Stiglitz Goes To Paraguay: Move Over Chicago, A Cambridge Boy’s in Town

Among the throng of distinguished international guests drawn to participate in the first democratic transition of government in Paraguay’s 190-year history, Joseph Stiglitz, economist and advisor to the Clinton White House, may just prove the most influential.


Joseph Stiglitz

Among the throng of distinguished international guests drawn to participate in the first democratic transition of government in Paraguay’s 190-year history, Joseph Stiglitz, economist and advisor to the Clinton White House, may just prove the most influential. Two days before left-leaning president-elect Fernando Lugo’s inauguration, Stiglitz’s talk on globalization and equitable growth drew a full house to the Grand Theater of Paraguay’s central bank. Elites of various stripes filled the auditoriums plush seats, as the country’s largest soy farmers, ranchers, and industrialists, leaders of business and civil-society organizations, and privileged political class showed up for a glimpse of what the new government’s economic and social policy might look like.

International media outlets’ insistence on Hugo Chavez analogies aside, the transition team has given plenty of indication that it aims to provide pragmatic leadership, in particular the naming of U.S.-educated macro-economist Dionisio Borda as Minister of Finance. Broadly respected and considered technically competent, Borda occupied the same post for two years in the outgoing government, where he headed a successful effort to balance public finances and achieve macroeconomic stability before resigning in protest after the failure of more structural reforms of the public bureaucracy. He has arisen as the central figure in the team named by Lugo to execute his expressed goals of public-sector reform, equitable growth, and environmental sustainability. However, despite all attempts to distance himself from South America’s hard left, Lugo, as much as Brazilian president Lula on the eve of his inauguration, must confront the elite’s deep apprehension over a government that counts among its mandates a directive to reduce the country’s grave social and economic inequalities.

In this context, advising from such a well respected figure as Joseph Stiglitz represents a valuable tool for diffusing the ideological weapons yielded by the interests that sustained 60-plus years of extremely corrupt Colorado-Party rule. It must have been alarming for certain members of the audience to hear Stiglitz debunk one by one the conservative positions that development authorities and international institutions formerly bolstered and to which local elite groups and media continue to cling. With great authority and occasional cheek, Stiglitz enumerated the flaws and misconceptions that characterized the past decade of development thinking. Stiglitz openly declared that bilateral free-trade agreements almost inevitably favor the U.S. and offer few advantages for poorer, agricultural economies such as Paraguay’s, that "trickle-down" economics does not work and has never worked, that land reform was the basis of successful development experiences in East Asia, that privatization is not an automatic or necessarily the best answer to the woes of publicly owned enterprise, that U.S. monetary policy, rather than Latin American industrial policy, was to blame for the region’s "lost decade" in the 1980s, and that public investments form the basis for private dynamism in developing countries as much as in advanced countries like the United States. Stiglitz summarized his basic position, pointing toward the current U.S. mortgage crisis and stating that markets alone produce neither efficient nor socially desirable outcomes but instead provoke periodic crises that erase the gains of growth and hit the poor the hardest.

Stiglitz’s assertions are a far cry from the advice Paraguay’s future leaders would have received had they stood at this juncture 10-15 years ago. In 1989, the year the country became nominally democratic, Latin America’s economic policy was dominated by the so-called "Chicago Boys". After studying with Milton Friedman, this group of University-of-Chicago-trained economists returned home to engineer the economic recovery of Mexico and Chile from the severe economic dislocations and stagnation of the 1980s.

According to the day’s thinking, excessive government involvement in the economy was to blame for the region’s economic woes. Developing country governments must create the conditions for private investment to generate growth by maintaining a good business environment through the liberalization of trade and finance, privatization of state-owned enterprise and public utilities, and by maintaining low inflation. This resurrection of the classical or liberal economic theory formed the basis of the "Washington Consensus" among the U.S.-based international development and multilateral lending institutions, such as the International Monetary Fund, the World Bank, and the Inter-American Development Bank, that urged developing country governments to focus on fundamentals such as maintaining macroeconomic stability and generally shrink the size of the public sector. In practice, this often meant that government curtailed or abandoned its social obligations in order to maintain a good budget profile just as trade liberalization and unregulated financial flows left citizens exposed to the vagaries of the global economy. Thus, rather than market-led development, neoliberal economic restructuring has unleashed a wave of leftist electoral triumphs around Latin America, as voters responded with frustration to a decade of mediocre growth and the stagnation or deterioration of social conditions.


President Fernando Lugo

After several decades during which free-market fundamentalism dominated development theory and policy, Stiglitz’s visit to Paraguay and the content of his advising demonstrate an important political and ideological shift. Formerly the chief economist of the World Bank, Stiglitz is one of a number of economists whose ideas appear to be forming the foundation for a "Post-Washington Consensus". Stiglitz received his PhD in economics from the Massachusetts Institute of Technology and draws from an intellectual tradition with altogether different implications for the proper role of government in the economy. The scholar won the Nobel prize in economics in 2001 for his work showing that markets fail to produce efficient outcomes whenever economic actors do not act on perfect information, a condition that is nearly universally true and that invites and requires a wide set of government interventions into the market and regulation of the private sector aimed at enhancing efficiency. Consequently, Stigltiz argues that the reason that Adam Smith’s "invisible hand" seems invisible is because it is often not there to guide self-interested behavior toward socially beneficial outcomes. Moreover, addressing his audience of elite Paraguayans, Stiglitz argued that,even with proper regulation, markets do not produce socially equitable outcomes and cannot address entrenched inequalities in developing countries such as Paraguay. He thus opened wide the door toward social policy and redistributive spending that earlier development thinking had closed off as at least unnecessary if not distorting and counterproductive.

