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Power, Values and Theory: A political explanation of the United States of Americas foreign economic policy in Latin America since the Second World War. Introduction In my dissertation I intend to project the debate between materialist and constructivist/idealist political frameworks on to the issue of American foreign policy in Latin America and, more specifically, on to the way in which the US government has been influential on the process of liberalization of national economies since the Second World War. I want to examine whether it is possible to say that American policy has been influenced in a stringent belief in the superiority of liberalism as a political economic theory, or by the material factors of contemporary economic demands and structures. Much criticism of American foreign policy in general often argues not that the ideology is wrong, but that ideology is used as a front for the protection and furthering of material interests. Proponents of American foreign policy often argue that America is using its power to further the ideals of liberalism which will benefit the world as a whole. This debate is analogous to a broader debate within political science about the utility of materialist explanations of political outcomes and the question of whether ideas should be assigned causal roles in those outcomes. The objective of this dissertation will be to analyse which approach is best suited to this particular field. To examine this further it is necessary to explore a number of debates. First, I will analyse a range of literature surrounding the ongoing epistemic debate on the importance of ideas in political analysis compared to the importance of material factors. This debate shapes all forms of political research and analysis but I believe it is of particular relevance to the field of foreign economic policy. As such I will seek to use a study of American influence on economic liberalisation to investigate vital questions created by the debate around idealism and materialism. For instance, how do new ideas rise to political prominence, and why is it that individuals or groups trade old beliefs for new ones? How do ideas become embedded in organizations, patterns of discourse, and collective identities, thereby becoming separate entities away from the original conditions that gave rise to them? Finally, how do ideational 1

variables actually influence political behaviour? What specific causal pathways can we see that connect ideational variables to particular political outcomes?1 In my review I will argue that although the importance of material and structural factors cannot be ignored in this field, it is important to understand the ideological reasons for the success of particular orthodoxies. My study of American trade policy will thus begin with an outline of how economic liberalism became the dominant discourse in a country previously in thrall to protectionist policies. Subsequently, I will use case studies investigating the experiences of four Latin American countries to examine various policies and methods of influencing the liberalisation of national economies around the globe, such as diplomatic and financial pressure, trade treaties, domination of international institutions and military intervention. I will also demonstrate how governments can exploit ideas to realise material ambitions. I will ask whether American influence on economic liberalisation reflects a true desire to see the tenets of economic liberalism practised globally or a desire to protect and further American economic interests. I will also consider the argument that the threat of another ideology, communism, was the driving force for policy in this period. The case studies will examine the way in which the America has influenced the liberalisation of the economies of various countries. I will argue that having reviewed the methods and outcomes of American intervention, that a materialist approach to American foreign policy potentially limits our understanding of the related political outcomes, and as such it is clear that the role of ideology must be acknowledged.

Idealism, Materialism and Constructivism. In order to attempt a political explanation of Americas role I must first review the debate between Ideational and Material explanations in political analysis. The central issue for me concerns the causal effects of differentiated political ideas on the differentiated policy resultants. In the usual social science understanding of causation, causes are responsible for producing effects. But since causes are usually multiple and indeterminate in the social world, ideation is generally only one of many probable and

Sheri Berman, Review: Ideas, Norms, and Culture in Political Analysis Comparative Politics, Vol. 33, No. 2. (Jan., 2001), pp. 231-250.

partial causes of policy outcomes. Moreover, since ideation and policy are both differentiated, specifying their likely causal connections becomes even more formidable and complicated.2 This debate has been at the forefront of a variety of fields of political analysis and as Colin Hay has pointed it out it can be differentiated into those who privilege either moment in the process of social and political causation and those which explore the interaction between the two. 3 Perhaps the simplest of the positions held is the one taken by contemporary idealists. Their belief that ideas lead directly to political outcomes is based in essence on the suggestion that there is no relation between the material realm and the realm of ideas since, in the terms of Derrida, all is language, and there is nothing outside of the text. Idealists emphasise constitutive logics and processes, the construction in discourse of those objects on which material status is usually conferred. David Howarth gives the example of a forest standing in the path of a proposed motorway, it may be viewed by the contractors building the road as a mere obstacle, impeding the rapid implementation of a new road system; conversely scientists or naturalists might view it as a site of special interest or a symbol of a nations threatened heritage. Whatever the case, its meaning depends on the orders of discourse that constitute its identity and significance. So while in the discourse of economic modernisation the trees represent an obstacle, in the environmentalist discourse they represent vital parts of an eco-system or items of intrinsic beauty.4 As such idealism involves deconstructing the very distinction between the ideational and material in the first place.5 In International Relations this translates into the theory that material factors are not a reliable driver of foreign policy goals; states instead should make internal political philosophy the main influence of its foreign policy. Idealism in International Relations was the precursor of liberal IR theory which allows for pluralism in state actions.

Albert S. Yee, The Causal Effects of Ideas on Policies International Organization, Vol. 50, No. 1. (Winter, 1996), pp. 69-108.

Colin Hay, Political Analysis, (Basingstoke, 2002) p205 David Howarth and Yannis Stavrakakis, Introducing Discourse Theory and Political Analysis, in Discourse Theory and Political Analysis: Identities, Hegemonies, and Social Change ( Manchester, 2000)

Colin Hay, Political Analysis (Basingstoke, 2002) p207

The political science opposite of idealism is materialism. This approach also implies a relatively simple relationship between the material and the ideational. Here, however, roles are reversed and the material is dominant in determining outcomes. In materialist analysis, actors behaviour is rendered predictable by the context in which they find themselves.6 This is based on the materialist idea that actors are always rational and will act rationally in pursuit of a preferential set of interests. If this is the case, then we need only analyse the context of political behaviour in order to predict political outcomes. Within this approach there is no room for the role of ideas, in fact, if we were to introduce ideas as a causal variable, it would bring forth the possibility that actors informed by a different set of ideas may act differently in the same material context thus rendering prediction impossible.7 Non-material factors are simply dismissed as irrelevant to a science of the political modelled on the natural sciences. In the most extreme positivist approaches, the material circumscribes the realm of the real; the ideational is dismissed as a mere rhetorical distraction. For proponents of this form of analysis the goal of political science is to ascertain the genuine, material, causes for political outcomes. This approach has been dominant in political science for most of the post-war period, especially in International Relations. So, for example, materialist accounts of International Relations argue that the interests on which states act are derived from structure; they are regarded as given and prior to the ideas held by actors. Regime theorists may add extra emphasis on international organisations, considered to increase the possibility of co-operation between states, but they too treat ideas as exogenous to states interest formation and state interaction. In recent years however, it has been suggested that such accounts give no answers to questions of how or why particular sets of ideas come to prevail in the international arena.8 Given such problems and the chasm between materialism and idealism, it is perhaps inevitable that there should be an in-between approach. Thus Constructivism starts from the recognition that we cannot hope to understand political behaviour without understanding the ideas actors hold about the environment in which they find

Colin Hay, The Discursive and the Ideational in Contemporary Political Analysis: Beyond Materialism and Idealism, in Colin Hay, Political Analysis: A Critical Introduction, (Basingstoke, 2002) p196 7 Ibid 8 Andreas Bieler, Questioning Cognitivism and Constructivism in IR theory: Reflections on the Material Structure of Ideas, Politics 2001: Vol21 (2), 93-100

themselves. Yet while materialists believe that ideas themselves are shaped by material interests, constructivists reject this and accord ideas an independent causal role in political explanation. Nonetheless, while it is important for constructivists not to reduce ideas to a reflection of material interests, it is equally important not to subscribe to a voluntarist idealism in which political outcomes can be explained directly by the desires motivations of the immediate actors themselves. Political outcomes therefore are a complex product of the varying impacts of strategies which actors devise as a means to realise their intentions upon a context which favours certain strategies over others, irrespective of the intentions of the actors themselves.9 Further to this, Adler defines constructivism as the view that the manner in which the human world shapes and is shaped by human action and interaction depends on dynamic normative and epistemic interpretations of the material world.10 Constructivists believe the world consists of social facts, but these are only facts by human agreement. Despite this they do believe in a material world, thus Constructivism can be seen as an attempt to build a bridge between the competing factions of the materialist and idealist philosophies of social science.11 A constructivist insight into International Relations Theory, for example, is given by Friedrich Kratochwil and John Ruggie when they point out that the intersubjective quality of convergent expectations as the basis of regimes is not accessible12 to approaches that treat ideas as merely additional variables. Further more Kratochwil argues that international relationships resemble the intersubjective nature of games: positivists can only observe the facts of overt human behaviour, and a more interpretive approach is needed to understand the web of meaning that influences the rules that constitute the norms of social practice.13

