with their effects on economic growth and income dis­ tribution (Canovese and Rozenwurcell, 1991). Generally speaking, the privatization of public enter­ prises will only raise the growth rate of the product if the global investment rate is raised too. In the case of Argentina, however, the necessary investments were financed mainly from the windfall profits generated by the fixing of prices higher than those compatible with ordinary levels of profitability. As a function of the social pattern of consumption of public services, improvements in the growth rate would thus be due, in the final analysis, to regressive changes in income distribution. It is also generally assumed that public invest­ ment is less efficient than its private counterpart, since it is frequently distorted by extra-economic pressures. There is no proof, however, that in the Argentine economy the propensity to reinvest behaves in ac­ cordance with the theoretical model (Azpiazu, Vispo and Fuchs, 1993): the income from the frequent systems of cross-subsidization has not generated the same proportion of domestic saving and, in the final analysis, has not resulted in equivalent increases in the stock of productive capital. At the same time, in view of the economic and social structure of the country, the far from Schumpe­ terian attitude of its business class (Nochteff, 1993) and the special features of the Argentine privatization SOME LESSONS O F THE ARGEN TIN E PR IVATIZATIO N PRO CESS • D A NIEL AZPIAZU AND ADOLFO VISPO CEPAL REVIEW 54 process, the first consequence of a scheme of this type would be greater concentration of economic power. The functionality of this centralizing process has not been demonstrated by the authorities, which therefore run the risk of suffering some loss of credi­ bility and social support for the process of change.2 2 2. Some features of the regulation of natural monopolies Just as economic theory recognizes the existence of market flaws and problems of public interven­ tion, so it also identifies the risks associated with the regulation of privatized public services. Out of the various factors mentioned in such theory, we will analyse only two which display a certain mutually-reinforcing relationship. Non-symmetrical access to information These problems of non-symmetrical access to information belong to the type of problems tackled by the theory of the principal-agent dilemma, and arise when the critical data are difficult to obtain. The supervising agent -in this case, the regulatormust design systems of incentives which ensure, at the lowest possible follow-up cost, that the infor­ mation supplied is reliable and that decisions are in line with the agreed objectives. Generally speak­ ing, the regulators too will suffer from some de­ gree of non-symmetrical access to information on the profitability of investments, the effects of the incorporation of new technologies, efforts aimed at minimizing costs, the calculation of subsidies which will guarantee a certain amount of socially optimum services, and other aspects.2 3 a) 22 A policy of atomization of ownership, such as that used in Great Britain, reduces the validity of these doubts founded on principles of long-term efficiency and social equity. If, on the other hand, a concentrative strategy is adopted, this reduces the transparency of markets and encourages diversification and oligopolization. 23 In the case of Argentina, the regulatory bodies’ capacity for follow-up and negotiation was severely restricted during the privatization processes themselves. In this period there were cases of interruption, disconnection, and on many occasions “privatization” and dismantling of important historical records containing basic information in such areas as energy, transport and ports. • DECEMBER 1994 141 Although the prime responsibility of regulatory bodies is usually concentrated on following-up the prices and quality of the agreed services, in the case of natural monopolies (telecommunications, drinking water, gas, etc.) big capital investments are often needed, and these too must be supervised.24 Many of these investments will constitute an “entry barrier” to new bidders. The State must ensure both the satisfaction of future demand and a reasonable de­ gree of technological updating.25 In order to monitor the execution of investments it is also necessary to have the appropriate informa­ tion at hand. Every scheme has its own special fea­ tures: if a certain level of profitability is allowed in regulating the supply of services, this will encourage over-capitalization in order to increase profits, but on the other hand, if an adjustment formula is used based on the price index less a correction factor, this will result in lower service quality and under­ investment. The problem is even more complex when multiple products are involved or price frameworks are established for the future, since the regulator can­ not observe many of the variables directly. In these cases, it is hard to avoid the emergence of situations of discrimination and possibly of cross-subsidies. Finally, while economic theory only takes ac­ count of “non-symmetrical access in good faith” due to the technical complexity of the activities dealt with, the Argentine case involves a broader phe­ nomenon which could be termed non-symmetrical access to information due to the “renunciation” of the State.26 24 It should be recalled that one of the central justifications for the privatization process was the insufficiency of public invest­ ment in service systems. These systems displayed serious dete­ rioration due to inadequate maintenance, and in some cases they were near the end of their useful life (certain drinking water mains) or needed to make the transition to a new generation of technology (digital telephone exchanges). 25 The question arises, for example, of the long-term consequen­ ces of fixing electricity prices (that is to say, the prices charged by the least efficient thermal generator) on the basis of marginal cost estimates which do not guarantee the big investments needed in order to cover the growth of demand beyond the year 2000. 26 As, for example, the inability to monitor the fulfilment of the current regime for the motor industry or the possession by pri­ vate agents of the urban real estate registers for the Federal Capital, with details of the zoning that governs the possibility of commercial exploitation (the master copy of these registers “disappeared” in a fire). SO M E LESSO N S O F TH E A R G EN TIN E PRIVA TIZATIO N PRO CESS • D A N IE L AZPIAZU AND ADOLFO VISPO 142 CEPAL REVIEW 54 Co-optation o f the regulatory agent Another critical point in a regulatory system is the nature of the relationship between the regulatory agents and business. In these cases, frequent interac­ tion between the two sides may make the regulator more permeable to the interests of business firms. The official’s term of office, his salary level, the prospects of obtaining a high position in the sector subject to regulation and other aspects decisively af­ fect the degree of independence of the regulator and, ultimately, the effectiveness of the regulatory system. Likewise, the officials of regulatory bodies may be sensitive to pressures from high political circles of the government which appoints them. In this respect, and especially in view of the hastiness and makeshift nature of some of the privatization operations carried out in the country, the regulators’ authority has been weakened by prior decisions aimed at satisfying government political objectives. In general terms, it seems desirable that regu­ latory mechanisms should maintain the highest possible credibility and that the discretional lee­ way allowed to the regulatory agents should be limited by a legal framework which provides for adequate means of inspection and penalties. Since the regulation of privatized public services raises complex problems in both conceptual and practical terms, it is essential to have clear legislation and a suitable technical team empowered to collect the necessary basic information in order to act in an independent manner. If the condition of the inde­ pendence of the regulators from both business in­ terests and government officials is not met, then the system will continue to depend on decisions associated with particular political projects and yet another of the requirements for a “rational” pri­ vatization programme will be ruled out.27 In short, in the light of the conditions identified by Devlin (1993), it may be concluded that the Ar­ gentine privatization process has not been notable for its transparency. Thus, no mechanisms have been in­ troduced which reduce the non-symmetrical nature of the regulators’ access to the information they need. b) • DECEMBER 1994 Nor has the republican principle of giving full pub­ licity to government actions been respected, since access to the concession contracts and the official decisions of the various bodies (documentation which is of great importance in view of its poten­ tial for “interpreting” the framework legislation) continues to be restricted for the public and even often for the representatives of various government bodies.2 8 3. Bodies responsible for supervising privatized public services The regulatory functions of the State are defined as the set of attributions and instruments needed for the follow-up and supervision of compliance with rules imposed for the good of the community (environ­ mental control, road safety, etc.), including monitor­ ing of the provision of public services transferred to the private sector. These regulatory functions cannot be delegated, since they are designed to safeguard the common good. In Argentina, regulation was often implicitly delegated to the firms and bodies responsible for the provision of the services in question, thus giving rise to a rather unclear system of responsibilities. It was only with the privatization of public services that the explicit institution of regulatory bodies, designed to protect the rights of the consumer and, where possible, promote competition, appeared on the Argentine economic institutional scene.2 9 a) The regulatory bodies To date, the bodies responsible for the regulation of privatized public services constitute a collection of unconnected experiences at different stages of pro­ gress. A preliminary listing of the processes in terms of their degree of maturity and the level of effective­ ness attained is as follows: 28 An example of this is the effort made by the Ministry of the Economy to prevent the General Accounting Office from supervising the newly privatized firms. 29 In reality, the regulatory system has various components: the 27 There are many instances of this two-sided co-optation: for example, the attempt to make use of the fund for the stabilization of the spot price of electricity in order to apply these resources to infrastructural works in a province intervened by the federal gov­ ernment was approved by the Electricity Regulation Board (ENRE). framework legislation, specific legislation for the most import­ ant services, the corresponding regulations for the application of this legislation, the concession contracts (practically inac­ cessible to the public), and finally, the bodies set up to imple­ ment the State’s supervisory powers. For reasons of brevity, the contents of the various laws will not be analysed in this paper, which will confine its attention to the current capacities and effective limitations of these bodies. SO M E LESSO NS O F THE A R G ENTINE PRIVATIZATION PROCESS • D A NIE L A ZPIAZU A N D ADO LFO VISPO CEPAL REVIEW 54 i) Bodies with formal regulatory capacity. These bodies are the National Telecommunications Commission (CNT), the Electricity Regulation Board (ENRE), the National Gas Regulation Board (ENARGAS), and the Tripartite Sanitation Works and Services Board (ETOSS) . 30 The CNT was set up in 1990 and has the biggest operating resources (a bud­ get of 44 million pesos (dollars) and a staff of nearly 100). It corresponds to the first stage of the privatiza­ tion process, which was characterized by impróvisation and efforts by the government to gain political credibility.3 It was only after two years, during 1 which the Commission remained officially intervened and without a definitive structure, that the regulations for the basic telephone service were approved (these regulations seek to check some common practices of the companies holding the concessions, such as billing for services that were never provided). The estab­ lishment of ENRE and ENARGAS has suffered serious delays, and right from the start heavy political press­ ures have limited the autonomy declared in their re­ spective terms of reference. Their boards of directors and technical management staff were only completed more than a year after the respective concessions began to operate, and as at the end of 1993 their effective monitoring capacity was still dubious. Both of them have had to intervene in conflicts with social repercussions (such as the massive disconnection of illegal consumers in low-income areas), but some of their decisions were reversed by the Executive. Furthermore, as a result of investigations into the quality of the services provided, these bodies have imposed fines on private distributors (although these fines were very small and were only paid under protest) and have ordered the return to consumers of payments due to over-billing. ii) Bodies without effective regulatory capacity. These are bodies which were legally established but do not have an adequate structure or do not enjoy autonomy because they come under the administra­ tive authorities originally entrusted with the privatiz­ ation process. 30 In this latter case, it was only early in 1994 that steps were taken to fill the necessary technical posts. • DECEM BER 1994 143 This group includes the National Postal and Telegraph Commission, which is responsible for an enterprise which has not yet been privatized; the Na­ tional Rail Transport Commission, which is to super­ vise the concessions granted in that area; the National Railway Regulation Commission, which is em­ powered to act in conflicts among users, the State and the railway operators; the Commission on High­ way Concessions, which comes under the former De­ partment of Roads and Highways, and the National Motor Transport Commission, which comes under the Ministry of Transport. iii) Areas without regulatory bodies. To a large extent, conflicts of interest have prevented the estab­ lishment of regulatory bodies in the fields of air transport, the petroleum refining and marketing and gas distribution sector, multimodal transport in Greater Buenos Aires, ports and navigable water­ ways, and other areas. In general terms, both the legal structure of the regulatory frameworks and the formal attributions of the respective bodies seem to have incorporated the recommendations derived from international experi­ ence (calls for fair and reasonable scales of charges; defence of users’ rights, free competition and effi­ ciency, etc.). Furthermore, the organizational struc­ tures of the bodies have been designed by international-level consultancy firms, salary scales are in line with the functions discharged, manage­ ment and technical posts must be filled through public competition, and reasonable rules on incom­ patibility have been applied. However, all these conditions make little sense in practice when they are not backed up by the de­ tailed conditions of the contracts, and it is in this aspect that there are still serious doubts. The ultimate effectiveness of regulatory bodies depends largely on their independence of the concession-holders and political officials, their credibility in the eyes of so­ ciety, and the supervisory measures adopted. 4. The lessons of the first years of operation32 In Argentina, regulatory bodies have been or­ ganized for each privatized service or enterprise, 31 It may be noted that none of the markets corresponding to the other privatization operations of this first stage (highway toll concessions, sale of petroleum areas and air transport) has a specific regulatory framework. 32 For details of international and Latin American experience, see OECD (1993) and Rausch (1993). SOME LESSONS O F THE A R G EN TIN E PRIVATIZATIO N PROCESS • DANIEL AZPIAZU AND ADO LFO VISPO 144 CEPAL REVIEW 54 but independently of each other and subsequent to the granting of the concessions and the consequent transfer of assets. This strategy has had various consequences:3 3 i) Policy inconsistency. An example of this is that the regulatory bodies for gas and electricity are completely dissociated from one another, thus com­ plicating the tasks of medium- and long-term invest­ ment planning, design of policies for energy substitution and rational use of energy, etc. More­ over, such an important source of income as petro­ leum has no specific regulatory body or regulatory framework.34 The same kind of problems may emerge in time in connection with the various forms of land transport.3 5 ii) Deficient coordination o f information. An­ other of the negative consequences of the successive and disconnected establishment of the regulatory bodies is that the State loses the possibility of main­ taining a centralized and readily accessible store of information. This problem is further compounded by the varied jurisdictional nature of the regulatory functions. iii) Professional suitability of the new techno­ structure. The nominations and appointments to man­ agement posts in the regulatory bodies have not been the result of clear competition. Sometimes this means that those appointed are not the most suitable candi­ dates, but rather representatives of various power groups or agents. 33 Although these problems were in a sense to be expected, in view of the context which preceded the privatization operations and the haste and broad scope of the process, the possibilities of correcting the shortcomings will be significantly reduced after the expiry, in the middle of the next period of government, of the possibility of initiating legal actions that alter the present sys­ tem. From then on, there is a serious risk that the regulatory style of co-optation on two fronts will become consolidated. 34 Indeed, the central government has not been able to prevent increases in the local prices of fuels. The only tool available for checking these oligopolistic practices would appear to be the precarious Act on the Defence of Competition. 35 This problem could be avoided by, for example, the estab­ lishment of a centralized “superbody” which would obviate over-specialization by the regulating official and reduce the possibilities of co-optation. In an economy in which the main business conglomerates also dominate the privatized public ser­ vices sector, and in the absence of strict anti-monopoly laws, such a structure would in fact be essential. • DECEMBER 1994 iv) Equivocal legal status. As many of the con­ cession contracts antedated the detailed regulatory legislation, any change could be considered as an al­ teration of the rules of the game, thus depriving the government authorities of bargaining power. This can give rise to eminently technical arguments between the regulatory bodies and the concession-holders, and frequently to verdicts based on political consider­ ations at the various levels of the Executive. When this happens, the autonomy of the regulatory bodies is weakened and the process of co-optation of the regulators is facilitated. v) Little evidence of defence of users’ rights. An example of this was the attempt to present con­ dominiums with a single global bill for drinking water supply, which would have significantly re­ duced the administrative costs of the water com­ panies (by presenting only one bill instead of many), as well as solving problems of arrears of payment, since if the water were cut off, this would affect all the users in the building, and the cost of collecting or paying off the amounts owed by debtors would be paid by the neighbours. The political authorities fi­ nally intervened by postponing the implementation of this practice, thereby committing a de facto and de jure violation of the terms of the concession, which did in fact authorize this practice. It may be noted that the clause in question came from the regulations of the former National Water Supply and Sanitation Service, although it had not been applied in the past. Generally speaking, suitable conditions for clear and effective regulation do not appear to exist, since the regulatory bodies were not established before the privatization operations were effected, a new inde­ pendent technical structure has not been established, the system is not clear and easily understandable to users, and penalties are not applied automatically, but rather on a “consensual” basis. In short, the rationality of the Argentine privatiz­ ation programme has been significantly limited in at least two respects. Firstly, because certain critical as­ sumptions on microeconomic behaviour (the pro­ pensity of the agents favoured by the programme to make reproductive investments from their profits) are not being fulfilled, and secondly, because the nonmarket mechanisms needed to get closer to optimum solutions under conditions of the monopolistic supply of services are not yet operating. SOM E LESSONS O F THE A R G ENTINE PRIVATIZATIO N PROCESS • D A NIE L AZPIAZU AND ADOLFO VISPO CEPAL REVIEW 54 • DECEM BER 1994 145 IV Summary and conclusions In terms of economic, political and social relations, the privatization programme carried out in Argentina up to the end of 1993 has brought changes of a struc­ tural nature and provided many lessons on the suc­ cesses and errors, the social costs and benefits, and the advantages and disadvantages of undertaking such a broad and rapid programme. Quite apart from the differences that may be seen between the privatization operations carried out up to 1991 and those effected in the two-year period 19921993, the Argentine denationalization programme has distinctive features which differentiate it from other in­ ternational experiences of the same period. In this respect, the speed at which the operations were carried out is undoubtedly the most salient fea­ ture. In little more than three years, the authorities transferred to the private sector almost all the public enterprises producing goods and services, which together generated nearly 8% of GDP and around 20% of total investment in the country. This great speed, and the emphasis on a short­ term approach, initially made it possible to turn around the public sector’s critical financial situation. Furthermore, the capitalization of a large amount of external debt paper improved both Argentina’s posi­ tion in the various areas of external debt renegotia­ tion and the institutional relations with local economic groups. By giving priority to speed, however,36 this ap­ proach militated against the achievement of some of the objectives originally declared, and it also went against many of the recommendations that were be­ ginning to emerge from the incipient international practice in this field. Thus, a number of objectives were not attained, and sometimes the achievements were less than those that could have been reached with a better-organized and more gradual privatiza­ tion programme. 