The Free Market Experiment in Latin America

Neoliberalism

Neoliberalism may best be thought of as an economic theory which favors a limited role for the state in the economy. From this perspective, the state should act in defense of private property and contract rights, but otherwise should avoid interfering in the economy. Neoliberalism involves cutting government spending; balancing the budget; selling off government-owned enterprises; ending government subsidies; eliminating price controls for all commodities and services, including basic necessities; letting the market, not government action, set the minimum wage; ending restrictions on foreign ownership of domestic assets; the lowering or eliminating of tariffs; and ending restrictions on foreign profit repatriation.

Neoliberalism began as an anti-mainstream body of thought, most fully articulated by Friedrich von Hayek of the Austrian School of Economics (Nobel Prize in 1974) at the 1947 founding of the Mont Pelerine Society. By the 1970s, the University of Chicago’s Milton Friedman (Nobel Prize in 1976) had further articulated and help spread the free market vision. The philosophy gained significant political support in 1979 with the election of British Prime Minister Margaret Thatcher who was strongly influenced by Hayek. US President Jimmy Carter’s 1979 appointment of Paul Volcker as head of the Federal Reserve Bank and then the 1980 election of Ronald Reagan gave further advance to free market impulse. Reagan pronounced the victory of the new orthodoxy at the World Bank in 1983: “The societies that achieved the most spectacular … economic progress … [were] united … [in] their belief in the magic of the marketplace” (Peet, 2009, p. 14).

Ascendant politically, the neoliberal philosophy came to dominate thinking inside the international economic institutions, at the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO). Neoliberalism became the common sense view, promoting openness, reform, competitiveness, and rationalization. It was a technocratic clean fix; it was obvious, it was beyond ideology (Ardanaz et al., 2011, p. 54; Birdsall et al., 2011, p. 82; Nef & Robles, 2000, pp. 28–31; Weisbrot, 2000, p. 5). The “Washington Consensus” had formed; no other economic ideas need be taken all that seriously.

The IMF and its sister institution, the World Bank, fully convinced of the virtue and inevitability of free markets, turned their attention to advancing these policies around the world. In this undertaking, the Latin American debt crisis of the 1980s supplied them considerable leverage. The 1980s brought Latin American’s worst economic downturn ever, a “lost decade.” Average annual gross domestic product (GDP) growth in Latin America slowed to 1.1 percent, compared to the prior decade (1970–1980) when the economy had grown at 5.6 percent a year. As the crisis deepened, Latin America desperately sought to arrange new loans just to pay the interest due on existing foreign obligations. IMF and World Bank loans were essential, for they signaled to large commercial banks the credit-worthiness of debtor nations. However, IMF and World Bank loans were conditioned upon the adoption of the neoliberal policies. By the mid-1980s, three of four Latin American nations were under IMF or World Bank supervision (Ocampo & Ros, 2011b, pp. 15–16).

But Latin American adoption of neoliberal policy was more than just the product of external pressure. Many Latin American leaders were true believers in the new economic religion. Brazilian Central Bank President Gustavo Franco summed up this attitude in 1996, holding that one could be either “neoliberal or neo-idiotic” (Palma, 2011, p. 568). Some of the converts had been trained in US universities and others were influenced by economists imported from the US. Whether out of authentic belief in the virtues of free markets or due to the pressure applied by the IMF and World Bank, by the mid-1980s neoliberalism policies were being cemented into place across in Latin America, in many places over considerable social objections and political resistance.

Economic Growth: Import Substitution Industrialization versus Neoliberalism

One way to assess neoliberalism is to look at comparative records in achieving economic growth. Of course, growth is not the only way to evaluate economics policies, and growth certainly does not automatically mean that people are better off. However, growth is the measure that many neoliberal advocates prefer to turn to, so it is fair to begin with this measure.

Previously, from the late 1940s until the late 1970s, Latin American had generally followed import substitution industrialization policies (ISI) which called for the state to take the lead role in fostering industrialization and economic development. Government provided subsidies and other financial incentives to new industries. The ISI model was promoted by the United Nations’ Economic Council for Latin America (ECLA) (today ECLAC, Latin America, and the Caribbean) as a long-term solution to the Great Depression of the 1930s. In ECLA’s view, without government action industrialization could never take root (Kay & Gwynne, 2000; Ocampo & Ros, 2011b, p. 3).

To its many critics, however, ISI was unwise and irresponsible. To this view, ISI was the product of unscrupulous populist political leadership, men who knew how to get elected but who understood nothing about economics. Critics charge that ISI inserted incompetent and often corrupt government officials into all economic matters, producing inefficient hot-house industries, and always ended in runaway inflation. Worse, the argument continues, ISI created a maze of government regulation, choking off entrepreneurship, strangling economic growth, and killing the chance for long-term development.

