Latin America Resists Populism's Siren Call

DESPITE economic setbacks over the past year in many Latin American countries, there has been no rush to abandon market-reform efforts and return to populist or state-directed economic strategies. Sound economics - at least for the time being - appears to make political sense for most governments.

By the end of 1994, it looked like Latin America had finally turned the economic corner. The region seemed solidly on the road to economic recovery from its decade-long debt crisis and accompanying depression. Collectively, the economies of Latin America expanded by nearly 5 percent in 1994, the most in more than a dozen years. It was the fourth year in a row of positive per capita growth for the region.

Things went sour again the following year, however. Starting off with the Mexican peso crisis, 1995 was a year of almost no growth for Latin America. Per capita income slid backward. In some countries, the losses were particularly dramatic. The Mexican economy shrank by 7 percent, the Argentine by more than 4 percent. With a steep drop in foreign investment, Latin America - for the first time in four years - again became a net exporter of capital.

This year will be better, but not by all that much. Mexico and Argentina are recovering, but not as rapidly as hoped, and several other countries are facing new difficulties. Within Latin America, only Chile and, to a lesser extent, Colombia have managed to sustain high rates of growth.

What is remarkable is that, despite the reversals of the past year and a half, economic policies being pursued in Latin America have remained virtually unchanged. In country after country, governments have, by and large, stuck with the reform package of fiscal and monetary discipline, privatization, and trade opening. The decisions are not based merely on economic calculations. The choices are fundamentally political. Changes in policy course - toward populism, protectionism, and statism - are being rejected not only because they are economically unhealthy, but because they present unacceptable political risks, and they no longer generate much support anywhere. Every elected leader in Latin America today knows the political costs of runaway inflation and the considerable benefits of stable prices. They also know what it takes to keep inflation down, as well as to promote exports and attract foreign capital.

The good news, then, is that Latin America's democratic governments are likely to hold to relatively orthodox economic policies even when they suffer setbacks, because they know what is ultimately required to retain support and win elections. The bad news is that, in the great majority of countries, these policies are still not yielding very satisfactory performance, and it's unclear when they will begin to do so.

The World Bank has estimated that, without a growth rate of more than 3 percent, there is no prospect of reducing poverty. In only one year of the past five has Latin America significantly surpassed that mark. Few countries are consistently meeting the poverty reduction threshold, and only one - Chile - is exceeding it with any margin to spare. Although the data are sparse and not fully reliable, income and wealth inequality appear to be worsening in most parts of Latin America, which is already the region of the world with the widest chasm between rich and poor.

The peso crisis underscored another weakness of Latin America's economies - their vulnerability to external shocks. Steady flows of foreign investment are vital for the region to become internationally competitive and sustain growth over time. But in today's world, those flows can be quickly reversed and cause enormous damage, as shown in Mexico, Argentina, and elsewhere.

These problems - of low growth, high rates of poverty and inequality, and continuing economic vulnerability - have no easy or quick solutions. Addressing them will require even deeper, more fundamental changes than were needed to control inflation or get trade accounts in order. The political challenges will almost certainly be greater. Yet the popular support that has emerged in many Latin America countries for economic reform suggests that good government can also be good politics.

You've read  of  free articles. Subscribe to continue.
QR Code to Latin America Resists Populism's Siren Call
Read this article in
QR Code to Subscription page
Start your subscription today