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March 14, 2006

Latin America's Electoral Leftward Shift: The Importance of Economics

Press Breakfast with Mark Weisbrot and Claudio Loser at Old Ebbitt Grill in Washington, DC.

Mark Weisbrot is Co-Director of the Center for Economic and Policy Research in Washington, DC. He received his Ph.D. in economics from the University of Michigan. He is co-author, with Dean Baker, of Social Security: The Phony Crisis (University of Chicago Press, 2000), and has written numerous research papers on economic policy.

Claudio Loser is a Senior Fellow at the Inter-American Dialogue, also in Washington, DC. Prior to working in this position, he worked at the International Monetary Fund (IMF) for 30 years.  At the IMF, from 1994-2002, he was the director of the Western Hemisphere Department.


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WEISBROT: Ok. Thanks. I want to thank everybody for coming, and I won’t introduce CEPR because you all know us but I want to make sure that everybody gets this first chart that I want to look at because this is, I think, the most important fact that we’re going to deal with today. And I hope that Claudio will interrupt me maybe if I say anything in the factual presentation that he doesn’t agree with.

I think we’re going to agree on a lot here because there is something very big that has happened in Latin America over the last 25 years. And it’s interesting because if you read most articles, you know, in Foreign Affairs, in the editorial pages in most newspapers, you don’t get this impression at all.

The version you get, and the typical article that talks about the elections of the last seven years, where you’ve had now six elections where presidents have run against the reforms of the last 25 years, explicitly, what they call “neo-liberalism” in Latin America, and they have won on that basis; in Argentina, Brazil, Venezuela, Ecuador, Uruguay, and most recently Bolivia. And it was very close in Costa Rica as well on some of these issues. But in all these cases you have them explicitly running against these reforms, and in most of the coverage of this, and most of the public, believes that this is because of inequality in Latin America, which is certainly a factor. But inequality has not changed very much over the last 25 years. The region still has the most unequal distribution of wealth—and income, more importantly—in the world.

What’s really happened over the last 25 years is that – the big thing that’s been driving this – is the long-term growth failure.

This is what happened, you don’t even need glasses to see this (Real Per-Capita Growth in Latin America (1960-2005)). You had growth of 82 percent – in income per person – from 1960 to 1980, and only nine percent from 1980 to 2000. For the current decade so far we have just a little over one percent. Now this, I think, is really what’s driving the changes in Latin America. This is an economic failure that is really the worst in about a century.

And maybe I should back up a little and talk about growth, I know that you all understand it here, but I was talking to a journalist recently and I asked why this isn’t in the press more and she said, “a lot of people don’t understand growth. It’s easier for them to understand poverty and inequality and have a concept of that.” And so I think we have to figure out ways—I know it’s not your job to educate the public—but just in terms of reporting, there has to be a way to get people to understand that growth is really what raises people’s living standards over a long period of time.

Most people—most journalists, most editors, most members of Congress and their staff that I talk to—really don’t understand this. They don’t know that this happened, and when it’s shown to them, they don’t really understand the significance of it: that a whole generation-and-a-half, really, has lost out on a chance to raise their living standards. And this is really extremely important.

When we’re looking at growth here we’re just looking at income per person—or output per person, you could measure it either way—and we’re talking about productivity changes for the most part. We’re really ignoring changes in labor force participation, for example. And we’re just looking at, really, the economy becoming more productive. That’s the basis – you know, that’s why the United States today, as compared to 50 years ago, we have 84 percent of the population over 25 who have a high school diploma and it was only 25 percent 50 years ago. And college is now 27 percent versus seven percent. This is because of the growth of the economy and I think people have to understand that.

If you want to do anything about poverty, it’s very hard to do that when the economy doesn’t grow because if the economy grows then you can at least potentially redistribute income by making sure that a disproportionate share of the increased income and wealth goes to the bottom quintile. If the economy doesn’t grow, it means you have to take away from someone else and that is very hard to do without violence. And that’s why this is so important. Ok, I’m sorry to have to be that basic here, but your readers I hope will understand this eventually.

Now let’s back up for just a moment and take a look at some of the reforms of the last 25 years, and you’re all familiar with this, so I’ll just summarize this very quickly. You’ve had greatly reduced restrictions on international trade and financial flows …which you know about. You’ve had tighter fiscal and monetary policies, and  for monetary policy, it’s not just the higher interest rates or tighter credit, but also the Central Bank policy has changed.

