Latin America’s Uncertain Future
by Alan Stoga

Remarks prepared for delivery to the Council of the Americas forum in Houston, May 2, 2002

In the early nineties I gave a speech at a CEO conference that had been convened to talk about the future of Latin America. I usually avoid re-reading my old speeches, but as I prepared for this morning’s meeting, I thought it might be interesting to see what I was saying about the region almost a decade ago.

My basic message then was that the heavy lifting was over; that Latin America had turned a corner in moving away from socialist economics and authoritarianism. I argued that there would be ups and downs, but I told that audience that almost every country–and certainly every country of consequence–had left the past behind. And my underlying argument was that the most important change was not in specific laws or specific leaders, but in philosophy. Latin America would be different because its people were now thinking differently.

So, fast forward to today. My topic is "Latin America’s Uncertain Future;" perhaps it should be, "What went wrong–and will they get it right this time?"

The underlying fact is simple, if devastating: both democracy and free market economics are at risk in too many countries in Latin America, a decade after both had seemed firmly established throughout the region.

Since the beginning of 2000, the Presidents of four (out of ten) South American countries have been forced out of office. In Ecuador in 2000–and more recently in Venezuela–the military attempted to impose its own choice to run the government, reminiscent of military coups assumed to be part of Latin America’s unfortunate past. Public opinion polls regularly record the public’s nostalgia for the "good old days" of authoritarian rule, when the economy performed, even if at the expense of democratic and human rights. And even where democracy is in tact, it is clear that the institutions that are needed to make it really work, are for the most part, badly–or even, barely–functioning.

In part, this reflects the poor economic performance that almost every Latin American country has experienced in recent years. Since 1995, South America’s per capita income has grown less than one half of one percent per year. In Brazil, the largest economy in Latin America, per capita income actually declined almost 3% per year on average since 1995. Today, Argentina is caught in a depression; Mexico is slowly emerging from a recession; Brazil is growing, but barely; and only Chile consistently shows any dynamism. More than one-third of Latin American households survive below the poverty line and almost 15% exist in what the Washington agencies call "extreme poverty."

All of this in spite of region-wide embrace of privatization, trade liberalization, open markets, and the other elements of the so-called "Washington consensus."

So, before we can talk about the future–which is, undoubtedly, what most of you want to hear about–we have to explain what went wrong and ask whether it is fixable.

From today’s perspective, what went wrong is relatively obvious.

First, we underestimated how profoundly every Latin American economy had to change to succeed in a world of real democracy and free markets. We expected Eastern Europe to struggle as Communism was left behind–but we fooled ourselves into thinking that the roots of competitive politics and economics had already been well planted in Latin America. We forgot how difficult it is to build institutions, nurture new leaders, create or renew political parties, root out corruption, and learn the habits of representative democracy.

After all, it took us 200 years. Why did we expect Latins to do it practically overnight?

Second, very few Latin countries completed the full cycle of policy changes that the liberalizers designed. In Argentina, President Menem never liberalized labor markets. In Brazil, substantial restrictions continue to exist on trade. In Mexico–which comes closest (always exempting Chile, the star pupil) to having stayed the course–the energy sector is still closed, fiscal reform is still suspended, and competition is still a theoretical abstract, rather than a market reality, in key sectors of the economy. Arguably, this is the fault of the politicians, not the reformers–but that does not change the reality.

Third, debt, equity, and multilateral capital flows largely dried up, partially substituted by a dramatic surge in direct foreign investment. The former was not replaced, in any sustained way, with increased domestic savings. In many ways, the biggest failure of the reform process, was the failure to build local capital markets and to create local savings incentives.

This financing phenomenon had good and bad consequences. The good news is that the national balance sheet got healthier: less hot money to whipsaw currencies and economies. The bad news is that low savings and low investment mean low growth.

