WorldCity Business Magazine

Latin America stuck in stage-two democracy

by Marcela Sanchez

When President Bush spoke during his inaugural address about bringing freedom to the "darkest corners of our world," he most likely wasn’t including Latin America. The battle for freedom there began more than two decades ago and today, the basic components of democracy can be found throughout the region.

Latin America is now, so to speak, at stage two in the pursuit of freedom. But as Latin American leaders are discovering, maintaining a democracy requires nearly as much effort as achieving one. Unless there is more opportunity and less economic disparity, the electorate will lose faith in its leaders and turn against democracy itself, as it has happened in Ecuador and Bolivia.

During his first four years, President Bush’s prescription for stage-two countries was more and more freedom of a very particular kind: free trade. For those willing to embrace his vision of a "world that trades in freedom,’’ prosperity would abound and poverty would be ameliorated. As Robert B. Zoellick, the U.S. trade representative who has been nominated to become deputy secretary of state, has put it, the Americas should be the "proving ground’’ of the notion that in such a world "hundreds of millions of people are lifted from poverty through economic growth fueled by trade.’’

But does free trade lift people from poverty? That’s not an often-asked question in Washington. Here, free trade is orthodoxy and true believers are too busy basking in the success stories of market liberalization to digest the very question that continues to stall global and hemispheric trade talks.

No doubt you have heard that Chile’s enviable prosperity is based on its longstanding pursuit of market reforms and free trade agreements. You may have also heard that Mexico’s vigorous and growing economy—a total output last year of more than $658 billion, the largest in Latin America—would look very different without the North American Free Trade Agreement (NAFTA). Or you heard that unless the U.S. Congress approves the Central America-U.S.-Dominican Republic Free Trade Agreement, the region will have no chance to create new economic opportunity and cement political stability.

These examples certainly reinforce the idea that free trade fuels economic growth. They do not necessarily bolster the argument that the social component—poverty reduction—will follow. Adam Smith’s invisible hand is supposed to work its magic and ensure that the concerns of the poor are met as a natural consequence of such economic growth. But will the magic do the trick?

That is a gamble that many Latin American leaders simply don’t have the luxury to take. Even though many, from the left and the right of the political spectrum, share Bush’s optimism about the power of the market and free trade, they argue that these times demand activist governments to ensure that the market does not exacerbate the economic biases already entrenched in Latin American society.

NAFTA-driven growth in Mexico, in fact, did not reduce social and regional inequalities. During NAFTA’s first five years, northern Mexico posted GDP growth rates of 5.9 percent while the impoverished southern part of the country grew at barely 0.4 per cent. It would take a southern state such as Chiapas 132 years of such growth to close the current income gap with the capital, Mexico City, if and only if incomes in Mexico City stop growing altogether, according to U.N. statistics.

Two decades into market reforms, Latin America still suffers from the world’s worst disparities between rich and poor. The richest one-tenth of the population of Latin America and the Caribbean earn 48 percent of total income, while the poorest one-tenth earn only 1.6 percent, according to the World Bank.

That is why Chilean President Ricardo Lagos, who embraces the market as a crucial 21st-century tool, believes that "you can have a market economy but not a market society.’’ Lagos, as well as other left-of-center leaders, thinks the disparity of the market is no model for the egalitarian ideal of a democratic society.

But it is not only leftist leaders who think that way. In Latin America you can also run into a pro-market reformer who attributes key successes to serious investment of time and resources on poverty reduction. "Anyone who wonders about my success should realize that it had to do with the crude reality of helping the poor get ahead’’ through significant public investment, former Salvadoran president Francisco Flores told me last year.

Clearly free trade is a tool—an opportunity—but not a magical power that can cure Latin America’s societal ills. Yet some in Washington maintain a blind conviction that it can, perhaps because that’s all they have to offer Latin America today.