Envío Digital
Central American University - UCA  
  Number 117 | Abril 1991


Central America

The Neoliberal Model in Central America: Gospel of the New Right

Jesuit of Latin America

The word "development" has disappeared from Latin America's economic vocabulary, replaced with terms like "structural adjustment," economic "reactivation" and, as an umbrella for it all, the "neoliberal model."

The neoliberal model consists of reducing the state, privatizing state companies, eliminating subsidies and opening up the domestic and regional markets. The "market" is the model's deity and motor force, even incorporating the urban informal sector and small producers as "new entrepreneurs." A "social fund" financed by AID and other international donors compensates for the adjustment's costs to the poor called for by this "social market economy."

The model is backed by a new modernizing Right, which grew out of the crisis of the 80s, with the defeat of the regional oligarchy and the neoconservative model the Reagan Administration tried to impose in the region. This new Right is rational, calculating and increasingly integrated regionally. Its institutions have a capacity superior to those of the national governments currently under their control in every country in the region.

Costa Rica was the model for the neoliberal plan in Central America. Former President Oscar Arias promoted it with support from new Right's national think tanks coordinated through the Federation of Private Entrepreneurs of Central America with financial guidance from AID, the IMF and the Inter-American Development Bank. Now the Bush Initiative for the Americas, proposed in June 1990, and the Association for Development and Democracy provide international support in each country through the Association's Economic Assistance Program for Central America.

The political homogeneity of the current Presidents of Central America as well as of Panama, which has been increasingly included as a participant or observer in the so-called Central American Economic Community, has transformed the Esquipulas presidential summits into a mainly economic forum. A January 1991 meeting of the Central American Presidents with Mexico’s President Salinas de Gortari in Tuxtla Gutiérrez, Mexico, reaffirmed this new tendency toward regional integration and a continental free trade zone under Mexico's sponsorship. The foreign ministers of Colombia and Venezuela attended the meeting as observers.

This cumulative process is advancing in the midst of tensions, contradictions and deficiencies, mainly due to the weakness of regional institutions such as the Central Bank for Economic Integration, which are suffering their own economic crises and lack of effective governmental support. The first alarm signal is that the main actors in this process have no experience in the old Central American Common Market. The Regional Center for Social and Economic Research (CRIES) has called this "disintegrative integration."

General aspects of the model

From the perspective and logic of the Central American majorities, a preliminary evaluation of this neoliberal model confirms some general aspects and others specific to certain countries.

- It is a continental phenomenon that accompanies and characterizes the recent democratization process. The most advanced models are Mexico, Chile, Venezuela and Costa Rica. Brazil, Argentina, Colombia and Uruguay confront social and political tensions that do not permit their consolidation.

- It is sponsored by the United States and multilateral lending organizations.

- The model retains democratic formalities unless directly confronted. It prefers negotiation and cooptation over confrontation with popular alternatives, but if that approach fails, its promoters do not hesitate to resort to repression and human rights violations to maintain the model. A few reminders of bloody events provoked by popular reactions to economic adjustments are the March 1989 massacre in Caracas, Venezuela, just a month after President Carlos Andrés Pérez took office for the second time; the repression and killing of leaders in Mexico; the use of the army to suppress strikes in Honduras, the Dominican Republic and Brazil; and the expulsion of hundreds of state union leaders during popular mobilizations in Panama.

- The reduction of the state, which includes laying off public workers, cutting subsidies, privatizing certain state enterprises and adjusting macroeconomic imbalances—eliminating fiscal and commercial deficits and controlling inflation, for example—are necessary aspects that the popular model could accept and even promote, depending on who pays the cost, what the goals are and how each adjustment is negotiated.

This is a new arena for popular action. The demand for joining regional institutions and even aspects of the adjustment itself, although in an alternative framework, must become part of the workers' agenda for this decade. There is an urgent need for academic and professional support groups to participate in the popular movement and contribute to the presentation of an economic alternative.

