Neoliberal Transition in Latin America - Essay Example

 Neoliberal Transition in Latin America Introduction This paper discusses the contemporary relationship between the adoption of neo-liberal policies by governments, with a special interest devoted to Chile where neo-liberal policies have been in force for over two decades, and the related social impact of economic development in geographically adjacent Latin American countries. It seeks to examine some broad themes of the political economy of regional development shifts towards neo-liberal policies and examines generalizations that can be made on how the productive response of economic integration flows between countries. Economic integration between countries will be examined to see if any neo-liberalism is taking place within the regions of Latin American countries. Discussion includes analysis of manufacturing products and those based on renewable resources mainly in relation to regional development in Chile and the growth of non-traditional exports and labour markets. The paper first examines the origins and thought processes of neo-liberalism. Neo-liberalism Neo-liberalism maintains people act according to self-interest and that markets yield the most efficient outcome by free trade balances within liberalized capital markets with minimal government intervention in the economy. Karl Marx developed the theory that under capitalism, technical and distributional changes tend to follow specific patterns of evolution. This course of changes coalesce the expansion of output, capital, and employment. (Other mitigating factors include rise of labor productivity, the real wage and the capital-to-labor ratio.) Further in the evolution lies difficulty to sustain the progress of labor productivity without resorting to increased amounts of capital investment. The decline of the profit rate creates the conditions for large crises resulting in recessions and unemployment. (These movements and tendencies occur at declining rates of variation (Dumenil & Levy, 2004). Marxist economics are deeply rooted in many Latin countries and enjoy a strong historical foundation; however, “with the rise of the Cold War and the increasing United States’ hostility toward anything remotely progressive, the left in Latin America was first, mildly, and then severely repressed. The list of casualties includes: The Arbenz regime in Guatemala; Goulart in Brazil; Allende in Chile and democracy in Uruguay and Argentina” (Noble & Weinstein, 2005).  In the 1980’s, neo-liberal policies provided a framework to keep Latin economies from a collective debt crisis. Neoliberal economic policies were seen to improve the severe financial restrictions of the sudden drop in external business and increased government debt. Neo-liberalism at work The package of neo-liberal economic reforms highlights areas of fiscal management, trade, financial markets and privatisation of state firms. Fiscal management begins with budget deficits reduction, creating an independent central bank along with a budget and tax office. Trade reform is concerned with achieving an increased global economic outlook by promoting exports by reducing tariffs on imports. Financial market reform eyes manipulating Markey determined interest rates as the objective. Privatisation reform increases short-term government income by the elimination of inefficient state programs and departments. In addition, regulatory entities guarantee that the private sector public-use companies will work more efficiently than those of the former public sector (Edwards, 1996). The political economy of Latin American countries are increasingly characterised by neo-liberal approaches. The use of the term neo-liberal has terminology issues because of its ideological suggestion. In international policy circles, the term tends to be used to indicate a package of economic reforms as opposed to social policies or political reform. As a result, some speak of neo-liberalism as the new economic model. Neo-liberal economic policies have widened the income inequality gap between developed and developing nations. It is on this issue of whether the first priority of government should be to increase the economic pie or to redistribute the economic pie that neo-liberalism and the left diverge. Neo-liberalism in Latin America In this context then neo-liberalism is not a new phenomenon in Latin America. For over a century, the values and principles of the left have formed the foundation of Latin American society (Kay, 1993). Liberal reform in Latin America varies substantially from country to country in the extent of commitment to the economic and social policy. Chile has well over two decades of reform while Venezuela’s conversion to neo-liberal reform between 1989 and 1992 was short-lived. Comparisons can be made, though, between governments that have been committed to reform for a period of time in terms of their policies towards the integration of social policies and the objective of achieving greater social equity or neo-liberalism. A significant shift in social priorities occurred with