Chile, Mexico & Brazil: the triumph of pragmatism edit

Dec. 12, 2005

In December, the Chileans celebrated a new round of elections. However, beyond this event, there is yet another point worth celebrating: the profound and subtle transformation which is taking place in Chile and in Latin America stemming from the surge of economic pragmatism outside the predetermined paths of any rigid ideological model.


The example of Chile

The Chilean example is, from this point of view, exemplary (and perhaps unique), where the privatization of pension funds remained within the framework of a jewel of regulation of top quality institutional craftsmanship. Year after year, the system was modified and adjusted in order to improve. Today, the Chilean regulation body, the Superintendencia, is one of the most credible, technically prestigious and highly esteemed institutions in the country, making it a strong institutional mast.

This reform, above all, symbolizes the profound change that Chile underwent over the last decades: the invention of a pragmatic and gradual political economy in contrast to the years of tidal wave (and dizzy) ideologies. In the seventies social and liberal revolutions occurred which were built up and thrown against countries, in both cases searching to implement rigid paradigms invented in other hemispheres. The Good Neo-Liberal was nothing more than another side to the Good Revolutionary, both of them coinciding in their search for impossible economic policies. In the eighties and especially in the nineties, economic pragmatism prevailed. With the return to democracy, there could have been a temptation to create yet another model and break with the previous regime. This was not the case however, and Chilean democrats decided to carry on with the reforms already underway and tried to combine monetary and fiscal orthodoxy with social reforms and balanced growth. After 1989, the year democracy returned, assets in the pension system shot up and not only were reforms not cancelled but to the contrary, they were intensified, adopted and adapted.

Put in another way, the great lesson to be learned from Chile is this extraordinary combination of pragmatism and continuity, the emergence of possibilism, a new style of doing political economy. This is a combination which other countries such as Mexico and Brazil especially, seek to share.

The example of Mexico

In Mexico, pragmatism shone through in the mid-1990s with the signing of a free trade agreement with the United States. For the first time in history, a country from the South signed a free trade accord with a country from the North. Hooking up with an economic powerhouse and the leading democracy was a key undertaking for Mexico. In the same way as Spain with the European Union, the process was to allow the economy to benefit from an anchor of external credibility. In 2000, the country successfully underwent a change of government without an economic crisis; an unheard of event prior to then, with the cycle of political change every six years previously being accompanied by financial turbulence. Throughout the past decade, Mexico also achieved what no other country in the region had managed to do until then: lift the spell cast by the political cycle.

The country now counts on a wide range of institutional stabilisers. In the economic area, the independence of the Central Bank of Mexico is reflected not only in orthodox monetary policy but also in the decoupling of the institution from the political cycle: the mandate of the Governor does not coincide with that of the President. Whoever the next President is who emerges from elections in 2006, the Governor will remain in office until 2009. In the political field, the creation of the Federal Election Institute (IFE) constitutes another institutional innovation that allows the independent supervision of democratic elections in the country, consolidating the democratic dream of Madero. After the achievement of investment grade status, as well as the macroeconomic variables, the reduction in foreign debt and inflation, and fiscal balance and a flexible exchange rate regime, there are now these institutional stanchions in the shape of the Central Bank and the IFE.

The example of Brazil

Likewise, in Brazil recent governments carried out important pragmatic adjustments. The most spectacular of these was without doubt the one carried out by Lula's government. In 2002, the financial markets feared his rise to power but his monetary orthodoxy and fiscal policy, however, came as a surprise to everyone. In 2004, Lula managed to bring the country's economic growth rate to around 5%.The reforming impulse was very strong and several important fiscal, pension and banking reforms managed to overcome the «test of fire» of the Parliament. His social programmes and investment in infrastructure, although criticized, were in line with the promises made by the government for more just, efficient and better distributed growth levels. Beyond the present political noise in Brazil, what draws one's attention in recent years is the combination of fiscal and monetary orthodoxy with social policies.

This combination not only drew the attention of the financial markets and foreign investors, but also that of Latin American politicians, in particular, those belonging to the left wing, as can be seen in Uruguay where a left-wing government claiming this pragmatism came into power. If Lula is to be re-elected again in 2006 is at the present time an open question. Regardless who wins the elections (the present favourite is the PSDB candidate, José Serra) the pragmatic and gradual course will not change. The anchoring of the political economy of the possible in Brazil could be contagious throughout the Continent resulting in the spread of pragmatic, continuing and gradualist economic policies. In a continent which has become dizzy by so many changes in ideological paths, this would be without doubt a great piece of news.

In 2005, the stars are not only lined up for Latin America. Moreover, some countries such as Chile, Brazil or Mexico now also have powerful compasses which help them keep their bearings and sail away from the rocky coastlines where the populist sirens sing. This trio could be an inspiration to others. In 2006, when most countries are to elect their new leaders, this emulation is not expected to fade and the stars of the possible should continue to shine on firmly and brightly in the Latin American sky. This could be another reason for celebration at the 2006 Latin American Summit.