I.

PACKENHAM MODEL TO ASSESS PROSPECTS FOR ECONOMIC REFORM

The main four “hypotheses” or “explanatory factors” that explain how successful a
country will be at making MARKET REFORMS.

Used to explain why ARGENTINA made market oriented reforms quickly during Menem’s
presidency. And why in BRAZIL its taken much longer to make these reforms. Specially
during Collor de Mello’s time. Packenham argues that the model could be applied to
other countries.

1. Structure of Situation for Elected President - (Political Credentials of President)

President from a leftist background gets elected and says: “even I, a leftist, must
implement market reforms”. By doing this he has more credibility than he would if had
ALWAYS been in favor of market reforms.
• Carlos Menem in Argentina from the Peronist (leftist) party. At least in his first
term.
• Fernando Collor de Mello in Brazil, who was from the “right” had always
been in favor of reforms.
• Like “Nixon going to China”. President of the U.S. (very anti-communist)
decides to open diplomatic relations.
2. Political Party System - (Fragmented vs. Consolidated)
If a party system is “fragmented” (or “weak”), it means there are many political parties,
which are not well established. It is very difficult for the National Congress to pass
reforms and reach agreements.
• Brazil was (and is) very fragmented, many political parties and relatively
new.
• Argentina only two parties. The “Peronists” (Partido Justicialista) and the
“Radicals” (Union Civica Radical). The later in existence since 1890.
3. Presidential Leadership - (Leadership Skill)
If the President is a skilled leader he will be able to persuade Congress into making
reforms. If not he wont.
• Menem very politically skillful… at least in his first term.
• Collor was not skilful at all… at least after he got elected!
4. Consensus in Civil Society - (Consensus)
If there is consensus in society in favor of market reforms, then they can be made more
easily than countries with a lot of disagreement about them.
• In Argentina there was, because everything else had failed.
• But in Brazil there was a lot of disagreement.

II. CULTURAL/HISTORICAL OVERVIEW SECTION

In 1973 the Central Banks of USA, Canada, Japan, Germany, France, United Kingdom,
Italy, The Netherlands, Belgium, Sweden and Switzerland agreed to establish a flexible
rate system since it was hard to resist the free market forces

It’s a floating system that combines supply and demand and the intervention of central
banks buying and selling foreign currency

1. Fiscal Discipline - Reducing fiscal deficits

2. Public Expenditure Priorities - Switch spending from subsidies, especially subsidies
for state enterprises, to education and health
3. Tax Reform - Increase tax revenues and broaden the tax base
4. Interest Rates - Interest rates should be market determined and positive
5. Exchange Rate - Should be competitive, not overvalued*
6. Trade Policy - Free trade. Some trade protection OK if protecting an infant
industry (limited amount for a limited time)
 7. Foreign Direct Investment - Encourage it.
8. Privatization - Do it!
9. Deregulation - Do it!
10. Property Rights - Protect them

Williamson’s own critique…

• A moderate budget deficit maybe acceptable during time of recession.
• Labor reform is important (making laws more flexible).
• Stronger and more independent civil service, judiciary, and regulatory system.
• Policies to improve education, boost micro-lending, and strengthen IPR
• Liberalization of Capital Markets = Destabilization

III. ASSESSING PROSPECTS FOR MILITARY INTERVENTION

1. Modernization Theory
• Principal proponents: Seymour Martin Lipset, Robert Novak, Talcott Parsons
• Argument: Catholic, centralist, tradition/values = authoritarianism
• Solution: adopt “Western” values; diffusion of values
2. Marxist Theory
• Principal proponents: Karl Marx, V.I. Lenin, dependency school
• Argument: military serves interests of bourgeoisie
3. National Interest/“New Professionalism” Approach
• Principal proponent: Alfred Stepan
• Argument: broad professional training in economic development and “internal
security” has created “new professionalism” in military
4. Institutional Interest Approach
• Principal proponent: Martin Needler
• Argument: military defends institutional interests: hierarchy, prestige, budgets,
internal order and stability

IV. BARGAINING MODELS

1. Theodore Moran (extractive industries)

Key Concept: “Obsolescing Bargain” - Extractive Industries (e.g., copper
mining)

TNE Advantages Host Government Advantages

Skills Mineral ores
Experience Labor force
Access to market Control over taxation
Finance Capital

INITIALLY: The TNE has the bargaining advantage.

LATER: Bargaining advantage MAY shift (over time) to Host Government
WHY DOES THIS SHIFT TAKE PLACE?
• Reduction of uncertainty
• learning curve
• sunk costs

Manufacturing Industries may differ:

• HIGH-TECH: bargaining advantage favors TNEs
• LOW-TECH: bargaining advantage MAY favor Host Government
OTHER RELEVANT FACTORS:
1. Proprietary knowledge
2. Competition within the industry
3. Public visibility of industry
 2. Robert Grosse “Business-Government Relations”

Favors the firm Expected

Bargaining advantages
or government regulation
Proprietary knowledge Firm Low
Marketing skills Firm Low
Export dependence Firm Low
Scale/scope economies Firm Low
Ease of moving facilities Firm Low
Dependence on local resources Government High
Dependence on local markets Government High
Public visibility Government High
Competitiveness of the industry Government High

