The liberalization trap: Why did Latin America fall behind in the 1980s while East Asia continue to grow?

ABSTRACT

In the 1980s, while the East Asian countries continued to grow, the Latin American countries stopped, and since then are falling behind. The cause was not the “middle-income trap”, but the “liberalization trap”. Differently from the East Asian, the Latin American countries suffer the Dutch Disease, but were able to industrialize because they used high import tariffs on manufactured goods to neutralize this long-term overvaluation of the exchange rate. In the 1980s, however, trade liberalization dismounted this mechanism. The ensuing competitive disadvantage produced deindustrialization and low growth.

KEYWORDS:
Middle-income trap; trade and financial liberalization trap; Dutch Disease