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Globalization, a Dangerous Obsession: Latin America in the Post-Washington Consensus Era

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Globalization, a Dangerous Obsession: Latin America in the Post-Washington Consensus Era
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  4INTERNATIONAL JOURNAL OF POLITICAL ECONOMY 4  Int’l. Journal of Political Economy, vol. 32, no. 4, Winter 2002–3, pp. 4–21.© 2004 M.E. Sharpe, Inc. All rights reserved.ISSN 0891–1916 / 2004 $9.50 + 0.00. A LCINO F. C ÂMARA N ETO   AND M ATIAS V ERNENGO Globalization, a DangerousObsession Latin America in the Post-WashingtonConsensus Era In the late 1980s, John Williamson summarized the views of themainstream of the profession and the policy makers in Washing-ton, DC (the U.S. Treasury, the International Monetary Fund [IMF],and the World Bank) regarding proper policies for Latin Americancountries. Williamson’s decalogue became famous, or shall wesay infamous, as the Washington Consensus. Fifteen years havepassed, and hardly anyone, including Williamson himself, woulddisagree that the Washington Consensus was a failure.The Consensus was broadly for liberalization, deregulation, andprivatization, that is, for a reduced role of the state and, in thewords of the World Bank (1991), a market-friendly approach todevelopment. 1 These reforms would integrate Latin America intothe World economy and allow for high rates of growth. In fact, the Alcino F. Câmara Neto is Dean, Law and Economics Sciences Center, Fed-eral University of Rio de Janeiro, Brazil. Matias Vernengo is Assistant Professorof Economics, University of Utah, Salt Lake City, UT, U.S.A. The authors wouldlike to thank the participants of the “Reforming the Reforms” workshops in Riode Janeiro for their willingness to discuss with us the topic of this paper, and toFinanciadora de Estudos e Projetos (FINEP), the C.S. Mott Foundation, and theOpen Society Institute for financial support. We are responsible for all remainingerrors.  WINTER 2002–35 World Bank interpreted the Asian experience as being one thatwas successful for following the market-friendly approachdevelopment strategy (World Bank 1993). However, the 1990s werea second “lost decade” in terms of growth for Latin America, inparticular, the second half, as noted by Ocampo (2002). Financialcrises—Mexico in 1994, Brazil in 1999, and Argentina in 2001—plagued the region, and social indicators worsened considerably.This paper provides an overview of the main consequences of the adoption of the consensus policies in Latin America and offerssome alternatives for the post-Washington-Consensus period. 2 Thefollowing section shows that the liberal policies of the WashingtonConsensus resulted from the debt crisis. It is argued that the debtcrisis was not caused by the previous development strategy, andthe Washington Consensus did not solve the external vulnerability,which makes debt crises possible, of Latin American economies.The following section describes the main tenets of the so-calledpost-Washington-Consensus era. We contend that the view thatfailure of the Consensus was caused by lack of strict adherence toits rules and that some of the Consensus ideas remain sound, asdefended by Naim (2002) and Krueger (2003), is incorrect. Theemphasis placed by the authors of the post-Washington-Consensusliterature on market imperfections, transaction costs, andinstitutions is also criticized. The final section concludes by arguingthat an international environment geared toward promoting stabilityrather than free movement of goods and services would be moreconducive to development in the periphery, including in LatinAmerica. Foreign Savings and Financial Fragility Crises are usually catalysts for change, and debt crises are no dif-ferent. The widespread debt crisis in what used to be called theThird World, in particular, in Latin America, in the 1980s corre-sponds to a period of transition in the cycles of state intervention.In Latin America, the reinvigorated role of the state after the de-pression of the 1930s took the form of an import substitution de-velopment strategy. The Latin American debt crisis is the landmark  6INTERNATIONAL JOURNAL OF POLITICAL ECONOMY  that divides the import substitution industrialization (ISI) strat-egy, devised under the intellectual guidance of the EconomicCommission for Latin America and the Caribbean (ECLAC),and the market-friendly approach, institutionalized by the IMFand the World Bank (International Bank for Reconstruction andDevelopment [IBRD]).The debt crisis of the 1980s was the last of a series and was partof a long-standing pattern of cyclical lending flows to developingcountries. Table 1 shows the evolution of debt indicators for allLatin American countries during the last debt cycle.Table 1 shows that the ratio of total foreign debt to gross nationalproduct (GNP) increased from slightly more than 20 percent to 39percent. In terms of the amount of foreign resources that developingcountries are able to raise through exports, the burden of debtpeaked in the 1990s at 254.5 percent, and in 2000, it wasapproximately 172.6 percent. In 2000, debt service consumed 35.7percent of exports, approximately the same amount as in 1980.The share of short-term debt was, in 2000, close to 16 percent of total debt. We concentrate now on the causes of this last debt cycleand its consequences on development strategies, particularly inregard to the Latin American experience.In the early 1980s, several commentators presumed that theeffects of the debt crisis would be temporary, and growth wouldresume, because the traditional solutions, adjustment and finance,would be effective in surmounting what was seen as a short-lived Table 1 Latin American Debt Indicators (US$ billions) 1970 1980 1990 2000Total debt (TD) — 257.3 475.4 809.1TD/gross nationalproduct (GNP) 20.3 34.4 44.6 38.5TD/exports — 201.0 254.5 172.6Debt service/exports — 36.2 24.4 35.7Short term/TD 14.7 26.7 16.3 15.6 Source: World Bank 2003a.  