Fifteen years of monetarism in Latin America. Time to scream
by Róbinson Rojas Sandford (1997)
For the majority of countries in Latin America the new gospel of
'free-market plus non-intervention of the state in economic affairs'
began to be standard economic policy in the early eighties. For Chile,
though, the new gospel was inaugurated earlier, in 1974, and the military
junta in charge of imposing it did that via murdering, torturing,
imprisoning, and exiling score of thousands of workers, peasants
and intellectuals who tried to oppose the implementation of yet
another variety of "savage capitalism". For those who praise savage
capitalism, Chile is an "economic miracle" and the rest of the Latin
American nations are "deregulating", "rolling back", "decentralizing"
and "liberalizing" to become the "miracles" following the one created
by the murderous Chilean military junta.
On September 25, 1997, Financial Times informed that "two decades of
trade liberalisation and economic reform have helped fuel Chile's
enviable growth rate and contributed to lower inflation, the World
Trade Organisation says in a report published yesterday. But the WTO's
economists warn that Chile's current preoccupation with regional trade
agreements has increased the complexity of the country's trade regime
and MAY BE PRODUCING A MISALLOCATION OF RESOURCES. The country's policy
of 'growth with equity' was widely praised by fellow WTO members when
the report was discussed this week...The Chilean economy has grown by
6 per cent a year since 1990...However, the WTO notes that despite
diversification Chile's trade balance remains HEAVILY DEPENDENT ON
COPPER EXPORTS. PRIMARY GOODS, INCLUDING COPPER, FRUIT, WINE, FOREST AND
FISH PRODUCTS, REPRESENT 85 PER CENT OF EXPORTS. ONLY ABOUT 10 PER CENT
OF CHILE'S EXPORTS ARE MANUFACTURES, MAINLY PROCESSED FROM NATURAL
RESOURCES...In addition, a "dualism" has appeared in Chilean agriculture
between the efficient fruit and forestry export sectors and less
competitive domestic production".
The above paragraph is very interesting because is saying that Chile is
an economic success, that have been achieving "growth with equity",
but, it looks that there are problems with "misallocation of resources",
which is economists' jargon for "unsustainable growth".
The World Trade Organization is right on one account: yes, Chile's
growth is unsustainable. It is based mainly on non-renewable
resources and it has been missing the opportunity to industrialize
since the military assassins started murdering the Chilean people in
1973. Is wrong on two accounts: the actual growth rate for the period
1990-1996 is not 6% but higher (around 7 %), and growth since 1973
have been one of the most "savage" within the range of what is
known as savage capitalism. On average, real wages in 1995 were
lower than in 1972, when Allende's administration was trying to create
a non-dependent economic system in Chile.
Using official statistics from the Chilean government, and tables from
the World Bank and ECLAC's Economic Survey of Latin America and the
Caribbean, several years, the following appears:
TABLE 1
CHILE.-GDP US$ bn. Wages and Income on Growth of Index of real
1987 prices salaries capital Labour force wages
1970 13.3
1971 14.5
1972 14.4 9.1 5.3 100 100
1980 17.6 6.7 10.9 112 66
1992 30.0 11.5 18.5 167 76
1995 36.0 13.8 22.2 178 85
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From Table 1 we can derive an Index of real income on capital:
Table 2 CHILE.- Income on capital
Index
1972 100
1980 183
1992 209
1995 236
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There is nothing here related to "growth with equity". What we have
is a gigantic transfer of wealth from the non-capitalist class to
the capitalist class in Chile. Of course, drawing from Letelier (1976),
this kind of economic "freedom" had to be implemented only with
political repression.
A comparative analysis reveals some interesting weaknesses about the
so-called "Chilean economic miracle". In the period 1971-1972, the
economy, with international capital boicott and all, was growing at
a rate of 4.05% annual. If we extrapolate that rate of growth as
a long trend, which is even lower than most less developed economies
in the same period, we can build the following
TABLE 3.- CHILE.- Hypothetical Real growth
growth of Pinochet and
GDP (4.05%) after
US$ bn. 1987 prices
by 1980 19.8 17.6
by 1992 31.9 30.0
by 1995 36.0 36.0
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Table 3 is indicating that there is no miracle at all in the stage
of savage capitalism in Chile. What really has been happening is that
the long trend was kept, but with a dramatic transfer of wealth from
poor people to rich people.
