Wednesday, April 15, 2009

Washington Consensus and Latin America

The historic backlash against the Washington consensus is not without justification. According to a soon-to-be-released study by the Inter-American Development Bank, trade and investment liberalisation in Latin America has had only a small impact on economic growth and has accentuated inequality in the region. Indeed, only one country has had a faster growth rate since nations in the region began experimenting with Washington's prescriptions in the early 1980s. That country is Chile, which has strayed from the Washington consensus in significant ways.

A recent report by our Working Group on Development and Environment in the Americas found that investment liberalisation is partly to blame for the slow economic growth in the region. According to our statistical analyses, foreign investment in Latin America increased significantly over the past 20 years but wiped out many local firms and contributed to an overall decrease in total investment. Despite a tripling of foreign investment in the region since the 1970, total investment as a percent of GDP has declined from 24% in the 1970s to 19% today – far below the 25% recommended by the recent Spence Commission for sustained economic growth in developing countries. Rather than locating in Latin America and spurring new economic activity, foreign firms largely operate as enclaves with limited connections to the domestic economy.

That’s Gallagher and Wise in this opinion piece