Quo Vadis Latin America? A Study of Political-Economic Trends

Alejandro A. Chafuen, Hispanic American Center for Economic Research

Lumped together, the Latin American economies produce roughly the double than the Chinese economy, and with half of its population. Yet while the economic trends during the last fifteen years in China show it moving in one direction, Latin American countries have been moving in several and contradictory paths. This paper presents a survey and an analysis of several trends prepared from data from the growing number of indices that are being produced today.

Last year apart from a few exceptions, growth rates were very high by historical standards yet the political situation, when judged by the expansion of freedom or stability of institutions, continued to deteriorate. Latin America is developing at the same rate as the rest of the world, and at a faster rate than the United States or Europe. On the political front, for a while it seemed that Latin America was going to fall into an abyss. Yet the political economic trend, so far this year, gave those who seek a free and prosperous American continent some reasons for hope. Since late 2005, the political forces supported by the Venezuelan-Cuban axis were only victorious in producing one major change: Bolivia. In Peru and México, the most radical candidates lost support when it was seen that they were too close to the interests of the current president of Venezuela. In Colombia, President Alvaro Uribe, a strong ally of the United States won a resounding re-election victory. Statistically, however, the slowdown in the growth of populism, largely hinged on the close victory of president Felipe Calderón in México.

On the economic front, the best news comes from the countries which have signed free-trade agreements with the United States of America. A hopeful sign is the strong possibility that Uruguay, in the heart of Mercosur, will be signing a free trade agreement with the United States of America. It is hard to overstate how important this would be for the continent. Some of the most extreme anti-free-market forces were trying to build a Mercosur block in confrontation, rather than collaboration with the United States. The recent incorporation of Chavez’s Venezuela as a Mercosur partner highlights this danger.

During the beginning of the twentieth century few economists, if any, studied Latin American economies with the preconceived notion that the economies of that region had, or would have, any handicap when compared to the rest of the world. During the nineteenth century several countries developed at a fast pace, especially when compared to Europe. That explains why many Europeans migrated to Latin America.

At the beginning of the twenty first century, however, those of us who follow Latin America have very few things to cheer about. It is true that some trends, such as those reflected in the Human Development Indices, show improvement in most countries. Yet this improvement has been at a lower pace than most less developed regions. There has been a trend towards better fiscal management, more open trade, and lower inflation rates. On the other hand, there is a trend towards populism in several countries which is being accompanied by growing economic interventionism. These latter negative trends are being accompanied by a positive trend in the prices of Latin American exports. Fueled by these high prices some of the countries which are suffering the worse kind of populism, such as Argentina and Venezuela, are experiencing rapid economic growth.

The period which followed World War II was characterized by a shift to closed economies and import substitution policies. This model began to collapse during the seventies, and was replaced at first by piecemeal reforms allowing different degrees of free market activities, which also proved insufficient to provide stable growth. During the 1980’s and until the 1997 Russian crisis, several countries implemented free-market reforms, but after 1997, when faced with major economic challenges, most countries began to revert their course and slowly return to economic interventionism. But reaction was not in unison. Even neighboring countries, like Argentina and Uruguay, or Colombia and Venezuela, reacted in very diverse manner. I will focus more on the recent economic trends of Latin America after 1997, but to understand the reason for the direction of these trends, I will briefly describe how Latin American countries reached this stage.

Negative Trends from the Past

Today’s trends are the result of past actions. Are the roots of Latin America so rotten or weak that they condemn Latin America to stagnation? A recent best-seller finds very few positive things to say about the region. Liberty for Latin America, by Alvaro Vargas Llosa, is one of the best books ever written about Latin American political and economic plight. The subtitle of the book, “how to undo five hundred years of state oppression,” however, gives the impression of a continent that never saw any civilized light since Europeans set foot. If that would be the case there would only be one trend, and it would be in the direction of increased totalitarianism. After the landing of Columbus, several countries saw periods of sustained growth, and institutional reform, which were the envy of the world. My native Argentina, from 1853 until the advent of Peronism in the mid 1940’s, had a political economic environment which allowed the poorest of the poor to improve their lot more than in any other country but the United States. Why else would Europeans flock to its lands by the millions?

Vargas Llosa devoted a couple of pages to this period of Argentine history, and concludes that despite its prowess the project was easily reversed because the “gap between the “European” Buenos Aires and the criollo interior never really closed.” Although I would have not used those stereotypes, Vargas Llosa rightly hits on the challenge faced by countries where the population has hugely diverse expectations and attitudes. There was a trend in Latin America to negate that diversity, and during periods of elitist democracy, these disparities did not play a major role in the political destiny of the country.

Chile, during a long period in the nineteenth century, and again in the late twentieth century, has proven that it is possible to buck the trend. Latin Americans can overcome state oppression. Other Latin American countries have also prospered for long periods, especially during the nineteenth century which explains why few authors were writing books with a pessimistic view on Latin American trends at the early stages of the twentieth century.

