The Two Latin Americas – A Continental Divide Between One Bloc That Favors State Controls and Another That Embraces Free Markets, as reported in the WS Journal.
There are two Latin Americas right now. The first is a bloc of countries—including Brazil, Argentina and Venezuela—that faces the Atlantic Ocean, mistrusts globalization and gives the state a large role in the economy. The second—made up of countries that face the Pacific such as Mexico, Peru, Chile and Colombia—embraces free trade and free markets.
Because both sets of countries share similar geography, culture and history, this divide makes the continent today something of a controlled experiment in economics. For almost a decade, the economies of the Atlantic countries have grown more quickly, largely thanks to rising global commodity prices. But the years ahead look far better for the Pacific countries. The region as a whole thus faces a decision about (as it were) which way to face: to the Atlantic or the Pacific?
There is good reason to think the Pacific-facing countries have the edge. Much of the continent is “paying the costs of exaggerated protectionism and…irresponsible policy,” said Alan Garcia, Peru’s former president, at a recent conference in Mexico City. “That is not the Latin America that I see in the future. I see the future in countries like Chile—which has been a good example of how to do things for a while—Colombia, Peru and Mexico.”
In 2014, the Pacific Alliance trade bloc (consisting of Mexico, Colombia, Peru and Chile) is slated to grow an average of 4.25%, boosted by high levels of foreign investment and low inflation, according to estimates from Morgan Stanley. MS +1.55% But the Atlantic group of Venezuela, Brazil and Argentina—all linked in the Mercosur customs union—is projected to grow just 2.5%, with the region’s heavyweight, Brazil, slated to grow a meager 1.9%.
The diverging trend lines between the two Latin Americas may last long past 2014. When China’s economic growth was at its peak, the rising giant snapped up Venezuelan oil, Argentine soy, Chilean copper and Brazilian iron ore. But as China’s economy has slowed, commodity prices have followed suit, hitting the Atlantic economies hardest. Brazilian Finance Minister Guido Mantega used to boast that his country’s model of economic development would soon spread throughout the world. But Brazil—with its high taxes, red tape and tariffs—did little to prepare for the day when commodity prices might weaken.
Economists say that countries in the free-trading side of Latin America are better poised to prosper, with higher productivity gains and open economies more likely to attract investment. The Pacific countries, even those like Chile that still rely on commodities such as copper, have also done more to strengthen exports of all kinds. In Mexico, manufactured exports now account for nearly a quarter of annual economic output. (The figure for Brazil: a paltry 4%.) The Pacific economies are more stable too. Countries such as Mexico and Chile enjoy low inflation and bulging foreign reserves.
By contrast, Venezuela and Argentina are starting to resemble economic basket cases, with high inflation and weak government finances. In Venezuela, inflation is running above 50%—on par with war-ravaged Syria. President Nicolás Maduro, the successor to the late populist Hugo Chávez, is doubling down on price controls to try to tame inflation. The fairly predictable result: widespread shortages of everything from new cars to toilet paper. A popular new app uses crowdsourcing to tell residents of Venezuela’s capital where lucky shoppers have found, say, meat—allowing others to rush to the store and snap up the precious stuff.
This Latin America’s finances are unimpressive too. Among the three worst performing currencies in the region in 2013 were those of Venezuela, Argentina and Brazil. Argentina’s peso, for instance, fell 32% against the dollar at official rates—and some 47% on the black market.
Argentina has also suffered from heavy-handed regulation. In Buenos Aires, the southern hemisphere’s summer months have brought soaring temperatures—and regular blackouts. The government slapped price controls on energy prices back in 2002, hoping to help the poor overcome the 2001 financial collapse. But what was supposed to be a temporary measure became permanent. Electricity companies scared off by the price controls stopped investing in the city’s aging electricity grid.
Even Brazil, which has had far more responsible economic management than Venezuela or Argentina, is starting to struggle with rising prices and a boom in credit that is starting to turn. Last year, one Brazilian summed up the Atlantic bloc harshly: “Brazil is becoming Argentina, Argentina is becoming Venezuela, and Venezuela is becoming Zimbabwe.”
A key moment in creating the two Latin Americas came in 2005, when Brazil, Argentina and Venezuela (then led by Mr. Chávez) lined up to kill the proposed Free Trade Area of the Americas—a free-trade zone stretching from Alaska to Patagonia and promoted by President George W. Bush. Troubled by the FTAA’s demise, the Pacific Alliance set out to create its own free-trade area, eliminating tariffs on 90% of goods and setting a timetable to eliminate the rest.
The diplomacy practiced by this half of Latin America differs too: While the Atlantic bloc often views the U.S. with suspicion or outright hostility, the Pacific countries tend to have closer ties to Washington. “We set out to create the Pacific Alliance because we wanted to set ourselves apart from the populists,” said Pedro Pablo Kuczynski, a former Peruvian finance minister. “We wanted a thinking man’s axis.”
Many of the region’s young, the bulk of the population, have cast ballots for politicians such as Mr. Chavez, who offered painless growth by printing money. These youthful voters may have painful lessons ahead of them.
“In the end, the results from the different blocs will resolve the debates,” Mr. Kuczynski said, “but bad ideas take a long time to die.”