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American Politics and Society - Summer
State developmentalism without a developmental state: The public foundations of the "free market miracle" in ChileKurtz, Marcus
If export orientation is a goal in a sustainable development strategy, this study argues that public interventions at the sectoral level in a variety of markets can produce economic reorientation that pursues international comparative advantage faster and at lower cost than free market forces can. Pervasive failures in information, credit, input, distribution, and insurance markets can render strictly market-based adjustment both slow and costly. Although Chile's export boom and high growth rates have been associated with its free market economic policies, this article, based on a comparison of the fruit, fish, and forestry sectors, contends that new forms of public intervention were crucial catalysts in shaping a sustained export response.
The economic catastrophe sparked by the debt crisis of the 1980s in Latin America sounded the death knell for import substituting industrialization (ISI). Conversely, the postwar success of the East Asian economies demonstrated the centrality of export performance to any sustainable strategy of development. But if economists generally agree on ISI's flaws, particularly its anti-export bias and its tendency to produce rent seeking (Krueger 1974; Bates 1981), they have been comparatively less successful at elaborating a paradigm for successful export orientation.
Neoliberals, who see government failure as pervasive, argue for rapid and comprehensive liberalization as the only strategy that can simultaneously produce export orientation and avoid the inefficiencies of subsidy and protection (Krueger 1988, chap. 5; Bhagwati 1991; Williamson 1994). Developmentalists, on the other hand, are confident that at least some states can outperform market forces; and they argue for strategic trade and industrial policies (Evans 1995; Wade 1992; Haggard 1990). While neoliberals are correct in emphasizing the importance of export orientation, their prescription of rapid trade liberalization is undermined by the pervasiveness of market failures in poor countries. Consequently, there is much room for effective public intervention, even in contexts that lack the unusually capacitous state bureaucracies found in East Asia.
The idea that market failures pervade poor countries is not new. Indeed, it has been suggested that the historically high levels of state intervention in much of the underdeveloped world were a consequence of states' limited institutional capacity to perform effectively the regulatory functions crucial to the operation of markets (Chaudhry 1993, 249-52). Historically, however, statism has been associated with ultimately unsuccessful, inward-oriented development strategies, placing the very notion of public intervention into question. Given the goal of export orientation, however, this study will argue that public interventions at the sectoral level in credit, input, risk, information, and distribution markets can produce economic reorientation along the lines of international comparative advantage more rapidly and at lower cost than "market" forces alone.
The argument is not that free markets will fail to produce reorientation. Rather, they can induce a suboptimal process of adjustment, in two senses. First, they needlessly provoke high levels of inequality, asset concentration, and poverty. Second, they produce excessive economic costs from delayed investment in new export sectors, lost output in existing industries, and the misdirection of capital into speculative ventures. In underdeveloped countries where market failures are prevalent, strictly liberal policy reforms will eventually produce export reorientation, but at a high price-higher than what can be attained when the state actively intervenes to redirect investment and correct market failures.
This argument is based on the case of Chile, ironically one of the first countries to launch a sustained program of economic liberalization; a country that experienced high rates of growth and the emergence of a large nontraditional agroexport response in fruit, fish, and forestry products. In many ways, Chile should represent a "least likely" case for the contention that direct state intervention is crucial to export success. Indeed, Chile's export boom and sustained high growth rates have almost universally been associated with its free market economic policies (Nogues and Gulati 1994; Edwards 1995a). This article pursues the counterintuitive contention, which has recently emerged in the economic literature, that trade liberalization was not necessarily the cornerstone of Chilean export success (Schurman 1996a). Instead, new forms of public intervention were crucial catalysts.
This argument hinges on a sectoral comparison. In sectors where public intervention to correct credit, information, risk, and marketing failures was early and strong, fish and forestry export response was rapid and sustained. Where the state was much less willing to intervene (fruit), the emergence of dynamic exporters was delayed, and ultimately produced at excessive economic and social costs.
But if public intervention and promotion are as important as "correct prices" in producing export reorientation, then rapid and sectorally neutral liberalization of trade (both import and export regimes) may be an undesirable strategy. In Chile, exports surged even when trade policies were becoming more protectionist. Consequently, the case for broad-based and speedy trade liberalization weakens considerably, particularly because of the damage liberalization does to installed industrial capacity.1
Indeed, the optimal strategy for international economic integration may be illiberal in terms of both imports and exports. That is, public action to promote specific new export sectors can be combined with a gradually declining and sectorally differential tariff regime as part of an industrial policy aimed at export orientation. The point is not to defend inward orientation or ISI, but to show that nontraditional export sectors can be launched while adjustment (not deindustrialization) in manufacturing is promoted through a differential but declining tariff regime.2
This accords with recent reevaluations of the failures of ISI in Latin America and the successes of export orientation in East Asia. These analyses have revalued the forms of microeconomic intervention used in East Asia (such as industrial policy, sectoral targeting, and selective protection), which, when applied in Latin America, have often suffered from guilt by association with the unwise macroeconomic distortions that characterized import substitution.
Chile's primary product-based integration into the global economy has developmental implications. Two questions guide this discussion. First, can a focus on exporting natural resources continue to underwrite growth for the Chilean economy? Or will these sectors come to be characterized by declining terms of trade and increasing international competition? Second, are market forces fostering the creation of new manufacturing export sectors linked to existing natural resource sectors? Will neutral, market-based capital allocation produce investment in areas that will move Chile up the product cycle? Although the evidence to date is necessarily tentative, it may well be that without an active, sector-specific developmental effort by the Chilean state, the answer to both questions is no.
