Volume 45 Number 179,
October - December 2014
Real Salaries, The Balance of Payments and
the Potential Product in Latin America, 1980-2011
Germán Alarco*
Date received: October 7, 2013. Date accepted: April 30, 2014
Abstract

This work analyzes the relationship between real salaries and the balance of payments in Latin America from 1980 to 2011, developing a theoretical discussion of the link between these variables. It also describes how improved external accounts over the past decade have been accompanied by real salaries below 1980s levels. The empirical portion of this study uses Thirlwall’s model to calculate the growth of the potential regional product subject to external restrictions, concluding that an improved balance of payments and greater international reserves would create leeway to raise regional wages.

Keywords: Balance of payments, Thirlwall’s model, potential regional product, economic growth

INTRODUCTION

Starting in the 1980s, the majority of Latin American economies were subjected to structural adjustment programs with measures that restricted aggregate demand, incentivized supply and sought to bolster international competitiveness. Regardless of the relevance, sufficiency and quality of these programs and the international organizations that promoted them, it is apparent that they, among other factors, have been useful in improving, after a few decades, the principle balance of payment accounts in Latin American countries. However, this reorientation abroad, also evident in higher foreign reserves, has been accompanied by declining real wages, or real wages that have failed to grow as fast as gains in national and regional productivity.

This article has multiple objectives. It seeks to analyze the explicit and implicit theoretical ties between real wages and the balance of payments and empirically explore the relationship between real wages, the balance of goods and services and the balance of payments in Latin America from 1980 to 2011. It sets up a model to determine the growth potential of Latin American countries based on external restrictions, taking into account the performance of real wages in exports. Finally, this study conducts various simulation exercises to determine the growth potential of the regional economy, making use of external prosperity and bringing back the role of remuneration as an economic policy instrument, in contrast to the orthodox approach in which it is simply a residual component.

This idea is not novel. The International Labor Organization (ILO, 2012a) proposed that it is time to rebalance the share of wages and salaries both on the national and global level, avoiding the simplistic perspective that countries can emerge from the recession simply by making wage adjustments. Rather, the idea is to highlight policies that promote greater linkages between the growth of labor productivity and the growth of worker remuneration. This organization declares that the existence of a surplus in the current accounts of the balance of payments in some countries indicates that there is space to stimulate domestic demand, mainly by strengthening the connection between rising productivity and wages. The search for advantages through reduced labor costs would be a disincentive to economic innovation and productivity, hurting labor relations, all of which are key elements in the dynamics of a market economy.

Formally, this text has six sections, including the introduction and conclusions. The first offers a theoretical review of the ties between real wages and the balance of payments. The second presents an analysis of the basic statistics. The third formulates a model based on Thirlwall's perspective, which is useful in determining the growth potential of Latin American economies. The fourth conducts various exercises and simulations to identify the importance of foreign restrictions and remuneration for Latin America to improve its current situation.

This text does not provide a detailed analysis of the joint evolution of real wages and the financial accounts of the balance of payments, nor does it analyze how the nominal and real exchange rates of Latin American countries have evolved. An evaluation of the historical and future evolution of foreign prices of imports and exports, and the terms of exchange, would then have to be applied to each specific economic case, rather than to the Latin American subsets and overall analysis presented here.

REAL WAGES, THE BALANCE OF PAYMENTS AND EXTERNAL RESTRICTIONS

In the neoclassical school of thought – or classical in conventional macroeconomic literature – the link between real wages and the balance of payments is remote and indirect. In the labor market, real wages and employment levels are determined as a result of the interaction of the labor supply and demand. The latter is derived from the function of aggregate production and, from that perspective, according to Say’s law, it is supply that determines aggregate demand. In modern extensions, if the economy is open, imports are a function of the product, as an additional input to production (Cortázar, 1986). In the Keynesian model, the link between real wages and the balance of payments is also distant, but by a different logic. There is no labor supply function and employment levels are determined by production, rather than the other way around, like in the neoclassical model, where they are determined by the principle of effective demand. Wages are a key factor in determining prices. Here, when economies open up, imports grow due to higher demand, although these same imports will have a negative impact on the balance of payments (De Pablo, 1993).

