The Latin American paradox Al Edwards, La Jolla, California Friday, May 26, 2006 If Latin American economies are doing so well, why is there such an anti-market backlash? A cursory look at the macro- economic picture of Latin America would suggest that all is rosy in the garden. Growth of three to four per cent over the last three years with public debt being reduced to 30 per cent of Gross Domestic Product (GDP) is not bad by Latin American standards. Last year alone saw regional growth of three per cent in per capita terms and foreign direct investment (FDI) was US$60 billion. A third of that sum went to Brazil, a quarter to Mexico and the rest to Argentina, Peru, Colombia and Chile. In many of these countries there is low inflation, low fiscal deficits and the monetary situation looks promising. Yet, despite this picture, people of the region are not happy and there is growing discontent. This observation was the theme of Senior Fellow and Director for the Center on Global Prosperity at The Independent Institute (based in Washington DC), Alvaro Vargas Llosa's address to the 15th Annual Latin American Energy Conference on May 15, 2006, held at La Jolla, California. The conference was hosted by the Institute of the Americas. "The people of Latin America are empowering anti-market forces and populist leaders. There is a huge disconnect between the above- mentioned positive numbers and what people want," said Alvaro Vargas Llosa. But while these numbers may look good it must be borne in mind that Latin America is growing at half the rate of other developing countries. Over the last decade China and India have grown by 10 and eight per cent respectively. Ireland and New Zealand are growing faster than Latin America. Chile has reduced its poverty rate by half over the last 10 years while the rest of Latin America has 40 to 55 per cent of its population living below the poverty line. Latin American investment rates are low by international standards. Right now the rate of investment in the region, according to Alvaro Vargas Llosa, is 18 per cent of GDP. Now this is low compared with East Asia, which is 25 per cent, and in some cases 30 per cent of GDP. In Chile, the rate of investment is 25 per cent of GDP. Last year in Latin America foreign investment came to US$60 billion. Yet that was only 0.5 per cent more than 2004. Compare this with the worldwide situation where FDI went up 29 per cent in 2005 compared to 2004. In the Latin American region poverty went down by only four per cent over the last four years as opposed to 10 and 15 per cent in other countries. "If you look at these figures more closely you get to realise why so many people are angry and dissatisfied at the state of affairs and why this is translating politically into all sorts of populist governments who come to power riding on a wave of anti-market sentiments. "Now the question is why is this happening all over Latin America? This is very important because much of what happens in Latin America over the next decade or so is going to be dominated by that sentiment," declared Alavaro Vargas Llosa who made it clear that he comes from an unabashed free market perspective. He collaborated on a book called Guide to the Perfect Latin American Idiot who contends that the free market reforms that characterised the '90s in Latin America were in many cases contradictory and did not go deep enough. The book argues that behind this wave of left wing governments is popular frustration with the failure of the 1990s, a decade of reform under governments of the right that were supposed to catapult the region toward development. "Instead of decentralisation and the creation of a free, competitive economy and strong legal institutions open to all, crony capitalism and authoritarianism grew. "Unless Latin America's leftist governments are willing to deepen reform, the continent is unlikely to break free of its recurring cycle of economic stagnation and political disillusionment." Case study - Argentina A century ago Argentina was ranked one of the 10 most developed nations of the world. When President Mena came to power he was suppose to be an avowed free market thinker yet in the decade he was in power, public spending went up by 100 per cent! Also during the '90s GDP in Argentina went up by 40 per cent and the rate of growth of the government was two- and-a-half times the rate of the growth of the economy. This was a period where tariffs were supposedly slashed and the government said it would do away with trade protection. yet 71 out of 97 groups of items saw their level of protection against foreign competition go up rather than down through Mercosur-protectionism at the regional level. What is Mercosur? Mercosur is a trading zone between Brazil, Argentina, Uruaguay and Paraguay, founded in 1991 by the Treaty of Asuncion. Its purpose is to promote free trade and the fluid movement of goods, people and currency within Latin America. Bolivia, Chile, Colombia and Peru have associate member status. Venezuela was accepted as a member last year. The organisation has a South and Central America vocation. Fans of Mercosur believe it has the capability to combine resources to balance the activities of other global economic powers especially the United States and the European Union. Half of the member countries of Mercosur have rejected the Free Trade Area of the Americas (FTAA). The effectiveness of Mercosur was diminished by the collapse of the Argentine economy back in 2002.