WASHINGTON, Feb. 14 (UPI) -- Late in 2001 I wrote a piece on Latin America "The darkening continent" that aroused considerable reader skepticism, since at that time Latin America was still thought to be a bastion of "neo-liberal" success. Several years later the continent has indeed darkened, but is it fated to continue doing so?
Start with the good news. The price of oil and other commodities has shown a substantial upward trend in 2003-04, and as China and India continue to experience rapid growth and more of their 2.4 billion consumers enter the modern economy, can be expected to continue doing so. Latin America includes two major oil exporters, Venezuela and Mexico, a minor exporter, Ecuador, and a number of other countries such as Brazil that are more or less self sufficient. On the minerals side, a number of countries, such as Bolivia, Peru, Chile and Brazil are substantial exporters of minerals and have seen significantly improved foreign exchange earnings as a result. To the extent that the pendulum is swinging back from manufactured goods and services towards producers of primary products, therefore, Latin America should benefit.
A look at Venezuela, however, demonstrates why the continent may derive little economic uplift from this price rise. There, the additional oil revenue has gone into the government's pocket, and has been used for expanded subsidies and social programs, and for the suppression of democracy. Like most oil producing states, Venezuela has always been incapable of developing a stable non-oil economy; the events of the last half decade have made this inability very much worse.
Outside the resources sector, the picture is pretty unattractive. Argentina has enjoyed an artificial boom in the last couple of years, from a very low base, almost entirely at the expense of its unfortunate creditors. Bolivia in 2003 removed the democratically elected and moderate President Gonzalo Sanchez, and gave an effective economic veto power to the leftist union leader Evo Morales. Peru had already removed the democratically elected and economically successful (albeit corrupt) Alberto Fujimori in 2001; his moderate successor Alejandro Toledo is struggling at single digits in the opinion polls and is likely to lose the scheduled 2006 election to ultra-leftist Alan Garcia, whose 1985-90 presidential term was marked by drug-related scandal and economic collapse.
Mexico has benefited from the resilience of the U.S. economy, but has neglected all of the reforms for which hopes were so high when President Vicente Fox was elected in 2000. Pemex is still state controlled, the electricity company CFE is still unable to supply power to the power-short California and the modest budgetary austerity of finance minister Francisco Gil Diaz has been reflected only in increased opinion poll support for the leftist mayor of Mexico City Manuel Lopez, favored to win a Presidential election that is little more than a year away.
In Chile, there has been considerable backsliding on the economic reforms introduced by President Augusto Pinochet in the 1980s and preserved by Presidents Patricio Aylwin and Eduardo Frei in the 1990s. More sinister, the constitutional safeguards imposed at the end of the Pinochet years have been overturned, and Pinochet himself is being prosecuted, in spite of being 89 years old and suffering from Alzheimer's disease. Chile, which for many years had appeared an exception to criticisms of Latin American governance, appears now only too prone to relapse into the economic swamp of the rest of the continent.
To be fair, Brazil's leftist government of Luis Ignacio (Lula) da Silva hasn't caused the economy to collapse or Brazil to default on its international debt -- yet. As a consequence, his opinion poll ratings are suffering badly!
Having listed this catalogue of disaster, the question screams out: why? In the 1990s, many Latin American countries appeared to be embarked on a course of economic reform, carrying out long-needed restructurings of their public sectors and reining in the populism of their irresponsible governments. Yet today, throughout the continent, those policies are derided as "neo-liberalism," even though there are no obvious cases of their failure (such failures as occurred, such as in Argentina, were the result of corruption and inadequate control over the public sector, not the reform process itself.)
In China and India, both far poorer than most Latin American countries, a process of modest reform, unaccompanied by radical political change, has fed upon itself and produced rapid economic growth, which is transforming those societies. Yet China and India are not uncorrupt, and both have public sectors comparable in size to those in Latin America. So why is their economic performance so much better?
