Borderless Borders

3. Trading Places: U.S. Latinos and Trade Liberalization in the Americas

eltttpter 3 Trading Places: U.S. Latinos and Trade Liberalization in the Americas M.anuel Pasto1j Jr., and Carol "Wise Just as the 1980s stand out as the decade of the debt CrISIS ill Latin America, the 1990s have become the decade of free trade. After a number of failed attempts at trade liberalization during the 1970s, many states in the region began, by the second half of the 1980s, to make dramatic progress in reducing tariffs and eliminating quantitative trade restrictions .1 While the strongest evidence of this new open approach to hemispheric integration was reflected in Mexico's 1994 entry into a North American Free Trade Agreement (NAFTA) with the United States and Canada, the trends also include the commitment to develop hemispheric free trade growing out of the 1994 Miami Summit of the Americas and the ongoing consolidation of subregional trade pacts like South America's MERCOSUR (see Table 3.1). Of course, the movement toward free trade has not been without delays. Mexico's 1994 currency crisis took some of the shine off the notion of trade liberalization. The "tequila effect" meant that foreign investors' worries about the Mexican experience negatively influenced flows to other countries such as Argentina and Brazil, and some observers and policy-makers queried the value of open (and volatile) capital accounts . Meanwhile, the striking contradiction between the U.S. encouragement of Latin America's liberalizations of goods and capital and the increasingly restrictive U.S. attitude toward immigration have triggered anger and frustration among Latin Americans and U.S. Latinos alike. However, while U.S. Latinos and Latin Arnericans may share a concern about that contradiction and a general agreement on the need for a less restrictive immigration policy, the rationales for their respective positions differ. Latin American leaders and policy-makers, for example, seem to hope to maintain a location for labor export (in the case of Mexico) or a base for worker remittances (in the case of El Salvador) while U.S. Latino leaders (political and otherwise) are more worried about the racial discrimination likely to spill over from enhanced enforcement of immigration regulations. Given this divergence, it is perhaps unsurprising that Copyrighted Material 35 Table 3.1. Recent Commercial Policy Reform in Latin America Country Chile () .g S. Mexico '§. CDQ. ~ CD :::l. ~ Argentina Reform Period 1975-79 1985-88 1983-85 (mild) 1985-88 (strong) 1994-Accession to NAFTA 1988-92 1995 MERCOSUR b implemented Prereform Policies Multiple exchange rate system; QRs a and prohibitions on imports; average tariff 94%, maxlmlull tariff 220%; prior import deposits In 1982, QRs covering 100% of tariff positions and 92% of domestic production; average tariff 27%; official reference prices covering 19% of domestic production; export controls covering 60% of total exports Dual exchange rate; QR coverage in manufacturing more than 30%; ma."'cimwll tariff over 100%; additional specific duties and quasitariffs ; import prohibitions, advance notice requirements, etc. Accomplishntents of Trade Riform Unified exchange rate; QRs removed; uniform tariff of 10% (excluding automobiles), increased to 35% in response to 1982 crisis but since reduced to a uniform rate of 11%; prior import deposits and most tariff exonerations eliminated QR production coverage 20% in 1990; production-weighted average tariff 12.5%; maxlmlU11 tariff 20%, with most items 10-20%; most export controls removed; official reference prices removed; GATT joined in 1986; further liberalization of trade under NAFTA wid1 10-15 year timeline Unified exchange rate; QR coverage in manufactW'ing reduced to approximately 5%; progressive reduction in levels and dispersion of tariffs, wid1 3 rates and 22% ma.ximW11; 12.2% production-weighted average; no specific duties, but some quasi-tariffs remain; buy-Argentina and sectoral regimes still in place; fW'd1er tariff and nontariff reductions under MERCOSUR 255.162] Project MUSE (2024-04-26 12:01 GMT) Country Colombi,l () ~eru ~ <0' ~ CD Q. s: ~razil§: Rijorl/l Po'iod 1984-86 1990-94 After 1990 After 1990 1995 MERCOSUR implemented P1'C1401'1/I Policies QRs COVLTill~ 61 % of t,lritY l'0si tiolls 'lIlll 82% uf domestic 11l,1Ilubctllrillg; tariff r,mgc 0200 %, plus 18% surch,u'gc; ,wer,lgc t,lriff including surdurge 45% Multiple exchange rate system providing high protection to nonessential imports; widespread import licensing; maximum tariff 155%, average 67% Foreign exchange licensing and negative import lists resulting in discretionary control of virtually aU importS; in 1988, l1uximum tariff 80% Accomplislmumts ofTt-ade Reform By end of 1990, QRs virnlally eliminated, now covering 3% of t,uiff positions; maximulll tariff 100% (exduding lu;..:ury automobiles at 300%); t.lriff sl\rclurge 13%; ,\linage tariff including surdl.lrge 33~5%. T'lrgcts t(~)r 1994: most tariffs 515 %, with automobiles at 100%; tariff surcharge 8%; average t,\I'iff including surcharge 12% QRs eliminated overnight; tariffs reduced to two levels: 15% and 25% Foreign exchange licensing virtuaUv eliminated; no negative import lists. Tariff reform initiated in February 1991, setting maximum tariff target of 40% for end of 1994; tariff reduction accelerated to 14% in 1993; further tariff ,U1d nontariff reductions under MERCOSUR .1 Quantitative Restrictions. b MERCOSU R, or the Southern Cone Common Market, canle into effect January 1, 1995, when its tom member countries (Argentina, Brazil, Paraguay, and Uruguay) ended tariffs on most of dleir exports to each other and set a Common External T,lriff on imports coming into this free trade area. Sources: Kirsten Hallberg and Wendy Takacs "Trade Retorm in Colombia: 1990-1994," in AlYin Cohen Jnd Frank Gunter, eds., The Colombia~l Economv: Issues of Trade and DeJlelop111f11t (Boulder, Colo.: Westview Press, 1992), pp. 286-87; )lldidl De,1I1, Seema Des,H, and James Reidel ''Trade Policy Retorm in Developing Countries Since 1985: A Review of Evidence," World B,mk Discus\lon Papers no. 267 (Washington, D.C.: World Bank, 1994). 