There’s been a move towards the independence of the Central Bank, and all these policies of course were supported and advocated by the major multi-lateral lending institutions. And as we’ll see, this is an important change as well. Privatization of state-owned enterprises, you had $178 billion worth in the ‘90’s in Latin America, more than 20 times the value of what was privatized in the former Soviet Union.

Labor market and public pension reforms, privatization of Social Security, for example, in a number of countries. Here’s something that’s a little harder to measure, but if you follow the history over time you can see that states abandoned development strategies. It used to be quite common for countries to have a development policy, the idea being that you want to move from lower value-added areas of production to higher value-added areas. That’s kind of what development is in an economic sense. This was abandoned, the performance requirements, industrial policies, the kind of things that were geared towards doing this.

And, finally—this one’s not as well known but we have papers on this—the increased accumulation of foreign reserve holdings. This has probably knocked about a percentage point off of growth in Latin America over the last 25 years annually, because you don’t get much of a return on reserve holdings, and these have had to increase. This is one of the costs of globalization.

By the way, I want to say right now that two of the words that CEPR never uses to describe these changes are “free market” and “free trade,” because it’s easy to show from an economic standpoint that this was not really what happened. In some cases, barriers to international trade were reduced; in other cases, probably more important ones economically, in the case of intellectual property, for example, barriers were increased.

And the same is true with regard to macro policies, not necessarily a free market versus a state control question. Some of the worst mistakes that we’ll see that were made in Latin America and elsewhere involved fixed exchange rates, for example, in Argentina and Brazil, also in Russia. These were policy changes where the better solution would have been a market solution, a floating exchange rate and the authorities insisted on the fixed exchange rate. There are any number of examples I could give.

Ok let’s go forward too and just take a look at the magnitude of this change (Per-Capita GDP Growth, Latin America). This graph is a little hard to understand but basically each point represents a 25-year period going forward from that point. So that little point you see at the right, 1980, that’s the growth that you had from 1980 to 2005. And every one of those points is 25 years going forward. And so you can see that this is the worst 25-year period in a century.

To get close to it you have to go back to around 1905 or so, so that you get World War I and the Great Depression in the same 25-year period—both huge shocks to Latin America. And that’s how bad it is, just as a historical comparison. So it is a nearly unprecedented economic failure. And I should say, by the way, that using 1980 as the dividing point is not arbitrary. That’s what most economists would do, I think. It’s a business cycle peak for the United States and for the hemisphere and so if we want to make a long-term comparison and have a benchmark, that’s a fair comparison. You also had a serious slowdown in growth in the vast majority of developing countries, and as a result reduced progress in life expectancy, infant and child mortality, and other social indicators, which is just what you would expect in a period of reduced growth.

OK, a couple of cases here. I’m just going to go through these graphs quickly because we don’t have time. Here’s Argentina (Argentina: Real Per-Capita GDP (1998-2005)) Here you can see, my argument here is just that policy mistakes had a huge role in this reduced growth. Argentina is a very clear case—a non-viable convertibility system, bad macro policy, a whole number of mistakes that were made during this period and led to this terrible depression from 1998 to 2002.

And the recovery, I think, also illustrates something, and we talked about this at length at the last press breakfast, some of you were here and so I won’t  go into it in detail, this was with Michael Mussa – the transcript is on our website. But if you look at what Argentina had done to actually recover from this situation, and to achieve nine percent annual growth over the last three years, it was very much a reversal of some of the policies that we described. They’ve intervened heavily in the exchange market, but they abandoned, of course, the convertibility system, but they have tried to maintain a stable and competitive exchange rate and, I think, have been successful at doing that.

They had to default on their debt and drive a very hard bargain with their creditors. It’s very easy to imagine a situation where, if they hadn’t done that, they would not have been able to grow, for example. And there were a number of other policies where they disagreed with the IMF and they turned out to be right. And the Central Bank policy, is another example, where the Central Bank is involved in targeting the exchange rate, and not just inflation targeting as is the orthodoxy today. So that’s an example, I think, of both the failure and the post-failure success where macro-economic policy has clearly made a difference.

