Neoliberalism in the 90s and the New Left wave (2001-2014)

Fundamental to Jacksonville University’s mission is support for an environment where divergent ideas, theories, and philosophies can be openly exchanged and critically evaluated. Consistent with these principles and the concept of Academic Freedom, this course may involve the discussion of ideas that you find uncomfortable, disagreeable, or even offensive. These ideas are intended to be presented in an objective manner, they are not intended to persuade and are not an endorsement of what you should personally believe.”

This short guide is intended as an introductory resource. The questions posed are not central to the debates in this course, but rather serve as basic points of departure. I seek to present the material with objectivity, while acknowledging that the approach is, and cannot be, neutral. Prof. Jorge Majfud.

Table of Contents

Questions

1. Why did the new democracies of the 1980s have to pay debts they never signed, contracted by regimes that had suspended the vote?
2. How did a decision taken by the Federal Reserve in Washington turn manageable loans into a debt that could not be paid?
3. What does it mean to privatize profits and socialize debts, and who paid the bill?
4. Why did the cure prescribed by the IMF and the Washington Consensus consist of more loans, and what did those loans demand in exchange?
5. How did Mexico and Argentina go from being the model students of the 1990s to the symbols of their failure?
6. What did the left-wing governments elected between 1998 and 2014 actually achieve, and how much of it was policy and how much was the price of oil, gas and soy?
   

The Debt the Generals Left Behind

When democracy returned to Latin America in the 1980s, it did not come back empty-handed. It returned with a bill. Between 1975 and 1983, the region’s external debt rose from about 75 billion dollars to more than 315 billion, roughly half of its gross domestic product. A large share of that money had been borrowed by governments that no one had elected: the juntas of Argentina, Uruguay, Chile, and Bolivia; the generals in Brazil; the single-party regime in Mexico.

The banks of New York, London and Frankfurt were awash in petrodollars after the oil shocks of the seventies, and they needed somewhere to place them. A dictatorship was an exemplary client. It did not have to consult a parliament, it did not answer to newspapers, and it had already demonstrated it could maintain order. Washington, occupied with its war against communism in the hemisphere, did not pose many questions either. Credit flowed toward regimes that disappeared students in the same years they were signing loan agreements in dollars.

Argentina is the clearest case because it is the most extensively documented. Before the coup of 1976, the country had a relatively modest foreign debt. Under Economy Minister José Alfredo Martínez de Hoz, between 1976 and 1981, gross external liabilities grew by 27 billion dollars. By the end of the regime in 1983 it had risen from about 8 billion to 45 billion dollars, while industrial production declined by a fifth and real wages lost more than a third of their value. Much of that money never built a highway or a school. It came in, it was converted at a fixed rate, and it went out again in the suitcases of what the economists politely call capital flight.

The money was borrowed in the name of the nation. The nation was not consulted. And yet the nation would be the one asked to pay.

The FED Shock: When Washington Raised the Price of Breathing

Most of those loans had variable interest rates. That detail, buried in the fine print, decided the fate of a continent. In 1979, to fight inflation in the United States, the Federal Reserve under Paul Volcker began raising interest rates until they approached 20 percent by 1981. The decision was taken in Washington, for American reasons, by officials no Latin American had voted for. Its consequences were paid in Buenos Aires, Mexico City and São Paulo.

The arithmetic was harsh. Latin America’s annual debt service, interest plus principal, jumped from 12 billion dollars in 1975 to 66 billion in 1982. At the same time, the global recession lowered the prices of the raw materials the region exported to pay those debts. Countries had to sell more coffee, more copper and more oil just to stand still, and the price of coffee, copper and oil was falling. In August 1982, Mexico announced it could no longer pay. The rest of the continent followed. The eighties became the lost decade: between 1980-1985 the region’s income per person fell by almost 9 percent, while it transferred 108 billion dollars back to its creditors between 1982-1985.

