Political Prowess,
Economic Assets,
and Social Unity:
The Perpetuation of
Neoliberalism in
Middle Income
Countries
Frank Polizzi
Spring, 2013
Capstone Senior Thesis
International Relations
Abstract
______________________________________________
Growing foreign debt, vulnerability to the volatile world market, and instability
characterized Latin America in the mid 20th century. In order to combat this
downward spiral of economic and political collapse, leaders adopted neoliberal
policies to radically restructure the state. These reforms promised macroeconomic
stability and growth. In some states, these goals, and more, were achieved. While in
others, instability and inequality were exacerbated by the forces of globalization.
This paper explores the political, social and economic factors that perpetuate
neoliberal, open market polices in middle income countries despite a history of
continued criticism and a growing regional resistance.
_____________________________________________________________________
I. Introduction
The frequent assertion that the shift to "neoliberal reforms" has not worked in
South America is not persuasive. Chile, whose trade and investment policies have
been pro-globalization, and whose external borrowing has been prudent, has had
an almost steady growth rate of over 5 percent for nearly 15 years; they are the
exception that proves the rule.1
The successes and failures of neoliberalism in Latin America is a contentious issue
debated by scholars. However, economic success stories after adopting neoliberalism, such as
Chile and Costa Rica have led the two countries to be regional outliers. Chile continues to grow,
and has been dubbed Latin America’s most stable economy.2 In Central America, Costa Rica
adopted neoliberal reforms despite historically being a social democracy that provided state run
health care, education and insurance.3 Costa Rica diversified its exports, shrunk the size of the
state and reduced social spending while simultaneously growing and, “avoiding many of the
worst side effects usually associated with the implementation of neoliberal reforms and
globalization.”4 Overall, both countries, have consistently maintained neoliberal agendas,
despite a vocal counter-liberal ideology in the region.
1
Kenta Tsuda. "The Race to the Center and other Lessons of Globalization." Brown Journal of World Affairs. 8. no. 2
(2007)
2
Ricardo Ffrench-Davis. Economic Reforms in Chile from Dictatorship to Democracy. Michigan, MI: The University
of Michigan Press, 2005
3
Harry E. Vanden. The Effects of Globalization and Neoliberalism in Central America: Nicaragua and Costa Rica.
Neoliberalism and Neopanamericanism. Edited by G. Prevost & C. O. Campos, (pp. 161-174). New York, NY:
Palgrave Macmillan, 2002.
4
Ibid, 170
1
However, scholars, even proponents of neoliberalism, agree that free trade and
neoliberalism are not an automatic or guaranteed road to development and growth.5 It is for that
reason that this paper seeks to answer the question: What factors perpetuate neoliberal, open
market policies in middle income countries6 in spite of continued criticism and regional
resistance? Neoliberalism has been criticized in scholarly literature, as well as by leaders of
Latin American nations and civil society movements. However, despite this, some nations
continue with the neoliberal model, albeit with some modifications.
My argument is that political prowess, particular economic assets and social unity work
together to sustain neoliberalism in these countries. The political factors that contribute to the
perpetuation of neoliberal policies deal with the strength of the state. Neoliberal reforms are an
all-inclusive agenda that require a government with strong institutions and leadership to
implement them. This is not to be confused with a highly democratic government, as Chile
would be an exception, however a government with strong institutions, civil servants and
operative control over its state.7 Weak institutions are unable to successfully execute reforms
necessary for neoliberalism. Finally, a state’s role in the economy will determine how newly
acquired wealth will be distributed, which can be used to minimize the negative social effects
and alter how the general population will interpret the neoliberal reforms.
5
Penelope Pacheco-Lopez, & A.P Thirlwall, Has Trade Liberalization in Poor Countries Delivered the Promises
Expected? Market Liberalism, Growth, and Economic Development in Latin America. Edited by G. Angeles-Castro, I.
Perrontini-Hernandez & H. Rios-Bolivar. (pp. 9). New York, NY: Routledge, 2011
6
For the purposes of this paper, the World Bank definition of Middle Income Countries will be used: Middleincome countries (MICs) are the 86 countries that fall into the middle-income range set by the Bank's World
Development Indicators. They account for just under half of the world's population; are home to one-third of people
across the globe living on less than $2 per day; and are found in all six of the Bank's geographical regions. They
cover a wide income range, with the highest income MIC having a per capita income 10 times that of the lowest.
7
Vanden, 2002, pp. 172
2
Economically, trade, investment and entrepreneurship affect the perpetuation of
neoliberalism. Where a country’s comparative advantage lays will determine how beneficial free
trade and globalization will be. Additionally, as the world becomes more globalized, foreign
direct investment (FDI) becomes a more common practice. Entrepreneurship, as a source of
creativity and innovation, if encouraged by governments, attracts FDI and opens new markets.
These policies and practices in turn require, and benefit from liberal markets.
The social factor unique to Latin America is the presence of indigenous populations. I
hypothesize that modern nations that had to contend with relatively low indigenous populations
around the time of colonization, and that do not associate indigenous identity with national
identity, tend to prefer neoliberal policies. This can be seen in Chile and Costa Rica (amongst
others), versus the indigenous identities of Bolivia or Ecuador, which have taken a firm stance
against neoliberal policies.8 This is due to a more ethnically heterogeneous population that is not
embroiled in arguments about the lack of domestic rights such as land ownership and
sovereignty. In fact, Latin America experienced a reawakening of indigenous movements in the
early 1990s after waves of globalization made it clear that indigenous concerns were subordinate
to the macro-economic growth promised by globalization.9 On the other side of the social coin
are countries with large, highly educated middle-classes, in which globalization and open
markets increase their economic and professional opportunities. Therefore, a state with a
sizeable middle class during the time of neoliberal reform, and that has continued to grow since
the reforms, will receive popular support of these policies.
8
International Organization for Standardization (ISO). (2009, 05 08). Name change for Plurinational state of Bolivia.
Retrieved from http://www.iso.org/iso/newsletter_vi-6_name_change_plurinational_state_of_bolivia.pdf
9
Yashar, 1998
3
This topic is pertinent and worthy of study because Latin America is a dynamic region
with potential for growth. It is interesting to study how and why some countries benefit from
neoliberalism while their immediate neighbors search for an alternative. Moreover, I believe that
like the BRICs economies, certain Latin American states (particularly Chile and Costa Rica) will
be making headlines in the next five years. In fact, Chilean President Sebastian Piñera has stated
that he wants Chile to be a ‘developed country by 2020’.10 Also, newly developing countries
such as Turkey, former Soviet states and post Arab Spring nations are embracing traditional
liberal economics as they experience either rapid economic growth or regime changes.11 Finally,
by complementing my past research on criticisms of neoliberalism with proponents of
neoliberalism in Latin America, I would like to demonstrate that the gap between the opposing
paradigms can be filled.
The case studies to be reviewed in this paper are Costa Rica and Chile. These are two
similar, middle income countries that have adopted neoliberalism. Granted they have not
maintained the purely orthodox models of the 1970s-90s, however they have clearly distanced
themselves from the influence of Venezuela’s ‘Bolivarian Revolution’ what has taken root in
Bolivia, Ecuador, and Nicaragua, to name a few.12 By applying my factors to these cases, I hope
to identify a commonality that can be related to other Latin American nations that may seek to
explore neoliberal agendas.
10
Claire Brennan "President Sebastian Piñera: I want a First World Chile by 2020." CNN, 10 15, 2012
11
Surhan Cam. "Neo-liberalism and labour within the context of an ‘emerging market’ economy— Turkey." Capital
and Class. no. 2 (2002).
12
Laura Macdonald & Ruckert, A. (2009). Post-neoliberalism in the americas. UK: Palgrave Macmillan
4
Chile is often dubbed Latin America’s most stable economy and a ‘miracle case’ of
neoliberalism.13 When General Augusto Pinochet took power in a military coup in 1973, he
distanced himself from his predecessor Salvador Allende’s socialist agenda. Orthodox
neoliberalism, brought in by US-trained Chilean economists who would come to be known as
‘the Chicago Boys, was implemented and the results were very much what Washington was
looking for.14 Lowered inflation, increased exports and a growing GDP were the macroeconomic stabilizers that liberalization promised. Successive governments, though distancing
from the orthodox neoliberal model, have embraced globalization while balancing its forces with
stabilization and sustained growth.
Costa Rica, on the other hand, has led a distinct path to economic development. While
most of its neighbors were caught up in civil war, Costa Rica had abolished its military in 1948
and was continuously building its stable democratic government.15 In the 1990s, The
Washington Consensus was put into practice and the state was shrunk, public services privatized
and the market liberalized. However, since the abolition of its military, Costa Rica had heavily
invested in social services, specifically healthcare and education, to create a “well-trained, wellcared-for workforce” which was able to withstand the harsh side effects of globalization.16
Scholars agree that Costa Rica’s social safety net allowed it to embrace globalization while
13
Ffrench-Davis, 2005.
14
Ibid
15
Vanden, 2002.
16
Ibid, pp. 170
5
protecting its citizens.17 This has resulted in the nation becoming not just an economic outlier,
but a model for developing countries across the world.
This paper will begin with an introduction which will outline the argument and offer a
brief historical background to neoliberalism and the region. This section will also introduce the
factors that will be utilized to answer the research question. Next, in order to understand the
factors and the already existing research on them, I will do a review of scholarly literature and
my theoretical framework. Third, I will discuss two case studies, one of Chile and the other of
Costa Rica. The case studies will include brief background of the countries and data to connect
the factors to the case, in order to answer the research question. Following this will be a section
of analysis which will compare and contrast the cases and propose future research applications.
Finally, a conclusion will hypothesize where Latin America is headed, especially as counter
ideologies threaten the recent trend of regionalization.
II .Literature Review
What is neoliberalism and why was it implemented so widely in Latin America?
Neoliberalism is rooted in the classical theories of Adam Smith. Smith wrote that states must
take a limited role in the economy given that an ‘invisible hand’ would guide the market.18 The
idea of laissez faire economics has led to the market economies (versus state led) that largely
make up the global economy, with the degree to which the state intervenes varying from country
to country.
17
Ibid
18
Adam Smith. An Inquiry into the Nature and Causes of the Wealth of Nations. London, England: Methuen & Co., Ltd. , 1776.
6
Neoliberalism is a reinterpretation of traditional liberalism, having been adapted to the
globalized world. It calls for the state to be minimally interventionist, in order to encourage the
free flow of goods and capital.19 The size of the state must be shrunk, which leads to reducing
social spending and privatizing public services (education, healthcare, insurance, etc.).20 An
important aspect is that trade must be liberalized, which means that tariffs and non-tariff barriers
are greatly reduced or eliminated. The United States’ so called ‘Washington Consensus’ took
neoliberalism one step further by introducing the importance of fiscal responsibility. 21 Fiscal
discipline and reform were put in the hands of International Financial Institutions (IFI) such as
the International Monetary Fund (IMF) and the World Bank.
