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Volume 61 / Social Sciences

POLITICAL ECONOMY: Latin American Political Economy: Past, Present and Future

WILLIAM VISSER, Consultant, Washington, DC

During the post-World War II years until the end of the 20th century, Latin America has gone through an economically tumultuous period in which a confluence of inter-related events and developments deeply transformed the historical reality of the region. The inclusion of this review of recent Latin American economic history coincides with the appearance of a new section devoted to Political Economy, which in its latest manifestation, can be said to be the academic outgrowth of this period. History reminds us, however, that in the tradition of American social sciences, the fusion between economics and politics has been problematic. Economics arguably has become so technically forbidding that today's economists and the lay public have lost touch with each other. The main goal in presenting a description of the updated scope and methods of Political Economy is precisely an effort to resuscitate this dialogue.

The current split between political economy and mainstream scientific economics has a long history. Starting in the mid-18th century, Adam Smith and Thomas Malthus introduced economics as one of the newly coined moral sciences that sheltered philosophy, politics, and history. These disciplines were the precursors to John Stuart Mill's Principles of Political Economy, which a few decades later solidified the importance of moral philosophy to the evolving social sciences. It was only at the turn of the century that at Cambridge University Alfred Marshall first isolated economics from its moral and political moorings, yet without having any effect on Oxford, its sister institution, which to this day does not offer an undergraduate program in economics divorced from philosophy and politics. The more contemporary signs of this split emanate from the analysis of the Depression, which in the 1930s signified the global breakdown of classical economics. During this period, straight lines of descent can be drawn from the past to John Maynard Keynes, on the political economy side, and on the classical side, to Friedrich von Hayek and Milton Friedman from the University of Chicago, who helped transform the "utility maximizing" free market line of thought, into the current monetarist school for which their school is famous.

Times were more opportune to Keynes' audacious theories than to orthodox economics, which had proved incapable of preventing the 1920s malaise and its ensuing stock market crash. No mean logician, Keynes' first academic breakthrough was a treatise on probability, but who despite this vocation felt compelled to seriously question the role of mathematics in economic analysis. Add to this ambivalence his intellectual curiosity and political intuition regarding the role of public policies, and we gain an essential elucidation of his unique perspective on international economics. For our purposes, this Keynesian formula is a fitting method to study the current development in Latin America where, perhaps more than ever before, economics was deeply intertwined with politics. As a "politics of economics" this approach underscores explicit consideration of political actions taken by economic agents in the determination of development policies.

Closely related to modern political economy research is the new trend in economic history called the New Economic History (NEH). Historians first and economists second, John H. Coatsworth and Alan M. Taylor have introduced the theory and methods of the NEH to the study of Latin American economies. In their valuable, path-breaking contribution Latin America and the World Economy since 1800 (1998), these scholars seek to reduce the schism that has traditionally existed between economists and historians. To them, both professions have much to gain from a greater convergence, which could lead to economists adding historical references to their development studies, and to historians adding economic dynamics as more than just simple context to their research. Scholars may not have found enough reasons to pursue more detailed, historically slanted economic analysis, since the widespread perception of Latin America as "a mere appendage of the industrialized economies" closed off potential new avenues of inquiry. A consensus had grown around the adage that the root of Latin America's underdevelopment was its past subservient integration into the world economy, whence the idea of a "development of underdevelopment" was formed. The consensus extant among Latin American economists who argued that dependency theory provided the right approach to examine, and answer, queries related to the region's development problems was so strong that it seemed futile to entertain dissent.

The dependencia theorists eschewed world trade, inspired by Keynesian notions of interventionism and the Western welfare state, which fed their doubts about neoclassical economics that had suffered its big crisis with the Great Depression. In The Commanding Heights: The Battle Between Government and the Marketplace that is Remaking the Modern World (1998), authors Daniel Yergin and Joseph Stanislaw find a parallel between the Marxist insight of a class warfare and the dependencia theory, which suggested an industrial "center" comprised by the Northern industrial countries, and the Southern raw material producing "periphery" that would always lose in the reigning terms of trade between the two regions. Hence, it behooved the periphery to stand on its own, cease the importation of finished goods, and move rapidly to implement import substitution industrialization (ISI) policies, by breaking the links to world trade with high tariffs and other forms of protectionism (Yergin and Stanislaw, p. 234). In this economic system, political decisions rather than market signals would be the norm.

The young scholars who contributed essays to the edited volume Latin America and the World Economy since 1800 constitute a new breed of interdisciplinary analysis with a keen interest in transforming economic history into a new autonomous academic discipline. Borrowing from standard economics, these scholars value formal theory, empirical research, and statistical testing as the methodological foundation for their interpretations. History, on the other hand, provides them with the narrative tools to depict and analyze historical processes that affect economic events, but on balance, their preferred analytical technique remains empirical modeling. An extremely useful nontechnical book included in the NEH genre is The Economic History of Latin America Since Independence (1994; see HLAS 56:1052 and HLAS 57:1269), whose author Victor Bulmer-Thomas has earned sufficient credibility for his methodological prowess to obviate the customary "analytical weakness" rejoinders to his insightful work. Albert Hirshman is seen as the originator of this approach that "mixes economics and politics in a historical perspective." The cleometricians of the 1970s added their own quantitative methodology to Hirshman's views, thus enabling today's policy scientists and historians to establish "the methods of quantitative economic history as the main lens through which many of the key analytical issues on the development of Latin America should be viewed."

Few critics could refute the success of ISI policies until the early 1970s. Evidence demonstrated that per capita income doubled, employment skyrocketed, and the underlying "soft" social side of the economy noticeably improved. Social indicators such as life expectancy and literacy improved dramatically, yet maldistribution of income and poverty worsened. At the same time, modern infrastructure was built and industry grew to 25 percent of GDP. Understandably, only recently, armed with improved historical knowledge, statistical tools, and analytical skills, a palpable transition to a new economic history could finally occur.