What is lost in this critique, however, is that Latin America’s annual GDP growth rates set historic highs under ISI policies. In the years 1870 to 1913, Latin America’s GDP rose at a rate of 3.3 percent a year; from 1913 to 1950, 3.4 percent a year; but from 1950 to 1980 under ISI policies, Latin America’s GDP increased at 5.5 percent a year, a rate well in excess of the global average. Economic growth in Latin America under ISI or state-led development was actually much stronger than that subsequently achieved under neoliberal policies. From 1950 to 1980, the era of ISI, Latin America averaged 3.11 percent a year per capita GDP growth. In the 1980s during the change-over to neoliberal policies, per capita average annual GDP growth actually declined 0.9 percent a year. During the 1990s, a time when neoliberal policies were in place nearly everywhere in Latin America outside of Cuba, average annual GDP per capita growth scored an anemic 1.1 percent a year. Over the past three decades, most of it spent under neoliberal polices, Latin America’s per capita GDP growth has also been slower than that in other parts of the world. In 1981, Latin America’s per capita GDP was 20 percent above the world average, but by 2006 it was 11 percent below the world average (Ardanaz et al., 2011, p. 53; Bacha & Fishlow, 2011, p. 403; Birdsall et al., 2011, pp. 90–91; Bresser-Pereira, 2011, pp. 111–112; Cimoli & Porcile, 2011, p. 551; Franko, 2007, pp. 65, 131, 134, 137, 139; Moreno-Brid & Ros, 2009, pp. 7, 10; Ocampo, 2004, pp. 67–68; Palma, 2011, p. 567; Ros, 2009, p. 38; Stallings & Peres, 2011, pp. 757, 761–762).

Under neoliberalism policies in the years from 1990 to 2004, Latin America’s per capita GDP rose at only 1.3 percent a year, seriously outperformed by regions which used the state to help guide development to some extent, South Asia, 3.5 percent per capita annually; to a larger extent, East Asia, 6.7 percent per capita annually; or to a very great extent, China, 8.6 percent per capita year. For the years 1997 to 2007, Latin America’s per capita GDP annual growth rate ranked at the bottom of world, tied with sub-Saharan Africa (Abeyta, 2008; Bruton, 1998, pp. 924–925; Hausmann, 2011, p. 521; Ocampo & Ros, 2011a, p. 20; Palma, 2011, pp. 568, 602).

Conventional wisdom about ISI is that it while might have produced some growth it could not lead to a takeoff into sustained development. While some heavy industry emerged, this was only because the factories were cocooned in government protection. However, this commonly repeated viewpoint is contradicted by the evidence. Under ISI polices from 1950 to 1981, industrial output rose 10 times over in Mexico and Brazil, and three times over in Argentina and Chile. For Latin America from 1939 to 1973, industry as a percentage of GDP rose from under 17 percent to over 25 percent (Kay & Gwynne, 2000, p. 54; Ocampo, 2004, p. 76; Ocampo & Ros, 2011b, p. 13; Tussie, 2011, pp. 318–319).

Critics of ISI note that economic growth slowed for Latin America in the late 1970s, proving that the ISI model had been exhausted. However, economic growth slowed in much of the world from the late 1970s to the early 1990s due to global factors, especially the OPEC oil price shocks and follow-on debt crisis. Periodic economic downturns such as this are a general feature of the international economy, not just a particular function of ISI.

A more sound historical assessment of ISI is that some, not all, of the practices and policies were flawed. One key difficulty with ISI as implemented was that under the undemocratic regimes of this age, élite interests did much to shape the policy details, and those with good political connections effectively converted what had been intended as temporary protection of nascent industries into permanent entitlements. “The … issue,” as Henry Bruton has put it, “is then to design protection measures that induce learning rather than the easy life” (Bruton, 1998, pp. 930–931). For all its flaws, ISI did work. As analyst Mark Weisbrot has noted, if Brazil had continued to grow after 1980 at the same rate it achieved under ISI policies, then “Brazil would have European living standards today” (Weisbrot, 2010). The ISI experience cannot be said to have proven that all efforts at state-led development are ill-advised.

Debt and Inflation

Critics hold that ISI policies produced massive debts, a mess created by an orgy of spending by unctuous populists pandering shamelessly to the unlettered masses (Ardanaz et al., 2011, p. 53; Birdsall et al., 2011, pp. 80, 82; Bresser-Pereira, 2011, p. 111). But there is a far better explanation of the origin of the Latin America debt crisis. The problem began in the 1970s with the ready availability of foreign loans (“an irresistible temptation,” as economic historian Victor Bulmer-Thomas has put it) (Bulmer-Thomas 1994, p. 427). What made foreign loans so easy to obtain were the financial implications of the OPEC price hikes of 1973 and 1974. Flush with money, OPEC nations chose the safest place to park their earnings: US banks. The banks, in turn, took the petro-dollars and sought to turn them into assets, loaning the money out. And because Latin America looked to be a great place to invest, the latest go-go area, an unprecedented cascade of dollars flowed south (Bulmer-Thomas, 1994, p. 361). Nearly all Latin American states, especially those governed by the military, borrowed heavily in these years, using the money to cover current expenses, forego taxes increases, or on bad-idea white elephant projects. Sometimes, the money just disappeared.

The heavy borrowing and unwise spending was unsustainable. Mexico came near default in 1982, and suddenly Latin America appeared to be a very bad place to invest. New lending dried up, leaving behind only vast sums to be repaid. Just paying the interest due on the foreign debt often claimed nearly half of Latin America’s export earnings in the 1980s. As economic historians Werner Baer and Joseph Love observed, “during the 1980s many Latin American countries made larger transfers as a share of GDP than the reparations payments of Germany after the First World War” (Baer & Love, 1996, p. 55).

