Emerging markets are suffering from the aftermath of the Sept. 11 attack and the U.S. recession, but of all emerging market regions, the one with the greatest long-term problems may be Latin America.

In the 1990s, prospects for the region looked bright as economic reform seemed to take hold, but it appears now that long-term adverse factors may prove dominant, so that prospects are darkening for the continent as a whole.

The elements of Latin American decline are very clear. Country after country has seen its economic and political prospects worsen. This decline is not temporary, as is the case in Asia, where a decline in tech-sector exports already is being dealt with in the traditional Asian way, by tightening belts and working harder. Instead, in Latin America it is structural: The traditional weaknesses in Latin American society are reasserting themselves, and the progress made during the 1980s and 1990s in restructuring Latin American economies is being lost.

In Argentina, bankruptcy is only months away, in spite of bailout after bailout from the International Monetary Fund and the United States. While Argentine debt is still manageable as a percentage of gross domestic product, it is totally out of control as a percentage of exports, which remain tiny in terms of the size and sophistication of the Argentine economy.

As my colleague Ian Campbell has eloquently demonstrated, the problem in Argentina has arisen from the 1991 decision to enter a “currency board” arrangement fixing the value of the peso against the dollar. That decision, which appeared to impose a measure of discipline on the economy, in reality became highly dangerous when discipline was relaxed in the later Menem years (1994-1999) since domestic inflation simply made Argentine exports, such as they were, hopelessly uncompetitive.

Already by the autumn of 1998, Fiat Argentina had found its costs to be way out of line with volume car manufacturers in Brazil, and the position has only worsened since then.

With Argentina being one of the world’s least export-oriented economies and with its principal traditional exports being in any case locked out of Western markets by agricultural protectionism, the result has been inevitable for several years now. Austerity plans that trim but do not slash the bloated Argentine public sector merely result in huge unpopularity for the incumbent government, which is in this case likely to be reflected in heavy defeats for it in the Oct. 14 elections for the Senate and half of the lower house.

Argentina’s default is thus inevitable, and yet another period of impoverishment of the Argentine people equally so, but Argentina’s problem is merely the most immediate of the economic collapses facing countries right across the Latin American region.

Like Argentina, these countries made steps toward reform in the 1990s. Like Argentina, they believed that half-hearted reforms and an influx of foreign capital could allow them to continue the social and economic policies that had got them into trouble in the first place.

Probably the least immediate danger of collapse is in Chile. Here, from 1973 to 1989, under the free-market dictatorship of Agusto Pinochet, genuine reforms were instigated, resources were properly transferred to the private sector, and the bloated Latin American welfare state was cut back vigorously. One is reminded of the rule in Mexico of Porfirio Diaz at the end of the 19th century, a period denounced by politicians thereafter as one of black reactionary dictatorship, but remembered by ordinary apolitical Mexicans as one of peace and prosperity that was not to return until the presidency of Ricardo Aleman 40 years later. Had Pinochet not lost the 1988 referendum by a modest margin, or had his protégé Joaquin Lavin not lost the January 2000 election by a whisker, Chile might have continued as a beacon to other Latin American countries of how traditional Latin American vices could be overcome and Asian levels of economic development produced.

As it is, the opportunity seems to be lost. During the 1990s, the Aylwin and Frei governments were careful to maintain more or less the Pinochet economic policies, and not to allow the public sector to grow more than moderately. Since 2000 their successor, Ricardo Lagos, has moved the country toward “social democracy” and away from the free market. Foreign investors are finding themselves the target of tax and other investigations, and wages are rising rapidly in the unionized sector.

The trend is still reversible, but only with a change in government which does not appear likely in the short term.

Brazil, too, has seen the impetus to reform in the middle and late 1990s slow to a halt. Brazil avoided the Argentine problem and has benefited from two substantial devaluations of the real in the last three years. Nevertheless, economic growth in the country has slowed to a crawl and Brazil’s social problems are increasingly restricting the policies available to a Brazilian government that is at best only moderately reformist.

In any case, the slimming down of Brazil’s monstrously overgrown public sector is hugely obstructed by the country’s 1988 constitution, written by idealist socialists, that prevents layoffs entirely in the public sector and provides for large subsidies from the national to regional governments.

Brazil therefore has staggered on more or less adequately in a time of world economic prosperity; it will not continue to do so in the current downturn. Elections are due next year, and early signs are that an out-and-out socialist is likely to be elected. Expect, therefore, for Brazil to enter yet another decade of relative decline, probably accompanied by strident nationalism and default on its international debt.

If the prospects for Argentina, Brazil and Chile are gloomy, those for Peru, Venezuela and Colombia are still more so. In Peru, the reformism of the early Fujimori years descended into corruption and eventually chaos. The new President Alejandro Toledo was elected as an anti-Fujimori candidate, and appears currently to be attempting to harass those foreign businesses that had done business with the Fujimori regime. Peru, already a very poor country, thus appears to be sliding backwards.

