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Looking Up Down South
There is plenty of good news, and some bad, in Latin America -- is anybody paying attention?


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In his recent book, Forgotten Continent, Michael Reid of The Economist tries to explain the relative lack of U.S. and global attention to Latin America. “It is neither poor enough to attract pity and aid,” he writes, “nor dangerous enough to excite strategic calculation, nor until recently has it grown fast enough economically to quicken boardroom pulses.” Over the past few years, Americans have taken notice of Hugo Chávez, Venezuela’s radical leftist president, and they are now taking notice of escalating drug violence in Mexico, which has trickled over the U.S. border. But press coverage of Latin America often fails to provide a larger regional context. This makes it hard to keep the good news and the bad news in perspective.

There is plenty of each. “Economic growth has been positive and robust across the region in recent years, hyper-inflation is a fading memory, and sound fiscal management has never been so widespread,” Brookings Institution scholar Leonardo Martinez-Diaz wrote in the Fall 2008 issue of World Policy Journal. Indeed, most of Latin America has been maturing, both economically and politically, which has translated into vastly improved monetary and fiscal policies and sturdier democratic institutions. “On the macroeconomic front, there has been significant progress,” says Humberto Lopez, the World Bank’s lead economist for Central America. Lopez thinks that the period from 2002 to 2007 was an “excellent” time for Latin America: “Growth was at a three-decade high.”

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In many countries, that growth was partly driven by high commodity prices and surging Chinese demand for raw materials. But it also reflected a better, more sophisticated set of economic policies. “Overall, the quality of the policies is much, much stronger” than it was in the 1990s, says Alberto Ramos, senior Latin America economist at Goldman Sachs. Latin governments have reduced their public-debt burdens, expanded their stocks of international reserves, and boosted their credit ratings. An April 2008 Inter-American Development Bank (IDB) report highlighted the region’s persistent vulnerabilities and argued that its recent economic performance had been less robust than commonly believed. Nevertheless, the IDB study acknowledged the “substantial achievements” of the past several years, affirming that macroeconomic management in Latin America had “noticeably improved.”

Ramos says that Latin American economies are, on balance, more resilient than ever and thus better equipped to handle an external shock such as the ongoing financial crisis. The region as a whole is much stronger today than it was during past crises, says Guillermo Mondino, head of Latin America research at Barclays Capital. “It is a remarkable change. It is a clear sign of maturity in the region.”

Throughout Latin America, there is an emerging consensus on the fundamentals of economic management, with center-left and center-right politicians agreeing on broad principles of monetary prudence and fiscal responsibility. “That’s a major development,” says Ramos. As foreign-policy scholar Walter Russell Mead noted in a 2007 New Republic article, “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.”

Since taking office as Brazilian president in 2003, Luiz Inácio Lula da Silva, a former left-wing union leader, has proved to be a responsible steward of what is now Latin America’s biggest economy. In Chile, the center-left Concertación coalition has held the presidency since the restoration of democracy in 1990, and it has built upon the free-market initiatives of the Pinochet dictatorship. As Michael Reid writes, successive Concertación governments “kept the broad thrust of the dictatorship’s economic policies, deepened some of them and reformed others. That bestowed democratic legitimacy on the ‘Chilean model.’”

There is a huge difference between the radical politics of Hugo Chávez and the moderate politics of market-friendly social democrats such as Lula, Chile’s Michelle Bachelet, and Uruguay’s Tabaré Vázquez. The governments of some small Latin countries long bedeviled by extreme poverty and corruption have succumbed to the populist temptation and adopted the Chávez model. But most of the large economic powers in the region — namely Brazil, Chile, Colombia, Mexico, and Peru — have not.

Colombia, in fact, represents one of the most encouraging stories in all of Latin America. Under Pres. Álvaro Uribe, who took office in 2002, the country has reclaimed its cities from leftist guerrillas, dramatically weakened the rebels, and demobilized thousands of right-wing paramilitary fighters — all with important assistance from a U.S. aid package known as Plan Colombia. There has been a massive drop in violence and kidnappings; indeed, it is difficult to overstate how much the security situation in Colombia has improved. Meanwhile, the Uribe administration has pursued sensible economic reforms. Colombia’s annual GDP growth rate reached 7.5 percent in 2007 before slowing in 2008.

