Themes > Current Issues
28.12.2000
Jayati Ghosh
It
is one of the odd things about economics, that the more the data -
and the actual reality - show a particular tendency, the more most
economists persist in believing the opposite. How else can one explain
the axiomatic belief among mainstream (and even not-so mainstream)
economists today, that neo-liberal marketist policies which give a
lot of freedom and power to large capital, generally encourage higher
economic growth and employment even if they do not necessarily deliver
in terms of reducing poverty and inequality ?
The actual experience across the globe, in both developed and developing countries, is that the 1990s decade of globalisation, which experienced the most untrammelled power of large capital for a century, is that this was a period of lower economic growth and higher levels of unemployment. Yet, every time such evidence comes to light for a particular country or region, its economy is promptly declared to be an outlier, an exception which is suffering because of its own inadequate policies or rigid domestic institutions.
And whenever a whole region is affected, attention is shifted to other regions which are supposedly doing better. This was very evident in the late 1990s, when concern over the impact of indiscriminate trade and financial liberalisation in east Asia, leading to economic crisis there, was diverted by extolling the virtues of Latin America, supposedly in the midst of a remarkable and impressive recovery after its own slightly earlier crisis.
Indeed, in recent times the international financial press as well as the representatives of public and private international economic institutions have been lauding Latin America, and especially certain countries such as Mexico, Chile and now Brazil, as clear examples of the success of neoliberal economic policies. The revival of growth in the region in the previous year after another crisis scare in Brazil, has been seen as further proof of the argument that free market and investor-friendly (especially foreign investor-friendly) policies deliver higher output and employment growth.
As it happens, the Latin American region has effectively been turned into almost a laboratory test case for various neoliberal marketist policy experiments of the IMF "Washington consensus" variety. Most of the economies in the region have been under direct IMF control for fairly extended periods in the last two decades, their important economic and financial policy makers are strongly influenced by mainstream US economic thinking, and their continued dependence on external capital in any case means that room for independent manoeuvre is severely limited.
This being the case, it is worth examining how exactly these economies have fared over the past decade, when the spread and intensity of application of these policies was at its greatest. A new report from the UN Economic Commission for Latin America and the Caribbean (ECLAC) provides some disturbing insights into the actual effects of such economic policies.
Thus, the report brings out the fact that inequality has worsened, that social insecurity has increased, and that basic conditions of material existence have deteriorated for a significant section of the population across the region. This, by now, is hardly unexpected. It is now common knowledge that such policies benefit typically a minority of the population; even the proponents of such policies argue that the rest of the population is really benefited only through "trickle-down" effects.
But what is much more significant is the evidence that economic growth rates also are much lower than they were in the bad old days of import substituting industrialisation in the region. As pointed out by Jose Antonio Ocampo, the Secretary general of ECLAC and a former Finance Minister of Colombia, in the whole region economic growth in the period after neoliberal reforms has stabilised at rather low levels of 3.5 to 4 per cent annually. This is well below the average of 5.5 per cent per annum for the three decades prior to the debt crisis, when the now much-maligned import-substituting industrial policies were in place.
Not only that, but such low rates of growth, especially given the composition of output that they have implied, are clearly insufficient to reduce poverty, unemployment or the income gap with respect to industrialised countries at a reasonable pace. ECLAC estimates that annual growth rates of more than 5 per cent per annum would be necessary for minimally adequate employment generation. But even the latest recovery, which is already running out of steam, has only delivered growth rates of less than 4 per cent and in some countries less than 3 per cent.
Furthermore, even such growth is occurring in the context of greater external vulnerability and financial fragility. Even three and a half years after the Asian crisis, international credit markets remain unstable, with high interest rates and low average maturities for developing country borrowers. In 2000, for the second year in succession , capital inflows were not enough to offset interest payments and profit remittances, leading to negative flows for Latin America as a whole.
