Kingston’s thesis on the relationship of neoliberalism, institutionalism, democratization

and development in Latin America. Given the complexity of Latin America, what are the

implications for US foreign policy?

Inter American Security Issues

JL

Introduction:

This paper attempts to identify the relationship among neoliberalism, institutionalism,

democratization and development in Latin America (LA) and the implications for US foreign

policy. The terms will be properly defined in the introduction and evidence of the different

correlations will be identified and illustrated by sometimes citing specific examples in

individual’s countries. LA’s colonial experience plays a significant role in the development of a

unique socio-economic dynamic in the region. A brief summary of the historical highlights that

shaped this dynamic will aid the reader by shedding some light into the major causes behind

LA’s current problems. The development and cyclical resurgence of the political left in Latin

America, the cold war dynamics, race relations, the sources of extreme inequality in the region

and the disconnect between small ruling elites will also be explored.

In his book, The Political Economy of Latin America: Reflections on Neoliberalism and

Development, Peter Kingston’s summarizes the economic history of LA in order to explain the

shortcomings of both the import substitution and the neoliberalist models. He contextualizes the

current economic dynamics in the region by exploring the legacy of the Import substitution

model within the framework of the unique socio economic features of LA. According to

Kingston, extreme inequality, and a history of exploitation of the poor by a small elite, sets the

stage for a complex and highly inefficient political infrastructure that is constantly swinging

between two contrasting set of policy prerogative. The political system finds itself constantly

being pushed in different directions by the economic elites and a coalition made up of organized

labor and the middle class, this in turn, produces a polarized system where hard political choices

are often avoided and the implementation of coherent economic policy is made impossible by the

lack of cohesion and inherent corruption within the system.

Democratization is the transition to a more democratic political regime. Democratization

itself is influenced by various factors, including economic development, history, and civil

society. 1 In LA, a move away from the centrist left in a few countries in the region has given

way to more authoritarian governments like the one in Venezuela; these regimes have grown

more intolerant of political dissent and have consolidated an inordinate amount of power in the

executive branch. In Venezuela, high oil prices have practically ensured some level of success to

the government by providing the government with increased revenue. The oil bonanza has also

enabled the government to implement a massive wealth distribution effort. Nevertheless, most

social programs are badly mismanaged and ineffective, the long term impact of this lavish

spending will, in the long run, do very little to improve the living standards of the poor. The

small and midsize businesses have all but disappeared in Venezuela, provide property has been

eroded and private investment has all but dried up. The executive has set up special funds that

bypass the legislature, and public scrutiny, and has diverted oil revenues directly into these

funds. The lack of oversight has promoted unprecedented levels of corruption, waste and

mismanagement of oil revenues. Additionally, Venezuela has had access to Chinese loans in

order to complete much needed infrastructure repair and development, yet, despite huge

infusions of Chinese cash, the infrastructure of Venezuela continues to deteriorate.

Institutionalism is defined as a set of explicit or implicit "principles, norms, rules, and

decision-making procedures around which actors expectations converge in a given issue-area." 2

1 http://en.wikipedia.org/wiki/Democratization#cite_note-przeworski-0

2 Krasner, Stephen D. (1982) “Structural Causes and Regime Consequences: Regimes as Intervening Variables." International

Organization 36/2 (Spring). Reprinted in Stephen D. Krasner, ed., International Regimes, Ithaca, NY: Cornell University Press,

1983

Neoliberalism is a complex set of programs that point to the power of markets to

produce economic benefits. It attempts to tackle high government debt by slashing government

spending. It pushes to privatize state enterprises by suggesting that, due to their high

susceptibility to being politicized and subverted, they are inefficient by nature. This deregulation

is often accompanied by a strong push to strengthen private property rights. Finally, it strongly

discourages state protectionism of its internal industry. 3

Complexities in LA. LA suffers from extreme inequality and poverty; its governments

are experiencing different moves to the left and center left. Left leaning government in the region

are moving closer to the sphere of influence of United States rivals like China and Iran. The

voracious appetite of commodities required by China’s colossal economic and the need of some

LA countries to diminish the economic reliance on the United States, by finding markets for

commodities in China and Iran, have paved the way for closer tights. LA has also found a way to

finance massive infrastructure development and improvement projects, they now rely heavily on

Chinese loans to fund these projects and provide the engineering expertise. Both Chinese and

Iranian companies are winning lucrative bids in LA, especially in Venezuela. The progressive

strengthening of these relations could spell trouble for the hegemony of the US in its own

hemisphere as countries in LA become more dependent on countries like China, its influence

will only grow.