the Chilean transition of democracy after 1990 as tax increases were directed to pay for greater spending on social welfare, education and health. “The Chilean case showed neo-liberal reform cannot be only about making economies more market-oriented. Substantial institutional reforms have to take place that in Chile have stretched over a wide variety of political ideologies and include reforms to landholding, ownership of copper, pensions and taxation” (Martinez & Diaz, 1996). “It is the combination of these progressive institutional reforms with market-oriented neo-liberal policies that have allowed Chile to develop a competitive economy and society within a globalising and more competitive world” (Apey, 1995). Making it work In countries that undergo neo-liberal reforms, the prosperity of region is linked to the success of regional producers inserting themselves into the world economy. A complex collage of regions evolves in terms of the comparative advantage and factor endowments of regions in world markets. “Prosperity becomes linked to an area’s ability to attract investment and produce for export markets. In regions that did well under the inward-oriented model but find it difficult to attract export-led capital and restructure production for global markets, economic stagnation and decline relative to other regions has occurred, particularly in terms of labour productivity. Furthermore, the old reliance on supplying domestic markets becomes more difficult as regional producers now face competitive import goods and products” (Apey, 1995). Factors influencing success Many factors and thus uncertainties surround regional integration and development under neo-liberal policies. In general terms, the outward-leaning character of economic growth has had an impact on secondary regions. The ability of producers in those regions to export effectively significantly increases prospects for regional investment and as a by-product, a labour force and governmental tax income swell. In countries where producers stay tied to the domestic market alone, economic growth has not normally taken place. Non-traditional exports aid outward orientation of a country’s economy. Traditional exports experience overvalued exchange. These are usually raw materials and non-renewable resources such as oil and minerals traded on world markets whose value is reflected by the global balance of supply. The demand of the commodity is the key to export productivity rather than the costs of production. By contrast, “the growth of non-traditional exports (as opposed to traditional) is very much influenced by the costs of production of potential exports. As a result, nontraditional exports have benefited from the shift to outward orientation and more effectively-valued exchange rates. Quality and reliability of the export product are important considerations as well but the relative cost of production is the crucial factor behind the early growth of a non-traditional export” (Clapp, 1995). Non-traditional exports can best be divided into two groups – those based on renewable resources and those based on manufacturing products. With the move to neo-liberal economic policies, these types of exports have become significant for Latin America. From the middle to late 1980s, nontraditional agricultural exports grew at rates of 222% in Chile, 78% in Guatemala and 348% in Costa Rica (Barham et al, 1992). Chile’s unique perspective In the shift to outward orientation, many firms have been unable to compete in international markets and have closed plants. “Other firms, however, have been able to restructure successfully and achieve international levels of competitiveness. Such firms have required access to capital, new technology, best practice in management and a range of labour skills. However, the key factor in the international competitiveness of these firms has been low labour costs” (Shaiken, 1994). Chile has been practicing neo-liberal economics for a longer time period than other geographically adjacent Latin countries which makes the Chile a more accurate country in which to gauge the impact of the growth of non-traditional exports on regional development. “The pattern of Chilean regional development also has a well-defined core-periphery relationship. Chile’s core is the metropolitan region based around the capital, Santiago. In 1993, this region contained 40% of the nation’s population and 60% of industrial establishments. The periphery, meanwhile, is divided into 12 regions with 60% of the national population but only 40% of industrial establishments” (de Mattos, 1996). Distribution of income Regional poverty will be more effectively reduced and labour productivity will be enhanced if the production of the nontraditional export is labour-intensive and involves large numbers of regional workers in the export activity. “In terms of Chile’s four resource categories, agriculture is the most intensive user of labour, particularly in terms of harvesting and packaging, where a distinct gender division of labour also exists” (Barrientos, 1997). The rapid growth of