Contemporary Latin America

Development and Democracy beyond the Washington Consensus

By Francisco Panizza

Zed Books Ltd

Copyright © 2009 Francisco Panizza
All rights reserved.
ISBN: 978-1-84277-854-8

Contents

Introduction, 1,
1 Paradigm found: in search of the Washington Consensus, 9,
2 The organic intellectuals of the Washington Consensus, 31,
3 The ascent of free market economics: an economic reformation with popular support?, 51,
4 Democracy and its promises, 73,
5 Democracy and markets: contestation and consent, 98,
6 Paradigm lost: the unravelling of the Washington Consensus, 121,
7 The opening of a paradigm: growth, equity and democracy, 142,
8 The rise of the left, 168,
9 Left governments and the deepening of democracy, 197,
10 Left governments, economic constraints and policy choices, 225,
Conclusions, 250,
Notes, 256,
Bibliography, 267,
Index, 295,

CHAPTER 1

Paradigm found: in search of the Washington Consensus

What was the Washington Consensus?

Over the past twenty years, Latin America has gone through fundamental economic changes, which by common agreement have been characterized as the implementation of neoliberal reforms. Labelling these changes as neoliberal reforms makes it easier to identify what has been otherwise a complex, uneven and at times contradictory process. But if labelling a process makes it easier to give it an essence, it also risks obscuring some fundamental questions about its nature, or indeed makes more difficult a questioning of its internal logic and temporal unity.

We can try to address these questions if we move from labelling to definition and beyond. In public debate, neoliberalism seldom exists in its pure form, but coexists with other discourses embedded in economic and political institutions. As such, neoliberalism should not be conceived as a closed totality of ideas diffused across nations and through time, but rather as a loosely connected set of concepts, distinctions and arguments that gained meaning as they were articulated and then stabilized in specific ways, depending on the particular discursive and political contexts in which this occurred (Kjær and Pedersen 2001: 221).

Neoliberal discourse is not just concerned with the economy. It has achieved its current status by drawing on ideological, cultural and symbolic elements from different social, political and moral discourses, such as those concerning family relations, cultural values, consumer choice, individual responsibility, etc. As an ideational frame, neoliberalism is a mental structure that shapes the way its holders see the world (Lakoff 2004). It is grounded in a loose set of beliefs associated with laissez-faire capitalism, such as the notion that the health of the economy depends on the ability of rational individual actors to pursue their self-interest through free exchanges in competitive markets, that competition among private actors is the main source of innovation and growth, and that government intervention undermines efficient market activities (Campbell 2001: 171; Jessop 2002: 453). As an economic theory, neoliberalism has its roots in the classical economic thinking of Adam Smith, David Ricardo and John Stuart Mill, and in the present-day writings of Milton Friedman, Friedrich Hayek and many others. Its status within the economic profession and academic circles gives it a scientific dimension, subject to the protocols of scientific enquiry such as the use of the scientific method, reproducibility, contestation and falsifiability.

As a set of policy prescriptions, neoliberalism helps actors to frame concrete solutions to economic problems. Neoliberal prescriptions range from broad guiding principles, such as the benefits of reducing state intervention in economic affairs, the advantages of promoting free trade and the desirability of low taxation, to more specific policy proposals, such as that state-owned enterprises should be privatized. Neoliberal economic thinking has its institutional home in academic departments, in states’ financial agencies such as the ministry of the economy and the central bank, in advisory boards, think tanks and consultancy firms, in economic research departments within private firms and the public sector, and in international financial institutions (IFIs) such as the International Monetary Fund (IMF) and the World Bank (WB).

There is a considerable distance between the highly formalized formulations of modern neoclassical economists, which at best reach a selected number of peers, and political initiatives that seek to translate the loose principles of laissez-faire capitalism and supply-side economics into public policies. The difference is even broader between the terms of academic and technical debate on the one hand, and the terms of political debate that promotes or disqualifies economic policies in parliamentary discussions, political speeches and party manifestos. Politicians are usually hardly aware of the fine points of academic debate. They tend to borrow ideas from the most varied sources without particular concern for origins or orthodoxy, and they pragmatically adopt, adapt or discard ideas according to their own political calculations. And although inspired by economic ideas, policies are more often than not the result of messy compromises between contending interests rather than the transparent expression of a given intellectual orthodoxy. The diverse and uneven nature of neoliberal ideas means that their meaning cannot be asserted in the abstract, but can be provisionally fixed only by certain discourses, which are themselves subject to challenge and contestation. This means that neoliberalism is a relational construct, whose contested meaning is defined and redefined by the political struggles between its defenders and detractors, and to which specific policies are contingently articulated according to the history and contexts in which battles for hegemony are fought.

