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06/03/2006 | Do-It-Yourself Economics

Mary Anastasia O'Grady

Over the past five years, George W. Bush's political opponents have delivered some exquisite jeremiads on the subject of Latin American instability.

 

But let's be clear: These are crocodile tears. To the extent that out-of-power Democrats and their partisans around town have been able to pin Latin chaos on Dubya, the region's bad news has been good news for them.

Democrat lamentations have other explanations. Complaints that Mr. Bush doesn't pay enough "attention" to the region really mean that foreign aid, pumped through the firms of assorted Beltway bandits in the form of contracts and grants, isn't living up to its patronage potential. Forget about Latin America. The real calamity is that the environmentally insensitive cowboy president has threatened the food chain in the Washington biosphere.

This is the business of politics. Fair enough. But it's not a particularly useful exercise if development and liberty for the region's 560 million souls are the desired goals. Any serious analysis of Latin America has to recognize that a number of countries in the region are, in fact, making important progress, and it has nothing whatsoever to do with U.S. "attention."

It is due, instead, to heavy lifting in domestic politics. There is even an argument to be made that by stepping back, the Bush administration has encouraged a long-overdue maturation process of Latin governance. Consensus is developing and thankfully it is not a "Washington consensus."

Scholarly work may one day uncover the cultural and institutional differences, the role of important individual leaders and the exogenous factors that have led to the variations in policy seriousness around the region. But, for now, what matters most is acknowledging the gains, lest we become lost in the fog of partisan demagoguery.

Brazil and Colombia are two examples. Their two leaders are notably different in style and outlook, but both countries have sophisticated business communities eager to engage internationally. Both also have a large underclass with entrepreneurial instincts and talents. These "special interests," fed up with inflation, over-regulation and high taxes, are what's driving the restructuring of the political economy.

Last week Brazil announced that it was eliminating the income tax for foreigners who buy public debt. The decision to lift the 15% levy has already narrowed the interest-rate spread between Brazilian debt and comparable instruments. Treasury Secretary Joaquim Levy believes it could spark a doubling of foreign investment in government bonds -- to $10 billion from $5 billion -- within a year.

A tax cut for foreign moneymen is hardly the stuff one might expect from the left-of-center government of Luiz Inácio "Lula" da Silva, an avowed populist who rubs shoulders with Fidel Castro. Yet Lula is also trying to win an election in October and understands that investment is tied to improving living standards.

The nearby chart reflects the liberalization momentum that Lula, the hard-left firebrand, was up against when he took office in 2002. The renaissance began in the early 1990s with privatization and cuts in tariffs. Competition shocked many firms and they didn't adapt easily. Some froze and went belly up, others moved to the sidelines until they could understand the new environment. Unemployment went up and because the reform approach was gradualist, the adjustment process was slow. Yet the economy did gain efficiencies and eventually employment surged. When the populist Lula came to power, markets feared a relapse, but openness and transparency had put modernization in motion. Short of political suicide, Lula could not go back.

Lehman Brothers sovereign strategist John Welch says that one reason formal (taxpaying) employment is growing is because this government has "significantly reduced federal payroll taxes and the overall tax burden for small and medium sized companies and simplified the tax system." Mr. Welch also points out that while the elimination of the tax on public debt for foreigners is an important signal, what will do more to deepen Brazil's capital markets and increase efficiency is a government proposal to deregulate currency restrictions.

Institutional transparency and market pressure have also constrained the government's traditional profligacy. The Economist Intelligence Unit reported on Monday that officials are predicting an improvement in Brazil's bond rating to investment grade in 2007 if "the government that takes office next January maintains current investor-friendly policies."

Colombia's report card looks even better. And while it is true that the U.S. has aided Colombia on security issues, this "aid" is largely drug-war related and not of special economic value. What has mattered more is the political will of President Alvaro Uribe to confront both the narcoterrorists and the status quo of a rigid and uncompetitive economy.

This week Bear Stearns's Latin American equity strategist Thierry Wizman noted that under Mr. Uribe "labor market reforms, social security reforms, and a new securities law further strengthened both the economy and investor sentiment, as reflected in the strength of business investment within domestic demand." Unrevised annualized third-quarter gross domestic product growth was 5.75% and inflation is in check.

The Bush administration has made mistakes in the region -- notably endorsing Venezuela's non-transparent recall referendum and propping up the anti-market Argentine government with International Monetary Fund aid. But fundamentally what ails the region are matters of domestic politics that only locals can sort out. The reform pace is slow but leadership clearly comprehends the challenge.

The U.S. can help by leading on free trade. On that score, as the congressional battle over the Central American Free Trade Agreement demonstrated, neither Republicans nor Democrats have much to brag about. How much more, shall we say, "profitable" it is to involve the Beltway in fighting Latin underdevelopment.

Wall Street Journal (Estados Unidos)

 


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