What Should Be Done

Friday, January 30, 1998

The honeymoon of Latin America's free market reformers ended in Mexico in 1994 with the Chiapas war, political assassination, and the peso crisis. It ended in Brazil with peasant protests and in Argentina with extraordinarily high unemployment. In varying degrees and ways, reformers are under fire across the continent.

Yet much of the tension reflects problems that predate free market reforms. Those include inadequate public education, structural flaws in a number of economies, and the failure of political leaders to win long-term support for reform.

Most Latin American reformers have not adequately addressed the perennial problem of proving to people that they have something to gain besides reduced inflation.

Leftists of the past rallied people with promises of development but didn't produce. Free market reformers can produce goods and services, but they are falling short of their potential because they can't rally people.

What should be done

Continue the reforms. There is general global agreement that free markets are the best engines of growth. Latin Americans must resist the resurgence of economic foolishness, demagoguery, and "easy answers." Many Latin American economists know what to do in economic terms, and the expanding global economy is on their side.

Articulate reasonable expectations. The regional director of the United Nations Development Programs for Latin America recently said, "The period of euphoria over the idea that the free market is going to resolve everything is over." Good riddance. Unrealistic expectations have been a threat to reform from the beginning because they cannot be met, and failure produces cynicism and invites demagoguery. Reformers must set forth achievable goals.

Recognize the central role of politics. The critical relationship between economics and politics--or society, more broadly--is evident throughout the complex reform process. When it is mishandled, the most capable economic leaders will fail.

For example, from 1991 to 1996 the brilliant Argentine economics minister Domingo Cavallo was sustained in widespread reforms by the political savvy of President Carlos Menem. Yet in 1994 in Mexico, election-year political and other compromises floored another brilliant economist, Pedro Aspe. Alberto Fujimori's economic reforms in Peru are under heavy fire today mainly for political reasons, and the story is much the same in other countries.

Enlarge constituencies. Central to the success of the reforms is increasing the number of people supporting them. When inevitable setbacks occur, the continuation of the reforms will depend in large part on the strength of the national political constituency for reform and on the international credibility that flows therefrom.

Unrealistic expectations have been a threat to reform from the beginning. Reformers must set achievable goals.

Giving the majority a more obvious stake in growth has long been one of Latin America's most pressing needs. This change is in the interest of the elites and the poor because of the stability, predictability, and expanded growth that it would provide.

The most successful free market reforms in Latin America were carried out by an authoritarian government in Chile, a country with a long history of democracy, which by 1973 had nonetheless fallen deep into an economic abyss. In Mexico the Institutional Revolutionary Party claimed broad-based support for more than half a century, but until recently it consistently implemented flawed economic policies that failed to generate broad-based economic development.

Latin America today has an unprecedented number of democracies. It is up to its leaders to work closely with the people who voted them into office to ensure that all have a long-term stake in the success and institutionalization of free market reforms.