Latin America’s Process of Economic and Social Stabilization: A Stagnant Experiment or a Force to be Reckoned With?

Few critics would deny that in 2006 the economy of Latin America and the Caribbean reported growth performance at the highest rate since the 1970s. The present acceleration began in 2004 with a GDP increase of 5.9 percent. The region then continued in its fourth successive year of economic growth, averaging a steady and well-distributed rate of 5 percent. This growth obviously had positive effects on the overall economic situation of the region, but these figures may not necessarily tell the whole story. Some critics blame “neoliberal” structural reforms for the seemingly enduring income inequalities existing throughout Latin America.

Exports and National Debt Reduction
The 2006 external current account surplus, with its 1.75 percent of GPD, was at its highest level in decades. High profits from exports, a range of soaring income from tourism, and sustained capital influx in the form of direct and portfolio investment led to a vigorous surge in total reserves. A common problem for Latin American countries in the past was their inability to repay loans. They had weaker currencies, higher debt costs, faster inflation and punitive interest rates. Reflective of better times, in 2006 exports grew for the fourth year in a row, reaching a figure of $780 billion. Recently, revenues flowing to most Latin American governments are growing at a faster rate than public spending. Unlike in past decades, high state revenues have not led to uncontrolled government expenditure, and despite old habits, the present phase of growth as well as encouraging export revenues have generated a primary surplus and reduced national debt, to the benefit of much of the region. According to the IMF, further progress has also been made in debt relief for low-income countries in the region, covering Bolivia, Haiti, Guyana, Honduras and Nicaragua where the Inter-American Development Bank approved full debt relief totalling $4.4 billion in 2007. Increased economic stability, infrastructure growth, and financial strength have toughened up the region’s traditionally weak economic fundamentals so that emerging markets are better prepared to endure external shocks.

Regional Consumption and Demand for Goods
Unlike in preceding years, factors encouraging economic development in the region have not only been export dynamics and rising fuel prices, but also the visible stimulation of domestic demand for investment and consumable goods, which was encouraged by the reduction of interest rates. Latin America’s income per capita has increased for the third year in a row by more than 3 percent. For the first time in many years, no country in the region has registered decreasing income per citizen. As the 2004 economic growth rate figure of 5.9 percent shows, the situation of Latin American labor markets has improved throughout the current economic boom. Rising employment in Argentina, Brazil, Chile and Mexico has led to the lowest registered level of unemployment since 2002, averaging about 10 percent. In Brazil, the strengthened job market produced an increase of households with an annual income of $5,900 to $22,000 from 14.5 million to 22.3 million. Income distribution appears to be less unequal and the middle class’ purchasing power is becoming stronger. Sales of new cars, computers and consumer electronics are at record levels. This boost in regional consumption reflects the crucial tempo of economic development in Latin America and mirrors the transformative change in the region’s financial structure.

Economic and Social Achievements in Mexico and Chile
Besides the overall economic progress in the region, especially in Mexico and Chile, financial stability and faster economic growth have resulted in the reduction of some inequalities in wealth distribution. Although the recent class-based riots in downtown Santiago against what the poor perceive as society’s indifference to them, Chile has seen the greatest economic growth in the region since 2003. According to the World Bank, extreme poverty has fallen faster in Chile than anywhere else in Latin America, afflicting 1.5 million in 2003, with some saying it was as low as 500,000 in 2006.

Social policies, increasingly implemented by democratic governments in Latin America, are now responding to clamorous demands by lowering the gross total number of those living in poverty. In the case of Mexico, US economic growth has helped to encourage financial development. The number of people earning an income that is insufficient to even feed a family a minimal diet in Mexico fell from 37 percent to 14 percent over the decade through 2006. The fact that the number of Mexicans in the $400-1000 income bracket is rising faster than those in higher income bracket, shows that a “new lower middle-class” may be emerging from poverty, especially in Mexico.

Social Development
As several more leftist leaders have been elected or re-elected in Latin America in recent years, more social programs, such as health and education initiatives, are being put in place. The central objective is to lift people out of poverty and raise living standards. Innovative social networks and incentives are among the major contributors to the achievements that have been made in the social sector. One example of these initiatives can be found in countries like Argentina, Brazil and Venezuela, where stipends are provided to poor families in order to keep their children healthy and in school. Venezuela’s President Hugo Chávez announced that during this present economic revival, steps should be taken to ensure facilitated access to producers that will result in meeting basic human needs, including stable job markets and a quality education. The combination of strong economic growth stimulants and social assistance programs were instrumental in the process of lowering the unemployment levels and poverty rates. According to IMF Survey Magazine’s April edition, the rate of Latin Americans living in extreme poverty fell from 44 percent in 2002 to about 40 percent in 2005, and has since fallen to 38 percent in 2006. Lowering barriers to access consumer goods and services has made it possible for people to start up their own small businesses. Some low-income communities have become involved in production processes and are contributing now to the region’s upgraded economic stability.