Privatize the Profits, Nationalize the Debts

There is one more chapter, perhaps the most eloquent. In Argentina, much of the debt had been taken not by the state but by large private companies. When the peso collapsed in 1981 and 1982, those debts became unpayable for their owners. The solution was ingenious. Through exchange-rate insurance schemes run by the Central Bank, whose president in 1982 was Domingo Cavallo, the state absorbed more than 15 billion dollars of private foreign debt. Estimates vary between 14 and 17 billion, depending on what is counted. The names on the list included some of the country’s largest business groups and the local branches of multinational firms.

It was a flawless operation. During the boom, the profits were exclusive. When the bust came, the losses became public. The entrepreneurs kept their companies and, in many cases, the dollars they had transferred abroad. The citizens retained the debt. And when democracy arrived in December 1983, Raúl Alfonsín’s administration recognized that debt in full and began to pay it, as every government after him would do.

The free market, we are told, rewards risk. It depends on who takes the risk and who receives the reward.

The Washington Consensus: A Cure Made of the Same Poison

The remedy to a liability that could not be settled was, naturally, additional debt. The International Monetary Fund (IMF), the World Bank (WB) and the US Treasury supplied new loans and refinancing, first through the Baker Plan of 1985 and then through the Brady Plan of 1989, which exchanged old bank loans for new bonds. But the money arrived with conditions. In 1989, the economist John Williamson summarized them in ten points that would be known as the Washington Consensus: fiscal discipline, reductions in public spending, tax reform, liberalized interest rates, competitive exchange rates, open trade, unrestricted entry of foreign investment, privatization of state companies, deregulation and secure property rights.

Some of those points were reasonable on paper. No serious economist defends persistent deficits or hyperinflation, and several countries had both. The problem was not each component but the recipe, and who composed it. The conditions were not negotiated between peers; they were the price of the next loan. A nation that refused them was cut off from credit. A country that accepted them had to sell its telephone company, its airline, its oil, its water and its pension system, often to the same foreign banks and corporations that held its debt.

In the old empires, the gunboat arrived at the port to collect. In the new order, it was enough to send a letter of intent. The colonies no longer paid tribute in silver. They paid it in public companies.

The promise was that, once the state stepped aside, investment would flow, growth would follow, and its benefits would trickle down to the poor. The investment did flow, for a while. The rest of the promise took longer.

The 1990s: Private Profits and Public Losses, Again.

Mexico: From NAFTA to the Tequila Crisis

Under Carlos Salinas de Gortari (1988-1994), Mexico became the showcase of the new order. The state sold roughly a thousand firms, among them the telephone monopoly Telmex and the banks, and concluded the North American Free Trade Agreement, which took effect on January 1, 1994. The same day, the Zapatistas rose up in Chiapas, as if to remind everyone that not all of Mexico had been invited to the celebration.

Foreign capital poured in to purchase short-term bonds and equities. Mexico absorbed more than 94 billion dollars in capital inflows between 1984 and 1994, while its economy scarcely grew. When US interest rates rose again in 1994, the capital departed as fast as it had come. In December the peso crashed. Washington, the IMF and other lenders assembled a rescue of nearly 50 billion dollars, including 20 billion from the US Treasury and 17.8 billion from the Fund. The rescue saved the creditors. Mexicans got the recession: in 1995 GDP fell more than 6 percent and inflation reached 50 percent, while the state took over the bad loans of the newly privatized banks through the Fobaproa bailout.

Once again, the profits were private and the losses were public. Only now the operation had a free-trade agreement attached.

Argentina: One Peso, One Dollar, One Collapse

Argentina went further than anyone. In April 1991, Carlos Menem’s economy minister, the same Domingo Cavallo who had nationalized private liabilities in 1982, tied the peso to the dollar by statute. Inflation, which had reached 5,000 percent in 1989, disappeared. Then came the great liquidation: the oil company YPF went to Spain’s Repsol, the telephone company Entel was divided among Telefónica, France Télécom and Telecom Italia, and Aerolíneas Argentinas went to Iberia. The privatizations were hailed in Washington as a paradigm for the developing world.

