Beyond the Washington Consensus: Thoughts on Equity, Democracy and Conflict in Latin America, Mark L. Schneider

Remarks by Mark L. Schneider, Senior Vice-President, International Crisis Group, at Latin American Studies Annual Conference, Montreal, 7 September 2007

It is a pleasure to return to speak at this LASA Conference. I can now say that I have addressed LASA panels or the plenary in the 1970s, the 1980s, the 1990s and now the first decade of the 21st century. And if you don't start doing what I recommend, I will come back again a decade from now. With some nuances and slight shifts of order, I have been saying the same thing for the past 30 years.

Respect for human rights, advancing social justice, strengthening democracy and recognizing that growth has to be constructed with a priority assigned to reduce poverty and close the equity gap — that is the policy framework I still believe to be the interests of Latin America and of the United States. Growth is absolutely necessary but it is far from sufficient. And failure to address poverty and inequity inevitably acts as a drag on growth. That is one reason the Washington Consensus was off-track from the beginning.

The Washington Consensus failed in the full range of its objectives for another reason. It was relatively blind to the importance of governance and the role of the state. Without effective, inclusive and accountable governance, not only was it more difficult to implement the macro and microeconomic reforms but the flawed implementation undermined the sustainability of those reforms. Inevitably some of the measures produced losers as well as winners, and the poor and the most vulnerable always tended to be the losers. When the measures were implemented corruptly, or perceived  as such, the consequences exacerbated a sense of exclusion and alienation of growing segments of the population.

Much has been accomplished in the past decade in opening new schools and clinics — reducing the level of infant mortality from 100 per 1000, one in ten, in 1980 down to 25 per 1000, one in 40, and life expectancy rose significantly, access to primary education increased but the gaps in social justice remain far greater than they should given the level of income available to the countries of the Americas. Just as an example again on infant mortality, while there were clear improvements the difference between Latin America and OECD countries actually increased between 1980 to 2006.  In 1980, an infant was three times more likely to die before his or her first birthday if born in Latin America, now he or she is six times more likely. Nearly a decade ago, Carlos Fuentes spoke on the 50th anniversary of the OAS. He said and I quote, "The cry throughout Latin America is: we want political democracy, economic growth and social justice. We want them together.  And, we want them now". 

He said that Latin America was at a moment of unique opportunity. For the first time in his memory, the hemisphere, north and south, shared a perception of the importance of political democracy, economic growth and social justice and how to get there.

I doubt that he would say the same today. The importance of those goals remains unchanged. But agreement on "how to get there" has dissipated. The Washington Consensus has become contentious, and the perception is widespread of discrimination and unfairness in the dominant economic model.

Consensus

The Washington Consensus was a ten-point plan elaborated by John Williamson in 1990. According to its author, the plan was not a unique or innovative prescription for complete development, but rather his best deduction of the "lowest common denominator" of the economic policies of the main economic players in Washington, DC, with the hope of helping Latin America pull itself out of the 'Lost Development Decade' of the 1980s.  The goal as he stated it was "accelerating growth without worsening income distribution". His ten points revolved around three major ideas: macroeconomic discipline, a market-based economy and a policy of openness to both international trade and foreign direct investment — all three of which were supported by the U.S. Treasury, the Inter-American Development Bank (IDB), the International Monetary Fund (IMF) and the World Bank at the beginning of the decade. 

For the smaller countries of the Americas in the 1990s, particularly those reliant on the policy-based lending and conditionality of the IFIs, the Washington Consensus was more than descriptive. It was macroeconomic law. Some policy-makers in the Clinton Administration pressed for changes in that policy matrix. While some of the reforms on the ten-point menu had clear merit, others were positive only if complemented by effective governance, more inclusive and accountable democratic institutions and a policy framework that gave equal attention and priority to human capital investment and poverty reduction.

 I suspect few would recognize that among the 10 agenda items were tax reform and a focus on public expenditures, as Nancy Birdsall noted in the Washington Contentious, "with very high economic  returns and the potential to improve income distribution".  But the failure to focus on the role of governance in bringing about those objectives and the lack of attention to them by donors led many to simply ignore them and because priority was never assigned to reducing inequality, the "potential" was largely rhetorical.

On the tax side, the Center for Global Development and the Inter-American Dialogue noted that in most Latin American countries, loopholes and evasion are the norm. The World Bank report on inequality in Latin America added that beyond sound fiscal systems and broader access to services, there must be an end to what it called Latin America's "truncated, elitist welfare state", so that social security and social assistance preferentially reach the poor. Whether measured by the Gini coefficient, or other indices, Latin American countries have lacked  effective policies of inclusion and redistribution to reverse the disparities of income and power within their societies.

