Turning the Tables
Emerging Markets, March 18, 2007
President Bush has recently returned from a seven day, five country trip to Latin America, with which he had hoped to regain some of the influence that the United States has lost in recent years. The political and economic changes taking place in the region are often seen as a cyclical or temporary phenomenon – a swing to the left, or to populist or "anti-American" governments, that will in time reverse itself. The conventional wisdom is that populist governments that stray too far from the "Washington Consensus" will be unable to achieve sustainable growth and development. They will run into high inflation through irresponsible fiscal and monetary policies, or will stifle investment – particularly foreign investment – and therefore productivity growth. According to this view, they will inevitably revert to the set of orthodox economic policy reforms that have been introduced over the last 25 years.
This conventional wisdom is wrong. First, it misses the most important reason for the region's leftward shift: an unprecedented long-term economic growth failure. The prevailing view is that the reforms of the last 25 years – tighter fiscal and monetary policies, more independent central banks, indiscriminate opening to international trade and investment, privatization of public enterprises, and the abandonment of economic development strategies and industrial policies – has been successful in promoting growth. The problem, according to this view, is that many of the poor have been left behind, and inequality has worsened.
In fact, what has happened is that economic growth collapsed. From 1960-1980, the region's per capita GDP grew by 82 percent. This was not extraordinary by developing country standards – during this period South Korea grew twice as fast and Taiwan nearly three times as fast. But it was enough to raise living standards considerably for the majority of Latin Americans. From 1980-2000, per capita GDP grew by only 9 percent. From 2000-2005 it has grown by 4 percent. To find anything comparable to the long-term growth performance of the last 25 years, one has to go back more than a century.
It is difficult to exaggerate the importance of this type of economic failure. A generation and a half of Latin Americans have lost out on any chance to significantly improve their living standards. If Brazil or Mexico had simply continued to grow at the their pre-1980 rate, for example, they would have per capita incomes at European levels today.
In the past three years growth has picked up some, but this has not been enough to blunt the desire of most Latin Americans for change. While the "Washington Consensus" reforms were not all wrong nor completely unsuccessful – for example, hyperinflation or even very high inflation is now a thing of the past – it is clear that something terrible did go wrong. Because that has not been acknowledged by the political classes in these countries, the electorate has gone over their heads and voted for change: in Argentina, Venezuela, Brazil, Ecuador, Uruguay, Bolivia, and Nicaragua. In the last year or so, populist candidates also came close to winning in Costa Rica, Mexico, and Peru.
The second epoch-making change that has been vastly under-reported is the collapse of IMF influence in middle income countries. This is the biggest change in the international financial system since the breakdown of the Bretton Woods system in 1973, and it has enormous economic and political implications. The IMF was overwhelmingly the major avenue by which the US government influenced economic policy in Latin America. This was not so much because of the money that the Fund itself loans, but because of an informal arrangement that established the IMF as a "gatekeeper" or the head of a creditors' cartel. Governments that did not meet IMF conditions could not get most loans from the much larger World Bank, the Inter-American Development Bank, the G-7 governments, and sometimes even the private sector.
This arrangement is no longer operative. Just last week, the IADB made one of its largest infrastructure loans ever ($1.2 billion) to Argentina. Over the last five years the Argentine government has not only defied the IMF in its unprecedented settlement with defaulted foreign creditors, but on basic macro-economic policy issues. It has also criticized the Fund harshly and publicly, and finally paid off the IMF in January 2006. Given these circumstances, it is difficult to imagine a country like Argentina getting a loan of this magnitude from the IADB even a few years ago.
More importantly, the collapse of the IMF's creditors' cartel means that the loss of US influence in Latin America is almost certainly irreversible. Of course this is also a worldwide phenomenon: the IMF has lost its influence in middle-income countries throughout the world. The Asian countries have been accumulating reserves since the end of the East Asian financial crisis. The IMF's intervention in that crisis was widely perceived in the region as a failure, and the accumulated reserves enable these governments to avoid any future borrowing or conditions from the IMF. The Fund itself has seen its portfolio worldwide drastically downsized: from $96 billion as recently as 2004 to just $20 billion today. About half of that $20 billion is owed by Turkey; only about 3% is outstanding in Latin America.
In Latin America, the availability of an alternative source of financing – from the government of Venezuela – has also drastically reduced the power of the IMF and other traditional sources of lending. Venezuela has loaned or committed more than $3 billion to Argentina, and just this week the two countries collaborated on a $1.5 billion joint bond issue that was snapped up by investors. Venezuela has also loaned or committed hundreds of millions of dollars to Bolivia, Nicaragua, Ecuador, and other countries. The IMF's loans in Latin America are a small fraction of Venezuela's. And unlike loans from the IMF and World Bank, Venezuela's lending is without policy conditions.
Latin America's new independence has paid some noticeable economic dividends so far. Although Argentina's acrimonious divorce from the IMF meant that it got no help from the Fund or other multilateral institutions when it was mired in the country's deepest economic crisis (they actually took a net $4 billion, or 4 percent of GDP, out of the country in the worst year of 2002), the country has recovered remarkably on its own. It has grown at an average of 8.6 percent annually for nearly five years, pulling more than 8 million people (in a country of 36 million) across the poverty line. To do this the government employed a number of unorthodox macro-economic policies opposed by the IMF, including having the Central Bank target a stable and competitive exchange rate instead of just inflation.
Bolivia has added about 6.7 percent of GDP to its annual revenue from hydrocarbons since renegotiating its agreements with foreign companies, an enormous amount which would be equivalent to $900 billion in the United States. Venezuela has also greatly increased the government's take of oil production and has greatly increased social spending with these funds, providing greatly expanded access to health care, education, and subsidized food. There will probably be mistakes as well as successes as Latin American governments look for new ways to make capitalism work. But so far the region's increasing independence, which a greater range of economic policy choices, appears to be paying off.
Mark Weisbrot is co-director of the Center for Economic and Policy Research in Washington, DC.