Darkest Before The Dawn

The news couldn't be worse. Three years of recession or anemic economic growth, a megalomaniac attempting to build socialism in Venezuela, Argentina's debt default and collapse and--more recently--Bolivia's president run out of office by indigenous people fed up with his pro-business, pro-Washington agenda. More generally, Latin America's political mood has swung sharply leftward after citizens in several countries revolted against market-reform initiatives. Taken together, these trials have seemingly erased the promise of prosperity that wafted across the region a decade ago. Now there's the specter of a return to the dark days of the 1970s and '80s when economic and political chaos were the norm. No wonder Joao Pedro Stedile, the leader of Brazil's Landless People's Movement, recently described Latin America as a "volcano."

That doesn't seem like an exaggeration. Social eruptions have prompted a wide-ranging and contentious reappraisal of the economic orthodoxy--the neoliberal model--that has shaped policy in Latin America for the past 15 years. Market-oriented structural reforms have succeeded in a few crucial ways: they ended the ruinous era of hyperinflation, and inculcated a sense of fiscal responsibility among profligate governments. As Richard Feinberg, a professor at the University of California, San Diego, puts it: "Latin America now knows that you can't just print a lot of money; you have to balance your books... From the 1950s to the 1970s, there were people in Latin America who didn't believe that."

But belt-tightening has not led to the robust economic performance promised when reforms began. After enjoying encouraging GDP expansion in the early and mid-1990s, Latin America has stumbled through about five years of economic stagnation that have left the region's have-nots in a surly mood. Poverty rates remain high (about 185 million Latin Americans live in poverty), and structural reforms have done little or nothing to reduce the income inequality that remains the region's biggest challenge. Moreover, Latin America remains vulnerable to "hot money"--the investment-portfolio funds that quickly rush into and out of developing countries.

Nancy Birdsall, codirector of the Center for Global Development in Washington, says the recent events in Bolivia, which was among the first Latin American countries to embrace market reforms nearly 20 years ago, "capture the region's frustration with the lack of economic progress." As a result, she suggests, Latin America may be "teetering on the brink of another lost decade." Even John Williamson, the architect of the policy recommendations that came to be known as the Washington Consensus, has acknowledged "disappointment in the [economic] outcomes in many countries."

So, does the skein of bad news mean that the Washington Consensus has failed? The answer, as Williamson himself wrote recently, is no. None of the region's problems justify "a return to the high inflation of yesteryear, nor giving socialism another chance; nor reviving industrial policy, or closing economies again." Most experts agree on those points, but there is much disagreement about what the region needs to move ahead. Joseph Stiglitz, a Nobel Prize-winning economist, argues that developing countries should have looked to protectionist Asia countries, such as Japan and Korea, as their models for development and not thrown open their economies prematurely to ravages of multinationals. While conservatives contend that Latin America's reforms haven't gone far or deep enough to unlock real growth.

Everybody acknowledges that mistakes have been made--by institutions like the International Monetary Fund and the World Bank and by governments themselves. The IMF and World Bank urged nations to liberalize their capital accounts, Williamson told NEWSWEEK, which ushered in a flood of outside money that raised exchange rates to uncompetitive levels, stifling exports. And many countries perceived the Washington policy recommendations--among them, fiscal discipline, tax reform, trade liberalization, privatization and deregulation--as a panacea for their problems, an ideology rather than a strategy. Williamson blames Argentina's problems mostly on Argentina. Birdsall and Jan Kreger, author of the United Nation's 2003 trade-and-development report on Latin America, say many policy decisions--among them cutting controls on capital, encouraging fixed exchange rates and prematurely endorsing privatization--kept low-income people from getting their share of the pie.

Sweeping generalization is dangerous, of course, especially in Latin America, home to 34 nations--each with its own political and economic dynamics. As Luiz Fernando Furlan, Brazil's minister for Foreign Trade and Development, pointed out last week in New York, 23 of those countries account for only 1 percent of the region's GDP. The woes of Bolivia, South America's poorest country, are not the same as the pressing issues in Brazil, the continent's largest economy.

Some experts look at the political unrest and hint at darker things to come--perhaps even a rollback of democracy. "Things are definitely not OK," said Carol Wise, an expert on Latin America at the University of Southern California. "We're now in the third decade of market reforms, and it's fair to say that this decade is very troubling." Those with a more optimistic bent point out that economic slowdowns are cyclical and, in the case of Latin America, were exacerbated by a three-year recession that affected the entire planet. And, they add, two of the most important countries in the region, Mexico and Brazil, are on good long-term tracks. Mexico's sovereign debt is now "investment grade," and both it and Brazil have dramatically boosted their exports. Brazil's foreign sales are expected to rise from $60 billion to $70 billion this year.

