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The Failure of Neoliberalism

Will Mexicans Ignore What Bolivians Learned?

by HEATHER WILLIAMS

As a graduate student at Yale in the fall of 1993, I once attended a seminar with Barber Conable, former president of the World Bank. Following his talk, an audience member eagerly asked Conable whom, among Latin American leaders of the time, he considered to be his finest pupil of the Bank. Conable beamed and said without hesitation that it was then Mexican President Carlos Salinas de Gortari. "He’s the brightest of them all." he said. "And you might not take him seriously at first. He’s little-he looks like the doll on top of a wedding cake. But he’s really smart. And he’s doing great things for Mexico."

Fourteen months later, Mr. Conable might have had some explaining to do, as Mexico plunged into the worst economic crisis in a century. The wedding cake man, having left Mexico in the hands of his hand-picked successor Ernesto Zedillo Ponce de Leon, promptly flew to Ireland, where he lived suspiciously well for a man who had held nothing but bureaucratic posts (presumably with government salaries) since finishing his economics degree at Harvard. Meanwhile, Mexicans without refurbished Irish castles to live in scrambled for cover as the peso plummeted against the dollar, the banking system collapsed, two million people lost their jobs, and tens of thousands of domestic businesses went under.

But far from being diagnosed as the result of rapid-fire, reckless neoliberalism, the Mexican financial crisis–along with devaluation crises that raged through South America, Russia, East Asia and Southeast Asia in the next five years–Mexico’s disaster was attributed to technical miscalculations. Like Candide’s Dr. Pangloss explaining that everything happens for a reason and that there are no accidents, the architects of free trade explained to publics around the world that Salinas and his fellow free marketeers were actually part of a process of preparing for the inevitable. After all, IMF conditionality could be tweaked a bit in the future to avoid pushing a few hundred million more people into household insolvency (as had happened with the late 1990s financial crises), but globalization itself was not negotiable.

So while yes, billionaires did tend to get bailouts while the working classes lost their jobs and homes. And yes, food prices and petrol did skyrocket to rates un-payable for the 35 to 60 percent of populations living under the poverty line. And yes, between seven and forty percent of the economically active populations of Central America, the Dominican Republic, Mexico, the Philippines, and Ecuador did have to seek work abroad mostly as undocumented workers during the ensuing decade, but it could have been worse, but didn’t free trade help beleaguered nations climb out of the morass again?

The Washington punditry appears to have been more readily convinced of the dogma than Latin American publics. Now, it is hard to say what is the more annoying reaction among the Washington foreign policy crew and their friends in the press: the distracted hand-wringing or the reflexive condescension over this season of elections in Latin America.

Like clockwork, the mainstream press in the U.S. covered the Mexican presidential race as a righteous horserace until the final hour, and then pulled out the stops with subtly alarmist front page articles and op-eds implying that the slightly less right-wing candidate in the Mexican presidential race, Andres Manuel Lopez Obrador, really might represent a threat to order in the hemisphere because of his stated intent to address the needs of Mexico’s 40 million poor. In a prominent editorial in the The New York Times Wednesday, Mexican historian Enrique Krauze spoke of a danger of "messianic populism." Not to be outdone in the quest to generate fears of a brown planet, the Los Angeles Times ran a story days ago by Hector Tobar and Paul Richter tellingly entitled "Why the U.S. Has a Stake in the Mexican Election," which said that Lopez Obrador’s darker skin color made him different from the other candidates and more ideologically like darker-skinned leaders Chavez and Morales in Venezuela and Bolivia. In the same paragraph, Lopez Obrador was labeled a "street fighter" who had been involved in standoffs in the past with police. (What the authors of that story must have been referring to were attacks by ruling party thugs against a peaceful protest by Lopez Obrador and hundreds of workers and peasants in 1995 who walked 900 miles to the capital in protest of electoral fraud and violence in the state of Tabasco.).

Ironically, although few keeping track of the presidential campaign in Mexico really consider Lopez Obrador to be much of a leftist, what commentators believe is at stake is some amendment of the gospel of Free Trade, Deregulation, and Privatization, supported also by the Books of Dollarization, Fiscal Austerity, Cuts in Services, Tax Holidays for the Wealthy, and Guarantees of Profit Expatriation for Multinational Corporations. What on earth are the masses thinking? After it’s been explained to them over and over again that despite appearances to the contrary, that they inhabit the best of all possible worlds?

What is interesting is that after a decade and a half of experimentation of radical free-market experimentation on the world’s poor, even the most arrogant of the technocracy have had to admit that much of what they promised never materialized. Most importantly, GDP growth and low inflation have still resulted in virtually no gains in human welfare. What jobs are created in Latin America today are largely self-made: the Economic Commission on Latin America finds that nine of every ten new jobs in Latin America are in the informal sector. And that is a hemispheric average: in poorer countries, the number likely approaches 98 of every one hundred jobs. In other words, there are no jobs.