38 Trading Places ffiffiffiffiffirnrnrnrnffiffiffiffirnrnrnrnrnffiffirnffiffirnrnffiffiffiffiffirnffirnrnffirnrnffiffiffirnffirnrnrnffirn attitudes regarding trade policy and the ongoing hemispheric integration of goods and capital markets differ even more. Once again the strongest evidence in this area involves NAFTA. In the national debate prior to U.S. adoption of the treaty, different Latino interest groups took quite different positions. In the final vote, only nine of the seventeen Latino members of Congress supported the treaty. Subethnicity accounted for some of the difference-for example, all three Cuban-American congresspeople cast negative ballots because of concerns about Mexican-Cuban relations - but support was not unanimous even among Mexican-American congresspeople, and came only after significant arm-twisting and deal-making with the Clinton administration.2 This surprised many Latin American leaders and technocrats, who had expected a groundswell of Mexican-American support. After all, it was suggested, U.S. Jews have generally induced legislators to be supportive of Israel; why should there be such sharp disagreements within the Mexican-American community freer trade with the "home" country? Although this question may make sense from a Latin American perspective , it reveals a failure to understand the complex nature of the u.s. Latino communities.3 Many Latinos are, or are the descendants of, people who left "home" because of political disagreements or limited economic opportunities, often attributed to the failure of governments to generate employment and growth; supporting the economic policy of Mexico or other Latin American cOlUltries requires them to suspend a historic distrust. Moreover, many U.S. Latinos are working in the very secondary labor markets most W,ely to be hit by low-wage competition from the South; as workers, they have no immediate interest in more open markets.4 Of course, Latino businesses and professionals may be especially well placed to gain from the expansion of hemispheric trade because they may have a comparative advantage at managing the interchange between Latin American and U.S. firms. However, the occupational structure of U.S. Latinos, particularly of Mexican-Americans, is heavily skewed toward working-class and secondary sector jobs. Given this class composition, particularly the thin layer of professionals and managers, a unified Latino position supporting freer trade in the Americas is a remote possibility. Many of these tensions were revealed in the NAFTA debate. A variety of early research efforts noted that while the United States. might experience aggregate gains from further integration with Mexico, an10ng the likely losers were Latino workers in the United States.s Latino trade unionists and community groups were deeply concerned and often expressed opposition to the coming trade treaty.6 Meanwhile, business groups were early and firm supporters for the reasons noted above; in the words oOose Nino, then president of the U.S. Hispanic Chamber of Copyrighted Material Manuel Pastor, Jr., and Carol WiJ£ 39 ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi Commerce;' Hispanic entrepreneurs are a natural bridge for the economic integration of North America."? Concerned about the growing disunity, some Latino-based groups spearheaded an attempt to discuss the NAFTA issue in various communities and arrive at a single Latino position. While this "Latino consensus" was not complete-as reflected in the continuing debate among Latinos and the \'oting pattern of Latino members of Congress-many in the Latino poliC\' community were induced to support the treaty when the Clinton administration agreed to create a North American Development Bank (NADBank), guaranteed Trade Adjustment Assistance, and offered a series of side agreements to safeguard the interests of displaced Latino (and other) \\'orkers 8 The attention to the interests of Latino workers in this key policy episode suggests what it will take to garner Latino support for further hemispheric integration, a point to which we return in the Conclusion. In this chapter, we examine the movement to free trade in the Americas and the implications for U.S. Latinos. The focus is on the Latin American side, in part to fill the information gap that has so often plagued this debate. While we begin by examining the powerful trends that have been driving trade liberalization in Latin America, we suggest that, even within Latin America, challenges are emerging that could be properly addressed through some rethinking of trade theory and policy. Such new policy could include: (1) a departure from the recent tendency in Latin America to link macroeconomic stabilization with both trade liberalization and fixed exchange rates; (2) the design of effective industrial policy to facilitate the adjustment of small firms to open trade; (3) the opening of political and policy-making processes; and (4) the construction of social compensation packages to buffer free trade's "losers" as well as institutional reforms to promote equitable development. We argue that such a reworking of trade and stabilization policy would not only benefit Latin Americans; by propping up wages and creating more democratic and more supportable governments, it would also lead U.S. Latinos to be more favorably disposed toward increased trade openness, resolving the apparent divergence of class and other interests noted above. The Origins ofFree Trade in the Western Hemisphere While economists have