Latin American turnaround belies lost decade’ image

For many Americans, Latin America is still an economic backwater plagued by widespread poverty, runaway inflation and huge public debt. Yet to a large extent this image is out of step with reality. Among the best-kept secrets in the northern half of the hemisphere is the economic progress made in the south.

Perhaps it’s not surprising that Latin America’s image has been slow to catch up with the facts. The region’s prospects during the 1980s — its “lost decade” — were dim. Industries were heavily state-controlled. Trade barriers shielded companies from competition. Fiscal deficits and foreign debts ballooned. Inflation ran to double and triple digits. Foreign investors stayed away in droves and output plummeted.

Today the picture is vastly improved. One reason is that individual rewards in Latin America, more so than before, are tied to producing and selling in open markets rather than to gaining special favors from the state. How did Latin America achieve that turnaround? To begin with, many governments sold off inefficient state-owned industries, everything from telecommunications to mining, transportation, banking and food production. They also removed many burdensome regulations that impeded companies that were trying to grow. On a more general policy level, governments removed trade barriers, cut public borrowing and spending, made central banks independent and tamed inflation.

Evidence is mounting that these policies have worked. Sebastian Edwards, chief economist for the Latin American and Caribbean region of the World Bank, outlines the results to date in a recent paper published by the National Bureau of Economic Research. In the past three years, the region has grown at a real average annual rate of 3.5%. The fastest growing nations — Chile, Argentina, Peru and Costa Rica — are expanding at 6% a year or more. Growth is only part of the story, however. Because of reduced regulation and more trade, productivity of labor and capital has improved:

– in Chile, labor productivity in manufacturing jumped an average of 13% a year between 1978 and 1981, reflecting Chile’s early start on economic reforms in 1974.

– labor productivity in Mexico’s manufacturing sector increased at an annual rate of almost 4% between 1986 and 1991, more than double the pace between 1960 and 1982. Higher productivity, in turn, has led to higher real incomes for workers.

This is not to say that Latin America’s transformation to free markets is complete, or that all efforts have succeeded. Too often privatization has merely transferred government monopolies to private hands while barring new competitors. That has set the stage for huge price increases, as customers of Argentina’s newly private telephone company have discovered. If governments are serious about privatization, they should allow new competition to discipline prices and service standards.

Beyond that, governments must distinguish between economic regulation — dictating prices and service rules — and ensuring that companies meet minimal safety and fiduciary standards. Venezuela, for example, allowed financial institutions to operate largely free of oversight. That led to the failure of more than a dozen banks and a financial scandal that is yet to be sorted out. Above all, in their rush to implement free market reforms, Latin American governments must not ignore their poorest citizens. While general prosperity has increased, the region still has a wide gulf between rich and poor. In the long run, Latin America’s economic gains cannot be sustained in the face of persistent and widespread poverty.

That said, Latin America’s emergence from its “lost decade” can only be described as a success. Official Washington, which is agonizing over whether and when to forge closer hemispheric trade ties, should take notice. — From a Knight-Ridder/Tribune editorial.