By Eric Vandenbroeck and co-workers

From Chile To Mexico

While the collapse of Argentina's economy in 2001-2 attracted horrified glances, Colombia's drug lords and guerrilla violence still made headlines-- while Fidel Castro remained a curiosity, stubbornly ensconced in his communist island well into old age, having seen off nine American presidents. Then, suddenly, the veil of oblivion thrown over Latin America by much of the media in Europe and the United States parted. Presidential elections in a dozen countries in the thirteen months from November 2005 aroused a flurry of outside interest. This mainly focussed on the notion that Latin America was moving irrevocably to the left and out from under the thumb of the United States, where it was asserted to have forever languished. Much of the interest was catalysed by Hugo Chavez, Venezuela's voluble populist president, and by his search for disciples in the region. He aroused fears in many quarters (and hopes in others) that he might be another Castro - but one armed with oil.

But the recent U.S.-Venezuelan energy disagreements such as the PDVSA-ExxonMobil legal dispute are more for political show than anything else. Chavez wants to demonstrate that his country is not reliant on U.S. oil revenues and signal to the world that its national energy company is capable of standing up against its U.S. counterparts. But as long as the United States remains the most profitable export destination for Venezuelan oil, Chavez’s threats remain empty. And he needs the money to buy support at home.

 

Visiting Chile And Beyond

Twenty years ago, the Casablanca valley was a dusty place of sleepy farms through which traffic crawled on a narrow road linking Santiago, Chile’s capital, with Valparaiso, its largest port. Today, the valley floor is carpeted with mile after mile of trim vineyards. They produce good quality white wine, in a country which until recently had been known in the world only for cheap but reliable vino tinto. A fast new toll motorway snakes through the valley and over the dun-coloured hills to the coast. It was built and maintained by private investment under a public-private partnership. Beside the motorway stands an unobtrusive white building that houses the laboratory of Vitro Centre Chile. Opened in 2004, the laboratory turns out partially fattened lily bulbs using up-to-date biotechnology. It is a joint venture among local private investors, a Dutch firm and Fundacion Chile, a public-private technology agency. It began on a small scale, employing 43 people. But its founders hoped to be exporting lily bulbs to Holland within a few years, competing for a slice of a $750 million world market, and to have established a new high-tech flower-export business! If they succeed, they will follow a long line of new export industries created in Chile in recent decades, such as fish-farming, wine, fruit and furniture. The country is making a successful living out of its natural resources, partly by adding value to them.

 

The Chilean Model: Reform Deepened By Democracy

Uniquely in Latin America, Chile has achieved sustained and rapid economic growth over the past two decades, and as a result has seen poverty fall sharply. Over that period (1987-2006) its economy grew at an annual average rate of 6 per cent. The equivalent figure for Latin America as a whole was just 2.8 per cent. Even in 1998 to 2003, when the rest of Latin America stalled, Chile still managed to grow at an annual average of 2.8 per cent - once again more than twice the regional rate. From 2004 onwards, growth has returned to an annual rate of around 4 to 5 per cent. Keep it up, and in another decade or so Chile will have achieved developed country status, with a similar income per head to Portugal, Greece or Spain today.2 True, income distribution in Chile is much more unequal than in those countries. But poverty has fallen sharply, from a peak of 45 per cent of the population in the mid-198oS to 19 per cent by 2004 and 13.7 per cent by 2006.

It is an uncomfortable fact for democrats that the foundations of Chile's dynamic export-led growth we,r.e laid by General Pinochet - but only through a costly process of trial and error. Shortly after seizing power Pinochet entrusted the economy to the 'Chicago Boys', a group of neo-conservative economists trained at the University of Chicago. They implemented a drastic adjustment, which saw the fiscal deficit fall from 25 per cent of GDP in 1973 to 1 per cent in 1975, and a radical programme of structural reform. This included large-scale privatisation (though the copper and oil firms were kept in state hands), and the opening of a previously closed economy. Import tariffs were cut from an average of 110 per cent in 1973 to 14 per cent by 1979, and all restrictions on the financial system lifted. The Chicago Boys ignored the short-term social cost of their policies. They also made policy mistakes. In privatising, they paid no heed to competition or regulation. The result was that the economy came to be dominated by a clutch of highly indebted conglomerates centred on the privatised banks.3 This mistake was compounded by a second one. Worried that inflation was slow to fall, in 1978 the government fixed the exchange rate. The peso quickly became overvalued, prompting an import boom and allowing the conglomerates to borrow dollars cheaply abroad. In 1982, Chile went bust, hit harder by the debt crisis than any other Latin American country. The economy shrank by 14 per cent. In 1983, real wages fell more than 10 per cent and unemployment climbed to 30 per cent (including people on a government make-work programme). The financial system collapsed, and was re-nationalised. The bank bailout would lumber the government with liabilities equivalent to 35 per cent of GDP.

In its aftermath, a new economic team implemented more pragmatic, gradualist policies. Tariffs were temporarily raised, some prices were indexed and inflation would not reach single figures until 1995. To prevent overvaluation of the exchange rate, which was pegged close to inflation, the government imposed a tax on short-term capital inflows. A second round of privatisation, which included the utilities and the pension system, was carried out with more attention to regulation. Growth resumed, and this time it was sustained. The reforms had worked - but they took much longer to do so than their authors had assumed. By the early 1990S, Chile could be hailed as a 'textbook example of an open economy'.

The governments of the centre-left Concertacion coalition that have ruled Chile since 1990 kept the broad thrust of the dictatorship's economic policies, deepened some of them and reformed others. That bestowed democratic legitimacy on the 'Chilean model'. Since 1990, income per head has more than doubled. Growth has remained high but has been less volatile than under the dictatorship. It has been driven by exports and by investment. In 1970, exports were equal to just 12 per cent of Chile's GDP; in 2005, that figure was 41 per cent. In the 15 years to 2003, exports almost quintupled, while the share accounted for by copper fell from 86 per cent in the 1960s to 40 to 50 per cent. Under Ricardo Lagos, a moderate socialist who was president from 2000 to 2006, Chile deepened its commitment to open trade, signing free-trade agreements with the United States, the European Union and South Korea. From the late 1980s onwards, the rate of investment climbed steadily to reach around 25 per cent of GDP, well above the regional average. Uniquely in the region, most of this investment has been financed by an increase in national savings, which rose from 8 per cent of GDP in 1985 to 27.1 per cent a decade later. Those savings came partly from a consistent budget surplus, partly from the privatisation of the pension system by the dictatorship, but mainly from high levels of savings and investment by business, encouraged by a 1984 reform which cut taxes on re-invested profits.s The Concertacion governments placed greater emphasis on social policy, partly to repair the lack of social investment by the dictatorship and partly to try to reduce inequality. Their approach has been cautious. In 2004, public spending in Chile was only 22 per cent of GDP - the same share as in 1987, pointed out Nicolas Eyzaguirre, a Harvardeducated former IMF official who was Lagos's finance minister.6 But rapid growth and a reduction in military spending meant, for example, that spending on education tripled in the decade after 1990. Under a government-backed housing programme, campamentos (shantytowns) were all but eliminated. Lagos set out to abolish extreme poverty in Chile, through a programme called Chile Solidario. His government also introduced unemployment insurance. The Concertacion governments drew on private investment, operating under public contracts, to upgrade the country's infrastructure. More than 2,000 kilometres of motorways were built, and airport capacity tripled?