36 In the words of Gerchunoff (1992), “the urge to improve the Government’s image in the eyes of the business community” impelled and hastened “its privatization activities”. In reality, as has become clear in recent years, this attitude of the govern­ ment, and hence also of the top business circles, has played a leading role in seeking the necessary political, institutional and corporative support in order to facilitate (or even shore up) the present government’s economic and social policy. In the following paragraphs, some of the de­ clared objectives are compared with the real results obtained: i) Stimulation o f investment in the privatized en­ terprises, with its consequent multiplier effects: the contractually committed investments are minimal and, in view of the shortcomings and limitations of the regulatory framework, difficult to monitor; where there is no effective commitment, capital formation has reached only insignificant levels, and even then these scanty investments have mostly been spent on the purchase of imported equipment. ii) Definitive solution of fiscal imbalances: in most cases, the initial positive effect will be wiped out in the medium and long term; the generalized undervaluation of the assets transferred has reduced the income received by the government; the tax exemptions and benefits granted to some of the con­ sortia which purchased the privatized enterprises re­ duce fiscal income; the absorption of almost all the liabilities of the privatized enterprises means that there will be future fiscal outlays in respect of princi­ pal and interest payments, etc. iii) Significant reduction in external indebted­ ness: beyond the short term, the effect of the capital­ ization of external debt paper has been more than offset by new external indebtedness both by the purchasers of the privatized enterprises and by the public sector itself. iv) Incorporation o f modem management tech­ niques, with improvement of business efficiency and o f the quality o f the goods and services supplied to the community: for the moment, the relative improve­ ments in the performance of many of the privatized enterprises are only due to the serious deterioration suffered by those enterprises before they were trans­ ferred to the private sector. v) Global changes in the rules of the game: there has been a further strengthening of the power of the same economic agents who grew in the past thanks to such measures as industrial promotion, assumption by the State of the private external debt, and publicsector purchases of goods and services, and there has been an increase in their lobbying power and their SOM E LESSONS O F THE ARG ENTINE PR IVATIZATIO N PRO CESS • D A NIE L A ZPIAZU AND ADO LFO VISPO 146 CEPAL REVIEW 54 influence on relative prices and the distribution of wealth. Thus, rather than helping to give rise to a new business class with more enterprising features, public policies in general -and the privatization policies in particular- have helped to consolidate the market power of a few business conglomerates, mainly located in sectors producing non-tradeable goods and services. Furthermore, there has been a flagrant failure to take account of some issues of crucial importance for achieving the social benefits which could theoreti­ cally result from a selective and gradual policy of privatization of public enterprises. Examples of this are the lack of concern for putting the enterprises to be privatized on a sound footing before their sale; the scant attention paid to the need to regulate certain privatized areas; the transfer and further consolida­ tion of oligopolistic or monopolistic reserved mar­ kets; the establishment of conditions ensuring low or non-existent business risks; freedom to fix the prices and scales of charges of various public services; the transfer to a handful of economic agents of power to regulate markets; abrupt changes in the relative prices of the economy, to the detriment of consumers and of the sectors producing internationally tradeable goods; the scant interest shown in organizing compe­ titive bidding with a considerable number of bidders and the fixing of “entry barriers” based on the wealth of the potential bidders; and the further heightening of the process of the concentration and centralization of capital. There have also been shortcomings as regards public regulation, especially in the case of “natural monopolies” and areas and sectors where a highly oligopolistic structure has become consolidated. Among these shortcomings, special mention may be made of: i) the formulation of regulatory frameworks and the establishment of the respective regulatory bodies after the transfer of public enterprises to the private sector; ii) the adoption of provisions tending to preserve the monopolistic or oligopolistic nature of the enterprises privatized. Even though there may be clauses limiting the duration of these rights, the relative bargaining power of the parties when the contracts come to an end will not be such as to fa­ vour the State, as long as the weakness of the regula­ tory bodies and their co-optation by the economic agents they are supposed to regulate persists; iii) the frequent reformulation of rules laid down before the privatization process, which adversely affects the • DECEMBER 1994 public credibility of the regulatory system and may run counter to prior rights whose renegotiation would almost certainly be to the disadvantage of the State; iv) the scant protection afforded to consumers in the face of the oligopolistic practices of the consortia which purchased the privatized enterprises;3 v) the 7 establishment of formal anti-monopoly requirements which, however, in practice can be easily evaded without risking any penalty,38 and vi) the absence of rules guaranteeing the independence of the regulatory bodies with respect to private companies which ac­ quire privatized firms or areas. The Argentine experience also raises some queries about the heavy concentration of ownership of the privatized enterprises in a few big economic groups;39 within this context, the growing bargaining power of the conglomerates weakens the State in its role of promoting better links and relations within society as a whole. Finally, what has been done in Argentina in the field of the privatization and regulation of public ser­ vices is virtually in contravention of the best prac­ tices in this respect.40 Thus, most of the other experiences of privatization point to the conclusion that once the political decision to privatize all or some public enterprises has been taken, it is necess­ ary to apply a gradual approach, with criteria in terms of the time sequence which make it possible to har­ monize and optimize multiple short- and long-term objectives, the recognition right from the start of the need to restructure the enterprises to be privatized and put them on a sound business footing so as to maximize the value of their assets, and the prior for­ mulation of regulatory frameworks which guarantee the greatest possible social benefits. (Original: Spanish) 37 An example of this is the behaviour of the YPF S.A. com­ pany, whose predatory and anti-competitive practices have proved to be impossible for the Government to check with the instruments at its disposal. 38 The most flagrant example of this is the acquisition by Acindar of part of the equity of the former Somisa, thus infring­ ing the condition laid down in the privatization process that two local steelmaking firms could not form part of the, same consortium. 39 It has even happened that, after being favoured by the “entry barrier” represented by the fixing of minimum levels of corpor­ ate wealth for eligibility to participate in the bidding, some big firms forming part of the purchasing consortia have sub­ sequently transferred their share holdings, thus obtaining huge financial benefits in a very short space of time. 40 See, inter alia, OECD (1993), Devlin (1993) and World Bank (1988). SOM E LESSONS O F THE A R G EN TINE PR IVA TIZATIO N PRO CESS • D ANIEL AZPIAZU AN D ADO LFO VISPO CEPAL REVIEW 54 • DECEM BER 1994 147 Bibliography Argentina, Ministry of the Economy and Public Works and Services (1993): Argentina: un país para invertir y crecer, Buenos Aires. Argentina, Poder Ejecutivo Nacional (1993): Argentina en crecimiento, 1993-1995, Nos. I, H, III and IV, Bue­ nos Aires, Ministry of the Economy and Public Works and Services. Azpiazú, D., A. Vispo and M. Fuchs (1993): La inversión en la industria argentina 1983-1988. El comporta­ miento heterogéneo de las principales empresas en una etapa de incertidumbre macroeconômica (19831988), Documento de trabajo No. 49 (LC/BUE/L. 131), Buenos Aires, ECLAC Office in Buenos Aires. Basualdo, E.M. (1994): El impacto económico y social de las privatizaciones, Realidad Económica, No. 123, Buenos Aires, Instituto Aígentino para el Desarrollo Económico (IADE). Canavese, A. and G. Rozenwurcell (1991): Privatiza­ ciones, crecimiento y distribución del ingreso, in A. Porto (ed.), Economía de las empresas públicas, Tesis-ITDT, Buenos Aires. Coloma, G. (1992): Empresa pública y empresa privada: un análisis teórico de eficiencia comparada, in P. Gerchunoff (ed.), Las privatizaciones en la Argenti­ na. Primera etapa, Buenos Aires, Instituto Torcuato Di Telia. (1993): Desempeño empresario y contexto económi­ co: un análisis del período 1991-92, Documento de trabajo No. 12, Buenos Aires, U.I.A., Instituto para el Desarrollo Industrial, June. Devlin, R. (1993): Privatizations and social welfare, CEPAL Review, No. 49 (LC/G. 1757-P), Santiago, Chile, April. FIEL (Foundation for Latin American Economic Research) (1992): Capital de infraestructura en la Argentina. Gestión pública, privatización y productividad, 19702000, Buenos Aires. Gerchunoff, P. (ed.) (1992): Las privatizaciones en la Ar­ gentina. Primera etapa, Buenos Aires, Instituto Torcuato Di Telia. Nochteff, H. (1993): Constraints on the Transition to a Dynamic Economic System in Latin America. An Approach to Some Socio-Economic Conditionants for Development: The Argentine Case, Santiago, Chile, Latin American Faculty of Social Sciences (FLACSO), Programa Argentina, December. OECD (Organization for Economic Co-operation and De­ velopment) (1993): Regulatory Reform, Privatization and Competition Policy, Paris. Piffano, H. (1991): Teoría positiva de la empresa pública, autonomía de gestión y control de la Gerencia, in A. Porto (ed.), Economía de las empresas públicas, Tesis-ITDT, Buenos Aires. Rausch, A. (1993): Monitoring and Regulatory Aspects o f Privatization in Argentina and Latin America, Oxford, United Nations Development Programme (UNDP), July. World Bank (1988): Techniques o f Privatization o f StateOwned Enterprises, World Bank Technical Paper No. 93, Washington, D.C. SOM E LESSONS O F THE ARGENTINE PRIVATIZATIO N PR O CESS • D ANIEL AZPIAZU AND ADOLFO VISPO CEPAL REVIEW 149 54 Extraordinary comparative advantage and long-run growth: the case of Ecuador André A. Hofman Rudolf M. Buitelaar The authors are Economic Affairs Officers o f the ECLAC Economic Development Division, The objective of this article is to describe how the transformation of the trade and industrialization regime is taking place in Ecuador and what are the systemic factors stationed in Santiago, which condition the realization of this transformation. A Chile and the ECLAC long-run perspective of economic policy and growth in Subregional Headquarters in Mexico, respectively. Ecuador (considering the whole of the twentieth century) reveals that growth has been relatively fast compared to other countries in the region, with exports as the driving force of that growth. The disturbing fact is that these exports have been dominated by a few booming export products at different points in time, and that growth has therefore shown a distinct stop-go nature. Corporate behaviour would seem to be characterized by rent-seeking, as natural economic rents have been present at several moments in history. This study develops the hypothesis that one of the above-mentioned systemic factors is the country’s unstable growth, which can partly be attributed to the existence of extraordinary comparative advantages, and the effects of export booms and busts under different policy regimes are highlighted in this connection. The overall conclusion is that the import-substitution policy created a manufacturing industry that was hardly competitive, mainly because it replaced the economic rents from windfall profits with policy-induced economic rents. In the concluding section the outlines of a policy approach that could minimize the existence of such rents are discussed. DECEM BER 1994 150 CEPAL REVIEW 54 • D ECEM BER 1994 I Introduction Ecuador, like most Latin American countries, experi­ enced one of the severest economic crises in the 1980s, with mounting inflation and negative per capita growth, and this crisis led to a major shift in economic policies. Likewise, in Ecuador, just as in most of the other coun­ tries of the region, there is a growing conviction that the import-substitution industrialization strategy must be dismantled and that there must be a reorientation to­ ward a more outward-looking development strategy. This change of policy orientation is clear when one looks at the programmes of the two former administra­ tions and the present government, but the programmes adopted, whether of a more orthodox or heterodox nature, have failed because of natural disasters or sys­ temic political and economic factors. The objective of this article is to describe how this transformation of the trade and industrialization regime is taking place in Ecuador and what are the systemic factors which condition its realization. This study develops the hy­ pothesis that one of these systemic factors is the country’s unstable growth, which can partly be at­ tributed to the existence of extraordinary comparative advantages, and the effects of export booms and busts under different policy regimes are shown. Policy approaches in Ecuador aimed at diversi­ fying the export base and hence improving the stability of economic growth have a long-standing tradition but show frustratingly few successes. Only, perhaps, during the heyday of the oil boom, in the mid-1970s, can any noteworthy upsurge in non-traditional exports be ob­ served. This -perhaps surprisingly- makes the 19731978 period, together with the years of the Second World War, the only moments when the well-known “Dutch Disease” effects are least visible in the per­ formance of other tradeables. But this development was also related to rent-seeking behaviour, as differ­ ent policy instruments were developed to channel oilrents to the manufacturing industry. The collapse in the early 1980s proved this export drive based on oil rents to be unsustainable. A long-run perspective of economic policy and growth in Ecuador (considering the whole of the twentieth century) reveals that growth has been rela­ tively fast compared with other countries in the re­ gion, with exports as the driving force of that growth. The disturbing fact is that export performance has been dominated by a few booming export products at different points in time, so that growth has therefore shown a distinct stop-go nature. Corporate behaviour would seem to be characterized by rent-seeking, as natural economic rents have been present at several moments in history. The various approaches seem to be closing a circle: the essentially “laissez-faire” regime of the beginning of the century was abandoned during the Great Depression of the thirties, and the subsequent interventionist import-substitution strategy began to be dismantled during the debt crisis of the eighties. The debate is now about whether the unrestricted working of market forces will lead the country to a better performance, or if a different policy approach should be designed and what this should entail. It is not clear why the dismantling of intervention­ ist policies would achieve by itself high and stable growth. The country continues to depend on exports based on significant natural advantages, which renders long-mn growth unstable and leads to what has been called “ultra-biased” growth. There are strong reasons to support the dismantling of most import-substitution policies, as there are also strong reasons to suggest that a different type of intervention in the market mechanisms is called for. The lessons to be drawn from the Ecuadorian policy approaches may shed light on the contours of a new strategy, a main feature of which should be how to avoid rent-seeking beha­ viour among manufacturing enterprises. This article develops the argument in a descrip­ tive, chronological way. In section II the problem of unstable growth is shown through time-series permit­ ting an international comparison covering most of the twentieth century. Section III puts forward the hypo­ thesis that this problem can be attributed to the presence of extraordinary comparative advantages that lead to “Dutch Disease” effects. Section IV refers to long-run time series on ex­ ports and real effective exchange rates to show the effects of export booms and busts under different pol­ icy regimes. Three observations are crucial for the EXTRAORDINARY COMPARATIVE ADVANTAGE AND LONG-RUN GROWTH: THE CASE O F ECUADOR ANDRE A. HOFMAN AND RUDOLF M. BUITELAAR CEPAL REVIEW 54 argument: one is that an export boom under a laissezfaire regime in effect hinders the development of other tradeables; the second is that an export bust leads to changes in the policy regime; and the third is that the import-substitution policy designed to alter the effects of the export boom succeeded in stimulat­ ing the upsurge of other tradeables, but failed to pro­ vide a sustainable base for the diversification of exports and the stabilization of growth. Mainly in order to explain the third observation, section V analyses in some detail the policy ap­ • DECEM BER 1994 151 proaches adopted, while section VI deals with the behaviour of firms in different stages of the boomand-bust cycle. The overall conclusion is that the im­ port-substitution policy created a manufacturing industry that was hardly competitive, mainly because it replaced the economic rents from windfall profits with policy-induced economic rents. In the conclud­ ing section (section VII) the outlines of a policy ap­ proach that minimizes the existence of such rents are discussed and the final conclusions of the study are presented. II The basic problem: Instability of long-run economic growth and productivity The 1900-1989 period has been subdivided, as shown in tables 1 and 2, in order to permit international comparisons (Maddison, 1986 and 1991; Hofman, 1993a). In the case of a specific country these bench­ marks obviously function as a straitjacket, and we will therefore give the appropriate phases for the Ecuadorian case, when appropriate. However, it should be noted that our phases do in fact fit in rather well with Ecuador’s economic development (Benalcazar, 1989 and Hofman, 1994). The first years of the twentieth century show fast growth in Ecuador, propelled mainly by cocoa ex­ ports (especially between 1908 and 1914) (Moneada, 1991 and Salgado, 1989). In the phase from 1914 until 1924 growth was relatively slow, due, among other things, to the First World War and the decrease in cocoa exports. In the second half of the 1920s growth rates improved following institutional reform (creation of the Central Bank) and policies aimed at develop­ ment and export promotion (Drake, 1984; Rodriguez, 1987, and Marchán Romero (ed.), 1987). The “Great Depression” finished off this promi­ sing phase and led Ecuador, together with Latin America and the rest of the world, into a period of recession. We have divided this period into two sub­ periods -1929-1938 and 1938-1950- as these two subperiods show quite different results on a world scale. The first subperiod, 1929-1938, showed world­ wide deceleration of per capita growth. This pano­ rama changed drastically during the 1938-1950 period, however, when the world experienced the dis­ aster of the Second World War but Latin America remained relatively untouched, increased its exports and initiated an import-substitution industrialization process also induced by the unavailability of imports, thus increasing economic growth (Blomstrom and Meller, 1990; Abril-Ojeda, 1990). The 1950-1989 per capita growth rates (table 1) indicate that growth accelerated in Ecuador and Latin America during the 1950-1980 period but suffered an extreme slowdown, even with negative per capita growth, in the 1980s. The picture is different for the Asian and advanced countries, which show much higher growth acceleration in 1950-1973, after which, however, the Asian countries increased growth a little further in 1973-1980 and again in 1980-1989, whereas growth in the advanced countries slackened abruptly in 1973-1980, speeding up again slightly in the 1980s. Table 2 presents a comparison of the levels of per capita GDP with those of the United States for the 1900-1989 period. It is thus clear that, comparatively speaking, Ecuador’s growth record looks quite satisfactory. A closer scrutiny, however, reveals some important drawbacks. Figure 1 gives the annual per capita GDP growth data in constant dollars from 1940 to 1990. It can immediately be seen that the growth record is rather unstable. The average growth for the whole 50-year period amounts to 2.5% per year, but the standard deviation is 4.7%. In the 1940s, 1970s and EXTRAORDINARY COMPARATIVE ADVANTAGE AND LONG-RUN GROWTH: THE CASE O F ECUADOR ANDRE A. HOFMAN AND RUDOLF M. BUITELAAR 152 CEPAL REVIEW 54 • DECEM BER 1994 TA B LE 1 Per capita gross domestic product, 1900-1989 (Annual average growth rates) Country or region 1900-1913 1929-1950 1950-1973 1973-1980 1980-1989 1900-1989 2.5 1.9 0.5 1.6 1.6 1.0 2.0 0.7 1.5 1.7 2.9 2.5 4.8 5.3 4.7 3.3 2.3 5.4 1.4 -0.7 -0.6 5.9 1.9 2.2 1.1 1.2 2.0 Ecuador Latin America Asian countries Spain and Portugal Industrialized countries United States 1913-1929 1.8 1.0 2.1 2.2 2.1 2.1 1.8 1980 1989 22 42 71 17 24 26 40 70 100 100 1.7 -0.6 0.4 0.5 1.5 2.2 1.7 2.3 Source: A. A. Hofman, 1993b. TA B LE 2 Per capita gross domestic product, 1900-1989 (United States - 100) Country or region 1900 1929 1950 1973 12 29 18 34 60 13 29 15 31 54 13 28 14 28 51 16 28 9 19 29 16 41 43 100 Ecuador Latin America (average) Asian countries Spain and Portugal Industrialized countries United States 1913 100 100 100 21 68 100 32 22 Source: A. A. Hofman, 1993b. FIGURE 1 Ecuador: Per capita GDP growth rates, 1940-1990 Years 1980s growth rates are either between 8% and 10% a year, or else are negative. This unstable growth can be related to the country’s export performance, as we will argue at a more theoretical level below. Total per capita exports in constant dollars over the same 50-year period show an average growth rate of over 7% a year, but with a standard deviation of 26%. In other words, growth rates per year were as high as 80% or even more, but they also fell to -20% or less. Other flaws in Ecuador’s rather favourable longrun growth performance relate to productivity growth, and specifically to the capital-intensity of that growth and the quality of labour. In a paper by Hofman (1993b), in which figures on labour productivity in Ecuador and other Latin American countries are presented, it is shown that Ecuador systematically registered significantly higher growth rates (except in 1929-1938) than the other countries of the region. In capital productivity the overall picture is somewhat different, as Ecuador had lower capital productivity growth over the 1950-1989 period than the average for Latin American countries. With respect to total factor productivity, Ecuador turned in a good per­ formance, having the highest growth, together with Colombia. As regards labour inputs, however, the figures show that the growth rate of labour quality is far below the standards of other developing economies. In sum, Ecuador’s growth record in this century has been favourable in comparative terms, but shows problems of high instability. This seems to be due to the very unstable, but nevertheless dynamic, overall export performance. Other problems with Ecuador’s growth performance are the capital-intensity of growth and the slow improvement in the quality of labour. EXTRAORDINARY COMPARATIVE ADVANTAGE AND LONG-RUN GROWTH: THE CASE O F ECUADOR ANDRE A. HOFMAN AND RUDOLF M. BUITELAAR CEPAL REVIEW 54 • D ECEM BER 1994 153 m The hypothesis: “Dutch Disease” leads to unstable growth Since The Economist coined the term “Dutch Disease”, referring to the problems which arose in the Dutch economy as a consequence of the natural gas price hike following the first oil shock, it has mostly been associated with the situation in oilexporting countries. Conceptually, though, it can be (and has been) applied to all kinds of major windfall profits accruing to an economy. In Bianchi and Nohara (1988), the concept of extraordinary com­ parative advantage is used as a substitute for the Dutch Disease and is applied to the historical devel­ opment experience of Latin America, which it fits quite well. We will here follow their line of reason­ ing in order to identify the effects we will trace throughout the Ecuadorian development experience. The main hypothesis is that the unbridled exploi­ tation of economic rents creates distortions that fa­ vour both those sectors with extraordinary competitive advantages and the non-tradeable sectors, while pre­ cluding the production of other tradeables. This hy­ pothesis is based on a static and a dynamic argument. The static argument is that an export boom brings about a change in relative prices in favour of a boom­ ing tradeable, with an impact similar to an acrossthe-board tax on other tradeables. This works as follows: the massive inflow of foreign exchange leads to a sharp increase in internal demand, which exerts inflationary pressure on non-tradeables, as­ suming that output growth in non-tradeable sectors will not be able to match the growth in demand. Strong public investment in non-tradeables (infra­ structure, public services) exacerbates these inflation­ ary pressures in the short run, as a significant time lag is involved before output increases. The prices of tradeables are held in check through increasing im­ ports. Exchange rates will increase less than the do­ mestic rate of inflation, and the real effective exchange rate appreciates. A loss of competitiveness results, precluding the growth of other tradeables and eroding the comparative advantage of the booming tradeable. The movement of the real effective ex­ change rate is thus pivotal in these mechanisms, and although they do not tell the whole story, the index of the real effective exchange rate will be used in the next chapter to show the incidence of the Dutch Disease effects. The dynamic argument is that the exploitation of these rents leads to permanent distortions in product, capital and labour markets, in the nature of rentseeking. Both arguments combined lead to the phe­ nomenon of ultra-biased growth, characterized by virtually complete specialization in tradeables with extraordinary competitive advantage and in nontradeables. If export booms were permanent and the econ­ omy had no distortions, this specialization would scarcely matter for long-run growth. As it turns out, however, export booms are by nature transitory phe­ nomena (although there can be a number of suc­ cessive export booms), and their exploitation creates a number of distortions, for example on the capital market, where the private rate of discount will con­ tain a rent-element Since rent-seeking does not in­ crease value-added (output), growth of production will show a downward trend over time, as capital forma­ tion is precluded. If we assume imperfections in the labour and land markets, then the process of the ero­ sion of the export boom will be further accelerated, as a search for supra-competitive wages comes about, as well as a search for rents through the concentra­ tion of ownership rights. If we furthermore intro­ duce into the argument the existence of international competition, which makes the exporting economy a price-taker on international markets, it becomes clear that economic rents dissipate and export-booms are, by their very nature, transitory phenomena. In theory, an optimal rate of domestic savings and asset accu­ mulation would suffice to keep long-run growth up to potential, but in view of the above-mentioned imper­ fections it can be argued that capital accumulation will be restricted to the booming activity and will, in general terms, fall short of the rate required for opti­ mal long-run growth. Thus, the resulting ultra-biased EXTRAORDINARY COMPARATIVE ADVANTAGE AND LONG-RUN GROWTH: THE CASE O F ECUADOR ANDRE A. HOFMAN AND RUDOLF M. BUITELAAR 154 CEPAL REVIEW 54 growth is lower than long-run potential growth, and furthermore it is of a “stop-go” nature. To be sure, policy intervention can alter the effeet of temporary booms, but the question is whether there are arguments to make the case that policy interventions would lead to welfare improvement. It is theoretically possible, if we assume that economies • DEC EM B ER 1994 of scale, technological learning effects and the like externalities are greater in other tradeables than in the booming tradeables, that a policy-induced distortion of relative prices in favour of other tradeables can lead to higher long-run growth and welfare gains. It depends, however, on the type of instruments used and the way of implementing them. IV Export booms and busts Long-run series in constant 1980 dollars have been constructed for exports, the real effective exchange rate1 and GDP (Buitelaar and Hofman, 1993).2 In the , following paragraphs we will analyse three cycles of booms and busts. The first is the cocoa cycle, with a boom at the beginning of the twentieth century, fol­ lowed by its collapse and diversification of exports during the 1920s. The Great Depression and the years of the Second World War cannot be seen as part of a particular Ecuadorian boom and bust cycle, and are therefore discussed in the cocoa section up to the end of the depression (1937), and in the next cycle from that year onward. This second cycle really started with the banana boom in the early 1950s and lasted until the beginning of the oil boom in the 1970s. The third (oil and debt) cycle continues until the present. In each of these subperiods we will ana­ lyse the results with respect to the product enjoying a boom and other exports which do not enjoy extraor­ dinary comparative advantages. 