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After the fall of the Soviet Union, several economists affirmed that capitalism has become the only way to achieve economic success. The failing attempts, in the 70’s and the 80’s of command economies to provide and distribute wealth has provided a new incentive to the advocators of capitalism. Free market supporters had declared the triumph of the market and have pushed for an aggressive liberalization of economies as the only solution for all economic problems.
Neoliberalism is a term used infrequently by American economists; however, its relevance in Latin American countries is very significant. In fact, neoliberalism has created a major debate within policymakers across Latin America. Some economists view neoliberalism as the only cure for current economic crisis, others view it as a symptom, while still others view it as a cause (Phillips 1998, xvi). For this reason, the purpose of my research paper is to analyze objectively the results of neoliberalistic policies in Latin American countries, specifically: Argentina, Chile, Mexico, and Peru.
The former countries were selected because they are the closest examples of neoliberalistic policies. Other countries, such as: Bolivia, Venezuela, Brazil, or Costa Rica have pursued --in some way-- neoliberalistic policies. Nevertheless, the selected countries have a more consistent approach towards neoliberalism.
Before analyzing the effects of neoliberalism in Latin America, it is necessary to clarify the meaning of neoliberalism. Therefore, I will describe the concept of neoliberalism and explaining its source, recommendations, and objectives.
Neoliberalism’s success is very difficult to measure because the context of its policies varies from one country to the other. Consequently, to evaluate the performance of neoliberalistic policies in Latin America, I will analyze explicit economic variables of the previously selected countries to contrast their achievements and failures.
Singular economic indicators cannot measure realistically the economic success of a country. It is unfair and unreliable to make a conclusion using only economic variables. For this reason, I will analyze contemporary socio-economic indicators, which will reveal a broader perspective of the economic and social condition of a country.
Finally, based on selected economic literature, I will provide a set of recommendations for the new shift of neoliberalism across Latin America, a new shift that accounts other sectors of the economy previously ignored by traditional neoliberal economics.
As a conclusion, I firmly believe that neoliberalistic policies have achieved certain success in some sectors of Latin American economies, while some areas have been disregarded. Therefore, the underperformance of these areas has increased the social unrest of certain Latin American countries. Nowadays, economists have taken opposite sides regarding the effectiveness of neoliberalism as a policy to achieve sustainable and equitable economic growth. In fact, to find impartial economical analysis of neoliberalism has been a difficult task. For this reason, I firmly believe that my research paper will attempt to give an objective evaluation of neoliberalistic policies and its further recommendations, which will help people to get an unbiased conception of neoliberalism, its effects, and its future.
CONCEPT OF NEOLIBERALISM
Neoliberalism was created within the capitalist system in Europe and North America after the Second World War. It was a theoretic and political reaction against the state and its negative effects on the economy. One of the inspirers of the neoliberal theory was Fredish Hayek, an Austrian economist who wrote "The Slavery Way". This book was the foundation of neoliberal theory followed by economists, such as: Martin Friedman, Karl Popper, Walter Lipman, and Karl Polanyi. Neoliberalism stayed in theory for more than twenty years until it was publicly put on practice as an economic model by Margaret Thatcher in the late 70’s. (Polanyi 1944, 73)
Neoliberal theory can be summarized in four main ideas. First, humans are perceived as individuals, motivated only by their self-interests. Second, self-interest leads to harmony rather than chaos. Third, based on the previous idea, the market is the best expression of the harmony of self-interest. And fourth, because the market is the best expression of self-interest harmony, interference with the market’s natural performance, by government or any other actor, is undesirable. These four ideas build the foundation of neoliberal theory. (Waligorski 1990, 18 - 45)
The lack of an alternative thinking has encouraged the use of neoliberal policies as the only way to achieve sustainable growth. The awful results in Latin America of past practices such as import substitution and state-supported development have emphasized neoliberalism as the only solution to achieve sustainable economic growth.
Evidently, Neoliberalistic policies support Neoliberal theory and are aimed at freeing the market from unnatural distortions. In this framework, the solution for all economic problems is focused on adapting to the natural order of the market.
The best illustration of neoliberalistic policies is the set of policies and recommendations endorsed by the IMF and the World Bank called "The Washington Consensus Reforms". These policies will be discussed in the next section of the research paper.
