Volume 46, Number 181, April-June 2015



The war on inequality and the struggle for justice cannot be won with austerity policies. On the contrary, in democratic societies, eliminating inequality and injustice in income distribution is a challenge for economic development policy. As such, these topics are of great interest to many authors who have sought to demonstrate how income concentration has hurt the middle class over the past few decades in Latin America, Europe, the United States and other developed countries. In fact, many Latin American nations were the guinea pigs for austerity policies to confront the economic and financial crises of the 1980s and 1990s, which only further cemented injustice and inequality. The effect of these policies produced a democratic alternative contrary to what had prevailed in years past, especially in South American countries. Poverty indicators improved as new administrations focused on social inclusion, thanks to economic policies that reversed austerity measures. Of course, high commodities prices in international financial markets and the fact that governments raised taxes also made it possible to improve the human development index.

Contemporary economic development theories begin with the idea of the Kuznets inverted U relationship between national revenue and economic inequality to analyze income distribution. This concept emerged from the study of industrialization and economic growth in the United States and can be generalized to developed societies. With that said, to many authors, including Prebisch for Latin America, industrialization was the hypothesis that sustained “import substitution” as the necessary precursor to achieving economic development accompanied by a redistributive welfare state. Industrialization would be the platform needed to grow the middle class with better wages. Shifting from rural communities to industrial and urban societies, the demand for better remunerated jobs would, undoubtedly, increase the wealth of society. Concern for equality and better income distribution in Thomas Piketty’s book Capital in the Twenty-First Century essentially signaled that “when the rate of return on capital exceeds the rate of growth of output and income, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.” Moreover, the book supports the idea that inequality is an economic policy issue.

The proposal set forth by the Economic Commission of Latin America and the Caribbean (ECLAC) in the Social Panorama of Latin America summarizes the “trilogy of equality” that Executive Secretary Alicia Bárcena presented during the Ricardo Torres Gaitán lecture at the Institute of Economic Research at the UNAM. “Equality is the endpoint of development, structural change, the path, and politics the instrument for achieving it.” The dimensions of inequality are centered around “education, access to information and communication technologies, overcrowding and lack of access to durable goods, residential segregation in cities associated with private consumer goods and the absence of public goods.” It is therefore clear that we cannot achieve equality and end vulnerability with austerity policies. Rather, public policies are the means needed to reverse the current situation of inequality, injustice and austerity.

James Galbraith has asserted that inequality began to take off in the second half of the 1980s as a result of austerity policies. This is entirely the opposite of neoclassical theory, which begins by assuming that competitive markets, technological change and trade globalization will reduce inequalities within countries. It even differentiates skilled and unskilled workers. Besides these considerations, the neoclassical perspective does not link inequality with unemployment or the exchange rate. What is certain is that “global financial governability,” along with adjustments made to global interest rates and their relationship to the debt crisis and, later on, debt deflation, had an impact on inequality by guiding monetary, fiscal and financial policies based on the payment of debt service in favor of investors and institutions, thereby reducing public spending. As such, the credit boom and extraordinary financial sector profits during the period of Great Moderation brought about the Great Crisis, starting in 2008.

Structural changes have become entrenched over the past four decades, obscuring the role of the redistributive welfare state and the importance of central banks as lenders of last resort. Today, the fate of democratic societies hangs in the balance of falling commodities prices, rising sovereign debt and the ongoing discourse of austerity. The greatest challenge facing civilization now is to resolve the growing unemployment that is eclipsing development and to reverse the situation in which 1% of the population accounts for 50% of total global income. Currently, the Great Recession, characterized by economic stagnation, falling international prices and deflation, requires economic policies that target significant infrastructure projects to create upward job mobility, accompanied by public development bank credits. To stay on the path of austerity would mean to continue exacerbating poverty and unemployment, in the process undermining democracy itself.

One extremely important democratic phenomenon is the debate on international capital flight and its effect on economic stability and development in the context of financial globalization. How to define this phenomenon and, principally, how to measure it, is the subject of the paper “Capital Flight in Mexico: Analysis and Proposal for Measurement,” by Andrés Blancas. In addition to describing the stylized facts that have historically tied the volatility of foreign capital to recurring financial crises, the article is essential both because it criticizes traditional forms of measuring capital flight and introduces a novel methodology to estimate, based on social accounting, the amount of resources that flowed out of Mexico during the period of growing economic and financial destabilization that afflicted the country between 1980 and 1998. The discussion offered by the author is even more important in the framework of the Great Recession that set the tone for global economic performance following the 2008 financial crisis. This well-conducted empirical analysis reveals the tremendous financial fragility that still prevails in the architecture of structured finances. Continuing to refine the analytical instrument of the methodology suggested by the author would be useful in measuring the movements of capital flows, in light of the instability plaguing many countries. A more precise determination of the volume of capital likely to flow out of the country in the shot-term is a fundamental part of this academic work to contribute to the discussion of public policy and market regulations.

