A Tale of Reckless Liberalization and Overly Defensive Protectionism

Two weeks ago we published the main results of our Globalization Report 2016 covering 42 countries and the period from 1990 to 2014. This blog post takes a deeper glance at the results of the four Latin American economies which are included in this report.

Latin America maintains an ambivalent relation with globalization. If anything, specific countries within the region have swung back and forth like a pendulum between leaders who recklessly expose their countries to global markets, and those that unnecessarily protect their countries from global integration. Neither approach has been altogether successful.

Until recently, the region had almost split down the middle between Pacific facing countries such as Chile, Colombia and Peru that seek deeper integration (we have called these countries The Pacific Pumas), and more closed, Atlantic facing countries such as Venezuela, Brazil and Argentina. Now, even these trends may be changing: in electing Mauricio Macri as president in 2015, Argentine voters have demonstrated a desire for more orthodox economic policies. The impeachment of Brazilian President Dilma Rousseff in mid-2016, in favour of her more conservative Vice President Michel Temer, suggests that change could be afoot in Brazil as well (for better or worse remains to be seen). With this in mind, we consider some of the Latin America-oriented outcomes of our 2016 Globalization Index.

Only small increases in global interconnection since 1990

The globalization report works with a broad concept of globalization covering the economic, social and political interconnectedness of a country. The related indicators are combined into one index with scores between 0 (lowest level of international interconnection) and 100 (highest level of international interconnection).

In 1990, Brazil, Argentina, Mexico and Chile started with index values between 28.7 and almost 40. During the next 25 years, the four countries had quite different developments concerning their global integration. Chile, the country with the highest globalization index value, achieved the largest increase in international interconnection. Through 2014, Chilean globalization increased by 19.2 index points.

Argentina stands in sharp contrast to this trend of increased globalization: The country did raise its globalization level during the years 1990 to 2000 from 32.5 index points to 41.7 points. These years coincided with the administration of President Carlos Menem, which rapidly – and irresponsibly – sought to privatize and globalize the Argentine economy. This approach ultimately led to a devastating economic crisis in 2001. Argentine voters reacted to these events by subsequently tacking towards more statist, protectionist leaders: Specifically, Nestor Kirchner and his wife Cristina Fernández de Kirchner headed an inward looking government from 2003 to 2015.

Since the turn inward, Argentine globalization has declined. In 2014, its level of international interconnection reached 33.5 points – just one point more above its figure in 1990 (see figure 1). This drop reflects the lower economic integration of Argentina with the rest of the world. Political and social international interconnection remained more or less constant between 2000 and 2014.

… and small globalization-induced gains in GDP per capita

Brazil: The Big Country Syndrome

Interestingly, Brazil marks rather low on our globalization index, alongside other major emerging markets such as Russia, China, and India. These four countries average just under 40.00 on our globalization index – less than half the figure scored by the countries at the top of the table. At first, such results can seem shocking. After all, the quartet is celebrated as the “BRICs”, generally understood as leaders of emerging markets in a globalized world. However, these massive countries rely significantly on their own internal markets. Simply put, Brazil, with a population of 200 million, can and does rely on an internal growth motor in a way that, say, Chile, with a population of roughly 18 million cannot. Moreover, the bigger emerging markets have the capacity to defend their own markets in the hopes of nurturing their productive sectors.

This is certainly the case in Brazil, as we discuss at length in our study Five Steps to Kickstart Brazil. Under former President Dilma Rousseff, Brazil increasingly adopted defensive trade policy via tariff and non-tariff barriers intended to protect domestic industry. Just as when Brazil tried this approach in the 1970s, this has created inefficiencies and economic distortions: The quality of the Brazilian product may not be up to snuff, while the imported product may be too expensive. Both hinder Brazil as a major player in a globalized world.

So What Does it All Mean?

Between 1990 and 2014, all 42 countries analysed in our “Globalization Report 2016” could increase the gross domestic product (GDP) of their citizens. In Japan, GDP per capita was on average 1,470 euros higher each year between 1991 and 2014 due to increasing globalization. The annual gains for Argentina, Mexico and Brazil are much lower. All three countries are far down the ranking. Only Chile could take a higher position, reaching the 28^th rank (see figure 2).

Moving forward, one thing to keep in mind is that just because a country has not increased rapidly on our globalization index does not mean it has not benefited from globalization. Overall we found that an increase of one point on the globalization index led to a growth rate of real per capita GDP of around .3 percent. Thus, while Mexico, for example, may not have shot up our index, the gains that they did achieve would have a bigger relative effect for a country where per capita GDP remains in the neighbourhood of US$10,000.
Moving forward, all Latin American countries – both the reckless liberalizers and the over-protective defenders – would benefit from a more measured, long-term strategy towards joining an ever-more globalized world.