If we consider that wages and salaries participation in GDP since the
late 1960s was bordering 60% and in the first year of Allende's
government reached 62.9%, we can compare the real variations in wages
and the hypothetical variations in wages if the generals would have
not murdered the Chilean president on 11 September, 1973 around
2 o'clock in the afternoon.
Table 4 CHILE.- INDEX
GDP per capita GDP per worker GDP per worker
actual values actual values hypothetical
1972 100 100 100
1980 100 66 109
1992 136 76 124
1995 160 85 140
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Finally, the World Bank statistics on distribution of income are
illustrative:
TABLE 4.-CHILE. Income distribution. Households.
1969 1978 1989 1994
Poorest 20% 7.7 5.2 3.7 3.5
Next 20% 12.1 9.3 6.8 6.6
Next 20% 16.1 13.6 10.3 10.9
Next 20% 21.0 21.0 16.2 18.1
Richest 20% 43.2 51.0 62.9 61.0
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Income per person in US$ 1992 prices
1969 1978 1989 1992
Poorest 20% 1,001 641 494 505
Next 20% 1,573 1,146 908 928
Next 20% 2,093 1,676 1,375 1,406
Next 20% 2,730 2,588 2,163 2,211
Richest 20% 5,616 6,286 8,397 8,586
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Human Development Report 1996 gave the following information:
TABLE 5.- CHILE.- Poverty and destitution
Poverty Poverty Destitute
(country) (Santiago) population
1969 28.5% 28.0% 8%
1979 36.0% 57.0% (1976)
1989 42.0% 49.0% 12%
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THE INTERNAL STRUCTURE OF PRODUCTION
World Trade Organization's report on Chile was rather worried about
'misallocation of resources', or, not enough development of dynamic
sectors in the economy. In a word, the case of non-sustainable
development.
Detailed data from the World Development report 1994 makes possible
to argue that Chile's economy is based upon agricultural and services
grow, and not industrial, which confirms WTO's fears.
TABLE 6.- CHILE. GDP GROWTH by economic sector. Annual growth (%)
1970-1980 Total GDP = 1.8% 1980-1992 Total GDP = 4.8%
of which: of which:
Agriculture = 3.1% Agriculture = 5.6%
Industry = 0.2% Industry = 4.2%
Manufacturing =-0.8% Manufacturing = 4.2%
Services = 2.8 Services = 5.1%
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In both periods agriculture is the driving force of economic growth,
and as suggested by the World Trade Organization, this is not
sustainable because "a 'dualism' has appeared in Chilean agriculture
between the efficient fruit and forestry export sectors and less
competitive domestic production which enjoys a measure of trade
protection", which, of course, keep the domestic agricultural
oligopolies protected form "free-market competition" in the name of
free-market.
The overall picture, over time, shows the formation of a service-
agricultural economy, whose rationale does not stem from the
domestic market, but from international market needs.
TABLE 7.- CHILE. Sectoral breakdown of GDP.
1970 1980 1990 1995
Manufacturing 23.2 19.6 17.5 16.7
Mining 19.3 17.9 18.9 17.8
Services 49.3 54.8 54.6 57.4
Agriculture 8.2 7.7 9.0 8.1
source: World Development Indicators, 1997)
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Commenting on the above, P. Nunnenkamp (in "Foreign Direct Investment
in Latin America in the era of globalized production", in TRANSNATIONAL
CORPORATIONS, vol. 6, no. 1, April 1997) wrote "in 1980, the share of
manufacturing value added in total GDP in Bolivia, Costa Rica, Chile
and Honduras was considerably below the Latin American average of 25
per cent. This group of countries comprises both large and small FDI
recipients. At the same time, the share of manufacturing value added
exceeded the Latin American average significantly in both Argentina
and Brazil."
