Latin America's failed macroeconomic dictatorships

Enrique Dussel Peters Professor of Economics Universidad Nacional Autsnoma de Mixico Project Syndicate

In the 1990s Latin Americans were patted on the back for ridding themselves, at long last, of the military dictators that had blighted the continent's history. But the dictatorship of generals, sadly, was replaced by the dictatorship of an idea: macroeconomic stabilization. Now that dictatorship, too, is beginning to crumble. May it be buried quickly.

In the wake of Argentina's full-scale collapse and the slowing of economic growth across the region, debates about economic policy have intensified. What, people ask, has Latin America really gained from the restrictive macroeconomic policies it has pursued, for the most part, since the debt crisis of the 1980s? Are people better off? Has the continent learned anything from this experience? Is it time for this dictator to go?

In the early 1980s, much of Latin America was in serious economic trouble -- triple-digit inflation, huge fiscal deficits, and negative growth rates -- after decades of following a macroeconomic policy that emphasized import substitution. Then a group of Latin American economists educated in American universities began to suggest an entirely different development strategy.

They argued that integration into world markets demanded macroeconomic stability. In country after country, production shifted toward exports. According to this vision of development, macroeconomic policy should choke off inflation and rein in fiscal deficits, with foreign private financing becoming the principal source of investment capital.

In the face of the reality it has produced, this "vision" is now being savaged for its blindness. Its proponents and adherents failed to consider such fundamental and traditional macroeconomic variables as demand, production, investment, consumption, employment, wages, and the distribution of income. All of these disregarded details were part of neoclassical economic theory at least since the 1960s. Perhaps they enjoyed that role for a reason.

What have been some of the effects in Latin America of making macroeconomics supreme? The Economic Commission for Latin America and the Caribbean (CEPAL) has compared the periods from 1945 to 1980 and 1990 to 2000. Among its most important findings:

o On average, inflation rose by 20 percent annually from 1945 to 1980, 400 percent in the 1980s, and 170 percent in the 1990s;

o Exports grew four times as much from 1990 to 2000 as in 1945-1980, with imports duplicating the rate of growth of exports;

o Only Argentina and Chile demonstrated dynamic economic growth from 1990 to 2000; by 2003, only Chile remained in this category. In terms of per capita gross domestic product, the region's average annual growth rate of 3.1 percent in 1945-1980 fell to 1.6 percent in 1990-2000;

o Income distribution worsened. Whereas 35 percent of all households lived below the poverty line in 1945-1980, the share rose to 38 percent in 1990-2000.

Despite years of failing to improve income distribution or to create real jobs, investment, and livable wages, the dictatorship of macroeconomics remains entrenched. Latin American governments obstinately continue to give priority to fiscal discipline and controlling inflation in the hope of attracting foreign investors.

Mexico offers an excellent example of this flawed policy. From 2001 to 2003, Mexico's GDP has fallen by an average of 0.7 percent per year, 933 of the foreign-owned maquilas have shut down, translating into a loss of more than 290,000 jobs, or 27 percent of all maquila operations. Manufacturing has likewise lost 660,000 jobs -- 15 percent of the total.

Yet the prevailing macroeconomic emphasis on controlling inflation and fiscal deficits means that a real exchange rate of the peso that was overvalued by 30 percent is simply ignored, and bank loans to the productive sector are vanishing. In 2003, for instance, commercial banks financed a mere 22 percent of the number of firms they backed in 1995.

In short, the productive sector is being sacrificed for the sake of controlling inflation and the fiscal deficit. Pursuit of these macroeconomic goals was one the primary causes of Argentina's economic woes.

Across Latin America, a dangerous polarization has resulted. Large domestic and foreign export-driven corporations and investors are favored at the expense of the productive sector and salaries. The dictatorship of macroeconomics is neither inclined to make concessions or to learn from past experience. This can only be explained as the result of a Manichean ideology that insists on a stark choice between macroeconomic stability and chaos.

In contrast to this simplistic vision, a growing group of academics from the region's universities and businessmen such as Carlos Slim in Mexico, have proposed the need to reform economic reform. They call for the creation of public policies that, together with private initiatives, will reorient the political economy by putting employment, real wages, and regional integration at the center of a new development strategy that can be sustained well into the future.

It is already clear that it is impossible to sustain an economically viable macroeconomic policy with a crisis-ridden productive sector that fails to create jobs or to distribute income relatively equitably.

Moreover, it is clear -- or should be clear from the experience of Argentina and Bolivia -- that social and political stability is impossible to achieve if something isn't done to stem the deterioration of real wages that excludes a large and growing proportion of Latin American society.