Tag Archives: ISI

‘Paradigm found: In Search for the Washington Consensus’

Panizza, Francisco E. (2008) ‘Paradigm found: In Search for the Washington Consensus’ (manuscript)

A Summary 

In a Nutshell

The Washington Consensus was not (initially) an overarching doctrine of how a country should manage its economic nor political life. Rather it was a set of specific recommendations on how to tackle large deficits and hyperinflation. However it became part of the neoliberal “doctrine” and here it was expanded upon to reflect the beliefs of the liberals in markets. This doctrine became the dominant one on LA largely in response to crisis and as a means of turning away from what had come before. As ISI came to the end of its usefulness, the authoritarian regimes that were in power began to move away from the structuralist model but it was too late to prevent crisis. The crises in part lead to the downfall of those military regimes, but the heterodox solutions that the new democracies introduced only served (eventually) to aggravate the situation. The neoliberal model was pursued by LA governments in response to these constant failures. As such, Panizza is arguing that the reforms proposed by the Washington Consensus were not merely imposed upon LA due to their weak governments, nor because of bullying tactics from the IFIs (although he concedes their influence was great), but rather they were chosen as a rational response to crisis. 

What was the Washington Consensus?

  • Neoliberalism and the WC are now thought to go hand in hand. But Panizza shows that the former is a much wider concept.
  • WC was a list of policy prescriptions outlined by John Williamson  (JW) in Latin American Adjustment: How much has happened? that embodied the thinking of the economists of the time (esp. in USA). There were 10 main prescriptions:
  1. Fiscal Discipline
  2. Redirect public spending toward health/education/infrastructure i.e. that offer high economic returns and can improve income distribution
  3. Tax reform (broaden base, and cut marginal rates)
  4. Interest rate liberalization
  5. Competitive exchange rate
  6. Trade liberalization
  7. Liberalisation of FDI
  8. Privatisation
  9. Deregulation (barriers to entry)
  10. Secure property rights
  • The key for development was to emulate the market-oriented policies of the developed economies, and the evidence for this was the growth of new Asia.
  • It was a plan for stabilisation not necessarily a plan for long term growth management. Critically it does not distinguish between the best form of capitalism model; Anglo-Saxon, EU social market, Japanese corporate capitalism. It makes no claims about markets and trade in terms of welfare (JW later said the proposals should be supplemented with a PRS). It does not give “blind faith in markets” centre stage (JW).
  • Some prescriptions were very precise (deficit of no more than 2% /  Privatisation), some were e very vague (reduce tariffs to between 10 -20% in 5-10 years). 
  • Neoliberalism (NL)on the other hand is not just about the economy. It is a social, moral and political discourse. Based on British liberalism: freedom to pursue rational self-interest and competition  as main source of innovation and growth. 
  • WC was a set of codified policy agendas, BUT it had sufficient “surplus of meaning” that it could be re-interpreted, as it was so but the NLs. 

ISI

  • NL gained it hegemonic position due to its contrast with the directed economics of the ISI period.
  • ISI was born in ECLAC in the “structuralist economic doctrines” that said that developing nations had to travel a different path of development to the already developed economies, as their infant industries had no protection from competition unlike those of the developed world when they were developing. If industry was not protected they would be condemned to being agro exporters and resource providers (comparatively cheaper than industrial goods produced by the core).
  • Used currency overvaluation and tariffs to spur on home industry. Deficits and inflation were accepted consequences.
  • The state was the gatekeeper of the national interest (protect from threat of competition).
  • ISI had broad social base (Middle class in the large civil service, urban workers with higher wages, industrialists, elites who could be rewarded with industrial patronage by the state) although there were losers (peasant farmers, consumers).
  • But sectoral/individual gains began to become built-in prerogatives. This was aggravated in 60s and 70s when growth slowed, fiscal crises abounded, and inflation shot up. The result was the authoritarian attempt to dismantle ISI 

