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The Good News From Latin America

Thursday, November 15, 2007

Despite the rise of Hugo Chávez and the spread of populism, the past half-decade has been a remarkably encouraging period, writes DUNCAN CURRIE.

Bachelet and LuluThere is no shortage of bad news from Latin America. Drug violence is escalating in Mexico. The recent Guatemalan presidential campaign was marred by bloodshed. The new leader of Panama’s national assembly is a pro-Noriega radical who has been indicted in U.S. court for the 1992 murder of an American soldier. Buoyed by high oil prices, anti-American populist Hugo Chávez continues to pursue a failed economic model and unravel Venezuelan democracy. He now has acolytes in Bolivia and Ecuador, plus a budding alliance with Nicaraguan President Daniel Ortega and chummy relations with Argentina. Newspapers describe a “leftist” surge that is supposedly sweeping the region—a region wracked by corruption, poverty, inequality, an education gap, and rampant crime. According to the World Bank, Latin America remains one of the most difficult places on Earth to do business; it ranks “at the bottom of the list of reformers” worldwide. For that matter, as the International Monetary Fund notes in its latest World Economic Outlook, “the region continues to be at the bottom of the world growth league.”

Yet amid all the doom and gloom, some perspective is needed. In many ways, the past half-decade has been a remarkably encouraging period for Latin America, both politically and economically. Most governments have upheld the institutions of democracy and embraced responsible fiscal policies. “Economic management has really never been better,” says Peter Hakim, president of the Inter-American Dialogue. “Democratic politics is really very healthy in Latin America. This is a good period for the region.”

Indeed, there is “definitely a lot of reason to be optimistic,” says Alberto Ramos, senior Latin America economist at Goldman Sachs. In 2002, the region was just beginning to recover from a series of economic crises. Today, “It’s a completely different reality,” says Ramos. “The overall policy mix is definitely much stronger.”

As Diana Farrell and Susan Lund of the McKinsey Global Institute observe in the latest Milken Institute Review, “Real GDP growth has averaged 5.5 percent over the last three years, compared with just 2.1 percent in 1995 to 2002. Gross domestic savings are up as well, to 21.7 percent in 2002 to 2005 from 19.8 percent in 1995 to 2002.”

True, Latin America still suffers from a dearth of financial assets. But even here, the situation has improved. “Since 2002,” write Farrell and Lund, “the region’s stock of financial assets has grown at 18 percent annually (adjusted for exchange rate changes), up from just 5 percent in 1995 to 2002.” Between 2002 and 2006, it jumped from $1.7 trillion to over $4 trillion. “Equity market capitalization has increased even more,” note Farrell and Lund, “and the region’s markets have outperformed emerging markets as a whole by 40 percent.”

Ramos believes some of the most important policy reforms included anti-inflationary measures, steps to promote central bank independence, and deficit and debt reduction. He lauds Chile’s “impeccable” fiscal policies, and lists Colombia, Brazil, Peru, and Mexico among the region’s other top economic reformers.

In Colombia, the center-right government of Álvaro Uribe has achieved historic security gains since 2002 and created the conditions for rapid economic growth. Murders, kidnappings, and terrorist attacks are all way down. The left-wing guerrillas have been driven into the jungles and thousands of the right-wing paramilitaries have been demobilized. Last year, Colombia’s GDP grew at its fastest pace (6.8 percent) since the late 1970s. Business Week now touts Colombia as an “investment hot spot."

Contrary to popular perception, the past half-decade has been a remarkably encouraging period for Latin America, both politically and economically. Most governments have upheld the institutions of democracy and embraced responsible fiscal policies.

In Brazil, President Luiz Inácio Lula da Silva has curbed inflation and slashed poverty through pragmatic, market-oriented policies. Despite his past history as a left-wing union leader, he has governed from the moderate center-left, in stark contrast to Chávez. Brazil is now experiencing low-inflation growth, which is slowly chipping away at inequality. “Recent data from the Brazilian National Statistics Institute (IBGE) brings encouraging news,” the BBC reported in September, “with average incomes rising by 7.2 percent in 2006. The increase was biggest among the less well off, and in the northeast.” In recent years, millions of Brazilians have entered the middle class, a trend that has also been visible in Mexico.

“Latin America’s present expansion is its longest since the 1960s, and sustained growth has helped reduce external vulnerabilities,” says the IMF’s World Economic Outlook. “Latin American economies have allowed exchange rates to move more flexibly than in the past,” and have also “liberalized restrictions on capital outflows.” Meanwhile, the spike in global commodity prices has provided a boon to those countries rich in minerals.