Fixing the meaning of neoliberalism appears to be less problematic in Latin America than in other regions of the world, as in this region neoliberal dogma has been strongly identified with the so-called Washington Consensus (WC). It is therefore important to consider in some detail what the WC was and was not about, what are its relations with neoliberalism, and how it has changed through time. In 1990, the British-born economist John Williamson edited a book entitled Latin American Economic Adjustment: How Much Has Happened? In this book, which included contributions from a conference convened by the Washington-based Institute for International Economics in 1989, Williamson (1990) listed a set of policy prescriptions, which in his own words embodied ‘the common core of wisdom embraced by all serious economists of the time’ (Williamson 1994: 18). He labelled these prescriptions ‘The Washington Consensus’, after the city in which the main IFIs of the modern global era, such as the IMF and the WB, as well as the US Treasury, are located. In its original formulation, the WC was a decalogue for economic development, summarized in the following headings:

• Fiscal discipline.

• A redirection of public spending priorities towards fields offering both high economic returns and the potential to improve income distribution, such as primary healthcare, primary education and infrastructure.

• Tax reform (to reduce marginal rates and broaden the tax base).

• Interest rate liberalization.

• A competitive exchange rate.

• Trade liberalization.

• Liberalization of foreign direct investment inflows.

• Privatization.

• Deregulation (in the sense of abolishing barriers to entry and exit to markets and services).

• Secure property rights.

Williamson validated the consensual nature of these principles with an appeal to the authority of both reason and history. He argued that the key to successful economic development was to emulate the market-oriented and relatively open policies preached (although not always practised) by developed nations, and that the universal benefits of these policies were proven by the successful development experience of the East Asian countries (ibid.: 12). And yet, the consensual nature of the WC principles was soon to be hotly disputed no less than among Washington insiders. On a more detailed look, under the appearance of a closed totality, the WC had a more partial, open and flexible nature than is suggested by its label. In the brief formulations that followed the headings detailed above, the WC combines highly specific recommendations (e.g. an operational deficit of no more than approximately 2 per cent of GDP) with much more flexible ones (e.g. import tariffs of between 10 per cent and 20 per cent, to be reduced over a period ranging from three to ten years), and combines general normative principles (e.g. the legal system should provide secure property rights) with programmatic ones (e.g. a unified and competitive exchange rate).

The contested issues that Williamson (ibid.: 17–18) lists in his review of the original document include some key issues of economic development, among others the desirability of maintaining capital controls, the usefulness of income policies and wage and price freezes, the proportion of GDP to be taken in taxation, and whether there is a role for industrial policy in economic development. It is worth noting that some of Williamson’s contested issues, such as capital controls and industrial policy, are part of development programmes that are often presented as alternatives to neoliberalism. Perhaps more strikingly, Williamson notes that the wisdom of the Washington Consensus does not extend to addressing how to reinitiate growth after stabilization has succeeded, which was surely the key issue for Latin American economies following the 1982 debt crisis.

Williamson also disputes the identification of the WC with neoliberalism. Significantly, he notes that there is no consensus among economists on the best model of capitalist economy to be followed by developing nations – whether it should be the Anglo-Saxon model (the one more traditionally associated with neoliberalism), the European social market model, or Japanese-style corporate capitalism based on the responsibility of corporations to multiple stakeholders (ibid.: 18). He denounces the technocrats’ ‘blind faith in markets’ as ‘an idiosyncratic ideology’, and leaves open the question of whether competitive markets and an open trade policy are good for welfare (ibid.: 16). Against those who regard the WC as a right-wing decalogue, he argues that the policies of the WC, such as the need for fiscal discipline in order to combat inflation, the redirection of public investment towards primary health and education, trade liberalization and the defence of property rights, are pro-poor, although he notes that the impact on the poor of reforms is sensitive to the ways in which those policies are implemented. He also accepts that the original formulations of the WC need to be supplemented by more comprehensive poverty reduction and income redistribution initiatives (Williamson 2000).

