A 21st Century Growth Story With a Happy Ending
While countries in North America and Europe suffer through a downturn that has people questioning the very foundations of their economies, something far more positive is happening in South America. Countries that swung for decades between left-wing populism and right-wing authoritarianism have finally found a middle ground. Political stability is going hand in hand with economic growth in a way that offers a striking lesson for the rest of the world, as well as food for thought for investors.
In the 1980s and 1990s, people in South America were getting wealthier, but slowly. Their countries’ natural resources were in demand, and they were starting to reap the benefits of integration with the global economy. As they got wealthier, suddenly they had more at stake in their political systems; they weren’t going to follow a demagogue making big promises SP easily anymore, either on the left or the right. But their governments still had a tendency to overspend, and their susceptibility to financial crises remained.
Then something new happened. Center-right governments were elected and brought in the kinds of policies that made investors happy: tight budgets, monetary restraint, and even currencies that traded reasonably freely on world markets. Foreign capital started to flood in.
But that wasn’t enough. Many people in these countries felt left out of the newfound growth; the elites were benefiting the most. So they elected center-left governments as a reaction, throwing out the politicians perceived as too cozy with business interests.
These center-left leaders took an important stand. They would not throw out the policies that had engendered so much growth. Rather, they would give the policies of their predecessors legitimacy by sharing the gains from growth more evenly. New policies would promote growth from the ground up through investments in education, tax reforms, and incentive-based entitlement programs including conditional cash transfers.
The countries that followed this path – Brazil, Chile, and Uruguay – have settled into a steady growth pattern that promises to continue for years to come. Peru now has a chance to do the same, with Ollanta Humala following Alan García as president. Colombia may be one step away. Others, so far at least, seem less ready for this economic endgame.
Brazil, Chile, and Uruguay have created a narrative of growth that may someday merit as much space in textbooks as the success stories of South Korea and Taiwan. I saw it up close during almost four years living in Argentina and Uruguay. Countries in other regions – Sub-Saharan Africa and South Asia – may be poorer, but their democratization and rising incomes could pave the way for them to follow the South American example.
I’ve been talking about this new narrative for quite a while (see this talk I gave in January, for example.), and I still don’t think it’s getting enough attention. We need to be ready to appreciate new models of growth – the more, the better.