Latam ahead: Latin American economic policy has diverged toward extremes. With Hugo Chávez’s Venezuela and Sebastián Piñera’s Chile leading the way left and right, few countries now occupy the “Washington consensus” middle ground or its variants. The strains and benefits of extreme policies are already showing, but full results will await the next credit crunch.
Latin American countries have historically tended to pursue similar economic policies. In 1960-80, there was considerable state control, often by undemocratic governments, with heavy state borrowing for investment in heavy industry. In the 1990s the centrist “Washington consensus” policies were in vogue, with subsidies and tariff barriers reduced, heavy industries privatized and economic interaction between countries increased. However continued central control of economic policy, poor education systems, pervasive cronyism, corruption and heavy government spending, as well as persistently low commodities prices, prevented an Asian-style economic takeoff and brought increasing income polarization.
Since 2002 commodity prices have soared, removing most constraints on Latin American governments’ finances. In Venezuela and Argentina, this freedom has been used to expand government spending, expropriating private assets when funds get tight and largely closing the economy. Bolivia, Ecuador and Nicaragua have joined this group, which has had mixed success economically; current projections by the Economist magazine’s forecasters suggest Venezuela remains mired in decline while Argentina has resumed brisk growth after the 2008-09 recession.
At the other extreme, Chile even under the center-left government of Michelle Bachelet built up a $19 billion stabilization fund that cushioned the recession and has now embarked on a policy of free-market growth. Colombia has joined the free-market group and Peru is showing signs of doing so.
Brazil and Mexico remain imponderables. Brazil privatised during the 1990s, but has increased public spending recently. President-elect Dilma Rousseff has indicated she wants to see more state intervention in the economy and has replaced the monetarily cautious central bank chief. Mexico, in spite of a center-right government, never privatised its key energy sector. With the left well positioned for Mexico’s 2012 election, continued cheap money may drive both countries leftward. Other than in Venezuela, while money remains cheap there may be only modest differentiation between the economic performance of Latin America’s two groups. The next credit crunch, possibly in 2011, will however sort them effectively.