1. The cocoa cycle At the beginning of the twentieth century Ecuador experienced a period of rapid economic growth in which exports of cocoa were the dominant element. The boom before the First World War was further 1 The real effective exchange rate was calculated only with the nominal exchange rate and the consumer price indexes of the United States and Ecuador. A more sophisticated approach would need to consider the impact of industrial and commercial policy instruments (see, for example, the work of Schydlowski, S. Levy, R. Parot, M. Rodriguez, S. Hunt and I. Mezzera at the Center for Latin American Development Studies of the Univer­ sity of Boston). 2 These series can be obtained upon request from the authors. stimulated by the opening of the Panama Canal in 1914. At this time, Ecuador was the main exporter of cocoa in the world, with 20% of the market. The boom reached its historical peak between 1908 and 1914, with exports amounting to some US$77 mil­ lion (in constant 1980 dollars) in the years 1914 and 1916. A downturn occurred in 1918, but exports re­ covered to some US$60 million in 1919-1920. The movement of the real effective exchange rate was as expected, with the national currency appreciating up to 1914 and depreciating strongly after 1918. This would suggest a Dutch Disease problem in the sec­ ond decade (see figure 2). Non-cocoa exports, con­ sisting mainly of coffee, tagua, rubber and wood, fell steadily from almost US$37 million in 1912 to an all-time low of less than US$11 million in 1921-1922. The Dutch Disease hypothesis is thus confirmed, showing a sharp fall in other exports during the cocoa boom. The economic policy regime in these years is usually characterized as being a “laissezfaire” regime. Nevertheless, it is interesting to note that even so the policymakers reacted to the econ­ omic circumstances. A fundamentally self-sufficient agricultural economy was in these years transformed in an agro-export economy, and the major source of tax receipts changed from the taxes levied on land­ owners in the Sierra to import taxes, and later an export tax on cocoa. This economic evolution brought about a political rupture in 1895, when the so-called Liberal Revolution transferred power from the pre-capitalist Sierra landowners to the emerging capitalist agro-exporters: i.e., the rising financial and commercial class of the coastal areas. There were also other typical signs of the Dutch Disease, such as heavy public spending, basically on infrastructure. The single most important public works EXTRAORDINARY COMPARATIVE ADVANTAGE AND LONG-RUN GROWTH: THE CASE OF ECUADOR ANDRE A. HOFMAN AND RUDOLF M. BUITELAAR CEPAL REVIEW 54 FIGURE 2 Ecuador: Exports and exchange rates, 1913-1936 • DECEM BER EECA b Non-EECA C 4 Real effective exchange rate b Exports with extraordinary comparative advantages 0 Exports without extraordinary comparative advantages project carried out in these years was the railroad between Quito and Guayaquil, for which the Govern­ ment obtained a foreign loan. This railroad, which was opened in 1908, significantly increased contacts between the two main cities. It was constructed under the second government of General Eloy Alfaro: a period which was also marked by important sanita­ tion works and public lighting projects carried out in Quito and Guayaquil through foreign enterprises, as well as important institutional changes (education law, separation of Church and State, etc) ( e c l a c , 1953). In the latter years of this cycle (1926-1930) the export structure diversified with the inclusion of coffee (a rather spontaneous phenomenon, brought about by favourable prices) and rice exports, bringing the share of cocoa exports to less than 50% of overall exports. Non-cocoa exports rose in the 1920’s following the depreciation of the currency, with a time lag of several years. Total non-cocoa exports combined climbed from US$18 million in 1922 to US$49 million in 1928, reducing the share of cocoa exports in the total to less than a third. It could therefore clearly be con­ cluded that the collapse in cocoa exports impelled pol­ icy reforms which, together with currency depreciation and the private-sector efforts to increase other ex­ ports, seem to have had the desired effects. The Great Depression of the early 1930s brought this modest recuperation to an abrupt end, and over­ all export revenue sank to an all-time low of less than US$30 million in 1933. Once again, devaluations, 155 foreign exchange controls and tariff hikes were necessary in order to adjust to an extraordinarily low level of import capacity. Even so, the gold and foreign exchange reserves were depleted, making it necessary to maintain a very high real exchange rate until 1940. 2. REER 4 1994 The banana cycle (with a prelude covering the Second World War years) All exports recovered from 1937 onward. Up to 1948, they were quite diversified, as may be seen from the remarkable upsurge in exports of Panama hats, which were the main export product in 1945, accounting for just over 25% of the total (26 out of 103 million constant 1958 dollars). The bulk of the exports in the Second World War years consisted of rice and coffee, the latter being usually considered as the fourth export product of Ecuador. There is, how­ ever, no reason to distinguish a separate coffee boom with possible Dutch Disease effects, as coffee ex­ ports were never the main foreign-exchange earner and thus cannot be supposed to have altered signifi­ cantly the internal price structure. The restrictions on imports because of lack of supply provided an opportunity for “spontaneous” import substitution, despite the strong appreciation of the currency. Important industries that were estab­ lished during the 1930s include the oil refinery and a cement plant, as well as other industries basically funded by foreign investors. A typical example of this phenomenon is the pharmaceutical industry, cre­ ated by an Italian immigrant in 1940. This plant re­ portedly grew to employ as many as 700 persons in the 1940s, and exported to most countries in South America. Exactly how “spontaneous” this import substitu­ tion was might be a matter of debate, since import tariffs were quite high: ECLAC reports tariffs for raw materials between 25% and 30%, for intermediate inputs between 30% and 90%, and up to 265% for finished products. The term “spontaneous” refers not so much to the absence of trade policy as to the ab­ sence of a rationale in terms of economic theory (a rationale that was later formulated by e c l a c , around 1950). In any case, the war years provided a stimulus for industrial growth, and the industrial production index went up from 50 in 1939 to 100 in 1948. The recovery observed during the war years must be viewed, however, in the perspective of the extremely poor country Ecuador still was. EXTRAORDINARY COMPARATIVE ADVANTAGE AND LONG-RUN GROWTH: THE CASE OF ECUADOR ANDRE A. HOFMAN AND RUDOLF M. BUITELAAR 156 CEPAL REVIEW 54 A second moment of windfall profits for the Ecuadorian economy occurred in the early 1950s, with the banana boom. The main reason for the rise in the country’s banana exports did not lie in a strong price increase, but in the fact that the Central Ameri­ can countries, until then the major producers, suf­ fered from a pest (the Panama disease) that destroyed a large part of their crops. Thus, Ecuadorian banana exports rose from US$10 million in 1948 to US$113 million in 1955. There was never a significant collapse in the ba­ nana cycle, as occurred with the other two important product booms. Exports did fall to US$96 million in 1958, but recovered gradually to US$184 million in 1964. In the mid-1960s a structural change occurred in the Ecuadorian market position, as a disease-resis­ tant new variety was introduced in Central America. Ecuadorian planters reacted immediately by chang­ ing varieties, but the country lost its leading position on world markets to the countries in Central Ameri­ ca. Political turmoil in the latter region from the end of the 1970s onward, however, restored Ecuador’s market position, and favourable prices on world mar­ kets towards the end of the 1980s led to an all-time high in banana export receipts of US$433 million (in constant 1980 dollars) in 1990. This second banana boom came to an end in 1992. If we define banana and cocoa exports as being based on extraordinary comparative advantages and analyse the performance of all other exports, we see an unstable and rather sluggish period in which the total value of the latter exports fluctuated between US$120 million (1952, 1957) and US$87 million (1959, 1961). In these years, coffee exports ac­ counted for the bulk of such other exports. The Dutch Disease effect of the banana boom can thus be expressed by the downturn in the 6-year average of all other exports: from slightly above US$115 million in the 1952-1957 period to slightly more than US$100 million in the 1958-1963 period. If this is a Dutch Disease effect at all, it is definitely milder than the reaction following the cocoa bust. In 1965 a significant increase in other exports was reg­ istered, bringing the figure close to US$150 million, around which level it remained until 1971. Growth slackened from 1955 onward, invest­ ments hardly increased and construction stagnated. An atmosphere of national crisis was felt in 1959 , when some revolts took place, inflation accelerated, and a devaluation was necessary in 1961. Neverthe­ • DECEM BER 1994 less, it is difficult to speak of a collapse of banana exports, as in 1971 such exports surpassed historical records. It was the period of institution-building necessary to implement the by then widely accepted import-substitution strategy. The National Economic Planning and Coordination Board was set up in 1954, and the first Industrial Development Act was adopted in 1957. It provided for total exemption from import duties on capital goods and substantial reductions in other import duties, and it also allowed tax exemp­ tions on reinvested profits. The National Finance Corporation was created in 1963, and the Industrial Development Centre, which provides technical as­ sistance, was established in 1962. Towards 1970 the legal and institutional frame­ work of the import substitution industrialization strategy was completed: the changes in the import tariff structure of 1971 consolidated high and dis­ persed effective rates of protection, mainly for con­ sumer goods; the interest rate was legally fixed in 1970 at 12%, which meant negative rates in real terms, and a complex system of tax benefits and tariff exemptions for industries, as well as import prohibi­ tions and licenses, had been consolidated through the periodic revisions of the Industrial Development Act. The limited scale of the domestic market was a known problem, and the solution adopted consisted of ambitious regional cooperation projects in the con­ text of the Andean Pact market. The only missing elements in this strategy were resources to invest and import. From 1955 to 1972 domestic-market industries (in a broad definition) became the most dynamic element in the economy. These comprised the nontradeable public utilities (water, electricity and sani­ tation, which grew at 15% annually in the 1950s) and the services sector, which grew faster than the rest of the economy. Manufacturing industry in factories grew by 10% or more annually in these years, spurred by Government incentives and cheap credit, but overall manufacturing growth was less (5% per year) because of the stagnation of small enterprises and handicrafts. Within the manufacturing sector, the traditional food and textile sectors continued to be those which contributed most to growth, together with the chemi­ cal sector, which received a strong impulse from ba­ nana production because of the latter sector’s intensive use of pesticides and of plastics as protec­ tion for the fruit. Most other industries, including EXTRAORDINARY COMPARATIVE ADVANTAGE AND LONG-RUN GROWTH: THE CASE OF ECUADOR ANDRE A. HOFMAN AND RUDOLF M. BUITELAAR CEPAL REVIEW 54 metal products and other advanced industries, also have their (modest) origin in this period, however. A special case is sugar production, which more than trebled after Ecuador was granted a quota for the US market in 1960. 3. • DECEMBER 1994 157 FIGURE 3 Ecuador: Exports and exchange rates, 1972-1990 The oil and debt cycle Export performance and economic policy Investment in oil exploration led to the discovery of oil in the Amazon region in 1967 and to a consid­ erable increase in production capacity in the early 1970s. The international oil price hike in 1973 pro­ vided the country with an affluence of foreign ex­ change that helped to overcome two of the basic problems that were structural in the years before: the low levels of domestic savings and demand, and the low capacity to import. Oil revenue rose from vir­ tually nothing in 1971 to US$1160 million in 1974, accounting for almost two-thirds of total export earnings that year. A new high was reached in 1980, and an all-time peak of US$1400 million (in constant 1980 dollars) was registered in 1985. Public invest­ ment grew rapidly in the 1970s, channelled for example through the National Development Fund (FONADE), which effectively limited the danger of overexpanding Government consumption expendi­ ture. Inflation was held in check by deliberately keeping the wages of civil servants low. Most sectoral policies were consumer-oriented, in the sense that the basic goal was to provide wage goods at low prices. a) Exports of products other than those with extra­ ordinary comparative advantages (i.e., total exports minus exports of cocoa, bananas and oil: non-EECA exports, for short) multiplied by a factor of almost seven between 1969 and 1979, reaching an all-time high of US$950 million at the end of the first oil boom. This result is certainly not in line with the Dutch Disease argument, and calls for an explanation both in terms of economic policy and in terms of linkage effects. Two-thirds of these non-EECA exports came from two sources related to EECA exports: oil derivatives and cocoa derivatives. The exports of chocolate were not due solely to linkage effects, but were forcefully stimulated by the military gov­ ernment of the time, which obliged cocoa producers to build up chocolate production capacity. A signi­ ficant number of other products also registered steep increases. Years REERa EECAb Non-EECAc 3Real effective exchange rate b Exports with extraordinary comparative advantages c Exports without extraordinary comparative advantages The boom in domestic demand and the possi­ bility of importing capital goods provided fertile ground for a rapid increase in manufacturing output, together with the tax benefits provided by the Indus­ trial Development Act, from which half of all the firms benefitted (a total of 800 enterprises claimed benefits under this Act). Further benefits were the extremely low energy and gas prices. Schematically, we can speak of a channelling of oil rents to manufacturing industry through a series of mechanisms: • • • • • • • low energy and gas prices subsidized interest rates, negative in real terms tax exemptions for capital goods imports tax benefits for new industries wage repression made viable through the policy of price controls on basic consumer goods a slowly appreciating domestic currency, mak­ ing capital goods imports cheaper strong protection of domestic industry through high tariffs (basically on finished products), im­ port licenses, prior deposit requirements, etc. The outcome in the 1970s was a rapid increase in manufacturing output (almost 10% a year during that period), through the establishment of a host of small firms in a great number of activities. The re­ sulting manufacturing sector was allegedly over­ EXTRAORDINARY COMPARATIVE ADVANTAGE AND LONG-RUN GROWTH: THE CASE O F ECUADOR ANDRE A. HOFMAN AND RUDOLF M. BUITELAAR 158 CEPAL REVIEW 54 dimensioned and intensive in the use of energy and capital, but not in the use of labour, as rigid labour laws dissuaded entrepreneurs from granting long­ term contracts to employees. Furthermore, the indus­ trial sector ran heavy balance-of-trade deficits and performed poorly in terms of developing linkages both within the sector and with the rest of the econ­ omy. Agriculture benefitted least of all from these mechanisms channelling oil rents to the economy, and the growth of agricultural output was the lowest of all the productive sectors (Vos, 1984). While public expenditure increased, public in­ come slackened as it relied excessively on petroleum revenue. Oil exports remained more or less stable during the 1975-1982 period, and this, combined with a fixed exchange rate and a marked anti-export bias, led to fiscal deficits and balance-of-payments problems in the latter years of the 1970s. It was possible to put off the necessary adjustments, as in­ ternational banks were more than willing to increase lending and the international debt soared. The longpostponed adjustments finally became unavoidable, however, as international interest rates went up and capital transfers stopped after the Mexican debtservicing failure of September 1982 (Acosta, 1990). The expected Dutch Disease effect of declining exports on other products can be seen in the sub­ sequent period, between 1979 and 1983. By this time, a new product with extraordinary comparative advantages had developed: shrimps. Exports of this product rose from US$30 million to US$300 million constant dollars between 1978 and 1990. Conse­ quently, we have also subtracted shrimp exports from the total. All other exports plummeted back to US$207 million in 1983, recovering to US$490 mil­ lion in 1986 but suffering a steady decline after­ wards. In the early 1980s the oil boom, rapid economic growth and significant social improvements came to an end. In 1980 oil production fell, and in 1981 econ­ omic growth per capita was very low. The boom of the 1970s had left Ecuador quite unprepared for the 1980s. The competitiveness of its agricultural sector was weakened, while the subsidized manufacturing sector had grown a great deal without becoming in­ ternationally competitive. The public sector had grown rapidly, accounting for 23% of GDP in 1973 but over 30% in 1982. However, this public sector expansion was financed almost exclusively with oil revenues and foreign debt. • DECEMBER 1994 The debt crisis broke out in 1982 and brought a reversal in capital transfers and consequent balanceof-payments problems. However, exports of oil did not decline further (after the 1980-1981 drop) until the collapse in oil prices in 1986 and the earthquake that destroyed the oil pipeline in 1987. Cocoa exports had a low point in 1983, bananas in 1984, shrimps in 1985 and oil in 1987. Overall, we see periods of de­ clining exports between 1980 and 1983, a slight re­ covery in 1984-85, a collapse in 1986-87 and a very modest recovery afterwards. The debt crisis ended the possibilities for debt-led growth and the govern­ ment of President Hurtado was forced, for the first time since 1970, to devalue the sucre and introduce a package of stabilization policies. The package in­ cluded reduction of the fiscal deficit from 7% of GDP in 1982 to a small surplus in 1984, and import restric­ tions were introduced to improve the trade balance. However, the reduction of the deficit was financed in great part by money creation, causing an increase in inflation and a fall in per capita GDP in 1982 and 1983. It was the newly-elected administration of Presi­ dent Febres Cordero which initiated in 1984 a major stabilization programme also aiming at modernizing the economy through a series of measures contained in a neo-liberal (or neo-conservative) programme. The direct role of the State in the economy was to be reduced, along with the web of regulations. The pro­ gramme also included the elimination of price con­ trols and subsidies (e.g. on energy) and the freeing of trade and the exchange rate, and it involved a shift from import substitution to the promotion of manu­ factured exports. Foreign direct investment was pro­ moted through this programme, and full debt servicing was designed to improve Ecuador’s image. This programme had similarities with the pro­ grammes initiated earlier in Chile, Argentina and Uruguay, but with great differences in the economic and political context (Ramos, 1986). The initial results of the programme were rela­ tively positive, as GDP grew over 4% in 1984 and 1985, helped in particular by the recovery of the ag­ ricultural sector after the floods of 1983. However, social unrest mounted in the country as the social costs of the restrictive monetary and fiscal policy af­ fected a great part of the population through the removal of price controls, devaluation, falling em­ ployment, declining government subsidies and sink­ ing real wages. The loss of political support, EXTRAORDINARY COMPARATIVE ADVANTAGE AND LONG-RUN GROWTH: THE CASE O F ECUADOR ANDRE A. HOFMAN AND RUDOLF M. BUITELAAR CEPAL REVIEW 54 • worsened by the fall in oil prices in 1986, led to the relaxation of fiscal austerity and the initiation of a public works programme, with resulting budget defi­ cits and a rise in the rate of inflation in 1986 and 1987. The 1987 earthquake which destroyed the pi­ peline transporting oil from the Amazon region to the coast, and the additional fall in oil prices in 1988, caused disastrous economic results at the end of the Febres Cordero administration. The expected upsurge in other exports after the oil collapse in 1986 is not yet clearly visible, but perhaps we should bear in mind that historically nonEECA exports have lagged several years in reacting to the existence of a high real effective exchange rate. Total exports other than oil, cocoa, shrimps and bana­ nas declined from US$490 million at constant 1980 prices to US$322 million in 1990. This tendency was DECEM BER 1994 159 heavily influenced, however, by coffee, oil dérivâtes and chocolate. Some minor exports seem to be pick­ ing up, without reaching a scale that affects the over­ all picture. The Boija administration took office in 1988 and managed to restore the international reserves but did not advance very much in the modernization of the Ecuadorian economy. On a per capita basis the per­ formance was rather meagre, with zero per capita growth over the whole 1988-1992 period, although GDP growth did pick up somewhat at the end of the Boija administration. Inflation was persistently high, around 50%, during the whole period. One of the causes of this persistent inflation was that the administration was not able to combine monetary and fiscal policy efficiently, for while monetary policy was rather restrictive, this was not the case on the fiscal side. V Economic policy Poor manufacturing export performance and produc­ tion inefficiency characterize the Ecuadorian indus­ trial sector3, and this situation was made worse by the economic policies applied. Special attention will be given in this section to trade policy, exchange rate policy, and policy regarding foreign direct invest­ ment. 1. Trade policy Ecuador has a long tradition of the application of export regulations which has further increased the bias against exports, including export permits, export prohibitions and regulations on foreign exchange proceeds. Domestic protection, with its effect of de­ creasing the relative prices of exportables compared to import substitutes and non-tradeables, consisted of a very complicated system including four separate tariff lists which, until 1985, each had different ex­ change rates, a system of tax exemptions which were largely firm-specific, prior authorization for selected imports, import prohibitions and foreign exchange 3 For a more general description of economic policy and the political process, see Hurtado (1988), De Janvry, Sadoulet and Fareix (1991), and Thoumi (1990). authorizations. During the 1980s protection through tariffs and surcharges was raised and lowered on sev­ eral occasions. In 1983 new surcharges were added which increased the rate of protection. In 1986 a new tariff structure was introduced that lowered rates and reduced their dispersion, but in 1989 new import taxes were introduced. At the end of 1992 Ecuador dropped its previous objections to the Andean Pact Free Trade Area, and imports from Colombia and Bolivia have entered duty free since September 1992, and those from Venezuela since February 1993. In November 1992 Ecuador further reduced tariff rates by adopting a 5% to 20% tariff schedule for imports other than from the Andean Pact countries. Advances have also been made in the simplification of import and export procedures. 