In fact, with the global economy now gathering steam, some analysts are going even further. They suggest that Latin America may have bottomed out and stands poised for a rebound. Argentina's GDP is expected to rise by about 7 percent this year. Mexico--its economy highly integrated with its northern neighbor--was no doubt heartened by last week's news that the U.S. economy roared back in the third quarter, growing at an annualized rate of 7.2 percent. "I think what we're now seeing is a recovery in many Latin America economies, in terms of growth," asserts Tulio Vera, managing director of emerging-markets research at Merrill Lynch in New York. The recovery is "somewhat tentative," he admits, and dependent on external factors--meaning a sustained global recovery, an increased appetite for risk by investors and low interest rates.

Vera, who calls himself cautiously optimistic about Latin America's future, said that there are now two schools of thought about the reform process in the region. One argues that it is simply "exhausted," and not likely to go much further in the near term. The other school, to which the Merrill Lynch analyst belongs, contends that structural and institutional changes have not been completed. And that the most violent spasms of an old order come with its dying breaths. Said Vera: "Clearly, there has been this volatility the last few years that has led many people to question the neoliberal model. But I don't think you can say that the electorates have rejected reform policies across the board. What seems to be happening is that, in some countries, the political frameworks are now less market friendly." But while Bolivia, Ecuador and Venezuela have turned hostile to market demands, the significant regional players have elected governments that remain dedicated to liberal reform, even as they talk the talk of populism. Nowhere is that more apparent than Brazil. There, former labor leader Luis Inacio Lula da Silva was elected president largely because he vowed to tackle social problems like hunger and poverty. But he's not strayed from the fiscally conservative course set by his predecessors.

Global financial shocks have contributed to the crisis in Latin America. The Mexican peso crisis of 1994 was self-made, but it was followed by the Asian and Russian crises, then the U.S. and global recession. Little or no growth in a poor region with a history of leftist politics was a recipe for trouble. Foreign companies made good scapegoats, especially when they were buying, say, electric utilities in Argentina and trying to raise rates. Adds Vera: "That's when the reform process came into question. You [got] social backlash."

But the turmoil in some countries obscures the real progress made in others, especially Mexico and Brazil, the regional heavyweights. And as goes Mexico City and Brasilia, so goes Latin America. "They are not on the verge of economic collapse or of jettisoning reforms," said Feinberg. "They continue to adhere to orthodox economic policies, and their systems have become more open, more democratic, more accessible than they were 10 years ago." Most experts are impressed by Brazil's string of fiscal surpluses, and by its transition from a right-of-center president to a left-of-center president without any loss of policy continuity. And the country is pushing ahead with important changes: social-security and tax-reform bills are now weaving their way through the Congress.

Latin America desperately wants increased access to markets in the United States and Europe, but the region doesn't want to pursue trade deals on what it perceives to be unfair terms. South American leaders simmer at demands that they cut tariffs and liberalize their markets for services and government procurement while the United States and Europe continue to prop up their farmers and their less competitive industries with protectionist policies. Washington would like to cement a far-reaching Free Trade of the Americas (FTAA) pact. But Fernando Furlan, the Brazilian Trade minister, said last week that the first offer from the United States was "not pleasant"; Washington wants to keep agriculture out of FTAA talks. But for Latin American countries, cracking open the U.S. and European food markets is priority No. 1. "The only way to [economically] balance the world is to give opportunities to developing countries," Furlan said, "and agriculture is the biggest opportunity. Let's let everything be negotiable. There must be fairness."

That leaves the region with two ironies: given the defiant mood of Latin Americans these days, the best agents for further reform are the leftist political leaders who've helped spark the free-market revolt; and the only way to bolster the reform-minded governments of the region, which have weathered so much and still remained committed to the fundamentals of the Washington Consensus, is for Washington and Brussels to get more realistic about fair trade.

Only the leftists have the popular credibility to placate the disenchanted masses. Brazil's Lula, with his promises for more social investment, is the most popular leader in Latin America, polls show. Nestor Kirchner, Argentina's new president, is echoing Lula's munificent themes--even as he stiffs investors (both international and in his own country) who are owed about $100 billion by the government. Observers point out that the region's political left is far more mainstream nowadays than it was 20 years ago. Market incentives, institutional constraints and a need for investment now limit how rash any leader can be. That's a good thing. The challenge will be to push ahead with reforms that boost government transparency, reduce corruption and create jobs. But Latin America will also need more support and less hypocrisy from the rich North. If that happens, the people of Latin America might start to recognize the benefits of globalization--and renew their commitment to reform.