Latin America, in the mid to late 20th century, faced external dependency, growing
foreign debt and pressure from IFIs which resulted in the implementation of neoliberal ‘shock
programs’.22 Leaders preferred the risk of shock programs over gradual market reforms based on
a history of failed state interventionism and the calculated macro-economic benefits of
neoliberalism.23 Decades later, these reforms have gained popularity as some countries have
sustained economic growth, and infamy in those in which inequality has been exacerbated by
uneven development. These mixed results have led to the perpetuation of neoliberalism in some
countries, despite a regional resistance that seeks to find an alternative.
19
Vanden, 2002, pp. 169
20
Ibid
21
Ignacio Perrotini-Hernandez, Juan Alberto Vazquez-Munoz, & Blanca Avendano-Vargas. Beyond the Washington Consensus.
Market Liberalism, Growth, and Economic Development in Latin America Edited by G. Angeles-Castro, I. Perrontini-Hernandez &
H. Rios-Bolivar (pp. 26-58). New York, NY: Routledge, 2011
22
Kurt, Weyland. The Politics of Market Reform in Fragile Democracies. Princeton University Press, 2002.
23
Ibid
7
As mentioned, neoliberalism has faced continued criticism and regional resistance. In the
literature, this criticism was spearheaded by neo-Marxist scholars who recited the classical
assumptions of Marx on the destructive nature of capitalism which will be amplified in the
globalized world.24 The regulation of finance, a defining characteristic of neoliberal programs
throughout the developing world, was put in the hands of the IFIs.25 Scholars argue that these
institutions manifested waves of neo-colonization through financial capital as opposed to
military occupation.26 Within the last decade, a sub-theory, post-neoliberalism, has emerged that
encapsulates Latin America’s alleged left turn. Post-neoliberalism distinguishes itself from
traditional Marxist and neo-Marxist thought in that it does not require a complete overturn of the
system but, “is characterized mainly by a search for progressive policy alternatives arising out of
the many contradictions of neoliberalism.”27 This means, reform of the system, not a revolution.
A manifestation of this phenomenon has been Venezuela’s Bolivarian Alliance for the
Americas (ALBA). ALBA was created in 2004 as a counterattack to the US proposed Free
Trade Act of the Americas and has emerged as a regional political, economic and social
alternative to neoliberal open market policies.28 ALBA proposes bartering as an alternative to
trade, eliminating currency and sidestepping the inequalities that come with capitalism.29 With
24
Jeffery M. Ayres "Framing Collective Action against Neoliberalism: The Case of the Anti-Globalization
Movement". Journal of World System Research. 10. no. 1 (2004)
25
Ibid
26
Helen Milner. "Globalization, Development and International Institutions." Essential Readings in World Politics.
Ed. Karen A. Mingst and Jack L. Snyder. New York, New York: W, W, Norton & Company, Inc, 2011.
27
Macdonald & Ruckert, 2009
28
Al Attar, M., & Miller, R. (2010). Towards an emancipatory international law: The Bolivarian reconstruction. Third
World Quarterly, 31(3), 347-363
29
Ibid
8
eight members, the most prominent being Venezuela, Bolivia, Cuba, Ecuador and Nicaragua,
ALBA has taken a firm stance in the ideological landscape of Latin America.30 However,
despite this regional alternative, many nations have decided not to seek a substitute and maintain
a more conventional model.
Political, economic and social factors affect the perpetuation of neoliberalism in middle
income countries. The strength and role of the state, dynamic versus static comparative
economic advantage and the presence of an indigenous population can greatly affect how
neoliberal reforms are implemented and maintained. As each factor becomes developed, it is
important to observe the interconnectedness of each, no one factor is more important than the
other. For example, the social context sets the stage for the political actors to make economic
policy decisions, the results of these policies in turn affect whether or not they are maintained.
The symbiotic relationship between these factors will be evident throughout the paper, both in
theory and practice.
Political Factors
The political factors that contribute to the continuation of neoliberalism in middle income
countries are government stability, strong institutions and state involvement. Neoliberal reforms
are deep and all encompassing; therefore, a strong government is needed to fully implement such
reforms.
30
Ibid
9
State Stability and Functionality
Political institutions play a decisive role in the civil and economic branches of their
governance. The political system essentially exists to be a collective means of decision making
in which all actors involved have a stake in the outcome.31 Outcomes are most often policies,
which, in democratic systems, are voted on by civilians, supported by political parties or passed
by representatives. In terms of neoliberal policies, the presence of strong political institutions is
essential for their success. This means that the state apparatus must have a high level of
functionality and operation. Democratic rule and good governance take a subordinate role to the
stability and strength of the state in order to properly execute reforms.
Furthermore, Weyland argues that economic crises grant governments, especially the
fragile democracies of Latin America, a special position to implement neoliberal reforms.32
Nevertheless, the ‘success’ of these reforms depends on the “institutional powers of chief
executives and support provided by strong political parties.”33 State intervention in the ISI era
made neoliberal policies attractive to citizens and government officials, however they were not
prepared for the profound effects these reforms would have on their economies and societies:
These drastic, daring adjustment plans held the uncertain promise of ending the
crisis and turning the country around, but they also risked further disorganizing
the economy, unleashing a full-scale collapse of production and consumption, and
triggering social unrest and political turmoil, especially in politically unstable less
developed countries.34
31
George Tsebelis. Veto Players: How Political Institutions Work. Princeton, NJ: Princeton University Press, 2002.
32
Weyland, 2002.
33
Ibid, pp. 3
34
Ibid, pp. 5
10
In order to avoid this, Haggard and Kaufman add that, “centralized executive authority
and a cohesive, non-polarized party system facilitate the adoption of neoliberal reforms.”35 The
presence of a strong state gains further importance in a liberalized economy given the volatility
of the global market and the price shocks that can distress the export-based economies of Latin
America.36
Vanden analyzes the implantation of neoliberalism in Nicaragua, whose weak
governmental institutions due to civil war and unrest were unable to cope with the reforms.37 Its
economy deteriorated, as unemployment and inflation skyrocketed and payments on foreign debt
more than doubled those of domestic expenses.38 Decades later, Nicaragua is one of Venezuela’s
greatest allies in their regional offensive against neoliberalism. Vanden highlights that in 2000,
the Executive Secretary of ECLAC (the United Nation’s Economic Commission for Latin
America and the Caribbean), “noted inadequate governability and the lack of redistributive
institutions in Latin America, and the general weakness of Latin American nation-states in the
face of the forces of globalization.”39 In this example, we observe the importance of institutional
strength; Nicaragua’s weak state was wrecked by neoliberal reforms whereas the strong and
stable institutions of Chile and Costa Rica, which will be studied later, were able to implement
reforms and curb the forces of globalization.
35
Stephan, Haggard and Robert Kaufman. The Political Economy of Democratic Transitions. Princeton University
Press, 1995.
36
Ricardo Ffrench-Davis. Chile between Neoliberalism and Equitable Growth. Political Economy of Latin America.
Edited by P. Arestis & S. Malcolm. New York, NY: Palgrave Macmillan, 2007, pp. 71
37
Vanden, 2002. pp. 163
38
Ibid
39
Ibid, pp. 172
11
The Role of the State
A government’s ability to adapt the benefits of neoliberalism and economic growth to its
general population will affect its perception. Negative perceptions will result if inequality of
income distribution becomes an issue, while positive perceptions will result from social spending
in education, healthcare, etc. Stiglitz notes that, “we must reject...that growth will automatically
‘trickle down’ to benefit all.”40 Therefore, it is up to the state to divide up the winnings where it
can.
The role of the state in the economy is a debated amongst scholars. Traditional liberal
and neoliberal theory calls for a state that is completely absent from the economy. Milton
Friedman, economist and professor of the so-called ‘Chicago Boys’ who implemented
neoliberalism in Chile, suggests that, “people make their own best individual economic choices.
Intervention by the state distorts the necessary market signals for accurate decision making.”41
These views are challenged by the neostructuralist who, while within the framework of
traditional liberal theory, feel that the state must play an active role due to the imperfections of
the market.42 This includes economic and social intervention. Economic intervention is
expressed through institutions which stabilize the market, while social intervention invests in
education and health care.
40
Pacheco-Lopez, & Thirlwall, 2011, pp. 7
41
Franko, 2007. pp. 151
42
Ibid
12
In Latin America, due to its high inequality and poverty rates, it has been social spending
which has been a popular determinant of political and economic success.43 Macro-economic
stabilization, which was sought out by the Washington Consensus, does not translate well to
popular satisfaction of policies.44 In fact, “without an active role by government to ensure equity
and human services, the forces of globalization do not necessarily support human advancement
at all.”45 This is, however, contradictory given that reductions in social spending and
privatization of public services (healthcare, education) were of the main policy prescriptions of
the Washington Consensus.46 However, it was in countries such as Costa Rica, which will be
explored more later, in which neoliberal reforms and social spending were balanced enough to
achieve sustainable, satisfactory results.
Economic Factors
Trade
The economic factors that perpetuate neoliberalism deal with trade, investment and
entrepreneurship. Countries with a comparative advantage in an industrial good, versus an
agricultural or primary resource, reap the benefits of globalization. Stiglitz points out that:
A country whose static comparative advantage lies in, say agriculture, risks
stagnation; its comparative advantage will remain in agriculture…a large and
43
Vanden, 2002.
44
Ignacio Perrotini-Hernandez, et al. Beyond the Washington Consensus. Market Liberalism, Growth, and
Economic Development in Latin America Edited by G. Angeles-Castro, I. Perrontini-Hernandez & H. Rios-Bolivar
(pp. 26-58). New York, NY: Routledge, 2011
45
Vanden, 2002. pp. 163
46
Perrotini-Hernandez, 2011.
13
growing industrial sector provides revenues with which the government can fund
education, infrastructure, and other ingredients for broad-based growth.47
It is the importance of acquiring comparative advantage in a dynamic good (industry, energy,
technology) versus a static good (agriculture, natural resource, etc), which scholars have
emphasized. This can be observed in Mexico’s manufacturing industry, which is thought to be
one of Latin America’s more developed economies, versus the agricultural exports of many of its
Central American neighbors.48
In fact, abandoning protectionism and opening markets to trade will simply maintain a
static good and not perpetuate sustained growth.49 This, however, puts developing countries in
an awkward position as trade liberalization as a tool for development is meant to maximize the
efficient allocation of a country’s resources in order to achieve macro-economic development.
However, as Hausemann and Rodrik point out, all of the developed economies of today
prospered under a pre-globalized world and policies that today would be considered ‘bad’
(protectionism), served them quite well.50 As Rodrik points out, “the exchange of reduced policy
autonomy in the South for improved market access in the North is a bad bargain where
development is concerned.”51 It is for this reason that the Doha Rounds of the WTO have
continuously failed, developing countries are being held to a standard that developed countries
never were.