There is little question that under any conventional definition of neoliberalism, an economic programme that includes among its main prescriptions trade liberalization, privatization, deregulation and the liberalization of foreign direct investment should be considered part of what is conventionally known as a free market economic discourse, as it is equally true that other elements of the WC, such as the redirection of public spending towards social programmes, have a broader discursive affiliation. It is not my purpose here, however, to dwell on the true nature of the WC, whether neoliberal or otherwise. For the reasons expressed above, this attempt is ultimately meaningless, or rather its meaning is given by the political struggles to establish its ultimate significance. The issue is not to determine the neoliberal nature of the WC, but to show how, under the appearance of a highly codified and prescriptive policy agenda, there was a surplus of meaning that left it open to interpretation, contestation and redefinition by friends and foes alike (and even by its own author). Some of the WC’s core prescriptions, such as the importance of fiscal discipline and the benefits of low inflation, have now become part of conventional economic wisdom and have been incorporated into the policy decisions of many of those who campaigned against neoliberalism. And today, few would doubt the advantage of eliminating indexation or would argue in favour of wage and price freezes, which Williamson considered open questions at the time. A better understanding of the politics of the WC will not be achieved, however, through an analysis of its discrete policies or by giving too much respect to the privileges of authorship. Rather it is necessary to look at how the WC emerged as an attempt to address the key problems of the time, how its main institutional backers reacted to the model’s failures, and how it adopted and adapted some of the key elements of its critics’ agenda.

The historical roots of the free market reformation

The WC established itself as the hegemonic economic discourse of the era of capitalist globalization by redefining the terms of political debate against the old Keynesian-corporatist consensus. In the specific context of Latin America, the WC acquired its meaning in relation to the crisis of the dirigiste economic model based on a closed economy that dominated policy-making in the region between the late 1940s and the late 1970s, known as Import Substitution Industrialization (ISI), and its political correlate, the national popular state (Prebisch 1949; De Ipola and Portantiero 1989; Cavarozzi 1992).

For a period of time that ran from the late 1960s to well into the 1980s, no single economic narrative was able to impose its own version on the roots, nature and degree of the ISI crisis and the best alternatives to overcome it. A complex and contested process of change ensued, in which crisis narratives competed for hegemony while elements of the ISI settlement were dismantled, deepened or adapted throughout the region according to each country’s political and economic realities. The dimension and direction of changes were influenced by economic factors, such as the size of each country’s internal market and the availability of financial resources, for instance oil rents, that cushioned distributive struggles, and political factors, such as the capability of the state to mediate social conflicts, the degree of radicalization of the popular sectors, the economic elites’ perception of the threats posed to the established order by popular mobilizations, the military’s reaction to said threats, and the ability of governments to insulate themselves from corporatist pressures.

Free market ideas influenced to different degrees the economic policies promoted by technocratic sectors within the Argentinian, Chilean and, to a lesser extent, Uruguayan military regimes of the 1970s. These governments, particularly the Chilean government, represented the earlier and more radical attempts at dismantling the ISI settlement and at reorganizing the economy and society on alternative economic principles. For the military, the dismantling of the ISI model had above all a political objective. They identified the ISI model with economic stagnation, inflation and political corruption. They believed that the distributive struggles brought about by the model’s inbuilt dislocations resulting from extensive state intervention favoured the growing influence of the unions and were a breeding ground for communist and other subversive organizations. Thus, ISI-corporatist-style political arrangements were discarded in favour of technocratic policy-making and the deactivation and repression of working-class organizations.

Chile’s military government, the first and more radical of the free market reformers, is an early and extreme example of the two dimensions – political and economic – of the process leading to the imposition of free market reforms. Economically, it was in Chile that the survival of the capitalist system itself was perceived as more under threat from the policies of the socialist government of Salvador Allende (1970–73). As Jeffrey Frieden (1991) argued, the high degree of class conflict in Chile in the early 1970s encouraged most entrepreneurs, some of whom, particularly small and medium-size ones, would suffer to a greater or lesser extent under the impact of neoliberal reforms, to support the Pinochet regime. Radical free market reforms were imposed by Pinochet, not so much because the military were free market believers but as the best option to impose an alternative social, political and economic order that would make impossible the return of the left.

But with the exception of Pinochet’s Chile, economic failures, political opposition and internal contradictions within the military prevented the Southern Cone military regimes from effectively setting up the foundations of a new political and economic order. When implemented, economic liberalization policies affected a relatively narrow range of policies, particularly centred on partial trade and financial liberalization and in the enactment of gradualist, orthodox, monetarist anti-inflationary programmes based on wage restrictions and fiscal austerity. Even in terms of core policies, results were often modest. Many formerly state-controlled prices were left to the market, but the state still intervened extensively in the allocation of resources. External tariffs were reduced substantially, but from extremely high levels. In Argentina the combination of the overvaluation of the currency and the rapid reduction of import tariffs decimated the highly protected industrial sector, particularly small and medium-size firms. A not unwelcome result of deindustrialization for the military was the weakening of the traditional Peronist working class.

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