THE CHILEAN MIRACLE
In aggregate macroeconomic terms, Chile's recent economic performance undeniably has been remarkable. In the 1970s, one of the South American continent's most protected economies was rapidly (and surprisingly) opened to international competition. By the mid-1980s, economic growth had far surpassed historical levels, averaging 7.0 percent over the decade 1986-95. Agricultural, fishing, and logging exports managed 6.6 percent growth over the same period (IDB 1996, 409). Meanwhile, inflation moderated from an already historically low 20.1 percent average for 1986-90 to 13.3 percent over the period 1991-95. By 1997 it had dipped as low as 6.2 percent.
Orthodox economists have attributed this impressive export performance to the neoliberal package of trade liberalization, privatization, and elimination of capital controls (Dornbusch 1993, 14; Edwards 1995b). But such arguments beg two critical questions: What is the direct evidence for the export-inducing effects of the highly open trade regimes? and What output was lost or foregone as a consequence of rapid import penetration?
Closer examination shows that the initial confluence of trade opening and export expansion obscures serious inconsistencies. The trade opening initially launched by the military government between 1973 and 1975 was gradual and sectorally discretionary. It used increased international competition to spur modernization and adjustment in the existing industrial sectors. By 1974, the maximum tariff was reduced from 750 to 120 percent, the average tariff fell from 105 to 57 percent, and quantitative restrictions, import licensing, and prior deposits were either virtually eliminated or left unenforced (de la Cuadra and Hachette 1991, 218-19). This removed the water in the tariff and increased competition, but without threatening the survival of the manufacturing sector as a whole. And protection remained biased in favor of final-goods production; tariffs were lower for inputs and capital goods.
In 1975 the goal shifted toward economic reorientation. Instead of being adjusted, existing industries were to be allowed to collapse, freeing the resources they represented for investment in natural resource-based exports more immediately in line with Chile's static comparative advantages (ODEPLAN 1977, 78). Tariffs were first reduced to a range of between 10 and 35 percent for raw materials and manufactured goods, respectively (de Castro 1979, 208). Next, protection was reduced to a uniform 10 percent (in June 1979), ending the bias in favor of local manufactures that was embedded in the trade laws. Trade policy became extremely liberal as quantitative restrictions, subsidies on exports, and even antidumping and countervailing duties were abandoned (de la Cuadra and Hachette 1988, 76). At this point, the most rigidly orthodox economic policies were in place; the state observed strict liberal neutrality in its import and export regimes.
Unfortunately, trade liberalization had more success generating imports than exports, at least in the medium term. Over the entire 1973-81 period of deepest liberalism, trade surpluses were recorded only during the recession of 1975-76, and then only as the result of import compression, not export expansion.3 Indeed, if we take as a baseline for "normal" import levels the average over the period 1977-79 (after the 1975-76 recession, before the overvaluation of 1979-81), the level was $3.21 billion. Following the catastrophes of the debt crisis, this level of foreign consumption was regained only in 1987 ($3.79 billion). The trade surpluses recorded even as late as the 1983-86 period thus can be considered largely the result of import restriction (austerity), and only partly the result of strengthening in the nontraditional export sectors. The surpluses recorded after 1987 reflect the real success of the export-led model-a product not of austerity but of growth (see table 1).
More critically, the substantial trade surpluses recorded after 1983 arose in a period when protection was increasing. Tracing how world prices became increasingly distorted and exports expanded, it is difficult to assign strong causal priority to rapid and sectorally neutral trade liberalization in the 1970s. Nor do the lags between investment and agriculture and first harvest (as much as three to five years for some Chilean crops) account for the gaps. The period of greatest liberalization (1976-79), but before serious peso overvaluation distorted relative prices in 1979-82, was followed four years later by an increase in the value of fruit exports from only US$159.2 million to $183.6 million (in constant dollars of 1980). But acreage planted in grapes-representing new investment in Chile's premier agricultural export-doubled between 1982-83 and 1985-86, just as credit scarcities, economic collapse, and a tripling of tariffs took place (CIREN 1987, 64).
The argument here is not that trade liberalization will fail to induce sectoral restructuring, but that in small underdeveloped economies, market failures will make it a decidedly inefficient means of achieving the goal of export orientation. The likely result will be a very rapid increase in imports but a decidedly slow response in new nontraditional export sectors. This pattern fits the Chilean data on nontraditional export (NTX) performance (see table 1).
The early expansion of forestry exports is the exception that proves the rule. This was one of the very few areas receiving massive state subsidy and promotion during the era of peak liberalization (mid-to-late 1970s). The truly impressive increases in most exports occurred long after the period of serious trade liberalization had been substantially reversed; indeed, long after military rule itself had ended. In 1983 tariffs were raised to 20 percent, and then in 1984 to 35 percent, returning to 20 percent in 1985. At the same time, the peso was devalued by 23.6 percent (de la Cuadra and Hachette 1991, 269-70). Exports, moreover, strengthened even as the peso became overvalued in the early 1990s; from 1989 to 1994, fruit exports nearly doubled (ODEPA 1995, tables).
