The waning of the market myth

Published : Nov 07, 2003 00:00 IST

Mine workers clash with the Bolivian Army near the country's capital La Paz on October 9, during a protest march against the neoliberal policies of the government. - DADO GALDIERI/AP

Mine workers clash with the Bolivian Army near the country's capital La Paz on October 9, during a protest march against the neoliberal policies of the government. - DADO GALDIERI/AP

A recent report brought out by UNCTAD exposes the bankruptcy of the neoliberal economic policy model aggressively pursued by most Latin American countries and calls for a major rethinking of the development strategy.

FOR most of the people in the world, the myth that liberalised markets deliver the best possible economic outcomes had been fading for some time. The brave new world that was supposed to be ushered in in the era of globalisation - with larger and more sustained investment flows into poor countries, with global markets allowing developing countries to increase incomes and diversify their economies, and a more rapid convergence of rich and poor economies - simply did not materialise. Instead, large parts of the developing world have experienced reduced and more volatile economic growth, worsening conditions for labour and employment generation, serious problems for agriculturalists and much more unequal income distribution, leading to greater social and political tensions.

Nevertheless, for inexplicable reasons, the myth continues to survive. For those wedded to the neoliberal economic ideology, the evident failures usually reflect either institutional failures in particular countries (corruption or poor governance) or, bizarre as the argument may seem, insufficient doses of marketist reform. There are others who continue to believe that corporate globalisation and greater liberalisation of economic policies do deliver economic growth, but that other effects - such as greater inequality or inadequate "social sector" expenditure - need to be separately addressed.

In general, then, this perception persists, even among some critics of the recent pattern of corporate globalisation: that the process is helpful, or even necessary, for increasing investment and therefore growth and productivity in economies, even while it may have some other less benign social and distributive effects.

But this particular perception is also false, for there is little evidence to indicate that the elements of the neoliberal economic policy model actually work to deliver faster economic growth. A good example of this - in fact, almost a laboratory test case - is the region of Latin America, in which the majority of national governments have been implementing this particular economic model with some force since the early 1980s.

The Trade and Development Report 2003, the latest annual report from the United Nations Conference on Trade and Development (UNCTAD), contains a detailed discussion of the Latin American experience with marketist reforms, and the effects on investment, growth, productivity and employment. The results are quite damning for the neoliberal paradigm, and call for a major rethinking of the entire strategy of development which has been so comprehensively adopted on that continent.

A BIT of background first. In the 1960s and early 1970s, East Asia and Latin America grew at approximately the same rate, and the five largest countries in Latin America had per capita incomes that were above those of the first tier NICS (Newly Industrialising Countries - South Korea, Taiwan, Singapore and Hong Kong). Subsequently the pattern has been very different.

In the 1970s, the large Latin American economies grew rapidly on the basis of high accumulation rates based on external borrowing, only to culminate in the debt crisis of 1982. Thereafter, there has not only been slower growth but much greater volatility of economic activity in the region.

What is important to note is that the debt crisis of the early 1980s brought in a prolonged phase of extensive market-based reforms which were urged on and supported by the international financial institutions. There were sweeping changes in trade and industrial policies aimed at removing protection to domestic producers and reducing what were seen as price distortions. There was reduction of public investment, and continuous and comprehensive privatisation of major state assets in the major economies of the region. There were attempts to reduce the power of organised labour, through a combination of legislation and the pressure of greater unemployment in order to make labour markets more "flexible".

The explicit aim of the package was, in the first instance, to stabilise the economies by controlling inflation, and thus reducing macro-economic imbalances. But the more significant medium-term purpose was to remove the constraints to growth, increase productive capacity and improve external trade performance, and therefore reduce both the periodic balance of payments crises and boom-bust cycles of growth. However, the experience suggests that none of these aims has been even partially achieved in most countries (with the possible and sole exception of Chile, growth trajectory of which has been more stable in recent times).

At one level, the lower rates of growth in the Latin American region are not surprising, because the region also experienced a fairly substantial drop in investment rates (as a share of GDP, gross domestic product), among the highest in the developing world. This was of course contrary to the neoliberal expectation, that the removal of domestic price distortions and the freeing of market forces would improve the investment climate and generate rapid increases in private investment. What happened in reality was that there was a continuous decline in public investment, which meant that there were less virtuous linkage effects to encourage more private investment, and so total investment rates declined.

In most countries in the region, aggregate investment rates in the 1990s and after have fallen below the threshold level of 20 per cent of GDP. There has also been a shift in the composition of investment towards less productive activities such as residential house construction, and away from investment in machinery and equipment.

Significantly, the past two decades in Latin America have also been a period of "deindustrialisation", as declining shares of investment and manufacturing value added in GDP as well as manufacturing employment in total employment have been coterminous with stagnant or falling share of manufactures in total exports. This was the same period in which the much more interventionist policy regimes in East Asia were contributing to a significant expansion in manufacturing activity from that part of the world.

Nor did the neoliberal strategy operate to improve aggregate labour productivity in these economies. In most countries of Latin America, overall productivity in manufacturing actually declined or remained stagnant during the 1990s. In some enclave sectors where labour productivity increased, this was essentially due to the shedding of labour adding to unemployment, rather than greater investment and employment expansion.

So the weak investment performance tended to stunt productivity growth and upgradation. International competitiveness has been increasingly based on low wages (which is always an ephemeral advantage at best) rather than on increases in labour productivity.

In this context, even the opening up to more Foreign Direct Investment has not been entirely advantageous. A significant part of the FDI has been in acquisition of existing assets, often in non-tradeable infrastructure or service sectors, rather than in Greenfield investment in new projects. Even the Greenfield FDI has in general been concentrated in sectors producing or processing natural resources, rather than areas with high potential for productivity growth. Meanwhile, aggregate employment in productive sectors has suffered because of more capital intensity in resource based industries, accompanied by relative declines in traditional labour-intensive sectors such as textiles and clothing.

Essentially, therefore, the neoliberal strategy has mainly been successful only in the very limited aim of inflation control. But this has been achieved at the cost of a much worse record in terms of growth, employment, poverty reduction and higher volatility. The important point is that the strategy failed not only in terms of social and distributive consequences but in terms of a much worse performance in investment, growth and productivity. Not only has the transformation of the productive structure through higher investment and technological change failed to materialise, but many of these variables have actually deteriorated in most of the economies of the region.

The pity of it is that such obvious evidence of failure does not seem sufficient to force a rethinking of the strategy among the powers that be. The Trade and Development Report reflects: "Fanaticism, according to the Spanish philosopher George Santayana, calls for a doubling of effort in the face of failure. Despite its pantheon of critical and creative minds, economics is also susceptible to such thinking."

This is not to say that there are no independent and viable economic policy alternatives for the region. These are not only proliferating but growing more in terms of broader social support. Finally, of course, economic policies are more about politics, and there is now at least some hope that the changing political landscape of the Latin American region will force the government of these countries to adopt more equitable, democratic and sane economic policies.

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