The recent news from much of Latin America has been gloomy at best. In Argentina, a government and an entire financial system are on the verge of collapse. In Peru, a president recently elected by a firm majority is facing opposition from every direction.
Colombia continues to be mired in a drug-cum-civil war, with no end in sight. In Venezuela, a deeply divided society seems to be squaring off over whether President Hugo Chavez should be allowed to finish his term. And in Brazil, leftist Luiz Inacio Lula de Silva, poised to run for the presidency for the fourth time, is once again leading in the polls.
Will the first decade of the new century resemble the 1980s, years of political and economic stagnation? Some indicators do seem to point in that direction. The apparent disenchantment of many Latin Americans with their own governments has led to an avalanche of misinformed commentary in the international press. Much of the blame, we are told, can be placed at the door of an excessive adherence to “the Washington consensus,” a shorthand term for the economic reforms advocated by the United States and the International Monetary Fund during the 1990s--balanced budgets, stable currencies, lower tariffs, and, above all, the privatization of large public companies.
In some ways, this commentary is not all that new; for at least the past five years the same sources have been reminding us that, in spite of these changes, most Latin Americans remain poor, and some indeed are even poorer (relatively if not absolutely) than they were before 1989. And, we are darkly informed, social and economic deterioration is leading many Latins to question the value of their democracies. The underlying message cannot easily be missed--free market reforms do not lead to economic development over the long run, and they imperil the survival of fragile Latin American democracies as well.
Evaluating the Reform Record
These are serious charges, and they merit serious discussion. The economic reforms of the 1990s were driven by two overarching facts: first, the end of the Cold War and the disappearance of the Soviet Union; second, the inability of Latin American states to continue to borrow money whenever they wished, and in whatever quantities they wished, for whatever purposes they wished (the so-called debt crisis).
The first of these developments deprived the Latin political class of valuable leverage vis-a-vis the United States; the second forced it to face up to the fact that their societies were largely organized to consume rather than produce. Most state-run enterprises--airlines, telephone companies, mining and petrochemical concerns, and even major agribusiness enterprises--either made no money or operated at a loss. Local manufacturing industries that were sheltered behind artificial tariff walls produced shoddy, overpriced merchandise.
Although formal tax rates remained high, actual collections were so pitiful that most governments depended on hugely regressive value-added taxes to supplement their diet of foreign loans. Credit was unobtainable to all but the very rich; in many countries houses and apartments were sold for cash (in U.S. dollars), tying up huge amounts of liquidity that should have been recycled more productively through the financial system.
When caught on the horns of a dilemma--an end to foreign borrowing, and a lack of local revenue--some governments recurred to the printing press, thus producing hyperinflation. This is the system--or rather, the “model”--for which Argentina’s new president Eduardo Duhalde apparently pines and the one promised to Brazilians by Lula de Silva or to Venezuelans by President Chavez.
Since the bloom is evidently off the rose of reform these days, it may be useful to recall many of the good things that happened in Latin America’s economic life this past decade. Currencies were strengthened and saving was encouraged; inflation--a particular scourge of the poor--came to an end; long-term home mortgages became available in some countries for the first time; telephone systems leapfrogged several generations of technology; the region became a net importer of investment capital; billions of dollars were repatriated from foreign banks.
What did not happen was a drastic change in the way that many Latin American governments do business. Primary and secondary education was starved for funds so that universities, which cater to the middle class, could continue to crank out lawyers-without-clients; state enterprises were often sold to foreign companies in less than transparent transactions; the judicial system often lacked genuine independence; essential ministries--public works, education, health, and police agencies--were top-heavy with bureaucrats, which drastically shortchanged services at the end of the line. This last was particularly significant in reducing the quality of life in many Latin American cities, which became--in some cases, for the first time--genuinely unsafe, even in the daytime. To borrow a term from Soviet usage, the reforms of the 1990s only touched the “commanding heights” of the economy--and not always them.
What makes all of this particularly poignant is the fact that these deficiencies persisted or even grew under civilian governments. The point is worth stressing, since during the 1970s and 1980s the Latin American political and intellectual class habitually attributed the near-totality of its problems to the mere fact of military rule (and not infrequently, to U.S. “support” of de facto regimes). In this they were not wholly off base, since the leaders of most Latin juntas (apart from committing massive violations of human rights) were notoriously bad economic managers; with the exception of Chile, all left their countries in a state of near-total economic ruin.
