- 06 Nov 2003 21:25
#42018
Latin America Loses Faith In The Free Market
November 4, 2003
Most Latin Americans live in fear of losing their jobs and believe the neo-liberal free market reforms of the past 2 decades have done little to improve their living standards, according to a region-wide survey published last week by Latinobarometro, a non-profit organisation of polling groups in 17 different Latin American countries. Only 22 per cent of respondents thought that privatisation of public services had benefited their country, compared with 28 per cent last year and 46 per cent in 1998, the tail end of the mid-1990s boom. More significantly, only 16 per cent were satisfied with the market economy as a model.
To anyone who has witnessed the havoc wreaked on Argentina, Brazil, Bolivia, and Peru (to name a few prominent examples) over the past decade of “reform†such sentiments become readily understandable. Globalisation and the measures successively introduced by the World Bank and IMF have not delivered the promised free market nirvana. In fact, there is virtually no good evidence that the creation of efficient, rent-free markets coupled with efficient, corruption-free public sectors is even close to being a necessary or sufficient condition for a dynamic capitalist economy.
Consider the contrasting experience of East Asia, in which the state has played a much more prominent role in economic development strategy (despite persistent and inaccurate claims that these countries have reformed themselves along Anglo-American lines by discarding remnants of the “alliance capitalist†model): the last two decades of the twentieth century East Asia has re-emerged as the most dynamic region of the world economy, as it had been before the 18th century rise of the West. East Asia dramatically raised its average income in relation to the West’s, while all other “developing†regions—Latin America, Africa, West Asia, and South Asia—either fell or remained constant. And over this time frame, it is Latin America in particular that has embraced the peculiar notion that total deregulation, the unrestricted movement of capital and unfettered freedom of trade would provide the best route to economic prosperity and concomitant political stability.
But if one considers the state of “globalised†Europe before the onset of World War I, it becomes harder to hold this assumption. Trade and investment inside Europe at that time were, relative to the size of their respective national economies, greater 100 years ago than today. Germany was Britain’s second most important trading partner (after the United States), and Britain was the top market for German exports. Lloyds of London was a leading insurer of the German ships that the Royal Navy later sought to sink when the two nations were at war. Europeans moved freely from country to country, without passports and any kinds of real border controls.
Such intense interdependence, however, did not avert Europe’s rapid descent into war. And if economic interdependence could not save Europe from war in 1914, there is no compelling reason to believe the hype of peace and prosperity promised by the champions of globalisation today.
Today’s “pupils†in Latin America are repeatedly told that the new economic reforms foisted on them would usher in a period of unprecedented prosperity. Instead, it seems that each new successive rescue package introduced another variant of moral hazard, in which Wall Street banking interests were largely shielded from the consequences of their ill-conceived lending sprees during repeated IMF bailouts, whilst the majority of citizens in the recipient countries themselves experienced unprecedented poverty. They were told to embrace free trade even though the vast majority of developed countries declined to open up their markets fully to the goods of the developing nations. Worse, the net effect of the G-7’s perverse embrace of agricultural subsidies was to worsen the terms of trade for the developing world, by lowering the prices of what they received relative to what they were paying for imports.
The irony, of course is that almost all now-developed countries went through stages of industrial assistance policy before the capabilities of their firms reached the point where a policy of (more or less) free trade was declared to be in the national interest. Britain was protectionist when it was trying to catch up with the Netherlands. Germany was protectionist when trying to catch up with Britain. The United States was protectionist when trying to catch up with Britain and Germany, right up to the end of the World War II. Japan was protectionist for most of the twentieth century up to the 1970s, Korea and Taiwan to the 1990s. Hong Kong and Singapore are the great exceptions on the trade front, in that they did have free trade and they did catch up—but they are city-states and not to be treated as economic countries.
