Cry for Latin AMerica

36 THE INTERNATIONAL ECONOMY WINTER 2007
Cry for
Latin America
Those narrow sovereign debt
spreads and booming stock
markets have been a mirage.
It has often been quipped that Brazil is a country of the future and
will always remain so. Looking at recent Latin American economic
and political developments, one has to wonder whether the same
might not be said of the entire region. While one Asian country
after another has set itself firmly on the path of convergence with
the world’s most developed economies, the countries of Latin
America, with the possible exception of Chile, turn in economic
performances that are mediocre at best, widening the gap with the
developed world. And the strong ill political winds that are now blowing
through the region would seem to place even that already mediocre economic
performance at serious risk.
Latin America’s clouded long-run economic outlook is perhaps best
underlined by its recent sub-par economic performance at a time of unusual
global prosperity. If ever Latin America faced an external environment conducive
to rapid economic growth, it has to have been that of the past four
years. World economic growth has been at its strongest level in over twenty
years, while prices of international commodities—their primary exports—
have gone through the historical roof. Indeed, the International Monetary
Fund estimates that over the past four years record international commodity
prices have boosted export earnings of many Latin American countries by
Desmond Lachman is a Resident Fellow at the American Enterprise
Institute.
BY DESMOND LACHMAN
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INTERNATIONAL ECONOMIC POLICY
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WINTER 2007 THE INTERNATIONAL ECONOMY 37
LACHMAN
anywhere between 5 and 10 percentage points of GDP (see
Figure 1).
As if that were not favorable enough, ample global
liquidity conditions continue to blind international investors
to the possible risks of investing in many countries in that
region. This seemingly misplaced investor optimism is still
reflected today in booming equity markets in Brazil and
Mexico, as well as in record low sovereign debt spreads
across the region and in record inflows of local currency
investment.
Yet, despite such a favorable external environment,
and the direct boost from healthy commodity sales, Latin
American economic growth averaged only 4 percent
between 2002 and 2006. At the same time, the region’s
population continued to grow at 1.6 percent per year. To
be sure, this was Latin America’s best economic performance
since the 1970s and it was a far cry from that of the
1980s “lost decade.” However, it still left Latin America
as the slowest growing of any of the world’s developing
regions. And it was not simply a question of China and
India growing at over twice the Latin American pace, but
rather it was the fact that Latin America’s growth rate even
lagged behind that of war and famine-ravaged sub-Saharan
Africa (see Figure 2).
Latin America’s lackluster economic growth performance
over the past decade is to be explained at least in
part by its general lack of consistency and depth in implementing
economic reform. To be sure, over the past decade
Latin American countries generally tamed inflation and
reined in excessive budget deficits. However, with the
notable exception of Chile, Latin American countries failed
to make the deep labor market, budget expenditure, and
Latin America still has
the most inequitable income
distribution in the world.
Hugo Chávez,
President of Venezuela
Rafael Correa,
President of Ecuador
Unreconstructed Populists:
The New Doctors of Demogoguery
It should also have come as no surprise that post-election pronouncements by the
presidents of these countries give every indication that they will again be going down
the previous generation’s well-trodden path of populist and anti-market policies.
—D. Lachman
VALTER CAMPANATO/AGÊNCIA BRASIL
Evo Morales,
President of Bolivia
Daniel Ortega,
President of
Nicaragua
38 THE INTERNATIONAL ECONOMY WINTER 2007
LACHMAN
social security reforms that might have
materially improved their international
competitiveness and that might have
raised Latin America’s appallingly low
saving and investment ratios. Worse still,
as political conditions changed beginning
in the mid-1990s, the reform effort all but
stalled in Menem’s Argentina, Lula’s
Brazil, Fox’s Mexico and Chávez’
Venezuela.
Even more disturbing than Latin
America’s tepid economic growth is the
fact that its stuttering and half-hearted
attempt at economic market reform over
the past two decades has barely made a
dent at reducing the region’s mass poverty
and chronic income inequality. In fact,
various academic and multilateral bank
studies suggest that Latin America still
has the most inequitable income distribution
in the world. They also suggest that
there is more poverty and inequality in
Latin America today than there was in the
early 1980s when economic reform programs
were being initiated.
The dimensions of the region’s
socio-economic problems are perhaps
best illustrated by a recent Inter-
American Development Bank study
which estimates that the lowest fifth of
the region’s population received only 4.5
percent of its national income while the
highest fifth accounted for 55 percent.
Further compounding the inequality
problem is the fact that poverty today is
Figure 1 Impact of Commodity Price Movements
Since 2002 on Trade Balances
Percent of 2006 GDP
-5
0
5
10
15
20
25
Net Impact
Fuel
Non-fuel
Venezuela
Chile
Ecuador
Colombia
Bolivia
Peru
Argentina
Mexico
Brazil
Uruguay
Source: IMF
Political Pimp Job?