Why did investment surge in Chile's areas of comparative advantage at precisely the time when international price signals were being sharply distorted by price supports for traditional (domestically oriented) agriculture and a tripling of tariffs? The answer lies in the incentive structures facing entrepreneurs in the Chilean rural sector and the public interventions that helped reduce the market failures that previously suffocated productive investment. Obviously, a single time-series cannot alone adjudicate between liberal and developmentalist explanations of Chilean performance. Yet our comparison tries to show that trade data are inconsistent with the neoliberal argument that import and export liberalization were the key engines of outward reorientation. Structured comparisons among the three emergent nontraditional sectors (fruit, fish, and forestry), by contrast, encourage the contention that public intervention was the crucial component.
BEHIND EXPORT SUCCESS
Orthodox interpretations typically account for Chile's success with nontraditional export crops as a product of the neoliberal reforms undertaken during military rule. The crucial causal factors typically identified are a real devaluation to remove the antiexport bias of import substitution, and trade liberalization that reduced the cost of capital goods and inputs and shifted relative prices in favor of exports (see Edwards 1995b, 133). In principle, the argument is that once international prices are reflected in the domestic economy, resources will more or less unproblematically flow into areas of comparative advantage.
This study takes a contrary position. Trade liberalization not only was not principally responsible for export success; at some points it actually hindered the process of adjustment. Nor was devaluation critical. The Chilean currency suffered a sharp devaluation immediately after the 1973 coup that installed the military regime, and with the exception of the 1979-82 experience with fixed exchange rates, it was not sharply overvalued. Although Chilean exports surged in the 1980s as the peso devalued, they also surged in the early to mid-1990s as international prices for nontraditional crops declined markedly and the peso appreciated.
Once broadly appropriate international prices were obtained, purposive state action to correct critical market failures in information, infrastructure, credit, and insurance and risk made possible the rapid entry of private capital into dynamic export sectors (especially forestry and fishing). In those cases in which state support was limited (fruit), private adjustment was delayed and characterized by severe class biases and oligopolies. Even when more active state regulation of the economy returned in the latter portion of military rule (after the crisis of 1982-83), it was not sufficient to compensate fully for the inadequacies of the Chilean market economy.
As a consequence, adjustment to trade opening in Chilean agriculture took on a decidedly dualistic and suboptimal shape. Although market failures bedeviled all rural producers, public efforts to correct them were disproportionately targeted at larger capitalist farms, not the family farms that had emerged from the agrarian reform. Thus an important potential source of export production was lost, leading to increasing concentration of landholdings, rising poverty and inequality, and the decapitalization and marginalization of an important economic sector.
Market-based Adjustment and Agricultural Dualism
Despite a momentary opportunity to develop a substantial small-farmer class, the neoliberal mode of adjustment instead created an increasingly polarized pattern of land tenure as larger and smaller growers were differentially able to take advantage of the transition to export crops. The transfer of lands out of the peasant sector and into capitalist agribusiness hands can be seen in table 2.
As a result of the 1967-73 agrarian reform, the military found itself in control of over 40 percent of the best agricultural land in the country, most of it held under collective forms of tenure. This property was quickly privatized through sale at auction, restitution to expropriated landlords, and transfer into peasant hands, the last accounting for 51.6 percent of the total (Departamento de Economic Agraria 1980, 25). The eventual reemergence of private land markets, however, quickly transferred a large portion of this land out of peasant hands. By 1978, 36.8 percent of peasant beneficiaries of the agrarian reform already had wholly or partially ceded their land to nonpeasant buyers (ICIRA 1979, 116). By 1986, only 43 percent of agricultural land was in peasant hands, much of it in marginal microholdings; and by the early 1990s, the total had declined to a mere 39 percent.4
Why did this smallholding stratum of peasants fail so completely while Chilean agriculture was exploding so spectacularly (and profitably) onto global markets? Jarvis (1992b, 14) points out that after the coup, when property rights grew stable and agricultural wages plummeted, returns to exporters of fresh fruit were as high as $10,000 to $15,000 per hectare. At the same time, land was exceedingly inexpensive, roughly $1,000 per hectare. Profitability at this level should have provoked a flood of new investment. Surprisingly, however, massive investment in fruit agriculture waited almost a decade, and was controlled almost entirely by a new stratum of capitalist agribusiness interests. Peasant beneficiaries of the agrarian reform almost never made a shift into export production.
The notable class differentiation of export production is typically explained with the argument that family farms (on the order of 10 to 15 irrigated hectares) cannot compete in cost and efficiency with larger capitalist farms.5 Some agricultural economists have suggested, however, that this dramatic class segmentation of agriculture is not the product of competitive market forces. The price that fruit growers receive is very tightly connected to the quality of the product (which responds to labor inputs); family labor is very inexpensive and more careful than the low-- wage temporary workers who dominate the capitalist farming sector. These are good reasons to believe that smaller farms can be competitive (Carter and Barham 1996, 1138; Jarvis 1992b, 15). In Chile, therefore, it is the discriminatory effects of market failures that have caused both the tardiness of investment in the sector and the class biases that affect access to new export opportunities.