This is surprising, given that in 2000, several major countries in the region became once more the "good boys" of international capital, due to rising exports, lower government deficits and improved output performance. But a closer look shows that much of the expansion was due mainly to growth in exports, driven by the US import boom. Domestic consumption has not recovered at the speed expected and investment levels are still below those of 1998, while open unemployment remains at a level described by the report as "almost a historic high".
This relates to another problem identified by ECLAC, which is that throughout this period the generation of employment has remained weak and biased towards skilled labour, generating high unemployment and rising income gaps. Unemployment in the region continues to stagnate at very high average levels of 9 per cent of the labour force, compared to 6 per cent a decade earlier.
This can no longer be seen as a temporary tendency deriving from fierce stabilisation policies designed to control inflation. Rather, these high levels of unemployment are closely related to the very pattern of more open trade and industrial restructuring that are commonly cited as the positive results of the neoliberal policies.
This comes out very sharply in another study from ECLAC. (Jorge Katz, "Structural Changes in Latin American Industrial Productivity, 1970-1996", CEPAL Review 2000) This shows that structural changes in Latin America’s economies over the past twenty years have shifted manufacturing away from shoe, textiles, machine tools, and other labour and engineering intensive industries in favour of natural resource processing and assembly ‘maquiladora’ industries.
Thus, there are two types of production restructuring that have taken place. In Chile, Argentina and, to a somewhat lesser extent, Brazil, structural reforms of the past twenty years have favoured industries producing highly standardised industrial commodities, such as vegetable oil, fishmeal, pulp and paper, iron and steel, and aluminium. As a result, Latin American firms have ended up as price takers in highly competitive world markets in which they have very low unit profit margins.
Meanwhile, in order to maintain quality and other competitiveness requirement, the manufacturing plants for these products are highly capital intensive, automated, and technologically advanced, creating little employment. In general, most of their capital equipment comes from abroad) except to some extent in Brazil) thus reinforcing the old pattern of technological dependence.
The other type of production restructuring has occurred in Mexico and some small Central American countries. Here, the neoliberal reforms combined together with low domestic wages and geographical proximity to the United States in the context of a rapidly expanding US market, have encouraged assembly plants known as "maquiladoras". These use modern technology to produce state-of-the-art goods including computers, video and TV sets, and garments. However, they use product design and just-in-time technology, logistics and engineering almost entirely from the US, Japanese or Korean companies, which own these assembly plants. There is very little value added in the Latin American side of the operations.
Meanwhile, the associated trade liberalisation and elimination of subsidies has meant that manufacturing and competitive skills in leather goods, furniture, clothing and machine tool manufacturing for the domestic market have contracted strongly, with many small and medium-size firms being forced to close because of import penetration. The degree of domestic vertical integration has declined sharply, while outsourcing practices, mostly international, have increased. Inevitably, the region’s dependence on external capital goods and technology has increased in consequence.
This worrying trend has been reinforced by the privatisation of State-owned production facilities, particularly in telecommunications, energy, transport or water sanitation. Ownership of these sectors has effectively been transferred to large mostly foreign enterprises whose R&D facilities and capital goods suppliers are overseas. Not only has this been associated in some scandalous cases (as in Brazil) with higher costs for consumers and hugely increased foreign exchange outflow, it has also meant the loss of related domestic manufacturing and service production and employment which earlier benefited from linkage effects.
As a result, Katz concludes that "in countries where public enterprises carried out most local R&D and engineering efforts, recent structural reforms have had a strong and rather negative impact on the national systems of innovation. At the same time, the new production structure is finding it increasingly difficult to generate new jobs, let alone well-paid ones in high productivity sectors. Those created are precarious and mostly in the area of low-productivity services. Moreover, and as a result of the rapid increase in the demand for foreign machinery and equipment as well as vehicles and parts, the trade balances of many countries show a worrying, chronic tendency toward long-term disequilibrium."
