Neoliberalism 1990-2000 PDF

 1980s was the lost decade in Latin America  GDP turned negative, foreign capital stopped flowing in, credit became scarce, investments were minimal, inflation got out of control in Argentina, Brazil, Peru, and Bolivia13-2 Unsustainable Debt Expensive Projects...

 1980s was the lost decade in Latin America  GDP turned negative, foreign capital stopped flowing in, credit became scarce, investments were minimal, inflation got out of control in Argentina, Brazil, Peru, and Bolivia13-2 Unsustainable Debt Expensive Projects & Poor Returns Unsustainable Domestic Policies External Shocks 3 ISI and Economic Populism required massive borrowing to:  Finance money losing state owned enterprise (SOEs)  Finance growing government bureaucracy  Finance social programs  Finance easy credit for domestic private companies Which DID NOT export The only sector that was generating $$$ was still commodities! 4  Upuntil deficits were financed through: ▪ Bond finance (scarce due to poor pay back record) ▪ Foreign Bank loans (used heavily from 1974- 1982) ▪ Official lending (by governments or IMF/World Bank) ▪ Direct foreign investment (scarce due to protectionism) ▪ Portfolio investment in ownership of firms (protectionism prevented this during ISI’s peak) 5  August 1982: Mexico is bankrupt. It owes $100 b debt to 600 US private banks.  Reagan approves a US/IMF emergency loan to save Mexico and the US Banks!  Commercial banks refused new loans and demanded payment  October, 1983 - 27 nations rescheduled their debts, 16 were Latin American nations  Mexico, Brazil, Venezuela and Argentina owed $176 billion (74% of the total developing courtiers debt)  Banks collapsing, credit crunch, large increases in unemployment, economic stagnation, poverty increases  Save for Colombia, LA was broke and no one wanted to land anymore! Why Colombia bucked the trend?  6 15-7 8 The International Monetary Fund (IMF, only countries are members by paying fees). Headquartered in Washington DC. Created in 1944 The club extends short-term loans to its members Lander of last resort: When a country cannot get loans anywhere the IMF is he last resort but it comes at a stiff price. The IMF’s loans include stand-by loans based upon macroeconomic conditions to be met every three months. This means that a country gives up its economic sovereignty If the country does not meet such conditions after a while the loan is suspended and the situation may get worse 9 10  Structural Adjustment Stabilization: Control of M (inflation) Restructuring & Devaluation Liberalization Lower wages Abolish import controls to lower prices, Balance of Payments Budget Deficit improve efficiency Privatize! Attract foreign Reduction of imports Reduction of public sector expenditure inventors Switching to domestic Deregulate business production Tax reform Trade liberalization Increase interest rates 11 World Bank is the sister institution of the IMF (also in DC) Provides capital for long term development: Infrastructures, health, education, poverty reduction to help economic growth In 1990s joined IMF to support structural adjustment policies by providing loans for privatization and deregulation policies  By 1990 economists at the US Treasury, IMF, World Bank, and conservative think takes agreed that drastic measures had to be taken in Latin America.  The set of policies they picked was called The Washington Consensus First:  Fiscal deficit reduction, cut money supply, privatize  Deregulation  Opening up to Foreign Trade (Export led growth & abandon ISI and protection) Second: downsizing government &reduction of the state discretion How: shock therapy (introduce such reforms ASAP before opposition organizes)  Markets (private initiative) always better than state intervention  Politicians use government to favor their cronies in business and pursue narrow/corrupt interests  Solution: minimal government  How? Competition among businesses is best to promote growth => more responsive to consumers than government  Free trade lower prices, improve quality, prevents government/business collusion  Washington Consensus 1990 Deregulation Secure Property Rights Fiscal discipline Reorientation of Openness to FDI public expenditures “Stabilize, privatize Tax reform and Privatization liberalize” Financial liberalization Trade liberalization Unified and competitive exchange rates  Policieswere unevenly applied depending on countries  Shock Therapy: Chile (1973, 1981); Bolivia (1985) Argentina(1989); Peru (1991)  Gradualism: Brazil (1990, 1993), Uruguay, Mexico (1988)  Restore economic growth  Eliminated inflation  Reduced debt and deficits  Created new economic opportunities in private sectors  No clear evidence inequality, poverty, social spending  Free trade helped to reduce prices on basic consumer goods  Privatization improved access to a range of vital utilities –water, telephones, electricity  Too many unfulfilled promises  The explicit promise was short-term pain for long-term gain  Late 1990s, the long-term gains were not as strong as promised and the short- term pain more enduring and more painful than expected (job losses, increased cost of living, low growth)  New jobs did not have the same pay, benefits or security of the ones they were replacing. 