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Forum on Economic Reform (Part VII) In recent decades the alliance of neoclassical economics and neoliberalism has hijacked the term “economic reform”. By presenting political choices as market necessities, they have subverted public debate about what economic policy changes are possible and are or are not desirable. This venue promotes discussion of economic reform that is not limited to the one ideological point of view. The Future of Economic Policy Making by Left-of-Center Governments in Latin America: Old Wine in New Bottles?1 Juan Carlos Moreno-Bri2 and Igor Paunovic3 (United Nations, Mexico) Introduction To
assess the medium-term economic prospects of Latin America, a fundamental
element to be considered is the recent emergence of left-of-center
governments in the region. What
economic policies do they implement?
How do these differ from the orthodox ones put in place by their
predecessors? Will, as their advocates
argue, governments of this “New Left”4 adopt strategies –
radically departing from so-called neo-liberal ones – that will help Latin
America to enter a path of high and sustained economic growth? Or, on the contrary, are their fierce
critics correct in stating that such alternative programs are revamped
versions of populist experiments and, thus, sooner or later, will provoke
acute inflation, bloated fiscal deficits, and push the region into financial
crisis and recession? Other elements
to take into account are the constraints imposed by the world economy and the
international financial markets. In this paper we put forward a succinct
assessment of these elements in order to examine the economic policymaking of
the New-left governments in Latin America, and their results so far.. Antecedents A key root
behind the region’s shift to the left is the disappointing result of the
economic reforms – inspired by the Washington Consensus – implemented by
previous governments.5 Indeed, after nearly two decades of drastic
macroeconomic reforms favoring trade and financial liberalization,
deregulation, and downsizing of the public sector, Latin America is still
unable to enter a path of high and sustained economic expansion. Inflation has come down, but economic
activity has been sluggish. In
addition, in the last ten years, the region has suffered acute economic
crises; among the most conspicuous ones were the Mexican tequila crisis and the financial collapse in Argentina a few
years ago. During the 1980s
the average real per capita GDP declined in Latin America due to the debt
crisis. In the 1990s it expanded at
1.5 percent per year; four points below the average of developing countries
in Asia. Moreover, between 1980 and
2000 the income gap between Latin America and the OECD widened, and there was
scant progress in the reduction of poverty. By the beginning of the
Millennium, close to 50 percent of its population lived in poverty, with 25
percent in conditions of extreme poverty. And, particularly worrisome, Latin
America remained the most unequal region in the world. Not
surprisingly, Latin Americans became critical of the neo-liberal economic
policies implemented. Latinobarómetro showed that by 2000 less than 30 percent
of the population across the region believed that privatizations were
beneficial, an approval rate 30 points lower than a few years before. The majority considered saw the market
economy as the main road to development, but less than 25 percent claimed to
be satisfied with its results. By then more than 50% were against the view
that the state should not intervene in economic affairs. And physical insecurity and the lack of
employment were regarded as the major concerns of Latin America. On the other hand,
the success of China – and other Asian economies – in luring vast inflows of
foreign direct investment and maintaining a rapid economic expansion based on
heterodox polices that allowed for an active role of the State in the
economy, contributed to further undermine the credibility of the Washington
Consensus. Thus, at the same time that the native population was becoming
weary of the conventional economic strategies, the left-wing parties’
campaigns in favor of a new development agenda were attracting
respectability. An additional element
in their favor was the fact that, after 9/11, Latin America appeared to drift
away from the United States’ screen of geopolitical priorities. Rhetoric
and Reality The above
mentioned factors shifted political preferences in Latin America, allowing
for a number of left-wing parties to be ushered into power through democratic
elections. The debate about the macroeconomic policies adopted by these New
Left governments is ideologically charged, with rhetoric tending to prevail
over reality. Their supporters defend them as alternatives to counteract the
adverse effects of the neo-liberal agenda, while their critics brand them as
populist programs doomed to end in a financial and economic crisis.. A preliminary
inspection of the recent economic performance of the region suggests that the
macroeconomic policies put forward by the New Left governments to date are
not the irresponsible populist public spending experiments that their critics
describe. Figure
1 indicates that during 2003-05, the performance of medium and large Latin
American economies under left-of-center governments (with the exception of
Venezuela) does not substantially differ from that of other medium and large
economies in the region under governments with a right-of-center political
orientation. During this period the
former governments have, on average, been somewhat more successful in
sustaining a high rate of economic expansion, but less so in achieving low
rates of inflation. Differences
between both groups shrink if Venezuela is excluded. Note that in these three years the group of
left-wing governments held tighter fiscal positions than other economies here
considered. Indeed, whether Venezuela
is included or not, the former group registered an average fiscal deficit
lower than one percent of GDP, compared with an average of more than three
percent for the other group. With the
caveat that it is probably too early to draw firm conclusions, it seems that
the New Left governments do observe fiscal prudence.