By contrast, Argentina, once promoted as the IMF’s “star pupil†has effectively done a round trip. The fantasyland that the country represented to foreign bankers in the mid-1990s came to a catastrophic end some 2 years ago when the government finally defaulted on most of its $141 billion debt and devalued the peso by almost 80 per cent. A wrenching recession has left well over a fifth of the labour force unemployed and threw millions more into poverty. Is it any wonder that Argentina has taken a much harder line in negotiations with the Fund (which resulted in the IMF agreeing to roll over the country’s $15bn owed to the fund, whilst setting a relatively low floor for the primary fiscal surplus), and the country’s foreign bond holders?
A similar story has played out recently in Bolivia, where 80 people were killed last month after the army shot people protesting a project to privatise the country’s natural gas industry and export natural gas from Bolivia to the United States. The Government of President Gonazalo Sánchez de Lozada had agreed to sell the concession to a consortium called Pacific LNG which is composed of Repsol YPF, a Spanish-Argentine company, British Gas and British Petroleum. It is this which has caused the protests, since even Bolivian peasants can understand that it is a bum deal when the consortium expects to generate $1.3 billion in annual revenue, while returning as little as $40 million annually to the Bolivian treasury in the form of taxes and fees. Under immense local pressure, Sanchez de Lozada, was forced to resign, replaced by his Vice President, Carlos Mesa.
Like Argentina, Bolivia has had “shock therapy†more or less constantly since the mid-1980s. All the worst reforms which have devastated the economies of Russia and emerging Asia during the 1990s in the name of what had been done to Bolivia from 1985 onwards. As commentator John Laughland has noted: “What is politely referred to in Bolivia as “capitalisation†(privatisation to you and me) has meant quite simply the selling off of the country’s assets to foreigners: the telephone company was bought by an Italian firm in 1995; the mobile phone network is an US subsidiary; the national airline is 50% owned by a Brazilian airline (while Bolivia is also serviced by two US airlines); the railway network has been sold off to a Chilean firm, and so on.â€
And the economic payoff to Bolivia has been minimal. Despite more than a decade of frenetic IMF-style economics, Bolivia remains mired in economic stagnation. The riots, and the evident failure of these privatisation policies, suggest that Bolivia is soon to take its place alongside Argentina one of the great failure stories of so-called free-market. A country which has done everything that fashionable economists have told it to do, and which served as model for other countries on which “shock therapy†was inflicted, has had a stagnant or declining GDP for the last five years.
What is most striking about the widening challenges to the so-called Washington consensus and its love affair with “globalisation†is not the increased reaction against such ideals in the southern hemisphere, but the entrenched hold they continue to have on policy making elites in Washington, Wall Street, and the pre-eminent western multilateral institutions, such as the IMF and World Bank. The remarkable thing about the core Washington Consensus package is the gulf between the confidence with which it is promulgated and the strength of supporting evidence, historical or contemporary.
In theory, globalisation and the concomitant embrace of American style neo-liberal reforms is supposed to keep recurrent problems like those found in Argentina and Bolivia from recurring, the idea being that financial markets will reward sound economic policies by steering capital to deserving countries pursuing the right kinds of policies. According to theory, for example, capital controls are deleterious to the markets’ ability to make a dispassionate judgment on the respective countries; their absence is said to make a government even more disciplined, because policy makers know that otherwise investors may yank their money out.
In practice, of course, the opposite is true: the hot money that came into these economies with the liberalization of the capital account actually tended to serve as a major source of financial instability, rather than the collective benediction of the markets per se. In many instances, policy makers recognised the threat posed by such speculative inflows, but knew that the IMF would condemn them if they were to take action to restrict such flows (as it did Malaysia). In the specific case of Argentina, the gusher of foreign money that flooded the capital markets in the 1990s actually lulled the government into complacency, acknowledged Rogelio Frigerio, who was secretary of economic policy in 1998: “If you get the money as easily as we did, it’s very tough to tell the politicians, ‘Don’t spend more, be more prudent,’ because the money was there, and they all knew it.†In fact, because “the money was there†the government confidently began to issue more and more bonds, driving its already high debt to levels that would ultimately prove ruinous.