2. Exchange rate management Up to March 1983 the country had a fixed exchange rate system which was relatively stable. Between 1950 and 1983 the exchange rate was only changed four times, rising from 15 sucres per dollar in 1950 to 33 sucres per dollar in 1983. Until the mid-1980s exchange rate policies discriminated against tra­ deable goods. The main instrument for exchange rate EXTRAORDINARY COMPARATIVE ADVANTAGE AND LONG-RUN GROWTH: THE CASE OF ECUADOR ANDRE A. HOFMAN AND RUDOLF M. BUITELAAR 160 CEPAL REVIEW 54 management has been direct intervention in the sup­ ply of foreign exchange, fostered by oil exports and foreign indebtedness. These policies encouraged capital-intensive production and thus imports of capi­ tal goods. In 1983, after a macrodevaluation, a crawl­ ing peg system was introduced which lasted almost two years, after which the government introduced a dual exchange system. In 1986 a free market ex­ change rate system was introduced, with only official imports and oil exports remaining in the official mar­ ket, but macroeconomic instability caused the free market to collapse in 1988. After a short experiment with a fixed exchange rate, a new crawling peg sys­ tem was introduced which remained in place until September 1992. Since then the government has moved towards a free market exchange system, with Central Bank intervention to stabilize the exchange rate (a dirty float). 3. Foreign direct investment Recent years have seen a liberalization of the foreign investment regime. In 1991 new regulations included equal treatment for national and foreign firms in • DECEMBER 1994 terms of taxes, tariffs and other fiscal incentives, eliminated limits on the repatriation of net profits (doing away with the previous ceiling equivalent to 40% of the company’s capital base), and allowed foreign investment in sectors which had previously been classified as strategic, such as utilities, the mass media, advertising and domestic transportation. At the beginning of 1993 the recently installed new gov­ ernment further liberalized foreign investment regu­ lations, eliminating the remaining restrictions on foreign investment in commercial banking and ex­ tending to foreign firms the promotional mechanisms available to Ecuadorian firms. The new rules allow foreign investors and firms to become local investors without registering or meeting specific qualifications and eliminates prior authorization for the transfer of equity shares. Regulations on technology transfer have also been eased. A new investment code was adopted in mid1991 which gives equal treatment for national and foreign corporations in terms of fiscal incentives, does away with restrictions on the repatriation of profits and permits foreign investment in several pre­ viously restricted sectors. VI Business behaviour Typically, industries catering for domestic demand in Ecuador can be classified in four subgroups which have different characteristics as regards the type of firms involved (ownership, size), and as regards the type of government intervention applied. It may also therefore be assumed that they are different as re­ gards the strategies of the firms in response to changes in the policy environment: • Basic-needs-oriented companies, with price controls and oligopolistic market structures. • Enterprises producing traditional consumer goods, sometimes with a distinct indigenous background and usually operating in rather competitive markets, despite the frequently high tariff protection. • Companies producing durable consumer goods, with private quasi-monopolies in strongly regu­ lated markets. • Enterprises producing industrial and agricultural inputs, usually linked to firms dominating the field of traditional export products. The policy-induced distortions are greatest in the first and third groups of industries, and thus the changes in company behaviour in response to changes in the policy environment are likely to be stronger in these groups. 1. Industries catering for basic needs 4 Industries which may be classified in this group in­ clude those producing sugar, rice, oils and fats, phar­ maceuticals, and cement. Policies regarding this type 4 The descriptions of specific industries are partly based on Spurrier Baquerizo (ed.), various issues. EXTRAORDINARY COMPARATIVE ADVANTAGE AND LONG-RUN GROWTH: THE CASE OF ECUADOR ANDRE A. HOFMAN AND RUDOLF M. BUITELAAR CEPAL REVIEW 54 of industries generally obeyed the basic objective of keeping the consumer prices low, in order to dimin­ ish social unrest stemming from low wages. This poses the problem of how to guarantee an acceptable profit rate and usually requires the establishment of price controls throughout the production chain. Ex­ ports have to be prohibited, because otherwise foreign consumers would benefit from the subsidized consumer prices. As the profit rate thus depends on Government decisions regarding price levels, incen­ tives to invest in expanding production capacity or in modernization efforts designed to improve efficiency are very low. Production will eventually fall short of domestic (subsidized) consumption, and imports become necessary. These imports have to be sub­ sidized, making this another form of rent channeling to producers. Some examples may clarify these points. In the sugar industry, cane is processed in three main mills or “ingenios”, one of which is Stateowned (by the c f n ) . The quota granted to Ecuador on the United States market makes sugar exports a high­ ly profitable operation. The quota is distributed among the ingenios by the State retailing company, the National Commodity Storage and Marketing Company (ENAC), but in exchange the ingenios are obliged to sell all sugar for domestic consumption to ENAC. Price controls operate at all points in the chain: from the price between cane producers and ingenios, to the price for sugar in the shops. Since sugar pro­ duction usually falls short of domestic demand, per­ mits are given for the importation of sugar both to complement supply on the home market and for re­ export to the United States. It may naturally be as­ sumed that the effect on company behaviour is that there is no incentive to invest in more production capacity or to improve productivity, neither on the farms nor in the plants. A similar situation is found in the rice sector. This is still an important product, as a significant number of small farmers engage in rice production. Price controls are used, but cannot be enforced as easily as in the case of sugar. The grain mills are obliged to sell their output to ENAC. When prices are raised, production readily increases and has to be ex­ ported, which causes deficits for ENAC, as home pro­ ducer prices are higher than the (allegedly heavily subsidized) world market prices. Such market satura­ tion leads the Government to lower prices, leading to less rice cultivation and the need to import rice. In • DECEM BER 1994 161 this case, too, ENAC still suffers losses, as consumer prices need to be subsidized. The endless political struggle about rice prices is an explosive issue which has occasioned the dismissal of several Ministers of Agriculture. Four plants dominate cement production, one of which is State-owned. Price control was practiced until very recently, by fixing the profit rate in the industry. Output used to be at maximum potential, yet a shortage of cement in the market was the rule. Black market prices were alarmingly high, and ce­ ment smuggling to Colombia was reported. However, the price controls hindered investments to expand pro­ duction capacity. The Borja Government raised cement prices and abolished import controls, and the black market disappeared as demand dropped. The Andean Development Corporation proposed a major invest­ ment project for increasing production capacity. The pharmaceutical industry also has an import­ ant share in the consumption basket of the popula­ tion. It is perhaps surprising that this sector had a good performance from as early as the 1940s, and frequently exported its products, although these were based on imported active principles, which account for around half the production costs. Most of the transnational pharmaceutical enterprises set up shop in Ecuador, and by 1987 more than 100 laboratories were registered, of which the largest 26 accounted for 80% of production. Only two of these 26 are of Ecua­ dorian capital. Stiff price policies were meant to keep consumer prices low, and this was perfectly possible during the 1970s because imports were cheap in sucre terms. The devaluations from 1982 onward brought profit levels down, however, and enterprises reported losses, in response to which the Government decided to grant a subsidy based on the amount of imports. The laboratories always protested against these subsidies, which implied a fiscal sacrifice of close to US$50 million in 1990, arguing that the best solution was the abolition of price controls. Obvious­ ly, exports had to be prohibited and massive smuggling was reported (up to 30% of total produc­ tion). Finally, in September 1991 the Government an­ nounced the elimination of the subsidy and its replacement by a direct subsidy to low income groups. To the dissatisfaction of the laboratories, however, price controls were not eliminated. The en­ trepreneurs stress the competitiveness of the sector in the Andean market, and they are confident that the transnational companies might prefer Ecuador as a EXTRAORDINARY COMPARATIVE ADVANTAGE AND LONG-RUN GROWTH: THE CASE O F ECUADOR ANDRE A. HOFMAN AND RUDOLF M. BUITELAAR 162 CEPAL REVIEW 54 production base for the regional market. This will depend on the elimination of the export prohibition and the incidence of other trade and foreign invest­ ment policies. These examples clearly illustrate the negative side-effects of price controls designed to keep con­ sumer prices low. 2. Durable consumer goods Perhaps the best-known example of the effects of Ecuadorian industrial policies is the establishment of industries producing durable consumer goods. The policy approach was to guarantee a high rate of re­ turn for new establishments by subsidizing invest­ ments and guaranteeing a market. Investment subsidies took the form of credits at negative interest rates and tariff exemptions on imports of capital goods. The markets were secured through high tariff protection and regional agreements within the An­ dean Pact integration scheme. The result was that the price-quality relation did not really matter as far as making profits was concerned. Most industries did not develop a genuine capacity to compete in open markets, and they virtually disappeared after the change in economic policy. One exception is the automobile industry, where policy changes were slow to be implemented, and the competitiveness of the industry in open markets is therefore yet to be tested. The history of the automobile industry in Ecua­ dor is strongly linked to the common industrializa­ tion efforts of the Andean Pact countries. Before the Andean Pact there was only one assembly firm, linked to General Motors, and few suppliers of auto parts. The automobile policy of the Andean countries did not have all the desired effects, but nevertheless two more firms entered the market. In 1983 a more protectionist policy was installed, and Volkswagen set up shop in Ecuador. The main policy instrument was the authorization to import Completely Knocked Down ( c k d ) kits, with complete prohibition of other automobile imports. This complete prohibition was relaxed for a short time between 1985 and 1987, but extremely high import tariffs were maintained. The CKD import authorizations were distributed among firms by a coordinating agency, CORDINAUTO. In the latter half of the 1980s these authorizations were used to implement a programme known as the Econ­ omic Automobile. Under this programme, 40% of all • DECEM BER 1994 imports should be of inexpensive automobiles, and it caused local assembly operations to flourish. In 1991 the programme was stopped, and imports of CKD kits were freed from restrictions. The Andean Pact automobile production scheme was eliminated, and free imports from member countries were stimu­ lated. The Ecuadorian automobile industry does not seem to fear the competition from Colombia, Peru or Venezuela. Most firms are owned by mother com­ panies which also own firms in other Andean Pact countries. Consequently, a specialization strategy among daughter firms in the countries is taking shape, with Ecuadorian firms exporting cheap cars to Peru and Colombia, while importing the more luxuri­ ous models from those countries, and especially from Venezuela. The prospects of the industry in a scena­ rio of liberalization towards third countries (a pros­ pect that might become a reality after 1993) are not so clear, however. Among the other industries which benefitted to some extent from the impulse of the Andean Pact industrialization policies was the refrigerator indus­ try: a branch that registered at the end of the 1970s exports to member countries as high as US$80 mil­ lion, but the end of the Andean Pact industrialization strategy brought this export drive to a complete stop. The same is true of the woodworking industries. All four enterprises in this branch collapsed after the breakdown of the common policy. Likewise, of the 15 enterprises that entered the metalworking industry under the Andean Pact policies, all but four have stopped producing. The remaining four, producing electrical systems, sewing machines, vacuum clea­ ners and hydraulic systems, exported together US$8 million in 1989. In the chemical sector at least two enterprises (both of them in the pharmaceutical in­ dustry) survived the closing down of the Andean Pact industrialization policies. The country’s experience with the industrialization scheme in the context of Andean integration has not given Ecuador any im­ portant lasting capacity in any branch, with some firm-specific exceptions. Most firms simply could not survive without protection. To prove this last point, Ecuador’s share in the imports of the OECD countries has been calculated for the years 1963, 1971, 1980 and 1990, at the threedigit SITC level. Only the items with a market share of at least 0.01% of OECD imports have been taken into account. The oil boom was the period of stron­ gest export performance, also in items other than the CKD EXTRAO RDINARY COMPARATIVE ADVANTAGE AND LONG-RUN GROWTH: THE CASE O F ECUADOR ANDRE A. HOFMAN AND RUDOLF M. BUITELAAR CEPAL REVIEW 54 traditional products. A decline in competitiveness was observed in the 1979-1983 period, in line with the Dutch Disease argument, while there was a very • D EC EM B ER 1994 163 modest recovery of competitive positions in the 1983-1989 period, basically in EECA exports other than oil. VII Summary and conclusions Ecuador is on the road to a new development strategy which, as in many other Latin American countries, includes a reorientation towards a more outwardlooking strategy. The transformation of the trade and industrialization regime should take into consider­ ation one of the basic features of Ecuadorian growth, namely its instability as a result of the existence of extraordinary comparative advantages. Ecuador has grown quite fast during the twen­ tieth century: the overall 1900-1989 annual per capita GDP growth rate was 2.2%, compared to 1.7% for Latin America as a whole and 2.3% for the Asian developing countries. Since 1950 Ecuador’s per capi­ ta GDP growth has been significantly faster than the Latin American average, although the Asian coun­ tries have grown more than twice as fast as Ecuador. In this article we have analysed the different booms and busts that have occurred in Ecuador in the twentieth century: the cocoa boom at the beginning of the century, followed by its bust in the 1920s and the Great Depression of the 1930s, the banana boom of the 1950s and its decline in the 1960s, and finally the oil boom during the 1970s and the debt crisis in the “Lost Decade” of the 1980s. Ecuador experienced a clear-cut Dutch Disease problem during the cocoa boom at the beginning of the century. Growth in nontradeables -such as the very necessary public ser­ vices-, inflation and weakened competitiveness of other exports were the signs of this. It was already clear in 1921 that export diversification was called for, and a number of policy instruments were created to achieve that: import tariffs, foreign exchange con­ trols, credit allocation and tax benefits for other in­ dustries. Some results were achieved in the latter half of the 1920s, but then the Great Depression brought the exports to a halt. The recovery after 1937, sponta­ neous import substitution and diversification of ex­ ports were an abnormal phenomenon due to the disarray of the developed countries. Banana exports in the 1950s, while not constituting a boom of the magnitude of the cocoa and oil periods, allowed the strengthening of the Administration and financial in­ stitutions, and public investment rose quickly. An in­ stitutional system oriented towards an importsubstitution strategy was built at this time. A hint of Dutch Disease problems can be seen in the sluggish performance of non-EECA exports between 1955 and 1965, but domestic manufacturing industries were bom and grew at a considerable pace. Oil revenues provided the financial resources needed to complement the institutional set-up for the import substitution industrialization strategy. Rents were channelled to manufacturing industry through a large number of direct and indirect mechanisms, enough to offset the Dutch Disease effects. All ex­ ports grew, and the export structure diversified up to 1978. The inflow of foreign exchange through the accumulation of debt exacerbated the Dutch Disease problems, however, and the export data clearly show the weakening of competitiveness in the 1978-1982/3 period. A gradual adjustment strategy was followed from 1982 to 1984, and a change in development strategy was essayed after 1984, with the abolition in practice of special credits and fiscal benefits. The change in development strategy was consolidated after 1988 as tariff reductions and deregulation pro­ ceeded, and a deepening of the liberalization strategy can be expected in the near future. The deliberate import-substitution strategy, which lasted roughly 30 years, from 1955 to 1985, altered the Dutch Disease effects significantly and allowed the build-up of some manufacturing capacity and the diversification of ex­ ports, basically through the oil-rent-based subsidization of producers. However, it did not create a competitive manufacturing sector that can compete without sub­ sidies, with perhaps some firm-specific exceptions. But the return to a development strategy based exclusively on the mechanisms of free trade is not likely to produce stable export-led growth, as the Ecuadorian economy is still characterized by the EXTRAORDINARY COMPARATIVE ADVANTAGE AND LONG-RUN GROWTH: THE CASE O F ECUADOR ANDRE A. HOFMAN AND RUDO LF M. BUITELAAR 164 CEPAL REVIEW 54 presence of extraordinary natural competitive advant­ ages, and distortions on the internal markets abound. It is not unimaginable that Ecuador will experience a second oil boom, just as it experienced a second ba­ nana boom between 1987 and 1991. Or perhaps a new product will significantly alter the export struc­ ture, just as the surprising boom in the shrimp indus­ try did in the 1980s. Will tropical hardwood be the next product that brings significant rents to Ecuador, transforming the rain-forest just as cocoa and bana­ nas transformed the coastal area? The question remains how to make best use of these windfall profits in order to create competitive advantages in other areas and diversify (and hence stabilize) exports and, as a final goal, growth. Undis­ torted free trade will not do the trick unless one as­ sumes an economy without distortions. In the past, the free trade regime did not achieve sustainable growth, and the distribution of rents to entrepreneurs while maintaining real wages low, as in the import substitution industrialization period, has severe draw­ backs as shown by the reduced responsiveness and increased vulnerability of the production apparatus, not to mention the macroeconomic flaws of excess public spending and inflation. A free trade regime and the presence of extraor­ dinary competitive advantages distorts price signals and market mechanisms in the domestic economy, through rent-seeking behaviour. A conscious inter­ vention strategy should be followed so as to stabilize, but not immobilize, the relative price structure over time. This could involve measures to protect or stimulate other tradeables during a boom. But the specific measures taken in the 1955-1985 period were misdirected, if we evaluate them with the crite­ • DECEM BER 1994 rion of long-term growth. In a period of export booms, instead of subsidizing producers, measures should be taken to subsidize consumers, especially of the lower-income strata, through direct support, e.g. in the guise of scholarships for basic education and training. To slow down spending and stimulate sav­ ing, however, a high real interest rate would be necessary, instead of the negative interest rates that prevailed during ISI. Social insurance mechanisms are of the utmost importance for capturing savings and providing long-term resources to the financial system. At the same time, booming internal demand would be a great stimulus for local industries, and they should therefore not be (permanently) protected from international competition, but should instead be made familiar with international standards and prac­ tices. Apart from the drawback that protection from international competition hinders technological learn­ ing, imports are necessary to contain inflationary pressures and moderate oligopolistic behaviour. In sum, Ecuadorian development will require public intervention in the market forces in order to attain optimum long-mn growth. Such intervention will require other mechanisms, other institutions and better implementation than the type of intervention used in the past, however. To some extent, it will be a form of intervention to create and improve the functioning of the market forces in the domestic economy, instead of suppressing them. The task of changing the economic policy regime started with the debt crisis, but the shape of the new model is not yet entirely clear. It will probably take well into the next century to achieve a reasonably articulated and inte­ grated set of institutions aid mechanisms. (Original: English) Bibliography A bril-Ojeda, Galo (1990): Auge exportador y desarrollo en Ecuador, in M agnus B lom strõm and Patricio M et­ ier (eds.), Trayectorias divergentes. Comparación de un siglo de desarrollo económico latinoamericano y escandinavo, Santiago, C hile, Economic Research Corporation for Latin A m erica (CIEPLAN)/Hachette. A costa, Alberto (1990): La deuda eterna, Quito, Editorial “El D uende”. Benalcazar R ., René (1989): Análisis del desarrollo econ­ ómico del Ecuador, Q uito, C entral Bank o f Ecuador. Bianchi, Andrés and T akashi N ohara (1988): A Com­ parative Study on Economic Development between Asia and Latin America, Joint Research Programme (JRP) Series, No. 67, Tokyo, Institute o f Developing Economies. Blom strõm, M agnus and Patricio M eller (eds.) (1990): Trayectorias divergentes. Comparación de un siglo de desarrollo económico latinoamericano y escandi­ navo, Santiago, Chile, CIEPLAN/Hachette. Buitelaar, Rudolf and André A. Hofman (1993): Ecuador: Extraordinary comparative advantage, economic policy and economic growth. Paper presented at the ECLAC/ CEDLA Conference on Industrialization in Smaller Latin American Countries, A msterdam, July, mimeo. EXTRAO RDINARY COMPARATIVE ADVANTAGE AND LONG-RUN GROWTH: THE CASE O F ECUADOR ANDRE A. HOFMAN A ND R UDOLF M. BUITELAAR CEPAL REVIEW 54 D e Janvry, Alain, Elisabeth Sadoulet and A ndré Fargeix (1991): Politically feasible and equitable adjustment: Some alternatives for Ecuador, World Development, vol. 19, No. 11, New York, Pergam on Press pic. D rake, Paul (1984): L a misión K em m erer en el Ecuador: revolución y regionalismo, Cultura, vol. VII, No. 19, Quito, C entral B ank of Ecuador. ECLAC (Economic Com m ission for Latin A m erica and the Caribbean) (1953): El desarrollo económico del Ecuador, M exico City. U nited Nations publication, Sales No. 1953.II.G.5. (1990): Changing Production Patterns with Social Equity (LC/G.1601-P), Santiago, Chile. United Na­ tions publication, Sales No. E.90.II.G.6. (1992): Social Equity and Changing Production Patterns: An Integrated Approach (LC/L. 668), San­ tiago, Chile. Farrell, Gilda (ed.) (1989): La investigación económica en el Ecuador, Quito, Latin A m erican Institute for Social Research (ILDIS). Hofman, A ndré A. (1993a): Econom ic developm ent in Latin A m erica in the 20th century. A comparative perspective, in Adam Szirm ai, B art van A rk and D irk Pilat (eds.), Explaining Economic Growth. Es­ says in Honour o f Angus Maddison, Amsterdam, Elsevier/North-Holland. (1993b): The historical experience: Growth account­ ing. Paper presented at the ECLAC/CEDLA C onference on Industrialization in Smaller Latin American Countries, A m sterdam , July, mimeo. (1994): Ecuador: desarrollo económ ico en el siglo XX: un análisis cuantitativo, Cuestiones económicas, No. 21, Quito, Central Bank o f Ecuador. Hurtado, Osvaldo (1988): El poder político en el Ecuador, 6th edition, Quito, Planeta-Letraviva. • DEC EM B ER 1994 165 M addison, Angus (1986): Las fases de desarrollo capi­ talista. Una historia económica cuantitativa, M exico City, El Colegio de México/Fondo de C uitara Econ­ ómica. (1991): Dynamic Forces in Capitalist Development. A Long-Run Comparative View, Oxford, Oxford U niversity Press. M archán Rom ero, C arlos (ed.) (1987): Crisis y cambios de la economía ecuatoriana en los años veinte, Q uito, C entral B ank of Ecuador. M oneada, José (1991): De la independencia al auge ex­ portador, in L. Mejia, F. V elasco, J. M oneada, A. Moreno, A. C ueva and R. Báez, Ecuador: Pasado y presente, Quito, Editorial “El Duende” . R am os, Joseph (1986): Neoconservative Economics in the Southern Cone of Latin America, 1973-83, London, The Johns H opkins U niversity