Latin Economies Soar, Stumble With Reforms

Latin America has been a laboratory for free-market reform over the last decade. And in many ways, the experiment has worked, generating robust growth and billions of dollars in foreign investment while wiping out the hyper-inflation that smothered the poor.

But don’t talk to Sidney Setubal of Rio de Janeiro about the sweet winds of change or the blessings bestowed on his country by Ford or Wal-Mart or Motorola.

The former clerk was among nearly 3,000 workers fired in November by Telerj, Rio’s telephone company, after the government sold the notoriously inefficient utility to private owners, who slashed costs.

Setubal, 48, sat recently among morose former co-workers in a union hall, filling out forms and waiting to talk to a lawyer. The father of two had the dark, slender look of a beach-loving Rio native. His 22 years at a desk job had ensconced him in the lower middle class.

Suddenly out on the street and lacking a college degree, Setubal sees little hope of landing work soon. Unemployment rates have climbed to 7.5%, and Brazil is bracing for a deep recession in 1999.

“It’s hard to find a job when you’ve worked a long time in the same company,” Setubal said wearily. “You don’t know how to work elsewhere.”

The Brazilian’s plight reflects the growing paradox--and brewing political tempest--underlying Latin America’s all-out conversion to free markets in the 1990s.

Productivity and consumerism have soared, and a statistical patina of growth blankets much of the region.

But job creation is actually slower than a decade ago, and unemployment across the region is unchanged at 10%.

A bigger proportion of working-age people--57% today versus 52% in the 1980s--is trapped in the “informal economy” as street vendors and the like, neither paying taxes nor receiving pensions, medical insurance and other forms of security, according to a number of recent studies.

Reducing Poverty Remains Elusive Goal

The new economics is not replacing the inefficient jobs that have been slashed all across the region by the hundreds of thousands.

It’s the “dirty little secret” of today’s Latin America, as one economist puts it: While the wealthy enjoy the fruits of modernization, poverty and inequality persist and even worsen.

There is an increasing consensus among experts across the ideological spectrum that the ultimate goal of the reforms, the reduction of the region’s grinding poverty, remains little or no closer than a decade ago.

Jobs in the region have increased an average of just 2.8% a year in this decade, down from 3.3% in the 1980s--and far short of the 5% to 6% needed to absorb the millions who reach working age each year.

“The whole process has not been sufficiently equitable. You’ve got a few big winners and you’ve got a significant number of losers and a large number of people who have yet to see benefits,” said Richard Feinberg, a UC San Diego political economist and former advisor on Latin America in the Bush administration.

To be sure, some of the disappointments are facts of life elsewhere, including the United States, where the gap between rich and poor also widened this decade.

However, the scale here is vast. Disillusionment is acute in Latin America because inequality was already the worst in the world, said Nancy Birdsall of the Carnegie Endowment for International Peace, a Washington economics policy research group. And so it remains.

“It looks as though when times are bad the poor are worse off, and when times are good it’s not clear that the poor are better off,” Birdsall said.

It has been a long journey even if, for many, the distance traveled is short.

Until the 1980s, Brazil and other Latin American nations dedicated half a century to keeping imports out and building local industries. They relied on heavy government investment in basic industry to stimulate growth.

The region became a bastion of massively inefficient cronyism and inflated, make-work payrolls. Success hinged less on marketing and technological prowess than on cultivating contacts with power brokers.

The debt crisis of the early 1980s exposed the inadequacies of the old policy, showing that governments were borrowing enormous amounts in foreign loans to maintain unaffordable, socialist systems. The countries were being left behind in a rapidly globalizing, high-technology-based world.

Chile became the free-market pioneer. In the late 1970s and early 1980s, then-dictator Augusto Pinochet unleashed the so-called Chicago boys, technocrats molded by the conservative economics department at the University of Chicago.

Source of Chile’s Success Debated

Chile now has Latin America’s most privatized and deregulated economy and has done a uniquely good job of reducing poverty, from 45% to 23% of the population from 1987 to 1996. Unemployment shrank by more than half, to 7%.

Yet an ideologically charged debate rages over who gets the credit: Pinochet’s purist free-marketeers, whose innovations included privatized pensions, or subsequent democratic governments, which presided over greater growth.