Forecast For Economic Development
Continually improving investment markets and success in diversifying and expanding trade patterns provides grounds for an optimistic forecast. Steadily increasing revenues are reducing income inequality and it is estimated that by 2012, 15 million out of 27 million households could have attained middle-class level incomes. According to the IMF’s director Rodrigo De Rato, turbulences in global financial markets will still hit Latin America, but the damage is likely to be less than it would have been in previous years. Unfortunately, growth is expected to slow down in 2008 to 4.25 percent; nevertheless, economists expect net debt to drop to 44 percent of GDP in 2008, compared to an estimated 46.6 percent in 2007. The IMF stressed that Latin America must take “advantage of good times to tackle the daunting task of entrenching stronger growth, reducing still high levels of poverty, and decreasing vulnerabilities against adverse shocks.”

Gains Remain Fragile
Despite the recent economic success and newly fortified foundations regarding growth, poverty and economic issues, are still matters that persist on Latin America’s agenda. Income inequalities may be at their least extreme in a generation, but they still remain high compared with other economies in the world. Although several countries have succeeded in expanding their economies and the social benefits which they provide to their citizens, income disparity is still one of the most serious issues in Latin America, particularly when one looks at the fact that while the wealthiest 20 percent of the population is receiving 60 percent of all income, the poorest 20 percent account for only 3 percent.

Enduring Rural and Urban Poverty
Poverty trends have been relatively affected by the lack of improvements in the living standards of the poor. The World Resources Institute (WRI) has estimated that there are 360 million people “living at the base of the socio-economic pyramid, defined as living on the purchasing power equivalent of $300 per month or less.” The massive increase in class and national conflicts at a variety of socio-economic points has not been negligibly influenced by the Latin American variant of capitalism. Critics blame the current process of globalization for the region’s limited possibilities for change or the efflorescence of home-grown efforts at improving the responsiveness their economic structure.

The Relationship between Neoliberal Reforms and Poverty
Since the 1980s, Latin American economies have focussed on strengthening the financial stability of markets by means of a specific code of policies that came to be known as the “Washington Consensus”, which is mostly the U.S. government’s version of neoliberalism. Economic neoliberalism promotes privatization of public industries, decreasing governmental social spending and the deregulation of the financial sectors. Such measures have had little positive significance for underprivileged citizens. Market-opening reforms had surfeited Latin American countries with cheap imports, forcing area farmers to compete in local markets against reduced-priced of overseas goods. Neglecting the importance of improving domestic markets and factoring in the traditionally close economic links with the U.S. has made the region more vulnerable to exogenous factors, demonstrated by the effects of turbulences in the global economy.
Worldwide, economists would agree that generally speaking, neoliberal reforms could be a powerful engine for development. But they would also agree to the fact that whatever its positive impact on improving the situation of the poor is more dependent on political interests and sharp-shooter instincts for a particular cause, rarely resulting social justice. Politics which give market efficiency precedence over the redistribution of social benefits do not redress the situation of wealth inequalities; rather, they contribute to increasing rural and urban poverty. According to the International Fund for Agricultural Development (IFAD), “The voices of the poor and their organizations are still waiting to be heard with the regard to the design and implementation of economic policies” in favor of the marginalized.

Free Trade Agreements and Dependency on Washington
Free trade agreements like the North American Free Trade Agreement (NAFTA) were implemented in the last decade in order to “facilitate trade among separate sovereign societies.” Latin America’s increasing economic openness and trade liberalization, followed upon by trade agreements, were implemented alongside a weak institutional development strategy. Today, Latin America has to face the consequences, such as a dependence on the U.S. economy and the region’s unfair disadvantages within a number of trade agreements. Obviously, open markets and foreign investments do contain a huge potential for improvement in Latin America’s economy, but the region’s actual history tells another story. An article in an issue of the International Herald Tribune, noted that “unregulated open markets, rapid import liberalisation and the absence of essential government regulation and public services is bad for growth, bad for stability and disastrous for poverty reduction.” The barriers of today’s labor markets and the competitiveness of imported goods cause high rates of unemployment, driving millions of people into the already overcrowded and only marginally rewarded members of the informal sector.

Political Change
One of the new characteristics of Latin American politics is the increasing collaboration among the countries of the region, in order to break the dependence on the North and its liegemen among the international lending community. In 2004, Chávez introduced The Bolivarian Alternative for Latin America (ALBA), a regional trade plan in order “to counter the Bush-favored free trade areas of the Americas, which aims to benefit the poor and the environment.” Latin American scholars have showed that in past elections the electorate has strongly rejected political programs which act in accordance with the Washington-favored neoliberal policies. They voted for leaders who were seriously willing to invest in human and social capital and in pro-poor economic policies, which respect society as opposed to having a dismissive attitude toward it. This new course, could lead to an improved habitat and to the end of adverse macroeconomic policies. Ironically, neoliberals and their critics all agree with IMF deputy-managing director Murilo Portugal, who in a recent speech, observed that “it is in the sunny days that we should fix the roof of the house.”

This analysis was prepared by COHA Research Associate Concetta Kim Martens