3. Roy Nelson, “Corporate Strategic Alliances and Bargaining in Latin America”

• Traditional Hypothesis 1: the bargaining advantage will reside with the TNC,
and will remain with the TNC, to the extent that competitive success in the
segment of the industry in question is based on rapid technological
innovation, high levels of advanced technical training for personnel, and
large expenditures on R&D.
• Traditional Hypothesis 2: the bargaining advantage will reside with the local
firm to the extent that competitive success in the segment of the industry in
question is based on knowledge of local conditions, local marketing and
distribution networks, and local needs.
• Traditional Hypothesis 3: The bargaining advantage will initially favor the TNC
but will “obsolece” over time in favor of the local firm where:
i. Large amounts of capital are sunk
ii. Reduction of uncertainty takes place
iii. The “learning curve” is easy to ascend

• Modified Hypothesis 1: in “environmentally sensitive” sectors where

environmental policies or regulations will affect the development of the
industry, the bargaining advantage – even in segments of the industry with
low levels of technological innovation, low levels of technical training of
personnel, and low expenditures on R&D – will reside with U.S. based TNCs
and will tend to remain like that.
• Modified Hypothesis 2: “knowledge sensitive” industries where personnel with
advanced technical training as well as technological adaptation is
important to success, the bargaining advantage may tend to be relatively
evenly distributed initially but with obsolesce in favor of the local firm over
time.
• Modified Hypothesis 3: In “financial capital sensitive” industries where foreign
partner’s contribution is financial capital, and are therefore sensitive to
changes in the local availability of financial capital, the bargaining
advantage will tend to obsolesce in favor of the local firm over time.

V. BRAZIL Historical/analytical points/current events highlighted in lecture

The “model” for predicting devaluations developed in the Hipskind article, and as
discussed in class (I referred to it as a framework for assessing prospects for
devaluation).
A Framework for Assessing Prospects for Currency Devaluation:
• Flexibility of Exchange Rate: fixed or flexible?
• Size of Current Account Deficit: large or small?
 • Size of Budget Deficit: large or small?
• Amount of Foreign Reserves: small or large?
• Amount of Foreign Debt: large or small?
• Political Risk: high or low?

Packenham model - Lula

• Political Party System: fragmented
• Legacy of military regime
• Result: Lula’s Partido dos Trabalhadores (PT) has fewer than 1/5 of seats
Chamber of Deputies. Alliances necessary
• Political Credentials of President: good
• Leadership Skills of President: good
• Political Consensus: low

See also: Real Plan; Causes and Consequences of the 1999 Devaluation; Cardoso;
political obstacles to economic reform in Brazil; Lula. Again, pay special attention to
Packenham’s article, Nelson’s article on Cardoso, the summary I wrote up on the
“Causes and Consequences of the Devaluation of the Real,” online articles (especially
priority articles), and “Current Events” articles.

VI. ARGENTINA

Convertibility Law
• Minister of the Economy, Domingo Cavallo, 1991: Fixed peso at parity with dollar
• Strengthened tax collection agency
• Cut government payroll by over 200,000
• Continued privatizations: Entel, Aerolineas Argentinas, Yacimientos Petrolíferos
Fiscales (1992)
• Encouraged Mercosur: free trade zone took effect January 1, 1995
Results of Convertibility Law
• Budget surpluses (a result of privatizations and payroll cuts)
• Inflation rate down from 2,300%/year to <1%/year
• >$10,000 per capita income: among the highest in Latin America
• Economic growth
• Recipient of large amounts of DFI
• Unemployment: almost 15%
Consequences of Convertibility Law
• Under Convertibility Law, deficits had been covered NOT by printing money, but
by selling government bonds—debts now huge
• High interest rates, and drastic efforts to cut budget deficit, lead to two-year
recession, high levels of unemployment
• Corralito imposed, late 2001
• December 2001 riots: de la Rua resigns
• A number of interim presidents follow : Duhalde, Kirchner
• End of Convertibility Plan, January, 2002; devaluation follows
• Corralito policy continues; lasts until December, 2002
• “Pesification” implemented (asymetric)
• Tax on exports
• Social unrest, riots continue

Packenham model – Kirchner (Popularidad de kirchner de 70%)

• Political Party System: still somewhat “consolidated,” but less so than before?.
Peronists (PJ) - some internal conflict, UCR, Frepaso, other parties, etc.
(HOWEVER: after October 2005 elections, Peronists now have strong majorities in
both CD and Senate)
• Political Credentials of President: good
 • Leadership Skills of President: good
• Political Consensus: low

Current Issues
• Corralito has ended for withdrawals from savings and checking accounts
• Pesification and tax on exports remain
• Return of inflation, but not hyperinflation
• High unemployment

Union Cívica Radical (UCR) formed, 1890. Hipóloto Yrigoyen is leader – representing the
interests of the middle class

See also: Peron, Menem, Partido Justicialista, Look especially at the online article by
Martin Feldstein, and “Current Events” articles.

Note: readings that will be especially important for essays, as well as for multiple choice
section, are Packenham, Needler, and the articles on bargaining, especially in relation
to the EMBRAER case.

