Free Trade in South America: A Tale of Two Countries' Economic Growth (or Decline?).
Frederic Bastiat, French Economist, 1882, from the "Petition of the Candlemakers"
In the 19th century, Bastiat satirically portrayed France's protectionism of the country's domestic industries. This propensity toward protectionism was staunchly maintained by Frenchmen, she averred, even though foreign goods or services might be obtained at a reduced cost to the very people who vowed exclusion. But Bastiat claims that the French chose an isolationist position when the country could benefit from cheaper production "to encourage labor, to increase the demand for labor" (p. 388). In the satire, France's rationale for this standpoint is that producer and consumer are one and the same; therefore what most benefited the producer would be of most benefit to the consumer.
In depicting the irony he sees in this defense of protectionism, Bastiat uses France's candlemaking industry as the "victim" and the sun as the foreign interloper who is undermining the candlemakers by offering free sunlight. In this treatise, the French economist parodies the contradiction in wanting to protect domestic industry from foreign competition, while, as consumers, wanting to have an abundance of less expensive goods and services:
And does it not argue the greatest inconsistency to check as you do the importation of coal, iron, cheese, and goods of foreign manufacture... while at the same time you freely admit, and without limitation, the light of the sun...? (p. 389)
Does history repeat itself? Or, do we conscientiously take the lessons from the past and apply them to our current situations to avoid the costly mistakes of yore. If this were true in the case of modem trade practices then certainly countries would eschew protectionist doctrines. The parochial petition of the candlemakers would not be echoed anew.
But, unfortunately, history does have a habit of repeating itself. Even in an era of unparalleled trade, the vestiges of the candlemakers are still evident. Their desire to create a healthy economy based on continuous growth and equilibrium in demand and supply -- with domestic producers only -- is still strong over a century later.
The globalization of trade continues to accelerate as the new millennium approaches. Follow-the-leader strategies are being widely employed as an increasing number of countries seek ways to hone their competitive skills in the international marketplace and develop strong economic infrastructures within their domestic markets (Fites, 1997; Kennedy, 1996). In most situations, the strategy to emulate has been one predicted upon a free market philosophy (Reinicke, 1997; Thurow, 1992). One common result of this trading frenzy is the development of regional trade pacts between neighboring countries (Scholte, 1997; Ohmae, 1995). In some cases, these regional pacts will set the stage for the concentric enhancement of membership into regional trading blocs (Frankel, 1997).
Countries included in trade accords typically have five dominant characteristics that will permit the free trade principles of comparative advantage and demand/supply to work relatively unfettered (Devereux, 1997; Frankel, 1997; Kennedy & Koehn, 1996; Hodgetts & Luthans, 1994; Naisbitt, 1994). First, businesses are largely profit-making entities owned and managed by the private sector, as opposed to being state-owned or managed. Second, these businesses have a propensity to seek opportunities external to their own domestic markets, as opposed to being confined to national boundaries. Third, direct foreign investment is encouraged by government, as opposed to protectionist policies to limit or exclude foreign investors from domestic markets (Crow, 1992). Fourth, tariff and nontarrif barriers to import/export are usually under review for production as opposed to increases that could reduce trading activities. Finally, underpinning countrywide trading activities, the state extols an open-door philosophy as, opposed to publicly lauding isolationist doctrines.
Argentina and Colombia -- Past and Present
But what about the sector in these countries? Is there consensus with the public sector's stance? The answer is often negative. In two specific cases, Argentina and Colombia, the grim faces of many average citizens are in stark contrast to the beaming countenances of national political figures. The reason for this incongruence is not difficult to discern when one discusses economic conditions with the general populace. Most citizens are very articulate about the short-term realities of implementing free trade practices, and, for more, these realities translate into hardships to be endured on a daily basis. This dissatisfaction has been true in Argentina, even through Herring (1972) noted that Argentines have long been disillusioned with public policy. But an understanding of these hardships can best be gained through a historical analysis of the situation from the perspectives of both the public and the private sectors.
* Public Sector Economic Policies.
In 1976, the Argentine military took a major step away from isolationism and toward free trade practices when it began a divestiture of once-private firms that the state had acquired through receivership operations (Glade, 1991). But it was not until President Saul Menem's administration that the basic foundations for a more effective process of privatization were laid (Fraga, 1991). The Enabling Law of 1989 was the first of several proposals affecting privatization to be enacted by Congress (Fraga, 1991).
