When foreigners look at Latin America, their most common mistake is to view the region as a whole. The Latin American subcontinent stretches from the Rio Grande all the way to Tierra del Fuego. It comprises many different countries that have some things in common but also a great many differences. The first step toward progress in Latin America is to understand and accept those differences and divergent economic interests, along with the uneven development of recent decades. Rubén Berenblum, professor of economic history at the University of Buenos Aires (Argentina), explains why Latin America continues to be a land of eternal promise and when the region will awaken from its lethargy.
“It makes no sense to put Paraguay and Chile in the same basket,” says Berenblum. A leading expert on the economic history of Latin America, Berenblum has traveled to Spain to give a series of conferences on this topic, which has vital importance for Spanish companies. The largest investors in the region, Spanish flagship firms such as Banco Santander Central Hispano, Banco Bilbao Vizcaya, Repsol-YPF and Endesa have a strong presence in the region.
Strangely enough, one must go back to a common point of departure to fully understand the differences among Latin American countries. That departure point is the independence process that the region experienced during the 19th century. “All of these countries developed an economic model based on the cultivation of a single crop. They all forged links with the great powers of the era, not just with the United Kingdom, but also France, Germany and the United States,” Berenblum said. From that point on, however, the countries pursued divergent strategies.
“One group of countries focused on cultivation of a single crop and on extractive industries,” said Berenblum. “Among these countries, Uruguay, Peru and Chile stand out. Other countries, such as Mexico, Brazil and Argentina, pursued a process of import substitution; they developed their industrial sector by gradually replacing imports. A third group was born during the 1950s and 1960s when U.S. and European countries invested in plants for their subsidiaries. Brazil and Argentina were able to develop heavy industry (autos, electronics and petrochemicals), and they enjoyed significant social and technological development. Meaningful changes came from this process, including nuclear families, migration from the countryside to the cities, the creation of social security institutions, the expansion of transportation, and so forth.”
Nevertheless, the process of social transformation followed several different rhythms and procedures, he added. “Brazil, Mexico and Argentina achieved the greatest advances, but even within those countries there were great contrasts. In Mexico, the South remained neglected. Argentina had only a few cities. In Brazil, almost all the progress was concentrated in the State of São Paulo.”
Globalization and the IMF
With the arrival of globalization, each country behaved differently within a common framework for development imposed by such international institutions as the International Monetary Fund, the World Bank, and the World Trade Organization. For many countries, strict compliance with these institutions’ requirements has been both a mistake and a burden. Berenblum criticizes the fact that some of these demands have not been imposed on those developed countries that have state-owned companies, and use government aid to support specific industries.
“The demands made by international institutions can be summarized in several ways: There was, for example, indiscriminate opening of the economy to all factors, including goods, capital and technology. There was also a minimizing of the role of State, including depriving it of control over the economy. Government subsidies were treated as economic distortions; one had to let the market decide, and there was no reason for the government to get involved.” Although the U.S. and Europe did not comply with the letter of the law, these demands had serious consequences for some industries in Latin America.
“In Argentina, for example, we had a railway network that needed a great deal of investment to be brought up to date,” said Berenblum. “The country could not do that, and the railroad died. Years ago, we had 35,000 kilometers of railroad; now, we have 5,000 kilometers. That is barely enough to take care of the needs of the suburbs of Buenos Aires. There are also small freight lines that carry goods to the port. The rest of our long railroad lines no longer exist.” Only one measure gets Berenblum’s blessing — the obligation to make labor markets more flexible.
“The great contrasts in the current situation stem from the various ways each country applied components of this program. However, there were some common characteristics, such as the debt they assumed as a result of their loans.” Berenblum stresses the extraordinarily high level of debt in some countries. For example, the IMF “permitted Argentina to pile up debt of close to $200 billion, when Argentina’s GDP was only about $140 to $150 billion.”