All this sounds strangely familiar - this peculiar combination of worsening real conditions amidst greatly increased hype and international celebration of another success story for international capital. But what is also depressingly familiar is the sense that even such examples need not nudge our own policy makers into a more realistic and domestic citizen-oriented approach to economic policy.
The actual experience across the globe, in both developed and developing countries, is that the 1990s decade of globalisation, which experienced the most untrammelled power of large capital for a century, is that this was a period of lower economic growth and higher levels of unemployment. Yet, every time such evidence comes to light for a particular country or region, its economy is promptly declared to be an outlier, an exception which is suffering because of its own inadequate policies or rigid domestic institutions.
And whenever a whole region is affected, attention is shifted to other regions which are supposedly doing better. This was very evident in the late 1990s, when concern over the impact of indiscriminate trade and financial liberalisation in east Asia, leading to economic crisis there, was diverted by extolling the virtues of Latin America, supposedly in the midst of a remarkable and impressive recovery after its own slightly earlier crisis.
Indeed, in recent times the international financial press as well as the representatives of public and private international economic institutions have been lauding Latin America, and especially certain countries such as Mexico, Chile and now Brazil, as clear examples of the success of neoliberal economic policies. The revival of growth in the region in the previous year after another crisis scare in Brazil, has been seen as further proof of the argument that free market and investor-friendly (especially foreign investor-friendly) policies deliver higher output and employment growth.
As it happens, the Latin American region has effectively been turned into almost a laboratory test case for various neoliberal marketist policy experiments of the IMF "Washington consensus" variety. Most of the economies in the region have been under direct IMF control for fairly extended periods in the last two decades, their important economic and financial policy makers are strongly influenced by mainstream US economic thinking, and their continued dependence on external capital in any case means that room for independent manoeuvre is severely limited.
This being the case, it is worth examining how exactly these economies have fared over the past decade, when the spread and intensity of application of these policies was at its greatest. A new report from the UN Economic Commission for Latin America and the Caribbean (ECLAC) provides some disturbing insights into the actual effects of such economic policies.
Thus, the report brings out the fact that inequality has worsened, that social insecurity has increased, and that basic conditions of material existence have deteriorated for a significant section of the population across the region. This, by now, is hardly unexpected. It is now common knowledge that such policies benefit typically a minority of the population; even the proponents of such policies argue that the rest of the population is really benefited only through "trickle-down" effects.
But what is much more significant is the evidence that economic growth rates also are much lower than they were in the bad old days of import substituting industrialisation in the region. As pointed out by Jose Antonio Ocampo, the Secretary general of ECLAC and a former Finance Minister of Colombia, in the whole region economic growth in the period after neoliberal reforms has stabilised at rather low levels of 3.5 to 4 per cent annually. This is well below the average of 5.5 per cent per annum for the three decades prior to the debt crisis, when the now much-maligned import-substituting industrial policies were in place.
Not only that, but such low rates of growth, especially given the composition of output that they have implied, are clearly insufficient to reduce poverty, unemployment or the income gap with respect to industrialised countries at a reasonable pace. ECLAC estimates that annual growth rates of more than 5 per cent per annum would be necessary for minimally adequate employment generation. But even the latest recovery, which is already running out of steam, has only delivered growth rates of less than 4 per cent and in some countries less than 3 per cent.
Furthermore, even such growth is occurring in the context of greater external vulnerability and financial fragility. Even three and a half years after the Asian crisis, international credit markets remain unstable, with high interest rates and low average maturities for developing country borrowers. In 2000, for the second year in succession , capital inflows were not enough to offset interest payments and profit remittances, leading to negative flows for Latin America as a whole.
This is surprising, given that in 2000, several major countries in the region became once more the "good boys" of international capital, due to rising exports, lower government deficits and improved output performance. But a closer look shows that much of the expansion was due mainly to growth in exports, driven by the US import boom. Domestic consumption has not recovered at the speed expected and investment levels are still below those of 1998, while open unemployment remains at a level described by the report as "almost a historic high".
