Think Again: Latin America

"Free-Market Reforms Failed"

No. Perhaps the clearest sign of Latin America’s disenchantment with market-oriented economic reforms is the local popularity of Globalization and Its Discontents, by Nobel Prize–winning economist Joseph Stiglitz. A scathing critique of the "market fundamentalism" peddled by the International Monetary Fund (IMF), the book scaled bestseller lists in Argentina, Colombia, Paraguay, Peru, and Venezuela in 2002. "I am unemployed because of globalization," an out-of-work architect complained to me last year in Bogotá. "Stiglitz is speaking a great truth!"

Many observers have seized upon the region’s recent dismal economic record to argue that Latin America’s market reforms of the 1990s — that is, privatization, trade liberalization, deregulation, and the opening of capital markets, popularly known as the Washington Consensus — have failed miserably. However, the problem in Latin America might not be too much reform, but too little. Following the "lost decade" of the 1980s, during which the region experienced stagnant growth and runaway inflation, structural reforms helped stabilize the Latin economies. (The defeat of hyperinflation is now largely taken for granted in Latin America, which only underscores this remarkable achievement.) Investors responded by pouring in $66 billion in foreign direct investment from 1990 to 1995, when economic growth averaged some 4 percent each year.

How did this period of relative growth evolve into the current crisis? The culprits include a combination of chronically low savings rates, which compel countries to borrow excessively from abroad; the inability (or unwillingness) of some governments to run budget surpluses during good years; currency instability; and global financial contagion. But current conditions don’t prove the reforms were a bad idea. The crisis simply shows that market reforms, though an important step forward, were far from enough to put the region on a sustained growth path. In hindsight, reformers oversold how easily market policies could take hold after decades of state-guided development. They were likewise blind to the vulnerability of Latin economies to quick-spreading international financial crises, such as those in Asia and Russia during the 1990s. And they underestimated the need for safety nets and institutional reforms to mitigate long-term poverty and income inequality.

Nonetheless, nations that made the most progress in economic reform — including Chile, Mexico, and Peru — are showing relatively less economic distress than their neighbors. (Argentina dutifully followed the reform recipes, too, but its unsustainable currency peg with the U.S. dollar proved its undoing.) And despite their obligatory populist rhetoric, new leaders such as Brazil’s Luiz Inacio "Lula" da Silva are not veering radically from market policies or from regional and international engagement.

Critics of the Washington Consensus now rightly call for additional measures such as tax reform, greater spending on health and education, and even a new "open-economy social contract" in Latin America. But solutions must be tailored to specific countries and specific problems; a single, magical, one-size-fits-all model will never work. A simple point, perhaps, but an important one for a region long enamoured of big ideas — from dependency theory to market reforms to dollarization to property rights — that were at various times supposed to solve every economic problem.

"Democracy Has Replaced Authoritarianism"

For now. Barely a grenade toss away from the stately presidential offices in Buenos Aires, just across the busy Paseo Colón thoroughfare, looms a tall, forbidding building: the headquarters of the army. In the small park in front, statues of soldiers marching with bayonets bared — a monument to fallen heroes of the futile 1982 Falklands War — offer an ominous reminder of military adventurism at its worst. Can anyone blame Argentina’s elected presidents for, quite literally, looking over their shoulders at a restless military that might step in at the first sign of turmoil?

Fortunately, the image of a bewildered señor presidente being ousted by some generalísimo in tinted glasses is no longer the archetype of Latin America’s turbulent politics, as it was for much of the 20th century. Scarred by repression and economic mismanagement at the hands of past military regimes, virtually all Latin American countries began joining the ranks of democratic nations in the late 1970s and throughout the following decade.

Still, the allure of a strong leader who can set all things right has endured. In the 1990s, democratically elected presidents such as Peru’s Alberto Fujimori and Argentina’s Carlos Menem assumed semi-authoritarian powers. They pushed economic reforms past weakened legislatures and rewrote their countries’ constitutions, allowing those leaders to run for reelection. As these countries prospered, citizens forgave such excesses. Democratic niceties seemed superfluous in light of so much progress and modernity.

