Latin America’s Locust Years

The bad news keep coming in Latin America these days. Economic conditions worsen almost everywhere, social cohesion unravels and political instability mounts. Little wonder, since much of Latin America spent the last twenty years going nowhere. Assets were sold and national debts ballooned, but almost nothing lasting and beneficial was gained. Truly, these were years that the locusts ate.

Over the past twenty years, annual per capita GDP growth in Latin America averaged 0.35%. At that pace, an economy would need 200 years to double in size. In Asia, the standard of living doubles every decade. With such anemic growth, how can Latin America expect to compete in world trade except through ever shrinking wages?

Profound misgovernance, not bad luck, is to blame for this economic stagnation. If Latin America does not change, it could look increasingly like Africa – a region of weak states with large informal economies and widespread poverty. Four factors have put it on this path.

First, in Latin America’s privatization gold rush, everything from public utilities to manufacturing companies went on the auction block. For a short time, asset sales helped balance national budgets, and also provided resources to sustain consumption. In the end, however, the income from privatization delivered little in the way of better infrastructure or more competitive exports.

Worse still, the sale of state assets was accompanied by massive external borrowing. In some cases, notably Argentina, borrowing by domestic buyers exhausted all available lines of credit. Other countries did not drop to Argentina’s level, but creditworthiness is an issue almost everywhere in Latin America.

Second, because reform has not delivered prosperity, the region has grown sick of reform. Capital inflows produced a wealth effect, but only while they lasted. When the money stopped flowing in, the wealth dried up. No sane politician will commit himself to another decade of structural reforms that will test the patience of ordinary Latin Americans beyond the limits of electoral survival. But without more and deeper reforms, there will be too few of the preconditions for economic growth that lure the investment without which no growth is possible.

This development dilemma points to the third factor: ineffectual politics. Governments that operated along technocratic lines, and that viewed economic growth as a rising tide that lifts all boats, have vanished. In Argentina one bumbling president succeeds the next. Institutions are torn down, property rights are called into question, and a random and ever more corrupt redistribution effort is underway.

Peru and Venezuela hardly look better; Brazil may soon follow the same course. The popularity of Lula Ignacia da Silva and his team, who leads opinion polls in Brazil’s presidential election campaign, serves as a warning that much of the Latin American public is prepared to reject traditional governments. Lula and his party are so far outside the mainstream of economic thought and policy that capital has already begun fleeing-even though the election is months away.

In Mexico, democratization has brought greater stability, but this could well prove ephemeral. The peso is now grossly overvalued. If the external balance deteriorates further, the economy will be in for a hard landing. For all the good news about Mexico’s infant democracy, its president is beginning to justify the early fears about him: no vision, no Congress to work with, and no team that knows what to do.

The last factor is the desperately low rate of saving that is endemic in the Americas. Indeed, this is the bottom line economically, for where there is little saving, there is little investment and little basis for capital accumulation and productivity growth. Venezuela now pines for the fat OPEC years of the 1970s-which it missed, because it neglected to develop its oil industry. Argentina’s wealth is now vacationing in Miami, perhaps for good. Brazil and Mexico are prime examples of countries that sold assets and borrowed rather than saved.

The contrast with Asia is arresting. Consider China, where the saving and investment rates are near 40%, where current accounts are in surplus, and there is no public debt. Government institutions are market friendly, and the population is well educated, disciplined, and flexible in its learning. Rewards for risk taking and initiation are immediate and highly motivating.

To be sure, China remains a poor country. Its per capita GDP is only half that of Brazil. But with growth in China’s coastal region running at possibly 15% per year, who can seriously doubt that in fifteen years it will surpass Brazil? In China, for all of its massive problems, things continue to go right not least because of huge inflows of foreign direct investment and the imminent benefits of WTO membership. In Latin America, things continue to fall apart: governments backtrack on reform and the economy loses ground to the rest of the world.

Latin America did well when soft money flowed in, but those times are largely over. So we should expect more bad economic, social, and political news in the years ahead. Demagogues like Venezuela’s Hugo Chavez or Carlos Menem, an Argentine presidential candidate once again, may seem like, a bad joke, but anyone who cares about Latin America’s fate should not laughing.

Rudi Dornbusch is Ford Professor of Economics at MIT and a former chief economic advisor to both the World Bank and IMF.

COMMENTARY

Serhiy TOLSTOV , Director of the Institute for Political Analysis and International Research:

Any form of an economic course designed to create expensive money, cutting demand, and increasing foreign loans, including for stabilizing exchange rate of national currency and putting off budget deficit, leads to economic disaster. Under any option of economic policy the only rational way is one using the country’s relative advantages in creating new and using existing production factors along with increasing its competitiveness based on the scientific and technological capabilities of the economy. This implies either creating favorable conditions for the formation of domestic capital or involving international corporations that would agree to create autonomous centers in the country oriented toward advanced technologies and production sectors. Since in many Latin American countries including Peru, Columbia, Brazil, and Ecuador (with the possible exception of Uruguay, Chile, and Costa Rica) the economy is unstable and considerably depends on the policy of foreign loans and investment, including state loans, in case of a deteriorating state of the world market and rapid withdrawal of foreign investment, economic collapse would become inevitable in these states. For example, despite the most favorable attitude toward South Korea and many billions in economic aid from the IMF, the Asian crisis of 1996 struck it off the list of pretenders to economic leadership.

As regards mass social protests whereby tens and hundreds of thousands of people at some moment start to act according to mob behavior, they are possible in most Latin American countries, especially in the big cities. However, this is almost out of question in Ukraine, with the exception of some polarized and relatively homogenous areas like the Donbas or Lviv. In most of Ukraine’s regions it is impossible to imagine mass actions of people impelled by some common interest. A Ukrainian mob is rather a crowd of people suspicious of one another, speaking Russian, Ukrainian, or surzhyk, Orthodox, Greek Catholics, or Protestants, etc. Besides, the most active representatives of these communities, each of which is a relative minority in the nation, in the eleven years of independence have earned a stable hostility from other social, cultural, and denominational groups. Thus it is practically impossible to imagine any leaders able to head any such mob at first.