Once again Latin America is confusing development with economic
growth, and economic growth with increased investments and exports. These same
ideas have come up again and again over the last 50 years, and although
subjected to criticism to the point of losing credibility, they return again. To
get beyond this confusion, it’s necessary to review the various debates about
Traditional Latin American economists, along with many politicians, insist over and over that economic growth is the key motor behind development and that it leads to poverty alleviation. This idea is expressed not only in over-simplified terms, but also in other more colorful ways.
In some cases, it is thought that economic growth is only reached through foreign investment or through large export flows. One way or another, the emphasis is placed on economic expansion as a necessary condition to get at problems related to poverty.
These ideas are deformed, reduced to the most basic formulas, and some of these factors end up becoming ends in themselves. Throughout the last several decades this oversimplified generalization has been debated and criticized, but it is always reborn.
The Growth Theory
Positions that maintain that Gross Domestic Product per capita (GDP) growth is indispensable to poverty reduction still prevail. The increase would be achieved through some key factors, including two in particular: more foreign investment and increased exports. Both aspects are related, since they also maintain that an increase in exports isn’t possible with internal savings and requires significant foreign investment.
International financial institutions have almost always defended the idea that economic growth, boosted by trade liberalization and investment, will end poverty. For example, the World Bank economists David Dollar and Aart Kraay published a highly-promoted article with a very specific title: “Growth is Good for the Poor” (Dollar and Kraay, 2000). The idea was simple: the expansion in trade stimulates economic growth and that permits poverty reduction.
Positions such as these have kept alive the old idea that economic growth is the central axis of development, but now associated with economic opening, to export more as well as to receive foreign investment.
The Search for Investment
The importance of attracting foreign investment to feed economic growth has reached the point of becoming so simplified that it ends up stating that investments are necessary to combat poverty.
During the presentation of the Economic Evaluation of Latin America and the Caribbean in 2005 by the executive secretary of the Economic Commission for Latin America and the Caribbean, Jose Machinea, he emphasized the need to increase investment to make GDP grow, and that the investment should be large enough to affect the employment market and cause a decrease in unemployment.
Without a doubt, investment is an important aspect of development, but the simplification of these ideas causes other factors to go unexamined, to be ignored, or to be thought of as conditions of the investment.
For example, the creation of productive jobs does require a macroeconomic environment that is favorable to new business, but investment for the sake of investment is insufficient to solve this type of problem.
Many examples can be found of enormous investments oriented toward sectors such as mining, where the employment generated is comparatively small. Also, positions like Machinea’s seem to reduce a complex problem such as competitiveness to a simple relationship with the flow of investments.
This vision maintains that an increase in investment is the way to increase competitiveness and for that to happen, certain measures must be put in place to attract capital flows, such as intellectual property norms, bank liberalization, etc. Even the measures that productive industries take seem to be conditioned on objectives related to capital flows.
With this reasoning, a good part of the national economic strategy is left as a supporting actor to the star role of capital flows. This idea is deeply rooted in Latin America. It has been put into practice by governments with conventional strategies such as Alvaro Uribe of Colombia, but also by the left, beginning with the Concertation Coalition in Chile and followed by the economic measures of the administration of Luiz Inácio Lula da Silva in Brazil.
Another recent example can be seen in Uruguay, where the leftist government of the Broad Front is adopting proactive measures to attract investment because, according to the Economic Secretary Danilo Astori, world experience advises to go out and look for investments because “there are many opportunities for investors in the world.” The example repeatedly presented as a success story is the investment to build a cellulose plant on the Uruguay River, assuming that this will set in motion “huge job growth.”
Precisely this case illustrates the grey area of this minimalist conceptual vision. On the Uruguayan side of the Uruguay River they are building the largest cellulose processing plant in the region, using investment by the Finnish company Botnia in excess of one billion dollars. This initiative is at the heart of a heated conflict between Uruguay and Argentina because Argentine citizen groups denounce the serious environmental impacts that this type of plant can have.
From the Uruguayan financial point of view, the arrival of that much money might seem like incredible good fortune. But the difficulties become evident when we see that a good portion of the announced investment is in reality machines and goods that are purchased in other industrialized countries, including Finland.
