State Intervention: A Barrier to Development

Introduction Over the past century, most Latin American governments have heavily relied on state intervention in the markets to fuel economic growth and ‘development. ‘ Political and economic instability in the region throughout the 20th century set the stage for people to put their faith in a powerful state that promised stability and security. Many Latin American countries would put their faith in the Import-substitution Industrialization (IS’) economic model, which was an “inward-oriented” model that used state intervention extensively in an attempt to fuel development.

The result loud be an ensuing debt crisis with high inflation that hampered any change of future development. Pursuit of the SIS economic model by Latin American governments during the second half of the 20th century proved to be a disaster and illustrated how state economic intervention never leads to sustainable development. Therefore, free market policies should be embraced and implemented by Latin American governments to ensure future economic growth and development. Growth of the State in the Pursuit of the SIS Model Prior to the Great Depression, Latin American nations depended on high modify exports to fuel economic growth.

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The Modernization Theory of development argued that this export-oriented path would fuel development in the region. This perspective proposed that Latin American nations could progress in the same fashion as the United States if markets were free from intervention and free trade policies were applied. Limited manufacturing capacity was seen as an inherent weakness of this model, because it put countries in the region at a disadvantage with industrialized ones (Kingston). When the Great Depression set in, the demand of Latin American exports to the industrialized nations fell.

Since economic policy in this region depended heavily on exports to fuel growth, Latin American countries suffered immense economic hardship. The Modernization Theory was seen as inefficient in leading Latin America on path to sustainable growth and development. The Structuralism and dependency perspectives on development were put forth as alternatives to the modernization theory. These schools of thought argued that the nature of the global economy put developing countries in the region at a disadvantage to industrialized nations in terms of trade.

The solution according to these perspectives was the SIS model, which focused on “inward-oriented” policy to fuel development. This model required the state to take an active role in the economy in hopes of creating self-sustaining growth (Tooled 461-467). The SIS model economic tools utilized consisted of subsidies for domestic producers, creation of state-owned enterprises (Goes), exchange rate manipulation, and import tariffs. Populist movements in the region, which advocated redistribution of wealth policies, would also be co-opted by politicians to gather support interventionist policies.

Goes, which included major industries such as telecommunications, oil, and steel, required a substantial amount of public funds to operate. These Goes would also be used to employ many people. Since Goes were managed to provide cheap inputs for the private sector instead of being profit driven Like private enterprises, teeny were less inclement Ana Carlen losses Tanat prevented them from expanding to meet higher demand. Import tariffs were also used to protect domestic industries from foreign competition and to increase demand for domestic production in general (Franks 58-61).

SIS policies would soon prove to be inefficient. State ownership was incapable of promoting risk-taking behavior in businesses and led to less efficient business practices. Protectionist trade policies prevented nationally manufactured goods from meeting international quality standards and therefore made them less competitive in the global market. Moreover, since interventionist policies required large amounts of government spending, deficit spending soon became common and governments were forced to rely on external borrowing and monetary expansion.

Pursuit of the SIS del would soon lead to a debt crisis in the region that hampered economic development (Franco 70-72). Debt Crises and the New Development Perspectives The spending practices associated with the SIS strategy eventually led the Latin American region into a debt crisis. High inflation ensued and lack of confidence led to capital flight in the region. Countries would soon turn to external resources such as the MIFF and the World Bank for relief furthering entrenching themselves into the global economy and making them further dependent on foreign influence (Franco 3-99).

Two theories of inflation, Monetarist and Structuralism, were influential in addressing the problem of inflation. Monetarists argue that deficit spending and high government debt are the main contributors to inflation. Accordingly, the monetarist’s solution to restraining inflation is simple: “decrease government spending”. The Structuralism perspective differs in that in cites the structure of the underdeveloped economy as the cause of inflation. Structuralism argued for developing ways to minimize the costs of inflation (Franks 113-116).

Since the sass and sass, new theoretical approaches on state activity in markets have been put forth: the new political economy (NOPE), the new institutional economy (NINE), and the instrumentalists. These new approaches do not differ that much from past approaches. NOPE is very similar to the neo-liberalism perspective (I. E. Free markets and focus on individual economic choices), while the NINE and instrumentalists schools resemble the Structuralism and dependency perspectives (I. E. Markets are incomplete and need to be directed by institutional arrangements and state intervention), (Franks 149-155).

Free Markets: The Sure Path to Development The Latin American debt crisis illustrated how the SIS model and government intervention failed to produce sustainable development. Therefore, governments should move towards economic policy (NOPE) that removes the disease of state intervention and allows individual economic choices to lead the direction of the economy. Government policy should adhere too minimalist role of enforcing contracts and property right. Government intervention in the economy allows interest groups and powerful elites to influence politicians in how they apportion public funds, opening the door for corruption and inefficiency.