But a fixed exchange rate requires a constant stream of dollars, and once the family silver had been sold, the dollars could only derive from loans. Argentina’s public debt went from 61 billion dollars at the end of 1991 to 145 billion at the end of 1999, and the IMF kept lending to uphold a regime that, as its own evaluators later acknowledged, had become unsustainable. Between 1999 and 2002, output declined by about a fifth. In December 2001, with the banks frozen and people banging pots in the streets, the country defaulted on about 95 billion dollars, the largest sovereign default in history until then. Argentina had five presidents in two weeks. By October 2002, 57.5 percent of the population lived below the poverty line.

The best student in the class had followed every instruction. That was precisely the problem. Other countries walked similar paths with different accents: Bolivia privatized its hydrocarbons in 1996, Ecuador defaulted in 1999 and gave up its own currency for the dollar in 2000, Uruguay’s banking system collapsed in 2002, when GDP fell 11 percent and poverty doubled. In Cochabamba in 2000, people went to the streets because a foreign consortium had raised the price of water. In 2003, the gas war brought down Bolivia’s president. The map of the 1990s ended as a map of protests.

The New Left Wave: Voting Against the Recipe

When the populace could not alter the economy, they transformed the government. Hugo Chávez triumphed in Venezuela in 1998. Lula da Silva in Brazil in 2002. Néstor Kirchner in Argentina in 2003. Tabaré Vázquez in Uruguay in 2004. Evo Morales, the first indigenous president of Bolivia, in 2005. Rafael Correa in Ecuador in 2006. None of them emerged through a coup. All of them arrived through the ballot box that the creditors had so often extolled.

Throughout the region, the figures shifted in a direction they had not shifted in decades. According to ECLAC, poverty declined 15.7 percentage points between 2002-2012, and some 60 million individuals left poverty between 2002-2013. Inequality, the region’s oldest ailment, also diminished: the Gini index dropped from 0.542 to 0.486.

Venezuela

After the 2002-2003 oil strike, the government took full control of the state oil company PDVSA and, in 2007, of the Orinoco oil projects. With oil prices rising, the revenue went to social programs. According to ECLAC figures, poverty fell from 49.4 percent in 1999 to 29.5 percent in 2012, and extreme poverty from 21.7 to 11.7 percent. Unemployment dropped from 14.5 percent to 7.8 percent between 1999 and 2011. The same period, however, deepened the country’s dependence on oil, which rose from 80 to 95 percent of exports.

Bolivia

In May 2006, five months after assuming office, Evo Morales nationalized the oil and gas sector that had been privatized in 1996. Foreign companies became subcontractors and had to renegotiate. Government revenue from hydrocarbons increased from 1.55 billion dollars in 2006 to 6 billion in 2014. Poverty declined from 59 to 39 percent between 2005-2014, and the Gini index from 0.60 to 0.47. The real minimum wage climbed 87.7 percent between 2005-2014. A nation that had lived under IMF agreements almost continuously for twenty years concluded 2014 with reserves of more than 15 billion dollars, close to half its GDP.

Ecuador

Rafael Correa established a commission to audit the debt incurred since 1970. In December 2008, after it discovered irregularities, Ecuador halted paying its 2012 and 2030 global bonds, about 3.2 billion dollars. In 2009 it repurchased 91 percent of them at 35 cents on the dollar. The markets predicted disaster. The catastrophe did not come. Between 2006 and 2014, GDP expanded an average of 4.3 percent a year, and poverty declined from 37.6 to 22.5 percent.

Argentina

Néstor Kirchner assumed office in 2003 with 22 percent of the vote and a nation in ruins. In 2005 he renegotiated the defaulted debt with a reduction of 65 to 75 percent, endorsed by 76 percent of bondholders, and in January 2006 he paid off the IMF in full, close to 10 billion dollars, to liberate the country from its conditions. The economy expanded more than 8 percent a year through 2008. Poverty declined from 57.5 percent in 2002 to about 34 percent in 2005. Under Cristina Fernández de Kirchner, the state reclaimed the private pension funds and Aerolíneas Argentinas in 2008, and 51 percent of YPF in 2012.

