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Latin America in the Global Economy:
Running Faster to Stay in Place

By Gary Gereffi and Lynn Hempel, in NACLA's Report on the Americas, 10:02 AM Apr 2, 1996

During the latter half of the twentieth century, the organization of the world economy has changed in fundamental ways. Until the end of World War II, the advanced industrial countries of western Europe and the United States controlled most of the world's trade and industrial production. Since the 1950s, however, the industrialization gap between developed and developing countries has been narrowing.

Industrial production has shifted out of the West, initially to Japan, then to the newly industrialized countries (NICs) of Latin America (Mexico, Brazil and Argentina) and East Asia (Hong Kong, Taiwan, South Korea and Singapore), and now to virtually every country of the world. As developed economies shift toward high-value-added manufacturing and services, the center of gravity for production activities in many global industries has moved to the developing world.

Industrialization itself, however, may be losing the key status it once had as a definitive hallmark of national development.1 There are two reasons for this. First, industrialization and development are not synonymous. This is apparent in the disparate social and economic consequences of industrial growth in the Latin American and East Asian NICs over the past several decades. In addition, authoritarian rather than democratic political regimes have been associated with high economic growth rates in many countries. Second, while industrialization may be a necessary condition for core status in the world system, it no longer is sufficient.

Mobility from the semiperiphery to the core, or from the periphery to the semiperiphery, cannot be defined simply in terms of a country's degree of industrialization. More important is a nation's success in upgrading its mix of economic activities toward products and techniques that require skilled workers, rising wages, and higher levels of value added. Continued innovations by the most developed countries tend to make core status an ever receding frontier. Thus, developing nations have to run faster just to stay in place.

The new manufacturing by developing nations is largely export-oriented. Third World exports encompass a broad range of traditional items (such as coffee, bananas and tin) as well as nontraditional ones (such as snow peas, blue jeans and cars). These exports go disproportionately to developed country markets. This pattern of diversified, export-oriented industrialization requires a more sophisticated explanation than the "cheap labor" hypothesis that views low-wage workers located in export-processing zones as the catalyst for the surge of manufactured exports from the Third World. These assembly-oriented export activities have frequently characterized only the initial stage of export-oriented industrialization in many nations.

Economic globalization is not a frictionless web of arm's- length market transactions. Countries are incorporated in the global economy through international production, trade, and financial networks which are dominated by foreign capital.

Latin America's involvement in these networks is quite different from that of Asia, and as a result Latin America has exploited only some of the opportunities that are presented by economic globalization. This has limited the ability of Latin America to move toward the high-value-added niches in the global production hierarchy, and to develop a more integrated pattern of industrial development with substantial local ownership and domestic linkages.

In global capitalism, economic activity is not only international in scope, it is also global in organization. "Internationalization" refers to the geographic spread of economic activities across national boundaries. As such, it is not a new phenomenon; indeed, it has been a prominent feature of the world economy since at least the seventeenth century, when colonial empires began to carve up the globe in search of raw materials and new markets for their manufactured exports. "Globalization" is much more recent than internationalization and implies functional integration between internationally dispersed activities.

Globalization requires the agency of three kinds of international capital: (1) industrial capital--i.e., vertically integrated transnational corporations that establish international production and trade networks through the activities of overseas subsidiaries; (2) commercial capital--i.e., large retailers, merchandisers of brand-named products, and trading companies that create and control global sourcing networks typically headquartered in developed countries, coordinated from semiperipheral locations (the NICs), and with production concentrated in the low-wage periphery; and (3) finance capital--i.e., commercial banks, official international lending institutions (such as the World Bank and the International Monetary Fund), and, to a lesser degree, portfolio investors that supply the short-term funds used to finance global production and trade.

Industrial and commercial capital has promoted globalization by establishing two distinct types of international economic networks, which may be called "producer-driven" and "buyer-driven" commodity chains.2 Producer-driven commodity chains refer to those industries in which transnational corporations or other large integrated industrial enterprises play the central role in controlling the production system (including its backward and forward linkages). This is most characteristic of capital- and technology-intensive industries like automobiles, computers, aircraft and heavy machinery. What distinguishes producer-driven systems is the control exercised by the administrative headquarters of transnational corporations.