Three paradigm shifts during the period under review (1972–2002) form a framework that will serve to enhance our grasp and understanding of recent Latin American economic history. First, the end of ISI at the onset of the 1973 oil crisis until 1982, the year of the Mexican default that sparked the debt crisis; second, the debt crisis and debt-led growth from 1982 until the Mexican peso devaluation in 1994 that had financial repercussions throughout Latin America; and third, from 1994 through a period of external shocks, i.e., the Asian crisis, the Russian meltdown, and the Argentine debt-repayment moratorium that closed the 20th century.

The study of the effects of the reforms in the last three decades of the 20th century would be incomplete without a cursory glance at the ISI episode of which the reforms were mere sequels. The postwar period up to the 1973 "oil shock" constituted for Latin America "the golden era for economic growth" during which historically unprecedented rates of expansion took place in the global economy. This exceptional moment in the region's economic growth of 5.5 percent average growth per annum occurred in conjunction with a similarly splendid 7 percent, inflation-less and full employment growth in the industrialized world. In Latin America, this led to substantial improvements in the living conditions of many households in these countries, inter alia, a life expectancy at birth increase of four years (from 58 to 62) between 1967–77 in Brazil. Protected, hence profitable, home markets attracted domestic entrepreneurs to invest and share in the anticipated growth.

During the 1950s the economies of these countries were constrained in foreign-exchange holdings, replete with structural distortions, and saddled with thin capital markets. By carefully elaborating incentives and committing themselves to closed markets, these nations managed to promote significant industrial growth. Their policymakers viewed their economies as ready to compete in capital-intensive, high technology, and high productivity manufacturing. For an example of this view, see Helen Shapiro, Engines of Growth: The State and Transnational Auto Companies in Brazil (1993; see HLAS 55:2202).

To ascertain with greater precision which line of thinking presents a more persuasive view of the post-1973 regional economic reality, whether ISI was detrimental or beneficial, scholars have focused on four objective, data-yielding practices of the neoliberal toolkit: trade and financial liberalization, reduction in state expenditures and public services, foreign direct investment, and privatization. Conclusive views on the decades' liberal reforms are best served if they are fostered on the basis of these empirical data-sets. These four variables help construct the framework of explanation for the viewpoints arrived at in the literature reviewed in this essay.

What has been the outcome of this juggernaut of neoliberalism that dictated policies in the Americas after the 1972 oil embargo? The fault line between those analysts who rate the preceding era of ISI's record as positive and those who see the experience as basically flawed lies in their separate perceptions on the model's systemic economy-wide "inefficiencies." Cognizant that positive results were a long-term proposition, anti-ISI advocates asserted that the wait would be worthwhile and more likely to be of near-term duration. Studies (by scholars such as Bela Balassa) which look back from the 1980s to these decades of prosperity, elaborately document "static economic inefficiencies generated by high and extremely dispersed effective rates of protection (ERP) in the countries' manufacturing sectors." Protectionism, they asserted, introduced distortions in the economic rationale prohibiting countries to benefit from deep financial markets and commercial exchange opportunities extant worldwide. Other critics went further in claiming that ISI had given the leading countries a false hope, an illusion of strength that distorted their views of reality, hence unnecessarily heightening the preternatural "love-hate" strain which characterizes US-Latin American relations.

Just as in the early 1960s when the American generosity in development assistance that emanated from the Cuban Revolution clouded the views of national authorities and encouraged them to see this bonanza as an unlimited sign of goodwill, similarly in the 1970s regional economic integration (REI) was visualized by these authorities as an outgrowth of ISI's success, and, as such, constituted a creative defense against US superiority and control. Not surprisingly, the US vehemently opposed ISI as just another trait of "command and control" socialism, and viewed the wish expressed by regional leaders to create regional alliances that excluded the US as politically motivated anti-Americanism. See, for example, Bill Emmott's incisive 20/21 Vision: Twentieth Century Lessons for the Twenty-first Century (2003). Theorists of international relations are especially fond of this idea of "ganging up." The world tends toward a balance of power rather than continuing with a situation of overwhelming dominance by one country. If this theory holds true, other countries can be expected to react to dominant American power by forming alliances against it. This proved to be only one of many times that culturally conditioned misperceptions between the two regions unexpectedly damaged their mutual understanding, often with detrimental effects for both.

The defenders of ISI, Jacqueline Roddick included (Dance of the Millions: Latin America and the Debt Crisis, 1988, p. 73), argue, however, that these studies failed to show that "outward-oriented" export strategies would have been systematically immune from the same kinds of inefficiencies. Rather, they contend that the neoliberal political economy strategies were destroying the social and political fabric of many countries in the region, and eroding the impact of recent accomplishments achieved under the protective wings of ISI. These two contrasting studies documented in detail some of the static economic inefficiencies generated by high and dispersed effective rates of protection (ERP) in these countries' manufacturing sectors. In fact, the productivity performance of many Latin American countries was, in a comparative perspective with East Asia, exemplary (citation, p. 71). Of course, since generalizations regarding Latin America's uneven development patterns are ill-advised, it is not surprising that some ISI adherents did not achieve the same level of success: Argentina is a striking counter-example, with an average total factor productivity (TFP) growth of only 0.2 percent during 1960–73 (citation, p. 71). There were also few cases of negative value-added outcomes, i.e., cases in which expensive inputs into highly protected plants surprisingly led to outright losses, which further obfuscated a clear evaluation of ISI policies. Overall, however, as Roddick concludes, "warts and all, as a strategy of industrialization intended to increase domestic investment and enhance productivity, import substitution worked well in a very broad range of countries until at least the mid-1970s" (Roddick, p. 74). Had the world come to an end in 1973, ISI would have closed it successfully and never acquired its dismal reputation nor would East Asia have earned its "miracle" appellation (Roddick, p. 75). In that sense, Roddick shares the opinion of other critics who insisted that it was the plethora of subsequent reforms that fostered the revisionist perspective which invalidated the judgment of these three decades as belonging to an exceptional "golden" era in Latin American history.