- This demands a structural negotiation, not merely a reform-oriented one. The macroeconomic parameters frame and determine the possibilities of microeconomic projects and establish their costs, whether business, sectoral or popular projects.

The debate over reducing the fiscal deficit, for example, can imply a wage freeze or drop, cuts in the health and education budgets, and increased costs of public services (water, electricity, transportation). Or it could mean a drastic reduction of the military budget, substantially higher taxes on medium- and large-scale capital and property, an import tax on luxury items and a rationalization of salaries and perks that go along with high-level government posts.

These are two very different ways to carry out the necessary adjustment. The same could be said of anti-inflationary policies, which could be more effective by reducing the defense budget than by merely freezing salaries and reducing public employment. Productive proposals to increase basic grains production, for example, could stimulate the expansion of basic industrial goods production and create multiplier effects throughout the economy, reducing food imports and increasing effective demand among peasants.

- Despite the neoliberal institutional apparatus, its results have been catastrophic, not just in Central America, but in all of Latin America. According to the most recent data of the UN Economic Commission on Latin America (CEPAL), the great macroeconomic distortions have not been corrected (see chart). We take 1985 as a base, because neoliberal adjustment policies were implemented throughout Latin America that year. Since then, inflation has continued growing almost constantly. Despite the adjustments, fiscal deficits have been reduced in only 11 of the 25 countries and have increased in 10. Trade balances have maintained a positive rhythm but one inferior to that of 1985. The net transfer of resources abroad has begun to drop, but still hit $146.4 billion between 1985 and 1990, an amount that approaches the total trade balance in the period ($154 billion). In other words, the trade balance has not improved and, despite the reduction of net resource transfers abroad, almost all trade profits have gone to pay interest on the debt.

It has not been possible to overcome the negative terms of exchange. Though they have improved, we still lost 20.6% of the value of our exports in the last five years because of the deterioration of their price relative to the manufactured and capital goods we must import.

These factors have led to a decrease in GDP growth since 1985, and stagnation in the last three years. The per-capita GDP has deteriorated, especially in the last three years. In addition, the distribution of income is deteriorating throughout Latin America, increasingly impoverishing the great majority. Real wages have substantially fallen in all countries since 1980, except Colombia and Chile.

At least half of the "lost decade," the 1980s, has been dedicated to adjustment, yet the situation in Central America is substantially worse than in the rest of the continent. We could speak of four lost decades for Nicaragua, three for El Salvador and Panama, two for Honduras and Guatemala and more than one for Costa Rica.

- Nicaragua and Panama demonstrate the model's weakness and inability to initiate economic reactivation and social and political reconstruction. Both countries began a new era, in Nicaragua by ending the war and US economic embargo and in Panama the corrupt dictatorship and US economic boycott. The populations wanted to throw themselves into the reconstruction of their countries and counted on the international community, particularly the United States, to provide rapid and substantial aid as pledged.

Neither of the two countries achieved recovery, stability, macroeconomic balances, foreign aid or social peace. Instead, their economies deteriorated further: Nicaragua's GDP dropped from -3% in 1989 to -6% in 1990 and inflation rose from 1,500% to 13,500% in the same interval, making it both the most expensive and one of the poorest countries in Latin America, along with Haiti. Nicaragua's fiscal deficit increased from 2% to 14% of the GDP and its trade deficit increased from $325 million to $343 million. The area under cultivation dropped 7%. Increased social differentiation accompanied growing poverty. The official currency did not stabilize, despite over 50 devaluations in 10 months and the support of $130 million in hard currency.

In Panama, social deterioration, unemployment, violence and instability increased, culminating in a second US military intervention during the National Assembly elections at the end of January 1991. Thirteen months after the first US military intervention, the Endara government was totally discredited.