Buyer-driven commodity chains refer to those industries in which large retailers, designers, and trading companies play the pivotal role in setting up decentralized production networks in a variety of exporting countries, typically located in the Third World. This pattern of trade-led industrialization has become common in labor-intensive, consumer-goods industries such as garments, footwear, toys, houseware, consumer electronics, and a variety of hand-crafted items (e.g., furniture, ornaments). Production is generally carried out by tiered networks of Third World contractors that make finished goods for foreign buyers. The specifications are supplied by the large retailers or designers that order the goods.

One of the main characteristics of the firms that fit the buyer-driven model, including retailers like Wal-Mart, Sears Roebuck, and J.C. Penney, athletic footwear companies like Nike and Reebok, and fashion-oriented apparel companies like Liz Claiborne and The Limited, is that these firms design and/or market, but do not make, the brand-named products they order. They are part of a new breed of "manufacturers without factories" that separate the physical production of goods from the design and marketing stages of the production process. Profits in buyer-driven chains derive not from scale, volume, and technological advances as in producer-driven chains, but rather from unique combinations of high-value research, design, sales, marketing, and financial services that allow the retailers, designers and traders to act as strategic brokers in linking overseas factories and traders with evolving product niches in their main consumer markets.

Profitability is greatest in the relatively concentrated segments of global commodity chains characterized by high barriers to the entry of new firms. In producer-driven chains, manufacturers making advanced products like aircraft, automobiles and computers are the key economic agents not only in terms of their earnings, but also in their ability to exert control over backward linkages with raw material and component suppliers, and forward linkages into distribution and retailing. The transnational corporations in producer- driven chains therefore frequently participate in global oligopolies. Buyer-driven commodity chains, by contrast, are characterized by highly competitive and globally decentralized factory systems. The companies that develop and sell brand-named products exert substantial control over how, when and where manufacturing will take place, and over how much profit accrues at each stage of the chain. Thus, whereas producer-driven commodity chains are controlled by industrial firms at the point of production, the main leverage in buyer-driven industries is exercised by retailers and brand-name merchandisers at the marketing and retail end of the chain.

For nearly five decades until the 1970s, Latin America followed a strategy of import-substituting industrialization (ISI). This strategy, originally geared towards consumer-goods production for the domestic market, came to be based on producer-driven commodity chains. Transnational corporations, which have actively exploited Latin America's oil, mineral, and agricultural resources since the nineteenth century, began to establish automobile assembly plants in large countries like Mexico, Brazil and Argentina in the 1920s. By the 1960s, a range of advanced ISI factories were spread throughout the region in diverse industries such as petrochemicals, pharmaceuticals, automobiles, machinery and computers. Buyer-driven commodity chains, by contrast, have been virtually absent in Latin America. This is because transnational corporations that originally invested in the ISI context were more interested in gaining access to Latin America's domestic markets than in production for export. The goal set by Latin American domestic elites was national economic development based on growth via industrial deepening. Meanwhile, the local exporters in the East Asian NICs concentrated on gaining the lion's share of U.S. and European markets for consumer goods, which could be profitably supplied through buyer-driven chains.3

In the 1970s, the main source of external financing for ISI in Latin America shifted from foreign direct investment to increasingly heavy amounts of foreign debt, which culminated in the debt crisis of 1982. The 1980s was labeled the "lost decade" for many Latin American nations, as they suffered through economic recession, spiraling inflation, severe budget cuts in social expenditures, high levels of unemployment and underemployment, and pervasive poverty.

Under pressure from the international lending institutions, one Latin American country after another was forced to opt for "neoliberal" policies. As the state abruptly withdrew from many of its traditional activities, faith in the market came to replace faith in government as the ideological basis for these regimes.

The new economic policies in Latin America and the Caribbean rest on the conviction that the region's future depends on an improvement in its international competitiveness, along with further integration into the world economy. This integration includes not only trade, but also foreign capital, especially foreign direct investment. The current policy orthodoxy is composed of a familiar trilogy: liberalization--open up economies to international trade; privatization--reduce the role of the state; and deregulation--increase the space for foreign capital to operate in the region. While this "market friendly" orientation reputedly underlies the economic success of the nations in East and Southeast Asia, the implications for Latin America are far less clear.4

Unlike Latin America, most Asian economies have experienced high economic growth rates, substantial gains in industrial competitiveness, and rising per capita incomes since 1980 [see Table 1]. Export growth within Asia has accelerated since 1970. East and Southeast Asia have increased their exports at an average annual rate of 9% during the 1970s, and almost 11% since 1980. In Latin America and the Caribbean, exports were nearly stagnant during the 1970s (an annual growth rate of 0.9%). Between 1980 and 1993, they grew at an average annual rate of 3.4%.5