The behavior of the world economy during the early 1980s was important in the timing and magnitude of the debt crisis. Growth in the industrial countries was sluggish, real interest rates were on the rise and commodities suffered a consistent drop in prices. These factors begin to explain the deterioration of unit prices of Latin American non-oil products and the increased interest rate that was illustrative of the region's current account deficit at the onset of the 1980s (Substitute Title of Book About the World Economy Published by Andres Bianchi, Roberto Devlin, and Ramos, 1987). Not surprisingly, these conditions quickly translated into internal effects. The outgrowth of the earlier influx of money, domestic demand pressures, and rising import prices had the perverse effects of fueling inflation and overvaluation of the exchange rates, without a concomitant strategy of raising exports to introduce some balance. At the end of the 1970s these disturbing imbalances provided incentives for massive capital flight in search for more stable returns and avoidance of forthcoming domestic devaluations. Only a combination of the reduced investment inflow and accelerated outflow of homegrown capital to safer havens could begin to realistically depict the depth of the 1980s crisis.

As the region crossed from the 1970s into the 1980s, it was clear that both the private and public sectors of most Latin American countries had over-reached in accessing foreign debt and needed to retrench dramatically if their debt ratios were to become tolerable. Countries struggled under the burden of international debt, and with their long-term foreign debt quadrupling from 45.2 billion US dollars to 176.4 billion US dollars, most nations' obligations had grown on average 20 percent per year (Substitute Title of Book or Article about Latin American Foreign Debt in the citation for Sebastian Edwards, p. 17). A very small percentage (3–5 percent) of government revenues came from taxes; the rest came from the central banks where foreign debt was managed. Because the persistent deficits were the root cause of the borrowing bonanza that grew out of the 1970s oil crisis, fiscal adjustment was an urgent necessity. The script was, as usual, a familiar one. Easily available credit induced over-borrowing, often for capital-intensive projects that were politically rewarding but not necessarily wise. The nontradable sectors boomed to the detriment of basic and semimanufactured goods that formerly fueled exports. During this boom phase economies stabilized. Soon thereafter, prices of goods purchased on credit rose to artificially high levels, which led to an inevitable crash, making both borrowers and lenders alike the losers. Hence, spending levels plummeted, dragging down the economy with them.

There is little doubt that the magnitude of the 1982 debt crisis generated profound disenchantment with traditional economic policies and political practices in the region. In a leading country like Mexico, the first signs of breakdown came in the early 1980s. The currency devaluations started in 1981 and continued into 1982 when the government announced a 90-day moratorium on repayment of the principal due on its external debt. Persistent inflation and resource shortages led to Mexico's dramatic decision to nationalize its central bank and implement exchange controls that inevitably resulted in a last-resort agreement signed with the IMF in 1983. Contagion caused this setback to spread throughout Latin America, especially Argentina and Brazil, and even affected US banks and commercial exporters.

During the decade following the Mexican moratorium of 1982, there was a heavy focus on the short term, continual debt renegotiation, and ill-conceived stabilization plans. For creditors, these measures were not necessarily counter-productive. Forced to close their current account deficits in less than three years, major debtors managed to engineer a profound turnaround in their trade balance by improving from an aggregate trade deficit of 2 billion US dollars in 1981 to a surplus of more than 39 billion US dollars in 1984, mainly through contractions in imports and incentives offered to returning investors. While this imposition may have embarrassed debtor countries, politically it was time to reassess. With ECLAC's technical assistance throughout the region, countries increased their levels of institutional readiness to return to democratic rule which had been a part of the impending change a few years earlier. Economically, emergency adjustment programs were geared toward producing large trade surpluses in brief spans of time that would create the proper conditions for renewed growth by means of fresh capital inflows. When fiscal adjustment proved to be insufficient, the external debt crisis became a high-inflation crisis because governments resorted to printing money in the absence of continued foreign lending. Thus, more easily prescribed than executed, this adjustment in the mid-1980s led to declines in real income, high levels of unemployment, and galloping inflation. The resulting fiscal crisis also led to severe cuts in social spending, which suffered a 10-percent decrease in real terms between 1982–86 where it remained until the 1990s.

Entering the 1990s, many Latin American countries adopted neoliberal policies in order to surmount economic crises. Mainstream political and economic scholarship relinquished hitherto state-centered economic policies on development and growth to surrender to pragmatic US-dominated and Washington-based neoliberal strategies. It appeared that finally the world as a whole had come to the realization that the current notion of globalization, buttressed by its neoliberal theoretical underpinnings, was the lesser evil of all existing political-economy paradigms that claimed to possess therapeutic powers for dysfunctional economies. This sentiment inspired confidence leading the regional leaders to determine that any resistance to adopting the "Washington Consensus" seemed irrational and retrogressive. If the 1980s had indeed constituted the ignominious decline of the region's economies, this inter-American consensus at least held the promise of an opening to piecemeal corrections.

Countries like Argentina, Brazil, and Peru experienced extreme inflationary upheavals in the 1980s and early 1990s, which necessitated severe fiscal adjustment. See, for example, the volume edited by William Easterly and Luis Servén, The Limits of Stabilization (2003). Zealously protective of ISI either out of nationalistic pride or self-indulgence, these countries turned to the support of ECLA's research and advocacy to determine ways of forestalling their appropriation of the neoliberal ethos. Emphasizing exchange and price controls and de-emphasizing demand management and fiscal discipline, Argentina's Plan Austral, Brazil's Plan Cruzado, and Peru's Plan Apra were all experiments in heterodox stabilization, and all failed rapidly because unrelenting inflation made it impossible for governments to stabilize their currencies and protect public interest against external pressures. At the time, and in the midst of the debate about neoliberal reform, these governments's inability to contain inflation added credence to the need to downsize the overextended state. Invariably, even the most recalcitrant authorities soon caved to the demands of the consortia of banks, governments, and multilateral agencies. Only in Mexico, where the dominant PRI Party was able to create its own heterodox version called the Consejo de Solidaridad, was it possible to forge a consensus between labor, state, and business to agree on a stabilization plan through price and wage controls. Unlike other countries in the region, the unique features of the Mexican political system made it possible to enlist Fidel Velásquez, the iconoclastic and gifted octogenarian labor leader, whose uncanny political savvy had managed for half a century to sustain a peaceful and productive coexistence between labor, the private sector, and government. Solidarity would have remained a pipe dream had it not been for Mr. Velásquez, who once again, just before his death, succeeded to deliver to the PRI regime the unanimous labor vote, without which the consensus would have been unattainable. Argentina and Brazil, on the other hand, imposed wage and price control decrees which lacked the concerted social agreement between labor and the private sector that could have helped reduce inflation, at least to levels similar in Mexico.

