Free Market Wins Few Friends in Latin America

Like many other Latin Americans, Peruvian Raul Linares conceded the need for drastic action to tame an out-of-control economy when inflation in his homeland hit 7,000% a year in the early 1990s.

Then a mid-level bureaucrat in the Agriculture Ministry, he grudgingly accepted the loss of his job as part of an economic “shock” program that included widespread layoffs.

Four years later, he runs a bare-bones photocopy shop, and his income is less than a quarter of what it was. He has fallen from the middle class into poverty.

“When I was laid off I was devastated, but in my heart I didn’t blame the government because the situation was so bad I knew drastic steps had to be taken,” Linares, 49, said inside his downtown Lima storefront, where a bare lightbulb hangs by a cord from the ceiling.

“Now I feel swindled, as if I sacrificed for nothing.”

Across Latin America, millions of people feel similarly cheated by free-market economic policies that swept the region over the last decade, usually replacing socialist-oriented economies.

A backlash is looming as reforms that successfully curbed inflation and stimulated economic growth have failed to provide enough new jobs, reduce poverty, close the gap between rich and poor--already the world’s worst, according to the Inter-American Development Bank--or generally improve living standards.

“It’s been a success for the rich and a martyrdom for the poor,” former Venezuela president Luis Herrera Campins of the Social Christian party COPEI says of what some critics call capitalismo salvaje--savage capitalism.

President Clinton, a backer of free-market reforms and trade liberalization, nonetheless acknowledged on his recent trip to South America that “it is wrong for only a few to reap the benefits of the wonderful changes going on while many remain mired in poverty.”

The downside of the policies were underlined this month in Brazil when turmoil in Asian markets helped send the Sao Paulo Stock Exchange--Latin America’s largest--plunging more than 30% in two weeks.

President Fernando Henrique Cardoso announced a harsh austerity package for Brazil on Nov. 10 that is expected to bring economic stagnation and boost unemployment--already at 16%. His plan calls for laying off 33,000 government workers next year, eliminating 70,000 state jobs and cutting the budget by $4.7 billion.

Initially, many Latin Americans accepted the tough policies of public sector layoffs, budget cuts, privatization and devaluation, believing that sacrifice today would mean a better life tomorrow.

But tomorrow is here, and for many the payoff is nowhere in sight.

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Various countries are being buffeted by social unrest, destabilizing strikes and the formation of new political movements. Influential groups such as the Roman Catholic Church, labor unions and university academics are criticizing the reforms.

Laid-off sugar cane workers blocked roads with burning tires and clashed with police in rural northern Argentina, a country with a near-record 16% jobless rate. At least 150 people were injured.

Middle-class and poor Ecuadoreans massed in the streets of the capital, Quito, to protest the tripling of utility rates.

Venezuelans seething over businesses’ failure to raise worker pay walked off the job for 12 hours in the country’s first general strike in eight years.

In Mexico, opposition parties ended the ruling Institutional Revolutionary Party’s seven decades of control of the lower house of Congress, partly by capitalizing on discontent with free-market policies that also are called “neo-liberal.” Leftist politician Cuauhtemoc Cardenas won the coveted Mexico City mayoral seat.

“These are not unrelated events. From Mexico to Argentina, there is a reaction, because neo-liberalism resolves macroeconomic problems, but that only means the rich get richer . . . and the poor get poorer,” said Guillermo Moron, a leading Venezuelan historian.

Moron is a member of Fundapatria (Building the Country), a group of mainstream Venezuelan intellectuals, businessmen and writers who are developing alternatives to “savage capitalism.”

The backlash seems to be dispersed and is not part of an organized or revolutionary mass movement. There is little indication that it might spawn a revival of armed guerrilla groups like those that proliferated in the region in the 1960s to 1980s.

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Academics have joined the debate, publishing a spate of books noting the negative side of reforms that were routinely praised earlier as trade boomed along with real estate and stock markets.

In Chile, Latin America’s free-market pioneer, poverty doubled to 41% of the population during the 1970s and ‘80s, although it has since declined, and foreign debt quadrupled to $21 billion--one of the highest per capita debts in the world, says Joseph Collins, a respected expert on economic development in Third World countries.

After decreasing for decades, the number of poor in Latin America is again on the rise. The number of impoverished leaped from 135 million in 1980 to a record 210 million today, or two of every five people, the U.N. Economic Commission for Latin America and the Caribbean says.

One of every four people in the region survives on less than $1 a day, the U.N. Development Program estimates.

One of the biggest costs of the reforms is employment. Mass layoffs followed privatizations of state-owned airlines, steel mills, telephone and other major companies. After Argentina’s state oil company, YPF SA, was sold in 1993, its work force dropped to 7,500 from a peak of 52,000 in 1990.

Without doubt, the free-market transformation has notched clear triumphs.

When Argentine President Carlos Menem took office in 1989, annual inflation was 4,924%. Now it’s near zero.

Peru’s economic output soared by 32% between 1993 and 1996.

Defenders of the changes argue that the poor benefited tremendously by the reduction of inflation, that the old economic system was collapsing anyway, and that more time is needed for the benefits of free markets to spread.

“Despite all the difficulties of the last 10 years, not a single government in Latin America has abandoned the so-called neo-liberal strategy. No one could go back. No one is going back,” said Harvard University professor Jeffrey Sachs, a leading free market proponent who has advised Bolivia’s government.

But he acknowledged: “You can’t say these reforms added up to the achievements that they hoped for.”

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New political leaders and movements are trying to capitalize on the discontent, and traditional parties are feeling the heat.

In Argentina, a new center-left alliance handed Menem’s ruling Peronists their first nationwide defeat in a decade in Oct. 26 congressional elections. The alliance accepts the basic principles of Menem’s free-market changes, but is pushing for a greater emphasis on social needs.

Some groups are more openly critical. A splinter party of Venezuela’s Radical Cause workers’ party, Country for All, proclaims it is “anti-neo-liberal” and is pushing for alternative policies.

“We are the party of the weak, the poor and the outcasts of society, the housewives, the students and the unemployed. We reject neo-liberal policies that are starving our people,” Congressman Vladimir Villegas yelled at a recent rally launching the party.

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Governments are getting the message that people are unhappy and are increasing spending on social programs and slowing the pace of reforms.

The sale of Venezuela’s huge aluminum and steel plants, slated for this year, has bogged down partly because politicians think many voters oppose it and will punish them in the presidential election next year.

Hugo Banzer, the former army general and dictator recently elected president of Bolivia, campaigned on a platform of curtailing privatizations and spending more on education and health.

President Alberto Fujimori’s approval ratings in Peru, sky-high in his 1990-95 term, plummeted this year to record lows. He recently launched a $2.7-billion anti-poverty program.

Argentina’s Menem followed with his own $3.3-billion plan, and Chile’s Eduardo Frei declared fighting poverty his government’s top priority.

Even die-hard critics do not advocate a return to Latin American-style socialism. They urge shifting emphasis to job creation and land reform, keeping profitable state enterprises in public hands, increasing spending on health and education and cutting outlays on the military and foreign debt service.

They call for more taxes on the rich and a better safety net for the young, the old, the poor, the disabled.

“Brazil has changed for those who have money but not for the poor,” said Salomao Dantas da Silva, who was laid off in 1995 after 15 years at an engine and farm-machine factory in Sao Paulo state.

“We shouldn’t accept the fact that the inflation decreases with the sacrifice of the people,” he added. “We are paying the price. Isn’t there another way of cutting down the inflation without such a tremendous social cost?”