Latin America is back in the spotlight this year. The political climate is warming up once again, with major elections taking place in several countries. Economic prospects remain bright, as low interest rates and high prices of raw material exports bolster Asian-style growth rates, while China in particular sucks in huge quantities of soya, iron, copper, oil and gas. The emerging markets are awash in liquidity, with high yields attracting investors. Latin America has recorded three successive years of growth, its first such run in half a century and one that looks set to continue in 2006.
But underneath this impressive performance lies a rather turbulent social and political picture. Global markets may have spurred the growth, but a cocktail of persistent poverty and social discontent have enhanced the popular appeal of anti-globalisation policies. Presidents have been driven out of office in Argentina, Bolivia, Ecuador and Peru, replaced by populist icons such as Bolivia’s Evo Morales, an indigenous Indian, leftist and critic of the US.
Latin Americans–and the markets–are divided about this sea of changes. Some see instability and worse poverty ahead. Others see hope and a better, more independent, future. But putting these events into perspective, what really stands out are not so much the popular protests as the profound–and less noisy–domestic transformations that have been taking place in some of the countries of the region over several decades. Indeed, for the last quarter century several countries in Latin America have been laying institutional pillars, and casting monetary and fiscal anchors, without the confines of any predetermined path or strict ideology. Chile is one of those countries, Brazil and Mexico also.
Take Chile first of all. Long held up as a pioneer of economic transformation, Chile again broke new ground in March 2006 when Michelle Bachelet became the first woman president in South America. Yet far from being a radical swing, this significant event reflected Chile’s ongoing pragmatism as the socialist leader has promised continuity. In other words, rather than lapsing into fracasomanía (failure syndrome) as countries in the region have done in the past, it portrays a widespread optimism, what Albert Hirschman would call a “bias for hope”.
Consider for instance the privatisation of pension funds, which in regulatory terms was a jewel of top quality institutional craftsmanship. Launched in the early 1980s, the pension funds produced high yields during the first half of the 1990s, and tried to accommodate the country’s low savings rates of barely 20% of GDP. Reforms also addressed the informal job markets in a bid to cast the pensions net as widely as possible. The result is that over half of Chile’s workers now have coverage, far more than in many other Latin American countries. Moreover, assets are estimated at 71% of GDP ($75 billion in 2005) with strong annual growth.
After the return to democracy in 1989, there might have been a temptation to create yet another model in a euphoric break with the previous military regime. Not a bit of it. Chilean democrats stepped up existing reforms, combining monetary and fiscal orthodoxy with social measures and a drive for balanced growth. In short, the reform is symbolic of the new shift towards pragmatic and gradual transformation after years of dizzying ideologies.
True, the pension system may not be perfect–coverage is still far from universal, and more has to be done to encourage savings and raise normal state pensions, which currently stand at about $130 per month. But the process has allowed healthy long-term capital markets to develop and to reduce Chile’s dependence on external financing. The country’s pension reforms have even been emulated by several Latin American countries, with varying degrees of success. Little wonder the regulatory body, the Superintendencia, has earned respect as one of the country’s most credible and technically accomplished institutions.
There has been pragmatism on the external front too; while Chile opened up its markets and signed free trade agreements with countries all around the world, including Japan, Korea and, lately, China, it nonetheless retained some capital controls (albeit “suspending” them in 1998).
Also, despite widespread privatisation, the country’s main company has remained a public one; indeed, Codelco, the copper giant, is a true world leader, providing 30% of the world copper production and 20% of Chilean total exports. This makes it the largest single asset in the country, providing 15% of the national budget and accounting for nearly 5% of GDP.
Mexico’s pragmatism kicked in a little later, with the signing of a free trade agreement with the United States and Canada in 1994. Sure enough, the country had already joined the GATT and in the same year became the first Latin American member of the OECD. But the North American Free Trade Agreement marked the first time in history that an emerging economy from the “south” had joined a free trade area with industrialised countries from the “north”. It proved to be a test for Mexico, as witness the currency crisis shortly after NAFTA’s launch, followed by tough restructuring programmes.
However, the economy came through in the end. In the same way as Spain with the European Union a decade or so earlier, the process was to allow the economy to benefit from a credible anchor on the external side. By 2000, the country had undergone a smooth change of government, for once without sparking a financial crisis—this newly found political normality represented another breakthrough.
Mexico can now count on a range of institutional stabilisers, with economic pragmatism becoming the alpha and omega of government policy. While the central bank accumulated more than $70 billon in reserves, Mexico’s by now freely floating peso steadied and its inflation rate eased. In fact, by 2005 it reached as low as 3.3%, down from 5.2% a year earlier, its lowest rate in nearly four decades. Public finances are now broadly balanced and Mexico is the only major Latin American country, apart from Chile, to benefit from an investment-grade sovereign credit rating. No one would dream of putting such hard-won stability at risk now, not even Andrés López Obrador, the former mayor of Mexico City and left-wing candidate in the 2006 presidential race, whose recent “market-friendly” regional tour included a stop-off in Wall Street.
The fact that the governor of the politically independent central bank will remain in office until 2009 will help reassure the markets, as will the presence of the Federal Electoral Institute (IFE), another innovation to assure the independent supervision of democratic elections. Future governments will have the tough job of tackling such challenges as widespread poverty and furthering the structural changes needed to help Mexico close the gap with its OECD partners. But on the whole, the economic and institutional scene is set for the winner of the 2006 elections to uphold pragmatic reforms and so help Mexico step up its remarkable transformation of the last decade.
The Brazilian story is different. In fact, after much promise and several false starts, the financial markets became nervous in 2002 with Lula’s rise to power, but were in the end pleasantly surprised by the left-wing president’s attachment to the monetary and fiscal orthodoxy of the previous administrations. In 2004, Lula managed to bring the country’s economic growth rate to around 5%. At the same time, as for Chile and Mexico, he looked to trade to anchor the transformation process. Even though the exchange rate appreciated by almost 15% in 2005, the trade surplus reached a record $45 billion, as total exports broke the $100 billion barrier for the second year running.
The momentum for change has been powerful and several important fiscal, pension and banking reforms have withstood the test of parliament. Lula’s social programmes and investment in infrastructure, though much criticised, have not damaged the new found fiscal and monetary orthodoxy. Moreover, Lula has attempted to stick to promises of more just, efficient and equitable growth.
He has raised the minimum wage and tried to boost social programmes in education and health. His fight against hunger may also be working, with a reduction of poverty recorded for the past two years by the local-based research institution, Getulio Vargas Foundation. Whether Lula is to be re-elected again in 2006 is an open question, but pragmatism seems to be so well anchored now that whoever wins next October will probably not change course.
Rather than engaging in impossible strategies, the trio of Chile, Mexico and Brazil have used the art of the possible to deliver change. Will these experiences inspire the rest of Latin America to set their compasses and sail clear of the rocky shores and their populist sirens? Some are up to the challenge, Uruguay for instance, where a left-wing government claiming this new pragmatism has also come to power. But in Bolivia, Ecuador and Venezuela, clearly the signals point in the opposite direction. Nevertheless, the election year is still young and while it remains to be seen which trend gains the upper hand, the chances are that Latin America’s new wave of pragmatism will not fade just yet.
*This article is based on the author’s new book, Latin America’s Political Economy of the Possible: Beyond Good Revolutionaries and Free-Marketeers, published by MIT Press (Cambridge, Mass.) in 2006. The article was written specially for the OECD Observer.
©OECD Observer No 255, May 2006