When Francis Fukuyama spoke optimistically about the “end of history†some 10 years ago, he was positing the neo-liberal utopian ideal in which liberal democracy remained ascendant, linked together in peace and trade. “Historyâ€, however, is having the last laugh, responding with a flowering of war, tyranny, increased terrorism, and profoundly discontent with the prevailing market ethos. Yet the myth continues to be expounded in spite of all historical evidence to the contrary; there is no allowance for increased political risk premiums in spite of the collective rejection of an ideology that attracted western capital in the first place.
As the respective cases of Argentina and Bolivia indicate, Latin America has demonstrated a proclivity to embrace “shock therapy†– i.e. massive liberalization and privatization – as a means to economic prosperity, in spite of widespread evidence that a more gradualist approach has engendered far more economic success. As Professor Robert Wade of the London School of Economics has noted in the preface to his updated “Governing the Marketâ€:
“Today’s fast and populous growers—mainly China, India, and Vietnam—have certainly benefited from the more open markets and international investment of the past two decades. But they began their fast economic growth well before their fast trade growth and even longer before their trade liberalizations. They have constrained their trade liberalizations by considerations of the capacities of domestic firms to compete against imports, in just the way List recommended.
Within the “transitional†countries (moving from communism to capitalism) the comparison between Russia and China provides the extreme case in point: Russia—massive liberalization and privatization (shock therapy), catastrophic economic performance; China—gradual liberalization and privatization, excellent economic performance (by standard measures). Within each region (central Europe, southeastern Europe, the former Soviet Union, East Asia), one finds that the more radical liberalizers performed worse economically in the 1990s than those that moved more gradually. For example, the Czech Republic pursued the most ambitious economic liberalization and privatization compared to Slovakia and Poland, and has had substantially worse economic performance.â€
At the global level, the world has experienced a surge of market liberalization and integration across borders (big reductions in all kinds of policy-based market restrictions, big rises in trade and investment to gdp). But policy improvement has not yielded better aggregate economic performance. On the contrary, world economic growth has fallen sharply, as also for the oecd countries and developing countries taken separately. Per capita growth in the oecd fell from 3.5 percent between 1965 and 1979 to 1.8 percent between 1980 and 1998. Per capita growth of developing countries fell from 2.4 percent in 1965–79 to 0.0 percent in 1980–98. Yet these depressing results have only served to lock-in the Washington Consensus: they are taken to show the need for even more market liberalization. So the communiqués from the regular meetings of the finance ministers of the G7 (the seven biggest industrialized economies) have consistently emphasized—from the beginning in the mid-1980s all the way to the late 1990s—the need to raise growth rates, cut unemployment, and stabilize exchange rates by curbing budget deficits, tightening monetary policy, and making labour markets more flexible.
Yet if we are to accept the polls of Latinobarometro at face value, it appears that this orthodoxy is being conspicuously rejected. This perception helps to explain the rise of ostensibly populist leaders in the region, such as Argentina’s Nestor Kirchner and Luis Inacio Lula da Silva (“Lulaâ€) in Brazil, both of whom continue to score well in government approval ratings. They are increasingly representative of a new breed of policy maker who is rejecting some variant of the neo-liberal Washington Consensus agenda—maximum integration into the world economy plus domestic reforms to stabilize integration and make domestic markets more efficient (including “good governance†reforms to bring the poor into the process). They represent the collective political judgement on the part of their respective electorates that markets do not often work well – in the wrong sort of circumstances they could engender massive unemployment and severe financial fragility. Ironically, the IMF was originally founded on the belief that greater collective action was required to deal with these potential market failures, but today it functions as an effective champion of one form of market fundamentalism, thereby exacerbating the very failures it was originally designed to alleviate. It seems time to put less emphasis on ideology and more hard thought into what works or the collective response embodied in Latinobaremetro’s latest polls could take on a much more violent character later on.