1. improvement of economic efficiency 2. modernize domestic economy 3. strengthening capital markets 4. improvement of business climate 5. cut fiscal and balance of payments deficit 6. rationalization of state operations 7. lack of alternatives (communism/Keynes out of favor)  Argentina: Menem 1989-99  Brazil: Collor (1990-92); Cardoso (1994-2002)  Venezuela: Carlos Andres Perez (1990-92)  Bolivia: Sanchez de Losada (1993- 96)  Peru: Fujimori (1990-2000)  Mexico: Salinas (1988-94) 9 8 7 6 5 Brazil 4 East Asia 3 Latin America 2 1 0 1961-1980 1981-1993 1994-2004 21  Foreign direct investment, net inflows to the Latin American Region (US$ millions) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: World Development Indicators, World Bank 22 Inflated Expectations Led to Big Disappointments In the early 1990s, investors and government had unrealistic expectations High expectations were based upon faulty empirical models by IMF/World Bank linking growth to market reforms Faulty Empirical Models Lead to Rosy Forecasts Predicted and Actual Growth by Empirical Models Linking Growth to Policy Reform Source: World Bank (2005:34) 28 Broadly defined:  Privatisation refers to the processes by which assets or activities owned and controlled by the public sector are transferred to private ownership or management. These implies:  the closure of unprofitable plants which do not lure private investors;  the concession of public services (telephones, electricity, water)  the outright transfer of assets to the private sector by selling all government shares through public auctions or sales in the stock market.  Figure 1. Privatiz ation Has Been Beneficial (1998- 2007) Latin America Brazil Mexico Argentina 60 Positive Responses 50 40 30 20 10 0 1998 2000 2001 2002 2003 2005 2007 Ye a r Source : La tinoba rome tro 2007 32  Often companies were sold as a monopoly to private sector leading to very high prices and little or no competition (electricity in Chile, telephones in Mexico and Argentina)  Corruption and collusion in many cases (Argentina, Chile, Mexico, Brazil)  Poor regulation leading companies to neglect consumer demands and investment commitments  Speed prevailed over competition  So Latin Americans often disliked privatization  But liked free trade, regional integration, and foreign investments  Within privatization Support for: Telecoms, electricity, airlines Opposition to: water, pensions, health services  Can you guess why? 7 6 5 4 Brazil 3 East Asia 2 Latin America 1 0 -1 60s 70s 80s 90s 2001/2004 35 10 9 8 7 Brazil 6 5 East Asia & Pacific 4 3 Latin America & 2 Caribbean 1 0 90 92 94 96 98 2000 36 37 38  A free market economy is the only system for a country to develop (Percent of respondents who agree with statement) 80 2002 2007 70 65 63 61 60 58 54 52 49 48 50 47 47 44 41 42 41 40 40 36 31 31 30 20 10 0 Source: Latinobarometro fuente: latinobarometro  Many complex institutional requirements for private markets to work – clear property rights, contract enforcement, efficient judiciary, incentives to control private or public corruption  Shock therapy -- Introducing free markets from the top down (e.g. rapid privatization) into weak institutional environments can have disappointing or even negative results.  Political backlash against free markets from disappointing results leads to reversion to populism and statism  Gradual reforms that correct most extreme distortions in sequence can bring high returns and build political support for continued free market reform 40  It curtails the ability of central and local governments to finance and provide social services - education, health, water, sanitation, etc.  It increases poverty and social unrest.  It negatively affects trade and investments.  It erodes the effectiveness and reliability of the rule of law and the judicial system.  