The case of Venezuela
deserves a special comment to the extent that its fiscal position relies on
oil revenues (50%), though the same can be said of Mexico, where the oil
sector contributes 40 percent of total public revenue. The fiscal situations
of both countries are vulnerable and, unless additional sources of tax
revenues are exploited, may become even more problematic if world oil prices
decline significantly. In this event in particular, subsidies for food and
health care for the poor in Venezuela may be subject to severe cuts. To partially
compensate for the adverse impact of high oil prices on consumers, many
countries grant subsidies or set price controls on gasoline. In Argentina, to cut down inflation, the
government has not updated utility rates, and has set up agreements to impose
price caps on a range of basic goods, including beef, with wholesale stores
and producers,. These measures will be ineffective if the Argentine economy
continues growing, as it has, at real annual rates of 9 percent or above, unless
additional investment comes forward to ease supply-side bottlenecks. In this
regard it is important to point out that the government has put in place
special incentives to stimulate the investment in sectors that produce key
inputs or other goods intensive in innovation. In addition it recently banned
the export of beef, in order to insure the supply for the domestic market. A characteristic of the New Left’s
economic strategy is its marked effort to strengthen the margin of autonomy
of macroeconomic policy by the reduction of public foreign debt. Argentina – against the advice of the IMF – negotiated with its foreign creditors and managed
to restructure its external debt in the largest operation of its kind in
history, obtaining a discount of 70 percent on close to US $100 billion. In addition, some New Left governments in
mineral-rich countries have significantly increased their fiscal revenues by
renegotiating with transnational companies the distribution of rents from the
exploitation of natural resources. This has been done by increasing royalties
and tax rates or, in Bolivia’s radical move, by moving for the
nationalization of such resources. For fiscal policy to have the capacity to act in a counter-cyclical
way, Latin America (on both sides of the political spectrum) needs
comprehensive fiscal reforms to: 1) increase tax revenues as a proportion of
GDP by at least 5 points above their current range of 10-20 percent, and 2)
implement a more progressive tax system that will affect income distribution. Some advances have been made, but fiscal
reform has a long way to go. It
remains to be seen whether recently adopted measures to tax exports of
certain commodities and financial transactions will be only temporary fixes,
and soon abandoned to avoid their long-term distorting effect on production. Fiscal prudence has been accompanied in most new-left governments –
with perhaps the exception of Brazil - by a commitment to avoid a persistent
and significant appreciation of the real exchange rate. Indeed, through open market operations,
Central Banks have been reducing the supply of foreign exchange in the
domestic arena and, simultaneously, increasing their external reserves. This
orientation of monetary policy implies a recognition that the exchange rate
has an important influence, not only on domestic inflation but also on
international competitiveness. Another essential element in considering
the adequacy of the New Left’s macroeconomic policies is the extent to which
the government interferes in wage settlements. Argentina enacted income policy measures to
strengthen the purchasing power of poor and middle income families. Uruguay,
in addition, reinstated the old institutions of Wage Councils (Consejos de Salarios), which
are once again the institutions where wages are negotiated at a national
level. Most of the new governments in
the region have decreed a significant but far from excessive hike in minimum
wages, given the deterioration they had had in real terms in the past. Such restraint may reflect the fact that
policy makers are concerned more with creating jobs than with improving
employees’ earnings in formal labor markets. It also reflects the recognition that,
unless backed by increases in productivity, nominal raises in minimum wages may
fuel inflation with scant effect on real wages. In any case by 2005, with the
exception of Chile, the real average earnings of workers in countries under
left-of-center governments were still below their
level in 2000. So far, radical measures to alter income and wealth distribution have
not been included in the New Left agenda.6 They have been ruled out due to political
and electoral, as well as to economic considerations. In particular such measures, when unless
they have a wide and strong political supports, tend to weaken the business
climate and alienate part of the electorate.
In addition, recall that New Left governments took power accompanied
not by the noise of bullets but by ballots in free elections. Consequently,
these governments are very much aware of the impact of their policies on the
overall electorate. And some of these
governments are backed by coalitions of diverse political trends and sectors,
coalitions that may be not be solid enough to support radical redistribution
policies or fiscal reforms. International relations are one area where the economic policies of
the New Left governments depart from previous models, as virtually all
left-leaning countries are moving toward greater independence from
international financial institutions.
