COMMENT & ANALYSIS: Latin America turns left
By Richard Lapper Financial Times; Jul 29, 2002
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 Jose 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 Inacio 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 Chavez 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 Guillen, 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 Chavez 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 Guillen 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."