VERY IMPORTANT NOTE: I will also ask some multiple choice questions
related to the readings for Broadcast 4 (on Mercosur and Other Trade
Pacts and Costa Rica).
 MC 40-8=32
Essay 54

Total 86

Please see my comments at the end of your essay.

NAME: José

CAMPUS: PHX

Midterm Exam: GM 6030: RBE: Latin America

Dr. Roy Nelson / Summer 2005

Part I: Multiple Choice (40%)

Answer ALL of the following multiple choice questions (2 points each)
Please highlight your answers.

1. The reforms that President Nestor Kirchner of Argentina must make in order to
satisfy the IMF’s conditions are all of the following EXCEPT:
a) renegotiate rates with privatized utility companies
b) maintain a primary budget surplus (before interest
payments) of at least 3% of GDP
c) reform the national government’s relationship with the
provincial governments by passing an amendment to the
constitution similar to Brazil’s fiscal responsibility law
d) increase taxes on exports
e) In fact, President Kirchner must do ALL of the above in order
to satisfy the IMF’s conditions

2. The “enduring democracy” view disagrees with Seligson’s “cycles” view, which
says that Latin America swings back and forth between democracy and
authoritarianism in regular cycles. Which of the following trends or factors
support the “enduring democracy” argument?

a) The end of the Cold War

b) Literacy rates and GDP/capita have increased significantly
in Latin America in the last several decades
c) Military governments throughout Latin America have been
discredited
 d) ALL of the above support the “enduring democracy”
argument

3. Which of the following was NOT a cause (either direct or indirect) of

Brazil's January, 1999 devaluation of the Real?

a) Brazil's fragmented political party system made enacting economic

reforms
(and, therefore, reducing the budget deficit) difficult. This contributed to
investors' nervousness, because they believed that eventually, the
Central Bank might have to finance the budget deficit as it had in the
past by abandoning the fixed exchange rate the "Real Plan" had
established, and, instead, going back simply to printing money to
finance the deficit.

b) Brazil's exchange rate, pegged to the dollar, became increasingly

"overvalued." This, plus the "Brazil Cost," contributed to the difficulty Brazil
experienced in exporting its products. This created another deficit the
current account (trade) deficit. That could be financed by foreign
investment (sales of Brazilian government bonds, etc.), as long as
investors were willing to keep putting their money in Brazil. But as the
trade deficit grew in size, investors became increasingly more nervous.

c) Itamar Franco's refusal to pay his state's external debt - which then
had to be assumed by the national government created the perception
that the domestic budget deficit problem would only get worse. When
investors sold off billions of dollars in assets in January 1999, and
exchanged their Brazilian currency for dollars so that they could take
their money home, they flooded the market with a large supply of
Brazilian real. Even with IMF assistance, the Central Bank lacked sufficient
dollar reserves to buy up this local currency to maintain its value.

d) Brazil's large amounts of foreign direct investment (FDI).

e) All of the above were causes of Brazil's 1999 devaluation.

4. The populist Argentine president Juan Peron did all of the following EXCEPT:

a) Increased wages
b) Made his third wife, Isabel, his temporary vice president.
When he died unexpectedly, she became president
c) Protected domestic industry with high tariffs
 d) Started a Marxist political party known as Unión Cívica
Radical, the Radical Party

5. Which of the following has facilitated President Kirchner’s ability to implement

economic reforms in Argentina?

a) he is a member of the Peronist party

b) Argentina’s political party system seems to have become
more fragmented
c) Argentina currently seems to lack a strong consensus in
favor of market-oriented reforms
d) there are conflicts within the Peronist party itself
e) all of the above would make it easier for Kirchner to
implement market-oriented reforms

6. What is one of Lula’s main objections to the Free Trade Area of the Americas
(FTAA)?
a) It will result in excessive foreign direct investment (FDI) in
Brazil.
b) Lula does not want to open Brazil’s market until the U.S.
reduces agricultural subsidies.
c) Brazil is currently having difficulty exporting its products. The
FTAA would make this even more difficult.
d) All of the above.
e) Both “a” and “b,” but not “c.”

7. Normally, after a large devaluation, a country experiences high rates of inflation.

Why did inflation remain relatively low in Brazil after the massive devaluation of
the real in 1999?

a) Brazil did not rely on imports to the extent of other

economies
b) after the devaluation, the National Congress passed some
reforms to help keep the budget deficit under control;
therefore, the Central Bank did not have to “print money” to
finance its budget deficit
c) The Central Bank president, Arminio Fraga, maintained a
tight monetary policy by means of “inflation targeting” – if
 inflation rose beyond a certain level, he raised interest rates
to keep it in check.
d) all of the above

8. All of the following are part of the original “Washington Consensus” on policies
Latin American governments should follow (as summarized by U.S. economist
John Williamson in 1990, not as “refined” later), EXCEPT:

a) Foreign direct investment (FDI) should be encouraged, not

restricted.
b) “Fiscal discipline” is important (budget deficits should be
avoided).
c) In order to make sure that market-oriented economic
reforms are successful politically, governments should also
give special attention to poverty alleviation and the social
dimension to their policies.
d) Whenever possible, government-owned companies should
be privatized.
e) Labor reform – making the labor market more flexible in
order to encourage foreign investment – is highly important.
f) Neither “c” nor “e” was part of the original Washington
Consensus.

