James Surowiecki, writing in the Financial Page of the New Yorker writes:

Twenty years ago, a radical economic experiment began in Latin America. With economies beleaguered by foreign debt and runaway inflation, many of the region’s politicians decided that salvation lay in a program of market-friendly reforms that became known as the Washington Consensus—privatization of state-owned businesses, balanced budgets (usually achieved by cutting social spending), free trade, and openness to foreign investment. Reform, the promise went, would lead to prosperity.

The reforms happened. The prosperity didn’t. And so, in Latin America, it’s a time of backlash. In recent years, voters in Brazil, Uruguay, and Venezuela have elected leaders with avowedly leftist politics and a vehement rhetorical opposition to Washington Consensus economics (also known as neoliberalism). The latest evidence of this shift came several weeks ago, when Bolivia elected Evo Morales, a forty-six-year-old Aymara Indian, as President. In almost every way, Morales represents a clean break with the past: he’s the first indigenous President of Bolivia; he’s a former leader of the country’s cocaleros, or coca-leaf growers, and has promised to decriminalize coca growing; his party is called the Movement Toward Socialism; and he has called for the re-nationalization of the country’s lucrative natural-gas resources. Like Hugo Chávez, the President of Venezuela, Morales is openly hostile to the United States, speaking freely of the need to resist “U.S. imperialism.” Not surprisingly, the Bush Administration has tried to dismiss Morales as a kind of unholy combination of Pablo Escobar and Fidel Castro. But his ability to win a solid majority in a country where politics has traditionally been dominated by a small, ethnically homogeneous élite shows just how badly neoliberalism has failed in the region.

Neoliberalism actually enjoyed a strong start in Bolivia. In 1985, when inflation was running at twenty-five thousand per cent, the country instituted a campaign of “shock therapy,” eliminating price controls, slashing government spending, and removing barriers to trade. The changes stopped the hyperinflation almost overnight, and got the economy growing again. In the years that followed, Bolivia deregulated its banks, reformed its tax system, privatized its five biggest state-owned companies, and tried to attract more foreign investment. But during the past fifteen years the country’s per-capita economic growth has been just 0.5 per cent a year, and today half of all Bolivians live on less than two dollars a day. Bolivia has always been a very poor country with a few very rich people, but inequality has worsened, with the élite skimming off most of the little wealth that has been created. The immense gap between what neoliberal reforms promised and what they delivered has inevitably left people feeling cheated and angry.

Neoliberalism failed in Bolivia because a macroeconomic checklist is not enough to make an economy work. Incorporating a new business in Bolivia, for instance, takes fifty-nine days, entails fifteen separate procedures, and costs twice as much as the average person earns in a year. So, according to a recent World Bank study, most of Bolivia’s businesses remain “informal,” which means that they have no legal protection, and limited access to credit markets. Corruption is rampant—a survey in 2000 found that it was a greater problem in Bolivia than in about ninety-five per cent of other countries surveyed. And the state bureaucracy has been more interested in patronage and clientelism than in good policy. The government’s campaign against coca farming, for instance, left the cocaleros without economic alternatives, since the infrastructure necessary to get food crops to market in a timely fashion didn’t exist. Privatization, however, turned into a handout to the wealthy.

Even if Bolivia got the big picture right, it got the details all wrong. And it’s increasingly clear that when it comes to development God really is in the details. A country’s history, institutions, and power structures have a profound impact on whether reform can work. Neoliberalism, at least in its purest form, suggested that good policies alone were what mattered. But, as a just-released study of development in Latin America by the Inter-American Development Bank puts it, “Policies and institutions are inseparable.” Reforms that can’t be implemented properly are sometimes worse than no reforms at all.

Unfortunately for Bolivia, though, Morales is just as utopian as the neoliberals were. His economic vision looks like the Washington Consensus turned on its head: instead of privatizing industries, you nationalize them; instead of liberalizing trade, you control it; instead of deregulating industries and prices, you subsidize and supervise them. And Morales’s promise is similar to the one Bolivians heard two decades ago: my program will lift us out of poverty.

It may be foolish to expect caution from a populist like Morales; radicalism is the basis of his appeal. Ultimately, however, utopian rhetoric and utopian strategies are the last thing a country like Bolivia needs, because they foster the illusion that prosperity is easy to achieve. Morales has some potentially useful ideas, most notably land reform, which was instrumental in the development of Japan, South Korea, and Taiwan—countries where tenant farms owned by absentee landlords were gradually replaced by independent farms. But his hyperbolic rhetoric and his lack of attention to the concrete realities of reform will make it harder for even his sensible ideas to work. Bolivians have been promised too many big victories. What they need now are some small ones.

The article can be found here.

“The new wave of populists is led by Chavez, who’s been using the recent windfall in oil revenues to expand government and solidify his hold on power. But even while $100 million in oil money pours into Venezuela every day ($60 million of that from those terrible gringos north of the Rio Grande), the poverty rate has risen above 50 percent.

Meanwhile, the poverty rate has declined sharply in Chile, to about 20 percent (compared with about 50 percent in the rest of the continent). Chile has become South America’s economic success story by embracing capitalism and making its own free trade agreements with the United States and other countries, most recently China”. –John Tierney, writing in the New York Times