WASHINGTON CONSENSUS
History of Neoliberalism in Latin America
Several economists identify external agencies such as the International Monetary Fund (IMF) and the World Bank as the main instigators of the neoliberal economic adjustment. In fact, both agencies created a set of policies so-called "Washington Consensus", which were aimed for the macroeconomic stabilization of emerging countries. Although in the early 70’s, Chile developed a set of policies nearly neoliberalistic, the birth of the Washington Consensus was approximately ten years later.
The Washington Consensus was created in the middle of the debt crisis of Latin America in the early 80’s. At that time, Latin American markets were performing poorly because of dysfunctional and ineffective public policies. (Stiglitz a, 1998)
The economical environment of Latin American countries was very hopeless. Budget deficits were incredibly high, and the government spending was not being used for productive investments but for subsidizing inefficient state sectors. These deficits were financed by borrowing heavily from abroad. Meanwhile, after 1980, real interest rates increase in the United States restricted overseas borrowing, forcing many Latin American countries to print money in order to meet its high level of public spending and its foreign debt’s interest payments. (Kolodko 1998)
In this environment, the economic behavior was oriented toward protecting the short-term value of money rather than making productive long-tem investments. This behavior led to an inflationary recession, destroying the Latin American economy and its purchasing power.
In addition, protectionism policies were hindering the development of the private sector. Firms had insufficient incentives to increase their efficiency, maintain international quality standards, or improve their competitiveness.
Consequently, the Washington consensus reforms were assembled to stabilize the economic environment of Latin American countries in turmoil. The IMF proposed conditional financing to Latin American countries only if they apply the reforms to steer their economies toward neoliberalism. The reforms included a set of policies that should be followed as a whole. The conjoint interaction of the policies was very important; therefore, the consensus reforms must be adopted entirely.
Policies:
Macroeconomic Stabilization
Unquestionably, the single most important concern of international financial agencies such as the IMF or the World Bank was the macroeconomic stabilization of Latin American countries. Moreover, these agencies were their major lenders of Latin American economies as well as other industrialized countries such as United States and OPEC nations, which were recycling their petrodollars. For this reason, the most substantial recommendation of the Washington consensus reform was an aggressive macroeconomic stabilization.
Inflation is costly and can provoke economic instability, based on the major premise regarding macroeconomic stability. Hence, the consensus reforms viewed lowering inflation at controllable levels as the single objective of the monetary policy, committing all the countries’ efforts and resources on lowering inflation at any cost. In addition, countries with extremely high inflation rates were encouraged to decrease their inflation using shock measures. (Stiglitz a, 1998)
Role of the State
Under the Washington consensus reforms, the state has a very limited role. In fact, the consensus policies were based on the rejection of the state’s activist role and the promotion of a minimalist, non-interventionist state. The major assumption was that governments are worse performers than markets; therefore, its intervention must be avoided. (Stiglitz d, 1998)
Traditionally, Latin American governments have focused excessively in too many sectors, reducing their efficiency. Moreover, the excessive coverage of the state has inflated government budgets at a point where it was impossible to operate efficiently. Large budget deficits affected the daily operations of crucial sectors of the governments, such as health care and social security.
Under the previous assumption, it was imperative for Latin American governments to decrease their role in the economy. The secondary effect of cutting back the state’s role was the reduction of government expenditures, cutting needless government jobs, reducing the budget deficit. Likewise, the latter assumption encouraged the privatization of state enterprises, deregulation and liberalization of financial market, and other policies that will be described next.
Privatization
Reducing the role of the state involved the end of an era where the government was an administrative entity. Certainly, state monopolies in certain industries have decreased competition. In addition, political intervention has decreased the efficiency of state companies. For example, governments usually withdrew funds from state companies in order to ease their budget deficits, risking the operational performance of state enterprises. Overstaffing, undercapitalization, and other misallocation of resources are clear examples of negative political intervention in public enterprises as well.
One advantage of privatization is that it establishes a market for managers. In other words, it will ensure efficient management of resources—human or capital. Moreover, private enterprises are scrutinized more strictly by the market. In contrast, public companies often operate on a lenient work environment. For instance, public enterprises can borrow capital at less-than-market interest rates, enjoying subsidies and other concessions from the state, which are not enjoyed by the private sector. In addition, private firms are subject to failure, which can end up in either bankruptcy, liquidation, or hostile takeover. When failure is a real threat, managers are forced to take decisive action to avoid it. On the other hand, public companies’ managers do not experience this type of situations, which demand the greatest efforts from managers. In conclusion, the neoliberalistic approach regarding state enterprises advocates their privatization to make them more efficient and at the same time, to decrease their burden in government’s budget. (Nellis, 1998)
Trade Liberalization
Globalization has been one of the major driving forces of the Washington consensus reforms. Neoliberalistic policies were designed in a global context, taking into account the challenges and opportunities of the global financial environment.
