The market reforms that have improved life in Latin America are coming under attack from politicians who seek a return to statist policies, a prescription for disaster. A better course for the region is to continue market liberalization combined with needed political reforms.

Opponents of market reforms contend that they have not benefited ordinary citizens, and this perception is now being expressed at the polls. In Brazil, the world’s 11th largest economy, leftist presidential candidate Luiz Inacio “Lula” da Silva won 46 percent of the vote on October 6. Second-place, pro-market candidate Jose Serra received only 23 percent. Lula is expected to defeat Serra in the October 27 runoff.

In Bolivia, Sanchez de Lozada, the newly elected pro-market president, received only 22 percent of the general vote while leftist candidate Evo Morales received 21 percent and Morales’s party received the second-largest number of seats in Congress. The unpopular Peruvian free-market president, Alejandro Toledo, recently warned Latin American nations of a “trend toward disenchantment with democracy” that could threaten governments and invite autocratic rule.

Critics have forgotten how market liberalization has substantially improved Latin America’s economic and social development over the past 10 to 15 years. The current crisis aside, levels of poverty, infant mortality, and other development indicators have all improved sharply. This occurred while inflation was reduced, tariffs were lowered, and economies were integrated into world markets.

Generally, countries with greater economic freedom score better on development indicators. Latin America is no exception. According to the Economic Freedom of the World index, the average level of economic freedom in South America’s largest countries between 1985 and 1999 improved from 4.5 to 7 out of 10. By comparison, Russia is currently rated 4.7 and Taiwan is rated 7.2.

During the same period, per capita gross domestic product increased by more than 80 percent and poverty fell by 29 percent. The belief that market reforms are causing Latin America’s current financial problems is wrong. The true cause is the region’s lack of political reform. For 50 years, statist ideologies have been woven into the fabric of its political and economic institutions, with harmful effects.

Brazil’s constitution, for example, is 220 pages. It mandates that the government “guarantee national development” and “eradicate poverty,” and, to this end, vests the government with wide discretion to intervene in the economy. Similarly, Peru’s constitution has a section titled “The Economic Regime,” which mandates that the state be responsible for “stimulating the creation of wealth.”

It is pie-in-the-sky to expect long-run prosperity in countries where governments are encouraged by their constitutions to intervene extensively in the economy. In Latin America, government intervention often involves “crony capitalism,” an inefficient system in which friends and family of politicians receive favors, often illicit, that provide large personal gains but even larger net social losses. The effects of such arrangements are too well known.

Cronyism contributed to the East Asian financial meltdown of the late 1990s, another region that experienced significant economic growth due to market reforms. Such corruption is not new in Latin America.

Transparency International, an anticorruption organization, reports that the average level of corruption in Latin America in 2001 was equal to the level in Egypt. This high degree of corruption existed throughout the 1990s as well, while the levels of economic freedom and economic development improved significantly. Thus, corrupt and stagnant political institutions remain in place, acting as a drag on development and as a catalyst for periodic financial crises including the current one. The answer to Latin America’s current plight is not to return to leftist economic policies or IMF bailouts, but to continue reforms.

Recent free-market policies are sound, but the political institutions that often filter these policies are not. Latin America must continue to liberalize its markets by undertaking a second round of economic reforms that would remove rigidities and create greater investor confidence. But more important, Latin America needs to reform its political institutions to limit government intervention in economies, secure private property rights, reduce bureaucracies, and eliminate cronyism, which costs Latin America and the Caribbean $20 billion a year.

If voters want economic growth and stable, civil societies in Latin America, they must reject the lure of the left and embrace continued reforms.

Lawrence J. McQuillan, coeditor of the book The International Monetary Fund: Financial Medic to the World? is director of the Center for Entrepreneurship at the California-based Pacific Research Institute. Derek Fears is a public policy intern at PRI and a research assistant at Stanford University. Contact the authors at lmcquillan@pacificresearch.org.

This article was also published in the Spanish-language newspaper La Opinión (October 6, 2002).