In the article “The Limits of Exchange Rate Stability in Mexico, Violeta Rodríguez focuses her analysis on exchange rate stability and how it affects other real variables in a context of financialization. She proposes the hypothesis that the fact that monetary and exchange rate policy have been coordinated constitutes a sterilized interventions strategy, which when implemented in Mexico, did not enjoy the same resource availability to be financed autonomously, which led to sharp imbalances in the management of international reserves. The sterilized intervention process is a factor that guarantees the amount and capacity of paying earnings, principally to major international investors. In light of that, Mexico was forced to incorporate a sterilization policy in its exchange rate market and together with monetary policy, control inflation, the interest rate and the exchange rate. These are policies that guarantee the value of financial assets and the liabilities of the non-financial sector, which the author describes as: sterilized interventions with a financialist policy. Given the scenario of instability for external variables, the sterilized interventions strategy is of central importance, which is why she offers a model to elucidate its limits when a certain degree of stability is reached. In this way, she proposes a segmented simulation model of difference equations with variable coefficients to observe the stability of the variables in question. The study is based on segmentation over time into four historical periods. The path and sterilized interventions strategies converge to create a model with ever more stabilizing components. That means that the exchange rate, external debt and international reserves incorporate elements of stability, and exogenous factors such as oil shocks and the risk premium make the proposed model vulnerable. This leads to a sterilized interventions strategy with a temporary and impermanent stabilizing component; in the case of Mexico, it has fostered earnings for institutional and international investors.

In the article, “Mexico: Price Stability and the Limitations of the Bank Credit Channel,” Josefina León and César Alvarado introduce an analysis of credit and its influence on Mexican economic development. They explain that the existence of an oligopoly means that in the Mexican financial sector, credit does not flow to the most productive projects, nor on the best terms, so there is no confidence in payments and savings do not receive adequate returns. This article is divided into three sections. The first provides a theoretical overview of the importance and impact of bank credit; the second analyzes the case of Mexico, especially the features that inhibit bank credit from driving economic growth and the third offers conclusions. With an analysis of the Mexican banking system, the authors focus on certain elements that make the credit market inefficient and therefore hinder economic growth. The determinants they point out to explain this inefficiency include the fact that both deposit collection and credit granting are highly concentrated. The banking institutions Bancomer, Banamex and Banorte alone account for 51.48% of deposits and 55.42% of credit. They reinforce the hypothesis that the oligopoly is a key element preventing the credit market from becoming more efficient and therefore driving economic development in Mexico, and from there, they reflect that development banking is key to increase competition and support strategic sectors that commercial banking has failed to support, not to mention financial reforms to bolster competition, enhance financial inclusion, combat informality and encourage financial intermediaries to take risks with the credit they grant.

One of the manifold objectives of the North American Free Trade Agreement (NAFTA) was to reduce migration flows to the United States. However, the issue of migration did not formally appear in the NAFTA structure because it was thought that the free movement of capital and commodities would reduce the flow of migrants. The paper entitled “Migration from Mexico to the United States: The Renewed Liberal Paradox of NAFTA,” by Genoveva Roldán, addresses jus this topic. It consists of two main sections: the first looks at the theoretical aspects of migration, explains the phenomenon and tells why it must be stopped through economic integration; the second describes the trends of Mexican labor mobility over the past 20 years. The solution to migration, implicit in NAFTA, was coherent with the liberal school of thought and proposed reducing migration flows by economically integrating the countries. This school asserts that the liberalization of trade and investments promotes economic growth and leads to economic convergence, making it possible to reduce migration flows. This proposal is paradoxical because globally, when there is trade liberalization or agreements, the emphasis is generally on liberalizing trade and the circulation of goods, capital and investment, but with restrictions on labor mobility. Over the past 20 years, migration between Mexico and the United States has grown to such an extend that it is now one of the largest migration systems worldwide; this reality is incongruent with the purposes NAFTA was to fulfill with respect to migration.

