Stabilization and Growth in Latin America: A Critique and Reconstruction from Post-Keynesian and Structuralist Perspectives

Latin American Politics and Society, Winter 2002 by Sheahan, John

Vera, Leonardo V. Stabilization and Growth in Latin America: A Critique and Reconstruction from Post-Keynesian and Structuralist Perspectives. New York: Palgrave, 2000. Tables, figures, bibliography, index, 229 pp.; hardcover $55.

In this book, Leonardo Vera has an ambitious and intriguing set of objectives. His main goal is to develop a model of economic growth and distribution that can fully account for the special structural characteristics and problems of Latin America, and thereby offer a superior alternative to orthodox International Monetary Fund and World Bank programs for stabilization and growth. To start with, he wants to demonstrate that general adoption of those programs in Latin America in the last two decades has proven unsuccessful.

To explain this lack of success, Vera develops an analytical model presumed to underlie IMF and World Bank policy prescriptions and performs a step-by-step dissection of where and why it goes wrong. His own alternative model then offers a way to incorporate more realistic basic assumptions into a complete logical system. Once that system is established, he confidently uses it to conclude what can best be done to gain more effective and more equitable economic growth. All that in one relatively brief volume.

Some readers may not be easily captivated by economic modeling; in some hands, it can become an arid, mechanical exercise. This book does much better. The emphasis is on ideas and issues. The mathematical side of the models is modest, not likely to be a problem even for those who may become restive at the sight of a series of equations. The modeling is essentially a way to organize an impressively wide-ranging review of the vast existing literature on issues of Latin American development. Practically all the great debates of the last half-century are brought onstage for succinct examination, each in its place, to help explain the causal connections employed in the overall models.

While the author patiently brings out conflicting interpretations rather than simply imposing his own, he makes the latter perfectly clear. Orthodox programs for stabilization and growth have not been successful and are not likely to become so. Because they are based on unrealistic assumptions, that is only to be expected. Why are Latin American countries following such unpromising strategies? In large measure, because they need external financing, which gives great authority to the international financial and development institutions, but also because they lack the help of a more constructive alternative model. The early postwar CEPAL version of development did not prove to be a key to sustained success, and failed to protect the region from the traumatic debt crisis of the early 1980s. That crisis opened the door to the dominant roles of the IMF and the World Bank, not just because of the need for external financing but also because Latin Americans did not have a strong alternative with which to defend themselves. The book then has a mission: to provide such an alternative.

The analysis of the model underlying IMF and World Bank policies includes a careful review of many old friends: the Polak and Chicago versions of the monetary approach, absorption analysis based on Keynesian concepts, expenditure switching, and McKinnon-Shaw financial repression. Criticism of the model analyzes the defects of the muchmaligned Walras, the law of one price, the consequences of devaluation, and more generally the "inherited weaknesses" of the whole system.

Construction of the new model includes a review of the meaning of post-Keynesian economics and structuralism, the foreign exchange and fiscal constraints on growth, inflation dynamics, and the methodological problems of relating all such considerations in a consistent model. Each of these major categories takes up an army of issues, carefully citing conflicting research results and explaining (with necessary brevity) why the author comes to his own conclusions about each set of conflicts.

When the model is established, it provides a basis for review of major policy areas, including demand-side policies, response to shocks to private investment, debt relief, income distribution, balance of payments constraints, government and foreign saving, export revenue, and the possible combination of more dynamic growth with improved income distribution. Quite an order, clearly presented.

The book might be ideal for assignment to graduate students, so that they could see all these classic confrontations presented in organized form and perhaps think through their own conclusions about what is valid and what is missing. For a reviewer, the problem is where to start; the book offers an overwhelming supply of insights to applaud, oversights to lament, and doubtful beliefs to question. In an effort to restrain verbosity, it may be best to limit observations to three points. The book oversimplifies the consequences of orthodox structural reform and stabilization in the last two decades; it commits the crime of attempting to support, yet again, one of the most costly errors in postwar Latin American economic policy, namely the repeated strangulation of exports and growth by overvalued exchange rates; and it overlooks how such modeling in terms of given relationships can blind practitioners from seeing, or at least from taking seriously, the fundamental question of how incentives act to shape the behavior of firms and governments.