long extolled the virtues of free trade-sometin1es with less than compelling evidence9 - a nation does not relax trade restrictions because of a sudden awareness of potential economic and social welfare gains. Rather, external pressures and domestic political dynamics conspire to loosen the grip of one group over trade policy and prepare ~he way for the entrance of another set of interests and assOCIated policy Copyrighted Material 255.162] Project MUSE (2024-04-26 12:01 GMT) 40 Trading Places rnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrn makers. Below, we examine the kinds of international and domestic influences that fostered a more open trade regime in Latin America. External Influences Several international facrors stand out as necessary, although not entirely sufficient, to explain Latin America's receptivity to a liberal commercial policy. The first is the impact of the 1982 debt crisis. One might suppose that a region facing Latin America's situation in 1983-declining terms of trade, developed country protectionism, an abrupt drop in external capital flows, and severe macroeconomic disarray-would be unlikely to proceed with the reduction of tariff and nontariff barriers. On the other hand, the drastic foreign exchange crw1Ch gave international creditors and multilateral agencies more leverage in promoting an open trade regime, a longterm goal. Moreover, the sheer force of the 1982 debt shocks shattered economic and political models in most of Latin America. The resulting destabilization led to increasing inflation, and it proved difficult to balance the need to contain inflation and the need to generate foreign exchange. The problem was that most of Latin America sought to promote exports through a strategy of rapid currency depreciation- a strategy that fueled domestic inflation as rising prices from intermediate imports quickly permeated Latin America's productive structure. In frustration, Argentina, Peru, and Brazil launched a series of heterodox experiments in the mid1980s , geared toward reducing inflation via wage and price controls. Unfortunately, each of these alternative programs backfired, as all three governments succumbed to fiscal laxity and thus failed to rein in excess demand. Having witnessed these earlier failures, Mexican policy-makers devised their own version of heterodm.)' in 1987, combining an orthodox commitment to fiscal austerity and tight monetary control with a more open trade reginK The latter was also coupled with a targeted exchange rate, which, in effecr, constituted a second level of price controls: domestic producers were not able to set prices above competitive foreign substitutes that were now entering the cow1try more freely. Mexico's success in reducing inflation from nearly 160 percent in 1987 to below 10 percent in 1994 prompted other countries (such as Argentina, Peru, and EI Salvador ) to follow suit. Thus, the twists and turns of macroeconomic management in the region eventually led to the coupling of macroeconomic stabilization and trade liberalization: the identification of free u'ade with reduced inflation widened the circle of beneficiaries from liberalization and gave it a new basis for political support. A second international-level factor in Latin America's recent ecoCopyrighted Material Manuel Pl1st01~ Jr.} and Carol Wise 41 ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi nomic opening was the increasing import,mce of intrai..l1dustry trade. By 1990, intraindustry o'ade, or the mutual excha.nge of goods across borders in a certain product category, accounted for as much as 50 percent of manufacturing trade activit\' for Argentina, Brazil, and Mexico.1o Since open borders reduce the costs of imported inpurs while trade protection complicates cross-border production, those Latin American manufacturing interests that are tied into this trade network (which often amounts to multinational intrafum trade) tended to constitute a domestic force favoring trade liberalization.II A third factor propelling free trade was the end of the Cold War. On one hand, near-universal rejection of state-centered economic models led Latin America, which had its own set of disappointing experiences with state intervention, to accept more readily the market policies being heavily prescribed in both the East and the West. Perhaps more importantly, the post-Cold War era prompted U.S. policy-makers to refocus on international economic as vvell as military matters. In doing so, Washington increasingly recognized that its own trade balance had been harmed by the formidable competition emanating from the European Union in the West and the Asian regional economic bloc to the East. One way to respond to the growth of regional bloc competition was to law1Ch a regional cou.nterinitiative. Thus, the United States announced "Enterprise for tl1e Americas" in Tu.ne 1990, promising debt reduction and a small private invesnnent fund while extending an open invitation for Latin American cou.ntries to sign bilateral Free Trade Agreements (FTAs) with the United States. From the standpoint of U.S. policy-makers , the initiative fell on unexpectedly receptive ears, as many adjustmentweary Latin American states rushed to sign such agreements.12 Because of its geographical proximity and close economic ties with the United States, Mexico was predictably the first in line, With tl1e lau.nching of tl1e NAFTA negotiations in 1991, what had been absolutely w1thi.nkable in 1982Mexico 's entrance into a highly competitive and legally binding free trade agreement with the United States a.nd Canada-became a political reality by 1994. In sum, the regional shift to free trade emerged from the scramble to find a new macroeconomic adjustment strategy to cow1ter the lasting shocks of the debt crisis. When export promotion via exchange rate depreciation worsened the