47
Pacheco-Lopez, & Thirlwall, 2011, pp. 9
48
Gary, Gereffi, "Rethinking Development Theory: Insights from East Asia and Latin America." Sociological Forum.
4. no. 4 (1989): 505-533
49
Ibid, pp. 20
50
Ricardo, Hausmann and Dani, Rodrik. Economic Development as Self Discovery. Journal of Development
Economics. December, 2003.
51
Dani, Rodrik. The Global Governance of Trade: As if Development really Mattered. New York, UNDP, 2001.
14
Trade liberalization, on the other hand, opens up new markets for developing countries to
diversify their exports. Winters et. al claim that, “theory provides a strong presumption that
trade liberalization will be poverty alleviating in the long run and on average.”52 This is
exemplified in Ecuador’s flower industry. The Andean Trade Preferences Act of 1991 was a US
policy that sought to liberalize trade between Bolivia, Ecuador, Colombia and Peru and the US in
order to create economic alternatives to drug production and trade.53 Tax-free imports led the
Ecuadorian fresh cut flower industry to grow from around zero percent of Ecuador’s export
earnings to nine percent.54 This industry continued to grow and Ecuador now supplied the US
with as much as 20 percent of its flower imports.55 This example shows how trade liberalization
offers new opportunities for developing countries, especially in areas where protectionism was
impeding them. However, a scholar from a different ideological standpoint may look at this
same situation and not see macro-economic growth as an automatic success story. The
Ecuadorian flower industry is notoriously poorly regulated; resulting in child labor, harsh and
dangerous working conditions, and a hostile environment to labor unions.56 The pros and cons
of liberalization in this case play into the never ending debate between scholars on the role of
trade in development.
52
Alan, Winters, et al. Liberalization and Poverty: The Evidence so far, Journal of Economic Literature, 2004.
53
Patrice, Franko. The Puzzle of Latin American Economic Development. Lanham, MD: Rowman & Littlefield
Publishers, Inc., 2007, pp. 238-241
54
Ibid
55
Ibid
56
Ibid
15
Investment
Another important economic factor is foreign direct investment (FDI). As countries open
to the global market, they become more attractive to investors. Determinants of FDI are widely
studied, however scholars have concluded that investors are more interested in economically,
socially, and politically stable countries where lower-risk investment is guaranteed.57 This is a
reciprocal relationship in which investment simultaneously offers economic growth and state
stability. In 2003, ten countries accounted for 69 percent of all FDI, five of these were Latin
American countries, Brazil, Chile, Colombia, Mexico, and Argentina.58 Interestingly, all of
these countries, except Argentina, have refuted the anti-neoliberal ideology which has swept
through Latin America. Grazzi documents that the benefits of FDI include,
Technology spillovers, it helps to create human capital, contributes to international trade
integration, leads to a more competitive business environment and enhances enterprise
development. All of these factors stimulate economic growth, which is a prerequisite for
alleviating poverty.59
It is the neoliberal principal of the mobility of foreign capital which has turned the FDI industry
into a US$1.8 trillion industry in 2007.60 However, as Bargh argues, “the types of technologies
which are transferred to developing countries more often constitute hazardous technologies
exploiting lax or nonexistent safety and environmental regulations.”61 This is not the case,
conversely, in developing countries that are receivers of high-end technological investment such
57
Mateo Grazzi. The Determinants of FDI in Chile. Market Liberalism, Growth, and Economic Devlopment in Latin
America . Edited by G. Angeles-Castro, I. Perrontini-Hernandez & H. Rios-Bolivar. New York, NY: Routledge, 2011
58
Franko, 2007. pp. 189.
59
Grazzi, 2011, pp. 149
60
Ibid
61
Maria, Bargh. Resistance: An Indigenous Response to Neoliberalis. Huia Publishers, 2007.
16
as communication and information technology, which will be seen in Chile and Costa Rica.
These countries are being rewarded with safe and advanced technology investments for being
economically and politically stable.
Furthermore, the growing trend of regional economic integration, which Latin America is
currently experiencing, is expected to further liberalization and facilitate foreign investment.62
Goda cites ‘the new growth theory’ which states that, “higher growth rates might result from
openness to trade and foreign direct investment.”63 Developed economies are encouraging
North-South and South-South economic integration in order to ensure liberalization reforms and
facilitate multinational negotiations.64 This is known as ‘new regionalism’ which works to
simultaneously integrate states regionally and internationally at the same time, promoting deeptrade, investment and involvement in the international economy.65 Differing from traditional
integration, such as the European Union, new regionalism will create blocks around the world
that will work like clockwork in order to move the global economy. Mercosur, South America’s
leading South-South regional integration, is a key example of this phenomenon. Schiff and
Winters find that South-South integration increases FDI flows to middle income countries and
largely benefit the most developed economy in the regional bloc.66 Brazil, in the case of
62
Thomas Goda. Regional Integration and its effects on inward FDI in developing countries. Market Liberalism,
Growth, and Economic Devlopment in Latin America . Edited by G. Angeles-Castro, I. Perrontini-Hernandez & H.
Rios-Bolivar. New York, NY: Routledge, 2011
63
Ibid, pp. 81
64
Ibid
65
Ibid
66
Maurice, and Alan, Winteres. Regional Integration and Development. Washington, DC: The World Bank, 2003.
17
Mercosur, has experienced increased FDI inflows from outside of its regional agreement which,
in turn, allow it to invest regionally.67
Entrepreneurship
Finally, a state that supports the private sector, specifically domestic entrepreneurship,
further enjoys the benefits of globalization.68 Entrepreneurship, especially in the industrial
sector, is a source of innovation and growth. Moreover, it offers an alternative to the
dependency that generally comes with export-based economies. Porter identifies three stages of
competitiveness in economic development: 1) factor driven stage, in which low cost exports are
emphasized, 2) efficiency driven stage, in which education of the workforce creates more
efficient production and finally, 3) innovation driven stage, where a knowledge based economy
is continuously breaching the technological border to create new and unique ideas or
commodities.69 All developed economies are in the innovation stage, while most Latin
American countries are in the efficiency stage, with some more developed economies closer to
the third stage than others.70 The competitiveness, innovation and benefits of entrepreneurship
are increased by globalization as technology, markets and ideas are shared.
More than ever, innovation is driving economic prosperity.71 This is because
globalization has led to competition between nations on a scale not previously seen. Porter
67
Ibid
68
Pacheco-Lopez, & Thirlwall, 2011, pp. 20
69
Michael, Porter. The competitive advantage of nations. New York: The Free Press, 1990.
70
Zoltan J., Acs, and Jose Ernesto Amoros. "Entrepreneurship and competitiveness dynamics in Latin America."
Small Business Economics. 31. no. 3, 2008
71
Porter, 1990
18
argues that it is no longer a country’s natural resources or the strength of its currency that
matters, however, “a nation’s competitiveness depends on the capacity of its industry to innovate
and upgrade.”72 This can be observed in many recently industrialized nations and regions,
specifically Japan and South East Asia. These states utilized careful domestic investment in
industry to transform from rice exporters to industrial powerhouses.73 With careful planning,
stable economic and political institutions, there is no reason this cannot take place, to varying
degrees, across the developing world.
Social Factors
Indigenous Population and Identity
Countries with small indigenous populations and that do not have contradictions between
indigenous identity and national identity tend to better reap the benefits of neoliberal policies.
Indigenous representation in politics and national identity vary from state to state. However,
indigenous populations are often marginalized and cloistered into special interest groups that do
not receive the same attention as widespread issues.74 Indigenous claims in modern societies
vary from territorial autonomy, to further representation in politics and alternative laws that suite
the needs of this specific group.75 Scholars agree that in Latin America, compared to other
regions of the world, ethnic identity has played a very small role in political organization and
72
Porter, 1990
73
Pacheco-Lopez & Thirlwall, 2011
74
Deborah, Yashar. "Contesting Citizenship: Indigenous Movements and Democracy in Latin America."
Comparative Politics. 31. no. 1 (1998).
75
Ibid
19
national identity.76 This may be surprising given that in Guatemala and Bolivia 51% and 62%,
respectively, of the population claim an indigenous identity.77 The indigenous groups of Bolivia,
Ecuador, Guatemala, Peru and Mexico account for 90% of all of Latin America’s indigenous
people.78
Neoliberal policies, however, have brought indigenous demands back to the forefront of
Latin American politics. Yashar claims that globalization in the 1990s was the root cause of
many Latin American indigenous movements.79 In fact, in Bolivia, the exploitation of natural
gas reserves due to its privatization resulted in large scale protest by indigenous groups in 2003.
What became known as ‘The Bolivian Gas War’ resulted in the resignation of then president
Gonzalo Sanchez de Lozada and the eventual election of Evo Morales, the nation’s first
indigenous president with a hard-line policy against neoliberalism.80
Free trade is a significant aspect of neoliberalism. Bhagwhati argues that free trade will
foster prosperity and is a country’s best path out of poverty (citing India and China as prime
examples).81 Furthermore, the freer trade is, the more prosperous it is for all. However, Kelly
states that free trade creates winners and losers and that in the North American Free Trade Act
76
Ibid
77
UNHCR, "World Directory of Minorities and Indigenous Peoples: Bolivia."
UNHCR, "World Directory of Minorities and Indigenous Peoples: Guatemala."
78
Yashar, 1998.
79
Yashar, Deborah. "Resistance and Identity Politics in an Age of Globalization." Annals of the American Academy
of Political and Social Science. 610. (2007): 160-181.
80
Nancy, Postero. "Indigenous Responses to Neoliberalism." Political and Legal Anthropology Review. 28. no. 1
(2005): 73-92.
81
Tsuda, 2007.
20
(NAFTA) between Canada, the US and Mexico, no single group resulted worse off than the
indigenous people of Mexico.82 Preferential treatment for the mobility of foreign capital
threatens to unweave decades of land reform that indigenous people have fought for and
potentially, “annihilate the native Indian population of southern Mexico.”83
Silva, in his analysis of Latin America’s recent ‘left-turn’, utilizes Karl Polanyi’s theory
of market society.84 Polanyi argues that free market capitalism and the construction of a market
society intrinsically breeds its own opposition. This is because in utopian capitalism:
All social relations are expressed in capital, land, and labor to market principals of
exchange and efficiency in the interest of production and profit...market society could not
be the foundation for a stable and just social order. It created social tensions that
inevitably led individuals and society to seek protection from the market’s destructive
power because market society sought to reduce humans to one dimension: that of
commodities.85
Therefore, social movements against capitalism are an inevitable phenomenon and certain groups
experience more successful movements than others. Groups which share a ‘horizontal linkage’,
or a historic shared identity or cause, will execute more effective movements.86 This can be
observed in the indigenous movements of Bolivia against free markets, versus the young, student
movements in Chile.87 In Bolivia, indigenous groups have been able to lead successful, even
82
David P, Kelly. "Trading Indigenous Rights: The NAFTA Side Agreements as an Impetus for Human Rights
Enforcement." Buffalo Human Rights Law Review. 113. (2000).