9. Using the Packenham Model for assessing prospects for economic reform in a
given country, choose the factor or situation that would tend to INCREASE the
chances that a government will be able to implement effective, market-oriented
economic reforms.
a) The recently-elected civilian president is from a leftist
political party. A former autoworker with a well-earned
reputation as an advocate of protectionism for domestic
industry, he is also known as a champion of the working
class. Upon taking office, however, he proposes market-
oriented economic reforms as the only way to solve the
country's economic crisis
b) the country's political party system is highly fragmented
c) BOTH "a" and "b" would increase the chances for effective,
market-oriented reforms
 d) None of the above would increase the chances for
effective, market-oriented reforms.

10. Which of the following was a major cause of the riots in Argentina in
December 2001?
a) Argentina’s continued membership in the Mercosur customs
union
b) The prospect of former President Menem facing trial over
corruption charges
c) the government’s corralito policy, which restricted
withdrawals from bank accounts
d) All of the above was a direct cause of social unrest in
Argentina.
e) None of the above.

11. Although we have not specifically studied Mexico in this course, we did
discuss how the Packenham model might be applied to President Fox’s
efforts to implement reform in Mexico. Following the Packenham model,
which of the following might tend to make enacting market-oriented
reforms more difficult in Mexico at the present time?
a) President Fox’s background as former president of Coca-
Cola de Mexico
b) Increased political fragmentation in the party system
c) Lack of political consensus in the Congress
d) All of the above factors would make enacting market
reforms more difficult
e) None of the above would make enacting market reforms
more difficult

12. Which of the following is FALSE about the Unión Cívica Radical (UCR), or
Radical Party, in Argentina?

a) It has been in existence since the late 1800s, and is still an

important political party in Argentina
b) It is a Marxist party, now legalized, that was responsible for
terrorist acts of violence in Argentina in the late 1960s
c) It represents middle class interests in Argentina
d) It formed an alliance with another party, Frepaso, to form a
coalition (known as Alianza) to oppose the Peronists
 e) It is currently the majority party in Argentina’s National
Congress.

13. An “institutional interest” explanation for military intervention would argue that
the military in a given country might be more likely to intervene in a civilian
government, either “behind the scenes” (more likely nowadays, if this were to
happen, than a direct “takeover”) or in an outright military coup, if:

a) the interests of important industrialists are threatened

b) a civilian president’s policies seem likely to create long term
economic and political instability
c) in order to reduce the budget deficit, the president
proposes big cuts in the military budget
d) None of the above is consistent with the “institutional
interest” perspective.

14. Which of the following represents the so-called “unholy trinity” – groups that were
part of the traditionally powerful oligarchy in Latin America in the 19th century,
but which still have power today?
a) industrialists, landowners, evangelical Protestants
b) labor unions, peasants, the military
c) the military, Catholic Church, landowners
d) the military, indigenous people (“indians”), the Catholic
Church

15. Provincial legislatures in Argentina have some independence in making

policy.
They can even do the following:
a) print their own money without any objection from the
national government
b) pass laws limiting the size of retail stores
c) establish tariff barriers separate from the Mercosur Common
External Tariff rate
d) none of the above is correct
16. Which of the following would be a lesson that could reasonably be learned from
Argentina’s recent financial crisis?
a) Overvalued exchange rates, a currency crises, and
widespread defaults may be risks associated with countries
with fixed exchange-rate systems. Countries with market-
determined floating exchange rates are more likely to avoid
these problems.
b) Latin American governments that borrow large amounts of
money in dollars to cover their deficits are following a risky
strategy.
c) The encouragement of foreign direct investment was NOT
the cause of the Argentine crisis; therefore, reversing this
policy now would not solve the crisis.
d) All of the above would be lessons that could be learned
from this crisis.

17. Consider the following scenarios. In which of these situations would a U.S.-based
transnational corporation (TNC) have the most bargaining power in its
negotiations with a host government in Latin America?
a) A TNC is planning to build a major manufacturing plant that
will create over 2,000 relatively high-paying jobs. However,
the company is willing to consider only one state within a
very large country as the possible location for its
manufacturing plant – a state that already has received
enormous amounts of foreign investment that is similar to
what the TNC offers.
b) A TNC in a high technology industry is considering four
different countries as possible sites for its manufacturing
plant. Two of these countries have federal systems, allowing
the TNC to select which state within those countries would
be the best place for the investment. No other company in
this particular industry (a high growth sector) has established
manufacturing operations in Latin America – this company
would be the first.
c) both scenarios "a" and "b" would give the TNC a great deal
of bargaining power
 d) Neither of the scenarios would give the TNC any bargaining
power in its negotiations with a host government in Latin
America.