What explains Chile's remarkable success? The first factor, without doubt, is effective economic policies. These assign clear roles to market and state. 'The market is essential for growth and democracy is essential for governance,' as Lagos has put it.8 Under the Concertacion, the state has concentrated on regulating markets, rather than intervening in them. Fiscal policy has long been prudent, and has become increasingly sophisticated. In contrast to Venezuela, Chile saves in a 'stabilisation fund' part of its windfall when copper revenues are high. As a result, alone in the region Chile was able to increase social spending during the recession (mild in its case) of 2000 to 2002, enabling it to break with its past cycles of boom and bust. Lagos codified this counter-cyclical fiscal policy in a rule. This requires the government to record a fiscal surplus of 1 per cent when the economy is growing at its potential (as defined by an independent panel of experts) and when the copper price is at its expected long-term average (as forecast by a second panel). If either figure is below par, the government can spend more. The surplus required under the rule is in part to defr~y the liabilities from the 1982 banking collapse.9 This fiscal rigour means tnat public debt stood at just 12 per cent of GDP at the end of 2004, and has given Chile Latin America's best credit rating and some of its lowest interest rates. As the copper price went through the roof in 2005 and 2006, the government once again faced the challenge of trying to prevent the peso from appreciating too much. The response was characteristic. The administration of Michelle Bachelet, who succeeded Lagos as president in March 2006, announced that on top of the existing copperstabilisation fund, it planned to set aside an amount equal to about 0.5 per cent of GDP per year in a pension-guarantee fund whose proceeds will be invested abroad.lO But fiscal rigour and respect for markets has been combined with a dose of pragmatism - and even heterodoxy. The dictatorship did not privatise Codelco, the state-owned firm which is the world's largest copper producer, partly because some of its profits went to the armed forces for arms purchases. The Concertaci6n governments have kept Codelco in state hands, but encouraged private (including foreign) investment in new mines and reduced the proportion of its profits spent on arms. Similarly, the controls on capital inflows were counter to IMF orthodoxy, but are now widely accepted to have helped Chile avoid financial instability (they were abolished when the Central Bank adopted a floating exchange rate in 1998).

As important as the policies themselves is the broad political consensus that sustains them. This was forged in negotiations over the transition to democracy after Pinochet lost a 1988 referendum on staying in power. From this consensus derives policy stability. In Chile, unlike in many other countries in the region, businesses can afford to make long-term investments, knowing that political surprises are highly unlikely. That applies equally to private investment in infrastructure, and explains why Chile has the most modern network of roads, ports and airports of anywhere in the region. This policy environment eventually spawned a dynamic business class in Chile, helped by deep capital markets. Though foreign investment is welcome, Chile is notable for a large number of home-grown companies, many of which have begun to invest in other Latin American countries.

A third factor is relatively solid institutions, such as the civil service and courts - a legacy of the country's long tradition of constitutionalism and the Chilean democracy has become increasingly self-confident. For much of the 1990S, the Concertacion coalition had to govern in the shadow of Pinochet and his supporters, who exercised much influence over the army, business and the media. More than in most countries, the transition to democracy was a negotiation. Under this deal, Pinochet stayed on as army commander for seven years, the civilian government was saddled with a military-dominated national security council, and former military commanders were among nine appointed senators who gave the conservative opposition a veto over constitutional change. Pinochet';'- arrest in London in 1998, at the request of a Spanish court, proved to be a turning point. It emboldened Chile's judiciary to unpick parts of the amnesty that the dictatorship had granted itself for its abuses of human rights. By January 2005 some 300 retired officers, including 21 generals, were in jail or facing charges.15 Lagos was both willing and able to adopt a more robust attitude than his two elected predecessors to making Chile 'a democracy above suspicion' as he put it. In 2005 the conservative opposition finally agreed to scrap the authoritarian clauses in the constitution. In other ways, too, Chile has become a palpably more relaxed place. The Lagos government pushed through laws abolishing the death penalty and film censorship, and legalising divorce (though abortion remains prohibited, even in cases where the mother has been raped or her life is endangered by the pregnancy). Talking in La Moneda, the palace where Allende had fallen, Lagos pointed to 'a wider cultural change in Chilean society' and 'a greater openness'.16

These changes were symbolised by the election of Michelle Bachelet as president in 2006. A paediatrician in her fifties, Bachelet came originally from the left wing of the Socialist Party and had spent part of her exile in East Germany. The main difference between her and Lagos was in her relative lack of political experience. As a candidate, she seemed hesistant on policy issues. But when asked about her life and how Chileans see her, she became animated, a note of passion entering her voice. Bachelet's father was an air force general who sympathised with Allende. He died of a heart attack while in prison after the coup; both she and her mother were briefly detained and ill-treated in Villa Grimaldi, the headquarters of the DINA, Pinochet's notorious intelligence agency, before going into exile in Australia and then East Germany. Rather than her socialist politics, what made her election remarkable in a country long held to be the most socially conservative in Latin America was that she is an agnostic and has three children by two different men, neither of whom she lives with. 'The polls show that more than half of Chileans think I'm the person who best represents Chile,' Bachelet said. 'I have a different sort of family, but one that is similar to a third of Chilean families.' 17 In her first year in office, Bachelet looked less than assured. She handed economic policy over to a competent American-educated team, but with only a couple of exceptions her first cabinet was as inexperienced as she was. She proclaimed her intention to promote a 'citizens' democracy,' with greater public participation in policymaking. But in May and June 2006, her government was shaken by protests by school students, backed by many parents and teachers, over the poor quality of education. It was the biggest display of discontent since the end of the dictatorship. With the state's coffers overflowing with record copper revenues, the protestors demanded that the government breach its fiscal rules and spend more on schools.18 Yet the problem of education is as much one of management as of lack of money. The government stood firm, at some cost to its popularity.