In Venezuela, the government of the openly anti-capitalist Hugo Chavez has so far been able to survive thanks to high oil prices. If oil prices continue their recent drop, however, Venezuela’s situation is likely to worsen rapidly. In any case, Venezuela is second only to Nigeria in the damage that oil income has done to the fabric of the economy, the non-oil sectors of which are wholly dependent on public subsidy. Hard decisions about Venezuela’s future are never made because the oil income is always just sufficient to keep the Venezuelan state barely solvent, its officials opulent and its people barely above the poverty line. Expect Venezuela to get worse before it gets better; indeed, you should hope it does, for otherwise the hopelessly anti-market Chavez years will be remembered by the Venezuelan people as a golden age. The last thing Venezuela needs is the replacement of the Chavez government by an economically sensible one just as the money runs out.

Venezuela’s problems are entirely its own fault, or rather, the fault of a succession of terrible governments and the deluded people that elected them.

In Colombia, this is not the case. Twenty years ago, Colombia, which had governments significantly less populist than elsewhere in Latin America, appeared to be the rising star of the continent, with a relatively small public sector and rapid economic growth. Since then, it has allowed the public sector to balloon, which has stifled economic growth but it has also suffered two economic problems that were not entirely of its making: the debauchment of the economy by drug lords and the continuing leftist guerrilla campaign. With U.S. help, it may be possible to get both problems under control. Only when this has been done and a firm free-market government has been elected can the Colombian economy be restored to the hopeful state of the early 1980s.

Ecuador and Bolivia, both small countries, offer some hope of a contrary trend. In Ecuador, economic reform was not really tried until 2000, so its benefits are currently being felt and its long-term difficulties have not yet become apparent. High oil prices, however, are needed for the Ecuadorian economy to prosper. In Bolivia, reformist policies have been pursued since 1985, with especial vigor under President Hugo Banzer in recent years. However, Banzer’s death in July 2001 has thrown the political and economic situation into uncertainty, with a nationalist-socialist revival likely in the elections due in 2002.

Mexico, finally, embraced economic reform enthusiastically under President Ernesto Zedilla, after the 1994 crisis, and also had the immense good fortune to be taken into a free trade area with the world’s strongest economy, one that for several years enjoyed outstanding rates of economic growth. At the end of 2000, with the one-party rule of the corrupt statist PRI having been democratically replaced by a PAN government apparently more committed to economic reform, the prospects looked bright.

This has been a dreadful year for Mexico. To move forward economically, it is essential that Mexico privatize the state petroleum monopoly Pemex, which is the principal source of financing for the huge corruption in Mexico’s public sector. It also is highly desirable that Mexico privatize the electricity company CFE; after all, its immensely rich neighbor to the north is suffering from an electric power crisis from which a privatized and efficient CFE could make extraordinary profits, that could provide funding for a large part of Mexico’s capital development needs.

President Vicente Fox is not going to do this. Presumably to appease the PRI, which is still more or less in control of Mexico’s parliament, Fox has ruled out privatization of both Pemex and CFE. By doing so, he has assured the beneficiaries of Mexico’s corrupt political system that they need not fear, the system will continue to provide for them under the PAN as it did under the PRI.

This cowardice has in any case availed him little. His modest tax package is in trouble in parliament, and appears unlikely to pass in its present form.

The hope that Fox might prove another Porfirio Diaz, opening up Mexico finally to the free market and ensuring its long term prosperity, is fading fast.

Meanwhile, Mexico’s rich neighbor to the north has itself entered recession, and no longer provides the hope of rapid economic growth and export of surplus population that the Mexican economy needs. Consequently, Mexico appears doomed to fall back into the Latin American trough in spite of NAFTA, and to repeat once again the statist mistakes of the past.

This is a succession of sorry tales, with a gloomy conclusion, but there are a number of themes in common. Neither Spanish nor Indian culture traditionally rewarded individual initiative, instead they taught people to rely on the state or the church for salvation. While Spain itself has shown that, over time, this cultural challenge can be very largely overcome, it requires an effort of national will to do so, and that effort has been lacking.

Another problem is the lack of attention paid in traditional Catholic cultures to education, which tradition has continued in Latin America to a much greater extent than in southern Europe or Asia. Economic development requires the whole population, not just an elite, to be educated; Latin America is improving in this respect but has far to go.

In general, therefore, the electorates of Latin America are more likely to be seduced by populist panaceas than elsewhere, as evidenced by the remarkable success of Hugo Chavez in Venezuela. This tendency has not been affected by the economic reforms of the 1990s, indeed, it appears to have got somewhat worse recently. Dictatorships on the Pinochet or Diaz model are not the solution, because no dictator in Latin America has ever solved the succession problem; consequently the dictator, however able, is succeeded, possibly after a lapse of some years, by a populist government determined to undo everything he has done.

It is easy to say that the Latin American people need to acquire the self-discipline and zest for self-improvement that is typical of East Asian cultures. What is wholly unclear, however, is how this is to be achieved.

In the meantime, while one can hope for another upswing after the currently impending downswing, progress in Latin America must inevitably be slow indeed.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.