18. Which of the following was true about former President Fernando Collor de Mello
in Brazil?
a) His policies were even more “populist” and protectionist
than those of Getúlio Vargas, known in Brazil as the “father
of the poor.”
b) O Globo, Brazil’s dominant media conglomerate,
contributed greatly to his success in the beginning with
favorable media coverage – and to his downfall later, when
the media giant turned against him
c) Collor had the strong support of his political party, Partido
dos Trabalhadores, until he resigned in 1992.
d) All of the above are true statements.

19. Which of the following was NOT a factor, either direct or indirect, that led
eventually to the Argentine government’s defaulting on its debts and (not long
after that) to the devaluation of the Argentine peso?
b) The government’s inability in the late 1990s to balance the
budget, in part because the Argentine constitution allowed
the provincial governments to pass on their debts to the
central government. Because of the fixed exchange rate –
which prevented the government from financing the deficit
by simply printing more money – the government was forced
to finance the increasingly large deficits by borrowing
(issuing government bonds), at high rates of interest.
c) Brazil’s 1999 devaluation of the real, resulting in large trade
deficits in Argentina – which the government also had to
finance by borrowing (issuing government bonds).
d) Because Argentina’s exchange rate was rigidly fixed to the
dollar, the Argentine peso became increasingly overvalued
in the 1990s as the U.S. dollar appreciated. This made
 Argentine exports seem more expensive to consumers in
countries with weaker currencies.
e) Menem’s privatization of state-owned enterprises (SOEs) in
the early 1990s.
f) Strong union pressures, which prevented the Menem and de
la Rua governments from reforming rigid labor laws. This
weakened Argentina’s international competitiveness by
making its exported products expensive.

20. Based on your reading of the Intel case, which of the following made Brazil less
attractive than other countries on Intel’s short list as a location for a high-
technology company interested in establishing a plant that would manufacture
products for export to the United States?

a) The “Brazil cost” – extra costs associated with doing business

in Brazil
b) Relative lack of interest in attracting Intel on the part of São
Paulo state government officials, compared to other
countries on Intel’s short list
c) Intel executives’ perception that labor unions might be more
aggressive in Brazil than in some other countries on the short
list
d) All of the above

Essay Questions On Next Page

Part II: Essay (60%)

Write on ONE of the following. Remember: be sure to use as many examples and
illustrations as possible to support your argument. Make specific reference to the
reading whenever possible.

1. KORPUS, a large U.S.-based sporting goods company that sells athletic

clothing, small radios and cameras), is considering investing in South
America. The company hires you as a consultant. KORPUS would like to
know whether it should set up new stores in Brazil, Argentina and/or Costa
Rica. In your answer:
1. Based on assigned readings and class lectures on Brazil, which of the following is
NOT a concern of Brazil’s current president President Luis Inácio (“Lula”) da Silva as
he enters his second four-year term?

a) Brazil’s high crime rate

b) reforms that can help accelerate Brazil’s economic growth rate

c) consolidating multiple state sales tax rates into a single national value-added tax

d) finding a way to pay off Brazil’s loans to the IMF

2. Based on the Packenham Model, which of the following would make it easier
politically for President Kirchner to implement economic reforms in Argentina – if he
were willing to do so?

a) he is a member of the Peronist party

b) Argentina currently seems to lack a strong consensus in favor of market-oriented

reforms

c) there are conflicts within the Peronist party itself

d) all of the above would make it easier for Kirchner to implement market-oriented
reforms

3. Based on your reading of the EMBRAER case (and other assigned reading), as well
as class discussion, which of the following would be TRUE about the EMBRAER case
that we studied in class?

a) The Brazilian government’s support for EMBRAER over the years – and specifically,
the original creation of EMBRAER itself – would be consistent with the “Washington
Consensus” approach to economic policymaking.

b) The WTO prohibits most export subsidies. This also applies to the Brazilian
government’s current subsidies to help finance the sale of EMBRAER’s planes to
foreign buyers.

c) Some analysts could argue that EMBRAER “won” the outcome of its negotiations
with Cessna and Piper, in part, because EMBRAER was able to play one
transnational enterprise off of another.
 d) This case clearly demonstrates that when they are negotiating joint ventures, U.S.-
based transnational enterprises always have more bargaining power than host country
governments or local firms.

e) Both “a” and “c” are correct.

f) Both “a” and “d” are correct

4. According to an article by Lara Sowinski which was part of the assigned reading for
today’s broadcast, entitled “What can DR-CAFTA Do for You?”, which of the
following is TRUE about DR-CAFTA?

a) It has already been approved by the U.S. Congress, but has not yet been ratified by all
the other countries that negotiated this agreement.

b) Although the U.S. Congress finally approved DR-CAFTA, it faced strong opposition
from some U.S. sugar producers and textile manufacturers.

c) ALL of the following are advantages that doing business with DR-CAFTA countries
offers to many U.S. firms, compared to doing business with Asian countries: 1)
proximity to U.S. market; 2) similar time zone; 3) few manufacturers of heavy
machinery in Dominican Republic or Central America

d) ALL of the above are true statements

5. Which of the following was NOT a cause (either direct or indirect) of Brazil's
January, 1999 devaluation of the Real?

a) Brazil's fragmented political party system made enacting economic reforms

(and, therefore, reducing the budget deficit) difficult. This contributed to
investors' nervousness, because they believed that eventually, the Central Bank
might have to finance the budget deficit as it had in the past by abandoning the fixed
exchange rate the "Real Plan" had established, and, instead, going back simply to
printing money to finance the deficit.

