Brazil's New Global Fears

Brazil's presidential election represents a final unraveling of the so-called Washington consensus: a broad set of ideas, generally favoring free markets and free trade, that promised faster economic growth for developing countries. Brazil tried many of these ideas without achieving the expected astounding success. The resulting discontent has produced a huge first-round vote--46 percent of the turnout--for Luiz Inacio Lula da Silva of the leftist Workers Party. Known as Lula, he promises a new "economic model."

What that might be is unclear, assuming (as is likely) that he wins the Oct. 27 runoff against Jose Serra, the candidate of the party of the current president. But win or lose, Lula's support symbolizes a shift in public opinion across Latin America. "There is a generalized rejection of the free-market model in its [most extreme] version," says economist Sebastian Edwards of the University of California, Los Angeles.

This does not mean that the ideas were (or are) wrong. A market economy is a motivational device. It entices people to work hard and take risks by allowing them to keep most of their earnings. Trade encourages countries to maximize their wealth by specializing in what they do best. These can be powerful forces for progress, as a study by Indian economist Surjit Bhalla suggests. Among regions, Asia has liberalized most. Its incomes have risen sharply; that's not news. What is news is Bhalla's finding that the declines in extreme poverty far exceed official World Bank estimates.

From 1980 to 2000, the number of extreme poor (those with inflation-adjusted incomes under $1.50 a day) dropped by 727 million in China and 207 million in India, says Bhalla. As a whole, Asia's poverty rate has declined to 7 percent in 2000 from 54 percent in 1980. On a global scale, Bhalla puts the poverty rate at 13 percent, down from 44 percent in 1980. By contrast, the World Bank's poverty estimate is 23 percent. These statistics depict massive inroads against human misery.

Gains are unfortunately missing from two regions: Africa and Latin America. Although pro-market reforms in Africa have been meager, Latin America is another story. For decades, its economies were heavily protected. Government ownership of industry was widespread. Foreign investment was minimal. The theory was that to end dependence on basic commodities (coffee, sugar, copper), industries had to be protected against bigger--usually U.S.--companies. Nationalism and economics made a marriage of convenience.

But beginning in the 1980s, Latin governments changed, because economic performance was dismal and Asia's example was instructive. The phrase "Washington consensus" was soon coined by economist John Williamson of the Institute for International Economics to denote the policies that the U.S. government and Washington-based institutions (the World Bank, the International Monetary Fund) were advocating: lower tariffs, higher foreign investment, tighter budgets, less inflation.

Brazil exemplified the shift. In 1985, tariffs averaged 80 percent; by 2000, they were 15 percent. Privatization of nationalized companies exploded; from 1996 to 2001, Brazil received nearly $150 billion in foreign direct investment. As The Economist notes, the changes have benefited Brazil. Hyper-inflation (exceeding 1,000 percent annually) was conquered. Infant mortality is down. But there was no permanent boom, and since 1999, the economy has slowed. Unemployment is about 8 percent.

Elsewhere in Latin America, the story is often similar. In the 1990s, the region's average per capita incomes rose about 1.5 percent annually. Though better than the 1980s, when gains were nonexistent, this was hardly spectacular. And some gains are being surrendered: in Argentina, where debt default has caused economic turmoil; and in Venezuela, where Hugo Chavez's erratic rule has done the same.

To say that the Washington consensus is unraveling does not mean that the ideas are being eagerly abandoned. Even Lula has softened his leftist rhetoric and pledged not to default on Brazil's debt--a promise that, regardless of who wins, may be hard to keep. But what is gone is the confidence that these ideas, if applied mechanically to societies, can automatically induce economic renewal. There is a new appreciation of the complexities: of the role played by local culture in determining countries' success or failure; of the practical problems of introducing some changes--foreign investment, for example--too quickly, and of the potential instabilities of the larger world economy.

Globalization, like the Internet, was over promoted in the 1990s. It was supposedly an irresistible force that, through trade, technology and foreign capital, would erase borders and pull countries into a higher economic trajectory. Experience has taught that no two countries react identically and that, in any case, success requires patience and persistence. The present backlash partly reflects unrealistic expectations but, perversely, could create self-defeating reactions. Countries that have become dependent on the rest of the world cannot easily withdraw without damaging themselves--and perhaps others, too.