Simultaneous with privatization, the policy agenda in most Latin American countries, such as Argentina and Colombia, included liberal direct foreign investment (DFI) legislation (Crow, 1992). The two economic policies, privatization and DFI. are intended to work with one another as the key components of the shift toward open door trading (Ramanurti, 1992). In many cases, this interrelatedness means that foreign private investors are targeted for buying publicly-owned businesses (Antal-Mokos, 1997). Freer (1997) concurs by saying that often the primary goal of DFI in Latin America is to attract private global funds.
A third attribute of the new economic policies pervasive in Latin America is the strong trend toward regional trading blocs or common markets. For Argentina, this translates to a membership in the Mercosur, while Colombia is a member of the Andean Pact.
The Mercosur. Formed in 1991, Mercosur is comprised of four full members -- Argentina, Paraquay, Uruguay, and Brazil (Hicks, 1995). In 1996, Chile became an associate member and, more recently, Canada has sought an affiliation similar to that held by Chile (Lascano, 1997; Gon-cavales, 1996). Bolivia, a member of the Andean Pact, is also seeking membership in the Mercosur (Thomson, 1997).
The Andean Pact. Columbia, as a member of the Andean Pact, joins Bolivia, Ecuador, Peru, and Venezuela; Chile, an earlier member, withdrew over policy disagreements. This trade accord was initiated in 1969 by the Cartegena Agreement to accelerate development of the member states through economic and social integration. In recent years, the Pact has signed cooperative agreements with the European Union, the United States, Brazil, Argentina, and Panama. The most recent summit of the Andean Pact, held in Peru in 1996, outlined a series of reforms designed to speed up the Andean integration process. To symbolize these revisions, the group's name was changed to the Andean Community.
* Open-Door Trade Policy
Privatization of Publicly-Owned Businesses. In Argentina, a wide variety of public enterprises  have been candidates for privatization over the last few years. Fraga (1991) believes that privatization in Argentina was initially a product of circumstances, not of adherence to a plan or ideological position (p. 96). Therefore, the Argentine government's movement toward privatization were not based on arguments of efficiency, quality of service, or reallocation of productive resources, but on fiscal necessity (Fraga, 1991, 1996). Since 1989, however, public policy has begun to promote privatization as the most efficient way to redistribute resources because it leads to competition, the lifeblood of free trade.
In Colombia, privatization mainly targets the foreign investor. Clemente del Valle, Colombia's Director of Public Credit, says "our privatization program is geared toward the strategic foreign investor...." That contrasts with many other foreign investment programs that are aimed more toward domestic investors (Thomson, 1997). As a result of Colombia's policy, according to Stanway (1996), worldwide private institutions are putting millions into the country.
Direct Foreign Investment. Colombia, which has stated its intent to attract foreign capital, is not simply offering its assets to foreign buyers. Instead, the country is asking investors to come in and create infrastructure. "This is being done through the sale of concessions where foreign developers will have the right to operate part of the country's infrastructure over a term -- usually 20 years -- before it is returned to the state" (Colombia's concept sells, 1996, 154). This is the predominant policy, even though in 1997 the government sold off its remaining shares of one of the country's most valuable public assets, the Cerro Matoso nickel mine (Thomson, 1997).
On the other hand, according to Fraga (1991) direct foreign investment in Argentina has lacked the clear focus of Colombia's policy. Also, he points to a certain timidity in earlier years to sell off public assets. These two factors -- lack of clarity and public sector hesitancy -- coupled with the resistance from labor unions and businesses toward foreign investors buying publicly-owned businesses have caused the Argentine program to stumble and often stall since its inception.
* Private Sector Perceptions of Public Policies
In Argentina and Colombia, the typical private sector perceptions of the outcomes of open-door trading differ significantly from that of the public sector. This is especially true concerning privatization and direct foreign investment policies. When discussing outcomes of these with the average citizen of either country, conversations usually become quite heated. The outcomes most often attributed to privatization and foreign investment, and the ones likely to elicit intense diatribes, are high unemployment rates, unfair competition from foreign producers, and excessive interest rates. The irony of this latter factor is particularly interesting because as interest rates increase, new investment is discouraged (Bowden, 1985).