b) Brazil's exchange rate, pegged to the dollar, became increasingly "overvalued." This,
plus the "Brazil Cost," contributed to the difficulty Brazil experienced in exporting its
products. This created another deficit the current account (trade) deficit. That could
be financed by foreign investment (sales of Brazilian government bonds, etc.), as long
 as investors were willing to keep putting their money in Brazil. But as the trade
deficit grew in size, investors became increasingly more nervous.

c) Itamar Franco's refusal to pay his state's external debt - which then had to be assumed
by the national government created the perception that the domestic budget deficit
problem would only get worse. When investors sold off billions of dollars in assets in
January 1999, and exchanged their Brazilian currency for dollars so that they could
take their money home, they flooded the market with a large supply of Brazilian real.
Even with IMF assistance, the Central Bank lacked sufficient dollar reserves to buy
up this local currency to maintain its value.

d) Brazil's large amounts of foreign direct investment (FDI).

e) all of the above were causes of Brazil's 1999 devaluation.

6. The populist Argentine president Juan Peron did all of the following EXCEPT:

a) Increased wages

b) Made his third wife, Isabel, his temporary vice president. When he died unexpectedly,
she became president

c) Protected domestic industry with high tariffs

d) Started a Marxist political party known as Unión Cívica Radical, the Radical Party

7. Normally, after a large devaluation, a country experiences high rates of inflation.

Which of the following is NOT a reason why inflation remained relatively low in Brazil
after the massive devaluation of the real in 1999?

a) As a major producer of both raw materials and manufactured goods itself, Brazil did
not rely on imports to the extent of other economies in Latin America.

b) after the devaluation, the National Congress passed some reforms to help keep the
budget deficit under control; therefore, the Central Bank did not have to “print
money” to finance its budget deficit

c) the Central Bank president maintained a tight monetary policy by means of “inflation
targeting” – if inflation rose beyond a certain level, he raised interest rates to keep it
in check.

d) The Brazilian government imposed price controls on all products in the aftermath of
the devaluation.
8. Which of the following were part of the original “Washington Consensus” on
policies Latin American governments should follow (as summarized by U.S. economist
John Williamson in 1990, not as “refined” later)?

a) Foreign direct investment (FDI) should be encouraged, not restricted.

b) “Fiscal discipline” is important (budget deficits should be avoided).

c) In order to make sure that market-oriented economic reforms are successful

politically, governments should also give special attention to poverty alleviation and
the social dimension to their policies.

d) Whenever possible, government-owned companies should be privatized.

e) Labor reform – making the labor market more flexible in order to encourage foreign
investment – is highly important.

f) In times of recession, governments should pursue an “anti cyclical” fiscal policy –

increase government spending and cut taxes, even if a large budget deficit results, in
order to stimulate economic growth.

g) “a,” “b,” and “d” were all part of the ORIGINAL Washington Consensus.

h) “a,” “b,” and “e” were all part of the ORIGINAL Washington Consensus

9. Which of the following was NOT a factor, either direct or indirect, that led eventually
to the Argentine government’s defaulting on its debts and (not long after that) to the
devaluation of the Argentine peso?
a) The government’s inability in the late 1990s to balance the budget, in part because the
Argentine constitution allowed the provincial governments to pass on their debts to the
central government. Because of the fixed exchange rate – which prevented the
government from financing the deficit by simply printing more money – the government
was forced to finance the increasingly large deficits by borrowing (issuing government
bonds), at high rates of interest.

b) Brazil’s 1999 devaluation of the real, resulting in large trade deficits in Argentina –
which the government also had to finance by borrowing (issuing government bonds).

c) Because Argentina’s exchange rate was rigidly fixed to the dollar, the Argentine peso
became increasingly overvalued in the 1990s as the U.S. dollar appreciated. This made
Argentine exports seem more expensive to consumers in countries with weaker
currencies.
d) Menem’s privatization of state-owned enterprises (SOEs) in the 1990s.

e) Strong union pressures, which prevented the Menem and de la Rua governments from
reforming rigid labor laws. This weakened Argentina’s international competitiveness by
making its exported products expensive.

10. Which of the following was a major cause of the riots in Argentina in December
2001?

a) Argentina’s continued membership in the Mercosur customs union

b) Menem’s arrest on corruption charges

c) Kirchner’s borrowing money from Venezuela to help pay off Argentina’s debt to
the IMF.

d) the government’s corralito policy, which restricted withdrawals from bank accounts

e) all of the above were direct causes of social unrest in Argentina in 2001.

11. Using the Packenham Model for assessing prospects for economic reform in a given
country, choose the factor or situation that would tend to INCREASE the chances that
a government will be able to implement effective, market-oriented economic reforms.

a) the recently-elected civilian president is from a leftist political party. A former

autoworker with a well-earned reputation as an advocate of protectionism for
domestic industry, he is also known as a champion of the working class. Upon taking
office, however, he proposes market-oriented economic reforms as the only way to
solve the country's economic crisis

b) the country's political party system is highly fragmented

c) BOTH "a" and "b" would increase the chances for effective, market-oriented reforms

d) none of the above would increase the chances for effective, market-oriented reforms.

