Glocal Economics | Banana Republic Insights
October 2BUENOS AIRES, Argentina - Latin America, for the most part, is a region with great potential, but it faces tremendous difficulties. Though the region has been gradually slid off the American radar in recent years, President Bush and other important leaders should be prepared to focus their energies here in order to help foster sustainable growth and strengthen democracy. Recent history has not been helping the situation. The 1994 Tequila Crisis, the 1999 Brazilian devaluation, and the 2001 economic meltdown in Argentina were major blows against the Washington Consensus in South America. During this era, the liberal economic model and its promoters began to be seen as enemies of the people. The region has still not fully recovered. As awful as these economic shocks may have been, Latin America has not moved entirely to the left. It has become clear that Fidel Castro-like declarations of "Marxism-Leninism" are no longer constructive. Where does that leave us? Democracy in the region, though stable, is vastly different than in the United States. Education and literacy levels do not compare, and the history of the caudillos, or authoritarian strongmen, is fresh in the minds of many. Politics here is tainted, in varying degrees, with corruption and populism. Economic policy is not far removed. Recent events in the region's most important countries have shown a significant risk that the spread of economic liberalism may be hampered by populist economics. In Brazil, President Luiz Inacio Lula da Silva, or Lula, has found his Worker's Party bogged down by an ongoing corruption scandal. Though Lula has not been directly implicated, his image has been tarnished and his chances for re-election have been jeopardized. Lula has been a driving force in expanding free trade in the region. Because of his charisma and popular appeal, and given his humble roots and background, he has consistently been able to move Brazil in the direction of market liberalism without losing the support of the people. The scandals mean any of the country's other leading parties could be voted into office in the Oct. 2006 elections. The Brazilian electorate may lose its patience with the policies of politicians who have not earned its trust. Unquestionably, any potential change in the direction of Brazilian politics will worry the entire region. Further south, the Kirchner administration in Buenos Aires has been coping with similar woes. When Shell announced last May that it would raise prices, the Argentine President called for a nationwide boycott of Shell gas stations. According to The Economist, this resulted in a 70 percent drop in sales. Utility prices have essentially been frozen since the country's economic collapse in 2001. It is not surprising then that energy companies have been finding it difficult to earn profits, especially given recent growth. Utility companies were left with dollar debts, but their income was "pesified," meaning that their revenue now comes in the form of the devalued Argentine peso and many of their expenditures continue to be dollar-based. It is not hard to understand, why on Sept. 8, Suez SA, the second largest water company in the world, announced that it would abandon its controlling stake in Aguas Argentinas, the principal Argentine water company which services 10 million people in Buenos Aires alone. Electricite de France SA pulled out of Argentina in June, and the Sociedad General de Aguas de Barcelona SA's - another major water supplier - exit is seen as imminent. Though Pat Robertson may not want to admit it, Hugo Chavez has become a source of influence in Latin America. He is well liked by the people here, and is on good relations with heads of state. Bilateral agreements, including the provision of cheap oil, have expanded Chavez's role in Latin America. Yet the ideals of Chavez's Bolivarian Revolution sometimes oppose the notion of democracy and frequently run counter to market liberalism. Earlier this month, the Chavez government confiscated lands belonging to a British meat producer as part of its land redistribution program. Though it is unlikely that other Latin American countries would start similar programs, Chavez's influence is hardly beneficial for a region trying to encourage international investments and promote steady economic growth. To further complicate the issue, American leadership in promoting free trade for Latin America is precarious at best. Though Presidential Bush spoke eagerly of a Free Trade Area of the Americas, terrorism and Iraq have largely directed the Bush Administration's attention elsewhere. In the House of Representatives, the Central American Free Trade Agreement passed by a margin of two votes, hardly a mandate for the expansion of free trade. The recent hurricanes and the economic woes that may follow will not help alleviate this gridlock. Latin America stands at a crossroads in history. Though tinkering with economic policy is generally a good thing, much of Latin America is still rebuilding itself after a lost decade. A carefully managed expansion of free trade in the region would yield vast benefits. Mistakes today could have significant ramifications, and ultimately these are the political choices that determine if a family has enough to eat at the end of the day. Hopefully regional leaders will not be easily swayed by polls and will instead push for policies that can deliver the lasting rewards that Latin America needs.