High Unemployment Rates. According to Fraga (1991), Argentina has confronted inflation with erratic anti-inflationary policies over a number of years. However, government efforts to combat the aftermaths of inflationary periods -- unemployment and recession -- have, according to some only worsened the situation (Crow, 1992). Tactical policies to curb unemployment have included measures such as indiscriminate subsidies to sectors characterized by doubtful productivity, exaggerated and unjustified protectionism, and the purchase of expensive and poor-quality goods (Fraga 1991). As unemployment rates have spiraled upward, opposition to the public policies, such as privatization, has increased.
Encroachment on Domestic Resources from Foreign Competitors. Akin to the 19th century candlemakers in France, many in the private sector in Argentina and Colombia are concerned with what they view as encroachment on their domestic resources by foreign competitors. In Mendoza, Argentina, in 1997, among a large gathering that included journalists, private business owners, managers, and employees, local public officials, students, and college professors, one Argentine, discussed this point of view. His remarks were translated as follows:
Argentine spokesperson: We don't want foreigners coming in and taking away our resources. Right now there is a large car manufacturer that wants to come in and buy land and build a manufacturing plant. This won't be good for ... It strips away ownership from Argentina and gives back nothing in return.
Question: Would not the foreign investor hire local citizens to work in the plant, thereby helping to ameliorate the local unemployment crisis?
Argentine response: (hesitantly) Uh, yes, I suppose that is true.
Question: Would not the foreign investor most likely buy supplies of key inputs from local or regional sources and, thus, directly infuse capital into your country?
Argentine response: Maybe... yes.
Question: Since demand greatly exceeds supply in this country, would not an increased supply of autos serve to eventually drive down the price? [In Argentina during this particular period, limited supplies of cars were being sold at premium prices.]
Argentine response: (reluctantly) There may be some truth in all that you say. (emphatically now). But if we were left on our own, without [foreign] intervention, we could achieve the same success, especially if we had better public fiscal policies to lower interest rates and unemployment...
Competition in the Global Marketplace. A third source of concern for the private sector in Argentina and Colombia is competition in the global marketplace. A long history of government protection, especially under Peron in Argentina, has not prepared businesses with the necessary strategies for global competitiveness. In fact, Glade (1991) states that in Argentina "... much of the private sector appears historically wedded to an intricate scheme of rent-seeking behavior in which business profits derive, not from innovation and production efficiency, but from such things as the manipulation of returns on capital by government regulation, favoritism in government spending, and preferential tax treatment" (p. 8).
High Interest Rates. The private sectors in Argentina and Colombia also decry interest rates, which are usually exceptionally high. In Argentina, for example, high inflation has resulted in periods of high rates alternating "with periods of sudden dissolution of debts or 'stop-and-go' monetary policy," according to Fraga (1991, 89). As a result, producers face severe interest rate problems; stagnation prevails, and business opportunities grow fewer and more uncertain.
Free Versus Protected Market Forces
A recent newspaper editorial by Harte (1998) stated: "Consumers long accustomed to price controls and subsidized supplies don't customarily welcome free markets and their reliance on the inexorable laws of supply and demand" (p. A13). To illustrate this point, he uses the example of tortilla prices in Mexico:
For the great mass of Mexicans, the most important news last week was that tortilla prices would go up 15 percent. Without getting into the details of corn milling and tortilla manufacture, the situation essentially is that the Mexican government is moving away from subsidizing the tortilla industry toward free markets. As this 'neoliberal' policy is implemented, consumers will be paying more of the cost of the basic item of the Mexican diet, and the government will be paying less (Harte, 1998, A13).
The tortilla metaphor effectively explains the dichotomy between public policies and private sector sentiment in Argentina and Colombia; i.e., as the public sector has gravitated toward free market policies in these Latin American countries as an answer to domestic economic problems, the countries' citizens have increasingly viewed these moves as the cause rather than as the solution. Just as the candlemakers, they, too, view open markets as a threat to the producer-consumer, not the lifeline.
* Public sector: The Rationale for Advocating Free-Market Policies.
In Argentina and Colombia, the countries' leaders are adopting free market policies primarily as solutions to internal economic problems. According to Ramamurti (1992), there is a great deal of international pressure on governments to privatize, primarily from the World Bank, the International Monetary Fund (IMF), and the United States Agency for International Development.
