October 5, 2007

Commentary:

Latin America’s Process of Economic and Social Stabilization: A Stagnant Experiment or a Force to be Reckoned With?

By Concetta Kim Martens

Few critics would deny that in 2006 the economy of Latin America and the Caribbean reported growth performance at the highest rate since the 1970s. The present acceleration began in 2004 with a GDP increase of 5.9 percent. The region then continued in its fourth successive year of economic growth, averaging a steady and well-distributed rate of 5 percent. This growth obviously had positive effects on the overall economic situation of the region, but these figures may not necessarily tell the whole story. Some critics blame “neoliberal” structural reforms for the seemingly enduring income inequalities existing throughout Latin America.

Exports and National Debt Reduction

The 2006 external current account surplus, with its 1.75 percent of GPD, was at its highest level in decades. High profits from exports, a range of soaring income from tourism, and sustained capital influx in the form of direct and portfolio investment led to a vigorous surge in total reserves. A common problem for Latin American countries in the past was their inability to repay loans. They had weaker currencies, higher debt costs, faster inflation and punitive interest rates.

Reflective of better times, in 2006 exports grew for the fourth year in a row, reaching a figure of $780 billion. Recently, revenues flowing to most Latin American governments are growing at a faster rate than public spending. Unlike in past decades, high state revenues have not led to uncontrolled government expenditure, and despite old habits, the present phase of growth as well as encouraging export revenues have generated a primary surplus and reduced national debt, to the benefit of much of the region.

According to the IMF, further progress has also been made in debt relief for low-income countries in the region, covering Bolivia, Haiti, Guyana, Honduras and Nicaragua where the Inter-American Development Bank approved full debt relief totaling $4.4 billion in 2007.


Regional Consumption and Demand for Goods

Unlike in preceding years, factors encouraging economic development in the region have not only been export dynamics and rising fuel prices, but also the visible stimulation of domestic demand for investment and consumable goods, which was encouraged by the reduction of interest rates. Latin America’s income per capita has increased for the third year in a row by more than 3 percent. For the first time in many years, no country in the region has registered decreasing income per citizen.

As the 2004 economic growth rate figure of 5.9 percent shows, the situation of Latin American labor markets has improved throughout the current economic boom. Rising employment in Argentina, Brazil, Chile and Mexico has led to the lowest registered level of unemployment since 2002, averaging about 10 percent.

In Brazil, the strengthened job market produced an increase of households with an annual income of $5,900 to $22,000 from 14.5 million to 22.3 million. Income distribution appears to be less unequal and the middle class’ purchasing power is becoming stronger. Sales of new cars, computers and consumer electronics are at record levels. This boost in regional consumption reflects the crucial tempo of economic development in Latin America and mirrors the transformative change in the region’s financial structure.

Economic and Social Achievements in Mexico and Chile

Besides the overall economic progress in the region, especially in Mexico and Chile, financial stability and faster economic growth have resulted in the reduction of some inequalities in wealth distribution. Although the recent class-based riots in downtown Santiago against what the poor perceive as society’s indifference to them, Chile has seen the greatest economic growth in the region since 2003.

Social policies, increasingly implemented by democratic governments in Latin America, are now responding to clamorous demands by lowering the gross total number of those living in poverty. In the case of Mexico, US economic growth has helped to encourage financial development. The number of people earning an income that is insufficient to even feed a family a minimal diet in Mexico fell from 37 percent to 14 percent over the decade through 2006. The fact that the number of Mexicans in the $400-1000 income bracket is rising faster than those in higher income bracket, shows that a “new lower middle-class” may be emerging from poverty, especially in Mexico.

Enduring Rural and Urban Poverty

Poverty trends have been relatively affected by the lack of improvements in the living standards of the poor. The World Resources Institute (WRI) has estimated that there are 360 million people “living at the base of the socio-economic pyramid, defined as living on the purchasing power equivalent of $300 per month or less.” The massive increase in class and national conflicts at a variety of socio-economic points has not been negligibly influenced by the Latin American variant of capitalism. Critics blame the current process of globalization for the region’s limited possibilities for change or the efflorescence of home-grown efforts at improving the responsiveness their economic structure.

The Relationship between Neoliberal Reforms and Poverty

Since the 1980s, Latin American economies have focussed on strengthening the financial stability of markets by means of a specific code of policies that came to be known as the “Washington Consensus”, which is mostly the U.S. government’s version of neoliberalism. Economic neoliberalism promotes privatization of public industries, decreasing governmental social spending and the deregulation of the financial sectors.

Such measures have had little positive significance for underprivileged citizens. Market-opening reforms had surfeited Latin American countries with cheap imports, forcing area farmers to compete in local markets against reduced-priced of overseas goods. Neglecting the importance of improving domestic markets and factoring in the traditionally close economic links with the U.S. has made the region more vulnerable to exogenous factors, demonstrated by the effects of turbulences in the global economy.

Worldwide, economists would agree that generally speaking, neoliberal reforms could be a powerful engine for development. But they would also agree to the fact that whatever its positive impact on improving the situation of the poor is more dependent on political interests and sharp-shooter instincts for a particular cause, rarely resulting social justice.

Free Trade Agreements and Dependency on Washington

Free trade agreements like the North American Free Trade Agreement (NAFTA) were implemented in the last decade in order to “facilitate trade among separate sovereign societies.” Latin America’s increasing economic openness and trade liberalization, followed upon by trade agreements, were implemented alongside a weak institutional development strategy.

Today, Latin America has to face the consequences, such as a dependence on the U.S. economy and the region’s unfair disadvantages within a number of trade agreements.

Obviously, open markets and foreign investments do contain a huge potential for improvement in Latin America’s economy, but the region’s actual history tells another story. An article in an issue of the International Herald Tribune, noted that “unregulated open markets, rapid import liberalization and the absence of essential government regulation and public services is bad for growth, bad for stability and disastrous for poverty reduction.” The barriers of today’s labor markets and the competitiveness of imported goods cause high rates of unemployment, driving millions of people into the already overcrowded and only marginally rewarded members of the informal sector.

Political Change

One of the new characteristics of Latin American politics is the increasing collaboration among the countries of the region, in order to break the dependence on the North and its liegemen among the international lending community.

In 2004, Chávez introduced The Bolivarian Alternative for Latin America (ALBA), a regional trade plan in order “to counter the Bush-favored free trade areas of the Americas, which aims to benefit the poor and the environment.” Latin American scholars have showed that in past elections the electorate has strongly rejected political programs which act in accordance with the Washington-favored neoliberal policies. They voted for leaders who were seriously willing to invest in human and social capital and in pro-poor economic policies, which respect society as opposed to having a dismissive attitude toward it.

This new course, could lead to an improved habitat and to the end of adverse macroeconomic policies. Ironically, neoliberals and their critics all agree with IMF deputy-managing director Murilo Portugal, who in a recent speech, observed that “it is in the sunny days that we should fix the roof of the house.”

Concetta Kim Martens is a Research Associate with The Council on Hemispheric Affairs (www.coha.org).

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