NBER, Working Paper 15190, July, Sebastian Edwards (2009)

This article reviews the 20th century economic history of Latin America, with particular attention to the role of import substituting industrialization and the Washington Consensus.

Import substituting industrialization was the development policy of choice in Latin America starting in the 1930s.  Despite growth, industrialization, and wage increases in these early years, pervasive problems soon set in.  Import barriers led to inefficiencies and expensive domestic goods.  Poverty and inequality were rampant by the 1950s.  Edwards examines the Latin American economic and social environment from the 1940s to the 1980s, and in particular the Alliance for Progress, a US aid program designed to alleviate social problems and compete with the rising appeal of the left.  Edwards finds that “in spite of the Alliance, social circumstances did not improve significantly” (2).  Additionally, “throughout this period protectionism and government intervention became more ingrained, discouraging productivity improvements” (2). 

President Kennedy launched the Alliance for Progress in August 1961.  Alliance goals included

“achieving a rate of growth of per capita income of at least 2.5 percent per annum; a more equitable distribution of income; the diversification of regional exports; the implementation of “programs of comprehensive agrarian reforms”; the elimination of adult illiteracy and the expansion of educational coverage; the construction of massive housing for the poor; low inflation and price stability; and putting in place the polices that would reduce the occurrence of major currency crises. In order to achieve these goals the countries in the region were to develop consistent Economic Programs for the medium term and longer run. The charter also established that the United States would provide substantial aid—2 billion dollars per year—for at least ten years” (4).  However, no economic liberalization measures were included in these reform measures.

Despite initial enthusiasm in Latin America, the Alliance for Progress soon drew criticism.  It was faulted for political overtones and the failure to incorporate civil society groups and support Latin American goals such as the development of a trading bloc.  Following US discontent with the ineffectiveness of the Alliance in combating communism and declining aid to Latin America overall in the 1970s, the Alliance ceased operations.

In the 1960s and 1970s, protectionism increased throughout Latin America.  Economist Victor Bulmer-Thomas found that import tariffs in the 1960s stood at 168% in Brazil, 138% in Chile, 131% in Argentina, 112% in Columbia, and 61% in Mexico, compared to 13% in the European Economic Community.  The Fraser Institute deemed Latin American countries to be some of the most protectionist in the world in the 1980s.  Average national tariffs stood at 42% compared with 15% for the East Asian Tigers.

Unemployment and informal employment increasingly became a problem in this period as well.  Edwards reports that “In 1989 more than one half of non agriculture jobs were in the informal sector (52 percent).  Of those employed in the formal sector, one third worked for the government, and had a dubious level of productivity.  This dismal state of affairs captured forcefully the severe limitations of the import substitution protectionist model followed by most Latin American countries without interruption since the late 1930s” (14).  Despite high unemployment rates, rural-urban migration continued unabated, leading to growing slums.

Macroeconomic conditions deteriorated in the 1970s and 1980s, with double digit inflation, balance of payments problems, currency crises, foreign reserve drawdowns, and IMF bailouts.  In 1983-1985, average annual inflation rates totalled approximately 300%.  Edwards reports that “This rapid increase in prices had a number of negative effects: credit virtually disappeared, uncertainty increased, investment declined, government controls became stricter, and the population at large – and especially the poor – saw the purchasing power of its wages, pensions and savings erode rapidly.” (15).  Latin America saw 26 devaluations and external crises over 1983-2003.  Notably, after 18 of these, income inequality and the fraction of people below the poverty line increased.  As a result of this confluence of factors, the 1980s came to be known as the “lost decade” in Latin America.  Edwards reports that this “was the culmination of Latin America’s affair with protectionism and a government-led economic strategy” (24).

The 1989 Brady Plan, championed by US treasury secretary Nicholas Brady, aimed to address these problems through debt relief, liberalization, and jump-start lending.  Mexico, Venezuela, Uruguay, Argentina, and Brazil signed onto the plan in the late 1980s and early 1990s.  The 1990s saw the development of the Washington Consensus—a “collection of loosely articulated ideas aiming at modernizing, deregulating, opening up, and reforming the Latin American economies” (25-26).  Adoption of these reforms initially reined in inflation and stimulated GDP and wage growth.  However, all was not well.  Pegged currencies became increasingly overvalued in the 1990s, reducing Latin American exports and increasing speculation.  Competitive exchange rates, property rights, and monopoly prevention measures did not keep pace with other reforms.  These weaknesses led to disaster in subsequent currency crises. 

Overall, Latin America’s economic orientation evolved greatly from its autarkic impulses in the 1930s to its embrace of the Washington Consensus in the 1990s.  Crises since then have soured the appeal of the Consensus in many Latin American countries, leading to serious domestic debates over fundamental issues of economic policy today.