Impact of Economic Reforms in Latin America

Abstract:

Economic reforms were undertaken by the Latin American countries since the 1980s to bring about changes in tax systems, public enterprises, financial sector and foreign trade. The major impact of the reforms can be observed in the areas of inflation, economic growth and income disparity and poverty.

Extensive economic reforms have been undertaken in Latin America since the 1980s. Many Latin American countries implemented reform measures to induce economic growth by adopting an open market economic framework. Structural reforms were introduced to bring about significant changes in the following sectors -

Tax system

Public enterprises

Financial sector

Foreign trade. The reform measures included measures to privatize the public sector, liberalize foreign trade and deregulation measures. The impacts of these economic reform measures in the Latin American economy can be observed in three major areas -

Inflation

Economic growth

Income disparities and poverty

Inflation

The most remarkable success of the economic reforms in Latin America has been in terms of controlling inflation. Latin America had been adversely affected by inflation for a long time. The crisis was severe in the 1980s with the average inflation level nearing 500%. The worst situations were faced in Brazil and China where the inflation rate was even higher. The high socio-economic costs of enduring exorbitant inflation rates were a major deterrent to economic growth. High inflation affected the Latin American economy negatively in terms of -

Poverty

Income disparities.

Distortion of relative prices

Resource allocation in unproductive sectors.

Under such economic crises, Latin American economies undertook intensive economic reforms in the 1990s. Stabilization policies based on exchange rates were adopted in several countries like Argentina, Mexico, Brazil, etc. Although the implementation varied in magnitude in different countries, the general outcome in terms of reducing the rate of inflation was encouraging. Inflation rates fell to below 10% by the end of the 1990s.

Economic Growth

Latin American economies had experienced economic decline in the 1980s. There was an average fall of 0.5% to 1% in per capita GDP in the Latin American economy. Almost all Latin American economies faced negative growth, the only exceptions being Chile and Columbia who registered economic growth.

The implementation of economic reforms in Latin American countries in the late 1980s and early 1990s reversed this negative trend and brought the Latin American countries on the path of economic growth. Although the growth in Latin America was quite low compared to the Asian countries that had implemented economic reform during the same period, nevertheless the growth in Latin America was no less significant economically. Average per capita GDP grew up to 2.5% during 1991-1997 in Latin America.

Income Disparities and Poverty

The impact of economic reforms on poverty had been encouraging. The Latin American economies were able to effectively negotiate the debt crisis with the implementation of reforms. Moreover the rate of inflation was under control. This helped to reduce poverty substantially after economic reforms were undertaken.

However, in the late 1990s, poverty increased again in Latin America. Moreover income inequality has remained a plaguing problem. Income inequality continued to exist even after implementation of economic reforms in 1990s although in lesser dimensions. Proper Structural Adjustment Programs (SAPs) are being undertaken to address these issues.