Failures in information, credit, distribution, and risk-assurance markets have bedeviled all growers interested in pursuing export agriculture. In Chile, these market failures later began to be corrected through the private action of large multinational fruit-exporting companies and processors, but in ways that introduced dramatic class biases into the process of agricultural modernization; indeed, even the capitalist growers who made the transition found themselves in a dependent and vulnerable position.
Market Failure and Investment
Information is the first and most critical requirement for the redirection of investment-a point frequently omitted in standard discussions of comparative advantage (Keesing and Lall 1992). Potential agricultural exporters must first be aware of profitmaking opportunities in foreign markets, and second must have access to the necessary technology to compete successfully in those markets. Survey evidence suggests that growers consider information on market prices and technology transfer absolutely critical to success (for some of the risks, see USAID 1994, 32).
This sort of information, however, is a public good that is typically underprovided in private markets (USAID 1994, 14; Jarvis 1992b, 47). And in Chile, a country with little history of agricultural exports of any kind, access to private sources of such information is even less likely. Private provision of agricultural extension and research can only have the potential to exist where agricultural exports are well established. But over the 1967-69 period, agricultural and fishing exports averaged a paltry $25 million, a mere 2.8 percent of total exports (calculated from Banco Central de Chile 1989, 362).
Recognition by potential investors of Chile's agricultural comparative advantages did not, however, simply result from the advent of "correct" international prices. As early as the mid-1960s, the state began actively promoting fruit agriculture both directly and through a massive irrigation campaign (ODEPA 1994, 14). As part of the 1967 plan for fruit development, CORFO, the public development agency, provided the infrastructure and resources-market analysis, technology transfer, credit, tariff drawbacks, and phytosanitary inspections-essential to export success. In 1964, the National Institute for Agrarian Research (INIA) was established to build domestic capacity in agricultural technologies (Jarvis 1992b, 11-12).
With the coup, however, these critical information roles for the state were dramatically scaled back. The land reform agency and its associated research center were closed, and agricultural extension (INDAP) and research (INIA) suffered severe cutbacks. What technical assistance was available was provided on a fee-for-service basis, and its provision in a manner accessible to peasants would await the return of democracy (Jarvis 1992a, 197; Gwynne and Kay 1997, 5). In infrastructural terms, after 1973, virtually no new major irrigation projects were launched-in comparison with the investment of more than US$500 million between 1965 and 1973.
Given the high risks involved in agricultural exports, the demanding quality standards of international markets, and the virtual elimination of public technical support and market information, it is not surprising that investment in fruit production remained low in the 1970s. The investments that subsequently launched the first major expansion of fruit exports, by contrast, were made between 1979 and 1982, when the Chilean peso became severely overvalued and relative prices moved against exports but public and private efforts to correct market failures expanded. Price signals, when they were favorable, were, conversely, often unable to induce sustained investment. Indeed, much of the critical investment in fruit production occurred as the relative price picture deteriorated. Fruit prices declined steadily after 1985, and the peso became overvalued in the 1990s. Nevertheless, exports surged from $291.6 million in 1984 to $963.1 million in 1994 (ODEPA 1994, tables).
It can be argued that much of the gain in output recorded in the mid-1970s reflects the public investments made before the coup, investments that were made in the decidedly hostile price context of exchange rate overvaluation and restrictive import regimes. Given the lags between investment and first harvest, they had to have been made while the state controlled or managed the bulk of the agrarian sector. When private investment in fruit agriculture finally did occur on a large scale, it did so in competition with a return to import substitution in basic grains (after 1982). This should have drawn capital out of NTX sectors and into this rental haven. (On support for domestic food agriculture, see World Bank 1995, x).
Assuming that accurate information about the opportunities for export agricultural production exists, the second barrier a producer faces is the acquisition of the capital with which to transform production. Failures in capital markets-which disproportionately affect small producers-were a significant problem as well. Nontraditional agricultural conversion requires investments sustained over relatively long gestation periods, and substantial amounts of working capital (Carter et al. 1996, 40-51). Gwynne and Ortiz (1997, 29) suggest that aside from the cost of the land itself, the present cost of converting land to table grape production in a typical part of the fruit region of the central valley would cost about US$31,500 per hectare. During the crucial time of adjustment, the mid-1970s, capital, when it was available, was very expensive. Real interest rates averaged 35.5 percent over the 1976-82 period (calculated from de la Cuadra and Valdes 1990, 16).
At these "market" interest rates, few farmers would willingly borrow. Peasants were, however, excluded even from this extremely expensive formal credit system. Small-holding beneficiaries of the agrarian reform each carried the burden of a proportional share of the debt acquired during the expropriation process, and their farms began to operate in a highly decapitalized state Jarvis 1992a, 194). Public credit through the Banco del Estado de Chile or the agricultural extension agency was dramatically reduced or terminated. Private banking institutions were reluctant to make loans to small producers, whose overhead costs are higher and risks are difficult to evaluate.
All these limitations made the acquisition of even working capital very difficult. Often, peasants were forced into usurious "in kind" loans from former landlords (Olavarria 1978, 23). When investments were contemplated that were dramatically in excess of the value of agricultural land-as they were in the conversion to grape production-banks did not extend that degree of unsecured credit to peasants. What lending did emerge, moreover, appears to have been more a mechanism for the redistribution of land to capitalist producers through the default vehicle. (For data on the credit-oriented causes of land loss, see ICIRA 1979, 119.) Loans more often provoked foreclosure and land sale than entry into NTX production.