Consequently, one of the IMF conditions for future loans was the rejection of protectionism. The consensus reforms required a bold move towards the integration of global economies. They encouraged single market areas, such as Mercosur or the Andean Pact. Trade policies were aimed at reducing tariffs and trade barriers among countries.
Due to the failure of import substitution strategies, the Latin American private sector was forced to improve the competitiveness of its exports in order to be a player of the global market. In conclusion, the assumption was that growth of trade will increase the efficiency of products and the final beneficiary will be the consumer by having access to a wide variety of products with better quality and better prices.
Financial Liberalization and Deregulation
Financial systems play an important role in transferring excess resources across the different sectors of an economy. They can ensure the success of an economy, and in the worst case can foster a financial crisis. For this reason, an important piece of the Washington consensus reforms was to revitalize and relieve the weakened Latin American financial markets of the 80’s.
The former assumption of free market advocates the aggressive liberalization of Latin American financial systems to integrate them in a global financial market. Under this assumption, investors benefit from the global financial market because they can diversify their funds in a larger pool of investment opportunities with no boundaries.
Governments were encouraged to open their capital accounts to attract global investors. Thus, governments deregulated their financial markets and allowed free movement of capital --regardless of its term structure-- to attract foreign investors interested in exploiting arbitrage opportunities across the world. The capital inflow followed by the deregulation of financial market will suppose to bring liquidity and stability to Latin American capital markets. In addition, local companies will have access to foreign financial institutions, taking advantage of services not offered at the local financial market.
Deregulation of Labor Markets
Neoliberalism is based on the neoclassical model; therefore, it assumes that wages are perfectly flexible. For this reason, neoliberalistic policies advocate a more flexible labor market that reacts accordingly to the forces of the free market. Basically, it encourages wage freezes, labor deregulation, and non-unionization.
The neoliberal model believes that heavy labor regulations motivate inefficiency in employees. For example, companies are forced to keep inefficient employees just because the firing costs are more expensive than the hiring and training cost, decreasing their labor productivity.
Traditionally, Latin American labor markets have been very controlled and unionized. Syndicates and unions play an essential role in labor politics. Consequently, the Washington consensus reforms encourages government intervention in order to weaken labor unions so wages will be priced according to the forces of supply and demand.
As a conclusion, the mentioned reforms were highly recommended/required by the IMF and World Bank for countries to be able to receive external financial aid. These policies, following the neoliberal theory, were supposed to stabilize Latin American macroeconomics, foster growth, and minimize the probabilities of a future financial crisis.
EFFECTS OF NEOLIBERALISM IN LATIN AMERICA
The content of the Washington consensus reforms was adopted in different ways by Latin American countries. Therefore, analyzing the effects of neoliberalistic policies in Latin America as a whole would be inadequate. Other countries, such as: Colombia, Brazil, or Venezuela have implemented some of the policies recommended by the Washington consensus; however, I selected the following countries based on the depth, time, and distinction of its neoliberalistic economic policies. These countries will provide contrasting results of neoliberalism as a model for economic progress.
Argentina
Argentina is a very interesting country to analyze. It has experienced special events that other countries have not experienced and its authorities have implemented economic policies that no other country in Latin America has implemented. Therefore, this country requires a careful analysis of its neoliberalistic policies.
In the late 80’s, Argentina experienced one of the highest and longest inflationary periods in the post-war history of economics. Such levels of inflation demanded decisive moves towards macroeconomic stabilization. Moreover, many economists believe that by having such levels of inflation, Argentine people were in favor of shocking measures to stabilize their economy because it was the only way out. When people experience 3,000% of inflation, they are eager to accept shocking monetary policies to decrease inflation at any cost. On the other hand, when countries do not experience these levels of inflation, people are more reluctant to accept higher costs of disinflation.
Certainly, the most peculiar economic policy implemented by Argentine authorities was the program called "Plan de Convertibilidad". The major premise of the program was to peg the Argentine currency with the dollar. To do this, the government made a significant structural adjustment creating a currency board. The board’s singular objective was to maintain a fixed exchange rate, adjusting accordingly Argentine money supply and international reserves. Based on the CPI percentage change showed in Table#1, it is evident that the currency board has been effective decreasing Argentina’s inflation rate.