Press. Rodriguez A., Linda (1987): La reforma bancaria de la Revolución Juliana y sus secuelas económicas, 19261937, Revista ecuatoriana de historia económica, No. 2, Quito, Central Bank o f Ecuador. Salgado, G erm ánico (1989): Lo que fuimos, lo que somos, in Gilda Farrell (éd.), La investigación económica en el Ecuador, Antología de las ciencias sociales, Quito, Latin American Institute for Social Research (ILDIS). Spurrier Baquerizo, W alter (ed.) (several issues): Análisis semanal, G uayaquil, Ecuador. Thoumi, Francisco E. (1990): The hidden logic o f “irra­ tional” econom ic policies in Ecuador, Journal of Interamerican Studies and World Affairs, vol. 32, No. 2, United States, University o f Miami. V os, Rob (1984): Industrialización, empleo y necesidades básicas en el Ecuador, Quito, ISS/Regional Em ploy­ m ent Program m e for Latin America and the Caribbean (PREALC). EXTRAORDINARY COMPARATIVE ADVANTAGE AND LONG-RUN GROWTH: THE CASE OF ECUADOR ANDRE A. HOFMAN AND RUDOLF M. BUITELAAR CEPAL REVIEW 54 167 The cultural industry and new codes of modernity Martín Hopenhayn Social Development W ithin the context o f the globalization of the economy, Division, ECLAC. comm unication and culture and the transition towards societies based on information and knowledge, the sustained developm ent o f the cultural industry stands out as a priority means for the articulation of society. For at least the last three decades, culture has been increasingly linked with the grow th o f the social comm unication media. Indeed, the cultural industry is becoming a strategic sector for competitiveness, employment, consensus-building, the style of politics and the circulation of inform ation and knowledge. This growing weight o f the cultural industry is closely linked with its own diversification. Technological innovations have given rise to great leaps forward in the cultural industry which make it necessary to redefine its lim its year by year. A market for messages which forms part o f the circuit o f global interchange and constant acceleration in terms o f tim e is transform ing the lim its of “heavy” and “light” culture, highbrow and lowbrow culture, sophisticated cultural products and those appealing to a popular audience, and national and foreign cultural manifestations. In the following pages, an analysis w ill be made o f the changes which these developments have brought about in the image o f modernity and modernization in Latin America. The coexistence o f various past tim es in a single present and the current tension between the high levels of symbolic integration through the cultural industry and the low levels o f social integration form the central concerns of this article in its efforts to set forth the potential and risks of the cultural industry in the region. DECEM BER 1994 168 CEPAL REVIEW 54 • DECEM BER 1994 Preliminary considerations The concept of culture has two very different conno­ tations. The first of these associates culture with the past, with the fine arts and letters; it is the sphere of the “great works” of the spirit, of the highest intellec­ tual, scientific and artistic achievements of a society, and of its architectural and archaeological heritage. The second connotation is broader, and sees culture as the way of life of a people, its systems of values, language and codes of communication, and the vari­ ous forms of popular thought and creation. In the following pages, this second connotation will be used, for two reasons. Firstly, because the close rela­ tion between the dynamics of culture and those of devel­ opment becomes more evident when using a broader concept of culture, and secondly, because the assessments of the recent impacts of the cultural industry on society are of such varied scope that they make it essential to work on the basis of a global view of culture. Likewise, the concept of the cultural industry should itself have a sufficiently broad scope to allow it to be related with the broad universe of culture. The division which José Joaquín Brunner proposes between the “light” and “heavy” cultural industries is very inter­ esting in this respect. The first of these refers to “televi­ sion, popularization, rapid reading, snapshots, dictionaries of quotations, ready-made products in general, hack writing, occasional art, therapeutic reli­ gions...”, whereas the heavy cultural industry is “that of long-lasting ideologies: age-old religions, classics, for­ mal education, taboos and a sense of guilt, authority, beauty, methodology, accumulated knowledge” (Brun­ ner, 1988, p. 27). Although this classification may seem rather vague for defining the cultural industry, it does illustrate the leading role that industry could play both in the superficial and fortuitous exchange of messages and in the construction of ideologies and bodies of knowledge which form an underlying presence and de­ velop by slow accumulation. The rapid cultural de-territorialization due to the globalization of communications and the tele­ matics revolution1 makes it difficult to maintain 1Telematics is taken to mean the combined effect of new techno­ logies in telecommunications and informatics. watertight views and categories in this field: “The de-localization of enterprises, the worldwide simulta­ neity of information, the adaptation of certain inter­ national knowledge and images to the knowledge and habits of each people (...), the de-localization of sym­ bolic products by electronics and telematics, the use of satellites and computers in the spreading of cul­ ture, also prevent us from continuing to see the con­ flicts of peripheral countries as frontal combats with geographically defined nations (...). The reorganiza­ tion of cultural scenarios and the constant crossing of identities mean that we must look elsewhere for the orders which systematize the material and symbolic relations between groups” (Garcia Canclini, 1990, pp. 288-289). It is even argued that national societies are merely segments of global markets and that this is particularly true in the field of the cultural industry and the consumption of culture. The differences, it is claimed, lie in the local reception codes, within “the unceasing movement of transmission circuits which extend all the way from publicity to pedagogy” (Brunner, 1988, p. 218). If this approach is accepted, then the cultural universe opened up by the combined impact of telematics and the cultural industry may be defined as an era of decentralized culture in which cultural heterogeneity does not refer to the diversity of local and national expressions but to “segmented and differential participation in an international mar­ ket for messages which ‘penetrates’ the local cultural framework on all sides and in the most unexpected ways” (Brunner, 1988, p. 218). There is tension between the concentration pre­ vailing in the classroom and the dispersive force of the multimedia of social communication. Hybridiza­ tion goes beyond the ethnic level and becomes an everyday event that affects everyone: there is no identity that can remain in the pure state for more than a few hours in the face of the extremely strong stimuli received from all comers of the earth. The aesthetics of collage and pastiche which is so dear to post-modem sensibility is not a chance phenomenon but is a metaphor for this state of continual recompo­ sition of cultural sensibilities and messages. Such THE CULTURAL INDUSTRY AND NEW CODES O F MODERNITY • MARTIN HOPENHAYN CEPAL REVIEW 54 terms as “hybridism”, “syncretism”, “intercultural tissues” or “decomposition and recomposition of signs” are increasingly common in analyses of the cultural processes of today. In this sense, there is no clear limit for the cultural industry or well-defined frontier for delimiting cultural identities. It is within this dynamic of blurring of frontiers that we must place ourselves in order to understand both cultural processes and their close links with the cultural in­ dustry complex. It must also be remembered that during the last five years the world has undergone dizzying political changes and a considerable proportion of the world’s population have witnessed the recomposition of the international political scene from their own homes. The Gulf War, the conflicts in the former Yugoslavia, the fall of the Berlin Wall and the rise of the new democracies, with all their airs of renewal and their more sinister aspects, have been witnessed in detail and without a moment’s delay in all latitudes of the world. Not only is instantaneous and exhaustive in- • DECEM BER 1994 169 formation now available, but there is also a growing diversity of readings in this planetary-scale diffusion of events. The incorporation of telematics into the cultural industry has meant that the whole world is now affected by the rest of the world. Muslim fun­ damentalism, Serbian nationalism or the violent acts of groups of young neo-Nazis in Germany serve as a mirror or appeal to the conscience of other cultures or groups in other parts of the world which are under the stress of this new modernity open to the world at large. In this context of rapid change and intensive dis­ semination, culture tends to become a kind of on­ going dialogue among the citizens of the world. The cultural industry may be defined, partly as a meta­ phor and partly literally, as a play of mirrors which makes it possible at every moment to recompose our identities through dynamic relations with all the other identities which we see in action through the mass media, information networks, comments heard in the street and at work, and telephone consultations. II Cross-temporal cultural consumption The school, the city and the television are the pillars on which, over the last four decades, a mass culture has been built which is in many respects a mixture of heterogeneous cultures and times. This diachrony has been particularly marked in the case of the leap for­ ward in education: access of the middle class to higher education was promoted when half the popu­ lation over 15 in the region was still illiterate.2 Through rapid urbanization and the modernization of employment, the masses are now rapidly forced to participate in a type of social life which demands that they be able to handle codes which were previously totally unknown to them: bureaucratic rationality, tech­ nical rationality and abstract mental processes. With re­ gard to the impact of the mass media, it has often been said that this phenomenon causes cosmopolitanism to exist side by side with localism, especially in view of the speed and extent to which the various components of the conventional cultural industry have spread in Latin America and the Caribbean.3 In terms of access to information, this means that the local spaces, includ­ ing those which previously suffered from chronic isola­ tion, now have a window through which they can see what is going on in the world. 2 Only four decades ago, around 1950, Latin America was a totally different continent in terms of its cultural makeup: 61% of the population lived in rural areas, the illiteracy rate among those over 15 was nearly 50%, and gross enrolment at the sec­ ondary level was barely 7%. Today, however, gross enrolment rates are 100% in primary education and over 50% at the second­ ary level. In a number of countries, the proportion of the popula­ tion over 25 with a post-secondary level of education is between 5% and 7%, which is comparable to the levels in Austria, Hungary and Italy (Brunner, 1990, pp. 11 and 31). 3 In this region, “the number of radio receivers increased to nearly 140 million by 1987: that is to say, 332 per 1 000 inhabi­ tants - a proportion more than double that of the average for all developing countries. Likewise, the number of television trans­ mitters, which was only 250 in 1965, rose to 1 590 by 1987, while the number of television receivers, which was only 8 mil­ lion in 1965, amounted to 60 million by 1987, representing an increase from 32 to 147 per 1 000 inhabitants, compared with 1987 figures of 49 per 1 000 in Asia and 14 per 1 000 in Africa” (Brunner, 1990, p. 32). THE CULTURAL INDUSTRY AND NEW CODES O F MODERNITY • MARTIN HOPENHAYN 170 CEPAL REVIEW 54 The effect may be even more profound, how­ ever, in the case of symbolic consumption, where a whole range of new codes, sensibilities, dramas of human passion, human conflicts and scales of values are set forth in television films or soap operas and now reach publics which lived for centuries on the basis of reciprocal relationships, immemorial forms of religious syncretism, rituals connected with the ag­ ricultural cycles and precarious forms of survival. Not only do different time-scales exist in the contrast between the messages and the cultural environment in which they are decodified, but the programming of the media itself contains at one and the same time forms of logic and sensibility which belong to differ­ ent cultural “moments”: a Mexican soap opera and a Flash Gordon serial follow each other without a break in the weekday afternoon programmes shown in La Paz or Guatemala. In point of fact, modernity in the region is a new time which contains many other times. This means that it is difficult to project to our region the assump­ tion of the linearity of historical time, based on the idea of the “relief’ of one culture by another culture which succeeds it, which forms part of the classical idea of modernity in the countries of the North. In Latin America and the Caribbean, cultures reflect this syndrome of tardy modernity which consists of rapid incorporation into exogenous symbolic markets and which inevitably results in some degree of cultural hybridism. At the same time, there is no scale which allows the recipients of the messages from the media to be grouped according to their degree of modernity of cultural consumption. What criterion can we use to determine whether a person watching the CNN televi­ sion news is more modem than one watching a Bra­ zilian soap opera, or whether the reader of a political journal is more modem than someone reading a sports magazine? In the light of experience, in hypercommunicational modernity the modem aspects are increasingly connected with the logic of the mass media. The degree of modernity is no longer defined by an order of categories, but by the incorporation of technology and intellectual added value in the pro­ duction of messages. Thus, a light entertainment pro­ gramme on the television is more modem than a cultural report if it is capable of simultaneously inte­ grating with presenters and programmes of other countries. On the other hand, a cultural report may be more modem than a soap opera if it is capable of • DECEM BER 1994 introducing greater contrasts, a greater variety of le­ vels of discourse, better definition of views or greater dynamism in dealing with a subject. With the most recent effects of the globalization of communication and technological diversification on the cultural industry complexes, the idea of mod­ em culture is shifting from a scale of contents to a scale of fertility of communication. This phenome­ non, further heightened by the tremendous increase in the supply of products of the cultural industry (vi­ deos, cable television, video games and computing, telematics and fax networks, satellite antennas), is redefining the conventional contrast between tradi­ tional and modem culture. The new scenario into which new and flexible branches of the cultural industry are being incorpor­ ated is not just a more highly developed version of the heterogeneity of times and cultural patterns al­ ready referred to. As far back as a couple of decades ago, the spread of television led to the oft-quoted assertion that “the medium is the message”. In more recent years, however, the change has gone even deeper. Because of the greater competition and inter­ nationalization of television and the proliferation of new production and consumption options in the field of the cultural industry, a substantial change is taking place in the concept of what is modem in the area of cultural production and consumption.4 In the cultural market, the level of modernity is increasingly defined by the form of production rather than the content, by the technological packaging rather than by the message, by the rate of innovation rather than the “class” of the product. This change is bringing new signs into the cultural imagination. While on the one hand it undermines the conven­ tional categories of values of culture, it also under­ mines cultural identities. It destabilizes views of the world and heightens cultural hybridism to un­ dreamed-of degrees: hybridism is no longer just a syncretism or crossing of two cultural codes, but a creative game or new invention for the cultural market - a totally new combination which makes it possible to continue innovating in the field of recreation. 4 For example, in the field of cultural consumption a newgeneration Nintendo game about monsters is more modem than a conventional television series set in New York. A laser digital recording of Beethoven’s Ninth Symphony is more modem than Ravel’s Bolero recorded on a conventional cassette. No matter how boringly domestic its subject may be, a home video film is more modem than a 1960s superproduction. THE CULTURAL INDUSTRY AND NEW CODES O F MODERNITY • MARTIN HOPENHAYN CEPAL REVIEW 54 The same flexibility of images, codes, languages and rules which forms part of the technology of video games, computer games or virtual reality gives rise to a state of continual metamorphosis of images, symbols and traditions. The different combinations are limitless. The world can be recreated for ever in a diskette or video tape. There is not even any shortage of space for this, because the spaces can be reduced almost infinitely in the microchips where so many worlds circulate. In­ stead of needing a football field (or the street, to go out and play with the neighbours), there are thousands of games right there inside the monitor. A Nintendo is an infinite version of the whole universe of games: it takes up hardly any space, never gets tired, is always new, and yet at the same time unceasingly neutralizes the whole intensity of that novelty. Culture is passing from a hybrid state to one marked by the unbridled repetition of the act of “hybridization”: every day, as part of the race en­ gaged in by the image industry itself, a new version is produced of the encounter between Hernán Cortés and Malinche. It is not clear what impact these new cultural technologies are having on the view of the world held by children who are just beginning to tune in to the new waves of the cultural industry. What happens to the view of the world held by a secondgeneration literacy student who still maintains certain • DEC EM B ER 1994 171 vernacular traditions and values in his order of sym­ bols when he enters the vortex of the constant entry into and exit from new worlds every time he sits down in front of a video screen or a computer? What influence is exerted on the selective capacity, the image of the world and of the specific place each person occupies in that world, and the storage of in­ formation in the mind by the relatively recent habit of coming home in the evening and beginning to jump from one to another of twenty or more possible television channels coming from ten or more differ­ ent countries? It is not our intention to draw an apocalyptic picture suggesting that the globalized impact of the cultural industry will wipe out all the social links, customs and values which have been built up in the course of centuries of conflictive history in Latin America and the Caribbean. The new forms of the cultural industry are not necessarily negative: it is not so much the negative or positive nature as the extent of the impacts of the cultural industry in recent years that need to be taken into account. It is no longer possible to speak solely of the incorporation of the masses into modem forms of language, modem ideas and modem occupations: what is now involved is their incorporation into the ongoing changes in forms of language, images, ideas and occupations. HI Active and passive participation in the area of the cultural industry The new branches of the cultural industry make possible a fuller mutual relation between the produ­ cers and consumers of culture. The operational flexi­ bility and smaller size of the components and the cost of the equipment have made it possible for some years now to expand the field of the producers and establish more horizontal links among the actors in the cultural market. Paradoxically, the new cultural industry complex combines greater professionalization with a more mass-oriented focus among the issuers of messages. The professionalization of the cultural field increases as competition among television stations becomes more intense and more internationalized. Operators and transmitters become more highly technified, while two different fronts made up of producers and consumers are maintained. Nevertheless, the pro­ gressive diversification of the supply of television programmes forces viewers to develop greater selec­ tivity and to play a more important role as consu­ mers. We are in the presence of “the creative work of millions of viewer/consumers who, individually and sometimes collectively, process, interpret, appropri­ ate and experience in their own way this mass of signs which are produced and transmitted” (Brunner, 1990, p. 36). The apocalyptic view which was taken TH E CULTURAL INDUSTRY AND NEW CODES O F MODERNITY • MARTIN HOPENHAYN 172 CEPAL REVIEW 54 a few years ago, warning of the growing passivity of consumers with regard to what the media put before them, has been replaced by the idea of an active, decodifying, selective consumer who processes the information supplied to him. The welter of options and the competition reigning among the media pro­ viding them force the consumer to develop into a productive consumer. In the new products which the cultural industry is disseminating among our societies, at great speed and at ever-lower prices, the division between pro­ ducers and consumers is becoming more tenuous. Neither heavy resources nor much technical knowledge are required in order to make home vi­ deos, operate video games or computer games, play an active part in the circulation of messages through telematics networks or teleconferencing, or-w hat is most novel and surprising- to change one’s life and persona for five minutes by putting a few coins in the slot in order to enter the limitless world of vir­ tual reality.5 The capacity to take an active part in the new technologies may be facilitated by learning the rudi­ ments of computing in primary school. The shift from professionalism to everyday use by the masses is evident when we see how, in the industrialized countries, millions of children are operating compu­ ters with a mastery and ease which only seemed to be within the reach of engineers and advanced techni­ cians just a few years ago. This familiarity with com­ puters and integrated information/communication systems is indeed a new form of literacy. It is most impressive that many children are already capable of reprogramming a game on the computer and that no­ wadays they show greater aptitude than many adults for the assumption of interactive roles in new bran­ ches of the cultural industry. In Latin America and the Caribbean, however, these “computer-literate” children are a minority. Whether because they go to elite schools or because they come from families where the computer is part of family life, they have a considerable advantage over the many schoolchildren who are lucky if they have one computer monitor for a whole classroom. In a new and disturbing manner, this redefines the divi­ ding line between those who are “in” and those who are “out”. We are, of course, still very far from a • DECEM BER 1994 situation where every Latin American home has a computer, but the new strength gained by the cultural industry with the incorporation of this new range of goods brings into social interaction the image of a computer within the reach of everyone. In the case of these new “literates” the relation with work, study and leisure necessarily involves radical changes in the uses of communication and information. In our region, this new spurt in the cultural in­ dustry also brings the risk of further increasing the gap between those who are integrated in the new system and those who are not. “Integrate or die” would be a crude but very apt image of this new pattern. The danger that this gap may be consolidated from the earliest years of schooling means that in the future there may be a substantial majority of people who are computer illiterates and do not know how to cope with the logic of computer languages. In Brazil, which is the leading country in the region in terms of the television and informatics industries, the promises of individual development could extend, with luck, to a third of the total population, who are moving ahead with giant steps. In the case of the other two-thirds, the low income levels and scanty access to the benefits of modernity represent an insurmountable barrier to their expectations of per­ sonal development.6 5 It is no longer a question, as in Gabriel García Márquez’s famous novel Cien años de soledad, of an experience like that of Colonel Aureliano Buendia, when his father took him as a child to a gipsy’s tent to get to know ice: virtual reality now allows us to enter ice, move about inside it, look out of it from the inside, and so forth. 