"FTAA-Lite" Reflects Long-Term Economic Failure

November 26, 2003

Mark Weisbrot
Houston Chronicle, November 26, 2003

Knight-Ridder/Tribune Information Services – November 24, 2003
Fort Worth Star-Telegram
– Nov. 30, 2003
Grand Forks Herald
– Dec. 8, 2003

It was clear to anyone who followed the negotiations closely in Miami that the ministerial meeting of the Free Trade Area of the Americas (FTAA) was at least as much of a failure as the collapse of the WTO talks in Cancun in September. The difference was that this time the U.S. and Brazil papered over their differences in front of the cameras.

But the ministers skipped town a day early, knowing that the longer they stayed, the more likely it was that their façade of diplomatic pleasantries would crumple.

The political rifts between the U.S. delegation and Brazil — with the latter quietly supported by much of the rest of Latin America — were widely reported, in both Cancun and Miami. But there is a very important economic basis for the widespread public skepticism of the FTAA among Latin Americans. This underlying economic reality has received almost no attention.

The Latin American region is suffering through an enormously long, profound economic slump, which has followed in the wake of a series of economic reforms that began in the 1980s. These reforms, known collectively in Latin America as “neoliberalism,” have included high interest rates, tight fiscal discipline, large-scale privatizations, and the replacement of development policies with a simplistic opening to international trade and investment flows.

The reforms, also known as “the Washington Consensus,” were supposed to promote economic growth. But as any economist can verify, they have failed spectacularly.

For the two decades from 1980 through 1999, income per person in the region grew by a paltry 11 percent. In the previous two decades (1960-1979), it grew by 80 percent.

And we now have data for the first half of the present decade (2000 through 2004), using IMF projections for next year. Even with these optimistic projections for 2004, there has been almost no growth in income per person: one percent for the whole five years. The present decade is looking like another “lost decade,” as the 1980s are sadly known.

There has been no long-term economic failure of this magnitude in Latin America for more than a century, even if the years of the Great Depression are included.

And this says nothing about the distribution of income, which has probably worsened over the last quarter century. But income per person is the most basic measure of human welfare that economists have. And it is generally difficult — if not impossible — to improve the living standards of poor people in developing countries without increasing overall income (or GDP).

When the economy grows, it is sometimes possible to direct more of the new income and wealth to those who need it most. When it does not grow, the only way to raise the living standards of the poor is to take from the non-poor. As a practical matter, this is generally not feasible.

After nine years of negotiations, the ministers in Miami could only agree to continue talks on a scaled-down version of the FTAA. Left to an uncertain future were some of the biggest non-trade items: rules on intellectual property, investment, and government procurement.

These things do not belong in trade agreements, as some of the most pro-trade economists have acknowledged. Patents and copyrights are, from a purely economic viewpoint, the most costly forms of protectionism in the world. And the investment rules that the United States is seeking would make it more difficult for developing countries to use foreign investment for their own development needs.

But these non-trade items are the most lucrative and important to U.S. business interests, and Washington is unlikely to conclude any agreement without them. So the future of the FTAA is very much in doubt.

The demise of the FTAA will not by itself put an end to Latin America’s long economic malaise. To restore the reasonable growth rates of the past will require new economic policies. Among the most important will be lower interest rates — Brazil, for example, is mired in recession right now with short-term rates set at 17.5 percent (as compared to 1 percent set by the Federal Reserve in the United States).

But the failed negotiations at Miami and Cancun are an acknowledgement that Washington’s formula for growth is wrong, and should not be locked-in further with new international treaties. At the very least, this opens the possibility for development and progress.

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