Dollar Diplomacy: United States Economic Assistance to Latin America by Francis Adams

Author:Francis Adams [Adams, Francis]
Language: eng
Format: epub
Tags: Political Science, General
ISBN: 9781351782975
Google: XtqiDwAAQBAJ
Goodreads: 2493319
Publisher: Routledge
Published: 2000-04-01T00:00:00+00:00

Faith in the Market

U.S. assistance to Latin America was fundamentally restructured during the 1980s. The public sector projects of the past were supplanted by a new emphasis on private enterprise development and market-oriented reform. Aid officials argued that the Private Enterprise Initiative was consistent with their developmental mission. The stagnation of Latin American economies during the 1970s was clear evidence that past approaches had not been effective in promoting national development. An overextended public sector produced little more than cumbersome budget deficits and debilitating external debts.41

Latin American countries had traditionally reserved a prominent economic role for the state. Most governments assumed primary responsibility for the provision of basic goods and services, tightly regulated wages, prices, and interest rates, and controlled the largest industrial sectors. The Latin American state also restricted foreign trade and investment. Economically nationalist policies can be traced to the early 1950s when populist governments, responding to pressures from the incipient business class and urban labor, adopted various safeguards to protect their domestic economies. Import-substitution industrialization (ISI) programs were employed to shield local producers from foreign competitors.42 Strict limitations were also placed on foreign direct investment.43 By protecting their economies from external forces, Latin American governments hoped to lay the foundation for industrial diversification and self-reliant national development.

Although protectionist policies did stimulate industrialization in a number of countries—most notably Argentina, Brazil, Chile, Colombia, Mexico and Uruguay—this state-led development model produced its own set of problems. By the mid-1970s, government spending programs had created rapidly expanding public sector deficits, and private sector growth was hampered by excessive regulation. State enterprises, often highly inefficient in their use of scarce resources and operating at chronic losses, represented an additional fiscal burden.

Economically nationalist policies also slowed regional growth. High levels of protection created few incentives for domestic industries to improve operating efficiency or reduce costs. Since import-substitution policies encouraged capital-intensive industrialization, employment opportunities rarely expanded. These policies also led to foreign exchange shortages. Although the development of domestic manufacturing did reduce some consumer imports, the new industries themselves were highly import-dependent. Intermediate and capital goods still needed to be purchased from abroad. Foreign exchange shortages expanded as global market prices for Latin America’s traditional exports declined. Capital flows into the region, which might have offset declining export earnings, were also limited because of restrictions on foreign investment.44

USAID argued that the transition to competitive market economies would offset many of these financial difficulties. Aid officials encouraged the transfer of state functions to the market: cutbacks in state spending would reduce government budget deficits and remove bottlenecks in the provision of basic services; deregulation of domestic economies would stimulate private sector activity and expand employment; and privatization of state-owned industries would reduce public sector debt and create new opportunities for domestic firms.45

Latin American countries would also benefit, aid officials argued, from liberalization of trade and investment regimes. By embracing free markets and promoting exports, private enterprises would have greater incentives to modernize and improve operating efficiency. Access to external markets would allow these firms to produce at levels well beyond what domestic markets could absorb.

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