“The previous governments had an almost religious conviction that the market solves everything,” said Ricardo Ffrench Davis, a former top official of the government elected in 1990.

“What we did was introduce pragmatism. We invested more in production, in quality of education, in physical infrastructure, in equity.”

By the early 1990s, Chile’s neighbors had started down the free-market road. Mexico, Argentina, Peru, Colombia, Brazil and others gradually lowered trade barriers, invited foreign companies to invest and began selling off bloated, inefficient state-run industries.

But as progress has faltered or, in the case of Mexico, been reversed, the disappointments have accumulated, and a debate over market reforms has been building for years.

Many Latin Americans had already concluded what people elsewhere in the world have deduced in the last 18 months: that “free markets” can devastate developing nations.

The Global Economy Domino Effect

The economic flu that began in Thailand in 1997 and spread across Asia, Russia and Brazil sent capital pouring out of all emerging markets. It still threatens to send Brazil over the brink, menaces economies across the hemisphere and led to a $41-billion international bailout in November. Regional economic growth is nearing the vanishing point, projected to slow to 1.5% this year.

This just a few years after nervous money fled Mexico and left that nation an economic shambles that will not be fully repaired until early in the new millennium.

“Hot money can break a country in 24 hours,” lamented Gov. Tasso Jereissati of Ceara state in northeast Brazil. “Everyone can be happy today and then we wake up broke because of something that happened overnight in South Africa or Hong Kong. In this kind of world, it’s hard for an emerging country to really emerge.”

At the same time, most conservatives and leftists alike agree that landmark structural achievements of the 1990s should not be touched: monetary stability, open markets, leaner governments.

Indeed, purists say the changes did not go far enough. They blame the entrenched woes of working people on halfhearted modernization, pernicious corruption and a failure to accompany free markets with strong democratic institutions.

However, a chorus of critics wants to “reform the reforms” to make the economies more responsive to have-nots.

The region’s heavy reliance on the market has caused nations to neglect the state’s vital role in educating and training its people, said Jose Antonio Ocampo, director of the U.N.’s Economic Commission for Latin America and the Caribbean.

“The second wave of reforms is not more economic liberalization,” he said in an interview. “There are these fictions that the problem is insufficient liberalization. Where? This has become incredibly simplistic. . . . We must seek more pragmatic solutions.”

A Huge Market for U.S. Exports

New solutions might well be necessary to mute a backlash that is already gaining strength as more citizens equate free-market democracy with lawlessness and lost jobs.

Venezuelans in December elected as president populist Hugo Chavez, an ex-paratrooper who once attempted a coup and denounces “savage capitalism.” Center-left political movements have gained ground in Argentina, Chile and Mexico partly because they criticize “el modelo”--the dominant economic model.

The United States, of course, has a big stake in the health of the region’s democracies and economies, particularly the working and middle classes--all potential consumers or, conversely, illegal emigres. U.S. exports to Latin America are expected to more than double to $240 billion by 2010, exceeding the projected combined exports to Europe and Japan.

That speaks to the particularly Latin American irony of all this: A sizable minority, tens of millions of people, are thriving. Brazil has been called “Bel-India” because the elite live as if they were in Belgium and the masses as if they were in India. That clash of images increasingly fits Latin America.

Thus, companies such as Compaq Computer Corp. and J.C. Penney Co. are scrambling to sell computers and bedsheets to Brazil’s new middle class. More lasting investment--in factories, power plants and the like--continues to pour into the region on the bet that these economies will keep growing.

Brazil last year received $23 billion in direct foreign investment, up from $1 billion in 1990 and second only to China. In energy projects alone, about $170 billion will be invested in the region over the next decade.

New Opportunities for Entrepreneurs

The lifestyle of Pilar Caicedo, a Colombian consultant who conducts sales and customer service training, proves that home-grown entrepreneurs are also part of the new economic pie.

Caicedo, 53, is a sophisticated, fashionable mother of four. She socializes with a former president, drives a sleek Mazda sedan and travels the globe for business and pleasure.

The opening of the hemisphere’s economies has boosted her company, which is based in the hills above Cali and has representatives across the continent. Customers include Dow Chemical Co. and IBM Corp.

Neighboring countries used to obstruct foreign entrepreneurs, Caicedo said. But now taxes on foreign firms have been slashed, and she has expanded operations in Peru, Ecuador and Venezuela.

