TCS Daily


Latin America's Wrong Turn

By Desmond Lachman - December 20, 2006 12:00 AM

Over the past fifty years, Latin America, which was once the developing world's most prosperous region, has been in relative decline. Looking at recent Latin American economic and political developments, one has to wonder whether that decline is not going to pick up pace. For as one Asian country after another has set itself firmly on the path of convergence with the world's most developed economies, those countries in Latin America, with the possible exception of Chile, turn in economic performances that are mediocre at best. And the strong ill political winds that are now blowing through the region would seem to place even that mediocre economic performance at serious risk.

Latin America's clouded long-run economic outlook is perhaps best underlined by its recent sub-par economic performance at a time of unusual global prosperity. If ever Latin America faced an external environment conducive to rapid economic growth it has to have been that of the past four years. World economic growth has been at its strongest level in over 20 years, while international commodity prices have literally gone through the roof. As if that were not favorable enough, ample global liquidity conditions continue to blind international investors to the possible risks of investing in many countries in that region, which allows the region to borrow at very low interest rates

Yet, despite such a favorable external environment, Latin American economic growth averaged only 4 percent between 2002 and 2006 at a time when the region's population continued to grow at 1.6 percent a year. To be sure, this was Latin America's best economic performance since the 1970s and it was a far cry from that of the 1980s "lost decade". However, it still left Latin America as the slowest growing of any of the world's developing regions.

Even more disturbing than Latin America's tepid economic growth is the fact that its stuttering and half-hearted attempt at economic market reform over the past two decades has barely made a dent at reducing the region's mass poverty and chronic income inequality. In fact, various academic and multilateral bank studies suggest that Latin America still has the worst income distribution in the world and that there is more poverty in Latin America today than there was in the early 1980s when economic reform programs were being initiated.

Against this dismal economic backdrop, it should have come as no surprise that unreconstructed populists would win presidential elections this year in Bolivia, Ecuador, Nicaragua and Venezuela. It should also have come as no surprise that post-election pronouncements by the presidents of those countries give every indication that those countries will again be going down the well-trodden path of populist and anti-market policies.

Keeping those countries company in their heterodox application of economic policy will be Argentina under President Nestor Kirchner. For rather than drawing any lessons from the many mistakes of his country's tragic economic past, Kirchner is again obliviously resorting to pervasive price controls and anti-market regulations that are anathema to both domestic and foreign investors.

It is fashionable in some Washington circles to dismiss the rise of Hugo Chavez, Evo Morales, Nestor Kirchner, and Rafael Carrera as somewhat of a sideshow for the region as a whole given that these countries are economically relatively insignificant. After all, it is argued, did not a reformed Lula just win a second term of office in Brazil, the region's most populous country? And did not a conservative Felipe Calderon manage to stave off the populist Lopez Obrador in Mexico's recent six-yearly presidential election?

Taking comfort in Lula and Calderon's electoral victories glosses over the fact that neither of those two leaders won a mandate for deepening their countries' halting economic reform programs. It also overlooks the fact that both Lula and Calderon will be confronted with divided and fractious Congresses that likely will result in a prolonged period of policy paralysis.

The very real prospect that Latin America will now be backtracking on its reform agenda could not come at a worse time for the region. It would seem all too probable that Latin America's unprecedented commodity boom will soon fade as global growth moderates, while its international borrowing costs will rise as global liquidity dries up. More menacing still is the almost certainty that competition from China will only intensify in the years ahead.

If Latin America is to avoid the fate of being reduced to the world's slowest growing region and to a mere commodity supplier, it urgently needs to deepen its economic reform effort. It should do so with a view to making its economy more competitive to stave off the Chinese challenge as well as to raising its dismally low savings and investment effort. Yet, the necessary economic reforms so desperately needed to attain those goals now look farther down than ever on the region's political agenda. This has to make one pity Latin America and to wonder whether the region's time will ever arrive.

The author is resident fellow at the American Enterprise Institute.


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