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Impacts of 1990s Liberalization on Economies of Latin American and Eastern Europe

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Introduction

Economy is a very essential and sensitive aspect of the social and organization structures of any country. Economy defines the epicenter of survival and existence of any country. A country without an economy cannot be enjoy independence but will remain to be dependent on others in every aspect of its operations. When this happens, the dependent country without an economy will seize to be country but will likely become part of the helping or supporting country. It is for mentioned reasons that economy becomes an essential part and in fact the defining aspect of every country. Economy of a country controls all other things happening in the particular country. To enjoy a sustainable economy, there is usually the need to support the economy through employment and adoption of various policies. Liberalization is one such policy that can help rejuvenate, empower, expand and grow an economy. This paper will put special focus on the need, nature and effects of liberalization policies employed by Latin American countries and Eastern Europe countries in the 1990s. To be successful and explicit, the paper will explore the behavior of and status of microeconomic indicators before and during liberalization.

Background

During the 1990s, countries in the Latin America were busy trying to recover from the financial crisis that rocked them in the 1980s. In 1970s, Latin American countries enjoyed good trade offers from their trade partners particularly United States of America. They received loans on low interest rates this made them to borrow massively from the international banking institutions. This led to broadening of their debts and coupled with the rise in global oil prices in 1979, it became difficult for the Latin American countries to pay the debts. During the same time, countries in the Latin America experience serious inflations that worried international banks if the creditors will pay back the loans borrowed. For example, the four largest economies of Latin America that include Argentina, Brazil, Mexico and Venezuela owed approximately $ 177 billion to the foreign commercial banks. This made the international banks to increase their interest rates making it difficult for the Latin American countries continue to borrow to fiancé their operations. This led to massive contraction of the average Gross Domestic Product (GDP) of the Latin America with a drop of -1.8% in 1981, -3.6% in 1982 and -4.7% in 1983. In 1981, Brazil succumbed to GDP drop of -6.6%, Argentina had -7.1% and Venezuela had -3.4% (Aezenman 23). These were among the eight countries out of the total eighteen that suffered drop in their GDPs. 

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In 1982, all Latin American countries except Panama faced another serious drop in their general GDPs. In 1983, all Latin American countries with exception of Argentina, Costa Rica, Nicaragua and Salvador experienced another tragic fall in the regions GDP. The economy of Latin American countries suffered from serious inequalities in income coupled with very low employment rates. There was massive outflow of currencies from the Latin American countries to bring imports with little exports to bring revenues. The general massive outflow of money from the region made foreign lenders raise interest rates charged on the borrowing countries. This effectively shrunk supply of capital in the economies as well as demoralizing investments. Poverty levels were very high in the rural regions, which also experienced shortage in the supp.ly of basic household commodities. Towns and urban regions enjoyed better economic times earmarked by better pay and better supply of basic household commodities.

During the 1980s, Latin American economy witnessed general and stiff reduction in the net imports as well as consumption of goods and services. Foreign direct investments of the region also reduced and stop for long time. Moreover, the period of 1980s preceding the reforms of 1990s saw massive emigration from the Latin American countries into the United States to seek for employment opportunities. Despite several policies adopted by various Latin American governments to correct the situation, the problem seemed to persist until 1990s when the governments resolved to another form of liberalization of the economies.

Historically, Eastern Europe consisting of Poland, Russia, Germany, Bulgaria, Yugoslavia, Romania, Lithuania and Hungary exercised and operated socialism type of economy. The economies of thee countries did not make it possible for rise and growth of entrepreneurs who could be starting their own businesses. This kind of economic tradition saw segregation of the countries in Eastern Europe from Western countries and their allies. The countries in Eastern Europe could only trade among themselves, a situation that saw them remain behind as the rest of the world was growing. It was due to economic stagnation that countries in the Eastern Europe decided to stop the socialist economy and shift to market oriented economy. The economy of the region was in the verge of serious reforms that would make them pace with the rest of the world. The period of 1990s marked the inception of the adoption of liberalization reform policies that have since demonstrated significantly positive outcomes.

