Gestures against reform

In dribs and drabs, a populist reaction is gathering pace against the bold free- market reforms of Latin America

BEFORE Eastern Europe, Latin America was the region that first saw the ascendancy of free-market democrats over authoritarian protectionists. In just a decade, well-educated, market-minded civilians arrived in power everywhere (bar Cuba), shoving aside the protectionists and brass-hats who had long run the place. In some countries radical free-marketeers have been in charge (Argentina, Mexico); others have been run by more gradualist reformers (Brazil, recently Chile). But everywhere, the direction of policy has been the same: to chop back the over-mighty state. And everywhere, the results have been similar: inflation is down; foreign investment is up; dictatorships are out.
     Yet (as in much of Eastern Europe) the liberal ascendancy stopped short of triumph. And now a backlash is appearing. From the rugged sierras outside the Mexican resort of Acapulco, the People's Revolutionary Army (EPR) has been running a vicious bombing campaign in half a dozen states. Maximo Gomez, the priest of Atoyac de Alvarez, a scrubby town in rebel country, thinks that "90% support the guerrillas in their heart . . . if the government does not act soon, this place will explode."
     The rise of the EPR is a small but worrying part of wider regional reaction against the new generation of free-market reformers. The great expectations that accompanied their bold reforms have come crashing down. Unemployed and angry voters have looked to populists--only to find the easy solutions they profferred also disappear. The resulting disgust with all politics is coinciding with rising violence of all kinds, from guerrilla action to crime.
     This rising discontent represents the greatest challenge yet faced by the continent's reformers. Chile's President Eduardo Frei seems to have got the message. Earlier this month, he got the annual summit meeting of Latin American and Iberian leaders to focus on "governability for efficient and participatory democracy". In plain English, rulers too are frustrated by the pace of reform. They are looking for new ways to encourage growth and speed up the delivery of its social benefits. Time does not seem to be on their side.
     Given the sweeping nature of the reforms, that is hardly surprising. For decades, Latin America was mired in state controls, bouts of hyperinflation and slump. Hope dawned in the late 1980s, when a new generation of brash, foreign-educated leaders embraced the so-called "Washington consensus", a heady mix of privatisation, financial liberalisation and trade reform which sought to balance the books and end the power of a corrupt and paternalistic state.
     Despite bumps along the way--most notably Mexico's currency and banking troubles of 1994-95--the gains are undeniable. One is the slaying of inflation, that most insidious of taxes on the poor, which fell from a regional mean of 196% in 1991 to just 19% last year. Fiscal discipline has slashed the average budget deficit by two-thirds, from 5.5% of GDP in 1988 to 1.8% in 1995.
     Most impressive has been the embrace of freer trade. Protectionist barriers have tumbled unilaterally or as part of accords which doubled intra-regional exports to $32 billion in the five years to 1994. NAFTA, the North American Free-Trade Agreement, has linked Mexico with the giants to its north. In South America, Mercosur is edging Argentina, Uruguay, Paraguay and Brazil the same way. In December 1994, Latin leaders pushed the United States and Canada to agree to negotiate a Free-Trade Area of the Americas by 2005. The opening of the region's economies has spurred exports; they grew 6% a year during the early 1990s, up from 1.8% a year during the mid-1980s.
     This first wave of reform was popular, as liberalisation boosted growth. Along came an expansion of credit and a flood of cheap imports, which pleased consumers, and propelled reformers such as Peru's Alberto Fujimori and Argentina's Carlos Menem to re-election.
     But the reforms' popularity was based partly on unrealistic expectations. They were liked not because they laid a foundation for a far brighter future than had seemed possible during the "lost decade" of the 1980s. Rather, voters liked reform because it was accompanied by spurts of growth. Alas, these boomlets were not "the pay-off for reform", as Ricardo Hausmann of the Inter-American Development Bank (IDB) argues. Rather, many of them were fuelled partly or largely by one-off inflows that resulted from the return of stability. In Mexico and Venezuela short-lived booms ended in banking crises; Brazil's boom escaped that, but not by much; Argentina's was killed by sudden monetary contraction after the Mexican crisis.
     The fundamental economic outlook is favourable. But the poor cannot eat "fundamentals". What they see is that the region's traditionally wide gap between incomes is widening further. The reforms of the early 1990s did reduce the percentage in poverty, but population growth ensured that the absolute number soared (see chart 1). Real wages have fallen. Unemployment in most countries is now higher than in 1990.
     The reforms have not yet delivered the kind of sustained growth needed to wipe out poverty. True, the region's GDP grew 3.5% in 1991 after the reforms started. But growth fell to 0.8% last year after Mexico's crash. From about 3% this year, it may reach 4% next year.
     Not bad, but it may not be enough. Many economists reckon growth of 6% will be needed to reduce poverty as populations continue to rise. A year ago, Shahid Burki, until recently the World Bank's top Latin America man, thought regional growth might reach 6% soon. No longer. In a candid and controversial assessment, he argued that the ripple effects of the Mexican crisis have exposed the fragility of banks from Mexico to Argentina. He worries that it will take another decade to achieve a stable growth rate of 6% or so. Will voters wait that long?