Colin Hay, Political Analysis (Basingstoke, 2002) p208 Emmanuel Adler, Seizing the Middle Ground:: Constructivism in World Politics European Journal of International Relations 1997; 3; 319
10 11

Ibid Friedrich Kratochwil and John Ruggie, International Organisation: A state of the art on an art of the state, International Organisation 40 (4) p771, cited in Andreas Bieler, Questioning Cognitivism and Constructivism in IR theory: Reflections on the Material Structure of Ideas, Politics 2001: Vol21 (2), 93-100 13 Andreas Bieler, Questioning Cognitivism and Constructivism in IR theory: Reflections on the Material Structure of Ideas, Politics 2001: Vol21 (2), 93-100

Certainly in the field of political economy a constructivist approach is attractive, as it would be a mistake to overlook the role of ideas as components of political and economic worlds. It is ideas, in the form of economic theories such as liberalism, economic nationalism, Keynesianism (to name but a few), as well as the policies developed from these theories that enable national leaders to chart a course through turbulent economic times; it is ideas about what is efficient, expedient and just that motivate the movement from one line of policy to another. Structural accounts can tell us a great deal about the constraints facing policy makers, but policy making is about creation as well constraint. If we want to explain innovation as well as the underlying continuities in policy, we must recognize that the knowledge basis of state action, as well as the processes by which the state itself influences the development and application of social knowledge, are indeed research issues of central importance14 Additionally, while a materialist approach renders state actions predictable according to the context in which they occur, constructivist approaches assert that when an actor is bereft of perfect information they often rely on ideology to both shape policy decisions and construct a narrative of past events. Simply recognizing that ideas are important to the development of policy is not enough, however. All too often ideas are treated as purely exogenous variables in accounts of policy making, imported into accounts to explain one outcome or another, without much attention to why those specific ideas mattered. But if we cannot say why one set of ideas has more force than another in a given case, we do not gain much explanatory power just by citing ideas. In short, if we want to accord ideas an explanatory role in analyses of policy making, we need to know much more about the conditions that lend force to one set of ideas rather than another in a particular historical setting. It is all very well to say that policy makers are influenced by the lessons drawn from past policy experiences, but the lessons that history provides us are always ambiguous. Why are some lessons learned from a given policy experience, rather than others? Why is one set of ideas influential in some times and places but not in others? What are the processes whereby new ideas acquire influence over policy making?15 As such the material context of policy decisions may not be primary, but it cannot be ignored.

Peter Evans, Dietrich Rueschmeyer, and Theda Skocpol, On the Road to a More Adequate Understanding of the State, in Peter Evans et al., eds Bringing the State Back In (Cambridge,1985)p357

The influential idea that I wish to examine in this essay is economic liberalism. This is the idea that, since the Second World War, has become the dominant orthodoxy, espoused by International Financial Institutions like the World Bank and International Monetary Fund. American governments, in one way or another, have also played a role in exporting this ideology across the globe by American governments. Does the rise to prominence of this set of ideas fit in with an idealist, constructivist or materialist explanation?

The foundation of Liberal Economic Ideas in the United States of America The institutionalisation of liberal economic ideas in the United States can be traced back 1934 and the US Reciprocal Trade Agreements Act. Although the benefits of liberal policies had been debated since the 19th century, it was only after 1934 that American central decision-makers looked to free trade ideas as a basis of policy.16 Of course, the primary event that acted as a catalyst for this move to liberalism is the Great Depression. The failure of the Smoot-Hawley tariff of 1929-30 to deal with economic decline created a crisis in policy making. This act had raised US duties to historic levels and increased the scope of tariff coverage. In the wake of the act, World Trade fell by about two-thirds by the mid-1930s.17 The apparent failure of protectionism forced the political community to search for an alternative theoretical approach to explain past errors and provide guidelines for future behaviour. So we can point to material reasons that favoured the adoption of a new set of ideas. Indeed a key moment came when institutional responsibility for tariff-making was relinquished

Peter Hall, The Political Power of Economic Ideas: Keynesianism Across Nations, (Oxford, 1989) pp361-362

J. Goldstein, Ideas, Institutions and American Trade Policy, International Organization, Vol. 41, No. 1, 1988.


Gilbert. R. Winham, Evolution of the Global Trade Regime, in Global Political Economy, ed. John Ravenhill (Oxford, 2005) p91

to the executive; a Democratic Congress, assured of a strong Democratic president, handed over what had been a constitutionally granted mandate. Smoot-Hawley became an issue in the 1932 presidential election when it was attacked by Franklin D. Roosevelt as contributing to the depression.18 Yet material reasons alone do not account for the adoption of liberalism: the president needed to have a cognitive explanation of the interconnections between electoral misfortune, the Great Depression, and the protectionist policies of earlier administrations to gain congressional agreement for new policies. These connections were made repeatedly to the President and Congress by "free traders" such as Secretary of State Cordell Hull. The idea of economic liberalism provided a framework for the reforms necessary after the disaster of the Great Depression. The lessons from that event were carried into the Second World War and when America emerged victorious as a global superpower, they were in a position to ensure that liberal ideas could spread around the world. The ascendancy of the United States in the early post-war period was immediately evident in the play of international policy making. The US used its position as leader of the Western alliance to play a hugely influential role in the formation of new international institutions like the United Nations, International Monetary Fund and World Bank. Equally important was Americas economic hegemony. In 1947 the United States held about 70 percent of the monetary gold stock of the world. By 1950 the US accounted for 17 percent of world trade, its share one and a half times as big as the next leading nation. Finally, in the post war period the US increased its accumulated stock of foreign investment from $7billion in 1946 to over $100billion in 1973 (51percent of the worlds total foreign investment that year).19 Clearly then, America had the ability to shape the post-war political and economic system. To put its subsequent actions into the context of the debate about the role of ideas we need to question its intentions. We can create two different narratives; the first involves a triumph of liberal ideology. So for those who believe

Judith Goldstein, Ideas, Institutions, and American Trade Policy, International Organization, Vol. 42, No. 1, The State and American Foreign Economic Policy. (Winter, 1988), pp. 179-217.

Gilbert. R. Winham, Evolution of the Global Trade Regime, in Global Political Economy, ed. John Ravenhill (Oxford, 2005) p93

that it was the power of liberal economic ideals that drove American policy, the varied initiatives were an effort to provide many nations with the generalized benefits of peace and prosperity, sacrificing U.S. short-term interests for the good of the world community. In this narrative, the U.S. was the nation at the vanguard of a timely liberal revolution in global politics, using its hegemonic position to provide collective or public goods. In this context, collective goods refer to identifiable benefits that are available to all who participate in the system (even if they pay no part of the cost) and consumption of the good by one participant does not diminish consumption by others. One of the central tenets of hegemonic stability theory states that collective goods, such as security and prosperity, will emerge only if the most powerful nation accepts the costs of providing them and defers its own benefit to the future. This country, in effect, must be willing to think in terms of benefits to a wider set of nations.20 From a materialist perspective, however, it is hard to accept that America would use its hegemony in such an altruistic fashion. For materialists, the realist approach to hegemonic stability theory is more attractive: the collective benefits of international order will be supplied only if the dominant state can extract a disproportionate amount of the benefits. This view sees the United States as able to use its post-war position to gain special privileges or to compel member states to make contributions to the costs of world order, in order make providing international order a profitable venture. Indeed, it is possible to go even further and say that the idea of collective goods in a global economic system obscures the fact that liberal economic policies produced a substantial array of private benefits to the United States; hegemons at the height of their economic power will tend to opt for liberal economic policies so as to maximise the gains from comparative advantage. In this materialist narrative, America took the lead in Bretton Woods negotiations, and created a new international regime that would instinctively serve American interests. The IMF and World Bank can be seen as mechanisms to supplant German reparations as the mechanism through which to provide the allies with institutionalised means to sustain their demand for US goods and to maintain the