Such disagreements are the lifeblood of a normal democracy - which is what Chile has at last become. Purists might argue that its transition to democracy will not be complete until there has been alternation of power. That is partly because some Chileans will remain unconvinced that the conservative opposition has itself embraced democracy, as Franco's supporters in Spain's Popular Party did. Yet one can hardly blame the government for not losing an election. Not only does Chile's democracy now look consolidated. Its combination of market and state, growth and social policies, stands as a more powerful and effective example to the region than Chavez's sound and fury. Lagos, in particular, repeatedly tried to distinguish Chile's path both from events elsewhere in the region and from the neo-conservative policies of his country's recent past. 'How much of what we are seeing in Latin America is related to the simplistic belief of a few people that distribution can only occur in the context of populism? In our experience this will end in failure in the long-run. And how many others think that growth is enough, and the rest will come naturally?' 19 Of course, some of the factors in Chile's success were not easily exportable. But other countries, such as Peru - another open economy based on mining and export agriculture - have adopted elements of them.

 

Brazil: Reform Through Democracy

Mention Chile, a country of just 15 million people, in mighty Brazil, and you will be greeted with derision. Brazil has followed its own path towards development over the past dozen years but like that of Chile over the same period it has been marked by democratic pragmatism. After a decade of false starts, with the Real Plan of 1993-4 Brazil finally began to rganized its economy and embarked on rganized reforms of the kind adopted earlier elsewhere in the region. Reform in Brazil has been slow and incremental, democratic and consensual. It has involved bottom-up institution-building rather than top-down dictation. By 2006 there were fears that the reformist momentum had been lost. But what has been achieved looks more solid than in some other countries.20

There were several reasons why reform came late to Brazil. Unlike, say, Argentina, Brazil enjoyed rapid and almost uninterrupted economic growth for three decades until 1980. And unlike Argentina, Brazil had found ways of living with inflation, chiefly by rganized indexation under which wages, prices, debt payments and so on were adjusted automatically for past price increases. It was an eff~ctive but insidious system which aggravated inequality. Inflation rose steadily, but the annual rate only broke into three figures in 1980 and into four figures in 1988. ‘Inflation gave to many people (but not to the great mass of poor Brazilians) the illusion of abundance,’ noted Fernando Henrique Cardoso, who would eventually end it.21 Another delaying factor was that the 1982 debt crisis and the economy’s subsequent stutters coincided with a protracted – and accident-prone – transition from dictatorship to democracy. The generals and their supporters allowed free elections for state governors in 1982, but then snubbed a popular campaign for a direct election for president three years later. That ensured that the first civilian federal government in two decades would be weak. Tragically, it was weakened further when Tancredo Neves, the leader of the opposition party of the Brazilian Democratic Movement (PM DB) and the man chosen as president by the Congress, died before he could take office. His vice-president, Jose Sarney, took over, but as a longstanding supporter of the military regime who had switched sides at the last moment, he lacked Neves’s legitimacy. The election in 1989 of Fernando Collor de Melo, a young telegenic politician from the backward north-eastern state of Alagoas, proved to be another false start. His technically flawed rganizedn plan failed. His high-handed treatment of Congress backfired; he resigned to avoid impeachment for corruption. His only lasting achievements were to have slashed import tariffs and begun to privatise the state’s vast holdings. He was replaced by his vice-president, Itamar Franco, an undistinguished PMDB politician from Minas Gerais.

A third problem was that reform in a federal democracy is inevitably slow and complex. Brazil is simply too large and diverse ever to be a ‘delegative democracy’ in which the president can decree far-reaching change from the rg With the brief exception of Vargas’s Estado Novo, Brazil has always resisted absolutism: it is not coincidental that its monarchy was a constitutional one, and that its dictatorship of 1964-85 chose to keep the Congress in being and limited its military presidents to fixed six-year terms. To make matters even more difficult for reformers, Brazil’s fledgling democracy equipped itself with a new constitution in 1988 which was riddled with flaws. It entrenched the failing economic model of statist nationalism and corporatist privilege just when this was going out of fashion across the world. It even included a constitutional cap on interest rates, at 12 per cent – a provision inevitably honoured in the breach. It gave all those who had worked in the public sector for five years absolute job tenure and full pension rights even though they had not sat competitive exams. As politicians rushed to exercise their new scope for patronage, federal government spending on personnel increased from 2.5 per cent of GDP in 1986 to 4.5 per cent in 1989.23

The constitution was drawn up at a time when the federal executive was weak, both in relation to the Congress and to the directly elected state governors and mayors who secured an exaggerated devolution of power and money, free from corresponding responsibilities. Cardoso, a senator in the Constituent Congress, later said that this body ‘reminded me a lot of my time [teaching at the University of Paris] in Nanterre in May 1968 when it was forbidden to forbid’.24 In reaction to the dictatorship’s shackles on political parties, the politicians in Brasilia rejected any rules that might impose party discipline on legislators. But they kept the gross over-representation of poorer and more backward northern and north-eastern states introduced by the generals to diminish the weight of democratic and progressive opinion in Silo Paulo and the south. Unlike other federal states, such as the United States and Germany, Brazil allows less-populated remote areas to be over-represented not just in the Senate but in the lower house too (as does Argentina). According to population, Silo Paulo should have 110, rather than its current 70, seats in the Chamber of Deputies while Roraima, on the border with Venezuela, should have just one rather than its current eight. Over-representation of sparsely populated areas in the Senate is even greater in Brazil than in the United States: one vote for the senate in Roraima has equal weight to 144 votes in Silo Paulo.25 The Congress was given the power to revise the constitution five years after it came into effect, by simple majority rather than the normal 60 per cent vote. But when it came, in 1993, that opportunity was not taken, because Congress was reeling from a scandal in which members of the budget committee were found to have taken bribes from construction companies. Of 30,000 proposed amendments, only five were adopted.26 One of these further weakened the executive by cutting the president’s term from five to four years.