Table 8.- FDI flows to major Latin American countries (%)
1980-1985 1986-1990 1991-1995
Argentina 9 10 17
Brazil 33 15 12
Chile 4 3 7
Colombia 8 5 5
Mexico 22 29 27
Venezuela 2 2 4
Other 23 36 28
source: Nunnenkamp (1997)
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THE EXTERNAL FORCES SHAPING CHILE'S AND LATIN AMERICAN ECONOMIES
Drawing from R. N. Gwynne's "Modern Manufacturing growth in Latin
America" (in D. Preston (ed.), "Latin American Development. Geographical
Perspectives", Longman, 1987), we agree on that "the economies of
Latin America are closely interlinked into the world capitalist system.
The operation of the world capitalist system significantly affects both
the pace and rythm of economic growth in each Latin American country.
Recession in the developed world has major repercussions on the Latin
American economies as the 1979-83 recession demonstrated. Economic
growth in the developed world can have similarly advantegous results,
providing export-led growth in Latin American economies. Generally
speaking, the more 'open' an economy is to outside influences from
the world economy, the more it will benefit in times of world economic
growth and the more it will suffer in times of world recession. An
excellent example of this can be seen in the recent economic history
of Chile. Between 1974 and 1977, Chile became one of the most 'open'
economies in Latin America and between 1977 and 1981 the economy grew
at an average of 8 per cent a year. With the world recession hitting
Chile in 1981, there followed two years of widespread economic decline
- a decline, it should be added, exarcebated by poorly judged economic
policies. The economy of each Latin American country is then
inextricably linked to the performance of the world economy as a whole
and in particular to that of the developed world...It is best to see
modern manufacturing in Latin America as the result of both exogeneous
and endogeneous forces. This is because modern manufacturing in Latin
America has been fashioned both by mechanisms that originate outside
the country in question and by economic processes very much internal to
that country". (see O. Letelier, "Chile: Economic 'freedom' and
political repression", and R. Rojas, "Latin America: a dependent mode
of production")
Table 9.- CHILE.- Trade.
EXPORTS and IMPORTS as % of GDP
1960 13.7 16.8
1970 10.8 11.6
1975 25.5 28.4
1980 21.6 25.5
1990 35.3 32.7
1995 39.0 43.9
source: World Development Indicators, 1997)
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One of the most powerful external forces shaping the industrial sector
in any dependent economy are foreign direct investment. The sectorial
interests of international capital will push dependent economies to
be especialized in what that international capital needs.
For the whole of Latin America, the picture is as follows:
Table 10.- Latin America. Inward Foreign Direct Investment Stock,
by sector. Percentage of total FDI stock
country PRIMARY SECONDARY TERCIARY
1980 1995 1980 1995 1980 1995
Argentina 15 10 63 53 22 37
Brazil 4 2 74 58 22 40
Chile 48 59 31 15 21 26
Colombia 6 61 71 20 23 18
Ecuador 28 51 38 31 34 18
Mexico 5 2 78 54 17 45
Peru 44 21 34 14 22 66
Venezuela 2 3 62 58 37 39
source ( P. Nunnenkamp, 1997)
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It is clear from table 10 that Chile, Colombia, Ecuador, and Peru to
certain extent, are being specialized in the extractive industries,
while Argentina, Brazil, Mexico and Venezuela generate manufactured
goods for transnational capital.