Furthermore, the Argentine government pursued an aggressive integration into the global market. Argentina’s financial liberalization was very abrupt, attracting a large volume of foreign direct investment in the early 90’s. In fact, from 1991 to 1993, foreign direct investment grew approximately 60% per year. Large state-owned companies, especially utilities, were privatized and the labor market was deregulated enhancing its flexibility. To summarize, these policies followed literally IMF’s recommendations.
Economically, the Washington consensus reforms worked almost precisely in Argentina providing macroeconomic stabilization until the Mexican crisis of 1995 took place. The crisis demonstrated the risks of rapid financial liberalization. The excessive reliance of foreign capital inflows increased Argentina’s exposure to capital surges. When foreign direct investment contracted, the Argentine economy suffered severe effects. To illustrate, GDP growth was -5.8% and foreign debt increase by an amazing 20%. In other words, the perfect model was crumbling down. Argentina’s economy went from a successful economic model to a nearly collapsed country. In less than five years, it experienced heaven and hell.
Besides, the negative social effects of neoliberalism did not take five years to show. In fact, from 1988 to 1996, unemployment rose almost three times and underemployment increased nearly 12%. Privatization, deregulation of labor markets, and budget deficit cuts were the most probable causes. In addition, many benefits enjoyed by retired government employees were cancelled, leaving retired people with no security.
In terms of income distribution, Table #10 shows that the biggest losers from neoliberalism have been the low and middle class, which experienced a substantial decrease of their participation in Argentina’s gross national product. Likewise, Table #11shows that the number of households living under the line of poverty has increased as well.
Evidently, the social effects of the Argentine economic plan have demonstrated the drawbacks of their macroeconomic policies. Nowadays, Argentine economic authorities are focusing more on social issues like their shocking unemployment levels. In conclusion, the Argentine case has demonstrated the apparent virtues and defects of neoliberalism as a model of sustainable economic and social development.
Chile
The depth of neoliberalistic policies varies from one country to another. In the case of Chile, the public has a misconception of the content of their economic policies. Honestly, before doing this research, I thought that Chile was the most neoliberal country in Latin America, when in fact is the least oriented towards the Washington consensus reforms. I will describe three examples that confirm my findings.
First, the state’s role in the economy has been one of the most important recommendations of the Washington consensus reforms. Despite, the role of the Chilean government and its budget has increased throughout the last twenty years of a so-called neoliberalistic regime. Second, the Chilean government has not privatized the copper industry, which provides the largest amounts of tax revenues to the government, regardless of Washington’s privatization suggestions. And third, Chile has not followed the consensus recommendations regarding the deregulation of financial systems. In fact, Chile has certainly the most regulated financial market in Latin America. Nonetheless, it has been the most stable financial market even in times of crisis. To summarize, Chile cannot be considered the most neoliberal country in Latin America because it has not followed literally some of the recommendations endorsed by the Washington consensus.
Like Argentina, Chile experienced many events that changed abruptly the direction of its economic policy. Chile did not begin its neoliberal structural adjustment before the debt crisis, as the rest of Latin America. Since the 70’s, Pinochet’s authoritarian regime facilitated the neoliberal adjustment, which always experiences strong opposition from many sectors of the economy. For example, labor flexibility is very difficult to attain without having problems negotiating with unions and syndicates. Nevertheless, during Pinochet’s regime, labor unions were repressed and labor leaders were even executed. In other words, they did not experience any type of opposition because all the opposition was killed or was mysteriously disappeared (Lear and Collins 1995, 13-17). I will not go further in this issue; however, policymakers and economists must be aware of the repugnant crimes committed in Pinochet’s regime, regardless of its economic success.
The economic restructuring took place under the influence of U.S. trained Chilean economists known as the Chicago Boys for their neoliberal training with Milton Friedman at the University of Chicago. The cornerstones of the Chilean success have been its strong financial market and its competitive exports. Chilean policymakers were successful recognizing the strengths and weaknesses of the Washington consensus reforms. They adapted these reforms to the Chilean environment.
Based on the analysis of selected economic variables, Chile has been the most successful country in Latin America, not only economically but also socially. Table #3 shows that in the last nine years, Chile has reduced its unemployment approximately 36%, while maintaining a solid GDP growth of approximately 8%. Furthermore, it has maintained a stable single-digit inflation rate while decreasing its foreign debt. In terms of income distribution, Chile has not achieved great success; however, they have been less incompetent than the rest of Latin America. In other words, Chile has developed its economy without hurting badly its income distribution as opposed to Argentina.
