The Political Economy of Latin America

Reflections on Neoliberalism and Development after the Commodity Boom

Peter Kingstone

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781317404477
• Edition: 2
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

This brief text offers an unbiased reflection on debates about neoliberalism and its alternatives in Latin America with an emphasis on the institutional puzzle that underlies the region's difficulties with democratization and development. In addition to providing an overview of this key element of the Latin American political economy, Peter Kingstone also advances the argument that both state-led and market-led solutions depend on effective institutions, but little is known about how and why they emerge. Kingstone offers a unique contribution by mapping out the problem of how to understand institutions, why they are created, and why Latin American ones limit democratic development.

This timely and thorough update includes:

• A fresh discussion of the commodity boom in the region and the resulting "Golden Era" in Latin America;
• The recent explosion of social policy innovation and concerns about the durability of social reform after the boom;
• A discussion of the knowledge economy and the limits to economic growth, with case studies of successful examples of fostering innovation.

1 Markets, States, and the Challenge of Development in Latin America

“Latin America after the Golden Era” … that was the topic of discussion when a group of leading Latin American and Iberian economic officials met in Madrid in July 2014 under the auspices of the Ibero-American General Secretariat (Secretaría General Iberoamericana, SEGIB). SEGIB coordinates meetings and summits every year, but this one centered on the bold, but somewhat worrisome idea that Latin America had had a “Golden Era” but it was over and there was now a “new economic reality”¹ threatening the region. The idea that Latin America had experienced a “golden age” or a “golden decade” roughly between 2003 and 2012 was actually quite common. Perhaps the most emblematic image of Latin America triumphant was the Economist magazine cover depicting Rio’s famous Christ the Redeemer (Corcovado) statue rocketing into the sky with the enthusiastic caption “Brazil Takes Off.”² But, Brazil was not alone. All through the region, Latin Americans and foreign observers shared the sense that something historically distinctive had been happening. But, a “Golden Era?” What was so special about the first decade of the 2000s that merited such a triumphant term?

The answer is that the period really did stand out as an historic period of economic, social and political changes in virtually every Latin American country. Those changes included tens of millions of people lifted from poverty and rapidly declining inequality in a region known as the global champion of inequity and exclusion for decades if not centuries. At the same time, foreign debt, budget deficits, and inflation fell, in most cases dramatically. This came in a region so engulfed and devastated by these macroeconomic troubles that the 1980s had been dubbed “the lost decade.” Politically, Latin American democracies appeared in general to be strengthening and deepening as well, with new groups mobilizing and participating and formal and informal barriers to women, indigenous, racial minorities, and the poor all falling. Over the 2000s, Latin America went from the world’s champion of inequality to the world’s leading laboratory for innovative new social policies. After roughly 500 years, it appeared as if long-standing patterns of social and economic exclusion might instead be heading towards a new “golden” standard of inclusion.

Two exemplars widely held up as possible models of development highlight Latin America’s visibility and impact on the global community. On one side, Venezuela under Hugo Chávez offered a new form of socialist change that inspired leftists all around the world, based on an explicit critique of liberal democratic capitalism. At his peak, Chávez financed sympathetic left-wing politicians and parties throughout the region, provided social assistance for programs in other countries (including subsidized fuel to low income Americans), and openly challenged US leadership in the world, delighting his admirers by calling George W. Bush “the Devil” at his 2006 address to the United Nations.³ On the other side, Brazil, led by working class hero turned party leader and president, Luiz Inácio Lula da Silva offered a more moderate model heralded as the “Brasília Consensus” that blended support for markets with a strong state presence and progressive social programs. Lula and his admirers spread the gospel of Brazil’s miracle, offering political advice to other leftist parties in the region, such as the Farabundo Martí para la Liberación Nacional (Farabundo Martí National Liberation Front, FMLN) of El Salvador, technical advice and aid to other developing countries, particularly in Africa, and marking the country’s new found prominence on the global stage by winning bids to host the World Cup in 2014 and the Olympics in 2016.

But, if the era was so special, why did it come to an end? The idea that the “golden age” had reached its end by 2012–2013, and that the road beyond was filled with perils was also widely held across Latin America. Newspapers from diverse parts of the region all pointed to an end to the unusual cycle of good times, fueled by historically high commodity prices. Commodity prices across a wide range of products – from energy, to food, to minerals and metals – had risen steadily over the 2000s (even recovering very quickly from the 2008 global financial crisis), driven primarily by Chinese growth and consumption of commodities. But, by 2011, China’s growth had slowed and prices began to decline at an accelerating pace. The end of the cycle was not a surprise – commodity prices are particularly volatile and prone to cycles. Indeed, observers such as the Inter-American Development Bank noted concern that Latin American governments were overly dependent on commodity export revenues, particularly for domestic spending, which had also risen sharply over the period.⁴ Others noted that very few Latin American countries had taken advantage of the boom to invest in future prosperity or to create genuine stabilization funds to protect them against a downturn in commodity prices.⁵ In short, the region had benefited from an incredibly favorable global economy – “good times” that gave politicians unusual room to offer new social and economic benefits.⁶ With the fall of commodity prices, the good times were over.

