We are used to thinking of the modern world as one of steadily rising productivity, where year by year through the application of new technologies workers achieve higher output per capita and wealth correspondingly increases. Yet in Latin America this is not the case; since 1980 productivity has been in steady decline, with the marvels of modern technology failing to raise living standards. This is a puzzle; it is also a tragedy with considerable geopolitical implications.
The productivity evidence is pretty damning. Mexico’s labor productivity declined in the decade after the 1994 ratification of the North American Free Trade Agreement, contrary to all economists’ predictions that NAFTA would produce a Mexican economic miracle. It is startling to recognize that in a decade when Mexico had (by Mexican standards) consistently pro-business governments, foreign investment in Mexico approximately quadrupled and the low-wage Mexican economy was given free access to the rapid growth of the United States, Mexican labor became less productive and higher living standards for the average Mexican conspicuously failed to appear.
Over Latin America as a whole, according to a 2004 paper published by the Inter American Development Bank, total factor productivity declined by 0.65 percent per annum in the 1990s, following a staggering decline of 2.65 percent per annum in the 1980s. True, the 1980s was a difficult decade for the continent, but the 1990s appeared at the time to be a period of recovery, not of further decline. Since 2000 the political and economic position of Latin America has generally darkened further; it’s unlikely the productivity picture has significantly improved.
Latin America’s productivity performance in 1980-2000 was less appalling than those of Africa and the Middle East, but Africa’s extreme poverty and the Middle East’s extreme wealth in the baseline year of 1980 offer at least partial explanations for those regions’ even worse performance. Latin America, even in 2000 was richer than India or China, yet after 1990 her productivity performance was far worse than that of either of those countries. Instead of moving towards modest wealth and stability, Latin America since 1980 has been slipping steadily further towards impoverishment and degradation.
According to the IADB study, there were a number of economic corollaries to Latin America’s poor productivity performance, although it’s difficult to label them as causes. The continent had a very rapid growth rate in the labor force, below only Africa and the Middle East, while its investment rate at 19 percent was the lowest of all the world’s regions (thus producing a low growth rate in capital stock.) Its education level was relatively poor, and falling behind East Asia and the Middle East, although South Asia and Africa had worse education levels and before 2000 at least were not significantly catching up. Most countries of Latin America were below average in all three factors (macroeconomic environment, public institutions and technology) studied in the World Economic Forum’s annual Global Competitiveness Report. Finally, a factor not mentioned in the IDB report, Latin America has very high inequality, below only Africa and the Middle East.
It was not always thus. Before 1945, Latin America was among the world’s wealthier regions, and even up to 1980 its economic performance was respectable and its productivity growth was positive, if not stellar. By global standards, the region is still not especially impoverished. Nevertheless, just as in China around 1978 and in India around 1991 macroeconomic performance turned decisively for the better, so in Latin America between 1945 and 1980 it turned decisively for the worse. Macroeconomic factors such as the terms of trade can explain only part of this change; after all in the 1970s and since 2003 the prices of commodities, important to the region’s economies, have been relatively high.
The most notable change in Latin America since 1980 has been the spread of democracy, and U.S. policy towards Latin American governments. Before Jimmy Carter’s administration (1977-81) the United States did not distinguish significantly between democratic and authoritarian regimes in Latin America, intervening only to discipline those regimes that chose an ostentatiously leftist, anti-American path.
Since 1977 and more particularly since 1979-80 U.S. policy in Latin America has been very different. Both directly and through the U.S.-dominated institutions of the World Bank, the International Monetary Fund and the IDB it has actively encouraged democracy, pressuring rightist regimes such as Augusto Pinochet’s Chile (1973-89) and the 1980s military governments of Brazil and Argentina, and more recently assisting local mobs to force out even democratically elected conservatives such as Peru’s Alberto Fujimori (2001) and Bolivia’s Gonzalo Sanchez de Losada (2003).
At the other end of the spectrum, the United States has turned a blind eye to the misdeeds of democratically elected leftist governments such as Peru’s Alan Garcia (1985-90), Argentina’s Nestor Kirchner (2003- ), Brazil’s Luis Ignacio “Lula” da Silva (2002- ), Bolivia’s Evo Morales (2006- ) and even Venezuela’s thuggish, election-stealing and violently anti-American Hugo Chavez (1998- ).
