The Washington Consensus and Long-Term Austerity in Latin America 1

Naked Capitalism has published the excellent article The Washington Consensus and Long-Term Austerity in Latin America.

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.

Remember this paragraph when you hear President Obama and his Republican allies tell you that the way for our economy to grow is for us to export more. If the successful economies get that way by exporting to us, then won’t those economies decline as we increase our exports to them? Then who will we export to? Unless we expand the middle-class around the world, there won’t be a market for our exports. As I keep saying, “What part of no freakin’ customers do you not understand?”

As with many posts on Naked Capitalism, the comments are excellent and informed. That’s true of even the dissenting comments.

Here is a non-dissenting comment by “Oakchair”.

I can see why people would think that policies that focus on export led growth would be better then policies that focus on domestically producing goods for local demand. It seems intuitive that the way for a poor country to get rich would be to focus on producing things to sell to rich countries. The problem is that export led growth makes your economy subject to the whims of the rich countries you are exporting to. While domestic production creates growth not only in producing the good but in the demand created in the local purchase of that good. And when you focus on local demand you can always export that stuff and are more subjected to the whims of your own economies demand.

With a country the size of the USA, I would think that “import substitution” would be a better cure for our economic ills than more lousy trade deals (TPP).

Has Obama got his head on backwards with regard to free trade, just as much as he has with other economic issues? Can we afford to elect another President who is so ill-informed and ill-advised on economic issues? I am naturally talking about choosing Hillary Clinton over Bernie Sanders. That would be the definition of insanity.

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One thought on “The Washington Consensus and Long-Term Austerity in Latin America

  • SteveG Post author

    I think this Naked Capitalism article is the perfect explanation as to what was the flaw in our economics professors teaching us that free trade is the universal solution to all problems economic. What they should have taught us is that if you have a well functioning domestic economy, and other countries have good domestic economies, too, then increasing global trade can make everyone a little better off. If you destroy your domestic economy in pursuit of more exports, then this will lead to an inevitable race to the bottom among countries. Instead of setting up a system with built in incentives to race to the top, this emphasis on increasing exports over domestic consumer demand is sure to have built-in incentives for an ever faster race to the bottom.