FORGOTTEN CONTINENT<BR< soul
Yale University Press.
Why has Latin America been so much of a failure when compared with the United States or Canada? In attempting to answer this question, Michael Reid’s Forgotten Continent looks at all the explanations available. One is so-called dependency theory, developed by economists in the 1940s, which blames “United States intervention and Latin America’s subordinate role in the world as an exporter of raw materials”. Then, as Reid explains, there is the idea that “Latin America has been doomed by its culture, and in particular an Iberian, Catholic tradition of social organisation and political thought which, it is argued, is both anti-capitalist and inimical to democracy”. Reid also invokes the region’s difficult geography, its “Baroque” legal system, its lack of solid institutions, and its deep inequality, which stems from the colonial period, if not before: the Inca Empire was rigidly hierarchical. Reid quotes Alexander von Humboldt, in an essay on Mexico of 1811: “The architecture of public and private buildings, the women’s elegant wardrobes, the high society atmosphere: all testify to an extreme social polish which is in extraordinary contrast to the nakedness, ignorance and coarseness of the population” – a stark description of inequality that persists up until now.
Which of all these explanations for the region’s backwardness does Reid regard as the most plausible? Always even-handed he says that it is a “mistake to seek a single, overarching explanation for Latin America’s failure”. The real explanation is to be found in a mixture of all the explanations, in what he sees as a never-ending “contest between modernisers and reactionaries, between democrats and authoritarians”.
Reid points out that between 1850 and 1930, many Latin America countries had a very successful run. Their economies were relatively open, exports thrived, and in some countries, democracies looked like consolidating successfully. By 1910, a century after independence, Argentina was, on a per-capita income basis, one of the half dozen richest countries in the world. Immigrants flocked there from all over Europe. Chile was also thriving. German immigrants had colonized large tracts of the south and Valparaíso was one of the world’s most prosperous ports. These successes cast doubt on many of the traditional explanations for Latin America’s failure summarized by Reid. Perhaps there are other explanations? In the case of Chile and Argentina, the Great Depression had a devastating effect, as Reid points out, and it went deeper than the tragedy entailed by mass unemployment. Economic failure opened the floodgates of extremist ideology. Both Communism and Fascism had a huge impact, and unlike Western Europe, Chile and Argentina were not cured of extremist ideas by the sufferings of war. Electorates were sold the magic of a quick fix: equality and prosperity here and now. Voter expectations rose, while the capacity of the economies to meet them declined, because of the instability caused by governments trying to force through unrealizable goals. Generally, in successful countries round the world, voters and governments enter into an implicit social contract, whereby no government promises to, or is expected to, deliver benefits which, though apparently desirable in the short term, will eventually cause untoward economic damage. It is a pact whereby both candidates and voters somehow recognize that “nations, like men, do not have wings. They make their journeys on foot, step by step” – a wise and elegant statement, quoted by Reid, made in 1837 by Juan Bautista Alberdi, Argentina’s great liberal constitutionalist. The pact ensures long-term governability and sustainable growth. In Chile and Argentina it was broken after 1930.
Over the past twenty five years or so, it has been restored in Chile. In Argentina Néstor Kirchner, and his wife Cristina, who has now succeeded him, govern very much in the populist tradition of their mentor Juan Domingo Perón. This leftist-sounding tradition, as Reid points out, in fact owes less to Marx than to Mussolini. The state plays a commanding role, key prices are fixed, and the private sector is at the mercy of a high-handed, corrupt government. Fortunately, there is an implicit pact of sustainable governability similar to the Chilean one in place now in several other countries, such as Mexico, Brazil and Colombia.
Where is Latin America going now? What will be the outcome of the “battle for its soul”? Reid analyses the attempts at economic liberalization that have been made under the umbrella of the so-called Washington Consensus. Under it economies are supposed to be open to world trade, and to be subject to market forces, under a rule of law that guarantees secure property rights. The government’s role in the allocation of productive resources is supposed to be reduced to a minimum. That implies privatization of state enterprises and withdrawal of sector subsidies or special taxes. The government is also supposed to practise fiscal responsibility and focus its attention on areas such as education and poverty, where it cannot be replaced by other agencies.
