The “Good” Left in Latin America comes to the Market

Riordan Roett. Professor. IE Business School

13 December 2010

Venezuela and Brazil are two sides of the same coin, namely left-wing politics in Latin America. Venezuela frightens off investments and breeds poverty, while Brazil is busy building a world power.

Latin America is deeply divided in terms of development models. Countries that experienced social and economic crises in the last twenty years have chosen to ignore globalization and opt for inward looking and, ultimately, costly approaches to development. That collection of “misguided” regimes on the Left include Venezuela, Ecuador, Bolivia and Argentina, among others. The countries that have chosen to undertake a careful, sequenced approach to economic – and social – development are benefitting from a decade or so of good governance. These countries are best exemplified by Brazil, Chile, Colombia, Peru, and Uruguay.

The states on the misguided Left first experienced a brief period of programs that attempted to address the growing challenges of productivity and competitiveness. The governments that attempted to implement these programs ultimately failed and were forced from power or were defeated at the ballot box. The future for this group of countries is unpromising. Foreign Direct Investment (FDI) is low or practically nonexistent. These have done little to add value to their traditional exports. Human capital development has suffered. And the political leaders of these countries practice a bombastic populist style of government that chooses to ignore the realities of globalization.

Venezuela is perhaps the most extreme case. In 1989, Carlos Andres Perez (CAP) returned to office without the strong support of his own party, Democratic Action (AD). CAP had served as president in the 1970s and presided over “Petro-Venezuela” when oil prices sky rocketed after the 1973 and 1979 Middle East wars. He brought with him a young group of U.S. educated intellectuals and proceeded to try to implement a Venezuelan version of the infamous “Washington Consensus,” a blueprint for reform published in 1989-1990. CAP’s acolytes, without societal consultation, began to implement the program, raising bus fares, starting to privatize state companies, and other market friendly measures. Violent protests broke out. A number of people died in the ensuing mayhem. The program stopped. CAP was later impeached and the rest of the 1990s was a period of drift and haphazard efforts to stabilize the economy.

In 1992, in protest against the “savage capitalism” of the CAP program, Colonel Hugo Chavez attempted to overthrow the government. The coup d’état almost succeeded. Chavez was imprisoned but soon released and built a political machine that allowed him to win the presidency in 1998. Since then he has implemented his “Bolivarian Revolution” that basically uses oil revenues, and political repression, to control the electoral process and the economy. There is little if any FDI. Physical infrastructure is deteriorating. It is a government of handouts for the poor and marginal folk in society. If one looks at the most recent Global Competitiveness Report of the World Economic Forum, the results of the Bolivarian Revolution are clear. The quality of primary education is ranked 110 out of 139 countries. The country’s “capacity for innovation” ranks 127th. And the independence of the Judicial system is ranked 139th.

This is a society that is ignoring the new realities of international business and finance. What serious company would invest in a country where the court system is totally politicized? How does a firm find competent workers and managers given the terrible state of the education system? If there is no ability to innovate, productivity and competitiveness will remain hopelessly mired in populist rhetoric that satisfies the ego of Chavez but badly serves the interests of the citizens of Venezuela.

In contrast, Chile has become a model in the region for good governance during twenty years of responsible government on the Left. Taking power democratically in 1990, the Concertacion (a political coalition of Christian Democrats and Socialists) retained the structural reforms of the era of General Augusto Pinochet (1973-1990) but initiated a program of responsible social investment in social security, education, health and housing. Pinochet had made the Central Bank independent prior to the transfer of power. Briefly, the politicians of the Concertacion complained bitterly; but quickly came to understand that an independent monetary authority was one of the best guarantees of successful economic and financial development. Chile has benefitted from the raw material demands of China and exports a significant part of it annual copper production to China. But the government also decided to implement a counter-cyclical fiscal policy – when copper prices are high, a portion of those earning are deposited in a special fund to cushion an eventual decline in copper prices.

Chile ranks first among the countries in Latin America in the rankings of the GCR – 30th out of 139 countries. The country ranks 15th in terms of the quality of its management schools. It is 24th in terms of the availability of scientists and engineers and 10th in the “transparency y of government policymaking.” This is an impressive track record for a Left of Center government that opposed the military regime, defeated Pinochet at the ballot box, and then proceeded to implement a policy of economic and financial continuity. The recent election of Sebastian Pinera of the National Renovation (RN) political party has displaced the Concertacion, but the theme will be continuity in policy terms. Chilean political leaders have learned that partisanship and fragmentation do not serve the interests of the economy or the people. Chile is an impressive example of how the democratic Left has learned to manage globalization.

Brazil is another example of the Left coming to the market. With the election of President Luis Inacio “Lula “da Silva in 2002, the markets panicked. The Workers Party (PT) had attacked market capitalism for two decades prior to Lula’s election and the defeat of the candidate of the Social Democratic Party (PSDB). Under the leadership of President Fernando Henrique Cardoso (1994-2002), Brazil turned a corner. State corporations were privatized successfully and responsibly. The Central Bank – autonomous but de facto independent – initiated a policy of inflation targeting that works extremely well today. A fiscal responsibility law reigned in municipal and state government spending.

After being defeated three times for the presidency, Lula and his advisors decided to change tactics and recognize that Brazil had to operate in the 21st century. The President-elect quickly appointed highly qualified individuals to the Central Bank and the Finance Ministry. He confirmed his government’s support for recognizing the country’s debt obligations and its relationship with the International Monetary Fund (IMF). Banking reforms, initiated during the Cardoso presidency, were implemented so that Lula could say in 2008-2009 that Brazil was the last country to enter the financial crisis that began with the collapse of Lehman Brothers in New York, and the first to exit the global downturn. Brazil had a better regulatory framework than many of the industrial countries – more transparent and accountable.

One of the major challenges for Brazil has been high levels of poverty and inequality. The Lula administration was “lucky” in that good fiscal management led to a decision by the rating agencies to give Brazil “investment grade” permitting a rush of capital into the Brazilian economy. Unemployment dropped. The new prosperity combined with a Conditional Cash Transfer program (Bolsa Familia) for the poorest Brazilians permitted tens of millions of citizens to enter the middle class – not an industrial middle class admittedly – but one that has begun to save and consume. It is a social sector that will serve as the foundation for the country’s prosperity for years to come. Brazil has managed its natural resources with sophistication and strategic planning. The country has become an agricultural giant. With new petroleum findings off the southeast coast, Brazil, now self-sufficient in terms of oil, should become a major exporter in the next four to five years.

Unlike Venezuela, the Leftist PT government has begun to plan carefully to manage the new oil wealth. While politically difficult, the next government that takes office in January 2011 will inherit a financial bonanza. The Lula government has demonstrated that it can respond to social challenges – with programs like Bolsa Familia – and manage the economic with sophistication and pragmatism. Brazil’s Leftist government is the sort of responsible Left that other countries in the region – Bolivia, Ecuador, and Argentina – need to emulate.

The responsible policies of countries like Chile and Brazil were not created by magic. It requires a good deal of common sense and policy continuity. What is impressive in both countries is that regime changes – in Brazil from the Center Right to the Left, and in Chile from the Left to the Right, will be painless. Political leaders have discovered that citizens now understand the value of low inflation, FDI, honest management of public resources, and an innovative program of export expansion. The contrasts in the region are very sharp.

Chileans and Brazilians – and Colombians and Uruguayans, among others, benefit from globalization. Other countries – Venezuela, Ecuador, and Bolivia – drift. The leaders of those countries substitute populist policies that will ultimately fail, for good governance. In the long run it is the responsible regimes that will consolidate democracy and give priority to social and economic inclusion.

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