Econ212 Final
What is the Washington Consensus?
-A collection of policies to reform Latin America's economies. -When ISI failed, many countries left with large amounts of debt. -Debt had to be restructured and countries agreed to reforms proposed by the IMF and Brady Plan. -The Brady Plan required governments to commit to reforms aimed at controlling inflation, deregulating economies, and fostering competition.
What may explain the decrease in income inequality in some countries and the increase in income inequality in others?
-A combination of economic growth and programs for the poor explains the improvement in inequality.
What did Pinochet do to the opposition?
-All leftist parties that had consulted Allende's Up coalition banned. -All other parties placed in "indefinite recess" and later banned outright. -The governments violence was directed at dissidents and also their families and other civilians. -People disappeared (killed, tortured, imprisoned, exiled)
What policies have the new democratic governments of Chile (since 1990) undertaken that are consistent with the Washington Consensus?
-Chile continued to preserve rule of Law and Property rights. -Chile has kept free markets, lowering tariffs, putting into effect a FTA with the US and many other countries, and welcoming FDI
What was the Mexican Peso Crisis of 1994? What trade agreement did Mexico complete at the time?
-Currency crisis sparked by the Mexican governments sudden devaluation of the peso against the US dollar in December 1994 -Became one of the first international financial crises ignited by capital flight. -The peso crisis occurred right after Mexico signed NAFTA.
Why do most reports on poverty in Latin America use income?
-Few countries in Latin America routinely conduct national household surveys with consumption/expenditure-based questionnaires, while all of them include questions on individual and household income. -Most countries have expenditure surveys that are mainly devoted to the construction of weights for the Consumer Price Index (CPI). However, these surveys are usually carried out over long periods of time (10 years) so they are not appropriate for closely monitoring poverty.
Who were Salvador Allende's enemies? How did Allende die?
-Foreign investors notably from the US due to his nationalization of the copper industry. -Local Business Owners, Land Owners, and the Rich -The people who did not like the effects of the socialist-style planning policies replacing the market system that created goods shortages. -Initial reports say Allende committed suicide. Allende's family supports this but his supporters say he had been killed by soldiers.
What two countries have the highest remittance to GDP ratio in 2017?
-Honduras -El Salvador
Why is it better to use consumption data rather than income data to establish if a family individual is poor?
-Household consumption is a better proxy for well being than household income. 1. If people can lend and borrow current consumption is closer to permanent income than current income 2. Differential under-reporting by strata is usually a more severe problem for income than for consumption 3. Incomes are frequently reported before taxes, while consumption is an after-tax concept.
Who was Augusto Pinochet? How did he gain power? For how long was he in power?
-In 1973 a military coup took Allende's government out of power. General Augusto Pinochet the army chief of staff replaced Allende as president. -Augusto Pinochet was a chilean general, politician and US backed dictator of Chile between 1973-1990 who remained command-in-chief of the Chilean Army until 1998 and was also Preisdent of the Government Junta of Chile between 1973-1981.
What two countries receive the largest amount of remittances in Latin America in 2017?
-Mexico -Brazil
In what way was Milton Friedman involved with the Chicago Boys?
-Milton Friedman was a professor to the Chicago Boys. -He went to Chile to meet Augusto Pinochet to talk to him about the "shock treatment" that the Chilean economy needed to improve. -He gave support to the Chicago boys policies outlined in "El Ladrillo".
According to Sebastian Edwards, what policies from the Washington Consensus were not successful and why?
-Most of the countries still have poor record of rule of law and property rights, -Latin American voters blamed capitalism and the Washington Consensus for the poor economic performance of the 1990's and 2000's. -Reduction in government deficits, lowering of tariffs, and opening of the markets to FDI did not have the positive impact on the economies because they were not implemented correctly.
Why did Pinochet agree to the Chicago Boys reforms?
-Pinochet knew that the Chicago boys had written "El Ladrillo" and became convinced that the outlined policies could help the Chilean economy. -He was also convinced by Milton Friedman that free market policies were necessary to take the Chilean economy out of its deep recession and high inflation.
What are some possible explanations as to why so many countries experienced a decline in poverty rates in Latin America?
-Positive economic growth in most Latin American Countries -New social programs to help the poor
What economic reforms did Allende implement or propose to implement?
-Pursued a policy called "La via chilena al socialismo". -This included nationalization of certain large-scale industries (notably copper), health care system, and continuation of his predecessors policies regarding the education system, a program of free milk for children, and land redistribution. -Copper was already partially nationalized by his predecessor by acquiring a 51 percent share in foreign owned mines.
How do remittances affect economies in Latin American Countries?
-Remittances are an especially important and stable source of private inflows to LAC's -They bring in large amounts of foreign currency and a substantial amount of income. -Help individuals increase consumption and investments (including education)
Who was Sergio de Castro? What position did he get in the Chilean Government? Who appointed him?
-Sergio de Castro was one of the Chicago boys. -He became the minister of the economy and finance during Pinochets rule. -He was one of the authors of "El Ladrillo".
What type of economics did the Chicago boys learn at Chicago?
-The economics taught at the University of Chicago is called neoclassical economics. -It is a free markets ideology where the "markets" are considered efficient. Government intervention should only be limited because government regulation is seen as inefficient. -They advocate widespread deregulation, privatization, free trade, and foreign direct investment.
What is the poverty line?
-The world bank put into effect a poverty line to compare poverty rates across countries. -They start with national poverty lines, which usually reflect the line below which a person's minimum nutritional, clothing, and shelter needs cannot be met in that country. -$1 per day per person is the international poverty line
What type of international trade changes did the Chicago boys undertake?
