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. Only four years later, the very same Real Plan is derided for the overvalued currency it has produced and its inability to deal seriously with the country's chronically large fiscal deficit.
We now know that President Cardoso's plan deftly addressed the hyperinflationary Brazil of the old days, but did not foresee the arrival of a global economy in which being good is no longer always good enough. This holds true especially when one is competing for precious financial capital with other emerging countries (or even developed countries) worldwide. By finally slowing the rate at which the poor's purchasing power eroded, Cardoso's slaying of inflation might have been the most beneficial social program in Brazil's history. It also probably ensured his reelection. But, amazingly, it was only the first step in satisfying the demands of the international financial markets, which demanded greater progress on privatization and the fiscal deficit.
In short, leaders in Brasilia, Caracas, and Mexico City now probably wish that adopting the Washington Consensus were all that was required of them. Developing regions like Latin America are now inextricably mired in a new global world that will increasingly resemble an economic "survival of the fittest" (or at least "survival of the most appealing to Wall Street").
The concept of "confining conditions" is an interesting tool that helps us view the way countries must deal with the rapidly changing international economic environment. Political scientists used the concept of confining conditions to analyze the transitions from authoritarian to democratic regimes during the 1970s and 1980s. They would, for example, look at systemic factors such as democratic heritage or superpower influence in a certain authoritarian country and present these factors as parameters in which a democratic transition might take place.
In addition to democratic transitions, we can also formulate confining conditions within which Latin American countries must now manage their political systems and economies. Not surprisingly, the overriding confining condition that confronts regions like Latin America is their inextricable financial link to the outside world. No matter what type of political regime may be in power, it cannot ignore the will of international financial markets. Unlike the past, when a charismatic leader like Argentina's Juan Peron could singularly focus his efforts on courting an increasingly influential working class, today's Latin American leaders must pay almost as much attention to Bloomberg financial updates as they do to their relations with domestic actors such as labor or the legislature.
In Venezuela, the election of President Hugo Chavez, leader of a 1992 coup attempt, illustrates the region's new confining conditions. During the presidential campaign in the fall of 1998, Chavez positioned himself as the champion of Venezuela's overwhelming majority of poor and disaffected and as the enemy of what he deemed the incestuous, ineffective traditional party system that catered only to the needs of the country's elites. Chavez reinforced this position with fiery speeches that made clear his intentions to destroy the oligarchical system the minute that he took office. Chavez's trademark red military beret became standard wear for his many supporters.
Captioned as: Waiting for the bailout to help. Latin America still awaits institutional reform to combat social marginalization and integrate into the global economy.
But as election day approached, Chavez soon realized that what worked well in the slums surrounding Caracas would not be so effective in the boardrooms on Wall Street or in the halls of the International Monetary Fund. Increasingly, the Hugo Chavez that visited the United States talking about the possibility of a currency board system, debt targets, and austerity packages looked quite different from the man who, back in Venezuela, riled crowds up into a frenzy by suggesting that the congress be closed and a new constitution drafted. In short, the new confining conditions of the international economic system have set firm boundaries around Chavez's populist agenda, an occurrence that will have a great impact on how we view the interplay between politics and economics in the next century.
Money Isn't Everything
The primary factor that merits greater attention is Latin America's continued legacy of dysfunctional institutions, which are still unprepared to deal with the new confining conditions of the global world. Stated differently, the new global economy is placing demands on Latin American states that the institutions of these countries are often not equipped to deal with effectively. A case in point is the recent US$41.5 billion bailout package that the IMF and US Treasury assembled to assist Brazil in its efforts to stabilize its currency, the real, and stave off the economic contagion from Asia and Russia.
While many observers immediately concluded that such an enormous sum of money would surely be sufficient to deal with the crisis, it soon became apparent that money alone would not save the real. The international financial community made it known that it considered a substantial reduction in the fiscal deficit essential if Brazil was to prove to the world that it was serious about economic reform. President Cardoso and his economic team recognized this and thus knew what had to be done in order to get capital flowing back into the country. But the one factor that still had to be reckoned with was the notoriously feckless and obstinate Brazilian congress, within which fiscal rectitude is greeted with about as much enthusiasm as a loss by the national soccer team. To the surprise of few who study Brazilian politics, the legislature (and state governors) won out and the Real Plan was dealt a major blow. If Brazil is to survive in today's world it must address this type of institutional crisis, especially since Washington is going to think twice before it ever tries to bail out Brazil again.
Similar fault lines can be seen in Ecuador, where newly elected President Jamil Mahuad is simultaneously attempting to effect change and to respond to the incessant demands of the international capital markets in an attempt to sink the rudderless ship of corruption, misery, and apathy that has characterized Ecuador for decades. But Mahuad has run straight into a completely dysfunctional political system in which dissent is manifested in violent strikes and highway blockages that bring the economy to a standstill on a seemingly daily basis. Ecuador is like an 18-year-old army conscript-eligible for military service but still basically an adolescent. As a new conscript in the global financial world, Ecuador has no choice but to work within these new confining conditions-it must fight the war that is the international economy, or risk falling even further behind.
