The second Washington consensus and Latin America's quasi-stagnation

Abstract

It took more than ten years for Latin America to overcome the debt crisis, which turned into a fiscal crisis of the state. Yet in the early 1990s, most of Latin America had undergone deep reforms (particularly trade liberalization and privatization), and, thanks to exchange rate devaluation and fiscal adjustment, they had reduced the foreign and the public debt. Yet growth was not resumed. The basic reason for that was the adoption of the growth cum foreign savings strategy coupled with financial opening (the 'second' Washington Consensus). The huge capital inflows created serious solvency problems, as the foreign indebtedness threshold was exceeded. On the other hand, capital inflows appreciated the national currencies, artificially increasing wages and consumption, having as trade-offs the reduction of domestic savings and, again, the increase of foreign debt. Despite sizable direct investments, the total investment rate remained constant, as growth did not resume. Only the foreign financial and patrimonial debt increased.