The fall of President Evo Morales in Bolivia, with overtones of a military coup, is the culmination of a rocky period in Latin America this year. Protests in Ecuador that led the government to provisionally move from Quito to Guayaquil; protracted violent protests in normally peaceful Chile and in usually volatile Haiti; a confrontation between the executive and legislature in Peru, that led the Peruvian Congress to proclaim its own “acting president” (albeit to no avail); the emergence of a narco-state in Honduras; and the critical situation in Venezuela, have marked an annus horribilis in the lands South of the Rio Grande.
What is wrong with countries that at the beginning of this decade showed such promise that the Inter-American Development Bank proclaimed this would be “the decade of Latin America,” and The Economist published a cover with a map of the Americas turned upside down, with South America on top of the world?
Those predictions were far off the mark. Of all regions in the world, Latin America has had the worst performance this decade, with annual growth somewhere around 2 percent, far below Sub-Saharan Africa, at 4.4 percent. According to the UN’s Economic Commission for Latin America and the Caribbean (ECLAC), this year, in fact, the region’s growth will be a paltry 0.1 percent, and exports are projected to fall by 2 percent.
Yes, global trade is down, and the commodities boom is over, but isn’t this a bit too much? Why such a violent reaction?
We have gone from a “golden decade,” roughly from 2003 to 2013, in which the region had its best performance in half a century, growing at an average of 3.5 percent a year, to the current predicament in a short period. Expectations have been dashed, and people are understandably frustrated.
Yet, this is nothing new. The region’s two centuries of independent history have been marked by these violent swings from boom to bust. When commodity prices are up and countries do well, they spend like there is no tomorrow and make the most of our innate joie de vivre; when prices go down (as they must), there is a crisis, the IMF is called in (as Argentina and Ecuador have just done), and shock policies are applied. Repeat and rewind.
In this previous boom, which lasted more than most, some progress was made, and the income generated helped to diminish somewhat the region’s extreme income inequality. Yet, this ended circa 2014, and the region has since gone into stagnation mode. Some 48 percent of urban jobs are in the informal sector, and 184 million Latin Americans live under the poverty line, while 62 million find themselves in extreme poverty.
Latin America is caught in a middle-income trap of its own making. Despite its abundant natural resources, both mineral and agricultural (South America has one-fourth of the world’s fresh water reserves, making it an agricultural powerhouse, and the Andes mountains are basically a gigantic, open-pit mine of valuable metals), it has never managed to diversify its production matrix and committed to seriously adding value to its many riches – as opposed to exporting them unprocessed.
The self-reinforcing and self-perpetuating combination of commodity-exporting economic activity plus high levels of income inequality is deadly. Contrary to conventional wisdom, Latin America has the worst income distribution anywhere, with a 0.5 Gini coefficient, higher than Sub-Saharan Africa (at 0.45), East Asia (0.40), Middle East and North Africa (0.37) and South Asia (0.34), Eastern and Central Europe (0.33), and the OECD countries (0.30). In Brazil, Chile, Colombia and Mexico, the richest 1 percent of the population owns 20 percent of the wealth. This has a drastic impact on productivity and innovation.
This is not to say there are no specific reasons for protests and demonstrations across the region. In Ecuador, it was the end of petrol subsidies. In Chile, the rise in subway fares, on top of that of many others; in Bolivia, which has had the best economic performance in the region this decade, it was Morales’s overreach for a fourth presidential term that did him in. In Haiti, the poorest nation in the Western Hemisphere, it is governance failures of the highest order, which successive international interventions have not been able to resolve.
The point is that, whatever the specific triggers for this discontent, it is nurtured by the huge social chasm that characterizes Latin American societies, and the immense social distance between its social classes and among its various ethnic groups. One would think that, with economic progress, these distances would be cut and made less dramatic. Yet, if anything, they have been made worse, with increasingly spatially segregated societies where the members of different social classes rarely meet and mingle with each other as equals in public spaces.
For far too long, Latin American countries have been engaged in the same act. Powerful economic groups that control the countries’ wealth extract monopolistic and oligopolistic rents for their own benefit to such a degree that they have little incentive to innovate and think outside the box. If you are making so much money through guaranteed returns on capital from utility companies, why bother to come up with new products or business processes?
The region’s tax systems don’t help either. Drawing mostly on regressive, indirect taxes (like VAT) and very little on progressive personal income taxes, they do little to alleviate these huge social disparities, while tax evasion (estimated to reach as much as $360 billion a year) is rampant.
The time has come for Latin American countries to seriously rethink the approach to development they have followed until now. The writing is on the wall.
The author is a research professor at the Pardee School of Global Studies, Boston University, a Wilson Center global fellow and a non-resident senior research fellow at the Center for China and Globalization (CCG) in Beijing.