Abajo neoliberalismo!
The answer may be no. In recent months, the golden boys of reform--Messrs Menem and Fujimori--have seen their popularity plummet. Everywhere, polls show citizens have an exceptionally low opinion of politicians and parties (see chart 2).
     What seems to be happening is that middle-class folk are joining the backlash of the poor. A remarkable revolt took place at a recent assembly of Mexico's ever-ruling Institutional Revolutionary Party (PRI). Furious that unpopular market reforms had resulted in electoral defeats, hardliners rebelled. "Down with neo-liberalism!" rang the cries as they voted to stop privatisation and ban technocrats from high office. The public cheered the rebellion. Middle-class anger at cuts in utility and energy subsidies helped drive Venezuela's Carlos Andres Perez from office in 1993. And Nicaraguans were so disgusted with six years of IMF-encouraged reform that nearly 40% (on the official count) voted for the ex-Marxist Sandinists in the recent election. The Sandinists did not win the election, but the warning was plain.
     This backlash may, however, bring disappointment and frustration. In Mexico, the reaction against reform was led by the dinosaurs of the PRI, who, if their record in office in the 1960s and 1970s is any guide, are more likely to stuff their pockets once in power than to help the poor.
     In more pluralistic countries, the backlash is no more likely to lead to leftward policy shifts. By and large, the Latin left has failed in opposition. Alvaro Vargas Llosa, the son of Mario Vargas Llosa, a Peruvian writer and defeated presidential candidate in 1990, explains why in a controversial book, "The Idiot's Guide to Latin America". The left, he says, blames the CIA, multinational companies and the IMF for the region's woes. Leftist leaders have not come up with any coherent alternative to the prevailing free-market agenda.
     Old-style populists are no better at defusing voters' discontent, though for a different reason. Venezuela's Rafael Caldera portrayed himself as an outsider who would end unpopular reforms; he won in 1993. In Ecuador, the populist to end all populists, Abdala Bucaram, swept into office last July with a campaign featuring rock CDs, strippers and pork-barrel politics. Yet in office both returned to their senses. Mr Caldera is now implementing IMF-style reforms, while Mr Bucaram has taken advice from Domingo Cavallo, the architect of Argentina's reforms. Presidents Menem and Fujimori both traversed a similar path.

Enter the caveman
The resulting victory of sound policies over populism is good news for the economy. It may give the policy reforms a little more time to work. But if so, the extra time may be bought at the expense of further political disillusion.
     Guerrilla insurgencies, which many thought would subside with the Central American civil wars of the 1980s, are back. Colombia, where peace had seemed not far out of reach a year ago, has seen guerrillas unleash attacks of such fury that some compare the past few months to the early days of la violencia, the terrible civil war of the 1950s which claimed nearly 300,000 lives.
     Colombia is the worst case but not the only one. Peru's Shining Path has shown, through recent horrific attacks, that the capture of Abimael Guzman, its mastermind, has not dealt it a death blow. Mexico has both the telegenic masked Zapatists and the EPR, the "cavemen of the left", as Denise Dresser, a Mexican political scientist calls them, roaming the countryside.
     It is easy to dismiss this--as some officials do--as merely a tale of bandits in remote regions. Certainly, guerrilla violence is nothing like as bad as it was in the 1960s and 1970s. Nor are guerrillas any longer the proxy warriors of a cold war fought in Uncle Sam's backyard. Yet if their ideology does not amount to much, their willingness to resort to violence does. For guerrilla activity is just part of a much broader escalation of violence.
     Nearly every city in Latin America is more dangerous today than it was ten years ago, before the reforms began. The region's murder rate, already six times the world average, is surging (see chart 3). Kidnappings are rife; half of all the world's abductions take place in Colombia, where rich and poor pay a combined total ransom of $100m a year to get their loved ones back.
     The root causes of violence are complex, ranging from drug trafficking and consumption to income inequality, mega-cities without services, and corrupt police and courts. But, according to Luis Ratinoff of the IDB, discontent with the political order has contributed to the recent spurt in violence. He thinks that the demise of traditional purveyors of hope--from radical clergymen to Utopian parties and trade unions-- means that those frustrated by the reforms may be more willing to resort to violence. Even in Mexico, traditionally one of the region's more peaceful countries, a poll by a daily newspaper, Reforma, showed that nearly a third of the population believes armed violence is justified.