Dismantling ISI

  • On the left dependency theory claimed that LA should cut itself off from the market as being connected could only ever keep it underdeveloped due to the chain of exploitation starting in the core and spreading to the periphery.
  • On the right, free market ideas gained traction as it became ever more costly to mediate the problems caused by ISI. Monetarism (later to be called NL) was part of a narrow economic debate on how to solve bop and inflation problems. Inflation was a monetary problem caused by deficit and overexpansion of credit. This contrast with structuralist view that inflation was reversible using structural reforms to bring more people in the economy thus expanding the industrial base.
  • There was an overlapping political debate about spending and distribution. Monetarists wanted austerity, but sturcturalists said austerity caused recessions. 
  • 60s-80s no one narrative could dominate, rather there was a complex process of change. Elements of ISI were dismantled, or deepened depending on the country specific political/economic realities. Change was influenced by many factors including availability of financial resources to fund ISI (oil rents etc.) as well as political factors (how the government/elites dealt with popular protest etc.).
  • Chile was one of the first to dismantle ISI under Pinochet. This was in part a political move – the technocratic policies of monetarism excluded the working classes, and prevented the distributive struggles that were a breeding ground for socialism and the left in general. 
  • Internal contradictions in the military regimes of LA in the period prevented them from founding a true new political and economic order. 
  • Dismantling was uneven in the region:
  • e.g. Arg: rapid reduction of tariffs decimated local industry (weakening the Peronist working class – a benefit for the military). Tariffs still very high relative to the rest of the world. State reform was very limited and fiscal austerity was abandoned in the late 70s. In 80s recession tax revenue was eroded and resulted in large deficits as inflation reached 310% in 1983 (last year of military rule)
  • In Brazil, Mexico and Peru the 70s and 80s saw a deepening of state-led model. E.g. brazil had growth of 7.4% and industry was growing with low inflation.
  • E.g. Same for Mexico but it had a tight control over public spending. However with the rise of Echeverria (70-76) public spending was increased and deficit funded by borrowing. The increased borrowing and deficit and eventual capital flight lead to devaluation and financial crisis when external funding dried up in late 70s. Debt crisis of 1982! 
  • The 1982 crisis represented a watershed. Economic policy options narrowed and there was a paradigm shift that unshed in the hegemony of free market economics.

 Neoliberal Hegemony

  • The dominant ideas of IS had become discredited and the crisis weakened the elite’s ability to maintain the status quo (Olson). There was a new possibility of change (although direction was still unclear). NL did not become totally dominant until the late 80s.
  • Ideological shift was part of worldwide pattern following end of post war growth period, inflation and recession that lead to focus on the UK-US laissez-faire model. Additionally forces of globalization were become unstoppably strong. But this is not enough for Panizza to explain how NL became part of LA.
  • NL reforms were chosen by democratic states (except in Chile). So pressure from IMF etc. (although great) and worldwide trends, are not sufficient to explain why they were adopted in LA.

 

  • NL was part of the maturing of democracy in the region. When democracy was nascent in LA, liberal reforms were associated with the military regimes. Public debate about democracy focused on human rights etc. not on economics. So with the first elected presidents we do not see the introduction of NL reforms. Rather, reforms were heterodox
  • e.g. Peru. President Terry had tried liberal reforms (80-85) but there was much resistance. His successor Alan Garcia (85-90) returned to state led heterodoxy e.g. price freezes, wage increases, more spending financed by reduction in debt servicing. The result was hyperinflation.
  • e.g. Bolivia went democratic in 1982 with Siles Suazo at the head. He also used heterodox methods and they too failed to combat inflation. His successor Estenssoro then introduced a radical free market reform package.
  • In general the Heterodox solutions caused hyperinflation which obliterated livelihoods and jobs. There was a concomitant breakdown in social order and thus political order. The state could no longer regulate social relations and there were mass protests.