One obvious difference is the level of inequality in the respective societies. China and India both have Gini (inequality) coefficients around 40, similar to that in the United States (China a little higher, India a little lower) whereas Latin American countries all have much higher Ginis, generally in the 50-60 range but Brazil, by some measures, even higher than that. It appears that Ginis at the Latin American level are corrosive, when popular opinion is allowed to determine governmental outcomes. The poor see no virtue in protecting the property rights of the rich, since unlike in China, India or the United States they do not believe that either they or their children will ever be rich. The rich live lives harshly separated from the poor, whom they regard primarily as sources of crime, squalor and government attempts to confiscate their wealth. The system is thus self-perpetuating, in both its inequality and its poverty.
Another difference, very likely caused by the first, is the greater respect given to savings in China and India. India has a high savings rate, China an exceptionally high one, and both countries have low inflation and banking systems that, while not perfect, protect the value of their depositors' money and have not suffered a major default for many years. Conversely in Latin America there is a history of very high inflation rates and, even more disastrously, a history of middle class savings being used as a "piggy bank" when the local government runs into financial difficulties. In Argentina in particular, partial expropriation of middle class savings has taken place in every decade since the advent of Juan Peron in 1945. Little wonder therefore that the Latin American middle classes save relatively little, and tend to run offshore bank accounts in Miami or the Caribbean, seeing little point in saving domestically when their savings are likely to be treated with such contempt.
Middle class savings are important because they are by far the most important source of finance for small business, the principal creator of wealth and new jobs. The most effective way for micro-businesses to be financed is from the savings of friends and relatives; only as the businesses grow does funding from banks, venture capital funds and more formal sources become important. In India and China, secure savings and strong family ties provide ready support for entrepreneurship. In Latin America, savings are either kept offshore (hence available only with difficulty, and kept secret since they are technically illegal) or, in the poorer classes, are not available at all because the poorer classes have a separation from the formal economy that is more typical of Bangladesh and Africa than of India or China.
Finally, there is the question of the time horizon of decision makers in business and government. Both in China, where the government has changed only glacially since the death of Mao Zedong in 1976 and in India, where Manmohan Singh's modest economic reforms of 1991 were taken up by both main parties and extended over the years that followed, creating a consensus on the issue, there is an expectation that elections (if they occur at all) will not change much. In both countries, policy will remain generally pro-market, but China is not going to reform its state-owned industries in a hurry, nor is India going to eliminate its subsidies for the rural poor or its price controls. Politics is thus not expected to produce rapid change, either positive or negative.
In Latin America, this is quite different. There is a messianic quality to the local politics that is wholly destructive, and an expectation that if only the right guy wins the next election (or is installed by military coup or populist revolt) everything will change within a few years. On the one hand, free market policies can be tried for a few years and then completely reversed, so that for example assurances on pricing given to foreign investors in the Argentine utility sector by the Carlos Menem government in the 1990s can be ignored by the new governments since 2001. On the other hand, decades of subsidization and state handouts can be ended at a stroke by a new team of Chicago-trained economists, producing real hardship for many people. The result is a short-term business time horizon and an insane fascination with political intrigue that are completely counterproductive to solid economic progress over the long haul.
In order to change expectations of the participants in its economy, any Latin American country will need at least 15 years of stable, reformist government. However, events in Chile in the last few years suggest that even this is not enough, certainly not if it is achieved by abandoning the norms of democracy (though the elections of 1989 and 2000 that restored the left's control were both agonizingly close.)
Maybe Brazil has the best chance of achieving this currently. If Lula can retain the support of much of his leftist coalition, yet carry out policies that secure private property and reduce the power of the state, while doing something to mitigate Brazil's appalling inequality, then if he retains power for a decade, reduces Brazil's international debt, and is succeeded by a center-right government rather than a left wing one, expectations in that country may finally change, and property rights and economic progress be secured.
But I wouldn't put a great deal of money on it. Meanwhile, Latin America is a worsening problem for the world and for the United States in particular, while India and China are not.
(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.)
Martin Hutchinson is the author of "Great Conservatives" (Academica Press, 2005) -- details can be found on the Web site greatconservatives.com.