The demise of the cold war in the 1990s was followed by a reaffirmation of ideals, principles and values of liberal democracy courtesy of the western countries thanks to the United States and her allies. Capitalism and its political values derived from liberal democracy emerged as the new socioeconomic ideology of the day. Freedom of the individual and communities from the strict control of the state was endorsed.
It was held that individuals and communities are inherently free to develop themselves as they wish by way of accumulating wealth through free trade and exchange of goods, services and ideas (Somerville, 2011). In other words, the strict control of the state of trade and industrialization advocated for by socialist enthusiasts under the leadership of USSR and her satellites during the cold war was opposed and victoriously denounced by the capitalists camp under the leadership of USA and her allies.
The role of the state was supposed to be provision of an ideal environment in which individuals, groups of individuals as well as communities would carry out their socioeconomic activities without unnecessary interference of the state provided they did so within the parameters of the law. The purpose of this research paper is to explore impacts of trade liberalization between Latin American countries.
Since time immemorial trade has been an important impetus of growth and development in virtually all societies. In other words, people from all world civilizations have always sought to engage in exchange of what they had in surplus for what they lacked and they were in need of. Rogowsky et al. (2001) argues that trade is an engine of growth because it facilitates income gain irrespective of whether the exchange takes place between individuals or between nations.
Trade like any other human activity have been underpinned by the main ideas informing human affairs at the local, national and now at the global level. In fact, the cold war was fundamentally founded on ideological differences between the West led by USA on one hand and the East led by USSR on the other hand on what ideology should underpin human activities at the national level as well as at the international level.
These differences were premised on the fact that increasingly countries could not exist in isolation politically or socioeconomically from other countries and so there was the all important question on what ideology should underpin domestic and international trade.
USA sought to spearhead the spread and embracement of her preferred capitalist ideology while USSR sought to persuade countries to adopt socialist ideology in which the state controls trade and other human activities with an iron hand. The capitalist camp won following the break up of the USSR and that marked the beginning of an entrenchment of the ideas of trade liberalization at the national level and in between and among nations.
Essentially, trade liberalization derives its breath from the liberal ideas of freedom of the individual to develop as he or she wishes guaranteed they obey the laws of the society. At the international level, nations who are the main actors were deemed free to develop themselves through free exchange of goods and ideas with countries of their own choice provided they did so within the matrix of the international trade laws and statutes which regulates the conduct of countries the field of global trade.
According to Rogowsky et al (2001), supporters of trade liberalization held that removal of tariffs and other trade barriers between countries permits productive resources to move to their most efficient use in other countries. In other words, it allows countries to exchange what they have in excess with what they need from other countries.
Those who espouse trade liberalization maintain that this ensures that resources are in put in use where they are needed thereby facilitating their efficient use. Gingrich and Garber (2005) carried out a research study on the El Salvador’s agricultural sector and according to their findings, it emerged that Costa Rica had managed to attain enormous trade surplus thanks in large part to market liberation and trade. On the other hand, the agricultural sector in El Salvador witnessed a major decline due to the issue of liberalization.
Opponents of trade liberalization emphasized that the highly developed western countries would benefit more than the less developed countries owing to their mighty purchasing power. That would give them an unfair upper hand in trade negotiations. Opponents lamented that the rich countries would end up as price setters at the expense of the poor countries who would not enjoy an equal say on international trade matters.
For instance, Quiggin (2005) argues that as early as mid-nineteenth century, leading critics of capitalism Marx and Engels had already foreseen the emergence of an international economy dominated by Europe. However, despite a spirited opposition from those who were suspicious of the Western idea of trade liberalization, because it was an idea whose time had come it gradually took root in the international trade as well as domestic trade.
In fact, Western donors as well as international financial institutions (World Bank and International Monetary Fund) threatened to cut off their financial aid and loans to governments of developing countries that were keen on trade liberalization in their countries Gingrich and Garber (2010).
Measures like the so-called the Structural Adjustment Programs (SAPs) were put in place in the developing countries to facilitate trade liberalization especially in those that the state had strong control on trade. It is against this kind of background that we are exploring the impacts of trade liberalization between Latin American countries.
Impacts of Trade Liberalization between Latin American Countries
The debate about the impacts of trade liberalization between the Latin American countries revolves around questions like; has trade liberalization had positive or negative effects on the economies of these countries? Has trade liberalization enabled the Latin American countries to raise the standards of living of their citizens?
