Trade and Financial Liberalization and Its Effects on Growth, Employment and Income Distribution in Latin American Countries

Strong capital inflows and comprehensive trade and financial liberalization characterized the last decade in the majority of Latin American countries. Despite some modest improvement in poverty incidence, the evolution of employment, wages and income distribution has frustrated even the most “Panglossian” of the Washington Consensus’s policy maker that largely run the continent along the last years.

Considering the evolution of household income distribution along the last two decades in Latin America countries an comprehensive analysis observed an asymmetrical pattern of growth with a high income concentration during the “lost decade” of 80’s and a distributive rigidity during a more expansionist phase observed in average in the region along the nineties (Sáinz, and Fuente (2001). But even this evaluation can not be assured since there is a strong underestimation of the income of the richer strata. Due to a disappearance of regular jobs in the continent a polarization process with a hollowing out of middle class and a top-driven increase in inequality seems to be happening in many countries in recent years as a social consequence of the economic and structural changes led by external opening . But unfortunately this performance is not the bottom line. Nowadays an implosive decline is taking place in Argentina with tragic consequences on poverty incidence.

Given the diversity of experiences of liberalization in the continent and the superposition of many economic and social changes to identify and even more to isolate the effects of trade and financial liberalization on income distribution it is not a simple question.

In an effort to bridge a classical/sraffian theory of income distribution with a structuralist approach to economic development and a institutionalist approach to labor markets, this paper tries to address to these questions considering the balance of payment constraint through its effect on interest rate, exchange rate, relative prices and in GDP growth as the dominant macroeconomic force shaping income distribution. Some routes can be singularized. From the classical/sraffian surplus approach emerges the proposition that there is an inverse relation between the rate of interest (formed exogenously by monetary forces) and product wage. This relationship will be considered as a clue factor connecting financial liberalization and functional income distribution. From this perspective, the level of productivity in wages goods sector is essential for the determination of real wages.

From the classical and structuralist approach we retain the basic conception that in a surplus labor economy economic growth generates not only a reduction in poverty – an indisputable stylized fact- but trough an increase in formal employment an improvement in the distribution of labor income. From both approaches we take that structural heterogeneity between sectors is a primary source of income differentiation. Thus, the impact of external liberalization on income distribution depends on whether financial and trade liberalization contributes to reduce or to increase the real rate of interest, the level of employment, and the structural heterogeneity.

The majority of studies on income distribution concentrate exclusively on personal/family income distribution with no concern on functional distribution. In general the nationals survey data only report evidences adequate to this concept. This dominant approach underreports non wage income – barely covered in household surveys – and exclude some important connections between macroeconomic forces and income distribution. This data inadequacy and other pitfalls arising from the exclusive focus on labor income will be observed and explored along this position paper.

Given the high level of income concentration observed in Latin American countries, this paper will not cover the distributive social policies that in the last decade was enlarged in many countries in order to alleviate the poverty incidence, its focus will be on the forces that shape the primary income distribution.

Besides this introduction the main argument unfolds in four sections. In the first we briefly examine how the balance of payment constraint has historically influenced the income distribution in Latin America countries. A brief analyses of the first experiment of external liberalization intended in the beginning of eighties in Argentina and Chile was viewed an avant- premiére of what happened in almost all countries in the nineties. In the second section we consider the determinants of the large capital flows and their connections with balance-of payment liberalization in the continent. We stress the major role played by external pull forces and distinguish differences on trade liberalization in Mexico (and some small countries above Panama) and in South American and the differences on financial liberalization in Chile in contrast with other countries. In the third section we analyze some evidences on growth, employment, relative prices, wages and income distribution in the continent considering two stylized situations: an “import-led consumption boon” (Taylor and Vos, 2000) based in fix or semi-fixed exchange rate and the more recent period characterized by floating exchange rate with income concentration and no growth. Some important differences are observed among countries. In the last section we conclude and explore some questions for future research.

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