6 The following contrasts in Brazil give food for thought: where­ as that country has the fourth biggest television network in the world (O Globo), in 1990 the members of 43% of the country’s households had an average of between 0 and 3 years’ schooling. Likewise, in 1990 the country had 213 television sets per 1,000 inhabitants, which suggests that most Brazilian households had a window on the world through this medium, yet at the same time the national illiteracy rate was close to 20%, the incidence of child malnutrition was around 13%, and 55% of the economi­ cally active population were classed as “poor” (World Bank, 1993; UNESCO, 1992). THE CULTURAL INDUSTRY AND NEW CODES O F MODERNITY • MARTIN HOPENHAYN CEPAL REVIEW 54 • DECEM BER 1994 173 IV Blurring of limi The distinction between the “heavy” and “light” cul­ tural industry is increasingly difficult to maintain as the systemic integration of the means of information and communication advances. Can we really assert, nowadays, that a religious upbringing makes a deeper impression on a child’s mind than his contact through television with the war in Iraq or the last world foot­ ball championship, or that the subjects he had to study for a history examination are etched more dee­ ply in a child’s memory than a cultural report that he watched on television for half an hour or so while browsing through the various channels? Who can re­ ally swear that an adolescent develops a greater ca­ pacity for logical thinking through a course of syntax or mathematics at his secondary school than through the games he plays on his computer when he gets home in the afternoon? The field of cultural consumption is becoming so diverse that it is now very difficult to draw the line where the cultural industry ends. The logic of com­ puter software moves from the monitor screen to the street and becomes a new form of processing of cul­ ture. Cultural consumption takes on a new form which serves as a kind of packaging for very varied contents: a form like that of software, which each user starts, stops and interchanges according to the relevant preferences, situations and objectives. The software model as it applies to culture also enters into training activities, through workshops with audiovis­ ual support, weekend retreats and videos or computer programmes on new forms of management. In this software-type cultural consumption, too, the cultural industry is blurring the frontiers between producers and consumers. When learning processes become light and varied, little training is needed in order to progress from student to teacher or from consumer to producer. Training to become a profes­ sor of meditation in a Himalayan monastery is a very different thing from receiving training in a personal development module in a business firm; being a lit­ erature professor in a university is very different from being a literature teacher in a neighbourhood group. As cultural consumption takes on the form of soft­ ware, it also becomes a simpler matter to enter the THE CULTURAL INDUSTRY AND NEW in the cultural industry cultural industry as a supplier of goods or services. Protagonism exists side by side with “provisionalism” in the new cultures integrated into the recent waves of modernity. In our region, this combination of protagonism and provisionalism in integrated culture becomes ex­ clusion and precariousness in the case of the poor. Here, the lightness is connected more with the pre­ cariousness of survival than with flexibility in the consumption of cultural goods. The uncertainty about the future is due more to fear than to the wealth of options available for shaping one’s life; more to inse­ curity than to dynamism. The lightness becomes de­ privation; diversification becomes fragmentation. The software metaphor also penetrates here, but it is mingled with the survival-oriented culture of the big cities, where the activities for each new day are re­ programmed in the light of the need to generate a minimum income: the software is a strategy based on the culture of precariousness, not “provisionalism”. In the Latin American setting, the integrated and the excluded are on the one hand united by television culture, and on the other hand restratified in the new cultural markets. In the case of television, as the de­ finition of the supply of all types of programmes im­ proves, the limits between highbrow and lowbrow culture become increasingly blurred. But although cultures may intersect in television, the socio-cultural gap reappears in new forms in other fields of the cultural industry. As we already noted, society is divided up into those who are integrated into the rapid circulation of information and new languages and those who are excluded from this. It is true that rapid obsolescence and growing competition quickly reduce the cost of computers, video cameras and recorders, cable television ser­ vices and other new cultural goods, which means that the middle strata can join the ranks of those who are integrated into the new ways, albeit with some delay in the rate of renewal. A very large section of the population, made up of the low and lower-middle income strata, however, remain on the sidelines of these new patterns of cultural consumption and sym­ bolic integration. The result of this is that forms of O F M ODERNITY • MARTIN HOPENHAYN 174 CEPAL REVIEW 54 general symbolic integration (through the television, generalized basic education, opening up of channels of political participation thanks to democracy) coex­ ist with forms of segmentation as regards the con­ sumption of the vast range of goods that now make up the cultural industry. In short, the blurring of limits in the cultural field is a development which is both strongly marked and recent. The frontiers between light and heavy in the channels of internalization of culture are disappearing; the personal “menu” as regards the use of goods and services connected with the cultural industry is becoming much more diversi­ fied; the patterns of integration and discrimination in the field of symbolic consumption are being re­ shaped as a result of the rapid changes in the cultu­ ral industry, and the limits are also disappearing between producers and consumers or between ac­ tive and passive participants in the field of the sup­ ply and consumption of culture. • DECEMBER 1994 This blurring or disappearance of limits due to the changes in the cultural industry must not be taken light­ ly. It tends to have such a profound impact on the cul­ ture of our societies that it even alters the perception of everyday life in various senses. Firstly, it is no longer so easy to associate everyday matters with continuity. Whether through provisionalism or precariousness, everyday matters are becoming more random and dis­ persed. Secondly, the reiterative dimension of everyday matters is becoming less marked, through employment insecurity, the speeding up of technical change, the growing volatility of traditional roles, or the sensation of a “time tunnel” experienced as a result of the explo­ sive increase in the offerings of the information and communications industry. Finally, the short-term hori­ zon is tending to take the place of any long-term project in daily life, through the effect of precariousness in some cases, through provisionalism in others, and through the much faster rate of change in all areas of everyday activities. V The need for new efforts to promote cultural integration in societies with low levels of social integration In societies with low levels of social integration, like a large proportion of the Latin American and Carib­ bean countries, the potential contribution of the cul­ tural industry to development may be under-utilized. In our region, the segmented access to the new goods in the fields of information and communication means that a large part of society is kept in a situation of relative backwardness, with the risk that the gaps in terms of levels of productivity, access to new mar­ kets and development of intellectual faculties may be further widened. On the one hand, the lowering of the cost of the new goods offered by the cultural industry and their greater ability to penetrate to dif­ ferent socio-cultural sectors holds out the promise of greater integration, but on the other hand, the new forms of illiteracy represent a new threat for the great masses of the region’s population who have no ac­ cess to any form of information-based progress. The tensions between cultural identity and mod­ ernity, which could be resolved with synergic effects through the new potential of the cultural industry, may also take on more conflictive features due to the high levels of social disintegration. Uncertainty about the future is generated by the impact of globalization on endogenous cultures and on their relation with the universalist culture which prevails in global ex­ changes. It is hard to know, in our region, whether this globalization of communications will make it possible to reduce the levels of social disintegration, offset economic and social disintegration with higher levels of cultural and political integration, or else set off a kind of societal schizophrenia, with a great deal of integration in cultural consumption but profound heterogeneity in levels of productivity and material well-being. THE CULTURAL INDUSTRY AND NEW CODES O F MODERNITY • MARTIN HOPENHAYN CEPAL REVIEW 54 In order to reconcile the special socio-cultural features of our societies with the universalist impulse that modernity is now channelling through its new cultural industry complexes, an order of modem citizens is required. Modem citizenship means the existence of social actors who have the capacity to decide for themselves, to represent their interests and demands, and to exercise their legally recognized in­ dividual and collective rights. As long as this modem citizenship is only the privilege of minority sectors of society, the symbolic integration made possible by the cultural industry complex will have the dual ef­ fect already referred to: integration in some fields, but greater discrimination in others. The impact of the cultural industry complex on societies with low levels of social integration is thus rather ambiguous. As an inertial trend, it may be ex­ pected that new relations of exclusion will be formed. Thus, for example, the division between for­ mal and informal-sector workers in the field of la­ bour may shift to a gap between those who have • DECEM BER 1994 175 access to information-based progress and those who have not; the segmentation between the modem and the traditional may shift in the cultural field to a new division between active and passive participants, and the gap between literates and illiterates will give rise to a division between achievements of high quality and those of low quality. Finally, the cross-temporal aspects which have given culture in the region its hybrid identity will be bound to intersect even more as the cultural industry expands, without however dissolving the ways of life and views of the world maintained by Andean or Caribbean communities, jungle tribes and AfroBrazilians. This exacerbation of different times with­ in a broader single time need not necessarily have a negative effect: they can also be a reflection of a cultural fabric of great complexity, richness and beauty. They may even be seen as an asset for the future, in view of the increasingly heterogeneous na­ ture of symbolic exchanges in the new versions of the cultural industry complex. VI The cultural industry as a new vehicle for social integration and participative culture The link between culture and endogenous develop­ ment depends to a large extent on the adaptation of the potential offered by the cultural industry. Objec­ tively, its structure of growing versatility and dimin­ ishing costs is a feature of the new cultural industry complex which can be used to promote greater social integration and cultural development. The possi­ bilities for action and for playing important roles op­ ened up to ethnic groups and socio-cultural actors who have been deprived of access to the benefits and codes of modernity can be considerably increased if the resources of the cultural industry are properly mobilized. This synergic mobilization of information, communication and interaction resources can do a great deal to reverse the attitudes of resignation, pessimism and fatalism which spread over Latin America and the Caribbean during the 1970s and 1980s with regard to the viability of endogenous development and of the full deployment of national cultures. In the field of the cultural industry, costs are going down arid there are increasingly flexible tech­ nical possibilities for incorporating socio-cultural ac­ tors so far little integrated into the public exchange of messages. This should make possible intensive use of the niches of the cultural industry complex to carry out small-scale actions designed to promote and de­ fend autochthonous cultures which have only precari­ ous access to the benefits of modernization. “Over the last four decades, the real cost of “hardware” has been going down steadily by an average of 20% per year. The most sophisticated technologies of the re­ cent past are increasingly accessible (if not for all, at least for many more people every year). One metre of fibre optic cable, which cost US$3.50 in 1977, now costs 25 US cents, and this decline in cost has been accompanied by a marked improvement in quality” (Annis, 1991, p. 94). And in the words of ECLAC: “The dissemination of telematics (a combination of THE CULTURAL INDUSTRY AND NEW CODES O F MODERNITY • MARTIN HOPENHAYN 176 CEPAL REVIEW 54 • DECEMBER 1994 telecommunications and information technologies) opens up a good many possibilities (...). Increasing affordability, miniaturization and user-friendliness and the ease with which these technologies can be put to many different uses make them ideal for pur­ poses of coordination among very diverse or dis­ persed agents” (ECLAC, 1992a, p. 243). As the price of components goes down, com­ munications can be more and more horizontally linked. Integrated systems -telephones which link up with telexes, computers, databases, fax machineshave so many entry points that their access can also benefit low-income socio-cultural actors.7 At the same time, increasingly light and portable compo­ nents mean that information is physically more ac­ cessible to remote areas, which are precisely where autochthonous cultural identities are most often preserved, albeit in isolation. The region needs to consolidate a second gener­ ation in the development of the communications in­ dustry and to ensure progress towards a third generation which will strengthen endogenous devel­ opment and socio-cultural protagonism (Annis, 1991). The first generation oriented the use of televi­ sion and radio towards the sale of commercial pro­ ducts. The second generation, which is currently beginning to show positive effects, adapts publicity techniques to “social marketing”, which includes educational campaigns on the environment, the prevention of epidemics, political information and other matters which help to build modem citizenship. A culture of citizen concern and action promoted by the communications media helps to break down so­ cial barriers and to involve society at large in com­ mon problems. The third generation, which is still very incipient, moves from the phase of active recep­ tion to that of horizontal interchanges among the communication agents. Systems of teleconferences, informatics networks and integrated connections (telephone-fax machine-computer-photocopier) can serve to give voice to those who have not previously had the possibility of making their views known in public spaces. These new systems, when also inte­ grated with the mass media, offer a very valuable potential for expanding public communication spaces. By this means, a wide range of social de­ mands coming from dispersed or subordinated actors could begin to find their place in the public circula­ tion of messages. Thus, the strategies for the development of the cul­ tural industry in the region are faced with an enormous challenge. The assertion of an endogenous form of de­ velopment requires a participative culture, a body of citizens with the will to play a leading role, and socio­ cultural actors who are incorporated into modernity in the horizontal interchange of symbols and messages. For this purpose, the consolidation of the second and third generations of the communications and informa­ tion markets can become a vital element The tendency to decentralize the issue of mess­ ages in the cultural industry can contribute to the democratization of the region’s societies. As we have already attained political democracy in the great ma­ jority of our countries, the further heightening of democracy on the basis of more prominent roles for a broad range of social actors could be boosted by the spread of the new forms of the cultural industry in the area of communication. There are now interesting cases in various countries of the region where the use of new goods produced by this industry has made possible horizontal links among various groups which previously suffered from socio-cultural segre­ gation. These cases could serve to promote new in­ itiatives in this field, such as the establishment of systems for the incorporation of the demands of dis­ persed sectors, greater links among the indigenous ethnic groups of the countries of the region, the pro­ duction of programmes for the spread of autochthon­ ous cultures, organized by the indigenous sectors themselves, etc.8 7 The following is a good example of what the telephone holds out for the future: “Nippon Telegraph and Telephone, the Japanese communications giant which employs 3,000 scientists on technological research and design, hopes to develop and spread throughout the world a portable telephone device, the size of a calculator or digital clock, which will be very cheap to buy and use and will serve to communicate with anywhere in the world and also see the person receiving the call, in what it calls “intelligent visual personal communication services”. Moreover, the calls will be free from interference and can make use of simultaneous interpretation services if language is a problem in communication” (El Mercurio, 1993). 8 Thus, for example, in Guatemala indigenous peasants fax messages about human rights violations to international non­ governmental organizations, even though they do not know how to use a typewriter. In Amazonia, in Brazil, illiterate Indians exchange video cassettes in order to spread their native customs. Mexican neighbourhood organizations increase their pressure in public spaces with the aid of computers, their own data bases, and inter-neighbourhood information networks. In Chiapas, as­ sociations of small coffee producers communicate with similar groups in Central America and the Caribbean in order to share information on transport, markets, international prices, produc­ tion techniques and international negotiations (Annis, 1991). THE CULTURAL INDUSTRY AND NEW CODES O F MODERNITY • MARTIN HOPENHAYN CEPAL REVIEW 54 Because of their decreasing costs and flexible capacity for systemic combination and linkages, the possibilities opened up by the new cultural industry complex present society with a challenge in terms of creativeness and intelligence. It is necessary to de­ velop a capacity for inventiveness and adaptation, both in State cultural policy and among the various economic actors in the cultural industry, in order to take advantage of the potential for social and cultural integration offered by the new cultural industry com­ • DECEM BER 1994 177 plex. The virtuous circles which can be sparked off in connection with this complex through the innumer­ able possible combinations of uses and linkages of the available components also depend on the flexi­ bility and intelligence in terms of such combinations developed by governments for this purpose. This also means flexibility and intelligence of combination in terms of the ways in which State policies link up with the private economic agents working in the field of the cultural industry. vn The cultural industry and the spread of codes of modernity In order to link up education, knowledge and produc­ tive development in the region it is necessary that there should be universal access to the codes of mod­ ernity (ECLAC/OREALC, 1992, pp. 157-169). Thus: “the entire population should be trained to handle the basic cultural codes of modem society or, in other words, should possess the knowledge and skills re­ quired in order to participate in public life and play a productive role in modem society” (ECLAC/OREALC, 1992, p. 149). It is also specified, in the same text, that these capabilities include those required for the execution of basic arithmetical calculations; reading and understanding a written text; communication in writing; the observation, description and critical ana­ lysis of the surrounding world; die reception and interpretation of the messages of modem communi­ cation media, and participation in the design and ex­ ecution of group tasks. Universal access to the codes of modernity, as defined in the preceding paragraph, calls for an in­ tensive effort by the countries of the region to achieve universal coverage of basic education, to im­ prove its quality, and to modernize it, as well as the strengthening and adaptation of programmes of edu­ cation and training for adults. Education must not only transmit useful items of knowledge but must also, as suggested above, teach students how to ob­ tain and analyse information. This requirement would appear to be of prime importance if the aim is to give the new generations better opportunities to gain access to the benefits of an information-based society and respond more effectively to its challenges. In the same proposal presented by ECLAC and to the governments of the region, emphasis is placed on the need for a systemic approach, invol­ ving the mobilization of the various different agents and instruments, in order to secure the equitable dis­ semination of knowledge on how to gain access to the items needed in order to meet the new demands of the modem world in the fields of production and communication. The following lengthy quotation may serve as an illustration: “In modem society, there are many different sources of knowledge (libraries, data banks, manuals, newspapers and magazines, the mass media, experts, etc.), and an individual can gain access to that knowledge only if he or she has learned to make use of those sources. Education should plot out “access routes” to knowledge by incorporating all these sources as different types of reference materials (...) The use of modem communications media such as radio, television and, increasingly, computers is especially important; in­ deed, the use of such media in the region has spread so rapidly -and continues to do so- that their inclusion in any future educational strategy is clearly called for” (ECLAC/OREALC, 1992, p. 155). 9 UNESCO 9 In ECLAC (1992b) emphasis is laid on the seriousness of the pattern of exclusion in the field of telecommunications, because of the multiplier effect this can have on well-being and social cohesion. This document notes that in the countries of the region which have a low density of telephone service, the installation of public and rural telephones, with preferential charges for dis­ tant areas, become', a part of social equity policy. This can be equally or even more decisive in the light of the integration into the telephone system of other “communications goods” such as fax services, the radio, and various information services. TH E CULTURAL INDUSTRY AND NEW CODES O F M ODERNITY • MARTIN HOPENHAYN 178 CEPAL REVIEW 54 Efforts to spread the capacity to gain access to the new cultural codes of modernity, which facilitate improved performance in the fields of both produc­ tion and communications in a knowledge-based so­ ciety, must necessarily encompass two elements (ECLAC/OREALC, 1992, p. 162): i) The use of the communications media to de­ velop more or less formal channels for distance learning by children and adults which will give ac­ cess to the cultural codes of modem society to dis­ persed population groups with few resources and little training. ii) The utilization of the content and techniques of modem communications media to put out educa­ tional programmes, by means of their integration into learning processes and their use as a means of open­ ing up the schools to the community. This also re­ quires complementary action by the schools to teach television viewers to receive and interpret the mess­ ages sent out over the mass media in a critical and selective manner. 