Starting with these perspectives, all standard macroeconomics establishes a direct relationship between activity levels and imports and it will be negative with respect to the trade balance, current accounts and the balance of payments. In addition, it will also add relative price variables, such as the real exchange rate or the relationship between the price of imported goods and competitive domestic prices for these goods to the explanatory function of imports. Later on, the national and foreign bond market with free capital mobility under a fixed and flexible exchange regime is added, giving rise to the Mundell-Fleming (1968 and 1962) model.

Although not explicitly, Dornbusch and Edwards (1989) imply that increases in real wages impair the balance of payments from the perspective of populist macroeconomics. This point of view proposes a specific type of Latin American economic policy that emphasizes growth and income redistribution but minimizes the risks of inflation and financial deficits, external restrictions and the reaction of economic agents to policies operating outside of the market.

Kalecki (1956) explains the connection between income distribution, aggregate demand and the product. In Keynes, distributive topics were implicit by means of the tendency to consume, which intervened in the expense multiplier. Strictly speaking, the former provides the relationship between price determination – where wages are part of primary costs –, income distribution and economic activity levels. Kalecki makes it clear, however, that the increasing/decreasing participation of wages and salaries in the product or income leads to, ceteris paribus, increasing/decreasing demand levels and the product. However, in the basic model, the connection between wages, or their participation in the product, and imports is not direct. Greater levels of imports have a negative impact on aggregate demand and the local product.

Post-Keynesians, followers of Kalecki, clearly establish the link between wages, income distribution, economic activity levels and the current account balance of the balance of payments. Taylor (1986), in a study evaluating how devaluation in Portugal caused contraction, establishes a model with four building blocks:1) prices, where wages, the price of imports, profit margins and indirect taxes are explanatory factors, 2) income distribution, 3) demand and product levels and 4) balance between private savings, public savings and external-investment savings. In this model, higher nominal wages have repercussions on prices and, at the same time, increase their share in income, driving demand and the product level. This, in turn, increases public revenue (public savings) and external savings due to increased imports associated with higher demand and production. Later, Taylor (1989) delves into the issue of the trade balance and balance of payments.

Bacha (1982), in the post-Keynesian line, defines a negative slope function that establishes the equilibrium of the trade balance between prices and economic activity levels. Gibson (1985) reiterates the importance of external restrictions, while Thirlwall (2003) links it to economic growth. The basic principle of this model is that the demand for exports determines product growth in the long term. Likewise, export performance depends on factors traditionally associated with global demand and the behavior of domestic prices relative to international references. Later on, local prices will depend on what happens with profit margins and the principal costs of production, which are real wages adjusted for variations in labor productivity. In a more complete version, this is not dependent merely on the export of goods and services, but also on capital flows.

This analysis includes the major economies of Latin America, 18 in total: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Dominican Republic, Uruguay and Venezuela, excluding Cuba, Haiti and other Caribbean islands, as well as some of the more recent, now former, European colonies in South and Central America. The detailed accounts of the balances of payments come from the International Monetary Fund (IMF, 2013). All of the information on gross domestic products (GDP) in current and constant dollars was taken from the World Development Indicators of the World Bank (2013). Average real wages from the various countries selected for the time period 1980-2011 were drawn from the Economic Commission for Latin America and the Caribbean (ECLAC, 2012). However, when information was missing for certain economies or years, this data was obtained from international sources or, in the case of Bolivia, Brazil, Ecuador, El Salvador, Honduras, Nicaragua, Peru, Dominican Republic and Venezuela, from local sources.

Table 1 shows the principal balance of payment accounts in Latin America and all countries in the region analyzed. It includes accounts relative to the export and import of goods and services, the sum of revenue, transfers, net financial accounts, errors and omissions and the annual average balance of payments in the 1980s (1980-1989), 1990s (1990-1999) and 2000 and beyond, expressed as a percentage of GDP in each specific country and at the regional level. Information on Latin America as a whole effectively reveals that the balance of payments was somewhat negative in the 1980s, became positive in the 1990s and stayed positive, but to a lesser extent, in the twenty-first century. The data expressed as a percentage of GDP indicates that there was no improvement in the export of goods and services between the 1980s and 1990s, but there was a jump starting in 2000, although not very significant. By contrast, imports of goods and services did increase over the base average of the 1990s and kept growing into this century. We must not forget that the region only began to open up its markets in the 1980s.