Let’s take another one – that’s just Argentina split up by decades (Argentina: Total Growth in Real Per-Capita GDP) – and you can see the difference. Here’s Bolivia, another reason for the electoral and social unrest there, you can see Bolivia is below their per-capita income of 27 years ago (Bolivia, Real Per-Capita GDP) despite 20 years almost continuously, except for eight months, of being under IMF agreements. And, in fact, you can see, again the difference in growth (Bolivia: Total Growth in Real Per-Capita GDP)– and  here you can Bolivia’s structural reforms (Bolivia: Structural Reforms (1985-1999)). And you can see that on this index that was compiled by an economist at the Inter-American Development Bank, Bolivia has been mostly above the rest of Latin America in completing the structural reforms – they have privatized almost everything that wasn’t nailed down, including the Social Security system and their gas and energy production – and they did quite terribly in terms of economic growth.

Here is Brazil. Brazil has grown about a half percent annually over the last 25 years in terms of per-capita income (Brazil: Real Per-Capita GDP). If they had grown at their pre-1980 rate, they would have European living standards today. This is the difference that growth makes over a long period of time.

And Brazil, again, if I can pause to look at the policy for a moment, look at what they have today. You know, they’ve grown by 2.3 percent total, so that’s not per-capita, very slow growth last year, and this is considered good for some reason. I’m not sure why. In the third and fourth quarter last year it was down to 1 and 1.4 percent. Again, total growth, not per-capita, so per-capita would be near zero.

And if you look at some of their policies—17.25 percent interest rates for the overnight rate, imagine that’s going to be very hard to grow with that kind of interest rate, and also a lot of times the interest rate in these countries works through the exchange rate. The exchange rate is also a drag on the economy right now. It’s about 2.14 reals to the dollar, which is very over valued. It’s increased about 49 percent since May of 2004. Prospects do not look good with current macro policies. I would say that this is part of the story of Brazil.

There’s Brazil’s performance in the prior period as to more recently (Brazil: Total Growth in Real Per-Capita GDP). It was one of the faster-growing countries in the world, not as fast as the Asian countries, but fast…a fast-growing country. I just put Costa Rica in there because of their election (Costa Rica: Total Growth in Real Per-Capita GDP), you can see, they’ve also had a big slowdown as well.

These are the countries that have had these elections, where voters have rejected what they call neoliberalism. Let’s take a look at Mexico because that’s another example (Mexico: Real Per-Capita GDP). They would be very close to European living standards also if they had continued their prior growth. They have not had very good growth since NAFTA either. It’s been about a third the rate even though they’ve had a vast increase in foreign investment and trade. The rate of growth of per-capita income is about a third of what it was in the pre-1980 period. So they also have, I think, a policy problem.

Venezuela is probably the most drastic example. Their decline started in the ‘70’s. They had the worst decline from 1970 – 98, a per capita income decline of about 35 percent, and, they’re doing fairly well now. They’ve had now almost three years of political stability and the economy has grown quite rapidly, and I would predict that they will also, like Argentina, continue to grow. People are, of course, pointing to oil prices, but it is not the oil economy that has grown in Venezuela, actually. It of course helps, the revenues help, but they had a decline in the 1970’s in per-capita income despite oil price increases that were bigger and oil prices that were higher in real terms than they are today. So, clearly, oil prices are not the only driving factor.

And I want to point out one other thing which I think Venezuela is a good example of. It’s often seen as one of the more radical changes of government, but in fact the private sector is a larger share of the economy today in Venezuela than it was before Chávez took office, so the reforms there have been gradual, mostly macroeconomic, and of course…well, the other ones have been social, health care – the majority of people now have access to free health care and subsidized food. But, nonetheless, I think it’s important to realize that what these, you know, “left” governments are trying to do is really…even the most rhetorical…they’re trying to make capitalism work. That’s what has not happened for the last 25 years.

And, sure, there may be more radical alternatives in the future, but for the foreseeable future, that’s what I think is happening in these elections and in Latin America right now. So I’ll stop there and give Claudio a chance and then we can come back and talk more, hopefully about what policy changes may have led to this economic failure. Yes?

AUDIENCE: In terms of the ‘80 to 2000 crisis, its very interesting, but I’m thinking: there’s a much longer-term history to poor performance, and maybe that the good performance is the anomaly. You were saying that Argentina could have had European living standards, but Argentina did have European living standards – a hundred years ago. I’m just wondering if there’s something particular about this most recent period, or if the anomaly is actually ‘60 to ‘80.

WEISBROT: Well, there are people who have said that not only about the developing world but the golden era of the Breton Woods system for the developed countries as well, really. They had higher growth than they’ve had since then, although differences not anywhere near as pronounced.

AUDIENCE: …didn’t have the history of failure before in quite the same way.