“In some ways, Latin America has never had it better,” former Clinton administration official Eric Farnsworth said in a speech last month.Economic growth across the region is at historic highs, particularly in nations that export natural resources and primary products in agriculture, energy, and mining. Even the so-called populists speak in the language of fiscal restraint, low inflation, and attracting foreign investment,” said Farnsworth, who now serves as vice president of the Council of the Americas. “Democracy across the region requires nurturing but it is largely secure, and human rights have never been more respected.”

What about the blustery Chávez? Isn’t he attracting broad Latin American support? In fact, the Venezuelan gadfly has high negatives throughout the region. Of the seven Latin American nations polled in the 2007 Pew Global Attitudes Survey, majorities in Chile (75 percent), Brazil (74 percent), Peru (70 percent), Mexico (66 percent), and Bolivia (59 percent) expressed little or no confidence in Chávez “to do the right thing regarding world affairs.” Even in Argentina, perhaps the most anti-American country in the region, 43 percent of respondents had little or no confidence in Chávez.

In the same poll, majorities in Venezuela (72 percent), Brazil (65 percent), Chile (60 percent), Mexico (55 percent), and Bolivia (53 percent), along with a plurality in Peru (47 percent), agreed that “most people are better off in a free-market economy, even though some people are rich and some are poor.” As Pew reported, “There is broad support for free-market economic policies across Latin America, despite the election in the past decade of leftist leaders.” Indeed, majorities in Venezuela (74 percent), Brazil (70 percent), Mexico (65 percent), Chile (63 percent), and Peru (61 percent), along with a plurality in Bolivia (49 percent), said that foreign companies were having a “good” impact on their countries.

In terms of the “leftist” electoral wave, it is crucially important to distinguish the market-friendly democratic left from the anti-market radical left. As foreign policy scholar Walter Russell Mead has written in The New Republic, “Latin America is now beginning to acquire something it has sorely lacked: a left-of-center political leadership able to combine its mission of serving the poor with a firm commitment to currency stability, the rule of law, and the development of a favorable business climate.”

This has been amply demonstrated by the current center-left governments of Chile, Brazil, Peru, and Uruguay, which rank among the most pro-market regimes in the region. The leaders of these countries have become models for other left-wing politicians. After Álvaro Colom won this month’s Guatemalan presidential election, Reuters reported that “Colom defines himself as a moderate social democrat and says he is inspired by leftist presidents Luiz Inácio Lula da Silva in Brazil and Michelle Bachelet in Chile. He says his government would not clash with the landowning and business elites of Guatemala, a major coffee producer.”

There is no question that Latin populism has reemerged, with the aid of Venezuelan petrodollars. And if Ecuador, Bolivia, and Nicaragua follow the Chávez route, that will be bad news for their citizens. But these are three of the weakest, poorest countries in the region, without much influence or strategic value. For that matter, it’s not as if free markets have failed in Venezuela, Ecuador, Bolivia, and Nicaragua. The much-maligned “Washington consensus” (or “neoliberal”) reforms were never really applied there, due to massive corruption.

Latin America remains beset by staggering socioeconomic difficulties, which is why the siren song of populism can be so alluring. “It’s still the slowest growing region in the world, and that is a concern,” says Ramos. Moving forward, Farrell and Lund argue for reinforcing central bank independence (following the lead of Chile and Mexico), trimming inflation, and eliminating budget deficits. In the legal realm, they note that Latin America needs much better contract enforcement and investor protection, not to mention sweeping bankruptcy and judicial reforms.

U.S. policy is at a crossroads. Democrats routinely criticize George Bush for “alienating” allies around the world. But if the Democratic Congress kills a bilateral free trade pact with Colombia it will severely damage America’s image in Latin America and deal a blow to regional cooperation. If such cooperation unravels, Chávez is ready to fill the vacuum. So are the resource-hungry Chinese.

As Farnsworth has put it, “The United States must choose, whether or not to prioritize the Americas, helping the people of the region attain their highest aspirations, supporting reformers who are politically exposed and taking a chance by working closely with the United States, while pursuing shared values and common interests with regional allies and friends. Otherwise, if we delay or choose not to decide, the choice will be made for us.”

Duncan Currie is managing editor of THE AMERICAN.

Image by Getty Images

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