Need for reforms

The economy of Latin America needed reform for various reasons that had direct impact on the economic performance. To begin, the region needed the reforms to increase efficieny and growth of output. The region further needed the reform to help switch from the non-tradable and inefficient exports towards efficiently exportable production activities. In this vision, each country was going to emphasize on the production activities in which it has significant comparative advantage. According to Barros, Lance and Rob, the reforms also intended to attract inflow of finances that would stimulate growth of investment and general productivity of the region (16). Reforms also would help the region balance distribution of household income and achieve income equality. This would also help reduce levels of poverty in the region.   

Eastern Europe required economic reforms for various purposes and reasons that generally summed up to expanding domestic income. One of the constitution reasons for economic reform in the Eastern Europe was the need to establish a system of market that would provide adequate institutional and macroeconomic frameworks. Economic reforms in the Eastern Europe was also necessary to help the economies of the region to create private firms that would increase domestic investment to help rejuvenate the countries’ capital stocks and improve their production lines to increase healthy competition in the region through innovation and imitation. Moreover, Eastern Europe required economic reforms to help them exploit their advantages in the international division of labor by exposing their tradable resources and sectors to the international competition.  In addition, Eastern Europe needed economic reforms to establish strong framework of monetary policy based of on a central banking system with mandates to regulate and control inflation.

Nature of reforms

As the debt crisis experienced in 1980s by the Latin American countries persisted, the governments of the region explored other liberalization policies to help resurrect the economy of the region. Washington Consensus defined the main benchmark policy that the Latin American governments decided to adopt in the 1990s liberalization program. The Washington Conesus policy has three main building blocks, which include privatize, stabilize and liberalize (Aezenman 26). The entire Latin American countries resolved for adoption of policy of openness, where they would make their current accounts accessible to anyone. The general economy of Latin America shifted towards removal of trade restriction and liberalization of internal and external finances.

The reforms in part involved removal of restrictions in the capital inflow a concept termed as capital account liberalization. This would enable relaxed flow of capital and investments into the region. Reforms also entailed deregulation of current account that took the form of transformation of quota restriction to tariffs when it was necessary and reducing tariff rates. There was also deregulation of domestic financial sector that enabled easy entrance oaf new banks into the market. Reforms also partly involved exemption tuff taxation measures that saw many countries in the region rely only on value-added taxes and ignoring direct taxation. Generally, the reforms intended to reduce poverty level alongside supporting low-income earners.

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The nature of economic reform in the Eastern Europe typically based on privatizing operations and allowing free flow of capital in the constituting economies. In the privatization process, eastern Germany had about 8000 firms to privatize, Poland had 7000, Russia had 30000, Hungary had 2500, and Bulgaria had 1500 (Lane 31). In the arrangement, Hungary planned to privatize about 500-600 of its firm by 1993. Hungary also planned to privatize 50% of its state owned firms by 1996 with 25% of the total assets expected to go foreign investors. The nature of economic reforms Eastern Europe also targeted at reducing restrictions on quotas of imports and exports.

 Impact of the reforms on Latin America and Eastern Europe

Upon effective implementation of the trade liberalization program adopted by the Latin American countries, the region began to experience significant improvement in the net export. This means that the region began receiving substantial foreign income compared to the previous 1980s. In fact, the growth of rate of exports of services and goods lifted from the previous average of 4.8% from 1970 to 1991 to an average of 7.3% as from 1992 to 2006. During the liberalization of trade within the Latin American region, countries like Paraguay, Uruguay, Nicaragua and Panama specialized in exporting majorly traditional commodities. For the four countries, the ten leading export commodities accounted for between 64% and 71% of their total exports from 1991 to 2006 (Barros, Lance and Rob 18).

The move to liberalize the economy of Latin America in 1990s saw significant decline in poverty margins. Poverty margins as at 1990 stood at 41% and by 1997, it had reduced to 36%.  Within the same period, indigence line otherwise called extreme line of poverty reduced from its highs of 18% to 15%. Indigence line refers to the total amount of money or income that a household would require to afford nutritional demands based on the prevailing prices of food basket. Any household falling below the indigence line qualifies the classification of surviving under extreme poverty.