It undermines democratic institutions  It prevents the participation of civil society in the oversight of how public resources are utilized. Perception of corruption... Corruption Perception Index (10= highly clean, 1= highly corrupt) Canada 8.5 United States 7.5 Chile 7.4 Uruguay 6.2 Costa Rica 4.9 Brazil 3.9 Colombia 3.8 Panama 3.7 Mexico 3.6 Peru 3.5 Argentina 2.5 Ecuador 2.4 Venezuela 2.3 Bolivia 2.2 Paraguay 1.9 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 Worse Better  Erodes the region’s rule of law Rule of Law Index Chile 0.75 Costa Rica 0.65 Uruguay 0.61 Trinidad & Tobago 0.58 Panama 0.51 Argentina 0.5 Brazil 0.46 Jamaica 0.45 Mexico 0.44 El Salvador 0.42 Peru 0.41 Bolivia 0.4 Ecuador 0.38 Colombia 0.37 Venezuela 0.35 Honduras 0.35 Guatemala 0.35 Paraguay 0.34 0.0 0.2 0.4 0.6 0.8 1.0 Worse Better Lack of independency of the judiciary Judicial Independency (7 entirely independent, 1 no heavily influenced) Better 7.0 5.9 6.0 5.2 4.8 4.9 5.0 5.0 4.1 4.0 3.4 3.0 3.0 2.0 2.1 2.1 2.2 2.2 1.8 2.0 1.5 1.0 0.0 Worse United States Costa Rica Ecuador Colombia Uruguay Argentina Bolivia Paraguay Chile Brazil Mexico Venezuela Peru Panama Canada  Low level of transparency Transparency of goverment policymaking (7 always fully and clearly informed, 1 never informed ) Venezuela 2.3 Ecuador 2.5 Argentina 2.6 Paraguay 2.6 Bolivia 2.9 Peru 3.0 Panama 3.3 Uruguay 3.3 Mexico 3.5 Colombia 3.8 Costa Rica 3.8 Brazil 3.9 Chile 4.5 Canada 4.6 United States 5.0 0.0 1.0 2.0 3.0 4.0 5.0 Worse Better  By European standards LA states are smaller  EU states account for 40% of GDP; LA 20%  LA spends less on education, defense, social security, and health than EU states  Why smaller => low tax base  In terms of GDP %, LA countries have less debt but they have less access to external financing than the EU countries which can issue bonds much more easily  Chronic fiscal deficits throughout the century, financed through debt. This, not import-substitution industrialisation, the root of 1980s crisis.  Very high debt service ratios compared to other developing countries; due to both amortisation and interest payments.  Consequent inability to manage fiscal response to external shocks (Hausmann and Reisen, 1996)  Inadequate provision of public goods as debt service crowds out health, education etc.  Simplification of taxation system, reduction of rates, introduction of VAT 9taxes on consumption)  Much lower tax pressure than elsewhere; little evidence of convergence on OECD levels  Indirect tax similar to elsewhere; reduction of taxes on trade  Decline of Customs Shares of Fiscal Income 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1939 1949 1959 1969 1979 1989 1999 Even after Reform LA Has Low Tax Revenues Average Tax Revenue/GDP by region, 1990-2000 (in percent) OECD 30.00 East Europe & Central Asia 27.44 SubSaharan Africa 17.96 Southeast Asia 16.31 Middle East & North Africa 15.54 LAC 15.10 South Asia 10.54 0.00 5.00 10.00 15.00 20.00 25.00 30.00 35.00  Reform has succeeded in strengthening fiscal institutions The path of reform for fiscal institutions Source: OECD Development Centre, 2007. Based on Filc and Scartascini (2007), “Budgetary Institutions” in Lora, The State of State Reform in Latin America, IADB and Stanford University Press Note: To construct the figure, the reforms were weighted in accordance with their relevance and direction and were normalized between 0 and 1. So, each curve shows the transition of the institutions from their initial situation in 1990 to their situation in 2005. The slope measures the number of reforms and their relative importance. 52  But reform has failed to raise significantly more revenue Tax revenue (Central Government, % GDP, 2006) Source: OECD Development Centre, 2007. Based on ECLAC’s ILPES Database and OECD Revenue Statistics Database.  Tax productivity has increased, but remains low for income taxes due to widespread loopholes and informality Tax productivity Tax exemptions Shadow economy (rate/revenue) (% GDP) (%GDP) Source: OECD Development Centre, 2007. Based on data by Goñi, López, and Servén (2006) for tax productivity, Lora (2007) for tax exemptions (original source: Gómez-Sabaini) and Schneider and Enste (2005) for shadow economy. 54  Tax Money Does Not Reach Those Who Need it the Most Inequality before and after taxes and transfers Gini coefficient Source: OECD Development Centre, 2007. Based on data by Goñi, López, and Servén (2006).  The result is very limited political capital to work with… fiscal legitimacy is low % of citizens who trust Firms’ assessment of the tax revenue is well spent neutrality/composition of government (2003-05) decisions/spending (2003-2006) Fairer/ Wiser Unfair/ Wasteful Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003, 2005) and World Bank Institute, Governance Indicators Database. Based on World Economic Forum, Global Competitiveness Report, 2003-2006.