export activities in the peripheral regions of Chile has increased labour in Chile by nearly 40% between 1983 and 1991, with the most striking advances taking place in the export-oriented regions. The regional distribution of investment in non-traditional exports has definitely favoured Chile’s peripheral regions, “in terms of foreign investment 86.7% of investment in primary sectors, 43.7% in manufacturing and 85.6% in transport” (de Mattos, 1996). At the regional level, growth in agricultural exports neither automatically improves nor worsens the distribution of income. Export escalation radically changes access to land of rural populations and employment opportunities. “Size of holding becomes a crucial variable as to the incorporation of rural groups into adopting export crops. Owners of larger holdings can become directly incorporated into the export boom whilst those with access to small plots of land find it more difficult” (Gwynne & Ortiz, 1997). Three key factors determine to what extent agricultural export growth is inclusive of the rural poor. One, if small-scale farms participate in producing the export crop and enjoy the higher incomes generated from it. Two, if the export crop encourages a precedent of structural change that methodically improves or worsens the access of the rural poor to land and third, whether agricultural exports attract more or less of the labour of landless and part-time farmers. “This provides a useful framework within which to gauge the impact of agricultural exports on the populations of rural regions, particularly if these are examined within the context of changes in land and labour markets” (Carter et al, 1996). Land-based markets have been more vigorous in export-oriented regions than in agricultural regions still oriented to domestic markets. During the 1980s, high international prices gave the farmers reasonable incomes. As international trading conditions tightened during the early 1990s, however, debts of farmers started to increase as a result and many began to record debts nearly as high as the value of their agricultural land. Agriculture type production is labour-intensive and can increase labour absorption at the regional level. The combination of waged labour with agricultural exportation in poor rural regions has had significant impacts on income levels for the rural poor (Bee & Vogel, 1997). Rural income levels in agro-exporting regions have improved and labour shortages have even emerged in some areas. The benefits of agro-exportation to a region depend on the type of commodity being developed and on two key variables, the land access effect and net employment effects. “The most positive outcome would be one in which small farmers adopt a labour-absorbing crop on most of their land, resulting in high direct participation and greater labour opportunities for the rural poor. The most negative outcome would be one in which small farmers find their participation thwarted by resource constraints and the labour intensity associated with larger farms drops below the levels of previous crop choices” (Carter et al, 1996). The reality of the labour situation usually lies some where between these two extremes. Efforts to make agro-export growth benefit the rural poor require more than market liberalization and an outward-looking policy orientation. In the areas of small-scale export production, government assistance would have to be given to small-scale producers. Latin American history During the 1980s and 1990s, the link between neo-liberal policies and democratic governance has become particularly strong in Latin America. The decade witnessed considerable advances in the globalisation of the world economy, with global capital flows, trade and investment increasing exponentially. The inward oriented export system was in fact cutting Latin American economies off from the advantages of being more fully inserted into the world economy. “Neo-liberal policies provided the framework for Latin American economies to increase trade with other world regions and increase inward investment and capital inflows from firms and banks in those regions … It is now widely understood that development should not be a top-down externally imposed technocratic process but rather an on-the-ground inclusive process. This conclusion was not easily arrived at in the development community; it involved many disappointing experiences with unsuccessful development programs” (Gereffi & Wyman, 1990). From the 1860’s to 1920’s, modernization theorists asserted that Latin America was just a few decades behind Europe and the United States on the development path,  believing that economic progress was only a matter of time. Developing countries were advised to simply wait it out, that their turn, economically speaking, was fast approaching. New theories were forthcoming in the 1930s and 1940s. Economic researchers began to observe Latin America’s economic problems not as short-term fixable speed bumps on the road to economic development but as deep-seated defects in the orderliness of their economies. Theorists prescribed