EC 214 Economic Policy and Performance in Contemporary Latin America
Latin American Economic PolicySpring 2002page 1
EC 214 Economic Policy and Performance in Contemporary Latin America
Patrice Franko Miller Library 236 x-3347; (e-mail):
Spring 2002 Colby CollegeOffice Hours M 3:30-4:30; Tu 1-2; Wed 1:45-2:45 & by appt.
Course Description: This course challenges students to think about the Latin American development puzzle and critically evaluate policy responses. Latin American development is fascinating, fraught with promise and frustration. A wide variety of country experiences turns standard economic prescriptions on their head. Puzzles abound. Can steady growth be maintained in the face of gross inequality? Why was inflation so intractable in the region? Why did Latin America, despite it potential, stagnate when the Asian tigers took off? Are rising incomes incompatible with an environmentally sustainable policy? Do women benefit from development? What makes private capital so volatile in the region? What are the conflicts between internal and external balance? Is integration realistically possible? The study of Latin American economic development raises questions about the ability to sustain internal and external macroeconomic balance while meeting the basic human needs of the population.
Course Objectives: The objective of Economic Policy and Performance in Contemporary Latin America is to develop and apply economic tools of analysis to the study of the region. The course analyzes the opportunities for and constraints on development in Latin America. In addition to lectures, the text and outside readings, case studies will focus on key policy issues in the region. This hands-on approach to learning will challenge you to learn how to do country or sectoral analysis and present your results in oral and written form.
Philosophy of the Case Method: The case study method is grounded in the proposition that students learn best when they are active participants in the learning process. Central to the method is the belief that the process of learning to learn is as important as the product. A case method approach is different from discussion in that the participants are called to address squarely the facts of the case, collectively culling broad lessons from specific evidence. The case study method therefore challenges the student to move beyond memorization or mechanistic application of principles to more generalizable skills of investigation, teamwork and argument.
Mechanics of the Case Teaching Method: The success of the case teaching method depends on the active participation of the group. It is therefore important that each member of the class assume responsibility for each other's learning. Cases should not simply be read before coming to class; they must be thought about. Exercises will formally require prior group work, underscoring the value of learning from each other. These exercises are designed to challenge you to discover and apply economic principles prior to class exposition and to learn to work in teams.
Academic Honesty & Attendance Policy: All students are expected to be familiar with Colby's standards on academic honesty for both exams and written work. Taking the work of another, either during an exam, out of class or in written form may be met with failure of this course. This strict interpretation of academic honesty is grounded in a profound respect for each student's right to demonstrate his or her own talents in an intellectual community. Academic dishonesty violates these rights of others and publicly compromises your own integrity.
I do not formally take attendance. However, I do take note of your participation and you can’t participate if you are absent. Participation and attendance is particularly critical in case classes; by design you learn from each other. If you must miss any class, I expect the courtesy of a phone message or email explaining why.
Course Requirements: This course will have a midterm and a final exam, 100 points each. As this is a policy-oriented course, briefing papers are required; they total 100 points. (10 cases *10 = 100.) Peer evaluations for case work are worth 25 points; class participation is worth another 35. Because of group writing requirements, this course is offered for four credits.
This course, in conjunction with IS492, may be used to satisfy the senior seminar requirement for international studies. Economics students may also write their 391 with this class. Those participating in the independent-writing group will be required to attend several supplementary workshop sessions. For those electing the senior seminar or 391 option, a paper proposal, outline and preliminary bibliography are due by February 18; your hypothesis, how you plan to defend it, and a review of the literature (or preliminary chapter drafts as appropriate) is due March 12; a first paper draft will be read if submitted no later than April 25; the final date for the submission of papers is May 9. Failure to comply with these deadlines may be reflected in the final paper grade.
Brief Writing Case work is driven by the group. Each case is worth 10 points. Brief assignments encourage concise written expression. Your policy brief should describe the problem, provide the analytical criteria to evaluate the outcome, present the downside to your proposal, and come to a clear, definitive conclusion--all in one page! This kind of writing is common in business and in government. In preparing your brief, begin by asking the questions: What is the problem? Who are the actors? What are the constraints? This is the first level of analysis: description. Next, consider the criteria to judge competing outcomes. There is no right answer in any of the cases. The purpose of case work is to teach you to sort through conflicting positions and to present a clear and cogent argument. This argument should be grounded in your theoretical toolbox. How do the concepts we are studying guide your recommendation? The best briefs make the evaluation criteria explicit. You briefs should also present the best alternative argument. You wouldn't want your boss or client to be blindsided by arguments left unconsidered. After considering these counter-points, come back to conclude why you have selected a particular position. Please consult the template "Guide to Brief Writing for stylistic points.
