The Destructive Legacy of US Economic Statecraft in Latin America and the Caribbean

March 25, 2020

NACLA Report on the Americas, Volume 52, 2020 – Issue 1

See article on original site

In Latin America and the Caribbean, 2019 was a year of protest. During 12 turbulent months, major demonstrations rocked Argentina, Bolivia, Chile, Colombia, Ecuador, Haiti, Honduras, Paraguay, Puerto Rico, and Venezuela.

Several of the region’s governments claimed that Venezuelan and Cuban agents were behind many protests. These assertions—which were never confirmed by any sort of evidence—were echoed by Trump administration officials like Elliott Abrams as well as by Luis Almagro, the secretary general of the Organization of American States, who blamed sinister “Bolivarian breezes” for the regional upheaval.

Cooler-headed observers identified a more plausible culprit: the economy. Every country swept by protests—with the notable exception of Bolivia—was plagued by some combination of economic ills, including entrenched inequality, a downturn in growth, spiraling inflation, increased poverty, and price hikes that negatively affected middle-class and low-income families. Debate, however, continues over what spawned these economic problems; while some point to the fall in commodities prices, others highlight the policy errors of governments.

Largely absent from these debates is any discussion of the potential role played by the geopolitical and economic superpower to the north. At most, pundits portray the U.S. government as too economically disengaged in the region and criticize it for failing to block China’s alleged hegemonic economic aspirations in Latin America. “With so little opposition from the United States, China’s Belt and Road Initiative will naturally and easily extend to Latin America,” wrote an alarmed analyst in the Diplomat. In reality, U.S. economic statecraft is alive and well in the region, and helped foment the dire conditions that sparked the recent wave of uprisings.

Today as in the past, the U.S. government influences the economic and political trajectories of Latin American and Caribbean countries through sanctions, control of international financial institutions, trade policy, and aid programs. These varied tools of economic statecraft are all, according to official discourse, deployed with the objective of improving the lives of Latin Americans. Yet, they have made life harder for the majority of Latin Americans, and contributed to the region’s failure to achieve inclusive growth. As U.S. progressives debate what a progressive foreign policy would look like, they would do well to set their sights on U.S. economic interventionism in the region.

***

Economic statecraft consists in using economic and financial means to achieve foreign policy goals. It is most frequently associated with sanctions, a tool much of the Washington establishment sees as a legitimate and effective way to pressure “deviant” governments. In recent years, the U.S. government has implemented punishing sanctions against three Latin America and Caribbean countries: Cuba, Venezuela, and Nicaragua. In all three cases, the official purpose of the sanctions is to advance human rights and liberal democracy and to weaken—and ultimately topple—the governments of a so-called Latin American “troika of tyranny,” in former national security advisor John Bolton’s words. However, in all three instances, sanctions have ended up violating the human rights of ordinary citizens while failing—so far—to produce the political change advocated by the U.S. administration.

In Cuba, the U.S. government has maintained a near-total trade embargo since 1962. Though it is difficult to assess the economic damages, the United Nations has estimated that the embargo has cost Cuba about $130 billion in lost revenue. Until the late 1980s, the Soviet Union helped Cuba survive by purchasing much of the island’s sugar exports at higher-than-market rates. Since the Soviet collapse, Cuba’s economic situation has been dire, with national production in decline and growth rates consistently low. The embargo has also negatively affected Cuba’s healthcare system by blocking imports of life-saving drugs and medical equipment patented in the United States.

The economic sanctions targeting Venezuela, though much more recent, have arguably had a more dramatic impact, in part because the country was already in the midst of a major economic crisis. Venezuelan economist Francisco Rodríguez has demonstrated that a first set of financial sanctions in 2017 contributed to a sharp reduction in oil production—the country’s main source of revenue—which led to an estimated income loss of nearly $15 billion and prevented the economy from recovering. Subsequent measures, which include January 2019 sanctions on oil exports to the United States, have provoked an additional loss in income of at least $7.5 billion.