Rather than drawing any lessons from the many mistakes of his country’s
tragic economic past, Néstor Kirchner is again obliviously resorting to
pervasive price controls and anti-market regulations that are anathema to
both domestic and foreign investors. He is doing so to suppress inflation and to
artificially boost growth ahead of next year’s presidential election without paying
any regard to those policies’ time tested long-run costs.
—D. Lachman
Argentina’s
Néstor Kirchner
WINTER 2007 THE INTERNATIONAL ECONOMY 39
LACHMAN
concentrated especially among those living in the rural
sector, among women, and among the region’s indigenous
population.
Against this dismal economic backdrop, it should
have come as no surprise that unreconstructed populists
would win presidential elections this year in
Bolivia, Ecuador, Nicaragua, and Venezuela. It should
also have come as no surprise that post-election pronouncements
by the presidents of these countries give
every indication that they will again be going down
the previous generation’s well-trodden path of populist
and anti-market policies.
Keeping those countries company in their backwards
application of economic policy will be
Argentina under President Néstor Kirchner. For rather
than drawing any lessons from the many mistakes of
his country’s tragic economic past, Kirchner is again
obliviously resorting to pervasive price controls and
anti-market regulations that are anathema to both
domestic and foreign investors. He is doing so to suppress
inflation and to artificially boost growth ahead of
next year’s presidential election without paying any
regard to those policies’ time tested long-run costs.
It is fashionable in some Washington circles to
dismiss the rise of Hugo Chávez, Evo Morales, Néstor
Kirchner, and Rafael Correa as somewhat of a
sideshow for the region as a whole given that these
countries are economically relatively insignificant.
After all, it is argued, did not a reformed Lula just win
a second term of office in Brazil, the region’s most
populous country? And did not a conservative Felipe
Calderón manage to stave off the populist López
Obrador in Mexico’s recent six-yearly presidential
election?
Taking comfort in Lula and Calderón’s electoral
victories glosses over the fact that neither of those two
Small Comfort
Taking comfort in Lula and Calderón’s
electoral victories glosses over the fact
that neither of those two leaders won a
mandate for deepening their countries’ halting
economic reform programs. It also overlooks
the fact that both Lula and Calderón will be
confronted with divided and fractious
Congresses that likely will result in a prolonged
period of policy paralysis. Far from
being receptive to reform, both the Brazilian
and Mexican Congresses show little appetite
for more of the same Washington-consensus
style policies that in their view have delivered
so little to the average Brazilian or Mexican
worker.
—D. Lachman
Mexico’s President Felipe Calderón (left) and Brazil’s
President Luiz Inácio Lula da Silva.
It would seem all too probable that
Latin America’s unprecedented
commodity boom will soon fade as
global growth moderates, while its
international borrowing costs will
rise as global liquidity dries up.
Continued on page 61
WINTER 2007 THE INTERNATIONAL ECONOMY 61
LACHMAN
leaders won a mandate for deepening their countries’
halting economic reform programs. It also overlooks
the fact that both Lula and Calderón will be confronted
with divided and fractious Congresses that likely will
result in a prolonged period of policy paralysis. Far
from being receptive to reform, both the Brazilian and
Mexican Congresses show little appetite for more of
the same Washington-consensus style policies that in
their view have delivered so little to the average
Brazilian or Mexican worker.
The very real prospect that Latin America will now
be backtracking on its reform agenda could not come at
a worse time for the region. It would seem all too probable
that Latin America’s unprecedented commodity
boom will soon fade as global growth moderates, while
its international borrowing costs will rise as global liquidity
dries up.
More menacing still is the almost certainty that
competition from China will only intensify in the years
ahead. This poses the very real danger that the process
of China’s hollowing out Latin America’s manufacturing
sector will only gain pace. Notwithstanding the considerable
advantages which Mexico enjoys in its
dealings with the United States under NAFTA, China
has already overtaken Mexico as a U.S. trade partner
and it has already diverted substantial foreign direct
investment away from the region. If the rest of the
region, outside of Colombia and Chile, continues to
oppose further trade integration, whether through the
World Trade Organization or through an Free Trade Area
of the Americas effort, that trend will likely accelerate.
If Latin America is to avoid the fate of being
reduced to the world’s slowest growing region and to a
mere commodity supplier, which current political movements
would only make more likely, it urgently needs to
deepen its economic reform effort. It should do so with
a view to making its economy more competitive to stave
off the Chinese challenge as well as to raising its dismally
low savings and investment rates. And it needs to
do something about income inequality and poverty that
is more constructive than repeating the populist mistakes
of the past.
Yet the necessary labor market, budget, social
security, and market deregulation reforms so desperately
needed to attain those goals now look farther
down than ever on the region’s political agenda. This
has to make one reverse Evita’s song and cry for almost
all of Latin America, wondering whether the region’s
time will ever arrive. ◆
Figure 2 Real GDP Growth
Percent change
0
2
4
6
8
10
Latin America
Developing Asia
Central and Eastern Europe
Sub-Saharan Africa
2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
Real GDP (percent change)
Latin America
Developing Asia
Centraland
Eastern
Europe
Sub-Saharan
Afr
ica
Source: IMF
Continued from page 39