Magazine | August 10, 2009, Issue

Not Your Father’s Latin America

Its troubles continue, but the region has made real progess

Hugo Chávez likes to boast that history is on his side. During a recent broadcast of his talk show, Aló Presidente, the Venezuelan leader informed Barack Obama that “the process of change in Latin America is not going to stop,” even if the U.S. deploys naval fleets and fighter planes. It’s easy to dismiss such rhetoric as typical Chávez bluster. But is there a nugget of truth in it? Is Venezuela’s illiberal “Bolivarian revolution” really sweeping Latin America?

The short answer is no. The longer answer is that, while various small countries have embraced Chávez-style populism, most of the region’s large economic powers have not. In general, Latin American officials have greatly improved their fiscal and monetary policies, making their economies less sensitive to external shocks. Though Latin America has not escaped the global recession and is still plagued by many of its perennial troubles — such as widespread corruption, high levels of violent crime, ethnic fissures, and yawning inequality — its recent progress offers grounds for optimism. 

We must appreciate just how far Latin America has come. From the late 1970s through the early 2000s, the region went through a seemingly endless series of economic and financial implosions. Meanwhile, frequent military coups and prolonged civil wars stifled its movement toward liberal democracy.

Even after free elections and constitutional government became the norm, inflation remained a scourge, and currency meltdowns continued to wreak havoc. The 2001–02 Argentine financial crisis sparked a full-blown economic collapse and a massive debt default, which fueled severe turmoil in neighboring countries. In mid-2002, the Bush administration endorsed a $30 billion International Monetary Fund bailout for Brazil (which was suffering from its own domestic woes) and dispatched a $1.5 billion Treasury loan to Uruguay. The U.S. took a sterner line on Argentina but eventually supported a new IMF loan package after Argentine economy minister Roberto Lavagna implemented some prudent reforms that mitigated the crisis.

As the global economy recovered, so did Latin America’s. Between 2002 and 2008, the region enjoyed its most robust expansion in decades. Unlike the growth spurt during the 1990s, this one led to substantial poverty reduction. According to World Bank estimates, the poverty rate in Latin America and the Caribbean — that is, the share of the population living on less than $4 a day (in purchasing-power-parity terms) — fell from 45.4 percent in 2002 to 32.5 percent in 2008. Over that same period, the rate of extreme poverty (the portion living on less than $2 a day) dropped from 21.5 percent to 13.1 percent.

Had Latin America just gotten lucky? After all, its anti-poverty gains occurred during an era of abundant liquidity, high commodity prices, and booming global trade. But that wasn’t the whole story: Latin America also strengthened its fundamentals, taming inflation and accumulating foreign-exchange reserves while slashing its external debt. An April 2008 Inter-American Development Bank study pointed to lingering vulnerabilities but affirmed that economic management in the region had “noticeably improved.” More recently, a May 2009 IMF survey said that many Latin American countries “have made strides in strengthening fiscal positions and public debt structures, solidifying financial systems and their regulation, anchoring inflation expectations, and building more credible policy frameworks.”

Latin America’s experience during the current global slump has underscored these achievements. The downturn has been painful (in some countries, deeply painful) but not cataclysmic. Previous recessions in Latin America triggered banking and currency disasters. Not this one. The region has demonstrated that it is much more resilient now than it was in the past. Alberto Ramos, senior Latin America economist at Goldman Sachs, says the difference is “night and day.”

Perhaps the most pleasant surprise of recent Latin American history has been the performance of Brazilian president Luiz Inácio Lula da Silva, a former union boss whose 2002 election spooked the investment community. Lula’s predecessor, Fernando Henrique Cardoso, was a more conservative social democrat who had helped devise and manage the anti-inflationary “Plano Real” during his tenures as Brazilian finance minister (1993–94) and president (1995–2003). As former Federal Reserve chairman Alan Greenspan writes in The Age of Turbulence, the Plano Real “successfully brought the nation’s roaring inflation to a halt after it had surged more than 5,000 percent during the twelve months between mid-1993 and mid-1994.”

Lula, a member of the left-wing Workers’ Party and a longtime friend of Cuban dictator Fidel Castro, had fiercely opposed the Plano Real. He had also spent years attacking free-market economics and calling for major social changes. How would he govern as president? “To the surprise of most, myself included,” writes Greenspan, “he has largely followed the sensible policies embodied in the Plano Real.” Indeed, there has been a great deal of continuity between the Cardoso and Lula administrations. Despite being dogged by assorted scandals, Lula has acquired enormous popularity and international stature.

He is part of a bigger trend: Throughout Latin America, there is a growing center-left political class that broadly agrees with conservatives about the basic tenets of good economic stewardship. “This is a very positive development for the region,” says economist Luis Oganes, head of Latin America research at J. P. Morgan. In a 2007 New Republic article, foreign-affairs scholar Walter Russell Mead wrote that “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 can be seen in countries such as Chile, Uruguay, and Peru. The Chilean economy remains the most dynamic in Latin America. Since 1990, it has been piloted by the center-left Concertación coalition, which inherited a slew of free-market reforms from the Pinochet dictatorship. Successive Concertación governments “kept the broad thrust of the dictatorship’s economic policies, deepened some of them and reformed others,” writes journalist Michael Reid in Forgotten Continent. “That bestowed democratic legitimacy on the ‘Chilean model.’” During the recent commodity boom, Chile saved a hefty chunk of its copper windfall. As the Wall Street Journal reports, this enabled it to craft “one of the largest stimulus packages in the world relative to the size of its economy.”