Since the only money around has been in the hands of foreigners, more and more of the banking, service, infrastructure and industrial assets are ending up in the hands of foreigners. This may be better economics than it is politics. For example in Argentina, we are seeing that politicians have a hard time treating local capital and foreign capital alike in times of crisis. In a region where the rule of law needs constantly to be reinforced and where judicial systems are weak, high profile foreign ownership provides a convenient target for populism and demagoguery.

The fourth part of the explanation is the global economic downturn and the continued deflationary bias in the industrial world. Deflation is great if you are efficient, if you are a creditor, or if you are a consumer of commodities. Deflation is painful if you are inefficient, if you are a debtor, or if you are a commodity producer. You all know on which side of the fence most Latin economies sit.

The final element of what went wrong is the lack of a consistent U.S. policy engagement with Latin America. To my mind, this is a bipartisan sin that, with the very important exception of NAFTA, has been shared by Presidents, administrations, and Congresses of both parties. Although I believe no region is more central to the U.S. national interest than Latin America–even more so if you add Mexico, which, admittedly, seems every day more North American than Latin American–no region seems further from our leaders’ preoccupations. For the region, as well as for companies invested or doing business in the region, this is a serious problem.

It is also an inexplicable one, at least to me. Consider a few facts:

• The region provides 1/3 of U.S. energy requirements; today Venezuela is the third largest supplier of oil and oil products to the United States. Mexico, of course, has the potential to be an enormously important energy partner, particularly in gas and electricity.

• The region is the largest U.S. regional trading partner. Even excluding Mexico, two way trade with Latin America totals approximately US $125 billion annually. Indeed, U.S. companies sell more to Brazil and Argentina combined than they sell to China.

• U.S. companies have invested more than $200 billion in plant and equipment throughout the region; U.S. institutional and individual investors have bought billions more in debt and equity of Latin governments and companies; U.S. banks are the leading international creditors of the countries of the region.

• Hispanics–mostly from Mexico and Central America–are the largest U.S. minority; Latin culture and the Spanish language are having an increasingly pronounced impact on the United States.

• In a world where "homeland security" has become the new watchword, geography matters more than ever. Economic prosperity and democratic development in our own region are, obviously, paramount to the security of our borders.

Despite all this, Latin America seems to barely register on the Richter scale of our national interest. This inevitably contributes to instability and underperformance.

I hope what I have said so far has come across as explanations, rather than excuses. We all expected the region to perform better than it has, and we are all disappointed. The question is whether the trend lines will change, and, if so, why?

With the enormously important exception of Mexico, I think the answer still lies in the balance and will be determined by what happens on the ground during the next six to twelve months in Argentina, Brazil, Colombia, and Venezuela. Each of these seems to be at or near important inflection points, and each could go well or could go badly wrong.

I am not enough of an optimist to predict that everything will work out, but I am enough of an analyst to believe that we can identify the issues that will determine whether the region as a whole moves in a positive or negative direction.

Let me start with the exception. Mexico is the place where my forecast of a decade ago has come closest to reality. The economy is firmly embedded in North America; it has weathered all sorts of financial shocks; its banking system, now largely owned by foreigners, has been recapitalized and modernized; orthodox fiscal and monetary policy is routine, rather than exceptional. Mexican companies are becoming serious players in North America and, in one or two cases, world markets–which is a sure sign of fundamental health at home.

The political transformation seems equally deep. The shocks of 1994 led almost directly to the shock of 2000: the election of an opposition president. Of course, the day-to-day operation of Mexican democracy is sloppy, since the new rules of representative democracy and separation of powers are still being written, partly by trial and error. But, for the Mexicans there is no turning back.

From a business point of view, the reality is that the border between the United States and Mexico essentially no longer exists. The economies move in lock step: Mexico will suffer our recessions and will benefit from our recoveries. On the one hand, there is almost nothing that the government could do to change that for the worse. On the other hand, there is a menu of things the Mexican government could do–mostly in the energy area–to grow at a substantial premium to the United States. Unfortunately, the super-virtuous circle of structural reform kick starting much more rapid Mexican growth seems beyond the reach of the Fox government.

The basic point, however, is that I believe Mexico has now graduated from Latin America. That is a dramatic–and a dramatically positive–change in the paradigm.