So the good news from Latin America is bountiful. But so, alas, is the bad news. The region has been walloped by the financial crisis and global recession. Argentina is flirting with another economic implosion. Mexico is being terrorized by vicious drug gangs. Violent crime is rising in Central America. A former Marxist-Leninist guerrilla outfit may be on the verge of winning a presidential election in El Salvador. Democracy has suffered major setbacks in Venezuela and has also been curtailed in Nicaragua. In Bolivia, opposition to Pres. Evo Morales, a Chávez-style leftist, has spurred bloody unrest. Testifying before a Senate committee in late January, Defense Secretary Robert Gates warned that Iran is conducting “subversive activity” in Latin America.

On the economic side, Latin America still needs deep structural reforms. For example, Mexico needs to revamp its state oil monopoly, and Brazil needs to reduce its high tax burden and loosen its onerous labor regulations. (In the World Bank’s latest report on “the ease of doing business” across the globe, Brazil ranks 125th out of 181 economies, behind even Nigeria and Russia.) “
Many of these economies are still quite closed to trade,” says Ramos. In October 2007, toward the end of the recent global economic boom, the International Monetary Fund observed that Latin America “continues to be at the bottom of the world growth league.”

In terms of weathering the global economic meltdown, Mondino reckons that Chile, which saved a big chunk of its copper windfall during the commodity boom, is in the best position of any Latin country to conduct countercyclical policies, followed by Peru and Brazil. (The mineral-rich Peruvian economy expanded by 9.8 percent in 2008.) Ramos says that Chile and Peru have “very well-managed” economies, while Brazil and Colombia are “relatively strong.”

At the other end of the spectrum are countries such as Venezuela and Argentina, which wasted their commodity windfalls and are now being bludgeoned by the global crisis. The Venezuelan government must contend with galloping inflation, and Argentina has been hurt by Pres. Cristina Kirchner’s decision to nationalize the private pension system. “Chávez has got enormous vulnerabilities,” says Michael Shifter, vice president for policy at the Inter-American Dialogue. “He can be beaten in 2012.” (Venezuelans recently voted to eliminate political term limits, allowing Chávez to run for a third term in 2012.)

Because Mexico is deeply enmeshed with the U.S. economy, it faces steep challenges, despite the fairly solid macroeconomic policies implemented by Pres. Felipe Calderón. Its troubles have been exacerbated by a harrowing war against vicious drug gangs. Calderón deployed the army against these gangs in 2007, which is one reason the bloodshed has increased.

Violent crime also poses a serious threat to political stability in Central America. “Democratic institutions are at risk,” says Shifter. A sharp decline in remittances from the United States has heightened economic strains in countries such as El Salvador, Guatemala, and Honduras.

On March 15, amid economic and social turmoil, Salvadorans will vote in a presidential election. Farabundo Martí National Liberation Front (FMLN) candidate Mauricio Funes is leading in the polls over Rodrigo Ávila, a member of the incumbent Nationalist Republican Alliance party (ARENA). Though Funes, a former television journalist, appears to be a moderate, the FMLN is an ex-guerrilla group that was created by revolutionary leftists. Top FMLN officials still have a “Stalinist mentality,” says a former Latin American diplomat. “These people are going to be calling the shots if Funes wins.” Regardless of who wins, says Shifter, the victor will be presiding over a tremendously polarized country wracked by socioeconomic strife and endemic crime. While “nobody should have any illusions” about the FMLN, Shifter reckons that practical constraints will most likely prevent the next Salvadoran government from veering off in a radical direction.

On Saturday, March 14, the day before Salvadorans head to the polls, President Obama will host Brazil’s Lula at the White House. Lula has urged Obama to scrap the U.S. embargo against Cuba. But according to the Wall Street Journal, the Brazilian leader has also “vowed to lobby the U.S. to adopt a free-trade deal with Colombia.” As Shifter puts it, the failure by Congress to approve the U.S.-Colombia trade pact “sends a signal that the U.S. is not a reliable partner.” He says Colombia will be a key test for the Obama administration.

Like all regions, Latin America is now coping with severe economic and financial challenges. Yet overall, its recent record has been very encouraging. “Most countries have shown a commitment to stable and fairly independent macroeconomic management,” says Carol Graham, a senior fellow at the Brookings Institution. This represents “a departure from the region’s past.” As Graham indicates, there is ample reason to be optimistic about Latin America, despite its current problems. But those problems are considerable, and the months ahead will be rough ones indeed.

-- Duncan Currie is deputy managing editor of National Review Online.



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