The impact of structural adjustment on government spending and debt in Latin America

Abstract

In theory, the policies associated with adjustment and stabilization (AS) in Latin America were designed to contain wasteful government spending, enhance economic efficiency, and forestall recurrent debt and liquidity crises. In practice, AS succeeded in shrinking the size of government, but regional debt rose and debt servicing remained historically high. Government spending on physical infrastructure and subsidies fell sharply, while military spending in much of the region escalated. The changing magnitude and relative pattern of government expenditures corresponded with slower economic growth, higher unemployment, and continued liquidity crises.

Keywords:

• Stabilization
• Debt
• Government spending
• Defense burden

Notes

‡E-mail: [email protected]

†Corresponding author. E-mail: [email protected]

†Corresponding author. E-mail: [email protected]

Enhanced access to foreign capital and the resulting debt was precisely the measure of Argentina's short-lived neoliberal success story in the mid-1990s. Since the Convertibility Plan prohibited the government from financing debt by money emission, public deficits were covered by bond issues paying high interest rates. Tight money and high interest rates helped to ensure an over-valued exchange rate and current account deficits. Over the 1990s, Argentine public debt as a percentage of GDP rose sharply and monotonically from 30% in 1993 to over 51% in 2000. Interest payments rose from 6.8% of government expenditures to 16.8% (Baer et al., 2002: 72, 73).

The distinction made by the World Bank between fundamental and selective interventions was a contested one. Since the Bank's analysis admitted the presence of a multitude of market failures, some argued that state intervention must necessarily be “selective” if a country was to capture positive externalities present in learning and skill creation or among interdependent investments in vertically integrated industries; or to adjust for capital market deficiencies. Thus, “there [was] no economic basis to distinguish between functional and selective interventions …” (Lall 1994: 647–48). For its part, the IDB had little to say about market failure and its consequences for government policy.

The highly questionable inference in this assertion was that other expenditure categories did not by right entail “sovereign” decisions and thus were not immune to intervention by international lenders.

The current study incorporated data from the IMF's Government Financial Statistics between the period 1980 and 1999. Given the difficulty in compiling complete data across time and for all the relevant categories of government spending, our sample included eight countries from the region: Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Panama and Venezuela.

Data for the spending categories come from Tables B and C in the IMF's Government Financial Statistics.

In spite of the fact that Brazil increased its human capital spending by around 40%, the average total share devoted to human capital in the last half of the 1990s – 14.4% – was only slightly more than half of the reported regional average value for that period, or 26.8%

Costa Rica's average human capital spending also dropped – if less dramatically – between 1980–81 and 1995–99. Still, by the latter period, Costa Rica devoted on average about 48% of its total primary budget to human capital; a figure well above the regional average.

Between 1987 and 1996 and as annual interest payments on the debt grew about 20%, the steadily rising amortization outlays shot up by an astounding 245%. In the latter year, the level of amortization – US$75 billion – was almost double the US$39 billion interest payment (IDB, 1998: 246, 247). Indeed, Latin America's amortization payment in 1996 constituted 12% of the outstanding debt (IDB, 1998). In spite of this enormous debt paydown, the 4% growth of the region's total external debt in 1996 still exceeded the 3.7% growth of GDP (CEPAL, 2001). If amortization of debt in 1996 was unusually high, in more typical years during the late 1980s and early 1990s, its level was at least equivalent to interest payments and began to exceed them significantly by the latter part of the decade. Given the tremendous increase in relative and absolute terms of debt amortization, the fact that the rates of growth of external debt continued to outpace GDP growth rates indicated the “treadmill” on which the region found itself.

The armed forces in Latin America increasingly and routinely deployed large numbers of its troops to “combat” drug trafficking. The US Drug Enforcement Agency reported that upwards of “…20,000 Mexican soldiers take part in poppy eradication operations on any given day” (NACLA, 2002: 14).

It is assumed that the military spending figures reported here do not include the public order category that we have incorporated. Of interest, however, is the trend. In this regard, our data, whether looking at defense as separate from public order or aggregated into one variable, indicated a similar stability to the Lahera and Ortuzar study over the 1990s.

Scheetz (1991) reported a similar inverse relation of the defense burden on real GDP growth in a study of Argentina, Chile, Paraguay, and Peru. Similarly, simulation estimates of the impact of reduced military spending in Guatemala over the period 1984–94, indicated rising per capita GDP (Marwah et al., 2002).

“…[I]n 2002 the region will have lost a full half-decade of growth. In that time period, per capita GDP will have fallen to a point nearly 2% below its 1997 level … The region has not experienced such an adverse situation since the debt crisis during the first half of the 1980s…” (CEPAL, 2002: 26).

As with the changes reported in military spending in Table 3, the increase in the mean index value of military spending was driven by the experience of Mexico, Colombia, and Costa Rica.

These per capita figures were cited at the website for Latin American Newsletters: www.latinews.com/big_issues/bi99-02-e.htm.

Interestingly, recent critiques of the IMF and the Washington Consensus, like that made by Stiglitz (2002), had been made earlier and in the years that immediately followed the 1980s debt crisis. See: (Ground, 1984).

At the end of 2002, the economic outlook for Latin America was uniformly bleak according to a study by CEPAL (2002). Notwithstanding, the promoters of the WC continued to call for budget constraint in spite of economic stagnation or recession. In the case of Brazil, and following recent accords with the IMF, the debt and related payment problems had so escalated that it was estimated that interest payments would account for 7.6% of GDP in 2003, while amortization would amount to fully 17% – not of government expenditures – but of GDP (Lapper, 2002). At the same time, and during a period of reduced growth and near recession, Brazil was expected to run a primary budget surplus of 3.75%. The negative impact of such a surplus on discretionary spending would be enormous.

Additional information

Notes on contributors

Jon Jonakin †

‡E-mail: [email protected] †Corresponding author. E-mail: [email protected]