Even though the liberalization policies adopted in the Latin America during 1990s demonstrated slight effectiveness, there was still the problem of incoome inequality in the region. According to Kirby with reference to the statistical data of the Inter-American Development Bank (IADB), income inequality during the implementation of liberalization policies in the 1990s in the Latin America significantly increased to exceed its level during 1970s. With reference to the data of IADB, Kirby demonstrates that the poorest who represents 10% of the Latin American population suffered 15% reduction in their income for the period starting from 1990 to 1995. Kirby adds that the next 10% category poor population in Latin America suffered 4% decrease in their income. According to Kirby with close reference to statistics of IADB, 10% of the richest population in the Latin America also succumbed to relative reduction in their average income. The middle class income earners of the entire population of Latin America are the ones who enjoyed significant gains.

While referring to the statistical data of Commission for Latin American and Caribbean (CEPAL), Kirby indicates that concentration in the distribution of income decreased in the urban areas of Bolivia, Mexico, Honduras and Uruguay. Countries like Argentina, Costa Rica, Brazil, Panama, Ecuador and Paraguay expressed significant increase in the concentration of income distribution in the urban areas. Chile is the only country in the region that did not experience change in urban income distribution. 

Transition into liberalization made Eastern Europe experience mixed economic responses. At the beginning of the transition into liberalization, the member countries of Eastern Europe enjoyed the advantage of substantially educated labor who exhibited significant motivation that promised to spur economic growth in the region (Baer and Joseph 21). During the transition period, USSR demonstrated high level of poverty. Slovakia, Poland, Czech Republic and Hungary were perhaps the wealthiest countries as at the time of transition.  The early period of 1990s immediately at the beginning of transition period, member countries of Easter Europe succumbed to serious recession that increased poverty margins. it took member countries different time frames to move out of the recession with Poland taking two years, Ukraine took ten years as Estonia took five years to recover. Drop in Gross Domestic Product GDP ranged from 15% for Czech Republic to 50% for the USSR (Blanchflower 39). The region also became victim to serious inflation during the 1990s liberalization program. Poor countries and citizens are the ones that suffered most from the effects of inflation because they did not have appropriate structures and skills to cushion them the adverse inflation.

The consequences of inflation were increase in the levels of poverty and increase in income inequality. Inflation also damaged savings by private developers who wanted to invest in the economy. Hungary succumbed to 34.8% inflation in 1991, as Czech Republic experienced 20.8% of inflation in 1992 (Lane 51). The two cou8antries, Hungary and Czech are only ones that experienced the lowest inflation rates during the transition. Poland appeared to suffer the highest inflation rates with 585.8% in 1990 and 70.3% in 1991.

The main reason for such economic difficulties attributed to the shifting of government roles to the private investors who were perhaps not very ready to take over. The souring economic demises in the Eastern Europe during the 1990s liberation program impacted negatively on domestic investment tat would probable create employment for the region’s population. The effects of 1990s liberalization of the Eastern Europe saw Eastern Germany reunify to join the European Union. 

Conclusion

Liberalization of economy is only viable way a country can open up for rapid and fruitful growth and development. Liberalizing economy works to allow free flow of labor, trade materials and abundant supply of capital within the country’s economy. Latin American countries and the Eastern European countries are good examples of the need to liberalize a country’s market. Both Latin American countries and Eastern European countries realized the need to liberalize their economies from 1990. This realization came after seasons of serious economic difficulties that could only spur rising rate of unemployment and expansion of the poverty line. Eastern Europe in specific was grappling with socialism facets that locked them out of the rest of the world. To revive and revamp the economy of the region, the member countries had to resolves to liberalization reforms that shifted towards privatization of all state owned firms and creation of sustainable market environment. The main purpose of liberalization was to enable the countries participate in productive international trade with Western countries and allies. The move also intended to expand capital base in each member country. However, the transition period presented several economic difficulties that saw massive inflation and high unemployment rates.

Latin American countries also realized the need to liberalize their economies majorly after suffering serious fiscal crisis in 1980s. The region required liberalization to narrow poverty lines and ensure equality in the distribution of income. Even tough the liberalization of the 1990s bore some cognizable fruits; inequality in household income seemed to increase alongside unemployment rate. The economic liberalization policy adopted by Eastern Europe appeared to capitalist based while that of Latin America seemed to be more of socialism.

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