Week 2 - History, Politics, Economics

PART 1:  Conquest and Colonization in Latin America, 1500-1800

Associated Readings

1. Eduardo Galeano, selections from Open Veins of Latin America: Five Centuries of the Pillage of a Continent, pp. 175-199 (1971)
2. Harry Sanabria, "Conquest, colonialism, and resistance," The Anthropology of Latin America and the Caribbean, pp. 76-109 (2007)

For the first half of this week's blog, please watch the following 45-minute online lecture.

Online lecture

PART 2:  The Rise of Neoliberalism

Associated Readings

1.  Tom Chodor, “The Neoliberal World Order,” pp. 45-64

Introduction

Our goal in the paragraphs that follow is to get familiar with the political-economic paradigm known as “neoliberalism.” As I will show, neoliberal globalization is the dominant form of globalization in today’s world. In contemporary South America, neoliberalism is both extremely influential and extremely contested. As such, it is imperative that we come to an understanding of where neoliberalism comes from, what its characteristic features are, and how it shapes the lives of ordinary South American citizens.

I.  How to Rebuild the World: Modernization Theory’s Vision of Economic Development in the Post-World War II Years (late 1940s/1950s)

A useful place to begin is with the ending of World War II (1939-1945), at which time the victorious nations of the Allied Forces, led by Great Britain, the Soviet Union, and the United States, confronted a daunting question:

How should the great problems of poverty and under-development among the world’s nations be addressed so as to avert another “world war” in the future?

The backdrop for this question was the awareness that economic under-development (especially during the Great Depression) had been a major factor in the social unrest and fascist ideologies that contributed to the war.

Just months before the end of the war, from July 1-22, 1944, the heads of 44 nations met at a resort in New Hampshire known as Bretton Woods to dialogue on the question above and to make financial arrangements for the postwar world after the expected defeat of Germany and Japan.  The agreements that came out of this meeting came to be known as the “Bretton Woods system.”

Before describing the policies and principles of the Bretton Woods system, it is useful to elucidate the ideology that guided them. This was an ideology known as modernization theory (also known as “development theory”), which dominated Bretton Woods and, more generally, discussions among policymakers and academics at the time. Despite its name, modernization theory isn’t so much one single theory as a particular understanding of how poverty and underdevelopment in the world should be addressed. Modernization theory divided the world into ‘modern’ and ‘traditional’ societies (so-called “First-” and “Third-world” countries).  It held that traditional societies will become modern through industrialization and market expansion.  Moreover, modernization theory emphasized the capacity of unrestricted trade across national borders to promote economic stability and therefore political peace. In other words, the modernization of a poor country entails opening its economy to the world market through imports and exports.

But since poor countries did not have financial resources available for this type of development, how could “modernization” move forward? The answer: low-interest, long-term repayment loans.  And it was the Bretton Woods accord that led to the creation of global economic lending institutions--funded and controlled by wealthy nations--that would made these loans available. Bretton Woods set up two lending institutions:  the World Bank and the International Monetary Fund (or “IMF”). (In fact, Bretton Woods set up other lending institutions as well--I am condensing this story to convey the key points.) The World Bank and the IMF were set up to make capital available to the governments of under-developed countries. Government leaders were encouraged to borrow money from international lending agencies like the IMF to modernize their economies. These massive loans were typically approved for large-scale “infrastructure” projects--projects like hydroelectric dams and highway systems--which would make possible industrial development. One well-known example of a public works project funded through a World Bank loan in the 1960s was the Akosombo Dam in Ghana (Africa).

In Latin America, government leaders quickly took advantage of IMF and World Bank loans in order to "modernize" their economies, such that by the late 1970s, these countries had accumulated gargantuan debts.  The following chart, which only represents World Bank loans, gives you an idea of the scale we are talking about:

If you are familiar with the efforts of U2 frontman Bono to organize around debt relief, you will be interested to know that most these debts were incurred under IMF and World Bank loans guided by modernization theory and promoted under the Bretton Woods system.  
 