The military's few public investments were made largely for irrigation (as necessary for export agriculture), organized under Law 18.450 of 1985; these overwhelmingly benefited large producers, who captured 95 percent of the subsidies (Kay 1997, 20). Credit markets failed all growers in the 1970s but were particularly unfriendly to small producers. Given this situation, even under equal competitive conditions, capitalist growers would expand at the expense of smallholders; the capitalists would be more able to ride out the inevitable ups and downs of agricultural production because of their preferential access to credit.
Successful investment also requires reliable access to inputs, distribution channels, and, especially in agriculture, insurance against risk. Before the military coup, agricultural inputs were typically publicly provided, but after the military's privatizations they came to be dominated by private oligopolies (P. Silva 1987; Gomez and Echenique 1988, 181). For service inputs (information about operation in foreign markets or technical assistance), private providers did not exist at all (USAID 1994, 16-17). For smaller producers, successful sale of the crop is also difficult (and uncertain): distributors prefer to deal with large growers to minimize overhead costs and supply or quality problems (Murray 1997, 49). Peasants and small producers were typically left in the uncertain role of swing producers.
Finally, agricultural production is shot through with risks, from volatile prices to changes in weather patterns to blights and infestations. Where year-to-year variations pose substantial subsistence threats, adequate crop insurance or futures markets are a sine qua non for investment. Peasant cooperatives and public marketing boards, the historical means to supersede such problems, were largely dismantled by the state in pursuit of its neoliberal developmental model (Barria et al. 1988, 195-205). This coincided with a political vision that sought to undermine the social and organizational bases of reformist or radical politics.
Private Solutions to Market Failures
Given all these problems, many of which affected even large producers (particularly the scarcity and cost of capital), it is much more surprising that capitalist agriculture successfully reoriented to fruit production than that peasant agriculture failed. An examination of how this was accomplished is enlightening because it also suggests what might have been done to make the development of nontraditional exports a much broader process. One segment of Chilean agriculture, fruit crops, overcame the market failures described here through a private contract-farming mechanism. But this was an adjustment that came late and at a high price, both for those growers excluded and those lucky enough to participate.
In historical terms, export agricultural production originally took off only because of the structural reforms and agricultural investments undertaken by the democratic governments of Eduardo Frei and Salvador Allende (1964-73). Certainly the pre-coup developmental bureaucracies had recognized where Chile's comparative advantage lay. The 1965-80 agricultural development plan outlined as two of three principal goals a change in agricultural production to favor fruits, sugarbeets, and corn; and the creation of a surplus in the agricultural balance of trade (ODEPA 1968, 14-15). As part of this process, the agrarian reform would redistribute lands of large (and largely unproductive) haciendas; real crop prices would be raised to create incentives for private investment; and substantial provision of marketing, irrigation, and export services would be launched (ODEPA 1968, 79-98).6
Without the structural reforms of the pre-coup democratic period, land markets would not have been easily created, irrigation would have been far less available, and its private provision would have been nearly impossible. Most important, the positive externalities generated by the early, publicly funded efforts at fruit export ("bandwagon" and "catalytic" effects), while hard to measure, were probably important in overcoming uncertainties and information deficits (on these sorts of externalities as a justification for public intervention, see World Bank 1990, vii; USAID 1992, 3-7). It is a sign of the earlier democratic governments' commitment to exports that substantial investment-and noticeable success-took place even in the context of rapid structural transformation, uncertainty about property rights, and political instability.
The most important barrier to export grape production, the scarcity of information and investment capital, was eventually resolved through the action of private actors. Multinational and domestic fruit export companies finally-for a segment of agrarian producers-provided technology transfer, finance, and marketing support on a contract-- farming basis. Under this system, cheap credit is allocated to growers on the condition that a strict timetable of inputs (often provided by the same export firm) and harvest is observed. In the process, control is transferred to the export companies, and margins paid to growers are reduced (for a detailed description, see Murray 1997, 48). Thus, where credit markets have failed, private firms have filled the gaps (but only for larger producers), and at the expense of both grower profits and economic autonomy.
These private firms, however, managed to correct market failures and even to provide public goods (technical assistance, market information, quality control) because they operated in a collusive fashion. Not only did they collude to pay a uniform price to growers, but by the 1980s, through their industry association, they "regulate[dl competition for suppliers among buyer firms" and shared information on costs, yields, and international standards (Perez Aleman 2000, 46, 48). This double-edged, cartellike pattern of industrial organization solved market failure and collective action problems, but also shifted the balance of power upward among distributors, processors, growers, and peasants-- generally in that order.
Public Action and Private Success
The two other NTX sectors in which Chile has been particularly successful are fish and forests. Here, the bulk of the market failure-correcting interventions came from the state itself. Under decree law 701 of 1974, the state provided ample subsidies for timber planting (E. Silva 1997, 378). Their effect was enormous. Lands forested under DL 701 were exempt from existing taxes; they received subsidies of up to 75 percent of establishment costs; and (from 1975 to 1979) they could be planted with inexpensive credits from the central bank (Gwynne 1993, 151). Until 1979, substantial planting was even directly carried out by the state forestry corporation (CONAF). Even this promotional support was suboptimal, however, insofar as it principally benefited large producers.