You will work with the same assigned group for the first five cases. You will likely find this difficult. Some in the group may be bossy and not listen; others may be lazy and unproductive. This replicates a real world work environment—and challenges you to dig deep for interpersonal and managerial skills to get the job done. There will be one peer evaluation after the fifth case; it will be worth 25 points. The second five cases will be independently formed groups, allowing you to select those you would like to work with. Group composition may change from case to case. Signups for groups will take place in the class at least a week prior to the case.
Required Reading:
Patrice Franko, The Puzzle of Economic Development in Latin America. Boulder, CO: Rowman & Littlefield, 1999
Latin American Weekly Report (Sign up for subscription in class; current events subject to examination)
HBS N9-797-015Chiquita Brands International
HBS Mexico: Escaping from the Debt Crisis?
HBS 9-701-104Brazil: Embracing Globalization
HBS9-800-166 StarMedia: Launching a Latin American Revolution
HBS 9-395-125 Guatesalud
HBS 9-701-116Mexico: The Unfinished Agenda (end semester)
Kennedy 951.0 Bolivia (A): Controlling Hyperinflation, 1985-1986
Kennedy 1593.0 Cancún, Mexico: Water System Privatization
Kennedy 1362.0Santiago's Sewage
Kennedy 1560.0 Costa Rica's Forests and the Market for Carbon Emissions Reduction Credits
Resources on the Internet
Finance and Development, a quarterly publication of the International Monetary Fund and the World Bank is at
Back issues can be found at
Information about the IMF is available at
- is the website for the World Bank.
is the Inter-American Development bank's homepage. You may access important country information there. IDB America is on line at this address, and includes automatic links to IDB press releases, project summaries and policy papers.
The Organization of American States can be found at
- is the website for the Economic commission for Latin America and the Caribbean.
- is the Pan American Health Organization
A good gateway for Latin America info is http://lanic.utexas.edu
- Some important policy institutes include
- the Inter-American Dialogue,
- The Wilson Center’s Latin American Program, http://wwics.si.edu/PROGRAMS/REGION/LAP/LAP.HTM,
- the Washington Office on Latin America,
- The Council of Hemispheric Affairs and
- The Center for Strategic and International Studies,
- The Council of the Americas,
Class Schedule and Reading Requirements
1. The Puzzle of Latin American Economic Development
What is development? By these standards, how well is Latin America doing?
The purpose of our opening classes will be to raise the issues we will grapple with in our course--not to provide quick answers. An underlying theme in this section will be the diversity of experience in Latin America. Is it even useful to think about Latin America regionally?
February 5: Introductory Class:
What are the salient characteristics of economies in Latin America? How should we think about the character and contradictions of economic development in the region? What is economic development anyway?
Franko, Chapter 1
February 7: Making Development Assistance Effective—Actors, Institutions and Evaluation
This class provides an introduction to the multilateral, regional and nongovernmental actors engaged in development work in Latin America. In addition to a tour of the alphabet soup of development agencies, we will take a stab at the question “What is ‘good’ development policy?”
Read Global Development Finance 2001, Chapter 4, “Making International Aid and Debt More Effective,” and Chapter 5, “Effective Use of Development Finance for International Public Goods.”
Go to the websites listed in the beginning of the syllabus; spend about a half an hour roaming around the websites. What are the key issues on the development agenda in Latin America?
2. Historical Legacies
As the novelist Garcia Marquez has warned us, Latin America recycles its past. It is important to understand the historical legacies of the region to evaluate contemporary policy. Sacrificing rich historical detail due to time constraints, this class will show how the colonial and early independence periods shaped later development problems. Rather than an historical timeline, our discussion will be organized around the inputs to development: availability of labor, capital and technology to promote agricultural and industrial growth at home and abroad. What historical lessons can we derive about how countries grow--or not?
The epilogue to this story, which can be shown through the data, is that historically growth in Latin America was disappointing. This weak performance sets the context for Raul Prebisch and the ECLAC theory of import-substitution industrialization.
February 12 Historical Roots of Latin American Economic Development
Franko, Chapter 2
February14 Case Class: Case Class: Austin, “Chiquita Brands International"
Case Group Brief Assignment: Your group will be representative of a banana exporting Latin American country (Ecuador, Costa Rica, Colombia, Honduras, Panama, Guatemala, Mexico.) What position will you take in response to a new offensive by Chiquita to play hardball with the EU?
3. ISI period
Given disappointing historical growth, Prebisch and those at ECLAC defined the development problem as how to promote growth in the face of an international system controlled by the center countries. This section will explore the tools of inward-looking development. It will treat the role of the state as a developmental actor, and introduce the exchange rate and trade tools used to promote industrialization.
The experience of import substitution industrialization varied widely across countries. The theme of difference among countries in the region will be further developed. The difficulties of import-substitution industrialization will be analyzed, linking this section to the macroeconomic problems the region faced in the 1980s.
