"Free-Market Reforms Failed"

No. Perhaps the clearest sign of Latin America's disenchantment with market-oriented economic reforms is the local popularity of Globalization and Its Discontents, by Nobel Prize–winning economist Joseph Stiglitz. A scathing critique of the "market fundamentalism" peddled by the International Monetary Fund (IMF), the book scaled bestseller lists in Argentina, Colombia, Paraguay, Peru, and Venezuela in 2002. "I am unemployed because of globalization," an out-of-work architect complained to me last year in Bogotá. "Stiglitz is speaking a great truth!"

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Many observers have seized upon the region's recent dismal economic record to argue that Latin America's market reforms of the 1990s -- that is, privatization, trade liberalization, deregulation, and the opening of capital markets, popularly known as the Washington Consensus -- have failed miserably. However, the problem in Latin America might not be too much reform, but too little. Following the "lost decade" of the 1980s, during which the region experienced stagnant growth and runaway inflation, structural reforms helped stabilize the Latin economies. (The defeat of hyperinflation is now largely taken for granted in Latin America, which only underscores this remarkable achievement.) Investors responded by pouring in $66 billion in foreign direct investment from 1990 to 1995, when economic growth averaged some 4 percent each year.

How did this period of relative growth evolve into the current crisis? The culprits include a combination of chronically low savings rates, which compel countries to borrow excessively from abroad; the inability (or unwillingness) of some governments to run budget surpluses during good years; currency instability; and global financial contagion. But current conditions don't prove the reforms were a bad idea. The crisis simply shows that market reforms, though an important step forward, were far from enough to put the region on a sustained growth path. In hindsight, reformers oversold how easily market policies could take hold after decades of state-guided development. They were likewise blind to the vulnerability of Latin economies to quick-spreading international financial crises, such as those in Asia and Russia during the 1990s. And they underestimated the need for safety nets and institutional reforms to mitigate long-term poverty and income inequality.

Nonetheless, nations that made the most progress in economic reform -- including Chile, Mexico, and Peru -- are showing relatively less economic distress than their neighbors. (Argentina dutifully followed the reform recipes, too, but its unsustainable currency peg with the U.S. dollar proved its undoing.) And despite their obligatory populist rhetoric, new leaders such as Brazil's Luiz Inacio "Lula" da Silva are not veering radically from market policies or from regional and international engagement.

Critics of the Washington Consensus now rightly call for additional measures such as tax reform, greater spending on health and education, and even a new "open-economy social contract" in Latin America. But solutions must be tailored to specific countries and specific problems; a single, magical, one-size-fits-all model will never work. A simple point, perhaps, but an important one for a region long enamoured of big ideas -- from dependency theory to market reforms to dollarization to property rights -- that were at various times supposed to solve every economic problem.

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