Early one Sunday morning last month, the residents of Jiutepec, Mexico, were rocked from their slumber by the ongoing siege against capitalist democracy in Latin America. Bombs exploded simultaneously at three large, foreign-controlled banks in the small city. A fourth was later discovered in the local offices of HSBC, Europe's largest bank. The next day a left-wing revolutionary group claimed responsibility and issued a warning to President Vicente Fox. "Our commander detonated four explosives in banks with foreign capital," it read. "Fox has tried to turn the nation into a private business."
Mounting anger has so far only foiled Fox's plans for economic reform. But four of the 18 democratically elected governments in Latin America have fallen to protests fueled by economic discontent since 2000, one every year for the last four years. The tumult began with the surprise victory of a self-styled heir to Simon Bolivar, Hugo Chavez, whose reign in Venezuela has turned politics into a running street fight. It brought down four presidents in Argentina alone in two riotous weeks in 2001. The revolt led by Evo Morales in Bolivia toppled one government, and could still bring down its successor. Growing unhappiness with economic stagnation has inspired similar insurrections in Ecuador and Peru. Even Costa Rica, long a political oasis, has been roiled by anti-privatization protests. "I am not surprised that there is this feeling after five years of very bad growth," says Guillermo Perry, the chief Latin American economist for the World Bank. "It's no surprise that social tensions have increased, that the conflict with globalization has increased."
For all the optimistic headlines about recovery this year in Latin America, the truth is that even the most optimistic projections (of up to 4 percent growth) mean the continent is still falling behind. That's not fast enough to produce jobs for a burgeoning population, to catch up with much faster-growing countries in Asia, Eastern Europe and even Africa, or to end a period of stagnation that now dates back to 1980. Since then, annual GDP growth in Latin America has averaged less than 3 percent and, far more ominously, per capita GDP growth has averaged negative every year for the last five. "This is the biggest slowdown in Latin America in the last 100 years," says Mark Weisbrot, codirector of the Center for Economic and Policy Research in Washington, D.C.--one of many analysts who now warn that Latin America is heading for another "lost decade."
This one could be much more harmful than the first one. During the 1980s, shrinking Latin economies fueled rebellions that ultimately brought down dictatorships from Argentina to Nicaragua and set the stage for the democratic era that is the continent's justifiably great pride today. Defenders of Latin America say its new democrats should not be expected to match the economic pace set by the autocrats who rule China. The problem with this argument is that India, too, is a democracy, and it registered 7.4 percent growth in 2003. Chinese accept their communist bosses because they deliver the goods. Latin America is turning on its democratic politicians because they do not.
Increasingly, this is the view of the silent majority, not just the rebels. In an April poll taken by the United Nations, 53 percent of Latin Americans said they would prefer an "autocratic" government if it improved the economy. A recent Mexican poll found that fully 58 percent of Mexicans would prefer a politician who was "a little bit dishonest," if he could get the job done. Even Fox, elected in 2000 at a moment of great hope that Latin America was "coming back," is sounding the alarm. "I would say that we have lost decades," he warned at a recent economic summit in Guadalajara, "Particularly the last 10 years."
This sense of gloom is also new. In the dark days of the early 1980s, Latin America threw itself optimistically into a reform program that came to be known as the Washington consensus. Its principles were clear: bring the continent's raging inflation and crippling debts under control, remove state barriers to private-sector growth and prosperity would follow. Step one proved surprisingly easy. Strong Finance ministers willing to apply the bitter medicine of budget cuts and tight money came to power in Buenos Aires, Mexico City and Brasilia, and suddenly the hyperinflationary spectacle of ordinary people hauling bushels of cash to the grocery store was over. By the late 1990s there was talk of turning the corner, but stability would prove easier to produce than prosperity.
It is now widely agreed that, given a degree of macroeconomic stability, the key to economic growth is the creation of a vibrant private sector, and it's here that Latin America has fallen off the rails. No other developing region moved faster to sell off state companies. By the end of the 1990s, Latin America accounted for fully 55 percent of total privatization revenues across the developing world, dwarfing the numbers from Southeast Asia. Yet it's now clear that the appearance of rapid change was largely an illusion: trade barriers fell and government-run enterprises were sold, but rather than dispersing the power and capital of the state, the bulk of it was simply transferred, en masse, to a dysfunctional private elite still working in cahoots with a meddling state. "Nominally, the process we saw was 10 years of what looked like privatization, but there was no public dispersion of ownership," says Glenn Yago, an economist at the Milken Institute in Santa Monica, Calif. "It was just breathtaking, studying those economies."
Governments in Latin America were generally less willing than those in Asia to allow real competition in privatized industries. State-run industries were sold off but not opened up to greater transparency and accountability. Banking sectors in Ecuador, Venezuela and Mexico underwent crises as a result, and the sector still suffers widely from "related lending"--in which newly privatized banks give preferential rates to friends of the new owners.
Government protections like price controls and trade restrictions continued to shield unreconstructed business practices. Argentina, in particular, saw a dizzying array of badly managed privatizations--the national airline company, for instance, was bankrupted by its sale. "The government effectively took the fleet and sold it and took the money," says the Inter-American Dialogue's Claudio Loser, who was with the International Monetary Fund at the time of the sale.
