Tensions in Latin American structural adjustment: Allocation versus distribution

In the economic history of Latin America, a growing population demanded jobs; creating more jobs required industrialization; and industrialization made it necessary to cover a productivity differential. There were two feasible options for this purpose: i) to preserve allocative efficiency and generate a major regressive income redistribution process; or ii) to lose allocative efficiency but leave the distribution of income largely unchanged. Governments chose the latter and built in lasting distortions in the foreign exchange market. Import substitution industrialization ended in stagnation. Increased pressure in the labour market could have driven wages sharply downward, but instead the informal market arose and, thanks to its monopolistically competitive structure, segmented the goods markets and ensured a minimally acceptable form of income distribution.