These sanctions have had an enormous human cost. An April 2019 study by economists Mark Weisbrot and Jeffrey Sachs estimates that the reduced access to essential imports of food and medicine—caused by the sharp decrease in foreign currency inflows resulting from financial and economic sanctions—has resulted in at least 40,000 deaths. The number has no doubt significantly increased since.

In Nicaragua, U.S sanctions introduced in late 2018 mostly received attention for targeting the assets of individuals allegedly involved in human rights violations or acts of corruption; their real bite, however, lies in provisions that instruct U.S. Treasury officials to block loans to Nicaragua from the World Bank, Inter-American Development Bank (IDB), International Monetary Fund (IMF), and other international financial institutions. For Nicaragua, these sanctions came at the worst time. Following a nation-wide protest movement and subsequent violent clashes beginning in April 2018, the economy contracted by 3.8 percent. Though the country has recently stabilized, in part due to state-led repression, experts expect the economy to shrink an additional 5 percent in 2019. This crippling downturn is directly linked to a sharp decline in foreign investment fueled by U.S. sanctions.

Aside from human suffering, particularly within the most vulnerable low-income communities in these three countries, what have any of these sanctions achieved? Certainly not the sort of political change the U.S. government advocates. Cuba has experienced the longest trade embargo in history, but its Communist Party remains firmly in control. In Venezuela, sanctions were intended to spur the removal of President Nicolás Maduro, but his hold on power appears stronger than ever. Meanwhile, in Nicaragua, there’s no sign that President Daniel Ortega is going anywhere. Why, then, do sanctions continue to be an important part of the U.S. foreign policy arsenal?

One clear motivating factor is Florida politics. Florida remains a key swing state in presidential elections, and both the Republican and Democratic Florida political machines rely on the votes and donations of right-wing activists from the Cuban-American and, increasingly, Venezuelan-American communities. Within these groups, sanctions against Cuba, Venezuela, and Nicaragua are quite popular.

But Florida is only part of the explanation. Economic sanctions also serve as a warning to governments that deviate from the U.S. political and economic agenda in the region. Short of outright military intervention, sanctions are perhaps the most effective way to make clear to Latin American and Caribbean governments that the United States has the power to devastate countries it disagrees with and has no qualms about deploying this power—even if thousands of lives are lost as a result. But the U.S. government has other less brazen tools of economic statecraft at its disposal, and has for decades deployed these tools to shape the economies and politics of the region.

***

There are few international institutions that Latin Americans hate more than the IMF. Protesters have chanted the slogan “¡Fuera FMI!”—“IMF Out!”—in countless marches in the streets of Lima, Buenos Aires, La Paz, Porto Alegre, and elsewhere. But it wasn’t always like this. Until the late 1970s, the IMF had played a relatively uncontroversial role in the region as a lender of last resort focused primarily on maintaining international currency exchange stability.

But in the 1980s the IMF began heavily intervening in domestic economic policymaking. As country after country in the Global South became submerged in debt crises provoked by a combination of easy lending of petrodollars, global recessions, and a sharp increase in U.S. Federal Reserve interest rates, the IMF swept in with bailout programs with unprecedented and painful conditions attached. In order to receive funding, Latin American and Caribbean governments were required to abide by an IMF-driven neoliberal agenda that included labor and financial market deregulation, massive public sector cuts, and the elimination of tariffs and other protectionist measures. While workers throughout the region took to the streets, a significant portion of domestic elites supported these measures, in part because they weakened the power of organized labor and allowed companies to buy up state assets at heavily discounted prices.

The U.S. government, which has the biggest voting share in the IMF, was the major force behind the organization’s new interventionist approach. As Alexander Kentikelenis and Sarah Babb have shown, the Reagan administration pushed for loan conditionalities to promote “market-oriented” reforms intended to stimulate economic growth. Developing nations like Brazil balked at this for undermining developing countries’ sovereignty, yet there was little they could do to oppose the IMF’s interventionist approach without jeopardizing their own access to loan programs.