 

  • It was now a question of assigning responsibility for the crises. The problem was both old and new. New as it represented problems specific to the 80s (debt crisis, oil shocks etc.) and old as it was the result of deeper long term problems rooted in ISI. However, it was now argued by free-market adherents that the 80s crisis could not be overcome simply by fiscal adjustment packages and so the WC became a much wider NL economic and political reform agenda. There would have to be a wholesale reform of the relationship between citizen and state 
  • Alfonsin in Arg having implemented heterodox packages now turned around and sought to liberalise. It was too late though to stabilize the economy, and the political outsider Menem came to the fore and implemented wide ranging reforms [see Grindle from EH451]
  • Collor came to power in brazil on a similar mandate.
  • Mexico did not suffer such a huge turnaround – rather reform was more gradual
  • So NL’s rise was founded in the failure of the new democratic administrations in the 80s to deliver a better life and thus a change occurred in the relationship between democracy and free-market economics (as it was previously associated with military dictatorships as being the only governments powerful enough to force through such reforms). NL offered d a clear diagnosis and prescription. “In this new political context economic liberalism’s mistrust of the state and ultimately of politics, resonated with popular disillusionment with failed promises of a better life under democracy”.
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Silent Revolution

THE SILENT REVOLUTION

Duncan Green

Chapters 1,3,4

A Summary

 

The first chapter is largely about ISI and it failures. It adds nothing new to my understanding. Like others he sees IS as a response to the crash in 1929 bringing the free-trade to an end and brought in ISI based on Keynes. It went hand in hand with populism which preferred to print money rather than take difficult distributive decisions. He emphasises the benefits of ISI including the raised life expectancy and literacy indicators as well as urban development (albeit with lots of inequality). Also it broadened political inclusion with the insertion of the working class into political life. But whilst EA countries successfully transitioned away from ISI, in LA they could not. This resulted in poor products, a two tier labour force, a continued reliance on imported capital goods etc. meaning that the trade deficit was not actually remedied. There was still huge inequality. Tariffs hurt the rural sector as capital good were expensive to import and overvalued currency made export uncompetitive. This lead to a large migration to urban centres.

As the flaws became apparent in the 60, governments tried to modify their policies.

He has a traditional line on debt: petro$s increased investment etc. and this was embraced by the neoliberal authoritarian regimes that also liberalized trade and caused de-industrialisation in e.g. Arg. He emphasises that ISI and huge debt do not necessarily go hand in hand e.g. Korea and EA countries who managed debt well.

 How did Neoliberalism Come to Dominate?

  • Support of local economists (Chicago university program in Chile)
  • Pre-existing crises in ISI
  • Lack of alternatives
  • Green is bemused at the rise of the technocrat which he sees as pivotal in the acceptance of the free-market reforms. He advocates Ha-Joon Chang’s historical approach to finding patterns and seeking their explanation rather than relying on abstract theory based on barely plausible assumptions. There is too much emphasis on mathematics and not enough on real life situations and people. He states rightly in my view that maths does not mean objectivity. Indeed decisions about policy always contain political choices about the rival merits of state and market and the role the state should play in people’s lives. He argues that replacing the state with the market disenfranchises people when pressure groups and individuals have learnt how to lobby the state in a certain way. In order to get the same influence over policy they would have to acquire influence over large corporations etc. [This seems pretty farfetched. Given the fluctuations between democracy and authoritarianism I doubt very much pressure groups knew if they were coming or going]
  • He argues that it could be that neoliberalism is more political than economic as it was designed as a counterfoil to the rise of communism – it was part of a battle for ideas not a serious map of where a country should aim to go.

 The Lost Decade

  • Green focuses on the human cost on liberalization: falling wages, rising inequality, redundancy, an increase in families below the poverty line, (a staggering 80.1% in Bolivia in 1991), breaking of the unions, de-industrialisation, bankruptcy etc.
  • The genesis of the reforms was found clearly in the recession of 1982-83 caused by sudden end to lending by the commercial banks. Now LA was exporting capital rather than importing. The could either declare a debt moratorium or generate trade surplus, so they did the latter. As exports were already depressed due to the overvalued currency and focus on inward development, this surplus could only come from import suppression i.e. stop the citizens consuming – this means devaluation and recession.
  • The rules of the debt game meant it kept increasing even while the population suffered. Payments that might have been used to purchase imports instead went to debt service.
  • He interprets the lack of domestic investment as a consequence of the capital exporting to service the debt, rather than a deliberate policy choice (unlike S. Edwards). It was more politically expedient to cut investment than sack employees although they did that too. “The level of investment is crucial to any economy’s prospects: Latin America was mortgaging its people’s future to pay its debts.”
  • There was the additional problem of turning the trade surplus into debt service payments as a large slice of the export income dollars was in private hands. In some cases the government was forced to print money to purchase the forex causing renewed inflation. If they did not, they had to tempt exporters to invest in government bonds with high interest which only lead to more debt, this time domestic.
  • Even despite the cuts, the devaluation and increasing cost of debt meant that deficits grew and grew and even the largest governments printed money with resulting hyperinflation.

