Jewish World Review Nov. 10, 2005 / 8 Mar-Cheshvan, 5766

U.S. should lure, not lecture, Latin business world

By Robert Robb

http://www.JewishWorldReview.com | The contentious Summit of the Americas illustrates why the United States might achieve more with a less pushy foreign policy.

President Bush has preached free trade as a way to improve economic growth and alleviate poverty in developing countries. He has proposed a Free Trade Area of the Americas, basically making the entire hemisphere a free trade zone.

That idea got essentially shelved at the summit by members of a regional common market of sorts known as Mercosur. Mercosur consists of Brazil, Argentina, Uruguay and Paraguay, with Venezuela scheduled to become a full member by the end of the year.

The headlines went to Venezuela's virulently anti-American leader Hugo Chavez. But the real political dynamic at work is more subtle.

Center-left governments have been coming to power in Latin America in part in reaction to what are perceived to be the failings of what is known, misleadingly, as the Washington consensus. The perception is that Latin America followed the prescriptions of the United States during the 1990s, including freer trade. But the U.S. benefited disproportionately from the trade, while the lot of Latin America's poor didn't improve.

The Washington consensus, however, is more accurately described as the International Monetary Fund consensus, which stresses debt management over growth policies.

Moreover, Latin America has clearly benefited from freer trade. Latin American exports to the United States nearly tripled over the last decade.

Overall, Latin America went from running a trade deficit with the United States to running a pretty healthy trade surplus.

Improved economies did not, however, much affect the poverty rate in Latin America, which runs close to 50 percent. But this is certainly not because of freer trade. It's because of cultural and institutional barriers to indigenous growth.

In his book Liberty for Latin America, Alvaro Vargas Llosa analyzes the historical and political developments that left Latin America with a corporatist rather than an entrepreneurial economic structure and culture.

The World Bank has actually done some useful work documenting how government bureaucracy and red tape adversely affects indigenous economic growth. It takes longer to start a business in Latin America, and requires more governmental approvals, than virtually anyplace else in the world.

As a result, more than 40 percent of economic activity in Latin America is estimated to take place in the informal sector. The key to helping the poor in developing countries, as Peruvian economist Hernando de Soto has pointed out, is giving legal entitlement to what they own and sharply reducing regulatory and tax barriers to participating in the formal economy.

Trade can help, however, and Latin America remains well behind other developing countries in both export growth and attracting foreign investment.

While there is a political desire to be perceived as more independent of the United States, the new center-left governments, with the radical exception of Chavez, are not turning their backs on economic liberalization.

In fact, some of the reluctance about a free trade agreement for the Americas is to keep the pressure on for a new global free trade agreement.

Brazilian President Lula da Silva wants deep reductions in agricultural subsidies among developed nations worldwide. He has also been foremost among the new center-left leaders in reassuring markets and investors, although scandals in his party illustrate the political and legal instability that is another hindrance to Latin American development.

Beyond the leaders, a recent Latinobarometro poll found that about two-thirds of the Latin American people believe that a market economy is the only system that can develop their country.

Center-left leaders in Latin America are trying to diversify their economic relations. But the U.S. market is just too big and too convenient to ignore or minimize. About 60 percent of Latin American exports currently go to the U.S., and the U.S. is the largest source of foreign investment for most Latin American countries.

Given the current Latin American political climate, a U.S. government that quietly did business might very well do more to advance free trade and economic liberalization than one that preaches and lectures about them.