WASHINGTON, Dec. 10 (UPI) -- As the economic situation in Latin America deteriorates, should a rational bank or portfolio investor "redline" the region as a whole -- refuse to lend or invest there?
In Part 1 of this analysis Monday, I reviewed the Latin American economies, concluding that there is nowhere a rational person would lend or invest. In Part 2 I want to step back and determine to what extent this problem is structural and long-term rather than immediate and short-term.
The key to the problem can be seen by examining the reaction of two key countries, Brazil and China, to the proposal by the Bush administration two weeks ago to work toward universal free trade in manufacturing by 2015.
China, in the form of Trade Minister Long Yong-tu at an Institute for International Economics meeting Friday, welcomed the initiative, and said that only by initiatives of this kind could the Doha round of trade talks move forward. He also stated that universal free trade would be extremely beneficial, because of its potential for increasing globalization, a process which the Chinese people strongly favor. China is negotiating so many free-trade agreements that they could form a stepping stone to a global agreement -- which would simply be an integration of deals already done. Of course the negotiation of a global free-trade agreement would be a very complex matter because of the particular difficulties of many developing countries, so the process should be flexible, allowing particular exemptions in particular areas where real hardship might be caused.
In Brazil, on the other hand, as reported by United Press International's Bradley Brooks on Nov. 29, economists and government officials called the U.S. proposal unrealistic and hypocritical, given the U.S. stance on trade in agriculture, the area where Brazil -- and most of the developing world -- can best compete.
Rubens Barbosa, the Brazilian ambassador to the United States, told the Brazilian press that the U.S. farm proposal before the WTO reveals a hypocritical policy when contrasted with the call for the abolition of tariffs in the manufacturing sector. "In the agricultural proposal, they suggested the end of subsidies, but they foresaw the maintenance of tariffs of up to 25 percent. It so happens that, in the industrial section, there are practically no longer subsidies, nor tariffs as they exist in the agricultural area."
In other words, Barbosa said, in the sectors of trade where the United States has less protection -- manufacturing -- it wants to see steep cuts in tariffs. The United States and the rest of the developed world are confident their industries can withstand competition. Yet in the area where the United States is well-protected -- agriculture -- it envisions tariffs remaining high. It is here that a country like Brazil, with its strong agricultural sector, can make inroads in foreign markets.
The Brazilian business newspaper Valor said in an editorial: "The proposal by the United States ... is clearly unrealistic and it cannot be taken seriously as a suggestion capable of being discussed by the member countries (of the WTO), The proposal doesn't take into consideration the fact that, if accepted, it would make unfeasible the possibility that developing nations could continue to grow in their industrial sectors."
Recognizing that the proposal, and the Bush administration's trade policy as a whole, are areas where one can perceive the glass as being half-full or half-empty, there is nevertheless a big difference in the two countries' approach. China chose to see the glass as half-full, focusing on the new proposal's potential to move discussions ahead, whereas Brazil saw it as half-empty, representing a hypocritical U.S. approach to trade as a whole.
The Brazilian attitude on trade is emblematic of the central Latin American problem, which is the prevalence in the region of panhandler economics.
Under panhandler economics, the world owes the country a living, the country's difficulties are caused by a conspiracy of the rich West, the country's principal aim in international negotiations is to increase the inflow of foreign aid money and cheap debt, and any attempt to open the country's markets is thought to be imminently fatal to its domestic well-being.
Panhandler economics is not confined to Latin America, of course. It was the principal driving force behind the Indian Congress governments from 1947 to about 1990. It is also more or less universal in Africa, in some cases (Zimbabwe) in particularly virulent form -- even South Africa, under President Thabo Mbeki appears infected with the disease.
Of course, in some cases, panhandler economics is appropriate. There are countries so poor and so lacking in natural or human resources, that their only possibility of survival is the handout. Natural disasters, too, play a part -- it is economically silly to expect impoverished Central American countries to bear the entire costs of their earthquake-prone region, or indeed to expect African countries to cope unaided with what appears to be a universal scourge of AIDS.
Nevertheless, panhandler economics, if perpetuated, is nothing more nor less than a poverty trap. It directs resources through the local government, suppresses both international trade and local entrepreneurship, and makes it seem more attractive for both the government and a substantial minority of the people to look for handouts rather than trying to be productive.