domestic problem of inflation, countries sought to solve their external and internal problems by linking macroeconomic stabilization with trade liberalization. The rise of intraindustry tradewith its attendant creation of domestic interests who could only benefit from lower tariffs-and the U.S. attempt to respond to the "regionalization " of the world economy via the consolidation of its own hemispheric bloc also provided "external" impulses for trade liberalization. Copyrighted Material 42 Trading Places rnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrn Internal Influences Those external influences do not explain fully how a domestic alliance was crafted to reject Latin America's protectionist past. One important factor here was simply the decline in the strength of older import-substitution industrialization (lSI) producers, whose industries were battered by the prolonged recession that followed the debt crisis; another was the aforementioned strategy of linking import competition with inflation reduction , an approach that helped enhance the positive consequences, and image, of free tradeY While free trade worked its way into policy circles throughout the region, at least two broad patterns of institutional policy-making change had to occur in order to cement a new political coalition. The first, characteristic of Chile, Colombia, and Mexico, involved a wide range of institutional innovations and new business-state alliances. Institutional innovations included the establishment of an autonomous central bank in various cow1tries; in Mexico, moreover, trade policy was extracted from its traditional base in the Ministry of Industry and dispersed to other state agencies that were much less susceptible to interest group pressures.14 A5 for business-state alliances, all three cow1tries have created links between well-trained technocrats and the "commanding heights" of the business community. Interestingly, all three have also developed compensatory programs to quell potential protest and help facilitate the adjustment to an open economy. In a second group of countries-Argentina, Brazil, and Peru-coalitional strategies have been less prominent; instead, the reform effort has been pushed from above, often with a certain ideological fervor, and executive politics and presidential decrees have assumed the role played by institutional overhaul in the first group of countries. The result has been free trade without a safety net: officials within the main trade and finance ministries have played second fiddle to elite, executive-level decision-makers , state-business relations remain lmderdeveloped, and these countries lag far behind in terms of devising credible compensatory policies for the hardest-hit sectors and income groups. As a result, the free trade process in Argentina and Peru has a thin social and institutional base, while Brazil's commitment to commercial opening remains lukewarm. Although we include Chile in our first group of institutional innovarors , it is important to note that Chile's open trade policy actually emerges from a much longer sequence of external economic shocks interacting with intense domestic and political conflict that produced nearly twenty years of authoritarian rule. A decade (1973-82) of groping in the dark with market-oriented policies driven largely by ideology and political force was followed by a second set of external shocks in the early 1980s, Copyrighted Material 255.162] Project MUSE (2024-04-26 12:01 GMT) Manuel Pastor,jr., and Caval Wise 43 ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi which forced public authorities and private economic actors to regroup. A number of institutional reforms and a more flexible set of policy approaches to correct for previous macroeconomic errors resulted. By the early 1990s, a sophisticated state-business alliance was consolidated, along with a shared commitment to the more successful macro policy management of the late 1980s.15 While this torturous path might offer some hope for our second group of reformers-given enough tin1e, policy-makers can eventually hit upon the right set of policies and then build the necessary political coalitions - it is important to stress that the authoritarian nature of the Chilean reform process is both undesirable and unacceptable in the current political atmosphere. Indeed, both groups of reformers have unfortunately tended to rely on a policy-making approach based on technocratic expertise and bureaucratic insulation, the key difference being whether the insulation has been institutionalized and used to build new alliances with capital. While this less-than-democratic approach may have been functional for the initial phases of reform, it likely has negative implications for the sustainability of a new policy regime. The Challenges to Western Hemispheric Free Trade The Latin American embrace of free trade has gratified international financial institutions and many outside observers. Yet both the path ahead and the sustainability of liberalization face a series of emerging challenges. Following the format used above, we explore those issues at first the international and then the domestic level; we then briefly consider what sorts of policies and politics might best address these difficulties. External Challenges The negotiation and eventual approval of NAFTA both delighted and worried the rest of Latin America. Many leaders-eager for heightened access to the large U.S. market and anxious to obtain the "seal of approval " NAFTA entry symbolizes in order to attract greater capital flows-were relieved that some mechanism for accession to NAFTA had been included in the final agreement. On the negative side, many observers feared that U.S. congressional and public resistance-evident in the NAFTA debate and reflected in the discord over trade policy even within