The Slow Burn

The Washington Consensus and Long-Term Austerity in Latin America

Raul Zelada Aprili and Gerald Friedman, Guest Bloggers

This article originally appeared in the July/August issue of Dollars & Sense.

For over thirty years after World War II, Latin American governments promoted economic growth and development through policies that favored domestic industrialization. Capital controls (restrictions on international capital mobility) and trade protections helped promote “import substitution”—producing goods domestically that previously had been imported—rather than exports. Most Latin American countries—including those, like Chile and Brazil, where democratically elected leftist governments were overthrown in the 1960s and 1970s—reversed course to adopt “neoliberal” economic policies. Rather than stimulating growth through import substitution, the new policies sought to promote export-led growth by exploiting the region’s main “comparative advantage,” low-wage labor. Labeled the “Washington Consensus” by British economist John Williamson, these policies failed to promote economic growth, but did dramatically widen the gap between rich and poor. In recent years, the return of democratic governance has led most Latin American countries to abandon the failed neoliberal experiment, bringing renewed growth and narrowing inequality.

Figure 1: Average Annual Growth Rates, Real Per Capita GDP, Selected Latin American Countries, 1951-2013

Neoliberal economic policies resulted in slower economic growth. In the 1970s and 1980s, Latin American governments adopted neoliberal—“free market” and “free trade”—economic policies, despite three previous decades of rapid economic growth under import-substitution policies. From 1951 to 1979, the annual growth rate in per capita income averaged 2.7%, led by Brazil’s average of over 4%. Growth dropped precipitously in the 1980s—known as the “lost decade.” Per-capita income fell throughout the region under the impact of IMF-imposed austerity programs. While economic growth revived in the 1990s, it was only in the early 2000s, after the election of center-left governments across Latin America (known as the “pink tide”), that the continent returned to the rapid growth rates of the pre-Washington Consensus period. One country that has not abandoned neoliberal policies is Mexico, the only large country in the region where economic growth has not accelerated significantly since 2003.

Figure 2: Exports as Percent of GDP, Latin America and the Caribbean, 1960-2013

Neoliberalism promoted exports, not income growth. Latin American countries’ foreign trade increased dramatically during the neoliberal period. The export share of Latin American GDP held nearly steady at around 11% until the 1970s; it then soared with the advent of neoliberal policies, beginning in Chile in the mid-1970s and then spreading throughout the region. Despite the subsequent slowdown in the growth of trade—due to the Latin American recession of the late 1980s and the world recession of the early 1990s—by 2003, over a quarter of the region’s GDP came from exports. Fast-growing trade, however, did not translate into comparable economic growth. Per capita income grew much more slowly during the neoliberal era than before or after.

Figure 3: Real GDP Per Capita (Constant 2005 US$), Trend and Actual, Latin America, 1960-2013

Neoliberal policies cost Latin Americans income, and continue to do so. From the 1950s into the early 1970s, successful economic policies raised per capita income growth rates to nearly 3% a year. Austerity policies during the debt-crisis of the 1980s lowered per capita income across the region. By the end of the decade, per-capita income was almost 20% less than what it would have been had growth followed the 1951-80 trend. From there, growth remained slow under neoliberal policies. By 2003, the region’s per capita income was about 30% below the 1951-80 trend. In 2003, Latin America’s average per capita income was under $5,000, about $2,500 less than it would have been had growth continued at the rate of the import-substitution period. Since 2003, Latin American countries have been growing faster, but they have a long way to go to regain what they lost in the neoliberal era.

Figure 4: Average Gini Coefficient, Latin America, 1980-2008

The burdens of slow economic growth have not been borne equally by all Latin Americans. Historically, Latin America has been one of the most unequal regions in the world. The gap between rich and poor widened with neoliberal policies. Government policies to promote export-led growth concentrated the burden on workers and peasants. Trade liberalization and deregulation policies led to higher unemployment rates, which drove down wages and pushed workers into the low-wage informal sector. Governments exacerbated the trends by repressing labor unions and lowering minimum wages. Latin America saw a dramatic increase in inequality after 1980, with the average national Gini coefficient (the most widely used measure of income inequality) rising from 0.50 to over 0.53 by 2003. Since then, with the renewal of progressive economic policies in Argentina, Brazil, Chile, and elsewhere, the Gini has declined most of the way back where it was in the early 1980s.

Sources: Economic Commission for Latin America and the Caribbean (ECLAC); World Bank, World Development Indicators; Leonardo Gasparini, et al., “Pobreza y desigualdad en America Latina: conceptos, herramientas y aplicaciones,” (“Poverty and Inequality in Latin America: Concepts, Tools, and Applications”), Center for Distributive, Labor and Social Studies, Universidad Nacional de La Plata (Argentina) (CEDLAS-UNLP).

Gerald Friedman is a professor of economics at the University of Massachusetts-Amherst.

Raul Zelada Aprili is a graduate student in economics at the University of Massachusetts-Amherst.

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