Fall 1996

South America’s "Southern Cone" (Argentina, Chile, Paraguay, and Uruguay) likes to think that the past is behind them. Political repression, military aggression, and economic stagnation marked the first half of the 1980s. Many believe the nation’s claims that the days of military strongmen and hyperinflation are over.

All four nations have transitioned from military to democratic governments. In Argentina, hyperinflation and the British defeat in the 1982 Falklands War discredited the country’s military regime. The generals transferred power to a civilian, democratic government in 1983. Chile switched from an authoritarian to a democratic government in the 1980s for other reasons. General Augusto Pinochet seized control of the Chilean government and implemented a series of liberal economic reforms. Chile’s economic success failed to satisfy it citizens, however. A 1989 plebiscite ushered in a center-left coalition to replace the military government¹ Unlike in Chile and Argentina, Paraguay’s transition to democracy was much more violent. A 1989 coup brought the progressive general Andres Rodriguez to power. By lifting restrictions on the press and political organizations, General Rodriguez started the process of democratization. Paraguay drafted a new constitution in 1992 and held presidential elections the following year. For now, at least, it seems that Argentina, Chile, Uruguay, and Paraguay are committed to democracy.

Chile and Argentina: The Leaders

Chile and Argentina, like many other Latin American nations, have instituted economic reforms that have transformed the countries economically. These governments have undertaken privatization, improved tax collection procedures and cut spending to bring down inflation.² Argentina went a step further and pegged the value of its Peso to the U.S. dollar in order to combat inflation. These reforms have had dramatic effects. Recent inflation rates for Argentina and Chile were as low as 4 percent and 11 percent, respectively. These are dramatic improvements for a region that once had the kind of inflation that toppled governments.

Chile and Argentina have also liberalized their markets. Both have cut tariffs, deregulated financial markets, and entered into free trade agreements. Symbolic of the Southern Cone’s commitment to a competitive marketplace is the Mercosur agreement. Under this agreement, member nations have access to each other’s’ markets and levy a common external tariff on imports from outside the zone. Chile, however, also seeks to enter a market that is far more competitive than Mercosur’s: North America. If the U.S. had allowed Chile to join NAFTA, Chilean businesses would have been able to compete in one of the most competitive markets in the world.

Lastly, Chile and Argentina have enacted reforms to improve economic efficiency. Many Latin American governments have privatized state-owned enterprises. Chile has been the region’s most zealous privatizer. In the 1980s, the country sold off its airlines, power utilities, telecommunications sector, and steel industry. These reforms have attracted vast amounts of capital from the industrialized world and have ushered in high economic growth and low inflation. Chile and Argentina are determined to avoid economic stagnation and achieve higher standards of living.

Uruguay and Paraguay: The Laggards

Uruguay and Paraguay, however, have not reformed their economies with the same enthusiasm as their southern neighbors. Uruguay has only recently sold 51 percent of its state-run airline; it has abandoned plans to sell over half of its public telephone company in the face of public opposition.³ Airlines and phone companies are essential to a developing nation like Uruguay. Foreigners are reluctant to invest in developing nations if they cannot control their investments from their home offices by phone or regular visits. Uruguay will not attract foreign capital if it does not privatize more of its state-owned industries. Similarly, Paraguay’s financial sector needs to be reformed and several state-run industries await privatization.⁴ The best inspiration for Uruguay and Paraguay may be the economic success of Chile and Argentina. If these countries continue to prosper, then wages will increase because low-wage manufacturing will be transferred to other countries.

An Uncertain Future

It is far from certain that Chile and Argentina can continue to grow at their current rates. Their governments have made impressive changes in economic organization, but the resulting growth will not necessarily bring higher wages and higher standards of living. Chile and Argentina must boost worker productivity by supporting investment and education. The nations of the Southern Cone are now democratic but they are not immune to political instability.

The peoples of these nations must save more to ensure a secure pool of investment capital. The Chilean government has already set up a pension scheme in which workers deposit 10 percent of their wages in privately managed funds. This policy has increased savings from 5.4 to 20.4 percent of GDP between 1980 and 1981 and reduced the country’s dependence on foreign capital.

The nations of the Southern Cone need well-educated and well-trained workers to fill the high wage jobs they desire. Latin American governments have historically channeled money into higher education at the expense of primary education.⁵ These governments must balance their other economic commitments with their need to educate their work force.

If the economic reforms do not deliver their promised benefits, then the military may decide to reassert its control. The region has made a great deal of political progress and a substantial amount of economic progress but its future freedom and prosperity are by no means certain. The region’s economic reforms must boost national savings and educate workers as well as deregulate. The region’s militaries must accept their limited role if these nations will remain democratic. Then the nations of the Southern Cone will move past dictatorship and economic stagnation to democracy and economic success.

Notes: 1. "Not Going Back," The Economist, 3 June 1995: 17-18. 2. "Disappointed," The Economist, 11 June 1994: 42. 3. "Democracy, It’s Wonderful," The Economist, 26 November 1994: 43-44. 4. "Disappointed," The Economist, 11 June 1994: 42. 5. "Reforming Latin America," The Economist, 26 November 1994: 43.

Mr. Williamson, TC'99, is a political science major at Yale.