government involvement in the economy. The countries’ governments were viewed as the only body capable of compassionately and logically guiding economic development. “During the post-war era, Import Substitution Industrialization (ISI), which favored protectionist trade policies for local industries, was adopted as a short-term solution to jumpstart the domestic manufacturing sector. It was championed by Raul Prebisch, an Argentine economist who headed the United Nations Economic Commission for Latin America” (Noble & Weinstein, 2005). While ISI produced short term economic growth; it failed to produce sustained economic growth in the long term. Preventing the transition to a post-ISI model were the political impediments of removing subsidies, creating budgetary reform and restructuring labor and financial associations. The distended state sector created ample prospects for political payoffs and a propensity to print currency as elections approached.  It also pushed out private sector competition and muffled any individualistic entrepreneurial atmospheres. The protectionism philosophy made possible an incentive practice that disheartened domestic manufacturers from making products that were competitive in international markets. In the 1960s, in an attempt to explain why advanced industrial economies had higher standards of living than economies that possessed natural resource rich development. The dependence theory surmised that a country’s economic position and progress depended not on its natural endowments but its position of power in the international capitalist world market. The ideals of intellectuals and leftists were carried away within the swell of military dictatorships and the outbreak of oppression that swept across Latin America in the late l960’s and l970’s. Fears of currency devaluation led to capital investment departures, undermining macroeconomic stability and the domestic policy makers’ ability to direct fiscal and monetary policy in the debt-led development strategy of the 1970’s. This strategy imploded on itself in the early 1980’s as interest rates on the debt increased. Latin economies were burdened with fiscal deficits, mounting external debt, trade imbalances and spiraling inflation. This calamitous economic circumstance caused enough dissatisfaction to provoke political changes. Ironically, the failure to develop a sustainable economy and achieve political stability was the same rationale that gave dictatorships power in the 1970’s and was their demise in the 1980’s.  Told that the liquidity crisis was a result of their debt led the ISI development strategy in Latin nations. They were advised to reduce the size of their public sector by selling public companies and cutting back on social spending. Hundreds of domestic industries folded, thousands lost jobs and millions more slid into poverty. In 1990, John Williamson set forth 10 policy instruments he believed would successfully guide economic policy reform in developing countries in what later became known as the Washington Consensus. This economic guide contained three goals; free-market capitalism, an outward economic direction and a cautious macroeconomic policy (Williamson, 1990). After decades of economic crisis, military intrusion, extensive human rights violations, the debt crisis and the collapse of the Soviet Union, this formula could not withstand the economic exhaustion experienced for consecutive decades in Latin America. U.S. economic and social guidelines have dictated the Western Hemisphere’s policies since the early 1990’s. The reinstated democracies of this area had no alternative but to accept the contemporary U.S. system. These economic mechanisms supplied some positive growth early in its inception, but then directed most countries to an economic collapse. Conclusion It has been argued that neo-liberalism ideals of economic integration and political foundations are superficial and unstable. The sustainability of the neo-liberal economic model requires that it reduces domestic, organizational and social deficits. If neo-liberalism is to be replicated it will require the rebuilding of institutions that react to both privileged and popular interests. The disenchantment with neo-liberalism economic and social ideals is not simply a difference in values. This disillusionment is representative of a more deep-seated dissatisfaction with how economic development was managed throughout the twentieth century.  