Latin American tax regimes, as a paper that Dr. Aaron Schneider co-authored noted, have displayed overall low and narrow tax rate, narrow tax rates, a prevalence of tax exemptions, insufficient administrative capacity, and most importantly, relatively weak redistributive effects,  focused largely on high consumption taxes. To increase their own revenues and fund social projects aimed at reducing inequality, Latin American governments must be willing to impose higher tax rates on income and wealth. Taxes on incomes and profits, which are more redistributive, make up a very small proportion of overall revenue in Latin America. In 2001, the regional average was 5 per cent of GDP, compared to 6.5 per cent for other countries with emerging market economies and 12.5 per cent for OECD. Tax reforms carried out in the 1990s under the banner of the Washington Consensus did little to address these concerns, because they were never at the top of bilateral or multilateral policy agenda. To impact the inequity problems discussed above, more effective and redistributive tax policies must be vigorously pursued throughout the region. 

Here again, it is not disagreement on the goals, it is a failure to achieve political consensus "on how to get there" and to construct political coalitions that can bring about those reforms in freedom.

To give credit, it is worth recalling where the hemisphere was at the end of the "lost decade" of development of the 1980s. The average level of inflation in the region was 450 per cent between 1986 and 1990. By 2000, the average inflation level had dropped to 10 percent. Furthermore, through improved fiscal control in the 1990s, the average budget deficit of the region was more than halved (from 5 to 2 per cent of GDP) and external debt was reduced from 50 per cent to 20 per cent of GDP.  

Even those who strongly supported the Washington Consensus had to admit that it failed the goal of spurring spur economic growth at levels close to those of Asia. The promised trickle-down impacts on poverty and inequity never reached the poor and excluded. Nor did they the policies achieve the promised levels of accelerated growth.

Latin American GDP Growth

From 1988 until 2006, the average annual per cent change in GDP for Latin America was 3.2 per cent, considerably lower than the Middle East's 4.3 per cent average and less than half of developing Asia's 7.6 per cent average over the same time period. Furthermore, most of Latin America's more significant growth has come in the last four years, but its 5.3 per cent average change in GDP since 2003 still is below the Middle East's 5.6 per cent and nowhere near developing Asia's 9 per cent average since 2002.  Also Latin America's growth rate is somewhat distorted by the far higher growth of oil-rich economies. Therefore, it can be argued that even the basic driving force behind adherence to the Washington Consensus — the quest for better economic growth — has not been realised.

Now while Williamson argued that since his ten-point agenda was not implemented fully, he shouldn't be blamed for the feeble levels of growth and therefore minimal impact on poverty and inequity.

The minimal nature of the impact on poverty and inequity demanded serious review of the original agenda. Williamson himself has stated that while many of the reforms he promoted benefit the poor and marginalized indirectly, he specifically omitted any strategies that were strictly redistributive in nature, believing "the Washington of the 1980s to be a city that was essentially contemptuous of equity concerns". Unfortunately I am afraid that while the rhetoric may be different the policies of the US government over the past seven years have not shown greater attention to those issues in the region or for that matter at home.

Poverty

According to the United Nation's Special Economic Commission for Latin America and the Caribbean (CEPAL), since 1990, poverty in the region has been reduced by just under 10 per cent. However, in 2006, 38.7 per cent of the region's people were still living at or below the poverty line, and near 15 percent were classified as extremely poor or indigent. In absolute terms the population living in poverty has actually increased by about 5 million over that same time period. Furthermore, since 1980, the number of people in Latin America living in extreme poverty has risen from 62 million to 79 million. The total population living in poverty moved from 136 million in 1980 to 205 million last year.

If we look particularly at rural America, poverty still hovers around the 70 per cent. The World Bank has found that in at least 12 countries, the majority of the poor are rural.

Inequity and Inequality

What about inequity and inequality? Since its colonisation, economic and social inequality have characterised its history, acting as a drag as well on the region's  capacity for full growth. Inequality exists around the planet, but it is notably worse in Latin America. According to the UNDP Human Development Report, the richest 10 per cent of the population in the region receive 48 per cent of the national income and the poorest 10 per cent receive 1.6 per cent. It also is clear that the richest 10 per cent pay virtually no taxes. Perhaps the most stunning statistic, coming from the CIA World Book was that of 98 countries it tracked on which such data were available, 12 of the 20 most unequal in the world were in Latin America.

