Political Risk: Neo-Liberal No More

Free market capitalism is having a rough ride in Latin America after a decade of almost unquestioned ascendancy. Center-left and populist candidates pledging social reform won four of the six presidential elections held in Latin American countries in the last 15 months.

Even Vicente Fox, Mexico’s new conservative president, leavens his speeches with promises of justice for the downtrodden. Venezuela’s Hugo Chávez, the leftist-populist leader, won “confirmation” as president last July after rewriting the country’s constitution and denouncing neo-liberal policies of the past. Chávez hopes to remain in power for over a decade.

The only true conservatives to win election were Jorge Batlle in Uruguay and Peru’s deposed ex-president, Alberto Fujimori, elected in a discredited poll. To be fair, some of the region’s new leaders, such as Ricardo Lagos, Chile’s socialist president, and Fernando de la Rúa in Argentina, have promised – and practiced – continuity with their predecessors’ market-oriented policies.

Free market capitalism is becoming increasingly associated with stagnant incomes, unemployment, growing inequality and corruption. Brazil’s Workers Party (PT) did well in mayoral elections last October with its by anti-corruption campaign. Corruption was a major factor in the downfall of the Institutional Revolutionary Party (PRI) in Mexico after 71 years in power. And even in the region’s three strongest economies-Brazil, Chile and Mexico-unemployment and poverty remain a serious problem.

Growing Discontent
Frustration is boiling over in Argentina and in the Andean region, where governments are grappling with severe economic problems and political unrest. Important legislative and presidential elections are due in Argentina, Colombia, Peru and Brazil over the next two years and politicians are sensing the growing discontent. In Argentina and Peru, politicians have responded by calling for suspension of debt payments. This creates additional uncertainty at a time when international financial markets are becoming particularly risk averse. Rating agencies recently downgraded Argentina, Colombia and Peru largely because of growing political risk.

Still mired in recession, Argentina saw its coalition government fractured following the resignation in October of Vice President Carlos Alvarez, of the left-leaning Frepaso party.

Political paralysis brought the country to the edge of an international payments crisis, averted only by December’s $39.7 billion international rescue package. Defeat for de la Rúa’s party in this October’s mid-term elections could make it hard for him to govern the country effectively in the final two years of his term.

Neo-liberalism is under the greatest pressure in the Andean countries. Fujimori, its standard bearer in the region for the best part of a decade, was thrown out of office in December by the Peruvian Congress after faxing his resignation from a refuge in Japan.
The disgrace of Fujimori and his inteligence chief Vladimiro Montesinos, which came about when the Peruvian economy was already weak, has soured popular sentiment towards the free market policies that Fujimori embodied. Carlos Boloña, the finance minister and the architect of reform in the early 1990s, did not help by remarking that some of the hundreds of millions of dollars raised by government privatizations were unaccounted for.

Faced with a growing budget deficit and failing banks, interim President Valentín Paniagua proposed reducing Peru’s foreign debt payments. Service payments on the country’s $20 billion foreign debt take up 25% of government spending-money politicians want to spend on social programs. Paniagua’s proposal raised the specter of a return to the days of former President Alan García, who froze debt payments and broke relations with the multi-lateral lending institutions, and has recently announced his candidacy for the April elections. Other leading presidential contenders still appeared to be adopting a conservative stance, albeit tinged with populism.

In Ecuador, a January 2000 military coup ousted Jamil Mahuad, a would-be reformer, amid a wave of protest against his privatization policies. Gustavo Noboa, his successor, was able to enact his predecessor’s dollarization program and is making some progress in stabilizing the economy and returning the country to growth. Noboa must still grapple with a dead-locked political system.

Venezuela’s Chávez, an ardent admirer of Fidel Castro, has embarked on a quixotic leftist program with authoritarian overtones. Chávez even provoked the brief recall of Colombia’s ambassador from Caracas because of his perceived support for Colombian Revolutionary Armed Forces (Farc) guerillas, who spoke at an event in Venezuela’s National Assembly. There is a permanent risk of instability in Venezuela should oil prices decline, cutting the only source of economic growth.

