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Latin America - CPE LATIN AMERICA MARCH 5 2008 Between 1980...

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CPE LATIN AMERICA MARCH 5 2008 Between 1980 and the present Latin America has gone through a political transformation and an economic transformation The political transformation was a switch from military dictatorships to democracy The economic transformation was a sift from capitalist economies that were relatively closed to international trade to ones that are more open By the 1990’s most of these countries became democratic and became more open to trade Import Substitution Industrialization- Model of capitalist economy used by Latin American countries from the 1930’s to the 1980’s. Latin America main exports during the 19 th century were primary products like agricultural products, minerals, basically anything from the earth. During the Great Depression the demand and price for primary goods dropped substantially and caused the Latin American to change their economy. This caused Latin America to go to ISI which is when you produce locally what you could import (Like tools needed for primary goods). ISI runs on two principles and they are a protectionist view on international trade (Limit imports) and heavy reliance on the export of primary goods. Over time the state became more involved in the Import Substitution A lot of countries grew substantially during this time period In the 1970’s ISI began to run into problems and the problems exploded in the 80’s ISI firms that were highly protected had few incentives to modernize their plants and equipment. ISI’s were not competitive on global markets. Price of primary products is very volatile and that happened during the 50’s and 60’s. In the 70’s Latin American had big deficits in their “balance of trade”. Balance of trade is what you earn in selling exports compared to what you spend buying imports. ISI firms owned by the states employed supporters of politicians and this caused these
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firms to have very high wage expenses. Politicians were under pressure to keep the prices of state owned ISI ‘s low. Soft Budget Constraints- If you run deficits then you can get the government to help Two deficits build up. One is a governmental deficit that was caused by the government bailing out the state owned ISI’s during their deficits. The other one was caused by the balance of trade deficit. To cover deficits you need to borrow either by issuing government bonds or borrowing directly like the Latin American countries did from Europe. The first catalyst of the collapse of the ISI was the oil shock crisis. This was caused by the formation of OPEC. Oil prices went through the roof because of he high demand and relatively low supply. In 1979 prices spiked again because of the Iranian revolution. Most of Iran’s oil was taken off the market and again with the low supply demand went up and prices shot up.
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