Lula did not nationalize the economy. He wagered instead on elevating the minimum wage and on Bolsa Família, a cash transfer to impoverished families conditioned on school attendance and health examinations, which cost approximately 0.5 percent of GDP. Poverty declined from 35.8 percent to 15.9 percent between 2003-2012. According to the World Bank, 29 million people exited poverty between 2003-2014, and the Gini index decreased from 58.1 to 51.5.

Uruguay

Uruguay had withstood the wave of privatizations through popular referendums (like its national telecommunication company, ANTEL), and its citizens inscribed public ownership of water into the constitution in 2004. That same year, following the 2002 banking crisis, poverty attained 39.9 percent; six of every ten young children were poor. Under the Frente Amplio, poverty declined to 9.7 percent in 2014, and extreme poverty from 4.7 to 0.3 percent, without nationalizations and without defaults. It was perhaps the quietest transformation of all: it consisted of collecting taxes and expending them on the poor.

In 2007, under socialist Dr. Tabaré Vázquez, Uruguay became the first nation to provide every public school pupil and instructor a laptop and a free internet connection. By 2009 every primary school had them, from Montevideo’s poorest barrios to rural schools at the end of dirt roads. Plan Ceibal was not about devices. For centuries, knowledge has been property, inherited like land. Uruguay dared to treat it as a right.

The experts had said that whoever did this would be punished by the markets. For a decade, at least, the markets had other things to worry about.

The Other Side of the Ledger

Nuance matters here as much as anywhere. The left-wing decade overlapped with the largest commodity surge in a generation, propelled above all by Chinese demand for oil, gas, minerals, and soy. However, commodity surge had also been a cyclical phenomenon in Latin America and, in many cases, did not reduce poverty but exactly the opposite: poverty grew. Part of the poverty alleviation would have occurred under any government, and it did: between 2010-2014, Peru and Chile, governed by very different coalitions, reduced poverty by 9.8 and 9.1 points respectively, close to Brazil and behind only Uruguay. When prices declined, regional poverty stopped decreasing and remained stuck at around 28 percent from 2012 on. Chile introduced a social layer: a mining royalty, the AUGE health guarantees, and the 2008 pension overhaul that established a state-funded basic pension. Piñera (2010–2014) maintained the same model from the right. The label was “neoliberalism with social adjustments.” In Peru, Humala campaigned in 2006 and 2011 on a nationalist, left-leaning platform, then softened before the 2011 runoff, kept the central bank chief, and ruled orthodoxly. Peru implemented targeted programs (the Juntos cash transfer, Pensión 65, a new social development ministry) without changing the economic model.

Venezuela never escaped oil; it clung to it more tightly. Between 1999 and 2011, its foreign debt expanded from 37 to more than 95 billion dollars, and when the price collapsed in 2014 the country began to descend into an economic catastrophe. Washington’s sanctions made sure no one could climb out of it. In Bolivia, according to a Cornell analysis, the state company drilled almost no new wells between 2006 and 2014, reserves diminished. In Argentina, inflation reappeared, and several nationalized companies kept losing money.

None of this erases what occurred, and none of it restores the decade before. The neoliberal formula did not fail because a few left-wing presidents stated so; it collapsed in Mexico in 1994, in Argentina in 2001 and in Uruguay in 2002, under governments that had followed it loyally. What the subsequent decade demonstrated is that the margin of sovereignty was greater than the creditors had claimed. What it did not show is that sovereignty alone builds a different economy. That remained, and remains, the incomplete task.

Because debt is not only an amount of money. It is a relationship of power. And relationships of power do not end when a bill is paid; they end when someone else stops writing the rules.

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