The 1980s and the early 1990s were a time of extraordinarily high inflation in Latin America, and taming inflation was a central objective, even fixation, of the neoliberal project. In Brazil, the annual inflation rate reached as high as 1,862 percent (in 1989); 2,177 percent in Bolivia (1984); 4,924 percent in Argentina (1989); and 7,482 percent in Perú (1990). Today, inflation rates are in single digits nearly everywhere in Latin America (Birdsall et al., 2011, p. 85; ECLAC, 2010, p. 21). But it was not so much the careful application of neoliberal cures as the easing of the debt crisis by the mid-1990s that underlay the decline in inflation rates. What had most been driving hyper-inflation was the servicing of the vast foreign debt. After the US Brady Plan of 1989 allowed indebted Latin American countries access to the secondary loan market, Latin American nations began to buy back some of their external obligations, steadily lowering their total foreign indebtedness. Paying less in servicing their foreign debts, they borrowed fewer dollars, thereby reducing the money supply, and lowering inflation.

Recent Growth Performance

The years from 2003 to 2008 brought strong economic growth for Latin America as a whole, with a combined average growth rate a healthy 5 percent a year compared to the world average of 3.6 percent a year. The top regional economic performers were the winners in the “commodity lottery,” where in any given year some primary product exports do particularly well in the international market (Bárcena, 2010, pp. 9–10; Lora, 2011, p. 368; Santiso & Zoido, 2011, p. 293; Stallings & Peres, 2011, pp. 761–762). Chile and Perú have done well in the commodity lottery, with increased production of copper, fruit, fish, and lumber for Asian markets. By 2008, China and Japan purchased a fifth of Peruvian and quarter Chilean exports, with raw materials making up three-quarters of shipments (Cimoli & Procile, 2011, p. 552; ECLAC, 2010, p. 33; 2012, p. 7; Gallagher & Porzecanski, 2011, pp. 465, 467, 484; Weintraub, 2009, p. 59). However, while this growth is good, raw material export is not a pathway to economic development. Focusing on primary product extraction serves instead to reinforce existing productive structures (Abeyta, 2008; Bacha & Fishlow, 2011, p. 398; Economist, September 11, 2010a, p. 8699; Miguel & Sunkel, 2011, p. 131; Pineda & Rodríguez, 2011, pp. 414–415).

The boom ended in 2008 and Latin America fell into a sharp recession until the mid-2009, a downturn second in severity only to the Great Depression of the 1930s. This difficult episode, a time when the Latin American economy contracted by 3 percent per capita in 2009, was in many ways the result of the stripping away of government regulations, safeguards which might otherwise have served to protect Latin American economies from speculation-driven swings in the international economy (ECLAC, 2010, pp. 7, 18; Ffrench-Davis & Griffith-Jones, 2011, p. 161).

Some free market supporters argued that what explained the failing Latin American economies was that they were “non-compliant” in adopting neoliberal measures. Had these nations authentically embraced the free market philosophy then things would have gone much better, this view held. For the many obviously neoliberal states that failed to grow, defenders of the free market model seized upon any doctrinal apostasy, no matter how minor, in an effort to explain away weak economic performances. In the alternative, defenders of the free market model argued that nations that failed to grow under the neoliberal regimen did not have the right institutions: honest and efficient bureaucracies; respect for rule of law; protection of private property rights, especially intellectual property rights; contract enforcement; or a sound banking structure. However, it is at least equally valid to argue that these institutions are created by the process economic development, not the foundation of it. History would seem to so suggest (Bértola, 2011; Chang, 2005, 2008, 2010; Starr, 2009, p. 226).

The Latin American economy recovered from mid-2009 to the present. Economies commonly post strong growth numbers coming out of recessions as they make use of under-utilized capacity. The Latin American nations that came through this episode the most quickly were those that employed counter-cyclical Keynesian government spending programs designed to stimulate the economy. Ecuador, for example, greatly expanded its housing assistance and cash transfer programs to poor households. Of the countries that bounced back the strongest from the recession – Brazil, Uruguay, Paraguay, Argentina, and Perú – only Perú actually followed neoliberal policies (Birdsall et al., 2011, p. 93; Cárdenas & Perry, 2011, p. 267; Chang, 2010, pp. 247–248; ECLAC, 2010, p. 19; Ray & Kozamen, 2012, p. 1; Stallings & Peres, 2011, pp. 761–762).

Social Conditions and Neoliberalism

Poverty in Latin America has been reduced substantially in recent years. In the late 1980s, nearly half of the population of Latin America lived in poverty. Today, the fraction is about a third (Bárcena, 2010, pp. 10–11; Ocampo, 2004, pp. 81–82). This is important progress, and it has continued in some nations. Still, it is worth underscoring that for the years from 2002 to 2008 poverty fell most in Venezuela, Bolivia, Nicaragua, and Argentina, nations which had largely abandoned neoliberalism; in Brazil, which had at least partially rejected neoliberalism; and in only two neoliberal states, Honduras and Perú (Bárcena, 2010, p. 12; Montecino, 2011, p. 1; Puryear & Molloy Jewers, 2009).