Looking at the sum of financial accounts, revenue and transfers, errors and omissions, it is notable that this value was negative in the 1980s, as a result of the debt crisis that cut off foreign public debt flows and reduced foreign investment. In the 1990s, these flows increased, but then fell again starting in 2000. Over the past decade, the balance of payments can be principally explained by the difference between exports and imports of goods and services, while the contribution of revenue accounts and financial accounts was lower.

Every economy has its peculiarities, which this work will not address, but more generally, we can distinguish between the dynamics of two major subsets; first, large South American countries and Mexico, and second, Central America and the Dominican Republic, where economies are smaller and per capita income is lower. Most countries in South America and Mexico are strongly influenced by Brazil, which is a more closed economy. The second important influence has been Mexico, a country more open to foreign influence. In the 1980s, the balance of payments for the entire group was slightly negative, resulting from negative capital inflows. In the 1990s, the balance of goods and services was negative because markets began to open up and this was financed by the inflow of capital. Starting in 2000, the balance of goods and services was positive, accompanied by a balance equal to but less than capital movements. The economies of Central America and the Dominican Republic have increased their exports of goods and services over the past three decades, but import growth has been even stronger over time, generating a negative imbalance between exports and imports. This growing imbalance is covered by, one, financial resources (debt and investment) and, two, revenue and transfers (remittances) from abroad. The balance of payments is positive, but lower, than in the group of South American economies and Mexico.

The balance of payments has been positive for all of Latin America, with the exception of the 1980s. It has improved over the past three decades in South American economies and Mexico while falling slightly in Central America and the Dominican Republic between the 1990s and now. The countries with the highest positive balances in this millennium include: Bolivia, Peru, Paraguay and Uruguay. The lowest balances were in El Salvador, Venezuela, Ecuador, Dominican Republic and Argentina.

Figure 1 shows the evolution of real wages and the balance of goods and services for the period 1980-2011 – in the first column – and the evolution of real wages and the balance of payments – in the second column – for the various groups of Latin American countries in the same time period. The base year with an index of 100 for real wages was 2000, and the balance between exports and imports of goods and services and the balance of payments ix expressed as a percentage of GDP in each country as an average in each of the three decades analyzed.



 

Figure 1. Real Wages, the Balance of Goods and Services and the Balance of Payments in Latin America, 1980-2011 (real wage indices and % of GDP)

Source: Prepared by the author based on the World Bank, ECLAC, IMF and others.

 



In all cases, real wages were slightly higher in 1980-1989 than in 1990-1999 and 2000-2011, although figures for 2000-2011 were, in all groups analyzed, higher than in 1990-1999. The structural adjustment programs implemented in the majority of Latin American countries starting in the 1980s shrunk real wages, which can be seen most clearly in the first decade following this implementation, along with negative balances on goods and services due to the opening of markets. Later, in the third decade, the balances tended to be in surplus, due to price and quantity effects and this situation was accompanied by real wages higher than the decade prior.

The above analysis applies to the sub-group of South America and Mexico and Latin America as a whole. However, it is not valid for Central America and the Dominican Republic. Although wages evolved similarly to the former group, the balance of goods and services was more negative in 2000-2011 than in decades prior. These smaller countries have seen the deficits in their trade balances and balances of services increase over time, unlike South America and Mexico. The most severe imbalances require greater financing through financial accounts and transfers. In this way, the balances of payments are, on average, positive, although to a lesser extent in 2000-2011. The balances of payments of South America, Mexico and Latin America have continuously improved over the years, with real wages initially falling and then rising. However, in Central America and the Dominican Republic, the average balance of payments was more positive in 1990-1999 and then fell in 2000-2011.