Temporary agreements with the International Monetary Fund (IMF) on macroeconomic policy tend, in general, not to be
renewed. Moreover, in a move that
gained international prominence, Brazil and Argentina prepaid their
outstanding debt with the IMF. The recent evolution
of some regional accords has been complicated. Indeed, for example the Andean
Community has suffered the withdrawal of Venezuela, though partially
compensated by Chile. And the Free Trade Area of the Americas (FTAA) project seems to have stalled. In any case, regional integration is still
seen as a more attractive option for increasing commerce than bilateral trade
agreements with the United States. On the multilateral front, in contrast
with the passivity in previous rounds, the New Left governments play an
increasingly active role. It is clear
now that the negotiations of the Doha Round face a grim future unless
developed countries agree to open their agricultural sectors and to eliminate
agricultural subsidies.. Exogenous Risks: The Global Imbalances
There are two scenarios that, in
our view, should be first explored regarding the likely medium-term evolution
of the world economy and its impact on Latin America. The first is
characterized by a, say, “soft landing” of the United States’ economy coupled
with a continuation of a rather strong growth of the European Union, the
Chinese and other Asian economies so that world trade keeps expanding at a
relatively solid rate. This scenario
implies that the region will face no significant adverse shocks and, thus,
its macroeconomic policies will not be particularly challenged. If the boom
in commodity prices does not loose impetus, governments in the Southern Cone
will continue to be pressed to avoid the appreciation of the real exchange
rate. If the expansion of world trade does decline, the whole region will
then continue to be pressed to meet the challenge presented by China in
international markets, and may implement policies to boost production of
tradable goods and value-added services, as well as of commodities and inputs
that the Chinese market demands. The alternative scenario assumes that the fiscal and current account
imbalances in the US economy soon become un-manageable, and lead to a
recession combined with substantial turmoil in the exchange rate matrix. In
this case, the Latin American economies will be dramatically urged to
accommodate a fast depreciation of the dollar, a slowdown in its GDP growth,
and an increase in interest rates. This adverse scenario will pose a major
challenge for macroeconomic policymaking in the region, with some countries
most likely unsuccessfully fighting to avoid acute destabilization and
recession. Conclusions With the exception of Chile’s Concertación,
New Left governments in Latin America are recent arrivals on the real
practical policymaking arena.
Assessing and predicting the impact of their macroeconomic policies is
thus an exercise in audacity and of a partial and preliminary nature. With this caveat, it is safe to conclude
that so far Latin America’s New Left’s policies are not in a populist,
free-spending mode that ignores budgetary constraints. On the contrary, New Left governments have
shown strong fiscal prudence, an increasing state intervention in economic affairs
and a commitment to avoid the persistent appreciation of the real exchange
rate. This is particularly true of governments that, concerned with
employment problems, try to stimulate job creation in export-oriented
sectors. Concerning the trade-off between inflation and economic growth, the
New Left governments seem inclined to accept – within limits – higher
inflation if it is accompanied by higher rates of economic growth. They emphasize the need for macroeconomic
policies guided by development goals and not merely by price
stabilization. In practice, their
approach to achieving key social goals – poverty alleviation, income
redistribution – has been gradual.
They have not implemented high-impact social measures that run the
risk of triggering large fiscal imbalances and debt spirals. Minimum wage
increases have been rather reasonable, and trade liberalization measures have
not been rolled back. The starkest
innovations on policy matters concern relations with international financial
institutions and some transnational corporations regarding the distribution
of rents in activities that are intensive in the use of mineral resources. To
achieve greater degrees of freedom in macroeconomic policymaking, governments
have lowered the public debt ratio, rescheduled public debt maturity
structures, issued bonds denominated in local currency, and, most notably,
run high primary fiscal surpluses to improve debt sustainability. The constraints that Latin American governments – left-wing and
center/right-wing – face are formidable.
Radical, drastic changes in macroeconomic policies are likely out of
the question, given the weakness of public sector revenues and the commitment
to trade liberalization and the free movement of capital flows. Nevertheless, certain changes in the
composition of public expenditure, as well as in policies to promote
innovation and to develop specific sectors, could lead to very different and
positive outcomes in the medium term. Perhaps the main risk today is having a big gap between what is
expected from the New Left governments in terms of social and economic
development and what they will actually achieve. A large credibility gap may undermine
support for New Left governments, and lead society to push for more radical –
left-wing or right-wing – governments.
In our view, the Left today in Latin America is in the process of
building a new paradigm of economic development policies. Whether it will succeed in doing so is
unclear. In other words, and contrary
to the opening statement in the title of this essay, the New Left
macroeconomic policies seem to be more a case of “new wine in new
bottles”. Whether this wine will age
gracefully and have a rich and memorable taste or, on the contrary, sour and
decay is too early to know. Table 1 Latin America: Macroeconomic indicators of
selected countries
Source: Authors’ own
elaboration based on official data from ECLAC Endnotes 1. The opinions expressed in this paper are the exclusive responsibility of the authors and may not necessarily coincide with those of the United Nations Organization. This is a revised and updated version of a paper that appeared in the Harvard Review of Latin America. 2. Research Coordinator, Economic Commission for
Latin America and the Caribbean, United Nations. 3. Economic Affairs Officer, Economic Commission for Latin America and the Caribbean, United Nations. 4. The term “New Left” is not used in the
European sense of the last thirty years, but only to identify the
left-of-center governments currently in power in Latin America. 5. Ricardo Hausmann
(2006) recently stated in the Council of the Americas that voters in Latin
America tend to shift to political options based on heterodox economic
programs, concerned with distribution, when the terms-of-trade of their
primary commodities and mineral resources are high. And, analogously he
claimed that they favor more orthodox stabilization policies in times of
economic slowdown and high inflation. 6. Bolivia’s launched an Agrarian Reform to
redistribute 22 million of unused productive hectares to poor families. It is too early to tell whether these
reforms will actually be fully implemented, and what will be their socioeconomic impact. ___________________________________ SUGGESTED CITATION: |
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