Yet it was mostly factors beyond economic policy that explain recent declines in Latin American poverty. One was increasing remittances from Latin American workers laboring in the developed world, especially in the US. Total remittances from Latin American workers rose from $12 billion in 1995, to $45 billion in 2004, and $68 billion in 2006 (Weintraub, 2009, p. 59). But “by far the main contributor to the reduction in the poverty rate,” as Jaime Ros has noted, was “the fall in the dependency ratio” (Ros, 2009, p. 42). This ratio measures the number of non-working age people – children and the elderly – who are supported by the working age population. The higher the dependency number, the greater the economic burden.

Latin America’s demographic history underlies this shift. In the late 1940s, Latin America saw dramatically lower overall death rates (the number of people who died a year divided by the total population), especially due to lower infant and childhood mortality rates. Initially birth rates stayed high as death rates fell, but after a generation Latin America’s birth rates began to drift downward to match the lower death rates. The time gap between the fall in death rates and the eventual fall in birth rates resulted in an unprecedented population explosion. Latin America’s numbers rose from 167 million in 1950 to 285 million by 1970. Today, these people are moving through the Latin American population profile, bringing the region a historic but one-time economic advantage, the “demographic bonus” or “demographic dividend.” Latin America’s dependency ratio fell from 87.3 in the years 1965–1970, to 55.0 for 2005–2010, an all-time low. In Mexico, it fell from 102 in 1965 to 53 in 2010. In Brazil, it fell from 89 in 1965 to 48 in 2010. As a result, Latin America today temporarily enjoys a situation of a very large number of workers providing for a greatly reduced number of dependent people. Latin America’s demographic bonus means that there is, for the moment, less poverty due to the increased number of working age people per household (Bárcena, 2010, p. 23; ECLAC, 2012, p. 7; Ros, 2009, pp. 39–40, 42–43).

A drop in the dependency ratio carries with it greater female participation in the workforce, for lower fertility means there are fewer children to care for, freeing women to enter the paid workforce. Lower fertility also means better overall lifetime health for women, resulting in more years in the paid workforce for adult females. The fertility rate, the number of children born per woman per year, fell in Latin America from 5.6, 1965–1970, to 2.4, 2005–2010. The resulting demographic bonus is providing a significant, but fleeting, economic asset. By 2025, Latin America will need to support a very large elderly dependent population (Hausmann, 2011, p. 520; Helwege & Birch, 2007, p. 3; Leeson, 2011, pp. 76–77; Moreno-Brid & Ros, 2009, p. 216; Ross, 2004, p. 3). It is fair to conclude that the reduction of poverty in Latin America in recent years was produced by some short-term victories in the commodity lottery, a spike in remittances, and most of all, a one-time reduction in the dependency ratio.

Income inequality data for Latin America is less positive. In the 1980s and 1990s, inequality increased significantly in Latin America. In Mexico from 1984 to 1994, to take just one for example, the income of the top 10 percent rose by 21 percent while the income of the bottom 10 percent fell by 23 percent. Nevertheless, there have been improvements of late, albeit modest ones, in lowering the Gini coefficient (a measure of economic inequality with 0 being the least inequality – everyone has the same income, and 1.0 being the most inequality – one person has all the income).

From 2002 to 2008, the Gini coefficient came down in Venezuela, Argentina, Perú, Bolivia, Nicaragua, Panamá, and Paraguay. Five of the seven where inequality has decreased, Venezuela, Argentina, Bolivia, Nicaragua, and Paraguay, have traveled the farthest in rejecting neoliberalism. Outside of these nations, inequality stayed the same or even increased, including in the largely neoliberal states of Colombia, the Dominican Republic, and Guatemala.

In Latin America, in 1970, the richest 1 percent made 363 times more than the poorest 1 percent. By 1995, it was 417 times more. Latin America continues to have the greatest income inequality, by far, of any region in the world. Of the 15 most unequal economies in the world today, 10 are Latin American. If Latin America’s income were only as unevenly distributed as that of Eastern Europe or South Asia, its recent economic growth, however uneven and sometimes anemic, would have reduced the percentage of those living in poverty to 3 percent of the population (Bárcena, 2010, p. 12; ECLAC, 2012, p. 9; Gasparini & Lustig, 2011, pp. 691–692, 696; Helwege & Birch, 2007, p. 24; Hoffman & Centeno, 2003, p. 368; Lustig, 2009; Pribble et al., 2005, pp. 6–7; Ros, 2009, p. 38; Santiso & Zoido, 2011, p. 295; Zibechi, 2010, p. 28).

In a recent review of the Latin American economic situation, The Economist wrote that the region was “well on the way to building middle-class societies” (Economist, September 11, 2010b, p. 8699). However, the informal sector – where people arrange irregular employment without any protective regulation or benefits – today accounts for more than half of all workers in Latin America. More than eight of ten new jobs in Latin America are in the informal sector (Ocampo, 2004, p. 26). While some have sought to portray the members of the informal sector as anti-red tape, entrepreneurial heroes, they really are not. Desperately poor, people in the informal sector live by their wits, striving to scratch out a living, day by day. Meanwhile, union membership among active workers in Latin America fell from around one-quarter in the 1980s to under one-sixth by the 1990s.