Table 2 displays four cases for each set of variables (clockwise): improved real wages and improved balance of goods and services, declining real wages and improved balance of goods and services, declining real wages and declining balance of goods and services, and declining balance of goods and services and improved real wages. There are four scenarios for the balance of payments: improved balance of payments and improved real wages, improved balance of payments and declining real wages, declining balance of payments and declining real wages, and declining balance of payments and improved real wages. The Euclidian distance between the final and original position is given in parentheses.1



The economies that saw improvements both in the balance of payments and real wages were, in order: Chile, Colombia, Argentina, Paraguay and Uruguay. On the other end of the spectrum, countries in which both variables declined were: Nicaragua, El Salvador, Dominican Republic and Panama. In an intermediate situation, where real wages declined but the balance of goods and services improved, we have: Venezuela, Peru, Brazil and Bolivia. The group with improving real wages but a declining balance of goods and services included Honduras, Ecuador, Costa Rica, Mexico and Guatemala. An evaluation of real wages and the balance of payments reveals that in no Latin American country did the balance of payments decline between 1980-1984 and 2005-2011.2

A MODEL RESTRICTED BY FOREIGN CURRENCY AND REAL WAGES

The Thirlwall model (2003) was chosen to evaluate the effects of foreign currency availability as a growth restriction in Latin America. To this effect, a simple model was developed in which currency availability is determined by the real exports of goods and services, net revenue flows, transfers and net financial accounts, and a proportion of the net flows of foreign reserves, which, instead of being accumulated, are channeled into supporting economic growth. The most detailed model included an explanatory function for exports, introducing the effect of real wages and the average labor product, among other variables.

Equation (1) establishes that the real GDP growth rate (gp) is equal to the growth rate of foreign exchange earnings (g1) through a parameter that reflects the higher growth of imports with respect to GDP (). Equation (2) establishes that this parameter is an inverse function of the elasticity of real imports with respect to real GDP (π), which in the long term, tends to range between 1 and 1.5, but may be higher in the short term. Equation (3) establishes that the growth rate of real foreign exchange earnings can be explained by the weighted sum (θ) of real export growth ( e) and the real growth rates of revenue flows, transfers and net financial accounts ( f). Equation (4) is a reduced version of the first model, which allows us to determine the potential GDP growth rate associated with currency restrictions.

(1)
(2)
(3)
(4)

The lower real wages seen in many Latin American economies could explain part of the foreign reserve earnings, as these wages would mean fewer imports.3 In that sense, the improvement in real wages may be equivalent to channeling a proportion of the increase in net foreign reserves ( s) to support economic growth. To consider this effect, we substitute equation (3) for (5), obtaining (6), the reduced version of the model.


(5)
(6)

The more detailed analysis includes an explanatory function for real exports and prices that incorporates the evolution of remuneration. In this regard, we go back to the export demand ( E) function, which depends on the relative export prices: domestic prices ((Px) with respect to foreign prices (Pi), measured in a common currency. Similarly, exports also depend on global economic performance ( M). In the export demand function in equation 7, two elasticities are considered: the price elasticity of export demand (Є) and income elasticity, associated with global demand (), where ∈ <0 and > 0. Then the logarithms were taken, the derivative with respect to time was calculated and the equation was expressed in terms of the export growth rate of equation (3), while the other variables are the growth rates of the variables described earlier and their respective elasticities.

(7)
(8)

The assumption is made that domestic prices are determined in accordance with the evolution of two of their principal components, real wages (W), the average product of labor ( R) and the profit margins on labor costs: (1+z = T from equation (9). Similarly, the logarithms were taken, the derivative with respect to time was calculated and the variables were expressed in terms of growth rates. Then equations (8) and (10) were substituted into equation (6) to obtain the reduced form of the expanded model.

(9)
(10)
(11)

According to equation (11), the increase in currency availability allows higher growth for the potential GDP, unless the elasticity of real imports increases in greater proportion. Higher growth in the explanatory factors for the real exports of goods and services, capital flows and allocating a portion of currency availability previously meant to accumulate foreign reserves are also sources of economic growth. In the specific case of the explanatory factors behind the real export of goods and services, an increase in real wages above the average product per laborer will have a negative impact on economic growth potential, as will an increase in profit margins. In addition, high labor productivity growth with respect to the growth of real wages or falling profit margins in export sectors will increase economic growth potential. Appendix 1 offers an overview of a few ways in which the Thirlwall model has been applied before in Latin America.