This relates to another problem identified by ECLAC, which is that throughout this period the generation of employment has remained weak and biased towards skilled labour, generating high unemployment and rising income gaps. Unemployment in the region continues to stagnate at very high average levels of 9 per cent of the labour force, compared to 6 per cent a decade earlier.
This can no longer be seen as a temporary tendency deriving from fierce stabilisation policies designed to control inflation. Rather, these high levels of unemployment are closely related to the very pattern of more open trade and industrial restructuring that are commonly cited as the positive results of the neoliberal policies.
This comes out very sharply in another study from ECLAC. (Jorge Katz, "Structural Changes in Latin American Industrial Productivity, 1970-1996", CEPAL Review 2000) This shows that structural changes in Latin America’s economies over the past twenty years have shifted manufacturing away from shoe, textiles, machine tools, and other labour and engineering intensive industries in favour of natural resource processing and assembly ‘maquiladora’ industries.
Thus, there are two types of production restructuring that have taken place. In Chile, Argentina and, to a somewhat lesser extent, Brazil, structural reforms of the past twenty years have favoured industries producing highly standardised industrial commodities, such as vegetable oil, fishmeal, pulp and paper, iron and steel, and aluminium. As a result, Latin American firms have ended up as price takers in highly competitive world markets in which they have very low unit profit margins.
Meanwhile, in order to maintain quality and other competitiveness requirement, the manufacturing plants for these products are highly capital intensive, automated, and technologically advanced, creating little employment. In general, most of their capital equipment comes from abroad) except to some extent in Brazil) thus reinforcing the old pattern of technological dependence.
The other type of production restructuring has occurred in Mexico and some small Central American countries. Here, the neoliberal reforms combined together with low domestic wages and geographical proximity to the United States in the context of a rapidly expanding US market, have encouraged assembly plants known as "maquiladoras". These use modern technology to produce state-of-the-art goods including computers, video and TV sets, and garments. However, they use product design and just-in-time technology, logistics and engineering almost entirely from the US, Japanese or Korean companies, which own these assembly plants. There is very little value added in the Latin American side of the operations.
Meanwhile, the associated trade liberalisation and elimination of subsidies has meant that manufacturing and competitive skills in leather goods, furniture, clothing and machine tool manufacturing for the domestic market have contracted strongly, with many small and medium-size firms being forced to close because of import penetration. The degree of domestic vertical integration has declined sharply, while outsourcing practices, mostly international, have increased. Inevitably, the region’s dependence on external capital goods and technology has increased in consequence.
This worrying trend has been reinforced by the privatisation of State-owned production facilities, particularly in telecommunications, energy, transport or water sanitation. Ownership of these sectors has effectively been transferred to large mostly foreign enterprises whose R&D facilities and capital goods suppliers are overseas. Not only has this been associated in some scandalous cases (as in Brazil) with higher costs for consumers and hugely increased foreign exchange outflow, it has also meant the loss of related domestic manufacturing and service production and employment which earlier benefited from linkage effects.
As a result, Katz concludes that "in countries where public enterprises carried out most local R&D and engineering efforts, recent structural reforms have had a strong and rather negative impact on the national systems of innovation. At the same time, the new production structure is finding it increasingly difficult to generate new jobs, let alone well-paid ones in high productivity sectors. Those created are precarious and mostly in the area of low-productivity services. Moreover, and as a result of the rapid increase in the demand for foreign machinery and equipment as well as vehicles and parts, the trade balances of many countries show a worrying, chronic tendency toward long-term disequilibrium."
All this sounds strangely familiar - this peculiar combination of worsening real conditions amidst greatly increased hype and international celebration of another success story for international capital. But what is also depressingly familiar is the sense that even such examples need not nudge our own policy makers into a more realistic and domestic citizen-oriented approach to economic policy.
© MACROSCAN 2000