I firmly believe that the major reason of Chile’s success has been the implementation of tailored policies. Chilean authorities have identified the opportunities of neoliberalism without ignoring its threats. For instance, strengthening its financial system with gradual financial liberalization has ensured its stability regardless of external financial shocks. Finally, they recognized that the state is not the enemy of the private sector but a regulating entity that must set the preconditions for the well performance of a free-market economy.
Mexico
Mexico’s neoliberal structural adjustment began under the administration of Miguel de la Madrid and later emphasized by Carlos Salinas. After the debt crisis of 1982, international financial agencies demanded several policies from Mexican authorities in order to provide bailout loans. However, the biggest move towards neoliberalism came with Salinas’ regime even tough he rejected that term. He preferred to define his political philosophy as "liberalismo social", meaning social liberalism. (Beaucage 1998, 3-4)
His economic policies were focused on the modernization of Mexico, including the state government and the private sector. Trade liberalization was also a big issue under Salinas’ term. He pushed the development of the North American Free Trade Agreement, a bold move towards the economic integration of Mexico to the global market.
Furthermore, hundreds of state industries and agencies were privatized. As a result, federal budgets were reduced due to the decrease of government employment. Pursuing labor flexibility, the government got rid of any distortions in the labor market to find labor’s real market value.
The Mexican model was considered a huge success until the crisis of 1995. Just like the Argentine economy, Mexico experienced high levels of GDP growth until the financial crisis of 1995 took off. The results in Table #4 demonstrate a sudden decrease of GDP and an increase of unemployment. In addition, direct investment decreased 13.2% due to an abrupt capital outflow and foreign debt increased by an enormously 74%.
Like Argentina, Mexico has not been successful distributing its wealth and building its human capital. The participation in Mexican’s income of the middle and low class has decreased significantly.
The most appropriate explanation for the Mexican financial crisis was Mexico’s mediocre macroeconomic management, specially regarding its monetary policy. The Mexican currency was excessively pegged with the American dollar, particularly in times were the slow down in capital flows was evident. Mexico’s excessive short-term capital flow was inconsistent with the long-term investments made in Mexico.
Another reason for the Mexican crisis was its political instability. Notorious political scandals involving high-rank government officials --such as the ex-president-- decreased the level of confidence in Mexico. Creditors had to reassess country’s ability to pay its outstanding debt. Consequently, the decline in foreign exchange reserves causing financial panic plus the political instability pushed the Mexican financial system into a terrible crisis.
The direct impact of the stabilization policies determined by the Mexican government affected first the public sector. Although, the broader structural adjustment package --with its openness to global competition-- squeezed small and medium inefficient Mexican firms.
Moreover, the negative effect of neoliberalism increased the social unrest in Mexico. The Chiapas insurrection is a clear example of the potential threat of social revolts due to the hopeless social and economic situation in Mexico. (Gledhill 1995, 6-9)
Due to the increased trade, Mexico has become an essential partner for American interests. Therefore, international financial organizations have focused on assisting the Mexican economy. Many economists argue that excessive bailout loans in Mexico have increased the moral hazard and at the same time, have increased the potential risks for future financial crisis. In conclusion, the Mexican economic model, which followed literally the Washington consensus recommendations since the early 80’s, has been incapable of achieving sustainable economic progress and raising Mexican living standards.
Peru
Peru began its neoliberal structural adjustment in 1991. Its president, Alberto Fujimori implemented economic policies pursuing the macroeconomic stabilization of Peru, following the same Mexican and Argentine procedure.
Like Chile, Peru did not experienced strong opposition for the implementation of its neoliberal policies because its president --backed by the Military-- dissolved the Peruvian congress. Therefore, the government did not have to negotiate with the opposition to implement its new policies. Even though nobody was killed, many laws were broken. As a matter of fact, Fujimori became a relatively authoritarian president.
Like Argentina, Peru experienced high levels of inflation that encouraged their economic authorities to pursue an energetic macroeconomic stabilization. Following the Washington consensus reforms, Peru lowered its inflation from 7,596% in 1990 to 8.6% in 1997. In addition, the GDP growth rate and foreign direct investment has increased significantly through the last six years (See Table # 8).
