THE LANDSCAPE OF Latin America provides constant reminders of bygone riches. From the grand opera houses of Buenos Aires to the mid-century modernist glories of Caracas or Brasilia, there is barely a city in the region that doesn’t look upon its past with nostalgia for the good old days.
In 1950, for instance, Venezuela’s GDP per capita, in 1995 dollars, was $6,021: twice that of Spain, three times that of Portugal, and four times that of Taiwan. By 1966, the per capita figure had increased to $9,588, still comfortably ahead of those other countries. By 2000, however, it had dived to $4,911 – a lower level than 50 years before. Spain, Portugal and Taiwan, by contrast, could each boast GDP per capita more than three times Venezuela’s.
Although other countries in Latin America might not have suffered quite such dramatic losses, the general trend in the region is unmistakeable – strong growth from the end of World War II to about 1980, and extremely disappointing performance since then.
Sluggish growth
What’s more, things haven’t been getting better. Though there’s no doubt that the 1990s were, in aggregate, less bad than the 1980s, Latin America has been experiencing sluggish growth rates for a very long time. The region’s GDP per capita in 2003 is going to be 2% lower than it was in 1997, according to the UN’s Economic Commission for Latin America and the Caribbean.
Why is the performance of Latin American countries in such stark contrast to those of southern Europe or east Asia? The answer seemed clear at the end of the 1980s: the region had been plagued by dictatorships and hyperinflation, and the introduction of democracy and free-market reforms would bring lasting and rapid changes.
Now analysts are being forced to review their prescriptions for sustainable growth. Though there are many reforms yet to be implemented, Latin America’s governments have more or less done exactly what they were told would bring them success.
It was called the Washington Consensus – 10 reforms, from privatization to fiscal discipline, drawn up by John Williamson in 1989 as a purely descriptive list of what economists from around the region (not just in Washington at the headquarters of the IMF) thought necessary for growth.
After 14 years, during most of which there has been negative or stagnant growth, economists and investors are taking another look, to work out how to bring the region back to competitiveness.
The prescriptions fall generally across two axes: political/economic, and domestic/international. Although there’s little outright optimism, the international group is the most pessimistic: only external forces can save Latin America, they say, and that’s not likely to happen any time soon.
Within the international group, the politically minded generally point to strong US hemispheric leadership – backed up with cash – as both necessary for the region’s development and extremely unlikely to come about.
The economically minded, on the other hand, take some heart from the few years of growth before the Asian crisis hit, and see a very strong correlation between international capital flows to the region and Latin growth rates.
Under this view, growth will resume when international investment comes back – which is not likely to be any time soon, given the more risk-averse nature of direct investment flows these days.
More hope
Other analysts, generally from Latin America, are slightly more hopeful. Look at Chile, they say. It’s perfectly possible for a Latin country to make it on its own, without reliance on public or private sponsorship from abroad.
Again, there’s the political and economic cleavage: the political analysts see a need for political reform, many going as far as to say that the whole Latin presidential system should ideally be scrapped and replaced with something more prime ministerial. The economists, on the other hand, see countries moving beyond the Washington Consensus, and implementing economic reforms that can put Latin America back on a sustainable growth path.
The international group does have some good arguments. “What makes economic reforms successful?” asks Joyce Chang, head of emerging market research at JPMorgan. “Is it growth or capital flows? No matter what reformers do right now, the structure of capital flows is different.”
Chang’s point is that it’s impossible to judge the success of reforms in a vacuum. If you just look at whether they lead to economic growth, then you miss a hugely important part of the picture – that it is capital flows that are responsible for growth. “A lot of the historical work has said that Latin America needs capital flows to grow,” Chang says. If the flows aren’t there, reforms can’t produce growth on their own.
Alternatively, then, one can look to capital flows to judge the success of reform: if international investment starts flowing into a country, then the government must have done a reasonably good job of making itself an attractive place to park capital.
The problem here is that the existence or otherwise of economic reforms drives only a small part of the decision to invest.
At the height of the economic boom, for instance, telecommunications companies were awash with capital that they could hardly spend fast enough. Now that they’re suffering under enormous debt loads, shareholders do not generally respond well to announcements of new investments in Latin America. “The external trends usually overpower the internal reform trends,” Chang says.
