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Sebastian Edwards is the Henry Ford II Professor of International Business Economics in the Anderson Graduate School of Management at the University of California, Los Angeles.

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Left Behind

THE UNIVERSITY OF CHICAGO PRESS

Contents

Preface.............................................................................................xi1 Latin America: The Eternal Land of the Future.....................................................12 Latin America's Decline: A Long Historical View...................................................213 From the Alliance for Progress to the Washington Consensus........................................474 Fractured Liberalism: Latin America's Incomplete Reforms..........................................715 Chile, Latin America's Brightest Star.............................................................1016 So Far from God: Mexico's Tequila Crisis of 1994..................................................1227 The Mother of All Crises: Argentina, 2001–2002..............................................1438 Populism, Neopopulism, and Inequality in the New Century..........................................1659 Chávez's Challenge and Lula's Response.......................................................19110 A Three-Speed Latin America for the Twenty-first Century.........................................223Notes...............................................................................................237Bibliography........................................................................................255Index...............................................................................................273

Chapter One

On January 1, 2003, Luiz Inácio da Silva, universally known by his nickname, Lula, was sworn in as Brazil's constitutional president. The occasion was solemn and fraught with symbolism. Lula was the first trade union leader and self-declared socialist elected to the presidency of a Latin American country. For many years his political party, the Workers' Party, or Partido dos Trabalhadores (PT), had advocated nationalization of large firms and banks, deep agrarian reform, and a move toward socialism. Lula's election represented a dramatic change in Brazil's history and a test for the country's young democracy. For more than two decades, from 1964 through 1985, Brazil had been ruled by a military dictatorship that had persecuted, imprisoned, and even tortured its leftist opponents. Lula spent time in jail in the 1970s, and his predecessor, Fernando Henrique Cardoso, an affable academic and the son and grandson of military officers, had been forced into exile in the 1960s.

Lula's inauguration, held in Brazil's modernist capital, Brasilia, was attended by numerous heads of state, dignitaries, and high-ranking officials from around the world. President George W. Bush, however, was not among those in attendance; nor was Vice President Dick Cheney, Secretary of State Colin Powell, or any other prominent member of the U.S. cabinet. The United States' delegation was headed by Robert Zoellick, the U.S. trade representative, who, in spite of being an able official, lacked the political and diplomatic stature that the occasion called for. With his traditional lightheartedness and keen sense of humor, Lula dismissed the slight and said that there would be many occasions for him to meet with his colleague from the North. Other Latin American heads of state and officials, however, were not so casual; they were off ended. In their view the absence of an appropriate U.S. representative was a serious diplomatic affront and a clear reminder that, with few exceptions—including Cuba and, possibly, Mexico—Latin America was not a political or diplomatic priority for the United States. To them it confirmed that Latin America was a "forgotten continent."

As it turned out, Lula was right. Four years aft er his election, the rift between his government and the Bush administration had been mended. Secretary of State Condoleezza Rice attended the inauguration for his second term in office, and he developed a close rapport with President Bush. In 2007 Lula became the first Latin American leader to be invited to Camp David. This improvement in economic and diplomatic relations was largely due to Lula's decision to eschew the left-wing policies that had long been espoused by his Workers' Party. Instead, he followed a market-friendly economic program that reduced inflation, revived credit markets, and attracted considerable volumes of foreign investments. In 2008 Lula's commitment to fiscal prudence, economic stability, trade openness, and market orientation paid off when Standard & Poor's granted Brazil's national debt the "much-sought-after" investment grade classification, which helped the country attract additional foreign investment and allowed it to borrow internationally at significantly lower costs.

But in spite of the happy ending of this Brazilian episode, all is not quiet on the Latin American front. Since the early twenty-first century the Latin American public has moved increasingly to the left and has elected—sometimes by wide margins—presidents who are openly critical of the United States and its economic and foreign policies and who have pushed populist agendas in their respective countries.

Hugo Chávez of Venezuela has been the most vocal among Latin America's populist and anti-American leaders. But he is not the only one: Néstor Kirchner and Cristina Fernández de Kirchner of Argentina, Evo Morales of Bolivia, Rafael Correa of Ecuador, Fernando Lugo of Paraguay, and Daniel Ortega of Nicaragua have been outspoken in their criticisms of the United States and the market system. All of them have relied on populist rhetoric to attack globalization and to argue that the region needs to greatly increase the role of government in economic affairs. Over the last few years in most of these countries private companies have been nationalized, trade barriers have been hiked, and government controls on prices, investment, and business activities have been tightened. In many of these nations—including Bolivia, Ecuador, and Venezuela—new constitutions aimed at paving the path toward a socialist society have been enacted, and legal maneuvers have been initiated or approved to keep leftist presidents in office.

