“When U.S. monetary policy tightened in 1981 everything changed” (Brock & Connolly et al. 1989. p10). In 1981, the US drastically decided to try to sure up its system, in order to stabilise itself and provide a solution to growing debts. Interest rates were put up in the US and this coupled with a deep recession in 1982, proved to be too much for borrowers from many less economically developed countries to take. Higher interest rates meant that repayments for the loans that Latin American countries took out, would dramatically increase, with governments not being able to meet payment targets and banks having more money lent out, then they were worth.
New system employed
Bulmer-Thomas (1996. p10) talks about how the “inability of state-owned enterprises to continue to finance investments through external borrowings” and “the need to generate a trade surplus to accommodate debt service payments” meant that some alternative economic strategies had to be employed. A severe overhaul of the current system was in order.
The NEM was not a simple set of steps that had to be taken which would then lead a country out of its economic ruin and into prosperity. It was a series of guidelines, which were set out and were supposed to be met, which would lead to the completion of phases and would be an incremental process that, after the completion of each phase would draw the country ever closer to its target of self-sustained development. But to reach this final phase, the country would have to first, stabilise the economy and then undergo a structural facelift, both no mean feat (Bulmer-Thomas. 1996. p1).
Basically the NEM was a way of trying to reverse the trends, which led Latin America into its dire position. Inwards-looking development and import substitution would be replaced with the promotion of exports, to lead to export-led growth. With state-owned enterprises being so costly, privatisation would be championed, allowing more of a free market setting to generate wealth (Bulmer-Thomas. 1996. p10).
Trade liberalisation is seen as an imperative measure in the NEM, for export-led growth to be able to occur. With the stern trade barriers erected during the 1930s and the general “anti-export bias” in Latin America, it is much harder for the export market to flourish and to achieve a good balance of payments record. Therefore the lowering of tariff and non-tariff barriers to trade is necessary. Latin America is forced to open itself up to the world market, with the NEM. With the proliferation of Latin American exports, in theory the world market should be more competitive and so the imports coming back into Latin America should also be of a higher quality and possibly cheaper and so trade liberalisation should help them indirectly as well as directly (Bulmer-Thomas. 1996. p10).
The initial stabilisation that is required by the NEM in its first phase is mainly based on controlling the level of inflation. The NEM recommendations are that government savings are increased, with higher interest rates and wage controls to play down consumption. Government savings increases will essentially mean cutbacks in spending on public services and the decrease in the general standard of living (Cardoso & Helwege. 1997. p18).
Fiscal reform and financial liberalisation are more requirements of the NEM. Tax revenues need to be increased. This can be achieved by raising taxes but this will increase already high levels of poverty if it is not properly income-assessed. The selling-off of industries and services and general deregulation, will give the government more money and will save money by not having to pay running costs. It will also generate tax revenues. After a more stable and freer market has been assembled and structural reform has taken place, countries can look to attract more foreign direct investment, increase their own investment and look for a productive economy to provide for them (Bulmer-Thomas.1997. p1/56).
Affects of the NEM
Bulmer-Thomas (1997. p298) says that overall, wealth has risen following the implementation of the NEM in Latin America. I would suggest that this wealth increase has simply made the rich richer and increased economic inequality and social polarisation. There has been privatisation, which has led to widespread lay-offs of workers who are made redundant in an effort by private owners to cut costs and become more efficient and profit maximising. There have also been labour market reforms though, which would be expected to counteract this. The labour market becomes more flexible spatially and in terms of not over-specialising in one field. In practise in Latin America, this has led to even more unemployment as it has been made easier and cheaper to recruit labour. So overall, unemployment is greater then before the NEM.
When looking over a list containing seven Latin American countries and their rates of growth of real gross domestic product, per head, showing data from the three decades before the debt crisis, 1985-1990 and 1990-1994, growth rates have all increased (with the exception of Colombia) in the nineties compared to the eighties. Levels have not reached pre-debt crisis (apart from Argentina and Chile), in terms of growth, but the NEM has shown progress, even if it has been below expectations.
Many of the processes that the NEM creates, have led to the Gini coefficient getting higher, meaning that inequality has increased. Inflation has fallen at least, which has proved good for the rich and poor, but real wage rates have declined. As formal unemployment has increased, people have been forced into the urban informal sector, which has increased following the NEM and even though they may actually be working, they are able to be exploited and paid below the minimum wage. I would say that the increase of wealth has not reached the poorer people in Latin America.
The significance of poverty and inequality
“The most positive feature of the NEM is the reduction in inflation and the gains this brings for the bottom decile (quintile)” (Bulmer-Thomas. 1997. p301). The decrease of inflation and relative stabilisation of prices is good for poor people as it should mallow goods and services to be more affordable. Apart from the reduction in inflation, most of the other factors which have resulted from the implementation of the NEM have led to more poverty and inequality. Even the inflation effect is counteracted with the decrease in real wage rates though.
It is a fact that the NEM has not been implemented in its entirety in any Latin American country and has not been put into practise how it was originally intended, with only portions that are deemed suitable being employed. If the model is not implemented how it was intended, that it cannot really be blamed for rises in poverty and inequality. It is similarly true that it is not just the factors resulting from the implementation of the NEM that cause poverty and inequality. Education, health care, sanitary standards and more, all have a decided impact on poverty.
The processes that have been put into place by the NEM have led to rises in poverty in the majority of cases. If implemented correctly, in theory the NEM should reduce poverty though. With economic growth, produced through the promotion of and increased levels of exports and the exportation of non-traditional goods, wealth should be generated for a wider ranging labour force. This has not been the case though, with traditional exports being the focus and growth not even resulting from exports in many cases (like Argentina). Therefore I would say that rises in poverty and inequality are not the most significant outcomes of the NEM in Latin America. The model is designed to reduce poverty if implemented in theory and there are other large-scale factors to take into consideration such as demographic fluctuations. I believe that the main or major outcomes of the NEM have been the gradual stabilisation and return to growth of many Latin American economies and the efficiency of governments increasing. In time when governments have become self-sustaining and are developing, they will be able to tackle the problems of poverty and inequality with more vigour.
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List Of References
Bulmer-Thomas, V (ed.). 1996. The New Economic Model In Latin America And Its Impact On Income Distribution And Poverty. London. Macmillan Press Ltd.
Brock, PL (ed.) & Connolly, MB (ed.) et al. 1989. Latin American Debt And Adjustment: External Shocks And Macroeconomic Policies. New York, NY (USA). Praeger Publishers.
Cardoso, E & Helwege, A. 1997. Latin America’s Economy: Diversity, Trends And Conflicts. Cambridge. The MIT Press.