Latin America is more susceptible than most regions to fluctuations in capital flows, because its domestic savings rates are minuscule and its countries generally have very large debt burdens. “If there’s a slowdown in capital flows to emerging markets for reasons that aren’t related to emerging markets, it affects Latin America,” Chang notes.
Plunging investment
In general, foreign direct investment into Latin America is plunging. Bizarrely, it held up through many of the years when spreads were widening and liquidity was leaving the region – while net portfolio flows were negative in 2000 and 2001, FDI remained above $60 billion.
In 2003, however, with bond investors starting to smile upon Latin America again, FDI is likely to be about half that level. In Brazil, which was used to annual flows of $30 billion just a couple of years ago, bond spreads have plunged, and yet JPMorgan projects total FDI this year of just $7.5 billion, a quarter of its erstwhile level.
To be sure, other regions are suffering but not as badly. China seems exempt from risk-aversion, and the Asia/Pacific region as a whole, largely thanks to China, is seeing an increase in FDI to almost $60 billion this year. Emerging markets in general, however, are forecast to have their lowest total of FDI in years, according to the Institute for International Finance.
Still, it is possible to have growth without FDI: look at Chile and Russia. And Chile has posted solid growth and achieved a solid investment-grade credit rating while still suffering from many of the political weaknesses that are often held up to help explain Latin America’s economic underperformance.
Even Chile is far from the ideal to which all other nations should aspire. Many economists forget, for instance, that the country’s move from inflation to stability was extremely painful.
The Pinochet regime’s economic shock therapy resulted in two huge recessions: a 24% drop in GDP per capita from 1971 to 1975, and another 14% drop between 1981 and 1983. The latter drop, it’s worth noting, came as a result of pension reform, the sort of thing that is now being prescribed for the rest of the countries in the region.
Chile’s economic shocks, of course, were also imposed on the country by a military dictatorship: it’s nigh-on useless as a model for how governments are going to be able to achieve reforms in the face of popular opposition to neoliberal policies.
And the big-picture, internationalist political view is even bleaker as far as South America is concerned. Why did Spain outperform Venezuela over the past 50 years? Why does Bulgaria have a BB+ credit rating and Mexico an investment-grade one while Brazil and Uruguay struggle?
The answer can be given in one word: convergence. If your economy is strapped tightly to that of an economic superpower like the US or Europe, you’ll grow with or without reforms.
Former Mexican foreign minister Jorge Castañeda addressed this issue in an influential article in the May/June issue of Foreign Affairs entitled “The Forgotten Relationship”. He wrote that “In the post-September 11 world, Latin America finds itself consigned to the periphery: it is not a global power centre, but nor are its difficulties so immense as to warrant immediate US concern. In many ways, the region, at least in terms of US attention, has become once again an Atlantis, a lost continent.”
| Castañeda, Quarles and Kuczynski: pondering where to go next after the Washington Consensus. Is Latin America a lost continent? |
Goodwill remains
This view does not go down well, needless to say, with the US administration. “I read that article while I was on the G5 with Snow between Brasilia and Quito,” says Randal Quarles, assistant secretary for international affairs at the US Treasury. (John Snow is the low-profile present treasury secretary; the G5 is the Gulfstream V private jet in which he travels on international trips.)
No-one is accusing Quarles of not caring about Latin America, of course. The US Treasury remains to all intents and purposes in control of all IMF decisions in Latin America, and recent IMF programmes in Ecuador and the Dominican Republic do show a certain amount of goodwill. “Look at the level of engagement on economic questions,” says Quarles. “Other US interests in other parts of the world have not crowded out Latin America.”
But even Quarles admits that the US is acting in Latin America mainly through the medium of the IMF. “You help with whatever the best tools at hand are for the financial stress that you are seeing,” he says. “The IMF has been the right tool in Latin America.”
Beyond the IMF, the US says that it’s working hard on negotiations to bring about a Free Trade Agreement of the Americas (FTAA) by its self-imposed 2005 deadline. But no-one thinks that remotely possible. The idea that the US would open up its borders to incredibly cheap imports of, say, Brazilian soybeans and oranges – not to mention steel – just does not seem feasible.
And Brazil, with its new left-wing administration, also seems in no mood to compromise with the US on such matters.
Meanwhile, the US seems to be signalling the diminished importance of FTAA by concentrating much more on bilateral trade agreements, such as the one recently signed with Chile, and the larger World Trade Organization talks. It’s also spending quite a lot of effort on Cafta – a Central American Free Trade Agreement covering Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua.
