|Liberalization Fails to Promote Rapid Growth in Latin America
Stagnation has increased poverty, wiping out some of the gains in the nineties. Open unemployment has risen to 9.1 per cent, higher even than in the 1980s. Some 44 per cent of Latin Americans are now poor, and some 20 per cent suffer extreme poverty. These woes have brought discontent, political turbulence and disillusionment with liberalization policies. Inflation rate is as high as 40.5 per cent in Argentina, 30.7 per cent in Venezuela, and 10.9 per cent in Brazil. Currency depreciation in the year 2002 was 72 per cent in Argentina, 33 per cent in Brazil, 40 per cent in Venezuela and 18 per cent in Colombia. Interest rates are as high as 31.3 per cent in Venezuela and 21.9 per cent in Brazil.
Currency depreciation makes debts more expensive, undermining investor confidence in a vicious circle that saw a net outflow of capital from the region of $ 39 billion in 2002. This is a reversal of the regular foreign capital inflows to Latin America in the past. Stock markets have dropped by 53 per cent in Argentina 47 per cent in Brazil, 26 per cent in Venezuela and 13 per cent in Chile during 2002. Most forecasts are that the region will see a modest growth of about 2 per cent in 2003, hardly adequate to make a dent in poverty. In both Argentina and Venezuela production is falling while in Brazil, Chile, Colombia and Mexico it is rising sluggishly at 1 to 2.5 per cent.
Brazil has elected a left-wing president but he has reassured investors that there will be no radical changes. A burst of inflation led to the raising of interest rates in December 2002 by three percentage points to 25 per cent. A general strike in Venezuela has devastated the economy while drug-financed guerillas and paramilitaries continue to slow Colombias economic recovery. Argentinean government has stopped debt repayments to the World Bank and appears to be a little closer to an agreement with the IMF. The government has lifted the freeze on bank deposits. Argentinas GDP however, shrank by 11 per cent in 2000. The most interesting case is that of Mexico. It is growing at only 1.8 percent in spite of being a member of North American Free Trade Association (NAFTA) and the much advertised inflows of capital from the US. Mexico has not performed well in the recent past.
Its average annual economic growth was 1.1 per cent in 1980-1990 and 3.1 per cent in 1990-2000 even lower than the average for the Latin American region of 1.7 per cent in the eighties and 3.3 per cent in the nineties. The membership of NAFTA does not appear to have helped Mexico to achieve a moderate let alone a high growth. In fact, the Latin American countries which are not members of NAFTA have achieved higher growth than Mexico. Actually, there was an increase in FDI inflows to Mexico from $ 2.6 billion in 1990 to $ 13.3 billion in 2000 but they do not appear to have contributed to high growth. (See Table I)
Foreign Direct investment (FDI) in Latin America in 2000 exceeded that to East Asia: it received 75.1 billion while East Asia received only $ 52.1; but Latin America achieved a much lower growth rate than East Asia as the figures above reveal. It is puzzling that Chile which received much less FDI than Argentina, Brazil and Mexico achieved a higher growth rate than all of them. Thus, FDI does not necessarily result in higher growth as generally touted. (See Table II)
Heavy Debt Burden
Latin Americas external debt is the biggest of all developing regions: $ 774 billion in 2000 in contrast to $ 632 billion in East Asia, $ 204 billion in the Middle East, $ 216 billion in Sub- Saharan Africa and $ 166 billion in South Asia. Debt service as percentage of exports of goods and services has risen from 24.4 per cent in 1990 to 38.7 per cent in 2000. This is in contrast to other developing regions where the debt service ratio declined in this period as shown in the table. Latin American debt service ratio is the highest among all regions: 10.8 per cent in East Asia, 13.8 per cent in South Asia, 10.5 per cent in the Middle East and 10.2 per cent in Sub Saharan Africa. Although the average debt service ratio was 38.7 per cent in 2000, the ratio exceeded this figure in three countries: Brazil 90.7 per cent, Argentina 71.3 per cent and Peru 42.8 per cent. Liberalization and deregulation have encouraged these countries to borrow liberally from abroad and this has inevitably led to their debt service burden which is restricting resources for rapid growth. (See Table III)
Decline in Intra-Regional Trade
Poor economic performance of Latin America in recent years under liberalization is reflected in the fall in the intra-trade flows within almost all the regional trading blocs. Between 1995 and 2000, intra-regional exports declined in the LAIA (Latin American Integration Association) from 17.1 per cent to 12.9 per cent, in the Andean Group fro 12.0 per cent to 8.5 per cent, and in the CACM from 21.7 per cent to 12.4 per cent. They fell from 25.0 per cent in 1998 to 20.8 per cent in 2000 in Mercosur and from 17.4 per cent in 1998 to 15.0 per cent in 2000 in Caricom.
Widening Income Gap
A conspicuous feature of Latin American development under liberalization is that the income distribution has worsened, with the rich growing richer and the poor growing poorer - the process of polarization. (See Table IV)
(World Bank: World Development Indicators 2002)
The share of income of the lowest (poorest) 10 per cent of the population is between 0.7 per cent and 1.3 per cent in the five Latin American countries shown in the table while it is between 2.4 per cent and 3.5 per cent in the five Asian countries: the share of income of the lowest 20 per cent is between 2.2 per cent and 3.5 per cent in Latin America while it is double that in the Asian countries 5.9 per cent to 8.1 per cent. The richest 20 per cent receive over 60 per cent of the total income in three Latin American countries while two others receive between 50 per cent and 60 per cent. In the four Asian countries the share of the richest 20 per cent is between 40 per cent and 50 per cent. The share of the top 10 per cent of the people in Latin America is between 40 and 50 per cent whereas it is between 24 per cent and 34 per cent in the Asian countries. Clearly, liberalization has increased the income gap in Latin America and increased poverty.
Economic Reforms Have destabilized the Latin American Economy
The Newsweek of September 16, 1996 emphasized the growing polarization and the consequent social instability in the following words:
"It is indeed undeniable that in most of the region the rich are getting even richer while the poor struggle even harder to stay alive and the middle class loses ground... Given the level of hardship in the region, its surprising there hasnt been more violence. Still the killing at a minimum raises the question whether the pain of economic reform has become so intense that it may begin to threaten Latin American stability. In a classic example of dashed hopes, the new economic model hasnt removed the root causes of the regions revolutions poverty and corruption. Even where there is peace, Latin America is suffering. Reforms have thrown people out of work wholesale and disrupted the agricultural economy.... Droves of working-age teenagers in Bogota have turned to prostitution. Former factory managers drive taxis in Lima. Many farmers in Colombia can feed their families only by growing coca or poppies for drug traffickers. In Mexico, which only recently boasted the worlds fourth highest number of billionaires, four out of ten people now work in the "informal economy" as peddlers or the like."
Boston University political scientist David Scott Palmer stated:
"While Latin American economies by and large have been growing since 1992, the people on the whole are worse off in 1996 than they were in 1980. This wasnt supposed to happen."
The Newsweek of October 13, 1997 reconfirmed this as follows:
"The key question for Latin America remains what it has always been. The riches bestowed by robust growth get appropriated by a narrow sector of society. Low skill jobs are under siege..."
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