Neo-Liberalism in Latin America-I

contributed by Umair Siddiqui & Tariq Aftab

This paper aims to study the advent of neo-liberalism in Latin America by looking at the backdrop that made it possible. It will also study the impact made by neo-liberal policies on the region, its economy and people. The paper has been divided into two parts. The first part will study how neo-liberalism found its way into South America and the initial impact it had. The second part of the paper will look at the social reform movements that sprang up as a result of mass discontent for neo-liberal policies. The aim is to gain a better understanding of the economic and social history of Latin America through the eighties and nineties and to see how a radical reform movement for development from the west fit in to this environment. This will provide a base for better understanding of how to exact successful development in the region.

Neo-Liberalism in Latin America

Neo-liberalism exploded into Latin America in the early eighties and since then, it has managed to establish a very strong foothold in the region. The introduction of this school of thought came with the advocacy and even enforcement by the World Bank and IMF following the debt crisis of 1982. The debt crisis gave massive power to these financial institutions as Latin American economies became more and more dependant on loans from them. The major event which marked the debt crisis occurred in August 1982 when Mexico declared that it could no longer afford to pay its foreign debt. The event exemplified the emerging problem developing in Latin America with the failure of import substitution. The period was marked by a sharp reduction of outside investment in the region, which had previously fuelled the economies. The debt crisis led to a loss of confidence and banks refused any lending.

The newly emerging neo-liberal sentiments on the world stage seemed a perfect remedy for Latin America. The staunchly neo-liberal World Bank and IMF stepped in and proceeded to solve the crises using their methods. The economic plans imposed by neo-liberalism were broadly based on two stages. The first was immediate stabilization of the economy through reduced demand and recession. The second was a longer term strategy of structural adjustment. After this, the economy would go into a phase of export-led growth. At that time, and even to the present day, the World Bank and IMF were confident that their method would yield the necessary results. The impact of these neo-liberal policies on some of the Latin American countries will now be discussed briefly.

Neo-liberalism in Bolivia:
Bolivia is said to be one of the success stories of the neo-liberal approach. The advent of neo-liberalism in Bolivia came about in 1985, when a new government came into power. The country at that time was in a huge economic crisis with hyperinflation and a shrinking economy, and was unable to keep up with debt repayments.

The desperately needed aid from the IMF came after certain conditions were met. The conditions were a list of reform adjustments in the economy. These included removal of trade barriers, freezing of public sector wages, deregulation of labor laws, and massive lay-offs. The measures were effective in the short run. Inflation fell rapidly and was under control by 1987. A severe recession was avoided and the economy started to grow slowly.

However, the seeming success came at a cost. There was massive unemployment and the gap between the rich and the poor was widened. The end of protectionism resulted in the shutting down of hundreds of businesses and the tenuous industries of the country fell into collapse. The percentage of people living in poverty increased from 74.6% in 1987 to 80.1% in 1991. Also, in the city of El Alto, almost all of the births were underweight. Such were the conditions all over the country throughout the eighties. The suffering of the poor, unemployed masses was apparent and was demonstrated through protests, strikes and violence throughout the eighties and early nineties.

Neo-liberalism in Nicaragua:
Nicaragua was also forced to accept neo-liberal principles in exchange for lending. In the regime of Voileta Chamorro, 250000 public employees lost their jobs in the first three years, causing unemployment to double from 11 to 22%. Industrial employment fell by a third. Even after this, in 1994, when a new agreement was signed with the IMF, there were conditions requiring further action. These included cutting more public sector jobs, freezing spending on health and education, higher utility rates, fees for health and education, and higher sales taxes. The government was not in favor of such policies but was powerless against the IMF due to the need for lending and strong international influences. According to a UN study, the next generation of Nicaraguans will be smaller in size, weaker and less intelligent than before. Even after these harsh measures, the economy as a whole does not seem to be showing the promised signs of success.