How seriously should this be taken? According to JPMorgan’s Chang: “If you’re serious about free trade, I don’t think you start with Honduras.”
In any case, says John Coatsworth, director of the David Rockefeller Center for Latin American Studies at Harvard University, for successful reforms to take root in the region “the US has to have a coherent and focused policy that offers more than mere access to the US market. The way to sabotage FTAA is to talk about nothing else. Unless it’s seen as something that will improve the lives of large numbers of people, it’s a dead duck.”
This is where Latin America needs the attention not just of the Treasury, but also of the Department of State and – crucially – top decision-makers in the White House, such as Karl Rove. The Treasury does not have the influence over US policy that it had in the Clinton years, and there’s no indication that Latin America is on Bush’s radar screen at all.
Crucial test
Castañeda sees Brazil as being the crucial test of US attitudes to the region. “Washington should do everything it can to help Lula succeed,” he says. “It can go beyond benevolent neutrality to actively endorsing his regime.”
Coatsworth gives one possible example. “Imagine if somebody in Washington had said Lula’s zero-hunger initiative was massively important for the hemisphere: if hunger in Latin America had got as much money as Aids in Africa.”
That sort of engagement, however, seems very unlikely from the Bush administration. Latin America is being left largely to its own devices, and is going to have to try to sort itself out without much help from the north.
John Williamson, senior fellow at the Institute for International Economics, coined the term Washington Consensus and has, with former Peruvian finance minister Pedro-Pablo Kuczynski, published a book entitled After the Washington Consensus that seeks to lay out a map for how Latin America can grow of its own accord.
“I think the idea that Latin American countries can’t make it without a helping hand from Uncle Sam is probably mistaken,” says Williamson. But he adds that if the US has no interest in Latin America, “it puts the region back several years”.
Those several years could be ones Latin America can ill afford. Kuczynski notes that “in a number of South American nations there is a danger that they will grow old before they grow up: rapidly improving healthcare and declining birth rates will eventually lead to an aging population before these countries have had an opportunity to reach reasonably modern living standards. Once the population stabilizes, only a near-miraculous productivity gain can propel a country to modernity.”
Williamson and Kuczynski add a number of new ideas to the old Washington Consensus policies in an attempt to find a recipe that will finally be sufficient for the rapid growth that Kuczynski, at least, is convinced should be possible in the region.
Key among them is labour market reform: Latin America suffers, at the moment, from a situation in which a select set of employees – mainly civil servants – are extremely well paid and receive excellent benefits, while the majority of workers have no safety net at all.
Also crucial, the new book says, are more redistributive policies: if growth only benefits the rich – as was generally the case in the 1990s – then the population as a whole has no reason to support it.
For this reason, say political scientists Patricio Navia and Andrés Velasco in one chapter of the book, there’s a compelling view that progress can only be made by leftist politicians: what they call the “Nixon in China” thesis.
Coatsworth at Harvard is definitely a strong proponent of this idea. “If you think about Alberto Fujimori in Peru, he was the left-wing candidate when he ran the first time around,” he says. “Part of his credibility and durability was the extent to which resources were devoted to poor communities in the country.”
Fujimori presided over a period of economic successes in Peru, while his right-wing successor, Alejandro Toledo, with much the same set of policies, has some of the lowest ratings in all of Latin America.
No correlation
Lacey Gallagher, head of emerging market research at CSFB, says there is no correlation between growth rates and presidential popularity in Latin America. Peru has the fastest growth in Latin America, but a hated president; Brazil has virtually no growth at all, but Lula is extremely popular.
If that’s the case, then there’s very little incentive for presidents to spend political capital on pro-growth economic policies. What’s more, privatizations and tight fiscal policy – the first-generation reforms – could often be effected by presidential decree and in any case had negligible effect on the middle classes.
In contrast, write Navia and Velasco, “the set of interests potentially affected in the next stage reads like a Who’s Who of highly organized and vocal groups – teachers’ and judicial unions, the upper echelons of public bureaucracy, state and local governments, owners and managers of private monopolies, and the medical establishment.”
Most Latin countries are not in crisis, which, paradoxically, makes any kind of reform much more difficult. To implement serious reforms, says Kuczynski, “you need a perfect storm. Reforms only take place when you hit bottom.”
