How Western Economic Policy Practice Messed Up Latin America
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.
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.
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
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.
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
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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