Many of these ideas were applied in several Latin American countries in the 1980s and 90s, but they were not always successful. Argentina’s economy suffered a disastrous debacle leading to devaluation, deep recession and widespread unemployment in 2001. Reid is right in suggesting that Washington Consensus measures are not to blame for these crises. He thinks – plausibly – that part of the problem was that they were not always implemented together. You cannot just leave one out, like the Argentinians under Carlos Menem, who privatized, and opened the economy, but never practised fiscal discipline. Reid is also right to argue that governments failed to build strong institutions to bolster their reforms. Perhaps he is too polite to say so, but this failure can be largely explained by the fact that the administrations concerned were corrupt. The Menem government in Argentina looked very liberal to some, but it acted in the old Peronist tradition in its thirst for the booties of power. This so-called liberal government privatized, but did so taking bribes from the new owners, and packing the Supreme Court with allies lest anyone object through legal action.
An interesting attempt to apply Washington Consensus policies was made in Venezuela in 1989. It is a cautionary tale which shows that countries can get to a point where they are practically beyond repair. Venezuela had had a stable, two-party democracy since 1958, but economic policy was always populist and corporatist. Governments got away with it because they could draw on huge oil revenues to finance state handouts, and large state investments in steel and aluminium plants. Then from 1982 to 1998 the price of oil fell. As Reid succinctly points out, “the ratio of government oil revenues to population fell from a peak of $1,540 per person in 1974 to $382 in 1992 (and $315 by 1998)”. Since politicians could not bring themselves to stop spending, by 1988, “the fiscal deficit was 9.4 per cent of GDP, the current-account deficit was the largest in Venezuelan history and the price of everything from bank loans to medicines and staple foods was artificially held down”. Against this background, Carlos Andrés Pérez, who had been a populist, big-state-project president between 1974 and 1979, took office for a second term, in 1989. He realized that the economy had to be reconnected with reality. Unfortunately, Venezuelans had by then developed social attitudes typical of a petro-state. They felt that they had been endowed with limitless riches to which they had an inalienable right. When Pérez implemented austerity measures, Caracas mobs went on the rampage, looting supermarkets, particularly near the poorer areas of town. After “thirty hours of chaos”, the army was asked to restore order, and over the next three days 400 people were killed.
Pérez struggled on with his reforms, but he remained deeply unpopular. In 1992, an obscure comandante called Hugo Chávez staged a military coup against him. The coup failed and Chávez went to jail, but his promise of a return to the free-spending days of old lingered in the minds of Venezuelans. Pérez was impeached in 1993, and the next elections were won by an ageing former Christian Democrat president, Rafael Caldera, who idiotically undid Perez’s free market reforms. In the meantime the price of oil kept going down. In the 1998 presidential elections, Chávez, who had been pardoned by Caldera, stood on a populist platform, and obtained 56.2 per cent of the vote. The Venezuelans desperately wanted to believe the good news of future welfare on which he campaigned.
Chávez’s populist economics would normally have led Venezuela to even greater economic ruin and therefore to his own eventual downfall. They may still do so one day. But his free-spending ways were rescued by rising oil prices. Unbelievably, 1998 was the low point in a sixteen-year bear market for oil. Since then the price has risen so much that Chávez has even been able to prop up Fidel Castro, thus securing an important military and ideological ally, and to export his “Bolivarian revolution” to Bolivia, Ecuador and Nicaragua. Chávez finances populist, anti-capitalist politicians all over Latin America and no country is now immune from his influence. With his “Bolivarian” dream of uniting the continent under his aegis, he is the region’s new imperialist. Amazingly Chávez gets away with selling himself as a man of the Left. Yet his authoritarian populism is closer to fascism. In Venezuela, the main beneficiaries of the “Bolivarian Revolution” are Chávez’s own megalomania, and a new breed of so-called Boligarchs: businessmen who profit from Chávez’s hand-outs in an economy in which he calls all the shots. The poor have benefited too, but their benefits are not sustainable. Government price-fixing is already causing acute shortages of staple goods.
Today’s battle for Latin America’s soul is pitched between supporters of Chávez and those who prefer a model closer to that of Chile, Peru, or Brazil. All three countries are run by centre-left governments who administer a market economy, while focusing fiscal revenues on the poor and on the improvement of education, which in its present state does not deliver equality of opportunity. There is no question which of the two models is able to deliver long-term success. While the petrodollars flow, however, Chávez will be able to seduce Latin Americans at will. Reid is surprisingly confident that he will not be that successful. I hope he is right. Much will depend on the price of oil, and on the ability of other countries to stick to a sensible course.