The left is in power in Argentina, Brazil, Chile, the Dominican Republic and Venezuela. With this months inauguration of Tabaré Vázquez as president of Uruguay, this trend will likely continue. The year 2006 could bring a similar leftward shift in Mexico and Peru, while in Bolivia the Socialist opposition has been setting much of the political agenda since the fall of President Gonzalo Sánchez de Lozada in 2003. Although this movement is hardly homogeneous (there are major differences between Venezuelas Hugo Chávez, Chiles Ricardo Lagos and Brazils Luiz Inácio Lula da Silva), the continental pattern is clear.
Behind this tilt is popular frustration with the failures of the 1990s, a decade of reform under governments of the right that were supposed to catapult the region toward development. Despite the success of many of these governments in curbing inflation, that development failed to happen. Instead of decentralization and the creation of a free, competitive economy and strong legal institutions open to all, crony capitalism and authoritarianism grew.
Countries replaced inflation with new taxes on the poor, high tariffs with regional trading blocs, and, especially, state monopolies with government-sanctioned private monopolies. The courts were subjected to the whims of those in power, widening the divide between official institutions and ordinary peopleone reason recent surveys in Latin America have pointed to such widespread disillusionment with democracy.
This frustration opened the doors of power to the left. With some exceptions like Venezuela, this new left is trying to avoid the worst mistakes of the old, especially 1980s-style hyperinflation and open war against foreign investors. Some of the results are impressive: investment is picking up in Brazil, economic growth reached 8 percent in Argentina last year, and a Socialist president in Chile has overseen a big decrease in poverty (only 18 percent of the population, according to the Inter-American Development Bank, is below the poverty line in that country). Politically, despite a few authoritarian spasms in places like Argentina, the new governments are playing by democratic rules.
It would be a mistake, however, to think that all these governments need to do is stay the course. Unless Latin Americas leftist governments are willing to deepen reform, the continent is unlikely to break free of its recurring cycle of economic stagnation and political disillusionment. The good news, however, is that left-of-center governments in other parts of the world have put such reforms into place and lived to tell the tale.
Latin Americas rebound owes a great deal to favorable international circumstances, from low interest rates in the United States to heightened demand for commodities by China and India. After experiencing little or no growth between 1998 and 2003, the regions economies have benefited from the high price of oil (Argentina, Ecuador, Mexico, Venezuela), minerals (Peru) and other commodities like soybeans (Argentina, Brazil).
But investment levels are still low: 15 percent to 17 percent of gross domestic product in the majority of countries, compared with roughly 25 percent in East Asia over the past two decades. With the exception of Chile, poverty is not diminishing. Last year the region had a net capital outflow of $77 billion, which is not surprising considering that foreign investment has not yet returned with force; that is in part a result of social unrest in the Andes but also of the perception that many of the structural reforms promoted in the 1990s have yet to be achieved.
In order to compete with economies that have undergone reform in East Asia and Europe, Latin Americas left must dismantle corporatist states that hamper enterprise among those who are not close to government and, through legal privilege, mock the notion of equality before the law.
Many companies that were privatized in the 1990s (telephone service in Mexico and Argentina, and electricity in Peru) still have effective monopolies and are in cahoots with regulators. Getting rid of these privileges could help to persuade the poor to embrace the idea of economic freedom. Significantly reducing high sales taxes that were set in times of fiscal profligacy would lift a burden from the poorest citizens. Slashing the bureaucratic requirements that force citizens to spend up to 80 percent of their annual income if they want to set up a private company would also help to empower would-be entrepreneurs.
Even more important, decoupling the judicial and the political spheres (for example, by reversing an expansion of Argentinas highest court that was undertaken by a former president to pack the bench) could begin a vital legal reform process in which all citizens are given real legal protection.
Such measures could turn current growth into sustained progress. More fundamentally, by reconciling human rights and free markets, two notions that have been sadly at odds across the continent, they could enfranchise millions. Further reform is the best way to meet the current social unrest and prepare for when the prices of Latin American commodities go down or interest rates in the United States go upa likely prospect if Chinas growth slows and deficits in the United States keep rising.
Other left-of-center role models for reform abound, from New Zealand to Ireland, Estonia and Lithuania. Ultimately, the real challenge facing Latin Americas left is to avoid the temptation of being too conservative.