Whereas Latin America and the Caribbean remain primarily a raw-material exporting region, Asia has shifted dramatically away from primary commodities and toward manufactured exports in a strategy of continuous industrial upgrading. This broad generalization, however, obscures pronounced development hierarchies within these regions, which are highly correlated with industrial diversification and export performance. Asia's development hierarchy has Japan at the core, followed by the East Asian NICs, then in descending order of industrial capacity by China, Southeast Asia, South Asia, and formerly socialist economies such as Vietnam, Cambodia and Laos at the bottom. There is an equally distinct regional division of labor within the Americas, with the United States at the core, followed by Canada, Brazil and Mexico in a second tier, then the Southern Cone countries, the Andean countries, and finally the small Central American and Caribbean economies.

Latin America's development hierarchy is evident in the divergent export profiles of individual countries [see Table 2]. Central American and Caribbean nations mainly export agricultural goods and apparel. The Andean countries are almost exclusively primary-product exporters (with the exception of Colombia, where manufactured exports are one- third of the total). Southern Cone countries such as Argentina and Chile also emphasize primary products, but they have somewhat higher levels of manufactured exports than is found in the Andean subregion. Finally, in the region's two largest economies--Brazil and Mexico--manufactured goods account for more than half of total exports.

Manufactured exports are thus highly concentrated in a few countries. Brazil and Mexico accounted for 77% of the regional total in 1992; these countries, plus Argentina, Colombia and Venezuela, represented 90% of all manufactured exports in Latin America. The relative weight of Brazil and Mexico increases in proportion to the technological complexity of goods; the two countries accounted for 60% of traditional exports, 77% of basic intermediate inputs, and 85% of regional exports of advanced industrial products.6

Countries are connected to the global economy through a variety of export roles, each with distinct implications for development. Within Latin America, the main types of exporting are: raw material supplies, including processed "industrial commodities" and nontraditional agricultural exports; the export-oriented assembly of traditional manufactured goods, such as apparel and electronics items, using imported components; and the manufacture of advanced industrial products, such as automobiles and computers, within the integrated production and trade networks of transnational corporations.

In most Latin American nations, raw materials still make up 80% or more of total exports. A number of countries, however, have been quite successful in upgrading primary-product exports, either by shifting to nontraditional agricultural and other primary goods or by processing raw materials more before selling them as "industrial commodities" (for example, paper, plastics, petrochemicals and steel). Chile and Costa Rica provide good illustrations of the dynamics and dilemmas of the nontraditional export strategy.

Chile, which enjoyed a solid decade of economic growth averaging 6% per year since 1983, supplemented its market- based economic reforms with a sharp turn towards export- oriented industrialization based on the country's abundant supply of natural resources. Exports as a percentage of gross domestic product (GDP) rose from 10% in the 1960s to 29% in 1985 and 37% in 1993. While copper remained Chile's most important single export (over one-third of total exports), three groups of nontraditional items--fruits, fish products and forestry products--accounted for an additional one-third of the export total in the early 1990s. Foreign direct investment, attracted to these traditional and new export industries by Chile's debt-equity conversion scheme known as Chapter XIX, was one of the pillars of the country's export- based strategy.7 In the case of fresh fruits, whose share in total exports rose to 10% by the early 1990s (from 1% in the mid-1970s) and with annual export revenues approaching $1 billion, four of the five fresh fruit firms were owned by transnational corporations. A similar pattern of foreign dominance exists in the forestry and salmon sectors.8 Chile's natural resource-based model also has profound environmental costs. Meanwhile, neoliberal economic policies decimated the country's domestic industrial framework, built up under ISI.