In this situation, a significant proportion of the investment will end up in other places and never reach Uruguay. The “net” investment that this country will receive is still a matter of debate – there is no independent state agency that can analyze the situation. It is estimated that of the US$ 1.2 billion of promised investment, about US$ 800 million will reach Uruguay.
In addition, there are side effects and externalities that should be weighed when considering any investment. It has not been analyzed how much should be subtracted from the Finnish investment for possible environmental impacts, the reduction in tourism in the area, and the disappearance of the local fishing industry.
Ultimately, the Uruguayan economic team defends these investments as job creation. The Botnia initiative has employed nearly 1,500 workers at the peak phase of construction, but after that stage ended no new employment has been generated. During its regular operation it is estimated that the plant will offer around 300 jobs.
It is a typical case of the enormous investment to export commodities that generates relatively little employment but severe social and environmental impacts. Similar cases include the investments in hydrocarbon extraction in Ecuador and Peru, and new mining projects in Peru and Argentina.
These and other examples demonstrate how the over-simplified reasoning that relates investment and exportation with economic growth to reduce poverty continue to be popular. But there is also much empiric evidence that obliges us to be a bit more careful.
An increase in exports has coincided with an increase in GDP per capita in only a few countries: Chile, Costa Rica, Colombia, El Salvador, and the Dominican Republic (using the average growth figures from 1985-2005 according to CEPAL, 2006).
In other countries such as Panama and Uruguay, the near opposite occurred – GDP increased while exports grew very little (rates below the continental average of 6% annually). This is particularly notable because many Latin American countries registered increased exports while their GDP per capita barely increased (below the continental average of 1.1% annually during those two decades). This situation runs contrary to conventional theory, yet Brazil, Argentina, and Mexico find themselves in that situation.
These cases offer additional lessons that also go against conventional positions. Brazil is not only a big exporter, but also the region’s largest recipient of direct foreign investment, and despite this, its economic growth rates have been quite modest.
Mexico is not only the major Latin American exporter, it also has the highest proportion of manufactured goods. Yet, these economies barely grew and continue with high levels of poverty (on the order of 38% in Brazil in 2003 and 37% in Mexico in 2004).
An increase in exports and a high level of investments are not guaranteed to generate more jobs. For example, Brazil is the Latin American country that attracts the most foreign investment, but increases between 1990 and 2003 were not always associated with a growth in jobs.
Furthermore, in 1990 the rate of unemployment was only 4.3% and foreign investment low (US$ 324 million). However in 2003, with much higher investment, US$ 9.894 billion, unemployment rose to 12.3%.
Coldly considering these Brazilian indicators, one might say that, on the contrary, greater investment leads to greater unemployment. This is an undoubtedly risky position, and just as it cannot be stated that more investment brings more unemployment, neither can it be claimed that more investment brings more employment. Clearly, relationships between investment and employment are much more complex.
By themselves, factors such as investment or exports cannot affect significant drops in the unemployment rate or the number of poor, though prominent economists have argued this for years.
Direct causal relationships do not exist among those factors, and always key is the role states play in managing those processes and applying mechanisms for redistribution of wealth and compensation. The insistence on reducing the development dynamic to economic growth is often presented as a marker of common sense, though it is actually a facile formula.
Finally, the idea of solving the problems of poverty and inequality by the “trickle down” of economic development would imply waiting for decades in order to achieve substantive improvements.
A Foundation for the New Economy study took the average economic development from different countries between 1980 and 2001 and, based on that increase, calculated the time required to reach the same level of distribution of wealth as in the European Union (Woodward and Simms, 2006).
Brazil, with an economic growth rate averaging 0.5%, will have to wait 304 years, Mexico 187 years, and Colombia 138 years. Chile, with an average rate of 3.3%, will need 38 years.
History of the Debate
The illusion of solving poverty through economic growth has been toned down and questioned on many occasions. Let’s review some examples. Among the most recent, Bernardo Kliksberg (2000) lists 10 fallacies about social problems in Latin America, and the third fallacy is the idea that economic growth by itself is sufficient to improve people’s quality of life. Kliksberg states that the economic growth is only a means, and, as such, cannot be changed into an end in itself.
