Index > Briefing
Friday, August 07, 2020
How Western Economic Policy Practice Messed Up Latin America
Chan Kung

Equilibrium or balance has always been the goal of economic research. In most interpretations, classical economists such as Adam Smith maintained that the free market would tend towards economic equilibrium through the price mechanism. That is, any excess supply (market surplus or glut) would lead to price cuts, which decrease the supplied quantity (by reducing the incentive to produce and sell the product) and increase the demanded quantity (by offering consumers bargains). Adam Smith believed that it was a mechanism that would abolish the glut automatically.

Of course, there are plenty of people who refuse to buy Adam Smith's theory.

The Austrian school of economics and Joseph Schumpeter believed that equilibrium could never be achieved because everyone always wanted to get the lowest price, and there are always dynamic factors in the system. The advantage of the free market is not in creating static or universal equilibrium, but in being able to allocate resources to suit individual desires and "discover" the best way to make economic progress. Steven Ng-Sheong Cheung, a Hong Kong economist, points out that equilibrium means that the model has enough constraints to lead to a hypothesis that can be refuted. He believed that the demand is not observable, and therefore the imbalance, i.e. the surplus and shortage, could not be verified. This of course, is tantamount to the destruction of the hope of "new planned economy".

But while equilibrium is the focus of economic theory, it is also true that the recommendations of the world's economists to achieve it often lead to greater imbalances.

Chile's Augusto Pinochet is the most talked-about case of neoliberalism and of Milton Friedman’s thoughts. In the past, almost all liberal economic theories talked about Friedman, and when they talked about Friedman, they always talked about the case of Chile.

In the last century, after Pinochet came to power through a military coup, in order to overcome the severe economic crisis, he invited more than 100 economists to form an advisory group and conducted a careful study of the Chilean economy. They believed that after the mid-1960s, Chile's economy had slipped to the brink of collapse due to the loss of vitality of the "import substitution" development model and the mistakes of the Salvador Allende government's economic policies. They proposed to adopt the economic theory of "Chicago School" and implement the free-market economic policy. Believing in the Chicago school of economics, Pinochet implemented a series of reforms.

First, there was the privatization of state-owned enterprises. Second, the abolishment of longstanding state price controls and subsidies to encourage competition among firms. Third, the implementation of tax reform, the setting-up of value-added tax, increase of direct tax, and stricter measures against tax fraud and tax evasion. Fourth, the liberalization of foreign trade, reduction of tariffs, abandonment of "import substitution" policy, promotion of exports, and encouragement of domestic and foreign companies to compete. Fifth, the absorption of foreign capital. Sixth, the reduction of the number of government personnel and administrative costs. These policies and measures were backed by Pinochet's power, and no one in Chile dared to say "no". In those days, anyone who said "no" could be thrown from a helicopter into the sea and simply disappeared.

The above-mentioned policies and measures adopted by Chilean political strongman Pinochet had gradually restored and developed the Chilean economy. A year after he took the office, the output of copper, Chile's main economic lifeline, had increased. From 1974 to 1978, foreign investment in Chile reached USD 3 billion, and the skilled personnel abroad began to return to Chile. From 1976 to 1980, Chile's GDP grew at an average annual rate of 7%. Due to the Latin American debt crisis at that time, the military government adopted "Emergency Economic Plan" and the "Debt Crisis Mitigation Plan" in 1983 to strengthen the adjustment role of the state in the macro-economy, and the economy recovered quickly. From 1983 to 1988, Chile's GDP grew at an average annual rate of more than 5% and reached a record high of 10% in 1989. The inflation dropped from 800% in 1973 to 12% in 1988, and the people's living standards were greatly improved.

The economic achievements of Pinochet administration came at a time of severe economic and external debt crises throughout Latin America, and Friedman was precisely proud of such achievement. The problem is, as is often the case in all theoretical practices, that is not the whole picture of the Chilean story.

Chile is a very special country in Latin America, a country with a respect for order, a relatively conservative cultural tradition, and a large German immigrant population with modern management skills and knowledge. The Chilean army is now dressed similarly to that of the German army during World War II. Chile's economic growth rate also fell sharply twice during the Pinochet administration, one in 1975 and the other in 1982. Although Pinochet had only just come to power during the 1975 downturn, the second economic downturn still occurred during Pinochet's administration, and Chile did not escape the strong influence of the international market. In fact, there are many interesting comparisons. In the post-Pinochet era, although the economic policies of Chile have been modified and reversed to a great extent, the economic growth rate of Chile, on the contrary, remained at a relatively high and stable level, which shows that the economic growth of Chile is irrelevant to the economic theory of Chicago school.

Looking at the Chicago school of economics and the liberal economic theory in Latin America as a whole, some Latin American countries did grow at the beginning of the implementation of neoliberalism. However, the economic development of some Latin American countries did not accelerate, but decreased significantly, only equivalent to 50% of the level before the reform. After several years of back-and-forth, thanks to the improvement of the international economic situation, Latin America recovered somewhat in 2004, but it is still below pre-reform levels.