83
Leonard, Cavise "NAFTA Rebellion." Human Rights Law Review. 21. (1994): 36-40.
84
Eduardo Silva . Challenging Neoliberalism in Latin America. New York: Cambridge University Press. 2009
85
Ibid, pp. 18
86
Ibid
87
De la Barra, 2011
21
regime changing, social movements against neoliberal policies.88 Whereas in Chile, young
student marches have been reduced to reckless vandals because of the lack of essential linkages
to form an effective social movement.89 Therefore, the prominent presence of an indigenous
population can be a deciding factor in the perpetuation of liberal market policies.
Indigenous movements of the Americas have criticized the privatization of public lands
and resources (oil, gas, logging, agriculture) while the state recedes and social services decline.90
Given that privatization and the shrinking of the state are central principals of the neoliberal
doctrine, this puts indigenous interests and neoliberal market reform in ideological contention.
Literature Review: Closing Points
Through a review of the scholarly thought on the political, economic, and social factors
that perpetuate neoliberalism, the complexity of each factor is understood. Furthermore, the
relationship and need for balance between each is implicit. For example, economic growth from
exports without redistribution will result in income inequality which may consequently result in
social uprising. Also, a strong political authority can exist, but without a degree of social
consensus, regime change can be forced. In both cases, Chile and Costa Rica, the perfect
balance between each factor has resulted in the perpetuation of neoliberal policies despite
continued criticism and regional resistance.
88 88
Roger Merino (2012). What is 'post' in post-neoliberal political economy? Informally published manuscript,
Department of Social and Policy Sciences, University of Bath, Bath, UK
89
De la Barra, 2011
90
Yashar, 2007.
22
III. Case 1: Chile
Case Background
Chile shares a unique relationship with neoliberalism. On September 11th of 1973,
General Augusto Pinochet stormed La Moneda, bombarding the capital building with air strikes
in a military coup that would take the life of socialist president Salvador Allende. For the next
16 years, Pinochet would rule unchallenged, like many Latin American dictators around him.
During the Allende administration, GDP growth staggered at 1.2%, inflation at 293.8% and
export growth shrunk to -4.2%.91 Pinochet formed a technocratic government, largely headed by
Chilean economists trained by Milton Friedman at the University of Chicago. These ‘Chicago
Boys’ implemented a neoliberal ‘shock treatment’ to achieve macroeconomic stabilization.
Liberalization of imports, financial market deregulation, expropriation and privatization of public
enterprises and reduction of the public sector were the policy implications of this economic
framework.92 Though inflation lowered and the economy stabilized, during Pinochet’s
dictatorship, average GDP growth was only 2.9%.93 However, in the years following GDP grew
at an average of 5.5%, reaching 7.7% from 1990-93.94 These figures led scholars to declare
Chile a ‘neoliberal miracle’. Chile continues to embrace neoliberal ideals, emphasizing trade
and liberalization as means of development, stability and growth.
91
Ffrench-Davis, 2005
92
Ibid
93
Ibid
94
Ibid
23
Political Factors
State Stability and Functionality
Scholars agree that a strong, functioning state is needed to implement neoliberal reform.
Therefore, it is important to look historically at the building of the Chilean state in which “early
independence and a strong, centralized administration” were important factors which allowed for
a highly functional state apparatus.95 From the beginning, this put Chile a step ahead of its
neighbors in terms of political, social and economic development. In the late 1800s to the early
1900s, ‘Developmental Welfare States’ dominated Latin America. Economic and social
development were each state’s central policies, along with creating the institutions necessary to
encourage such development. This state model became known as ‘developmentalism’.96 This
movement saw the beginnings of the transition from agrarian societies to urban populaces,
largely due to state-run infrastructure and industrial projects. In Chile, it was the construction of
a state-sponsored railroad, which ran the length of the country, which allowed for the agrarianto-urban societal transition to take place. On top of this, the importance of education was
emphasized as the foundations were laid for the University of Chile, which continues to be one
of Latin America’s most prestigious universities.97 These early developments set up a highly
functional state which would run relatively unhindered until the 1973 military coup. In fact,
95
Ximena de la Barra. Neoliberalism Fractured Showcase. Leiden, The Netherlands: Brill Hotei Publishing, 2011. pp.
14
96
Ibid
97
Ibid
24
Ximena de la Barra adds that, “in Chile, [early] developmentalism left in place the basic
foundations upon which neoliberalism took hold.”98
More than a highly functional state, the stability of a state is also an important precursor
to the implementation of neoliberal reforms. Blanco and Grier, in their analysis of 18 Latin
American countries, highlight regime type, macroeconomic stabilization and social welfare as
the main factors that affect political stability.99 They conclude that from the formation of
statehood until the 1970s, and then after the 1973 coup, Chile has been of the most politically
stable Latin American countries.100 This is important, and once again sets Chile apart from its
neighbors, given that Latin America has been ranked as the third most politically unstable region
of the world. While Guatemala, El Salvador, Nicaragua, Colombia and Peru, amongst others,
suffered coup after coup and decades of civil war, Chile experienced one coup, no civil war, and
relative domestic and international peace.101 This government stability, combined with a highly
functional state, would facilitate the implementation of neoliberal reforms in the 1970s.
Furthermore, it was the centralized authority of the Pinochet dictatorship that facilitated
the complex restructuring of the economy and allowed for the regime to have policy
autonomy.102 Pinochet made quick work of his opposition by banning all political parties, trade
98
Ibid, pp. 14
99
Blanco, Luisa, and Robin Grier. "Long Live Democracy: the Determinants of Political Instability in Latin America."
University of Oklahoma.
100
Ibid
101
Ibid
102
De la Barra, 2011
25
unions, various social organizations and media outlets.103 De la Barra argues that, “dismantling
all political opposition was fundamental to achieving the new economic policy goals, and the
regime of political repression allowed the economic agents to operate with complete laissez
faire.”104 This is also in accordance with Weyland’s idea that economic and political crises
allowed for the implementation of neoliberal reforms in Latin America. Pinochet filled his
cabinet with technocrats while suppressing opposition parties, thus fulfilling Weyland’s
requirement that, “the institutional powers of chief executives [be] supported by strong political
parties.”105
The Role of the State
The role of the state, though debated by scholars, is an important aspect in any economic
model. Despite Friedman’s preaching of state-shrinking and limited interaction, it was Chilean
state interaction, though limited, with the economy which contributed to macroeconomic
success.106 Franko argues that in developing countries, for a successful market-based economy,
competent institutions must be present.107 This is because:
In developing countries, where markets may not function perfectly, state-sponsored
institutions can promote better flows of information, encourage standards for production,
and facilitate communications and the diffusion of knowledge among firms.108
103
Ibid
104
Ibid, pp. 15
105
Weyland, 2002
106
Franko, 2007
107
Ibid
108
Ibid, pp. 149
26
Given the strength, functionality and stability of the Chilean state, it is not surprising that along
with neoliberal reforms, Pinochet introduced complimentary institutions. One of the main
agencies, CORFO, “searched out the best foreign practices and fostered networks of small
producers to supply large, modern processing firms in promoting agro-exports.”109 Another was
PROCHILE, a state-owned agency which helped private firms to break into new foreign markets
in order to diversify exports and buyers.110 It was this special balance of state agencies, private
firms, and market economics which allowed for the macroeconomic ‘miracles’ that neoliberalism
brought to Chile.111
The strength, stability, and centralized authority of the Chilean state upon the
implementation of neoliberalism allowed that the reforms were properly executed. This
economic agenda was realized so thoroughly by the Pinochet regime that, “this extremist
neoliberal group extended its power until it dominated public policy, making the range and depth
of the economy’s structural changes increase.”112 The quick macroeconomic stabilization, vast
reduction in inflation and steady growth that was achieved allowed for the continuation of these
reforms in succeeding administrations.
The referendum which ended Pinochet’s reign and ushered in a new era of democracy
saw the return of political parties and unions that were repressed by the dictatorship. Leftleaning Patricio Aylwin was elected in 1990 and having had observed the macroeconomic
success of neoliberalism, decided to not majorly reform the system. He did, however, seek
109
Ibid, pp. 149
110
Ibid
111
Ibid
112
Ffrench-Davis, 2005
27
solutions to the growing demands that the government take a larger role in quelling the forces of
globalization and funneling growth to the people. His administration sought to, “reconcile
macroeconomic and macro-social equilibrium and implement a style of economic policy that
become legitimate within the democratic framework.”113 To get this achieved, Aylwin made a
point to incorporate workers, unions, and employers into the macro-decision making process. A
reform to the labor code was passed by Congress after a final draft was agreed upon by
government, laborers and employers.114
Finally, large sectors of the copper industry were nationalized, which allowed for the
government to increase social spending and raise minimum wage.115 Though against the
fundamentals of Pinochet’s neoliberal reforms, the nationalization of copper granted the state
more income and thus allowed for macroeconomic growth and stability to reach the people. This
final aspect is an important factor in the perpetuation of neoliberalism, given that the large-scale
growth achieved by globalization does not necessarily benefit large-scale populations.116
However, succeeding regimes have slowly re-privatized previously public services,
falling back on the neoliberal principals introduced in the 1970s.117 Under Allende, 100% of the
Chilean copper industry was nationalized and referred to as “Chile’s salary”.118 As of 2008, only
113
Ibid, pp. 16
114
Ibid
115
Ibid
116
Pacheco-Lopez & Thirlwall, 2011
117
De la Barra, 2011
118
Ibid, pp. 201
28
26.2% of copper is nationalized.119 Education, another fundamental public service, was also
privatized under Pinochet and continues to be to this day. The privatization of higher education
has led to ‘for-profit’ universities which has been met with criticism and sparked the Chilean
Student Movements of the last few years.120 These policies, however, were inherited by
Pinochet’s neoliberal agenda and continue to perpetuate.
Economic Factors
Trade
Trade, investment, and entrepreneurship further perpetuate liberal, free market policies in
middle income countries. Chile holds its comparative advantage in the production of copper and
has used this resource strategically for economic development.121 Copper, a static good,
threatens economic stagnation, versus the growth potential of a dynamic good.122 Chile,
however, does not hold any comparative advantage in a dynamic good and thusly compensated
this by utilizing free trade agreements (FTAs) to maximize the potential of its static good.123
Canada, the United States, Mexico, Central America, the European Union, Scandinavia, the
Pacific, Turkey, China and South Korea are just some of the countries and regions of the 51
FTAs Chile has in effect.124 The earliest of these acts dates backs to 1996 and the most recent,
119
Ibid
120
Ibid, pp. 219
121
Franko, 2007
122
Pacheco-Lopez, & Thirlwall, 2011
123
De la Barra, 2011
124
Congreso Nacional, "Tratados de libre comercio firmados por Chile."