1 0 The cultural industry complex is both the agent and the product of the new dynamics of dissemina­ tion and use of the cultural codes of modernity. On the one hand, it is an agent because the policy­ makers, entrepreneurs and operators of the cultural industry must make use of a wide range of options, which can be combined in a very flexible manner, in order to jointly optimize access to those codes. On the other hand, it is a product because cultural codes of modernity are also required in order to optimize the use of the cultural industry, not only in consump­ tion but also in its management and in the exchange of messages in that field. This brings us to a new paradox. On the one hand, the cultural industry favours the dissemination of codes of modernity to society as a whole and thus has a favourable impact on social integration. On the other hand, however, insofar as cultural codes of 10 Some isolated experiments have been made in the region in this respect, such as the “Telesecundaria” programme organized in Mexico in the late 1970s to provide educational services in isolated and thinly-populated areas where the cost of setting up and maintaining traditional-type schools was prohibitive. Vari­ ous initiatives have also been taken in Chile in the last ten years, such as the television series “Sentencia”, where a dramatic for­ mat was used to show legal problems affecting the low-income urban population; “Teleduc”, which is a pilot system of televi­ sion classes, and the mass communication campaign undertaken in support of the educational effort on breast-feeding carried out by the National Food and Nutrition Council. • DECEM BER 1994 modernity are needed in order for its products to be consumed in a productive manner, it generates greater segregation among possible users. Those who have more training in the handling and selection of information, in language skills and mathematics, and in flexible systems of management and organization will always be in a better position to take advantage of the products of the cultural industry complex. Consequently, an integrated strategy in the field of the cultural industry must deal with both sides of this question: mobilizing the cultural industry to democratize the knowledge required by modem life, and at the same time employing it to teach how to use the new cultural goods, especially on the thre­ shold of the third generation referred to earlier, which opens up the possibility of creating more horizontal and interactive links in such use. To this end, the region must not only take advantage of the successful experience built up over the last decade in the vari­ ous countries but must also take into account the ex­ perience in the field of the dissemination of the codes of modernity which has given good results outside the region. Finally, the capacity for discernment and produc­ tion of symbols is not only functional to the perfor­ mance of individuals in a modem habitat, but also has an important ethical and political dimension, since in knowledge-based societies the exercise of citizenship and the development of persons requires this capacity for discernment. “Thus, increasing the capacity to obtain and prepare cultural information (...) means that there cannot be a single or total solu­ tion for any of the great dilemmas of human exist­ ence (...) and therefore socially establishes the right to trial and error” (Bravo, 1991, p. 16). Today, cultural democracy necessarily involves democracy of communications, i.e., “the possibility that the various social and cultural agents of the country can express their presence in the collective imagination: in the way we conceive and represent ourselves” (Subercaseaux, 1992, p. 27). The region must advance in the areas of cultural pluralism and the democratization of culture. Both the pro­ cesses of political democratization experienced in the 1980s and the progressive impact of the opening-up of the communications and information markets and the consequent increase in cultural exchanges are having far-reaching effects in our region. In Latin America and the Caribbean, they impart spe­ cial importance to the links between innovations THE CULTURAL INDUSTRY AND NEW CODES O F MODERNITY • MARTIN HOPENHAYN CEPAL REVIEW 54 in the cultural industry complex, on the one hand, and the democratization of our societies and of ac­ cess to culture in them, on the other. The promotion within society of initiatives that will make it possible to take advantage of this “ecstasy of communication” for the benefit of more horizontal cultural exchanges • DECEM BER 1994 179 is still only at an incipient stage, but such horizontality -whether in terms of the mutual penetration of points of view or the dance of symbols- can become a renewed version of the utopia\>f hybridism in Latin America and the Caribbean. (Original: Spanish) Bibliography Annis, Sheldon (1991): Giving voice to the poor, Foreign Policy, No. 84, Washington, D.C., Carnegie Endow­ ment for International Peace. Bravo, Germán (1991): Transición a la democracia y política cultural, Santiago, Chile, Latin American Fa­ culty of Social Sciences (FLACSO), October, mimeo. Brunner, J. J. (1988): El espejo trizado: ensayo sobre cul­ tura y políticas culturales, Santiago, Chile, FLACSO. (1990): Tradicionalismo y modernidad en la cultura latinoamericana, Documento de trabajo, Santiago, Chile, FLACSO, mimeo. ECLAC (Economic Commission for Latín America and the Caribbean) (1992a): Social Equity and Changing Production Patterns: An Integrated Approach (LC/G. 1701/Rev. 1-P), Santiago, Chile, April. United Nations publication, Sales No. E.92.ELG.5. (1992b): Información y telecomunicaciones: vector de la transformación productiva con equidad (LC/R.1102/Rev.l), Santiago, Chile, July. ECLAC/OREALC (UNESCO Regional Office for Education in Latin America and the Caribbean) (1992): Edu­ cation and Knowledge: Basic Pillars o f Changing Production Patterns with Social Equity (LC/G. 1702/ Rev.l-P), Santiago, Chile, August. United Nations publication, Sales No. E.92.II.G.6. El Mercurio (1993): Revista Siglo XXI, Santiago, Chile, 5 August. García Canclini, Néstor (1990): Culturas híbridas: es­ trategias para entrar y salir de la modernidad, Mexico City, Editorial Grijalbo. Subercaseaux, Bernardo (1992): Democratización y demo­ cracia cultural, Revista de crítica cultural, No. 5, Santiago, Chile, July. UNESCO (United Nations Educational, Scientific and Cul­ tural Organization) (1992): Statistical Yearbook 1992, Paris. World Bank (1993): Social Indicators o f Development 1993, Baltimore, Johns Hopkins University Press. THE CULTURAL INDUSTRY AND NEW CODES O F M ODERNITY • M ARTIN HOPENHAYN CEPAL Recent ECLAC publications Reformas tributarias en América Latina. Análisis de experien­ cias durante la década de los años ochenta (Tax reform in Latín America. An analysis of the experiences of the 1980s), Ricardo Carciofi, Guillermo Barris and Oscar Cetrdngolo, ECLAC/ Netherlands Government Regional Project on Public Policy Reform, May 1994, Santiago, Chile, 356 pages. During the 1980s, a number of Latin American countries carried out substantial reforms of their tax systems. In most cases, these reforms were a policy response to the macroeconomic and fiscal imbalances being experienced by the countries of the region at that time. In other cases, the reforms were applied with the aim of modifying the tax structure through changes in the way various taxes operated, but they were not designed to increase the real tax burden. This study analyses the experiences of six countries -Argentina, Bolivia, Chile, Colombia, Costa Rica and Mexico- as regards the tax reforms they implemented in the 1980s. In view of the characteristics of the period in question, the study not only analyses the specific content of the tax policies applied but also seeks to place the reforms in the macroeconomic context in which they were undertaken, with particular attention to the fiscal and institutional aspects forming the framework for tax policy. It thus emphasizes the relation between the macroeconomic, fiscal and institutional context and the specific features of the tax measures adopted in each case. The first part of the study deals with the six national cases, while the second part compares the tax policies applied, noting the effects of the respective reforms on the design of the main taxes and the influence exerted by the macroeconomic and institutional context. Two observations of a general nature may be made with respect to the first part of the study (chapters I to VI). The first of these refers to the scheme of contents followed in the case studies. The index, which is applied in all the cases, has three main head­ ings. The first of these refers to the most salient aspects of the macroeconomic trends observed during the decade, with more or less explicit emphasis (depending on the countries) on the interac­ tion between the external and fiscal deficits, indicating the periods involved and the policies used to deal with these two deficits. The second heading covers the evolution of the public finances, bring­ ing out the institutional dimensions of the public sector which are relevant for understanding its economic performance. The third heading concentrates on tax matters proper: it describes the tax system and its main structural features and analyses the tax reform policies. In order to facilitate consideration of the national cases, preference has been given to the use of data sources of common scope. The second general observation concerns the nature and depth of analysis of the case studies. A by no means inconsiderable part of the overall research effort was devoted to the collection and identification of the facts involved, especially those of particular significance for tax aspects and tax reform. Although from the analytical point of view this may seem to be a minor problem, in REVIEW 54 181 practice it was by no means easy to collect the relevant informa­ tion on the evolution of the tax system and, in particular, to obtain data making it possible to understand the objectives behind the various reform efforts and the specific contents of the measures adopted. This difficulty was not encountered, of course, in the case of the macroeconomic evolution of the countries, regarding which there are many more information sources and studies than in the case of tax matters proper. The second part of the study (chapters VII to X) deals exclu­ sively with comparative aspects and explores three basic ideas. Firstly, it looks for common issues given priority in the reforms, even though these issues may have arisen in connection with situ­ ations which are very different from each other in macroeconomic and fiscal terms. The result is very noteworthy, not only because there were indeed changes which, time and again, mainly affected similar types of taxes, but also because the thrust of these changes was similar in many cases. These tax issues, which crop up re­ peatedly in the various national cases, are analysed in the second part of chapter VO, following a summary of the main reforms applied. Chapter VM makes a comparative analysis of certain fea­ tures (mainly quantitative) of the tax systems studied. Using data from the early part of the decade, a comparison is made of aspects of the level and composition of the tax burden, and the situation of the six countries studied is contrasted with a broader sample of 86 developing countries. An analysis is then made of the evolution of the tax burden in the course of the decade, using information which makes it possible to identify the main differences between the tax systems of the six countries. This analysis brings out econ­ omic and institutional features which result in tax systems, within the group of countries studied, whose soundness in terms of tax levels and structures is very varied: there are countries whose tax system is much better fitted to absorb macroeconomic shocks. Chapter IX brings out the influence of macroeconomic vari­ ables on the behaviour of tax systems and indicates in what way and to what extent the reforms studied represent a suitable answer to the prevailing conditions, as well as noting their similarities and differences. An important distinction which is made is that some countries carried out tax reforms whose contents and general thrust were in line with conventional thinking on the matter, while others applied policies whose main objective was to completely renew their tax systems. The last section in the chapter deals with the political and institutional factors conditioning the reform pro­ cesses. Finally, chapter X presents some conclusions, recapitulating the leading topics dealt with in the second part of the study and highlighting certain issues which the authors feel should be in­ cluded on a future agenda for the reform of the tax systems of the region. DECEM BER Industrialización y desarrollo tecnológico (Industrialization and technological development), Report No. 15, Economic Com­ mission for Latin America and the Caribbean, LC/G. 1791, Santiago, Chile, December 1993, 72 pages. This issue in the series “Industrialización y Desarrollo Tec­ nológico” presents a summary of the results of four studies on industry in Bolivia. The first study, by Luis Baudoin Olea, analyses the potential dynamism of Bolivian manufacturing, with special reference to the textile and jewellery industries. 1994 182 CEPAL REVIEW The second study, by Freddy Bascopé and Enrique Arana, deals specifically with the textile industry and the manufacture of goods made from cotton fabrics, angora and fine camelhair. The last two studies, by Heinz Meder and Daniel Pozo, re­ spectively, make an in-depth analysis of the production of jewel­ lery from gold, silver and semi-precious stones. S3 • AUGUST 1994 The studies propose policies whose application could help to raise the levels of competitiveness of the sectors of Bolivian indus­ try studied, which are particularly noteworthy because of the im­ portant role played in them by small-scale enterprises and craft-type microenterprises. R EC EN T EC LA C PUBLIC A TIO N S ECLAC publications ECONOMIC COMMISSION FOR LATIN AMERICA AND THE CARIBBEAN Casilla 179-D Santiago de Chile 1987, 1988, 1989, 1990, 1990, 1991, 1991, 1992, 1992, 1993, 1993, vol. 1 vol. II vol. 1 vol. II vol. 1 vol. II vol. 1 vol. II 692 pp. 741 pp. 821 pp. 260 pp. 590 pp. 299 pp. 602 pp. 297 pp. 579 pp. 289 pp. 532 pp. 1987, 1988, 1989, 1990, 1990, 1991, 1991, 1992, 1992, vol.l vol. II VO/./ vol. II vol.l vol. II 685 pp. 637 pp. 678 pp. 248 pp. 472 pp. 281 pp. 455 pp. 286 pp. 467 pp. (Issues for previous years also available) Anuario Estadístico de América Latina y el Caribe / Statistical Yearbook for Latin America and the Caribbean (bilingual) PERIODIC PUBLICATIONS C E P A L Review CEPAL Review first appeared in 1976 as part of the Publications Programme of the Economic Commission for Latin America and the Caribbean, its aim being to make a contribution to the study of the economic and social development problems of the region. The views expressed in signed articles, including those by Secretariat staff members, are those of the authors and therefore do not necessarily reflect the point of view of the Organization. CEPAL Review is published in Spanish and English 1980, 617 pp. 1981, 727 pp. 1982/1983 , 749 pp. 1984, 761 pp. 1985, 792 pp. 1986, 782 pp. 1987, 714 pp. 1988, 1989, 1990, 1991, 1992, 1993, 1994, 782 pp. 770 pp. 782 pp. 856 pp. 868 pp. 860 pp. 863 pp. (Issues for previous years also available) Libros de la C E P A L 1 Manual de proyectos de desarrolb económico, 1958, 5th. ed. 1980,264 pp. Manual on economic development projects, 1958, versions three times a year. Annual subscription costs for 1994 are US$16 for the Spanish version and US$18 for the English version. The price of single issues is US$10 in both cases. The cost of a two-year subscription (1994-1995) is US$30 for Spanish-language version and US$34 for English. 2nd. ed. 1972,242 pp. América Latina en el umbral de bs años ochenta, 1979,2nd. ed. 1980,203 pp. Agua, desarrolb y medio ambiente en América Latina, 1980,443 pp. Los bancos transnacionales y el financiamiento externo de América Latina. La experiencia del Perú, 1980,265 pp. Estudio Económico de América Latina y el Caribe 664 pp. 1980, 1981, 863 pp. 1982, vol.l 693 pp. 1982, vol. II 199 pp. 694 pp. 1983, vol.l 1983, vol. II 179 pp. 1984, vol. 1 702 pp. 1984, vol. Il 233 pp. 672 pp. 1985, 734 pp. 1986, Economic Survey of Latin America and the Caribbean 629 pp. 1980, 1981, 837 pp. 1982, vol.l 658 pp. 1982, vol. II 186 pp. 1983, vol. 1 686 pp. 1983, vol. II 166 pp. 1984, vol.1 685 pp. 1984, vol. II 216 pp. 1985, 660 pp. 1986, 729 pp. Transnational banks and the external finance of Latin America:the experience of Peru, 1985, 342 pp. 5 La dimensión ambiental en los estilos de desarrollo de América Latina, Osvaldo Sunkel, 1981,2nd. ed. 1984,136 pp. c O La mujer y el desarrolb: guia para la planificación de programas y proyectos, 1984,115 pp. 6 Women and development: guidelines for programme and project planning, 1982, 3rd. ed. 1984,123 pp. 7 Africa y América Latina: perspectivas de la cooperación interregional, 1983,286 pp. 8 Sobrevivencia campesina en ecosistemas de altura, vols. I y II, 1983,720 pp. 9 La mujer en el sector popular urbano. América Latina y el Caribe, 1984,349 pp. 10 Avances en la interpretación ambiental del desarrollo agrícola de América Latina, 1985,236 pp. 11 El decenio de la mujer en el escenario latinoamericano, 1986, 216 pp. 11 The decade for women in Latín America and the Caribbean: background and prospects, 1988, 215 pp. 12 América Latina: sistema monetario internacional y financlamiento externo, 1986,416 pp. 12 Latin America: international monetary system and external financing, 1986,405 pp. 13 Raúl Prebisch: Un aporte al estudio de su pensamiento, 1987,146 pp. 14 Cooperativismo latinoamericano: antecedentes y perspectivas, 1989,371 pp. 15 CEPAL, 40 años (1948-1988), 1988,85 pp. 15 ECLAC 40 Years (1948-1988), 1989,83 pp. 16 América Latina en la economía mundial, 1988,321 pp. 17 Gestión para el desarrollo de cuencas de alta montaña en la zona andina, 1988,187 pp. 18 Políticas macroeconômicas y brecha externa: América Latina en los años ochenta, 1989,201 pp. 19 CEPAL, Biblbgrafía, 1948-1988,1989,648 pp. 20 Desarrollo agrícola y participación campesina, 1989, 404 pp. 21 Planificación y gestión del desarrollo en áreas de expansión de la frontera agropecuaria en América Latina, 1989,113 pp. 22 Transformación ocupacional y crisis social en América Latina, 1989,243 pp. 23 La crisis urbana en América Latina y el Caribe: reflexiones sobre alternativas de solución, 1990, 197 pp. 24 The environmental dimension in development planning I, 1991, 302 pp. 25 Transformación productiva con equidad, 1990,3rd. ed. 1991,185 pp. 25 Changing production patterns with social equity, 1990, 3rd. ed. 1991,177 pp. 26 América Latina y el Caribe: opciones para reducir el peso de la deuda, 1990,118 pp. 26 Latín America and the Caribbean: options to reduce the debt burden, 1990,110 pp. 27 Los grandes cambbs y la crisis. Impacto sobre la mujer en América Latina y el Caribe, 1991, 271 pp. 27 Major changes and crisis. The impact on women in Latin America and the Caribbean, 1992, 279 pp. 28 A collection of documents on economic relations between the United States and Central America, 1906-1956,1991,398 pp. 29 Inventarios y cuentas del patrimonb naturaI en América Latina y el Caribe, 1991,335 pp. 30 Evaluaciones del impacto ambiental en América Latina y el Caribe, 1991,232 pp. 31 El desarrolb sustentadle: transformación productiva, equidad y medio ambiente, 1991,146 pp. 31 Sustainable development: changing production patterns, social equity and the environment, 1991,146 pp. 32 Equidad y transformación productiva: un enfoque integrado, 1993, 254 pp. 33 Educación y conocimiento: eje de la transformación productiva con equidad, 1992, 269 pp. 33 Education and knowledge: basic pillars of changing production patterns with social equity, 1993, 257 pp. 34 Ensayos sobre coordinación de políticas macro­ econômicas, 1992, 249 pp. 35 Población, equidad y transformación productiva, 1993, 158 pp. 35 Population, social equity and changing production patterns, 1993, 153 pp. 36 Cambios en el perfil de las familias. La experiencia regional, 1993, 434 pp. 37 Familia y futuro: un programa regional en América Latina y el Caribe, 1994, 137 pp. 39 El regionalismo abierto en América Latina y el Caribe, 1994, 109 pp. 39 Open regionalism in Latín America and the Caribbean, 1994, 103 pp. 40 Políticas para mejorar la inserción en la economía mundial, 1995, 314 pp. MONOGRAPH SERIES Cuadernos de la C E P A L 1 América Latina: el nuevo escenario regbnal y mundial / Latin America: the new regional and world setting, (bilingual), 1975,2nd. ed. 1985,103 pp. 2 Las evolucbnes regbnales de la estrategia 'internacional del desarrollo, 1975, 2nd. ed. 1984, 73 pp. 2 Regional appraisals of the international development strategy, 1975, 2nd. ed. 1985,82 pp. 3 Desarrollo humano, cambb social y crecimiento en América Latina, 1975, 2nd. ed. 1984,103 pp. 4 Relaciones comerciales, crisis monetaria e integración económica en América Latina, 1975,85 pp. 5 Síntesis de la segunda evaluación regional de la estrategia btemacional del desarrollo, 1975,72 pp. 6 Dinero de valor constante. Concepto, problemas y experiencias, Jorge Rose, 1975,2nd. ed. 1984,43 pp. 7 La coyuntura internacional y el sector externo, 1975, 2nd. ed. 1983, 106 pp. 8 La industrialización latinoamericana en los años setenta, 1975,2nd. ed. 1984,116 pp. 9 Dos estudios sobre inflación 1972-1974. La inflación en los países centrales. América Latina y la inflación importada, 1975,2nd. ed. 1984,57 pp. s/n Canada and the foreign firm, D. Pollock, 1976,43 pp. 10 Reactivación del mercado común centroamericano, 1976,2nd. ed. 1984,149 pp. 11 Integración y cooperación entre países en desarrollo en el ámbito agrícola, Germánico Salgado, 1976, 2nd. ed. 1985,62 pp. 12 Temas del nuevo orden económico Internacional, 1976,2nd. ed. 1984,85 pp. 13 En tomo a las ideas de la CEPAL: desarrollo, industrialización y comercio exterior, 1977, 2nd. ed. 1985,57 pp. 14 En tomo a las ideas de la CEPAL: problemas de la industrialización en América Latina, 1977, 2nd. ed. 1984,46 pp. 15 Los recursos hidráulicos de América Latina. Informe regional, 1977,2nd. ed. 1984,75 pp. 15 The water resources of Latin America. Regional report, 1977,2nd. ed. 1985,79 pp. 16 Desarrollo y cambio social en América Latina, 1977, 29 La polñica monetaria y el ajuste de la balanza de pagos: tres estudios, 1979, 2nd. ed. 1984,61 pp. 29 Monetary policy and balance of payments adjustment: three studies, 1979,60 pp. 30 América Latina: las evaluacbnes regbnales de la 31 32 33 34 2nd. ed. 1984,59 pp. 17 Estrategia internacional de desarrollo y establecimiento de un nuevo orden económico Internacional, 1977, 3rd. ed. 1984,61 pp. 17 International development strategy and establishment of a new international economic order, 1977,3rd. ed. 1985,59 pp. 18 Raices históricas de las estructuras distributivas de Amérka Latina, A. di Filippo, 1977, 2nd. ed. 1983, 64 pp. 19 Dos estudios sobre endeudamiento externo, C. Massad and R. Zahler, 1977, 2nd. ed. 1986,66 pp. s/n United States - Latin American trade and financial relations: some policy recommendations, S. Weintraub, 1977,44 pp. 20 Tendencias y proyecciones a largo plazo del desarrollo económico de América Latina, 1978, 3rd. ed. 1985,134 pp. 21 25 años en la agricultura de América Latina: rasgos principales 1950-1975,1978,2nd. ed. 1983,124 pp. 22 Notas sobre la familia como unidad socioeconómka, Carlos A. Borsotti, 1978,2nd. ed. 1984,60 pp. 23 La organización de la información para la evaluación del desarrolb, Juan Sourrouille, 1978, 2nd. ed. 1984, 61 pp. 24 Contabilidad nacional a precbs constantes en América Latina, 1978,2nd. ed. 1983,60 pp. s/n Energy in Latin America: The Historical Record, J. Mullen, 1978,66 pp. 25 Ecuador: desafbs y logros de la política económica en la fase de expansbn petrolera, 1979, 2nd. ed. 1984, 153 pp. 26 Las transformaciones rurales en América Latina: ¿desarrolb social o marginación?, 1979, 2nd. ed. 1984,160 pp. 27 La dimensión de la pobreza en América Latina, Oscar Altimir, 1979,2nd. ed. 1983,89 pp. 28 Organización institucional para el control y manejo de la deuda externa. El caso chileno, Rodolfo Hoffman, 1979,35 pp. 35 estrategia internacional del desarrolb en bs años setenta, 1979,2nd. ed. 1982,237 pp. Educación, imágenes y estilos de desarrollo, G. Rama, 1979, 2nd. ed. 1982,72 pp. Movimientos intemacbnales de capitales, R. H. Arriazu, 1979, 2nd. ed. 1984,90 pp. Informe sobre las inversiones directas extranjeras en América Latina, A. E. Calcagno, 1980, 2nd. ed. 1982, 114 pp. Las fluctuaciones de la industria manufacturera argentina, 1950-1978, D. Heymann, 1980, 2nd. ed. 1984,234 pp. Perspectivas de reajuste industrial: la Comunidad Económica Europea y bs pases en desarrolb, B. Evers, G. de Groot and W. Wagenmans, 1980, 2nd. ed. 1984,69 pp. 36 Un análisis sobre la posibilidad de evaluar la solvencia creditbia de bs países en desarrolb, A. Saieh, 1980,2nd. ed. 1984,82 pp. 37 Hacia bs censos latinoamericanos de los años ochenta, 1981,146 pp. s/n The economic relations of Latin America with Europe, 1980, 2nd. ed. 1983,156 pp. 38 Desarrolb regbnal argentino: la agricultura, J. Martin, 1981,2nd. ed. 1984,111 pp. 39 Estratificación y movilidad ocupacional en América Latina, C. Filgueira and C. Geneletti, 1981, 2nd. ed. 1985,162 pp. 40 Programa de acctón regional para América Latina en ios años ochenta, 1981,2nd. ed. 1984,62 pp. 40 Regional programme of action for Latin Amer 'ica in the 1980s, 1981, 2nd. ed. 1984, 57 pp. 41 El desarrolb de América Latina y sus repercusiones en la educactón. Alfabetismo y escolaridad básba, 1982, 246 pp. 42 América Latina y la economía mundial del café, 1982, 95 pp. 43 El ciclo ganadero y la economía argentina, 1983, 160 pp. 44 Las encuestas de hogares en Amérka Latina, 1983, 122 pp. 45 Las cuentas nacionales en América Latina y el Caribe, 1983,100 pp. 45 National accounts in Latin America and the Caribbean, 1983,97 pp. 46 Demanda de equipos para generación, transmisión y transformactán eléctrica en América Latina, 1983, 193 pp. 47 La economia de América Latina en 1982: evolución general, política cambiaría y renegociación de la deuda externa, 1984,104 pp, 48 Polñbas de ajuste y renegociación de la deuda extema en América Latina, 1984,102 pp. 49 La economía de América Latina y el Caribe en 1983: evolución general, crisis y procesos de ajuste, 1985.95 pp. 49 The economy of Latín America and the Caribbean in 1983: main trends, the impact of the crisis and the adjustment processes, 1985,93 pp. 50 La CEPAL, encamación de una esperanza de América Latina, Hernán Santa Cruz, 1985,77 pp. 51 Hacia nuevas modalidades de cooperación económica entre América Latina y el Japón, 1986,233 pp. 51 Towards new forms of economic co-operation between Latin America and Japan, 1987,245 pp. 52 Los conceptos básicos del transporte marítimo y la situación de la actividad en América Latina, 1986, 112 pp. 52 Basic concepts of maritime transport and its present status in Latin America and the Caribbean, 1987,114 pp. 53 Encuestas de ingresos y gastos. Conceptos y métodos en la experiencia latinoamericana. 