Latin America’s Bad Habits

GUATEMALA CITY — After 60 years in power, Paraguay’s ruling Colorado Party was pushed aside April 20 by a charismatic former Catholic bishop promising economic and political reform and power to the people.

The election of Fernando Lugo as Paraguay’s new president was hailed by an official of America’s left-leaning Center for Economic and Policy Research as a sign of the “deep and irreversible . . . changes sweeping Latin America.”

But “change” doesn’t always mean change for the better. And only time will tell whether Mr. Lugo will pursue an independent new course that improves conditions in the poverty-stricken nation of 6.5 million, or follow other recent populist politicians who, in the name of change, have curbed individual liberties and strangled their economies.

Paraguay is, importantly, different. Bolivia, Ecuador, Nicaragua and Venezuela, other countries led by populist politicians who promised change, could afford to make mistakes. Their economies are propped up by valuable commodities and natural resources: tin, zinc, oil and natural gas in Bolivia; oil in Ecuador; coffee and gold in Nicaragua; and bauxite and oil in Venezuela. Paraguay enjoys no such riches.

None of this is new. If there’s one constant in Latin America it may be this: For every step forward—politically and economically—there’s an equivalent step back. How else can one explain the never-ending roller-coaster many Latin American countries seem to ride? Bursts of freedom, energy and progress, followed by periods of inexplicable resentment, regret and regression.

Venezuela and its copy-cat states are not alone on this ride. In Argentina, the government, forever insatiable, has taken advantage of high soy prices by raising taxes on exporters to as much as 44 percent. If you want to kill soy exports that’s how to do it.

For five years, Latin American economies have enjoyed a bonanza. The export of raw materials, the region’s principal source of hard currency, has increased to meet a growing world demand that, in turn, has fueled higher prices. China’s booming economy and the awakening of India, along with the weakness of the dollar, have made the prices of oil, minerals and agricultural products rise almost constantly, often to levels never before reached.

Thanks to this export boom, the economies of Latin America have grown ceaselessly during the last five years, fostering expansion in almost all sectors. With higher tax revenues, the governments have been able to eliminate or reduce deficits and increase social spending.

What many of them haven’t done—in some cases simply to spite the United States—is to make needed structural changes in their economies to promote long-term economic growth or to deal with the inevitable economic slowdowns that follow good times.

Public money has been spent on bureaucracy, on social programs of doubtful efficacy, and on shoring up their political bases—Venezuela’s Hugo Chavez likes nothing more than occupying center stage—but not on economy-building. That’s why Latin America has grown at half the speed of China.

But now the good times are ending. High prices have begun to batter, with great force, the scant purchasing power of the poor. In Paraguay, for example, more than a third of the country—and by some estimates nearly half—live in poverty. When you’re poor especially, prices matter.

The politicians, meanwhile, refusing to move beyond the populist speeches with which they try to gain the voters’ favor, turn to the same tired solutions: impose more controls, try to govern the economy from some ministry, increase subsidies and impose more fiscal burdens. An army of bureaucrats who constantly talk about fighting poverty receive most of the public revenue. Business, meanwhile, always a convenient scapegoat, flees the region in search of friendlier climates, making sustained economic growth difficult.

Latin America needs to understand that greater economic development cannot be achieved by returning to the failed measures of the past. It cannot be achieved by controlling prices, nationalizing industries, confiscating private businesses—even those owned by gringos—or raising taxes. As experience shows, such populist measures only lead to greater shortages, increased inflation and a return to the cruel crises so common in this part of the world.