12. One assigned reading related to today’s broadcast was entitled “An Ominous Step:
Mercosur and Venezuela.” Which of the following is NOT consistent with the points
made in this article?
 a) by admitting a regime whose president is ambivalent about democracy, Mercosur
devalues its “democratic clause,” requiring all members to be full democracies

b) Within Mercosur, Venezuela’s entry may strengthen Argentina in its rivalry with
Brazil, since Kirchner’s populist policies are more similar to Chavez’s than Lula’s
more pragmatic economic policies, and Argentina has the greater need for energy
imports.

c) Only now that Venezuela is a full member of Mercosur will the other Mercosur
members get access to Venezuela’s oil exports – before Venezuela’s entry as a full
member, the Mercosur countries were not able to import any oil from Venezuela
whatsoever.

d) Venezuela’s entry into Mercosur as a full member may make Mercosur’s

relationships with the rest of the world more complicated

e) Venezuela will now have to adopt Mercosur’s common external tariff

13. Which of the following is FALSE about the Unión Cívica Radical (UCR), or Radical
Party, in Argentina?

a) It has been in existence since the late 1800s, and is still an important political party in
Argentina

b) It is a Marxist party, now legalized, that was responsible for terrorist acts of violence
in Argentina in the late 1960s

c) It represents middle class interests in Argentina

d) It is currently the majority party in Argentina’s National Congress.

e) Both “b” and “d” are false.

14. An “institutional interest” explanation for military intervention would argue that
the military in a given country might be more likely to intervene in a civilian
government, either “behind the scenes” (more likely nowadays, if this were to happen,
than a direct “takeover”) or in an outright military coup, if:

a) the interests of important industrialists are threatened

b) a civilian president’s policies seem likely to create long term economic and political
instability

c) in order to reduce the budget deficit, the president proposes big cuts in the military
budget

d) none of the above is consistent with the “institutional interest” perspective.

15. Provincial legislatures in Argentina have some independence in making policy.

Currently, they can and DO implement the following policies:

a) print their own money, thus creating their own distinct provincial currencies. A
practice always strongly supported by the IMF, this is something that all of
Argentina’s provincial governments still do.

b) pass laws limiting the size of retail stores

c) establish tariff barriers separate from the Mercosur Common External Tariff rate

d) none of the above is correct

16. Which of the following would be a lesson that could reasonably be learned from
Argentina’s recent financial crisis?

a) Overvalued exchange rates, a currency crises, and widespread defaults may be risks
associated with countries with fixed exchange-rate systems. Countries with market-
determined floating exchange rates are more likely to avoid these problems.

b) Latin American governments that borrow large amounts of money in dollars to cover
their deficits are following a risky strategy.

c) The encouragement of foreign direct investment was NOT the cause of the Argentine
crisis; therefore, reversing this policy now would not solve the crisis.

d) All of the above would be lessons that could be learned from this crisis.

17. State governments in Brazil have more independent control over economic policy
than Mexican states. Which of the following is something that Brazilian states can offer
to prospective foreign investors considering where to locate a manufacturing plant, but
Mexican states cannot offer?

a) free land

b) free training for local workers at the plant (for a limited period of time)

c) loans and exemptions from state income tax

d) In fact, both Brazilian AND Mexican states can offer ALL of the above.

18. Following the Packenham model, which of the following might tend to make
enacting market-oriented reforms MORE DIFFICULT in any Latin American
country?

a) The president of the country had a previous career as a high-ranking executive for a
major U.S. multinational corporation

b) Increased political fragmentation in the country’s party system

c) Lack of political consensus in the Congress regarding market reforms

d) All of the above

e) None of the above

19. Consider the following scenarios. In which of these situations would a U.S.-based
transnational corporation (TNC) have the most bargaining power in its negotiations
with a host government in Latin America?

a) a TNC is planning to build a major manufacturing plant that will create over 2,000
relatively high-paying jobs. However, the company is willing to consider only one
state within a very large country as the possible location for its manufacturing plant –
a state that already has received enormous amounts of foreign investment that is
similar to what the TNC offers.

b) a TNC in a high technology industry is considering four different countries as

possible sites for its manufacturing plant. Two of these countries have federal
systems, allowing the TNC to select which state within those countries would be the
best place for the investment. No other company in this particular industry (a high
growth sector) has established manufacturing operations in Latin America – this
company would be the first.

c) both scenarios "a" and "b" would give the TNC a great deal of bargaining power
 d) neither of the scenarios would give the TNC any bargaining power in its negotiations
with a host government in Latin America.

