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Latin America's Economic Challenges: Lessons for Emerging Economies



Tulane Economics Working Paper Series Latin America’s Economic Challenges: Lessons for Emerging Economies Nora Lustig Department of Economics Tulane University New Orleans, LA [email protected] Jaime Ros Graduate School of Economics National Autonomous University of Mexico (UNAM) Mexico City, Mexico [email protected] Working Paper 1112 February 2011 JEL: O10 Latin America’s Economic Challenges: Lessons for Emerging Economies1 Nora Lustig and Jaime Ros2 February 11, 2011 (Final Draft) Introduction In the last quarter of the 20th century, Latin America—like many other parts of the developing world—experienced a major shift in its development strategy. From the aftermath of the Second World War up until the debt crisis of the 1980s, the region had embraced a strategy of state-led industrialization, largely (although not exclusively) oriented towards the domestic market. Following the 1980s debt crisis (and even earlier in a few countries), state-led industrialization was replaced by a new development model in which markets and integration with the global economy took center stage. A number of “big facts” contributed to the shift in development strategy. In particular, the rapid growth of East Asia, based on manufacturing exports and outward orientation, led to a reassessment of the role of international trade as an engine of growth.3 The shortcomings of central planning and statist development models also became clear in the 1980s. For Latin America, the debt crisis of the 1980s was by far the most important “big fact” determining the shift in strategy; critics of state-led industrialization saw this crisis as a result of the preceding development model in its entirety. The results of the new outward-oriented market-based development strategy have been disappointing (Figure 1). Overall, the recent growth performance of Latin America has been lackluster even if we leave aside the “lost decade” of the 1980s. For the period 1990-2008,

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