Lairson, Thomas D. and Skidmore, David, The political economy of American Hegemony in International Political Economy: The Struggle for Power and Wealth (London,1997) p80

discipline of gold in international relations. During the war Americans realised that, given Americas economic supremacy, a more open global economy would not impair the US economy, but would link the economic activity of other non-communist countries into a satellite relationship with the United States.21 In 1944 two new finance-capital and debt-management consortia were established at Bretton-woods as permanent organisations in which foreign governments held some stock, although not enough to match the dominating veto share held by the US government. Other countries could do little to control the use of the capital of these organizations, save to facilitate the servicing of their own indebtedness. US government finance capital thus drew the finance capital of other governments into an international cartel directed by US policy makers and dominated by the US government.22 From an economic perspective it is hard to gauge the extent to which American policies were truly motivated by a rigid belief in Liberal ideals. The General Agreement on Tariffs and Trade (GATT) was successful in producing a substantial drop in world tariff levels. In the period from 1890 to 1935, U.S. tariff levels fluctuated between 30 percent and 45 percent of dutiable imports. By 1955 these had been cut to 15 percent and by 1970 to 12 percent.23 But even this helps illustrate a key fact about GATT and American post-war economic objectives: American leaders strongly favoured lowering tariffs and other barriers to trade, that is, they were interested in freer trade; they were really not interested, in spite of much rhetoric to the contrary, in free trade. GATT did embody a commitment by its members to establish a schedule of tariff rates and a set of trade principles designed to produce uniformity and predictability in international commercial relations. However, although tariff barriers on manufactured goods fell substantially, trade in agriculture and services remained largely outside GATT (as did the communist bloc and many Third World nations).

Michael Hudson, Super Imperialism: The Economic Strategy of American Empire (London, 1972) p120 22 Michael Hudson, Super Imperialism: The Economic Strategy of American Empire (London, 1972) p120 23 Lairson, Thomas D. and Skidmore, David, The political economy of American Hegemony in International Political Economy: The Struggle for Power and Wealth (London,1997) p80


Furthermore, freer trade provides great benefits to the most productive and low-cost nations (such as the US) because their exports are likely to expand relative to others. Moreover, the nation with the worlds key currency receives special benefits by avoiding the need to adjust its domestic economy to payments deficits. Because the dollar functioned as a key currency and because other nations accepted it as payment for goods, the United States was able to force these nations to bear some of the costs of its international operations.24 What is clear is that the nation that stood to gain the most from a new liberal political economic world order was the United States.

So which narrative is more convincing? In terms of bearing the costs of a stable international order, the United States was certainly the only state able to provide enough capital to begin guaranteeing the security of nations. And certainly if the aim of Bretton-Woods was to provide a framework for peace and stability in Western Europe then it can claim a success for the liberal ideas implemented. However, the scale of the economic benefit that the US as a hegemonic power could derive from a liberal international regime underscores the attractiveness of a materialist approach, and we should acknowledge that the United States government was bound to labour to protect its interests. It would be nave to apply a voluntarist form of idealism in which political outcomes can be explained directly by the desires motivations of the immediate actors themselves, and a more useful approach would be to use a constructivist explanation where political outcomes as described above a complex product of the varying impacts of strategies actors devise as a means to realise their intentions upon a context which favours certain strategies over others, irrespective of the intentions of the actors themselves. Using a constructivist approach, the key to understanding U.S. motives in promoting international stability lies with the perceptions of U.S. leaders about the military and political costs that would come from dissolution of world order. The experience of depression and war convinced many key government officials that U.S. prosperity and security depended



on prosperity abroad and on eliminating or blocking the acts of hostile and aggressive states. Should the United States not act to ensure these outcomes, international economic conflict would certainly harm the American economy? In an important sense, the benefits of a liberal world order derived from the unacceptable costs that could be forgone with its presence. Judith Goldstein and Robert Keohane provide a valuable explanation of when ideas can influence public policy: firstly, when "the principled or causal beliefs they embody provide road maps that increase actors' clarity about goals or ends-means relationships," secondly, when they become "focal points that define cooperative solutions or act as coalitional glue," and finally, when they become embedded in political institutions.25 The process by which the institutions of the New World Order were created fulfils all these categories. Liberalism provided a road map for understanding the failure of inter-war economic policy; supported by American hegemony it became an ideological focal point for global reconstruction and in the process it became embedded in the both the American and global political systems.

Case Studies In the subsequent part of this dissertation I will examine the role played by the United States in influencing and indeed altering the methods of economic governance in a variety of states. For each state I will ask what kind of political explanation is most plausible for explaining the actions of the United States. By investigating the methods by which America has influenced different national economies, as well as the varying outcomes of such policies it will be possible to obtain a clearer picture of which is the more realistic of the narratives described above: a material explanation contending that US policy since the Second World War has been aimed at the protection and promotion of American political and economic interests abroad; or a constructivist approach which emphasises a causal role for ideas and ideology in the formation of American foreign economic policy towards Latin America.


John Kurt Jacobsen, Much Ado About Ideas: The Cognitive Factor in Economic Policy, World Politics, Vol. 47, No. 2 (Jan., 1995), pp. 283-310


In the post-war period, it would soon become clear that under the binary logic of the Cold War the US would intervene to affect national economies in the name of economic liberation as well as containment of the communist threat. The first targets of such interventions would be the emerging Third World developmentalist governments, developmentalism being the economic theory which states that the best way for Third World countries to develop is through creating a strong and varied internal market and imposing high tariffs on imported goods to protect domestic industry. It is necessary to ask whether a political explanation of this policy should draw on a constructivist or materialist methodological framework. Clearly, a constructivist explanation suggests that a belief in the superiority of liberalism over communism was a causative factor in the policy of containment. However, there is a material explanation to be examined. The success of such of nationalist economies, especially in the Southern Cone of Latin America was seemingly a concern for the US state department. At a time when large portions of the globe were turning to Stalinism or Maoism, developmentalist proposals for import substitution were actually quite centrist, yet the ideas of these governments had powerful enemies. Feudal landowners had been happy with the status quo which provided them with steep profits and a limitless supply of peasants to work their land. Now they were outraged to see profits being diverted to build up other sectors, their workers demanding land distribution, and the government keeping the price of their crops artificially low so food could be affordable. American and European corporations doing business in Latin America began to express similar complaints to their governments: their products were being blocked at the borders, their workers were demanding higher wages and most alarmingly there was talk that everything from foreign owned mines to banks could be nationalised to finance Latin-Americas dream of economic independence. Under pressure from these corporate interests, a movement took hold in American and British policy circles that attempted to pull developmentalist governments into the binary logic of the cold war. Do not be fooled by the moderate, democratic veneer these hawks warned: Third World nationalism was the first step on the road to totalitarian Communism. Two of the chief proponents of this theory were John Foster Dulles (Secretary of State) and his brother Allen Dulles head of the new 13

CIA. Before taking public posts both had worked at the legendary law firm Sullivan & Cromwell which represented many of the companies that stood to lose most from developmentalism, such as JP Morgan & Company, the International Nickel Company, the Cuban Sugar Cane company and the United Fruit Company. The results of the Dulles ascendancy to top governmental posts were immediate: in 1953 and 1954 the CIA staged its first two coups dtat, both against Third World governments (the first being in Iran) that identified more with Keynes than with Stalin. 26

