Complacency Is Newest Threat to Reform in Latin America

January 7, 2003

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May 25, 2000 - With inflation in Latin America under control for the first time in decades and investment capital pouring into that region’s technology sector, the time is ripe for continuing serious reforms, but the hemisphere is now plagued by a stultifying complacency. This was the overall sense of participants at a high-level conference at the Council on Foreign Relations last week.

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Most participants felt that complacency of Latin America’s leaders about economic reforms was all the more serious because democracy itself is once again under threat in the region. The challenge to democracy is particularly great in Peru, Venezuela, and Colombia.

Without vigorous political support for the next phase of reforms, participants warned, Latin America’s economies would be susceptible to renewed global financial instability.

Participants generally agreed that while there was a constructive role for the United States to play in Latin America’s reform efforts, it was primarily a matter for the countries of the region themselves to handle. Moreover, U.S. involvement would be useful only if it is sensitive and sustained over time.

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The timeliness of the May 18-19 conference’s theme, "Latin America: Sustaining Economic and Political Reform," was reinforced by the news of Alejandro Toledo’s withdrawal from Peru’s presidential election, a failed coup attempt in Paraguay, and renewed jitters in Latin American markets as a result of developments on Wall Street.

The conference, hosted by the nonpartisan Council on Foreign Relations, convened 200 Latin and U.S. leaders from the business, investment, policy, academic, and NGO communities to grapple with the fundamental choices that must be made by Latin American countries—and the United States—if progress in the hemisphere is to be maintained.

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Speakers included Chile’s President Ricardo Lagos, former Treasury Secretary Robert Rubin, Mexico’s Energy Minister Luis Tellez Kuenzler, and William McDonough, President and CEO of the Federal Reserve Bank of New York.

Cesar Gaviria, Secretary General of the Organization of American States, and Thomas F. "Mack" McLarty, Vice Chairman, Kissinger McLarty Associates, and formerly President Clinton’s Special Envoy to the Americas, served as Conference co-chairs.

Key findings and recommendations:

On Economics:

-- The region remains vulnerable to external financial shocks; pervasive income disparity and poverty threaten long-term stability and growth;

-- Limited access to primary education is compromising the region’s competitiveness in an increasingly knowledge-based global economy;

-- NAFTA was generally viewed as a success, but participants were concerned that political leaders in both the U.S. and Latin America had failed to make a clear connection between trade and the benefits of development.

-- Many conference participants believed that over the past ten years, Latin America’s trade and borrowing had become substantially more diversified, and that despite the risk of instability in global markets, this resulted in greater flexibility and a hedge against external shocks.

-- Former Treasury Secretary Robert Rubin said it is imperative to seize the opportunity to reinforce reforms. Sooner or later, Latin America "will be tested again by adverse circumstances in the global economy," including a downturn in the U.S. markets, he cautioned, and he urged vigorous perseverance. Garnering political support was an absolutely essential part of the process. "If you don’t get the politics right, you will never have the opportunity to put the economics into effect."

-- There is a risk that the "new economy" would reinforce the divide between the richer Latin countries like Argentina, Brazil and Mexico and the poorer countries such as Paraguay, Equador and Peru.

On Political Reform and Democratization:

-- Strong political leadership, credibility of government, and quality of democracy are essential preconditions for success;

-- Serious problems have accompanied the region’s remarkable and rapid transition to democratic styles of government. Some saw these as natural growing pains, others argued that current trends toward authoritarian populism in several Andean countries will take years and much economic prosperity to roll back.

-- Ineffective government and corruption are the single largest impediments to economic development. Transparency, privatization, and good law enforcement are top priorities.

-- With important contested presidential elections soon to occur in Peru and Mexico, concern was expressed about destabilizing potential for upsets in each contest, but Mexican Secretary of Energy, Luis Tellez argued that both on the economic and political fronts Mexico was well prepared and its democratic institutions strong enough to sustain surprises. Co-Chair Mack McLarty summarizing the conference findings said that anything less than a transparent free and fair election in Peru would be "a serious, serious mistake, and a setback for democracy in the region."

-- Although support for democracy remains high in Latin America, many remained disconnected from the political process.

-- Some participants warned that a three-way split was developing in the Hemisphere with a north centered zone focused on NAFTA with Central America and the Caribbean, a southern cone region centered on Mercosur, both of which had successful reform processes and stable democracies in place, contrasting strongly with the third intermediary region, largely bounded by the Andes from Venezuela to Peru with increasing political instability and populist and in some case militarized governments facing severe governability problems as a result of domestic, ethnic and indigenous conflicts.

On the U.S. Role in the Region:

-- Participants agreed that periodic U.S. involvement in the region is not working. It’s not enough for U.S. officials to give a speech one month and attend a conference six months later. The U.S. must engage in Latin America on a continuing basis and with sensitivity toward what Latin American leaders think the U.S. can do that would be helpful in furthering reforms. This is especially true when it comes to the complex process of political and economic reforms.

-- Participants identified a number of issues that have traditionally been viewed as domestic policy concerns but now belong on the foreign policy agenda: drug policy, immigration, human rights, environment, capital markets, and technology.

The conference sponsor was Deutsche Bank AG, and conference contributors were Banco Mercantil C.A., S.A.C.A., Continental Airlines, Inc., J.P. Morgan, Merrill Lynch & Co., Inc., Schlumberger Foundation, Inc., Violy, Byorum & Partners LLC, with additional support from Banco Santander Central Hispano.

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