Urban poverty is common place in LA and it can be found in all its major cities. In

Brazil, favelas, poverty and race are closely interconnected. Most of the favela’s poor inhabitants

are Afro Brazilian; in countries like Bolivia, Guatemala, Ecuador, Paraguay and Peru, indigenous

3 Kingstone, Peter R. (2011). “The Political Economy of Latin America: Reflections on Neoliberalism and Development.” New

York, New York, Routledge Publishing.

people are disproportionally represented among the rural poor. The disposed in LA are becoming

increasingly vocal, the movement of the landless in Brazil has become a powerful grassroots

movement and the indigenous movements in Bolivia, Ecuador and Peru, have been successful in

forcing their governments to back away from development projects, awarded to foreign firms,

that these groups have opposed.

Violence. The increasing level of violence and insecurity has become an institutional

threat for most governments in LA. Violence is feed by both highly organized cartels of drug

traffickers and paramilitaries, from the right and the left, and by massive unemployment, the

later aids at the development of a culture of discontent among the lower socio economic classes,

which in turn expresses their discontent by violently pushing for wealth redistribution by force.

Countries in LA are plagued by high debt, the risk of inflation, perennial instability of

commodity prices; income gap growing; high levels of corruption and redistribution of wealth

among small elite all of which further complicate the picture in the region.

Highly Stratified Socio-political systems: Social inequalities in LA are staggering,

extreme poverty afflicts the majority of their populations and this poverty coexists with the

fabulous wealth of very small elite. This socio-economic system is a legacy of colonial times.

Large native populations were quickly subdued in LA, “forming a vast, racially distinct

underclass that could be exploited for the enrichment of a small European elite.”4 The racially

distinct underclass element has tremendous repercussions for the development of democratic

4 Black, Jan K.. “Latin America: Its Problems and its Promises.” Westview Press. 2011. 163

institutions in the region, with countries which did not possess a “racially distinct underclass to

exploit,” developing more egalitarian systems. 5

Distinct Developmental Differences: Due to significant economic and developmental

differences among Latin American countries, the strength of government institutions, and their

ability to effectively implement economic reforms, varies along a continuum.

Marxism, Socialism and Dependency Theory. It is not possible to understand the

polarizing effects of Neoliberalism in LA outside the context of the revolutionary Marxist

radicalization of the LA Left during the Cold War. 6

In the early 1960’s, “Social Marxism,

imported from Cuba by revolutionaries such as Che Guevara. . . attracted disenfranchised in

large numbers.” 7

The left found a home in LA public universities, they have “frequently been

major centers of leftist political and ideological opposition to the state,” 8

in “Latin America’s

not too distant undemocratic past it was unfortunately rather frequent to see troops or

paramilitary groups entering public universities premises to repress professors/student

organizations and jail or eliminate some of their leaders.” 9 With most university educated

5 Black, Jan K.. “Latin America: Its Problems and its Promises.” Westview Press. 2011. 163

6 Chaouch, Malik T. “Christianity and Politics in Latin America: The Paradigm of the Liberation Theology.”

Desafios, 2007, II S. 157-199.

7 Ibis 157

8 Levy, Daniel C. (1986) “Higher Education and The State in Latin America: Private Challenges to Public

Dominance.” University of Chicago Press. 258.

9 Moreno-Brid, Juan C. & Ruiz-Napoles, Pablo (2008). Public Research Universities in Latin American and Their

Relation to Economic Development.” The David Rockefeller Center for Latin American Studies, Working Papers

on Latin America No 07/08-01

individuals passing through their ranks, it is logical to assume that they acquired some affinity

and familiarity with left leaning thought. Nevertheless, it would be a mistake to assume that the

support of universities and their students for the left is unqualified. In Venezuela, university

students have been instrumental in opposing some of reforms of Hugo Chavez, and have been

successful in organizing at the grass root level to oppose government attempt to curve or silence

the independence of the press.

Dependency theory: In order to justify a frontal attack to capitalism and modernization

theory, many LA intellectuals turns to the theory of dependence to explain economic

underdevelopment in LA. 10

Dependency theory argues that underdeveloped countries are not

early versions of developed countries, but have unique features and structures of their own. The

theory argues that underdeveloped nations are in the situation of being the weaker members in a

world market economy and as such, they need to reduce their connectedness with the world

market so that they can pursue a path more in keeping with their own needs, less dictated by

external pressures. Opponents of neoliberalism in LA, believed that the region entirely lacked the

ability to formulate pure, free trade, given its long history of bondage and dependency to Europe.

11 This lead to the wide acceptance of Dependence theory in Latin America, and drove the

adoption of the import substitution model throughout the 1970s and 1980s.