Guatemala At nine pm June 27, 1954 Guatemalan president Jacobo Arbenz Guzmn announced his resignation. Colonel Carlos Castillo Armas and his band of several hundred peasant soldiers, the so-called liberation army, had invaded Guatemala from Honduras with logistical support from a covert U.S. CIA operation code-named PBSUCCESS.27The background to this event makes Guatemala an instructive starting point in the debate between a materialist and constructivist approach to American foreign policy. In 1944, the freest elections in Guatemalan history had bestowed the presidency on Juan Jos Arvalo. Arvalo was a self-proclaimed spiritual socialist, but he disavowed Marxism because it prescribed class struggle and viewed men to be economic animals.28 Arvalo began a program of reform intended to help Guatemalan peasants by passing the Law of Forced Rental that obliged the oligarchs at the top of Guatemalas near feudal economic system, to lease uncultivated lands at low rates. Urban labour received support through legislation that by 1950 had provided a social security system, a labour code that allowed strikes and union organising, and a central bank.29 This program was met with bitter resistance by oligarchs and foreign

Naomi Klein, The Shock Doctrine, (London, 2007) p58 Stephen M. Streeter, "Interpreting the 1954 U.S. Intervention in Guatemala: Realist, Revisionist, and Postrevisionist Perspectives," <http://www.historycooperative.org/journals/ht/34.1/streeter.html> (1 May 2008). P1 28 Walter LaFeber, Inevitable Revolutions: United States in Central America. (Ontario, 1984)p110113

Walter LaFeber, Inevitable Revolutions: United States in Central America. (Ontario, 1984)p110-113


investors. Their reaction was predictable, as was a 1948 US State department memorandum which held that the reforms, though not absolute proof of communism did not mean that there was no communist inspiration behind them. 30 Indeed it was during this period that the US ambassador to Guatemala Richard C. Patterson Jr became so concerned about Communist infiltration of the country that he was moved to devise a now famous method of detection: Many times it is impossible to prove legally that a certain individual is a communist; but for cases of this sort I recommend a practical method of detection the "duck test". The duck test works this way: suppose you see a bird walking around in a farm yard. This bird wears no label that says "duck". But the bird certainly looks like a duck. Also he goes to the pond and you notice he swims like a duck. Then he opens his beak and quacks like a duck. Well, by this time you have probably reached the conclusion that the bird is a duck, whether he's wearing a label or not.31 If the US was alarmed by the nationalist policies of Arvalo then his democratically elected successor Arbenz was even more radical. In 1952 he secured the passage of the Agrarian Reform Law. Rural labourers as well as urban workers were to receive more governmental protection. The need for some sort of reform was painfully obvious. Two percent of the Guatemalan population owned 72% of the land; per capita income in rural areas amounted to $89.15; malnutrition was rife and worsening.32 The goals of the legislation were to eliminate all feudal type property especially work servitude and the remnants of slavery;33 to end the countys dependence on oligarchy and foreign investors; to improve self-sufficiency by growing staple foods rather than importing them from the US; and to allow as many rural labourers as possible to work their own land or alternatively to become urban labourers. The law had a powerful effect. It expropriated the unused lands of large plantations (with compensation based on tax evaluations) and by 1954, 100,000 peasants had received land as well as bank credit and technical aid for sowing and

Memorandum from R.Wilson to Wise and Newbegin, 6 May 1948, 814.00B/5648, NA, RG 59. cited in Walter LaFeber, Inevitable Revolutions: United States in Central America. (Ontario, 1984) p113 31 , Richard H. Immerman , The CIA in Guatemala: The Foreign Policy of Intervention,(Austin, 1982)pp182-186 32 Walter LaFeber, Inevitable Revolutions: United States in Central America. (Ontario, 1984) 114 33 Neale J. Pearson, "Guatemala: The Peasant Union Movement, 1944-1954," in Latin American Peasant Movements ed. Henry A. Landsberger (Ithaca, 1969), p 224


marketing. By most standards the measures were a success. Guatemalan exports rose until, by 1954, the country enjoyed a favourable balance of payments. Peasants could provide themselves with their own food, even make cash from sales. Moreover they were involved them in the political system for the first time in 400 years. These provocatively nationalist economic reforms alarmed the American government. So much so that in 1951 the CIA began formulating an operation, codenamed PBFORTUNE that would oust Arbenz from the presidency if it was felt that he presented a communist threat. Yet PBFORTUNE was never carried out and Arbenzs economic reforms continued. A key moment however, came in 1953 when Arbenz announced that he was expropriating 234,000 acres of land that was left uncultivated by the American giant United Fruit (UFCO). Based on the companys tax valuations, the president offered one million dollars compensation. In response, UFCO demanded $16 million and claimed that the land was not uncultivated but merely left fallow to protect it against disease. United Fruit subsequently launched a massive lobbying campaign for US intervention. It had enviable connections to the Eisenhower administration, including Alan Dulles, head of the CIA, who had served on UFCOs board of trustees. The companys top public relations officer, Ed Whitman, was the husband of Ann Whitman, President Eisenhowers private secretary. The UFCO lobbying campaign, including a film called Why the Kremlin hates bananas, helped condition Americans to accept the US state department line that Arbenz was controlled by communists. Within a year the CIA launched the new Operation PBSUCCESS which led to Arbenz being overthrown. So while the US did not design its military intervention merely in order to save the property of United Fruit, the UFCO incident certainly aided in convincing officials that Guatemala was worth intervening in. A materialist explanation of the Guatemalan incident is easy to formulate. In materialist analysis actors behaviour is rendered predictable by the context in which they find themselves.34 This is based on the materialist idea that actors are always rational and will act rationally in pursuit of a preferential set of interests; the interests

Colin Hay, The Discursive and the Ideational in Contemporary Political Analysis: Beyond Materialism and Idealism, in Colin Hay, Political Analysis: A Critical Introduction, (Basingstoke, 2002) p196


on which states act are derived from structure and regarded as given and prior to the ideas held by actors. So in this case the US intervention was predictable because the actions of the Guatemalan were directly contradictory to the interests of the American economy and certain American companies who benefited greatly from the feudal type system which existed previously. Certainly Arbenz was in no doubt what triggered his ousting. Our crime, he explained in his resignation speech, is having enacted an agrarian reform which affected the interests of the United Fruit Company.35 But perhaps the American perspective encourages a more nuanced analysis. If we use a constructivist approach, political outcomes become a more complex product of the varying impacts of strategies actors devise as a means to realise their intentions upon a context which favours certain strategies over others, irrespective of the intentions of the actors themselves.36 If we believe the sentiment of John Foster Dulles when he announced If the United Fruit matter were settled, if they gave a gold piece for every banana, the problem would remain as it is today as far as the presence of Communist infiltration in Guatemala is concerned37, then perhaps we should acknowledge a causal role of the ideas of economic liberalism and containment in the decision to intervene in Guatemala. There are clear problems with this approach however; firstly the policy of containment can easily be explained in material terms as a predictable reaction to the communist threat to American economic interests. Secondly, the legacy of American intervention was not a new economically liberal regime, but in most respects, a return to the old oligarchic system US companies moved back in, labour legislation was repealed, UFCO quickly recaptured 250000 acres of land. From 1960, the country was plunged into a 36 year civil war. 38 Guatemala is an instructive starting point for the materialist/ ideational debate because it gives a clear picture of how the materialist approach became dominant for so much of the post-war period. The intervention seemed to be a classic and

Stephen M. Streeter, "Interpreting the 1954 U.S. Intervention in Guatemala: Realist, Revisionist, and Postrevisionist Perspectives," <http://www.historycooperative.org/journals/ht/34.1/streeter.html> (1 May 2008). P5 36 Colin Hay, Political Analysis (Basingstoke, 2002) p208 37 Stephen M. Streeter, "Interpreting the 1954 U.S. Intervention in Guatemala: Realist, Revisionist, and Postrevisionist Perspectives," <http://www.historycooperative.org/journals/ht/34.1/streeter.html> (1 May 2008). P5