Poverty rates have remained about 35 percent for the hemisphere, and the poor, according to most the U.N., are poorer than ever. And this, of course, does not measure additionally penalties incurred by the poor not measured in income: lands despoiled by gargantuan mining operations, water and forests destroyed by runaway logging and toxic effluent, air clogged with lead and particulate matter.

Choosing words carefully, sensitive to these shortcomings, the punditry now takes the line that Latin American publics are understandably pissed off about high-level corruption, poverty, and shortfalls in health care, education, housing, potable water and sanitation, but that there are in fact two kinds of reformers in the hemisphere: the good ones and the bad ones. The latter are dangerous, undisciplined types who talk about keeping subsoil resources (especially oil and gas) in public hands and using revenues to for literacy campaigns, health care, and land reform; the former are the virtuous leaders who talk in Clintonesque terms about growing economies and creating jobs through markets.

As ideological chameleon (or, once-leftist, then self-ascribed social democrat, then eager new pal of the Fox Administration, then unsuccessful presidential candidate, and now professor of politics at NYU) Jorge Castañeda explains in his latest piece in Foreign Affairs, "there is not one Latin American left today: there are two. One is modern, open-minded, reformist, and internationalist…The other…is nationalist, strident, and close-minded." [sic]

By this, he means that Michelle Bachelet in Chile is A-okay (no moves to protect part-time workers or address huge gaps in the privatized pension system) and Lula in Brazil seems alright (impressive fiscal discipline!). But Kirchner in Argentina is problematic for his harsh words about the IMF, and Hugo Chavez is "Peron with oil." Evo Morales in Bolivia is a "skillful and irresponsible populist." Weighing in on elections in his own country occurring this Sunday, July 2nd, he lumps the center-left candidate Andres Manuel Lopez Obrador with the bad ones, calling him a "cash-dispensing, authoritarian-inclined populist."

Whatever the outcome in Mexico this week, onlookers would do well to remember that what all this blather about moderation versus radicalism ignores is that Latin Americans are responding today to a series of bad mistakes by technocrats in the public sector who promised much and gave little to anyone but their friends in the world’s largest companies. Latin Americans were experimented upon by a class of economic elites handling billions of dollars of other people’s money (most often, the public assets of Latin American peoples themselves), and today, the challenge is who among leaders in Latin America can actually begin to clean up the mess.

On this subject, one of the best new books this year is Benjamin Kohl and Linda Farthing’s new monograph, Impasse in Bolivia: Neoliberal Hegemony and Popular Resistance (Zed Books). Avoiding a simple litany of why, in generic terms, neoliberal policies are problematic, Kohl and Farthing’s study enumerates in precise and devastating terms how the project of neoliberal restructuring unfolded on the ground in Bolivia.

In one of the best accounts around on privatization and deregulation, Kohl and Farthing explain exactly why Bolivia’s program of market restructuring failed so miserably and why Bolivia’s workers, peasants, and urban poor were responding reasonably when they joined forces and eject two presidents and dozens of other sub-national officials for their mismanagement of Bolivia’s affairs.

What ordinary people perceived– in the form of soaring food and fuel prices, rate hikes in utilities (esp. water in Cochabamba, which resulted in the famous 2000 "water war" against multinational owners of Aguas del Tunari), rising unemployment, and new flat-rate taxes-somehow got lost on the way to the World Bank, where officials continued to praise Bolivia for its thoroughgoing transition under President Gonzalo Sanchez de Lozada (1993-97 and 2002-03) and former military dictator-cum-president Hugo Banzer (1997-2000).

What Kohl and Farthing show is that Bolivia–South America’s smallest and poorest country-became a special kind of testing ground for untried schemes put together by various powerful governments and multilateral banks- the IMF, the World Bank, the U.S., Canada, the EU. Its abject finances and broken polity in the 1980s made it the perfect patient for the debt doctors, and a perfect place to screw up and not have the world notice that much.

By the 1990s, Bolivia was selling off the last of its state-owned enterprises, including concerns that were actually operating in the black and pulling in significant portions of the government’s revenues. In an ill-conceived plan to set the market free in Bolivia and integrate this nation’s tiny economy (next-door Brazil has an economy 80 times the size of Bolivia), Bolivia’s Carlos Salinas, Gonzalo Sanchez de Lozada pushed through changes that placed control of virtually every part of Bolivia’s economy and regulatory structures into the hands of foreign development agencies and private investors.