Significant areas of severe poverty remain in Latin America, expressed along class, racial, gender, and regional divides. Poverty underlies poor health situations, contributing to elevated rates of infant, childhood, and maternal mortality. Of those living in poverty in Latin America, nearly half are children. Due to undernourishment, a quarter of Latin American children, and over half of children in rural Perú and rural Guatemala, is stunted in their development. In Perú, the infant mortality rate for the poorest fifth of the population is five times higher than that of the wealthiest fifth. In Mexico, childhood mortality (age 5 or younger) is two and a half times higher for indigenous than non-indigenous people. Across Latin America, malnutrition is an underlying cause in more than half of the deaths of children under the age of five. In Guatemala, maternal mortality among indigenous women is 83 percent higher than the national average. In Perú, among the poorest fifth of the population, 85 percent of births are not attended by trained personnel, compared to only 4 percent among the wealthiest fifth.

Today, two-thirds of Latin American municipalities do not treat their sewage prior to dumping it into adjacent rivers or the sea. In Panamá, three in ten homes lack access to improved sanitation (sewage disposal), and in Perú, nearly four in ten lack this essential service. Yet with all this effluvium flowing out, still three-quarters of Latin America municipalities do not check public drinking water supplies for impurities. One-quarter of Latin American people do not have in-home potable water (Casas et al., 2001; ECLAC, 2005, pp. 68, 73, 139, 141, 144, 148–150, 163; 2012, p. 12; Gasparini & Lustig, 2011, p. 717; Londoño & Székely, 2000; Montenegro & Stephens, 2006, pp. 1859–1869; Pan American Health Organization [PAHO] 2002; Replogle, 2004, pp. 2056–2057).

In Latin America, today nearly two-thirds of hospital admissions are due to diseases related to the lack of sanitation. Diarrhea accounts for six of every ten deaths of children under the age of five in Latin America. Fresh water saves lives: with each percentage point increase in potable water coverage, the infant mortality rate drops 1 death per 1,000 live births. But conditions are not improving. Life expectancy in Latin America was 5 years longer than East Asia in the mid-1960s; by the mid-1990s, it was 1.2 years shorter (Boscov-Ellen, 2009; Powdar, 2008).

The weight of this evidence leads to an inescapable conclusion. Cambridge economist Ha-Joon Chang has put it most succinctly.

The Abandonment of Neoliberalism

“There is no alternative [to free market policies],” British Prime Minister Margaret Thatcher once pronounced, but across Latin America there has been a steady erosion in support for the free market model. As of 2014, three-quarters of Latin America governments may fairly be characterized as being governed by center-left or left-oriented leaders.

There has been a far-reaching reassessment of the wisdom of IMF advice, especially after the organization’s punishing response to the 1997 and 1998 Asian economic crisis. The Asian economic meltdown brought the reflexive recommendations from the IMF: harsh austerity measures. This time, however, the pro-cyclical policies demanded by the IMF so plainly worsened the economic situation and needlessly caused considerable human misery that the IMF’s reputation was badly damaged. In the wake of IMF’s subsequent mishandling of the 1998 economic crises in Russia and Brazil, large private lenders, especially European ones, stopped requiring IMF assurances that borrowing nations follow neoliberal strictures. As Richard Peet has noted, “the … [IMF]’s reputation has never recovered, even in circles that the Fund values.” “The power of the IMF has been reduced by failed crisis management, [with] countries paying up as quickly as possible and distancing themselves” from the IMF (Peet, 2009, pp. 93, 125). European lenders concluded that new loans to non-neoliberal Latin American states would perform just fine, which, in fact, they have. The IMF’s power to impose neoliberal policies on debtor nations has been seriously compromised.

Argentina, following its severe economic crisis in 2001–2002, proved that a nation could challenge the IMF and get away with it. Argentina defaulted on its $100 billion foreign debt and renegotiated its obligations, paying off at a fraction of the original cost. Argentina finished retiring its debt to the IMF in 2005, benefitting greatly from Venezuelan assistance. In offering the money, Hugo Chávez promised that “if additional help is needed to help Argentina finally free itself from the claws of the International Monetary Fund, Argentina can count on us” (Weisbrot, 2006).

Other Latin American nations looked on as Argentina defied the IMF, and continued to watch as Argentina’s economy soared, growing faster than any other nation in the Western Hemisphere after it abandoned IMF-imposed economic policies. Soon a stampede of those flouting IMF mandates followed, with each new defection providing courage to all those nations rejecting neoliberalism. A prison break ensued.

Other international lenders appeared. Venezuela loaned money to other nations, including Bolivia, Ecuador, and Nicaragua, but only if they ignored the counsel of the IMF. The Bank of the South, established in 2007, joined Venezuela with Brazil, Argentina, Ecuador, Bolivia, and Paraguay as an alternative source of credit. China is also supplying capital, and China does not care what the IMF recommends. At the same time, some primary product commodity export prices have trended up recently, in part due to the rise in global demand driven by increasing Chinese imports. This has allowed several Latin American states to build up their financial reserves, making new foreign borrowing less necessary. Today, the IMF can coerce only the most feeble economies, really only now in sub-Saharan Africa.