LaFeber, Inevitable Rrevolutions pp110-114


predictable case of an actor behaving rationally in pursuit of a certain set of interests. Despite the rhetoric of the American government, considered as an isolated case it is hard to find a causal role for ideas in the decision making process, however, the events in Dominican Republic ten years later, make an instructive comparison. Dominican Republic Rafael Trujillo came to power in 1930, effectively installed by U.S. marines, and despite his legendary corruption and comparable repression,39 he retained the support of the US until the 1960s. Over the course of 30 years he proved himself to be a despot of monumental vanity, immense greed and profound immorality who perfected the use of terror, deceit and humiliation as political weapons.40 Despite this, it was not until the advent of Castro in Cuba that Washington began to consider removing him. With Trujillo becoming ever more autocratic and corrupt, US foreign policy makers began to fear that Trujillo was comparable to Batista and that the Dominican Republic was set up for a Communist takeover.41 American concerns were reinforced when Trujillo tried to assassinate Romula Betancourt, the President of Venezuela, and a man American policy makers viewed as a beacon of democracy in Latin America. In August 1960, after the assassination attempt, the US joined all other members of the Organisation of American States (OAS) in breaking diplomatic relations with the Dominican Republic. Furthermore, the US used various forms of economic coercion to try to force an end to the Trujillo regime. Trade in arms, petroleum products, trucks, and spare parts was stopped, and US purchases of Dominican sugar were limited.42

Gabriel Kolko, Confronting the third world : United States foreign policy, 1945-1980, (New York 1988) p161 40 Rollie E. Poppino , Political Science Quarterly, Vol. 83, No. 1 (Mar., 1968), pp. 149-151

Stephen D.Krasner Defending the national interest : raw materials investments and US foreign policy (Princeton, 1978) p292 42 Anna P. Schreiber, Economic Coercion as an Instrument of Foreign Policy: U.S. Economic Measures Against Cuba and the Dominican Republic, World Politics, Vol. 25, No. 3, (Apr., 1973), pp. 387-413


The US also prepared itself for the likelihood of military intervention; when relations deteriorated, the highest ranking US official left in the capital Santo Domingo, became the main conduit for contacts between the CIA and Dominican anti-Trujillo groups. Around the turn of 1961 a plan was approved to give financial support for dissident forces in the Dominican Republic to be used for the arming of a yacht and the purchase of weapons.43 Trujillo was assassinated in May 1961. No American officials or materials were directly involved in the operation, but the CIA certainly knew who the plotters were, and the US had made it clear they would support a new government. So once again the US made a concerted effort to force the removal of the leader of a Latin American state. However, on balance, it seems the efforts to remove Trujillo can be more easily explained by ideological considerations than by economic or strategic ones. It was a particular view of a global world order that convinced American policy makers that action was needed, rather than any concern about particular economic interests. Those were safe enough under Trujillo. It was the policy-makers perception that the rise of authoritarian regimes such as Trujillos was inextricably linked with the rise of Communist regimes like Cuba that led the US to try to remove Trujillo through the use of force.44 The absence of official concern for specific US investments is further revealed by the nature of the economic pressure brought to bear against Trujillo. The US government sought to limit the benefits to the Dominican Republic from the American sugar import program. They did this despite the sizeable rewards accruing to US firms with Dominican sugar holdings. The sugar program, begun in 1934, delineated the American market from the rest of the world through a series of domestic and foreign quotas. Since it largely kept American prices above those that could be found on the world market, a share of the U.S. market was an important prize. After a year of political wrangling, the US government was able to secure a cut in the quota of Dominican sugar in the American market. While it is true that American sugar beet growers were happy that this cut allowed them a bigger share of the market, companies with interests in the Dominican Republic were not so

US Senate Alleged Assassination Plots, pp 192-196 cited in Krasner, Defending the National Interest p293 44 Krasner, Defending the National Interest p292-298


enthralled. About one third of Dominican production was controlled by an American owned firm, the South Puerto Rican Sugar Company. The company attacked efforts to limit imports from the Dominican Republic and sought, unsuccessfully, to recover the $7million it had paid in special import duties.45 Certainly this was not an equivalent situation to the role of United Fruits in engineering the coup in Guatemala. After Trujillos assassination, the Dominican Republic entered a period of political instability that deeply involved the US. The Council of State that succeeded Trujillo was strongly supported by the Americans and early in 1963 Juan Bosch was elected President, again with American backing, however seven months later Bosch was overthrown and when a group of his supporters launched another coup to reinstall him, President Johnson authorized the landing of American marines. Within ten days there were almost 23,000 troops in the Dominican Republic. So what prompted such a severe response? American policy towards the Dominican Republic in the post-war period suggests that the over-riding concern of policy-makers at this time was that the Dominican Republic would become another Cuba. American intelligence forces were fixated on the activities of suspected communists in the rebel movement. Indeed, in the period immediately after the start of the anti-government movement activity the American Ambassador went as far as to say that rebel radio broadcasts had a definite Castro flavour.46 While it is true there were leftist elements in the forces supporting Boschs return, American officials almost certainly exaggerated their importance. Furthermore the US had virtually no information about the middle level military officers and civilians who were actually leading the revolt. The American obsession with the dangers of another communist takeover in the Caribbean had led to a severe distortion of the information being used.47 As such, there is a certain non-logical element to American behaviour in the Dominican Republic that is present in a number of cases of American intervention in the period after 1945. The perception of American leaders was skewed by their fixation on the dangers of communism and despite the seriousness of the step of
45 46

Ibid p296 Abraham, F. Lowenthal, The Dominican Intervention (Cambridge, 1972) p97 47 Krasner, Defending the National Interest pp292-298


sending in US troops, there was no extensive search for alternative solutions. U.S. central decision makers felt compelled to send in the marines. As Stephen D. Krasner, who later went on to serve at the Department of State, put it opposition to communism [in this period] more closely resembles a millennial goal, a religious quest, than a logical, rational or predictable strategy.48 It is important therefore to reconsider Guatemala in comparison to the Dominican Republic. The outcome was the same; the US engineered the removal of a Latin American leader, officially in the name of the containment of Communism, but the different methods used and the differing situation in terms of economic outcomes does not point towards an actor behaving predictably in a given context to protect its interests. What both case studies share is evidence of an overstatement of the communist threat which suggests that the United States was an actor without perfect information relying to some extent on ideology to provide a narrative which provided their understanding of events in Latin America, and certainly influenced their policy decisions. Chile Just as important as containing the envisaged threat of communism in Latin America was eradicating nationalist developmentalism which was thriving in the postwar period. The experience of Chile is an illuminating example of how the US government went about achieving that goal. On September 11 1973 the democratically elected Socialist Salvador Allende was murdered during a coup which ushered in the reign of General Augusto Pinochets military junta and began a period of laissez-faire liberal economic policy. The genesis of that economic revolution can be traced back to a discussion between two American men as they met in Santiago in 1953. One was Albion Patterson director of the US International Cooperation Administration in Chile, the other was Theodore W. Schultz, chairman of the Department of Economics at the University of Chicago.49 Patterson was unsurprisingly perturbed by the nationalist economic tendencies of Latin American governments and the influence of pink economists such as Raul Prebisch. But
48 49

Krasner Defending the National Interest p298 The University of Chicago was the spiritual home of free-market economics, led by Milton Friedman