Such regimes eventually proved corrupt and unable to sustain growth, and their appeal ultimately faded. Gazing across Latin America today, one is more likely to see helpless, ineffective heads of state, fettered by newly assertive legislatures and power-hungry local leaders. Presidential approval ratings are abysmal, and some democratic governments seem unable to maintain control or command respect within their borders. Increasingly, many citizens don’t expect presidents to complete their allotted terms.

But don’t anticipate a new wave of military coups in Latin America. Instead, pot-banging civilian protests have become a more popular means for "regime change" in the region — messy, for sure, but still democratic. President Fujimori stepped down in Peru amid heavy protests in 2000, Argentina’s Fernando de la Rúa did the same in 2001, and Venezuela’s Hugo Chávez could be next in line. Despite his overwhelming electoral victory last October, Brazilian President Lula may soon face a similar situation if his nation’s economy deteriorates further. Watch for a short honeymoon in Brasilia.

Yet, when nothing unites an opposition beyond its disdain for the leader in charge, a divided, weak, and unstable regime will likely follow once that leader is removed. This scenario has already played out in Ecuador, Peru, and Argentina; look for the same in Venezuela. Don’t be surprised if Latin American voters soon yearn for the days of strong-armed stability.

"Chile Is the Region’s Fastest Growing Economy"

That’s so mid-1990s. Try instead the Dominican Republic, which in recent years has emerged as a growth leader in the region. Tourism, remittances, the telecommunications and electricity sectors, and export-processing zones helped the Dominican Republic average nearly 7 percent annual economic growth from 1997 to 2001 — the highest pace in the region and among the world’s fastest. Another small economy, Costa Rica, also showed dynamism during the latter half of the 1990s, thanks to the growth of tourism and investments by microchip giant Intel, which has sizable operations in the country. The company’s importance is such that national income accounts in Costa Rica are sometimes calculated with and without Intel.

So, what happened to the Chilean "model," long hailed by reformers as proof that market economics work and can go hand in hand with poverty reduction? During the 1980s and part of the 1990s, Chile set the economic standard in Latin America. Following the market reforms introduced during the dictatorship of Augusto Pinochet, economic growth in Chile averaged more than 7 percent from 1987 to 1995, while inflation remained stable, real wages grew, and the government ran a fiscal surplus. And from 1987 to 2000, the poverty rate dropped by half.

But Chile’s miracle has stumbled a bit in recent years, slowed by a recession in 1999. And while the country’s progress does show that market economics can reduce poverty, other elements of Chile’s much-praised policies are sometimes misinterpreted. Consider the controversial, oft-cited "lesson" that Chile’s small tax on capital inflows during the 1990s proved developing countries can successfully deploy capital controls to fend off the wrath of the "electronic herd." Champions of such controls often forget that Chile actually eliminated that tax in 1998 for fear that investment would dry up due to the Asian financial crisis. Moreover, the creator of the policy, former Chilean central banker Roberto Zahler, has cautioned that only countries with sound fiscal and monetary policies should consider such preventive controls.

Finally, the Chilean growth experience should by no means suggest that only a coercive, authoritarian regime such as Pinochet’s can build a sound economy in Latin America. To the contrary, Chile has enjoyed a long democratic tradition; military rule and the preceding instability under President Salvador Allende were highly anomalous. Chile’s strong growth record in the 1990s owes as much to the country’s post-Pinochet political stability and highly professional public institutions as to the reforms of the military era.

"Corruption Is Worse Than Ever"

Be careful. Ask foreign executives to name the top obstacle to economic growth and business opportunities in the region, and they will answer in unison: corruption. Yet, despite studies showing how corruption curbs economic development in this or that country, other nations (say China or, more recently, the United States) have experienced prolonged periods of growth even under questionable governmental or business practices. Were some Latin governments corrupt during the 1950s and 1960s? Most likely they were — but that didn’t stop the region from growing at a brisk clip during those decades. Indeed, those who blame Latin America’s current economic woes on crooked politicians forget that, regrettably, corruption is not a new challenge for Latin America. "In the past, corruption in politics was expected; you were a [cabinet] minister to become rich," quipped Bolivian President Gonzalo Sánchez de Lozada in a recent speech in Washington, D.C. "A poor ex-minister was really despicable!"

