Latin American economies

businessworld kenneth rogoff

(Copyright: Project Syndicate, 2006)

When is the US going to wake up to what is happening in Latin America? The growing influence of Venezuela’s president, Hugo Chávez, is casting a shadow over the region. Some countries like Chile and Columbia remain committed to progressive and democratic regimes. But over the past year, allies of Chávez have come to power in countries such as Ecuador and Bolivia, and just missed winning in a few others. In Mexico, Andrés Manuel López Obrador would have seized the presidency had he convinced just a quarter per cent more voters to support him.

With almost everyone else pursuing market-oriented economies, why is Latin America veering dangerously in another direction? Is it because some voters do not appreciate having single-digit inflation, down from an average of more than 300 per cent 12 years ago? Fortunately, at least half the voters appreciate these improvements. Nevertheless, a growing schism between left and right has led to a distressing level of policy paralysis. This is nowhere more apparent than in Mexico. Its growth has ranged from poor to tepid since its economic crisis a decade ago. Why has it not benefited more from the 1992 North American Free Trade agreement?





Part of the problem is China, whose ultra-low wages provide competition for Mexico. But the real issue is a political system unable to reach consensus on economic reforms. Its new president, Felipe Calderón, speaks of the need to break up Mexico’s monopolies. Where will he start, telephones or tortillas? There is too much choice.

Peasants toil on tiny plots of land, in a form of disguised unemployment similar to that seen in rural China. The state-owned oil company invests too little in technology. Crime abounds. International comparisons of corruption are not flattering. Worse, López Obrador seems willing to throw Mexico into turmoil rather than accept his defeat. So, how is the US planning to react? By following through on plans to build a 2,000-mile wall across its southern border.

Brazil, meanwhile, has shown great stability. Yet, if it is to enjoy growth above the modest levels, the country needs to reform its labour laws, open itself more to foreign trade, and improve its primary education system.

With Latin America’s two largest economies in a holding pattern on reform, it is that much more difficult for even the region’s high flyers, like Chile, to achieve escape velocity into a sustained high growth orbit. Even the weak growth of the last few years in Latin America marks the region’s best performance since the 1970s, and incomes are actually catching up to those in the US, Europe and Japan. Nevertheless, Latin America remains the slowest growing among the world’s developing regions. It is not only China and India that are growing faster, but also Central Europe, Central Asia and the Middle East. Even Sub-Saharan Africa has enjoyed more rapid growth in the past few years.

Does the pied piper of Venezuela offer a better way to grow? Unfortunately, no. Venezuela is merely being pulled along in China’s tailwind, thanks to high oil prices. When oil prices collapse, as they will at some point over the years, Venezuela’s economy will also collapse. With production still running far below the level when Chávez took over, there is little doubt about how this story will end.





In today’s global economy, there is no ‘third way’ for countries to avoid continued liberalisation. The current instalment of Latin American socialism is all too likely to produce a re-run of tragic episodes from the past.

In this context, the US’s indifference towards the region is both naive and dangerous. The Democratic US Congress has signalled that free trade deals with Peru and Columbia need to be ‘renegotiated’. What kind of message does that send to the US’s few remaining allies in the region? If the US does not start embracing its friends in Latin America, it may take a generation to undo the damage.