Kuczynski says the worst inflationary periods in the history of Argentina and Chile were followed by successful reforms. In Peru, the crisis came in the form of domestic terrorism. And in all cases, from Pinochet to Menem to Fujimori, there was a strong, egotistical president who was capable of bullying his legislation through – even if doing so meant changing the nation’s constitution.
What’s more, both Menem and Fujimori were elected on platforms diametrically opposed to those they eventually implemented. It’s Nixon in China: the only way to find support for neoliberal policies is if a leftist politician proposes them.
It’s certainly possible for sustainable growth to come from a programme of gradual change: India and China are two clear examples. But that has never worked in Latin America, which often seems to take three steps back for every two forward. “It’s a star-crossed region,” says Riordan Roett, director of the Western Hemisphere Program at Johns Hopkins University’s School of Advanced International Studies.
Recently, Latin America has been plagued by weak presidents – from Fernando de la Rúa in Argentina to Toledo in Peru. Alvaro Uribe in Colombia is the exception. He also has the advantage of substantial counter-narcotic and counter-terrorist financial assistance from the US.
But it’s not just that the presidents are weaker. Their reforms require much more cooperation from the legislature, from the judiciary and from provincial governments than the first-generation reforms did.
Most Latin American countries are in a more or less permanent state of gridlock when it comes to tensions between the three arms of government, broken only by occasional forward lurches pushed through by the IMF in times of crisis.
Columbia University economist Jeffrey Sachs likens it to an emergency room: if you’re able to go to work on a dying patient, it’s best to take the opportunity to treat the underlying disease as well as the symptoms.
Stalemate
But since no Latin country is in the emergency room right now, they’re mostly back to the standard stalemate. “Presidentialism only works in the US,” says Roett.
One popular reform theory is to move Latin America from a presidential to a prime ministerial system of government. This would help bring the executive and legislature into alignment with each other. The idea goes down well with Roett, Williamson, Coatsworth and others, especially Castañeda, who’s generally considered its father. But quite aside from its impracticality, there’s no guarantee that Latin countries would suddenly have strong, UK-style prime ministers rather than weak, Italy-style ones.
A prime ministerial system only really works when there are only two or three very strong parties. In Latin America, the party system has largely broken down, causing dozens of parties in countries like Brazil, and almost comically weak ones in countries like Argentina.
Where does the answer lie?
So is there any hope for Latin America? Maybe the answer doesn’t lie in economic reforms or political reforms, in US hegemony or in perfect storms in emergency rooms. By far the most optimistic person that Euromoney spoke to for this article was Violy McCausland, CEO of M&A boutique Violy & Company.
In the wake of the tequila crisis in Mexico in 1995, she says: “Everybody was looking at the macroeconomic situation, but there were zero analysts on Wall Street looking at the private sector”. It was the private sector, on this analysis, that took advantage of the crisis in Mexico to re-imagine and professionalize itself, becoming the engine that drove Mexico to recovery much faster than expected.
“Out of difficulty is born the creative solutions that have been put in place which have allowed the private sector to flourish,” says McCausland. “It’s very easy to say what’s bad about something. I thought the people doing the credit reports at JPMorgan were the dumbest people on earth. It’s easy to find the downside. What’s hard is finding the upside.”
McCausland, looks at the huge workforce in Latin America, unencumbered by European social-security systems, and sees a very bright long-term future.
Analysts love to bellyache about social security reform in Latin America, she says. “But what really annoys me is people who use a standard to judge what’s appropriate and good in Latin America that they don’t apply to Europe and the US. We have a much bigger workforce on which to build a pension system, and we can learn from all the mistakes made in Europe.
“Where is there more upside?” she asks. “You have no upside in Europe, because there’s no growth in consumption. In Latin America, you have a poor but aspirational, young and growing consumer base.”
What’s more, young people in Latin America are cheap labour. While in the US and Europe efficiencies are made by using fewer people, in Latin America talent does not come at an exorbitant cost.
For McCausland, Latin America is a success story waiting to happen. Yes, the cost of capital is far too high and a certain amount of fiscal discipline is needed. But over the long term, the region has a built-in competitive advantage over Europe and the US, and should be set for strong, private sector-driven growth.
It’s a story people believed in the mid-1990s. There’s no reason why investors might not start believing it again at some point.
Comparison of countries’ GDP per capita (1995 dollars)
Click to enlarge image