29
with Thailand, Vietnam and Hong Kong, are still under deliberation.125 Chile’s commitment to
FTAs has perpetuated the free market policies rooted in the orthodox neoliberalism of the 1970s.
In face of the 2008 global financial crisis, Chilean economic ministers reassured the strength of
the ‘armored’ Chilean economy and stated that:
There was a group of countries, those where neoliberal transformations had been most
profound, that would be impacted the least [by the financial crisis]. This group was
headed by Chile, which they proclaimed would be the least effected country in Latin
America.126
Despite critics continually affirming that the Chilean economy would be wrecked by recession
due to the volatility of an open market in a global crisis, the GDP grew 4% in 2008, -1% in 2009,
and quickly recovered by growing 6% in 2010, and thusly sustained growth.127 Trade, and the
macroeconomic growth it has brought, has allowed for the continuation of liberal open market
policies. In fact, other industrializing nations who embraced neoliberalism to achieve macrodevelopment have experienced similar sustained growth rates and state transformations.128
Given that Chile’s success has often been paralleled to that of the ‘Asian Miracles’, Pacheco
highlights, “Japan and South Korea, whose comparative advantage once lay in rice, but who,
through selective protection, import substitution, and export promotion, transformed themselves
into industrial power-houses.”129 Chile has experienced a very similar pattern with its
comparative advantage in copper.
125
Ibid
126
De la Barra, pp.
127
The World Bank, 2013
128
Pacheco-Lopez, & Thirlwall, 2011
129
Ibid, pp. 10
30
In an effort to emerge in a new market and advance the global commitment to the
environment, Chile, along with some of its FTA partners such as China, Mexico, and Japan, is
brokering new agreements to create a global carbon emissions trading market.130 Chile is
spearheading a global greenhouse gas registry system as an integral aspect of this network. 131
Given its large mining and energy sector, Chile plans to commodify its emissions and join this
growing international market.132 Furthermore, this demonstrate how a static good such as
copper, can be utilized in innovative ways to avoid market stagnation. This is just another
example of how trade and liberal markets are perpetuated in countries with macroeconomic
growth due to neoliberal polices. Searching for more markets and expanding trade are
fundamentals of liberalism; these policies continue to be upheld in Chile due to the practical
results which they have brought.
Finally, in 2010, Chile became the 31st member and second Latin American state to join
the OECD, the Organization for Economic Co-operation and Development.133 This multilateral
economic organization seeks to promote social and economic development through liberalized
trade and open markets.134 This demonstrates Chile’s commitment to liberal, open market
principles and policies as the engine of macro-economic growth. In fact, OECD General
Secretary, Angel Gurría, emphasized the excitement of the OECD to have ‘The Chilean Way and
130
The World Bank, "Carbon Markets of the Future are Forming Where You Might Not Expect.", 2013
131
Ibid
132
Ibid
133
OECD, "Chile signs up as first OECD member in South America." Last modified Nov 01, 2010.
134
Ibid
31
expertise’ as part of the organization, referring to Chile’s model of economic development.135
By joining this economic ‘club’, Chile has further committed itself to the free market policies
that began with its neoliberal reform of the 1970s.
Investment
Chile’s current president, Sebastian Piñera, is the country’s first right-wing leader since
Pinochet. He has declared his intent to have Chile be a ‘developed country by 2020.’136
Through a regimen of market liberalization, free trade agreements and openness to foreign direct
investment (FDI), his administration has ushered in years of sustained macroeconomic growth.137
FDI in industrializing countries is an important factor for economic development given that it
results in technology spillovers, generates human capital, further integrates and encourages trade
and development of domestic firms.138 From 1974 to 2005, the gross total of FDI that entered
Chile was US$78.1 billion, with 89% inflowing after 1990.139 This means that the neoliberal
policies of the Pinochet regime, which quickly and efficiently reopened the market that had been
previously closed by Allende, laid the groundwork for Chile to be an attractive receiver of
FDI.140 Transparency, government stability, and numerous investment treaties were what the
newly democratic nation inherited from the military dictatorship in 1990. In fact, another aspect
inherited from the Pinochet era was a constitutional guarantee that assures no discrimination
135
Ibid
136
Brennan, 2012.
137
The World Bank, 2013
138
Grazzi, 2011
139
Ibid, pp. 151
140
Ibid
32
against foreigners or foreign firms, a reassuring fact for potential investors.141 Chile’s policies
make it one of the most open countries and easiest countries for FDI inflows.142
Given Chilean economic and political stability, transparency and growth, investors have
rewarded the country with high-level, sophisticated FDI. Additionally, across the board, Chile
has received A+ scores from the main investment risk rating agencies.143 The European Union,
United States, and Canada are the top three sources of FDI inflows to Chile.144 Furthermore, the
top three sectors that receive FDI are mining, energy, and communications. These sectors are
more dynamic than agriculture or forestry, which can often suffer from the negative side effects
of FDI and globalization.145
A dynamic, innovative, and long-term US$150 million investment was made by Google
in 2012 to create its first data center in Latin America.146 Data centers are Google’s regional
super computers which work around the clock to store and process information. This center will
employ highly trained professionals, promote sustainable energy practices and directly invest in
local public improvement projects.147 Google asserts that it was Chile’s, “ideal combination of
reliable infrastructure, a skilled workforce and a commitment to transparent and business
friendly regulations” which resulted in it being chosen out of any other location in Latin
141
Ibid
142
Gobierno de Chile, "Foreign Investment Committee.", 2013.
143
Ibid
144
Grazzi, 2011
145
Pacheco-Lopez, & Thirlwall, 2011
146
Google, "Data Centers - Quilicura, Chile." Accessed April 11, 2013.
147
Ibid
33
America.148 Chile’s open market policies and openness to FDI have rewarded it with advanced
investment with potential for growth and innovation. This, in turn, perpetuates such liberal
policies, both by the government and general population. Investment helps support
macroeconomic growth, however it also, as seen by Google’s investment, generates employment
for the educated workforce.
Entrepreneurship
In a liberalized, open market economy, entrepreneurship benefits from the free flow of
capital, markets, ideas and technology.149 Furthermore, when a state invests in the private sector,
specifically the entrepreneurial, opportunities are increased. Entrepreneurship is important
because once a workforce becomes educated, free enterprise is largely a source of innovation and
growth.150 Once this sector becomes an important part of the economy, liberal policies will
persist as to not diminish the growth achieved by it.
In Chile, entrepreneurship has been encouraged at levels not seen throughout the
industrializing world.151 Due to President Piñera’s development plan and emphasis on free
enterprise, being a businessman himself, the state has earned the nickname ‘Chilecon Valley’ for
its attractive atmosphere for entrepreneurship.152 In 2010 the Chilean government created
‘Startup Chile’, a unique program that seeks entrepreneurs and innovators from Chile and around
148
Ibid
149
Pacheco-Lopez, & Thirlwall, 2011
150
Nicholas Dew and Saras Sarasvathy. "Innovations, Stakeholders & Entrepreneurship." Journal of Business Ethics.
no. 3 (2007).
151
"The lure of Chilecon Valley." The Economist, October 13, 2012
152
Ibid
34
the globe to bring their ideas to Chile.153 Startup Chile funds projects and grants temporary visas
to people from several disciplines including business, engineering and agriculture. Since its
inception, 500 companies and more than 900 entrepreneurs from around the world have
participated.154 This has not just encouraged Chile as a destination for entrepreneurship, but
inspired a growing domestic force for innovation.155 This is pertinent given Porter’s three stages
of economic development, in which an educated and innovative workforce is the characteristic of
the final stage.156 By embracing an open and liberalized economy, in more than just trade, Chile
has managed to transform its state apparatus into that of innovative, open, stable and transparent
receiver of investment, capital, technology, and ideas. We can see how trade, investment and
entrepreneurship benefit from a liberalized open economy. This relationship is symbiotic in
which the open market encourages these policies while the policies are enhanced by the openness
of the market.
Social Factors
Indigenous claims in a globalized world tend to contend with liberal, open market
policies.157 Land rights, autonomy and representation are not well met by the privatization, stateshrinking and liberal market policies that neoliberalism dictates. This is especially relevant in
Chile where the centralized authority that indoctrinated neoliberalism shut out other political
153
Ibid
154
Ibid
155
Ibid
156
Porter, 1990
157
Yashar, 1998
35
parties, let alone indigenous or special interest groups.158 For these reasons, I hypothesize that
states with smaller or non-existent indigenous populations will prefer neoliberal policies given
that this group, which is particularly effected by liberalization, is not present.
Indigenous Population and Identity
Chile’s ethnic diversity of its approximately 16 million person population is 95% White,
3% Amerindian, and 2% other.159 The white population is the decedent of the Spanish and other
Europeans who colonized the nation. The largest indigenous group, which only constitutes 3%
of the population, approximately 450,000 people, is the Mapuche.160 The Mapuche or, people of
the land, were the largest native population of present day Chile when the Spanish colonizers
arrived.161 They largely resisted the European population, but in the late 1800s were defeated
and placed in reservations in the south-central Araucania region.162 Presently, ethnic Mapuche
tend to remain in this region while some migrate north in search of work.163 Frequently, violence
and protest erupt in the Araucania region as Mapuche fight against the government for autonomy
and sovereignty.164 They resist modernity given their “alternative to modernity” lifestyle which
158
De la Barra, 2011
159
Embassy of Chile, "Demographics.", 2013
160
Ibid
161
Guillaume Boccara, "The Mapuche People in Post-Dictatorship Chile." Études rurales. 163-164. no. Dec. 2002
162
Faron, Louis. "Symbolic Values and the Integration of Society among the Mapuche of Chile." American
Anthropologist. no. 6, 1962
163
Boccara, 2002
164
Ibid
36
bases itself around local knowledge sharing and appreciation of the land.165 This has put the
Mapuche people in direct contention with the private logging and agriculture companies that
seek to extract the resources of southern Chile. However, given their geographic and cultural
isolation from the majority of Chilean society, the Mapuche have not been able to lead a decisive
battle against the liberal market polices which the government has taken.
This is not the case in Bolivia, a far less ethnically heterogeneous population that is
majorly composed of indigenous people. The white population of Bolivia is a scarce 15%, while
Quechua and Aymara Indians make up 60% and the final 30% are the mestizos, the mix of white
and native ancestry.166 Since the election of Evo Morales, Bolivia’s first indigenous president,
the country has taken a hard-line stance against neoliberalism and open market policies.167
Morales changed the state’s official name to the “Plurinational State of Bolivia” in an attempt to
officially recognize the importance of Bolivia’s ethnically diverse population.168 Furthermore,
Morales has aligned himself with Venezuela’s Bolivarian Revolution and ALBA initiative, two
assertive attacks against neoliberalism.169 Chilean President Sebastian Piñera has publically
ridiculed Venezuela and Bolivia’s rhetoric and actions and has continuously proven commitment
to open market policies.170
165
Ibid
166
CIA World Factbook, "Bolivia, People and Society." 2013.