President Chávez has condemned capitalism, foreign investors, and the international business sector; he packed the Venezuelan supreme court with his supporters, closed a TV channel owned by his political opponents, severed diplomatic relations with neighboring Colombia (only to reinstate them a few days later), meddled in other countries' affairs, and became a close ally of ailing Fidel Castro. In a speech at the United Nations in September 2006, Chávez called U.S. president George W. Bush "the devil" and accused him of "acting as if he owned the world." Chavez's criticisms, however, have not been directed exclusively at the United States; in a meeting of the Ibero-American heads of state held in Santiago, Chile, in November 2007, he engaged in a serious argument with King Juan Carlos of Spain and accused Spain's former president José María Aznar of being a "fascist" and "a serpent." Chávez later threatened Spanish multinationals with expulsion from Venezuela. In May 2008 he criticized German chancellor Angela Merkel and said that her Christian Democratic Party shared "the political ideals of Adolf Hitler."

In February 2009, Hugo Chávez won a crucial referendum that will allow him to run for president as many times as he wishes. If things go his way and he is reelected once more, in 2013, he will be president of Venezuela until at least 2019, extending his tenure to no less than twenty-one years, longer than that of most of the region's recent strongmen, including Chile's Augusto Pinochet. Things could go even better for the former army officer, of course, and he could stay in power indefinitely. A few days after winning the referendum Chávez sent military squads to take over rice-producing companies throughout the country. Chávez then proceeded to condemn the government of newly elected president Barack Obama for allegedly maintaining George W. Bush's foreign policies and complained that the U.S. State Department continued to characterize Venezuela's record on human rights as less than pristine.

Of course, not every leftist leader has been as vocally opposed to open markets and globalization as Chávez, nor have all of them pushed populist policies. In contrast to the Bolivarian president and his supporters there is what former Mexican secretary of foreign affairs Jorge Castañeda has called the "New Latin American Left." In addition to Lula, past and current representatives of this moderate left include Fernando Henrique Cardoso of Brazil, Ricardo Lagos and Michelle Bachelet of Chile, Alan García of Peru, and Tabaré Vázquez of Uruguay. These moderates do not demonize globalization but understand the importance of the market—(despite their criticism of some of its excesses, including those that triggered the global crash of 2008) and acknowledge that innovation and efficiency are at the core of economic success. To be sure, they believe that more government intervention and regulation are essential to reducing inequality. However, they are not hard-core socialists; their goal is to adopt the policies of Western Europe's social democracies.

The Economic Future of Latin America and the United States

The economic future of Latin America, a region with a population of more than half a billion people and vast reserves of natural resources, is important for the rest of the world. In particular, a mediocre economic performance in Latin America is bad news for the United States. If incomes, jobs, and wages grow sluggishly in Latin America—or worse yet, if they stagnate—the flow of illegal immigrants into the United States is likely to increase drastically. During the last decade, almost half a million illegal immigrants entered the United States every year. The vast majority of them—more than 80 percent—come from Latin American nations. Illegal immigrants are no longer only Mexicans and Central Americans. They are now arriving from every corner of Latin America: Argentina, Bolivia, Brazil, Colombia, Ecuador, Paraguay, Peru, and Venezuela. Not surprisingly, the harder economic conditions are at home, the larger is the flow of people who cross the border illegally. Illegal immigration also affects the European Union. In the twenty-first century large numbers of Latin Americans—many of them young, unskilled, and poor—have emigrated illegally to Europe, particularly to Spain, Portugal, Italy, and France. Beginning in 2005, European authorities redoubled airport controls in an effort to stem the flow of undocumented Latin American migrants. Since then, scores of Latin Americans of all ages and walks of life have been denied entry, detained, and sent back to their countries of origin.

An unsuccessful Latin America will be mired in poverty and inequality, and the population will blame capitalism and globalization for the region's misfortunes. Policies aimed at increasing protectionism and government controls will be implemented, and multinational corporations based in the United States, along with Spanish banks and European utility companies, will face stiffer regulations, changes in the regulatory landscape, and higher risks of nationalization. Failure is also likely to result in a lower degree of economic cooperation in areas such as intellectual property rights. And, of course, there is always the possibility that some petroleum-producing countries—Venezuela and Ecuador come readily to mind—may disturb the flow of oil and provoke serious economic dislocation in the United States.