WINTER 2002–37  balance-of-payments crisis. There is a fundamental differencebetween crises where a country’s underlying debt position issustainable over the long run and crises where debt restructuringis unavoidable. Many thought that the crisis unleashed by theMexican default of August 1982 was of the former type.The crisis, however, was more lasting and acute than expected,and, in fact, the 1980s became known in Latin America as the“lost decade.” By the mid-1980s, most analysts were certain thatthe crisis was going to be long lived (Diaz-Alejandro 1985), andsome argued that a radical change in the development strategywas necessary. The policies that were suggested—and then imposedin the context of international agreements—and that eventuallybecame known as the Washington Consensus (Williamson 1990),are, therefore, the result of the need for a new development strategy.In many respects, the crisis of the developmental state and thedebt crisis represent for Latin America what the so-called fiscalcrisis of the state does for the developed world. In that respect, themarket-friendly approach to development is the other face of theconservative revolutions of Ronald Reagan and Margaret Thatcherin the developed world.Capital flows to the developing world in the last financing cycle,in particular, to Latin America, started before the 1970s. Foreigndirect investment (FDI) flows in the 1950s and official aid flowsin the 1960s (linked to the Alliance for Progress) preceded theprivate capital flows of the 1970s that took the form of bank loans.Conventional wisdom presupposes that from World War II to thedebt crisis, during the ISI period, economic policies were focusedon domestic markets, and an antiexport bias was developed(Edwards 1995). The ISI strategy was characterized by high levelsof import tariffs and a relatively high dispersion of the tariff structure protecting domestic production, an overvalued exchangerate discriminating against the exports of primary goods andfavoring the imports of intermediate and capital goods. The rate of growth was, as a result, highly dependent on the expansion of domestic demand. Conventional wisdom presumes that governmentspending crowded out private investment, and that protectionismmeant that inefficiencies abounded.  8INTERNATIONAL JOURNAL OF POLITICAL ECONOMY  In this view, the results were the accumulation of trade and fiscaldeficits and the piling up of debt. In addition, the investment effortwas beyond the fiscal capacity of the state. Foreign savingsprovided the necessary finance for the development strategy, butthen, when the unsustainability became clear, capital flows driedup, and the debt crisis ensued. In addition, the response to the oilshock is seen as an important cause of the debt crisis.For most non-oil-exporter countries in the Third World, the oilshocks meant increasing trade deficits. There are basically twosolutions to the problem. If the deficits are deemed temporary,one may finance the short-lived balance-of-payments disequilibria.On the other hand, if deficits are seen as long lived, thenadjustment—depreciation and lower rates of growth—is neededto restrain the deficit from ballooning.The other consequence of the oil shocks of the 1970s was thecreation of large trade surpluses for the countries in theOrganization of Petroleum Exporting Countries (OPEC). Thesedollar surpluses were deposited in the euro-dollar market, providinga huge amount of liquidity to a deregulated market. Interest ratesbecame negative, and, as a result, the finance option became farmore attractive than the adjustment option for developing countries.Further, international financial markets forcefully tried to pushloans to developing countries (Darity and Horn 1988). In this view,therefore, countries continued to pursue ISI development strategiesand were able to do so because of favorable conditions ininternational financial markets. However, negative terms of tradeshock and an additional interest rate shock made the strategyunsustainable. The Mexican default of August 12, 1982, was, then,the result of a misguided development strategy, and the ultimatesolution depended on adopting a new one.The problem with conventional wisdom is that the ISI periodcorresponds to a high growth phase for most developing countries,one in which they caught up with the developed world despite thefast growth in the latter. Table 2 shows that during the ISI periodfrom the 1950s to the 1970s, Latin America grew as fast as Asiaand the United States. 3 It is only in the 1980s that Latin Americangrowth performance collapsed. In fact, Dani Rodrik argued that
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