167
Roger Merino (2012). What is 'post' in post-neoliberal political economy? Informally published manuscript,
Department of Social and Policy Sciences, University of Bath, Bath, UK
168
International Organization for Standardization (ISO). (2009, 05 08). Name change for Plurinational state of
Bolivia
169
Merino, 2012
170
Opinión de Piñera sobre el Gobierno de Chávez no ha cambiado." Terra
37
Chile’s small, cloistered and relatively absent (from politics and culture) indigenous
population has permitted the state to pursue liberal market policies without resistance from this
group. In Bolivia, former President Gonzalo Sanchez de Lozada was popularly ousted when he
privatized natural gas resources.171 Furthermore, the World Bank was met with large-scale
popular resistance when water privatization was part of their loan requirements.172 Protests led
by locals and indigenous groups led to the re-nationalization of water within one month of the
private company’s arrival.173 This demonstrates the interconnectedness of each factor. It is not
enough to have a centralized political authority to implement liberal market reforms, given that
large-scale popular resistance has historically shown that it is able to resist and deny the
government of policy autonomy.
Most of all, in Chile, the indigenous population lacks the connection to the greater
population and identity to form a successful social movement against ubiquitous market policies.
In Chile, the state exists in the interests of its citizens, and though indigenous are citizens, the
state clearly prioritizes economic policies over specialized indigenous claims.174 This distinction
is not made in other states where ethnic identity plays a more homogenous role in state identity
(Bolivia and Ecuador, for example). In fact, scholars argue that indigenous social movements
171
Postero, 2005
172
Andrew Nickson, and Claudia Vargas. "The Limitations of Water Regulation: The Failure of the Cochabamba
Concession in Bolivia." Bulletin of Latin American Research. no. 1, 2002
173
Ibid
174
,Yun-Joo Park, and Patricia Richards. "Negotiating Neoliberal Multiculturalism: Mapuche Workers in the Chilean
State." Social Forces. no. 3 (2007).
38
are futile to neoliberal reforms and that any attempt made by the government is to pacify this
group and to prevent social unrest.175
Hale highlights that:
The power of indigenous movements [is] exaggerated, and plays down the extent to
which pro-Indian policies represent a strategic move on the part of the neoliberal state.
Rather than completely denying indigenous rights, neoliberal states are deliberately
granting some reforms in order to undermine pressure for more radical change.176
This has created what has been labeled, “neoliberal multiculturalism” in which a new
subject/actor paradigm is created: indigenous people who work for a neoliberal state.177 In Chile,
the employment of Mapuche Indians is common in state and municipal agencies, state sponsored
NGOs and public projects. However, scholars would argue that this is not done in an effort
towards equality, however in an attempt to ameliorate this population and grant the state a degree
of control over their sovereignty. Furthermore, many state employed Mapuche continue to
participate in “Mapuche movements, some in organizations with strong anti-state discourses”
which puts into question where the indigenous interests lay and how they justify their roles in the
state and within their community.178 Nevertheless, liberal open market policies are continuously
prioritized over indigenous needs. Moreover, given that indigenous needs are in direct
contention with neoliberal policies, this put the state and the indigenous population in a constant
state of disagreement and conflict, both ideological and sometimes physical. Needless to say, the
175
Ibid
176
Ibid, 1320
177
Ibid
178
Ibid, 1321
39
absence of an indigenous population helps to facilitate the implementation and maintenance of
liberal market policies.
Size and Composition of Middle Class
Given that a small indigenous population in Chile does not form a concise offensive
against neoliberalism, a strong and growing middle class must be benefiting form the macroeconomic growth that liberal, open market policies have brought. Since the end of the
dictatorship and full implementation of neoliberal reform, Chilean society has experienced
almost as much reform as the economy did. In 1990, 40% of the population was impoverished,
as of 2009 that number has shrunk to 15%.179 Moreover, the nation has experienced the growth
of a large middle class which constitutes 50% of its population and is the third largest of Latin
America.180 Chile’s highly educated middle class, especially in the fields of engineering,
business and medicine, see the benefits that globalization has brought the economy as
technology, ideas and markets are exchanged through liberalization.181 Given that in developing
countries the middle class is the ‘engine of growth’ these policies have been accepted and are
expected to be continually supported.182 Some scholars go as far as to say that the Chilean
middle class, “does not want to throw out the democracy and market-friendly baby with the bath
water.”183 This has already been proven by continuous middle class support of free market
179
Patricio Navia, "Chile’s Middle Class Flexes Its Muscles," Current History (2012)
180
OECD, "Middle class in Latin America economically vulnerable." Last modified 2010
181
Navia, 2012
182
Pacheco-Lopez, & Thirlwall, 2011
183
Navia, 2012, pp. 2
40
policies as seen by voting patterns.184 Once again, we observe a symbiotic relationship in which
open markets create a large middle class which is in turn benefited by these policies, thusly
perpetuating growth and stability.
Case Summary
Through a careful examination of the political, economic and social factors that
perpetuate neoliberalism in Chile, we see how each factor works together like clockwork. The
historical pretext that created a stable and functional Chilean state led to the centralized authority
and efficiency of the Pinochet regime. This regime was able to implement, unhindered, vast
neoliberal reform which radically reshaped the states model of economic development.185
Economically, Chile’s economy benefited on a macro-scale from liberal market reform. Its key
export, copper, was able to withstand market fluctuations by capitalizing on new markets due to
the liberalization of its trade policy.186 In the 1990s, decades after the initial neoliberal shock
programs, Chile proved to be a global leader in Free Trade Agreements, utilizing these new
economic relations to armor its economy against market variations, as proved by the 2008 global
financial crisis. Investment and entrepreneurship, which have only been amplified by an open
market, have continued to prosper and prove to be a vital characteristic of Chile’s current
economic model.187 Socially, Chile’s small and secluded indigenous population has been unable
to form a unified offensive movement against neoliberal reforms. An important fact given that
we have observed that popular indigenous resistance was able to force regime change in
184
Ibid
185
De la Barra, 2011
186
Franko, 2007
187
De la Barra, 2011
41
Bolivia.188 Furthermore, its highly educated middle class benefits from globalization and thus
these policies receive popular support.
Although Chile has distanced itself from the orthodox neoliberalism implemented in the
1970s, it continues to emphasize the importance of free markets and liberalization as a path to
development. Trade, investment, and entrepreneurship executed by a highly functional state in a
socially homogenous, middle class population have led Chile to be the economic ‘success story’
that it claims to be.
IV. Case 2: Costa Rica
Case Background
Costa Rica is often labeled as a regional outlier, politically, economically and socially.
Known for its stable, long lasting democracy, growing economy, and peaceful society, the
Central American state has led a distinct path to development from its neighbors. The Central
American isthmus was largely absent from international attention and until the 1950s, was
considered a poor ‘backyard’ to the United States.189 It wasn’t until the Cold War, when
ideological warfare allowed the Soviet Union to get a foothold in the Western hemisphere. State
after state fell under the Iron Curtain as Marxist guerillas lead civil wars against their US-backed
governments in Nicaragua, Honduras and Guatemala.190 Meanwhile, Costa Rica was enjoying
relative peace, political stability and economic growth. What led to this Costa Rican
exceptionalism?
188
Postero, 2005
189
John A Booth, C Wade, and T Walker . Understanding Central America. Boulder, CO: Westview Press, 2010.
190
Ibid
42
Upon the time of colonization, tropical landscapes and dense forests isolated what is now
known as Costa Rica from the rest of Central America. More importantly, its homogenous and
small indigenous population allowed it to escape many of the social disparities that its neighbors
suffered upon colonization. This is not to say that the nation did not experience its fair share of
instability. Between 1824 and 1899, one in every five regimes ended in a military coup. 191
When the military wasn’t running the country, wealthy agricultural oligarchies held office and
ruled over the majority, illiterate rural population. However, these regimes weren’t as malicious
as others and certain economic and political policies laid the groundwork for the socially
conscious society of present-day Costa Rica.192 Braulio Carrillo, the first military dictator,
increased the number of small farmers by redistributing state land to small farmers and promoted
coffee cultivation, creating an expanding class that would grow to be Costa Rica’s middle
class.193 In the turn of the 20th century, foreign investment created railroads and infrastructure
which lead to further exportation of coffee and opened up the banana market. Furthermore, in an
effort to secure the labor which was essential to the agricultural sector, the government chose to
guarantee decent wages and working conditions over exploitation and repression.194 These early
characteristics evolved into the social welfare state which Costa Rica is famously known for. A
brief, three month civil war in 1948 between a communist alliance and the social democrats led
to the total abolition of the army and decades of unhindered democracy.195 Social, political and
economic stability continued until the 1970s-80s when the government, trapped by dependency
191
Ibid
192
Vanden, 2002
193
Booth, 2010
194
Ibid
195
Vanden, 2002
43
on foreign exports which were experiencing a drastic decline in revenues, took out foreign loans
to maintain its social safety net. In 1970, foreign debt accounted for 12% of Costa Rica’s GDP,
however by 1982, this number rose to 147%.196 This paved the way for the implementation of
neoliberal reforms and strict financial regulations. The state was shrunk, all public services were
cut and key institutions were privatized such as banking and insurance.197 Health care and
education, vital aspects of the Costa Rican public service system, remained public despite their
budgets being trimmed.198 Inflation was stabilized, markets were liberalized and trade barriers
were reduced as this new economic model radically transformed the state. Costa Rica’s stable
and highly functional state apparatus was able to implement such reform. Furthermore, given its
historical stance as an exceptional state, Costa Rica began to receive large rates of Foreign Direct
Investment (FDI) which employed its highly educated middle class.199 The state’s reputation for
safety, especially when compared to other Central American states, has allowed it to capitalize
on its dynamic comparative advantage in ecotourism. Although neoliberal reforms were not
universally accepted, Costa Rica’s socially homogenous society eliminated the threat of
indigenous rebellion or resistance and allowed the state to focus on its macro-economic goals.
Presently, despite maintaining its social welfare programs and commitment to environmental
sustainability, Costa Rica has perpetuated liberal, open market policies.
