It is difficult to talk about the economic history of Latin America as a whole. Latin America is a large world region, a mixture of countries of different sizes, geography, climate, population, socio-economic structures and factor endowments. However, the existence of common features in Latin American history is clear: the Iberian colonial experience, specialization in natural resource-based products and primary export patterns are examples of these common traits that make it possible to distinguish Latin American countries from other regions and to consider them as a unit of analysis.

Latin America is not part of what is regarded as the ‘developed world’. None of the countries has attained uniformly high enough living standards. Even more, some of them are still very poor and have large segments of their populations on the sidelines of modern economic and social development processes. Even so, Latin America as a region has made large strides in bringing about very notable economic, social and political changes over the last decades. These transformations have placed the region on a development path that has enabled it to attain middle-income status on a global scale.

Despite these changes in most Latin American countries, there are aspects that remain unchanged. The bulk of the Latin American countries have not been able to leave their natural resource-based production patterns completely behind them. Their pattern of trade specialization has held them back from gaining access to more technologically dynamic segments of the global market or segments in which the growth of demand is more robust. This, coupled with the region's markedly cyclical access to capital markets, has undercut its development efforts.

Conversely, other countries and regions have been able to leverage their natural resource endowments in ways that have enabled them to bring about sweeping economic changes. With differing degrees of success at different stages in their development processes, the United States, Canada, Australia, New Zealand (a group of countries that we will call, using Maddison's terminology, the ‘Western offshoots’) and the European Nordic countries provide examples of countries that have taken advantage of their natural resource endowments to place themselves upon development paths that have been more successful than those followed by Latin American countries.

‘We believe that the central challenge we face today is to ensure that globalization becomes a positive force for all the world’s people’, reads the fifth paragraph of the United Nations Millennium Declaration (United Nations 2000). Although globalization reflects technological advances and economic forces, it can be moulded by society and, particularly, by democratic political institutions. In fact, the form that globalization has been taking has been largely determined by explicit policy decisions.

In this sense, the most disturbing aspect has been the uneven and unbalanced character of the current phase of globalization and of the international policy agenda that accompanies it. The latter has both reproduced the traditional asymmetries in the world economy and created new ones. There are four issues that have dominated the economic agenda: free trade, intellectual property rights, investment protection, and financial and capital account liberalization. In the latter case, the condition that it should be subject to strong regulatory frameworks has been superimposed as a result of recent crises, particularly in the developing world by the 1997 Asian financial crisis and in the industrial world by the most recent 2008–9 global financial crisis. Moreover, in the area of international trade, liberalization is incomplete and asymmetric: various goods of special interest to developing countries are subject to the highest levels of protection and, in the case of agriculture, to subsidies in industrialized countries.

Introduction

As noted in several earlier chapters (e.g. the Introduction by Underhill, Blom and Mügge; Chapters 3 by Baker and 9 by Tsingou), developing countries have had relatively little influence on the development of the existing international financial architecture. Whether the term is actively used or not, there is an odour of policy capture by private interests circulating around public decision-making processes in financial governance (e.g. Chapter 6 by Claessens and Underhill; Chapter 2 by Helleiner and Pagliari), indicating a lack of input-side legitimacy within the current international financial architecture. This limited input legitimacy has contributed to building a system which is far from development-friendly, particularly for the poorest countries. This in turn limits the output-side legitimacy (i.e. the effectiveness) of global financial governance from the standpoint of a wide range of developing economies (see Chapter 4 by Cassimon, Demetriades and Van Campenhout). This limited output legitimacy is particularly visible in the highly pro-cyclical, market-based nature of the system, limiting policy space for developing countries and enhancing the possibility of costly bubbles and crises. This chapter argues that one of the major functions of an effective international financial architecture should be to mitigate the pro-cyclical effects of financial markets and to open ‘policy space’ for counter-cyclical macroeconomic policies in the developing world. The chapter goes on to provide recommendations to enhance the development-friendliness of the international financial architecture in this respect.

This volume is a major contribution to a growing body of literature that questions the assumptions of market reforms undertaken in Latin America in recent decades, on the basis that market reforms did not deliver on their basic promise: rapid economic growth. Indeed, even when we take into account the recent period of exceptional conditions in international commodity and capital markets that has facilitated rapid growth in Latin America since 2004, the rate of GDP growth in the region has been 3.3 percent from 1990 to 2007 (and only 2.5 percent if the point of reference is 1980), far short of that achieved during the phase of import-substitution industrialization—or, as I prefer to call it, state-led industrialization—when Latin America grew at an average rate of 5.5 percent a year. Another set of criticisms relates, of course, to the disappointing social effects of market reforms. Again, a simple reflection of this fact is that only in 2005 did Latin America return to the poverty levels of 1980—i.e., the region experienced not a decade, but a quarter century lost in terms of poverty reduction.

The volume concentrates on one of the major aspects of the globalization and liberalization processes: the growing role played by multinational corporations (MNCs) and the opening up of the Latin American economies to foreign direct investment (FDI). Drawing on case studies from about half of the countries in the region, it explores the determinants of FDI, the role that it has played in advancing environmental sustainability, and some political economy issues associated with such investments.