Vargas Llosa finds some of the problems of Latin American political thought and practice on the contributions of Aquinas and part of the Roman Catholic legacy. He states, for example that “The theological foundation of absolutism was derived from Thomistic thought” and that kings were given a divine stature. This is almost the exact opposite of the truth. It was actually Thomistic authors who opposed absolutism and the divine political stature of kings. (Stoetzer, 1979) To his credit, Vargas Llosa then provides us with a long list of late-Scholastic authors, followers of St. Thomas Aquinas (1226-1274), who in many cases can be seen as the founders of the free society. He mentions the Jesuit Juan de Mariana (1535-1624), whose works were studied by Thomas Jefferson, and Francisco Suárez (1548-1617). Mariana and Suárez, together with St. Robert Bellarmine (1542-1621) taught at the College of Rome in the late sixteenth century, and the teachings of Aquinas arrived to Latin America tempered by the commentaries of the authors of the School of Salamanca, such as Suárez, and Francisco de Vitoria (c. 1480-1546), or those influenced by them, as Bellarmine. It is for that reason that even someone like Lord Acton could argue that “The greater part of the political ideas of Milton, Locke and Rousseau, may be found in the ponderous Latin of Jesuits who were subjects of the Spanish Crown, of Lessius, Molina, Mariana, and Suárez.” (Acton [1907] 1993, p. 82).

During the 1930’s and 40’s, the Latin American elite who went abroad for education began to see in academic circles the popularity of the New Deal policies of Franklin Delano Roosevelt, the National-Socialist policies of Germany and the Fascist experiment in Italy. Those who attended the London School of Economics also got their dose of socialism and welfare state champions. Response to apparent market failure was always the same: more government intervention. In many cases, conservative politicians created the regulatory bodies, central banks, and state-owned companies that were later seized by populists to amass and control power. Populist leaders emerged in many countries and Latin America’s trends began to deteriorate during the 50’s and 60’s.

The influence from the United States was not much better. The interventionist trend in Latin America was reinforced by the “Alliance for Progress” launched in August 1961 by President John F. Kennedy. The recommendations of the State Department, which played a key role in the preparation of the document, were almost exactly the opposite of what has led countries to prosperity. Among other interventionist measures, the Alliance called for land redistribution and agrarian reform, central planning, and progressive taxation. As usual, these programs drawn and launched from the desks of social engineers based in Foggy Bottom, include a large portion of funds destined for “capacity building.” These funds, used to bring, train and pamper foreign bureaucrats in Washington or fancy conference resorts, lure bureaucrats and the elite of Latin America into becoming players with vested interests on the reforms.

As it often happens, US foreign policy is heavily influenced by reactions to sudden shocks. One of them was the takeover of Cuba by the communists. Recently elected President Kennedy reacted fast calling for the meeting in Punta del Este, a fancy beach resort town in Uruguay, under the “Alliance for Progress” banner. Twenty two countries attended. The two major points of the Alliance for Progress were that a) cheap credit was essential for development and b) to have access to the 20 billion dollar line of cheap credit countries would need to develop a comprehensive national development plan. (Díaz, 2003, p. 350) Ernesto “Che” Guevara, who from being a frustrated elite Argentinean went to become a communist guerrilla, prison torturer, and then Minister of Commerce and Industry of Cuba, attended the meetings in Punta del Este, Uruguay, where the Alliance was launched. A careful reading of his speeches and intervention show that he never criticized the specific economic policies of the Alliance. He only criticized the endeavor because he saw them as a US plan to move Latin America away from Cuba.

This thinking, that moderate socialism is better for Latin America, prevailed during most of the 60’s and 70’s, and for a handful of exceptions, it is still the position of many senior career officials at the State Department and in U.S. embassies around the globe.

In the following years, the Economic Commission for Latin America at the United Nations, under another Argentinean, Dr. Raúl Prebisch, played a key role in increasing state intervention in Latin America. The model encouraged closed economies, loose monetary policy, and constant state intrusions on private property. It also offered almost the exact opposite recipe than the one that has helped lift the extreme poor in most regions of the world. It collapsed in the mid 70’s, but those who have profited from it continue to occupy leading roles in Latin American and international organizations elite circles. This mercantilist force adds an element of instability to most countries in the region.

International organizations dominated by the US helped fuel this trend towards statism. A widely used text-book, stated that “The World Bank, particularly since 1967, and the Asian, African, and Latin American development banks have preferred to channel large portions of their resources through SOEs [State Owned Enterprises]” (Gillis et al, 1983, p. 571). They concluded “Regardless of their performance . . . the role of state-owned firms in development is not likely to diminish in the foreseeable future.” (Gillis et al, p. 583) Almost immediately after they wrote this, considerable portions of the world embarked on privatizations of SOEs which for a while reversed the statist trend.