Institutional breakdown
Contributing to this strain on the rule of law is the weakness of institutions. With few exceptions, courts are inefficient and corrupt; in many countries, policemen and former policemen engage in murder.
     The spiral of violence has produced a spiral of spending on private security, which often contributes to more crime, as private armies turn into paramilitary squads. All told, the region spends an astonishing 13-15% of GDP on security expenses (both private and public). That is more than total welfare spending. It represents a crippling burden on the economy.
     The rich and the middle classes may be able to afford this for a while. But the poor cannot. They are turning to mob justice. In the past few months, there have been televised lynchings of suspected criminals by villagers in Ecuador, Mexico and Guatemala.
     Frightened by the violence, governments are calling in the military. The army has been given special powers in chunks of Colombia. Several Mexican states have a heavy military presence. Over a dozen of Peru's departments have been under army rule for years. One of Mr Bucaram's first acts as president was to give the Ecuadorian army a role in public security.
     One worry is that these armies may not be under full civilian control. In Chile, General Augusto Pinochet today cannot be sacked by the civilian president. In Venezuela, the soldiers who launched two bloody coup attempts in 1992 have been granted a pardon. In Paraguay, a seditious general nearly toppled the civilian government earlier this year. By and large, though, the threat is not (at least, not now) the old Latin American one of the caudillo, the army strongman. It is that, in dealing with security problems, too many armies think they can do more or less as they like.
     Civilian rulers, in short, are failing to strike a balance between democracy and efficiency--and the answer, some people think, is to have less democracy. "Right or wrong," says Peter Hakim of Inter-American Dialogue, a think-tank, "the public blames democracy for the current outbreaks of criminal violence." Some technocrats are beginning to wonder whether too much democracy is a reason why reforms have been so slow to bear fruit.
     In Peru and Argentina, presidents have got the constitution changed to allow themselves immediate re-election. The presidents of Brazil and Ecuador are thinking about following suit. There are arguments for this trend, which is anyway very different from the old military authoritarianism. Civilians are still in charge and are still submitting themselves to the test of electoral opinion. Nevertheless, in the context of widespread discontent, growing violence, and military rule in some areas, there are risks. The consequence may well be to shift attention away from the painstaking business of building up institutional democratic bulwarks (political parties, the courts, an accountable civil service) and towards the personalisation of power.

A Santiago consensus
If that danger is to be avoided, some policy shifts may well be needed. John Williamson, formerly of the Institute for International Economics, muses that a powerful president may be best for governability and growth. That is remarkable coming from the father of the Washington consensus, whose followers have tried to get the state out of almost everything. He now says: "Policy needs to shift from cutting back a state that had become bloated to strengthening a number of key state institutions whose efficient functioning is important for rapid and/or equitable growth." Call this policy shift the Santiago consensus:

Strengthen the state. In their zeal to end the overbearing state, some reformers fear they went too far. Devolution of central power can allow local elites to derail reform. It is clear that tackling profligate state governors in Brazil and Argentina, or drug barons in Mexico or Colombia, requires a strong president.

Heighten supervision. Privatisation and deregulation have sometimes ended in corruption or corporate crisis. Mr Williamson recommends the setting up of institutions similar to America's Securities and Exchange Commission to improve supervision. Many argue for independent central banks.

Bolster institutions. Disregard for the law has made reform of the judiciary and police essential. Already, America's US AID is helping train new police forces in Haiti and El Salvador. The World Bank is helping overhaul Venezuela's secretive and inefficient judicial system.

Target social spending where it is most needed. Latin America spends more of its GDP on social services than the Asian tigers, but lags behind in standards of primary education and basic public health. A main reason, suggests the IDB in its new annual report, is that social spending is run by centralised bureaucracies which are corrupt. It argues that local governments and non-governmental agencies should be permitted to provide social services.
     Given the populist backlash, the authoritarian temptations and the economic obstacles ahead, can Latin America stick with market reforms and democracy? Paul Krugman, an eminent American economist, argued last year that the zeal for reform "may usefully be thought of as a sort of speculative bubble" and that Mexico's crisis marked the beginning of its deflation.
     That may be too pessimistic. Latin American leaders, at any rate, seem determined to stay the course, if only because their room for manoeuvre is restricted both by financial markets and the glare of publicity (in Mexico, NAFTA and the American television spotlight it throws on the country was a big reason why the army did not try to crush the Zapatists).
     In short, the most likely outcome of the strains and stresses of reform remains a long, hard slog towards stable growth. A shift towards new ways of maintaining a social safety net could help calm the violent backlash and recoup some of the support for reform free-marketeers once enjoyed. Even then, it will not be easy. Sebastian Edwards of the University of California, Los Angeles puts it this way: being a reformer in Latin America is rather like running up a down escalator: you have to keep running to stand still.

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