 The False Dawn

  • There was a return to growth in 1984 but this was mainly due to Brazil’s Sarney government raising wages in a “growth first” policy framework that brought growth to 8% aided by restrictions on its debt service payments.
  • By 1985 there were doubts over the IMF style stabilisation. The result was heterodox solutions to managing inflationary expectations using freezes on wages, ex rates and prices. They are supposed to be a cooling off period in which time the government can deal with the underlying problems. However the deficits etc. were not dealt with, and the short term boom lead to a surge in consumption, but this could not be sustained and inflation made a fierce comeback as the plans failed.
  • 1984-87 saw the gradual shift toward the export-led growth model and trade liberalization that would be ubiquitous by the end of the decade. Whilst this saw imports increase investment was still stagnant and this may have laid the foundations for continued underperformance in the region.
  • The debt service “hemorrhage” continued to the detriment of healthcare and education etc. All public services suffered “the social and economic fabric of Latin America was falling apart”.

 

Social Impact of the Lost Decade

  • Up to 1980 % living in poverty had been falling. The welfare indicators had been rising (see Astorga et. Al). In 1980s 64 million new names were added to the list of the poor. There was hunger, disease and despair.
  • Lower wages, greater insecurity and steep price hikes for food basics. Meanwhile TV flooded the continent showing flashy American lifestyles leading to the dispossessed men turning to alcohol and rage causing family breakdown, crime and social disintegration.

 [What is interesting is the totally different way Green looks at the reforms. He looks to the human consequences rather than just the economic justifications or stabilisation successes. What we have to wonder though is how much of this was due to the popular mandate i.e. in the post crisis world (wherever the blame lies for the increased debt etc.), where hyperinflation was destroying wages and savings, did the people sign up for the reforms at any cost? Were the costs greater than they anticipated? Why did some governments go further than they were required to? (Weyland).]  

 Investment, Growth and Development

  • Capital inflows resumed in 1991 albeit in forms other than purely commercial loans: equity purchases, bond purchases, bank loans to LA companies, FDI in farms, factories and service industries.
  • Total debt began to rise again –by 1999 it had reached $762bn for the region.
  • But the new money dried up just like it had in the 80s and thus we had the 1994 Mexico crash. The liberalized financial markets meant investors could pour money into Mexico, but they could just as easily whip it out – so there was considerable flight risk. As every the taxpayer had to pick up the bill for bailing out the banks.
  • The capital had flowed in and had been sucked up as a new option in cushioning from the worst effects of the liberal adjustment. The capital inflows meant that the debt could be serviced and the economy restructured. Moreover it meant the currency could be kept strong thus curbing inflation by keeping import prices low. The consequence of course was trade deficit, but even this could be funded by the capital inflows, as long as they lasted.
  • However, once again LA was at the mercy of external events. The U.S IR rises of 1994 meant that Mexican bonds were no longer so desirable. There was political turmoil in that year too (Zapatista uprising) and investors lost confidence.
  • Brazil was next, the contagion had spread despite the relative health of Brazil. Investors pulled out $30bn in two months.
  • Then it spread to Argentina.
  • All three governments were forced into sudden devaluations. Argentina was worst hit, with large scale government cuts and $-denominated bank account freezes. This cause political and social chaos. Urban unemployment in Mex doubled. Brazil had 0 growth and 25% unemployment.

 Lessons for the Future

  • “Reliance on the fools’ gold of fickle capital inflows made the region vulnerable both to events beyond its control, such as the Asia crisis of 1998, and to the received wisdom of the markets.” If investors were not happy, they just pulled out.
  • “The main lesson is that capital account liberalization is not the answer to LA’s historical inability to save and invest sufficient quantities to generate growth and jobs.”
  • $isation of the currency can be an option for smaller countries.
  • FDI is better than other types of capital as it is sticky.