The import substitution model was adopted in LA as a response to a widespread

realization that the instability of commodity prices would forever impede efforts to achieve

sustainable development in the region. Agriculture had constituted an important portion of the

10

Phan, Peter C. “Method in Liberation Theology.” 2000. Theological Studies 61. 45

11

Westwell, Arthur. “Where Religion Meets Revolution: Liberation Theology and the Impulse to Social Justice in

World Religion.” The Cambridge University Journal of Politics. May, 2011.

growth domestic product for most of LA’s history but the commodities model was highly

susceptible to diminishing demands from industrialized countries. The initial protectionism of

the young industrial complex was considered a temporary measure necessary for the

development of a strong industrial sector that could later compete against the more mature

industries of the developed world.

ISI succeeded in increasing the level of industrialization throughout Latin America. ISI

was also instrumental in the appearance of a larger, urban middle class as well as a more

prosperous industrial workforce. Unfortunately, the economic elites behind the industrialization

process quickly grew complacent. Most countries in the region achieved a limited level of

industrial development but when it came to take the next step in the spectrum of

industrialization, most new industrialist were hesitant to invest the heavy sums that were needed

to achieve the next level of industrialization.

When mineral wealth was discovered in many countries in LA, only the government

showed a willingness to make the large investments needed to develop this profitable industry.

Around the same time, the agricultural elites who had paid, through their tax contributions, for

the government’s efforts to industrialize their countries, started to feel the pain. Government

policies had pushed the strength of the national currencies up, in order to facilitate the acquisition

of the industrial equipment crucial for the modernization efforts, but that had made agricultural

products uncompetitive in the global markets. The agricultural sector was also hit hard by the

great urban migrations, millions of people left the rural areas to join the ranks of manufacturing,

creating labor shortages in the country.

Governments responded to diminished tax revenues, due to diminish agricultural

production, by borrowing heavily from foreign banks. At first, the borrowed money served to

make the enormous expenditures in infrastructure needed to jump start their mineral industry, as

the ranks of State Owned Enterprises (SOE) grew in order to absorb increasing number of skilled

and unskilled employees, the companies became less efficient. The initial policy of protectionism

which was supposed to expire after some level of industrialization had been achieved became a

permanent feature of the system. SOEs became less efficient and more corrupt. ISI brought very

large foreign debts in the 1980s, debt was in dollars and vulnerable to exchange rate risk. After

foreign banks became concerned about the levels of debt and access to new capital began to dry

up, a wave of defaults sweep the region. In the middle of turbulent economic crisis, many LA

countries went to the International Monetary Fund for assistance; many were forced to adopt

neoliberalism as an economic model, as a pre-condition to receiving the much needed financial

relief.

Implications for US Foreign Policy.

Cartelization: The appearance of cartels of economic integration like Mercosur, the

Andean Community, the Central America Integration System (SICA) and Brazilian alternative to

the US-sponsored free trade zone of the Americas, UNASUR.12

The experience of Mexico in

NAFTA has created few neoliberalist converts in Latin America. The agricultural chapter of

NAFTA has decimated small and mid size agricultural producers and largely benefited large

agribusinesses. The heavy toll that free trade would exert over small and mid size producers was

considered during the treaty negotiations and a governmental plan of wealth redistribution or

compensation, was drafted. However, such plan was never executed due to the global economic

crisis in 2008, during a time of fiscal tightening, the compensation plan was postponed, which in

12

http://rensmicrodiplomacy.wordpress.com/2011/10/26/guest-post-comparative-public-diplomacy-of-trade-brazil-

and-venezuela/

turn created a significant backlash against the government and NAFTA. This is a good

illustration of neoliberalism failure to properly build the necessary political capital that it is

needed to ensure its survival and expansion of free trade initiatives in the region. As countries

learn their lessons from Mexico’s experience, they may continue to support regional free trade

initiatives that specifically exclude the United States from participation, which in turn,

contributes to progressive erosion of US hegemony in the region, in favor of some of its

adversaries.

Loss of influence in the region due to close association with economic systems, like

neoliberalism, that are perceived to have failed the region. Additionally, the United States is

having to contend with the weakening of institutions, like the Organization of American States,

which once served to buttress America’s hegemony in the region. Instead, the last decade has

seen a move away from America’s orbit. This has given rise to political clubs based purely on

ideology like the Bolivarian Alliance of People of Our America (ALBA), which recently

accepted Syria and Iran as observers. 13

Venezuela’s Hugo Chavez, the main architect of ALBA,

is staunchly anti-American, he represents, along with Evo Morales, Correa in Ecuador and

Fernandez in Argentina, a brand of LA left that has been labeled the contestatory left. The

contestatory left has attempted to reverse privatization and has invested heavily in promoting a

united front against neoliberalim and the United States. In stark contrast with the contestatory

left, we have seen the rise of a more moderate center ride movement, also known as the pink

tide. Brazil is the best example of this most centrist brand of leftist ideology, which does not cut

completely with neoliberalim but instead, proposes a gradual implementation of the neoliberal

model with a special emphasis in social programs that benefit the poorest sectors of society.

