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Date: Mon, 6 Nov 1995 23:10:45 GMT
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SAPs in Latin America: Summary and conclusion

Paper by D'GAP, 6 November 1995

The present financial crisis in Mexico has served as a wake- up call to people throughout the hemisphere. While the World Bank and IMF continue to insist that structural adjustment will eventually resolve the region's economic problems, serious doubts have emerged among citizens' groups, government officials and international organizations. Throughout Latin America, leaders who had been told that the neoliberal economic program implemented in Mexico was the model that all should emulate have begun to wonder if their countries too could suffer Mexico's fate.

In each of the countries described in this report, and indeed throughout the Americas, structural adjustment programs have failed to steer economies onto courses of development that are equitable and sustainable. Rather, these policies have led virtually everywhere to a series of new economic woes marked by growing disparities in wealth and income, increased poverty, diminished productive capacity, and extensive environmental damage, with a disproportionate impact on women. The experience to date suggests that SAPs, given their primary focus on opening still-developing economies indiscriminately to increased international investment and trade, can produce no other outcome and that a major rethinking of both the process of economic decisionmaking and the content of economic policy is in order.

Productive Capacity and Quality of Life Deteriorate

In their overwhelming emphasis on production for export and on international competitiveness based on low wages and weak labor standards, SAPs have gutted local productive capacities and local markets. In Bolivia, trade-liberalization measures abruptly opened the economy to competition from cheap imports, which has resulted in the bankruptcy of more than 120 factories since 1985. Many Mexican small and medium-sized firms, which employ over 80 percent of the work force, have been forced to become retailers of U.S. imports or to close their doors due to a flood of imports and skyrocketing interest rates. Drastic reductions in the availability of credit and technical assistance to small farmers in Costa Rica have resulted in the nation moving from near self-sufficiency in food production in the early 1980s to importing more than one half of all basic food grains consumed today.

Instead of investing in what the Bank and the Fund consider to be "inefficient" local enterprises, many countries in the region have shifted under adjustment to non-traditional agricultural and maquiladora production. Both of these activities are highly dependent on foreign investment, often compelling governments to offer exceedingly generous incentives. In some cases, these incentives have taken the form of subsidized interest rates or tax holidays, often at the same time that the SAPs are forcing cuts in subsidies and hikes in interest rates that affect local producers, as well as reductions in government social-sector spending. In others, the chief attraction for investors has been "flexible" labor markets, with low wages and low levels of unionization. It is difficult to imagine how the deplorable wages and working conditions for which the maquiladoras are famous in countries like Mexico, El Salvador and Guatemala, coupled with new restrictions on the ability of workers to form unions, could ever lead to stable, decent-paying jobs in the future, and yet the proponents of adjustment measures continue to tell workers to wait for the benefits of investment and growth to trickle down.

Overall, there has been a trend towards falling wages and poor working conditions in many of the countries that have implemented structural adjustment programs. Real wages in Bolivia, Mexico and Nicaragua have fallen substantially in the past decade. In Chile, a country with high economic growth and low unemployment rates and hailed as a model for the rest of the Americas, 45.5 percent of workers have incomes that are lower than the minimum required to maintain a family.

Governments have been willing to adopt wage-suppressing measures due to their desperation to create jobs. Nevertheless, high rates of joblessness have been another hallmark of SAPs. In Mexico, there has even been an inverse relationship between foreign investment and employment, with the former increasing by nine percent during the past three years while job creation has fallen. In Nicaragua, just as employment opportunities had reached their lowest point in years due to stabilization and adjustment measures, over 285,000 military and other public- sector workers were laid off. Over two-thirds of the population is currently either un- or underemployed.

The combination of austerity, low wages and joblessness has led to worsening poverty rates and income distribution in many countries in the region. In Bolivia, rural people were hit by a combination of trade liberalization and cuts in credit and fuel subsidies. A recent study by the International Fund for Agricultural Development revealed that 97 percent of the country's rural population lives below the poverty line. In Nicaragua, poverty has risen to over 70 percent of the population.

This is not to say that no one has gained from SAPs. Rarely, however, has it been the poor, workers or even large segments of the middle class. Exporters and those connected to the financial-services sector have gained disproportionately in many countries. In Costa Rica, the gap between the wealthiest and poorest ten percent of the population doubled between 1970 and 1990. During the Salinas Administration in Mexico, from 1988 to 1994, the number of billionaires rose twelve-fold. Meanwhile, the World Bank estimates that the number of Mexicans living in poverty has increased by nearly ten million over the past 15 years.

Women have been especially hard hit by adjustment programs. In Costa Rica and Nicaragua, they have often been the first fired in public-sector cutbacks, including those associated with privatization programs. The lack of job opportunities in Mexico, El Salvador and throughout the rest of Central America, coupled with the need to increase declining family incomes, have led many young women to consider employment in the maquiladoras and the informal sector as their only real economic options.

In many countries, cuts in health-care, education and other social-service budgets, as well as environmental deterioration resulting from the adjustment programs, have forced women to spend more time than ever attempting to meet their own and their families' needs. In El Salvador, the reduction in water supplies caused by increases in agricultural production and deforestation affects most those rural women and women from poor urban zones who must haul water every day. Urban women in Mexico have felt compelled to organize community soup kitchens to ensure that their children get enough to eat. The result has been that many women now work a "triple shift", one at their jobs, one at home, and one in their communities. They are caught in an impossible and clearly unsustainable situation, squeezed between their increasing responsibilities and decreasing resources.