Corruption seems worse now only because the region’s democratic reforms have helped uncover more wrongdoing. Nevertheless, anticorruption measures are multiplying in light of popular discontent. Shortly before Brazil’s 2002 presidential vote, then candidate Lula pledged to create a national anticorruption agency. The Bolivian government has tasked its vice president with developing a comprehensive anticorruption strategy. And in Argentina, where the phrase ¡Que se vayan todos! ("Out with them all!") has become a popular anti-corruption slogan, non-governmental organizations (NGOs) are proposing innovative legal reforms to address public malfeasance. All praiseworthy initiatives, no doubt, but a word of caution is in order: In the battle against corruption, Latin America hardly needs more laws. It might well need less. The region’s history is littered with legal codes and constitutions that are constantly remade to suit short-term political exigencies, thus creating additional opportunities for illicit dealings. In Peru, for example, lawmakers are now debating what would be the 13th new constitution in the nation’s 182-year history — or an average of one new constitution every 14 years. Haiti and Venezuela have gone through more than 20 constitutions each. Perhaps if Latin American nations exported constitutions, they might have a better chance of reaching First World living standards.

Some historians and culture mavens babble on about Latin America’s "Iberian legacy" to argue that corruption is embedded in the Latin DNA. It isn’t. Like most individuals, Latin Americans respond to incentives and information. Of what use are more laws, for example, when judges don’t earn enough to resist bribery? And the more discretion public officials have over government financing decisions, the more corruption will occur — in Latin America or anywhere else. Finally, an intrepid investigative press can accomplish more than an army of crusading attorneys or well-intentioned NGOs. Peruvian anti-corruption laws didn’t bring down Fujimori’s corrupt regime in 2000; but television broadcasts of the infamous vladivideos, which caught high-level bribery and corruption on tape, sufficed to tumble the seemingly unassailable ruler.

"Globalization Has Made Latin America the World’s Most Unequal Region"

No, it already was. And it probably will be for a long time to come. Despite a few relatively more egalitarian countries such as Costa Rica or Uruguay, the top 10 percent of income earners in the region amass some 40 percent of total income, and the bottom 30 percent earn less than 8 percent. Along with entrenched poverty, Brazil has the worst income distribution of all — little surprise that President Lula has made ending hunger his new government’s top priority.

Unfortunately, skewed income distribution in the region is a long-standing problem that has endured through countless booms, busts, and shifts in economic policy. Most recently, economists find that Latin America’s income distribution improved in the 1970s, deteriorated in the 1980s, and remained somewhat stagnant during the 1990s. But even if globalization does not necessarily increase income disparities, it doesn’t exactly solve them, either. As economist Nancy Birdsall has argued, income inequality increased in some parts of Latin America during the investment boom of the mid-1990s, when capital inflows increasingly went into financial assets and thus benefited the already wealthy.

Historically, Latin America’s natural endowments and patterns of land tenure influenced the region’s income inequality. Economists Stanley Engerman and Kenneth Sokoloff maintain that, during Spanish colonial times, the climate conditions in the Americas were well suited to certain crops, such as sugar, that were produced most efficiently on large-scale slave plantations. Moreover, Spanish authorities rewarded their elites with land and control of workers. These conditions led to extreme disparities in power and income.

Today, however, Latin American income inequality does not result from a few rich families controlling land and industries — rather, it is much more a question of education. During the 1990s, Latin Americans with at least a high-school education saw faster wage increases than those with less schooling. In Brazil and Mexico, for example, workers with even just six years of education earn nearly twice as much as those who never attended school. Sadly, education policy in Latin America has often aggravated inequality, since influential elites prefer to devote public funds to higher education rather than primary schooling for the poor.

"Dependence on Natural Resources Hurts Latin America"

It doesn’t have to. Historically, countries in the region have been identified with the products they’ve sold in global markets — Cuban sugar, Chilean copper, or Venezuelan oil. And for decades, dependency theorists in Latin America have argued that developed countries exploit these resources or that the prices of these goods perform poorly compared with the prices for manufactured goods sold by the almighty North.

Although the evidence is mixed on whether global prices have systematically worked against Latin American exports, Latin countries have been vulnerable to shocks and price volatility in world commodity markets. Unfortunately, the protectionist trade policies that this vulnerability inspired in Latin America in the 1960s only rendered the region more susceptible to external shocks, since such policies isolated local manufacturing industries from global competition and left economies even more dependent on natural resources.

