AMERICAS BUSINESS NEWS
Latin America's Left
Takes Pragmatic Tack
To Reduce Poverty, New Leaders May Have
To Sell Economic Changes to a Skeptical Public

By DAVID LUHNOW
Staff Reporter of THE WALL STREET JOURNAL
March 2, 2005; Page A15

Uruguay became the latest Latin American nation to swear in a socialist president yesterday, consolidating the left's grip on power in the region but raising an important question: Will it be any more successful in easing poverty than the centrist parties it replaced?

Tabare Vazquez, a 65-year-old former physician, rode to power in Uruguay promising to help the poor, a populist platform that growing numbers of the region's politicians are finding a useful springboard to power, thanks to popular frustration at two decades of U.S.-inspired free-market economic policies that have done little to ease poverty.

Mr. Vazquez represents a new breed of pragmatic leftists in Latin America who hope to combine the left's traditional warm-hearted social goals with a new-found appreciation for cold economic calculus. In other words, Mr. Vazquez, a former cancer specialist, wants to cure poverty, but he knows he can't simply spend money to do it.

"You're seeing the same kind of transformation that a lot of left-wing parties carried out in Europe, an evolution into something that respects basic market principles," says Mohamed El-Erian, who oversees $14 billion in emerging-market bonds for Pacific Investment Management Co. "I call it financially principled populism."

Many observers doubt the region's so-called New Left will have much success reducing poverty if policy makers don't go beyond simply learning not to overspend. Latin America is fast falling behind Asia's dynamic economies in the battle to attract investment. These observers fear the region may not be able to get the jobs it needs to reduce poverty if it doesn't carry out a host of changes to its economies. That includes, among other things, improving the quality of education, making rigid labor laws more flexible, and improving government's ability to collect taxes to spend on areas such as health care and highways.

"I'm not sure these guys are offering anything new," says Riordan Roett, head of Western Hemisphere Studies at Johns Hopkins University's Center for Strategic and International Studies. "There are a whole host of microeconomic problems that no one is resolving."

What is clear is that the region's populations are desperate for change. In country after country, voters have kicked out old-line conservative parties and given the reins of power to untested leftist parties and outsider political figures. Even on Washington's doorstep in Mexico, a leftist from a party that has never governed nationally leads the polls ahead of next year's presidential race.

With the exception of Venezuela's populist Hugo Chavez, who has ramped up public spending on everything from highways to utopian projects such as urban farming, the change in Latin America's leftists is striking. Most bear little resemblance to the region's left-wing parties of the past, embodied by iconic figures such as Cuba's Fidel Castro and Argentinian revolutionary Ernesto "Che" Guevara.

The new leftist generation is proving to be surprisingly pragmatic on many macroeconomic issues. Bouts of past hyperinflation have convinced most governments of the need to control the public purse, and most now believe they need to have an open economy in order to develop economically. Brazil's president, Luiz Inacio Lula da Silva, embraces free-market discipline with such fervor that some of his supporters wonder if the conservative politicians that Mr. da Silva beat for the presidency would have governed any differently.

[New Translation for left]

"It is an article of faith among the region's progressive movements now that you can't reduce poverty simply by spending," says Chile's education minister, Sergio Bitar, a member of socialist President Ricardo Lagos's cabinet.

Given the broad consensus between the left and right on economic principles, what may matter is the left's political ability to pull off economic changes by selling them more effectively to skeptical publics. They have made some progress. In Brazil, Mr. da Silva managed to overhaul the nation's pension system -- something that stymied his predecessor, Henrique Cardoso. In Chile, Mr. Bitar is spearheading a program to teach English at all public schools in a bid to help Chilean workers become more competitive in the global economy.

But the changes haven't gone far enough, according to critics. Mr. da Silva's efforts to loosen Brazil's labor-law restrictions, which are widely seen as reducing employers' incentives to hire, have so far languished in the country's parliament. Some economists wonder if the burly former labor activist, the country's first working-class leader, is pushing hard enough for a change that could antagonize his labor base.

Some economists trying to find the right formula for growth in the region are willing to give the leftists a chance to tinker with free-market formulas, including giving the state a more active role in managing the economy. The Inter-American Development Bank, for instance, commissioned a study by Harvard University economists for use by Mr. Vazquez's government. The study, by economists Ricardo Hausmann, Dani Rodrik and Andres Rodriguez-Clare, calls for the government to boost its subsidies to create successful businesses where Uruguay has a competitive advantage, such as intensive rice farming.

The study also urges the new government to follow the example of Chile in trying some unorthodox means to keep its currency steady and relatively weak, in order to help exporters.

"The idea is to try to come up with some new ideas that can be useful in the context of change in Uruguay," says Eduardo Fernandez Arias, an economist at the IDB and a Uruguayan.

So far, Washington has viewed the region's leftists, with the exception of Mr. Chavez in Venezuela, as more or less benign. Some believe the U.S. should engage the pragmatists much more aggressively, helping them devise better ways to reduce poverty and improve their economies' competitiveness.

"Washington should see this new breed of pragmatists as part of the solution to the region, given that the formulas advocated in the '90s haven't produced results," says Michael Shifter, a policy analyst at the Inter-American Dialogue think tank in Washington. He adds that building closer relationships with pragmatists such as Brazil's Mr. da Silva can help the U.S. find an interlocutor in dealing with Mr. Chavez and others in the region who oppose U.S. interests.

Write to David Luhnow at david.luhnow@wsj.com1