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					EC 214 Economic Policy and Performance in Contemporary Latin America Patrice Franko Miller Library 236 x-3347; (e-mail): pmfranko Spring 2000 Colby College Office Hours T-Th 2:30-4, Wed 9:30-10:45and by appoint. 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 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. Course Requirements: This course will have a midterm and a final exam, 100 points each. As this is a policyoriented course, briefing papers and presentations are required; they total 100 points. (7 cases *15 = 105. With advance notice due to a schedule conflict you may choose to do one brief individually or drop your lowest peer grade. This is designed to accommodate senior interviews, a big exam or a sports conflict on a one time basis.) In addition to case participation grades, class participation is worth 25 points. You will be asked to provide input to your own and classmates' participation grade. 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. Those participating in the independent-writing group will be required to attend several supplementary workshop sessions. For those electing the senior seminar option, a paper proposal, outline and preliminary bibliography are due by February 17; a review of the literature (or preliminary chapter drafts as appropriate) is due March 9; the first paper draft is due April 13; the final date for the submission of papers is May 2. Failure to comply with these deadlines will be reflected in the final paper grade.

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Team Work: Case work is driven by the group. Each case is worth 15 points: 10 for the group brief, 5 for group work. You are required to maintain an excel work sheet that records peer grades by case group. Failure to submit this worksheet electronically by May 2 will result in forfeiting your own 30 points of peer participation. Medical excuses will be accepted with verification from the health center, but the written portion of the case briefs will still be required. Format for Brief Writing: 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. Required Reading: Patrice Franko, The Puzzle of Economic Development in Latin America. Boulder, CO: Rowman and Littlefield, 1999 Rosemary Thorp, Progress, Poverty and Exclusion: An Economic History in the 20 th Century, Washington, DC: The Inter-American Development Bank, 1998. Nancy Birdsall, Carol Graham and Richard H. Sabot, (editors) Beyond Tradeoffs: Market Reforms and Equitable Growth in Latin America. Washington, DC: The Inter-American Development Bank and the Brookings Institution Press, 1998. Kari Keipi , Forest Resource Policy in Latin America, Washington, DC: The Inter-American Development Bank, 1999 Latin American Weekly Report (Sign up for subscription in class; current events subject to examination) Harvard Business School cases to be purchased in bookstore: 9-797-005 Veraguas (a) System of Poverty (not a group case) 9-390-105 Standard Fruit in Nicaragua 9-797-096 Mexico (A) From Stabilized Development to Debt Crisis 9-799-004 Brazil Confronts an Interdependent World 9-797-077 The Advent of Venture Capital in Latin America (not a group case) 9-798-092 Chile: The Latin American Tiger? 9-799-084 The Han Young Labor Dispute 9-398-071 Finansol 9-395-125 Guatesalud Resources on the Internet Finance and Development, a quarterly publication of the International Monetary Fund and the World Bank is at http://www.imf.org/external/pubs/ft/fandd/1999/12/index.htm Back issues can be found at http://www.worldbank.org/fandd. Information about the IMF is available at http://www.imf.org http://www.iadb.org 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.

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The Organization of American States can be found at http://www.oas.org A good gateway for Latin America info is http://lanic.utexas.edu 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? Feb. 3: 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 Thorp, Chapter 1 and 2 Feb. 8 Development Challenges in Latin America We will open our course with the Veraguas Case. The purpose of the case is to introduce various aspects of the problem of development. What do we mean by development or underdevelopment? What are the everyday conditions of life in an underdeveloped country? This case is designed to raise more questions about the puzzle of development in Latin America than provide answers. Note: all other cases will involve group brief presentations; Veraguas will not. 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 importsubstitution industrialization. Feb. 10 Historical Roots of Latin American Economic Development Franko, Chapter 2 Thorp, Chapters 3 and 4 For further reading consult Victor Bulmer-Thomas, The Economic History of Latin America Since Independence," NY: Cambridge University Press, 1994, especially chapters 1-4. Feb. 15 Case Class: Austin, “Standard Fruit Company in Nicaragua" Case Group Brief Assignment: What recommendation should DeLorenzo make to the Castle & Cooke board of directors about the company’s continued involvement in Nicaragua? In addressing this question, be sure to treat the historical context in Nicaragua as well as the structure of the banana industry. 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

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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. Feb. 17 Founding Paradigms: Import Substitution Industrialization Franko, Chapter 3 Thorp, Chapters 5 and 6 Feb. 22 Case Class, Mexico (A) From Stabilized Development to Debt Crisis What were the factors leading up to the Mexican debt crisis? What role did ISI play? Characterize the causes of debt build-up—were they financial or developmental? Could the crisis have been avoided? How? Prepare a group brief addressing the causes of the Mexican debt crisis. 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. Feb. 24 Limits to Import-Substitution Industrialization: The Debt Crisis Franko, Ch 4, Thorp, Chapter 7 Feb. 29 Stabilization Ch 5, Franko Birdsall, et. al, Ch. 3, Lora and Londono, Structural reforms and Equity Note: an additional class will be scheduled in this week as interim review. Students with limited economics backgrounds will find this material especially challenging. The review is intended to help clarify some of the questions you might have about international economic tools. Mar. 2 Case Class, Lodge, “Brazil Confronts and Interdependent World” Group Brief Assignment What micro economic characteristics contribute to Brazil’s macroeconomic instability? How have growth patterns exacerbated the tendency toward crisis? What heterodox policies were attempted? What are the lessons of the Collor Plan in Brazil? How did earlier stabilization attempts