Let me turn briefly to Argentina, Brazil, Venezuela, and Colombia, and discuss some of the issues that will determine how these countries will evolve.

Let me start with two factoids that, for me, summarize the problems of the southern cone:

Brazil today has twice as many political parties, as Argentina has currencies–and the numbers are not 2 and 1. Brazil has 30 political parties and Argentina has 14 currencies, making Brazil practically ungovernable and Argentina practically insolvent.

As you may know, the democratically elected president of Argentina was forced to resign by street protests that also consumed his two immediate successors. The current President was elected by the Congress–effectively converting a presidential system into a parliamentary one, without the institutions and traditions that stabilize such systems. For weeks, Argentina’s President, Congress, provincial governments, and judiciary have been locked in a struggle that has made an almost impossible economic situation even worse.

The country is gripped by a four year economic depression which has crushed the middle class and impoverished 15 million people in a nation of 36 million; the currency is increasingly worthless and the banking system has been destroyed; the country’s government, banks, and companies have defaulted on hundreds of billions of dollars of debt; and prices are rapidly escalating–in the country which invented hyperinflation. One number that summarizes the dramatic decline: per capita income has fallen from $9,000 to $3,000, in what used to be a middle class country.

I believe that–outside of war–no country in the modern period has engineered itself into a more complicated economic, financial, and political crisis. There will be no quick recovery, as the Mexicans produced after 1995, or the Brazilians after 1999, because Argentina is caught up in something far more vicious that the usual problems caused by devaluation and default.

The best hope is that the effort launched last week by national and provincial political leaders to forge a consensus underpinning an economic strategy of reform and reconstruction can be executed in the next few days. This could begin to instill confidence in Argentines in their own country, as well as to persuade the International Monetary Fund that Argentina is able to implement the policies and programs the country needs.

This would begin to reverse the debilitating downward dynamics of the last several months. But that is a very narrow, very perilous road–and, certainly not the most likely scenario.

I may have exaggerated when I said Brazil is practically ungovernable, although I think the debate is more likely to be about the adjective than about the noun. Fernando Henrique Cardoso has done a brilliant job in moving the country into an economic and political transformation process that, in all of its dimensions, is unfinished.

Brazil is not competitive internationally, but has the size and the resources to avoid most of the consequences. The country managed to survive its maxi-devaluation with remarkably few casualties and to return to growth, largely on the back of strong leadership from Arminio Fraga in the Central Bank, but the days of almost double digit growth are gone. Arguably, Arminio and ever higher interest rates could be all that stand between Brazil and some kind of crisis during this political year.

As far as politics goes, the political system functions, but there is almost no possibility for serious reform. With power scattered among parties, governors, congress, and the President, sustained movement–in any direction–is almost impossible.

That, of course, can be construed as good news in a country where the political fulcrum seems to be moving to the left or, at least, towards a kind of samba populism that could be less and less friendly to international investors or to IMF-style free market economic policies. In a year when the country will elect a President, several key governors, and most of the Congress, the three leading Presidential candidates are a former union leader, a long serving (and somewhat uncharismatic) government minister who reflects the views of Sao Paulo’s industrial elite, and a socialist.

Two out of three are not good odds, especially when those two seem much more in touch with the mood of the country than does their centrist competitor.

I learned a long time ago not to predict election outcomes, but I will tell you that I think we should expect at least one of the two candidates from the left to make it into the second round. Regardless of who wins, this will shock many who are oblivious to the growing restlessness of Latin civil society with orthodox solutions.

This unhappiness with orthodoxy came into sharp focus in Venezuela’s recent on-again, off-again coup. There, a popular revolt against a leftist President–whose rhetoric for months was increasingly reminiscent of Fidel Castro’s movement toward Communism in 1960–was hijacked by rightist businessmen who failed to understand the widespread revulsion against an economic and political model that had failed to deliver for most of the people of that country.