The political landscape has shifted too. By the late 1990s, the old left-wing political parties built around organized labor had been flattened by the assault on unions under neoliberalism. At first, voters were willing to give candidates that supported the neoliberal program a chance, but as it became increasingly clear that the policies were failing, those who spoke out against neoliberalism were elected. The trouble was that once in office they too often carried out neoliberal programs anyway, either because they secretly favored these policies, because the IMF forced them to, or both.

With the traditional left-wing parties marginalized, and with the abandonment of anti-neoliberal promises by elected politicians, ordinary people had to develop new political methods to defend themselves. Neoliberal policies so savaged the working class, the urban marginalized, and the peasantry that they had no choice but to organize and fight back. To this end, they created new organizations and, in some cases, used them to seize power. By pressing the neoliberal agenda, the Latin American élites had overplayed their hand, and they have paid for it by losing control of governments they had controlled for so many years, in Venezuela, in Ecuador, in Bolivia, and beyond. A 2009 Latinobarómetro Survey found that support for democracy as preferable to all other forms of government was highest in nations that rejected neoliberalism. Of the top five nations in popular support of democracy, four were governed by progressive leaders: Venezuela, Bolivia, Uruguay, and El Salvador (Economist, December 10, 2009).

Supporters of the free market approach have continued to counsel patience. The theory predicts that growth will come, and that all will benefit in the long run. While neoliberal reforms might cause some short-term belt tightening, defenders explain, such adjustments, while sometimes painful, are necessary for the larger good. We should not give in to “reform fatigue,” but stay the course, they advise (Birdsall et al., 2011, p. 90; Stallings & Peres, 2011, p. 757). But neoliberal policies have been in place for over 30 years, now. How long is the long run? How long must we wait? As John Maynard Keynes famously observed, “in the long run we are all dead.” In 1937, US President Franklin Roosevelt observed, “We have always know that heedless self-interest was bad morals. We know now that it is bad economics” (Roosevelt, 1937). The age of neoliberalism is ending. It is time for some good economics.

What Is to Be Done?

As Latin America moved away from neoliberal economics in recent years, with several governments reversing privatizations, advancing economic nationalism, readopting and extending social programs, some neoliberal supporters have either sought to deny this reality – “there has been little backsliding” – or else have derided these steps as irresponsible populist giveaways, a sad retreat from the hard-won gains of modern economic reform (Stallings & Peres, 2011, p. 761). Neoliberals’ faith in the Washington Consensus orthodoxy is unshakeable. But these laments notwithstanding, the conversation has moved on to the construction of developmental economic policies that are evidence-based and to policies that put urgent human needs first.

There has been a renewed spirit of experimentation by progressive governments in Latin America, but what has been missing has been the articulation of an alternative model of economic development. Fortunately, the practical experiences of anti-neoliberal governments coincide with some very important new work in thinking through the broader issues of economic development. Some of this began last decade in ECLAC under an approach sometimes termed “neostructuralist.” This perspective sought to reconcile emerging globalization under neoliberalism with ECLA’s previous structuralist outlook, a stance that had focused on the center–periphery structure of the world economy. Since then economists and economic historians, including Jeffrey D. Sachs, Joseph Stiglitz, Eric Reinert, some of the recent position papers of the ECLAC, publications from the Center for Economic Policy Research, and most important of all, the work of Ha-Joon Chang, have in selected portions of their work, and each in their own way, laid out individual aspects of an alternative approach to development (Bárcena, 2010, p. 8; Beasley-Murray et al., 2009, p. 321; Bresser-Pereira, 2011; Chang, 2005, 2008, 2010; Macdonald & Ruckert, 2009, pp. 1–2; Reinert, 2007; Rovira, 2011, p. 228; Sachs, 2005, 2008, 2011; Stiglitz, 2003, 2006).

Several points are clear. We must reject the formally mathematical approach of orthodox economics and neoliberalism’s abstract, deductive, theory-based reasoning. We must reject the one-size-fits-all reductionism which has meant ignoring essential features of each particular setting. We must reject neoliberalism’s embrace of David Ricardo’s nineteenth century theory of comparative advantage. Policies which focus on nature-made primary product exports can yield only decreasing returns and stagnant labor productivity (Reinert, 2007). We must reject faith-based thinking. To believe in the magic of the market is to believe in magic. Policies which will only work in theory have harmed the actual living people who reside well outside of the happy assumptions of orthodox theory.

In its place must come an approach that is concrete, inductive, and, most of all, empirically grounded. We should strive to develop an approach which promotes a process of continuous emulation, using the state to guide economic activities into areas of human-made increasing returns, knowledge-intensive, high value-added activities which increase labor productivity (Bárcena, 2010, p. 20; Bielschowsky, 2009, p. 172; Ferrer, 2010, p. 12; Hausmann, 2011, pp. 523–524; Kay & Gwynne, 2000, pp. 55, 62).

Central to the neoliberal project has been the assertion that the most economically developed nations in the world today achieved their success by carefully following free market policies. This claim, while often repeated, is historically inaccurate. Industrialization, the core of economic development, came only with considerable government interference with free markets.