For Chile, being trapped in the primary sector, the following table
is illustrative:
Table 11.- United States FDI stock in Chile (US$ million)
year total % in mining % in manufacturing
1960 739 70 3
1968 963 61 7
1980 886 49 31*
1990 6,175 56 13*
* include agribusiness
source: World Investment Directory, Vol. IV, Latin America and
the Caribbean, 1994
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Table 11. United States FDI stock in Chile, 1980-1990 (%)
Industrial distribution of the stock
1980 1990
PRIMARY SECTOR 48.6 55.9
Agriculture 2.9 2.3
Mining and quarrying 44.3 48.8
Petroleum 1.4 4.8
SECONDARY SECTOR 30.7 13.5
Food, beverages and tobacco 9.9 3.4
Textiles, leather and clothing 0.5 0.2
Paper 1.9 1.6
Chemicals 7.1 4.1
Non-metallic mineral products 7.0 1.3
Metals 0.6 0.2
Mechanical equipment 3.3 2.1
Other manufacturing 0.6 0.6
TERCIARY SECTOR 20.6 30.6
Construction 2.4 2.0
Distributive trade 3.1 2.6
Transport and storage 0.6 0.4
Communication 0.1 4.6
Finance and insurance 13.2 20.0
Real estate 0.9 0.8
Other services 2.4 0.2
TOTAL 100.0 100.0
TOTAL (US$ million) 886.0 6,174.8
source: Ibid
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Primary sector and finance account for 75.9% of total FDI stock,
which, of course, shapes the type of exports the Chilean economy
produces. Table 12 illustrates World Trade Organization's worries
about an unsustainable "miracle" in Chile:
Table 12.- Chile. Breakdown of exports of goods. F.O.B.
Mining Agriculture Manufacturing
1971 84.5 3.1 12.4
1989 59.3 9.7 31.0
1990 55.3 11.4 33.1
1991 48.3 13.5 38.1
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The evolution of manufactured products export (%)
Food and Paper Timber Chemicals Basic Metallic
beverages Metal machinery
1 2 3 4 Ind.
1971 40.3 26.8 5.8 9.9 7.5 3.7
1989 47.6 16.7 11.5 12.6 3.1 3.6
1990 44.2 14.9 13.0 14.2 3.3 5.4
1991 46.0 12.9 12.4 14.3 3.0 5.3
source: Economic Survey of Latin America, ECLAC, 1991
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Groups 1, 2, 3 and 4 in manufactured products export are resource-
intensive and labour-intensive production, which is typical output
of a pre-industrialized society. For 1971, those four groups accounted
for 82.8% of manufactured goods exports, by 1989 it reached 88.4%, and
in 1991 accounted for 85.6%. Thus, all in all, in 1991 Chile's
exports of 'traditional' products was as follows:
Mining 48.3% of total
Agriculture 13.5%
Manufactures 32.6%
TOTAL TRADITIONAL 93.4%
Where is the miracle, then?
Probably, the miracle is negative. That is, Chile and the rest of
the Latin American economies became more dependent, more fractured
and more unequal than they were before adopting deregulation, free
market and monetarist recipes.
Summarizing from UN and World Bank literature [1}, we can say that the
monetarist experience has brought about a fundamental change in the
region's development process were the main economic role is not anymore
plaid by the state, but by the private sector. In the triple alliance
between the state, domestic monopolic capital and transnational
corporations, the state's role is essentially political. It is basically
about maintain a social order adequated to the works of the capitalist
private market.
Nonetheless, the region's average growth rate for the 1990s has been
no more than moderate: respectable but below its traditional level of
performance and unsatisfactory from the dual standpoint of technical
progress and the elimination of social lags.
The new production patterns have not generated
a) a sufficient rate of job creation,
b) an acceptable reduction in inequalities
-the number of high-quality jobs has been very slow to rise,
-the relative wage rates for jobs requiring different skills levels
have tended to diverge further,
-compensatory social policies have so far been of limited effectiveness,
-social expenditure has been curbed by efforts to maintain budgetary
discipline.
By and large, the Latin American economies are in a serious position
of vulnerability:
1) macroeconomic stability has been achieved at the cost of large
deficits on the balance of payments current account,
2) these deficits have been financed with volatile capital that may
be withdrawn the moment that anything shakes investors' confidence,
3) the 1980s saw a steep downturn in saving, and in particular,
investment, rates,
4) the production activities that have been hit the hardest have been
branches of industry that serve the domestic market, and state-run
enterprises,
5) in contrast, export sectors, natural resource-based activities,
large locally-owned conglomerates and transnational corporations
have been the ones profiting from the new circumstances.