-They lowered tariffs to 10%. Prior to that Chile had been one of the most protectionist economies in the world. -They also opened up the country to foreign direct investment and established laws to protect foreign investors from expropriations.
What are the policies proposed by the Washington Consensus?
1. Achieve fiscal balance as a means of reducing inflationary pressures and stabilizing prices. 2. Target public expenditures on the poorer groups in the population 3.Implement deep tax reform in order to reduce evasion, increase government income, and eliminate perverse incentives to production and investment. 4. Free interest rates and modernize the financial sector. 5. Avoid artificially strong currencies that discouraged exports. 6. Reduce the extent of protectionism, and rationalize trade policy. 7. Encourage Foreign direct investment (FDI) 8. Privatize state owned enterprises 9. Deregulate business transactions, including investment decisions. 10. Improve legal protection of property rights in order to secure greater investment by both foreigners and nationals.
According to Sebastian Edwards, what policies from the Washington Consensus were successful in Latin America.
1. Exchange rates: Most Latin American countries have adopted flexible exchange rates. Market policies determine currency values. 2. Central bank independence: Chile and Peru have the most independent banks.
How large was the devaluation of the Mexican Peso?
50% devaluation
Who were the Chicago boys?
A group of young economists who participated in an exchange program between the Catholic University of Chile and the University of Chicago in 1955. The students who returned to Chile from Chicago began promoting free market economics to aid in the economic stagnation that plagued the Chilean economy.
According to the Chicago boys, why did shock therapy supported by Preisdent Pinochet's government and the Chicago Boys succeed in making Chile one of the highest income countries in Latin America?
According to the Chicago Boys, the Economic shock treatment of the policies implemented by them worked because of the military rule which suppressed dissent against the government and their reforms.
What is the name of the main professors who worked with the Chicago boys?
Arnold Harberger worked closely with the Chicago boys. He was an academic advisor to the students and became a friend as he visited them on a regular basis and married a Chilean woman who was friendly with the Chicago boys.
Who was Salvador Allende?
Chile's president from 1970-1973
What is "El Ladrillo"? Who wrote it? Why did they write it? Was it written before or after the coup de etat?
Document written by the Chicago Boys that had a set of policy prescriptions to take the Chilean economy out of high inflation, food shortages, and nationalizations that occured under the government of Salvador Allende. -El Ladrillo is a study considered to be the base of many of the economic policies followed by the military dictatorship that ruled Chile from 1973-1990. -El Ladrillo was written by the Chicago Boys a few weeks before the 1973 Chilean coup de etat.
What has happened to economic growth in Chile after Pinochet's government ended?
In 2015, Chile's economic growth under President Bachelte was 2-2.5%. This is low compared to the Chicago boys average 3-4% growth and the first democratic government after Pinochet, President Aylwin's 7-7.7%
What has happened to Chile's economy since democracy returned to Chile?
Most of the policies established by the Chicago boys were kept by the new democratic governments of Chile.
What did Mexico do to overcome the Peso Crisis?
On December 22, 1994 the Mexican government allowed the peso to float.
What happened to human rights in Chile after Pinochets government ended?
Pinochets plans to remain in power were foregone in 1988 when the regime accepted democratic displacement in a referendum that opened the way for the reestablishment of democracy in 1990. Thus, this ended military rule and most open human rights violations. The two prominent Chilean governments that followed Pinochet: 1. Patricio Aylwin Azocar 2. Veronica Michelle Bachelet Jeira
What factors contributed to the Mexican peso crisis?
Problems in Mexico that account for the crisis: 1. Use of hard peg, overvalued, led to the collapse of the currency. 2. Lack of fiscal controls- Budget deficit of 7% of GDP. 3. Central bank not independent of Government and thus printed too much money. 4. Rule of Law was and has been weak.
Why were the Chicago Boys controversial?
The Chicago Boys were controversial because they worked under the government of Augusto Pinochet, who violated human rights in order to suppress dissent and to eliminated socialist/communist group.
Who helped Pinochet craft the Economic shock therapy for the Chilean Economy?
The Chicago boys crafted the Shock Therapy policies used to improve the economic conditions of Chile after the military coup. They were supported by the economist Arnold Harberger and Milton Friedman. Harberger an American economist who taught at the University of Chicago alongside Friedman was a father figure to the boys (group of Chilean economists who studied at the university in the 1950s. There, they became enthusiastic towards Friedman's free market economic philosophies. They were given free reign to implement these philosophies on an unprecedented scale during Pinochet's dictatorship of Chile. These ideas changed Chile into one of the richest countries in Latin America.
What were the main reasons for the collapse of the peso?
The peso was overvalued. The central government tried to defend the peg but failed as they ran out of foreign exchange.
What type of exchange rate policy did the Chicago boys undertake?
The peso was pegged to the dollar in 1979, this created inflation because the peso become artificially strong. This type of policy is not free market and goes against the neoclassical ideology. Eventually the Chicago boys changed the fixed exchange rate to a flexible exchange rate because it became unstable.
What type of institutional changes did the Chicago boys undertake?
They reduce government expenditures by 25% and balanced the budget.
What are remittances?
Transfer of money from foreign workers to an individual in his/her home country.
Were the Chicago Boys policies successful?
Yes. The Chicago Boys were very successful and their policies have been attributed to the fact that Chile has one of the highest incomes per capita in Latin America.