November 4, 2003
Most Latin Americans live in fear of losing their jobs and believe the neo-liberal free market reforms of the past 2 decades have done little to improve their living standards, according to a region-wide survey published last week by Latinobarometro, a non-profit organisation of polling groups in 17 different Latin American countries. Only 22 per cent of respondents thought that privatisation of public services had benefited their country, compared with 28 per cent last year and 46 per cent in 1998, the tail end of the mid-1990s boom. More significantly, only 16 per cent were satisfied with the market economy as a model.
To anyone who has witnessed the havoc wreaked on Argentina, Brazil, Bolivia, and Peru (to name a few prominent examples) over the past decade of “reform†such sentiments become readily understandable. Globalisation and the measures successively introduced by the World Bank and IMF have not delivered the promised free market nirvana. In fact, there is virtually no good evidence that the creation of efficient, rent-free markets coupled with efficient, corruption-free public sectors is even close to being a necessary or sufficient condition for a dynamic capitalist economy.
Consider the contrasting experience of East Asia, in which the state has played a much more prominent role in economic development strategy (despite persistent and inaccurate claims that these countries have reformed themselves along Anglo-American lines by discarding remnants of the “alliance capitalist†model): the last two decades of the twentieth century East Asia has re-emerged as the most dynamic region of the world economy, as it had been before the 18th century rise of the West. East Asia dramatically raised its average income in relation to the West’s, while all other “developing†regions—Latin America, Africa, West Asia, and South Asia—either fell or remained constant. And over this time frame, it is Latin America in particular that has embraced the peculiar notion that total deregulation, the unrestricted movement of capital and unfettered freedom of trade would provide the best route to economic prosperity and concomitant political stability.
But if one considers the state of “globalised†Europe before the onset of World War I, it becomes harder to hold this assumption. Trade and investment inside Europe at that time were, relative to the size of their respective national economies, greater 100 years ago than today. Germany was Britain’s second most important trading partner (after the United States), and Britain was the top market for German exports. Lloyds of London was a leading insurer of the German ships that the Royal Navy later sought to sink when the two nations were at war. Europeans moved freely from country to country, without passports and any kinds of real border controls.
Such intense interdependence, however, did not avert Europe’s rapid descent into war. And if economic interdependence could not save Europe from war in 1914, there is no compelling reason to believe the hype of peace and prosperity promised by the champions of globalisation today.
Today’s “pupils†in Latin America are repeatedly told that the new economic reforms foisted on them would usher in a period of unprecedented prosperity. Instead, it seems that each new successive rescue package introduced another variant of moral hazard, in which Wall Street banking interests were largely shielded from the consequences of their ill-conceived lending sprees during repeated IMF bailouts, whilst the majority of citizens in the recipient countries themselves experienced unprecedented poverty. They were told to embrace free trade even though the vast majority of developed countries declined to open up their markets fully to the goods of the developing nations. Worse, the net effect of the G-7’s perverse embrace of agricultural subsidies was to worsen the terms of trade for the developing world, by lowering the prices of what they received relative to what they were paying for imports.
The irony, of course is that almost all now-developed countries went through stages of industrial assistance policy before the capabilities of their firms reached the point where a policy of (more or less) free trade was declared to be in the national interest. Britain was protectionist when it was trying to catch up with the Netherlands. Germany was protectionist when trying to catch up with Britain. The United States was protectionist when trying to catch up with Britain and Germany, right up to the end of the World War II. Japan was protectionist for most of the twentieth century up to the 1970s, Korea and Taiwan to the 1990s. Hong Kong and Singapore are the great exceptions on the trade front, in that they did have free trade and they did catch up—but they are city-states and not to be treated as economic countries.