For a specific Latin American example, the Crisis Group reported that in 2005, Bolivia's wealthiest 10 per cent had more than 140 times the income of the poorest 10 percent. Another measurement of income distribution is given by analyses of relative poverty, which is most commonly measured by calculating the percentage of a population that is "at risk of poverty, based on a threshold equivalent to 60 per cent of the national median equivalent disposable income". At the end of the lost decade of the 1980s, relative poverty averaged at about 27.5 per cent. After nine years of Consensus-inspired reforms, the rate actually increased slightly to 28.6 per cent and was still as high as 27.7 per cent in 2005. What is perhaps worse the average GINI coefficient — arguably the best objective measure of inequality in income distribution — for the region actually increased from 0.55 in 1990 to 0.58 in 1999.

Characteristically political and economic elites have sufficient control over power to protect their interests and in the process produced these distortions in distribution that produce polarisation and exclusion.

Discrimination

A linked phenomenon to the challenge of reducing poverty and inequity is the growing realisation that indigenous peoples and Afro-Latinamericans still are discriminated against on a daily basis. The World Bank study found indigenous men earning 65 per cent less than white in seven countries with the highest numbers of indigenous among its population. Indigenous women also have the least access to potable water, education and employment.

Though many Latin American countries have enacted legislation prohibiting racist acts and established ministries to protect the rights of indigenous groups, they remain among the most vulnerable in the hemisphere. 

The failure of democratic governments to assign high priority to ending exclusion of these groups, most of whom dominate the rural populations in their countries has paralleled rising militancy, rising violence and rising political instability. That is why the International Crisis Group has begun to examine these issues because they potentially may lead to instability and violence. The comparative failure to extend physical infrastructure of roads, water, electricity and sanitation, as well as schools and clinics to their communities reflects a continuing lack of social cohesion in many countries of the region. And that lack of social cohesion as CEPAL has argued undermines a sense of belonging and is the antithesis to the sense of inclusion that "founded upon the effective exercise of citizenship and a democratic ethic" 
 
It also ignores the success of the southeast Asia experience where there was a relative balance in the investment in urban and rural infrastructure and subsequent relative parity between those areas.

Democracy

The Washington Consensus was silent on the political changes taking place in the hemisphere with the decline of military regimes and the end of the Cold War. Yet many were lulled a decade ago into thinking that all countries were advancing along a common path toward democratic values and growth with equity with a common agreement about what policies would lead there. That confidence has been eroded partly by the very failure of the Consensus to achieve its objectives. But that failure was intimately involved with flaws in the democratic transition.

We all know the realities: twelve presidents did not finish their terms of office since 1990; and since 2000, three presidents were ousted in Ecuador alone, two presidents forced from office in Bolivia and one in Haiti. Legitimate frustrations that economic reforms have not brought fast, visible or sufficient improvement in their lives or their hopes for their children, have given rise to populist appeals to overturn entirely an economic system that was not working for them. Electoral reform gave what was in large measure a pragmatic rather than ideological call for change a way to achieve results, with individuals and movements whose own goals are less clear, a way to capitalise on that frustration and secure control of the state.

During the past decade, the rise in political instability along with the potential for violence can be seen in Venezuela, Bolivia, Ecuador, Peru and now Guatemala, as well as Haiti. There are a host of unique reasons for those conditions for each of the countries. But there are some elements which are similar and they link back to the discussion we are having on the Washington Consensus, the related issues of poverty, inequity, discrimination, and lack of social cohesion. The International Crisis Group, a non-profit organization, has been examining that the drivers of conflict in the Andes and Haiti and increasingly it is clear that these issues set the stage for political instability and potentially deadly violence.

In each, the rural populations have been largely excluded from the national economic and political mainstream.  As a result, it has made other national and regional goals more difficult:

• In Colombia, it makes it more difficult to end a conflict whose victims for the most part are rural non-combatants. The International Crisis Group produced a report on The Humanitarian Crisis in Colombia and not surprisingly, found that the rural departments with the highest levels of poverty were the regions where conflict was most severe. Most of the Internally Displaced in Colombia, which has the third highest number worldwide, are from those rural departments. We are convinced that whatever else is occurring in Colombia that may be positive — in the absence of a visible and high priority rural development strategy, all efforts to bring an enduring end to the conflict are made much more difficult. The same situation exists today with respect to the aftermath of the paramilitary demobilisation. I went out to the rural population and found ex-paras, their victims in the communities of rural Tierralta, and the displaced, all asking where were the promised benefits in schools, clinics and jobs. No wonder that there has been a reappearance of rearmed paramilitary groups.
•  In the Andes as a whole, the disproportionate poverty of the rural population makes it more difficult to confront a narcotics industry that often uses intimidation, force and violence to coerce campesinos to cultivate coca; but also pays them well for an easy crop that can be planted and harvested three times a year. 
• In Peru and Bolivia, Ecuador and Colombia, that failure is linked to the exclusion of the indigenous populations from full participation in national life.
• In Central America, it remains part of a still unfulfilled promise of the peace accords, and the unfulfilled pledge of transformation not simply reconstruction that was made in response to Hurricane Mitch. And I suspect will have be made again in the aftermath of Hurricane Felix.