Adjustment was gradually introduced successfully in a number of the larger countries, which were comparatively more exposed to international economic trends. All countries searched for methods to reduce their debts, but success was evasive. By early 1989 lack of progress in resolving the crisis with the debtors prompted a change in the official debt strategy. Also, earlier World Bank studies had shown that the conditionalities routinely applied to the relatively more robust economies could not be repeated to the more indebted ones, since they would be unable to generate sufficient trade surpluses to make interest payments as well as maintain acceptable levels of consumption (Marcelo Selowsky and H. Van der Tak, "The Debt Problem and Growth," World Development, Vol. 14, No. 9, 1986, p. 1107-1124).

As the end of the 1980s approached, three seminal but interrelated developments occurred to provide momentum to economic development in the region—the Brady Plan, the Washington Consensus, and the onset of globalization in the Southern Hemisphere. In response to the misgivings publicized by the World Bank in Aug. 1989, the US Secretary of Treasury Nicholas Brady unveiled the Brady Plan, a voluntary debt reduction initiative whose aim was to place debt rescheduling on a better footing throughout the continent. The plan proposed exchanging old debt for new long-term debt with lower face values. To be eligible for negotiations, countries had to be willing to engage in the serious economic reforms the Washington Consensus touted. Clearly, the general economic scenario was upbeat enough for this low-risk plan, especially when commercial banks also began to write off their "bad debts" and interest rates dropped enough to warrant a return of the capital markets to the more vibrant customers in the region. Colombia and Chile turned down this offer, arguing that their independent delinking from the global economy would serve their purposes. Mexico and Costa Rica were the first countries to reach broad agreements in the context of the Brady Plan to reduce the value of their debt. In 1991, Venezuela and Uruguay joined in, and one year later Argentina and Brazil followed. After almost 10 years of negative net resource transfers, the region finally witnessed positive transfers from the outside in a remarkable magnitude, surpassing 20 billion US dollars in capital inflows by 1993 (Substitute Title of Book or Article about Latin American Foreign Policy by Sebastian, p. 82).

While the push to diminish the state's role in economic management had started in the mid-1970s, it gained momentum in the mid-1980s alongside a number of unexpected developments. Foreign creditors' original understanding of the burgeoning crisis in the early 1980s was that it was temporary, one of liquidity and not of solvency, which could easily be resolved by debtors' financial contractions and creditors' generous rescheduling support. Moreover, foreign financiers succeeded in convincing their national counterparts that the crisis was partly due to large-scale public sectors local officials themselves had helped create. National authorities tended to agree with this exhortation due to their governments' undeniable intervention in the economy by means of price and interest rate controls and the state's pervasive involvement in the production of goods and services. Thus, ill-conceived economic practices of protectionism and "command and control" interventionism became discredited and were replaced by responsible approaches consistent with the neoliberal credo, which placed market forces in the leading role in the allocation of resources. The state withdrew from most production activities in favor of the private sector in a radical paradigm shift destined to raise economic efficiency and long-term growth. Not surprisingly, by the end of the decade, a new atmosphere for amicable interaction between lenders and borrowers had been established—seemingly at a very propitious moment.

It would not defy logic to discern a direct historical continuum between the post-1982 "borrowing binge" and the North-South capital flows that followed once stabilization had some effect. At a meeting held in Washington in 1989, a consensus was reached between representatives from both creditors and debtors on the formal articulation of the neoliberal principles, which would further guide ongoing adjustments and reforms in Latin America and elsewhere. The Washington Consensus was neither an official doctrine nor an enforceable legal document, but it did nonetheless help codify the arrangements and conditions regarding loans and credit Latin American client countries were compelled to accept if transactions with the capital markets were required. Permeating the political and business vernacular of the time, the Washington Consensus was a manifesto that could be viewed as an article of faith between the two regions.

If the mid-1980s typified a period of systematic application of the yet to be formalized policies of the Washington Consensus, the early 1990s signalled a major shift in the language used to describe reform. In place of the milder and more amicable terms of adjustment and liberalization relative to the market and trade, a more onerous concept of reform—even structural reform—was introduced in this North-South dialogue. At the same time, major political reforms were taking place worldwide as illustrated by the fall of the Berlin Wall and the collapse of the Iron Curtain. To most politically savvy developing countries, the Cold War had served as a welcome safety umbrella which heavily indebted countries in Latin America and elsewhere could use to mitigate relentless Western economic and political pressures. In 1994 the Uruguay Round of the GATT gave way to the creation of the World Trade Organization. Exhortations calling for a more debtor friendly global financial architecture were diluted, and the IMF unilaterally launched a new effort towards complete convertibility of the capital accounts in countries' balances of payment—an agenda item that had met vociferous resistance in the past, but had now succumbed to the pressures of the larger shareholders of the Bretton Woods agencies.

Latin America's debtor nations turned to trade and privatization to ease themselves out of debt. Historically, trade had been the preferred mechanism to foster mutually respectful relations and to level power hierarchies between nations. During the period of adjustment, trade was a pivotal first-stage condition for rescheduling debt repayment. "Trade not aid" was the slogan in inter-American meetings where the promises of less dependence and mature self-reliance were fully embraced. Under these conditions, Mexico was the first to break with policy precedents by joining the General Agreement on Tariffs and Trade (GATT) in 1985, followed by other countries who abandoned traditional protectionist policies for free trade and open-market principles.