SIMULATION EXERCISES: TAKING ADVANTAGE OF FOREIGN PROSPERITY

The goal here is to compare the average growth rates of the effective real GDPs of various Latin American countries and their subsets for the time period 2000-2011, with respect to potential growth rates in different scenarios. In the first case, the elasticity of real imports with respect to real GDP is 1, in the second case 1.25 and in the third 1.5.4 In each scenario, the average potential growth rate is determined by assuming that real foreign exchange earnings are equivalent to the export of goods and services, and of these plus revenue flows and net financial flows considered by grouping the various balance of payment accounts.5 To this a proportion equivalent to half of the balance of payments is added, under the assumption that these foreign reserve earnings could be channeled towards real GDP growth.6 The model used is the reduced form expressed in equation (6) of the previous section.7

Table 3 displays the results of the three scenarios of the potential product with external restrictions with respect to the effective GDP growth rate. In general, we refer to an intermediate scenario in which the elasticity of real imports with respect to real GDP is 1.25. First, it was relevant to analyze the potential and effective product by subset. In that regard, the effective growth rates of the economies of Central America and the Dominican Republic were higher than the potential rates, meaning they would not be able to elevate their growth rates. They have already reached the maximum threshold for expansion pursuant to external restrictions. By contrast, the economies of South America and Mexico have grown below their potential and therefore have leeway to increase their effective growth rates. Likewise, given the higher weight of the latter group, Latin America, on the whole, has the capacity to elevate its annual growth rate by 0.32 percentage points up to 3.82%, taking advantage of the evolution of the balance of payments. If Latin America were to use half of its annual foreign reserve earnings, all of the economies in the region could grow an additional .37 percentage points above current rates.

The main factors that explain foreign exchange earnings in the economies of South America and Mexico are exports of goods and services, distantly followed by annual foreign reserve earnings and the combined effect of revenue, transfers and net financial accounts. In Central America and the Dominican Republic, exports of goods and services are in first place, while the combined effect of revenue, transfers and net financial accounts is in second. Foreign reserves did not play any role in this group of countries. In all of Latin America, between 2000 and 2011, financial accounts accumulated a contribution of between 3 and 4.5% of GDP for the three scenarios analyzed. In the same time period, half of annual foreign reserve earnings would contribute between 3.4 and 5.2% of cumulative GDP.


If we analyze the data by country, Brazil, Uruguay, Nicaragua, Bolivia, Mexico, Paraguay, Chile, El Salvador and Honduras stand out as economies with the greatest leeway to increase their effective growth rates. On the other end of the spectrum are Costa Rica, Colombia, Guatemala, Ecuador, Peru, Panama, the Dominican Republic, Argentina and Venezuela, who have less or non-existent leeway to do so. High average labor productivity, above real wage growth, is a source of growth for the potential product with external restrictions as described in equation (11) of the previous section.

Looking at Central American countries and the Dominican Republic, productivity grew faster than real wages between 1981 and 1990 and then from 2001 to 2005. The same was true of South America and Mexico between 1986 and 2005, while for the periods 1981-1985 and 2006-2011, real wages grew faster than productivity. In overall Latin America, productivity grew faster than real wages between 1986 and 2005, and the highest period of productivity growth with respect to real wages was 1986-1990. The evolution of this variable went along with the increase of the potential economic product.

Table 4 offers a simulation exercise for the two subsets of Latin America and the overall area. In the simulation scenario, average productivity growth minus real wages is an annual average of 1%, assuming different values for price elasticity of export demand: -0.05, -0.10 and -0.25, keeping in mind that the value of this elasticity for Mexico was -0.12. In that regard, in keeping with the logic of the model, the growth of labor productivity with respect to wages may help explain the growth of the potential product in the region. With an intermediate price elasticity of demand, in the three real import elasticity scenarios, the potential product of Central America and the Dominican Republic would grow between 0.05 and 0.08%. In Latin America, it would vary between 0.06 and 0.09%, annually.

The results would be higher if the price elasticity of demand were more elastic, if the elasticity of real imports to real GDP were lower and if the increase in productivity were higher. If labor productivity less real wages grows at 2% annually, with import elasticity with respect to real GDP of 1.25, the potential product of Latin America would grow at 0.15% annually.