Costa Rica has also experienced a dramatic nontraditional export boom.9 The share of Costa Rica's total export earnings that are derived from nontraditional products jumped from 12% in 1984 to 43% by 1990. The portfolio is quite balanced among agricultural products, fish and seafood, and some light manufactured products. As in Chile, there is a pronounced "multinationalization" of Costa Rica's nontraditional agricultural export sector, with Del Monte dominating fresh pineapple exports, and foreign firms also controlling the export of flowers and ornamental plants.10 Export subsidies are an important source of political conflict in the nontraditional export sector, however. Costa Rica, a heavily indebted country with the fourth highest per capita debt in the world, has been disbursing a significant portion of central government funds (8% of the national budget in 1990) as export tax credits to nontraditional exporters. A few large exporters, mainly foreign firms such as Del Monte's pineapple subsidiary, PINDECO, that are supposed to be helping to shore up national finances, have received the biggest tax credits. Substantial fiscal deficits, documented cases of corruption, growing labor strife, and concerns over large-firm dominance have led to cutbacks in the export subsidy program. The resulting uncertainty in fiscal incentive policy has caused a serious downturn in export performance and threatens the future of Costa Rica's nontraditional export strategy.

The most common form of export activity in developing countries is the labor-intensive assembly of manufactured goods from imported components in export processing zones (EPZs). Over 200 EPZs currently employ nearly two million workers in more than 50 countries.11 Around 80% of the workforce in EPZs are women, the majority between 16 and 25 years of age. Working hours in EPZs are 25% longer than elsewhere, and the wages paid women are from 20 to 50% lower than those of men working in the same zones.12 Women also make up a large share of the total informal-sector workforce in developing countries (39% in Latin America), which places them at the very end of the subcontracting networks of transnational corporations, where they are paid on the basis of piece rates, rather than working days, and they are unprotected by labor legislation.

Export-oriented assembly in Latin America is centered in Mexico and the Caribbean Basin because of this area's low wages and proximity to the U.S. market, where over 90% of their exports are sold. Virtually all of the EPZ production in the region is of a very low value-added nature, which is a direct result of U.S. policy. Under U.S. tariff schedule provision HTS 9802.00.80 (formerly clause 807), enterprises operating in EPZs have an incentive to minimize locally purchased inputs because only U.S.-made components are exempt from import duties when the finished product is shipped back to the United States. This constitutes a major impediment to increasing the integration between the activities in the zones and the local economy, and it limits the usefulness of EPZs as stepping stones to higher stages of industrialization.

Mexico's maquiladora industry, which was established in 1965, is made up of assembly plants (known as "maquilas") that mainly use U.S. components to make goods for export to the U.S. market. In 1994, the maquiladora industry generated nearly $6 billion in foreign revenue and employed 600,000 Mexicans.13 Until the past decade, Mexico's maquiladora plants typified low value-added assembly, with virtually no backward linkages (local materials typically accounted for only 2-4% of total inputs). In the 1980s, a new wave of maquiladora plants began to push beyond this enclave model to a more advanced type of production, making components for complex products like automobiles and computers.14 Despite the predominance of more technologically sophisticated and higher value-added assembly operations in the new maquiladoras, the passage of the North American Free Trade Agreement (NAFTA) is likely to further increase the attractiveness of old-style apparel and textile assembly operations in Mexico over those in the Caribbean Basin, whose countries don't enjoy the tariff benefits NAFTA accords to Mexico.

Caribbean Basin venues are now the favored locales for export-oriented assembly in Latin America. By the early 1990s, EPZs had become a leading source of exports and manufacturing employment in various Caribbean nations. The Dominican Republic is a prime example. There are 430 companies employing 164,000 workers in the country's 30 free-trade zones; three-quarters of the firms are involved in textiles and apparel.15 In terms of employment, the Dominican Republic is the fourth-largest EPZ economy in the world (the fifth if China's Special Economic Zones are included). The Dominican Republic has an especially large dependence on EPZs, whose share of official manufacturing employment on the island increased from 23% in 1981 to 56% in 1989; by this latter year, EPZs also generated over 20% of the Dominican Republic's total foreign-exchange earnings.16 U.S. investors account for more than half (54%) of the companies operating in the zones, followed by firms from the Dominican Republic itself (22%), South Korea (11%), and Taiwan (3%).17

Caribbean EPZs often have highly specialized export niches. For example, the Dominican Republic, along with Costa Rica, Honduras and El Salvador, supply over 40% of all U.S. underwear imports, and are viewed by U.S. transnational corporations like Fruit of the Loom and Sara Lee Corporation (the world's leading hosiery supplier, with brands like Hanes and L'Eggs) as part of "a trans-American alliance to take on Asian underwear manufacturers in world markets."18 This is part of a new logic of regional integration introduced by a stricter enforcement of the national rules-of-origin clauses in NAFTA and the Caribbean Basin initiative. These clauses restrict duty-free access to the U.S. market only to products that originate within the region, thereby reducing the impact of Asian imports of intermediate as well as finished goods.