Kohl and Farthing document the jaw-dropping scandals that accompanied Sanchez de Lozada’s ill-named Law of Capitalization, which converted state-owned enterprises, including oil and gas, into shares. A controlling portion went into the hands of private sector investors, mostly foreign, and a minority share was kept in trust for the Bolivian pension system, with the idea that dividends and share price increases would then go to pay Bolivian workers from the formal sector over 65 a $250 a year payment. (a modest goal that remained unreachable after only two years of private pension fund management, even though most Bolivians, with an average lifespan of 65 years, don’t live long enough to collect pensions.)

Scandals that ought to have gotten the World Bank architects of this law fired rather than promoted included the following:

Fire Sale Prices for Bolivian Assets: Winning bids for state-owned enterprises often didn’t even put cash in hands of government, but instead were deals that required a fraction of the sticker price down in cash, and promises of investment over time. The Bolivian national airline, for example, was purchased for $5 million in cash and $42.5 million in promises of future investment by a Sao Paolo company. Investments, where they happened, generally benefited foreigners at the expense of Bolivians. "For example," Kohl and Farthing write, " in the case of LAB, the company’s largest single investment, the 1996 purchase of a Boeing aircraft, probably created more employment in Seattle than in Bolivia. Steel pipe for the construction of the Brazil-Bolivia gas pipeline came from Argentina, Brazil, and Korea, and the U.S. 435 million dollar investment directly created fewer than 600 permanent jobs."

Asset Stripping: new owners would sell off stuff, cut services, and transfer profits to parent companies. Bolivia’s regulatory authorities, even where they should be protecting shareholders, often lacked the will or ability to do so. With Chilean owners of Bolivians’ railroads, 80 percent of the workforce was cut and passenger services were largely eliminated. Profits in first couple of years of privatization were hailed as sign of neoliberal wisdom, but, as Kohl and Farthing point out, "by the end of the decade, Ferro Carril Andino, operating in the western half of the country, had begun to decapitalize, selling assets that included land and even the railway stations themselves. The company failed to maintain the roadbed and removed sections of tract between Cochabamba and Oruro, closing service to over fifty stations in communities that had no road access. They dismantled bridges, reportedly transporting the materials to Chile to build spur lines to mines."

Export of Profits: The Bolivian enterprises, in the hands of private sector managers, tended to take profits from Bolivia and place them in the coffers of parent companies. The Italian owners of the Bolivian telecommunications system, for example, which had been the second most profitable of the state-owned enterprises, had double digit revenue growth through the 1990s, but the share price dropped, and the company continually reported profits well below what the state-owned company had posted before privatization.

Profiteers Writing the Regulations: Kohl and Farthing write, "An increasingly important component of international development assistance includes ‘institutional capacity building’-creating the environment needed for markets to operate. Included is technical assistance to construct ‘competitive’ regulatory frameworks. In Bolivia’s case, some of the hydrocarbons regulations were written with assistance from PriceWaterhouseCoopers, awarded a five-year Canadian $8.25 million contract by the Canadian Agency for International Development (CIDA)… Rather than working for the interests of Bolivia, ‘assistance’ was designed by the international agency to sere the interests of either international corporations or those based in their own countries. A CIDA (2004) report clearly demonstrates that the generosity of the Canadian government provided about an 800 percent return to Canadian businesses."

Keeping Bolivian Exports Prices Low: Before privatization, the Bolivian gas concern, YPFB, was on the verge of completing a pipeline to connect the Bolivian gasfields to Brazilian markets. Revenue from this single pipeline could have increased its profits by billions of dollars by enabling Bolivia to sell its gas at or near world prices of US $7 per million British Thermal Units rather than the miserable US $3.5 negotiated under private managers selling to Argentina and Brazil.

Making The Poor Pay What the Rich Don’t: Hydrocarbons and minerals still account for 52 percent of legal exports. This used to account for 80 percent of government revenues, but after mining privatization, less than 20 percent of mineral revenues flowed to the government. The deficit was compensated for by a regressive regimen of taxes on consumption and flat taxes on income.

So in the end, Bolivians ought to be congratulated for their wisdom in electing a government that is committed to stopping the highway robbers masquerading as development experts. Mexicans would do well to consider doing the same someday in their country. As in Bolivia, the debt doctors’ prescriptions in Mexico have not necessarily created more jobs than would otherwise would have been generated, they did not stimulate durable or equitable economic growth, they did not save pension systems, and they did not integrate or diversify the economy. For my money in this election year, Kohl and Farthing’s book ought to be on the doorstep of every voter in this hemisphere.

HEATHER WILLIAMS is assistant professor of politics at Pomona College. She can be reached at hwillliams@pomona.edu