We all know what conventional economists say about the future of Latin America: Venezuela, Argentina, Bolivia and other countries that pursue populist policies will go downhill, whereas Chile, Peru, Colombia and others that pursue “responsible” economic policies will do great.
So when I interviewed the most unconventional among the best-known U.S. economists — Nobel Prize winner Paul Krugman — last week, I was eager to know whether he agrees with the conventional wisdom on Latin America.
Krugman, who has just published a book titled “End This Depression Now!” — in which he argues that the United States and Europe should increase their economic stimulus packages to jumpstart the world economy, rather than continuing to cut public spending — is often cited by Latin America’s populist governments as a supporter of their big spending policies.
Earlier this year, Argentina’s President Cristina Fernández de Kirchner enthusiastically cited in a speech one of Krugman’s “Conscience of a Liberal” blogs in The New York Times, in which he stated that Argentina’s economy is getting unfair treatment from the media.
Asked whether he agrees with mainstream U.S. economists that Latin America’s “populist” governments will end up destroying their economies, while “responsible” governments will do much better, Krugman surprised me by being much closer to the mainstream — at least on this issue — than one might have suspected.
“The little bit that we know is that the old rules still apply: If you print money to cover your bills even when the economy is not in a recession, you will get high inflation. If you follow irresponsible populist policies, it will hurt growth. So I don’t think that Venezuela is any kind of role model,” he said.
“On the other hand, the hard-line free market stuff has not worked the way it was supposed to,” he added. “We had heard promises of great growth in Mexico for decades now, and Mexico is not terrible now, but it certainly has not had the kind of takeoff. The economies that seem to do the best are the ones that seem to have somewhat middle-of- the road policies, that are basically free market, responsible fiscal policies, but also make some serious efforts at poverty reduction, Brazil being the obvious case.”
Asked about Argentina, he said that “it’s not a good story either, although it’s not in the Venezuelan league.”
According to Krugman, “Argentina had a remarkable recovery from its crisis of the early years of the last decade, but clearly they have gone on with the populist policies too far too long. ... If they had made a turn to more moderate policies in 2007, then the Argentine story would be an entirely positive one. Instead, they kept their foot on the gas pedal.”
Despite the fact that the region’s economy is expected to slow down from 4.3 percent last year to about 3.7 percent this year, Krugman said he is “still relatively optimistic” about the region.
“I don’t see anything in the latest data that would lead me to believe that it’s actually going to get caught up in the full depth of the (world) crisis,” he said.
On whether he is more optimistic about Brazil or Mexico, he said that “while I am not a dire pessimist about Mexico,” Brazil right now looks more promising. “I don’t think there is an easy policy explanation about why Brazil has done better. It just seems that there seems to be more of an entrepreneurial drive,” he said.
Asked what would be his advice for Mexico’s virtual president-elect Enrique Pena Nieto, Krugman said that Mexico has been pursuing sound economic policies, but that now “it needs to work on all the boring but necessary stuff: education, infrastructure and rule of law, which is a big issue for Mexico.”
“The best thing you could do for the Mexican economy would be to control the drug trade and the crime wave, and hope that the re-shoring of production from China (to Mexico) finally generates the economic miracle we keep waiting for,” he added.
My opinion: I agree with most of Krugman’s views on Latin America, especially his recommendation that Mexico focus on the “boring but necessary stuff,” such as education and infrastructure.
That should be sound advice for the entire region, and perhaps for the United States, too. I would only add that the biggest challenge for our part of the world is to stop seeing these tasks — especially education — as “boring,” and re-packaging them as the most exciting challenge of our generation.