by Sam Alexander ’16
In this paper I explore the effects of neoliberal economic policies on Latin American economic development. Since World War II there has been an exponential rise in liberalized international commerce, and in the past forty years, Latin American countries have been under disproportionate pressure to adopt neoliberal economic policies. These policies revolve around what Klein (2007) calls the “free-market trinity” — privatization, deregulation and large cuts to social spending.
I argue that in Latin America neoliberal policy reforms by themselves are only minimally effective, but produce much stronger results when paired with democratization. As states become more democratic they should be more likely to conclude free trade agreements (FTAs), which tend to benefit international trade more than any domestic economic policies. I explore this topic using time series analyses of the economic conditions of both Mexico and Chile from the implementation of their first neoliberal reforms to the present. The reason for focusing on Mexico and Chile is that they were two of the first Latin American countries to undergo serious economic reforms, and thus offer the longest histories through which to evaluate the policies’ long term effects. I find that neoliberal reforms alone produce mixed results, and that the positive results are often outweighed by the negative ones. Conversely, I find that there are substantial improvements to economic development after a country has democratized, and that the most significant improvements follow the implementation of FTAs.
Much of the existing literature explores the positive and negative effects of neoliberal reforms on economic and, occasionally, political conditions throughout Latin America. Wiarda and Kline (2011) examine the political histories of both Chile and Mexico, and offer a solid foundational background from which to move forward. Huber and Solt (2004) discuss the specific implications of moderate and more radical reforms throughout Latin America, as well as highlighting many of the negative social repercussions. Klein (2007) focuses specifically on neoliberal policy changes in Chile, and the way in which the reforms unexpectedly affected the economy and the population as a whole. Mansfield et al. (2002) analyze the ways in which regime type determines foreign economic policy, and conditions under which FTAs are most likely to be concluded. Despite the valuable contributions of these authors, none of the existing literature explores the effects that democratization has in tandem with neoliberal economic models, and more specifically the role that FTAs play in furthering such policies and realizing the combined benefits for economic development in Latin America. My contribution to the literature is an examination of this crucial connection.
Political and Economic Overview of Mexico
According to the Polity IV index, Mexico did not become a democracy until Vicente Fox Quesada was elected in 2000 (Polity IV: Mexico, 2011, p. 2). Up until that point, “the Institutional Revolutionary Party (PRI) was able to maintain one-party rule and control of the presidency in Mexico for over 70 years (p. 2).” Despite the time it took for Mexico to democratize, the country underwent substantial neoliberal reform some time before that. In the early 1980s Mexico’s foreign debt began spiraling out of hand and, in 1982, the IMF made the government a number of bailout loans contingent on the implementation of a Structural Adjustment Program (Farnsworth, 1982). The program involved decreasing trade barriers, cutting social spending, and in 1989, the country underwent a “massive deregulation of agriculture (Snyder, 2002, 173).” Then, in 1994, Mexico signed the North American Free Trade Agreement (NAFTA) with the United States and Canada (Wiarda and Kline, 2011, p. 390). Thus, Mexico underwent its first neoliberal reforms between 1982 and 1989, implemented NAFTA in 1994, and became a full democracy in 2000.
Political and Economic Overview of Chile
Unlike Mexico, Chile was a low-level democracy throughout the middle of twentieth century until 1973 when the democratic government was overthrown in a military coup led by Augusto Pinochet (Polity IV: Chile, 2011, p. 2). Pinochet ran the country under a “strict military dictatorship” from 1974 until 1990 when “authority was returned to an elected president” (p. 2).During the Pinochet regime, economic policy was dictated by a group of neoliberal economists known as the Chicago Boys wielding an extensive package of policy reforms called “the brick” (Wiarda and Kline, 2011, p. 179). These reforms called for increased competition, privatization of enterprise, the removal of price controls and the reduction of tariffs (p. 179). The program was undertaken gradually at first, but then in 1975 the reforms were applied aggressively in what the famous economist Milton Friedman termed “shock treatment” (Klein, 2007, p. 82). Based on Chile’s long and extensive digression from democracy, we will consider Chile to have undergone democratization in 1990, while the country’s radical economic reforms occurred between 1975 and 1981. It wasn’t until 2003 that Chile finally signed an FTA with the United States (Wiarda and Kline, 2011, p. 185).