As table 1 shows, the yield from this investment was substantial. The early export surge reflects the legalization of raw log exports in 1975 and plantings carried out by previous democratic administrations. The later surge in the 1990s is strongly connected to the plantings promoted in the 1970s. The maturation time for timber in southern Chile is as little as 20 years (Gwynne 1993, 154). By 1994, forestry exports had reached a total of $1.4 billion (ODEPA 1995, table 4.1).
Direct state promotion was also vital in the fishing sector. In Schurman's study of fish-processing entrepreneurs (1996a, 96), access to credit is clearly a crucial barrier to successful investment. Indeed, in 1983, more than $231 million in cheap credits from the Inter-American Development Bank (IDB) and the Chilean Development Corporation (CORFO) were made available to investors in NTX sectors. Another $310 million was made available in 1986. Fully half the seafood plant owners in Schurman's study received loans through this mechanism (1996b, 1698). Problems related to overfishing soon appeared, moreover, emphasizing both how rapidly investment entered this promoted sector and how much regulatory interventions were needed to assure its sustainability (Pens 1996).
The free market approach to agricultural restructuring implemented by the Chilean military government was valuable in that it recognized the importance of encouraging agricultural exports. The neoliberal economic model in Chile eventually produced a successful reorientation of the economy along the lines of international comparative advantage, albeit with substantially more state intervention than is commonly acknowledged. The way it was generally achieved, however-emphasizing market price signals and wholesale trade liberalization-produced severe costs for import-competing domestic industry and food agriculture. It also heightened rural inequality, left peasant labor underutilized, and created negative externalities. All this may be a necessary price for adjustment to succeed, but only if wholesale liberalization is indeed the root cause of export success.
At first glance, those costs do not seem high. Employment, for example, increased substantially as nontraditional agricultural exports utilized substantially more labor per hectare than the more extensive grain cultivation they replaced. It could also be argued that the class biases in agricultural transformation merely reflect efficient scale; and in any event, as peasants lost land, they gained jobs. Agricultural employment increased dramatically: roughly 472,000 in 1970, it peaked in 1992 at 901,700, then fell back to 816,400 by 1997 (for 1970: Banco Central de Chile 1989, 251; for 1990, 1997: ODEPA 1997, 10). The problem is that this labor force is overwhelming seasonal, strongly segmented by gender, and largely denied the right to organize labor unions to defend living standards (Barrientos 1997; Bee and Vogel 1997, 85-88; Rodriguez and Venegas 1989, Ch. 6; CEPAL 1986, 81-86). Pay rates are better than those that can be obtained, for example, in domestic service, but tend to hover around the legal minimum. For much of the (particularly female) labor force, moreover, only seasonal work is available. The negative implications of this increase in inequality go beyond the sector, affecting even the national developmental trajectory.
The increasingly class-stratified pattern of land tenure shown in table 2 produced the consequence that when agricultural exports surged, so did poverty. By 1987, rural poverty rates exceeded 53.5 percent, rising from a comparatively low 25 percent in 1970 (Leon 1994, 65). Since the democratic transition, efforts to combat this increased poverty have absorbed substantial portions of the national budget, money that under other circumstances might be invested in productivity-enhancing or comparative advantage-creating human capital.
Export promotion, targeted credit, public infrastructural investment, and outright subsidy have all been effectively used to target resources, even in neoliberal Chile.7 They can succeed, moreover, without the enormous short-run costs that accompany rapid liberalization.8 This relationship is at the heart of the East Asian developmental experience, and important echoes of it can be found in Chile's transition to export orientation.9
THE LIMITS OF MARKET FORCES
Despite these difficulties, Chile nevertheless has become a very successful exporter of natural resource-based primary products. The question now is whether the relatively uninhibited operation of market forces will transform this growth into a sustained dynamic of development-that is, movement up the product cycle into higher value-added manufacturing exports. The evidence on two counts is negative. First, as global markets saturate, resources reach their natural limits, and new competitors enter traditional markets, the value of Chilean primary product exports is stagnating. Second, while the market model has led to substantial new domestic and foreign investment, little of that investment has been in new sectors, least of all manufacturing.
Schurman (1996a, 87-88) has made the compelling case that a substantial level of "state developmentalism" was involved in creating Chile's natural resource export sectors. This analysis can be explained in terms of the mitigation of severe and pervasive market failures. But while "state developmentalism" was important in Chile, it by no means has a "developmental state."
Sustained and broadened development will require efforts to create just this sort of public capacity. Otherwise, Chile's entry into manufacturing exports-where economic dividends are higher-will be difficult to bring about. Here, comparative advantages will have to be constructed, and neither climate nor geography help. In a textbook world of complete and competitive markets, public action might not be required to bring this about. In an underdeveloped world of market failures, pervasive rent seeking, and informational deficits, public action may be essential to translate price signals into long-term productive investments. Correct prices by themselves may simply lead to perverse, speculative responses.
There may be limits to the ability of primary product exports to sustain high levels of economic growth in Chile. The case of table. grapes is instructive because it was one of the first nontraditional agroexports to succeed in Chile, and it is easily the most important single food export. The basis for growth in this crop was extensive. Production of table grapes utilized 12,386 hectares of land in 1982-83, expanded to 24,731 hectares in 1985-86, and further to 49,214 in 1990 (data for 1982, 1986 from CIREN 1987, 64; 1997 from INE 1997, table 10). Between 1990 and 1996, however, the amount of territory planted actually declined slightly, to 45,968 hectares. Export volume expanded from 178,400 tons in 1984 to 512,879 tons in 1996, an average increase of 15.6 percent a year (calculated from ODEPA 1995, 1998). Overall, land area planted in grapes has been roughly constant since 1996, while total production has declined in the period 1997-99 (FAO 2000).