Political Factors
State Stability and Functionality
196
Booth, 2010
197
Ibid
198
Ibid
199
Vanden, 2002
44
Costa Rica is well known for being a small, developing country with a particularly
sophisticated social welfare system. The state’s ability to sustain such a system is largely due to
its strength, stability and high functionality. In fact, Vanden argues that Costa Rica, “developed
an excellent educational and health care system that rivaled those of many developed
countries”.200 Given that state stability and strength is a precursor to successfully implementing
neoliberal reform, Costa Rica is prime example due to its continued social programs and good
governance. The nation managed to develop a sophisticated state apparatus that offered free
public education, regionally renowned infrastructure, social security, health care, pension
system, labor protection, state run insurance, and highly trained bureaucracy that was protected
by Latin America’s only civil service system.201 Furthermore, Costa Rica scores highly on
democracy indicators such as low levels of corruption and fair elections; not surprising given that
it is in the list of the world’s 22 oldest democracies.202
Despite Costa Rica’s ailing economy due to foreign debt, when neoliberal reforms were
enacted in the 1980s, the state remained functional and stable.203 Liberalization brought about
new investment, sustained macro-economic growth and stabilization of debt and inflation. In
fact Costa Rica’s strong state and good governance allowed for neoliberal reforms to be executed
well and within political harmony:
The implantation of neoliberal reforms and process of globalization in Costa Rica were
done very much within the Costa Rican political and social consensus. It was
accomplished within a political system that not only permitted different political factions
200
Vanden, 2002. pp. 167
201
Ibid
202
Booth, 2010
203
Ibid
45
to articulate their divergent policy perspectives, but also allowed and even encouraged
different social groups to pressure the policy process to meet their needs and demands.
This made for a rather unique example of how these changes could be made. The Costa
Rican case avoided many of the worse side effects usually associated with the
implantation of neoliberal reforms.204
In neighboring Nicaragua, neoliberal reforms brought about more debt, higher inflation and vast
government instability.205 Capital did not flow into the country as expected and instead the small
nation accumulated more debt, which reached US$ 12 billion by the mid-1990s, the highest per
capita debt in the world.206 Costa Rica’s strong and stable state apparatus was able to properly
execute reforms while the weak government of Nicaragua was wrecked by the new economic
model. Currently, Costa Rica maintains liberal economic policies while Nicaragua opposes them
and searches for alternatives. This demonstrates the importance of state stability upon the
implementation of neoliberal reforms and how they will be interpreted in the following decades.
The Role of the State
However, based on the literature, we know that the role of the state in a neoliberal
reformation is an integral characteristic of the success or failure of this new model. In Costa
Rica, the reduction of social services due to neoliberalism brought about mass citizen
mobilization.207 Nevertheless, despite the social service budget being cut, the state was able to
sustain programs and alleviate some of the social uprising. Across the board, wages were
maintained high, support of unions and labor organizations remained, and social assistance and
204
Vanden, 2002, pp. 170
205
Ibid
206
Ibid
207
Booth, 2010
46
housing subsidy programs were funded more highly. 208
Furthermore, inflation, which reached
90% in 1982, was reduced to 11% by 1984 and maintained below 20% in the following
decades.209 All the while, Costa Rica has maintained an equitable level of income distribution,
an issue that frequently harms developing economies.210 Vanden confirms that, “the
governability that the state exercised was thus sufficient to mobilize and distribute the resources
necessary to protect its people against the socioeconomic ravages usually associated with rapid
implementation of neoliberal reforms.”211 In Costa Rica, the functionality of the state allowed
for neoliberal reforms to be executed properly while its role in the economy helped to perpetuate
these policies. The macro-economic growth and stabilization achieved by these reforms resulted
in Costa Rica being a ‘poster child for neoliberalism’, especially given that the policies have
continued currently.212
Economic Factors
The forces of globalization can be harsh, especially when privatization and state
shrinking result in sectors of the economy changing and adapting to neoliberal reforms. 213
However, trade, investment and entrepreneurship are well complemented by liberal markets and
thusly help to perpetuate these policies. In Costa Rica, liberalization in the 1980s diversified its
trade, brought large amounts of foreign investment and granted new opportunities for its young
208
Ibid
209
The World Bank, 2013
210
Booth, 2010
211
Vanden, 2002, pp. 171
212
Booth, 2010
213
De la Barra, 2011
47
and educated working class.214 Furthermore, the state worked actively to ensure the well-being
of its citizens:
Even when forced to adopt this set of distributively stingy policies, Costa Rican
governments found ways to cushion some of the economic blows to citizens, managed a
short-term macro-economic turnaround, and found new industries to bolster economic
output over the longer run.215
Trade
Costa Rica’s main exports are electrical machinery, medical equipment, bananas,
pineapples and coffee.216 Originally, Costa Rica focused on agricultural exports, like many of its
Central American neighbors. However, these goods are stagnant and thus offer very little growth
while also being easily susceptible to market fluctuations. Neoliberal reforms in the 1980s
encouraged nontraditional exports as a means of economic growth, for Costa Rica this meant
pursuing industrial and mechanical goods over agricultural.217 Nontraditional exports can be any
good that is not a traditional or standard export good for that nation. In order to diversify, the
state cut subsidies for agricultural goods and pursued new markets for its nontraditional
exports.218 This policy, in turn, employed many of Costa Rica’s highly educated workforce in
the engineering and industry sectors. By 2012, nontraditional exports constituted 68% of all
214
Booth, 2010
215
Ibid, pp. 72
216
CIA World Factbook. “Costa Rica.” 2013.
217
Booth, 2010
218
Ibid
48
exports.219 Liberalization of the economy and the promotion of nontraditional exports connected
Costa Rica to new markets and further integrated it into the global economy.
We have hypothesized that states with a comparative advantage in a dynamic good better
reap the benefits of globalization than those with a comparative advantage in a static good.
However, Costa Rica mainly exports agricultural goods and machinery, which offer little
potential for growth.220 In order to capitalize on breaking into the world economy and its
reputation as a stable and safe country, Costa Rica transformed its abundance in biodiversity and
diverse landscapes to create a market for tourism, specifically eco-tourism. Tourism has become
a $1.92 billion industry, which attracts almost two million visitors per year and constitutes 13
percent of the nation’s employment.221 Furthermore, Costa Rica has proven continuous
commitment to the environment, seeking to be the first carbon neutral country by 2020. This is
due to an understanding that its environment is a vital part of the nation, therefore protection and
sustainability is prioritized over the macro-economic promises of exploitation of natural
resources. Liberalization of its economy has allowed Costa Rica to pursue nontraditional
exports and diversify its trade by opening up this entirely new sector.
Another area that emerged due to Costa Rica’s strong educational institutions and open
economy is medical tourism, which accounts for about 1% of the nation’s GDP.222 The
government estimates that in 2011 alone over $196 million was spent on medical tourism, while
another $84 million was disbursed to hotels, tourism, food and shopping by those ‘medical
219
CIA World Factbook, 2013
220
Vanden, 2002
221
CIA World Factbook, 2013
222
"Costa Rica's Medical Tourism Boom." Huffington Post, 11 26, 2012.
49
tourists’.223 This shows how well the private and public sectors work together in Costa Rica to
create sustainable cycles of economic growth. Liberalized trade and diversification of exports
are important factors in the macro-economic growth that has brought Costa Rica an average
annual GDP growth rate of 5.3% since 1991.224
Investment
The liberalization of the economy brings about many new opportunities for a country,
especially when matched with political stability and ease of investment. In Costa Rica, FDI
averaged around $60 million until neoliberal reforms were implemented in the 1980s. Once
these policies were allowed to mature, the small nation saw a huge new influx of foreign
investment. By 1990, FDI reached $160 million and has steadily increased since. In 2011,
investment peaked at nearly $3 billion, the highest per capita investment rate in Latin
America.225 Costa Rica attracts high-level investment in medical, information and manufacturing
technology, creating thousands of new jobs for its educated workforce. In fact, in 2011, IBM
announced a long-term $300 million investment in the creation of a regional service center. This
center, which will be functional by 2014, will employ at least one thousand Costa Ricans and
service IBM’s clients throughout North and South America.226 Other sophisticated investments
include medical technology, microchips and computer processors. Once these goods are
manufactured in Costa Rica and exported, they further integrate the nation into diverse sectors of
223
Ibid
224
Booth, 2010
225
USDA, "Exporter Guide: Costa Rica." 2012
226
"IBM invierte US$300 millones en un nuevo centro de servicios en Costa Rica." Empresas en Costa Rica, June 30,
2011
50
the global economy. In Costa Rica’s transformation from a primary product exporter, to a
dynamic manufacturing goods exporter, FDI has been, “the principal engine of the countries
dynamism”.227
Entrepreneurship
A recent study by INSAED, a European business university and the World Intellectual
Property Organization, an agency of the United Nations, deemed Costa Rica the most innovative
country in Central America and third in the entire Latin American region, trailing closely behind
Chile and Brazil.228 This is due to an expert partnership between the private and public sectors,
which has resulted in the service sector exports outweighing agricultural exports by several
billion dollars. Minister of Foreign Trade, Anabel González, mentioned that, “This shows Costa
Rica has achieved success [by getting] multinational companies to establish themselves in the
country and domestic companies to integrate themselves into chains with global value.”229 In
fact the source of innovation, the service sector, is comprised of firms that were encouraged
under neoliberal development, medical, information, and communications technologies. By
further integrating into the world economy and gaining regional notoriety, the possibilities for
small, medium and large sized entrepreneurs to reach new clientele is increased.
Overall, Costa Rica macro-economic success and stabilization due to neoliberal reforms
have contributed to the popularity of these policies. While many nations struggled with this new
economic model, in Costa Rica:
227
Vanden, 2002, pp. 170
228
Mario Garita. "Costa Rica makes strides in innovation." Inside Costa Rica, 2013.
229
Ibid
51
Government spending on social services far exceeded any other country in the area. GDP
per capita grew by nearly 25 percent between 1990 and the early 2000s, driven by a
tourism boom, domestic and foreign investment, new computer assembly and onlineservices industries, and expanded textile manufacturing.230
Social Factors
Indigenous Population and Identity
As hypothesized, states with small indigenous populations will better reap the benefits of
liberal market policies. Costa Rica, with a total population of approximately 4.5 million, only
accounts for 100,000 indigenous people, around 2% of the population.231 Furthermore, the
several different groups of indigenous people are widely spread out and not concentrated in any
one area. The Indigenous Law of 1977 created reserves throughout the country where the
different native groups peacefully maintain their traditional lifestyles.232 This small population
has resulted in a relatively homogenous Costa Rica society, especially given that there were only
around 20,000 natives when the Spanish arrived. This led the society to grow in a more
egalitarian way, as the hierarchical social structures were not set up like in other colonial
societies.233 Therefore, when neoliberal reforms were implemented in the 1980s, specialized
indigenous resistance was not an issue. The lack of this population, in turn, contributes to the
perpetuation of liberal market policies.
230
Booth, 2010 pp. 71
231
CIA World Factbook, 2013
232
Booth, 2010
233
Ibid
52
Size and Composition of Middle Class
Costa Rica’s public education system and high levels of investment have created a
flourishing middle class which benefits from the open market. With a remarkable
unemployment rate of around 7% and a relatively equal income distribution, globalization did
not ‘wreck’ the society as experienced in neighboring countries.234 Costa Rica did however
experience a societal transition when neoliberal reforms were implemented. A decline in state
investment in agriculture, encouraging of non-traditional exports and new foreign investment in
manufacturing brought large scores of the population from the rural countryside to the capital
city, San Jose.235 This laid the foundation for Costa Rica’s current thriving middle class, despite
also leading to an influx of migrant workers from neighboring Nicaragua and informal sector
employment (street vendors, handicrafts, unlicensed taxis, etc.).236 These aspects are, however,
characteristic of a regional hegemonic economic power.