13

http://www.economist.com/node/21540319

Growing influence of US rivals in the region: China has been investing heavily in LA, in

Venezuela, it has contribute at least twelve Billion dollars to a development fund, while lending

one Billion to Ecuador, making a ten Billion emergency fund available to Argentina and

investing ten Billion in the Brazilian oil sector.14

In both Brazil and Chile, China has overtaken

the United States as their largest trading partner and in other countries in the region, China is

catching up fast.15

Narco-traffic becomes more difficult to control, countries like Bolivia, Venezuela, Ecuador,

Paraguay and Peru have stopped cooperating with America’s war on drugs and even if the efforts

in Colombia prove successful, that success will do little to cut drug production in the region, as

plantations and laboratories are moved to the mushrooming number of countries that do not want

to cooperate with the United States. Also, powerful gangs in Central America, and the expansion

of Mexican drug cartels into northern Guatemala, threaten to spread the Mexican bloody war on

drug cartels to the rest of the hemisphere. Central America is struggling to cope with a

increasingly worsening security situation. Mass deportation of Central American gang members

from US jails have confronted Central American countries with a powerful enemy that they were

not prepared for, the highly organized gangs have quickly taken advantage of weak government

and corrupt public officials to terrorize these countries, murder rates have soared and in the

recent elections in Guatemala, a former General won the election by promising a heavy hand

against the gangs.

Conclusions:

14

http://www.nytimes.com/2009/04/16/world/16chinaloan.html

15 http://www.reuters.com/article/2011/03/16/us-latinamerica-china-idUSTRE72F19C20110316

The distribution of wealth in LA, remains one of the most skewed in the world. Both ISI

and NL have been instrumental in securing better working conditions for poor workers in LA but

the situation remains troubling. Recent report from the UN Economic Commission for Latin

America reveals that poverty is shrinking in the region, just as encouraging, the report also

mentioned that the gap between the rich and the poor is also beginning to get smaller. The

percentage of Latin Americans leaving in poverty has drop from a peak 48.4% in 1990 to 30.4%

today, 16

but that stills represent a large number of people that continue to struggle with securing

the most basic living necessities. Also, we are seeing a “growing elite hostility to grassroots

initiatives, grounded in fear of challenges to the legitimacy and effectiveness of hierarchical

authority,” 17

the current rise in crime, could give governments the excuse that they need to

become more repressive and under the pretext of controlling crime, continue their traditional

protection of the elites. However, elites will have to content with a new boldness to grass root

movements in the region. In Bolivia, a decision to privatize the water system generated violent

protest and riots that eventually ran President Sanchez de Lozada out of office, current president

Evo Morales is also facing widespread mass protest and has had to tread lightly in order to avoid

confrontations with a grass root movement that is quickly moving away from the center left.

President Humala, in Peru, has also been under tremendous pressure from organized indigenous

groups that have been protesting, sometimes violently, against the concession of foreign mining

contracts. In Cajamarca, Peru, Newport, Inc, an American mining company, has abandoned plans

to exploit on the Conga gold mine and has threatened the government of Peru with legal action

for failing to live up to its commitment under the contract.

16

www.economist.com/node/21541031

17

Levine, Daniel H. “Assessing the Impact of Liberation Theology in Latin America.” The Review of Politics. Vol

50, No 2, Spring 1988.

LA continues to present tremendous challenges and its current levels of polarization

make for a volatile situation in the region, nevertheless, the decision of LA governments to move

towards the achievement of greater levels of industrialization was unquestionably correct.

Import substitution and Neoliberalim share the commonality of having fallen short of their

promises but it would be a mistake to assume that LA would have been better off without them.

Kingston correctly points out that economic systems are only as good as the institutional

framework that implements it, LA’s endemic corruption has not been conducive to effective

implementation of policies that under the best possible conditions, would have still shown

weaknesses and limitations. Brazil’s version of neoliberalism with “a human face,” seems to

contain the right combination of pragmatism and social conscience to become attainable but the

process of strengthening political institutions and addressing extreme inequality is always a long

one and as far as LA is concerned, could very well take another century.