OVERVIEW OF THE BUREAUCRATIC-AUTHORITARIAN MODEL

OVERVIEW OF THE BUREAUCRATIC-AUTHORITARIAN MODEL

D. Collier

In D. Collier (ed.) The New Authoritarianism

 A Summary

In a Nutshell

Modernisation theory in development literature suggested that socio-economic modernization and democracy go hand in hand, this is why the conversion to authoritarianism in LA proposed such a challenge to academics. More generally the change happened in an era where the expectations of the 50s and 60s that greater economic and social equality would lead to a more democratic form of politics, were eroded. In place of these ideas it was now suggested that in late developing nations, more advanced industrialization may coincide with the collapse of democracy, and an increase in inequality. Indeed it was posited that the social, political and economic tensions generated by the particular type of dependent capitalist industrialization led to the collapse of the populist regimes, and hence as the popular sector as one of political strength. The elimination of the popular sector from politics, and the associated regressive move of income toward the middle and upper classes greatly increased inequality under BA.

The remainder of the chapter summarizes the key points of the O’Donnell thesis:

Political Systems and Change

  • Regime: the structure of politics – repression, representation, freedoms etc.
  • Coalition: class and sectoral composition of dominant political forces.
  • Policies: specific tools for allocating resources.

There are three types of “constellation” for O’Donnell that have different patterns of regime, coalition and policy

  1. Oligarchic: limited political competition. The elite is based upon primary product exports, and policy is geared toward this end (open economy). The system is not yet incorporating or excluding as the popular sector is not yet activated
  2. Populist: incorporating, multi-class coalition of urban-industrial interests including industrial elite and working classes. Economic nationalism is common. The state promotes industrialization based upon consumer goods.
  3. Bureaucratic-Authoritarianism: excluding systems that are non-democratic. Central actors are technocrats, military and civilian. Policy is concerned with advanced industrialization, and representation, elections etc. are eliminated.

The political transformations that move us from one to the other derive from social and political tensions produced by industrialization and by changes in the social structure. There are three particularly relevant factors:

  1. Industrialization: different phases linked to political changes as payoffs accrue to different class groups. Consumer goods production associated with the move from oligarchy to populism. This allows for the incorporation of the working class as wage setting can be generous without import competition, and also beneficial in expanding the domestic market. Thus workers receive important material benefits. Once this phase is complete, there are tensions as opportunities for expansion become more limited. The cost of importing the capital and intermediate goods is driving inflation, a balance of payment deficit, foreign indebtedness etc. Thus a shift to more orthodox policies is needed to create deepening of industry through domestic manufacturing of intermediate and capital goods. However in order to do this technology, managerial experience and capital is needed, and these things are often associated with multinational corporations. The need to attract this type of investment drives the adaptation of the move to orthodoxy.
  2. Activation of the Popular Sector: The popular sector will challenge the move to orthodoxy. There is thus a gap between demands and policies leading to strikes, and political/economic crisis.
  3. Technocratic Rules: Technocrats perceive high levels of popular sector mobilization as an obstacle to economic growth. They are thus bale to form a coup coalition.

The above process was evident in Brazil (1964), Argentina (1966, and 1976), Uruguay and Chile (1973). The case of Mex was once where phases one ISI was completed in an already fairly authoritarian society meaning the transition to advanced industrialization were accompanied by a continuity of political institutions.

The Evolution of Bureaucratic-Authoritarianism

  • Groups that initially supported the coup (entrepreneurs and middle classes) soon find themselves hurt by the orthodox polices. This means the principal class that supports the government is foreign capital. After a while there are increased called for this relationship to expand to include the middle classes.
  • This transition occurs according to the level of threat existent in the pre-coup society. i.e. the greater the threat to capitalism in the pre-coup era, the stronger the technocratic coalition will be, and so they will be better able to maintain order. This is seen in Brazil where the pre-coup crisis was severe and the subsequent regime strong, as compared to Argentina where the crisis was far less serious meaning elite cohesion post-coup was weaker which ultimately led to the regime falling.