Table 5 presents another simulation exercise. In this case, the idea is to figure out what would happen if the profit margins of various export-led sectors in Latin America were to fall. To this effect, given the lack of microeconomic data, we assume that the profit margin is 25%,8 which, in the simulation, would decrease to 20 and 18%. This reduced profit margin should not be understand as an absolute decrease in profits, because there could also be greater sales volumes with a lower margin per unit or greater profits resulting from lower aggregate costs due to the effect of economies of scale, associated with higher productivity and sales.

For the intermediate scenario of real import elasticity with respect to real GDP at 1.25 and price elasticity of export demand at -.01, the potential product of Central America and the Dominican Republic would increase between 0.25 and 0.36%. In the case of South America and Mexico, it would rise between 0.31 and 0.43%. For overall Latin America, the increase in potential GDP would be between 0.3 and 0.43%. If the elasticity of real imports with respect to GDP were 1.5, the potential product of Central America and the Dominican Republic would increase between 0.21 and 0.3%. In the case of South America and Mexico, it would rise between 0.26 and 0.36%. For overall Latin America, the increase in potential GDP would be between 0.25 and 0.35%. What we can be certain of is that falling profit margins would increase the potential GDP of various Latin American economies. The effect on potential GDP would be neutral if real wages were raised simultaneous to the decrease in unit profit margins.


CONCLUSIONS

Despite its importance, few studies evaluate the overall performance of the evolution of real wages and the balance of payments. However, it is clear that starting with the structural adjustment programs implemented in the majority of Latin American countries in the 1980s, these nations began to prioritize macroeconomics, including balancing public finances, lowering inflation or improving the balance of payments to the detriment of real wages, which then became a residual variable in economic policy.

The reason why analysis of the evolution of real wages and the balance of payments is separate can be found in the neoclassical macroeconomic approach, which says that the link between them is remote and indirect. This is the basic paradigm followed by those who designed and implemented the adjustment programs in Latin America. Even in various extensions of the Keynesian model, the link between these two variables is not close. Wages are part of aggregate demand, and when wages grow, imports increase, so the current account balance and the balance of payments decline. In Kalecki and, in particular, post-Keynesian models, the relationship becomes transparent and direct. Improved wages can affect prices, depending on how labor productivity evolves. However, the share in income increases, which elevates demand and the product, with a negative impact on the current account balance and the balance of payments.

Statistical information on the balance of payments in all Latin American economies reveals a general improvement over time. However, in the 1980s, there was a slight negative balance associated with the debt crisis and lower foreign investment. It is interesting to note that net financial flows were significant in the 1990s and then fell, which is why the principal source of foreign currency has been the export of goods and services.

The various economies in the region each have their own peculiarities, but some of the behavior and performance can be generalized by dividing the region into two subsets: the countries of Central America and the Dominican Republic, which tend to have strong imbalances in the balance of goods and services and higher compensatory financial transactions, where the balance of payments tends to be lower than in the other group of economies, which include South America and Mexico. The latter set tends to have positive balances of goods and services, with lower contributions from financial accounts, but balances of payments that are higher than the former group of countries analyzed.

It is clear that the balances of payments in Latin American countries have increased in the current millennium. Real wages have also gone up, although they have yet to return to levels last seen in the 1980s. Real wages were lowest in the 1990s.

Improving the regional balance of payments creates leeway to improve real wages, especially in economies that have experienced declining real wages. Some of these include Nicaragua, Venezuela, Peru, El Salvador, Brazil, Bolivia, Dominican Republic and Panama. The other group would include economies that have improved both real wages and their balances of payments, but there may still be some space left to maneuver. The Thirlwall model allows us to calculate the potential product for various Latin American economies taking into account the availability of foreign currency from exporting goods and services, the balance of payments, which adds revenue accounts and net financial accounts, and the possibility to use a portion of foreign exchange earnings accumulated in the current millennium. It also allows for us to conduct simulation exercises on the effects of growing labor productivity with respect to increasing real wages and falling profit margins for Latin American export companies.