Case Summary
Once again the complex nature between each factor is witnessed in Costa Rica. A
historically strong state apparatus was able to command the forces of globalization and maintain
its social safety net, thus appeasing its citizens and avoiding any indigenous resistance.
Promotion of nontraditional goods, a switch to industry and high level investment also further
perpetuated these policies. Costa Rica is a very unique case given that it was able to implement
234
CIA World Factbook, 2013
235
Booth, 2010
236
Ibid
53
neoliberal reforms, which intrinsically require vast reduction of the state, while preserving social
programs and sustained economic growth.
V. Analysis
Chile and Costa Rica are both notorious for being ‘neoliberal success stories’, however
when comparing the cases side by side, differences and similarities show the diverse conditions
under which neoliberalism was implemented. We utilized the same political, economic and
social factors to try to explain the perpetuation of liberal, open market policies in these two
countries despite continued criticism and growing regional resistance. Regardless of differences
between the two countries, each factor and their importance remained the same.
Political Factors
Politically, the two nations share institutional strength and political stability as defining
factors for the implementation of neoliberal reforms. In Chile, early independence and copper
wealth allowed for the early foundations of an institutionally stable state apparatus. Whereas in
Costa Rica, social spending and strong democratic ideals created a sophisticated state that was
capable of controlling the severity of neoliberal reforms. Scholars agree that strong institutions
are needed to balance and withstand the harsh forces of globalization; in this aspect both Chile
and Costa Rica far exceeded the necessary requirements. Additionally, these two nations are
regarded as regionally ‘exceptional’ in terms good governance, stability and corruption indices.
Where the two cases differ is in regime type and the role of the state. In Chile, it was the
centralized authority of the Pinochet regime which allowed for the uninterrupted remodeling of
the economy. By banning opposition political parties, media and social groups, Pinochet, along
with his technocratic government, benefited from policy autonomy. Costa Rica, however, as
54
Latin America’s oldest democracy, was on the opposite side of the political spectrum. Despite
neoliberal reforms constraining government autonomy, they were implemented in a democratic
setting. This allowed for collaboration and cooperation between various political groups, as
opposed to the total domination of one. Arguably, this consensus helped the Costa Rican
government to maintain its social safety net, whereas a dictator may have eliminated it all
together. Both regime types, though polar opposites, contributed to the perpetuation of liberal
policies in their own ways. It is surprising that in Chile, after the return of democracy in 1989,
that the neoliberal reforms, being associated with the dictatorship, were not completely
abandoned. I would argue that the seventeen years of military rule highly marginalized the
previously strong communist party presence, and that the macro-economic success of
neoliberalism outweighed its associations with the dictatorship. Despite being different regime
types, the two cases share a commonality: consensus. Be it consensus in an authoritarian regime
or across various political parties, this agreement led to the unhindered remodeling of the
economy.
Another important similarity is that the neoliberal policy prescriptions were foreign
concepts imported to each state. In Chile, Chicago trained economist enthusiastically preached
the macro-economic promises of neoliberal reforms. This model seemed even more appealing
given that the socialist regime of Salvador Allende brought skyrocketing inflation and stuttering
economic output. With a cabinet brimmed with neoliberal economist, Pinochet accepted the
ideology and Chile became one of many nations across the world where Milton Friedman’s
orthodox liberal policies were put to the test. In Costa Rica, neoliberalism was introduced
almost a decade after it was in Chile. By this time, the role of International Financial Institutions
had increasingly grown as neoliberal policies proved to quell many developing countries macro-
55
economic woes. Costa Rica’s growing foreign debt, due to its inability to sustain its social safety
net on its own, made it the perfect case for restructuring. The quick success of these reforms in
both cases transcended the policies from foreign ideologies to integral domestic policies.
Finally, the most prominent difference between the two cases is the role of the state. In
Chile, state run education and healthcare was privatized and continues to be an issue to this day.
The state also took a hands-off approach to the economy and only interacted with it through state
agencies that took a very limited role. Costa Rica, a historically social democracy, threatened to
lose its state run social safety net when neoliberalism was introduced. However, the policies,
though reduced, were maintained and scholars argue that it was this ‘cushioning’ which allowed
Costa Rica to avoid many of the traditional negative effects of globalization. I found this,
however, to be a contradicting fact in the literature given that the total reduction of the state is an
imperative characteristic of neoliberal reforms. Despite this, Costa Rica was still considered a
‘neoliberal state’ when theoretically defined. In this case, both Chile and Costa Rica maintained
different state roles however resulted in similar outcomes.
Economic Factors
Trade, investment, and entrepreneurship were analyzed in each case to understand how
they contribute to the perpetuation of neoliberal reforms. In Chile, Free Trade Agreements
(FTA) have played a decisive role in the country’s economic success. With copper being its
main resource, the state has avoided harsh market fluctuations by ‘armoring’ its economy with
various FTAs, this was proven in the 2008 financial crisis. Costa Rica, another proponent of
FTAs, most recently signed one with China, its second biggest trading partner.237 An important
237
CIA World Factbook, 2013
56
policy prescription of neoliberalism, which has contributed to its perpetuation, was the
diversification of exports. Non-traditional exports were encouraged and this, in both cases, saw
a large shift from agriculture to industry. The Costa Rican government transferred domestic
investment from agriculture to industry, which allowed for the diversification of exports and a
sustained economic boom. During this time Costa Rica also saw the rise of its textile industry
and the beginnings of its tourism boom, which has been a crucial economic asset to the country.
This allowed for dependency on coffee and other basic exports to be abandoned and new sectors
of the global economy to be reached. I found that in Chile there was less diversification of
exports and a continued reliance on copper.
Investment has also played a very important role in the continuation of liberal, open
market policies. Both countries saw exponential increases in Foreign Direct Investment (FDI) in
the decades following neoliberal reforms. Though there exists a substantial literature on the
drawbacks of FDI in developing countries, this was not the case in Chile and Costa Rica. Both
countries were rewarded with high-level, sophisticated investment for being politically and
economically stable. Information, communication and medical technology investments have
been made, and continue to be since the 1990s. Liberal policies allowed for investment to flow,
therefore liberal policies will be perpetuated in order to sustain investment.
I found that entrepreneurship, which is thought to be the final frontier of developing
economies, to be an important indicator of liberal reforms. Entrepreneurship, like investment, is
amplified by liberal policies, which in turn helps to perpetuate them. This is observed more
significantly in Chile where entrepreneurship has become an important domestic policy of
President Sebastian Piñera. In Costa Rica, I found that investment has been the main engine of
growth and has been emphasized more than entrepreneurship. This could be due to the fact that
57
Costa Rica has not quite reached the level of development in which innovation led by free
enterprise drives the economy, despite being Central America’s most innovative state.
I find that in terms of investment and entrepreneurship, the political and economic factors
intertwine. States open up their economies and thus investment flows and entrepreneurship is
encouraged. Politically and economically stable and transparent states receive higher-end
investment than unstable and corrupt states. Therefore, high-end investment simultaneously
stimulates the economy while holding the state to a high standard of governance. I would argue
that this symbiotic relationship has largely helped to perpetuate liberal market policies.
Social Factors
I hypothesized that countries with small indigenous populations better reap the benefits of
liberal policies. This is because indigenous claims are in direct contention with liberal policies
and therefore put this population at odds with the state. Chile and Costa Rica both have very low
indigenous populations, 3% and 2% respectively. Neighboring states such as Bolivia and
Guatemala both account for more than 50% of the population being indigenous, an issue which
has brought continued criticism of neoliberal policies. In fact in Bolivia, popular indigenous
uprisings caused regime change after key resources were privatized. The Mapuche people of
Chile frequently protest against neoliberal reforms, however this group is small and marginalized
and therefore their movement does not appeal to the greater population, like in Bolivia.
Furthermore, in Costa Rica, the indigenous population is almost nonexistent and has not led a
movement against neoliberalism. Costa Rica’s indigenous benefit from the countries social
programs as they are housed in state-run reservations.
58
If indigenous populations face shortcomings in a globalized world, I hypothesized that a
strong middle class must help to maintain a liberal economy. Both Chile and Costa Rica have
some of the largest and fastest growing middle classes of Latin America. Education and
investment have resulted in a highly educated population employed in the engineering,
technology and communications sectors. Given that the middle class, which has benefited from
the liberalization of the market, makes up most of the population, these policies have been
continuously supported at the voting booth.
Future Research Applications & Recommendations
Each political, economic and social factor works quite well when applied to Chile and
Costa Rica. In future research, I would like to apply this framework to other Latin American
countries such as Mexico, Colombia or Peru. Furthermore, it would be interesting to see if the
same factors applied to countries outside of Latin America, such as Turkey, Post-Communist
states or Arab Spring states or if the research design would need to be completely reworked to fit
each region’s particular characteristics. I acknowledge that this framework was built around the
common political, economic, and social history of Latin America. From colonization, import
substitution industrialization, to the Cold War, and on, the greater Latin American region has
more or less followed similar paths of development with each state experiencing unique results.
Furthermore, I would recommend that the literature seeks to redefine neoliberalism or
find a more contemporary set of definitions to explain present phenomenon. There exists
extensive literature, from the last decade, on post-neoliberalism which has been adopted to
explain the models that Venezuela, Bolivia and others are pursuing. Post-neoliberalism arose out
of the need for a new explanation given that traditional Marxist or even Neo-Marxist thought is
59
quite outdated. I would argue that the term neoliberalism is outdated as well given that its
orthodox form was abandoned in the 1990s. Therefore, we are left with a need to define formerneoliberal states such as Chile and Costa Rica, who stick to liberal, open market policies
however have redefined their state structures since the 1990s.
VI. Conclusion
Where is Latin America headed? The divergent ideologies which have emerged in the
last decade threaten to unweave the region in ways the 1950s Marxist invasion never could, as
state sovereignty is more highly respected and CIA-backed military coups are no longer the
norm. However, recent developments such as the death of Hugo Chavez and the spread of antiliberal ideologies put the region at a crossroads for further cooperation and unity. Although, in
many ways it is ahead of other regions with its cohesive regional structure, strong institutions
compared to several decades ago, and a history of reconciling regional differences. As such, it is
a much more viable model for new regional organizations than the European Union and
others. The existence of different paths to economic prosperity and reduction of poverty, and the
ability of the region to host deviating approaches while benefitting from each, simultaneously
shows that Latin America is likely to reap both the benefits of a globalizing world and provide
viable alternatives to it. This may eventually lead Latin America to gain leadership among
regions who similarly try to tackle questions of inequality, ideological divergence, poverty and
separate paths to economic prosperity and political and social stability. Latin America's task in
the next decade is to reconcile lessons learned from its own experience and expand its creativity
to new challenges as they arise.
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