[mgj-discuss] Political and Economic Changes in Latin America Likely to Continue

[Jeremy Bigwood]

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Political and Economic Changes in Latin America Likely to Continue 


By Mark Weisbrot

  _____  

This column was printed by Emerging Markets on Sunday, March 18. If anyone
wants to reprint it, please let me know.

  _____  

President Bush has recently returned from a seven day, five country trip to
Latin America, with which he had hoped to regain some of the influence that
the United States has lost in recent years. The political and economic
changes taking place in the region are often seen as a cyclical or temporary
phenomenon - a swing to the left, or to populist or "anti-American"
governments, that will in time reverse itself. The conventional wisdom is
that populist governments that stray too far from the "Washington Consensus"
will be unable to achieve sustainable growth and development. They will run
into high inflation through irresponsible fiscal and monetary policies, or
will stifle investment - particularly foreign investment - and therefore
productivity growth. According to this view, they will inevitably revert to
the set of orthodox economic policy reforms that have been introduced over
the last 25 years.

This conventional wisdom is wrong. First, it misses the most important
reason for the region's leftward shift: an unprecedented long-term economic
growth failure. The prevailing view is that the reforms of the last 25 years
- tighter fiscal and monetary policies, more independent central banks,
indiscriminate opening to international trade and investment, privatization
of public enterprises, and the abandonment of economic development
strategies and industrial policies - has been successful in promoting
growth. The problem, according to this view, is that many of the poor have
been left behind, and inequality has worsened.

In fact, what has happened is that economic growth collapsed. From
1960-1980, the region's per capita GDP grew by 82 percent. This was not
extraordinary by developing country standards - during this period South
Korea grew twice as fast and Taiwan nearly three times as fast. But it was
enough to raise living standards considerably for the majority of Latin
Americans. From 1980-2000, per capita GDP grew by only 9 percent. From
2000-2005 it has grown by 4 percent. To find anything comparable to the
long-term growth performance of the last 25 years, one has to go back more
than a century.

It is difficult to exaggerate the importance of this type of economic
failure. A generation and a half of Latin Americans have lost out on any
chance to significantly improve their living standards. If Brazil or Mexico
had simply continued to grow at the their pre-1980 rate, for example, they
would have per capita incomes at European levels today.

In the past three years growth has picked up some, but this has not been
enough to blunt the desire of most Latin Americans for change. While the
"Washington Consensus" reforms were not all wrong nor completely
unsuccessful - for example, hyperinflation or even very high inflation is
now a thing of the past - it is clear that something terrible did go wrong.
Because that has not been acknowledged by the political classes in these
countries, the electorate has gone over their heads and voted for change: in
Argentina, Venezuela, Brazil, Ecuador, Uruguay, Bolivia, and Nicaragua. In
the last year or so, populist candidates also came close to winning in Costa
Rica, Mexico, and Peru.

The second epoch-making change that has been vastly under-reported is the
collapse of IMF influence in middle income countries. This is the biggest
change in the international financial system since the breakdown of the
Bretton Woods system in 1973, and it has enormous economic and political
implications. The IMF was overwhelmingly the major avenue by which the US
government influenced economic policy in Latin America. This was not so much
because of the money that the Fund itself loans, but because of an informal
arrangement that established the IMF as a "gatekeeper" or the head of a
creditors' cartel. Governments that did not meet IMF conditions could not
get most loans from the much larger World Bank, the Inter-American
Development Bank, the G-7 governments, and sometimes even the private
sector. 

This arrangement is no longer operative. Just last week, the IADB made one
of its largest infrastructure loans ever ($1.2 billion) to Argentina. Over
the last five years the Argentine government has not only defied the IMF in
its unprecedented settlement with defaulted foreign creditors, but on basic
macro-economic policy issues. It has also criticized the Fund harshly and
publicly, and finally paid off the IMF in January 2006. Given these
circumstances, it is difficult to imagine a country like Argentina getting a
loan of this magnitude from the IADB even a few years ago.

More importantly, the collapse of the IMF's creditors' cartel means that the
loss of US influence in Latin America is almost certainly irreversible. Of
course this is also a worldwide phenomenon: the IMF has lost its influence
in middle-income countries throughout the world. The Asian countries have
been accumulating reserves since the end of the East Asian financial crisis.
The IMF's intervention in that crisis was widely perceived in the region as
a failure, and the accumulated reserves enable these governments to avoid
any future borrowing or conditions from the IMF. The Fund itself has seen
its portfolio worldwide drastically downsized: from $96 billion as recently
as 2004 to just $20 billion today. About half of that $20 billion is owed by
Turkey; only about 3% is outstanding in Latin America.

In Latin America, the availability of an alternative source of financing -
from the government of Venezuela - has also drastically reduced the power of
the IMF and other traditional sources of lending. Venezuela has loaned or
committed more than $3 billion to Argentina, and just this week the two
countries collaborated on a $1.5 billion joint bond issue that was snapped
up by investors. Venezuela has also loaned or committed hundreds of millions
of dollars to Bolivia, Nicaragua, Ecuador, and other countries. The IMF's
loans in Latin America are a small fraction of Venezuela's. And unlike loans
from the IMF and World Bank, Venezuela's lending is without policy
conditions.

Latin America's new independence has paid some noticeable economic dividends
so far. Although Argentina's acrimonious divorce from the IMF meant that it
got no help from the Fund or other multilateral institutions when it was
mired in the country's deepest economic crisis (they actually took a net $4
billion, or 4 percent of GDP, out of the country in the worst year of 2002),
the country has recovered remarkably on its own. It has grown at an average
of 8.6 percent annually for nearly five years, pulling more than 8 million
people (in a country of 36 million) across the poverty line. To do this the
government employed a number of unorthodox macro-economic policies opposed
by the IMF, including having the Central Bank target a stable and
competitive exchange rate instead of just inflation.

Bolivia has added about 6.7 percent of GDP to its annual revenue from
hydrocarbons since renegotiating its agreements with foreign companies, an
enormous amount which would be equivalent to $900 billion in the United
States. Venezuela has also greatly increased the government's take of oil
production and has greatly increased social spending with these funds,
providing greatly expanded access to health care, education, and subsidized
food. There will probably be mistakes as well as successes as Latin American
governments look for new ways to make capitalism work. But so far the
region's increasing independence, which a greater range of economic policy
choices, appears to be paying off.

  _____  

Mark
<http://www.democracyinaction.org/dia/track.jsp?key=304329693&url_num=2&url=
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Weisbrot is Co-Director of the Center for Economic and Policy Research in
Washington, DC

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