Marifeli Perez-Stable

Published in The Miami Herald

January 20, 2005

Latin America is lagging. China and India are leaping ahead. Ireland is already there. Central Europe is on the way. South Korea and Taiwan arrived a while back. Chile — the most likely candidate — but also Brazil and Mexico may make it sometime. Why the lag?

A key reason lies in the differences between import-substitution industrialization (ISI) that Latin America embraced (1930s-1970s) and the export-led industrialization first advanced by South Korea and Taiwan in the 1960s. The latter anchored macroeconomic stability, a dynamic industrialization and innovative state policies that resulted in sustained economic growth, large middle classes, and capital accumulation.

At its zenith, ISI generated growth and improved living standards. An activist state propelled industrialization via protective tariffs, subsidized credit, public enterprises and a dense regulatory web. In the 1960s, ominous faults emerged: spending far outpaced state revenues and imports similarly outdistanced exports. Rather than switch gears, political and business elites deepened ISI. By then, the military ruled in most countries. In the early 1980s, runaway inflation, devalued currencies, capital flight and Gargantuan debt choked Latin American economies.

That was the setting that opened the era of privatization, deregulation, free trade and fiscal discipline. Markets upstaged the state under a rainbow of liberalization that restored economic growth, tamed inflation and attracted foreign investment. Progress, however, was jagged. Chile (1982), Mexico (1994) and Argentina (2001) suffered deep crises. In most cases, job creation fell painfully short while inequality and poverty increased or remained unchanged. Sustainable growth is still elusive. By the mid-1990s, freely elected leaders governed virtually everywhere.

Mexico’s case

External shocks (e.g., the Asian crisis of 1997), mistaken policies (e.g., fixed exchange rates) and incomplete reforms (e.g., labor sector) certainly dampened the reform process. Politics, however, also played a part. ISI and the activist state left a great many players in place that made demands in exchange for supporting liberalization. Democratization and market reforms generally happened hand in hand and, in democracies, change is negotiated.

Mexico is a case in point. Under Carlos Salinas (1988-1994), $3 billion from privatization revenues funded a program to fight poverty through public works. Conveniently, it also served to shore up the then-ruling Institutional Revolutionary Party (PRI). Under President Vicente Fox, reforms have been stopped on their tracks by the opposition-controlled legislature. Allowing foreign investment in the oil industry and reforming the pension system, for example, would entail confronting constituencies that the PRI cannot alienate if it is to recover the presidency in 2006.

While PRI presidents enforced a consensus on the first round of reforms, Fox and the PRI have locked horns on the second round. Initial economic liberalization spurred enough of a political opening for Fox to drive the PRI from the presidency in 2000. Mexican politics, nonetheless, remains sufficiently clientelistic so that further liberalization is a steep trek uphill.

Where Latin America was in the early 1980s should always be kept in sight. It has come a long way even if not far enough to keep up with the beat of globalization.

An out-of-control, interventionist state — as ISI’s, particularly at the end stage — is not the same as a strong state. Strength means capacity: a competent bureaucracy, sound economic and social policymaking, an effective tax system, and an independent judiciary. Capable states are clearly not Latin America’s trademark and that’s a central reason why the region is lagging.

Able political leadership, vigorous entrepreneurship, a well-educated labor force and a capable state, together, engineered Ireland’s economic takeoff in the 1980s. Attracting foreign investment, improving the educational system and fostering research-and-development policies to complement the economy were all aggressively pursued by the Irish state. By the late 1990s, Irish GNP was growing at 7 percent a year, and per-capita income was almost on a par with Great Britain’s.

States and markets are not antipodes but complements. Latin America has yet to strike the right chord in this pas de deux. If it does reasonably soon, 10 years from now I’ll be able to drop ”lagging” for ”leaping” when commenting on the region’s standing in a world that will surely be even more fiercely competitive than it is today.