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Columnists

CHILE BLAZES TRAIL FOR LATIN AMERICA
By Martin Wolf

Financial Times (UK)
December 12, 2006

http://www.ft.com/cms/s/8869edfe-8a0f-11db-ae27-0000779e2340.html (subscribers only)

[Review of Javier Santiso, Latin America's Political Economy of the Possible: Beyond Good Revolutionaries and Free-Marketeers (MIT Press, 2006).

The deaths of Augusto Pinochet and the failing health of Fidel Castro mark the end of an era for Latin America. We should look back at the bearded revolutionaries and military despots, ideological fervor and utopian dreams, without any regret. Despite the recrudescent populism of Hugo Chávez in Venezuela and Evo Morales in Bolivia, a more sober style of democratic politics is cementing its hold across the region.

This is the theme of a fascinating book by Javier Santiso, deputy director of the development center of the Organization for Economic Co-operation and Development. "Since its independence," he argues, "one of Latin America's core dependencies has been its belief in miracles: the miracles forged by the Marxist or free-market magicians, revolutionaries and counter-revolutionaries, on the basis of a few grand theories and paradigms." There is, instead, "a dual movement of economic reforms and a transition to democracy," a move to "the political economy of the possible."

In its broad outlines, Mr. Santiso's story is convincing. Economic reform -- by which is meant a move towards greater reliance on the market -- has indeed spread, in fits and starts, across the region. Huge mistakes have been made. But only President Chávez, fortified by the wealth that comes out of oil wells, feels free to ignore economic rationality altogether.

As striking is the transition to relatively stable democracy across the region. Latin America was long a region of exceptional political instability, by which is meant changes not of governments, but of regimes. Over the past two decades, however, orderly democratic transfers of power have become the norm. Since 1983, notes Mr. Santiso, "no Latin American president was forcibly removed from office by a military insurrection." When power was terminated prematurely, it was after mass protests, corruption scandals, or judicial processes. The region's democracies are often disorderly. But they are democracies, all the same.

To romantic western socialists and Latin American populists, Mr. Castro remains a charismatic figure, beloved for his anti-American bravura. But that tells one more about these people's psychology than about anything else. He is a fossil. His regime seems unlikely to survive him. Nor should it: his has been a brutal dictatorship, responsible for the deaths of thousands of opponents in the early years and the imprisonment without trial of thousands more. It is also an economic failure: for that, the American embargo is a partial -- but only a partial -- excuse. Even so, that embargo has been idiotic. Its only value has been to demonstrate the ineffectiveness of sanctions under almost all circumstances.

Pinochet, too, was a brutal tyrant, responsible for the deaths of thousands and the imprisonment and torture of tens of thousands more without trial. Yet, on any list of the countries that have made a success of Mr. Santiso's "possibilism," Chile comes top. Some -- occasionally even Mr. Santiso -- wish to pretend that this has nothing to do with the Pinochet regime. But, like it or not, this brutal and corrupt reactionary did, for reasons that are not clear, launch the reforms that laid the foundation for his country's contemporary success. More surprisingly still, when he lost a referendum in 1988, he left power. Mr. Castro has not followed this example.

Chile's economic path has been far from smooth. After the monstrous inflation of the early 1970s and the slide in incomes per head, which were the proximate economic causes of the coup, a strong recovery ensued. This then ended in financial crisis in 1982. The Chilean crisis of the 1980s was a template for the "Tequila" crisis of 1995, which began in Mexico, and the Asian financial crises of 1997-98. As Sebastian Edwards of the University of California at Los Angeles, himself from Chile, has argued, the combination of a deregulated financial system with a pegged exchange rate and indexed wages was ruinous.** The experience had many lessons, none learned elsewhere until too late.

The exception to that depressing rule was Chile itself, where a renewed, but more pragmatic, move towards the market, buttressed by improvements in institutional quality, has made the economy the star of the region. The country's gross domestic product per head at purchasing power parity is now well above those of Argentina, Brazil, and Mexico (see chart). Between 1985 and 2005, Chile's GDP per head rose from 24 per cent to 40 per cent of US levels, making this country an exception to the region's general record of relative decline. The rise in real incomes per head between 1975 and 2005 was 181 per cent. A smooth transition to democracy and responsible policymaking by elected politicians cemented this success.

[CHART CAPTION: GDP relative to U.S., 1950-2006: Chile, Brazil, Argentina, Mexico, Cuba. Sources: Angus Maddison, IMF; World Bank]

Chile's record has been built on sensible market-oriented policies and good institutions. According to the World Bank's governance indicators, Chile is far ahead of other Latin American countries in the quality of its political, legal, and regulatory institutions (see chart). Similarly, the World Bank's Doing Business 2007 report places Chile in 28th rank, in terms of ease of doing business, against 43rd for Mexico, 101st for Argentina and 121st for Brazil. Moody's rates Chilean debt at A2. Even Mexico languishes at Baa1.

[CHART CAPTION: Governance indicators, 2005 (percentile ranks [among world nations]): Chile, Brazil, Argentina, Mexico, Cuba, Latin American average, OECD average, East Asian average. Voice and accountability. Political stability. Government effectiveness. Regulatory quality. Rule of law. Control of corruption. Sources: Angus Maddison, IMF; World Bank]

The era of despots is over. But the success of democratic rule is not ensured. Ultimately, stable democracy depends on broad economic success, which has, alas, been far too rare. Latin American countries remain vulnerable to the vagaries of world commodity and financial markets. Internal economic and social cleavages remain deep. The rise of China has been a boon to commodity exporters, but has also squeezed the region's low- and medium-technology manufacturing between the east Asian lower millstone and the upper millstone of the advanced countries.

In response, Latin America must improve institutions, make markets more flexible, upgrade education, build technological capacity and spread the benefits of growth. The U.S. cannot provide the institutional template that the European Union offers to entrants. But it can leave Latin American countries free to make their own experiments. Latin American countries must find their own way. But they have in contemporary Chile something precious: a good example.

—** Stabilization with Liberalization, Economic Development and Cultural Change, January 1985.