Latin America, hit particularly hard by the debt crises of the 1980s, became a vast laboratory for U.S. and IMF-driven neoliberal “structural adjustments” involving deregulation, privatization, and cuts to public services. These adjustments contributed to the abandonment of a uniquely Latin American model of development that promoted extensive state intervention in the economy through “import substitution industrialization” (ISI)—protectionist measures that helped bolster national industries. Though much reviled by free market advocates and the mainstream international financial press, the ISI model had a strong record of success: per capita economic growth hit 91.5 percent between 1960 and 1980, prompting vast improvements in living standards for most Latin Americans.

In contrast, between 1980 and 2000, per capita growth in the region only increased by 5.7 percent. Poverty reduction stagnated and inequality rose. Supply-side economics was clearly not working for most Latin Americans who, at the end of the 1990s, began electing the Pink Tide of progressive governments that rejected the so-called Washington Consensus. These governments, helped in part by the commodities windfall of the 2000s, succeeded in putting the slogan “Fuera FMI!” into action. IMF influence in the region fell precipitously throughout the early 2000s: Total disbursements to Latin American countries fell by 95 percent between 2000 and 2007.

Constrained by powerful domestic and international economic and financial actors, none of these governments were able to fully break away from the neoliberal paradigm. For example, monetarist interest rate policies under Workers’ Party governments stifled economic growth in Brazil, and Hugo Chávez’s government deployed excessive austerity during the 2008 economic downturn in Venezuela. Yet many did enact alternative policies—such as the re-nationalization of strategic sectors of the economy, major investments in healthcare and education, and cash transfer programs—that helped lift tens of millions out of poverty and increase economic growth to levels unseen since the 1970s.

But the Pink Tide would soon ebb. A variety of factors—including the global economic downturn and U.S.-backed coups—engendered the return of neoliberal governments to the majority of countries, including Brazil and, most recently, Bolivia. The IMF accompanied the right-wing’s return in Honduras, Ecuador, and Argentina with strong U.S. support. Unsurprisingly, massive street protests have returned too, as people have risen up against policies that hurt the middle classes and poor while shielding the wealthy and transnational capital.

Though IMF researchers have admitted that neoliberal reforms have failed to promote the promised have failed to promote growth and instead generated increased inequality, the Fund continues to support the same policies with the same disastrous results. The reasons are fairly clear: The U.S. Treasury Department continues to strongly influence policymaking within the Fund, and Wall Street—which favors these neoliberal reforms—continues to exert its own influence over Treasury.

In 2018, the IMF handed Argentina a $56.3 billion bailout—the biggest in IMF history—with a promise that it had changed its ways and would prioritize protecting the most vulnerable. Instead, the Fund has supported damaging austerity policies that have spiked poverty levels. In Ecuador, the Fund has endorsed sweeping public sector layoffs, the removal of fuel subsidies, and the weakening of regulations that had been effective in stemming capital flight. In both countries, people took to the streets to say “Fuera FMI!” and, in Argentina, voters put political leaders strongly opposed to neoliberalism back into power.

***

The IMF is not the only international financial institution that the United States uses to pursue economic statecraft. The World Bank and the Inter-American Development Bank (IDB), two multilateral development banks (MDBs) deeply influenced by the U.S. government, have both reinforced the Fund’s neoliberal agenda and played their own role in restructuring economies in a manner that suits Washington’s interests.

MDB loans and grants frequently accompany an IMF loan agreement. This was the case recently in Ecuador, which received assistance from both the World Bank and IDB after signing an IMF agreement. The prospect of receiving an extensive package of financial help from multiple sources makes an IMF agreement all the more appealing, even when it entails a painful structural adjustment.

The MDBs have also ensured that Latin American countries’ development strategies proceed along neoliberal lines. With the ostensible objective of making these countries’ economies more competitive internationally, World Bank and IDB experts have reformed regulatory and legislative frameworks and redesigned policy to support the selling off of public companies, the weakening of labor laws, and the lowering trade barriers, as well as land reforms that have further concentrated property in the hands of the wealthy. Meanwhile, MDB loans—which flow increasingly into private sector projects—tend to support low-wage, high-yield, export-oriented enterprises.