“This has helped us withstand the economic difficulties in Colombia,” Caicedo said on a recent afternoon in her suburban villa.

But Caicedo’s gilded world of professionals has little to do with the world where most Latin Americans live.

A Region Lacking in Educational Resources

The time-honored way to narrow such a gap, of course, is education. Yet educational opportunities are shrinking compared to other parts of the world--a seemingly damning comment on how the region has used its resources.

The region’s workers now have two fewer years of education than their Asian counterparts, whose schooling they equaled in the 1960s, according to an Inter-American Development Bank study. And technical training has failed to supply skilled workers or get the unemployed back to work.

As these nonworkers fall into the informal economy, streets have filled with tattered armies of itinerant peddlers from Mexico City to Caracas to La Paz. Not only are more workers shut out of health and pension coverage, but countries lose the productivity inherent in organized work.

Even the comparatively bright health statistics should be better than they are. Though some Latin American nations have dramatically improved life expectancy and infant mortality rates, those figures still trail countries with similar income patterns, according to the Inter-American Development Bank.

That such gloomy numbers coexist with the cheerful macroeconomic evidence, analysts say, reflects the differing, irregular and incomplete stages of reform that these economies have reached. As such, reform advocates say, it’s too early to pass judgment.

Brazil, for example--by far the dominant economy in Latin America--only five years ago tackled the kind of massive transformation others started in the 1980s. A generation or more might be needed for market-based reforms to reach full flower, said Amaury Bier, Brazil’s finance undersecretary.

The Brazilian government, which once owned or controlled the nation’s industries, is remaking itself as a creator of “human capital adequate to technological development” and of “macroeconomic conditions for future growth,” Bier said in an interview.

As the region ponders the options, the free-market switch--despite the shortfalls--is widely perceived as better than the alternatives.

In fact, because the hyperinflation of earlier years acted as a tax on the poor, its elimination was a godsend to them--arguably the most important reform to date.

In Brazil in 1993, inflation went up 1% to 2% every day, robbing the poor of spending power while the wealthy shielded themselves or profited from the fallout.

President Fernando Henrique Cardoso’s strategy of inflation-busting and a minimum-wage hike benefited the poor more than any other group and reduced their ranks in 1994, though the current downturn could partly reverse that progress.

The Crucial Decline in Birthrates

The latest thinking among many intellectuals and politicians would replace traditional free-market policies with an approach closer to the British Labor Party’s “third way” between capitalism and socialism.

“The [economic] opening has had no good effect on the poor,” Ciro Gomes, former finance minister and a future contender for presidency, said in an interview. “In trying to shock our companies into being more efficient, we’ve drowned them instead.”

Sounding like American tycoon and politician Ross Perot, Gomes complains that the lowering of trade barriers against foreign auto manufacturers caused more than 1,000 Brazilian auto parts companies to go broke. He wants the state to grant low-cost credit to help small and mid-size businesses compete. He also adds his voice to those around the world demanding limits on the free flow of capital.

But in the long term, such policy options might pale in importance compared to another change spreading across the region: a decline in the birthrate.

For many reasons, notably urbanization and the growth of women in the work force, birthrates are falling throughout Latin America. Population growth in the 1990s has slowed to 1.7% a year from 2% in the 1980s.

Until now, Latin America’s soaring birthrates defied efforts to create enough jobs for those flooding the ranks of would-be workers. And large families worsened the burden on wage earners, completing the poverty circle.

“If you are working and gaining income and on top of that have fewer kids to take care of, the easier it is to educate the kids you have, which raises their income levels,” says Ricardo Hausmann, chief economist at the Inter-American Development Bank.

Lower birthrates allow more of the region’s resources to be dedicated to such critical needs as education, land redistribution, pension reform, revisions of labor law and better tax collection.

Brazil’s Landscape of Inequality

Northeast Brazil offers a panorama of the challenges.

It is an alternately lush and desolate landscape of almost feudal injustice, the poorest and most unequal region in a nation with the world’s most unequal income distribution. In Ceara state, rural and urban desperation has been aggravated by a serious drought and the loss in Fortaleza, the capital, of industries shuttered by the new competitive climate.

“We can’t wait for the process of economic opening to take care of itself,” Gov. Jereissati said. “The state has to be more active to stimulate jobs.”