By way of contrast, all of the governments that came to power in the 1990s were freely elected, often by large popular majorities. Now, poor performance in office has led to a repudiation in many countries of the political class in its totality--as if its members were Martians rather than products of their own culture and environment.
Even so, merely deposing elected officials--as in the case of presidents Jamil Mahuad in Ecuador or Fernando de la Rua in Argentina, or earlier, Carlos Andres Perez in Venezuela--offers no evident solution. Nor does electing “anti-politicians” such as Chavez, who to date have displayed all of the vices of the old political class but few of its virtues.
If the Washington consensus can be blamed for anything, it is for having left the impression that the problem of governance in Latin America was strictly a matter of fiscal discipline. To be sure, without realistic budgets and a reasonably sound currency, no country can progress, but these are merely necessary--not sufficient--conditions for qualitative and quantitative growth. Nor can foreign investment alone substitute in its totality for domestic saving and for investment in social infrastructure.
Unfortunately for Latin America, good governance and its fruits cannot be exported from the G7 countries; if locals do not demand it of their politicians, they are not likely to get it.
It may be, of course, that in spite of these cautions some countries will once again revert (at least for a time) to boom-and-spend populism or some form of exaggerated economic nationalism. But they will do so under very different circumstances than in the past.
There will be no lending agencies, public or private, anxious to close the gap between income and expenditure, as there were during the 1970s, when Western banks were furiously recycling petrodollars through Latin America and other parts of the Third World. Nor is it likely that, after a decade in which ordinary people have suddenly been faced with a bonanza of high-quality consumer goods, most of them imported, they will accept a return to high tariffs and subsidized local industries that produce shoddy and relatively expensive substitutes.
The recent experience of Venezuela is extremely telling in this regard. President Chavez has lately revealed to his countrymen that even massive income from oil exports cannot override the costs of incompetence, inefficiency, irrationality, and wholesale corruption. If this is true for a country swimming in dollars, how much more so it must be for less favored republics near and far.
The Importance of Free Trade
There is another way in which the new decade is unlikely to resemble the 1970s or 1980s. The United States has committed itself with the other American nations to open borders to trade within the hemisphere by 2005, a project known as the Free Trade Area of the Americas (FTAA, or ALCA in Spanish and Portuguese). That should be--as in many ways it was intended to be--a massive incentive to get Latin Americans to put their economic houses in order. Admittedly, few observers believe the target date will be met, for there are many obstacles in the way, among them the unconfessed opposition of the Democratic Party (reflecting the importance of organized labor, one of its firmest constituencies) but also a growing resistance to expanding the boundaries of the North American Free Trade Agreement (NAFTA) even among some congressional Republicans, particularly those who come from parts of the south that are historically protectionist.
Even assuming, however, that the configuration of influences in Congress ends up favoring a widened version of NAFTA, no one will want to enter into an arrangement with governments that cannot make up their mind about taxes, tariffs and patents, or that resist globalization in one fashion or another.
This last point is particularly important because a very large number of influential Latin Americans--people in government, politics, the media, and intellectual life--labor under the misapprehension that the proposed FTAA is some sort of favor to the United States, a kind of economic version of the Rio security treaty.
One would have thought that the experience of Mexico would by now have made the benefits of free trade obvious to all and sundry. And that the example of those benefits should be Mexico! After all, no Latin nation--except for Panama--has suffered the same traumas of territorial dismemberment, invasion, and intervention, both covert and overt. None has maintained a more sturdy resistance to U.S. hemispheric initiatives generally, or defined its very identity in terms if independence from the United States.
Yet today, in spite of persistent controversies on specific matters, the overall benefits of free trade are virtually beyond discussion in Mexico. To be sure, to get to this point, Mexico had to make some drastic changes in its laws and practices, including a wide range of restrictions on foreign ownership of property. It is now, also, the only Latin American country with a world-class regime with respect to foreign patents.
While the hemispheric free-trade project is likely to miss its target date for completion, the United States will probably go ahead with individual countries or regions. Chile is a case in point. It cannot be a coincidence that the next candidate selected for inclusion is the one with greatest transparency, the lowest rate of corruption, the firmest judicial institutions, the most responsible political class and most disciplined fiscal management.
To the extent that the linkages between market access and quality of governance are established in the minds of the Latin American political public--linkages that depend, to be sure, on the readiness of the United States as well to respond effectively to good performance--the dynamic of the region will remain positive, in spite of momentary bumps in the road, or periodic temptations to repeat the mistakes of the past.
Mark Falcoff is a resident scholar at AEI.