The outcome of the above is dramatic:
A.- A shift in production towards natural resources-intensive
goods for export, especially mining products, which accentuates
both factors of unsustainibility and dependency,
B.- In the domestic setor, there have been strong growth rates for
energy, construction, and transport sectors, with a high component
of foreign investment, which, in the long term will create
severe unbalances on current account through the growth of net
factor payment to abroad,
C.- Growth of the tourism sector, MAQUILA type industries and data-
transmission services, which are creating new forms of dependency
and structural deficits on balance of payments,
D.- The manufacturing sector is being restructured as it moves away
from a pattern of specialization based on mechanical engineering
and towards a pattern based on NATURAL RESOURCE-INTENSIVE
ACTIVITIES ( aluminium, petrochemicals, paper and pulp, food
products and non-ferrous metals),
E.- The above expansion is balanced out by reductions in textiles,
leather and footwear, capital goods and fine chemicals, which
makes even stronger the characteristic of former colonies exporting
raw materials and cash crops, this time at a higher level of
productive sophistication.
Parallel to the above, structural effects are very marked:
1.- the structural heterogeinity which is characteristic of the Latin
American production apparatus HAS BEEN HEIGHTENED AS THE
PRODUCTIVITY GAP widens between the large companies at the
forefront of the modernization drive and the broad range of
activities that have fallen behind in this process (productivity
gains tend to be concentrated in and among
modern manufacturing activities,
export-oriented agriculture,
large-scale mining enterprises,
the energy sector,
telecommunications and
financial services.)
From the above, two main outcomes:
--- greater social inequality by increasing domestic productivity
differentials and the production structure's degree of economic
concentration,
--- impairs the economy's growth potential by limiting the expansion
of linkages and the spread of technical progress, while, as a side-
effect, also slowing the momentum ox exports,
By and large, the framework of extreme inequality among
the economic agents involved:
inequality between monopolistic and small and medium entrepreneurs;
inequality between the owners of capital and the owners of labour power,
is becoming more extreme.
This strenghtening of the links with international capital shaping
dependent capitalist economies is accompanied by social effects:
--severely regressive distribution of income,
--slump in per capita income levels,
--considerable expansion of urban poverty
-lower wages
-higher rates of unemployment
-variuos forms of underemployment
ECLAC gives the following range of figures on URBAN POVERTY
for the period 1980-1994: (% of households)
Colombia 36-38
Costa Rica 16-25
Chile 38-25
Uruguay 9-8
Argentina 5-10
Brazil 30-39
Mexico 28-30
Panama 31-34
Peru 35-
Venezuela 18-32
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Of course, there is a coexistence of a rapid modernization process and
an expansion of informal activities, a greater concentration of
production activity in companies belonging to large national or
transnational conglomerates. In a word, the creation, yet again,
as has been happening since XIX century in Latin America, or the
reinforcement of a two-tier social formation: one tier extremely
rich, the other tier extremely poor.
Is convenient not to forget a basic law of the capitalist market:
capitalist competition tend to make more unequal original
inequalities.
Or, as World Development Report 1997, page 26 put it: "competitive
markets may distribute income in socially unacceptable ways".
Also, competitive markets can make a "miracle" unsustainable because
of the destruction of the environment as a sequel to maximization of
profits. Some Chilean people are fighting back. One of them is
Sara Larrain. Please read her message. It is important for all of
us [Sara Larrain, Chilean Ecological Action Network]
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[1]ECLAC, "Social Panorama of Latin America, 1996", UN, 1997
UNDP, "Human Development Report 1997", OUP, 1997
O. Rosales, "Economic policy, Institutions and productive
development in Latin America", Cepal Review, August 1996
ECLAC, "Strengthening Development. The interplay of macro- and
microeconomics", ECLAC, 1996
ECLAC, "Latin America and the Caribbean: the economic experience
of the last 15 years", ECLAC, 1996
World Bank, "World Development Report 1997. The State in a changing
World", OUP, 1997
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