Land reform is a priority. By turning sharecroppers into owners, land redistribution makes them more productive and provides land as collateral, giving them the use of credit.

During the last four years, Brazil’s agrarian reform program has provided land to about 270,000 needy farm families. However, an estimated 2 million more landless peasants pose one of the society’s most difficult challenges.

The World Bank hopes to resettle 175,000 families in 13 Brazilian states over the next six years, based on a pilot program in the northeast that is resettling 15,000 families.

Francisco Dominguez de Souza and his fellow farmers, resilient men clad in linen shirts, work pants and sandals, are mulattoes and mestizos--like most of the almost 200 million Latin Americans trapped in poverty. Until February, they were the poorest of the poor.

As a tenant farmer, Dominguez was forced to move his family every year at the whim of landowners known as “colonels,” rural bosses who control political machines, county-size estates and regiments of private gunslingers. The landowners told him what crops he could grow, when and where. And he had to give them half of his harvest.

“I was kind of a slave,” Dominguez said.

Then a loan helped their 13-family collective buy an 800-acre farm from an absentee owner near the town of Acarau in Ceara. Land ownership means the difference between decent daily meals and going to bed hungry, between misery and dignity.

“There’s enough to eat,” said Dominguez, 54, a weather-beaten father of five interviewed in his small but sturdy new house. “And also there is liberty: the fact that I can pound this table and say it’s mine.”

Now he is his own master. He hopes for a bumper crop of coconuts next year and aspires to earn $2,500, which is five times the subsistence income he earned annually as a renter.

Such efforts might one day be part of a recipe that will move the majority of Latin Americans closer to prosperity. Yet until the region’s economies are deeply transformed, any such recipe will inevitably yield a bitter taste.

Consider the new $210-million electric power project in Cali, Colombia, being built by InterGen, a joint venture of San Francisco-based Bechtel Corp. and Shell Oil Co. It was made possible when Colombia agreed to let foreigners invest in the national power grid.

When the plant fires up this month, it will add 25% to Cali’s power capacity, improve reliability and reduce pollution. However, it will employ only half as many workers while generating five times the energy.

The same kind of wholesale job loss continues all across the region. Paper manufacturer Smurfit Carton de Colombia laid off 10% of its work force to compete with Finnish, Chilean and Brazilian challengers.

“We know changes are necessary,” union leader James Molina said at the paper plant. “But we need to put a human face on the changes.”

Special Report: 3 Degrees of Hardship

For many in Mexico and Argentina, the free-market revolution sweeping Latin America has meant a more precarious future, not a brighter one. In Ecuador, where protectionist policies are still in force, the picture is even darker. C1

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Growth Rates

The 1970s look like the good old days as the millenium draws near in Latin America. Per capita economic growth by decade across 26 nations, including the Carribean:

Average annual growth rates

1970-’79: 3.3%

1980-’89: -0.4%

1990-’97: 1.6%

Source: Inter-American Development Bank

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Slow Growth

Except for Chile and Argentina, economic growth since the 1970s in Latin America has been anemic. Average annual growth in gross domestic product, by decade:

Average annual growth rate

*--*

Country 1970-1979 1980-1989 1990-1997 Argentina 1.0% 2.4% 4.3% Bolivia 2.0% -2.0% 2.0% Brazil 6.1% 0.3% 0.5% Chile 0.8% 1.7% 6.9% Colombia 3.3% 1.7% 6.9% Ecuador 6.3% -0.6% 1.5% Mexico 3.5% 0.1% 1.0% Paraguay 5.4% 0.6% 0.0 Peru 1.2% -2.8% 2.7% Uruguay 2.8% 0.3% 3.6% Venezuela 0.5% -1.9% 1.7%

*--*

Source: Inter-American Development Bank

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The Good News

The region’s soaring inflation, which made people poorer by the day, has been tamed as countries stopped printing more money to pay their bills.

Annual growth in consumer prices (in annual percent)

‘97: 12.2%

Note: 1997 figures are preliminary

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Latin Wage Warp

Even those Latin American workers who have jobs have lost ground over the last decade. Annual percentage changes in manufacturing wages, adjusted for inflation:

Argentina, Brazil, Chile, Mexico

Source: Inter-American Development Bank