Stiglitz expressed his optimism that Paraguay could seek out an alternative path to demonstrate what a "Post-Washington Consensus" would look like and how it could work. Some of the features described by Stiglitz as part of this alternative sound exciting, in particular, helping Paraguay join the global economy by investing in the knowledge economy, closing the technology gap, and establishing research programs at the country’s universities. However, other reforms described by Stiglitz as crucial for meeting the challenges of equitable growth most likely sounded harsher to his audience.

First, Paraguay must expand its tax base if it is to make the sets of public investments necessary for growth, competitiveness, and equity in today’s economy. Paraguay remains something of an anomaly, Stiglitz argued, with no income tax and a total tax burden of only 11% of GDP (the lowest in the region). Even if it curbs tax evasion and improves the efficiency of public spending, the new government will need far more resources than currently available for investments in infrastructure and education. When asked where and how such taxes could be effectively applied given the country’s insufficient administrative capacity, Stiglitz implicitly suggested that his audience foot the bill. Taxing the country’s beef and soybean exports, he proposed, would generate fewer administrative costs, as the products must pass through a limited number of ports. Stiglitz spared Paraguay’s rural elites no responsibility for the country’s social problems, stating that, as the country’s main engines of growth, the ranching and soybean industries have not generated enough employment and drive inequality. Accordingly, Stiglitz cited agrarian reform as another necessary step for Paraguay, among the countries with the highest levels of land inequality in the world. He explained that land reform lay the foundation for the successful development experiences in East Asia, and that making land and other productive resources available too the poor would enhance both economic growth and equality.

Finally, Stiglitz stressed the need for civil service reform to staff the public sector with qualified professionals, hired through competitive exams and employed without tenure. This means dismantling the patronage system that held the Colorado party in power for more than sixty years and ensured elites the support of an urban middle class largely dependent clientelistic access to public-sector employment.

Stiglitz’s diagnosis of Paraguay’s economic and social problems and his prescribed reforms were not new to the country or even the audience; similar proposals have long been part of Paraguay’s progressive political discourse and, in large measure, formed part of Dionisio Borda’s initiatives as finance minister in 2003-2005. Their novelty comes from their statement by a Nobel-prize-winning economist, rather than priest-turned-president, Fernando Lugo, the country’s few leftist political parties, or thousands of protesting peasants as they fill the capital’s plazas to demand agrarian reform. Out of the mouths of such political discontents, local media has interpreted these policy positions as radical, populist, and dangerous to the country’s development prospects, occasionally dragging out tired references to the failures of Soviet and Cuban socialism. Joseph Stiglitz ideas cannot be as easily dismissed, and, while his words obviously cannot eliminate the recalcitrance of the country’s entrenched political and economic elite, they have reframed and renewed a stagnant and outdated debate over the role of government in economic development. By describing progressive tax and land reforms as crucial bases for economic growth, rather than obstacles to it, Stiglitz grants badly needed legitimacy to the newly elected government.

In the April 15 election, voters handed Lugo a 42% to 31% victory over Colorado-Party Candidate Blanca Ovelar and a clear mandate for reform. However, the electorate granted congressional majorities to the Colorado Party, and Lugo may quickly find himself squeezed between the unprecedented popular expectations for economic and social reform and conservative groups control of the legislature. Lugo’s success will depend on the executives’ political savvy and ability to manage the different factions within his own legislative coalition, the Patriotic Alliance for Change, and the opposition parties in order to build a consensus that meaningfully alters the status quo.

If Stiglitz remains part of Lugo’s advising team, he may prove a valuable ally in this process. Economic ideas, like those shared by Stiglitz days before Lugo’s inauguration, do not simply provide a set of policy options that can be applied by governments or their technocrats in search of the best outcomes. The content of economic theories about growth and development provide tools which different groups appropriate in political debates about whose interests should be privileged by policy and whose interests must be sacrificed in the name of progress. Throughout the 1990s, the advocates of social policy and regulation found themselves delegitimized by the neoliberal thought of the Washington consensus. Neoliberal economics provided an account of the world in which the interests of society coincided with those of the private sector and stood in conflict to those of the bureaucratic public sector, leaving little room for the political left.

In much of Latin America, as in the U.S., these years proved to be good ones for business and the upper echelons of the income distribution, but poor ones for the rest of society. The view of economic development afforded by Stiglitz and others contributing to a "Post-Washington Consensus," has not yet led to a coherent set of recommendations for developing countries. It is unlikely as well, given its rejection of one-size-fits-all policy. However, scholars like Stiglitz clearly see a much larger role for government in bringing about economic development and social justice than leading development institutions envisioned a decade ago. In theory, Lugo’s government stands to do a great deal of good in Paraguay, and Stiglitz laid out many of the tasks that lie ahead. In practice, the new governments’ achievements will depend on how well progressive groups can capitalize on Stiglitz’s ideas and re-conquer political spaces closed to them for decades.

Gustavo Setrini is a PhD candidate in Political Science at MIT. He is currently doing field research on fair trade and organic agriculture in Paraguay.