The art of the state in Latin America: External forces: The art of the state in Latin America: External forces 13 October 2005 Geske Dijkstra Erasmus University Rotterdam and Leiden University a.g.dijkstra@let.leidenuniv.nl


Central message: a vicious circle: Central message: a vicious circle Weak states → lower development Weak states → higher vulnerability to external forces: especially during debt crisis of the 1980s External forces and resulting economic model further weakens states Here: focus on role of IMF and World Bank


Overview: Overview The state and economic development The actors: external forces in Latin America How IMF and World Bank operate Contents of the policy conditions Effectiveness of policy conditionality Economic and political results of adjustment policies Conclusions


Annual average GDP growth in Latin America: Annual average GDP growth in Latin America


The state and economic development: The state and economic development Late industrializers: state more important (Gerschenkron) Example of South East Asian Newly Industrializing Economies (NIEs): strong, autonomous states Land reform Strategic trade and industrial policies: heavy state intervention Restrictions to FDI Performance criteria imposed on private sector High growth, relatively equal income distribution No democracy


The state in Latin America: The state in Latin America Strong socio-economic inequalities and political polarization States subject to struggles between elites and between elites and masses → Fiscal deficits, high indebtedness → Vulnerability to external forces


External forces in Latin America: External forces in Latin America US, with interests: Cold war, war on communism Trade and investment interests Access to oil and other resources War on drugs War on terrorism “Democratisation” Instruments: US Army, FBI, CIA, DEA, USAID IMF, World Bank, IDB WTO


The IMF: The IMF Aim: Providing temporary balance of payments support, originally, to avoid disruptive devaluations and revaluations Always policy conditions in order to guarantee repayment New tasks with debt and development crises since 1980: policy conditionality serves to guarantee debt restructuring & new lending by other creditors (and donors)


Structural adjustment programmes: Structural adjustment programmes Cooperation with World Bank: WB also moved into policy lending Scope of policy conditions expanded Area of operation limited to lower income countries (new for IMF) But …. no change in decision making structure


Organisation of IMF and World Bank similar: Organisation of IMF and World Bank similar IMF: Decision making on the basis of financial contributions US > 15% of votes Board of Governors (ministers of Finance or Central Bank presidents) 24 Executive Directors Managing Director (EU) Staff World Bank: Decision making on the basis of financial contributions US > 15% of votes Board of Governors (ministers of Finance or of development cooperation) 24 Executive Directors President (US) Staff


Contents of conditionality:The conditions: Contents of conditionality: The conditions Stabilization (IMF), so restrictive fiscal and monetary policies, plus devaluation Adjustment (World Bank) Trade reform Liberalization of prices (goods market, finance) Public sector reform and privatization “Second generation” conditions: Politics and governance “Third generation”: poverty reduction


The “Washington Consensus”: The “Washington Consensus” Williamson 1990: nuanced picture of measures; combination of good practice ideas floating around in Washington Obvious need to adjustment: fiscal crises, inefficient and corrupt state enterprises, too much intervention in exchange rates IMF applied extreme versions of these ideas


Effectiveness of policy conditionality: Effectiveness of policy conditionality General: limited effectiveness Domestic political economy factors far more important in implementation of measures: cosmetic implementation, delays, exemptions, counteracting measures Many failed IMF-stabilization packages in LA; succesful packages often got IMF support later Nevertheless: LA earlier and more complete adoption of neoliberal policies than elsewhere: elite interest in privatization and liberalization


Effectiveness of good governance conditions (in World Bank loans): Effectiveness of good governance conditions (in World Bank loans) Institutional development: “frustrating”1971-90 (OED). Only 29% satisfactory. Need for tailoring, but does not occur Civil service reforms: downsizing, wage cuts, training, specific salary increases; only 1/3 “satisfactory performance” Main factor: lack of “ownership”


Results, economics: Results, economics Stabilisation (inflation reduction) in most countries achieved by 1990 Trade reform: average tariffs from 40% to 10% 1990s: huge privatization drive, linked with FDI inflow Exports increased, but imports increased more Some economic growth Continued high debt: vicious circle of high trade deficits, high debts, high interest rates and low production & investment Increases in income inequality in most countries


Debt indicators 1978-2002 : Debt indicators 1978-2002


Poverty in Latin America(Source: UN): Poverty in Latin America (Source: UN)


Results, politics: Results, politics Economic model implies weak and weakened states: Banking and trade interests dominate over production; international integration over national development FDI in natural resources, public utilities → foreign interests important High debt → continued vulnerability to external forces Some countries: dollarization Domestic resentment → Instable governments, reduced state legitimacy Little success in improvements in governance


Conclusion: Conclusion Strong state, national development project necessary But this is not on the international agenda: WTO: Free trade IMF, World Bank, donors in general: poverty reduction, Millennium Development Goals