For a dozen years after the debt crisis broke in 1982, no government managed to rganized the economy for more than a few months and much of the public goodwill towards the new democracy was squandered. Yet just when Brazil appeared ungovernable in democracy, matters were in fact beginning to changeP In May 1993, Cardoso was Brazil’s foreign minister. He was at a dinner party in New York when he received a phone call from Itamar Franco, the eccentric interim president, who said he was thinking of making him finance minister. The job was a poisoned chalice. Inflation would top 2,700 per cent that year. Franco had already got through three finance ministers in seven months. Cardoso later recalled that by the time he went to bed he thought he had persuaded the president to desist. Franco appointed him regardless.28 It was that ‘accident’ that would lead to Cardoso, a brilliant and cosmopolitan sociology professor who lacked the common touch, being elected president of Brazil for two successive terms. As finance minister, Cardoso assumed the role of de facto prime minister. He assembled a team of talented liberal economists who came up with the Real Plan, a clever mix of budget cuts, a new cu~rency and a mechanism to break price indexation and inflationary expectations. According to Cardoso, ‘The root cause of inflation in Brazil was really very simple. The government spent more than it earned.’29 The forecast federal deficit in 1994 was $20 billion of a total budget of $90 billion. Yet dealing with the problem was not simple at all. As Cardoso noted, ‘The budget was a work of fiction. The accounts of the Central Bank and the Treasury were mixed together and nobody knew much about either of them.’ 30 Apart from budget reform, the groundwork also included putting an end to federal ‘loans’ to state governments which were rarely repaid and renegotiating the foreign debt.

Cardoso’s team correctly perceived that Brazilians were fed up with inflation and would support almost any measures to end it. They secured Congressional approval in 1993 for cuts in spending and in constitutionally mandated transfers to states and municipalities. But unlike previous failed rganizedn plans, the Real Plan did not involve either wage or price freezes. Its centrepiece was a ‘virtual’ currency, known as the Unit of Real Value, which operated alongside the devalued cruzeiro for several months. This allowed relative prices to adjust, and persuaded Brazilians that the new currency – the real, launched on 1 July 1994 – would preserve its value. It worked: annual inflation fell to two digits by 1995 and to under 2 per cent by 1998. Unlike many other countries in the region, Brazil vanquished inflation without a recession. The increase in the real value of wages sparked a consumption boom. Economic growth averaged 4 per cent a year from 1994 to 1997 despite interest rates remaining high.

Only weeks before the launch of the real, it had seemed inevitable that Luiz Inacio Lula da Silva of the left-wing Workers’ Party (PT), narrowly defeated by Collor in 1989, would win the 1994 presidential election. The success of the Real Plan turned the race upside down. Cardoso rganize that he would win the election during a campaign stop in Santa Maria da Vit6ria, a small town in the backlands of Bahia, in the impoverished north-east, on 11 July 1994. The townspeople in the square held up one-real notes and asked him to autograph them. ‘The real rescued hope and trust, not just in the currency and economic rganizedn, but in the country’, Cardoso wrote.31 While Lula, because of his personal journey from poverty to leadership, was a symbol in himself, Cardoso was not, and needed the symbol of the real to win. Bringing inflation under control in itself caused a 20 per cent drop in poverty.32 Lula, the PT and the rest of the left made the mistake of opposing the Real Plan. Its success meant that Cardoso won the election outright with 54 per cent of the vote. Yet achieving the new president’s goals of consolidating economic stability, integrating Brazil’s economy with the world, rganized the state and tackling Brazil’s social problems would involve a lengthy – and in 2006 still unfinished – political battle.

Cardoso was the leader of the Brazilian Social Democratic Party (PSDB), which in 1988 had broken away from the amorphous PMDB. The PSDB, with strong support in Sao Paulo, Minas Gerais and Ceara in particular, was a mainly middle-class party of professionals and technocrats. It had a clearer programme than the catch-all PMDB. Cardoso defined the PSDB as ‘a centreleft coalition of committed democrats ... We advocated a blend offree-market reform and social responsibility’ in the mould of Felipe Gonzalez in Spain, Bill Clinton in the United States and Tony Blair in Britain.33 To support Cardoso’s candidacy, the PSDB had formed a coalition with the conservative Liberal Front Party, and with the smaller Brazilian Labour Party (PTB). In office, Cardoso invited the PMDB to join the government. In theory, Cardoso’s government enjoyed the support of 70 per cent of the Congress, making constitutional reform easy. Yet, in practice, changing the constitution was a Herculean task. It involved rounding up the votes of 60 per cent of the total membership of each house of Congress. This majority had to be rganized not just for formal votes on constitutional bills, in two consecutive sessions of Congress, but to defeat line-by-line amendments by opponents. Many nominal government supporters regularly voted against it when public spending or corporatist privileges were at stake. Ideally, the government should have moved swiftly to achieve lasting fiscal stability by reforming the structure and financing of government at all levels. But these tasks were complex and politically divisive.34 Instead, Cardoso opted to give priority to more straightforward bills to roll back the state monopolies enshrined in the constitution. In 1995, Congress approved constitutional amendments ending the state monopolies of oil, gas distribution, telecoms and merchant shipping, and another one to guarantee the same treatment to foreign companies operating in Brazil as to local firms. In all, in eight years, Cardoso’s two administrations secured the approval of thirty constitutional amendments, most aimed at creating a modern social democratic state and all tenaciously opposed by the PT and other, smaller, left-wing parties.35

Yet despite these successes, Cardoso’s governments were dogged by the difficulty of rganized political support for fiscal reform in the teeth of myriad special interests. After the initial squeeze at the start of the Real Plan, the budget deficit steadily rose again: the public-sector borrowing requirement reached 8 per cent of GDP in 1998. There were several reasons, but most came down to a characteristically Brazilian vice: for decades, the better-off had turned the state into a device for lining their own pockets while robbing the poor through inflation. Qnce inflation ended, the state could no longer evade the bill for its misplaced generosity. One egregious example was the pension system. This broke just about every rule known to actuaries.36 There was no minimum retirement age. This mattered less when life expectancy was short. In the 1950S there were eight workers for each pensioner, but by the 1990S there were just over two. In the public sector, retirees could draw more than one pension and carryon working as well; the retirement pension was often higher than the final salary. By 1997 the total value of pensions paid to 2.9 million people in the public sector exceeded those paid to almost 17 million private-sector pensioners by the National Social Security Institute (INSS). The INSS itself went into deficit, partly because pensions went up every time the minimum wage increased. Total federal government spending on pensions increased from $5.5 billion in 1992 to $16 billion in 1996. The pension system was a prime example of the way in which public spending in Brazil was skewed towards the better-off: in 1999 the richest 20 per cent of Brazilians received 65 per cent of government spending on pensions, while the poorest fifth got just 2.4 per cent.37 Yet a constitutional amendment that would have brought some rationality to the system languished in Congress for years. The end of inflation exposed a number of other ‘fiscal skeletons’ as they were called. The government absorbed some of the debts of the states in return for their commitments to cut payroll spending and avoid future indebtedness. It bailed out the state-owned Banco do Brasil, the country’s largest bank, to the tune of $8 billion. At the same time – and contrary to the myth propagated by its critics on the left – the government expanded social spending, which amounted to 19.1 per cent of GDP by 2002, up from 17.6 per cent a decade earlier.38