The tensions began to show quickly, economically, socially and politically. On the economic front, growth and per capita GDP growth slowed down steadily from roughly 2012 on, turning negative on average by 2015–2016. Export revenues declined and along with them, the outstanding macroeconomic performance of the “Golden Era,” including debt levels, fiscal deficits, and the threat of inflation (already pronounced in some countries like Argentina and Venezuela). The growing constraints on revenues meant that governments began to feel pressure on their ability to maintain the levels of social spending of the “Golden Era.” In some countries, like Ecuador, efforts to cut spending led to open protests. In Brazil, vast expenditures to prepare for the World Cup in 2014 and the Olympics in 2016 contrasted with underinvestment in health, education and especially transport and provoked the 2013 Vinegar Revolution as hundreds of thousands of angry citizens took to the streets to demand FIFA (Federation Internationale de Futbol Associations) level social policy.⁷ In fact, by 2017, Brazil and Venezuela, champions of their respective models of development, had descended into severe crisis, economically and politically with Brazil paralyzed by a massive corruption scandal and Venezuela an openly and increasingly repressive authoritarian regime.

Of course, Latin America is not alone in confronting economic, social and political dilemmas in the contemporary period. In the US, the 2016 presidential election brought Donald Trump to power in a context of bitter polarization, framed explicitly around identity issues. But, beneath the ugly politics lay a story of diminishing economic opportunities affecting both Democrat and Republican voters. Bernie Sanders’ and Elizabeth Warren’s rhetoric targeted the privileges of the top 1% of earners at the expense of jobs and public services (including education) for the rest of society. Donald Trump’s angry white identity politics captured the mood in communities hit by declining opportunity and ravaged by social ills like opioid addiction that fostered a deep sense that the government and establishment elites had abandoned them. In the United Kingdom, angry working class voters shocked globalized London elite opinion by opting to leave the European Union and its guarantee of free movement of labor within Europe. The vote came after years of budget cuts that the ruling Conservative Party argued were necessary to restore growth after the global financial crisis of 2008–2009. By the time of the vote in 2016, the UK economy was growing faster than the rest of Europe, but it was growth that rested on stagnant wages, rising household debt, low wage (or no wage), low quality work, and devastating cuts to long cherished public services such as the National Health Service. The US and the UK were not unique among the rich democracies. In fact, bad economic performance, worrying social indicators, and fraught, angry politics had become one of the defining features of democratic capitalism around the world. How to promote growth and make sure society broadly shares in it has become one of the critical questions facing the world in the new millennium. And beneath that question lies the fundamental, controversial and deeply conflictual problem of whether you trust markets or the state.

In Latin America, the argument over market and state has always been present and it has always been intense. For example, in January of 2000, the residents of Cochabamba, Bolivia’s third largest city, went to war with their government. The conflict was fraught with emotion and marked by profound and ultimately irreconcilable differences. It lasted several months as angry protestors barricaded buildings, blockaded streets and occupied government offices. The government declared a state of siege and met the protestors with violent repression by Bolivian soldiers and Cochabamba police. So, what was so important to the citizens of Cochabamba that they would openly battle their government? The answer was water and the seemingly innocuous question of how best to deliver it to local residents. But, this harmless question triggered one of the most successful and extensive mobilizations of citizens in Bolivian history as middle class consumers, poor peasants, indigenous groups, environmentalists and labor unions came together to form an organization called Coordinadora por la defensa del Agua y la Vida (Coordination for the Defense of Water and Life). The movement drew the attention and support of left-wing and anti-globalization activists all over the world. Their purpose was to fight for their way of life, as manifested in the way they obtained their water.⁸

The problem had to do with privatization – the process whereby a government sells ownership of a state owned enterprise, or alternatively licenses the right to operate it. Access to running water was underdeveloped and inequitable and the government lacked the resources to invest in improved capacity.⁹ As a result, a hasty and poorly conceived auction took place. The winning consortium, Aguas de Tunari, led by Bechtel Corporation of the United States, promised to invest in increased capacity and in exchange was guaranteed a 15% return on their investment. Within days, Aguas de Tunari introduced rate increases of as much as 35%. Many residents drew their water from wells or from collected rainwater and believed that the contract granted Aguas the right to charge for this water as well. The threat of exorbitant prices for water and the uncertainty over who held rights to ground and rainwater stirred the uprising. Initially, President Hugo Banzer – one time general and military dictator of the country – refused to back down, defending the integrity of the contract and the necessity of the new investments. Ultimately, however, the rising anger over the use of unrestrained force against protestors involved in the struggle undermined Banzer’s resolve and he relented, canceling the contract and returning water service to local control. Aguas de Tunari officials had already fled the city in fear for their lives.¹⁰

