Economic Liberalisation in Latin America

Gerardo Angeles-Castro

• Publisher: Routledge
• Year: 2020
• Print ISBN:
  9780367456542
• eBook ISBN:
  9781000260939
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

This book explores the process of economic liberalisation in Latin America and revises the transition from the import substitution industrialisation model to market-oriented reforms. It explains the theoretical foundations of the neoliberal paradigm and the implications of the policies that were labelled as the Washington Consensus. The book also incorporates an assessment on the socio-political norms added to the orthodox prescription, the so-called Post-Washington Consensus. The study comprises a general analysis on the subcontinent and on different economic liberalisation paths, and looks at four country case studies: Mexico, Brazil, Chile, and Uruguay, from the 1980s to recent years.

From this approach, the reader can analyse weaknesses and strengths, the socioeconomic performance, and the difficulties that Latin America has presented through the turbulent process of economic liberalisation, both at an early stage and over the long run, by means of country case studies encompassing the most diverse and representative styles of economic openness in the subcontinent. This allows them to identify the challenges the country faces and the appropriate policies they can follow to cope with sustained economic growth, poverty reduction, and income distribution within an economically open environment. The study is carried out by analysing and contrasting theoretical and empirical perspectives, allowing a broader understanding of the topics.

The book is complementary reading for textbooks, due to the objectivity with which it addresses important and quotidian issues in the region, associating empirical and theoretical topics, and facilitating the understanding of the international political economy of Latin America. It is also suitable for practitioners and researchers, because of the depth in which it covers specific topics and the useful analysis it conducts to incorporate policy implications and suggestions for achieving equitable growth in a context of liberal markets.

1 The emergence of the Washington Consensus in Latin America

Theoretical foundations and challenges

The collapse of the ISI model and its destabilising effects provided an intellectual climate favourable for market-oriented reforms. The set of policies deemed appropriate for Latin America was labelled as the Washington Consensus. This neoliberal approach has solid foundations in standard neoclassical theory. It offered different perspectives for achieving economic growth, poverty reduction, and better levels of income distribution through the operation of market forces and the mechanism of prices. Nevertheless, its theoretical foundations have been challenged by an intensive critique, especially in the academic sphere since they are deemed idealistic and unfeasible if they are not complemented by additional strategies. This chapter comments on the transition from the ISI model to market-oriented reforms. In addition, it explains the theoretical foundations of the neoliberal paradigm and offers a critical approach of their ideological assumptions.

From the import substitution industrialisation model to market-oriented reforms

Latin America has been characterised by a high degree of inequality since independence, and even before; absolute poverty has also been largely endemic. The structuralist theory, developed simultaneously in the 1950s by several economists and by the Economic Commission for Latin America (ECLA), placed the responsibility for this situation on long-term historical forces, on the world capitalist economy, and on dominant classes who benefit from these conditions.

According to the structuralist approach the world economy is composed of a core or centre of highly industrialised countries and an underdeveloped periphery, where the former is dominant over the latter and determines the conditions in which peripheral economies produce. Gilpin asserts that the heart of the argument is that:

the nature of technical advance, cyclical price movements, and differences in demands for industrial goods and primary products cause a secular deterioration in the terms of trade for commodity exporters, that is, deterioration of the prices the less developed countries receive for their commodity exports relative to the prices of the manufactured goods they import from developed countries.

(Gilpin 1987, 275)

Consequently, for structuralists, a liberal capitalist world economy tends to preserve or actually increase inequalities between developed and less developed economies through mechanisms of trade and investment.

The core-periphery structure is maintained not just by the capitalist world system, but also by support from dominant classes, elites, or the ruling class in the periphery economies who benefit from the relationship and have an interest in perpetuating underdevelopment. These privileged classes maintain their internal position by exclusion or manipulation of the domestic social forces from economic or political power. For his part, Cox points out that within the periphery economies, a minority of labour employed in foreign-owned enterprises is integrated into the world economy, while the mass of local labour remains relatively deprived (Cox 1992, 174). Thus, the structuralist theory asserts that the world economy not only increases inequalities between developed and developing countries but also maintains social inequality in the periphery and neglects the true needs of the masses.

Structuralists have pointed out several policies to deal with these problems. The most important course of action advocated is rapid industrialisation in order to overcome the periphery’s declining terms of trade and to absorb its labour surplus. Therefore, peripheral economies should pursue an import substitution strategy through policies of economic protectionism.¹ The ISI model prevailed in Latin America from the 1950s up to the early 1970s; during this period, the region experienced rapid industrialisation, high rates of economic growth, and improvement of the terms of trade. Furthermore, economic growth was associated with a fall in poverty. However, despite a drop in poverty, the long pattern of unequal income was prevalent in this epoch.²

Oxhorn outlines that the ISI model in Latin America was associated with state corporatism, since elites in control of the state saw this system of interest intermediation as their solution to their developmental problems. He claims that state corporatist institutions encouraged populist coalitions between the growing working class and the developmental state through hierarchical institutions that could effectively moderate workers’ demands. According to Oxhorn, organised labour became a relatively privileged group, at the same time that its own interests were always subordinated to those of the dominant class. State corporatism became a fundamental component of process of controlled inclusion. On the other hand, people outside the modern industrial sector of the economy were generally denied economic and political power (Oxhorn 1999, 197–198). Hence, the model created economic polarisation between privileged groups and people outside them.