The central idea of “Stock Market Behavior in the Emerging G-9 (BRICS+4),” by Miriam Sosa and Alejandra Cabello, is a search for empirical evidence to demonstrate the viability of establishing a group known as the G-91 (BRICS+4), considering the relationships between the macroeconomic activity and stock market activity of each country. The authors propose that this emerging group of economically significant countries holds an important position and has a broad scope to act on the global level; thus the idea to examine the relationship between the macroeconomic variables and stock markets, to determine whether there is potential for this group, which would only be feasible if certain of the variables studied are homogenous across the board. The macroeconomic variables considered are: consumer price index, industrial production, export volumes and international reserves. The variable representing the stock market is the various stock market indices of the countries studied. The models are multifactorial, VAR, variance decomposition and impulse-response functions. They all take into account the factor of systematic risk, that is, how the four macroeconomic variables affect the sector or stock market. The results of the multifactorial model show evidence of heterogeneity, that is, in each of the economies analyzed, the stock market is affected by different variables. In Brazil, Russia and Turkey, inflation was the best explanatory variable for stock market indices, with a positive effect, while inflation had a negative effect in India and China. For Mexico, inflation and industrial production had a positive impact, while international reserves and exports negatively affected the stock market index. The conclusion is that because there are marked differences in the magnitude and nature of the effects in each economy, this grouping of countries is not viable. Based on the appraisal of the four macroeconomic variables and their respective stock markets, it is clear that they are heterogeneous structures with strong discrepancies. It should be noted, however, that the stock market had a common explanatory factor, making the stock market sector sensitive to these two variables.

The article “Subsidies in the Negotiations for China to Join the WTO: Implications for Development,” by Monica Gambrill, mentions that there is a direct relationship between the continuation of the temporary importation for re-exportation regime and the increase in the manufactured exports of the People’s Republic of China (PRC) following its accession to the World Trade Organization (WTO), especially in the elimination of a series of export subsidies and the application of certain multilateral rules on subsidies and, concretely, the preservation of special economic zones. As such, the effect of export subsidies on manufactured exports and the trade balance is positive. These actions contradict WTO prescriptions, specifically with regard to the prohibition on export subsidies for all products and all members included in the Uruguay Round (1995) and later in the Agreement on Subsidies and Countervailing Measures (ASCM), which is part of the General Agreement on Tariffs and Trade (GATT) (1994). It is worthwhile to note that the PRC negotiated its accession to the WTO under the Marrakesh Agreement and the Report of the Working Party on the Accession of China, which granted certain exceptions in sensitive areas. What is clear is that the rules were designed to satisfy the needs of the PRC, prioritizing foreign direct investment (FDI), while also obliging the country to speed up its transformation towards a market economy. In this way, following its accession to the WTO, the export sector enjoyed seven continuous years of extraordinarily high growth rates, while imports grew at a lower rate. This is thanks to the pronounced specialization of the PRC in the exportation of manufactured goods and not primary goods. Finally, Gambrill concludes that despite the fact that the ASCM prohibits export subsidies, the WTO accession protocol for the PRC made some exceptions to these rules, allowing the PRC to promote its manufactured exports in special zones that it had established since long before its accession.

Germán A. de la Reza authored the paper, “Art. XXIV of the GATT/WTO: The Relationship Between Regionalism and Multilateralism,” which contemplates the interaction of Regional Trade Agreements (RTA) and multilateral negotiations through World Trade Organization (WTO) Art. XXIV. It mentions three positions with respect to RTAs: the first, regarding the relative autonomy of RTA objectives, which exceed their function as an alternative to multilateral deficiencies; the second maintains that RTAs are an intrinsically discriminatory scheme and the third postulates that regionalism responds to relatively autonomous interests. In that sense, RTAs, in their bilateral, plurilateral or transregional variations, are partners in the creation of the global economic system, and this position is the author’s hypothesis. Historically speaking, RTAs have not had positive effects. Even now there has been testimony, such as the Fourth Ministerial Conference, Doha 2001, to the incompatibility of agreements, even though China is now part of the WTO. Despite the fact that WTO objectives have virtually been paralyzed, between 2009 and 2014, RTAs continued to invoke the idea of regionalism as an alternative to the failings of the WTO. However, the reduced capacity of Art. XXIV in negotiation processes has not driven greater depth and coherence between regionalism and multilateralism.

The reviews section recommends five books: The Solidarity Economy in Mexico, coordinated by Boris Marañón, reviewed by Hilda Caballero; The Economics of Public-Private Partnerships. A Basic Guide, by Eduardo Engel, Ronald Fischer and Alexander Galetovic, reviewed by Daniel Flores;The Oil Economy in a Politicizedand Global World: Mexico and Colombia, by Alicia Puyana, reviewed by Isabel Rodríguez; Trilogy, How to Sow the Seeds of Development in Latin America, Problemas del Desarrollo Collection of Books, coordinated by Alicia Girón, reviewed by Nora Ampudia and, last but not least, Good Living and Decolonization: A Critique of Instrumental Development and Rationality, coordinated by Boris Marañón, reviewed by Erika Martínez.

Alicia Girón
Journal Editor
unam, March 2015

1 Brazil, Russia, India, China, South Africa, South Korea, Indonesia, Turkey and Mexico.

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 194 July-September 2018 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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