Interviewed in his wood-panelled office in Brasilia’s Planalto Palace in March 1999, when his government was reeling from a forced devaluation, Cardoso admitted ruefully that if he had had his first term again ‘I would be much more severe in controlling federal spending and in encouraging state governors to do the same.’ 39 The price of loose fiscal policy was that the economic team headed by Pedro Malan, the shy, pipe-smoking finance minister from 1995 to 2001, came to rely on an overvalued currency and high interest rates to consolidate its victory over inflation. To make matters worse, throughout Cardoso’s two terms, Brazil was hit by periodic bouts of financial instability, in which the price of shares and bonds would plunge, and vast sums of money would leave the country. The origins of these episodes was usually external: Mexico’s devaluation of 1994-5, the instability of several East Asian countries in 1997-8, Russia’s default of 1998 and Argentina’s collapse of 2001-‘2. But they affected Brazil badly because of its fiscal vulnerability (which they aggravated) and because of its pegged exchange rate. Under the system adopted in 1995, the real depreciated by some 6 per cent a year against the dollar; by 1997, many economists reckoned it was overvalued by about 20 per cent, and Brazil’s current-account deficit had climbed to 4.2 per cent of GDP. When the Asian crisis hit and nervous investors began to yank their capital out of Brazil, the Central Bank doubled its benchmark interest rate (to a stratospheric 44 per cent) to defend the exchange rate. But this jacked up the cost of rolling over the ever-growing public debt, which leapt from a comfortable 28 per cent of GDP in 1995 to 44 per cent in 1998. In January 1999, days after Cardoso had begun his second term, his government was finally forced to float the real. After a few anxious weeks, financial order was restored, with the help of a loan from the IMF and a skilful new Central Bank president, Arminio Fraga, who had previously worked on Wall Street for an investment fund operated by George Soros. To restore confidence in the currency, the Central Bank temporarily increased interest rates again, while the government launched a raft of fiscal measures. This worked: inflation was contained and the economy grew in 1999, albeit by only 1 per cent. But high interest rates and the devaluation itself pushed the public debt (much of which was in dollars) to over 50 per cent of GDP, while interest payments on the debt peaked at a massive 6 per cent of GDP.40

Given its cost, the delay in devaluing the real was a matter of fierce debate in Brazil. The most common criticism is that Cardoso gave priority to winning a second term, for which he first had to secure Congressional support in 1997 for a constitutional amendment to allow re-election. In his memoirs, the president himself says that he was aware as early as 1995 of the need to loosen the exchange-rate peg. In retrospect, he says, he should have done so in early 1998. He gives three reasons for the failure to do so then, or at any other point in his first term. He wanted to wait for a moment when international financial markets were calm. His economic team was badly divided over the issue. Lastly, he argues, ‘In an economy that was still partly indexed and with the vivid memory of decades of inflation, the fear of a relapse into the inferno of hyperinflation tormented us. We remained victorious and immobile.’ 41 These arguments are plausible. Eliana Cardoso (no relation of the president), who left the economic team because of her disagreement with the exchange-rate policy, concurred that ‘a graceful exit strategy was simply not available ... As long as reserves and capital flows are available, the temptation to continue to use the exchange rate to keep inflation under control seems rganized.’ 42

In the wake of the devaluation, the government put in place a new set of macroeconomic policies. As well as the floating exchange rate, these included targets for inflation and for the primary fiscal surplus (i.e. before debt payments). These were underpinned by the approval in 1999 of a Fiscal Responsibility Law, which had the status of a constitutional measure, and which codified all the pu~lic-finance reforms of the Cardoso era, placing strict limits on the indebtedness of all levels of government. Months earlier, stung into action by the devaluation, Congress at last approved two long-awaited constitutional reforms. One was a watered-down pension reform. The other was a reform of the public administration, which required governments at all levels to reduce their payroll spending to 60 per cent of their revenues within two years, and allowed them to sack workers to do so. But the devaluation had a high political cost. Cardoso lost much of his previous popularity and his government lost the initiative in Congress amid infighting among some of his key supporters. A promising economic recovery was derailed in 2001, partly by a drought-induced energy shortage and partly by the knock-on effect of Argentina’s troubles. One final episode of financial instability lay ahead in 2002, when investors began to worry about Lula winning the election. Their fears turned out to be misplaced – Lula opted to maintain Cardoso’s economic policy framework. But they were understandable given the last-minute nature of Lula’s conversion to macroeconomic prudence.

In headline terms, the Cardoso government’s economic record was disappointing: the economy grew at an annual average rate of just 2.3 per cent between 1995 and 2002, while unemployment rose from 4-4 per cent to 7.5 per cent over the same period (or to 11.2 per cent using the new, more realistic methodology adopted in 2001). Yet conquering inflation was a historic achievement, and dealing with its aftermath was a long and messy job. Unlike in many other Latin American countries, devaluation was not followed by a banking crisis. That was in large part thanks to a well-executed programme, known as PROER, which cleaned up the banking system without bailing out miscreant or irresponsible bank shareholders, at a net cost of just 3 per cent of GDP.43 Officials argued plausibly that behind the disappointing growth figures lay a process of structural change in the economy which would bear fruit in the medium term. Having abandoned its past introversion, Brazil was becoming much more integrated with the world. More than $170 billion in foreign direct investment poured in, much of it attracted by a largescale rganizedn programme. The reduction in trade protectionism forced Brazilian firms to become more efficient. Productivity, which declined in the 1980S, rose at an annual average rate of 1.1 per cent in the decade after 1994.44

The devaluation triggered an export boom: Brazil’s exports rocketed from $51 billion in 1998 to $137 billion in 2006, as industries as diverse as cars and agriculture rganized. Much to his annoyance, Cardoso’s opponents in the PT sneeringly dubbed him a ‘neoliberal’. In his memoirs, he goes to great lengths to rebut this, insisting that, ‘If we did anything in the ten years that I was minister or president, it was to rebuild the administrative machine, give greater consistency to public policies, in summary to remake the state.’ 45 What rganizedn the Cardoso government’s refor~s was pragmatism, in which the freeing of markets was combined with measures aimed at creating a rganized, regulatory state. That spirit was rganized in the rganizedn of Telebras. Whereas Mexico and Argentina had turned state telecoms monopolies into private ones, Brazilian officials introduced competition from the outset. Similarly, the government kept Petrobras, the oil company, in state ownership but subjected it to market discipline by floating 40 per cent of its shares. The state retained around a third of the banking system. The government used BNDES, the state development bank, to pursue an industrial policy (though some would argue that instead of rganized capital it should have spent more on education). Cardoso also put much stress on reforming social policies. He won approval for a constitutional amendment which obliged state and municipal governments to boost teachers’ salaries and classroom equipment in the poorest areas. Primary-school enrolment increased to 97 per cent of the relevant age group, while secondary enrolment increased by 70 per cent. The government also initiated targeted anti-poverty programmes, and a large-scale agrarian reform that saw 80,000 families a year receive land. Yet the economic disappointments and intermittent financial turmoil of the second term meant that Cardoso was unable to see his chosen successor, Jose Serra, his health minister, elected. In October 2002, at the fourth attempt, Luiz Inacio Lula da Silva won the presidency with 53 million votes to Serra’s 33 million in a run-off ballot.