The correlation is too clear to ignore. Before 1945, most Latin American countries were not fully democratic, relying (when not ruled by an authoritarian regime) on a 19th Century middle class franchise, while development finance, when it was available, was provided by the private sector in the form of the London and occasionally New York merchant banks. The result was relatively rapid economic development, and consistent improvements in productivity, albeit at a more modest rate than has been seen in East Asia since 1950.
Between 1945 and 1980, Latin America oscillated between democratic and authoritarian governments, and the merchant banks had effectively disappeared. However the United States and its surrogates in the World Bank and the IMF for anti-Communist reasons remained deeply suspicious of leftist regimes in Latin America and relatively tolerant of its rightist dictatorships. Productivity growth slowed, but remained generally positive albeit intermittent.
Since 1980 the United States, and the development banks have pushed strongly towards democratic governments in Latin America, without too much concern over whether the polices pursued by those governments were in any way economically coherent (even relatively benign democratic governments, such as Raul Alfonsin’s in 1983-89 Argentina, often pursued populist development strategies that proved economically suicidal.) The result has been not merely a lack of growth, but actual decline, with the immense advances of technology proving powerless to lift Latin American productivity and living standards when matched against the fecklessness of Latin American politicians and business.
The Woodrow Wilsonian promotion of democracy that was so trumpeted in George W. Bush’s second inaugural address in 2005 has already shown its disadvantages in Iraq, as indeed it did in its original incarnation, when Woodrow Wilson’s Versailles peace agreement not only produced World War II but was still causing wars in Yugoslavia 80 years later. The reality is that democracy is a pretty fragile bloom; for example it cannot easily withstand the stresses in Iraq of a religiously divided polity in which because of oil essentially all the nation’s tradable resources are controlled by the government.
Latin America has similarly demonstrated that a society with very high inequality, poor education, an ethnically and religiously divided people, large natural resources subject to government meddling and lacking a Protestant/Confucian work-oriented culture will also have severe difficulty in making a democratic system do its job of promoting the welfare of its people. Liberal mush-mindedness by the United States, the international institutions and the European Union, in the form of debt forgiveness and excessive tolerance of obviously kleptocratic and economically illiterate regimes only makes matters worse.
I wrote in 2001 that Latin America was the “darkening continent.” Although the continent’s finances have been cushioned by high world liquidity and low interest rates, its overall position has darkened considerably since then and will darken further still if, as seems likely the leftist Andres Manuel Lopez Obrador wins the July 2 election in Mexico. A world recession and the election of leftist governments will not simply turn relative decline into absolute decline; Latin America is already economically in absolute decline. It will however turn a gentle slope of decay into a headlong plunge, with huge adverse implications for the United States’ illegal immigration, drugs and terrorism problems.
There are a number of policies which the United States and the international institutions can follow in order to improve matters. The experience of Chile since 1973 has shown that a period of government that is economically competent and freed from the need to pander to populism can produce long term change in a positive direction. Latin American experience since 1980 has demonstrated that debt flows determined by politics, directed through government and wholly or partially forgiven in the event of default do nothing to improve the lot of the recipient population, producing only moral hazard and the enrichment of a corrupt leftist elite. The failure to improve Latin American productivity and the ever worsening problems of drugs, environmental degradation and illegal migration demonstrate that excessive population growth, above all, must be curbed if Latin America is to prosper.
Thus the U.S. approach to Latin America must be one of tough love. Cut off the flows of funding from the international institutions, and devolve responsibility for development finance to the private sector where it belongs. Cease proselytizing for a “democracy” that produces anti-American, corrupt and economically illiterate governments and reward instead only those governments, democratic or not, which pursue sound policies and show themselves willing to work with the United States in a civilized manner (but avoid armed intervention, which causes more problems than it solves.) Use the talking shops of NAFTA, FTAA and the OAS to promote trade, by all means, but more directly to promote policies that will result in lower population growth, better education and healthier free market economies.
In Latin America, more than in any other region of the world, the soft pieties of State Department political correctness have shown themselves to be devastating to the welfare of the local population.
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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.