By contrast, Argentina, once promoted as the IMF’s “star pupil†has effectively done a round trip. The fantasyland that the country represented to foreign bankers in the mid-1990s came to a catastrophic end some 2 years ago when the government finally defaulted on most of its $141 billion debt and devalued the peso by almost 80 per cent. A wrenching recession has left well over a fifth of the labour force unemployed and threw millions more into poverty. Is it any wonder that Argentina has taken a much harder line in negotiations with the Fund (which resulted in the IMF agreeing to roll over the country’s $15bn owed to the fund, whilst setting a relatively low floor for the primary fiscal surplus), and the country’s foreign bond holders?
A similar story has played out recently in Bolivia, where 80 people were killed last month after the army shot people protesting a project to privatise the country’s natural gas industry and export natural gas from Bolivia to the United States. The Government of President Gonazalo Sánchez de Lozada had agreed to sell the concession to a consortium called Pacific LNG which is composed of Repsol YPF, a Spanish-Argentine company, British Gas and British Petroleum. It is this which has caused the protests, since even Bolivian peasants can understand that it is a bum deal when the consortium expects to generate $1.3 billion in annual revenue, while returning as little as $40 million annually to the Bolivian treasury in the form of taxes and fees. Under immense local pressure, Sanchez de Lozada, was forced to resign, replaced by his Vice President, Carlos Mesa.
Like Argentina, Bolivia has had “shock therapy†more or less constantly since the mid-1980s. All the worst reforms which have devastated the economies of Russia and emerging Asia during the 1990s in the name of what had been done to Bolivia from 1985 onwards. As commentator John Laughland has noted: “What is politely referred to in Bolivia as “capitalisation†(privatisation to you and me) has meant quite simply the selling off of the country’s assets to foreigners: the telephone company was bought by an Italian firm in 1995; the mobile phone network is an US subsidiary; the national airline is 50% owned by a Brazilian airline (while Bolivia is also serviced by two US airlines); the railway network has been sold off to a Chilean firm, and so on.â€
And the economic payoff to Bolivia has been minimal. Despite more than a decade of frenetic IMF-style economics, Bolivia remains mired in economic stagnation. The riots, and the evident failure of these privatisation policies, suggest that Bolivia is soon to take its place alongside Argentina one of the great failure stories of so-called free-market. A country which has done everything that fashionable economists have told it to do, and which served as model for other countries on which “shock therapy†was inflicted, has had a stagnant or declining GDP for the last five years.
What is most striking about the widening challenges to the so-called Washington consensus and its love affair with “globalisation†is not the increased reaction against such ideals in the southern hemisphere, but the entrenched hold they continue to have on policy making elites in Washington, Wall Street, and the pre-eminent western multilateral institutions, such as the IMF and World Bank. The remarkable thing about the core Washington Consensus package is the gulf between the confidence with which it is promulgated and the strength of supporting evidence, historical or contemporary.
In theory, globalisation and the concomitant embrace of American style neo-liberal reforms is supposed to keep recurrent problems like those found in Argentina and Bolivia from recurring, the idea being that financial markets will reward sound economic policies by steering capital to deserving countries pursuing the right kinds of policies. According to theory, for example, capital controls are deleterious to the markets’ ability to make a dispassionate judgment on the respective countries; their absence is said to make a government even more disciplined, because policy makers know that otherwise investors may yank their money out.
In practice, of course, the opposite is true: the hot money that came into these economies with the liberalization of the capital account actually tended to serve as a major source of financial instability, rather than the collective benediction of the markets per se. In many instances, policy makers recognised the threat posed by such speculative inflows, but knew that the IMF would condemn them if they were to take action to restrict such flows (as it did Malaysia). In the specific case of Argentina, the gusher of foreign money that flooded the capital markets in the 1990s actually lulled the government into complacency, acknowledged Rogelio Frigerio, who was secretary of economic policy in 1998: “If you get the money as easily as we did, it’s very tough to tell the politicians, ‘Don’t spend more, be more prudent,’ because the money was there, and they all knew it.†In fact, because “the money was there†the government confidently began to issue more and more bonds, driving its already high debt to levels that would ultimately prove ruinous.