 

Lula: Continuity, Change And Corruption

For Brazilian democracy, Lula’s was a historic victory. In the country of social injustice, his life story was a saga of triumph over adversity worthy of a telenovela. He was the seventh child of a dirt-poor family from the northeast. Aged seven, he made the bone shaking journey in a pau de arara (an open-bed truck known as a ‘parrot’s perch’ because passengers must cling to an overhead rail) to join his father who had migrated to Sao Paulo. He was the first in his family to complete primary school, but his formal education went no further. After a series of odd jobs, he entered a government training scheme, becoming a lathe operator at a metalbashing firm. He first came to public notice as the leader of the metalworkers’ strikes during the later years of the military dictatorship. Out of those strikes would eventually come the Partido dos Trabalhadores (Workers’ Party), in which trade unionists were joined by community activists nurtured by Catholic liberation theology and by leftist academics. Though never formally a Marxist party, for two decades or more after its foundation in 1979 the PT espoused far-left policies, such as debt default, nationalisatio~ of the banks and wholesale redistribution of wealth. But successive electoraCdefeats persuaded Lula and his key ally in the party, Jose Dirceu, the PT’s president, to move to the centre and seek alliances. That process suddenly gathered pace during the 2002 campaign. Weeks before the vote, Lula met Cardoso and signalled his assent to an IMF loan which committed the next government to stick to responsible fiscal and monetary policies.46 ‘I changed. Brazil changed,’ Lula repeated during the campaign. His television commercials, made by a professional marketing man, projected the soft-focus message of’Lula, peace and love’. It was a return to the pragmatism of his days as a trade union leader – except that the candidate had donned Armani suits. That union background marked Lula out from Latin America’s many more utopian leftists. Jose Sarney, the conservative former president who would become his ally, was reported to have said of Lula that he was ‘a man who knows the value of 3 per cent.’ 47 Lula is affable, speaks to ordinary Brazilians in homespun metaphors, and is by nature a negotiator rather than an ideologue, a reformist not a revolutionary. ‘Each day, even if we advance a centimetre, we are going forward – without any miracles, without breaking away from our international commitments, simply doing what needs to be done,’ he said in 2004.48 But Lula’s own personal history allowed him to stake a claim to be much more than just an ordinary politician. He was one of the few leaders who could speak both to the world’s plutocrats at the World Economic Forum in Davos and to discontented anti-globalisers at the World Social Forum, which originated in his own party’s stronghold of Porto Alegre.49

On the night of his electoral victory, Lula claimed before ecstatic supporters thronging Sao Paulo’s Avenida Paulista that Brazil had rejected ‘the current economic model, based on dependence, in favour of a new model of development’. But in practice Lula continued the main thrust of Cardoso’s economic policies. In the weeks preceding his victory, Brazil’s financial markets had yet again suffered an attack of nerves: the real lost around 40 per cent of its value in the six months before the election, falling to 3.8 to the US dollar.50 That in turn caused prices to rise and sent the public debt, much of which was denominated in dollars, spiralling to a peak of 66 per cent of GDP. Lula moved quickly to calm the markets’ nerves. Antonio Palocci, the new finance minister, was a former Trotskyist turned pragmatist who as mayor of Ribeirao Preto, a city in Sao Paulo state, had rganized some municipal services. He immediately announced a tightening of fiscal policy. To head the Central Bank, Lula named Henrique Meirelles, a former chief executive of BankBoston who was a member of the PSDB. The Bank nipped inflation in the bud by yanking up interest rates yet again. The government moved quickly to push a second pension reform through Congress. Lula’s calculation was plain: a year of pain followed by three years of gain. He also knew that debt default would be disastrous for Brazil: most of the public debt was held by Brazilian banks and pension funds, not foreign investors.

‘It is infantile to blame the IMF for these measures. We are taking them because they are in Brazil’s interest,’ Palocci told a packed meeting of financiers at the Bank of England.51 The government’s economic orthodoxy brought anguished disillusion to the PT’s left: half a dozen of its legislators, led by Heloisa Helena, were expelled and set up a far-left splinter party. But it paid off: the economy grew by 5 per cent in 2004. Although it slowed again the following year, as the Central Bank kept monetary policy tight to meet its inflation target, growth picked up again in 2006. The government was helped by favourable conditions in the outside world. High world prices for commodities helped Brazil’s exports, while cheap money in rich countries encouraged investors to seek out the higher returns offered by emerging markets. By the end of 2006, Brazil’s finances were in far more robust shape than four years previously. The real had strengthened to around 2.15 to the dollar (by May 2007 it had reached 1.95). The risk premium – the spread over the interest rate on American Treasury bonds – demanded by investors for holding Brazilian bonds fell from some 25 percentage points to just two. The public debt (net of government assets) fell to 49 per cent of GDP. The government retired most of the dollar debt, and replaced it with paper in rea is. In November 2005 it paid off its debt to the IMF early. Despite the strength of the currency, the export boom meant that Brazil’s current account moved into surplus in 2003 and stayed there. In late 2005 the Central Bank began cutting interest rates steadily.