An easy conclusion to make is that democracy is partly responsible for Latin America's inability to respond to a new international environment. The thinking goes that if President Cardoso or President Mahuad were only able to rule with an iron fist, they could circumvent their countries' institutional landmines and promote the "greater good" of the country. Indeed, a strong case can be made that President Alberto Fujimori in Peru and, to a lesser extent, President Carlos Menem in Argentina have accomplished a great deal by frequently bending-and at times breaking-the constitutionally mandated procedures for governance.
But while authoritarian tendencies might produce results in the short to medium term, the lasting solution to Latin America's institutional crisis is actually more democracy. This means more than the "Jimmy Carter democracy" of ballot boxes so triumphantly promoted by the United States and others during hemispheric summits. Rather, as some political analysts have already argued, Latin America needs to focus its energies on the creation and consolidation of institutions within which democracy can function smoothly. Corruption, taxation, and party systems are but a few of the many daunting areas that must be addressed.
Fortunately, Latin American governments and the international multilateral organizations have come to recognize in the last few years that institutions do matter. Furthermore, there have been several major victories that suggest civil society is coming to life in Latin America. In 1992, only a few years after the end of military rule, Brazilian civil society was able to impeach President Fernando Collor de Mello on grounds of corruption. And in 1997, residents of Mexico City elected a mayor from an opposition party, something unheard of less than a decade ago. This healthy transition of power reveals that legitimate political alternatives are indeed emerging, and that high-level corruption is at times being effectively addressed.
The problem, however, is that most of the success in institution--building has been on large, visible issues like elections. Day-to-day issues still test the patience of an already tired Latin American populace, and tug it further toward complete political apathy. Stories are ubiquitous across Latin America (except in a few countries, like Chile) of international mail packages being held up in customs until a bribe is paid, or of families who can receive a telephone line-already years behind schedule-only if they give a few hundred dollars directly to the installation agent. To be sure, as seen by the recent controversy surrounding the European Commission, corruption is certainly not unique to Latin America. Nevertheless, corruption remains one of the largest and most challenging obstacles to the institutionalization of Latin American political and economic society. Latin America must tackle its entrenched low-level institutional crisis if confidence in its political and economic system is to increase.
The Role of the United States
Primarily since Latin America is a weaker power in such geographic proximity, the United States has a natural inclination to believe that it can influence events in Latin America. While the United States' economic and political might can undoubtedly assist Latin America in its reform efforts, however, the real impetus for change must come from within the region. The IMF and the US Treasury learned this lesson well when they sent US$41.5 billion to Brazil on an economic kamikaze mission. They sought to defend an unsustainable currency whose only chance at resisting being devalued rested in the hands of the Brazilian Congress-perhaps the most irresponsible political body in the region, if not the world.
The United States must expand its understanding of Latin America beyond the narrow context of issues, like immigration and drugs, in which policy is driven by US domestic politics. Currently, the United States is obsessed with monitoring and controlling inflows of cocaine and heroin from Colombia and undocumented immigrants from Mexico and Central America. Yet other topics such as macroeconomic stability, civil-society formation, and human rights-issues undeniably more important for the long-term stability of these countries-are often ignored and poorly understood by the United States.
Consider the recent economic turmoil that has spread through countries like Venezuela, Brazil, Colombia, and Ecuador. The US Treasury is ostensibly the government agency in charge of monitoring and addressing these issues, but a quick walk through the halls of the international division of the Treasury Department will find few Spanish- or Portuguese-speakers and only a handful of officials who cover the region on a regular basis. At the same time, it is hard to toss a stone in Washington without hitting a US government official that monitors coca production in Colombia or border crossings from Juarez, Mexico into El Paso, Texas.
The shift from viewing Latin America solely through a domestic policy lens to a broader, more prescient one that treats the region as a vital economic and social neighbor will not be easy. Above all, it will require leadership on the part of our elected officials, especially those sitting in the White House. With the Cold War over, the United States no longer sees Latin America in a strategic sense, causing it to be largely neglected (outside drugs and immigration issues). And because Latin America is not currently considered a "crisis zone" like Kosovo, presidential initiative on foreign policy tends to be replaced by policies driven by the predilections of Congress and interest groups. Stated bluntly, US policy in Latin America is more about individual members of Congress sending helicopters to Colombia to look tough in the "war on drugs" and less about any type of well-formulated, comprehensive initiative toward the region.
Regardless of whether we see a change in the US view of Latin America, we can be certain that the region's path toward institutionalization will be bumpy and marked with setbacks. But we should not be repulsed, or even discouraged, by Latin America's "dirty laundry"; growing pains are inevitable in countries heading toward political, economic, and institutional consolidation at a time when the confining conditions of the global village are ruthless, vague, and everchanging. Be prepared to hang on.