While EPZs in Mexico and the Caribbean have been associated with undeniable gains in employment and foreign-exchange earnings, these benefits are offset by a picture of employment growth which is contingent on falling real wages and a decline in local purchasing power. In Mexico, the real minimum wage in 1989 was less than one-half (47%) of its 1980 level, and in El Salvador, workers in 1989 earned just 36% of what they did at the beginning of the decade.19

The rivalry among neighboring EPZs to offer transnational corporations the lowest wages fosters a perverse strategy of "competitive devaluations," whereby currency depreciations are viewed as a major means to increase international competitiveness.20 Initial results look impressive. Export growth in the Dominican Republic's EPZs skyrocketed after a very sharp depreciation of its currency against the dollar in 1985; similarly, Mexico's export expansion was facilitated by recurrent devaluations of the Mexican peso, most recently in 1994-95. Devaluations, however, heighten already substantial wage differences in the region. Hourly compensation rates for apparel workers in the early 1990s were $1.08 in Mexico, $0.88 in Costa Rica, $0.64 in the Dominican Republic, and $0.48 in Honduras, compared to $8.13 in the United States.21

Although it may make sense for a single country to devalue its currency in order to attract users of unskilled labor to their production sites, the advantages of this strategy evaporate quickly when other nations simultaneously engage in wage-depressing competitive devaluations, which lower local standards of living while doing nothing to improve productivity.

Mexico is taking another tack to link up with buyer-driven commodity chains. Despite its current recession, the lure of Mexico's nearly 100 million consumers, half of whom are under the age of 20, has proved irresistible for U.S. retailers. Spurred by NAFTA, the Americanization of Mexican retailing is in full swing. Sears Roebuck, for years the largest department store chain in Mexico, is being joined by other prominent U.S. department stores (such as J.C. Penney, Dillards, and Saks Fifth Avenue). More significant is the incursion of giant U.S. discount chains which augment retail consolidation by establishing joint ventures with Mexican partners: Wal-Mart, the largest retailer in the United States, and Cifra, Mexico's biggest retailing organization, have announced a 50-50 partnership; strategic alliances have also been formed between Kmart and Liverpool, and Price Club and Commercial Mexicana.22

Although the ambitious expansion plans of the U.S. retailers may be put on hold or slowed somewhat because of Mexico's current slump, two longer-term implications of the U.S. retail invasion are likely to be quite significant. First, Mexico's informal distribution networks, made up primarily of street markets, have been the dominant retail outlet for many consumer items, including about one-third of all apparel sales. Giant U.S. discount chains, like Wal-Mart or Price Club, are likely to erode sales first and foremost in the informal sector, with negative consequences for employment and income among these small vendors. Second, the relocation of U.S. retailers to Mexico may increase the incentive to establish local supplier networks for buyer-driven commodity chains. By 1994, the Mexican government had already established vendor-certification schemes that issued quality ratings and made recommendations for improvement to small and medium-sized manufacturers that hoped to supply large foreign retailers in Mexico and eventually the United States.

Producer-driven commodity chains like automobiles and computers offer numerous insights into how the Latin American NICs are making the transition from import-substituting to export-oriented development strategies. Under ISI, the state's strongest bargaining chip with transnational corporations was negotiating access to the domestic market.

The Latin American NICs were quite successful from the 1950s through the 1970s in moving from the assembly stage of manufacturing to the promotion of higher levels of local content, joint ventures with foreign partners, and sectoral export initiatives. After 1980, under pressure from multilateral financial institutions, this old pattern of internationalization was replaced by a new internationalization, which involved a strong commitment to exports, substantial amounts of vertically integrated local manufacturing, and a growing number of alliances between transnational corporations and domestic firms. The state's role in export-oriented industrialization shifted from industrial policy to macroeconomic policy, and from favoring domestic linkages to facilitating international ones. In many ways, the new internationalization built on the foundations laid by ISI strategies, since many domestic industries were established through joint-venture and local-content requirements.

