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Why was the Washington consensus irresistible in Latin America - Essay Example

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Introduction 3
Why the consensus was irresistible to Latin America 3
Loss making in state enterprises 3
Distortion of allocation of resources 5
ISI programs 6
Low foreign investment 7
The debt crisis 9

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Why was the Washington consensus irresistible in Latin America
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Download file to see previous pages ones. It came about as a result of a wave of globalisation. A number of historical occurrences had also led to the prevailing situation. This paper will trace the evolution of policy in the Latin American region in the decades prior to the consensus and during its actual adoption. The analysis will demonstrate how international banks as well as official financial institutions, politics, economic fundamentals as well as prevailing ideologies shaped the diffusion of neoliberalism in the region. Why the consensus was irresistible to Latin America The Washington Consensus took shape in the early 1990s starting with Mexico and Chile. Colombia, Argentina, Brazil, Guatemala, Peru, Venezuela and Bolivia would all follow suit. Fiscal adjustment was a key component of neoliberalism in this Consensus. Several countries removed fiscal deficits through changes in subsidy and taxation policies. Government was to step aside and let the market allocate resources on its own. Additionally, privatisation was also a crucial part of the reforms. Latin American governments were known for their heavy handedness in controlling their economies but these were privatised. Loss making in state enterprises As mentioned, Latin American governments had played a dominant role in the ownership of state enterprises. However, by the 1970s and 80s, it became evident that these enterprises were no longer making money (Gwynne, 2004). Creditors to the Latin American nations made them realise the benefit of privatising those institutions in order to make them profitable again. Since the US was one of the key lenders to Latin American countries, it soon became inevitable for these nations to privatise their institutions in order to boost the efficiency of their economies. Between 1980 and 1983, Latin America suffered from the problem of domestic debt. At the time, the countries had debt obligations to financial institutions outside the region. They were advised by the IMF to either increase their exports or minimise expenditure. Since these nations had a poor exporting history, many of them chose the easier option of curbing imports in their countries. This was sufficient to create a trade surplus of about $ 242.9 billion by the end of the year (Green, 2003). However, debts owed were almost close to these figures as they stood at $218.6 billion by the end of the decade. External debt as a percentage of GDP Source: Federal Reserve Bank of Atlanta, 2009. Imbalances of Latin American fiscal accounts. [online] Available at Accessed 18 December 2013] The graph illustrates the precarious situation in which Latin America found itself in the late 1980s. Its debts had reached unsustainable levels. In order to meet these obligations, Latin American economies somehow had to find a way of converting their trade surplus into dollars. However, because most state-owned institutions were not generating positive rates of return, it was necessary to create avenues of accessing earnings from the private sector. These governments somehow managed to convince private investors to purchase government bonds in exchange for their currencies. Countries like Mexico and Brazil used very high interest rates to achieve these outcomes (Williamson, 1990). Essentially, ...Download file to see next pages Read More
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