Pattersons plan to resolve the issue in Chile was unlike the course of action taken in Guatemala. What we need to do he had stressed to a colleague. is change the formation of men, to influence the education, which is very bad, 50 This coincided with Schultzs conviction that the American government was doing too little to combat the rise of leftist economics in Latin America The US must take stock of its economic programs abroadwe want [the poor countries] to work out their economic salvation by relating themselves to us and by using our way of achieving their economic development he said.51 The two Americans devised a plan that they hoped would eventually turn Santiago, which had been a hotbed of state-centred economics, into its opposite a laboratory for free market economic experiments. The US government would provide funding to send students from Chile to what was recognised as the most anti-pink school in the world the University of Chicago. Furthermore, Schultz and his fellow economists would also be paid to travel to Santiago to conduct research into the Chilean economy and to train students and professors in Chicago school fundamentals.52 Juan Gabriel Valdes who became Chilean foreign minister in the 1990s, later described the process of training hundreds of Chilean economists in Chicago school orthodoxy as as striking example of an organised transfer of ideology from the United States to a country within its direct sphere of influence the education of these Chileans derived from a specific project devised in the 1950s to influence the development of Chilean economic thinking in fact they introduced into Chilean society ideas that were completely new, concepts entirely absent from the ideas market.53 Of course this ideological onslaught was not Americas only method of influencing the Chilean economy. From the early 1960s onwards the United States was heavily involved in the Chilean political process. During the elections of 1964 the

Juan Gabriel Valdes, Pinochets Economists: The Chicago School in Chile, cited in Naomi Klein, Shock Doctrine, p59 51 Ibid 52 Ibid pp59-71 53 Ibid


primary objective was to ensure the Left did not triumph at the polls. To achieve this, the United States threw its support behind Eduardo Frei of the Christian Democrats, to the extent that more than 50% of his campaign funds came from the CIA.54Additionally, the American government funded a sustained propaganda campaign involving paying individual writers to support their cause and funding noncommunist papers including el Mercurio, the countrys largest daily. The campaign was successful and once elected the Christian Democrat regime received large amounts of overt foreign aid. Between 1963 and 1969 the Chilean government received more than one billion dollars in direct assistance, a higher per capita level than any other Latin American country. 55 Despite American assistance however, Freis mixed reform package which sought to continue with some developmentalist goals without alienating his American supporters was unsuccessful.56 The main economic debate in Chile and the Southern cone in general was about how best to take developmentalism to the next stage. While Marxist groups argued for nationalisation of profitable industries and radical land reform; centrists argued that the key objective should be greater economic cooperation amongst Latin-American countries, which could transform the region into a powerful trading bloc to rival Europe and North America. In this climate the Chicago trained economists in Chile could not get their voices heard, liberal reform was not on the agenda. In fact, by the time of the 1970 elections all three major parties were in favour of nationalising the countrys largest source of revenue: the copper mines controlled by US mining giants.57 The winner of those elections was the socialist Salvador Allende. As soon as Allende won he had powerful American enemies. President Nixon noted that he wanted to make the economy scream while the US ambassador warned Not a nut or bolt will be allowed to reach Chile under Allende adding Once Allende comes to power we shall do all within our power to condemn Chile and the Chileans to utmost

Stephen D. Krasner, Defending the National Interest: Raw Materials Investments and US Foreign Policy (Guildford, 1978) p231 55 Stephen D. Krasner, Defending the National Interest: Raw Materials Investments and US Foreign Policy (Guildford, 1978) p231 56 Gabriel Kolko, Confronting the third world : United States foreign policy, 1945-1980, (New York 1988) p218 57 Naomi Klein, pp 59-71


deprivation and poverty.58 All American aid and loans were reduced to a trickle, and Washington successfully blocked all multi-lateral bank loans as well. US multinationals too were fearful that he represented the beginning of a Latin American-wide move towards socialism and many were simply unwilling to accept the possibility of losing what was an increasingly important contribution to their profits. By 1968 20% of total US foreign investment was tied up in Latin America, and US firms had 5,436 subsidiaries in the region. The profits from investments were enormous. Mining companies alone had invested $1billion over the previous fifty years in Chile, but they had sent $7.2billion home.59 The focal point of American anti-Allende activity was the Washington-based Ad Hoc Committee on Chile, a group comprised of the major US mining companies with holdings in Chile as well as International Telephone and Telegraph Company (ITT), which owned 70% of Chiles soon to be nationalised phone company. ITT were so worried by Allendes plans that they devised an 18 point strategy for the American government that went as far as suggesting a military coup: Get to reliable sources within the Chilean military, it stated build up their planned discontent against Allende, thus, bring about necessity of his removal.60 Simultaneous to the efforts of American government and business to get rid of Allende, the president of the Chilean National Association of Manufacturers recruited several of the new band of Chicago school economists to design an alternative economic programme? The group held weekly meetings during which they discussed how to remodel the economy along neoliberal lines. According to a subsequent American investigation, over 75% of the funding for this opposition research organisation came from the CIA.61 The result of these meetings was a 500 page liberal economic bible that came to be known as the brick. According to a later US senate committee CIA collaborators were involved in preparing an initial overall economic plan which has served as the basis for the juntas most important economic


US Senate, Assasination Plots, 231n cited in Gabriel Kolko, Confronting the Third World: United States Foreign Policy 1945-1980, (New York, 1988) p220 59 Naomi Klein, Shock Doctrine p64 60 Ibid 61 Ibid p70


decisions.62 The proposals in the document bore a striking resemblance to those found in Chicago school luminary Milton Friedmans Capitalism and Freedom: privatization, deregulation and cuts to social spending. This is hardly surprising; eight of the ten authors of the brick had studied economics at the University of Chicago. When the coup finally came it was essentially a partnership between the military, led by Pinochet, and the liberal economists. The Chicago boys as they are known in Chile wrote Allendes Washington ambassador Orlando Letelier, convinced the generals that they were prepared to supplement the brutality, which the military possessed with the intellectual assets it lacked.63 The result of this partnership was swingeing neo-liberal reforms combined with decades of widespread, politically motivated torture and murder. The economic reform meant that Pinochet could rely on American support despite the rampant human rights abuse. Probably no one expressed this attitude better than the U.S. Secretary of the Treasury. After a visit to Chile, during which he discussed human rights violations by the military government, William Simon congratulated Pinochet for bringing economic freedom to the Chilean people. As Orlando Letelier put it This particularly convenient concept of a social system in which economic freedom and political terror coexist without touching each other, allows these financial spokesmen to support their concept of freedom while exercising their verbal muscles in defence of human rights.64 Americas actions in Chile are compatible with an interpretation of American foreign policy that emphasises the importance of long term political economic goals such as security of supply and greater market competition. It can certainly be seen as part of a strategy towards Latin America which involved the disruption and destruction of nationalist, developmentalist economic policies. However, given the methods used to influence used to influence Chiles economy, how useful is a material explanation which treats ideas as exogenous to the main causal factors of

Select Committee to Study Governmental Operations with Respect to Intelligence Activities, United States Senate, Covert Action in Chile 1963-1973 (Washington, DC: U>S Government Printing Office, December 18, 1975), 30 cited in Naomi Klein, Shock Doctrine p71 63 Orlando Letelier, The Chicago Boys in Chile: Economic Freedoms Awful Toll, The Nation, August 28, 1976. http://rrp.sagepub.com/cgi/content/abstract/8/3/44 (23/3/2008) 64 Ibid


change? The US embarked upon an organised transfer of ideology which was equally important in shaping Chiles economic future as the brutal methods of General Pinochet. One can say that in the context of Allendes nationalist economic program threatening major US economic interests it was predictable that America would intervene to protect those interests and make an example of a Socialist government. However, a materialist approach which precludes ideas from having a causal role in political outcomes is hardly applicable given that the staggering neoliberal reforms that Pinochet implemented can be traced back to the ideological prejudices of American economists funded to influence events in Chile. Mexico With its geographic and economic proximity to the US, Mexico is a paradigm case for understanding American foreign economic policy towards Latin America. The key to understanding economic change in Mexico, is understanding the way in which a combination of American influence over national economies and International Financial Institutions can ensure the liberalisation of national economies. The Mexican experience also illustrates that while trade openings can be beneficial to the economies involved they are also inextricably linked to broader patterns of social, economic, political, and cultural upheaval. The events in Mexico cannot be properly explained without reference to the International Monetary Fund, the body which was so influential in ensuring liberal reforms in the Mexican economy. The founding idea of the IMF was that it would act as a kind of global shock absorber, promoting economic policies that would reduce financial speculation and market volatility. However, allocation of power within the IMF on the basis of the size of each countrys economy (rather than one country, one vote like UN General Assembly) meant that the US had an effective veto over all major decisions. Under this system, US administrations could imprint their ideological prejudices on to the policies of the IMF. Officials within the IMF had always made policy recommendations when they handed out loans, but in the early eighties influenced by the neo-liberal revolutions of Reagan and Thatcher and emboldened by the desperation of developing countries, 26

those recommendations morphed into radical free-market demands. When crisisstruck countries came to the IMF seeking debt-relief and emergency loans, the fund responded with sweeping liberal adjustments, equivalent in scope to the brick drafted by the Chicago boys for Pinochet. Davison Budhoo, an IMF senior economist who designed structural adjustment programs in Latin America and Africa throughout the eighties, admitted later that everything we did from 1983 onward was based on our new sense of mission to have the south privatised or die; towards this end we ignominiously created economic bedlam in Latin America and Africa in 1983-88.65