Peru privatized several state industries and its most aggressive move was the privatization of its oil industry. Privatization generated a large flow of revenues that were invested in improving Peru’s infrastructure and at the same time, in reducing Peru’s government budget.
Peru’s macroeconomic stabilization attracted foreign investors. Low inflation resulted in low interest rate, which promoted investment and opened new business opportunities in a country with rich natural resources.
Peru’s foreign debt increase of approximately 28% in the last eight years might revel that Peru has incurred in debt to recover its weakened financial system. Such an increase in foreign debt can jeopardize its long-term economic progress.
Peru has also experienced the same socially negative results experienced by the countries that implemented neoliberal policies. In fact, unemployment rose from 7.1% to 9.1%, following the same pattern occurred in Argentina and Mexico. Furthermore, regardless of Peru’s relative economic success, the number of households living under the poverty line has increased. Today, nearly 50% of the Peruvian population lives in poverty. In conclusion, Peru has indeed stabilized its macroeconomic environment; however, it is miles away from a sustainable economic and social progress.
NEOLIBERAL CRITIQUE
The objective of the Washington consensus reforms was to provide a set of guidelines for Latin American countries in order to stimulate their economic growth. Certainly, the economic conditions of Latin American countries at that time was terrible; therefore, they needed courageous moves towards their stabilization. Based on the results of the selected countries, I firmly believe that even though the reforms provided some of the required foundations for efficient markets, the reforms were incomplete. They were based entirely in the desire of avoiding the worst possible economic disaster and did not ensure a sustainable economic and social development.
The recent financial crises in Latin America and East Asia revealed that macroeconomic stabilization is not enough for real economic progress. Joseph Stiglitz, chief economist of the World Bank affirms that "Without a robust financial system – which the government plays a huge role in creating and maintaining it – it is difficult to mobilize savings or allocate capital efficiently."(Stiglitz a, 1998). If the country do not set the required preconditions for efficient markets, liberal policies will mislead the economy. Otherwise, speculation will hinder the benefits of financial and trade liberalization.
Swift actions and deregulatory efforts to attract foreign investment have increased the reliance of Latin American countries to capital flows. Their excessive reliance on foreign capital has increased their risk exposure to contagion effects. In addition, government’s effort to maintain overvalued exchange rates had depleted the countries’ international reserves, leading to a late depreciation and loss of investor’s confidence.
The neoliberal theory is focused on the operation of efficient markets; however, there are few explanations of the institutional requirements necessary to the creation of such markets. Neoliberal supporters have taken for granted the existence of perfect markets that will provide low-cost and transparent transacting. Douglass North, the author of Institutional Economics believes that "efficient markets are a consequence of institutions that provide the low-cost measurement and enforcement of contracts. . . .efficient institutions must provide incentives for the acquisition of knowledge and learning, induce innovation, and encourage risk taking and creative activity" (North 1997). Thus, I firmly believe The Washington consensus reforms have failed addressing the previously mentioned issues.
In the case of the privatization efforts of Latin American economies, the results show that it has decreased the state’s budget. However, stand-alone privatization will not ensure better services. Private monopolies have the same defects as state monopolies. Furthermore, some privatization bids have not been totally transparent or truthful and only selected economic groups have reaped the benefits of it.
Neoliberalistic policies have led to a greater concentration of wealth. Only a small percentage of the wealthiest people in Latin America has maintained their income level. Without a doubt, neoliberalism has been unable of achieving and equitable distribution of wealth among the Latin American population. In fact, the people living under the line of poverty has increased throughout all the years of Washington consensus reforms.
Moreover, current financial crises have exposed the clear mistakes of international financial organizations in leading emerging countries to economic progress. Lately, many economists have severely criticized the IMF’s function as an international lender of last resort, especially Jeffrey Sachs, who believe that IMF’s recommendation have been negligible in many cases. (Sachs 1997)
In conclusion, the Washington consensus reforms indeed helped Latin American economies to somehow stabilize their economies. However, they have failed in maintaining a solid and consistent economic and social progress. Therefore, policymakers must revise their former policies to create a more "gentler and kinder" Washington consensus.
CONCLUDING RECOMMENDATIONS: Post Neoliberalistic Reforms
After reviewing the results of the Washington consensus reforms in the selected countries, I believe that next step for policy makers will be to redesign their whole economic approach to revise previous misjudgments. The following recommendations, summarized from diverse economic literature, will attempt to refine the consensus reforms to a more practical economic approach.
