Latin America turns left

[Michael Pugliese]

Financial Times
July 29, 2002

Latin America turns left
By Richard Lapper

Latin America is in turmoil. In recent weeks,  there
have been anti-privatisation riots in Peru and
Paraguay, violent strikes in Ecuador and  financial
crises in Brazil and Uruguay. Last week, as the
government candidate José Serra slumped further  in the
polls before October's election, Brazil's  currency and
bonds sank to their lowest levels ever.  Argentina's
economic crisis continues to fester.

The region's creeping political contagion may be  less
virulent than the financial crisis of the 1990s,  but
could yet prove more damaging. More than a decade  of
market-friendly reforms, analysts fear, may be in
peril.

In Argentina - the source of the upheaval -
devaluation has failed to provide a platform for
recovery. Output is expected to shrink by about  15 per
cent this year. Living standards are falling by  the
day and there is an ugly mood on the streets.

Argentina's plight has had a direct knock-on  effect on
two smaller neighbours, Uruguay and Paraguay,  whose
economies have sunk into the same recessionary  path.
In Uruguay, whose bonds were considered safe  enough
for pension funds to buy less than six months  ago, the
decline has been precipitous. Cash-strapped
Argentines, who have traditionally regarded  Uruguay's
banks as a safe haven, have been withdrawing  their
funds. Uruguay's foreign reserves have shrunk by  about
a third so far this month.

More generally, the losses suffered by foreign  banks,
utilities and other foreign companies in  Argentina
have led many international businesses to  reappraise
the potential risks of doing business in the  region.
Reduced flows of investment are aggravating  external
pressures, contributing to slower growth and  higher
unemployment in many countries.

All of this is stoking popular opposition to free
market reforms. Rioting of the kind seen last  week in
Ecuador and Paraguay has been one result. The
popularity in opinion polls of leftwing  politicians
has been another. In Brazil the strength of Luiz
Inácio Lula da Silva of the Workers' party has
unnerved bond market investors, raising fears  that a
new administration may be unable to manage the  growing
debt burden. As Peter West, Latin American  economist
at BBVA in London, puts it: "People would not be  so
nearly worried about Brazil if Argentina had not
defaulted."

There is as yet no evidence of governments  reverting
to state interventionism, trade protection,  deficit
spending and the other populist policies that the
region turned away from in the 1980s. Leaders  such as
President Hugo Chávez in Venezuela and Eduardo  Duhalde
in Argentina have occasionally hinted at such a  course
but in practice have not veered far from orthodox
prescriptions. "No one is turning the clock back,"
says Mr West.

But with disenchantment at limited social  progress on
the rise, that risk is growing. "There is a sour
mood," says

Michael Shifter, a director of the Inter-American
Dialogue policy forum in Washington. "People are
taking to the streets in a way we have not seen  for
some time."

Social protests in Bolivia and Peru have led to  the
creation of new movements, which already appear  to be
influencing the political agenda. In Bolivia, Evo
Morales, a leader of mainly indigenous coca  growers
and previously well known for organising  blockades to
thwart US-backed drug eradication campaigns, won  about
20 per cent of the vote in last month's  presidential
election.

In Peru, Juan Manuel Guillén, the mayor of the
southern city of Arequipa, who led successful  protests
against plans to privatise two electricity  companies,
is now one of the country's most popular  politicians.

Marxist and other revolutionary activists are  finding
a new sense of purpose. "In Peru, leftwing  movements
from the 1960s and 1970s that everyone thought  were
dead are popping up again," Mr Shifter says. "This is
fertile ground for any conceivable movement to  find
some space."

Alfredo Keller, a Venezuelan political analyst  and
pollster, likens these movements to the  Bolivarian
Circles, the organised and highly mobile  supporters of
Mr Chávez in Venezuela. The speed with which  large
numbers of activists took to the streets, many on
motorcycles, was an important factor in the  defeat of
April's coup attempt against the president.

All three movements, Mr Keller argues, are part  of an
"anti-system and anti-globalisation new left" that
seeks to articulate the anger of the "socially
excluded and those who feel they have missed out".

The changing mood presents the US administration  with
challenges. Staunch opposition to support for
Argentina by Paul O'Neill, the US Treasury  secretary,
has angered many Latin Americans, who feel that  after
the successful rescues of Mexico and Brazil in  the
1990s, the rules have been changed. When he  visits the
regions next week, the blunt-talking Mr O'Neill  will
need to be careful not to inflame passions.

Critics also argue that US policymakers are too
preoccupied with other "less important" issues,  citing
moves to tighten the trade embargo against Cuba.
Imposition of steel tariffs and farm subsidies  has
undermined the position of market reformers in  Latin
America.

On occasion, US actions have played into the  hands of
the new populists. Most recently, warnings by the  US
ambassador to Bolivia not to vote for Mr Morales
persuaded many young Bolivians to do just that. "His
strong showing was undoubtedly helped by anti- Morales
statements from the US embassy in La Paz," says  Chris
Brogan of the London School of Economics.

As the influence of politicians such as Mr  Morales and
Mr Guillén grows, fiscal and monetary stability  could
become precarious. In Peru, for example,
lower-than-expected revenues from privatisation  will
make it more difficult to meet budget targets  agreed
with the International Monetary Fund.

Ultimately, and maybe much more quickly than  anyone
expects, the relatively tight fiscal and monetary
policies that have been a condition for macro- economic
stability in most of the region will be at risk.  As Mr
West warns: "If stagnation continues, there is a
danger of a more aggressive return to policies  that we
thought had been abandoned."