WEISBROT: That’s right. They were already developed by this period. I don’t think it’s an anomaly …Well, let’s put it this way, I think the most important thing, because I don’t want to cut into Claudio’s time, is that if you have these examples, and you have all these countries that were able to do this, and then you have even faster-growing countries in Asia, and then you have China, which over the last 25 years has multiplied its per-capita income five-fold, I think that those are achievable goals for developing countries, and that the failure is more a consequence of policy mistakes than it is of some deeply rooted cultural, geographical, or other factors that are often invoked.

AUDIENCE: But also would you agree that the policy failures have been going on for a very long time?

WEISBROT: Yeah, …it depends on how far back you go, but, you could argue that if you go back far enough they didn’t have the institutional capacity, right, for development? Some, if you go to other parts of the world, a lot of them were colonies. But, again, we can get into that a little bit more. Go ahead.

LOSER: Ok. I could also make a PowerPoint presentation, but I will try to be more concise and thorough and base my comments on what Mark just said.

Obviously, the facts are the facts, and the numbers that have been presented are the right ones. I also believe that Latin America has had a very poor performance in the last 25 years. Now, let me give a different perspective, with regard to these numbers.

Obviously, Latin America had a very sub-par performance. Now, in terms of economic growth, I would say that taking the 1960-1980 period is really taking a very unusual period for Latin America in the sense that, as has been the case in other countries that started to grow rapidly—I will put the exception here in the case of Argentina and Uruguay—in the ‘60s—was really a process of catching up through a process of import-substitution which was, I would say, effective in a very short term but, in the end, was not a possible model to follow and that’s what was reflected in the ‘80s.

The 1970’s was, for Latin America, a very special period. It was growing above the rate of growth of the rest of the world at the time, but it was based on the oil boom, except for Venezuela which has had a dismal performance in any event. Plus the fact that financial markets opened and Latin America borrowed irresponsibly on the side of the borrowers and lenders did the same irresponsibly on the side of the lenders. And this came to an end in 1981 - 82, when the United States and other major countries had to adjust their policies, which were totally out of control in terms of inflation, and Latin America, which at the time was benefiting from the excesses of the oil period, found itself in a situation with low commodity prices, with no external financing and entered into this serious period which was called the “Lost Decade.”

Now, I would say that Latin America, during the subsequent period has had a very iffy performance, but that there have been major changes and that the 80s and the nineties, in spite of the problems that are given today to the neoliberal label in Latin America has made significant changes. It has become integrated to international trade much more. Of course there is the country that has done very well, which is Chile, which has really followed the principles much better than others, and therefore this is one case which we have to follow, and which has had a performance that has been very good.

Except for the crisis that existed in the financial system because of corruption issues, the Dominican Republic also had a very good performance. Mexico, I would say, which hasn’t had a very wonderful performance, nonetheless has been able to do reasonably well without crisis of any major nature after the 1995 Tequila Crisis. I have to say, I was in charge of the negotiation after the Tequila Crisis. That’s where I lost half of my hair and the rest became gray. And I think that’s a sign of distinction for all of us who have less hair than average.

And I would say that Mexico, afterwards, has been linked to the United States’ economy in a way that when the United States slowed down, and there have been problems of recession in the United States, Mexico did not suffer a recession or a major crisis as it did in the 1970’s, in the early 1980’s, and the late 1980’s.

Having said that, I fully agree that there have been problems of economic policy in many of the countries. That many of the policies have been corrected in recent years. If we look at the economies by their size, Brazil being the largest economy in the continent, Mexico the second by a small difference, and Argentina being the third by a big difference, Brazil has a situation where, although growth has been less than par, I cannot deny that, there has been a stability that has helped in making it, still, a very attractive country for foreign investment, where exports are growing very nicely, and where the economy is suffering from a high interest rate but this is declining. But where you see a continuity that goes beyond politics.

In the case of Mexico, we’ll have to see what happens with the elections. I know that there is in Latin America, a major change in political direction, and I think it is more a crisis not of numbers, per se, but a crisis of expectations. If one looks at the indices—not only GDP, but the Human Development Index that is produced by the United Nations, which includes elements like education, elements of longevity, etc.—Latin America does well. Asia is catching up, but I think that in Latin America, the political issue is one of promises that were far beyond what they should have been and a fundamental frustration with the fact that these promises were not fulfilled because they were impossible to reach. But anyway, in the case of Mexico, I think that the country has integrated better with the rest of the world. It has problems in competing with China, but then every country, not only in this continent but countries in Europe, have to compete with China and India and they don’t do well.

