Happy New Year….sort of

By Alan Stoga*

The start of the new year is typically a moment of hope and anticipation that the turning of the calendar portends a better future, whatever stresses and problems had accumulated during the past twelve months. So, too, as we move into 2006.

The good news is that the US economy is likely to continue to defy gravity this year. Despite massive deficits, high oil prices, rising interest rates, and a generally sour political mood, the American economy will continue to grow between 3.5% and 4.%. Since China also will most likely continue its amazing expansion, the international conditions will exist for another year of economic growth in Latin America: high commodity prices, relatively low interest rates, abundant liquidity, and continued U.S. demand for the workers who provide massive remittance flows back to their homelands.

The not so good news is that the virtual collapse of reform momentum everywhere in the hemisphere means that most of that external momentum will be wasted. Growth throughout the region will continue to be significantly less than it could or should be, creating much less income and far fewer jobs than are needed.

The bad news is that the perverse consequence of this continuing cycle of no reform and economic disappointment is likely to be the election of more left wing governments in more countries. This year more than 400 million people in 9 countries will vote for new governments. If today’s polls are to be believed, a majority of them will vote for candidates and parties that are increasingly populist, nationalist, anti-market, and intensely fearful of global competition — as recently happened in Bolivia.

That is more or less the formula whose failure produced the lost decade of the eighties and whose cure has kept growth disappointingly slow ever since. In a world that is much more globalized, where China has emerged as a fearsome industrial predator, and where knowledge and innovation, not natural resources, are critical for sustained economic success, what failed once will almost certainly fail again. Indeed, even the advocates of this old time religion — which is tempered only by a lingering commitment to relatively conservative fiscal and monetary policies, thereby preventing a new explosion of debt and inflation — do not argue it will produce the kind of economic boom that could start a real development cycle in the region. They only say they are tired of reform.

Why are the majority of voters looking left? Simply, because most of them are poor and profoundly skeptical that the economic elites and centrist governments who have dominated political life in the region for the last twenty years will make them less poor anytime soon. They do not believe in the promise of more reform because they do not think that the reality of reform has changed their lives. Even worse, they see an ever-widening gap between themselves and those who clearly are benefiting from globalization. They are understandably seduced by populist politicians who are willing to give them something real, even if only small handouts from the Treasury or short term protection from the marauding forces of international competition.

This is as true in desperately poor countries like Bolivia as it is in countries with a slowly emerging middle class like Mexico. In both cases — and everywhere in between — the majority of voters are poor and do not believe that centrist policies or centrist politicians will solve their poverty.

This is not a formula for sustained economic development, but it is a formula for a new kind of class warfare, fought in voting booths instead of the streets. And politicians from Kirchner and Lula to Chavez, Morales, and Lopez Obrador are enthusiastically encouraging that struggle, because — in a region where more than 200 million people are considered poor by the United Nations and many millions more live just above that poverty line — this is their most direct path to political victory.

The consequences of such a region-wide shift to a failed economic model will be felt in the long run: less investment, less job creation, more migration to the United States, greater dependence on commodity exports, more vulnerability to the Chinese economic threat — and, ultimately, even lower growth and slower development.

But in the short run — 2006 — the region will continuing growing, at least modestly. Compared to at least some alternatives, that is enough to celebrate.

*Alan Stoga is president of Zemi Communications.