15 July 2015

Latin America: A tale of two continents


We tend to forget how much of a basket case Latin America was only forty years ago. From 1959 onwards, the continent’s countries were, one by one and with few exceptions, gripped by dictatorship – sometimes left-wing, more often right-wing, and almost always with a military head. Persistent double-digit inflation, often turning into hyperinflation, ravaged national economies. Protectionist policies aiming at import substitution punished households and productive industry. Widespread state control of enterprise bred inefficiency and gaping budget deficits. Most Latin Americans were poor, many of them illiterate and living in slums on the edge of metropolises. Eduardo Galeano’s 1971 verdict in The Open Veins of Latin America that “underdevelopment is not a stage of development. It’s a consequence of it” rang true to many. No wonder the book, an essential manual in so-called dependency theory, went on to shape the thinking of hundreds of social scientists and politicians across the developing world.

And then, something remarkable happened. A few Latin American governments, realising the hopelessness of their situation, began to consider changes. The first one to look for an alternative was Chilean dictator Augusto Pinochet, who was advised by a group of young economists to pursue radical reform. Many of them had studied under Milton Friedman at the University of Chicago in the 1950s and 1960s, and they shared the Nobel prize-winner’s belief in economic freedom and stable money growth as key preconditions for prosperity. They recommended cutting the money supply to bring inflation under control; freeing prices and wages from state controls to address shortages and harmful distortions; and privatising the commanding heights of industry, as well as transport and infrastructure companies nationalised by Pinochet’s Marxist predecessor Salvador Allende.

It is often claimed that Friedman personally advised Pinochet, a claim used by his ideological opponents to discredit his free-market positions. In fact, Friedman only met Pinochet once, in 1975, and he never hid his disdain for a regime that violated human rights and denied political freedoms to its citizens. However, he fundamentally believed that economic liberalisation was essential both to improve the condition of ordinary Chileans and to eventually restore political freedom. As a man of integrity and good will, he endorsed his former students’ recommendations – and subsequent events have vindicated his convictions.

But before that, a painful adjustment period followed in which prices skyrocketed, unemployment rose and people’s standards of living declined. After all, decades of mismanagement at all levels of economic policy cannot be expected to turn into prosperity overnight. Yet, soon enough, good things began to happen. By the early 1980s, Chile had entered a period of relentless growth, boosted by a newly productive workforce, open markets and strong foreign demand for its natural resources. In twenty years, the country became Latin America’s most prosperous economy, not just in terms of GDP per capita, but also on measures of health, education and well-being. The United Nations’ Human Development Index put Chile at 0.822 in 2013, on a par with Portugal and Poland, and well ahead of any other country in the region. The economic growth achieved has been doubly beneficial to Chileans thanks to the unique privatisation of its ruinous state pension system in 1981, as it has brought admirable returns to the private accounts that each working citizen is required to contribute to.

Initially, other Latin American countries shunned the Chilean example, either because its recipes were associated with a bloody dictatorial regime, or because the ruling juntas felt all too comfortable in a barracks-like command-and-control economy. But, as Friedman himself had warned, “what is unsustainable will not be sustained”: by the middle of the decade virtually every unreformed economy on the continent faced the same problems Chile had confronted a decade earlier – only compounded. Inflation, fiscal profligacy and industrial decline combined with a plunge in commodity prices, resulting in acute sovereign debt crises in Mexico, Brazil, Argentina, and others. A mixture of external pressures (especially from the International Monetary Fund), the new popularity of free markets after the fall of the Berlin Wall, and widespread perceptions that the old corporatist recipes had failed spurred governments to replicate – to varying degrees – the successful Chilean reforms. Gradually, economic stability, growth and poverty reduction took hold – again, to differing extents. The biggest hurdle to prosperity, even in those nations which adopted macroeconomic prudence, was the deep-rooted cronyism of government elites, and long-standing patron-client relationships between rulers and ruled.

Nevertheless, the benefits of market reform are readily visible. Latin America is now richer, better trained, healthier and more open than ever before – and more prosperous than most observers could have imagined in the 1970s. The percentage of people in the region living under $2 per day stood below 10 per cent in 2011, compared to almost 24 per cent in 1981. In the context of a growing population, this translates into almost 70 million fewer poor in the span of three decades. And strong annual growth rates, averaging 5 per cent in the continent’s top reformers over the past decade, have enabled governments to support individual empowerment through cash transfer programmes and greater spending on primary education. The latter two, of course, need to be underpinned by flexible markets and productive economies to be sustainable – as Lula and Dilma’s Brazil, with its rigid labour market and heavy taxation, has recently come to realise.

I thought entitling this piece “a tale of two continents” was fitting because today’s Latin America is a starkly different place from the one Galeano lamented in 1971. (So much so that, before his death earlier this year, the author had renounced his Marxist theses on the continent.) But there is a darker side to the pun, because the Latin America of 2015 can neatly be divided into two camps. On one hand, there are the mostly Pacific countries which have doubled down on economic reform, the rule of law and limited government (Mexico, Colombia, Peru, Chile). On the other, we have their mostly Atlantic and Caribbean counterparts (Venezuela, Ecuador, Bolivia, Brazil, Argentina), where a mixture of corruption, challenging environments, populist politics and an inability to push through meaningful change have brought back the demons of the past.

Indeed, in some of them matters are decidedly worse: Venezuela is a far cry from the “Latin Saudi Arabia” it was known as in the 1970s. Argentina is arguably better off today than in the days when a senile Juan Domingo Perón (the original populist) was succeeded by his second wife, who then handed over the country to the monstrous Videla junta. Yet it is still, in relative terms, worse off than a century ago, when its per capita income exceeded that of the U.S. Cynical Argentines put it well when they say “Argentina is the country of the future – and always will be.”

Despite the setbacks and disappointments, there is reason to be hopeful. Things in Venezuela are so bad they are close to reaching the point where they can only get better. For the first time since Hugo Chávez came to power in 1998, the opposition stands a chance of winning the national parliamentary elections scheduled for December. Meanwhile, in Brazil, a series of corruption scandals have woken the public up to the evils of clientelism and the need to curb government power. The Free Brazil Movement has emerged as a mass organised effort calling for lower taxes and less state involvement in the economy. The ruling parties in Bolivia and Ecuador, hearing the bell toll for Venezuela, have decided to contain their socialist instincts. And Argentina – well, Argentina will hopefully rid itself of Peronism at the next election – at least for a while.

Most importantly, any country in trouble and looking for a way ahead no longer has to believe the confident claims of a maverick economist (though we could use one like Milton). Instead, it needs only look at the shining examples next door – countries that resembled their own a few years ago and are now making strides towards becoming part of the developed world. Provided the persistence and resolve needed, all of Latin America will, before we know it, have made underdevelopment a thing of the past. And it will come at no one’s expense.

Diego Zuluaga is the International Outreach Officer at the Institute of Economic Affairs.