Most Latin American nations now harbor only a parody of the private sector as a wisely regulated space in which business can flourish and compete. The ratio of the number of initial public offerings to population in Latin America is more than 10 times smaller than the world mean. The ratio of firms to population is about a third lower. Shareholder rights throughout Latin America remain poor. Brazil and Colombia have the world's most highly concentrated ownership of business capital. "This is what happens when you deregulate and privatize, absent the rule of law," says Denise Dresser, a political scientist at Instituto Tecnologico Autonomo de Mexico, a university in Mexico City. "You just transfer the resources to all the players in the old system."
And so the system doesn't really change or innovate. Today Latin America remains an economy built on commodities like oil, raw metals and farm produce. "Latin America gets more than 50 percent of its exports from commodities, and the Andean region is even worse, about 70 percent," says Enrique Garcia, CEO of CAF, a development bank based in Caracas. "That's about the same as 50 years ago." The problems associated with commodity-driven economies are politically explosive: they tend to reproduce plantation societies and mining towns, not create an expanding and increasingly well-educated middle class. And they make Latin America more vulnerable than most to highly cyclical demand in richer nations.
That's precisely what is happening now: Latin America is recovering later and more slowly than other regions from the global downturn in 2001. And even the optimists concede that this recovery is bound to be fleeting. As soon as demand for sugar or corn ebbs, whole parts of Latin America will sputter to a halt.
Most of the political elite knows what needs to be done: a "second wave" of reform to create a working private sector. By all accounts Latin America still has the most burdensome regulations, notably ineffective courts and the weakest investor-protection laws in the developing world outside Africa. It takes two months on average to open a new operation in Mexico; in China, less than a week. Closing a business takes 10 years on average in Brazil, against 18 months in the developing world as a whole, according to a recent World Bank study called Doing Business 2004. Yet, asked to name even one strong "second wave" reformer, even a self-proclaimed optimist like Garcia at CAF cannot.
No wonder direct foreign investment in Latin America dropped by nearly 20 percent in 2003, and domestic investment is flat. Economists estimate that Latin America needs net capital inflows of $40 billion a year to achieve healthy growth, and in recent years the net has been closer to zero. "The rest of the world is just surging ahead," says Florencio Lopez de Silanes, a professor of finance and economics at Yale. "Latin America is barely even walking. If a second wave of reforms don't happen, Latin America is going to stagnate even more."
The steady decline is feeding an increasingly volatile political scene. Over the last 25 years, the share of people living on less than $1 a day has plummeted in Asia from 55 percent to 15 percent, while in Latin America it has remained around 10 percent. Across Latin America some 227 million people are poverty stricken, according to the United Nations, and that's on a continent with the widest income gap in the world: the richest 10th earn 48 percent of total income; the poorest 10th, 1.6 percent. The anger this fuels could come to haunt even Chile, which is the region's top reformer, but sits on its second widest income gap. "Asia and even Africa have done better," says Ricardo Amorim, head of Latin American research with Global Financial Markets WestLB, a German bank.
Where stagnation is most acute, angry mobs have filled the streets. While these protests are often cast as anti-global, and sometimes specifically target the Inter-national Monetary Fund and other powers that pressed the Washington Consensus, what often unites them is popular disgust with failed Latin politicians. Two weeks ago peasant protesters in Ayo Ayo, Bolivia, lynched the allegedly corrupt mayor, Benjamin Altamirano. A similar killing took place in Peru the month before, prompting the Interior minister to deploy troops and consider declaring a state of emergency. Roadways in Bolivia and Peru have been blocked as indigenous peasants mobilize in increasingly large numbers to protest the privatization of Bolivian oil. Ecuador recently considered martial law in response to indigenous protests.
Economic discontent has brought populists to power in two of the largest Latin American countries, but anger now threatens them, too. Argentina is expected to grow 10 percent in 2004, but even that would not make up the ground lost in the crisis of recent years, and President Ernesto Kirchner has begun to speak publicly if vaguely of threats to himself and his government. In Brazil, where the economy shrank in 2003, President Luis Inacio Lula da Silva faces an uprising from the peasants of the Landless Workers Movement, who have seized livestock, larders and in April alone occupied 109 farms in the name of land reform. Moises Naim, the editor of Foreign Policy, has warned that such movements represent something new: "They all feed off the politics of rage, race and revenge that traditional political parties in Latin America have usually avoided."
The poor aren't the only ones who are angry. In Mexico, which has arguably the fastest-growing middle class in the hemisphere, there exists a pervasive sense of bitterness. "You can't sustain democracy if it doesn't provide results. No security, no growth," says Mexican political economist Lorenzo Meyer. "I see it in my own life. I have work but my son doesn't. I'm angry, sad. Democracy hasn't brought anything better. It's just democracy by default. What we're losing is our optimism." Analysts expect more violence, with calls for the return of strongmen who can deliver prosperity--men like Augusto Pinochet of Chile. That would take Latin America back to the 1970s, when it started to lose its way. Is that progress?