Recently, Latin American countries have been relying less on primary commodities. During the 1990s, for instance, Latin exports of manufactured goods grew much faster than the region’s exports of agriculture, minerals, or fuel. Even so, primary goods needn’t be a curse. A 2001 World Bank study titled "From Natural Resources to the Knowledge Economy" persuasively argues that what matters is not what a country produces but how it produces. Examining case studies in Costa Rica, Mexico, and Chile, the authors note that proximity to large markets, technical knowledge, human capital, and cheaper international transportation have altered old notions of natural resources and comparative advantage. "The dichotomy between a natural resource base and the ‘knowledge economy’ is a false one," argues study coauthor David de Ferranti. "Natural resources have as great potential for technological progress and growth as many manufactures."

Dependence on natural resources often becomes problematic for political reasons. Citizens in countries with vast natural riches can develop a sense of entitlement or of perpetual grievance: If we have all these resources, they ask, then why aren’t we all rich? Someone must be stealing from us — with that "someone" ranging from the United States to corrupt national or local governments, multinational corporations, the IMF, global investors, or national oligarchs. In other cases, the development of natural resources becomes politicized in almost unimaginable ways. A highly lucrative natural gas project in Bolivia has been delayed recently due to bitter debate in La Paz over which neighboring country (Peru or Chile) should host the pipeline that will pump the gas to the Pacific Ocean and from there to international markets. Some Bolivian activists and politicians are adamant against selecting Chile, since Chileans wrested away Bolivia’s access to the sea in the War of the Pacific back in the 80s — the 1880s, that is. "That one project will solve our balance of payments and budget deficit," the Bolivian president explained wistfully in a recent speech. "This is life or death; it’ll change Bolivia’s future. But a war of 130 years ago is the main obstacle."

"The United States Should Take Latin America More Seriously"

Except it won’t. Despite the current turmoil in the region, Latin America is not a priority for U.S. foreign policy, nor will it become one anytime soon. Iraq, North Korea, al Qaeda, the Israeli-Palestinian conflict, Russia, China, Japan’s economy… any of these issues trumps Latin America policy on the U.S. government’s to-do list. Just recall how rapidly the Bush administration shelved the "new era" of relations with Mexico following the September 11 attacks. After strutting through Washington in early September 2001, Mexican President Vicente Fox had to return home, cowboy boots and all, and explain why his American friends were ignoring Mexico — again.

A good relationship with Washington is currency in the region, but too much coziness backfires in anti-U.S. domestic public opinion. That explains why Latin politicos crave photo ops with U.S. officials on the one hand but blast gringo-imposed "neoliberal economics" on the other. Similarly, U.S. President George W. Bush has looked to Latin America mainly when absolutely necessary or when politically helpful, such as during his 2000 presidential campaign when, ironically, his relationship with Fox helped establish the Texas governor’s foreign policy credentials.

Since the end of the Cold War, U.S. policy toward the region has emphasized the promotion of free trade, or the hazier "free-market democracy." The North American Free Trade Agreement (NAFTA) of 1994 embodies this approach, as does reluctant U.S. support for IMF bailouts in the region. Nevertheless, the pattern of neglect has persisted. Bill Clinton was the first U.S. president since Herbert Hoover who failed to visit Latin America during his first term in office.

For the moment, "free trade" remains the Bush administration’s knee-jerk response to Latin America, with the creation of a region-wide Free Trade Area of the Americas by 2005 as the stated next goal. But even disregarding the political obstacles to such an agreement, trade with the United States is unlikely to help Brazil or Argentina as much as nafta has helped Mexico, due to the constraints of geography.

Ultimately, the failure to develop an overall policy framework toward the region shouldn’t be surprising. What single strategy can deal with immigration from Mexico, political chaos in Venezuela, economic debacle in Argentina, drugs in Peru and Bolivia, civil war in Colombia, or the uncertainty of an eventual post-Castro Cuba? With other priorities on the U.S. agenda, small symbolic gestures toward the region — such as a recent bilateral trade pact with Chile — will remain the norm, and Latin America will remain the province of marginal, midlevel bureaucrats in the U.S. foreign policy establishment.