One primary tenet of the free market approach is that over the long run prosperity and economic stability will result. Open doors will create more export-import opportunities and foreign investors will come in, bringing capital. Privatizing protected, state-owned business will be pivotal to the open markets, because private business will become more efficient and offer higher quality products and services as they continually strive to be more competitive in the global market. As private business competes more successfully its financial strength, grows since the two correlate directly. In this process, more citizens will have employment opportunities, and more inflows of capital in the form of taxes will line the state's coffers.
When Carlos Saul Menem was elected to the presidency in May 1989, Argentina was in a state of collapse. Foreign debt stood at $70 billion, the country was already $2 billion in arrears on interest payments on this debt, and the national treasury was empty (Crow, 1992). State-owned businesses were a drain on the domestic economy because they were largely inefficient with surpluses of employees (Pinerea, 1995). Menem immediately revived the process of privatizing the nation's industries and implementing other free trade strategies of liberalizing direct foreign investment and forging trade accords. As a result, Argentine companies began to retool plants and slash costs in an effort to become more globally competitive (Baker & Weiner, 1992).
* Private sector: The Rationale for Opposing Free-Market Policies
Crow (1992) stated that almost as soon as President Menem began to implement his free trade turnaround strategies Argentine citizens began to long for the days of military rule when the generals, by fiat, could set productive quotas, control prices, curb inflation, maintain order, and provide a favorable atmosphere in which businesses might operate. Much to the public's dismay, a surge in unemployment resulted from the public sector's free trade "medicine" (Collins & Lear, 1995). The situation in Colombia has mirrored that of Argentina. The citizens of the two countries are very concerned with the "here and now." It is often difficult for them to think about the possible long-term benefits from free market economics when the short-run realities, as one Argentine economist lamented to the author, are so painful (Neuquen, Argentina, August 1997).
Hirst (1997) theorizes that those at the bottom of the income distribution scale often experience few benefits or a worsening of their condition [from free trade], leading to widespread dissatisfaction and calls for the localization of production. Glade (1995) believes that for Latin America and a business environment with a tradition of rent-seeking behavior, the removal of public assets to private ownership brings no automatic guarantee of improved performance and innovation.
When one takes a long-run view of possible free-trade outcomes, it is easy to support an optimistic view of the future. Such as the case when hypothesizing about the future of Argentina and Colombia and the paths upon which these countries have embarked. But the situation changes dramatically if one stands among many of the citizens of these two countries and listens to their often emotional outbursts condemning this same pathway. Analogous to the 19th century Frenchmen who sought to bar France's door to foreign competition, Argentines and Colombians, seek to protect a familiar way of life. As a consequence of this prevailing attitude among the citizens, it is understandable that the public sector may be changing the economic course it has plotted to one that can help to insulate its members from free market competition.
As trade increases among member nations, the trading bloc seems to be taking on the characteristics of a domestic market protected, insulated in fact, from threats of foreign competition. Thus, Frankel (1997) addresses the question of whether regional trading relationships, such as those in the Mercosur and the Andean Pact, will become building blocks for further global liberalization or whether they are a new breed of preferential trade arrangements that will concentrate trade regionally. He concludes that a move to an absolute liberalization within blocks could push a trading system into the "supernatural zone" of an excessive degree of regionalism. The Future -- Economic Growth or Decline? In envisioning the future of Argentina and Colombia, one can reasonably assume, given the current climate among the citizens in these two countries, that they will be propelled more and more toward regionalism and less and less toward global free trade. Does this foretell economic growth or decline for the two countries ? Based on the free-trade stance espoused by Bastiat (1882) in the "Petition of the Candlemakers," a reversal toward protectionism would not bode well for either country.
Apparently, the "candlemakers" of today still hope to exclude the sun even though they and their countrymen enjoy the benefits of its light and warmth. Because they, too, comparable to their counterparts of yore, wish "to secure the national market to national labor"...
Dr. Stanford's teaching and research have been in policy, strategic management, and international management. In 1995, she published a book based on earlier research in the maquiladora industry that bridged the fields of strategic and international management. Invitations to lecture internationally included two series in South America.
(1.) The definition of public enterprise in Argentina is one in which the government holds majority or minority ownership, or those in which the government exerts control over decision making.
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|Author:||Stanford, Jane H.|
|Publication:||SAM Advanced Management Journal|
|Date:||Jan 1, 2000|
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