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Modern History Sourcebook:
Inter-American Committee:
Problems of Latin American Economies, 1965

PROBLEMS FACED WITHIN THE LATIN AMERICAN ECONOMIESthe Inter-American Committee, Excerpts from a Policy Statement by on the Alliance for Progress (CIAP)A. THE MODERNIZATION OF RURAL LIFEOne problem emerges above any. other in a broad view . of the Latin American scene, based on the country reviews and the Secretariat assessment; that is, the problem of modernizing rural life. The statistics reflecting industrial production and development in Latin America by, and large are moving forward with high and reasonably regular momentum. On the other hand, food output is lagging behind the increase in population, and the gap between rural and urban ways of life within Latin America is becoming more acute. As ECLA has recently, stated, the industrialization of Latin America can no longer be based on the substitution of manufactured imports at the national level. The Latin American nations must look outward-to Latin America as a whole and to the world-to expand their exports of primary products and manufactured goods, and must simultaneously look inward to the modernization of agriculture riot merely- to supplying food for a rapidly expanding population but also as a source of industrial raw materials, diversified export commodities and as markets for the products of Latin American industry.It is heartening to observe the beginning in one Latin American country, after another, of a new emphasis and priority. for agricultural development. Many countries have enacted legal measures of agrarian reform, but this is still a field where a much greater and deeper effort is needed. One essential element of the agricultural policy should be the reform of the structure of land tenure, in order to establish a sound economic and social basis for that development, which implies an increase in the agricultural productivity necessary to sustain the development of the economy as a whole.There are many complex factors to be dealt with in promoting improved performance in agricultural development, of which the following five against the background of adequate transport and infrastructure are critical: a reliable and equitable price to the farmer, which in turn requires radically improved marketing arrangements and often changes in price policies; provision to the farmer at equitable price of necessary agricultural inputs and desired incentive goods: improved credit at reasonable rates and of sufficiently long term; relevant technical assistance; and research. Ultimately, all of these interrelated elements in the agricultural productive "system" must be dealt with in an organized way (via producer's cooperatives, food processing firms, regional development institutions, etc.).Besides, as CIAP noted at its Mexico City meeting, a critical and hitherto neglected aspect of the linking of the urban and rural life must be the modernization of marketing arrangements and institutions. A concerted program designed to yield this result is already under way within the Alliance for Progress.B. INFLATIONA second major problem affecting some of the Latin American nations - including those which weigh most heavily within the indexes of over-all performance-is the problem of inflation. At the present time inflation in those countries is restricting and distorting the use of resources in Latin America and endangering the objectives of the Punta del Este Charter.Specifically, inflation has these major effects:a. It diverts investment away from channels which would yield the highest rate of return in terms of the development of the nation into channels which represent the best possible hedge against a rise in prices.b. It leads, through the creation of economic instability and the expectation of future devaluations, to the holding of substantial Latin American assets abroad.c. Through unrealistic exchange rates, it restricts undertakings which could generate export earnings, and reduces the incentive to export.d. It renders unattractive saving in the form of money; impedes the development of modern banking systems; and places an unnatural pressure and responsibility upon the central banks as the primary source of working capital.C. The need to hedge against possible future rises in costs leads to industrial price policies which arc unsound, and which do not exploit the possibility of selling more at lower prices.f. It damages disproportionately the poorer sections of the population which have the least possibility of taking action to hedge against price increases.g. It restricts and renders more expensive Latin American borrowing from abroad.h. By placing each element of the community in competition with others in the struggle to avoid damage through inflation, it renders difficult the creation of that sense of communal purpose and enterprise which is essential for the success of the development process.From the discussions of inflation in the reviews of countries that faced these problems, a consensus emerges concerning the major steps required to prevent inflation where it does not exist and to attack inflation where it does exist.Evidently specific measures must be designed in the light of specific circumstances in each country since each case is, in an important sense, unique. On the other hand, without going into the details of the importance of this policy in the development process it is possible to state the key general headings for a program to end inflation, assuming, of course, a framework of monetary and credit policy which is geared to stabilization itself.a. Reduction of the government deficit via: improved tax collection; reduction of subsidies to and inefficiencies in government-owned and operated corporations; adjustments of rates; and generally increased efficiency in and control over government expenditures.b. Systematic efforts to reduce the cost of living from the supply side are necessary. This should include high priority efforts within the over-all limits of monetary and credit ceilings to insure that foodstuffs in distant parts of the country are brought to major urban markets; agriculture production is expanded along the lines suggested in section A, above. In this effort to attack the cost of living from the supply side, the United States should consider modifications of legislation in order to permit a more effective use of its food surpluses to help reduce inflationary pressures, with due attention to the interest of other producers.c. With respect to manufactured goods specifically those important in the cost of living as well as manufactured goods relevant to agricultural expansion, government should seek arrangements with the private sector to expand output and to pass along the benefits of lowered average costs and in the form of lowered or relatively lowered prices. In this connection, textiles, shoes, household equipment, as well as farm equipment, tools, fertilizers and insecticides, should be considered. On a selective, qualitative basis, the central banks should induce the banking system to supply the working capital for this expansion.d. Against the background of efforts to constrain government deficits and to enlarge supplies particularly relevant to the cost of living, wage policies are required which do not have built into them self-fulfilling inflationary consequences. At the present time escalatory arrangements which automatically relate cost of living and wages in the short run, immediately set in motion price policies designed to protect industry against future wage increases. Such price policies, based upon the expectation of higher wages, produce the cost of living increases which then bring about the wage increases that were feared. In certain countries inflation continues quite independently of autonomous inflationary pressure from the monetary side. The banking system then finances by inflationary means the price-wage spiral set in motion by escalatory clauses in order to avoid unemployment. There is, in short, no substitution for a deep communal understanding between government, industry and labor in the form of wage-price policies which avoid the process of inflation via mutual expectation, and which systematically relate wage increases to the average increase in productivity.e. As Latin American governments undertake effective measures to bring inflation to a halt through this three-sided attack (reduction of government deficits, increased supplies, and income policy), the financing agencies of the international community should be prepared to make a maximum effort in the form of economic assistance.

Source:from The Alliance for Progress: Its Third Year, 1963-1964 (Washington, D.C.: The Pan American Union, General Secretariat, Organization of American States, 1965), pp. 5-8.

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