20. Which of the following was a reform or set of reforms Brazil has ALREADY made
that the IMF demanded, as part of its “conditions,” that Argentina adopt as well (at
least in some form)? (NOTE: now that the Kirchner government has paid off its debt to
the IMF, implementation of this reform seems much less likely in Argentina – at least
not until after the presidential election in 2007.)
a) Enacting labor market reform for the private sector (making the private sector labor
market more flexible by making it easier to hire and fire workers)

b) Fully privatizing the state-owned oil company

c) Enacting a fiscal responsibility law (making it more difficult for states to pass on their
debt to the national government)

d) Joining Mercosur as a full member

e) All of the above

f) Both “a” and “c” ONLY

g) Both “b” and “c” ONLY

 a) provide an assessment of prospects for the continuation and
sustainability of market-oriented economic reforms in Brazil
and/or Argentina in the future. [NOTE: In your answer, you
should use the Packenham Model as a framework for your
analysis. Don't just summarize Packenham, however; USE the
model to assess prospects for current and future market-
oriented economic reforms in Brazil and/or Argentina. Also,
make reference to lectures/other readings, where relevant.])

b) discuss any other factors (possible locations within the country?

demographics? culture? bargaining?) that might be relevant to
Korpus.

Korpus Stores Location in Latin America Analysis

Korpus is a large U.S.-based sporting good company that is considering in

investing in South America, especially in Argentina or Brazil. This essay will
demonstrate that investing in Argentina rather than Brazil will be a better option
for Korpus.

My analysis will be based in the Packemham model and then I will analyze both
countries demographically, culturally and some other factors.

The Packemham Model

The Packemham model takes into consideration four factors. Applying the
model to Argentina we can find that the President Nestor Kirchner has very
good political credentials. The main point here is that he is part of the Peronist
party which is a populist party. He has forced to make many market reforms so
that way many people have credibility on what he is doing. So in the first point
of the model Argentina is making it good. Referring to Brazil, Lula has also
good credibility. He has the same characteristics of Kirchner. He is a leftist and
populist that is making many market reforms so this point gives him also good
credentials.

The second point of the model talks about the political party system. In
Argentina the political system is really consolidated. The Peronist now have
strong majority in the congress. So the political system is Argentina is good. In
Brazil, the political party system is really fragmented. They have 11 parties and
no one has a real power. Brazil needs to find alliances to resolve this problem
which is really affecting the way to reach reforms to help the country’s growth.

The third point of the model refers to the leadership skill of the president. In
Argentina, the way in which Kirchner arrived to the presidency makes him a
leader. He won the elections with any political power. He quickly demonstrated
that he was willing to fight for the people, the way in which the restructured the
deal with bondholders make the Argentinean president a real leader. In the
case of Lula, he is also a good leader because he was able to form alliances
with other parties.

The political consensus is the last point of the model. In Argentina is point is
low, as in many Latin American countries. The crisis that the country lived
made difficult to find consensus in market reforms. Also another important point
is the internal conflict that the ruling party is living. The Peronist is having
problems to find consensus so it has hardened the way to Kirchner to find
consensus. Also in Brazil this point is low. As I mention before, the way in
which the political party system is fragmented have made difficult to find
consensus.

As we see in above points, Argentina has a better near future scenario.

Argentina would be a better option to invest for Korpus if we only take into
consideration this model.

Needed Reforms

Both countries are having problem in reaching consensus to develop market

reforms. Brazil needs to work especially in the Tax Reform which is affecting
the country and the foreign direct investment. Other important reforms that
Brazil need are the Social Security Reform and the State Owned Enterprises
(SOE) Reform.

In the case of Argentina, many reforms are now on the table but I think not as
important issue that Brazil is trying to resolve. The first point that Argentina
needs to work is the reform the elimination of taxes on export transaction.
Argentina mainly is working to complete all the recommendations that the IMF
asked for.

As we see both countries need some important reforms to have a better FDI
scenario. But I think that the Argentina’s recovery and the current political and
economic situation help Argentina to be a better option.

Additional Factors

Transportation: An important factor to take into consideration is distribution.

Korpus needs to move inventories from the U.S. or manufacturing countries to
the new stores. Argentina has better infrastructure in highways, railroad and
airports. Argentina has the best railroad system of all the Latin American
countries. They have daily flights to the United States. Their highways are
privatized and in really good conditions. So the distribution inside or outside
Argentina would no have any problem. In Brazil the situation is different; the
transportation is a really big issue. They have deteriorated highways, inefficient
railroad. They also have daily fights to the United States and an acceptable
international airport. Both countries are really far from the United States, so
distance is not a decision factor.
Cultural: Argentineans culture is really similar to the ones in Europe. I think
that all marketing strategies would be easier to develop in Argentina than in
Brazil which their culture is really different that in the United States.

Economic: Argentineans are used to spend more money than in Brazil. The
GDP per person in Argentina is higher in Brazil, which has one of the lowest in
Latin America.

Bargaining: I think that this point would be the same in both countries. Korpus
would find a lot of competition in both countries, so it will be difficult to have a
bargaining power in any country.

As we see, Argentina ill be a better option for Korpus to invest. The result by
using the Packemham model helped me to determine that Argentina would
have a better future for investing. The reforms implemented in Argentina are
still needed in Brazil. Finally, the additional factors also support the decision in
going thru Argentina.

Jose,

You make some good points here and this shows a clear understanding of the
Packenham model. However, your essay is a bit thin. I would have liked a
deeper analysis drawing more on class lectures and readings to illustrate your
points.

Thanks,

Roy Nelson