Years before, in a classic article, Albert Hirschman showed that in the 1980s, when almost all economic aspects worsened, some countries still managed to improve several social indicators in health and education. For this reason Hirschman concludes that “economic progress” has an intermittent connection to what he calls “political progress.” The relationships between them are causal at times but can be in opposition, though complex and intricate interactions are more common (Hirschman, 1994).
Another cycle of questioning occurred even earlier, starting in the mid-1960s. At the time an even simpler idea prevailed, with economic growth as the only consideration. Those ideas began to be questioned, and an important number of analysts maintained that the problem for the countries in the South was not growth, but development, an opinion rarely heard these days.
A flourishing debate ensued about development, including discussions on social development, creation of jobs, composition and distribution of growth, and the need to incorporate instruments to create equity (see the excellent historical review by Arndt, 1987).
In a memorable lecture in 1969, Dudley Seers pointed out that it was foolish to confuse development with economic development, and economic development with economic growth. He added that it was also childish to assume that an increase in national income, if it occurs faster than population growth, sooner or later will lead to the solution of social and political problems.
Seers added that it seems economic growth not only fails to resolve political and social difficulties, but that certain types of growth can cause those problems (based on Arndt, 1987). Those hard questionings had an important impact in the academy and in institutions working on development topics. But, once again, those voices were ignored, and faith in economic growth reappeared during the years of the Washington Consensus.
Debate Should Focus on Development
Today, evidence mounts regarding the limitations inherent in confusing investments, exports, or economic growth with development. The passive position that assumes a “drip” or “trickle down” of growth toward the poorest sectors does not work in practice, besides being politically, socially, and morally questionable.
On the contrary, conventional strategies still being applied achieve economic growth only at the cost of maintaining or deepening inequalities (Sánchez Parga, 2005). Besides problems on the social front is the ecological incompatibility of the idea of continued economic growth.
This is because natural resources are finite, and ecosystems’ capability of environmental adaptation is also limited. Emphasis on a financial strategy does not by itself create instruments of support for marginalized groups or produce the means for redistribution of wealth. Those sorts of instruments should be created and put into practice by the State with active social participation.
The orthodox vision of economic growth gives little attention to these types of components and merely accepts their application as palliative measures for social impacts, when, in fact, development strategy should be structured according to social demands. In its most successful version, it attempts to take part of the “trickle down” from economic growth to finance compensatory and palliative measures in the social arena.
Therefore, it is necessary to extend the debate around exports, investments, and economic growth to a much wider set of themes. The problematic of development is much broader than simply promoting shipments of exports and activating capital flows. It is essential to refocus the discussion on problems of development, so as to not get stuck within economics or within a particular mind set in that discipline. It is time that the issue of development return to center stage in all its dimensions – economic, as well as social and environmental.
Arndt, H.W., 1987, Economic development, The history of an idea, Chicago, University Chicago Press.
CEPAL, 2006, Espacios iberoamericanos, CEPAL and Secretaría General Iberoamericana, Santiago of Chile.
Dollar, D. and A. Kraay, 2000, Growth is good for the poor, World Bank, Policy Research Department, Washington.
Hirschman, A.,OR, 1994, “The intermittent connection between political and economic progress,” Estudios Públicos, Santiago de Chile, 56: 5-14.
Kliksberg, B., 2000, “Ten fallacies about the social problems of Latin America,” Socialismo and Participacion, Lima, 89: 49-75.
Rodríguez, F. and D. Rodrik, 2000, “Trade policy and economic growth: a skeptic’s guide to the cross-national evidence,” NBER Macro Annual 2000 (B. Bernanke and K. Rogoff, comp.), Cambridge, National Bureau Economic Research.
Sánchez Parga, J., 2005, “Without (growing) inequality there is no economic growth,” Socialismo and Participation, Lima, 99: 11-27.
Eduardo Gudynas and Carolina Villalba Medero are analysts in the CLAES-D3E (Development, Economy, Ecology, Equity-Latin America) section at: http://www.globalización.org/. This article is partly based on a piece published in the Revista del Sur, No. 165, May 2006. Translated by David Alford and Ade Oyelabi.
Translated from: Crecimiento económico y desarrollo: una persistente confusión by David Alford and Ade Oyelabi.