WHY IS TRADE REFORM SO POPULAR IN LATIN AMERICA?

WHY IS TRADE REFORM SO POPULAR IN LATIN AMERICA? A CONSUMPTION BASED THEORY OF TRADE POLICY PREFERENCES

A. Baker

World Politics 55 (April 2003), 423-55

A Summary 

In a Nutshell

Trade theory generally states that individuals make judgements about trade policy based on retrospective economic evaluations about earning power why is it that when polled Latin Americans consistently believe free trade to be good or somewhat good for the country. Particularly it is much more popular than privatization and this indicates that support of trade is not part of some wider stamp of approval for economic liberalism.

 The Heckscher-Ohlin model predicts that the relatively poor of Latin America should benefit from freer trade as they form the abundant factor: cheap labour. Conversely capitalists, including those with accumulated human capital, should be worse off, as it will be more profitable to import the services of such factors. This has not proved to be the case. Rather free trade has proved disastrous for employment opportunities at the lower end of the job market, the informal sector size increased greatly during the transition period. This may well be because those who are best able to benefit from free trade are those who have high levels of human capital as they have transferable skills and as such are able to adapt better to the shifting configuration of labour demand, and move more flexibly through the market. Thus in regions such as Latin America with large possibly majoritarian populations of undereducated people who have skills that are more specific to a particular sector or type of employment, there should be resistance to free trade policies.

 A retrospective economic evaluation based on earning power by citizens of Latin America should be negative for the majority who have lost out from trade opening. Why then does free trade seem to be so popular?

 The answer could be found in consumption. Most scholars overlook the fact that preferences for free trade could be formed by beliefs about liberalization by observing its impact on prices, quality and availability of goods for consumption. Under ISI citizens were charged extra to protect industry’s inefficiencies, and so once this system is dismantled all else equal there will be beneficial impact on prices for consumers. Thus individuals may be more willing to base their trade preferences on their status as consumers rather than producers of income earners. It could be that the links between trade liberalization and employment/wage variability are not obvious to those directly affected. Additionally everyone in the country is a consumer but not all are producers, meaning that trade preferences will be better tracked by trends in consumption rather than production.

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