Latin America Shifts Left: It's the Economy
Evo Morales' election in Bolivia, with an unprecedented (for that country) 54 percent of the vote, is seen and analyzed here mostly in political terms. He is a former head of the coca growers union and opposes the U.S.-sponsored attempts to eradicate the production of coca. He has talked about nationalizing the natural gas resources now owned by foreign corporations. "We're not just anti-neoliberal, we're anti-imperialist in our blood," he proclaimed at a recent campaign rally. These things will be more than enough to ensure that he does not get a fair hearing here in the United States.
But we would do well to step back from the politics for a moment and look at this election in economic terms. This explains a lot what is happening in Bolivia, and indeed across most of the region. Bolivia is the poorest country in South America -- its GDP (or annual income) per person is only $2,800, as compared to $8,200 for the Latin American region and $42,000 in the United States.
Bolivia has also been subject to IMF agreements almost continuously (except for eight months) since 1986. And it has done what the experts from Washington have wanted, including privatizing nearly everything that could be sold. Among the most notorious was the water system of Cochabamba, which led to the famous "water war" against Bechtel (the buyer) in 1999-2000 after many residents got priced out of the market. The country's Social Security system was also privatized.
But nearly 20 years of these structural reforms -- or "neoliberalism" as Morales and most Latin Americans call it -- have brought little in the way of economic benefits to the average Bolivian. Amazingly, the country's per capita income is actually lower today than it was 25 years ago. And 63 percent of Bolivians live below the poverty line.
So Morales' declarations cannot be dismissed as just populist campaign rhetoric. In fact, the economic failure of the last 25 years is both regional and unprecedented. For Latin America as a whole, income per person -- the most basic number that economists have to measure economic progress -- has grown by about 1 percent for the first five years of this decade. From 1980 to 2000, it grew by only 9 percent. Compare that to 82 percent for the 1960-1980 period -- before most of the neoliberal reforms began -- and it is easy to see that this is the worst long-term economic failure in modern Latin American history.
Here in Washington, most economists and policymakers have either ignored this profound regional economic failure or maintain that is has nothing to do with the structural reforms of the last 25 years. On the contrary, they argue that the reforms did not go far enough -- and that is the position of the Bush administration as well.
But most Latin Americans aren't buying it. This difference over economic policy -- much more than drug policy, the war in Iraq, immigration, or Cuba -- is the main thing that has set Washington on a collision course with most of Latin America. Evo Morales is now the sixth candidate in the last seven years to win a presidential race while campaigning explicitly against "neoliberalism." The others were in Argentina, Brazil, Venezuela, Ecuador and Uruguay. And there will likely be more in the near future, as there are 10 more presidential elections scheduled in Latin America over the next year.
The connection between a set of policy reforms -- implemented at different times in different countries -- and the economic failure of the last 25 years cannot be proven in a scientific sense. And each country's story is different. But there is considerable evidence that many of the policy changes since 1980 that have been advocated by Washington have contributed to this economic disaster.
Fiscal discipline is a good idea, but when the economy is in recession, it may be better to run a budget deficit, as we do in the United States. Inflation is always something to watch out for, but central banks can get carried away and set interest rates too high, stifling economic growth. This is especially true if they are completely unaccountable to anyone outside the financial sector or foreign financial markets.
Foreign capital can be useful, but opening capital markets completely can wreak havoc with a country's currency. This can hurt the investment climate -- a manufacturer that imports parts, and produces for export, needs to have some idea of what the exchange rate will be. An overvalued currency can hurt domestic industry by making imports artificially cheap. So too, can indiscriminate opening to imports from all over the world. And there are times when a country is better off restructuring -- even unilaterally, if necessary -- an unsustainable debt burden, rather than sacrificing its economic future for many years or even decades just to pay off debt.
The economic landscape of Latin America is littered with the ruins of these and other policy mistakes that were supported, and sometimes implemented, under considerable economic and political pressure from Washington and the institutions that it controls: the IMF, World Bank and Inter-American Development Bank. Governments also abandoned most of the policies that have contributed to the development of nearly every country that has reached high income levels today -- for example certain industrial and development strategies -- in favor of "market-driven" development.
Last month both Argentina and Brazil decided to pay off their remaining debt to the International Monetary Fund. President Kirchner of Argentina made no bones about why his government was willing to shell out a huge sum right now -- $9.8 billion -- to rid itself of the IMF forever. The IMF has "acted towards our country as a promoter and a vehicle of policies that caused poverty and pain among the Argentine people," he said in announcing the decision.