In addition, there is the issue of diplomatic cooperation. Although many Latin American countries have been historical allies of the United States, the region has not always supported U.S. initiatives in the United Nations and other international forums. This was the case, for instance, in April 2003, when Secretary of State Colin Powell failed to obtain the support of Chile and Mexico in the UN Security Council on a key resolution on Iraq. Collaboration at such moments would become even more difficult if anti-U.S. sentiments were to become generalized throughout the region.

Moreover, a significant slowdown in the Latin American economies is likely to result in an increase in illicit activities such as drug trafficking, smuggling, counterfeiting, and money laundering. During 2008 and 2009 drug-related violence spiked significantly in Mexico, and according to various reports from law enforcement agencies, the Sinaloa cartel has now infiltrated several U.S. cities. In a scenario of economic distress it is possible that the region would be less vigilant in dealing with terrorism and terrorist threats. The border between Mexico and the United States is very porous and could become a preferred entry point for terrorists, and the "triple border" between Argentina, Brazil, and Paraguay is notorious for concentrating all sorts of unsavory characters, including some with well-known terrorist connections.

Of course, the future of Latin America does not have to be economic gloom and failure. It is possible that some countries will exhibit robust economic growth and improved social conditions in the next two decades and that the region will cease being the eternal "land of the future." For this to happen, however, Latin America will have to encourage innovation, improve efficiency, and modernize its institutions. It will also have to put in place major reforms to improve the quality of education and equip new generations with the skills required in an increasingly sophisticated and competitive world. Whether the region—including its largest country, Brazil—is politically ready to give a new push to modernization is an open question.

From the Washington Consensus to the Resurgence of Populism: A Brief Overview

Latin America's move to the left has been the result of a deep disillusionment with a number of market-oriented reforms implemented during the 1990s. These policies, which came to be known as the "Washington Consensus," called for elimination of fiscal deficits, reduction of inflation, dismantling of restrictions on international trade, privatization of public enterprises, and deregulation of markets that for decades had been subject to a surreal array of controls, red tape, and restrictions that stifled investment and bred corruption.

The reforms of the Washington Consensus represented a dramatic change in policies throughout the region. Since the 1940s every country in Latin America had shunned the free market and had relied on massive tariff walls to protect its domestic industries. Most had also run large fiscal deficits, experienced runaway inflation, and faced recurrent currency crises. By the late 1980s Latin America had come to a standstill: average income per capita growth was negative for a decade—the so-called lost decade—unemployment was very high, and a number of countries had triple-digit inflation; in addition, the region had one of the most unequal income distributions in the world and an astounding incidence of poverty. It was at this time that, in country after country, politicians decided to embark on a major change in direction: suddenly the countries of Latin America welcomed foreign investment, lowered import tariffs, began to deregulate businesses, reduced fiscal deficits, and privatized state-owned companies.

During the early 1990s the Washington Consensus reforms bore fruit: inflation declined substantially, growth accelerated, and, adjusted for inflation, wages increased throughout the region. Optimistic observers, including officials of the International Monetary Fund (IMF) and the World Bank, believed that Latin America would stop being "the land of the future" and would finally take off. It was expected that growth, improved social conditions, and prosperity would replace decades of meager economic performance, pervasive and growing inequality, and recurrent economic and political instability. Throughout most of the region the first half of the 1990s was a period of hope and high expectations.

Progress, however, was short lived. Neither efficiency nor investment in equipment, machinery, and infrastructure increased sufficiently to sustain economic growth over the long run. Institutions were not reformed, property rights were not protected sufficiently, and there was scant improvement in the rule of law. Poverty did not decline significantly, and income distribution remained as skewed as in the past. Moreover, widespread policies that pegged the value of local currencies to the U.S. dollar at artificially high levels reduced exporters' competitiveness by lowering the number of pesos or other local currencies they received per dollar for foreign sales. In addition, many countries were unable to lower expenditures or raise taxes—and thus to control their public finances—and continued to run large government deficits. Eventually, deep currency crises exploded in countries as diverse as Argentina, Brazil, the Dominican Republic, Ecuador, Mexico, and Uruguay. Beginning in 1998 many Latin American nations entered severe recession and experienced heightened unemployment and increased levels of poverty. Between 1998 and 2002 Latin America's income per capita grew on average merely 0.2 percent; during the same period income per capita in emerging Asian nations—including China and India—grew ten times faster, at almost 2 percent per annum, and that of the so-called Asian Tigers (Hong Kong, Indonesia, Malaysia, Singapore, South Korea, Taiwan, and Thailand) grew an average of 1 percent per year.

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Excerpted from Left Behindby Sebastian Edwards Copyright © 2010 by The University of Chicago. Excerpted by permission of THE UNIVERSITY OF CHICAGO PRESS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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