New Role of the State
The government plays a vital role in achieving sustainable development but I also believe that the wrong kind of government intervention can be extremely detrimental. Policymakers must focus not in the size of government’s budget or personnel but in the scope and effectiveness of government activities.
Joseph Stiglitz described several propositions for the new role of the state in developing economies. First, the government should limit its intervention in areas where there is a significant influence of special interests. For example, the government intervention in the Latin American agriculture industry has been designed to help cartel-like industries. Second, Stiglitz believes that the government should take strong action to promote competition. Third, he states that greater openness and no secrecy within the government will reduce the influence of special interests and will improve the governments’ performance. (Stiglitz d, 1998)
In conclusion, I believe that the neoliberal assumption underlying the role of the state is inaccurate. The state plays an essential role in appropriate regulation, social protection, and welfare. Policymakers should not be concerned of the size of the government but the activities and methods of the governments. Economic policies are not enough, the quality of countries’ institutions that determine the environment within which markets operate should be a major concern. In addition, several market failures like externalities, public goods, and imperfect information demand the intervention from the government to secure economic progress.
Sound Financial Regulation
A healthy financial system is a primary requisite for economic progress; however, Washington consensus reforms have failed in strengthening it. Evidence shows that rapid capital account liberalization has increased the risk exposure of emerging economies. Joseph Stiglitz stated in a recent speech that "Unlike foreign direct investment, short-term capital does not bring with it ancillary benefits. Some short-term capital, especially trade credits, is essential for the economy to run. But when the saving rate is already high, and when the marginal investment is being misallocated, the main effect of additional short-term capital flows is to increase the vulnerability of the economy". (Stiglitz b, 1998)
Consequently, I firmly believe that government should eliminate any policy distortions that may have stimulated short-term capital flows. In addition, prudential regulations to limit the currency exposure of financial institutions will be essential to achieve financial stability. A clear example of this type of regulation is the Chilean reserve requirement on all short-term capital inflows. (Corbo 1998)
Currency risk has been a serious problem for Latin American economies. The problem resides in a lack of national credibility. Economists believe that overvalued currencies become a burden to the state and its well being; therefore, they should be allowed to float freely in order to reflect the true perspectives of the market.
However, floating approaches have also failed in Mexico and Latin America because of the lack of credibility of Latin American countries. Unlike in Sweden or England in 1992, Mexico’s effort to float their currency was detrimental even though Mexico has the least negative reputation among Latin American countries. (Krugman 1998). Consequently, to reap the benefits of a floating currency, the government should first reestablish the country’s reputation and trustworthiness among the global financial industry.
Broader Goals
One of the biggest failures of the Washington consensus reforms has been the narrow scope of their economic policies. Its only objective has been economic growth reflected solely in terms of GDP growth. The "Post-Washington Consensus", as Joseph Stiglitz describes, has a broader set of instruments for broader goals. Economic growth should not be expressed exclusively in terms of GDP growth but in terms of sustainable economic and social equitable development and maintaining a healthy environment.
Human capital is the biggest resource of a country and it helps promoting economic development in the long-term. The biggest success of East Asian economies has been their human capital development, which led to a more egalitarian society. In other words, human capital development will improve income distribution. I firmly believe that these economies will be able to recover from a crisis faster than any Latin American country due to its qualified manpower. Furthermore, skilled labor will adapt rapidly to technical development in the market, attracting foreign direct investment. Therefore, the Post-Washington consensus reforms should involve a deeper focus on fostering education.
Another primary objective of Latin American economic policies should concern corruption. Without a doubt, corruption is the leading cause of economic and political instability in Latin America. International financial organizations such as IMF or the World Banks should demand more transparency and accountability from emerging economies before offering a rescue plan.
Social variables have demonstrated that the only country that has performed consistently throughout the years of neoliberalistic policies has been Chile. And after Chile’s analysis I believe that it is the least oriented towards the Washington consensus reforms. Thus, Chile’s success can lead to conclude that tailored economic policies considering the unique background of Latin American economies may be more successful than Washington consensus reforms.
In conclusion, policymakers must learn from previous misjudgments to avoid future mistakes regarding economic policy. I agree that Latin American countries had to take decisive action to recover from the debt crisis of the 80’s. Countries did stabilize their macroeconomic environment but the policies did not ensure long-term economic progress and did not address the most important goal of any economy: the well-being of its society.
Check Tables (Excel File)