The Populist Temptation: Will Latin America Escape Its Past?

04/01/2013 10:59 am ET | Updated Jun 01, 2013

BUENOS AIRES, Argentina -- In the center of Buenos Aires, along the city's main boulevard, stands a tall building that houses the ministries of Health and Social Development. A huge visage of Eva Peron appears on both sides. The one facing the poor districts of the south is smiling and compassionate. The other, facing the rich districts to the north, is angry, agitated and defiant. Just as her image towers over the Argentine capital, so too her legacy looms over Latin America's future.

Shortly before her death in 1952, "Evita" was named "Spiritual Leader of the Nation" by the Argentine Congress for her work on behalf of the poor descamisados (shirtless ones) through the Sociedad de Beneficencia charity she founded as first lady during Juan Peron's first presidential term.

In popular culture and the collective memory of Latin America, she and her husband are associated with a particular brand of populism -- protected national industries and social programs for the poor majority dispensed by a caudillo, or strongman, financed by unsustainable debt and ending up in wild inflation, corruption and military coups to restore order out of the enveloping social chaos and discontent.

Though the interventionist role of the military has mostly disappeared across Latin America today, the temptation of populist politics remains. Indeed, today, the temptation is greater than ever as democracy joins with a politically active middle class rising largely on the boom of exporting soya beans, corn, copper, oil and other commodities to a voracious China.

Democratic elections always favor the short-term demands of the voting public over the long-term sustainability of society. By definition, the future has no political constituency today. Whether the demand is subsidies for the poor, middle-class aid for home ownership, generous pensions for organized labor or the expansion of a social safety net for all, the pressure is immense to spend and consume all the newfound riches now. Macroeconomic stability, investment in infrastructure, quality public education, and research and development that will generate future wealth inevitably take a back seat.

Part and parcel of the populist temptation is the protection of national industries from competition beyond their initial gestation stage.

Whoever promises the moon today, no matter the long-term costs, will be the most assured of getting elected to power.

As the historical record clearly demonstrates, however, populism that ignores the laws of economics is not affordable in the long run, and then the old cycle of debt, inflation and authoritarianism will return. Fiscal responsibility and open competition are the predicates of sustainable democratic governance, not its enemy.

VENEZUELA. The closest example of traditional populism has been Chavismo in Venezuela. Hugo Chavez justly set out to eradicate woeful inequality by spending oil revenues on massive new social programs for the poor. Without doubt, their lives improved during his tenure. But by the time Chavez died last month, Venezuela had the highest inflation rate in the world at nearly 23 percent and was forced to borrow $46 billion from China just to keep going. It has devalued its currency twice in recent weeks.

Chavismo's hostility to foreign investment and the related failure to modernize the oil industry, which accounts for 95 percent of its exports, has led to a reduction of exports by one quarter since 1999.

ARGENTINA. Argentina, once among the wealthiest nations in the world, relies on its exports of soya, wheat, beef and a host of minerals to Brazil, China and elsewhere but has spent so freely that, famously, it defaulted on its unsustainable foreign debts in 2001.

Though it initially recovered as its falling currency value stimulated exports, its growth has once again stagnated, and the old specter of inflation has returned. This is reflected in the wide gap between the official exchange rate for the U.S. dollar -- around 5 pesos -- and the "parallel rate" of over 8 pesos to the dollar. If you shop at the Sunday flea market in San Telmo, the merchants will happily give you the parallel rate if you have dollars. Everyone today has a terrifying sense of déjà vu that their savings will once again evaporate into thin air.

BRAZIL. For several years now Brazil has been the considered the "miracle" of Latin America, in no small part due to the Chinese demand for its oil and soya. Thanks to rapid economic growth accompanied by programs like Bolsa Familia, in which welfare for poor parents is tied to making sure their kids attend school, 22 million people have been lifted from poverty since 2003 while literacy has improved.

As part of her goal of creating greater domestic economic strength and more employment opportunities for the poor, Brazilian President Dilma Rousseff is increasingly turning toward statist solutions rejected by both of her predecessors, Lula da Silva and Fernando Henrique Cardoso.

Aside from enhancing already rampant bureaucratic corruption, this approach has also created bottlenecks that are slowing Brazil's economic miracle. Infrastructure investment has lagged growth so badly that trucks filled with soybeans line up by the hundreds at ports. This inefficiency led China to recently cancel a contract worth 5 percent of Brazil's total soya crop because it considered on-time delivery "unreliable."