Critics of the ISI model suggest that the nature of the strategy worsens income distribution. Frank claims that the model involves capital-intensive techniques, so employment is low, as are wages, leaving a large part of the population marginalised, either unemployed or in traditional low productivity activities (quoted in Brewer 1990, 172). From this viewpoint, Gilpin asserts that the ISI strategy failed to produce sustained economic growth in less developed countries because the traditional social and economic conditions remained intact. Indeed, he argues that the neo-colonialist alliance of indigenous feudal elites with international capitalism has been reinforced by the ISI strategy. The result was an increased misdistribution of income and domestic demand too weak to sustain continued industrialisation (Gilpin 1987, 283).

Although the ISI model encouraged poverty reduction and achieved relatively high rates of economic growth for several years, the role of state corporatism and the nature of the model did not allow for tackling the pattern of unequal distribution of income. Furthermore, by the mid-1970s the model had showed symptoms of depletion. Substantial fiscal and trade deficits, income concentration, capital flights, weak domestic markets, but especially high rates of indebtedness and inflation disrupted economic growth. In addition, protectionism, clientelism, and corruption associated with state corporatism and authoritarianism exacerbated problems of inefficiency and waste. By the early 1980s the ISI model had reached its limits and created a severe economic crisis that lasted most of the decade.

For most of the 1980s Latin America struggled with the aftermath of the debt crisis; overall GDP per capita fell by 11 per cent, real wages declined, and unemployment and underemployment sharply increased (Morley 1995, 41). Furthermore, the Economic Commission for Latin America and the Caribbean (ECLAC) estimates that in 1990, 41 per cent of Latin Americans were living in poverty and 18 per cent were indigent.³ By comparison, ten years earlier (in 1980), only 35 per cent were poor and just 15 per cent were indigent (ECLAC 1997, 28). It is worth noting that income distribution was also seriously affected. World Bank data for 18 Latin American countries indicate that the Gini coefficient rose from 0.45 in 1980 to 0.50 in 1989⁴ (quoted in Robinson 1999, 49).

In short, the collapse of the ISI strategy and the debt crisis of the 1980s showed that this developmental model failed to produce sustained economic growth. Moreover, the so-called lost decade erased some of the improvements registered in the 1960s and 1970s, especially in terms of employment, poverty, real wages, and per-capita income. In addition, major shifts in income distribution were not registered during the successful years of the model, and degrees of inequality were regressive in the 1980s. Under these circumstances, it became clear to Latin American states that they needed to undertake deep and radical socioeconomic reforms, which placed greater emphasis on outward-oriented strategies.

The neoliberal model

Theoretical foundations

The failures of the ISI model provided an intellectual climate favourable to market-oriented reforms. Moreover, the strong influence that technocratic groups and epistemic communities exerted on Latin American governments, and the conditionality that multilateral institutions attached to their loans, led to a shift in the development paradigm after the mid-1980s towards a neoliberal model in which inward-looking development was replaced by export-led growth and state intervention by market forces.

John Williamson is given credit for first labelling ‘the Washington Consensus’—the resulting agenda and the set of policy reforms which most of the multilateral financial institutions based in Washington thought would be good for Latin American countries.⁵ This prescription divides policy reform into ten areas. Hojman outlines these ten areas as follows: fiscal discipline, public expenditure priorities, tax reform, financial liberalisation, market-determined exchange rates, trade liberalisation, foreign direct investment, privatisation, deregulation, and property rights (Hojman 1994, 193).

The neoliberal ideological consensus has solid foundations in familiar neoclassical trade theory, which argues that the welfare gains from free trade are unambiguous. FitzGerald points out that in the neoclassical argument, adjustment to world prices would allow resources to be allocated more efficiently and growth to be maximised. Cheaper natural resources and labour (in the case of Latin America) would be used more intensively as exports and imports adjust to comparative advantages and costly scarce capital would be used less. Exports and output would grow more rapidly, while trade would balance through a variable exchange rate (FitzGerald 1996, 32). In this sense, the Heckscher-Ohlin theory stresses that the freeing of trade should shift factor demand in favour of unskilled labour and agriculture in the lest developed countries (LDCs) and thereby improve the distribution of income (Berry 1998b, 3). Accordingly, in increasing trade based on comparative advantages, peasants’ and low-skilled workers’ income should expand relative to capital returns, since the demand for their service will rise and income would be redirected away from the scarce factor and toward the abundant factor. In this way, Tanski and French claim that within the neoclassical framework, trade liberalisation has a greater distributive effect between capital and labour, and increases competitiveness and reduces the tendency toward concentration of wealth (Tanski and French 2001, 678).