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constrain his ability to manage inflation? What should he have done differently? Why did the Real plan succeed where others failed? What is the prognosis for Brazil today? 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. Mar. 7 Franko, Ch. 6 Thorp, Ch. 8 Mar 9 continued March 14 No class, professional meetings March 16 Take-Home Midterm due in economics department secretary’s office by 2:30. The take-home questions will be available as of class on March 9. You will elect 48 hours in the period March 9-March 16 hours to complete the exam, with the 48 hour period beginning during normal business hours with the exception of a Saturday noon start time. You must sign up for your start time in class by March 7; 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. March 17-26 Spring Break March 28 New Capital Flows in Latin America: Hot Money & FDI Franko, Ch 7 Birdsall et. al, Ch. 8, Rojas-Suarez and Wiesbrod,” Equity Benefits from Financial Market Reforms,” Scheduled for make-up class meeting time April 6 Spar, The Advent of Venture Capital in Latin America Case brief: What should be Advent Capital’s strategy for Latin America? 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.

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March 30

Franko, Chapter 8

April 4 Trade Policy: The Case of Chile Group Case: After evaluating Chile’s development strategy post 1973 and its appropriateness for other countries, argue whether or not Chile should join a regional trade group. If so, which one? Provide a brief for the new Chilean government as to new economics directions for the country. 7. Enhancing International Competitiveness Competitiveness in the international market is contingent on changes that will promote the productivity of labor—yet how should this be reconciled with the traditional labor surplus in developing countries. Growth will also be enhanced by introducing new technologies—yet technology is costly and often controlled by industrial countries. The third component in promoting growth is strong complementary infrastructure—but investments in public utilities and roads compete with scarce public dollars for funding. Agriculture, a sector long neglected under import substitution industrialization, must struggle to promote technological change, improve labor productivity and contend with insufficient infrastructure. Reconciling these resource constraints is critical to generating a sustainable pattern of growth in international markets. April 6 Sectoral Change: Labor, Technology and Infrastructure Chapter 9 Franko April 11: Case Class: Han Young The Han Young labor dispute raises difficulty issues of the role of maquiladors in Mexico’s development as they conflict with new standards implemented through the NAFTA accord. Prepare a case brief on the costs and benefits of the maquilas from Mexico’s perspective, advising the Mexican government on the next step with respect to the firm. April 13 Agriculture Franko, Ch. 10 8. Social Challenges & the Need for Participatory Development Social challenges to development constitute the greatest obstacle to development in the region. Poverty and inequality, weak public education systems, and the lack of adequate medical services plague the region. Discrimination against women and ethnic minorities limit their full potential as economic actors This section will focus on the question of development for whom, and ask how marginalized groups can more fully participate in the benefits of growth. It will address the role of women as development actors. Furthermore, it will argue that the investments in human capital for all members of society is a necessary step for stable growth. While the model of import substitution industrialization was biased toward top down development, resolving the social deficit requires a bottom-up approach to empower the poor in the process of economic change. Conceptually, this chapter will introduce the problem of measuring poverty and inequality within and between nations. April 18 Poverty & the Social Deficit Franko, Chapter 11 April 20 Case: Finansol After reviewing the progress of Finansol as a non-profit lender to microenterprises in Colombia, outline elements of a one year and five year plan for the organization. April 25 Health and Education Chapters 12 and 13 in Franko April 27 Case Class: GuateSalud You are Glenn Lopez's business consultant. Prepare a brief on directions Lopez should take for GuateSalud. 9. Environmental Challenges

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Development is no longer seen simply as growth in gross national product. Production may deplete renewable resources or create negative byproducts such as air, water or noise pollution. This section situates externalities within the development process and asks you to consider how these costs can be mitigated through policy. It considers how population pressures limit developmental choices. Environmental policy in Latin America is far more complicated than pictures of parrots and monkeys romping in lush forests convey. While this section will take up the important issue of tropical deforestation, it will be as attentive to the grave challenges regional policy makers face in managing urban environments. It will look at the degree to which market incentives can be used as policy tools, and question whether international trade can be part of a sustainable development strategy. Can Latin America support an environment strategy that is ecologically and economically sustainable? May 2 Environment & Economy in the Americas Franko, Chapter 14 Kari Keipi , Forest Resource Policy in Latin America, Washington, DC: The Inter-American Development Bank, 1999, selected chapters 10. Confronting the future: Challenges to development in the region. What is the future of economic development in Latin America? The region has gone through many cycles of expansion and contraction. Is the current trajectory a trend toward a more stable path or will the contradictions of the model overwhelm the capacity of the market? What institutional changes are required to promote stable, sustainable growth? May 4 Concluding class Franko, Ch. 15 Thorp, Ch. 9 Birdsall et. al, Ch 12, Graham and Naim, The Political Economy of Institutional Reform


				
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