To revive Brazil's shipbuilding industry, the state-controlled Petrobras oil giant was ordered to buy tankers made in Brazil. Cost overruns and delayed delivery schedules are now disrupting oil shipments. Meanwhile, the discovery of shale oil around the world is threatening to undermine Brazil's overreliance on oil exports.

High tariffs on goods make many consumer items expensive and retard diversification of the economy. While countries like Mexico and Chile thrive under free trade agreements, Brazil has three: with the Palestinian Authority, Egypt and Israel.

CHILE. Chile, Colombia and Mexico have so far done a better job of resisting the populist temptation.

Chile today has become the Singapore of the Western Hemisphere. Since 95 percent of Chile's trade is bound up in free-trade agreements, you can get anything from anywhere in its glittering capital, Santiago. Its sophisticated political class has had the foresight to try to diversify the country's dependence on its main commodity, copper, almost all of which today is exported to China.

When Ricardo Lagos was president from 2000 to 2006, he instituted a program to set aside revenues from futures contracts for copper and put them into a fund for research and development of new technologies. As he told me, "One day the copper will run out. We need to use today's resources to finance the future and diversify the economy. Otherwise, our prosperity will have been built on a weak basis. When the future arrives, we would then be back to square one."

COLOMBIA. Colombia's current president, Jose Manuel Santos, is a "third way" leader in the mold of Bill Clinton and Tony Blair. As he puts it, good governance means "as much market as possible, as much government as necessary."

While courageously seeking to disengage Colombia from its long civil war with the FARC guerrillas, Santos is at the same time engaging the future, when prosperity will be built more on knowledge than commodities. To that end, he is sponsoring a program to bring computer tablets to the poorest students and expanding broadband, following South Korea's example, to 1,200 cities across the country. To avoid the kind of bloated budgets that have gotten Argentina into so much trouble, he has passed legislation that requires provincial governments to maintain fiscal balances.

MEXICO. Under its new president, Enrique Pena Nieto, Mexico is leading the pack away from the populist past, building on the accomplishments of his predecessor, Felipe Calderon, as well as the NAFTA agreement in the 1990s. The economy grew at 4 percent last year and is expected to grow faster in 2013. There is a budget surplus. Mexico has a large middle class and a diversified economy that is attracting direct foreign investment -- such as from Bombardier and General Electric -- which is taking advantage of the deep engineering and professional labor pool as well as Mexico's proximity to the U.S. market. Rising wage rates in China are leading to "re-manufacturing" by companies that once left Mexico for cheaper labor. NAFTA and other free trade agreements have greatly aided diversification and reduced the price of consumer goods by 50 percent since 2000.

I attended Pena Nieto's inauguration last December at the Palacio Nacional in Mexico City. He stood boldly in front of Carlos Slim, the telecoms mogul, and Emilio Azcarraga Jean, the media mogul, sitting a few feet away, promising to disband the television and telecoms monopolies that dominate Mexico. To robust applause, he pledged reform of the teacher's union, which, incredibly, has long had the power to hire teachers and even pass on hereditary jobs.
He also promised to "open up" PEMEX, the laggard state oil monopoly that has been the core of Mexico's nationalist ideology since the 1930s, to foreign investment. Without technology and competition, the company has become a power unto itself and failed to modernize.

The inaugural audience was stunned by the scope and specificity of the new president's program -- and the fact that he was openly taking on the very historical pillars of his Institutional Revolutionary Party (PRI), which had ruled Mexico for 71 years until 2000.
The day after his inauguration, Pena Nieto broke the partisan rancor of the election campaign in a way that Washington could only dream of: He announced a consensus "pacto" of the other major parties in the Congress that agreed to support his list of reforms.

Less than five months later, he has delivered. The head of the teachers union, Elba Esther Gordillo -- known for her luxe wardrobe and accessories -- was arrested for embezzlement. The legislation that empowers the government to break up the telecom and TV monopolies has now been passed in the Congress. The historic legislation to open up PEMEX is well under way.

POPE FRANCISCO. As the new pope from Buenos Aires, Francisco, reminds us with his "preference for the poor," vast poverty weighs heavily on Latin America's future. That gap must narrow, not widen, as middle-class prosperity grows. But to finally escape its past, democratic governance must avoid the populist trap that, in the name of the poor, has so often led it back to square one instead of to a sustainable and upwardly mobile path that will endure. That is Latin America's challenge today.