In the case of most Latin American countries, it is also completely avoidable. Brazil and Argentina have a wealth of natural resources and are not by world standards poor (for example, Brazil is several times richer than China, and southern Brazil is substantially richer even than Guangdong.) There is thus no reason why in a free trade world Brazilian companies cannot compete, and use their labor cost and natural resources advantage to undercut the rich West, thus producing sustainable growth and eventually prosperity.
The Latin American preference for panhandler economics is of course politically driven. Latin American countries have only enjoyed periods of sustained economic growth when ordinary politics has been suppressed. Porfirio Diaz's Mexico (1876-1910), the oligarchy's Argentina (1880-1929) and Augusto Pinochet's Chile (1973-89) are all excellent examples of non-democratic regimes producing far better economic results than have been available from the region's democracies.
Nevertheless, it is too simple to conclude that what these countries need is a good military junta, with some University of Chicago economists on contract. Apart from the immediate human rights and governance issues, such a structure has what appears to be a fatal problem, that of succession. At some point, constitutional government must be restored. Once it has been restored, as Chile demonstrated in two agonizingly close votes in 1988 and 1999, it is very difficult for the restored democrats to defend the previous government's economic policies, because by doing so they appear to be arguing against democracy itself. Whereas a British conservative can argue for a return to Thatcherism, an American to Reaganism and a German to the policies of Konrad Adenauer (1949-63) and Ludwig Erhard (1963-66), it is not politically credible for a Chilean politician to argue for a return to Pinochet, or for a Mexican to argue for a return to Diaz.
In theory, of course, it would be possible for a group of economic conservatives to win an election in a Latin American country. In practice, it doesn't happen. There may be cultural reasons for this, dating back to the feudal social structure of the Spanish colonialist empire compared with the more egalitarian British colonies. However, a more immediate barrier to such an outcome arises from the heavily skewed income distributions throughout Latin America.
The GINI coefficient is a measure of inequality; it measures the area between the cumulative distribution of income in a country and the straight line that represents perfect equality, on a scale of 0 (complete equality) to 1 (everything owned by one person.) The most equal countries, in Scandinavia, have GINI coefficients in the range of 0.25 to 0.30, Western European countries generally have GINI coefficients between 0.25 and 0.35, and the United States has a GINI coefficient of around 0.4, up from 0.34 at the point of greatest equality, in the 1947-69 period.
Successfully emerging economies tend to have GINI's in the 0.3-0.4 range; Japan's is 0.35, China's 0.38, Estonia's 0.36, India's 0.32, South Korea's 0.34, Singapore's 0.39 and Taiwan's 0.31. Only Malaysia at 0.45 and Thailand at 0.47 of the successful Asian economies are outside this range.
Latin American GINI coefficients are extremely high, exceeded only by some countries in Africa. According to World Bank estimates of various dates, Argentina's GINI coefficient was about 0.48 in the mid-90s, Brazil's 0.60, Chile's 0.56, Colombia's about 0.52, Costa Rica's 0.46, Ecuador's 0.43, Mexico's 0.50, Peru's 0.45, and Venezuela's 0.54. (South Africa's has been estimated at 0.63, an indication of that country's problems.)
The combination of high inequality, corruption and spendthrift government in Latin America prevents economic conservatives from winning democratic elections. The vast majority of the electorate are both poorly educated and economically helpless, believing that they have little chance to get ahead whatever economic regime is in effect, and so must rely on handouts or, better still, steady government jobs and pensions. Paradoxically, it is extreme inequality, generally but wrongly thought to be a result of capitalism, that traps Latin American countries in their ghetto of panhandler economics.
There appears little chance of an easy way out, and hence little incentive in the foreseeable future for a rational, profit-maximizing lender or portfolio investor to devote resources to Latin America. The result will of course be greater impoverishment in the region, as feeble, misguided democratic governments rail against the unfairness of the world economic order. Like Africa, Latin America requires a fundamental reorientation of its political and economic culture before prosperity can come. While a spontaneous such reorientation would be enormously welcome, it is unlikely in the short to medium term.
One cannot be wholly pessimistic. Thirty years ago, both India and China appeared locked in a hell-hole of self-defeating economics and spiraling poverty. Today, both countries, with populations totaling 2.4 billion, appear to be making substantial progress on the road to prosperity. If they can do it, so can Latin America, with a population of only 500 million -- but don't invest or lend any money to Latin America until there are clear signs that the necessary revolution is happening.
(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
