Hot on Chile, cool on Rio

May 12, 1995

Huw Richards talks to Victor Bulmer-Thomas, the organiser of this week's ILAS conference on the Latin American economy. Rarely has that hackneyed formulation "First the good news, then the bad" been so justified as by events in Latin America late last year. First, to acclaim from international commentators, came the election of Fernando Henrique Cardoso, radical sociologist turned modernising politician, as president of Brazil.

Then, just before the turn of the year, came the collapse of the Mexican peso, bringing in its train doom-laden predictions that Latin America was about to sink back into the economic chaos of the heavily indebted early 1980s.

Academics regard high profile news with mixed feelings. Nobody wants to share the fate of historians whose books on the German Democratic Republic, published in late 1989 to coincide with its 40th anniversary, were made obsolete by events within weeks. But news also generates interest, publicity and sales.

Victor Bulmer-Thomas, director of the Institute of Latin American Studies, author of the newly-published The Economic History of Latin America since Independence and organiser of this week's ILAS conference on the Latin American economy, is disposed to welcome heightened awareness.

Any single event, however spectacular, is put into a rather different perspective when one's frame of reference is formed by nearly 200 years of history rather than a concentration on the here and now. Professor Bulmer-Thomas welcomed Cardoso's election and regrets Mexico's difficulties. But that is some way from believing that Brazil can lead Latin America into a new era of democratic prosperity or following the bankers who say "Chile is now the only Latin American economy with any stability".

He says: "Mexico will find the political fallout harder to cope with than the economic consequences. The need to take measures against inflation will create difficulties for the government."

The main economic worry is international confidence, but Bulmer-Thomas believes that this is already returning. Devaluation might even in time assist the Mexican economy - he notes that an uncompetitive exchange rate was, along with a low domestic savings ratio, the main difficulty afflicting an otherwise healthy-looking economy in 1994. And Mexican governments have certainly done enough in recent years to earn the favour of the markets: "It was the first country in Latin America to adopt economic reform measures - trade liberalisation, privatisation and deregulation."

Ironically the main victim of the Mexican crash could be found at the other end of Latin America. "Argentina was hit badly in the immediate aftermath, because it is the country whose economic profile is closest to Mexico's. And unlike Mexico it has not got the option of devaluing - its currency is fixed by law against the US dollar. Argentina has had to take deflationary measures to restore the health of its economy and I have been very impressed by the competence and courage with which this has been handled. There is a long way to go, but it has made an excellent start."

Brazil - ironically in view of the fact that Cardoso's election followed directly on a highly successful term as finance minister - handled devaluation rather less skilfully. And Bulmer-Thomas is in any case sceptical of suggestions that the Brazilian economy, vast as it is in Latin American terms, can act as a German-style motor to haul the rest of the continent into a more prosperous 21st century: "To have that sort of impact, it would need to be more closely linked to other Latin American economies as a trader. Whereas about 70 per cent of Germany's trade is with the European Union, only about 15 per cent of Brazilian trade is with Latin America. Cardoso has only a single four-year term and will have to spend a great deal of his time and energy coping with the political problems and corruption inherited from the last few governments."

Nevertheless a major trading economy is emerging as Brazil, once famous among international traders for protectionism, liberalises. "Its trade has at least tripled since 1991 and is still rising." And looking forward into the 21st century he believes that some Latin American countries will make considerable progress. "By the end of the first quarter of the next century, some countries should have reached roughly the level enjoyed by southern European countries like Spain, Portugal and Greece.

Predictions are always risky, but Bulmer-Thomas is willing to weigh up the balance of underlying forces and name Mexico, Brazil and Colombia as the countries best placed to do this. Colombia, best known to the outside world for its violence, may look an unlikely runner but he points out: "It has little debt, never had to reschedule, has low inflation by Latin American standards and healthy rates of growth. If it can control the violence it is very well-placed."

The main obstacle to progress is Latin America's grotesque inequalities of wealth and income. "Poverty damages economies both in the short and the long term and the inequalities have got even worse over the last 30 to 40 years. Countries that want to make a economic breakthrough have to address this."

And while the shift to democracy seen across the continent over the past decade is both welcome in itself and should open the political system to popular pressures, it is not a guarantee that poverty will be a priority. "Democracy may have replaced the generals, but the system is still very largely in the hands of the traditional elites, who do not have an encouraging record in this respect."

His book concludes with a warning to the governments of the continent. "If the goal is clear, the route forward is uncertain. Those countries that stumble through the incompetence, corruption or greed of their elites can expect to be punished. That is the warning the privileged must heed."

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