All of these factors have contributed to a growing sense of hopelessness and social disintegration in many countries in the region. In Nicaragua, former contra and Sandinista soldiers have taken up arms to demand access to land, credit and other resources. The Zapatista uprising in Chiapas occurred in large part because of the worsening economic situation in that Mexican state and local disillusionment with the overall national economic program. Street crime has risen dramatically in many countries, including Mexico, as have reports of domestic violence and alcoholism. Even Costa Rica, a country previously well known for its peace and tranquility, has suffered an alarming increase in crime rates in recent years.

Resignation and violence, however, have not been the only response to the worsening social and economic conditions. There has been a wave of labor unrest throughout the region over the last year as unions refuse to accept the imposition of further layoffs and reductions in wages and benefits. The unions, however, are not simply demanding that their current circumstances be maintained; they are insisting on a seat at the bargaining table that would allow them to determine the direction of economic-reform programs, particularly the nature of privatization and other measures that will directly affect them.

Other constituencies, including farmers, environmentalists, small and medium-scale businesses, and women, are also moving from protest to proposal and demanding that they be included in the determination of economic policy. In all five countries analyzed in this report, popular discontent over the impact of the adjustment measures has been matched by sectoral and, in some cases, multisectoral alternative development proposals. Furthermore, in recent presidential elections in Costa Rica, Honduras and Venezuela, voters demanded an end to structural adjustment measures and the charting of a new course. Unfortunately, as the experience of Costa Rican President Jose Maria Figueres demonstrates, the IFIs have not allowed the renegotiation of the terms of adjustment loans that would give governments the flexibility required to respond to their citizens' demands.

Macroeconomic Indicators Shaky at Best

The World Bank and IMF continue to point to improvements in macroeconomic indicators to prove that adjustment programs are working. In hyperinflationary situations such as those that existed in Bolivia and Nicaragua, the reductions in inflation rates have been dramatic. In Bolivia, inflation dropped from over 8,000 percent in 1985 to just nine percent in 1994, and in Nicaragua it fell from more than 13,000 percent in 1990 to 12 percent last year. These reductions in inflation were achieved, however, through severe policy-induced recessions, with negative or flat economic growth rates accompanying the drops in inflation.

Proponents of adjustment measures also continue to point to increases in exports as evidence of the success of the programs, while failing to acknowledge that sharp increases in imports resulting from trade liberalization have caused trade balances to deteriorate in nearly every case. The Costa Rican trade deficit increased from US$134.9 million in 1984 to US$651 in 1994, while in El Salvador the deficit doubled from US$524 million in 1989 to US$1.125 billion in 1994. Meanwhile, Mexico's trade deficit increased 2100 percent between 1990 and 1994, and similar increases were experienced in Nicaragua and Bolivia.

Chronic trade and current-account deficits have been problems for years in many Latin American countries. Rather than increasing national productive capacity, however, adjustment programs have simply led to a change in the sources of financing for these deficits. Now, instead of being financed by foreign debt, the deficits are covered by inflows of foreign investment, aid, remittances and, in some cases, drug monies. Recent experience demonstrates that each of these sources is highly unstable and unlikely to resolve the underlying structural problems that have led to the growth of the deficits. As FUNDE indicates in its alternative development proposal for El Salvador, this model "has favored consumption over investment, speculation over productive investment, the production of services over goods, demand over supply, and imports over exports".

FUNDE has joined a chorus of voices throughout the region insisting that the time has come to embark upon an alternative approach to determining economic policy. Rather than allowing economists at the Bank and the Fund to set a country's program, governments could draw on the knowledge and experience of their citizens by conducting broad-based consultations in order to determine the appropriate mix of measures designed to achieve equitable and sustainable development in each country. More democratic processes would yield programs that would likely balance the pursuit of improvements in growth and inflation rates, as well other macroeconomic indicators, with meeting the demands of the "real" economy. While lowering inflation rates and budget deficits are important objectives, they need not be achieved at the expense of undermining the creation of stable jobs at decent salaries or of expanding a country's productive capacity.

The Immoral Decade?

Latin America is a powder keg ready to explode. During the first half of the '90s, official Washington has gradually and reluctantly come to acknowledge the expanding poverty, the increasingly skewed income distribution, and the growing social conflict in the region. It has refused to concede, however, that a principal cause of these phenomena might be the very policies that it has foisted on the governments and people of the region. At the same time, the fear of reprisal has kept many officials in these governments and in international institutions silent on this critical issue.

The warning embodied in Mexico's economic collapse has not yet been heeded. One of the IFIs' show-case countries in the hemisphere, Mexico suffered from fundamental weaknesses in its "real" economy and relied on speculative capital and the patience of its citizens to sustain an economic program that was destroying its productive capacity and polarizing its society. While those seeking to protect economic-reform programs in Latin America have now joined the calls for a "new social policy" that emphasizes enhanced education, health-care and poverty- alleviation programs, they have successfully contained efforts to consider a "new economic policy" as part of official policymaking processes. The focus has been on the symptoms of what has become a very invasive and destructive cancer.

To those in the region, it is no secret that the economic model of adjustment is not working. Furthermore, there is serious concern from Mexico to Argentina that its failure will have explosive consequences unless there is soon a constructive change of course that more fully involves local populations. Recently, top United Nations officials from UNCTAD, UNDP, UNICEF and other agencies have joined many NGOs and popular organizations in the boldness of their remarks in this regard. Still, there remain far too many people of influence, particularly in the North, who refuse even to whisper what they know to be the truth about the emperor's new clothes.

Today, the problem is not that the crisis is not understood. It's that there is, in a very real and disturbing sense, a pervasive lack of courage to challenge vested interests and to act. The "lost decade" of the 1980s might be blamed on bad judgment. Should we fail now to help the people of Latin America free themselves from a patently and demonstrably disastrous economic policy imposed from afar, an objective assessment of the 1990s will undoubtedly render a much harsher judgment on our collective character.