Privatization, however, lacked a similar appeal. Undoubtedly it would be attractive to foreign investors and assist in the fiscal and balance of payment sides of the adjustment equation. (See Rosemary Thorp, Progress, Poverty and Exclusion: An Economic History of Latin America in the 20th Century (1998; see HLAS 59:1401, p. 223). 1

However, it would lack the capacity to bring about immediate short-term benefits. Privatization required additional regulatory reforms directed at strategic public utilities, as well as new income-generating measures that would raise tax and export revenues. This era was noteworthy as it was the first time since the explosive heydays of Chile's privatization in the 1970s that Latin American countries could openly divest the state from public utilities such as oil, electricity, telephones, and transportation with reasonable ease. In less than a decade the region had undergone a thorough transformation from a state-run, inward-looking system to one rapidly integrating into the world economy under the auspices of neoliberal reform.

Strict adherence to the tenets of neoliberalism, however, did not guarantee success. If success meant control of inflation, a balance of payment in equilibrium, trade liberalization, and popularly accepted privatization, then Argentina's economic failure at the beginning of the new millennium remains a huge mystery. Moreover, had the Washington Consensus' policy demands been met, operational prerequisites would still have failed to reveal how much of each neoliberal principle, how quickly, and in what sequence implementation should have been carried out. Only recently highly analytical research, especially Joseph Stiglitz's work Globalization and its Discontents (2002), poses more far-reaching technical questions and levels critique against self-serving assumptions regarding the trade and investment components of globalization. Despite strong reactions—primarily the IMF's—against Stiglitz's assertions, he succeeded in turning the focus towards evolving globalization policies to ensure a more complete and comprehensive understanding of the effects of reforms.

Globalization is the salient third feature of the 1990s, constituting an axis around which the last two decades of international economic relations revolve. Its widespread net provides the linkages between economies of individual nations and the world. Through trade, technology, and investment, comparatively weaker, and hence more vulnerable developing countries' economies wittingly subject themselves to both the favors and punishments of volatile and unpredictable globalized monetary flows. Developing countries, regardless of their level of economic strength, are capital poor and thus very attractive to external financial sources seeking returns to capital that outpace other venues. Clearly, this linkage between powerful global forces and emerging economies that are relatively unsure of their destinies constituted an asymmetrical relation in which Latin American countries stood to loose. However, the Brady Plan's stimulations, bond issuances on the international markets by Mexico, Argentina, and Brazil, were signals of growing confidence and an outright embrace of the new language of globalization by the more robust regional economies. Ironically, during the past few years, a dramatic reversal took place causing the early compelling and widely accepted viewpoint that "prosperity enhancing globalization promised benefits for both developed and developing countries", to be modified to such an extent that make forthcoming inter-American trade agreements such as the US-Central American Free Trade Agreement (CAFTA) highly contentious.

Since the publication of Stiglitz' book, the literature on globalization has advanced enormously, and now routinely addresses issues that go beyond the purview of economics. Recently, Martin Wolf, the chief economics commentator of the Financial Times, published Why Globalization Works (2004), which according to reviewers "is the fullest and most sophisticated treatment to date of the case for globalization" (p. 75, The Economist, July 17, 2004). Central to "political economic" reasoning is the state's role in fostering economic prosperity. In cases where countries have become "failed states," due to institutional weaknesses, globalization condemns them to remain poor. Unlike Stiglitz, who underscores the importance of economic dynamics for political action, Wolf highlights the "political divisions that cause economic fragmentation." Generally, in seeking the justification for reform, both emphasize the "lack of sound political governance" over that of the opposing view of "excessively large and over-reaching states," which the Washington Consensus blamed for the region's economic malaise.

By the beginning of the 1990s, economies of Latin American countries had begun to stabilize. Reforms were beginning to attain intended results, and higher rates of growth were expected and experienced. In 1993, financial media hailed the market-oriented reforms as a success and proclaimed that some of the region's countries were on their way to becoming a new generation of "giants" (Edwards, p. 6). Macroeconomic equilibrium had been achieved in most countries, exports were expanding, and productivity had grown substantially. Additionally, around the mid-1990s, private foreign capital entered the region at an unprecedented pace, surprising most observers. Only left-leaning critics saw this re-entry as déjà vu of the 1970s borrowing profligacy.

In 1992 ECLAC, the regional UN agency known for having ushered in the ISI strategy for inward-looking, government-led development, sensed in which direction the winds of "reform" were blowing and accordingly changed its own course to one of market forces, macroeconomic balance, openness, and social support programs for the poor. The fact that ECLAC is stationed in Santiago, Chile, must also have influenced its policy direction, since its researchers could closely witness their host country's pioneering experiences with successful market-oriented reforms. In spite of its earlier accomplishments, ECLAC's structuralist policies had lost momentum, and their attempt at reinvention under a neostructuralist or heterodox heading were rendered obsolete. Yet, most discouraging to ECLAC's mainstream Keynesian economists was the extent to which in its region of concern, income inequality together with unacceptable levels of extreme poverty had become palpably pernicious. This sentiment touched deeply, and any policy that could realistically remedy such inequities was accommodated, despite its inevitable sharp ideological clash with ECLAC's Keynesian orthodoxy.

It was again in Mexico, IFI's most ardent acolyte, where the renewed reversals of 1994 would ignite another episode of the clash between the two models. To Mexicans, failure of their heterodox anti-inflation program led to an impassioned embrace of neoliberalism. This dogma was implemented with relative success, but towards the end of Salinas' six-year administration in the early 1990s, the country's political economy started to unravel. Salinas' radical version of neoliberalism—strong market reform, massive trade liberalization, complete opening of capital accounts, as well as extensive privatization—all within a closed political system that discouraged consensus seeking debate on these issues—challenged the country. Coupled with the prospects of NAFTA and its immediate consequences of public apprehension and distrust, these hitherto unfamiliar changes created huge political tensions in late 1994, none more explosive than the Zapatista uprising in Chiapas and the assassination of Salinas' hand-picked presidential successor Luis Donaldo Colosio. The government decided it had to continue selling its liabilities to private speculators, thus rapidly depleting its reserves. In Dec. 1994, Mexico's economy collapsed, resulting in a massive devaluation that severely contaminated the region, especially Argentina. When Mexico's painless bailout was expeditiously carried out by official Washington-based IFI's and the US Treasury, many compared it to the lax support given to Argentina in a similar situation. In response, experts proclaimed that, due to its proximity to and special interwoven relationship with the US, Mexico must be seen as a sui generis example that, more often than not, puts a unique stamp on the study of US-Latin American economic relations.