Conclusion

  • At a general level the framework focuses on the interaction between crucial features of politics in LA – dominant collation, regime and policy.
  • At a more specific level it focuses on economic problems associated with different levels of industrialization and the perception of threat as a driving force of the evolution of BA.

ECLA AND THE FORMATION OF LATIN AMERICAN ECONOMIC DOCTRINE

ECLA AND THE FORMATION OF LATIN AMERICAN ECONOMIC DOCTRINE

E. V. K. FitzGerald

A Summary

 

 

In a Nutshell

There were important external events that led to the formation of economic policy in LA centred on ISI: 

·         the manufacturing drive that occurred during WWII due to lack of movement of capital goods; 

·         the lack of support from Washington regarding tariffs on imports from the US and exports to the US

·         Change in world view on integration

However, FitzGerald argues that cepalino theory is best understood as part of a wider postwar debate on world order, and not as a delayed reaction to the Great Depression

 

Postwar Reinsertion of Latin America in the World Economy

·         There was a worldwide discussion about the organization of the world economy. An influential book published by Staley in 1944 called for the industrialization of the South to ensure its integration with the world economy. The US was initially behind this position; indeed part of the remit of the Bretton Woods institutions was to stabilize world commodity process, promote manufactures trade and to plan investment.

·         In LA during the war little new investment had been made due to the impossibility of capital imports. However, industrial employment had risen nonetheless and this incorporated new urban workers into the political dialogue thus creating new calls for industrialization and the provision of social infrastructure.

·         Yet in 1945 at the inter-American conference in Mexico the US refused to grant aid to LA, or to give preferential tariff treatment. They now seemed to regard the economic problems of the region not as a consequence of trade matters, but of internal issues.

 

Contemporary Theories of Trade and Development

·         Growth in the 40s driven by primaries exports, and this was dependent on imported capital goods. It was thus thought that the terms of trade were determined exogenously, and there was a perceived imbalance between what terms commodities attracted as against manufactures. This is the concept of unequal exchange.

·         This concept was used to justify planned industrialization in Central Europe in the 20s. They regarded a difference between the nations at the “centre” and those on the “periphery” of the world economy (W. Sombart). Thus they wanted state led industrialization and economic autarky to overcome technological disadvantage. It is clear that these writing were read by economists in LA and particularly by Prebisch.

·         ELCA was created in 1948 as part of the UN.

 

 

ECLA Thinking

·         The 1948 survey described a structuralist interpretation of the main LA economies since 1937. There was a focus on the negative effect on growth seen from changing world trade conditions.

·         The 1949 survey was somewhat more radical and it was the first one over which Raul Prebisch had full control. The view taken was not just descriptive of the economic woes of the periphery, but also a criticism of the behavior of the core in setting higher prices, wages, and profits for itself on the one hand, and retarding the spread of technology and industry on the other. Domestic markets were not thought to be the optimal solution for LA but it was the best one given the limited import openness of the centre.

 

There were 4 key points:

1.       Terms of trade reflected a combination of collusive behavior between labour and business at the core which can “make” prices because of market control.

2.       Technology diffusion is retarded by institutional constraints. Increased productivity at the periphery is only reflected in more profit for the centre as prices fall.

3.       Import Substitution is second best alternative to fair prices and access

4.       National planning is legitimized by the need to use domestic profits for industrial investment rather than luxury consumption.

·         The crucial step in the critique is that the Centre was operating under monopolistic markets while competitive markets were seen in the periphery. Thus the argument was not counter Ricardo, but saying that Ricardian advantage did not exist due to protectionism at the Centre.

·         The surveys in the 50s followed similar lines, but with less emphasis on the “exploitation” of the periphery by the Centre.

 

The Doctrine in Retrospect

·         Some argue that the theories put forward by ECLA were based on the interwar experiences of depression and de-linking from the world economy.

·         Furtado argues it was a nationalist expression.

·         Cardoso and Pinto claim it was a technical critique of neo-classical theory.

·         It should rather be seen as the product of a larger discussion about how to order the world economy.