When Francis Fukuyama spoke optimistically about the “end of history†some 10 years ago, he was positing the neo-liberal utopian ideal in which liberal democracy remained ascendant, linked together in peace and trade. “Historyâ€, however, is having the last laugh, responding with a flowering of war, tyranny, increased terrorism, and profoundly discontent with the prevailing market ethos. Yet the myth continues to be expounded in spite of all historical evidence to the contrary; there is no allowance for increased political risk premiums in spite of the collective rejection of an ideology that attracted western capital in the first place.
As the respective cases of Argentina and Bolivia indicate, Latin America has demonstrated a proclivity to embrace “shock therapy†– i.e. massive liberalization and privatization – as a means to economic prosperity, in spite of widespread evidence that a more gradualist approach has engendered far more economic success. As Professor Robert Wade of the London School of Economics has noted in the preface to his updated “Governing the Marketâ€:
“Today’s fast and populous growers—mainly China, India, and Vietnam—have certainly benefited from the more open markets and international investment of the past two decades. But they began their fast economic growth well before their fast trade growth and even longer before their trade liberalizations. They have constrained their trade liberalizations by considerations of the capacities of domestic firms to compete against imports, in just the way List recommended.
Within the “transitional†countries (moving from communism to capitalism) the comparison between Russia and China provides the extreme case in point: Russia—massive liberalization and privatization (shock therapy), catastrophic economic performance; China—gradual liberalization and privatization, excellent economic performance (by standard measures). Within each region (central Europe, southeastern Europe, the former Soviet Union, East Asia), one finds that the more radical liberalizers performed worse economically in the 1990s than those that moved more gradually. For example, the Czech Republic pursued the most ambitious economic liberalization and privatization compared to Slovakia and Poland, and has had substantially worse economic performance.â€
At the global level, the world has experienced a surge of market liberalization and integration across borders (big reductions in all kinds of policy-based market restrictions, big rises in trade and investment to gdp). But policy improvement has not yielded better aggregate economic performance. On the contrary, world economic growth has fallen sharply, as also for the oecd countries and developing countries taken separately. Per capita growth in the oecd fell from 3.5 percent between 1965 and 1979 to 1.8 percent between 1980 and 1998. Per capita growth of developing countries fell from 2.4 percent in 1965–79 to 0.0 percent in 1980–98. Yet these depressing results have only served to lock-in the Washington Consensus: they are taken to show the need for even more market liberalization. So the communiqués from the regular meetings of the finance ministers of the G7 (the seven biggest industrialized economies) have consistently emphasized—from the beginning in the mid-1980s all the way to the late 1990s—the need to raise growth rates, cut unemployment, and stabilize exchange rates by curbing budget deficits, tightening monetary policy, and making labour markets more flexible.
Yet if we are to accept the polls of Latinobarometro at face value, it appears that this orthodoxy is being conspicuously rejected. This perception helps to explain the rise of ostensibly populist leaders in the region, such as Argentina’s Nestor Kirchner and Luis Inacio Lula da Silva (“Lulaâ€) in Brazil, both of whom continue to score well in government approval ratings. They are increasingly representative of a new breed of policy maker who is rejecting some variant of the neo-liberal Washington Consensus agenda—maximum integration into the world economy plus domestic reforms to stabilize integration and make domestic markets more efficient (including “good governance†reforms to bring the poor into the process). They represent the collective political judgement on the part of their respective electorates that markets do not often work well – in the wrong sort of circumstances they could engender massive unemployment and severe financial fragility. Ironically, the IMF was originally founded on the belief that greater collective action was required to deal with these potential market failures, but today it functions as an effective champion of one form of market fundamentalism, thereby exacerbating the very failures it was originally designed to alleviate. It seems time to put less emphasis on ideology and more hard thought into what works or the collective response embodied in Latinobaremetro’s latest polls could take on a much more violent character later on.
- By Tainari88
- By FiveofSwords
- By Pants-of-dog
- By Deutschmania