The need to protect infant industries has been understood and clearly articulated for quite some time. Alexander Hamilton, the US Secretary of the Treasury 1789–1795, in his work Reports of the Secretary of the Treasury on the Subject of Manufactures (1791), and subsequently German economist Friedrich List (1789–1846) in his book, The National System of Political Economy (1841) both championed an active role for government in the developmental process. List had been won over to this viewpoint after he observed Hamilton’s efforts in the US, where List lived from 1825 to 1840. Following this advice, both nations used government to protect young industries, employing protective tariffs, subsidies for nascent industries, import quotas, the practice of refusing to honor foreign patent protection, rebates on industrial inputs, government-funded research and development, and government funding of transportation infrastructure, among other measures.

In Great Britain, protective measures actually date back to the reign of Edward III (1327–1377) who banned the importation of woolen cloth to protect England’s promising wool manufacturing trade. Steps to protect Britain’s wool manufacturers continued under Tudors Henry VII (1485–1509) and Elizabeth I (1558–1603). In 1587, Britain banned the export of all raw wool, destroying the Low Countries wool manufacturing enterprises which relied upon cheap imported raw wool from Britain. In 1721, Prime Minister Robert Walpole (under George I, 1714–1727) took further steps to induce British industrialization, stating that “it is evident that nothing so much contributes to promote the public well-being as the exportation of manufactured goods and the importation of foreign raw materials” (Chang, 2005, p. 21). Walpole hiked tariffs on imported manufactures (Chang, 2005, pp. 19–24).

During List’s stay in the US, he noted with approval the rejection of the advice of Adam Smith in Wealth of Nations, and instead used “common sense” to protect its infant industries. The US set in place mildly protective tariffs in 1812, and by 1816 taxed most imported manufacturers at a rate of 35 percent. Despite Southern opposition, higher tariffs followed in 1824, 1828, 1832, and 1842. During the Civil War, with the South withdrawn from the nation and therefore without a voice in congress, the North passed strong protective tariffs in 1862, and even higher ones in 1864 (Chang, 2005, pp. 24–32).

As Chang notes, “Britain is widely regarded as having developed without significant state intervention … [but] this could not be further from the truth,” and in the US, “the importance of infant industry protection … cannot be overemphasized.” “US industries were the most protected in the world” (Chang, 2005, pp. 19, 25). Neoliberal theory notwithstanding, prior development actually relied upon the state to protect infant industries.

Accordingly, some of the state-led growth and development aspects of the previous ISI policies should be reconsidered. ISI in Latin America, despite flaws of design and especially of implementation, did coincided with a period of growth, industrialization, and economic development.

As it was implemented ISI often privileged foreign-based multinational corporations operating within Latin American host nations, an arrangement that did nothing to stimulate the domestically held industries which are so central to economic development. The terms of foreign participation must be structured to benefit the host country, and there is no good reason to suppose that leaving this key issue to be sorted out by unregulated market forces will result in development for the host nations (Ferraz et al., 2011, pp. 440–441, 456).

ISI should have been time-bound, not a perpetual entitlement to favored élite families, and should have been tied to performance. Moreover, import substitution industrialization is not enough; industrial exports must be part of the mix. Indeed, although most critics of ISI seem to forget this point, in the 1960s ECLAC advocated and some Latin American nations began to adopt a mixed approach to industrialization, with both import substitution and exports (Ocampo & Ros, 2011b, p. 6). Chang and others have argued for state–private industrial partnerships in areas that are innovative and that provide increasing returns, targeting available niches in the international economy. It is essential, Chang notes, that state support be patient. It may take a decade or even longer for protected state–private firms to become internationally competitive. If after this they still cannot compete, then ultimately the state will need to cut its losses. If they can compete, then the state should gradually remove the protections previously provided. This strategy has been empirically tested. It worked with the “Asian Tigers” and it will work again elsewhere. In addition, nations’ development plans for targeted global niches should be joined with incentives in advanced education to match the needs created by national economic policy. It is essential to train the experts that the economy will need. If this is done, the educated will be less likely to emigrate (Bruton, 1998, pp. 920–923; Chang, 2008; Hausmann, 2011, p. 528; Kay & Gwynne, 2000, p. 62; Ocampo, 2004, p. 85; Taylor, 2008, p. 544).

Care in building a domestic market is essential. Because pay increases in one area tend to spill over to other areas of employment, good paying jobs in industry tend to raise pay levels for the entire workforce. Unlike Latin America, in East Asia land reform typically came before ISI, holding down the flood of rural to urban migration which otherwise could overwhelm the available jobs in industry, driving wages to the subsistence level. On the other hand, if wages rise this helps create a larger home market, and with this, the potential for self-sustaining economic development. As it was, ISI was put in place in Latin America without land reform, even as ECLAC was calling by the 1960s for this critical step. In Colombia in the ISI decades about 1 percent of landholders held over half of the arable land, in Brazil 3 percent of landholders held about two-thirds of the arable land, and in Bolivia 5 percent of landholders held about three-quarters of the arable land. This failure in sequencing was a key block to development (Bielschowsky, 2009, p. 174; Huber & Stephens, 1992, p. 86; Kay & Gwynne, 2000, p. 52).