I would say that the Argentine case is the most dramatic, of course, and, being Argentine, I also, having been involved heavily in the IMF during the period of the Argentine crisis, cannot speak in a way that is unsuspected by others. But fundamentally the interesting thing is that there were many mistakes made by the Fund, there were many mistakes made by the Argentines who make use of their, power with the G7 countries to convince them that the IMF staff, who was criticizing them, was not right.

In the end, the Duhalde and Kirchner government, which is the current government of Argentina—did well because in my view, until six to nine months ago, they followed the orthodox economic policies that the staff of the Fund would have pushed, which is a strong fiscal, reasonably good monetary policy and exchange rate that is realistic.

And now I think that the situation is deteriorating because Argentina, in a cyclical or spiral process, is sort of moving back to policies that they were pursuing 50 years ago and I think will be a disaster. It is very important to note that Argentina has grown at Chinese rates in the last three years, but only last year was able to reach back to the level of GDP—not GDP per capita but GDP of 1998—and that they, at the moment, there are serious problems ahead.

There are stories—Bolivia is a dramatic case—of failure of the institutions. There has been arrogance on the part of the policy-makers in the countries and of the international organizations. Bolivia paid in many ways because there was no good dialogue with the stakeholders. But, I would say there are countries that have been doing reasonably well that people don’t talk so much about. A case is that of Peru, another one of Colombia. In the case of Peru, the politics have been separated from the economics, I would say, and in that sense the economy has been doing reasonably well, but again, I think there is an issue of expectations that is affecting the country.

I think that there have been reforms that have worked well. The most serious shortcoming, I would say: one has been some macro-economic mistakes like fixing the rate of exchange for some countries which was very…it was a very trendy approach in the early ‘90’s which had to do not with the IMF, it had to do sort of with the thinking in the major sort of intellectual centers in the world. And this was a big mistake and I think that was a serious problem.

The other one, which I’ve mentioned, and I’ll finish with this, is the fact that the policy makers and their international organizations said “these are the right policies” but did not make an effort, a serious effort, to explain and to convince the rest of the population about the merits. And there is a footnote to this, and that was that there were two areas that were not, strengthened enough. One was the issue of social reform that would have given a stronger base to the process of economic growth, which now is better than it has been. The other one is the fact that the institutions were not developed in the way that they should have, and therefore certain issues – like corruption—were not paid attention to, and therefore created the problems that we have seen. As a result, the reforms that have taken place in Latin America have been blamed for many of the issues that had nothing to do with the reforms per se, but to other reforms that should have taken place that did not take place. That’s where I will end. Thank you.

WEISBROT: You know, I wouldn’t mind just answering a little back and forth. You can, too. On the Argentine case, I want to…you know…

LOSER: We disagree on the interpretation of the Argentine case, I’ve discovered.

(laughter)

WEISBROT: I really have to contest the idea that Argentina has recovered because it followed the Fund’s advice. We have a paper trail on this. We have the most bitter fight ever with the IMF for any middle-income country over the last three years…

LOSER: Fund policies…the type of policies that the Fund supports, the advice…there is an issue there.

WEISBROT: Well, you know, they fought…Argentina defaulted to them actually, temporarily, in September of 2003 over these issues. And even in the most recent negotiations last year, the Fund was telling them they wanted a more liberal exchange rate…you know, less intervention…

LOSER: More flexible…

WEISBROT: Yeah, more flexible exchange rate, so that to me was one of the more important policies for their recovery. The export tax, which they closed most of the fiscal gap when they were first recovering, the Fund was opposed to that. The Fund wanted utility price increases, the government refused to do that. The other…probably the biggest thing of all is the debt. They wanted Argentina to pay off a lot more of its debt. I don’t think it would have had that recovery, this kind of a recovery, if Argentina had done this.

And I think this addresses some of the bigger questions, too, because when people look back and they say, “In the 1980’s, that was partly a result, or that was the Lost Decade because of the overspending of the ‘70’s,” well Argentina overspent, Argentina over-borrowed. They had a hundred billion dollars in debt that they defaulted on. But …after that default, that economy only shrank for three months. And then it started growing. It didn’t take a decade, it didn’t take 20 years, and it didn’t take 25 years. They immediately went to rapid growth that is still sustained right now.