In the 2002 election campaign, Lula had pledged himself to eliminating hunger. The PT had long rganized Brazil’s social policies as inadequate. Yet once in government it got off to an oddly unconvincing start. Lula had promised a scheme called Fame Zero (‘zero hunger’), an old-fashioned and inefficient plan for food stamps. After a year in which they achieved little beyond setting up a plethora of overlapping social ministries, Lula’s officials came to rganized the value of a clutch of targeted cash-transfer schemes for poor families established during the Cardoso government. They consolidated five of these into Balsa Familia (‘Family Fund’), which they swiftly expanded. By late 2006, this reached 11 million families, or one in four. It paid them 95 reais (US$44) a month.52 Bolsa Familia was ‘the most important incometransfer programme in the world’, according to Lula.53 His government also increased the real value of the minimum wage by 25 per cent. ‘How many countries have achieved what we have: fiscal responsibility and a strong social policy at the same time? Never in the economic history of Brazil have we had the solid fundamentals we have now’, he claimed, arguing that the country was now ready for ‘a leap in quality’.54

In other ways, Lula’s government was hugely disappointing. That was especially so in its management of the government bureaucracy (where it placed thousands of party militants in jobs regardless of qualification), and above all of Congress. The PT had done less well than Lula in the 2002 election, winning only 91 of the 513 seats in the lower house of Congress. Lula was less skilful than Cardoso in building a solid governing coalition. He kept nearly all the important ministries in the hands of the PT. He could count on the support of a handful of small left-wing parties. He, or rather Jose Dirceu, his chief of staff, also struck deals with several rent-a-parties. But in 2005 the government was rocked by revelations about those deals. After the head of one of these parties was implicated in a bribery scam at the federal postal service, he retaliated with claims that the PT was paying a monthly stipend, dubbed the mensaliio, to dozens of members of Congress from allied parties in return for their votes. Much of the money was channelled through an advertising man who received many government contracts, and who was then found to have repaid part of a bank loan taken out by the PT. The scandal forced the resignations of Dirceu, a dozen other senior officials and the entire top leadership of the ruling party. What made it all the more reprehensible was that the PT had long presented itself, sanctimoniously, as holding a monopoly on political ethics in Brazil. To make matters worse, Palocci was forced to resign as finance minister in 2006 over corruption claims stemming from his period as mayor of Ribeirao Preto.55

Lula insisted that he knew nothing of the mensaliio. Many Brazilians, especially poorer ones, appeared either to give him the benefit of the doubt, or to conclude that his party was no more corrupt than any of the others. Much of Brazil’s press took a different view, and became implacably hostile to Lula. The scandal damaged the PT’s standing among the middle class. But economic stability and Bolsa Familia, together with the affection that many poorer Brazilians felt for their president, won Lula a second term at an election in October 2006, in which he secured 61 per cent of the vote in a run-off ballot. Whereas in 2002, Lula had polled heavily in Brazil’s more developed south and south-east, this time he owed victory to the votes of the poorer, more backward north and north-east. Normally governing parties do well in Brazilian elections, but the scandals cost the PT seats. It only partially replicated Lula’s gains among the poor in the north-east.56 At the outset of his second term, Lula rganized an alliance with the centrist, catch-all PMDB, still one of the largest parties in Brazil but one with a voracious appetite for patronage and pork.

Overall, progress outweighed disappointment in Brazil. Much had been achieved over the previous dozen years. The proportion of the population living in poverty had fallen from 43 per cent in 1993 to 30.7 per cent in 2005. Income distribution was less unequal than at any time in the previous three decades.57 These achievements were the result of price stability and democratic social policy, notably universal primary education and anti-poverty measures. The incomes of the poor rose steadily, and they bought more: prices of food and medicines fell in 2004 and 2005. That was all the more remarkable since rapid economic growth still proved elusive. In Lula’s first term, growth averaged just 3.3 per cent a year while the world economy grew at 4.8 per cent.58 This was partly because of the continued reliance on high interest rates for price stability, and to compensate for relatively lax fiscal policy. The government piled up primary fiscal surpluses, but once debt payments were taken into account, the public finances were still in overall deficit. The debt burden was gradually falling, but it remained heavy: interest payments continued to cost the government up to 5 per cent of GDP.

Critics argued that the Lula government should have made a far more aggressive effort to reduce the debt while conditions in the financial markets were benign. Even after the reforms, the annual deficit in the public-sector pension system still cost taxpayers the equivalent of 4.5 per cent of GDP. Too much public spending was still constitutionally mandated, giving the government little room to re-jig it to favour the less well-off. Instead of fixing this and cutting wasteful spending, of which there was much, the government relied on higher tax revenues to achieve its primary surpluses. The result was that the tax burden, all told, amounted to 35 per cent of GDP in 2006 – a higher figure than in the United States. Since the 1988 constitution, governments issued an average of 37 different tax rules per day, according to the Brazilian Institute of Tax Planning.59 Around 40 per cent of employment was still in the informal economy. So the tax burden on legal businesses was stifling. It was one reason why investment was still relatively low, at around 16.3 per cent of GDP in 2005. Another reason was that public investment remained derisory. The Cardoso administration set up arms-length regulatory agencies to attract private investment to telecoms, roads and electricity. The Lula government mistrusted these, changed the rules and failed to attract significant investment. The result was potholed roads, clogged ports and a big deficit in drinking water and sewerage. These problems were aggravated by institutional failures and political corruption. After four years in Brazil as the World Bank’s representative, Vinod Thomas mused: ‘People wonder why, after so many years of so much investment in roads with external financing, the country is not yet able to maintain these assets, even though there are large taxes on gasoline to finance investment.’ 60 Logistics costs in Brazil are twice as high as in developed countries, he noted.

Much else remained partly or wholly unreformed. The burden of regulation was as stifling as that of taxation. Rigid labour laws deter companies from hiring more workers. The agency charged with policing monopolies and promoting competition was slow and insufficiently independent. Despite the trade opening of the 1990S, Brazil remained relatively protectionist. Imports faced an average tariff of 13 per cent and bureaucratic obstacles. The mensaliio scandal, and the difficulties of constructing legislative majorities, pointed to the need for political reforms. In the 2006 election, no fewer than 21 parties won seats in the lower house of Congress, a record. The mounting threats to the security of citizens from rganized crime and everyday violence pointed to the need for reforms of police, prisons and judiciary.

In his memoirs, Cardoso writes with feeling that: ‘The struggle to bring greater rationality to the public finances and to contain inflation is like the myth of Sisyphus: no sooner has it ended than it starts again.’ 61 Brazil’s economic drama over the past decade can be summed up simply: the cost of sustained political resistance to fiscal discipline was punishingly high interest rates that sacrificed economic growth and private consumption to the fiscal privileges of relatively better-off groups. Nevertheless, with stability achieved, economic growth was gradually edging up and Brazil was becoming a less unequal country. Its combination of stability, relative economic openness and democratic social reform lacked the dynamism of Chile, but its progress in reducing poverty and inequality looked far more sustainable than Venezuelan populism. What made Brazil’s progress all the more remarkable was that it was the fruit of the patient construction of democratic consensuses.

