Latin America: shifting to new paradigms - political and economic transformations

Business Economics, July, 1999 by Enrique P. Sanchez

THE IMAGE OF LATIN AMERICA IS CHANGING, BOTH POLITICALLY AND ECONOMICALLY.

Latin America, from the Rio Grande to Tierra del Fuego, is often considered a critical strategic and economic partner of the United States. It holds the United States' second largest trading partner, Mexico, and the world's fifth most populated country and ninth largest economy, Brazil (162 million people, and $700 billion GDP, without counting an "unregistered" economy estimated between 15 to 20 percent of GDP).

However, the region's economy is a relatively small portion of the global economy. With a GDP of $1.9 trillion (about 50 percent of that of Japan), it barely accounts for slightly more than 6 percent of the world's economy. Its population of 410 million people is one third that of China, less than half that of India and only 7 percent of the world's total. But it is in the backyard of the United States, and on a regular basis it seems to attract both the limelight and the fear of investors, either for its historical record of being the land of high inflation, military coups d'etat and revolutions, or for its seemingly cyclical pattern of financial crises. Nevertheless, the structural reforms implemented in many countries during the past ten to fifteen years are setting new models for the region, although a few countries still remain in, or have returned to, old ways.

Why is this important for business economists? One of the key challenges that we face in analyzing a country or a region is identifying the new paradigms and separating them from the frequent false alarms, so that our companies can be ahead of the curve in adjusting to new conditions. This challenge is equally valid for investors, as they have to set appropriate expectations for their returns.

In previous issues of Business Economics, I have discussed extensively both the process of reform in several Latin American countries(1) and the key elements of these reforms(2). These articles serve well as a background to this essay.

Democracies Have Replaced Dictatorships

Until the early 1980s most of Latin America was characterized either by a succession of dictators or by military ousting of democratically elected officials as well as other fellow military regimes. This paradigm has since been abandoned and replaced by democratic governments and by increasing transparency in the democratic process. Since the mid-1980s, all countries in the region (except for Cuba) have been under democratic governments. However, even within this wave of democracy, two groups of countries suggest some shades of political models of the past.

In a first group are countries where elected officials were not immediately successful in their economic policies. In these cases, the political process managed to impeach and/or (in the face of impeachment) force them to resign. At least four examples fall in this category: Collor de Melho in Brazil, Andres Perez in Venezuela. Bucharam in Ecuador and, in March of this year, Raul Cubas in Paraguay. Some could argue that such process is akin to military coups d'etat and could present as an example the fact that former President Collor of Brazil, after resigning to avoid impeachment, was found innocent by the judicial courts but could not be reinstated in office. In the case of Carlos Andres Perez in Venezuela, the opposition started the impeachment process right after a failed military coup d'etat led, ironically, by the current President Chavez. However, just like military coups d'etat, impeachment threats are not always successful. In Colombia, former President Samper finished his elected term, in spite of an unsuccessful impeachment based on the allegation that his electoral campaign had received support from drug cartels. In Ecuador, the financial crisis in February of this year placed President Mahuad at high risk of impeachment, only six months after his installation in office - yet such increased risk seemed to expedite his action to address the crisis.

In a second group are countries where elected officials' immediate success in addressing economic problems raised their popularity to record levels, supporting constitutional changes to allow the reelection of the same president. Three examples fall in this category: Fujimori in Peru, Menem in Argentina and Cardoso in Brazil. Notably, these presidents had been installed right after their respective countries had gone through long periods of economic disarray ending in hyperinflationary bouts, and their immediate economic success was taming inflation. Equally significant is the fact that in 1995 the overwhelming reelection of Carlos Menem took place when Argentina was going through a policy-induced recession. The same was true during the reelection of Fernando Henrique Cardoso in Brazil (1998).

Nonetheless, if Argentina serves as a leading indicator, electorates seem to be setting a "natural limit" to their leaders. This year President Menem was unable to gain support for another change in the constitution, and he is not allowed to run again in the October 1999 elections. Last year President Fujimori received court approval to run again in April 2000, but it is not yet clear whether he will run, as his popularity is waning.