II. Emergent Critiques of the Modernization Paradigm: Dependency Theory (1960s)

While dominant in post-War economic planning, the modernization theory paradigm did not go uncontested.  Its strongest challenge came from a set of ideas known as dependency theory. Developed by social scientists from both poor and wealthy countries, dependency theory fundamentally questioned whose interests the modernization paradigm really served. Rather than helping poor countries ascend to economic prosperity through investment with IMF- and World Bank loans, dependency theorists argued that modernization programs were in fact a rationalization of the ongoing exploitation by nations at the “core” of the world capitalist system of nations at the “periphery”--namely, exploitation by Europe and the U.S. of poor countries in the southern hemisphere. According to dependency theorists, the huge debts poor countries were accruing in the name of “modernization” wouldn’t rescue them from under-development--At best, it would help create new markets for products and services provided by wealthy nations.  At worst, indebted nations with limited resources to ever pay off their debts would remain in a state of permanent dependence on wealthy nations.

As you can see, then, dependency theory takes a very cynical view of the promises of modernization theory.

Instead of taking out huge IMF and World Bank loans to develop export- and import-oriented economies, dependency theorists called for a different strategy for development. This strategy was known as import substitution industrialization or “ISI” and from the 1960s through the 1980s it provided a formidable alternative to strategies promoted under modernization theory.  Rather than depending on the importation of foreign products, the proponents of ISI encouraged poor countries to develop what they needed within their own national boundaries.  They should, in other words, develop locally produced substitutes for goods and services that they had been importing. This was, in effect, a call for poor countries to close off their economies from the global market (strategies often referred to as “economic nationalism” or "protectionism").

One of the most famous and influential dependency theorists is the Uruguayan journalist Eduardo Galeano, whose work you have read recently. Can you see reflections of dependency theory as outlined above in the selections you have read from Galeano’s 1973 publication, Open Veins of Latin America? Watch the clip below to get a clearer sense of this extraordinary thinker and writer:

 

 

III. Political Crisis and Economic Consequences in Latin America

In the 1960s and 1970s, many Latin American countries, notably Brazil, Argentina, and Mexico, borrowed huge sums of money from international creditors for industrialization projects. These were massive infrastructure projects called for by modernization theorists. For a time, these investments seemed to be paying off, as the countries which had taken out loans saw expanding economies and growing gross national products. (In Brazil, for example, the late 1960s saw such incredible economic expansion that the period came to be called an “economic miracle.”) Thus, creditors like the IMF and the World Bank were happy to continue providing new loans. To give you an idea of the scale of borrowing that took place: Between 1975 and 1982, Latin American debt increased at a cumulative annual rate of 20.4 percent. This heightened borrowing led Latin America to quadruple its external debt from $75 billion in 1975 to more than $315 billion in 1983, or 50 percent of the region's gross domestic product (GDP). In other words, by the early 1980s, most Latin American governments were using more than half of their available funds to pay off their debt!

The promise of modernization initiatives shown in the 1960s and early 1970s came to a devastating halt in the late 1970s and 1980s. These were years of economic stagnation and inflation for nearly all of Latin America. Why did this happen? The answer is complicated--and contested by scholars--but most would agree that the economic crisis that befell Latin America in the 1970s had much to do with its vulnerability to unexpected fluctuations in the global market.

To understand what sorts of fluctuations took place and why, you need to know about the 1973 Oil Crisis.  Watch this short clip, from NBC news coverage at the time, to get a better idea:

 

 

As you can see, the crisis reflected the ongoing tensions of the Arab-Israeli conflict in the Middle East and began when members of the Organization of Petroleum Exporting Countries (OPEC) announced that they would no longer sell oil to countries supporting Israel.  Eventually, OPEC retreated on this position, but raised the price of oil on the global market.  You can imagine how increases in the price of crude oil (from which gasoline is made) on the international market stalls economic growth and translates into social hardship for ordinary citizens. Now imagine just how much worse the consequences of the Oil Crisis were in poor countries bound to expensive economic modernization projects and focused on imports and exports. Due to the crisis, Latin American countries were receiving less for their exported products. And worse, it was becoming increasingly difficult for governments to keep up with their debt repayments to the IMF, the World Bank, and other lending institutions.  Under these conditions, inflation rose and Latin America’s economies stagnated, devastating ordinary people who could no longer afford to pay for basic necessities like food and shelter for themselves or their families.