In these ways, the MDBs’ “modernization” agenda has contributed to a profound shift in Latin American development. Where governments once sought to diversify their domestic economies and build advanced industrial sectors through demand-side policies, they now focus on attracting foreign direct investment in order to vastly expand the production of goods for export with little or no added value. This helps boost the profit margins of the foreign companies that import and refine these goods, but does little to improve the lives of ordinary Latin Americans.

It is no surprise that this neoliberal, mercantilist model of development benefits the same economic actors that have long had a hold on U.S. politics. The deregulation of capital markets in many Latin American countries has been a boon to U.S. banks and hedge funds that invest heavily in commodities and export-oriented industries when they are highly profitable, before quickly withdrawing their capital at the first sign of risk. U.S. multinationals, meanwhile, are eager to gain access to commodities and cheap products, such as clothing produced in low-wage maquiladoras.

But history has demonstrated that neoliberal developmentalism deepens the region’s dependence on foreign capital and leads to increasingly destabilizing boom and bust cycles, with phases of capital flight that may lead to financial collapse, as happened in Mexico in the late 1990s and Argentina in the early 2000s.

Neoliberal policies have also been linked to widespread human rights abuses as traditional economic actors are forcibly dispossessed of their land and access to natural resources. For example, in countries like Brazil, Colombia, Honduras, and Guatemala, the expansion of oil palm cultivation—a major export crop purchased by agribusiness giants like Cargill and supported, both financially and technically, by the IDB and World Bank—has involved illegal land grabs and forced, and often violent, displacement of small farmers. Similarly, in Honduras and Guatemala the World Bank promoted the privatization of communally-held land, which fueled agrarian conflicts that resulted in dozens of assassinations of peasant leaders, often with the support of state security forces.

None of these abuses appear to concern the U.S. government, which has, through the U.S. Agency for International Development (USAID), supported the expansion of palm oil enterprises in Colombia, including some with links to paramilitary groups and drug traffickers that forced communities off land used to grow palm.

***

USAID, another institution the U.S. government uses to intervene economically, has been discreetly involved for years in consolidating the neoliberal agenda in Latin America. A firm promoter of “free markets,” the agency has supported the privatization of state enterprises and the expansion of private school systems and private healthcare. In many lower income countries, particularly in Central America and the Caribbean, it has undermined state sovereignty by funding non-governmental organizations (NGOs) that develop local agricultural development strategies, healthcare programs, and educational facilities without consulting or coordinating with state authorities. While many of these NGOs provide useful support to underserved communities, this anti-democratic approach weakens government—and citizen—control over public services. This is difficult to reverse and leads, as Haitians often lament, to a “Republic of NGOs” that are only accountable to USAID and other foreign donors.

U.S.-backed free trade agreements (FTAs) also institutionalize neoliberal policy changes. Contemporary trade agreements—including the U.S.-Canada-Mexico North America Free Trade Agreement (NAFTA), the Central America and Dominican Republican Free Trade Agreement (CAFTA-DR), and bilateral agreements the United States has signed with Colombia and Panama—strengthen foreign investor protections, formalize corporate-friendly international arbitration mechanisms, open up public services to private competition, and deregulate financial markets.

Though U.S. trade representatives invariably claim that each new FTA will generate robust growth and reduce poverty, the data often shows that the opposite is true. For instance, since NAFTA implementation began in 1994, Mexico has experienced one of the slowest rates of growth in the hemisphere, an increase in poverty, and the displacement of millions of workers.

U.S. assistance programs also serve to advance Washington’s political objectives in Latin America. As numerous State Department cables published by WikiLeaks attest, the U.S. government has deployed aid programs to impel the reelection of right-wing allies, such as through carefully timed inaugurations of U.S.-backed public works projects. U.S. officials have also threatened to suspend aid unless governments make decisions deemed to be in the U.S. interest, as when the Obama administration forced Haitian authorities to change the results of the country’s 2010 elections, despite no justification for doing so.