the U.S. Latino community-would render accession of further Latin American partners a long and tedious endeavor.16 The Clinton administration announced after the signing ofNAFTA in 1993 that it would host a December 1994 Summit of the Americas in Copyrighted Material 44 Trading Places rnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrn Miami to discuss the broader hemispheric agenda, including trade and investment, the environment, and other issues. Worried about securing passage of the implementing legislation for the Uruguay Round of GATT, the Clinton team publicly emphasized other elements of the Miami agenda (effective governance and sustainable development) to avoid inflaming the anti-NAFTA forces that had lost in Congress. Latin American policy-makers most interested in the trade agenda groused; to maintain good relations and enthusiasm for the summit, U.S. policy-makers made the interim gesture of offering bilateral accords on investment and intellectual property rightsY In the meantime, Latin American governments pushed ahead on subregional free trade agreements such as MERCOSUR and the Andean Pact (a customs union made up of Bolivia, Ecuador, Colombia, Peru, and Venezuela).18 Chile, viewed as the next likely entrant into NAFTA, moved in mid-1994 to negotiate an affiliation with the MERCOSUR bloc as a whole and signed a number of bilateral free trade accords in the region. Colombia, initially considered another probable candidate for NAFTA, also pursued a "G-3" arrangement (with Mexico and Venezuela)19 and a series of other bilateral deals (with Chile, for example). Meanwhile, Brazil indicated that it did not want to become "an appendix of NAFTA" and instead lobbied to combine MERCOSUR and the Andean Pact into a powerful South American Free Trade Area (SAFTA) over the next ten years-a group that could well compete with NAFTA for intraregional market access.20 Fearful that it might be dropping the ball on hemispheric free trade and worried about the dynamics dut could emerge if a patchwork of subregional pacts were to evolve with no overall coordination, the United States eventually engaged in a serious discussion of free trade at the Miami SLUnmit. The results were a long-term commitment to complete a Western hemispheric free u-ade area by 2005 and an agreement to begin in1ll1ediate negotiations for Chile's entry into NAFTA. Yet U.S. policy-makers remain vague about whether hemispheric trade should be extended tlu'ough direct accession of a given state to the actual NAFTA document or through the negotiation of bilateral "interim" FTAs between the United States and individual Latin American countries. As a result, the institutional fi-ame\Vork for the expansion of fi-ee trade is still murky, especially since dle administration \Vas unable to secure fasttrack negotiating autllority from the U.S. Congress, even after heavy lobbying in late 1997. Ironically, since NAFTA's implementation, most of the thrust for deepening trade liberalization has come from Latin America, in the context of dle Free Trade Area of dle Anlericas (FTAA) working groups created after the Miami SLUllmit. While dlese groups are making considerable progress in gathering and disseminating data and hanlmering Copyrighted Material Manuel Pastor, Jr., and Carol Wise 45 ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi out technical details, doubts over the depth of the U.S. commionent continue to cast a shadow over the FTAA process.21 Added to the external challenge of perceived U.S. ambivalence and free trade's unclear institutional path are the interrelated problems of external capital flows and macroeconomic instability. As noted above, several recent macroliberalization episodes (in Mexico, Argentina, and Peru) have been marked by the use of the exchange rate as an anti-inflation tool. The resulting real overvaluation has rendered this set of recent adjusters hlmgrv for the foreign exchange needed to prop up their currencies and sustain their inflation reduction victories; as a result, their dependence on short-term portfolio capital flows has increased. In stark contrast, cow1tries like Chile and Colombia have, for diverse reasons, recognized the importance of maintaining competitive exchange rates and have been willing to live with the slighdy higher inflation rates that depreciation can provoke.22 The result of these policy differences is a paradox: those recent reformers (Argentina and Peru) which most need the capital- and confidence-enhancing endorsement of a free trade pact seem to be further back in the NAFTA queue than those countries (Chile and Colombia) which have pursued less fragile economic policies and therefore could survive sans NAFTA.23 Internal Challenges Within Latin America itself, the failure thus far of u'ade reform to reverse regressive distributional trends threatens political consensus on reform. We suggest in the Conclusion that addressing these distributional issues is the key to enhancing sustainable growd1 as well as reducing the ambivalence many U.S. Latinos have shown about further economic integration in the hemisphere. Reform usually proceeds in stages. Initially, reform is blocked by a status quo arrangement of political forces. An external shock can loosen the strucmre (as when the debt crisis diminished the power of old 151 producers) and create the space for reform. Policy-makers need to be insulated from lobbying pressures during this early, unsetded phase. In a final period of consolidation, the "winners" from the reform effort are persuaded or induced to develop a collective voice to maintain d1e new policy regime. Such a sequence is tricky, requiring both political skills and the ability actually to deliver expected gains in growth, productivity, and distribution. Although policy-makers enjoy a "honeymoon" during which memories of high inflation and