In the automotive sector, the transition from ISI to export- oriented industrialization resulted in a dual economy, with two largely separate industries existing side-by-side. Level one consisted mainly of old plants, severely dated technologies, and inefficient production processes making large and obsolete vehicles for the domestic market. Level two consisted of new factories and equipment installed by transnational corporations in the 1980s and 1990s; the primary objective was to export cars and components to regional and global markets. These two industries are generally in different geographical locations. In Mexico, the new export plants are found in the northern part of the country, close to the U.S. market and far from the old ISI factories near Mexico City; in Argentina, the more recent and smaller industry that exports components to Brazil and the global market has developed near the city of Cordoba.

In order to attain the economies of scale needed for world- class manufacturing, these export industries tend to be highly specialized. Mexico, for example, is one of the world's largest exporters of 4 and 6 cylinder engines; it also makes 60% to 80% of U.S. imports of windshield wipers, insulated ignition wiring sets, seat belts, and seats for motor vehicles.23 Argentina has become one of the world's premier exporters of transmissions.

Automotive exports in Latin American NICs have risen dramatically during the 1980s and 1990s. Mexican exports soared from 4% (18,000 vehicles) to 44% (472,000) of output from 1980 to 1993, Brazilian exports grew from 13% (157,000 vehicles) to 24% of production (330,000), and even Argentina went from 1% of production (3,600 vehicles) to 9% (30,000). These export surges had different destinations. Ninety percent of Mexico's exports went to the United States and Canada, while 80% of Brazilian exports went to South America. Almost all of Argentina's auto exports go to Brazil.24

Automotive exports are controlled by transnational corporations. In Mexico, while foreign firms accounted for two-thirds of all manufactured exports in the early 1990s, they supplied 99% of automotive exports.25 Brazil's half- dozen vehicle-assembly companies are subsidiaries of transnational corporations from the United States, Germany, Italy and Sweden. Although three-quarters of the 750 firms in the autoparts industry in Brazil are of national origin, the largest and most dynamic of the autoparts firms are foreign-owned.26

The economic hardships of the 1980s and 1990s in both Mexico and Brazil paved the way for an important policy initiative, the "popular car" regime. This policy, driven by the concern to make cheap and fuel-efficient no-frills automobiles widely available for domestic consumption, consisted of providing tax deductions and tariff breaks for small cars (less than 1,000 cc engines) that could be sold cheaply (currently, around $7,500). Mexico introduced this policy in 1989, and by 1990 popular cars accounted for 25% of all automobile sales.

In Brazil, popular cars had an even more dramatic impact on the market. The program was officially established in April, 1993, and by September, 1994, these compact models accounted for over 50% of all domestic car sales. Each transnational corporation assembler in Brazil has its own popular-car model. The popular-car boom represents a striking contrast with the past, when auto producers focused on luxury models with higher profit margins for a restricted market. With the turn to more austere vehicles, the assemblers are pursuing a two-pronged strategy: a mass-production logic for the domestic market and high levels of specialization for export markets.

The computer industry is a clear case of assertive industrialization in Latin America, where state policy was used to try to promote domestic technological development and enhance the capabilities of local firms. Brazil's "market reserve" policy in the late 1970s and early 1980s succeeded in giving Brazilian-owned firms the lion's share of the country's rapidly growing minicomputer market. More generally, between 1979 and 1989, local capital's portion of computer-industry revenues in Brazil grew from 23% to 59%, and locally owned firms expanded their share of university-trained employees in the industry from one-third to more than two-thirds.27 Nonetheless, the biggest computer companies in the country remained foreign-owned. In addition, Brazil's computer-industry policy privileged hardware and, as a result, the country was unable to develop local software applications based on prevailing international standards. Brazil was also slow in developing a local semiconductor industry.

Mexico followed a similar policy of emphasizing joint ventures and local production in the 1970s, but in 1984 the country shifted from ISI to export-oriented industrialization in computers. IBM, which earlier was refused admission to the Mexican market because it would not set up a joint venture with a local partner, was allowed to establish a wholly owned subsidiary in Mexico. In return, IBM agreed to export a substantial portion of its computer production. Mexico's computer decree of 1990 dropped local-content requirements to 30%; the onset of NAFTA is expected to abolish the local- content policy entirely and allow computer firms established in the country to import finished computers and parts duty free. Thus, if local computer companies in Mexico and Brazil are to survive, they will have to become more tightly tied to the supply chain of the transnational computer corporations, especially if they seek to expand their exports.