The dramatic failure of both experiences had their causes: a) The US and the rest of the international community did not fulfill their promises of quick and substantial aid to begin reconstruction, nor did the multilateral lending agencies provide such aid. b) Neither government could present a coherent national plan able to win the support of the diverse social forces. c) Most fundamentally, neoliberal adjustment policies don’t work anywhere in periods of continental crisis and world recession, much less in Central America and less yet in Nicaragua and Panama.

Panama and Nicaragua are two perhaps extreme but eloquent examples, proving that solutions cannot be based on foreign models. These countries require postwar reconstruction plans with broad national consensus that go to the causes of the crisis and do not foment polarization and social discrimination through technological and economic adjustments.

Besides, no foreign aid is available. The international market is stagnated and is not the motor of growth it was in the 1960s and 70s. The US recession could even aggravate the crisis. The Gulf war and the radical changes in Eastern Europe marginalize Central America even more.

The model’s external incoherencies

The neoliberal model might have been able to work in the 1960s and 70s, perhaps avoiding at least part of Latin America's severe foreign indebtedness. In the 1990s, there is no possibility that more newly industrialized countries like Taiwan, South Korea, Hong Kong and Singapore could develop. Those "economic miracles" occurred at a time when international trade had its greatest growth rates in the century. In addition, the countries themselves were surrounded by expanding powers (Japan and China), had no foreign debt, made profound agrarian transformations (Taiwan) and had states that played a direct role in the economy and in the technical training of the labor force.

Today, efforts to implement a Latin American neoliberal model are occurring in entirely different conditions:

1) We have extremely indebted economies that absorb up to 40% of exports in debt service, transferring to transnational economies the capital needed to reactivate our own.

2) The international market, fundamental motor of growth in the neoliberal model, has become a destabilizing factor because of the severe recession in the United States, Central and Latin America's main market. These countries are already destabilized by their dramatic macroeconomic imbalances (foreign debt and fiscal and trade deficits).

3) Central American industry is obsolescent, because of its lack of capital, technology, quality, production experience, know-how and management capacity. Taken together with its technical and commercial subordination to transnational complexes that impede exports, this means that the region's economy suffers from severe dependency, which prevents it from competing without a structural conversion of what and how it produces.

4) Central American agroindustry, basis of the region's comparative advantages, faces a worldwide technological revolution and protectionism in European and US agrarian policies. This not only makes it difficult to find markets, but also means that prices for its products are constantly deteriorating relative to the industrial goods it must import.

5) The multilateral funding agencies—the IMF, World Bank, IDB, AID, etc., founded to stabilize and propel development—have put themselves at the service of the Group of Seven. Their main objective is to maintain this asymmetrical "free" world market, which progressively widens the gap between North and South. Latin America has reduced its participation in international trade, having paid out more than $500 billion of net resources between 1982 and 1988 ($185 billion in debt service, $160 billion in capital flight, $100 billion in deteriorated terms of exchange, and $60 billion for patent royalties). Central America, for geopolitical reasons, was the only region in the 1980s to receive strong net transfers, which have now been cancelled, aggravating its crisis.

6) The recent failure of the Uruguay meeting and the GATT accords reaffirm that this problem does not originate only in the US, but in also the other countries that make up the Group of Seven. As never before in history, these seven countries, the wealthiese in the world, have centralized and monopolized capital, technology, computerized information, commercialization, the know-how to produce capital goods efficiently and competitively, efficient distribution circuits, optimal opportunities for financial capital and services and management capacity at the world market level. In these conditions, the kind of insertion promoted by the multilateral funding agencies for Latin America cannot, by definition, overcome the crisis; they can only aggravate it.

7) Latin America's subordinate insertion into the world market sharpens our traditional dependency and denationalizes and disintegrates the domestic markets, particularly in Central America, but also the continent as a whole. As long as there is no New International Economic Order, the external causes of our inability to resolve the crisis and move toward development will not be eliminated. On the contrary, neoliberalism will strengthen the incongruent internal aspects of our economies, also obstacles to development.