other disruptions create a social toler~ce for austerity, public patience with models that do not eventually an1eliorate adjustment burdens wears thin. Technocratic insulation, including the redesign of state Copyrighted Material 255.162] Project MUSE (2024-04-26 12:01 GMT) 46 Trading Places ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi institutions to make them less susceptible to pressure from special interests, can extend the testing period for policy reform.24 Yet there are also drawbacks to such insulation. Technocrats may develop a disdain for politics (as when Mexico's new generation of technocratic policy-makers distanced themselves from traditional forces within the ruling Institutional Revolutionary Party), failing to acquire the political skills needed for the task of organizing "winners" and crafting the broader political coalitions that can weather longer-term adjustment challenges. Insulation also can work against the kinds of policy debates that could serve to resolve adjustment problems before they explode into full-blown crises. Mexico again is an example: the lack of significant debate over exchange rate policy prior to the December 1994 crisis, as well as the ability of President Carlos Salinas and Treasury Secretary Pedro Aspe to resist the pro-devaluation entreaties of incoming President Ernesto Zedillo, spealcs volumes about the difficulties associated with closed policy-making systems. In countries Wee Argentina and Peru, exaggerated patterns of bureaucratic insulation have blinded policy-makers to the more pragmatic interventions and politicking that have rendered equally difficult adjustments more acceptable in contemporary Chile and Colombia. Underlying the political difficulties in Latin America are distributional pressures that either stem directly from trade liberalization or are the residue of past policy errors still tmaddressed by neoliberal reform. Economic models generally suggest that free trade can be quite progressive in distributional terms: shifting toward labor-intensive comparative advantage should raise wages, and eliminating protection should shrink monopoly rents. The real world of economic adjustment has proved much more complex. For one thing, trade liberalization can disrupt traditional agricultural relations, triggering a mass exodus from the countryside, swamping urban labor markets, and dampening any upward trend in wages.25 Second, the demands of production for a world market generally raise the relative demand for skilled labor, widening the income gap within the labor force. Finally, the scale ofoperations needed to compete successfully in world markets can induce a rise in the concentration of industrial assets, damaging the small business sector, often a major source of employment .26 In the country we have studied most extensively, Mexico, the distributional pattern thus far gives cause for concern. Surveys of household income and spending recently released by the Mexican government suggest that income inequality (as measured by tl1e distribution of monetary income to households) rose from 1984 to 1989-logically enough, given the tremendous debt-related adjustments of this period-and then worsened during the period of intense liberalization between 1989 and 1992.27 Real monetary income for the poorest Mexicans actually fell in the latter Copyrighted Material Manuel Pastor, Jr., and Carol Wise 47 ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi period (down 2.6 percent for the poorest tenth and 1.2 percent for the next-poorest decile).28 According to the most recent survey, distribution remained rougWy the same between 1992 and 1994, and real incomes were basicallv flat over the period; although the data are fragmentary, most observers agree that the post-peso crash economy, in which unemployment rose and real wages fell, made distribution more unequal. In Mexico, these income disparities are exacerbated by the continued concentration of industrial assets. Trade liberalization worsened this W1deriving problem in Mexico's business structure,29 partly because smaller producers have lacked access to the credit needed to modernize their producti"e struCtllre.30 Again, the problem became worse after the peso crash, as larger firms have been better able to export out of the depressed local markets, and smaller firms have been hit harder by skyrocketing interest rates. Are these distributional strains common to other recent reformers? Argentina's distributional picUlre has gotten worsen over the post-1989 reform period, and unemployment ticked up from around 5 to around 17 percent between 1990 and 1996; Peru, also following the neoliberal mode~ has been faced with crushing poverty statistics and continued social tension . Meanwhile, Chile, with its jwnp start on the reform process, succeeded in restoring rapid growth rates begiruung in 1994; the elected civilian government has also expanded its social spending. Colombia has been moderate in its policy approach and is the only major Latin American country whose Gross Domestic Product (GDP) grew every year of the 1980s and 1990s. It is interesting to note that these two most robust reformers have worked hardest to preserve their reform trajectory with credible social compensation schemes; in contrast, Mexico's- social compensation scheme has been replaced by charges of inadequacv and political manipulation.31 Making Reform Work What would make reform more successful and sustainable in Latin America ? A key task for policy-makers-and one highlighted by the Mexican peso crisis-is to reassess the macroecononUc sustainability of recent liberalization approaches. Some of todays strategies have coupled liberalization with fixing the exchange rate, mostly to tan1e inflation. Characteristic of Argentina , Peru, and pre-crash Mexico, such a strategy leads to increasing overvaluation , rising trade deficits, and a growing reliance on external flows to cover the deficits and prop up the currency. Chile went through this in an earlier era (the late 1970s) until macroeconomic disaster led to more responsible management of the exchange rate, as well as a number of impressive instiUltional reforms within key econonUc entities. Colombia has long Copyrighted Material 48 Trading Places ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ believed in maintaining a competitive exchange rate and living with the slightly higher inflation that often results. Mexico is now learning to do the same; whether others, such as Argentina, can follow suit will depend in part on whether they can convince investors that credibility is not as thin as the exchange rate band they are currently following. As for industrial concentration, it is useful to recall that some contraction of firms is to be expected; if the old system really was protectionist, both bankruptcies and complaints are part of a healthy adjustment. However , the end goal of reform is not simply to disrupt the old order, but to create a more efficient and internationally competitive industrial base. In this light, it is important to note that successful industries are based on "clusters" of economic activity, with numerous vertical and horizontal ties between large firms capable of competing effectively in world markets and smaller companion firms that provide innovative backup and serve as "just-in-tinle" suppliers to their larger parent enterprises.3l The current liberalization approach, which often has condoned the collapse of small firms as an example of a "survival-of-the-fittest" commitment to market discipline, has failed to recognize that small- and medium-sized firms are an essential element of a successful export drive. Hence, there is a need to provide adequate transitional financing, job training, and other support to small umovative firms, a policy that Latin America has lacked sorely during the 1990s.33 On the political front, the key question is whether certain countries can go beyond insulated technocrats and tepid democracies and create opportunities for more citizen participation in the policy-making process. States as diverse as Argentuu, Brazil, Mexico, and Peru have relied on a highly ulsulated executive ruling by legislative decrees; tl1is has streamlined tile policy process but done little to u1Corporate congress, political parties, and the citizenry into everyday politics. In contrast, countries like Chile and, to some extent, Colombia are now expanding the reform backdrop to include political parties, congress, and other nonstate actors. One sign of this more encompassing model of reform is tile current Chilean government's willingness to place tariffs wlder me jurisdiction of the legislature-an arrangement that Brazilian and Peruvian technocrats would surely view with fear. This incipient trend toward greater transparency , participation, and accountability in the policy-making process needs to be encouraged. Finally, the Achilles heel of Latin American reform remains the region's regressive distribution of income. Economic liberalization generally has failed to reverse, and may have contributed to, the polarization of income in the region. While common wisdom has it that such regressive impacts are temporary and will be corrected once growm beguls Copyrighted Material 255.162] Project MUSE (2024-04-26 12:01 GMT) Manuel Pastor, Jr., and Carol Wise 49 ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffirnrnrnffiffiffiffirnffiffiffiffiffiffirnrnffirnffi anew, we are more pessimistic about the medilUn-term (five- to ten-year) distributional benefits of economic opening in Latin America, especially in the absence of in-depth reform of the underlying structural factors that have led to persistent income inequality throughout Latin America's modern history. Correcting tIlis inequality, particularly in light of the impact of liberalization , is not simply a matter of "social justice." An emerging body of literature suggests several positive linkages between income equality and economic growth: more equal societies are less likely to postpone adjustment in response to short-term macroeconomic shocks; a better distribution of economic opportW"llties helps build the consensus for supporting property rights and thus encouraging economic innovation and long-term growth; and societies with both equal distribution and Widespread access to political power tend to invest more in the sort of basic education necessary to create a productive base of human capital.3-! The releyance of these argmnents for Latin America-a region long characterized by slow growth, high inequality, volatile politics, and subsidies tilted a\vay from primary education- is obvious. If restoring growth is the real object of trade reform, then an equally important policy imperative is the reduction of poverty and regressive income distribution within the region. The positive impact on growth would be dual: a direct boost for economic output, for the reasons sketched above, and an indirect benefit as greater equality averted or softened potential political challenges to economic liberalization.35 There are, of course, risks. Countries may simply pursue compensation schemes as a sort of payoff for political support during the adjustment process, and government efforts to encourage equity could deteriorate into the budget-breaking subsidies and antin1arket interventions of the past. The road to good intentions, it seems, is lined with potential detours to the economic hells of the past. Yet something more than the current laissez-faire attimde must be adopted. As we have noted, alleviating Latin America's longstanding patterns of inequality is necessary for the ultimate sustainability of market reforms within the reforming