Myths and Realities of the Latin American State

During the 1980s debt crisis, conventional wisdom viewed the Latin American state as an omnipresent institution that actively participated in the production of goods and services, squeezed out the private sector, and severely distorted the allocation of productive resources. Led by technocrats, who have at times been granted heroic status, most Latin American governments have since undertaken stabilization and structural adjustment programs. ¹ By the early 1990s, most countries in the region had achieved some degree of macroeconomic stability, privatized some—but not all—inefficient state-owned enterprises, reduced public expenditures, and in many cases, implemented reforms designed to broaden the tax base. In addition, Latin America opened up to international competition through trade and financial liberalization. This story of economic policy reform is well-known and documented. ² Clearly, Latin American policymakers had to curtail the excesses of state intervention which accumulated in Latin America during the post-World War II era. Yet it is also obvious to anybody traveling through the region that major social problems, such as high levels of poverty and inequality, remain unattended. These concerns are perhaps more urgent today than during the 1970s as most Latin states are now democracies. The long-term support required for the economic reforms of the 1980s depends on popular support to a greater extent than ever before. ³

Against the background of an incipient stable macroeconomic environment and ever-present social pressures, it is worthwhile to take stock of where the Latin American state has come from, and where it is going. Unfortunately, many myths still plague discussions regarding state reform in Latin America, while many realities remain obscured. We can think of three major myths that, if not dispelled, will continue to obstruct constructive debate regarding the future role of the public sector in the region.

Myth #1: The Latin American state is too large. It is unquestionable that the state had become overcommited by the 1970s in many regions of the world, including the industrialized countries. ⁴ In Latin America, the main problem was not one of the overall size of the state, but rather a problem of misplaced priorities. During most of the post-War era, until the mid-1980s, the Latin state drew from financial resources generated by the few profitable state-owned enterprises and particularly from domestic and international credit. These were then channeled to provide subsidies and subsidized credit for firms, to finance public universities, and to pay the salaries of public employees. There were exceptions and some targeted programs for the poor—for example, in Mexico subsidies for basic staples like maize and tortillas helped alleviate the impact of artificially high food prices—but these were few and far between. We contend that this pattern of misplaced priorities continues, but it is complicated by the macroeconomic reforms of the 1980s which relied too heavily on reductions in expenditure. These reductions have resulted in the further deterioration of schools, public health services, and infrastructure, all of which are essential components of a development strategy aimed at increasing growth rates and reducing poverty and social tensions.

Myth #2: Latin American government expenditures and taxes are too high.The fiscal deficits experienced throughout the region in the 1970s and 1980s revealed that excessive government expenditure is indeed one way in which state intervention can have pervasive effects on the economy. The key issue is not strictly a matter of expenditure level and revenues, but whether fiscal deficits are sustainable or not. The emphasis on the expenditure side of fiscal reform has relegated the restructuring of governmental revenue-raising capacity to second place. Fiscal deficits in the region not only were caused by excessive government expenditures but also by a lack of revenue. Therefore, state reform should focus on changing priorities rather than reducing the size of the state. Moisés Naim, a one-time Venezuelan reformer, has argued that “the discovery of the market will soon force Latin America to rediscover the state.” ⁵

Myth #3: There is only one way to go: small is beautiful. All governments intervene in the economy. They...