And I guess the other reason why I think that policy changes are really the key here is because, you know, the import-substitution story, for example. OK it’s partly true, it reached a phase where it wasn’t, in some countries, going to contribute to growth as it had in the past. But, these countries were all in different stages of development. There are vast differences, as you all know, between different Latin American countries, and yet they all went down the tubes at the same time, beginning in the ‘80’s. So that tells me that there were policy changes that were involved, that it wasn’t just import-substitution running its course, or one of these other explanations.

And the other thing I would say is that if you set the bar low enough, if you’re going to say that a half percent annual growth in per capita income for Brazil is good, is okay, or satisfactory because the country is stable or Mexico growing at a fraction of its former rate is okay because the country has become integrated in a way that they do not fall into a crisis when the US goes into recession, and by the way, we only had a very mild recession in 2001. We don’t know what would have happened if the United States had a recession like in 1980-82, for example, what would happen to Mexico now that 90 percent of its exports go to the United States. I would predict they would have a serious economic problem. But, again, if your goal is just integration, if your goal is—the policy changes in themselves that we listed—if your goal is simply very slow growth and stagnation, if you’re satisfied with that, then yeah, I guess it’s okay. But I really believe, and I think you will see as countries find alternatives to the reforms of the last 25 years, you will see much higher growth and much bigger increases in people’s living standards.

AUDIENCE: How do you know that in five years’ time we’ll be back here and it will be a better return to liberal policies? I mean, I’m no expert on Latin America, but they’ve a very, very long history of just going—never having any consensus behind policy—going one way and the other, constant metamorphosis (inaudible). And part of the problem is this inability, I don’t know if it’s a social or political system, it’s the inability just to separate economics from the politics and have some commitment to said policy and institutions they define. We’re just getting another swing that through history has been in many of these things. I mean, hopefully it’s right, if it’s the logic, fantastic. My bet is we’re back in five years talking about the return to more orthodox policies.

WEISBROT: Well, I think it might take time but I think they will settle on the policies that work. I mean, you give the example of Chile. Well, you know, the first 13 years of that experiment were pretty horrible, from ’73 to ’86 or so. Most of that growth you’re talking about in Chile was late ‘80’s and the ‘90’s. They had to reform those reforms. The ones that came out of the dictatorship didn’t work. And so I don’t think Chile is even as much of the orthodox, neoliberal story, including the capital controls, for example, that it’s often made out to be. So I think you’re going to see a process of experimentation.

I think one of the biggest mistakes that the IMF and the World Bank and these other institutions have made is trying to think that there was a textbook model. I think the… I think the different policies are going to work in different countries. You know, the fixed exchange rates didn’t work as we both agree, but they’ve worked pretty good for China for the last 25 years. That’s because it’s a different set of institutions there. So that’s a very fundamental question that’s, you know, a very basic macro question, what kind of exchange rate regime to have, and even that doesn’t seem to apply in the same way everywhere.

I think you’re going to have a process of countries finding different paths to development. I think Bolivia is going to do much better just because they have more control over their gas reserves. You can see that in the IMF projections, I put it in the paper there, their revenue has increased from gas, it’s going to increase in the future. All this talk about how, you know, investors weren’t going to invest and they were going to lose because of that has turned out to be wrong already, and I think, you know, Venezuela is another case. They had to get control over their oil… even though it was a national oil company the government had no control over it. So they had to actually go through a military coup and an oil strike and almost lose power in order just to get control of the revenues from that oil company. So in countries with natural resources, you’re going to see this is going to be important as well. It will probably be important in Peru. I’ll stop there. Another question?

AUDIENCE: …just wanted to say a quick thing on a technicality: isn’t that a long-term problem, just to swing from one set of policies to another, now is it…

LOSER: I would say that the, sort of, in the long-term perspective, the very long-term perspective, say hundred years, there has been cyclicality. There was a major period through World War I or so, when there was growth. There was an intermediate period where still they were pushing the integration policies through the major depression. Then you had the period of  World War II when Latin America did well because they were really not involved in war. They were selling to both sides of the conflict so they were doing very well. And the fifties again, you have a situation where because the economics, conditions of the world changed they move inwards. You have all the Cepal-Prebish approach to import substitution that worked well for a short time.

Then, I would say, the fifties, sixties, and seventies, was a period which, in fact, had a lot of government intervention, government ownership. And all the problems that were related to a very poor  management base.

I would say then the eighties and nineties, there was a change and now you have, again, a modification. I don’t think that what you are seeing today is going back all the way to the sixties or seventies. Not at all. You have certain lessons that the major countries have learned, and I think the most important ones are that you cannot gain—other than the cyclical conditions—you can not gain from being fiscally loose. And this is something you see in all of Latin America. This is an important change that has occurred and it’s politically neutral, in a way. The political elites understand this.