colmtries. It is also required to sustain free trade coalitions across the borders of North and South. As we suggest below, distributional improvement within Latin America could minimize the threat open trade with the region has seemed to pose ro lower-wage workers in the United States. This, along with the more open political systems that we also advocate for "home" cOlUltries, could cause U.S. Latinos to abandon their cautious attitude toward NAFTA and other free trade efforts and become the champions of hemispheric integration that Latin American policy-makers once hoped for. Copyrighted Material 50 Trading Places rnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrn Conclusion The past decade of reform in Latin America has been truly historic. Faced with unprecedented external pressures, Latin American policy-makers abandoned old economic models and adopted both new kinds of macroeconomic stabilization plans and new strategies for international integration. Gone was the protectionism of lSI; in was the openness of trade liberalization . By the early 1990s, NAFTA was proposed and signed, subregional trade blocs were gaining prominence, and hemispheric free trade had become a distinct possibility. In this chapter, we review the trends toward, and challenges facing, the trade liberalization and reform processes in Latin America. While the turn to free trade seems irresistible, there are nonetheless key obstacles to the further consolidation of reform. These include the need to reconsider three features of the current period: (1) the linkage, in several cases, of trade liberalization with exchange rate targeting; (2) the tendency of reformist governments to ignore the needs of the poor, lower-skilled workers , and small business; and (3) the continuation of closed policy-making processes. Addressing these issues would not only benefit the continent but would also tend to create a basis of common interest for U.S. Latinos and Latin Americans. We have noted Latinos' ambivalence about free trade pacts like NAFTA. The reasons are less opaque than many Latin American decision-makers believe: worries about competition at the low end of the labor markets, the fact that only a thin group of Latino businesses stands poised to benefit, and the historic resentments of immigrants and their descendants at less-than-democratic governments in "home" countries . Moreover, these reasons are also better rooted in reality than many free trade proponents might think: a recent report indicates that "NAFTA's burdens have fallen disproportionately on Latino and other minority workers," leading Latino congresspeople who had voted both for and against NAFTA to warn the Clinton administration that they would not support extending free trade agreements across the hemisphere without major improvements in federal adjustment programs.36 Adopting the same view were leaders of several major Latino groups that had provided critical support for a "Latino consensus" in favor of NAFTA. Clearly, allegiances regarding free trade are once again in doubt.37 A Latin American shift to the sort of approach outlined above might moderate Latinos' concerns. For example, promoting smaller businesses and integrating them within Latin America's export chain could help U.S. Latino businesses, many of which are also small and would therefore be useful partners to their Latin American counterparts. Democratizing the policy process could enhance the political image of Latin American reCopyrighted Material Mal/lte! Pastor,Jr., and Carol Wise 51 rnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrnrn formers and lead to the political solidarity with U.S. Latinos many Latin American governments desire. Finally, distributional improvements within Latin America itself could diminish legitimate worries among U.S. Latinos that reducing trade barriers with the region's reformers constitutes a "race to the bottom," with U.S. minorities likely to suffer most in the competition. In their pathbreaking work on the labor market effects of NAFTA, Albert Fishlow, Sherman Robinson, and Raul Hinojosa-Ojeda sketched the hemispheric dilemma quite clearly.38 Focusing on the United States and Mexico, they argued that protectionist strategies were likely to diminish each nation's potential for GDP growth and consumer welfare. Free and unfettered trade could represent an improvement-and, in any case, WclS already under way in fact as production was becoming increasingly integrated under the authority of transnationals and their subsidiaries and suppliers. Given this, the best alternative-the one most likely to raise production and interindustry trade growth and help those in the lower reaches of labor-is to create a planned integrative process that includes strong doses of social policy to drive up the wage floors in both the United States and Mexico. While modest elements of that approach were embodied in NAFTA via side agreements on labor and the environment and creation of NADBank to help burdened communities, it is safe to say that too little was done initially and that the implementation of NADBank and other NAFTA bandaids has been slow and uneven.39 Moreover, as is evidenced by the inclusion of such concerns in side agreements and parallel institutions , these efforts were largely an afterthought for both the U.S. and the Mexican governments. Unless more is done, and done intentionally, U.S. Latino support will be an afterthought as well. U.S. Latinos are, as noted elsewhere in this volume, exceptionally open to transborder flows of ideas and culture, and have frequently defended the rights of bordercrossing individuals. As hemispheric commerce expands as well, the position of U.S. Latinos will depend on the concrete form such economic integration takes. Copyrighted Material 255.162] Project MUSE (2024-04-26 12:01 GMT) Copyrighted Material ...