Latin-sclerosis: the Curable Disease
By Alan Stoga*

This has been a remarkably good year for the economies of Latin America. From Mexico to Brazil to Argentina, virtually every country in the hemisphere grew—in most cases faster than in recent memory.

The good news is this burst of grown—driven by a combination of strong U.S. and Chinese economies, relatively sound economic policies in key countries, high oil prices, and a weak dollar—should continue into 2005. The bad news is that, since so few of the economic drivers are home grown, Latin America’s economic future is hostage to decisions made in Washington, Beijing, Riyadh, and elsewhere. When, the global environment again turns hostile, Latin America will pay a high price.

One consequence of globalization seems to be that countries in this region lag the developed world on the upside, and suffer disproportionately on the downside. Part of the problem is that too few governments worked their way through the full menu of overdue structural reforms. As a result, the economies of the region cannot sustain growth on their own, unlike China and much of Asian. The irony is that, as long as growth remains erratic and wealth remains concentrated, the populist left will grow in popularity. Since the left’s economic prescriptions have produced economic disaster practically everywhere they have been applied, Latin America’s poor are likely only to get poorer unless this cycle is broken.

A few years ago, the solution seemed to lie in the direction of creating free trade agreements throughout the Americas. The signing of NAFTA launched one of the few genuine growth industries in the region: the negotiation of bilateral, sub-regional, and regional trade agreements. Only the too ambitious Free Trade Area of the Americas seems beyond the negotiators’ reach.

Unfortunately, there is not a lot of evidence that all this diplomatic activity made much difference. The reality is that most Latins actually got poorer, not richer during the past decade. At the very least, it is safe to say that freer trade—or more free trade agreements—will not be enough to change the region’s long term economic and, hence, political prospects.

Obviously, there is no silver bullet that will change Mexico into China, or Latin America into emerging Asia. Good policies, reforms, imaginative and honest leadership all matter. But Latin America needs a unifying project—a big project—to break out of its structural trap.

Europe faced a similar problem at the end of the 1970s, when the early dynamic of economic integration has faded. Key business leaders became increasingly worried that "Euro-sclerosis"—a combination of slow growth, inflation, and uncompetitiveness—would become permanent. Despairing of dynamic political leadership, they came up with their own program to restart the economic engines of Europe, organized around the simple idea that infrastructure—roads, bridges, ports, railroads, pipelines, electricity and telephone grids—could be the key to renewed growth. The businessmen developed a list of key economic projects they believed could literally link Europe together, and then lobbied their governments to act. The process had two profound consequences: first, some of the projects actually got built, creating jobs and wealth, and, second, the dialogue started around infrastructure contributed to a broader conversation that eventually led to the creation of the European Union.

What worked for Europe then, could work for Latin America now. Inadequate infrastructure retards growth everywhere in the region. The lack of rail, land, and air links probably have more to do with preventing a real intra-regional trade boom than the remaining legal trade barriers. A well designed infrastructure initiative would create jobs and income, and might even give the politicians new energy to think about how to make the region as a whole more prosperous.

The easiest part of the challenge would be the financing. The biggest Latin countries have accumulated substantial international reserves. With some imagination and a few good lawyers, a portion of these could be set aside and leveraged to create a region wide infrastructure fund. If this was managed with the discipline and integrity of a private investment bank, but the accountability of a public enterprise—unlike the World Bank, for example—the results could be dramatic.

The missing ingredient is leadership. Fernando Henrique Cardoso proposed a similar initiative before he ran for re-election, but found few takers because of the usual political jealousies among Latin presidents. Maybe this is a project better suited to ex-presidents or, like Europe of twenty-five years ago, to business leaders from around the region who are frustrated with political paralysis and who understand how actually to do things.

Sooner or later Latin Americans will realize they only have a future if they make one for themselves.

*Alan Stoga is president, Zemi Communications. www.zemi.com