Effects of Liberalization on Economic Growth and Quality of Democracy
Huber and Solt (2004) have shown that moderate economic liberalization has had a positive effect on both economic and political development when implemented slowly, but that radical policy reforms have the opposite effect. Using the General Reform Index (GRI) they found that countries with more liberalized economies “experienced clearly higher average annual growth in GDP per capita” though the countries that implemented their reforms quickly and extensively “experienced six times lower average annual growth rates… than countries that proceeded more cautiously” (Huber and Solt, 2004, p. 154). Huber and Solt also use the Polity IV and Freedom House democracy scores to explore the effect that economic reforms have on a country’s quality of democracy. They found that “countries with more liberalized economies as of 1995 showed greater improvements in the two measures of quality of democracy… than countries with less liberalized economies” (p. 157). Yet, “the more radical reformers improved… to a lesser extent than the more cautious reformers” (p. 157).These results seem to make a case for moderate economic liberalization, however, Huber and Solt also found that the more liberalized countries “suffered higher volatility, saw greater increases in inequality, and experienced higher levels of poverty” (p. 158). Moderate implementation of neoliberal policies can have positive effects on economic growth and quality of democracy, but there are considerable social and political implications.
Relationship between Regime Type and Cooperation on Free Trade Agreements
In considering the relevance of democratization to international cooperation Mansfield et al. (2002) analyzes the way in which regime type affects the likelihood of countries establishing FTAs. Mansfield et al. have found that “a country is increasingly likely to conclude a cooperative trade agreement as it becomes more democratic and that the probability of two or more countries signing such an agreement rises with the level of democracy in each country” (p. 493). While the authors are aware that the primary factor in establishing an FTA is the agreement’s economic relevance to each involved party, their research has shown that regime type has a significant effect on whether such agreements are actually concluded. Mansfield et al. argue that this result stems from their finding that “international cooperation in trade can be influenced by the control that voters exert over political leaders” (p. 478). Following this argument, autocracies should be less likely to establish FTAs based on their lower accountability to voters, whereas “the superior ability of elections in democracies to constrain leaders prompts democratic rulers to be more cooperative internationally than their non-democratic counterparts” (p. 478). Thus, the higher the quality of democracy is in a country the more likely that country should be to cooperate with others in establishing FTAs.
Existing literature focuses separately on the effects that neoliberal economic policies have had in Latin America regarding economic development, the relationship between democratic regimes, and their likelihood to conclude FTAs. I argue that the gap created by these two topics having been examined separately in the past is substantial because the establishment of FTAs is the single most beneficial factor in increasing economic and political development. By analyzing the effect that FTAs have had compared to other neoliberal policy reforms, it will be possible to reframe the debate over whether domestic neoliberal policies have played a positive role in Latin American development. By focusing on FTAs, economic conditions become apparent in the international context in which they exist, and scholars can begin to view development as the multilateral undertaking that it is.
In order to accurately compare the individual effects of neoliberal policy reforms, democratization and the establishment of FTAs a time-series analysis is the most effective tool. I use Gross National Product (GDP) as my primary evidence because of the consistency of the data available for this measure through the World Bank. I also include the GDP growth rates as an additional measure of economic effectiveness. I use the dates that are cited under each country’s Political and Economic Overview in the Previous Literature section.
Mexico underwent its first round of neoliberal reforms between 1982 and 1989. In 1982 Mexico’s GDP was at $173.7 Billion, by 1989 it was at $222.9 B, and in 1994 it was at $421.7 B. That shows a growth in GDP of $198.7 B five years after all of the neoliberal reforms had been implemented. The GDP growth rate was at 5.07% in 1990, dropping to 4.22% in 1991 and then 3.63% in 1992. While GDP rose significantly in the years following the full implementation of policy reforms, the economy was actually slowing down in its overall growth.
When Vicente Fox was elected president in 2000, GDP was at $581.4 B and it continued to steadily rise for the next five years up to $848.9 B by 2005. However, looking at Table 1 it is apparent that GDP was already quite obviously on the rise before he took office. The year after Fox was elected, the GDP growth rate was at -0.16%. In the following two years it went up to .83% and then 1.35% by 2003. This isn’t a very substantial increase, but it is significant nonetheless due to the fact that it is growing.