Mexicos history did not suggest that economic liberalisation and international integration was an obvious move; nationalism had always been strong in Mexico. Anger at foreign influence had helped fuel the Mexican Revolution of 1910 and had contributed significantly to the highly nationalist constitution of 1917. In the post World-War II period, Mexico was a leading advocate of the right and duty of national governments to build economic sovereignty through measures such as control over cross-border capital and trade flows and the nationalization of important industries. In 1973 Mexico enacted two major laws to regulate foreign investment and the transfer of technology.66 In the early 1980s all imports required previous government permits and were subject to a top tariff of 100 percent and an average tariff of 27 percent. 67 Mexico maintained a realist, economic nationalist outlook in an ever liberalising global market place. The Latin American Debt Crisis in 1982 provided an opportunity for change. Rising oil prices meant the Mexican government became unable to service its debt to a variety of international banks. The peso was devalued three times; the economy was stagnant, suffering from high interest rates, negative terms of trade and scarce credit. This was alarming for the American government, as loans to Mexico accounted for 44 per cent of the nine largest U. S. banks' capital in 1981. Mexican failure to pay interest on these loans for a year would eliminate more than one-third of their annual

Davison L.Budhoo, Enough is enough: Dear Mr CamdessusOpen Letter of Resignation to the Managing Director of the International Monetary Fund (New York,1990) cited in Klein p164 66 Tony Porter, The North American Free Trade Agreement, Political Economy and the Global Order, ed. Richard Stubbs and Geoffrey R.D. Underhill (Oxford, 2006)p317 67 Gerardo Otero, Neoliberal reform and politics in Mexico: An Overview, Neo-Liberalism Revisited, Gerardo Otero (Oxford, 1996) p7


net profits. Aware of Mexico's vital importance to the soundness of U.S. banks and the broader economic interdependence between the U.S. and Mexican economies, the US arranged for prepayment of $1 billion in purchases for the strategic petroleum reserve and $1 billion in agricultural credits. Meanwhile, the Bank for International Settlements together with the United States pledged a $1.8 billion bridging loan until a support package from the International Monetary Fund (IMF) could be negotiated. In addition, major foreign banks agreed to a three-month postponement in debt repayments. Of course these loans were conditional on structural reform. As a result of the agreements of 1982 as well as further loans from the IMF in 1986 and 1989 the Mexican government implemented rapid trade liberalization and deregulation of its capital account (direct and portfolio investment, as well as the removal of controls on the repatriation of profits), leading to rapid capital inflows The aftermath of the economic crisis of 1982, and the peso devaluation, caused Mexico to re-evaluate its economic policy. The economy was stagnant, suffering from high interest rates, negative terms of trade and scarce credit. This further deterred foreign investment. The perceived solution to this was to formally open up the economy by signing up to the General Agreement on Tariffs and Trade (GATT) in 1986. Furthermore, a new law regulating foreign investment was enacted in 1989 to permit 100 percent foreign ownership in most sectors of the economy and further deregulation occurred in 1993 in order to pave the way for the implementation of the North American Free Trade Agreement (NAFTA), which joined Mexico, USA and Canada in one formidable economic bloc.68

The negotiation of NAFTA was deeply rooted in US economic and political conditions and interests. The arguments of the Clinton administration in support of NAFTA in 1993 are revealing, our biggest challenge today is economic - to channel a changing international economy to our benefit This administration supports the NAFTA with supplemental agreements because it will create high wage US jobs, boost US growth, and expand the base from which US firms and workers can compete



in a dynamic global economy. From the US perspective, NAFTA was part of efforts to reconstruct US economic competitiveness and dominance; raw materials and transport were the key issues for the US in these negotiations as part of broader processes of restructuring the North American economy to increase US economic competitiveness. The origins of NAFTA can be seen in the mid-1980s during the Reagan administration; the US needed to create a secure, continental energy market that would help the US compete in the expanding global economy while reducing crippling dependency on overseas oil imports. Free trade in energy in the region would secure stable and low cost access to valuable energy sources in Mexico and Canada for US consumption.69 NAFTA established the rules for transnational corporations to locate production and market their goods and services in Mexico, where they could take advantage of their countrys comparative advantages: low salaries, abundant natural resources, weak or unenforced environmental laws, favourable tax structures, and infrastructure. The agreement also guaranteed U.S. companies technology advantage through its strict intellectual property rules. NAFTA was designed to make Mexico as attractive to foreign investment as possible.70 In this it seems to have succeeded. Between 1993 and 2000, trade in the NAFTA region grew annually at 12.5 percent additionally foreign direct investment flows between the NAFTA partners tripled between the 1989-1994 and the 1995-2000 periods.71 But if we investigate Mexicos economic performance in the post-NAFTA period we get an indication of how NAFTA was designed primarily to boost the US economy. Mexicos economic situation, the widespread poverty and lack of development were barely taken into account by NAFTA. Inevitably it seems, the social and economic disparities have widened since 1994.


Paul Ciccantell, NAFTA and the Reconstruction of U.S. Hegemony: The Raw Materials Foundations of Economic Competitiveness, Canadian Journal of Sociology Vol. 26, No. 1 (Winter, 2001), pp. 57-87

Timothy A. Wise, Hilda Salazar, and Laura Carlsen, Introduction: Globalization and Popular Resistance in Mexico, Confronting Globalization, ed, Timothy A. Wise, Hilda Salazar, and Laura Carlsen (Bloomfield, 2003) p 2 71 Tony Porter, The North American Free Trade Agreement, Political Economy and the Global Order, ed. Richard Stubbs and Geoffrey R.D. Underhill (Oxford, 2006)p323


NAFTAs advocates promise of sustained growth could not be fulfilled. In December 1994 Mexico was forced to once again devalue its currency, plunging the country into its worst economic crisis for decades. The so-called December mistake led to an economic contraction of 6.5 percent in 1995 and while the country was able to recover from this blow it was symbol of the malaise that meant in the overall period of neo-liberal reform, from 1982 to 2000, the Gross Domestic Product (GDP) grew only 0.48 per capita annually, in real terms. In 2001, growth again turned negative, falling 0.3 percent, according to Mexican government figures.72 A key element of the adjustment program carried out in Mexico was the establishment of "Pactos" among representatives of government, businesses and the official labour federation, through which incomes policies were imposed on the economy. Through the Pactos, the IMF demands for wage restraint were effected, as wage increases were indexed to "expected" levels of inflation. Between the implementation of the first Pacto in December 1987 and May 1994, the minimum wage increased by 136 percent, while the cost of a basic basket of consumer goods rose by 371 percent. An estimated half-million manufacturing jobs were lost from Mexico to lower wage countries from 2000 to 2003, including, for instance, 1200 jobs at a $250million Mitsubishi computer monitor plant, created in 1999 and closed a few years later when it could not compete with flat-screen monitors produced in East Asia. 73 For those who are still in employment wages have dropped significantly. Since NAFTA went into effect, the minimum wage has lost 23 percent of its buying power while contractual wages have also declined, losing 55 percent of their buying power between 1987 and 1989.74 Mexican agricultural producers were expected to respond to new economic signals coming from the liberalized agricultural markets. The same adjustment
72 73

