Up from the bottom of the pile - Latin America's economies
Arcaya & Asociados
August 18th 2007
Something rather exciting is happening in Latin America
MUCH of the news coming out of Latin America in recent years has been of radical populists proclaiming "revolution" or, as Venezuela's Hugo Chávez would have it, "21st century socialism". In their widely propagated caricature, a tiny white elite in Latin America oppresses an indigenous majority whose poverty has been exacerbated by the free-market reforms imposed by the IMF and the United States.
So it might be hard to believe that in many countries in the region, and especially in Brazil and Mexico, Latin America's two giants, things are in fact going better today than they have done since the mid-1970s. The region is in its fourth successive year of economic growth averaging a steady 5%.
In most places inflation is in low single digits. And for the first time in memory, growth has gone hand-in-hand with a current-account surplus, holding out hope that it will not be scotched by a habitual Latin American balance-of-payments crunch.
What is more, financial stability and faster growth are starting to transform social conditions with astonishing speed. The number of people living in poverty is falling, not only because of growth but also thanks to the social policies of reforming democratic governments. The incomes of the poor are rising faster than those of the rich in Brazil (where income inequality is at its least extreme for a generation) and in Mexico.
In both these countriesa new lower-middle class is emerging from poverty (see pages 22-24). Low inflation, achieved through more disciplined public finances and trade liberalisation, has brought falling interest rates. Credit has at last returned. So these new consumers are buying cars and DVD players or taking out mortgages. No wonder Latin Americans are in an optimistic mood: earlier this year a poll by the Pew Global Attitudes Project found a greater increase in personal satisfaction in Brazil and Mexico over the past five years than in any of the other 45 countries it surveyed.
Keep inflation low and fix the schools So if things are going so well, why have radical populists and leftists done well in recent elections? Look closer: they have in fact failed to carry all before them. Out of a dozen presidential elections in the region in the 13 months to last December, the radicals won only four. Moderate governments, of centre-left or centre-right, are in charge in most countries.
That said, politicssometimes lags economics. Even as things started to improve, many Latin Americans were in surly mood because they had suffered through five years of stagnation or worse between 1998 and 2003.
Besides, the progressis not uniform. In some of the smaller and poorer countries, the populists' caricature has a grain of truth to it. That is why Mr Chávez has friends in places like Bolivia and Ecuador.
But the important point is that the course upon which most Latin American countries are set—of democracy and open-market economies—is finally bearing fruit. The new middle class in countries like Brazil and Mexico derives its income from the private sector, not from public employment.
There lies the big difference with Mr Chávez's Venezuela, where falling poverty depends almost entirely on a vast increase in public spending, and is thus hostage to the oil price.
Of course plenty of caveats are in order. The first is that it is not just in Venezuela that growth has been underpinned by higher prices for commodity exports. Nevertheless, in many other countries export-growth is broad-based. With China and India industrialising, it is unlikely that commodities will be as cheap as in the 1990s any time soon. A second obvious worry is that the current financial-market flap will end up making a serious dent in the growth of the world economy. But—mirabile dictu— thanks to its current-account surplus Latin America is not in the front line of this particular market panic.
Another caveat is that for all its recent progress, Latin America remains a long way from enjoying widespread affluence. In the region as a whole, some 38.5% of people remain poor according to national definitions. The gains are still fragile. But the lessons for governments are clear. To bolster the new middle class, it is crucial to keep inflation low. So is improving the shoddy education imparted in the region's schools and universities. And businesses in the region are still held back by lack of transport infrastructure and an excess of red tape.
The commodity bonanza won't last forever, so now is the time to fix these things. Do so and Latin America's democracies could turn an important corner, in which inequality, poverty and populism give way to prosperous middle-class democracies where the majority has an interest in stability.