The result was a weekend of chaos in Caracas that killed dozens of people and produced the re-instatement of President Chavez. Chavez has the sole virtue of being the democratically elected President, but the vice of being a leader who has evidently lost the support of the majority of Venezuelans and who presides over a system whose basic political and constitutional institutions he has largely gutted–albeit, by democratic means.

Whether the coup attempt was pro or anti-democratic, as is being ferociously debated by diplomats and journalists, is less the issue than whether something like it will happen again. For better or worse, I think the reasonable forecast is that it will. Military resentment against Chavez seems to continue; popular unhappiness with a poorly performing economy is likely to intensify as the economy weakens further; and the deep fissures that run through Venezuelan society, if anything, are worse for having been exposed to daylight.

Another factoid: there are 60 legal actions pending against President Chavez. It only takes one of them to succeed to trigger his impeachment under the constitution. I cannot predict if or when one will succeed, but I am sure that the forces who opposed Chavez three weeks ago, oppose him even more fervently today.

Finally, Colombia. The very short story is that the country is in the grips of a civil war which it no longer has the luxury to ignore or to try to wish away. The leading presidential candidate in this month’s election barely escaped assassination recently, and another candidate has been kidnapped. Regardless of who wins the upcoming election, the country now seems ready to engage the guerrillas, who have a formidable, well financed army and who, like any insurgency, win by not losing.

The danger, of course, is that the United States will be drawn into Colombia’s fight. My own view is that, before 9/11, we were better served to remain at as great a distance as possible, but that after 9/11 we have no option. Already, the Administration is pushing to increase U.S. support for Plan Colombia and to broaden the training mission of U.S. troops that are in the country. Clearly, our involvement will increase.

If I won’t predict elections, I certainly won’t predict wars–but I think we all need to be concerned about the consequences of an increasingly pitched conflict in Colombia, as well as of that conflict spilling over into an increasingly polarized Venezuela. Since President Chavez is widely reported to have already made common cause with the major guerilla group in Colombia, the possibility of a much broader conflict is not beyond imagination.

Let me conclude.

The common thread through many of these countries is the greater or lesser failure of the democratic and economic reforms of the nineties to produce a sustainable improvement in the welfare of most citizens. The result is a warning signal–at least–that the region is becoming increasingly unstable.

Why should we care? Unfortunately, the answers are obvious, if ignored by most U.S. politicians.

First, if political instability in far away Afghanistan has the potential to affect U.S. national security, then we are even more at risk by similar instability closer to our borders.

Second, if our economic future is partly dependent on the continuous expansion of free trade, as advocated by every recent President of either party, then the creation of a regional free trade area is an obvious national priority–but one that cannot advance as long as the region is consumed by political and economic difficulties.

Third, and perhaps most importantly, since the global prestige of the United States partly depends on broad acceptance of the U.S. model of democracy and free markets, then the failure of that model in the Americas endangers the American national interest.

I think there is an even simpler formulation: without sustained economic growth, the politics of democracy cannot take root, and without democracy in the Americas, we are all in trouble.

The challenge for the Bush administration is to define a new doctrine for Latin America, and to develop and execute policies based on that doctrine. At the start, this doctrine should include the following elements:

• Real commitment to passage of Trade Promotion Authority for the president, without providing new hostages to the anti-free trade forces that have captured U.S. trade policy;

• Aggressive promotion of the Free Trade of the Americas effort;

• Passage of the U.S.-Chilean Free Trade Agreement and renewal of the Andean Free Trade Agreement;

• Establishment of exceptions for Latin American countries to U.S. import restrictions of agricultural goods, mirroring the exceptions granted by Europe to countries in Africa and elsewhere;

• Strong support for Argentina as it negotiates financial support from the IMF, and other international institutions.

These policies alone are not enough to change the direction of Latin America; that needs to be done by Latin Americans. But the United States must prove that it is committed to making democracy and free market economics work in the Americas. This is essential to the region and, more to the point, it is essential in the United States.

Anything less will assure that the next dramatic national security crisis is rooted in our own neighborhood, rather than thousands of miles away.

Thank you.