In Uruguay, the center-left administration of Pres. Tabaré Vázquez has promoted a solid economic agenda and completed a “trade and investment framework agreement” with the United States. In Peru, Pres. Alan García has effectively repudiated his earlier stint as chief executive in the late 1980s, when he espoused economic populism and unleashed hyperinflation. Since returning to the presidency in 2006, García has governed as a born-again neoliberal.

His 2006 election campaign reflected a larger ideological struggle. García defeated Ollanta Humala, a radical populist favored by Chávez, after telling voters to choose “between Hugo Chávez and Peru.” That same year, conservative Felipe Calderón won a razor-thin victory over leftist Andrés Manuel López Obrador to capture the Mexican presidency. Just as García did in Peru, Calderón linked his opponent to Chávez. It proved a smart strategy, as Calderón came from behind to triumph.

All of these countries — Brazil, Chile, Uruguay, Peru, and Mexico — have rejected Chavismo. All five have inflation-targeting central banks. So does Colombia, which has made greater progress over the past half-decade than any other country in the hemisphere. Pres. Álvaro Uribe took office in 2002 amid a horrendous guerrilla war that threatened to turn Colombia into a failed state. Since then, the government has reclaimed Bogotá, Medellín, and other cities from left-wing rebels; demobilized thousands of right-wing paramilitaries; dramatically reduced violence; and fostered a more attractive business environment. Prior to the recession, Colombia’s GDP was growing at its fastest rate since the 1970s. National police data show that in 2008, the country had 44 percent fewer homicides and 75 percent fewer massacres than it did in 2002.

Yet the number of massacres increased slightly from 2007 to 2008, and new scandals have emerged concerning extrajudicial killings by the army. Uribe helped expose paramilitary infiltration of the political system, but the subsequent discoveries have implicated many of his supporters. As for the drug war, an October 2008 Government Accountability Office report said that Plan Colombia, the vast U.S. aid package begun under President Clinton, had “not fully achieved” its drug-reduction goals but had nonetheless contributed to “major security advances.” Uribe is still immensely popular, though he has raised eyebrows by musing about a third term in office. (His current term expires in 2010.) Colombian lawmakers already amended their constitution to let him run for a second term in 2006.

It would be the height of moral confusion to associate Uribe, a staunch democrat, with Latin America’s populist rabble. But revising constitutions to extend or abolish term limits is the preferred strategy of Chávez and his ilk. That’s what ousted Honduran president Manuel Zelaya was trying to do, via an illegal “referendum,” before the supreme court and the military intervened.

His removal trimmed the ranks of Chávez allies. In 2008, Honduras had joined the “Bolivarian Alternative for the Americas,” a Chávez-led trade group whose members now include Venezuela, Cuba, Bolivia, Nicaragua, Ecuador, and a few tiny Caribbean nations. Heavily dependent on tourism, the impoverished Caribbean islands are especially susceptible to Chávez’s petro-diplomacy. The governments of Bolivia, Nicaragua, and Ecuador feel an ideological attachment to Venezuela. All of them have, to varying degrees, embraced illiberal populism. So has Argentina, where Pres. Cristina Kirchner nationalized the private-pension system late last year.

Though Venezuela, Argentina, and Ecuador posted impressive growth rates when commodity prices were booming, they are now dealing with the consequences of reckless policy decisions. The Kirchner government suffered a crushing setback in Argentina’s June 28 congressional elections. “There was definitely a shift to the right in Argentina,” says Oganes. In Venezuela, unfortunately, Chávez won a referendum on scrapping term limits this past February, and he has intensified his attacks on independent media outlets and opposition politicians. Chávez is also lending full-throated support to Zelaya as the deposed Honduran leader seeks to reclaim his former office.

Beyond the unrest in Honduras, Central America faces a raft of economic and security challenges. Costa Rica and Panama remain its most stable and prosperous countries. The latter is now led by a conservative supermarket baron named Ricardo Martinelli. El Salvador also has a new president, Mauricio Funes, who represents the FMLN, a former leftist guerrilla outfit turned political party. Funes cites Lula as his model and “has filled the cabinet mostly with moderates,” says Michael Shifter, a vice president at the Inter-American Dialogue. But it is unclear whether Funes can genuinely transform the FMLN and curb soaring crime. In neighboring Guatemala, Pres. Álvaro Colom has been hobbled by a sensational murder scandal at a time when his country is being overwhelmed by drug violence.

Meanwhile, such violence continues to generate grisly headlines in Mexico. It has exacerbated a nasty recession (the worst in Latin America), as has the swine-flu panic. President Calderón deserves credit for tackling the narco-gangs with military force. Though his anti-crime campaign is still widely popular, his party got thrashed in Mexico’s July 5 congressional elections. That makes it even less likely that Calderón will be able to undertake the tax, energy, and labor-market reforms necessary to boost his country’s long-term economic performance.

“To change Mexico, you really need an extraordinary leader,” says economist Rafael Amiel, regional managing director for Latin America at IHS Global Insight. “I’m more hopeful about Brazil than Mexico.” Like other Latin American countries, both Brazil and Mexico require deep structural changes in order to realize their full growth potential. “The Latin American experience has laid bare the fact that private ownership and fiscal prudence yield only limited benefits in a regime of overbearing taxation and regulation,” writes Harvard economist Andrei Shleifer.

While the ongoing recession has aggravated social tensions and reversed some of the region’s anti-poverty gains, Latin America’s recent record is one of significant progress. “Many countries are on the right track,” says Amiel. But a smaller cluster — the Chávez bloc — is clearly on the wrong track. As Shifter puts it, “We have different Latin Americas, and they’re moving in very different directions.”

 

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