Argentina and Brazil, for example, used to be the "developed countries" of Latin America, with a per capita GDP of over USD 8,000. However, after they "learned" from neoliberal reforms, Argentina's per capita GDP had fallen to USD 2,665 in 2002. Half the population of Amazonas, a vast state in Brazil's northern region, is still illiterate. The recession has been accompanied by high unemployment. The unemployment rate in Latin America has been rising for the past two decades, with the number of unemployed and semi-unemployed people in Argentina, Peru, Ecuador, and Nicaragua accounting for more than 40% of the total labor force. Even at the beginning of this century, the average unemployment rate in Latin America in 2001, 2002, and 2003 was still 9.2%, 9.3%, and 10.7%, respectively. In Argentina, the unemployment rate was as high as 23% in 2002. According to Argentine scholars, the neoliberalism turned Argentina, a vast and rich country, into one of the poorest in the region.

A consequence of the massive inflow and outflow of foreign capital is foreign debt. The heavy foreign debt burden is another major obstacle to the socio-economic development of Latin American countries. According to Argentine scholars, Latin American countries paid USD 150 billion in interest to foreign countries between 1982 and 1985, while making the only USD 40 billion in net income from those foreign investments. The USD 110 billion gap needs to be made up with their trade surplus, which is almost a third of the region's exports and 50% of its net savings. This has undoubtedly led to the shortage of domestic capital, reduced the people's living standards, and increased the pressure of inflation. Since 1999, the net capital outflow from Latin America has continued to increase year by year, reaching USD 63.9 billion in 2004 and further increasing to USD 67.5 billion in 2005, among which the increase of profit transfer from the foreign direct investment is one of the important factors. Between 1982 and 2000, Latin American countries paid interest on their foreign debt to the tune of USD 1.452 trillion, more than four times the total foreign debt.

Another major, extreme problem in Latin America is the deterioration of the gap between rich and poor. The biggest consequence of the implementation of neoliberal policies is that it produces serious social polarization. In the 1960s and 1970s, the 20% of the richest people in Latin America and the 20% of the poorest accounted for about 6 times the share of total social income. After the implementation of neoliberalism, this gap widened rapidly. In 1999, the 10% of the richest people in Latin America and the 10% of the poorest people accounted for a difference of about 40 times in total social income. In 2002, it rose to 46.6 times. According to figures provided by Argentine scholars, 110 million people in Latin America were in poverty in 1960. By 1994, it reached 209.3 million, and in 2004 it reached 222 million. 60% of the children in the region were in poverty, 53 million were threatened with hunger, and 42 million were still illiterate.

Throughout Chile, Brazil, Argentina and other Latin American countries, many of them have been influenced by Friedman's liberalism, but whether it is politics or economics, they are still in a state of repeated shuffling between left-wing and right-wing ideas. These practical problems can also be understood easily. Economists often engage in theoretical research, and policy practice is not what they are good at. Economists can argue about theoretical directions and provide useful experience summaries, but they absolutely cannot build, organize, and construct a country’s market systems. Without the policy practice of the market systems, it is meaningless to talk about success and failure, and this has little to do with economists' theory. Friedman's "economic experiment" therefore is actually a joke in Latin American countries, but it is one that many people took too seriously.

There are already numerous discussions of various “traps” in the world; the "Latin American trap" is a major one, and it deserves the most attention. I see myself as an advocate of stability and I believe in the philosophy of equilibrium. Although many people are also looking at the world from a balanced perspective, most of their discourses are purely philosophical. The true balanced philosophy is actually something practical and applicable, embodied and reflected in politics, economy, industry, and enterprises, especially in all aspects of national governance. The “Latin American Trap” tells us a fact that the path of radicalization, whether left-wing or right-wing, cannot produce sound and healthy results. It is only through balanced means that a country can bridge its social contradictions and maximized its development opportunities.

Going back to Chile’s policy practice, the “Chile Model” was widely admired, even at one point of time the International Monetary Fund recommended such model to developing countries. The relevant departments in China had also sent delegations to Chile in order to study such model, and they all responded that they "have benefited a lot." Truth to be told, all these studies on Chile have overlooked an important issue. Pinochet’s administration has actually created a non-human rights balance in politics and suppressed the disputes between the radicalized left and right wings, but at the same time it failed to realize the goal of social balance. Therefore, in Chile’s economic structure, there is "what should happen, happens" and in national governance, "what should happen is happening". In the end, Pinochet's efforts cannot continue.

Therefore, the policy practice of Western economists has not been successful in Chile and Latin America, and the final solution of the Latin American problem depends on the realization of the “great balance” of de-radicalization in the future, which is also an important core of Neo-Latin Americanism. aims. To put it simply, the de-radicalization of the social system is the core value of balanced philosophy.


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