He might have added that the IMF didn't give Argentina a dime after its economic collapse at the end of 2001, and in fact drained $4 billion (4 percent of GDP) out of the country in the calamitous year of 2002. And Argentina had to fight the Fund every inch of the way to adopt the polices that enabled its economic recovery, among them a stable and competitive exchange rate, relatively low interest rates and a tax on exported goods.
Keeping the currency stable and from becoming overvalued was essential for the export-led part of the recovery, and also to encourage domestic investment. Kirchner's government had to intervene many times in currency markets, and use the Central Bank for something other than fighting inflation, in order to accomplish this. The IMF remains opposed to these policies. The Fund also opposed the export tax, which was important in boosting government revenues. Instead, the IMF advocated a number of politically unpalatable and economically dubious policies including raising utility rates, running bigger budget surpluses and paying more money to foreign creditors.
Argentina's economic policy choices were decisive and successful. The economy has grown at about 9 percent for three years now, a nearly unprecedented growth streak in Latin America over the last 25 years. And it was done without any outside help and despite the net drain of money to the IMF and other lending institutions. This explains much of Kircher's political success, and the country's attitude toward the IMF and the Bush administration -- recall the not-so-royal welcome that President Bush received in Mar del Plata, Argentina, last month.
Even in the case of Venezuela, much can be understood by looking at the situation in economic rather than just political terms. Of course President Hugo Chavez is locked in a bitter political struggle with the Bush administration, and much of this is due to the latter's support for a military coup against his democratically elected government in 2002 and for an unsuccessful recall effort last year. But Chavez' popularity at home is primarily based on the country's recent economic performance.
The first four and half years of his government were marked by enormous political instability, including capital flight, several oil strikes -- one economically devastating in 2002-2003 -- and a military coup. But since political stability was established, the economic recovery has been remarkably rapid.
The Venezuelan economy grew by nearly 18 percent in 2004 and about 9 percent this year. Furthermore, the government more than doubled social spending and is providing free health care to a huge number of the poor population, as well as subsidized food for 40 percent of the country. It is common to attribute all of this to high oil prices, but oil prices increased faster and reached even higher levels in the 1970s -- and Venezuela's per capita income actually fell during that decade. In fact, from 1970-1998, Venezuela suffered one of the worst declines in per capita income in the world: It actually fell by 35 percent. The Chavez government's most lasting legacy may well turn out to be not his defiance of the United States, but the reversal of his country's remarkably long economic decline.
The tangible improvements for those living in Caracas' poor barrios have been noticed in the rest of Latin America, a region with the most outrageously unequal income distribution in the world. But Venezuela has changed the economic equation in Latin America in another very important way: by using its oil revenues to provide an alternative source of funds. Venezuela has loaned about a billion dollars to Argentina, and Chavez pledged last month to do more if necessary.
Which brings us back to Bolivia. Bolivia is in debt up to its neck, mainly to the international financial institutions. These include the Inter-American Development Bank, World Bank and the IMF -- but the IMF, and that means U.S. Treasury, calls the shots for the group.
It is likely that their recommendations for economic policy will be the same as they have been for the last 25 years and contrary to what Morales will need to do in order to deliver on his promises. Assuming he can get enough support from within his own government, will he be able to stand up to these powerful creditors?
Five or six years ago, the answer would have been probably not. If he tried, Bolivia would have been economically strangled. But today it is a new world. This is partly because the IMF has lost so much power. After the Asian economic crisis of the late '90s, in which the affected countries had a very bad experience with the Fund, the middle-income countries in the region piled up reserves so as to never have to borrow from the IMF again. And Argentina has shown that a country that was flat on its back could say no to the Fund and launch a solid economic recovery on its own.
The other big factor is Venezuela. The $950 million that Venezuela loaned Argentina is more than 10 percent of Bolivia's GDP. And Hugo Chavez is a very good friend of Evo Morales. Thus Morales will be the first president of a small, dirt-poor, heavily indebted country to arrive in office in an excellent bargaining position with the official international creditors. In fact, they may well discover that, just as in Argentina in 2003, they need him more than he needs them.
Of course, Morales will still face many challenges. The majority of Bolivia -- like him -- is indigenous, and they are poorer, discriminated against, and heretofore excluded from political power. There will be demands for political autonomy from them as well as from the some of the richer areas. Compromises will be made, and some of his supporters on the left will be disappointed. And the challenges of implementing any economic development strategy for a country of this size and level of development are considerable in any case.
But these are internal problems. At least he will have a chance to resist outside pressures to derail any reform program.
At some point Washington policymakers and economists will revisit the economic evidence and decide that perhaps some of their policy prescriptions have been wrong. But by that time, Latin America will have long passed them by.