There is also the notion that one has to fight inflation; that inflation is one of the worst taxes, and I think Venezuela and Argentina have not done well. I think Argentina only now is starting to do the right policies in terms of fighting inflation.

WEISBROT: But they’re using price controls, too.

LOSER: Which…

WEISBROT: Which is quite unorthodox.

LOSER: Which is awful, too. Because they are killing the goose of the golden eggs, and they just for…did the prohibition of exports of…

WEISBROT: Beef.

LOSER: Beef. Not that Argentina is exporting that much meat, but I think these are the signals, like controlling prices on gas, on gasoline, and therefore, on electricity, and therefore for the last ten years Argentina hasn’t had any growth in either reserves of energy or in capacity for electric generation.

All these things are a problem, but I would say that, fundamentally, the countries in Latin America which had inflation rates that were very high are now at world levels, and other countries in the rest of the world, in Asia, are doing the same thing. So these fundamental issues have changed, and I think they have changed in a permanent fashion. So in that sense, I would say—although I always like the notion of, sort of, the cyclical nature, that you have sort of the…you have swings—I would say there’s more of a spiral type of approach in Latin America. You go, you change some things you build on but you go back on some things.

AUDIENCE: Claudio, you said that Argentina’s (inaudible) deteriorating and moving back to policies of fifty years ago would be a disaster. Can you explain that?

LOSER: Yeah. Now, I feel very strongly about this, although the numbers in terms of growth do not justify my opinion for the moment (laughter). And there was a major de-organization in terms of…in terms of agriculture in Argentina, and also in terms of, the areas where they do well, like in energy. The controls that have been placed are—and I’m not talking now about price controls, per se, although I think those are very bad—but the controls that have been placed on the incentives of the private sector to invest in these major sectors because of the taxes on exports, because on the domestic price controls on public utilities are reducing the…are reducing the investment in what I would call the productive sector of the economy.

I have mentioned at another time that the issue is that in Argentina, there is a lot of investment in bricks but not enough in machines. There is a sense that there has to be fiscal discipline, but there is an untied private sector mood in the government, not that the private sector has been beautifully behaved and virginal in its approach, if I may put it that way, far from that. But I believe that there has been a very negative approach. I would say, as an example, Aerolineas Argentinas, which is owned by a Spanish company, and the head of the unions of pilots and technicians, is a member of the cabinet, and he acts sometimes as government, sometimes as  the head or leader of the unions, and is trying to move to a re-nationalization of the company. And that would be OK if it was in the context of, sound economic principles, when in this case it is more a question of trying to re-gain all the benefits that were received by those unions during the government-owned period.

AUDIENCE: Given the IMF’s reduced role in Argentina, what can they do? Is there anything they can do?

LOSER: I think that the IMF made many mistakes and, at the moment, it can provide advice. Sometimes, as Mark said, it’s not the best advice that is given. I think that there is very limited room for the IMF to influence Argentina at the moment.

AUDIENCE: Why?

LOSER: Because the Argentines will not pay any attention. And, from a political point of view, it is perfectly understandable. I understand exactly why this is happening. I think that the IMF, politically, is a liability, also it has not been very credible in many things it did. But I believe that the fundamental issue is that this government, hearing the word IMF is really like a curse.

I think that the issue in Argentina is that internally and from international pressures, etc., that there is…that Argentina gets a sense about the need to have more, sort of, streamlined policy. I won’t call them more orthodox or not, but streamlined policies that seem to work quite well in other places.

WEISBROT: You know, just to respond very briefly on the Argentine question—which we won’t agree about, that’s fine—people have been predicting the demise of this recovery since it started, and I guess I’ll believe it when I see it.

You know, first there was an Indian summer, then there was no investment. Investment has actually grown faster than the economy in this recovery now. Then there were bottlenecks…well, before that it was the problem that you raised, there wasn’t investment in productive capacity. But there has been that as well. And price controls, of course, are a temporary solution. I mean, I wouldn’t advocate those over the long haul, but I think it’s significant that the government, rather than taking the orthodox path of slowing the economy to bring inflation down when inflation is not out of control, it’s just higher than it was, shows a different set of priorities and when Claudio talks about people having learned the lessons of the past, yeah, I don’t think hyper-inflation is a threat anymore, although that was one of the mistakes that the IMF made in Argentina and in Russia, and other places. They thought it was still a threat. That’s why they were pushing tighter monetary policies than the government was willing to accept in the last three years.