Barrett states that in the neoliberal view, efforts to increase the organisational capacity and bargaining power of labour through state-enforced labour standards pose an inherent threat to accumulation and economic efficiency. This is because they are seen as a drain on savings and investment and a source of labour market rigidity. Moreover, he emphasises that from this approach, it is only by limiting union power and allowing wages and the supply of labour to respond flexibly to market signals that sustained growth will be achieved (Barrett 2001, 563). A dynamic and flexible labour market helps to reallocate resources, to encourage international investment, and to improve competitiveness. Labour market adjustment includes legislation to reduce the power of labour unions, reduction in the number of public servants, reduction in the legislated minimum wages, and reduction of employers’ contributions to various benefits for workers. Thomas asserts that in the short term these policies are likely to involve a net transfer from labour to capital and make the distribution of income more unequal. However, in the long term, freeing the labour market of distortions improves the distribution of income because it encourages employment expansion and wage increases in the poorest segments of society (Thomas 1996, 79, 86, 87).

In the neoliberal model, the package of fiscal, monetary, exchange, and related measures is intended to achieve macroeconomic stability, an essential requisite for the operation and free mobility of capital. The liberalisation of trade and finance, privatisation of public enterprises, and the opening of the capital account create the preconditions for large capital flows from abroad. Such foreign flows are welcomed because they supplement domestic savings and investments and therefore boost growth. Griffith-Jones argues that in the neoliberal perspective, portfolio equity and FDI emerge as a new source of finance which reduces commercial bank lending; furthermore, foreign capital inflows encourage the lowering of domestic real interest rates. In this view, government expenditure going to external and domestic debt servicing declines significantly and there is room for fairly large increased spending on the social sectors that benefit the poorer sections of society (Griffith-Jones 1996, 129, 139, 140). Hence, for neoliberals the impact of capital surges reduces income inequality and poverty.

For Neoliberals, through outward oriented reforms, income dispersion may widen and absolute poverty increases in the short-term. However, they argue that the market will react and their operations and the mechanism of prices cause resources to be reallocated; in addition, economic growth provides resources for poverty alleviation, but meanwhile the model suggests that social assistance can be used to provide targeted safety nets. In this context Vilas asserts that the neoliberal social policy is a set of measures oriented to compensate the negative effects of macroeconomic adjustments and market distortions. This policy is cyclical and is not permanent. Once economic growth and employment are reactivated, social programmes can be suspended, since the market forces can conduct the efficient allocation of resources. He also claims that neoliberal social programmes are not aimed at social development as the notion of the state intervention becomes redundant and misleading in the long-run; therefore, social policy is rather oriented to avoid further poverty and to assist the victims of the adjustment only during the transition process or during recessive periods (Vilas 1997, 934–935).

Robinson underlines that the political component of the neoliberal structural adjustment is to make the world safe for capital. It requires developing social controls and political institutions most propitious for achieving a stable world environment; furthermore, it requires promoting democracy in order to secure the best conditions for international capital accumulation (Robinson 2000, 312–313). The theoretical foundation of this position is classical modernisation theory.⁶ According to Panizza (2000, 737), this approach holds that economic modernisation will bring about an autonomous state capable of enforcing the universal rule of law, representative political institutions and a political culture of rights and accountability. Moreover, in classical modernisation theory, it is emphasised that liberal democracy and economic liberalism go hand in hand and that the former is the outcome of economic development. In the neoliberal approach, therefore, democracy provides political and social stability, which is essential for international capital flows and for the achievement of economic development. Poverty alleviation and better income distribution in such circumstances can be attained.

The neoliberal model takes the liberal assertion that failure to develop is ascribed to domestic market imperfections and improper government policies such as a weak financial system, substantial fiscal deficits, and overvalued currencies.⁷ In this sense, Gilpin asserts that for liberal economists, development requires the removal of political and social obstacles such as political corruption and parasitic social and bureaucratic structure (Gilpin 1987, 266–267). Whereas structuralists maintain that underdevelopment is caused by external forces of the world capitalist system, liberals find the obstacles to development within the l...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Dedication
• Contents
• List of illustrations
• Acknowledgements
• Introduction
• 1 The emergence of the Washington Consensus in Latin America: theoretical foundations and challenges
• 2 Implications of the Washington Consensus reforms and resulting trends
• 3 Country case studies, economic liberalisation implementation, and short-run results
• 4 Long-run evolution of equity and growth
• 5 Final remarks
• References
• Index