Ibid Tony Porter, The North American Free Trade Agreement, Political Economy and the Global Order, ed. Richard Stubbs and Geoffrey R.D. Underhill (Oxford, 2006)p324 74 Timothy A. Wise, Hilda Salazar, and Laura Carlsen, Introduction: Globalization and Popular Resistance in Mexico, Confronting Globalization, ed, Timothy A. Wise, Hilda Salazar, and Laura Carlsen (Bloomfield, 2003) p 3


program that liberalized trade, however, required cuts in credit, technical assistance and subsidized inputs. As a result, millions of farmers, particularly poor farmers producing food for the local economy, have been pushed out of agriculture altogether. Some 1.8 million peasants have left home in the three years since the crash in search of work in the United States, in Mexico's overcrowded cities and in the maquila sector. In rural Mexico, 82 percent of the population currently lives in poverty; 55 percent lives in extreme poverty.75 For America meanwhile, NAFTA has been an economic boon. U.S. employment increased over the period 1993period 1993-2007 from 110.8 million to 137.6 million people, a 24 percent increase.76 US industrial production, in which manufacturing makes up 78%, saw an increase of 49% from 1993-2005.77 Mexicos travails since economic liberalisation serve as a reminder that a narrative of American foreign economic policy that portrays America as a benefactor altruistically implementing liberal reforms in needy countries has never been realistic. As such it is perhaps the case study that best fits a materialist approach to American foreign economic policy. The materialist argument emphasises that although both the actions of IMF and the negotiation of NAFTA were subject to ideological rhetoric, ideology can be used merely to serve the interests of an actor acting in an otherwise predictable fashion. However the negotiation of NAFTA and the ideological leanings of the IMF involve various parties and a constructivist approach can cite the assertion of Kratochwil and Ruggie that the intersubjective quality of convergent expectations as the basis of regimes is not accessible78 to approaches that treat ideas as merely additional variables.



Ibid NAFTA Facts, Office of the United States Trade Representative www.ustr.gov (March, 2008)


Gary C Hufbauer, and Jeffrey J. Scott. NAFTA Revisited: Achievements and Challenges. (Washington,2005.) 78 Friedrich Kratochwil and John Ruggie, International Organisation: A state of the art on an art of the state, International Organisation 40 (4) p771, cited in Andreas Bieler, Questioning Cognitivism and Constructivism in IR theory: Reflections on the Material Structure of Ideas, Politics 2001: Vol21 (2), 93-100


Conclusion During her time as Secretary of State Condoleezza Rice has alluded to the debate I have examined in this essay: There is an old argument between realists and idealists said Rice, To over simplify realists downplay the importance of values Idealists emphasise the primacy of values , As a professor, she went on to say, I recognise that this debate has won tenure for many generations of scholars, as a policy maker I can tell you that these categories obscure reality. In this dissertation I have sought to apply this debate to the field of American foreign economic policy in Latin America in order to examine whether the binary debate between materialists and idealists is useful in explaining political outcomes or whether a more nuanced constructivist approach provides us with the best political explanation. The literature I reviewed concerning the theoretical epistemic debate suggested that a constructivist approach was the most inclusive and perhaps allowed us the greatest understanding of how certain policies are formulated. However, it is the materialist approach that has been dominant in the post-war period, so it was necessary to rigorously apply the differing epistemological frameworks to actual political events in order to gain understanding of how they can be used and which framework, in the context of decades of American policy, is most useful. If we are to pursue a constructivist approach it is necessary to understand how certain beliefs and ideas become embedded to the point where they can influence policy decisions. For this dissertation that meant examining how liberal economic ideas gained influence in the period after the Great Depression and how those ideas were then embedded in global institutions. My research shows clearly structural considerations, such as the failure of the Smoot-Hawley legislation created a need for change. However, the nature of the change relied on policy makers interpreting the nature and causes of previous failures. Liberal economic theories provided a cognitive explanation for these failures and allowed the executive to provide a narrative that eased the acceptance of a new paradigm. Once this became the dominant paradigm, Americas post-war material dominance meant that liberal ideas were bound to influence the creation of international institutions such as the World Bank, IMF and 32

UN. There is a strong material argument that the new international regime was designed to reflect American interests and it is certainly true that the major beneficiary of this New World Order, has been the United States; however the results of the Bretton Woods conference are an example of political outcomes being a complex product of the varying impacts of strategies actors devise as a means to realise their intentions upon a context which favours certain strategies over others, in this case the strategies, were crucially informed and influenced by the liberal ideology of the American government. Thus a constructivist explanation allows us to better understand how liberalism was transformed from the dominant paradigm in American politics to an ideology that was worth exporting globally. The research I undertook for the four case studies further underlined the importance of ideology in influencing American foreign policy and put it that influence in the context of Latin America. Materialists dismiss the idealist notion that America intervened in Latin America in order to facilitate the dissemination of liberal ideas as free markets and democracy, and they are right to do so. The study of Mexico indicates that America has used the ideology of free trade and liberal economic reforms to manipulate the economies of other states to its own advantage. We also know that America was quite happy to support authoritarian regimes of the worst kind if it meant having a reliable ally in the region, often to the direct advantage of American economic interests. The studies of Chile and Guatemala show this adequately. However this does not mean that a materialist epistemic framework provides us with all the answers. A materialist approach presumes that actors will act predictably within the constraints of the specific context. But American foreign policy in Latin America contains too many anomalies and there is no single narrative of predictable behaviour that corresponds with the theory that America was primarily concerned with protecting its economic interests. Rather one must look to the realm of ideology and values for a persuasive vision of American policies. This is epitomised by the comparison between Guatemala and the Dominican Republic, both countries experienced coups instigated by the American government, yet one displaced a democratically elected Socialist, the other a tyrant who previously had reciprocated support. Arbenz of Guatemala represented a threat to American economic interests, but Trujillo did not. The common factor in these cases is an ideological revulsion of the competing global paradigm, communism. Communism was anti-thetical both to 33

the liberal economic paradigm that had emerged after the Great Depression, but also to the Lockean liberalism that is the foundation of the American state. In the period during which the events in Guatemala and the Dominican Republic occurred Communism was a danger greater than the actions of individual Latin American politicians. Anti-communism was the ideology that provided a road-map that informed much American foreign policy. Materialists expect actors to respond rationally in all situations, but actors dont always have perfect information, in these situations they rely on ideas to inform their response. We have seen in the case studies that America often exaggerated the threat of Communism. In my view this is because they were relying on ideology, interpretation and social constructions to inform their policy, rather than material factors. The study of Chile only reinforces my belief that the role of ideology cannot be ignored in any political explanation of American foreign economic policy in Latin America, albeit for different reasons. Certainly, it is possible to see why a material explanation would be convincing:, the election of Allende triggered an American response that led to him being replaced by a military junta enamoured of neo-liberal economic ideas. However if we analyse this outcome we cannot ignore the effect of the ideological onslaught that partnered the military efforts. Materialists way want to wish away ideas as merely reflecting economic interests, but the case studies clearly showed how ideas can be casual factors in political end economic outcomes, inherently worthy of analysis. Such analysis is not part of a materialist approach. While structural accounts can tell us a great deal about the constraints facing policy makers, policy making is about creation as well constraint. If we want to explain innovation as well as the underlying continuities in policy, we must recognize that the knowledge basis of state action (as in Guatemala and the Dominican Republic), as well as the processes by which the state itself influences the development and application of social knowledge (as in Chile and Mexico), are indeed research issues of central importance. 79For that reason we must conclude that a constructivist approach is likely to give us the greatest understanding of the United States foreign economic policy in post-war Latin America.

Peter, B. Evans, Dietrich Rueschmeyer and Theda Skocpol, Towards a Better Understanding of the State, in Bringing the State Back In , ed. Peter, B. Evans, Dietrich Rueschmeyer and Theda Skocpol (Cambridge, 1985) p357