Neo-liberalism in Mexico:
Ever since its debt crisis in 1982, Mexico faced the same neo-liberal fate as the rest of Latin America. The harsh policies enforced by the IMF did not seem to help much, though there was a period of export boom in 1984. By the mid nineties, Mexico faced a foreign currency shortage caused by decreasing investment in bonds. This shortage caused a drain on national reserves. However, the sudden loss in investor confidence caused created a huge problem. Mexico did not have the money to pay its many international debts, accumulated through selling bonds, and the country was on the verge of a second debt crisis. In the end, however, Mexico was saved by a very large U.S loan. This shows the fragility of the economies of Latin America in this period of apparent economic recovery. Much like everywhere else in the region, Mexico experienced a rejection of the policies by its people. This led to protests and a guerilla uprising in 1994 which caused over a hundred deaths.

Neo-liberalism in Brazil:
Brazil, which was one of the biggest economies of Latin America, also suffered severely from the debt crisis. However, it was one of the very few nations that managed to recover from the recession. In 1984 alone, Brazil’s manufacturing exports grew by 37%. However, in 1985, a new government took over and diverted from the neo-liberal principles. The policies that followed allowed for a growth rate of 8%. Brazil was at this point the only successful economy in the region. However, the success was short lived. Export in Brazil began to decline and the inflation could no longer be controlled. By 1988, inflation was soaring at around 1000% and the apparent success of Brazil was proved a misconception.

Sentiments about neo-liberalism:
The debt crisis of 1982 had left the economies of Latin America in disarray. Foreign investment had become non-existent and commercial banks refused any lending. This put the countries in a very vulnerable position. It proved to be an ideal chance for the IMF and World Bank to exert pressure on these economies and gain control of economic policy making. This was the period which experienced a resurgence of liberal economic thinking in the west and became refined into what is known as neo-liberalism. The economic policies followed by the powerless economies were very rigid and inherently ignored the possible costs and consequences that came with it. The immediate goal of stabilization through reduction in demand proved disastrous to the poor masses. Massive unemployment became rampant throughout the region. Deregulation of labour laws meant that hiring and firing was done at will.

Workers saw reductions in wages and there was little, if any, protection for these workers’ rights. Apart from this, the neo-liberal policies demanded that public sector spending be cut down. This led to thousands of public sector job losses. Also, subsidies and price controls were eliminated. Spending on such necessities as health and education was also cut. All these measures resulted in severe decline in living standards for the majority of people. The gap between the rich and poor became ever wider and sentiments of deep resentment were common throughout the continent.

Throughout the eighties, large scale public discontent was reflected in the well-known IMF strikes. These riots were seen throughout Latin America and often resulted in loss of life and large scale destruction to property. Examples of such incidents include the 1984 demonstrations in the Dominican Republic, which led to the killing of over 100 civilians and left many more wounded. Also, the riots in Venezuela in 1989 left 300 or 1500 people dead, depending on source. The severity of the protests and their profuseness is a stark expression of how deeply the lives of the masses were affected. Thus, it becomes clear that neither the World Bank and IMF nor the entire west that backs them are in favor in South America.

The Debt Trap:
One of the biggest criticisms of the policies of the World Bank and IMF is the issue of the debt trap. Struggling economies who borrow money from these institutions become trapped in a vicious cycle of debt payments and repayments. For an economy that does not even have enough resources to feed its people, it becomes very difficult to repay the debt with interest. This debt servicing consumes large portions of the revenue earned by these countries.

The philanthropic image displayed by the lenders of aid seems to be a mere cloak for a massive profit making business. Throughout the decade of reform in Latin America, for example, the lending institutions made profits of tens of billions of dollars in the form of interest on debt. Such profit making, at the expense of the lives of millions, hardly seems justifiable and tarnishes the image of the lenders.

In conclusion, it can be seen that the policies of the World Bank and IMF have had limited success in the backdrop of many failures and pervasive public hatred. The decade of the eighties was consumed by economic turmoil and the promises of development by the west did not materialize as expected. This limited success came at a price which seems to high. Thus, the ideals of neo-liberalism seem to have, for all intents and purposes, failed. The plan of developing Latin America and introducing it to neo-liberal principles backfired completely. Latin America did not develop and neo-liberalism, instead of being welcomed and incorporated, became hated as a symbol of western suppression.

About the author

Tariq Aftab Hussain

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  • Wonderfully researched work!!!! Very quick and brief idea of whats going around in Latin America. Great work guys