The domino effect seems to aptly describe the volatile economic situations - and subsequent political uncertainty - that have ravaged developing countries around the world since the middle of the 1990s. An economic crisis in one country invariably manages to knock over some of its neighbors. Latin American countries continue to make up a list of critically ill economies in the 1990s. To make matters worse, the checkered economic performance of Latin America is taking place at a time when many observers had predicted the region would be basking in the light of free-market reforms implemented earlier in the decade. The region's path toward institutionalization will be bumpy and marked with setbacks.
New Guidelines for Latin America's Leaders
During the 1960s and early 1970s, proponents of American involvement in Vietnam argued that the failure to stop communism in Vietnam would result in a "domino effect" whereby one by one, the other countries of Southeast Asia would fall victim to the communist scourge. Equipped with the benefit of hindsight, most would agree today that the domino analogy was probably misapplied in the case of Vietnam. It does, however, seem to describe aptly the volatile economic situations-and subsequent political uncertainty-that have ravaged developing countries around the world since the middle of the current decade. Indeed, beginning with the Mexican peso crisis in 1994-1995, continuing with the 1997 Asian devaluations, and straight through to the more recent economic turmoil in Russia, Brazil, Ecuador, and Venezuela, it seems as though an economic crisis in one country invariably manages to knock over some of its neighbors.
Sadly, as the aforementioned list of economically troubled countries suggests, Latin American countries continue to make up a substantial portion of the list of "critically ill" economies in the 1990s. To make matters worse, the checkered economic performance of Latin America is taking place at a time when many observers had predicted the region would be basking in the light of free-market reforms implemented earlier in the decade. The vaunted Washington Consensus, launched in 1990 and quickly implemented by ivy-covered technocratic teams throughout the region, was a laundry list of neoliberal policy recommendations such as trade liberalization, privatization, and macroeconomic stabilization. The set of measures was sold (or "oversold") as the plan that would catapult Latin America out of its statist past and into the modern era. At the time of its inception, few of its architects would ever have imagined that almost all of the major Latin American countries would adopt, at times religiously, the tenets of the Consensus. Yet these same countries would still end up suffering severe economic crises.
Banking on Change
So what went wrong? Aside from an institutional deficiency that will be discussed later, a major cause of this paradoxical situation of reform greeted with economic rupture is that the rules of the economic game changed dramatically during the period of Latin America's economic-reform process. This change is seen mainly in the growing influence of private international capital markets, making Wall Street, and not the White House, the requisite stop in any visit to the United States by a Latin American leader. And since investment banks are now just as likely as multilateral lending institutions or the US Treasury to decide the fate of developing economies around the world, expectations have risen of what is deemed "acceptable" economic-and at times even political-performance in Latin America.
Take Brazil, where President Fernando Henrique Cardoso's 1994 reform package brought the country back from economic Armageddon virtually overnight. The "Real Plan" (named for Brazil's currency) managed to slice two digits off triple-digit inflation, and for the first time in memory provided the majority of Brazil's poor with some degree Df purchasing power. …