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Economic orthodoxy + social spending = success??

This past Thursday, I attended the Bildner Center lecture “China’s Engagement with Latin America: A US Policy Perspective.”  Daniel Erikson (Senior Advisor for Western Hemisphere Affairs, US Department of State) commented on how Brazil is benefitting from a boom in commodity exports, specifically soy and steel, due to the demand from China’s booming market.  This is interesting because in part, it suggests a return to the export led growth model which dominated Latin American economic policy before 1930.  However without the use of countercyclical measures during booms (recall this growth model was known for the boom-bust cycle), Brazil remains vulnerable to demand shocks in China’s market.  Erikson stated that all analyses suggest China’s growth will continue in an upward trend for the foreseeable future, however I am skeptical that it can remain this way forever (“doomsday will eventually come,” as Mauricio Font commented).  While I hope Brazil can benefit from China’s market in the meantime, I worry about the series of events so often seen in Latin American history: growth via dependence on a small number of primary good exports, a negative demand shock for these goods leading to a collapse in the exporting economy, increased yet unsustainable government spending financed through the printing of money resulting in large debts, inflation, and typically, austerity programs imposed by the IMF.

This brings up an important point I’ve noticed in reading about economic and social policy.  Economic growth, unaccompanied with social programs, produces inequality.  As Max Fraad-Wolf explained in a lecture at The New School on poverty and human rights (10/27/2011), “ Capitalism successfully produces wealth just as efficiently as it produces poverty.”  This is because competition under a capitalist system means one person’s advancement is due to someone else’s decline (a zero sum game) and the market mechanism allots more to those that have lots and little to those who have little (purchasing power).  However, social spending can not be done in a sustainable manner, one that is not inflationary and debt-producing, without economic growth.  It should also be noted that although austerity programs/economic orthodoxy can be successful in stabilizing economies, it is uncommon to witness substantial economic growth during these periods.  Thus it seems there is a fine line to walk in balancing economic growth and social spending.

On a side note, Santiso suggests such social spending, or redistributive policies as he refers to them, may be fundamental in maintaining democracy in Latin America.  He cites that “the probability of the ‘death’ of democracies was one in twelve in countries with per-capital income below $1,000 and one in 60 cases of per-capital income exceeding $6,000…beyond which the possibilities of the survival of democracy are greater, going up when the differences in income are narrower” (135, Lula Light).  Santiso suggests that it is the combination of fiscal austerity, tight monetary policy and social activism (and absence of ideological purism) that made Lula such a successful president of Brazil (Ch. 5, Lula Light).