This pattern of extensive growth seems to have reached its limits, but it also cannot be easily be replaced with a more capital- (as opposed to land-) intensive pattern of production. First, land suitable for fruit export production is a fixed and finite factor of production. Natural limits will inevitably be reached; indeed, imperfections in land markets will probably make the practical limit substantially lower than the natural one. Second, Chile's entry into world markets was based on "best practice" technology imported directly from producers in California. Although in 1992, Chilean per-hectare grape yields were only 52 percent of the U.S. level, by 1999 they were 76 percent, having reached even 91 percent in the unually good year of 1996 (FAO 2000). The margin for substitution of capital for land to increase yields, at least without substantial indigenous technological development, is very small.
The profitability of this sector, moreover, has been consistently declining. Foreign market saturation, rising international competition from other Southern Hemisphere producers, and monopoly distortions in distributional channels have sapped grape growers' margins (on competition from South Africa, New Zealand, and Argentina, see Murray 1997, 45). Prices received for table grapes peaked in 1984-86, dropping 27.7 percent by 1990-92 (calculated from ODEPA 1992, 21). Since then, international prices have declined. By 1996 they had sunk to 85.2 percent of their 1990 level (see table 3), while prices paid to Chilean growers fell to 66.2 percent of their 1991 levels by 1995 (calculated from FAO 2000 and Banco Central de Chile 2000a).
Similarly, the Santiago price of kiwis dropped 49.5 percent between 1990 and 1996, while apples and peaches have declined on the order of 22.9 and 49.2 percent, respectively. It is a sign of market saturation and increasing international competition that the volume of winter exports into the United States from Chile (February 15 to March 31, when such exports face no domestic competition) has declined from an average of 318,270 cubic meters in 1989-91 to 269,894 cubic meters in 1995-97.
The ability of foodstuff exports to contribute to net Chilean foreign exchange earnings has peaked and, indeed, has begun to decline. The agricultural balance of trade was negative throughout the entire course of military rule until 1985, when it turned positive as a result of the export boom. By 1991, it had peaked at $719.3 million, but it quickly entered a secular decline thereafter, reaching $530 million in 1994 (Banco Central de Chile 1989, ODEPA 1992, 1995). While certainly a contributor to development, the fruit sector in the future will no longer be an engine of growth for the entire economy. The fading of this sector, coupled with sharp declines in copper prices, put the Chilean balances of trade and payments sharply into the red until recession and import compression reversed the trend in 1999.10
Fishing, another principal nontraditional export, is likewise in no position to support future high rates of economic growth. Even before the unpredictable warm ocean current El Nino devastated the Chilean fishing harvest (Agra Europe 1998), serious supply problems were in the offing. Overfishing has led to resource depletion, with concomitant negative effects on the industry's profitability and labor process (Schurman 1996b, 1702-4). Another blow fell when the U.S. Department of Commerce imposed countervailing antidumping duties on Chilean salmon exports (NOTIMEX 1998). Even maintaining current levels of exploitation will be difficult because, despite the end to open fishing in 1986, restrictions on harvest have proven very difficult to enforce (Pena 1996, 370-71). As a result, the survival of the entire sector is in doubt; and as a source of future growth, fishing has surely reached its limits.
This, then, is the outlook for Chile's export reorientation of the Chilean economy in terms of static comparative advantages.11 The question becomes even more pointed when we consider the opportunities for intersectoral capital flows. There is strong evidence to suggest that market forces are not reorienting the economy toward manufactured exports or higher value-added products linked to the natural resource sectors. Pietrobelli (1995, 198-207) has shown that Chile has underutilized its human capital, and that the process of economic adjustment did not lead to the maturation of old ISI firms. Nor has openness to foreign investment provided the necessary resources; it is concentrated instead in areas of existing comparative advantage (Hojman 1995, 8).
Gwynne has shown that in the forestry sector, foreign firms have not invested in higher value-added aspects of production, and that with time, output has indeed shifted to lower value-added products (1993, 157-59). Even the World Bank (1995, 106) is skeptical that a focus on agricultural exports is wise in a world of continuing protection in wealthy countries and probable continuing declines in terms of trade. Indeed, even USAID (1994, 8) has identified the absence of intersectoral capital flows as a key difference between Chile and East Asia. It is well known that in East Asia, the state had a strong role in guiding such flows.
While the merits of free market or developmentalist economic strategies have been the subject of strenuous dispute, there has been little dispute that Chile, at least since 1975, has been a clear example of the former.12 The debate has its roots in competing efforts to understand the policy underpinnings of postwar East Asian economic success. The effort here has been to examine Chile, a "best case" from the perspective of advocates of neoliberal economic strategies, in an effort to understand the basis for its successful integration into global export markets.
This essay does not equate Chilean economic performance since the mid-1980s with the East Asian economic miracles. Not only has growth not been sustained over comparable periods of time, but broader development and distributional measures place Chile far short of the performance of the Asian cases. Growth was rapid nevertheless, and export orientation was achieved.