Democracy’s frail return was cushioned by economic policies which prompted people to re-examine the dispirited and demonized left-wing strategies. The neo-liberal economic direction in Latin American countries, with Chile leading the way, exhibits both a denunciation of failed policies and a devotion to the historic values and ideals of a significant segment of people. Technological advances have made comfortable lifestyles for many and the world an easier place to exist but it will be a hard journey to positive, sustained economic development. This ongoing experiment is amassed with complexity and enigmas for which there is no one exact answer or comprehensive version. The history of expansionistic programs demonstrates the necessity to shift this model of western economy. The governments and peoples of Latin American countries have steadily and progressively empowered the left to achieve this economic and social assignment. “Latin American political leaders have rejected the Bush Administration’s ‘War on Terrorism’ – the ‘civilization of fear’ the United States is currently promoting. It strikes too close to the Cold War paradigm that led to so much of the state terrorism that dominated Latin America in the recent past” (Noble & Weinstein, 2005). Latin American governments and citizens would rather focus issues that are real rather than imagined such as poverty and fair trade. Economic development should custom-fit to each country’s and region’s circumstances. Since the early 1990’s Latin America has struggled under a generic, if it works for us it must work for you, type of economic plan. If these assumptions were indeed a panacea as their authoring economists held them to be, they would have been more conducive to positive changes. The theories were formulated to employ standardized implementation regardless of the country’s distinctive characteristics and multifaceted state of affairs. New theories such as these occur in reaction to the deficiencies of previous theories. A developing economy would, for example, increase its social spending to stimulate the economy then informed a just few years hence that it must remove all subsidies and tariffs to free the markets and employ fiscal discipline. Economists generally advise that these policy fluctuations cause economic unsteadiness and hinder governments from achieving any long-term economic goals. Considerable studies have been performed to determine why particular economic development programs fail and what future development program should be. But there has been insufficient research showing how development programs work within the context of the cultural, political and historical values of a developing country, or rather how development can be tailored to the country’s existing values and institutions (Noble & Weinstein, 2005). “In the past, the method has been to prescribe a set of development policies and let the social and political institutions conform to the policies. Perhaps we have approached development from the wrong angle” (Noble & Weinstein, 2005). References Apey, A. (1995). Agricultural Restructuring and Coordinated Policies for Rural Development in Chile. [PhD Dissertation]. University of Birmingham. Barham, B; Clark, M; Katz, E & Schurman, R (1992) “Non-Traditional Agricultural Exports in Latin America.” Latin American Research Review. Vol. 27, N. 2, pp.43-82. Barrientos, S (1997) “The Hidden Ingredient: Female Labour in Chilean Fruit Exports.” Bulletin of Latin American Research. Vol. 16, N. 1, pp.71-82. Bee, A & Vogel, I (1997) “Temporeras and Household Relations: Seasonal Employment in Chilean Fruit Exports.” Bulletin of Latin American Research. Vol. 16, N. 1, pp.83-96. Carter, M R; Barham, B L & Mesbah, D (1996) “Agricultural Export Booms and the Rural Poor in Chile, Guatemala and Paraguay.” Latin American Research Review. Vol. 31, N. 1, pp. 33-65. Clapp, R A (1995) “Creating Competitive Advantage: Forest Policy as Industrial Policy in Chile”. Economic Geography. Vol. 71, N. 3, pp.273-296. de Mattos, C A (1996) “Avances de la globalización y nueva dinámica metropolitana: Santiago de Chile, 1975-1995.” EURE, Revista Latinoamericana de Estudios Urbano Regionales. Vol. XXII, No.65, pp.39-64. Dumenil, G. & Levy, D. (2004). “The Nature and Contradictions of Neoliberalism.” The Globalization Decade: A Critical Reader. Eds. L. Panitch, C. Leys, A. Zuegue, M. Konings. London: The Merlin Press, Fernwood Publishing. Edwards, S. (1996). Crisis and Reform in Latin America: From Despair to Hope. Oxford: Oxford University Press, p. 2. Gereffi, G & Wyman, D L (eds) (1990) Manufacturing Miracles: Paths of Industrialization in Latin America and East Asia. Princeton: University Press. Gwynne, R N & Ortiz, J (1997) “Export Growth and Development in Poor Rural Regions: A Meso-Scale Analysis of the Upper Limari.” Bulletin of Latin American Research. Vol. 16, N. 1, pp.25-41. Kay, C. (1993). “For a Renewal of Development Studies: Latin American Theories and Neoliberalism in the Era of Structural Adjustment.” Third World Quarterly. Vol. 14, I. 4, pp. 691-702. Martinez, J & Diaz, A (1996) Chile: The Great Transformation. Washington: The Brookings Institution. Noble, A. & Weinstein, M. (2005). “A Resurgent Left in Latin America: Implications for the Region and U.S. Policy.” A Journal of Modern Society and Culture. Retrieved 9 February, 2006 from Shaiken, H (1994). “Advanced Manufacturing and Mexico: A New International Division of Labour”. Latin American Research Review. Vol. 29, N. 2, pp.39-72. Williamson, J. (1990). “What Washington Means by Policy Reform.” Latin American Adjustment: How Much Has Happened? Ed. John Williamson. Washington D.C.: Institute for International Economics, pp. 7-20. Read More