February 19Founding Paradigms: Import Substitution Industrialization
Franko, Chapter 3
4. Macro-economic Crisis
Import-substitution industrialization exacted a financial price. Ambitious projects were beyond local financing, and international capital, fueled by petrodollar recycling was relatively cheap. When interest rates rose, however, countries found themselves trapped in debt. This section will explore the causes and the consequences of the debt crisis in Latin America. It will look at both internal and external factors contributing to the accumulation of debt, and the national and international policy responses to the crisis.
The debt crisis was not the only manifestation of an unstable development paradigm. Inflation gripped the region, fueled in part by the imbalances created by rapid economic change. Inflation became part of the culture in many nations, and expectations exacerbated underlying tensions. The political influence of populist practices will be examined as well as the heterodox responses to the inflation problem. Argentina's austral plan in the face of political instability is a good example of the difficulty in reigning in inflation. There were also differences in the various heterodox stabilization plans and these will also be highlighted.
Connections will be made between the macro and the micro level. Inflation hurt the poor more than the rich, as the rich were able to protect themselves with sophisticated financial tools and capital flight. The difficulties of an inflationary environment created for business will be drawn out. Financial wizardry was rewarded more than productive competency. As a result real investment for the future ground to a halt. States could not complete infrastructure projects. As countries tried to service debt in increasingly unproductive environments, environmental costs mounted. This section will challenge you to make these connections between the financial and the physical world.
February21 Limits to Import-Substitution Industrialization: The Debt Crisis
Franko, Ch 4,
February26 HBS Mexico: Escaping from the Debt Crisis? Shapiro, Helen Ch 4
February 28 Stabilization
Ch 5, Franko
March 5 Case Class, Kennedy 951.0 Bolivia (A): Controlling Hyperinflation, 1985-1986
5. The Neoliberal Response
With incentives and sanctions from the international community as well as sheer exhaustion, the variety of heterodox approaches to the problem of stabilization gave way to a Neoliberal, market oriented approach. Dubbed the Washington Consensus, this package included the liberalization of trade, domestic markets and shock therapies for macroeconomic stabilization. Privatization and the infusion of international capital replaced the state as the new locomotives of development. Measured by rates of growth, lower inflation and flows of foreign capital, the Neoliberal response represents a brighter vision for the region than the lost decade of the eighties.
But the magic of the market has not completely fulfilled the promise of development in Latin America. The fragility of this model was clearly demonstrated as the repercussions of the crash of the Mexican peso were felt around the region. Large portions of the populations are left out of the process of growth. The social deficit—the enormous unmet need in the region for education, housing, medical services, transportation and other public services—will not be resolved by the market. The conclusion of this chapter will emphasize the incomplete nature of any development theory. Import-substitution industrialization addressed the lack of internal dynamism; the neoliberal approach leaves policy makers vulnerable to the external market and social problems at home. Development in practice will always be confronted by new challenges to theory.
March 7 Franko, Ch. 6
March 12Kennedy 1593.0 Cancún, Mexico: Water System Privatization
March 14 New Capital Flows in Latin America: Hot Money & FDI
Franko, Chapter 7
6. International Trade Strategies
While opening up to the international economy through the expansion of imports and exports has been heralded as a key feature of the package, it has also been accompanied by a drive for economic integration to counteract some of the historical vulnerabilities of external orientation.
Latin nations have pursued strategies regionally and sub regionally, as well as attempting to expand formal relations with trading partners throughout the world. Different kinds of trade integration exist in the Hemisphere. The theoretical and practical problem for you to confront in this chapter is whether the gains from each type of integration exceed the costs. Some argue, for example, that integration results in trade diversion from the lowest price or highest quality goods as preference is given to a trading partner. Furthermore, the gains under economic union might be smaller than anticipated. However, these costs and benefits also need to be seen in the context of the political gains that often accrue under integration.
March 19 , Trade Policy
Franko, Chapter 8
March 21 HBS 9-701-104Brazil: Embracing Globalization (trade strategy) ch 8
March 24-30 Spring Break
April 2no class professional travel (class exemption for midterm work)
April 4 no class professional travel; CEMEX case
Cemex: Read the Cemex case handed out in class. Provide advice in a policy brief as to where Cemex should expand its global operations in Latin America. In addition to the case, you may consult the Cemex home page as well as the report on Cemex’s financials. You will have an opportunity for live consultation via email with Roman Azanza Colby ’90, Cemex’s Financial Advisor for Asia. Along with your brief, you must provide the questions submitted to Mr. Azanza, along with his answers. Each group may only submit one query; please give Mr. Azanza 48 hours to respond due to the time difference (he is based in the Philippines.) Briefs will be due in class on April 9.
April 8 Take-Home Midterm due in economics department secretary’s office by 4:30.
The take-home questions will be available as of class as of March 22. You will elect 48 hours in the period March 22-April 8 to complete the exam. You must sign up for your start time in class March 21; once determined, the start time is fixed. Penalties for late submissions of take homes are one point (out of 125) per hour late up to 7 points (approximately half a letter grade) per day.