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Analyzing neoliberalism’s failure in Latin America

By Hu Leming | 2015-03-16
(Chinese Social Sciences Today)

Ecuadorian President Rafael Correa promotes his book, Ecuador: From Banana Republic to the non-Republic, at the Chinese Academy of Social Sciences (CASS). He visited CASS to launch his book’s Chinese edition on Jan. 6, 2015. (PHOTO: ZHU GAOLEI)

 

Agriculture has historically been the primary driver of Ecuador’s economy, but neoliberal reforms introduced in the 1980s exploited workers and devalued the currency.

 

Ecuadorian President Rafael Correa’s book Ecuador: From Banana Republic to the non-Republic is composed of his academic papers from 1993 to 2005. The book draws on the experience of Ecuador to provide a summary of Latin America. In his book, Correa  discloses the “fake objectivity” of neoliberalism and great setbacks Ecuador suffered in its economic and social development due to neoliberalism. He also puts forward significant measures for Latin American countries to eliminate poverty and achieve social justice, while declaring that neoliberalism has utterly failed in Latin America.


Implementation of neoliberalism
Neoliberals claim that economic policy only responds to technical factors and nothing else. However, Correa argues that economic policy fundamentally depends on interests and value judgment. Latin Americans weren’t involved in the formulation of the so-called Washington Consensus based on opening-up, advocating the market mechanism and reducing government functions, which was put into practice from the end of the 1980s.


People from the working class were among the biggest victims of neoliberalism. Correa states that after the implementation of neoliberalism, in order to seek higher competitiveness and realize labor flexibility, exploiting and firing workers were both legalized by popularizing “labor intermediary” and “contract of hourly employee” in Ecuador, where unemployment insurance was not established.
 

Ecuador began deepening economic reforms after 1992, which Correa claims weakened functions of public departments and “demonized” public expenses. The Law of Financial Transparency stipulates that the actual growth of public spending must not exceed 3.5 percent annually. It requires all investment to come from private capital, simply pleasing private capital and completely ignoring the requirement of national development.
 

Latin American countries were at the mercy of extending institutions of the US Treasury, such as the International Monetary Fund (IMF) and the World Bank, even though their central banks were “autonomous” within their own countries. They implemented the policy of dollarization, resulting in the canceling of domestic currency. They not only utterly abandoned their own monetary policy and control measures for exchange rates, but also became more dependent on foreign countries.
 

The adoption of free trade is obviously more beneficial to developed countries than developing countries. As Correa states, it was “just a lie or extremely innocent” that free trade was always useful and could benefit all people. Undeveloped economies had a comparative advantage only in the field of natural resources. These economies therefore had to return to the mode of agricultural product export, becoming vassals of developed countries.
 

In recent decades, Latin American countries such as Ecuador carried out economic policies that served international capital and benefited developed countries. In order to rationalize these policies, they distorted the basic economic concept of economic stability, only stressing control of inflation; formulated the financial plan through the economic policy, paying back foreign debts with surplus as much as possible; and changed ethics such as “human labor is higher than capital.”


Disappointing consequences
According to Correa, although Ecuador followed the Washington Consensus and conducted deep economic reforms from the 1990s, its economic performance was utterly unsatisfactory. Ecuador’s average economic growth rate was only 2.7 percent from 1990 to 2002. The growth rate of GDP improved in 2003 and 2004 due to the opening of pipelines transporting oil produced by private transnational corporations. Nevertheless, per capita income in 2004 only renewed to the level of the early 1980s.


The result on the social level was disastrous. Like in other Latin American countries, the “stupid opening-up” caused unemployment to soar in Ecuador. It reached 11 percent of the population with economic independence in 2004. Population of underemployment covered up to 46 percent of labor force. Meanwhile, inequality was increasingly serious in this country. In 2004, the 20 percent poorest accounted for only 2.4 percent of the total income, while the 20 percent wealthiest accounted for 60 percent. However, at the beginning of the 1990s, the ratios were respectively 4.4 percent and 52 percent.
 

Finally, Correa points out that the bureaucrats of the IMF, the World Bank and the Inter-American Development Bank are not only representatives of creditors in some countries and capable assistants of executors of the foreign policy, but also the main advocates and pushers of neoliberalism. Their policies were once completely accepted and enforced by Latin American countries at the neglect of programs proposed by government leaders in election campaigns and willingly expressed by Latin Americans at the ballot box. Apart from leading to the failure of the economy and society, neoliberalism also severely damaged the legality of the democratic system.
 

New development strategy
Correa claims that after its utter failure, neoliberalism was in terminal decline in Latin America. Latin American countries must march on following new development strategy and concept, he says.


Firstly, Latin American countries shouldn’t be addicted to market liberalization. A liberalized market itself cannot ensure the effective allocation of resources. No country can achieve development without a definite strategy of national independent development. A state’s crucial role must be brought into play, breaking away from the bondage of capital and dominance of market. Society should be placed above the market, making the market serve the people.
 

The government should improve the competitiveness of national economic development by providing public products, such as infrastructure. Meanwhile, the government should play an important role in supporting new production activities. Private investment should be attracted through government public investment. Priority should be given to domestic manufacturers in government procurement. Correa argues that Latin American countries, especially Ecuador, should never believe groundless lies and instead should acknowledge that the state should become a leading role in economic development rather than a passive judge.
 

Secondly, these countries must break away from the control of so-called world financial organizations and strive to establish new local financial institutions. Correa considers the IMF and the World Bank as “financial systems,” which are important means of the US governing the world economy as well as weapons for neocolonialism. Latin Americans will live better if the financial organizations are fundamentally canceled, Correa asserts.
 

New local financial institutions established in Latin America will contribute to optimal utilization of local savings and effective fund usage. Such a new financial structure aims to establish a new local development bank, a common reserve fund, a payment system and a common monetary system, pushing forward the new integration process. It can make Latin American countries carry out more independent monetary policy, no longer relying on rapidly changing international markets.


Finally, Latin American countries must treat protection of social capital (mainly including social trust and social cohesion) as the foundation of development and place it above temporary economic achievements to rebuild personal value and social trust. In Correa’s view, selfishness was boosted as a lofty virtue of individuals and society, resulting from neoliberalism running rampant in Latin America. A successful country is built based on joint efforts made by all social members. Economic policies of Latin American countries must integrate their effect into social capital, regarding the re-establishment and protection of social capital as the key of development.
 

Delightfully, the Ecuadorian government is implementing the grand National Plan of 2013-2017 Beautiful Life, under the leadership of President Correa.
 

Hu Leming is a professor from the Academy of Marxism at the Chinese Academy of Social Sciences.