As the reform agenda moved forward, it became apparent that the social sectors were lagging behind. Even with the best of intentions under the heterodox anti-inflation plans of price controls, subsidies, and minimum wages, the poorest groups in society were given short shrift, thus exacerbating the already unequal distribution of income in the region. Inasmuch as there were positive patterns of growth to be celebrated, paradoxically among policymakers there was also a troublesome feeling of guilt associated with a widening disparity in income and growth of poverty. While monetary policies were being stabilized throughout the region with varying degrees of success, fiscal policies, in general, remained stagnant. The severity and impact of the "lost decade" of the 1980s signaled the need for drastic change. Consequently, leaders now clearly saw in a return to open democratic rule one of the few available methods to help reduce inequity. The architects of the Washington Consensus in 1989 questioned the validity of the much vaunted misery extant in the continent, and thus deliberately excluded poverty alleviation from the list of 10 recommendations comprising the document (Edwards, p. 59). By 1997, common reactions to the reforms presented an uneven picture. How was it possible when at different points in time and at a different pace, each country had subjected itself to reform, only to find that by 1995 half of the countries were in a recession? The answer could be identified only when the initial booms of the early 1990s had run their course and started running into the fiscal, financial, and external difficulties that were coupled with banking and exchange crises.

For those observers to whom the mid-1980s was the starting point of these reforms, a decade later the region must have appeared shockingly different. While considered successful in most of its applications by its architects, despite its brief time span, the reform process had nonetheless unearthed a number of complex problems that demanded attention if collective improvements were to be sustainable. The notion of sustainable development had become a new paradigm for economic growth. Leading social scientists argued that, without environmental protection and equitable distribution of society's assets, there was no use fostering accelerated economic growth if its products yielded little or no benefit to the disenfranchised. Income disparities showed no sign of abating and growing absolute poverty remained an impediment to growth. A growing sentiment spread among policymakers, corporate leaders, and intellectuals that the reforms needed to be reformed to prevent the external shocks and instability their countries had witnessed in the last few years in the macroeconomic arena, and in the fiscal policy arena, to redress the existing taxation policies, widen the social safety nets, and finance social programs regarding health, education and employment, as means of improving income distribution and combating poverty. These changes, together with a concerted attempt to widen public discussion and participation in the domestic decision-making process, would constitute an important part of the features any well-functioning promarket democratic system would consider vital to attain economic growth with equity.

Reforming the Reforms. By the mid-1990s, Latin America as a whole was involved with strategies aimed at macroeconomic stability, market-oriented growth, constitutionally embedded personal freedoms, and democracy. In addition, a growing awareness arose that for these objectives to be obtained, serious efforts needed to be made to reform the reforms in order to create, replicate, or stimulate markets for long-term operations, small- and medium-sized enterprises, technology, and human capital. At the turn of the 21st century, the language of international trade and finance had become interchangeable with globalization, a far more unitary concept susceptible to explaining complex economic, political, and even cultural processes as one phenomenon causing, or resulting from, wider historical dynamics. As such, the frequent reform initiatives between the 1970s-90s were all elements leading to the ultimate goal of a globalized economy in which these nations could legitimately participate and compete, provided they had also appropriated the prevailing neoliberal tenets. Unfortunately, this was not yet occurring convincingly, so when structural reform moved to center stage in the 1990s and countries needed to confront the external shocks of 1994–98, their economies displayed a fragility that was unexpected for globalization proponents.

On balance, as assessed in the early 2000s, globalization was at a crossroad. One of the region's most incisive analysts, Ricardo Ffrench-Davis, in his Reforming the Reforms in Latin America: Macroeconomics, Trade, Finance (2002), identifies the many shortcomings of globalization, and finds low long-term public productive investment with a corresponding low capital influx and formation over time (see item #bi2004002597#). Growth levels were mediocre, and regional economies had not seen substantive improvement since the 1970s, thereby revealing much of the faltering inner dynamics of past reforms. While market-friendly policies with correct prices had sharply reduced inflation and fiscal deficits in general, macroeconomic adjustments spread over the past three decades had failed. Consequently, the much-touted thesis of macroeconomic solutions to Latin American disequilibria underwent a reversal that demonstrated that such therapy was ineffective. In some cases, the adjustments provided quick and easy results, as exemplified by the ubiquitous case in which a new currency is introduced, and inflation subsequently plummets. But the macroeconomy is not a country and it will not solve the existing social problems of maldistribution of income and poverty. A far more complete reform was necessary, exceeding macroeconomic reforms limited to the financial sectors. By this time, national authorities recognized that in addition to social sector poverty-specific policies, numerous reforms in the political arena were required in areas such as electoral and judicial reform, census data collection, strengthening the quality of voter registration and political district mapping, through which democratic progress could be identified, strengthened, and measured. The known economic policy reforms were to be placed on hold, or combined with wider sociopolitical reforms to combat countries' newly defined developmental problems. Finally, Latin American leaders felt encouraged to take the lead in producing ideas on "reforming the reforms" that would best suit their own country's situations.