Colombia’s internal conflict has started to spill over into its five neighboring countries. Clashes between Colombia’s left-wing Farc guerrillas and right-wing paramilitary groups of the United Self Defense league (AUC) occur in Panama’s southern districts. In Venezuela, the guerillas kidnap wealthy landowners and executives for ransom and “tax” cross-border trade. Brazil has launched Operation Cobra, a three-year heightened security program along its 1,020-mile jungle border with Colombia. In Peru, Montesinos is accused of selling weapons to the Farc. And in Ecuador, oil workers near the Colombian frontier were kidnapped and the major pipeline bombed.

Colombia’s war has little relation to any ideology. It is about drugs. At stake is control of the production and export of cocaine and heroin. The primary actors are the Farc and the National Liberation Army (ELN) on the left and the AUC paramilitary groups on the right, with the Colombian security forces tending so far to be playing a minor role. That the war is about drugs rather than ideology only aggravates the threat to regional security. US involvement in military anti-drug operations is likely to exacerbate the fighting and the lure of drug profits is likely to encourage the conflict to spread beyond Colombia’s frontiers. Washington’s $1.3 billion commitment to the government’s “Plan Colombia,” a military and social program aimed primarily at the areas under rebel control, is likely to escalate the conflict.

As Colombia’s security and economic situation deteriorate, the country is fertile ground for the emergence of an authoritarian, pro-paramilitary candidate in the 2002 presidential elections. The most likely such candidate is Alvaro Uribe Vélez, a former departmental governor said to be closely associated with the AUC leadership.

The countries of Mercosur-Argentina, Brazil, Paraguay and Uruguay-face one major challenge in common with their Andean neighbors: persuading their people that the benefits of free market capitalism will eventually “trickle down” to the middle- and working-classes. The World Bank says that between 1990 and 1999, real GDP per person in Latin America expanded by an annual average of just 1.1%.

After more than two years of recession, Argentines, in particular, need to be convinced. Under pressure from international lenders, the government has agreed to cut public sector wages, freeze spending for five years and impose a series of pension and health reforms by decree. But unions, the opposition and even pro-government leaders are demanding change. Former President Raúl Alfonsín, now head of the ruling Radical party, has even proposed suspending debt payments.

The left has not advanced much in Brazil, where the eight-year rule of Fernando Henrique Cardoso is approaching its end. Although Marta Suplicy’s victory in the São Paulo mayoral election leaves the PT governing six state capitals, it won only 14% of the vote in October’s municipal elections. The four parties that comprise Cardoso’s center-right government still control most of Brazil’s 5,656 municipalities.

External concern generated by Suplicy’s election and the continued popularity of PT leader Luiz Inácio Lula da Silva, is misplaced. Lula has failed three times in presidential elections and the PT continues to suffer from internal divisions. Meanwhile, Cardoso’s popularity is on the mend as Brazil’s economy recovers from the January 1999 devaluation crisis, enhancing his coalition’s election prospects.

In Mexico, Fox’s inexperienced new government is struggling to cope with the country’s economic and social realities. Bowing to populist pressures in Congress-where no party holds a majority-Fox had to raise social spending more than planned, which has boosted the budget deficit by half, to 0.7% of GDP.

Dealing With the PRI
Fox made important concessions to the left. He appointed Jorge Castañeda, a left-wing political scientist who originally opposed the North America Free Trade Agreement, as his foreign minister. His first legislative proposal to Congress was a bill on indigenous rights that had already been negotiated between Zapatista rebels and former President Ernesto Zedillo. The original bill became bogged down in Congress and was never approved.

Similarly, Fox will meet significant resistance from the PRI and the center-left Revolutionary Democratic Party as he tries to push through tax reforms needed to finance his social initiatives. The greatest unknown is the extent to which Fox will be able to handle an unreconstructed PRI, which remains entrenched in all levels of Mexican public institutions and entities and is particularly strong in the states.

Few Latin American countries have created strong independent institutions such as a professional civil service or impartial judiciary that serve to strengthen the foundations of a modern state. Just as few governments in the region have responded convincingly to their peoples’ needs. Stopping inflation, restructuring external debts and privatization yielded immediate benefits in the early 1990s, but have yet to deliver sustained, rapid growth. The World Bank says that in 1998, 36% of people in Latin America and the Caribbean earned less than $2 a day, in spite of a decade of neo-liberal policies. Corruption remains widespread, nurturing distrust for political parties and in democracy itself-and putting off foreign investors as well.

Simon Strong is senior director at the Miami branch of the risk mitigation, investigations and security firm, Kroll Associates, which has offices in Argentina, Brazil, Mexico and Chile.