25 June 2006

By the 1990s the nations of Central and South America were making good progress in the adoption of free-market economic policies and the development of democratic political institutions. However, there was a failure to develop effective social-welfare policies to address social needs. Economic inequality is as serious as ever, and political instability has followed. Many countries in the region are facing serious problems of political or economic stability or social strife, including Venezuela, Argentina, Brazil and Peru. Their ability to solve social and economic problems will determine when, or whether, forward progress can resume on the processes of political and economic development.

Venezuela has relatively strong democratic political institutions, a sizeable middle class and a highly educated labor force. But it also has a high degree of economic inequality, which has led to the current political crisis and is not going to fix itself. If an effective social welfare system is not created, Venezuela will continue to experience an erosion of its democratic political system. The problems and solutions go far beyond any one person, whether it is President Hugo Chavez or anyone else.

In the 1990s Argentina pursued economic liberalization and achieved strong export-driven growth. But this was accompanied by increasing debt and government's continued inability to control spending. These fiscal problems combined with financial meltdowns in other parts of the world spooked foreign investors and led to capital flight at the end of the decade. Argentina's response to this crisis only made things worse. Restricting bank withdrawals, then defaulting on debts, then ending the pegging of the peso to the dollar only increased the capital flight. However, these measures did not hurt Argentina's fundamental economic strengths, including a highly educated labor force, and international investment soon returned. In the last few years the country has posted strong growth rates.

In Colombia, people are preoccupied with the struggle against the illegal drug trade. The United States bears a large amount of responsibility for the large market for cocaine. This combined with the necessity of outlawing such drugs has imposed a heavy strain on Colombia, which effectively has much of the drug war being waged by its own security forces on its own soil. President Alvaro Uribe has provided vigorous leadership and increased the resources devoted to fighting the Revolutionary Armed Forces of Colombia (FARC) rebels. However, though some military successes have been achieved, drug money has greatly benefited the Marxist rebels in their struggle against the government, and there is no outright victory over them on the horizon. Uribe probably does not expect an outright victory, but rather hopes to pressure FARC to the negotiating table, where the government can deal with the group from a position of strength.

The Brazilian economy has proved its resiliency over the last several years. President Lula da Silva has, for the most part, continued market-oriented, fiscally-conservative policies which have created modest growth. However, organized crime and economic inequality continue to be a threat to political stability. Peru has severe poverty in many areas, yet faces a pressing need to reduce the state sector to facilitate economic development. It is not yet clear whether the Peruvian people are ready to sanction the necessary policies.

The United States, both in its foreign and domestic policies, seems intent on exhausting itself. Those who hoped for a more restrained and systematic foreign policy, after the wide-ranging interventionism of the Clinton administration, have been disappointed. The Bush administration has continued to support NATO expansion and has strengthened US ties with Taiwan. Also, since the September 11 attacks, Bush has articulated a policy of preemptive attack, under certain conditions, against WMD proliferants, when what is really needed is a major revision of the NPT. Unfortunately these policies are not driven only by the preferences of a few political leaders but seem to reflect anxiety among many Americans about the country's long-term security and position in the world. There is a willingness among many to assert American dominance in any situation where a country appears to be acting contrary to American interests, though there is still much disagreement about this. More universal is the failure to understand that security depends more on the quality of relations with other nations than on raw military power, and the failure to keep security threats in proper perspective.

Over the last several years economic policy seems to have been dominated by an obsession with stimulating the economy rather than focusing on sound fundamentals. In the late 1990s there was the 'new economy' approach of essentially trying to defer recession indefinitely through incremental increases in the money supply. When the economy slowed down anyway, Republicans argued that budget surpluses proved that the economy was greatly overtaxed and advocated large tax cuts. The economy was probably somewhat overtaxed by the end of the Clinton administration. But surpluses are to be expected in good times and make it possible to run deficits in bad times without driving the country deeper into debt. However, Bush argued that the lack of accountability in Washington made responsible use of surpluses impossible and insisted that all of the surplus represented over-taxation. In the early 2000s the Republicans managed to pass a large tax cut. Almost as if on cue the country found itself at war, the economy—whose growth had run its course and which was now shocked by geopolitical uncertainty—finally went into recession, and a large budget deficit suddenly developed. Is it possible that the proper development of the business cycle was disrupted by all of the 'pump-priming' in the late 1990s and early 2000s, thus exacerbating the recession? The economy now seems ready for more growth. Even though growth in the last few years has been erratic, the fact that even that level of performance has been achieved in the face of skyrocketing oil prices and continued geopolitical uncertainty is a testament to its fundamental strength and readiness for growth.

Over the longer term there is a need to confront disfunction in the educational and social-welfare systems which allows an unnecessary degree of economic inequality and stratification. Bush has demonstrated interest in, and creative approaches to, solving these disfunctions. But he and the country have been distracted by foreign affairs. As the long-term trend of increasing libertarianism in American politics makes itself felt, what will become of efforts to solve such problems, or of leaders like Bush who are interested in solving them?