Paying the price for an increased state presence in the economy will require raising taxes. Fortunately, the wealthy should be able to pay more. At present, the Latin American nations are under-taxed, and the overall tax structure is highly regressive. The Organization for Economic Cooperation and Development found that industrial nations collect in taxes 30 percent to 23 percent of GDP, compared with Latin American nations, which take in 18–15 percent of GDP in generally smaller economies. The attitude of too many Latin American élite that avoiding taxes is a “deporte,” a sport, will need to be changed (Cárdenas & Perry, 2011, pp. 268–269; Wagner Faegri & Wise, 2011, pp. 246, 249).

As state-led growth promotes new industries, the state should take an active role to guide investments to maximize linkages. Optimum linkages for development do not occur automatically as a function of the market, and to believe that they do is a triumph of faith in theory over empirical reality. Investors must be required to use domestic suppliers whenever possible, although this practice, “local content requirement,” is presently restricted by the WTO (Bielschowsky, 2009, p. 181). Economic diversification is also important. The state has a role in guiding the economy away from mono-export, making it less vulnerable to swings in international markets. The state should likewise demand that firms pay the real costs of negative “externalities,” such as air and water pollution, which are too often ignored by classical economics.

While Latin America enjoyed a rising tide of foreign capital that began arriving in the 1990s, it soon became clear that much of this foreign investment came to buy up public firms being privatized or else to acquire domestically held private concerns. Foreign capital did not so much start new companies in Latin America as purchase existing ones (Kacowicz, 2009; Ocampo, 2004, p. 77; Vidal et al., 2011, p. 422). Foreign capital focused on primary production extraction and assembly plant (or maquila) industries. These activities have sharply truncated economic linkages, the opportunities for local inputs and new entrepreneurial possibilities that comprise the basic building blocks of economic development. Under free market policies, the industrial base developed under ISI withered, starved for capital, as neoliberalism functioned like a modern-day Morgenthau Plan, carrying out the deindustrialization of Latin America (Taylor, 2008, p. 546).

The state needs to take actions to protect against the de-nationalization of key resources. MNCs have great power; 51 of the largest “countries” in the world are MNCs. Who owns critical domestic assets is extremely important. Foreign-controlled firms reinvest less in host nations, share technology less often, train fewer local managers, and stimulate fewer linkages than do domestically controlled firms. Local owners naturally tend to feel a greater attachment and responsibility to their home country than do absentee owners, demonstrating a stronger desire to reinvest profits, to build something tangible that might be passed down to their children and nation. As Henry Bruton observed, “the basic objective is not to attract foreign investment as such, but to create an internal social and economic environment with which the nation knowledge-accumulating process profits from the presence of foreign firms” (Bruton, 1998, p. 930).

The state should take an active role in regulating external capital flows. Small Latin American economies are especially vulnerable to “herd” panics during global financial downturns, such as the 1994 Mexican meltdown and the ensuing “tequila effect” in 1995; the 1997–1998 Asian crisis and the ensuing slow down for Latin America from 1998 to 2003; and the sharp global depression from 2008 to mid-2009. As Arie M. Kacowicz noted, “the globalization of capital flows … left Latin America dangerously exposed to the problems of other countries” (Kacowicz, 2009). Governments must, Ricardo Bielschowsky adds, “restrain the inflow of speculative capital and mitigate its undesired effects” (Bielschowsky, 2009, p. 181). Indeed, even the IMF seems to be coming to understand the need to put some controls on capital flows. This can be accomplished by charging a transaction fee for the movement of capital from a host nation and placing a severance charge for the withdrawal of foreign capital (Gallagher, 2012; Kacowicz, 2009; Ocampo, 2004, p. 77; Vidal et al., 2011, p. 422).

Internationally, it would be wise to decrease the length of foreign patient and royalty rights. Under present law, patent protection can run for up to 20 years, providing monopoly profits the whole time. While some incentive is needed to encourage research and development, the present international system offers too handsome a reward for invention. The long monopoly period slows world adoption of new technologies, reducing economic efficiency everywhere. To Thomas Jefferson, ideas were like air, and should not be owned by anyone. Switzerland did not recognize foreign patents until 1907, and enjoyed a long history of borrowing generously from German chemical and pharmaceutical engineers. As a first step, the international community should require mandatory licensing, requiring the sale of needed new technologies at reachable prices, providing for their dissemination into developing nations.

Another necessary international step is the opening of developed nations’ markets. This measure has been championed especially by Joseph Stiglitz, who has called for each developed nation to fully open their domestic markets to all goods from nations poorer and smaller in population than themselves. As Stiglitz and Andrew Charlton argued, “any agreement that benefits the developing countries less than developed countries … should be … viewed as unfair” (Stiglitz & Charlton, 2007, p. 7).

Taken together, these measures could begin to open a pathway toward the construction of an alternative vision of development for the economies of Latin America.

The road we have been on, the free market capitalist approach, has failed us.

To me the most troubling aspect of free market thinking was supporters’ conviction that free market policies represented a general extension of human liberty, that free markets and human freedom were the same (Santiso & Zoico, 2011, p. 294). The trouble with this is that I cannot agree that economic freedom is the highest individual freedom, even if some would elevate it to this status. I would place much higher the freedom to say what one wants, the freedom of print, and, most cherished of all, the freedom of dissent and of free thought. But more, individual freedoms often stand at tension with common shared rights and goals, and the promotion of these public goods, the commonweal, may well outweigh the individual’s right to indulge every impulse. To me, the way forward begins by focusing on advancing this common good.