This article has argued that the important parts of the neoliberal explanation for Chile's development do not fit the evidence, most critically in terms of the role of public intervention or the virtues of radical trade liberalization. When successful integration into export markets occurred, public action was both substantial and crucial. Important elements of the neoliberal model, moreover, were just as often barriers to economic adjustment as promoters of it.
How can this be true, given the near-universal decline of the structuralist economic perspectives that historically had provided the intellectual grounding for state intervention (Prebisch 1959)? And what of the compelling evidence that actual structuralist experiments were disasters (Pastor and Wise 1992)? The answer involves no departure from the neoclassical cannon. Rather, it requires a reinterpretation of the challenges facing developing nations that is more sensitive to the problem of market failure and the associated space for positive state intervention. Advocates of quite liberal trade policies, such as Edwards, have argued that the "ability (and willingness) of firms to implement significant adjustment depends on two main factors: the degree of credibility of the reform and the level of distortions in the labor market" (1995, 30). This paper has argued that these are not always the critical issues; in addition, inadequate information, scarcity of credit, risk aversion, and the underprovision of public goods, such as basic research and development, have often suffocated investment.
The problem is that proponents of free market policies have spent too much time exorcising the demons of import substitution and have not fully appreciated the differences between "export orientation" and "trade liberalization." Too often, we have been confronted by a fictitious contrast between the workings of a decentralized, competitive market economy and that of a centralized, fully planned system. . . . The reality often comes closer to having to choose between an oligopolistic rent-seeking private sector and a predatory, elitist government. (Rams 1992, 99)
The question is not and should not be about the theoretical optimality of free trade given a broad spectrum of functioning, competitive markets. Instead, it should be about what policies are most appropriate in underdeveloped countries where government and market failure are both prevalent. In these contexts, pursuit of textbook solutions can lead to perverse outcomes indeed. And public action, as open to rent-seeking and inefficiency as it may be, might still be the best path to the export orientation that all sides accept as imperative.
This paper would never have been completed without the advice and encouragement of a wide variety of individuals: Andrew Barnes, Peter Houtzaget, Lawrence King, Aaron Schneider, Andrew Schrank, Kenneth Shadlen, and Teresa Wright. Errors and omissions are, of course, the author's.
1. In Chile from 1976 to 1997, the industrial share of GDP declined from 40.5 to 31.0 percent, while manufacturing declined from 23.6 to 15.0 percent (World Bank 1999, 192).
2. This strategy has obvious political and economic benefits. Economic costs are minimized through the gradual adjustment of protected sectors. Politically, resistance is reduced by avoiding a frontal assault on domestic industry; over time, powerful constituencies favoring international integration will develop.
3. Some of this can be explained by exchange rate overvaluation (at least between 1979 and 1982). Even accounting for this, however, exports did not surpass their 1980 level until 1986 (long after sharp devaluation). Thus, the early trade surpluses reflected austerity and import compression, not improved export performance.
4. Kay (1997, 18) cites the minister of agriculture in 1994 who suggested that of roughly 240,000 peasant proprietors in Chile, only roughly 100,000 farmed enough land potentially to convert to more profitable and modern agricultural methods.
5. Indeed, the World Bank (1995, 21) recommends even further concentration of landholdings to take advantage of scale economies, as a strategy to elevate the competitiveness of Chile's export agricultural sector.
6. Ironically, the large but traditional private producers of this era were then seen as the crucial barriers to agricultural modernization.
7. Moran (1989, 498) documents the lengths to which the Chilean state went after the crisis of the early 1980s to promote exports. These included elimination of the VAT on inputs, provision of credit insurance, drawbacks, strengthening of the export-promotion agency (PROCHILE), and exchange rate depreciation.
8. In Chile, these included the devastation of the domestically oriented segment of agriculture, especially in the south, as Chilean grain producers faced competition from the subsidized exports of First World producers (P. Silva 1992, 282).
9. Ranis (1995, 52-53), writing in the World Bank's own journal, argues that in Taiwan and Korea, tariff drawbacks and export-processing zones substituted for broader trade liberalization; and direct public action in infrastructure, human capital formation, credit, and marketing facilitated export orientation.
10. The trade deficits for 1997 and 1998 were US$1.3 billion and $2.5 billion, respectively. In 1999, after a peso devaluation and a sharp decline in imports (to 80 percent the level of the previous year), a trade surplus of US$1.7 billion was recorded (Banco Central 2000a).
11. Barham et al. (1992, 59) add to this a worry that this reorientation will "lock it in the long run into relatively low-skill, low-productivity activities."
12. The notable exception is Schurman (1996a, b), whose prescient analyses were the first to suggest the surprisingly statist policy toward nontraditional agroexport sectors, particularly fishing.
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Copyright Journal of Interamerican Studies Summer 2001
Other articles in the same issue:
- Can international boycotts transform political systems? The cases of Cuba and South Africa, by Kathleen C. Schartzman
- Strong societies, weak parties: Regime change in Cuba and Venezuela in the 1950s and today, by Javier Corrales
- Money, elections, and democracy in Brazil, David Samuels
- Japan's economic presence in Latin America, by Rubén Berrios
- Making and remaking "good government" in Brazil: Subnational industrial policy in Minas Gerais, by Alfred P. Montero
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