The New Economic Model In Latin America

The New Economic Model (NEM) was a system that was put into action following the 1982 debt crisis, in Latin America. Basically Latin America could not continue using the same economic strategies, as they were faced with debts, which they could not afford to repay. They tried a number of different methods, in looking to solve the debt crisis, including large-scale import substitution, but after the short-term positive effects of these began to subside, they were in search of a new economic strategy, which the NEM turned out to be (Bulmer-Thomas. 1996. p1).

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My aim is to look over the NEM in general, in Latin America and assess the results of the scheme. I will look at the results and will gauge the major outcomes resulting from the NEM and state what I believe the most significant affects are. It is important to look at the particular groups of people that have been affected, because a positive outcome for a member of the social elite may not be a positive outcome for the general public. In greater depth I will focus on poverty and inequality, in order for me to find out to what extent the overriding statement is true. The debt crisis The NEM was implemented as a retort to the debt crisis.

The debt crisis occurred and Latin America had to sort itself out quickly, in order to avert a total economic collapse. They needed to adopt different tactics to save and make money and use alternative methods. The 1974 oil shock was something of a precursor to the 1982 debt crisis. Exporters of oil laid down their monies in the commercial banks of developed nations, but in 1974 when oil prices rocketed causing a recession in many of these countries, the demand on credit noticeably decreased. “Left with excessive liquidity, bankers eagerly lent to the third world” (Cardoso & Helwege.

1997. p116). Latin American nations were persuaded to borrow by commercial banks and foreign governments. As the 1980s showed, Latin America overborrowed. Banks were wrong to lend out so much money and Latin America was wrong to borrow so much, but both parties seemed sure that it was a good idea, in the 1970s in particular. “The inflationary climate that preceded the debt crisis (… ) was brought on by the instability of the international monetary system after the breakdown of a disciplined international monetary order anchored to gold in 1971” (Brock & Connolly et al. 1989. p10).

Before 1971, the global currency exchange and valuation system in use was the Bretton-Woods, which was intrinsically linked with gold and its value. The Bretton-Woods collapsed in 1971 when US president Nixon decided to halt gold convertibility. At first it was replaced with the Smithsonian agreement, but this did not last long and then other world currencies were left to float against the dollar. As a result, currency was more reactive to inflationary pressures and price changes of certain other major commodities such as oil and international monetary stability and discipline was weakened (Brock & Connolly et al. 1989. p10). “When U. S.

monetary policy tightened in 1981 everything changed” (Brock & Connolly et al. 1989. p10). In 1981, the US drastically decided to try to sure up its system, in order to stabilise itself and provide a solution to growing debts. Interest rates were put up in the US and this coupled with a deep recession in 1982, proved to be too much for borrowers from many less economically developed countries to take. Higher interest rates meant that repayments for the loans that Latin American countries took out, would dramatically increase, with governments not being able to meet payment targets and banks having more money lent out, then they were worth.

New system employed Bulmer-Thomas (1996. p10) talks about how the “inability of state-owned enterprises to continue to finance investments through external borrowings” and “the need to generate a trade surplus to accommodate debt service payments” meant that some alternative economic strategies had to be employed. A severe overhaul of the current system was in order. The NEM was not a simple set of steps that had to be taken which would then lead a country out of its economic ruin and into prosperity.

It was a series of guidelines, which were set out and were supposed to be met, which would lead to the completion of phases and would be an incremental process that, after the completion of each phase would draw the country ever closer to its target of self-sustained development. But to reach this final phase, the country would have to first, stabilise the economy and then undergo a structural facelift, both no mean feat (Bulmer-Thomas. 1996. p1). Basically the NEM was a way of trying to reverse the trends, which led Latin America into its dire position.

Inwards-looking development and import substitution would be replaced with the promotion of exports, to lead to export-led growth. With state-owned enterprises being so costly, privatisation would be championed, allowing more of a free market setting to generate wealth (Bulmer-Thomas. 1996. p10). Trade liberalisation is seen as an imperative measure in the NEM, for export-led growth to be able to occur. With the stern trade barriers erected during the 1930s and the general “anti-export bias” in Latin America, it is much harder for the export market to flourish and to achieve a good balance of payments record.

Therefore the lowering of tariff and non-tariff barriers to trade is necessary. Latin America is forced to open itself up to the world market, with the NEM. With the proliferation of Latin American exports, in theory the world market should be more competitive and so the imports coming back into Latin America should also be of a higher quality and possibly cheaper and so trade liberalisation should help them indirectly as well as directly (Bulmer-Thomas. 1996. p10).

The initial stabilisation that is required by the NEM in its first phase is mainly based on controlling the level of inflation. The NEM recommendations are that government savings are increased, with higher interest rates and wage controls to play down consumption. Government savings increases will essentially mean cutbacks in spending on public services and the decrease in the general standard of living (Cardoso & Helwege. 1997. p18). Fiscal reform and financial liberalisation are more requirements of the NEM. Tax revenues need to be increased.

This can be achieved by raising taxes but this will increase already high levels of poverty if it is not properly income-assessed. The selling-off of industries and services and general deregulation, will give the government more money and will save money by not having to pay running costs. It will also generate tax revenues. After a more stable and freer market has been assembled and structural reform has taken place, countries can look to attract more foreign direct investment, increase their own investment and look for a productive economy to provide for them (Bulmer-Thomas. 1997. p1/56).