The last half of the 1990s had exposed the region to instability and a structural vulnerability to shocks emanating from like-minded regional partners (Mexico, Argentina, and Brazil) and far-flung areas (Asian countries and Russia). This widespread capital market volatility translated directly into a mass behavioral uncertainty that paralyzed market action. Evidence had shown that when confidence is lost in financial stability, the value of currencies falls and interest rates skyrocket, thus depleting available liquid capital. A critical lesson learned demanded attention: immediate action was needed to formulate policies aimed at reducing the intensity and frequency of these crises, first, by shoring up structures at home and, second, as members of global IFI's, nations should strengthen their collective technical know-how to thwart their reoccurrence. Once confronted, this type of crisis automatically led to the deeper question of whether globalization, as now constructed, could fulfill its promise of "accelerated growth and a unified globe in terms of economics, politics and culture."

Thomas Skidmore and Peter Smith, in their highly respected Modern Latin America (1st ed. 1984; see HLAS 56:1078 for review of 3rd ed.), provide an astute theoretical framework to understand the political changes that grew out of the economic reforms. A clear pattern emerging from their analysis is "a set of simplified causal relationships: economic changes produce social changes which furnish the context for political change" (Modern Latin America, p. 43). Throughout the 19th–20th centuries, this pattern was repeated, bringing forth different kinds of political actors and regimes—the military, the urban professionals and merchants, the industrial bourgeoisie, and organized labor—each showing varying levels of political weight during an evolving, but still eminently stable, import-export capitalist system that collapsed during the Oct. 1929 stock-market crash. With serious doubt about the viability of the reigning export model of growth, and lacking the deep pockets of reserves only the British and the Americans at that juncture could call upon to stay on the neoliberal capitalist course after the crash, Latin American countries readily welcomed the stabilizing, but illiberal and antidemocratic return of the military. Within a year after the crash, the military had taken over in Argentina, Brazil, Chile, Guatemala, Peru, and Cuba.

Supported by the military, and determined to seek alternative ways of growth that challenged the failed export model, ISI was adopted, in theory by all, but realistically by the more external shock resistant and larger-sized national economies. Industrialization meant importation of modern arms for the military and secure employment for the workers, a need for which the political elite felt compelled to acquiesce. As ISI progressed through the 1960s, however, the role of technology increased and that of labor decreased due the capital-intensive nature of new industry. As unemployment grew, pressures mounted and threatened the prevailing social order; the military crushed the government opposition that arose in Brazil (1964), Argentina (1966), and Chile (1973). Labor's most vital interests—wages, working conditions, fringe benefits, and the right to organize were sharply curtailed. In the mid-1970s, as previously discussed, profound anti-inflationary policies were enacted in response to the reforms demanded from foreign creditors, and in that process of inflation stabilization labor stood to lose the most.

The economics of the period made it difficult for military rule to endure. Slowly, as a result of civilian reaction to excessive military repression and corresponding human rights violations in "La Guerra Sucia," their regimes reluctantly accepted being replaced by more democratically oriented governments. "Whereas in 1979 almost two-thirds of Latin America lived under military control, by 1985 nearly 90 percent enjoyed more democratic governments, with Chile as the major exception. Civilian presidents were elected in Peru in 1980, in Argentina in 1983 and Brazil in 1985. This transition created more political space in which the public, including social sectors once poorly represented, could engage in open politics" (Modern Latin America, p. 59). Had the economic debt crisis of 1980s not been so devastating, the military may have been able to maintain their foothold in the political arena. Alas, being incapable of managing the technically complex and demanding "austerity" problems associated with recovery, and witnessing the outside world coming to the aid of the indebted nations through the Washington Consensus and the Baker Plan, the military option had clearly reached its end. The political system opened, electoral politics slowly returned, and the democratization process of the 1990s was put in motion.

Akin to the "boom and bust" cycles in economic theory, Latin American politics has its own oscillations between pro- and antidemocratic regimes. Coinciding with the period of the Alliance for Progress in the early 1960s, there were democratically elected, tolerant, and socially supportive administrations of Joselino Kubitschek in Brazil, Arturo Frondizi in Argentina, and Eduardo Frei in Chile. Starting with the first military coup in Brazil in 1964, each of these entered a military interregnum that lasted until the mid-1980s, thus nullifying the fallacious idea that "democratization" was still to come as an expression of neoliberal reform. What followed was a second wave of quasi-democratically elected leaders, illustrated, for instance, by the administrations of Sarney followed by Collor de Melho in Brazil in the second half of the 1980s, Jaime Lusinchi and the reelected Carlos Andrés Pérez in Venezuela in 1989, Chile's unique transition from Gen. Pinochet to Patricio Aylwin in 1990, and Argentine's post-Falkland War transition from the military to Raúl Alfonsín (1983–89). Carlos Menem's ascent in 1990 completed the country's slow transition to a total adoption of the neoliberal credo. Similarly, Mexico's transition epitomized the gradual and unsure transition to neoliberalism by first having President de la Madrid testing its waters (1982–88) and then jumping head first into the stream with his successor, neoliberal devotee Carlos Salinas de Gortari. For these leaders, it is fair to argue that at their level of preparedness it was too much of a transition from state-driven clientilistic polity to the more pragmatic, depersonalized, market-oriented outward looking political system. The hope these governments had that heterodox anti-inflation policies might work in their favor had dissipated, taking them inexorably to adopt the much-dreaded neoliberal reforms. The fall of the Berlin wall in Nov. 1989 cemented the notion that this wave of Latin American leaders could finally come to terms with their having lost leverage to block the arrival of neoliberal reform.

The second wave of leaders made an impact early in the 1990s. For that generation, a new agreement was emerging, coined by the president of the Inter-American Development Bank (IDB) Enrique Iglesias as the "trend towards convergence" (Enrique V. Iglesias, Reflections on Economic Development: Toward a new Latin American Consensus, 1992; see HLAS 55:3825). Analysts and intellectuals began making distinction between the economics focused, first stage of macroeconomic equilibrium and the corresponding elimination of microeconomic distortions stemming from uncontrolled inflation and dysfunctional fiscal policies. In this regard, it was no surprise that Mexico reprivatized the banks in 1992 after having nationalized them a decade earlier. This seemingly irrational behavior perfectly fits the existing context in which paradigm shifts over a relatively short period of time cause abrupt changes in perspectives, policy actions, and behavior. It would be unwise to construe macroeconomic stabilization as the sole prerequisite for wide ranging reform, which is the reason why the second wave would underscore the importance of a more comprehensive modernization that would bring under its umbrella the social programs that would reduce inequalities and eradicate poverty. Chiapas, and the upheavals in Santiago de Estero and the Jujuy province in Argentina taught the lesson that attention to social issues was not only good economics but that it also made eminent political sense, especially if one wanted to maintain democracy and consolidate the reforms for the long run (Edwards, p. 59).