Internal incoherencies of the model

1) The South's insertion in the international market described above is neither free nor fair. It foments an "economic Darwinism," a "law of the jungle" in which the powerful allies of transnational capital can subsist, albeit in a denationalized form, while the majority of small businesses, peasant farmers, urban informal producers and artisans are decapitalized and forced into unemployment and emigration. These sectors make up around 50% of the economically active population and contribute to the GDP in Central America in a similar proportion. They thus become a kind of dependent burden on the "adjusted" sectors.

2) Assembly plants in free trade zones, a la Taiwan, cannot absorb so much displaced employment. By not allowing unionization, they impose competition for lower wages in the region to attract their investment. This amounts to countries competing for the greatest misery. These assembly plants do not produce multiplier effects for the national economy because they lack productive links with the domestic market. Much to the contrary, they are vulnerable and volatile in the face of international or internal changes.

3) Industrial conversion is concentrated in key industries linked to transnational capital, provoking denationalization, the progressive disintegration of national industry and the weakening of the state itself, which becomes increasingly unable to contribute to a national project.

4) Decapitalization and unemployment in medium and small industry, aggravated by the indiscriminate cutting of state functions and personnel, reduce the country's effective domestic demand. The lack of a dynamic national market blocks productive conversion and the creation of domestic supply.

5) This vicious circle, classic in the South, can no longer be broken by the state’s organizing role, given its fiscal crisis and reduced political role in the neoliberal model.

The above-mentioned external and internal incoherencies of the neoliberal model do not imply an "anti-market" position. On the contrary, they underline the need to create a model that can restructure our national and regional markets in a more efficient, equitable and autonomous form. For that, the following steps are required:

a) Promote mixed-market forms that are more balanced between the state sector, large-scale business and medium and small-scale sectors.

b) Transform the monopolistic or oligopolistic market into something much more truly free. The market should be a mechanism for efficiency and productivity that permits a more competitive and autonomous regional and international insertion, not one that destroys the nation at the service of the monopolies.

c) Seek ways in which the national market can complement the regional one, to create a more rational large-scale market that allows Central America to negotiate the sale of its products in a less dependent and skewed setting.

d) Combine the neoliberal model's modernization and efficiency with the popular alternative's complementary proposals to create broad national consensus with a regional and Latin American projection. If this does not occur, the neoliberal model will return to the military repression necessary to contain the polarization and social instability it generates. For their part, the popular movements will be tempted to return to armed struggle after another failed attempt to participate democratically in the construction of a freely developed egalitarian national project.

In conclusion, the popular movement needs democratic participation and debate over alternative adjustment proposals as tools to influence macroeconomic policies. The new neoliberal Right also needs this if it wants to consolidate the stability and consensus necessary for the country's economy and democracy. Without this equitable and democratic process, the consequences of the neoliberal model for Central America will lead to a rapid wearing down of the governments and increasing ungovernability of the countries in the region.

Therefore, a national plan with a vision and a regional future, more complementary than competitive, is the task of this decade and this generation. The generational challenge is how and with whom a model can be developed that incorporates the aspirations and solutions appearing in dispersed form among the peoples of Central America.

Print text   

Send text

<< Previous   Next >>


Introduction and Dedication

The United States: Redefining Central America and the World

The Neoliberal Model in Central America: Gospel of the New Right

The Nation-State Crisis: Ungovernability

Demilitarization: The Other Face of Democratization

Central America’s Grassroots Movement: A Partial Alternative

Guatemala: The Civilian Facade Collapses

Honduras: A Grassroots Party Emerging from Grassroots Organization

El Salvador: UN Mediation and Civil Negotiations

Nicaragua: Political Maturity and Economic Immaturity

Panama: Eternally Condemned

The Popular Alternative: The Agenda and Challenge for the 90s
Envío a monthly magazine of analysis on Central America
GüeGüe: Web Hosting and Development