S. America reels, looks north again
President Bush Tuesday signed free-trade legislation after approving a loan for Uruguay.
WASHINGTON AND RIO DE JANEIRO — Uruguay has long been known as South America's Switzerland for its prosperity and financial stability. But these days Hernán Bolerio gauges his country's economic decline by the rising number of customers converting their cars from gasoline to diesel fuel.
"It's cheaper, and people are desperately searching for ways to survive," says Mr. Bolerio, the owner of an auto sales and repair shop in Montevideo, Uruguay's capital. "Without that [work], I don't know what I'd do."
Bolerio's tale is symbolic of a South America that, economically and politically, has once again run out of gas. After a "lost decade" of economic decline in the 1980s gave way to years of optimism over US-backed privatization and free-trade reforms, the region is again on the ropes teetering on the edge of a disaster that could drag the global economy down with it.
There is discouragement and frustration in the region. But as US Treasury Secretary Paul O'Neill visits this week on the heels of Monday's $1.5 billion "bridge" loan to reeling Uruguay and Tuesday's free-trade legislation signed by President Bush many regional observers are hoping the move portends a return to more US involvement rather than less.
The quick loan signals a shift away from the Bush administration's blanket condemnation of such bailouts. But it probably suggests even more about the administration's concern over Brazil, a giant with a sinking currency and Amazon-sized debt over $250 billion. With substantial investments by US banks and corporations in Brazil, it is considered too big to be allowed to fail.
With Brazil currently in negotiations with the International Monetary Fund (IMF) asking for an additional $20 billion to go with the $33 billion it has received over the past four years the "strong support" Mr. O'Neill lavished Monday on the Brazilian government's economic policies indicates the backing Brazil can expect from the US and international financial institutions.
After stops in Brazil Monday and Uruguay yesterday, O'Neill meets today with leaders in the storm's vortex Argentina, which in December defaulted on its $142 billion foreign debt, and where the economy is expected to shrink by 15 percent this year.
But Argentines should not yet expect any Yanqui bailout. For the Bush administration, the guiding principle will still be help for those who first help themselves. The US does not yet believe Argentina has done enough to control spending and cut corruption.
Still, word of the US loan to Uruguay and yesterday's signing by President Bush of trade legislation that may pave the way for a free-trade zone throughout most of the Western Hemisphere, are buoying hopes for US involvement in the region. "People don't want the US involved less in the economy, they want to see a real partnership that grows more," says Jorge Caumont, an Uruguayan economist.
Walter Tavares, a pet-shop owner in Rio de Janeiro, says that Brazil can argue all it wants with the US and the IMF, but ultimately it will have to back down because it needs financial aid.
"Brazil needs help right now, there is no way to avoid it," Mr. Tavares says. "Imagine if Brazil became like Argentina, this country ... the size of a continent. It would be chaos." Adds Uruguay's Mr. Caumont: "If the US offered a free-trade agreement today," for example, "Uruguayans would jump at it."
That's unexpected coming from a region that remains wary of globalized commerce. But it also suggests that the burden will fall on the US and other "wealthy" countries to formulate mutually beneficial trade and investment policies.
"You feel weariness and wariness across the region" towards economic reform and free trade with the US, says Michael Shifter, a South America specialist at the Inter-American Dialogue in Washington. "But people also need something to grab onto when they fear the abyss."
Part of South America's turmoil is caused by what economists call "contagion." Economic collapse in Argentina has spread like earthquake aftershocks through neighboring countries, leading to riots in Paraguay and bank closings in Uruguay, and threatening a meltdown in Brazil. Argentina's financial tremors, plus the spectacle of a near-coup in oil-rich Venezuela in April and a heating-up guerrilla war in Colombia, have drawn attention to what Mr. Shifter calls the "axis of upheaval," and put the region as a whole on the world's "troublespot" list.
"Investors back away from where they see risk, and that is cutting capital flows to Latin America," says Michael Gavin, head of emerging markets research with UBS Warburg in New York. In Brazil, the potential victory of a leftist candidate in October's presidential election is joining other sources of the jitters to give Brazil "one of the riskier atmospheres," Mr. Gavin says. "That starts to put pressure on the economy, validating the fears," he adds, and the prophesy of economic disaster fulfills itself.
But another cause is the deep disappointment region-wide in economic reforms such as privatizing national industries and trimming bloated bureaucracies, which caused massive job loss but have yet to deliver the promised dividends. There is a sense of having been hoodwinked by a world represented primarily by the US that imposed the rules of economic reform but didn't deliver the rewards.
After Argentina's deadly riots in January, Peru erupted last month over a government scheme to privatize the electricity-generating industry. And Uruguayans were shocked last week when the normally well-behaved country experienced Buenos Aires-style looting.
But a large part of the region's problem, according to some analysts, is self-inflicted, largely attributable to failed political leadership.
"The first wave of reforms was often carried out by autocrats like [Argentina's Carlos] Menem and [Peru's Alberto] Fujimori, where corruption was high, and the benefits were seen as restricted to a few individuals," says Eduardo Morón Pastor, an economist at Universidad del Pacifico in Lima, Peru. "What's lacking is a real reform that proceeds with transparency, equity, and political firmness."
Brazil's leftist leanings aside, some analysts point out that, far from turning wholesale to antireform populists, South Americans are often sticking with governments that favor the US-backed economic model.
Today in Colombia, for example, the reins of government pass to President-elect Alvaro Uribe Vélez, a fiscal conservative who promises an efficiency drive in government.
"Uribe has named an economic team with close ties to the IMF [and] the Inter-American Development Bank, and there is no controversy about that," says Fernando Cepeda, a Bogotá political analyst.
Mr. Cepeda notes, if anything, an "overly optimistic" response to US passage of the Andean Trade Preference Act last week, which will reduce tariffs on selected products from Colombia, Peru, Ecuador, and Bolivia. Colombians are talking about it creating 300,000 new jobs as a result, and Peruvians expect about 1 million new jobs over four years.
"You get the sense governments are still learning as they go along, but they see the US under the Bush administration learning too...." says David Scott Palmer, a Latin America expert at Boston University spending the summer in Peru. "You get the feeling the [US-backed] economic model will go ahead, but with some rethinking, with more emphasis on social issues, and with demands the US play a more active role."
Andrew Downie contributed to this report from Rio de Janeiro.