Has trade liberalization increased or decreased inequality between these countries and workers within these countries? (Quiggin, 2005). Gingrich and Garber (2010) argue that trade liberalization has had different effects upon various sectors in different countries. Some studies show positive effects while others show adverse effects.
Costa Rica liberalization led to a large increase in the agricultural trade balance of about 70% while in El Salvador liberalization caused decrease of almost 20% points (Gingrich and Garber, 2010).
These authors argue that countries that adopted trade and market liberalization made their domestic markets become less distortional and prices more closely revealed shortage values (Gingrich & Garber, 2010). In many of the affected Latin American countries, the government thought it best that they should effectively dissolve the agricultural marketing board, all the while assuming that the private sector would take the cue and assume the role played by the defunct boards.
In most Latin American countries liberalization reforms began roughly in 1980s and covered various sectors IDB (1997). Reasons for either positive or negative effects of trade and market liberalization in the Latin American Countries and elsewhere arises from international economic trends as well as internal socioeconomic and political conditions in a given country.
Gingrich and Garber (2010) have noted that the root cause of the negative impact that trade liberalization has had on the agricultural sector in this region is due to the fact that for a majority of these countries, their individual microeconomic conditions effectively hinders farmers from seizing any new opportunities to market their produce.
Other factors that can account for the kind of benefits that a country derives from trade liberalization in various sectors are sociopolitical while others are largely a question of whether country has a competitive advantage in that sector or not. For instance, El Salvador’s input and commodity markets were to a large extent nonfunctional during the immediate period following trade liberalization due to the civil war that lasted for nine years in that country.
In addition, Gingrich and Garber (2010) asserts that El Salvador does not have a competitive advantage in agriculture and thus it was not positioned well to reap the positive effects of trade liberalization in regional trade with other Latin American countries.
The case of Costa Rica and El Salvador with respect to impacts of trade liberalization on a given sector of an economy indicates that effects of liberalization depend on the specific economic conditions of a given country. They therefore caution that low income countries should react to liberalization as unique processes because more often than not the different results of trade liberalization arises from the state of economic development in each country which directly affects other economic sectors.
Broadly speaking trade liberalization has been vilified as one of the main cause of income inequality within various Latin American countries and between the countries themselves. Lopez-Calva et al. (2010) argue that even though Argentina experienced numerous reforms in virtually all aspects of economic life from the mid 1970s to 2000s, trade liberalization is highlighted as one of the major factors behind rise in Argentina’s income in equality.
Galiani and Sanguinetti (as cited in Lopez-Calva et al. , 2010 ) found out that in the sectors where import penetration was intensive, the wage gap between the skilled and the unskilled laborers increased. In short, critics of trade liberalization argue that more openness created a wider difference between the wages of skilled and unskilled workers thereby creating higher levels of general inequality.
Despite the many negative impacts that are brought about by trade liberalization it is observable that removal of trade barriers between the Latin America countries has encouraged many positive socioeconomic changes. It has for instance encouraged Foreign Direct Investment which has various positive impacts like creation of employment for the population and encouraging improvement of infrastructure.
Employment gives many people a source of income which is the foundation of wealth creation and reduction of poverty. Inter-American Development Bank (2002) points out that reducing barriers of trade makes it easier for countries to procure foreign technologies and that when countries have an increased flow of goods, services and communication between them cost of transferring technology drops.
In fact, Montes and Rajas (cited in Inter-American Development Bank, 2002) found out that technology had larger effects on equality than flow of trades as asserted by various scholars.
Gingrich, C. D., & Garber, J. (2010). Trade Liberalization’s Impact on Agriculture in Low Income Countries: A Comparison of El Salvador and Costa Rica. Eastern Mennonite University, USA: Eastern Mennonite University Press.
IDB (Inter-American Development Bank). (2002). Beyond borders: the new regionalism in Latin America. Washington, D.C.: IDB.
Lopez-Calva, Luis F.et al. (2010). Declining inequality in Latin America: a decade of progress? New York: Brooking Institution Press.
Quiggin, J. (2005). Interpreting Globalization: Neoliberal and Internationalist Views of Changing Patterns of Global Trade and Financial Systems. New York: United Nations Research Institute for Social Development.
Rogowsky, R. A. et al. (2001). Trade liberalization: fears and facts. New York: Greenwood Publishing Group.
Somerville, P. (2011). Understanding Community: Politics, Policy and Practice. Bristol: The Policy Press