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Stoga: Back to the Future?

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Latin America deserves a better fate than to replay the failed economic policies of the past, argues Alan Stoga.

 BY ALAN STOGA

The recent shift towards the left and populism in Latin American politics has generated considerable noise about possible expropriations, the need for income redistribution through increased taxes, calls for massive public sector infrastructure spending and the urgency of rejecting neo-liberal reforms in countries as different as Mexico, Peru, and Argentina. While all this seems to be good politics, it is bad economics and worse policy, ignoring both the lessons of the past decades and the profound transformation of the global economy.

The policy prescriptions of Presidents Chavez, Morales, Kirchner and their fellow travelers might have worked in the disconnected world of the last century. In those days, large, closed economies like Mexico and Brazil performed relatively well on the back of commodity exports and import substitution, although Latin America’s smaller economies have long suffered from boom and bust commodity cycles and endemic underdevelopment.

But we now live in a world where the prices of commodities, manufactured goods, labor, and even money are converging because of the leveling force of technology. Globalization is a reality, not a choice. Industrial production as well as knowledge jobs can be outsourced to the lowest cost provider, whether in India or China or Costa Rica, and comparative advantage has been washed away by the mobility of capital and technology. No country can avoid the consequences, regardless of overheated campaign promises or caches of petrodollars.

Of course, the failure of the post-Washington consensus economic and social policies to produce robust employment and income growth for most Latins has a lot to do with the almost surreal attraction of “back to the future” proposals promulgated by left-leaning politicians throughout the region. Most people in most countries in Latin America clearly do not feel they or their families are better off today than they were a decade or two ago, so they are prepared to vote for something other than economic orthodoxy. The fact that the “something else” is bound to fail—when the commodity price cycle turns down or as more competitive countries elbow Latin America further down the global food chain—is irrelevant to voters who believe they have been cheated too long by policies whose benefits seem only to cascade up, not trickle down.

The irony is that the only force that may save countries from the long term consequences of this folly is the same one that helped to create the problem in the first place: information technology. In a knowledge based economy, access to information is a critical factor in the success or failure of nations. And, despite the reality that millions of people in the region are not yet online, more than two-thirds of the Hemisphere’s population live within range of a mobile phone network. Since mobile phones are increasingly Internet enabled and cost a fraction of what a personal computer costs, this means that the overwhelming majority of people living in Latin America can begin to participate directly in the global economy, regardless of the choices of their politicians.

This can only benefit the people and countries of the region. First, the extension of telecommunication networks increases GDP growth: the World Bank estimates that every 1000 lines—wired or wireless—per million people raises GDP growth by one quarter percentage point. Second, these digital networks have the potential not only to link everyone on the planet, but to give them equal access to unlimited information. The issue increasingly no longer is where someone lives (or who governs him), but whether he takes advantage of the information that is ubiquitously available.

Over time, this dynamic will dramatically level the global playing field, creating unparallel new development opportunities. Of course, there is one catch: countries will only realize the full benefit of this technological revolution if their governments encourage real competition in telecommunications. Regulators must establish transparent rules, fairly arrived at and fairly implemented, which are defined across country borders whenever possible. These rules should favor the users of telecommunication services rather than the incumbent providers, who have for too long been protected from competitive forces.

The extremes of what can happen are demonstrated by the very different experiences of Chile and Mexico. On the one hand, Chile’s sustained strong economic growth in part reflects the country’s commitment to competition. For example, telecom regulators can only set tariffs if the Chilean Antitrust Commission determines the market to be uncompetitive. On the other hand, the Mexican telecom market remains effectively closed to competition, which the OECD, among others, insists has a depressing impact on growth and job creation. A more pro-competition regulatory regime would not only increase the range of value added services available to Mexican consumers, but reduce the cost of basic telephony service. Both would help usher more Mexicans into the twenty-first century, and give that country a fair chance at competing effectively in the global economy.

Latin America deserves a better fate than to replay the failed economic policies of the past, although that is the path that too many of the region’s new leaders seem intent to pursue. The bad news is that globalization has raised the cost of misguided policy choices. The good news is that it has also increased the alternatives.

© Copyright Latin Business Chronicle.  

Alan Stoga is president of New York-based Zemi Communications, which offers strategic communications counsel and services. He is also currently Vice Chairman of the Americas Society. Previously, Stoga has served as Managing Director of Kissinger Associates, as an executive of the First National Bank of Chicago and as an official in the U.S. Treasury. He wrote this column for Latin Business Chronicle.

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