This so-called “Water War” captures all the elements of the major conflicts playing out throughout Latin America and much of the rest of the capitalist world: markets versus government control; private property rights versus community needs; efficiency versus social justice; centralized, technical decision-making versus democratic accountability. Seemingly simple policy choices, like how to provide water, are often at the center of great trade-offs between much larger and harder to reconcile visions of society. This book is about those policy choices and the difficult trade-offs they reflect. It is about how those trade-offs have played out in Latin America over the past thirty years and what it means for the future.

Why Latin America? Latin America is a region that often escapes global and/or US attention. It is rarely at the center of global strategic struggles (the 1962 Cuban Missile Crisis a prominent exception). Although the region contains important deposits of oil and natural gas, it is not the central actor in global struggles over strategic resources, as with the Middle East or the former Soviet Union. It has not been the center of powerful, competing ideologies, such as communism or more recently political Islam. Indeed, a common Latin American complaint is that aside from the US’ periodic unwelcome interventions in national politics, American presidents actually pay little real attention to the region.¹¹ US governments care about drug interdiction policies, but Latin American concerns are rarely high priority matters for US foreign policy or foreign economic policy, or for the larger American public for that matter.

Yet, Latin America is an important region for both the US and the world. The US, of course, has a long and lamentable history of military and covert intervention in the region. Hugo Chávez’ intense anti-US rhetoric, such as calling President George Bush “satan,” may appear crazed to some US observers, but it reflects a real history of subverting democratic governments, supporting dictatorships, and financing violent insurgencies or counter-insurgencies.¹² But, the US connection to Latin America extends well beyond foreign policy. Perhaps most importantly, the US and Latin America are deeply integrated demographically and economically. By 2017, Latinos were the fastest growing minority in the country, constituting nearly 17% of the US population (52 million people), of whom 19 million were born in Latin America. The growing US Latino population and ongoing migration from the region have built upon the long-standing Latino population in the country, dating at least to the US seizure of roughly 1/2 of Mexico’s territory in the US–Mexican War of 1846–1848. These new flows of migration have deepened the already strong bonds with the region to the south.

In turn, this flow of migration reflects the development of Latin America’s economy. Economic development has been a controversial problem in Latin America for most of its modern history. Economic failures – most notably to provide meaningful opportunities and acceptable standards of living – left millions in the region in terrible straits. This misery at home with opportunity abroad played an important role in driving Latin Americans to look for work in the US. The US and Latin America are linked economically as well. Latin America is, in regional terms, one of the US’s largest trading partners, accounting for roughly 20% of all imports and exports with comparable importance for Latin American countries as well.¹³ So, while both the US public and politicians take Latin America for granted, what happens in the region matters a great deal.

From a global and historical perspective, Latin America matters also, most importantly because it raises intriguing questions about development and economic growth – questions that have been vital and controversial in the wake of the 2008–2009 economic crisis, the long, slow recovery and the emergence of angry populist and undemocratic politics everywhere. Latin America has been a laboratory of competing strategies for promoting growth and development for over 100 years – a region where the debate over the proper balance of markets and government leadership has continued unabated for decades. In some periods, markets have appeared predominant; in others government leadership. For roughly two decades over the 1980s and 1990s, the pro-market side, often referred to as “neoliberalism,” appeared to have won. As Francis Fukuyama observed, the “end of history” – meaning the end of debate over democratic capitalism – had arrived.¹⁴ Forrest Colburn lamented the triumph of consumerism over genuine citizenship and called it “Latin America at the End of Politics.”¹⁵ Government leadership in the economy was condemned as ineffective and inefficient – destructive of democracy and perpetuating poverty and inequality. The left in Latin America virtually disappeared.¹⁶ As Margaret Thatcher once declared: “there is no alternative.”

But, starting in 1999 and continuing into the new century, a “Pink Tide” swept the region as left-wing parties made a stunning resurgence. Voters in diverse countries supported critics of markets and US influenced approaches to the challenges of development and democracy. Indeed, as many of the world’s leading economies plunged into recession, Latin America’s development experiments became ever more relevant and took on renewed urgency and interest for both developing and developed countries around the world. For the left, this reversal in fortune represented a “backlash” against the reviled philosophy “neoliberalism.” For such critics, neoliberalism had been an elitist project that uses markets to reward the wealthy at the expense of the poor, undermines democracy, and ...