Latin America’s growing economic crisis reached a critical moment in 1982 when Mexico defaulted on its IMF loan repayment. At the time, Mexico owed billions to the IMF, but its leaders said in effect, “Our government does not have enough money available for us to make our monthly payment. We cannot pay you.”  What would happen next? Mexico was bound by the terms of its loan agreements to pay its debts to the IMF (and for years had nearly crippled itself trying to do just that).  And yet, the IMF couldn’t simply continue demanding repayment since this would risk pushing Latin America’s economies past a point of possible recovery.  If other Latin American states began to default, a domino effect could take place, leaving the continent in precisely the situation that Bretton Woods sought to prevent.

IV. Responses to Economic Crisis and the Origins of Neoliberalism: Structural Adjustment

The IMFs response to Mexico’s 1982 loan default--and to the economic crisis in Latin America more generally--was a set of policies known as structural adjustment. The fundamental aim of structural adjustment was to redirect economic development throughout the region in such a way that governments would soon be able to resume debt repayment. This meant finding ways governments could save money, and to this end, structural adjustment policies slashed government budgets, for example, freezing the wages of government employees and lowering public expenditures for social services such as health and education. Structural adjustment policies also asked Latin American states to increase exports and remove barriers on trade--to reintegrate their national economies, in other words, into the global market.

The immediate consequences of structural policies enacted in the 1980s were both positive and negative. On the one hand, these policies did successfully stabilize many Latin American economies (curtailing skyrocketing inflation rates, for example). On the other hand, the slashing of public social services proved devastating for the quality of life of ordinary citizens.  During the 1980s, thus, economies stabilized, but poverty and social inequality deepened.

It was these structural adjustment policies, devised and enacted in the 1980s, that formed the template for what would later be called "neoliberalism."

V. Codifying Neoliberal Policy: The Washington Consensus

By the late 1980s, there was broad agreement among the leadership of wealthy nations, the IMF, and the World Bank that the principles and policies of structural adjustment were the best way to ensure a stable economic future for Latin America--and therefore the timely repayment of outstanding debts. In 1989, these principles were codified into a doctrine known as the “Washington Consensus” which, like structural adjustment, emphasized market reforms to aid in the recovery of Latin American economies from the 1980s crises. To stabilize economies, these reforms included cost-cutting measures, required governments to balance their budgets, and deregulated (“liberalized”) trade. Part of this deregulation included welcoming foreign investors--encouraging foreign companies to set up factories and production facilities, for example.  To help governments save money, state-owned enterprises (for example, state-owned oil and gas companies, or telephone service providers) would be “privatized,” that is, sold to private corporations (sometimes foreign-owned).

Since the policies and principles of the Washington Consensus emphasize a new formulation of “liberal” economics--emphasizing trade deregulation and foreign investment--they have been called neoliberalism. And, since the 1980s, neoliberalism has emerged as the dominant economic paradigm embraced by Latin American governments.

It is useful to think of neoliberalism in two ways. First, we can understand it in economic terms. Borrowing from anthropologist Lynn Phillips, we can view neoliberalism as a shift from inward-looking strategies of development promoting national self-sufficiency to outward-looking free trade aimed at total integration into the world market. Several of the countries we’ll cover in the weeks to come--Bolivia, Brazil, and Venezuela, most famously--will reject the outward-looking approach of neoliberalism.

We can also think of neoliberalism as an ideology about human happiness and well-being, rooted in faith in the marketplace. From the neoliberal perspective, in a free-market society, people will have greater individual freedom, flexibility, and choice.
 
Final Thoughts for This Week
Whether neoliberalism has been good or bad for Latin America remains hotly disputed among academics and policymakers. Supporters argue that neoliberalism has helped stabilize economies and has provided ordinary Latin Americans with access to a range of new products and opportunities. Critics, however, argue that neoliberalism puts the Latin American worker in an economically exploitative position, compromises national self-sufficiency and self-determination (“sovereignty”), and limits people’s ability to maintain control over their ways of life and even over their modes of thought.

I'll end on a provocative note. Since in the United States, we tend to treat the benefits of free market economics as self-evident (that is, as obviously the best option), it is useful to challenge this position with a counter viewpoint. The short video below comes from lefty journalist Naomi Klein, who considers "neoliberalism" here in the United States. Consider her critique of neoliberal approaches followed in the aftermath of Hurricane Katrina. Do you agree? You have a chance to express your viewpoints in this week's Discussion Forum.