Presently, mainstream journalistic opinion seems to be heavily influenced by the current political developments that appear to take a U-turn back to the period before reform. These developments are characterized by six "throwbacks" to more populist regimes, whose critical rhetoric include serious questions regarding antiliberalization, prostate and antiglobalization ideas. While more so in name than in fact, socialism is alive and well under Chile's President Ricardo Lagos; Argentine's implacable Peronist President Nestor Kirchner is in the process of dismantling his predecessor's neoliberal legacy while defying IMF's dictates; Brazil, the region's dominant economy, pursues its own idiosyncratic external thrust to the left under President Luis Inacio "Lula" da Silva and hence constitutes a large part of what some observers perceive as the present leftward push in Latin America. Venezuela's controversial external and internal "revolutionary" leftward move under populist President Hugo Chávez, whose close friendship with Cuba's Fidel Castro and aggressive realignment of traditional forces at home seem ominous to political reporters; Uruguay's recently installed left-of-center President Tabaré Vázquez; in Bolivia, where since the coup against laissez-faire oriented and democratically elected President Ignacio Jaime Sánchez de Losada in 2003, a series of interim governments have followed, each trying to defuse the popular, mainly indigenous demand for a complete renationalization of the oil and gas industry. More importantly, the Bolivian unrest highlights broader regional trends. While a commodities sales boom in 2004 fed a significant 7.3 percent economic growth in the Andean region, a rising discontent has emerged among its populations, who feel frustrated by the dearth of benefits filtering down to them. Peru, Ecuador, and especially Venezuela are going through similar natural resource management experiences that inspire an incipient form of populism. And if, as is plausible, Mexico's right leaning, market-obsessed president Vicente Fox is replaced next year by Mexico City's PRD mayor Manuel López Obrador, or even a less pronounced left-of-center leaning PRI candidate, then a generalized leftward swing in the region will acquire a weight that cannot easily be dismissed as just another accidental counter-offensive to reform. There are enough indications to conjure up a vision that finds that "while populism and nationalizing governments may seem like a blast from the past, they could also be a wave of the future" (The Financial Times, June 13, 2005, p. 20).

Thus, are the recent political reversals to the left indications of ad-hoc, nonthreatening systemic self-corrections? Or are these changes aimed at undoing the macroeconomic stability, which earlier reformers believed had been achieved owing to their well-intentioned application of the Washington Consensus? It is of paramount importance to determine whether the last 25 years of reform are consistent with these optimistic views, or with an opposite view that considers the applied reforms ill-construed and adverse to sustainable development. Only the future will tell, but in the meantime, one could argue that the current volatile political reality is at least partly the result of the economic readjustments of the last 25 years. The question thus remains: what has brought us to this present three-pronged fork in the road? Would a wise future policy be one of "full-steam ahead with neoliberal reform," one of minor adjustment attempting to "reform the reforms," or a radical reversal that negates the current strategies and nostalgically attempts to return to the illusion of an updated, but similarly successful ISI?

There are two broad opposing interpretations: a neoconservative view that believes that, in general, neoliberal reform and the globalization movement have been, and are, good for Latin America. What was less successful was the fact that the reforms did not go far enough in radically transforming policies and institutions to reach heightened growth and liberty. While he does not openly identify with this category, it is plausible to consider Alvaro Vargas Llosa an emerging voice in the neoconservative, more right than center school. His recent book Liberty for Latin America: How to Undo Five Hundred Years of State Oppression (2005) argues that the only result of the past two decades of reform is that "illiberal elites backed by the US and Europe have perpetuated oppression in order to maintain their hold on power." Oligarchic statism, the main obstacle to effective reform, must be eviscerated through radical efforts to enable "the region to gain prosperity, technical progress and sound governments for the benefit of the disenfranchised public, which unwittingly has succumbed to an inertia of oppression." Similar to the Washington Consensus, the author calls for a dismantling of the state, the purging of government coercion, and the liberating of the people from authoritarian servitude.

To the left of the neoconservative position, but falling far short from commingling with a radical, albeit less mainstream neo-Marxist view, is the firmly entrenched more centrist view, represented by IDB president Enrique Iglesias. For him, and his like-minded, institutionally based colleagues, there are still significant shortcomings to be corrected, but these should be gradually altered through a process of "reforming the reforms," especially regarding those aspects where these reforms have backfired earlier, and provided the changes that are envisaged are incremental and not anti-status quo.

This centrist school of thought examines the costs and benefits of reforms and delves into the challenges the region must still address in order the achieve the authentic goals of social, economic, and democratic progress. Can it be said that the economic reforms of the last three decades have been effective and worth the effort? The institutionalist school, represented by Ricardo Haussman, argues in the IDB's 1997 Report "Latin America After a Decade of Reform" that in the 1990s, current development continued to be heavily influenced by complex monetary cyclical effects accompanied by the adoption of macroeconomic stabilization and structural reform plans. While hardly monolithic in their slowly evolving accomplishments, the post debt-crisis reforms undoubtedly ushered in significant progress. Abundant credit and consumption, strong capital inflows, appreciation of real exchange rates, and often overambitious liberalized financial systems typified a tangible wave of economic expansion. These improvements, in turn, increased tax receipts and made possible social programs that sought to close the gap that had gradually grown between the nation's macroeconomic growth and truncated social progress.


  1. Rosemary Thorp's most comprehensive, well-organized and analytical book is a superb addition to the literature, without which this essay could not have been written.

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