Losing Latin America

Kenneth Rogoff [0] is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF. His last piece on Webdiary was America’s Anti-Environmentalists [0]

by Kenneth Rogoff

When is the United States going to wake up to what is happening in Latin America? The growing influence of Venezuela’s leftist president, Hugo Chávez, is casting a dark shadow over the region. Some countries – Chile, Columbia, and Costa Rica, for example – remain committed to progressive growth-oriented and democratic regimes. But over the past year, allies of Chávez have come to power in countries like Ecuador and Bolivia, and just missed winning in a few others. In Mexico, Chávez’s admirer Andrés Manuel López Obrador would have seized the presidency, possibly for life, had he convinced just a quarter percent more Mexicans voters to support him.

With almost everyone else in the world successfully pursuing more flexible market-oriented economies, why is Latin America veering dangerously in another direction? Is it because some voters do not realize that the region has been enjoying greater economic stability than it has in decades? Is it because they don’t appreciate having single-digit inflation, down from a regional average of more than 300% 12 years ago?

Fortunately, at least half the voters in the region appreciate these improvements; otherwise, the situation would be far worse. 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, the region’s second largest economy after Brazil. Despite its enviable location next door to the rich and booming US, Mexico’s growth has ranged from poor to tepid since its economic crisis a decade ago. Why hasn’t Mexico benefited more from the 1992 North American Free Trade agreement?

Part of the problem is the emergence of China, whose ultra-low wages provide tough competition for Mexico, where wages are merely very low. But Mexico’s real obstacle is a political system unable to achieve any consensus on essential economic reforms.

The new president, Felipe Calderón, has spoken of the need to break up Mexico’s monopolies. Where will he start, telephones or tortillas? There is all too much choice.

Peasants toil inefficiently on tiny plots of land, in a form of disguised unemployment similar to that seen in rural China. The state-owned oil company, which accounts for a major chunk of government revenue, is hugely inefficient, and invests far too little in new equipment and technology. Crime abounds. International comparisons of corruption are not flattering. Worst of all, the election loser, López Obrador, seems willing to throw the country into turmoil rather than accept the constitutional legitimacy of 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 exhibited commendable political and macroeconomic stability. Yet, if Brazil is to enjoy growth above the modest levels of the past few years, the country badly needs to reform its labor laws, open itself more to foreign trade, and improve the quality of 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, such as Chile, to achieve escape velocity into a sustained high growth orbit.

Mind you, even the weak growth of the last few years in Latin America marks the region’s best performance since the 1970’s, and incomes are actually catching up slowly to those in the US, Europe, and Japan. Nevertheless, Latin America remains the slowest growing of any of the world’s developing regions. It is not only China and India that are growing faster. Central Europe, Central Asia, and the violence-ridden Middle East are growing faster, too. Even Sub-Saharan Africa, with its wars and famines, has enjoyed more rapid growth in the past few years.

Does the pied piper of Venezuela offer a fairer and 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 next few years, Venezuela’s economy will collapse with them. Over the long run, commodity exporters need to innovate just as much as manufacturers do in order to maintain profitability. With Venezuelan oil production still running far below its level when Chávez took over, there is little doubt about how this story will end.

In today’s hyper-competitive global economy, there is no reliable "third way" for countries to avoid continued liberalization and market-oriented reforms. Instead, the current installment 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 inexplicable indifference towards the region is both naïve and dangerous. The incoming Democratic US Congress has signaled 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 Americans don’t start embracing their friends in Latin America, it may take a generation to undo the damage.