Each country in Latin America has suffered a different sort of damage from this unhealthy debt level. “Those countries that had less ability to respond, such as Ecuador, Peru and Argentina, suffered most.” Their main problem was that they lacked an honest and responsible core. “The ruling class was tied to the leading economic players, and it acted on their behalf. In contrast, the same process had a different character in Chile and Brazil, because there was a political will for making national decisions, and things turned out better. That’s not to say people did not make mistakes or that no one suffered. However, the ruling class figured out how to react in a unified way, while aiming for a common national goal. For example, Brazil used most of its debt to construct an industrial economy. It made technological progress and, to a lesser extent, made some social improvements. In contrast, Argentina used the debt so that the Argentine owners of capital now have more than $100 billion deposited overseas.”
Berenblum believes that this figure could run even higher. “The only way to understand Argentina’s shocking setback is that the ruling class used the country as its private aircraft carrier, without worrying about what would happen to the rest of society. It took the money abroad, and to a safe place.”
Geography has also played an important role in explaining contrasting patterns of development. “Because of the special nature of their borders, Chile, Brazil and Mexico enjoy better conditions for confronting the challenge of globalization,” said Berenblum.
In recent years, each country has used different alliances to develop its economic potential. “Mexico has taken advantage of its relationship with the United States. Some are taking care of their fate all by themselves. Others are trying to enter regional associations, such as Mercosur.” Berenblum’s advice is that “each country develop its endogenous factors, without waiting for help to come from outside. Nevertheless, some countries have yet to make that decision, and they are undergoing a sort of delirium. They are confident that the world (the major developed countries), which spends $1 billion a day in subsidies, is going to help them get out of poverty.” Berenblum is referring to the support that major world powers continue to provide to industrial sectors they consider strategic.
“When France and Germany had economic problems, they broke the Maastricht Treaty and expanded their deficits. But they penalize us when we have a surplus,” Berenblum notes. “In Argentina, public spending was – and will continue to be – lower than in the 15 biggest countries. The problem involves how this money is spent, not how much is being spent. Without breaking anything, or while barely breaking the imposed criteria, Brazil has been able to develop a reasonable economy, even if it is still behind schedule paying off its debt.”
“The key for Brazil is that it has always had a national plan,” said Berenblum. “That had an influence on international institutions. Meanwhile, other countries made structural reforms in order to satisfy their prescriptions. In 1998, Argentine President Menem, who applied this approach more than anyone else, attended a meeting of the IMF where he was applauded by the executive director of that institution. Argentina was lauded as the IMF’s most conscientious student; it had carried out the IMF’s sage advice. Barely two years later, however, we were subjected to the gravest crisis in our history.”
Berenblum does not expect the IMF to pronounce a mea culpa for any errors it may have made [in Argentina]. “It would be naïve to think that we are facing a rebuke by the IMF, which is ultimately a financial institution that represents the interests of the 10 or 12 most developed countries.” However, he noted, “The essential decision is not one made by the IMF, the World Bank, or the WTO. What really matters are the political decisions made by various countries. Chile even privatized its social security system, although very carefully. Argentina, in contrast, destroyed it. Nowadays, retirees receive payments of 200 pesos. Most likely, they will receive that much or even less until the day they die.”
Other countries, such as Venezuela, have the potential to develop themselves, thanks to their internal wealth. However, they have been unable to achieve that goal because there is no consensus in the ruling class about a common national model. “Venezuela should be able to develop because it has oil. However, it has been unable to develop its industry. It continues to import manufactured goods, and it lacks some requirements of social development,” Berenblum said.
Several Roads toward a Common Future
Although every Latin American country must construct its own future to fit different realities, Berenblum recommends that each country construct “a predictable future in which every participant has a clear idea about the formula the country has chosen for its development. What cannot continue is this lack of definition, which economists call ‘juridical insecurity.’” The framework for development must be constructed through a consensus that includes everyone who plays a social role.
“You cannot put together solutions if you don’t have a policy,” he said. “The problem is that people believe all politicians are corrupt. Unfortunately, many politicians have confirmed that belief. Our continent needs politicians who are serious. If we don’t have them, we will fall for the dangerous notion that security is worth more than liberty, or the idea that we can take care of the economy first, and then democracy will come later. In my opinion, liberty and democracy are worth more than anything else. In the Americas, whenever people have tried to impose development through dictatorship, they wound up having neither liberty nor democracy nor economic development.”
The most suitable approach, Berenblum concluded, “is to increase the dosage of liberty and democracy within a political system in which the government takes care of the economy in ways that serve society.”