It is not as if we do not know ways to incorporate the rural poor in national life. 

• Investing in expanding the rural poor to have access to land through land reform—one way or the other, that is, through land markets, land funds and what Brazil calls "land market-assisted land reform", through expropriation of unproductive land, or through a land tax mechanism that encourages making more land available to small farmers;
• Investing in providing secure title to the land the poor own  as a fundamental step to enable them to acquire working credit for their farming and micro and small loans for their non-farm activities;
• Massive additional investment in micro and small credit facilities to enable them to use their land more productively and to facilitate their off-farm activities. Enrique Iglesias was at a conference on microfinance and we decided that USAID was financing close to 1 million microentrepreneurs and the IDB, World Bank and others another 1 million — and the need was for 50 million; 
• Investment in technology and rural infrastructure — so that rural roads, electricity, water and sewers and information technology actually reach the rural poor;
• Investment in human capital formation — in schools, health, nutrition; and
• Investment in social capital; cooperatives and joint ventures, rural micro-entrepreneurs.

All of these measures would enhance the inclusion of the rural population, increase social cohesion and I suspect strengthen support for democratic institutions. All depend on active effective government capacity.

One other three-tiered issue I would like to raise as another reason for failing to move the Washington Consensus to a more equitable framework for development, one underpinning greater stability and lowering the chance of internal conflict. It is the linked issue of corruption, impunity and the rule of law. Despite the adoption of the Inter-American Convention Against Corruption in 1996 and follow-up Mechanisms, in 2005, respondents to the Latinobarómetro region-wide poll stated that they believed that more than 68 per cent of public officials were corrupt, ranging from 41 per cent in Uruguay to 82 per cent in Ecuador. 

 Related to the issue of corruption is sense of impunity that persuades many in the region that the elites in their countries fail to pay their taxes, fail to treat their employes with dignity, receive favored access to contracts and pay their way out of any brush with the law. The belief that those with power have impunity from the fair enforcement of the law undercuts the democratic ethos. It violates the social contract. A poll less than two years ago, found that 66 per cent of Latin Americans stated that they had little to no confidence in the judicial system.

Strengthening the rule of law has to be a high priority concern of anyone interested in political stability, in sustaining economic reform policies and in strengthening social cohesion. It also is critical to addressing underlying causes of conflict in many of the countries of the region. In Colombia, it is absolutely essential if the country is going to put the spectre of paramilitarism behind it, if the attorney general and the supreme court are going to be able to carry the investigations and prosecutions of the parapolitica scandal are brought to a final conclusion. In Haiti, it is critical to see whether that poverty-stricken country can begin to operate under the rule of law. In Guatemala, it is essential to determine whether security forces that continue to conduct extra-judicial executions will be prosecuted.

In each of the countries, there is a need for more competent police, an impartial judiciary and a civil society that expects and demands the fair enforcement of the laws. More needs to be done to protect citizens. And far more energy needs to be devoted to assure access to the system of justice for the poor, indigenous and ethnic minorities.

The challenges that I have described are real but not new. Many have identified them in the past. The issue, as Carlos Fuentes said is "how to get there". We have to craft better political solutions to find that road.

Nearly 60 years ago, a great Latin American poet, Pablo Neruda, wrote an ode to Bolivar. He concluded with these words,

"Yo conocí a Bolívar
Una mañana larga
En Madrid,
En la Boca del Quinto Regimiento.
Padre, le dije,
¿Eres o no eres o quién eres?
Y mirando al Cuartel de la Montaña
Dijo: Despierto cada cien años
Cuando despierta el pueblo."

I believe the people are stirring even as we speak. Our challenge is to find ways to mobilise popular groups politically as a positive and non-violent force to bring about the reforms to strengthen democracy, expand economic growth and promote greater equality. 

At that point, we might actually get beyond the Washington Consensus.