The aforementioned model, applied for 2000-2011, reveals that the effective growth rates of the economies of Central America and the Dominican Republic were higher than the potential rates, which is why they are unable to increase their growth rates. They have already reached the maximum thresholds in accordance with external restrictions. In contrast, the economies of South America and Mexico have grown below their potential and therefore have leeway to improve their effective growth rates. Similarly, if they were to use a portion of annual foreign exchange earnings, all of the economies in the region could increase their annual growth. In addition, greater average labor productivity growth above the increase in real wages seems to have contributed to the growth of the potential product for economies in the region, by improving export potential. Similarly, reduced profit margins for export companies would increase export competitiveness by reducing domestic prices.

This text proposes a policy that would take advantage of improving foreign accounts to raise real wages without affecting the export and growth potential of Latin American economies. In this regard, this is possible through a compensated adjustment to raise wages, but it would naturally come with a reduction in unit profit margins. This proposal revives the role of remunerations as an economic policy tool. Similarly, aggregate profits are not necessarily impacted in large economies of scale due to higher domestic sales as a result of the greater share of remuneration in revenue and increased labor productivity, in accordance with the post-Keynesian approach.

This work does not specifically discuss the direct and indirect tools to increase real wages, but it is clear that there is leeway to do so. Likewise, the growth potential of Latin American economies would be higher if a portion of foreign reserve earnings obtained over the past decade were put to use to address the appreciation of major regional currencies. Country-level details of these proposals, analyzing the effects on their reserves, the evolution of real exchange rates and productivity, among other factors, are beyond the scope of this article.


APPENDIX 1.

SOME APPLICATIONS OF THE THIRLWALL MODEL IN LATIN AMERICA

Pacheco-López (2009), Madrueño (2009) and Jiménez (2010) have summarized the principle outcomes of applying the Thirlwall model to various Latin American economies. In this regard, the first author uses the model as part of a study to analyze the effects of market opening in the region, concluding that it has been a failure (except in Chile and Venezuela), in the sense that export growth rates have grown less than the income elasticity of import demand. As such, the potential GDP growth rate has fallen, instead of rising.

Madrueño draws conclusions similar to Pacheco-López, noting that practically all studies have confirmed the efficacy of the model up through the first years of the twenty-first century. Madrueño concludes that the majority of economies have declined, except Chile and, in some periods, Venezuela. The overall experience has been a substantial increase in the income elasticity of import demand following commercial liberalization. However, there is disagreement regarding the role of the exchange rate, net capital flows and supply-side frictions.9 Finally, Jiménez (2010) offers an overview of studies on developed economies and Peru, in particular, confirming that restrictions on economic growth are mainly external.

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*Post-Graduate School of the Universidad del Pacífico, Peru. G.alarcotosoni@up.edu.pe

1 The Euclidian distance between two points and coordinates is and between points P1 and P2 of coordinates and , respectively, is .

2 Trajectory between the first and last five-year period of the entire period under analysis.

3 Strictly speaking, reserve earnings could come about due to greater exports, especially when associated with improved terms of exchange, lower levels of imports due to falling demand and greater inflows due to net financial accounts or other associated items.

4 The values of real import elasticity with respect to real GDP between 1 and 1.5 are reasonable if we assume that there would be no pronounced appreciation in real exchange rates because a portion of foreign reserve earnings would be allocated for economic growth.

5 In this case, they correspond to revenue plus transfers, net financial accounts, errors and omissions of the balances of payments. Both this account and the account regarding the portion of the balance of payments are converted into real terms by considering the United States GDP deflator.

6 Many Latin American economies have accumulated foreign reserves above “optimal levels,” which could be channeled into economic growth (Alarco, 2011a).

7 The weighting factors were calculated using average data for 2000 and 2011. When the statistical series of financial flows and the balance of payments for the period 1980-2011 were extremely variable, the Hodrick-Prescott filter was applied to obtain the trends for these variables and from there obtain average growth rates between 2000 and 2011.

8 Rate below the tax-free profit rate of 27.2% for the Peruvian business sector, for 2005-2008, with a significant presence of extractivist mining and hydrocarbon sector companies.

9 For Mexico, the author calculated the elasticity of export demand with respect to relative prices to be -0.12 and the elasticity of export demand with respect to global demand to be 4.05.

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 48, Number 191, October-December 2017 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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