Following-up on last class, I'd like to touch on the dependency theory created by the Argentinian economist Raul Prebisch.
His country had specialized in exporting beef and Argentinians were clearly better-off while tapping into their natural and labor competitive advantages.
After the Great Depression, however, the US, the main client, drastically reduced the import of beef.
As trade stopped and fellow "hermanos" relied largely on a single commodity for attracting strong currencies, the economy plummeted.
Now clearly worse-off, Argentinians and their main economist, hitherto a great supporter of Ricardo's theory, changed position.
From now on they stated that developing countries should diversify their export basket of products by promoting industrialization.
High import and export rates, great amount of subsidies and controlled exchange rates were few macroeconomic tools used by Latin American leaders for protecting national economies and incentive state enterprises.
Brazil, for example, took for granted Prebisch's every word and ended up experiencing the second great economic growth worldwide from 1930 to 1990. Argentina's economy had also established its plants by La Plata basin.
Although protectionism mechanisms helped diversify the economy, products and services began losing competitiveness in the international market.
Public administrators in Latin America realized then that a strong regulated market prevented national economies from importing more efficient machinery in order to come up with innovative production systems.
At the same time, state companies have proved to be fairly less competitive and burdensome financially than multinational conglomerates from the developed world.
Quickly falling behind the rich, poor nations struggled in the 1980s and 1990s, years known as "lost decades".
Late 1980s, Argentinians tried to stimulate the economy by following International Monetary Fund (IMF)'s advice, The Washington Consensus, and opened up its economy again, heavily reduced taxs and subsidies, converted one peso to one dollar, and Maradona's fans turned out being better off once again.
However, early 2000s, and after experiencing a rapid deindustrialization process and not carrying out any significant political reform, Argentinians were hit by a financial collapse that ousted four presidents from office in one month.
Fellow "muchachos" were clearly worse-off again.
Meanwhile, Brazil had not followed IMF free trade dogma as strictly as neighbors and that is why we were not as badly hit as our soccer rival by a domestic financial crisis.
However, the giant of South America, although had privatized some inneficient state companies, had not done either any political reform to make the State better prepared to respond to the great competitiveness of the international market of goods and services.
Right now Brazil's economy hits the news as an example of resilience after 2008 US Housing financial crisis and Argentina is still trying to catch up with living standards late 1980s.
The lessons I take from these dramatic macroeconomic experiences are that free market is indeed a powerful phenomenon and mechanism for creating wealth and bringing in cutting edge technology but I also understand that governments play a crucial role in allocating resources efficiently and selecting national competitive advantages as well as ensuring that political reforms take place and national agencies meet contemporary challenges.
Tsu, Machiavelli, Hobbes, Richelieu, Metternich, Clausewitz, Bismarck, Kissinger, Gaulle, Morgenthau, and Bull dream with a world of order and peace but, in every opportunity, urged public administrators to keep a realistic approach towards the international market since in the context of fierce competition for scarce resources decision-makers prioritize sovereignty and national security over ideology and ethical concerns.
PS. This is a brief article containing Prebisch's ideas.
http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_dependencia.html
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