---------- Forwarded message ----------
Date: Mon, 5 Aug 1996 10:24:33 -0400
From: Victor J Mora <vmora@magnus.acs.ohio-state.edu>
To: Multiple recipients of list <ec-charla@mia.lac.net>
Subject: Latam economic model fails to spread prosperity
Estimados miembros de la lista,
Pense que este articulo seria de interes.
Victor J. Mora
From: C-reuters@clari.net (Reuter / George Lerner)
Subject: FEATURE - Latam economic model fails to spread prosperity
Date: Sun, 4 Aug 1996 17:50:05 PDT
NEW YORK, Aug 5 (Reuter) - If the blueprint for economic
change in Latin America has worked so well, some U.S. economists
are asking why so many people are still poor.
Across the region, Latin policymakers have applied the
``Washington consensus'', an economic model designed to subdue
inflation and boost production by deregulating markets,
privatising state firms and stimulating exports.
But striking paradoxes have cropped up at the heart of this
consensus.
While many Latin economies have grown and inflation has
subsided, much of the populace has not shared the prosperity.
One in every three Latin Americans lives in poverty, meaning
that 86 million people try to survive on incomes of less than $1
per day, according to a July study by the Inter-American
Development Bank.
Brazil, along with by Peru and Panama, has one of the
highest levels of wealth inequality in the world, a June United
Nations report stated.
BLUEPRINT FACING QUESTIONS
In popular forums and classrooms, critics are emerging to
challenge the ``consensus.''
``The idea behind the Washington consensus model is that a
fully liberal market economy will guarantee rapid growth and
perhaps equitable growth,'' said Lance Johnson, economics
professor at the New School for Social Research. ``That has never
happened in history.''
Johnson said that any form of functioning capitalism, such
as witnessed in the dynamic East Asian economies, has had market
intervention as an important component.
Other critics see the model as flawed because, contrary to
the concerns of most citizens, governments give priority to
economic growth over job growth.
``The failure of those programmes is that they are oriented
toward trying to get increases in gross domestic product rather
than increases in employment,'' said Bill Gibson, professor of
economics at University of Vermont.
PAINFUL COST OF CHANGE
Once enamoured by the reformers' ability to stabilise
prices, many Latin Americans have grown weary of the pains this
transformation demands.
Popular discontent contributed to the downfall of Argentine
Finance Minister Domingo Cavallo, architect of a stabilisation
plan that squelched inflation by pegging the peso to the U.S.
dollar.
With unemployment mired at 17 percent, opinion polls found
that most Argentines wanted Cavallo ousted and in late July
President Carlos Menem complied, naming orthodox central bank
head Roque Fernandez as a replacement.
Peru posted the world's highest level of growth in 1993, but
half the population remains stuck below the poverty line, and
President Alberto Fujimori's poll numbers have dropped as the
economy has slumped this year.
In Mexico, real wages have dropped dramatically as inflation
soared in the wake of the 1995 depression, its worst in six
decades. Amid harsh political and economic climates, Zapatista
rebels in the jungles of Chiapas held an international forum
last week to rally against ``big business''.
The Ecuadorean electorate last month cast their ballots in
favour of populist candidate Abdala Bucaram over financial
market favourite Jaime Nebot.
HYPERINFLATION AND STAGNATION BANISHED
To be sure, most economists, particularly those on Wall
Street, credit the Washington consensus as freeing Latin America
from the demons of hyperinflation and stagnation.
Supporters of the orthodox reform insist that the rewards of
liberalisation will come over the long-term, and the nations
cannot turn back to closed markets in an era of globalisation.
Still, some economists criticised the common tactic of
driving inflation to zero, even if that strategy strangles
growth and raises borrowing costs to exorbitant levels.
``If you are obsessed for controlling inflation and you use
the tools for fighting inflation -- high interest rates -- you
are sacrificing growth and keeping funds out of the productive
economy,'' said Lisa McGowan, of the Washington-based 50 Years Is
Enough Campaign, a group calling for reform of the International
Monetary Fund and World Bank.
The high interest rates needed to squelch inflation may mean
only the largest companies, which can turn to international
markets, can borrow funds, while small- to medium-sized firms
critical to the job creation process cannot afford the
exorbitant cost of capital.
CHILE AND COLOMBIA CURB INFLATION
A nation can thrive even with a moderate level of inflation
in the low teens, as long as the productive sectors of the
economy keep growing. The best performers in the region -- Chile
and Colombia -- have managed exactly that performance.
Another chink in the model's armour lies in the use of an
overvalued currency to anchor the inflation rate, said David
Felix, professor of economics at Washington University.
``What happens is that you're not using the market prices to
provide extra stimulus to exports,'' Felix said. ``You're
pretending that foreign capital will fill in any holes in your
macro-economic model.''
Policymakers in Argentina and Brazil have emphasised a
strong currency as the key to stabilisation, but this model
depends on the faith of foreign investors, as Mexico learned to
its dismay during a botched devaluation in December 1994.
CHILE - MODEL OF REFORM
An alternative to reliance on overvaluation can be found in
Chile, the exemplar of Latin American reform.
Santiago managed to post strong export-led growth through
the traditional means of deregulation and privatisation, but
also hoisted controls on foreign capital and remained active in
supporting agro-industries.
But other problems exist in applying the Chilean export-led
model, particularly in countries like Brazil or Mexico that have
large labour forces and the need to implement policy through
democratic means.
``What has never been shown to work is to have an export
oriented economy, a small fiscal deficit and conservative type
economy in an economy that has a lot of surplus labour and a
democratic system,'' Gibson said.