Chapter 15
Trade and Policy Reform in Latin America
◼ Outline
Introduction: Defining a “Latin American” Economy
Population, Income, and Economic Growth
Import Substitution Industrialization
Origins and Goals of Import Substitution Industrialization
Criticisms of Import Substitution Industrialization
Case Study: ISI in Mexico
Macroeconomic Instability and Economic Populism
The Debt Crisis of the 1980s
Proximate Causes of the Debt Crisis
Responses to the Debt Crisis
Neoliberal Policy Reform and the Washington Consensus
Stabilization Policies to Control Inflation
Structural Reform and Open Trade
Case Study: Regional Trade Blocs in Latin America
The Next Generation of Reforms
Case Study: The Chilean Model
◼ What Students Should Know after Reading Chapter 15
Recent Latin American economic experiences cover most of the material in the text, making it an excellent
arena for bringing together the interplay of trade, finance, and integration issues of Chapters 1 through 14.
The goal of both this chapter and the next two is to provide case studies that demonstrate the utility of the
earlier material. It begins with an orientation to the countries, population, and GDP of Latin America.
Chapter 15 Trade and Policy Reform in Latin America 85
The Washington Consensus is used as shorthand for the broad series of reforms undertaken by most
countries beginning in the mid-1980s but gaining momentum and greater weight in the 1990s. Students
should be familiar with the label “neoliberalism” after reading this section.
The second generation of reforms and reaction to the policy changes of the 1980s and 1990s is covered
briefly, but given the high degree of uncertainty regarding the direction that these responses will ultimately
take, I have not tried to provide a complete categorization. Venezuela’s Chavez presents one type of
◼ Assignment Ideas
1. The very recent past in Latin America suggested at least the possibility of a swing back toward
populism. Students can research this question and decide whether current populism in Latin America
2. Latin America has a wealth of regional trade agreements. A complete list and access to the texts
(some only in Spanish) is the Foreign Trade Information System (SICE is the Spanish acronym)
◼ Answers to End-of–Chapter Questions
1. What were the main characteristics of economic growth in Latin America from the end of World
War II until the debt crisis of the 1980s?
Answer: The text characterizes growth in Latin America as (1) inward oriented, (2) unequal in the
distribution of its benefits, and (3) unstable. Growth overall was adequate to good in most
2. What is import substitution industrialization? Explain its goals and methods.
Answer: ISI is an economic development strategy that uses industrial policies to target industries
3. What are the main criticisms of import substitution industrialization? Did ISI fail?
Answer: The text describes five main criticisms. These are (1) misallocation of resources when
4. Describe a typical cycle of economic populism. Why does it often leave its supporters worse off than
before the cycle begins?
Answer: The typical cycle goes through phases. In the first phase, there is widespread
disillusionment with current policy, often as a result of a recession or a period of very
5. Explain how economic populist policies usually lead to overvalued exchange rates and large trade
deficits.
6. What were the proximate causes of the debt crisis? How did the United States and other industrial
countries respond?
Answer: One may argue that decades of ISI policies caused the debt crisis, but the immediate
7. Why did the Latin American debt crisis of the 1980s cause recessions in each country?
8. What is the difference between stabilization policies and structural adjustment policies? Give
specific examples of each.
9. What is neoliberalism? Why do some people consider it a negative term?
Answer: Neoliberalism refers to the stabilization and structural reform policies that would be
recommended in the Washington Consensus. It represents a return to the classical
10. What was the content of Latin American trade reforms of the late 1980s and 1990s? How do the
actions taken relate to the desired goals?