Free Trade Agreement
The North American Free Trade Agreement (NAFTA) took effect on January 1, 1994 and that year Mexico’s GDP was at $421.7 B. One year later and it had fallen to $286.7 B, a $135 B drop. However, five years later in 2000 it had grown by $294.7 B, to $581.4 B. The year after NAFTA was established the GDP growth rate was at an all time low of -6.22%. Yet, one year later it had jumped all the way back up to 5.14%, and continued up to 6.78% the following year.
In analyzing the effects each of the three factors had on GDP, it becomes clear that neoliberal policy reforms had a substantial effect in increasing the country’s GDP and did so by nearly $200 B over five years. However, following the implementation of NAFTA GDP rose by closer to $300 B and did so while simultaneously increasing the GDP growth rate. Mexico’s neoliberal reforms increased GDP without being able to maintain an increase in growth rate. Trying to determine the effect that democratization had on the Mexican economy is difficult because, as Table 1 shows, GDP was already rising substantially before Fox was elected, yet it must be recognized that it continued to do so for the eight years after as well. The GDP growth rate also began to increase again after the country democratized, even though it had been decreasing previously. All in all, the most substantial and drastic improvements in Mexico’s GDP came after NAFTA was established.
Pinochet and the Chicago Boys implemented their neoliberal reforms most aggressively starting in 1975 and continued to push these policies until 1981. At the end of these massive reforms, in 1981, Chile’s GDP was at $32.6 B and was higher than it had ever been. By 1986, however, these reforms had begun to backfire and GDP had dropped $14.9 B to $17.7 B — almost exactly back to where it had been before the coup. The year after these reforms were realized, in 1982, the GDP growth rate was down at -10.32%. This is the lowest that Chile’s growth rate has ever dropped to with the exception of 1975, when Pinochet’s neoliberal experiment began.
Patricio Aylwin won the Chilean election against Pinochet in 1990, and at that time GDP was at $31.6 B and was begin to recover from the economic policies that had rocked it a decade before. By 1995, new economic policies had been implemented to fine tune the ones remaining from the Pinochet era, and GDP had more than doubled to $71.3 B. The GDP growth rate was at 3.7% when Aylwin was elected, however in the following year it rose to 7.97%, and was up to 12.28% by 1992.
Free Trade Agreement
Chile signed an FTA with Canada in 1996, and proceeded to establish one with Mexico in 1998 and finally with the United States in 2003. By the time Chile had signed a bilateral FTA with the U.S. GDP was already at $77.8 B. In the five year period following the implementation of this third FTA, their GDP was the highest it had ever been at $179.6 B. Between 2003 and 2008 their GDP had grown by $101.8 B. By 2003 the country’s GDP had a growth rate of 3.96%, and in 2004 in rose to 6.04% only to drop slightly in 2005 to 5.56%. Looking at Table 2 it is apparent how dramatically the Chilean economy has grown since 2003.
In examining the effects of each of the three factors as applied to Chile, it is clear that neoliberal reforms without a democratic government had a noticeably negative effect on the Chilean economy, as well as a number of social implications that resulted from the military coup. The country’s growth was also the absolute lowest it has ever been in 1775, directly after the military coup, and then again in 1982, directly after neoliberal reforms were fully carried out. In Chile, democratization was the second most beneficial factor in positively improving the country’s economy. Following 1990 the country’s GDP more than doubled, and the economy has continued to grow ever since. GDP grew more in the two years after Chile returned to democracy than it did after either of the other two factors. And finally, the most positive factor in increasing economic development was the implementation of FTAs and most specifically the one agreed to with the US.
Comparing results from both Mexico and Chile paint a very clear picture of the economic benefits that result from establishing FTAs. In both countries, I find that economic growth was the most substantial following the construction and implementation of FTAs. I additionally find that the most detrimental effects on economic development come from the implementation of neoliberal reforms before democracy has been established. Once democracy was established in both countries, economic growth rose significantly, and while the timing of democratization in Mexico doesn’t make it very easy to isolate it apart from the effects of NAFTA, it is still clear that it does not have a negative effect on the economy
In conclusion, I find that in the cases of Mexico and Chile, neoliberal reforms that were undertaken by non-democratic regimes had mixed effects on economic development. In both countries these reforms were the least effective at spurring economic development, and that their implementation directly led to decreased growth rates. I find that democratization is not a clear catalyst for economic growth, yet in both cases it had positive effects and consistently led to higher economic growth rates than before. And ultimately, I find that FTAs spark the most substantive economic growth, and are by far the most effective factor in increasing economic development.
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