Will Prudence Prevail?

Within two years of the Wall Street crash of 1929 there were military coups in seven Latin American countries, including Brazil and Argentina. The Great Depression that followed hit the region hard: ten countries saw the value of their exports fall by more than half between 1928 and 1932. (Chile’s total trade fell by no less than 83 percent.) But the political consequences were even more profound and lasting. In the decades between 1870 and 1930—the first great period of globalization—a liberal order that combined export-led growth with civilian representative government, albeit of an oligarchic character, was gradually established in much of Latin America. The Depression swept this away. In its place came inward-looking, more statist economic policies and political volatility, with dictatorship punctuated by brief democratic interludes.

There is certainly cause for concern. For more than a year after problems first surfaced with sub-prime mortgages in the United States, Latin America was in the rare and happy position of being a bystander in a financial crisis. But after the collapse of Lehman Brothers last September, along with the aggravation of the credit crunch and its transformation into a global manufacturing recession of savage intensity, the region suddenly ceased to be immune.

Only a handful of countries can hope for any economic growth at all this year, and 2010 may be worse. Unemployment is already rising. The golden half-decade from mid-2003 to mid-2008, in which Latin America enjoyed economic growth of more than 5.5 percent a year combined with financial stability, is well and truly over. There is a serious risk that many of the social gains of the past few years, including the reduction in poverty and expanded and improved provision of social services, will be reversed. That in turn could trigger unrest that would strain the democracies that in some cases have yet to command universal consent. Normally these economic conditions would provide fuel for the populists who have always derived political strength from Latin America’s deep inequalities of income and power…