The Economy

Dec. 21, 2004
Why is Latin America falling apart?

In Mexico they cannot even agree on what time it is. A recent decision to implement daylight-saving time on Apr. 1 was accepted only by a random assortment of cities. As Jorge Castenada, Latin America's leading political scientist puts it, the cleavages sundering Mexico have created not only two countries, but two increasingly alienated societies. Mexican figures for real GDP show the economy growing at 3% this year, but that figure is misleading. Even if it does occur, per capita GDP will be only barely above the level of 1994, the year before devaluation. Furthermore, while the maquiladora sector in the north is prospering because of booming exports, the rest of the country has plunged into recession. It isn't only Mexico. In Venezuela, the poor have commandeered vacant apartment buildings and have scrawled their own names on the doors. President Hugo Chavez refuses to send in the troops. He said in his election campaign that he would give property of the rich to the poor, and apparently the poor took him at his word. The "Big Three" of South America are mired in recessions this year. The latest forecasts call for real GDP to decline between 2% and 3% in Argentina, Brazil, and Chile. Argentina has managed to stifle fears that arose after The Financial Times carried an article speculating that the peso might be devalued, but the economy continues to crumble. For many years, hyperinflation was a way of life in Latin America. It accomplished nothing; the economy stagnated and the standard of living declined. Finally the governments and the voters saw the light. The monetary authorities were given the power to control inflation, financial institutions were restructured, and for a while it looked as though the textbook solution would work impeccably. The Mexican devaluation in 1995 threw a scare into the region, but with real growth rebounding by an average of 6% a year for the next three years, the worst fears were assuaged. However, when virtually the entire continent south of Monterrey is in a recession, it is painfully obvious that the preferred solution isn't working. While monetary stability is the critical first step, it can't do the job alone. The plan to generate rapid growth also includes fiscal responsibility, a balanced trade account, and a more equitable sharing of political power that ensures the middle class and the poor are not hurt by the policies that stabilize prices. In varying degrees, these conditions are not being met. The biggest problem in Mexico is the lack of political stability. We will never know who really won the 1994 election, but many think it was stolen by the PRI, the political party identified with the government. With the southern states becoming increasingly disenfranchised, only an honest election in 2000 is likely to keep the country from blowing up. In Brazil, the principal problem has been the adamant refusal of elected officials to make any serious attempt to reduce the budget deficit, which eventually resulted in the 40% devaluation of the real. That was the event that cut the legs out from under Argentinian and Chilean exports, leading to recessions in those countries as well. Austerity can be accepted only for so long. Chile went through a severe adjustment procedure in the early 1970s that lasted four years, but since 1976, with the single exception of the worldwide recession in 1981-82, real growth has averaged more than 7% per year. Other countries might not remain stable for four years. The recession conditions in Venezuela that started in 1994 have now come close to pushing that country to the breaking point. A year ago, even though there was some evidence of an economic setback, it appeared to many that Latin America had turned the corner and was about to enter a period of extended rapid growth. Today that dream has turned to ashes. Unless political stability and fiscal responsibility suddenly make their way to center stage, the outlook for the region will continue to worsen. Michael K. Evans is president of the Evans Group and professor of economics at the Kellogg School of Business, Northwestern University, Evanston, Ill. His e-mail address is [email protected].

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