1986,128 pp. 54 Crisis económica y políticas de ajuste, estabilización y crecimiento, 1986,123 pp. 54 The economic crisis: policies for adjustment, stabilization and growth, 1986,125 pp. 55 El desarrolb de América Latina y el Caribe: escolbs, requisitos y opciones, 1987,184 pp. 55 Latín American and Caribbean development: obstacles, requirements andoptions, 1987,184 pp. 56 Los bancos transnacionales y el endeudamiento externo en la Argentina, 1987,112 pp. 57 El proceso de desarrollo de la pequeña y mediana empresa y su papel en el sistema industrial: el caso de Italia, 1988,112 pp. 58 La evolución de la economía de América Latina en 1986,1988, 99 pp. 58 The evolution of the Latín American Economy in 1986.1988.95 pp. 59 Protectionism: regional negotiation and defence strategies, 1988,261 pp. 60 Industrialización en América Latina: de la “caja negra’ al “casillero vacio”, F. Fajnzylber, 1989, 2nd. ed. 1990,176 pp. 60 Industrialization in Latín America: from the “Black Box” to the “Empty Box”, F. Fajnzylber, 1990,172 pp. 61 Hacia un desarrolb sostenido en América Latina y el Caribe: restricciones y requisitos, 1989, 94 pp. 61 Towards sustained development in Latin America and the Caribbean: restrictions and requisites, 1989,93 pp. 62 La evolución de la economà de América Latina en 1987,1989,87 pp. 62 The evolution of the Latin American economy in 1987,1989,84 pp. 63 Elementos para el diseño de polñbas industriales y tecnológicas en América Latina, 1990, 2nd. ed. 1991,172 pp. 64 La industria de transporte regular internacional y ¡a competitividad del comercio exterior de los países de América Latina y el Caribe, 1989,132 pp. 64 The international common-carrier transportation industry and the competitiveness of the foreign trade of the countries of Latin America and the Caribbean, 1989,116 pp. 65 Cambios estructurales en bs puertos y la com petividad del comercio exterior de América Latina y el Caribe, 1991, 141 pp. 65 Structural Changes in Ports and the Competitiveness of Latin American and Caribbean Foreign Trade, 1990,126 pp. 66 The Caribbean: one and divisible, 1993, 207 pp. 67 La transferencia de recursos externos de América Latina en la posguerra, 1991, 92 pp. 67 Postwar transfer of resources abroad by Latin America, 1992,90 pp. 68 La reestructuractón de empresas públicas: el caso de b s puertos de Amérba Latina y el Caribe, 1992, 148 pp. 68 The restructuring of publb-sector enterprises: the case of Latin American and Caribbean ports, 1992, 129 pp. 69 Las finanzas públicas de América Latina en la década de 1 9 8 0 , 1993,100 pp. 69 Public Finances in Latín America in the 1980s, 1993, 96 pp. 70 Canales, cadenas, corredores y competividad: un enfoque sistémico y su aplicación a seis productos latinoamericanos de exportación, 1993, 183 pp. 73 El gasto social en América Latina: un examen cuantitativo y cualñativo, 1995,167 pp. Cuadernos Estadísticos de ia C E P A L 1 América Latina: relación de precios del intercambio, 1976,2nd. ed. 1984,66 pp. 2 Indicadores del desarrolb económico y social en América Latina, 1976,2nd. ed. 1984,179 pp. 3 Series históricas del crecimiento de América Latina, 1978,2nd. ed. 1984,206 pp. 4 Estadísticas sobre la estructura del gasto de consumo délos hogares según finalidad del gasto, por grupos de ingreso, 1978,110 pp. (Out of print; replaced by No. 8 below) 5 El balance de pagos de América Latina, 1950-1977, 1979,2nd. ed. 1984,164 pp. 6 Distribución regional del producto interno bruto sectorial en los países de América Latina, 1981, 2nd. ed. 1985,68 pp. 7 Tablas de insumo-producto en América Latina, 1983, 383 pp. 8 Estructura del gasto de consumo de b s hogares según finalidad del gasto, por grupos de ingreso, 1984,146 pp. 9 Origen y destino del comercio exterior de bs países de la Asociacbn Latinoamericana de Integración y del Mercado Común Centroamericano, 1985,546 pp. 10 América Latina: balance de pagos, 1950-1984,1986, 357 pp. 11 El comercb exterior de bbnes de capital en América Latina, 1986,288 pp. 12 América Latina: bdbes del comercio exterior, 1970-1984,1987,355 pp. 13 América Latina: comercb exterior según la clasificación industrial internacional uniforme de todas las actividades económicas, 1987, Vol. I, 675 pp; Vol. II, 675 pp. 14 La distribución del Ingreso en Cobmbia, Antecedentes estadístbos y característbas socioeconómicas de bs receptores, 1988,156 pp. 15 América Latina y el Caribe: series regionales de cuentas nacionales a precios constantes de 1980, 1991, 245 pp. 16 Origen y destino del comercb exterbr de bs países de la Asocbión Latinoamericana de Integración, 1991, 190 pp. 17 Comercio intrazonal de b s países de la Asociación de Integración, según capítulos de la clasificación uniforme para el comercio btemacional, revisan 2, 1992, 299 pp. 18 C lasificaciones estadísticas internacionales incorporadas en el Banco de Datos del Comercb Exterbr de América Latina y el Caribe de la CEPAL, 1993, 313 pp. 19 América Latina: comercio exterior según la clasificación industrial internacional uniforme de todas las actividades económicas (CHU) - Volumen I Exportaciones, 1993, 285 pp. 19 América Latina: comercb exterior según la clasificacbn industrialintemacbnal uniforme de todas las actividades económbas (CIIU) - Volumen II Importaciones, 1993, 291 pp. 20 Dirección del comercb exterior de América Latina y el Caribe según principales productos y grupos de productos, 1970-1992,1994,483 pp. 4 Estilos de desarrolb, modernización y medio ambiente en la agricultura latinoamericana, 1981, 4th. ed. 1984, 130 pp. 5 El desarrolb de América Latba en bs años ochenta, 1981,2nd. ed. 1982,153 pp. 5 Latín American development in the 1980s, 1981, 2nd.ed. 1982,134 pp. 6 Proyecciones del desarrolb latinoamericano en bs años ochenta, 1981,3rd. ed. 1985,96 pp. 6 Latin American development projections for the 1980s, 1982,2nd. ed. 1983,89 pp. 7 Las relaciones económbas externas de América Latba en bs años ochenta, 1981,2nd. ed. 1982,180 pp. 8 Integracbn y cooperación regáñales en los años ochenta, 1982,2nd. ed. 1982,174 pp. 9 Estrategias de desarrolb sectorial para bs años ochenta: bdustria y agricultura, 1981,2nd. ed. 1985,100 pp. 10 Dinámica del subempbo en América Latba. PREALC, 1981,2nd. ed. 1985,101 pp. 11 Estilos de desarrolb de la industria manufacturera y medio ambiente en América Latina, 1982, 2nd. ed. 1984, 178 pp. 12 Relacbnes económicas de Amérba Latina con bs países miembros del “Consejo de Asistencia Mutua Económica", 1982,154 pp. 13 Campesinado y desarrolb agrbola en Bolivia, 1982, 175 pp. 14 El sector externo: indbadores y análisis de sus fluctuaciones. El caso argentino, 1982,2nd. ed. 1985, 216 pp. 15 Ingeniería y consultoria en Brasil y el Grupo Andino, 1982,320 pp. 16 Cinco estudbs sobre la situación de la mujer en América Latina, 1982,2nd. ed. 1985,178 pp. 16 Five studies on the situation of women in Latin America, 1983,2nd. ed. 1984,188 pp. 17 Cuentas nacionales y producto material en América Latina, 1982,129 pp. 18 El financiamíento de las exportac'iones en América Latina, 1983,212 pp. 19 Medbbn del empleo y de b s ingresos rurales, 1982, 2nd. ed. 1983,173 pp. 19 Measurement of employment and income in rural areas, 1983,184 pp. 20 Efectos macroeconômicos de cambios en las barreras 21 Estudios e Informes de la C E P A L 1 Nicaragua: el Impacto de la mutacbn polñba, 1981, 2nd. ed. 1982,126 pp. 2 Perú 1968-1977: la política económica en un proceso de cambio global, 1981,2nd. ed. 1982,166 pp. 3 La industrializacbn de América Latba y la cooperación btemacional, 1981, 170 pp. (Out of print, will not be reprinted.) 22 23 24 al comercio y al movimiento de capitales: un modeb de simulación, 1982,68 pp. La empresa pública en /a economía: la experiencia argentina, 1982,2nd. ed. 1985,134 pp. Las empresas transnacionales en la economía de Chile, 1974-1980,1983,178 pp. La gestión y la bformática en las empresas ferroviarias de América Latina y España, 1983,195 pp. Establecimiento de empresas de reparación y mantenimiento de contenedores en América Latina y el Caribe, 1983,314 pp. 24 Establishing container repair and maintenance enterprises in Latin America and the Caribbean, 1983,236 pp. 25 Agua potable y saneamiento ambiental en América Latina, 1981-1990/Drinking water supply and sanitation in Latin America, 1981-1990 (bilingual), 1983,140 pp. 26 Los bancos transnacionales, el estado y el endeudamiento externo en Bolivia, 1983,282 pp, 27 Política económica y procesos de desarrolb. La experiencia argentina entre 1976 y 1981, 1983, 157 pp. 28 Estilos de desarrollo, energía y medio ambiente: un estudio de caso exploratorio, 1983,129 pp. 29 Empresas transnacbnales en la industria de alimentos. El caso argentino: cereales y carne, 1983, 93 pp. 30 Industrialización en Centroamérica, 1960-1980,1983, 168 pp. 31 Dos estudios sobre empresas transnacionales en Brasil, 1983,141 pp. 32 La crisis económica internacional y su repercusión en América Latina, 1983,81 pp. 33 La agricultura campesina en sus relaciones con la industria, 1984, 120 pp. 34 Cooperación económica entre Brasil y el Grupo Andino: el caso de los minerales y metales no ferrosos, 1983,148 pp. 35 La agricultura campesina y el mercado de alimentos: /a dependencia externa y sus efectos en una economía abierta, 1984,201 pp. 36 El capital extranjero en la economía peruana, 1984, 178 pp. 37 Dos estudbs sobre política arancelaria, 1984,96 pp. 38 Estabilización y liberalización económica en el Cono Sur, 1984,193 pp. 39 La agricultura campesina y el mercado de alimentos: el caso de Haití y el de la República Dominicana, 1984, 255 pp. 40 La industria siderúrgica latinoamericana: tendencias y potencial, 1984,280 pp. 41 La presencia de las empresas transnacbnales en la economía ecuatoriana, 1984,77 pp. 42 Precios, salarios y empleo en la Argentina: estadísticas económicas de corto plazo, 1984,378 pp. 43 El desarrolb de la seguridad social en América Latina, 1985,348 pp. 44 Market structure, firm size and Brazilian exports, 1985, 104 pp. 45 La planificación del transporte en países de América Latina, 1985,247 pp. 46 La crisis en Amérba Latina: su evaluación y perspectivas, 1985,119 pp. 47 La juventud en Amérba Latina y el Caribe, 1985, 181 pp. 48 Desarrollo de los recursos mineros de América Latina, 1985,145 pp. 48 Development of the mining resources of Latin America, 1989,160 pp. 49 Las relaciones económicas internacionales de Amérba Latina y la cooperación regional, 1985, 224 pp. 50 Amérba Latina y la economía mundial del algodón, 1985,122 pp. 51 Comercio y cooperación entre países de América Latina y países miembros del CAME, 1985,90 pp. 52 Trade relations between Brazil and the United States, 1985,148 pp. 53 Los recursos hídricos de América Latina y el Caribe y su aprovechamiento, 1985,138 pp. 53 The water resources of Latin America and the Caribbean and their utilization, 1985,135 pp. 54 La pobreza en América Latina: dimensbnesy políticas, 1985,155 pp. 55 Políticas de promoción de exportaciones en algunos países de América Latina, 1985,207 pp. 56 Las empresas transnacionales en la Argentina, 1986, 222 pp. 57 El desarrolb frutbola y forestal en Chile y sus derivacbnes sociales, 1986,227 pp. 58 El cultivo del algodón y la soya en el Paraguay y sus derivaciones sociales, 1986,141 pp. 59 Expansión del cultivo de la caña de azúcar y de la ganadera en el nordeste del Brasil: un examen del papel de la política pública y de sus derivaciones económbas y sociales, 1986,164 pp. 60 Las empresas transnacionales en el desarrollo colombiano, 1986,212 pp. 61 Las empresas transnacionales en la economía del Paraguay, 1987,115 pp. 62 Problemas de la industria latinoamericana en la fase crítica, 1986,113 pp. 63 Rebelones económbas internacionales y cooperación regional de América Latina y el Caribe, 1987,272 pp. 63 International economic relations and regional co-operation in Latin America and the Caribbean, 1987,267 pp. 64 Tres ensayos sobre inflación y politbas de estabilización, 1986,201 pp. 65 La industria farmacéutica y farmoquimica: desarrolb histórico y posibilidades futuras. Argentina, Brasil y México, 1987, 177 pp. 66 Dos estudbs sobre América Latina y el Caribe y la economía intemacbnal, 1987,125 pp. 67 Reestmcturación de la industria automotriz mundial y perspectivas para América Latina, 1987,232 pp. 68 Cooperación latinoamericana en servicios: antecedentes y perspectivas, 1988,155 pp. 69 Desarrollo y transformacbn: estrategia para superar la pobreza, 1988,114 pp. 69 Development and change: strategies vanquishing poverty, 1988,114 pp. for 70 La evolución económica del Japón y su impacto en América Latina, 1988,88 pp. 70 The economic evolution of Japan and its impact on Latin America, 1990,79 pp. 71 La gestion de bs recursos hídricos en América Latina y el Caribe, 1989,256 pp. 72 La evolución del problema de la deuda externa en América Latina y el Caribe, 1988,77 pp. 72 The evolution of the external debt problem in Latin America and the Caribbean, 1988,69 pp. 73 Agricultura, comercio exterior y cooperación internacional, 1988,83 pp. 73 Agriculture, external trade and international co-operation, 1989,79 pp. 74 Reestructuración industrial y cambb tecnobgbo: consecuencias para América Latina, 1989,105 pp. 75 El medio ambiente como factor de desarrolb, 1989, 2nd. ed. 1991,123 pp. 76 El comportamiento de los bancos transnacionabs y la crisis internacional de endeudamiento, 1989,214 pp. 76 Transnational bank behaviour and the international debt crisis, 1989,198 pp. 77 Los recursos hídricos de América Latina y del Caribe: planifbación, desastres naturales y contaminación, 1990,266 pp. 77 The water resources of Latin America and the Caribbean - Planning hazards and pollution, 1990, 252 pp. 78 La apertura financiera en Chile y el comportamiento de bs bancos transnacbnales, 1990,132 pp. 79 La industria de bienes de capital en Amérca Latina y el Caribe: su desarrollo en un marco de cooperación regbnal, 1991,235 pp. 80 Impacto ambiental de la contaminación hídrica producida por la Refinería Estatal Esmeraldas: análisis técnico-económico, 1991,189 pp. 81 Magnitud de la pobreza en América Latina en bs años ochenta, 1991,177 pp. 82 América Latina y el Caribe: el manejo de la escasez de agua, 1991, 148 pp. 83 Reestructuración y desarrollo de la industria automotriz mexicana en los años ochenta: evolución y perspectivas, 1992,191 pp. 84 La transformación de la producción en Chile: cuatro ensayos de interpretación, 1993, 372 pp. 85 Inversión extranjera y empresas transnacionales en la economía de Chile (1974-1989). Proyectos de inversión y estrategias de las empresas transnacionales, 1992, 257 pp. 86 Inversión extranjera y empresas transnacionales en la economía de Chile (1974-1989). El papel del capital extranjero y la estrategia nacional de desarrollo, 1992, 163 pp. 87 Análisis de cadenas agroindustriales en Ecuador y Perú, 1993, 294 pp. 88 El comercio de manufacturas de América Latina. Evolución y estructura 1962-1989,1993,150, pp. 89 El impacto económico y social de las migraciones en Centroamérica, 1993,78 pp. 90 El papel de las empresas transnacionales en la reestructuración industrial de Colombia: una síntesis, 1993,131 pp. 92 Reestructuración y desarrollo productivo: desafb y potencial para bs años noventa, 1994, 108 pp. 93 Comercio internacional y medio ambiente. La discusión actual, 1995, 112 pp. Serie INFOPLAN: Temas Especiales del Desarrollo 1 Resúmenes de documentos sobre deuda externa, 1986,324 pp. 2 Resúmenes de documentos sobre cooperación entre países en desarrolb, 1986,189 pp. 3 Resúmenes de documentos sobre recursos hídricos, 1987,290 pp. 4 Resúmenes de documentos sobre planificación y medio ambiente, 1987,111 pp. 5 Resúmenes de documentos sobre integración económica en América Latina y el Caribe, 1987, 273 pp. 6 Resúmenes de documentos sobre cooperación entre países en desarrolb, II parte, 1988,146 pp. 7 Documentos sobre privatización con énfasis en América Latina, 1991, 82 pp. 8 Reseñas de documentos sobre desarrollo ambientalmente sustentable, 1992, 217 pp. 9 MERCOSUR: resúmenes de documentos, 1993, 119 pp. 10 Políticas sociales: resúmenes de documentos, 1995, 95 pp. ÍÊ^k W U N C TA D R E V IE W 1994 S § > Diana Tussie The policy harmonization debate: What can developing countries gain from multilateral trade negotiations? Anil Markandya Is free trade compatible with sustainable development? Jan Kregel Capital flows: Globalization of production and financing development Gary Hufbauer, Darius Lakdawaiia and Anup Malani Determinants of direct foreign investment and its connection to trade Alfred Maizels Commodity market trends and instabilities: Policy options for developing countries Sanjaya Lall Industrial policy: The role of government in promoting industrial and technological development Ajit Singh Growing independently of the world economy: Asian economic development since 1980 Ricardo Ffrench-Davis, Daniel Titelman and Andras Uthoff International competitiveness and the macroeconomics of capital account opening David Felix: Industrial development in East Asia: What are the lessons for Latin America? Gerry K. Helleiner From adjustment to development in sub-Saharan Africa András Kõves From "great leaps forward" to normalcy: Some issues in transitional policies in Eastern Europe The UNCTAD Review is an international journal which publishes scholarly articles on all aspects of international trade, finance and development of concern to the United Nations Conference on Trade and Development (UNCTAD). The journal is published once a year. It welcomes articles by scholars from all parts of the world. Papers ate selected on fire basis of their rntrinsic analytical value and policy relevance. Opinions and comments, as well as proposed contributions for future issues, are welcome and should be addressed to the Managing Editor, UNCTAD Review, UNCTAD, Palais des Nations, 1211 Geneva 10, Switzerland. Further information and copies of the publication may be obtained from the same address. A United Nations publication. Sales No. E.94.I1.D.19. 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H C a m b r id g e UNIVERSITY PRESS ^ The Swiss Review of International Economic Relations ISSN 0004-8216 __________________ Nr. 1/95 » April 1995__________________ European Integration - Between Nation and Federation Heinz Hauser and Alexia Midler Legitimacy: The Missing Link for Explaining EU-Institution Building Rudolf Hrbek Federal Balance and the Problem of Democratic Legitimacy in the EU Klaus Armingeon The Democratic Deficit of the EU Giandomenico Majone The Development of Social Regulation in the EU: Policy Externalities, Transaction Costs, Motivational Factors Roland Vaubel Social Regulation and Market Integration: A Critique and PublicChoice Analysis of the Social Chapter Jiirg Martin Gabriel The Integration of European Security: A Functionalist Analysis Richard Tibbels WEU and Future European Security Arrangements Emst-Ulrich Petersmann How Can the EU Be Constitutionalized? The European Parliament’ s 1994 Proposal for a «Constitution for the EU» Martin Seidel Basic Aspects of a European Constitution Deirdre Curtin The Shaping of a European Constitution and the 1996IGC: «Flexibility» as a Key Paradigm? A journal for professors, lecturers, politicians, managers and students with an interest in international economic policy. Issued quarterly with articles in English and German. Annual Subscription: Orders: SFr. 142.- / Students SFr. 7 1 (A ir Mail SFr. 165.-) Verlag Rüegger A G ♦ P.O. Box 1470 • CH - 8040 Zürich Telefax: (Switzerland) 1 / 4931176 LATIN AMERICAN RESEARCH REVIEW An interdisciplinary journal concerned with scholarly studies o f Latin America Articles, Review Essays, Research Reports & Notes Gilbert W. Merkx Editor Jon M. Tolman Karen L. Remmer Associate Editor Associate Editor Sharon Kellum Managing Editor The Latin Am erican Studies Association publishes the LATIN AM ERICAN RESEARCH REVIEW three times a year to improve co mm u n ic a tio n among in d iv id u als and in s titu tio n s c o n cerned with scholarly studies of Latin America. Subscription rates and further information may be obtained from the LARR office. LATIN AMERICAN RESEARCH REVIEW Latin American Institute 801 Yale N.E. University of New Mexico Albuquerque, New Mexico 87131 Telephone: (505) 277-5985 FAX: (505) 277-5989 Frank Cass THE EUROPEAN JOURNAL OF DEVELOPMENT RESEARCH Jo u rn a l o f th e E u ro p ean A s so ciatio n fo r D evelo p m en t R e search and T ra in in g In stitu tes (EA D I) Editors Helen O'Neill, University College, Dublin, Eire and Cristóbal Kay, Institute of Social Studies, The Hague, Netherlands \ The European Journal o f Developm ent Research aims to achieve the highest standards of debate and analysis on matters of policy, theory and practice, in all aspects of development studies. It exists particularly in order to publish research carried out in Europe or in co-operation with European institutions. All issues are special issues with a common them e in addition to ‘free-standing’ articles. Recent Articles In vad e d W o m en : Sex, R ace and C lass in th e F orm atio n o f C o lo n ial S o c ie ty by Verena Stolcke T h e E th n ic is a tio n o f P o litics and th e P o liticisatio n o f E th n icity: C u ltu re an d P o litical D e v e lo p m e n t in S o uth A frica by Preben Kaprsholm C o n tro lle d E m an cip atio n : W o m en and H indu N a tionalism by Thom as Blom Hansen T h e P o litic a l E c o n o m y o f P o st-C o m m u n ist D evelo p m en t by Bjorn Hettne A fric a and th e C h an g es in E astern E u ro p e by Thandika M kandawire IS S N 0957-8811 V o lu m e 7 1995 T w o issu es p er year: Ju n e, D ecem ber In d iv id u a ls £ 3 6 /$5 5 In stitu tio n s £65/$95 UK/O VERSEAS O R D E R S to: Frank C ass, 8 9 0 -9 0 0 Eastern Avenue, Ilford, E sse x IG2 7HH, UK. Tel: 0181 599 8866 Fax: 0181 599 0984 E-mail: 100067.1576@com puserve.com US O R D E R S to: Frank C ass, c/o IS B S , 5804 N E H assalo Street, Portland, O R 97213-3644, USA. Tel: (503) 287-3093, (800) 944-6190 Fax: (503) 280-8832 Frank Cass THE JOURNAL OF DEVELOPMENT STUDIES Managing Editors C h ris to p h e r C o iclo u g h , IDS, University of Sussex, UK, C o lin K irk p a tric k , University of Bradford, UK, M ick M oore, IDS, University of Sussex, UK and D avid W all, University of Sussex, UK The Journal o f Developm ent Studies is one of the most well-known and wellestablished international journals in the area of development studies. Since its foundation in 1964, it has published many seminal articles on development and opened up m any new areas of debate. Priority is given to papers which (a) are interdisciplinary, (b) provide critical tests, based on empirical work, of alternative theories, perspectives or schools of thought; and (c) are relevant to important issues in developm ent policy. It also welcomes critical surveys of the literature in important fields of development policy and practice. Each issue keeps the reader up-to-date with the latest research and also contains reviews of recentlypublished books on development. Recent Articles B e h in d th e M arket S tag e W h ere Real S o cieties E xist - P art I: T h e R o le o f P u b lic an d P rivate O rd er In stitu tio n s by Jean-Philippe Platteau B eh in d th e M a rket S tag e W h e re Real Societies E xist - P art II: T h e R o le o f M o ral N o rm s by Jean-Philippe Platteau T h e C o n d itio n o f C h ild ren in th e C o u n tries o f th e F o rm er S o vie t U n ion (FS U ): A S tatis tical R eview by Beverley A Carlson W ill H IV B e c o m e a M a jo r D e term in an t o f F ertility in S u b -S ah aran A fric a? by Simon Gregson IS S N 0 0 2 2 -0 3 8 8 V o lu m e 31 1995 Q u arte rly: O cto b er, J a n u ary, A p ril, Ju ly In d iv id u a ls £ 4 5 /$ 6 5 In stitu tio n s £135/$195 U K/O VERSEAS O R D E R S to: Frank C ass, 8 9 0 -9 0 0 Eastern Avenue, Ilford, E sse x IG2 7HH, UK. Tel: 0181 599 8866 Fax: 0181 5 9 9 0 9 8 4 E-mail: 100067.1576@com puserve.com US O R D E R S to: Frank C ass, c/o IS B S , 5 8 04 N E H assa lo Street, Portland, O R 97213-3644, USA. Tel: (503) 287-3093, (800) 944-6190 Fax: (503) 280-8832 » w .ji ob <-Ã -í* jl l a J*U- ^Jl «¡¿Oi j » V4U (Ju^t ■pftjl >Wt £_j» ' j ç j j £ \ j t > t w C X jl ¡ j* «**■'* ^*YI o l j j i — ^ * ' - ir r y J* j çr*1 r-*• r^ s ' J s ^ M M *& m aim HOW TO O B T A IN U N IT E D N A T IO N S P U B L IC A T IO N S U n ite d N a tio n s p u b lic a tio n s m ay be* o b ta in e d fro m b o o k s to r e s a n d d is tr ib u to r s th r o u g h o u t th e w o rld . C o n s u lt y o u r b o o k s to r e o r w r ite to : U n ite d N a tio n s , Sales S e c tio n , N ew Y o rk o r G en ev a. COMM ENT SE PR O C U R E R L ES P U B L IC A T IO N S D E S N A T IO N S U N IE S L es p u b lic a tio n s d e s N a tio n s U n ies s o n t en v e n te d a n s les lib ra irie s et les ag e n ces d é p o s ita ire s d u m o n d e e n tie r. In fo rm e z -v o u s a u p r è s d e v o tr e lib raire o u a d ressez-v o u s à : N a tio n s U nies, S e c tio n d e s v e n te s , N ew Y o rk o u G en èv e. K A K nO JIY M H T I» H 3 A A H H H O P T A H H 3 A U H H O B T sE U IH H E H H M X H A U H H Haa&HHit OpraHMaattHH OO'scAHHeHHkix H aunfl momho KyriHTb b khh)khi>ix Mara3HH&X h areHTCTsax bo Bctx pafloHax MHpa. H bboahtc cnpaBKH 0 m saihhjix b 6 aauieM khhwhom M&raaHHe h/ih nwiiiMTe no aApecy : O praitm auiui OA'seAHHeHHMX HauMft, CeKuwa no npoA&we h3a&hhA, Hbio-Hopit m/ih HCeHeaa. COMO C O N SE G U IR PU B L IC A C IO N E S D E L A S N A C IO N E S U N ID A S Las p u b lica cio n e s d e las N a cio n es U nidas está n en venta en librerías y casas distrib u id oras en to d a s p artes d el m u n d o . C o n su lte a su librero o diríjase a: N acion es U nidas, S ecc ió n d e V en ta s, N ueva Y ork o G inebra. Publications of the Economic Com m ission for Latin Am erica and the Caribbean (ECLAC) and those of the Latin Am erican and the Caribbean Institute for Econom ic and Social Planning (ILPES) can be ordered from your local distributor or directly through: United Nations Publications S a le s Section, — D C -2-866 N ew York, NY, 10017 U SA United Nations Publications S ale s Section Palais des Nations 1211 Geneve 10, Switzerland Distribution Unit C E P A L — Casilla 179-D Santiago, Chile First edition Printed in United Nations - Santiago, Chile - December 1994 - 2 250 ISSN 0251- 2920 - ISBN 92-1-121198-0 Copyright© United Nations 1994 I n t h i s i s s u e o f t h e R e H ealth c are m arkets: th e ir m o rp h o lo g y, b e h a vio u r a n d regulation v i e w 7 Jorge Katz and Ernesto Miranda L ib era liza tio n o r fin a n c ia l d e ve lo p m e n t? 27 Giinther Held Fiscal a d ju s tm e n t and social sp en d in g an Rossella Cominetti W o m e n ’s fo rm al educatio n : a ch iev e m e n ts a n d obstacles 61 Diane Alméras I L a b o u r m arket fle xib ility: w h a t d o e s it really m ean? 81 Ricardo A. Lagos T h e m o d ern izatio n o f b ank su p ervisio n 97 Christian Larraín C en tral A m e rica n in tegration: its co sts and benefits 111 Luis Cáceres S om e lesso n s o f th e A rg e n tin e privatizatio n process 129 Daniel Azpiazu and Adolfo Vispo E xtraord inary c om p arative ad van tag e and long-run growth: the c a s e o f E cu ad o r 149 André A. Hofman and Rudolf Buitelaar Th e c u ltu ral in d u stry and new c o d e s o f m o d ern ity 167 Martin Hopenhayn G u id e lin e s fo r co n trib u to rs to CEPAL R eview 181