So… that is good, the threat of hyper-inflation is gone, but if I had to choose between 12 percent inflation and nine percent real growth, versus half that inflation or a third that inflation, and half the growth, I would take the inflation and so would anybody else who cares about employment, income, or any things that matter to the vast majority of people. And, so, I think this is extremely important. And for the IMF, you know, I think the IMF’s confrontation with Argentina had an enormous historic importance, because it really was the end of the IMF’s influence in middle-income countries.

The beginning of the end began in Asia, when the Asian countries piled up reserves after their terrible experience with the Fund, and they became determined not to ever borrow from the Fund again. And I think what Argentina showed by actually achieving this recovery without any help and with a net drain of resources by the Fund of about four percent of GDP in just 2002 alone out of the country—and by rejecting their advice on the major policy questions that they had to deal with—I think it showed that the Fund was unnecessary and, possibly, even destructive.

And I should say that this development is huge. What this means, is that this was a major instrument of influence by the United States, because the US Treasury is the dominant voice within the Fund, and the Fund, in the past, was the gatekeeper for loans, most loans, from other multi-laterals, including the World Bank and the Inter-American Development Bank, and then sometimes even the private sector. And this creditor’s cartel has now collapsed.

In fact, last week there was further evidence of this as the World Bank decided to loan $3 billion to Argentina in spite of the fact that it has no agreement with the IMF and will not have one in the foreseeable future. So I think this is a major development because it does allow for more policy space for countries that are, as I said, looking for alternatives to…to pursue a more reasonable rate of growth for developing countries and to alleviate poverty.

LOSER: I joined the IMF in 1972 and stayed there for 30 years, and I’m saying this not because I’m going to defend the IMF; there are many things that cannot be defended. In 1973, there was a major crisis inside the IMF, because everybody said the IMF is disappearing. And things happened, like the oil crisis, and the Fund was re-invented, there is nothing magic about it, there is something important about an institution like that. The same happened in the late ‘80’s. Then, December 1, 1994—these are just anecdotes—I took over, I became the director of the Western Hemisphere Department, for whatever mistaken reason that the Fund decided to follow.

And I said at the time: we have to worry because we have to change our emphasis because we have no crisis anymore in Latin America. And we have to look at the things because he have lost influence, blah blah blah. Two weeks later, we had the Tequila Crisis, which resulted in quite a few problems. And then there were all these others.

Unfortunately, I believe that Latin America—not all the countries, but some countries will fall again into some mistakes and that the Fund will become—in a different format—but it will become relevant again. It should be. The role of the Fund is to provide financing only during periods of crisis. The Asians decided to move in a different direction because they were very…they are still absolutely obsessed with the notion that they were…they had to follow the IMF, most countries have that situation. But the only way to go about it is to strengthen their external, their fiscal and reserve position, which is what countries like Chile have done. Brazil, I think, has done it. I just don’t believe that Argentina has done it in a sound way.

AUDIENCE: Claudio, do you think that the absence of IMF lending programs now makes it more or less likely that the countries in Latin America will fall into a crisis?

LOSER: One thing has changed in the last ten years, and that is that the private capital markets do not follow the, the advice of the IMF the way that they used to. But the countries are subject to two judges that are very tough. They are, first, the international financial markets, and second, the voters themselves. I think that the voters, they have moved to the left. But the moment there are mistakes made, the authorities pay a very heavy price and they and therefore, policy corrections will take place with or without the IMF.

AUDIENCE: Do you think that, with Argentina having sort of “bad blood’ on both sides, if Argentina were to get in trouble, would they have a harder time getting a lender? Would they have a harder time going to the Fund? And if they went to the Fund again, would they have a hard time getting a program?

LOSER: I mean, every…all the institutions are formed by individuals and every…and individuals hold grudges. That is, I mean, I don’t think there are institutional reasons for allergies among countries. But I think that it would take some time for the Argentines to go back to the Fund. About the Fund, I would say that the people that have been involved with Argentina now, they may have serious difficulties, but these people eventually will leave, too, in five years’ time. Neither…neither the Deputy Managing Director Anne Krueger or probably my successor within the position that they are now, and these people  will be different and they will say, “OK, we’ll go ahead with that.” If Argentina were to say, “I would like to negotiate with the Fund,” the Fund would say, “Yes, indeed.” Thank you.

 

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