Furthermore, Washington has repeatedly blocked MDB loans to governments it disagrees with, making them appear unsafe to international investors. For example, the Obama administration opposed MDB loans to the left-leaning government of Argentina’s Cristina Fernández de Kirchner, thereby discouraging private foreign investment amid a recession. This lack of funding contributed to Kirchner’s Peronist party losing the 2015 presidential elections to the neoliberal opposition. After that election, Obama’s Treasury secretary Jacob Lew announced that the United States would no longer oppose MDB loans to Argentina.

***

By and large, the neoliberal agenda that Washington has aggressively promoted has not worked for the people of Latin America, but rather has hampered economic development and contributed to drastic increases in inequality. However, these damaging policies have, once again, generated a popular backlash that is planting the seeds of change in many countries. To support local efforts to challenge neoliberalism, U.S. progressives must promote a radical overhaul of Washington’s economic statecraft.

First, economic sanctions, which harm ordinary people much more than elites, must be abolished. To begin this process, the U.S. Congress should no longer allow the president to unilaterally impose sanctions without congressional approval. Moreover, Congress should oppose any sanctions that could be considered “collective punishment” under the Hague and Geneva protocols, to which the United States is a signatory.

Second, U.S. progressives should call on their government to stop endorsing IMF loan conditions that impose structural adjustments and other major changes to a government’s domestic economic policy.

Third, to ensure that IMF, World Bank, and IDB policies align more with the needs of the countries they are meant to serve, their executive boards should be democratized. In particular, far more weight should be given to southern countries in the boards’ voting systems. This would allow Latin American and other southern nations to have greater influence over these institutions’ policies while preventing any single powerful country, like the United States, from arbitrarily blocking loan programs.

Fourth, to avoid the sorts of debt crises that typically lead to IMF bailouts, the United States should join the vast majority of the world’s countries in supporting a sovereign debt workout mechanism that allows for a fair, equitable, and timely restructuring of debt when it becomes unsustainable.

Fifth, USAID should no longer involve itself in the domestic affairs of foreign countries and should instead closely coordinate with governments to ensure that its programs support, rather than undermine, sovereign economic planning.

Finally, the United States should recognize the “climate debt” it owes to Latin America and the Caribbean countries, which on balance have played a marginal role in an ecological crisis that requires all countries to invest in renewable energies and pursue sustainable development. To assist its southern neighbors, the United States should contribute to multilateral climate funds that can help finance these complex and costly transitions and smake environmentally-friendly technologies freely available to all.

Measures such as these will help Latin American countries recover the policy space they need to independently shape their economic destinies, reformulate their political and economic relations with their neighbors, and better advance their development agendas. They could also lead to the revival of regional integration projects focused on economic cooperation rather than competition, such as the Union of South American Nations, the Community of Latin American and Caribbean States, and the Bolivarian Alliance of the Peoples of America, all of which emerged during the Pink Tide era before falling into decline during the right-wing, neoliberal counteroffensive.

During the halcyon days of the 2000s, left governments throughout Latin America launched paradigm-shifting multilateral institutions, including a Bank of the South—a development bank financed exclusively by countries in the region—and a Euro-inspired transnational currency named the Sucre. Though these ambitious projects foundered on the shores of right-wing reaction, they remain relevant models for nations seeking to achieve true economic and financial independence.

Indeed, these sorts of alternatives to the foreign currencies and neoliberal institutions that currently hold sway in Latin America could help unlock the region’s immense economic potential. But the prospects of achieving equitable, sustainable growth that uplifts the peoples of the region remain bleak so long as the United States continues to impose economic “solutions” that only benefit the global 1 percent.

As progressives in the U.S. mobilize to take power nationally, they should push for a new economic statecraft that advances the interests of the many and not the few. That could well be one of the most effective forms of solidarity with the millions of Latin Americans that inspired us with their protests in 2019.

Keep up with our latest news