September 25, 2007

“The word of the day in Latin America" says Mario Vargas Llosa—the great novelist and ftee-marketeer, "is liberal." Liberal, to Vargas Llosa's evident delight, has replaced social as the region's most fashionable political adjective. In Latin America and the Caribbean, the word refers back to the individualism of Adam Smith and John Locke, and has an unmistakable connection with free markets. When accompanied by the prefix neo, it refers to the kinds of economic policies North Americans have become familiar with over the past two decades or so: privatization of public activity, deregulation of private activity, cuts in social spending, and the encouragement of market solutions to social problems.

So completely do the free-market ideas called "neoliberal" dominate the current Latin American debate that opposing ideas are increasingly treated with the bemused condescension usually reserved for astrological charts and flat-earth manifestos: We hope the astrologers will come around, but there's nothing left to argue about. North American “opinion leaders,” in particular, have closed the debate on Latin American development. We hear only of the struggles between “modernizers” (all of whom have studied economics and speak flawless English), and the (pick an adjective) ignorant or corrupt or ideological or nationalist or special-interest old guard.

When, for example, the new Brazilian foreign minister, Herique Cardozo—an early advocate of state-sponsored development, and co-author of one of the seminal works on Latin American underdevelopment—spoke a few months ago to an audience of bankers and investors at Manhattan's Americas Society, he was introduced as a well-known dependency theorist who had outgrown his old ideas: an astrologer finally come to terms with Copernicus.

The basic ideas of neoliberalism are embedded in the development strategies of the International Monetary Fund (IMF), the World Bank and the Inter-American Development Bank (IDB). They are nowhere better spelled out than in the two most recent annual reports of the IDB, the institution most directly responsible for overseeing the implementation of these ideas in the hemisphere. The IDB's four "strategic directions" for Latin American reform contain the crux of the neoliberal agenda.

The Bank's first-and key-strategy, “outward orientation and hemispheric integration,” calls for a greater openness to international trade and investment. Countries are encouraged to develop export-oriented industries and to attract foreign investment to finance that development. Latin American and Caribbean countries pursuing export-led development strategies have historically exported primary goods (food, fuels and raw materials), and used their export earnings to purchase manufactured goods from the North. Since primary goods are subject to much more volatile price swings than manufactured goods, and have suffered a century-long decline in price relative to manufactured goods, this has put Latin American countries at a trade disadvantage. This disadvantage has been exacerbated since 1980 when the global demand for raw materials began falling precipitously.

More recently, therefore, the lending agencies have encouraged the development of an export-oriented manufacturing sector, usually linked to the production needs of transnational companies. In an increasingly common practice, transtrationals are establishing low-cost production facilities in underdeveloped countries which supply capital goods (like motors for cars, or chips for computers) to divisions of the same firm in other countries. Because of this practice, a growing percentage of world trade is between affiliates of the same transnational firms. According to the 1991 report of the U.S. Council of Economic Advisors, for example, an estimated 25% of U.S. exports and 15% of U.S. imports are transfers between U.S.-based firms and their affiliates in other countries.

Whether a country exports mainly primary goods—as with Chile and Costa Rica, for example—or whether a significant percentage of its export earnings comes from manufactured goods—as with Brazil, Argentina and Mexico—the country's resources are diverted from the production of goods for domestic consumption and increasingly allocated to the export sector. To sell exports and attract transnational investment, currencies are devalued, lowering the cost (to foreigners) of the country's output and productive resources (like labor), and raising the price of imports. This, combined with the concurrent cut-back in production for domestic consumption, has had the effect of raising the real cost of living—especially for the poor.

The IDB’s second strategy, “modernization through private sector development," means privatization and deregulation. The Bank hopes to finance the privatization of state firms through a combination of foreign direct investment, and the return of "Right capital"-the assets thatwealthy nationals have sent abroad to cam a higher return. Thus, privatization has meant that a small number of big investors (both foreign and domestic) have been encouraged to buy state companies and make them sleek, efficient and profitable. Wealth has thus become ever more concentrated—in Mexico, for example, 25 holding companies now produce 47% of the GNP—and the gap between rich and poor has continued to grow.

The third strategy, “public sector reform,” calls for a reduction in the size of government, cutbacks an public expenditures, and the development of a technocratic, “deideologized” state. While neoliberals can convincingly point to examples of bloated, corrupt and autocratic governments in Latin America, the state can be—and has frequently been—a repository of rights, benefits and social protection for large numbers of the working population. State cutbacks mean that rights that have been won through decades of political dialogue and struggle—the right to organize, for example, or the fight to the public maintenance of water and sewage lines—have become increasingly precarious.

The IDB's fourth strategy is “human-resource development.” There is an obvious recognition here that the market cannot by itself create the best conditions for its own development. The productive abilities of the population must be nurtured in the same way that roads and airports must be built. States that have taken on this responsibility-—Costa Rica, for example—have relatively productive economies, and are well-positioned to insert themselves into the world economy.

Included in this strategy is the understanding that capital accumulation does not take place in a vacuum; that a population's basic needs and expectations must be satisfied for a social order to thrive, or simply to hold together. The political dangers here are explicitly recognized in the IDB's 1991 Report: "A further deterioration of the already highly uneven income distribution in most of the countries in the region could effectively block recovery by creating political and social unrest, reducing private inflows and turning domestic saving outward again." Human resource development is a real test of—one is tempted to say contradiction in—the model. How does a government develop human resources, take care of the basic needs of the poor, and still privatize, deregulate and cutback?

This report examines the effects of the neoliberal agenda in three countries—Chile, Costa Rica and Mexico. While the majority of governments throughout the region have adopted neoliberal policies over the last few years, these three countries have experienced the effects of those policies for a period long enough to be studied and evaluated. Chile has been a neoliberal experiment since the military coup of 1973; Costa Rica since the dramatic inflow of strategic U.S. aid began in 1983; and Mexico since the De la Madrid Administration took office in 1984.

In these three countries—all neoliberal “success” stories—macrocconomic, growth has been accompanied by stagnant or declining real wages, an unambiguous growth in poverty, a loss of social benefits, a breakdown of community, and explosive growth of the informal, marginal sector of society. These contradictions, as both German Sanchez Otero and David Ruccio suggest in the following pages, may be so integral to the new agenda that they cannot be overcome without a radical transformation of development strategy. But for now, Vargas Llosa is right: Liberalism is an idea whose time has come in Latin America. It will last—since you can't beat something with nothing—until a credible alternative arises to take its place.


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