Third World countries have responded to economic globalization in several ways. The most ambitious approach is the internationalization of national industries, led by local firms seeking to conquer foreign markets. Perhaps the best illustration of this are Korean automobile companies, although all of the East Asian NICs, following the example of Japan, have utilized export-oriented development strategies to move to relatively autonomous, high-value-added niches in both producer-driven and buyer-driven commodity chains [see "The Keys to East Asia's Export Success," p. TK]. Unlike the East Asian NICs, however, Latin American countries largely lack a solid, autonomous domestic base for generating and accumulating a national stock of capital for investment in locally driven export-oriented development. The severely truncated Latin American state--the legacy of structural adjustment--in no way resembles the strong proactive states that devised and executed the East Asian development strategy.

An alternative arrangement, more typical of Latin America, is integrated international production, where transnational corporations are key actors. Regional and global strategies by transnational corporations are replacing those geared to maximizing profits in individual countries. Integrated international production networks were reinforced by ISI development strategies in Latin America and elsewhere during the 1960s and 1970s. For Third World nations that choose this particular strategy, the challenge is to try to harness the productive potential of transnational corporations, and to carve out more profitable positions in the global production chains of these companies, which supply export as well as domestic markets.

A third possibility is autarchy or exclusion from global trade and production networks. Autarchy, however, is generally not considered a desirable--or feasible--option in an interdependent world. For most countries, delinking means marginalization.

Latin America's experience with globalization in the 1980s and 1990s has several problematic features. First, Latin America's exports are heavily concentrated in resource-based and traditional manufacturing industries. With the partial exception of the automotive and computer industries, Latin America's technology-intensive exports to global markets are low. The legacy of failed ISI remains strong. Second, the region continues to be characterized by profound national and regional economic asymmetries. Only Brazil and Mexico have significant advanced manufacturing sectors; they account for one-half of the region's total exports and over three- quarters of its manufactured exports. High and growing levels of inequality in income distribution limit domestic markets and generate an over-reliance on exports. Third, transnational corporations have reasserted their importance in the region. By the early 1990s, portfolio investment and foreign direct investment had replaced international commercial bank loans as the primary source of foreign capital. Transnational corporations are now the dominant force in each of Latin America's three main export roles: resource-based sectors, traditional manufacturing industries, and advanced manufactured goods. In addition, given the neoliberal emphasis on privatization in Latin America, transnational corporations have added to their dominance by recapturing strategic positions in Latin America's extractive and intermediate goods industries, as well as in the burgeoning new service sectors like telecommunications and banking.

There are, however, some positive signs. Latin American exports have expanded in dramatic fashion, and at least some industrial upgrading has occurred in each of the region's main export roles. Although national industrial policy has been sharply curtailed, local capital seems to be holding its own and in some cases is becoming more important, especially as producers in nontraditional export activities, as assemblers in the EPZs, and as component suppliers in the advanced manufacturing sectors. Furthermore, regional integration schemes like NAFTA and Mercosur (which links Brazil, Argentina, Uruguay and Paraguay) are creating incentives for a regionalization of commodity chains, with greater potential for backward and forward linkages.

Globalization has improved the international competitiveness of many parts of the region, but not everyone is in a position to take advantage of global links. Globalization thus perpetuates uneven development in Latin America. While Mexico and Brazil, at the pinnacle of the region's development hierarchy, may reap some rewards, the vast majority of Latin American countries will be hard-pressed to keep pace with globalization, running faster just to stay in place.

Moreover, only certain groups are likely to benefit from globalization: large firms that can assimilate new technology and adopt international marketing strategies, and thereby move to more profitable niches in producer-driven and buyer- driven commodity chains; medium and small-sized enterprises that can join the region-based supplier networks of transnational corporations, whether those of giant retailers like Wal-Mart or J.C. Penney in Mexico or of advanced manufacturers such as General Motors and IBM; and workers who are able to acquire new skills and receive higher pay because of the investment in human capital and local technology development in selected sectors.

For the majority in the region--workers in low-paying and low-skill jobs, peasants in subsistence or traditional export sectors, consumers hurt by devaluations and eroding standards of living, and firms unable to compete in increasingly open markets--globalization appears to have more costs than benefits. While the state's ability to define and defend national economic interests is shrinking, the demands placed on it for social programs to handle those who are marginalized or unable to compete in the global economy will undoubtedly grow.

1. This discussion is adapted from Gary Gereffi, "Global Production Systems and Third World Development," in Barbara Stallings, ed., Global Change, Regional Response: The New International Context of Development (New York: Cambridge University).