The negative role played on long term development by the US led Alliance for Progress and the UN led ECLAC, or the World Bank and the IMF, does not negate that responsibility for the failed policies lies also on local elites. Yet the impact on the poor of the costs involved in transforming from closed to open economies should also be considered. Some countries, such as El Salvador, are only now reaching the income per capita levels of 1978–this after seventeen years of continuous growth. Before the Salvadorans began the process of market reforms, US officials pushed the country to adopt radical socialist measures. In a providential manner, the US gave support to a new think tank FUSADES, founded in 1983, which then hired outstanding Chilean economists that helped put the country on a right track. The local business community, however, deserves most of the credit. After Chile, El Salvador has been one of the best reformers.

When populist policies finally collapsed, Latin American governments experimented with market reforms. The best book that describes the period of economic reforms during the period of the collapse of interventionism and the new market oriented reforms is Carlos Sabino’s El Fracaso del Intervencionismo (Sabino, 1999). Unfortunately, the book has only appeared in Spanish. The author not only appropriately describes the improvement in trends that resulted from market reforms, but also correctly anticipated that due to the lack of progress in rule of law and institutional foundations, the reforms were going to be short-lived. Many countries embarked on privatizations. In a decade, from 1983 to 1993, Mexico privatized almost 1000 small and medium size state enterprises. Argentina, also privatized several hundred companies, and in its case, it went further than Mexico, privatizing the oil company, the water treatment plants, and even the post office. There was a trend to lower import duties and reduce monetary expansion which in turn, in several countries, brought down inflation from triple to single digits.

The country which stuck to these reforms, Chile, is the star performer of the region. But in most other countries, the population is falling into a new populist trend. This neo-populism presents different challenges than the old one of Juan Domingo Perón (1895-1974) and Evita Perón (1919-1952). It is coming dressed up by mass media communication strategies; well paid Washington lobbyists and lawyers, and less than scrupulous New York investment managers. It is making less explosive mistakes, such as uncontrolled government spending, monetary inflation, or widespread price controls and nationalizations. Even in Venezuela, the country with the worst political economic situation, the leader of the government has welcomed foreign company takeovers of local businesses. Foreign multinationals are less inclined to meddle in local politics and put stumbling blocks in the road of leaders trying to amass total power.  One of the most important debates taking place among friends of the free society in Latin America is that of the left-wing trend affecting most of the region. While one side argues that we have to distinguish between a democratic left and a totalitarian left, the other side, usually those living in each country, argue that all these leftist governments are part of the same “conspiracy.” The latter point at the Foro de São Paulo as the political movement which prompted the change in the trend. The Foro, founded by Luiz Inácio Lula da Silva, (1945-; 2002-) “Lula”, the current president of Brazil, has as one of its stated objectives, moving the region towards socialist policies. But with electoral victories and the responsibilities of governing, some of the leaders of the movement, beginning with its founder Lula, the current president of Brazil, have moderated their stance. During the 80’s and 90’s we saw other Latin American presidents selecting policy tracks which seem to defy past records. The first such change in the recent decades was that implemented by Victor Paz Estenssoro (1907–2001; during his 1985-89 term) in Bolivia, then followed by Carlos Saul Menem (1930- ; pres. 1989-99), in Argentina, Fernando Henrique Cardoso (1931-; pres. 1995-2003), in Brazil, and then Ernesto Zedillo (1951-; pres. 1994-2000), in México. Each went against the grain of their past statements or party positions. Lula has chosen a centrist economic policy, the president of Uruguay, Tabaré Vazquez (1940-; pres. 2004-), has been moving ahead to sign a free trade agreement with the United States. Several “left-wing” governments in Chile have also maintained market oriented economic policies. So although there is a trend in Latin America toward more interventionist and statist governments, I do not see a region wide move toward left-wing totalitarianism.

Ernesto Talvi, one the most talented Latin American economists of today argues that when one looks at investment flows and other economic variables, the change towards left of center populist governments can be traced to the 1997 economic crisis. He has a point. Before 1997, Latin America had mostly center right or centrist governments. A few had moderate social democrats, like Chile, Costa Rica, Ecuador, and the Dominican Republic, but overall, almost ninety percent of the population of countries representing almost 90% of Latin American GNP, had center right government. Less than ten years after the Russian crisis, center left and populist left wing government represent more than 60% of the Latin American population and GNP. If the Mexican election would have gone the other way, the tables would have turned almost exactly.

Recent Economic Trends

If I would have to make a one sentence summary of my paper I would say that Latin America is in a trend towards mediocrity. Except for one country, Chile, and leaving out Hugo Chávez (1954-) and Fidel Castro (1926-), the elite and leaders of the rest of the nations seem to be convinced that their country can’t become “great” and therefore are satisfied with pursuing economic policies destined to create mediocre economic performances. Even in Chile we are seeing a deterioration of trends.