 

Mexico: Reform Stalled By Democracy

A couple of kilometres to the north of the Zacalo in Mexico City lie the ruins of Tlatelolco, TenochtitIan’s twin city in Aztec times. Tlatelolco was the site of what was at the time the largest market anywhere in the Americas. It was also the scene of the final act in the Spanish conquest of the capita1.62 All that is left are the depleted bases of a dozen or more temple platforms set in a sunken garden. The site is overlooked by the monastery church of Santiago Tlatelolco, its austere baroque bulk fashioned by the Spaniards from the reddish black volcanic stone of the ruined temples. Beyond the church rises the ugly early 1960s concrete tower that housed the Mexican foreign ministry until 2006, when it moved to a taller building of glass and steel in the city centre. On the other three sides stand the apartment blocks of a government housing project from the same era. The raised open space of concrete flagstones between the buildings is called the Plaza de las Tres Culturas or the Square of the Three Cultures – indigenous, Spanish colonial and republican mestizo. In the ideology of the Institutional Revolutionary Party (PRI) these fused more harmoniously than in the architectural clashes of the square. At least so claims the stone plaque overlooking the garden: ‘On August 13^th 1521 heroically defended by CuauhtemoE Tlatelolco fell into the power of Hernan Cortes. It was neither a triumph nor a defeat. It was the painful birth of the mestizo people that is Mexico today.’

More recently the square was the site of another act of bloodshed, one that in retrospect would also come to be seen as marking another painful birth – that of Mexican democracy. In 1968 the student protests that began in Paris and swept campuses across the world from Berkeley to Berlin found an echo in Mexico. Students and their professors took over the National University and the Polytechnic in Mexico City. Many of the leaders admired Che Guevara, but above all the movement stood for freedom of political expression.63 The president at the time, Gustavo Diaz Ordaz, was a narrowminded authoritarian. Even as the student movement was fizzling out, he saw in it a threat to Mexico’s image in the world: the Olympic Games were due to open in Mexico City in mid-October. On the evening of 2 October, a march by a few thousand students was due to end with a rally in the square at Tlatelolco. As the marchers prepared to listen to speeches, watched by the army, members of a government-organised plain-clothes paramilitary squad, acting as agents provocateurs, fired on the crowd from a balcony in one of the apartment blocks, wounding the army general in charge. That prompted the army to rake the square with fire from armoured cars, bazookas and machine guns as well as small arms. The exact death toll is still not known. Contemporary newspaper accounts talked of up to 28 dead and 80 wounded. The student movement itself put the figure at 150 civilians and 40 members of the security forces killed. The Guardian, a British newspaper, claimed that 325 people were killed.64 After the massacre, the regime’s characteristic response was denial, captured by Rosario Castellanos, a poet, in lines carved into a second stone monument in the square, this one unveiled on a rainy evening in October 1993 on the 25^th anniversary of the massacre:

 

Who? Whom? Nobody. The Next Day, Nobody.

The square awoke swept clean; the newspapers gave as the main news the state of the weather. And on the television, on the radio, in the cinema there was no change in the programme, no special announcement, nor a minute of silence at the banquet (For the banquet indeed continued).65

Nevertheless, the massacre of Tlatelolco would prove to be a profound shock to the PRI system. It punctured the official myth of consensual political order. It alienated the middle class who had been the system's greatest beneficiaries - Octavio Paz, the poet, was the first to respond, resigning as Mexico's ambassador to India. It would cause future governments to react in ways that eventually would further destabilise the system. As Enrique Krauze, a historian, puts it: 'There had been a profound loss of legitimacy on that dark night of Tlatelolco ... Though the deep-seated cult of authoritarian government in Mexico would not recognise the fact, 1968 was both its highest point of authoritarian power and the real beginning of its collapse.' 66

In the decades after the Second World War, Mexico had enjoyed rapid economic growth. This reached its apogee under the long stewardship of Antonio Ortiz Mena as finance minister from 1958 to 1970. During that period, private investment was favoured, real wages rose at an annual average rate of 6.4 per cent, the exchange rate was fixed at 12.5 pesos to the dollar, the public debt was low and the budget in balance. Ortiz Mena called it 'stabilising development'.67 It was jettisoned by Luis Echeverria, who succeeded Diaz Ordaz as president in 1970. As interior minister in 1968, Echeverria was complicit in the massacre of Tlatelolco and the repression of the student movement. As president, he proclaimed a 'democratic opening' but only within narrow limits: there was a second student massacre in 1971, and the government launched a secretive 'dirty war' against peasant guerrillas in the Sierra Madre del Sur. At the same time, he appeared to embrace many of the ideas of the student leaders. He posed as a champion of the third world, and launched rhetorical attacks on businessmen (whose investment slowed as a result). He redoubled efforts to co-opt the universities and the middle class by throwing public money at them. The total number of public-sector jobs expanded by a staggering amount, from 600,000 in 1970 to 2.2 million in 1976.68 He paid for the breakneck expansion of the state by printing and borrowing money. Over his term, foreign debt increased sixfold while the real value of wages halved as inflation took off. Jose Lopez Portillo, Echeverria's successor, initially seemed to promise more moderate government. But the discovery of a huge oilfield offshore in the Gulf of Campeche allowed Lopez Portillo to resume the policies of Echeverria, until falling oil prices and rising interest rates caused the public' finances to collapse like a house of cards.

If Tlatelolco had damaged the PRI's political legitimacy, the devaluation, debt default and bank nationalisation of 1982 undermined its claim to economic competence. Yet the PRI's retreat from power and the transition to democracy in Mexico would be extremely gradual and occupy almost two more decades. It had formally begun with a political reform in 1978, which legalised the Communist Party and other left-wing groups. The opposition was allowed to win a quarter of the seats in the Chamber of Deputies the following year. However, the established order did not lightly surrender power to a divided but increasingly determined opposition to its right and left. Miguel de la Madrid, who as president from 1982 to 1988 had to cope with the wreckage left by Lopez Portillo, was an economic liberal. He began to return the economy to the policies of Ortiz Mena and 'stabilising development'. But he did little to reform politics. The government's response to a devastating earthquake in the centre of Mexico City in 1985 showed a characteristic mixture of denial and incompetence. Among some 370 buildings that collapsed was one of the blocks of flats at Tlatelolco, killing 700 people. In all, 20,000 people were killed and another 180,000 were left homeless. In many cases it was left to unofficial volunteers to rescue survivors from the rubble and care for the homeless. Out of this tragedy came a powerful grass roots movement for urban renewal, a novelty in a country where the state left little room for independent civic organisations.69

De la Madrid eschewed an opportunity to move towards democracy and fair voting when he failed to intervene after the National Action Party (PAN), the conservative opposition, was fraudulently denied an overwhelming victory in an election for governor of the northern state of Chihuahua in 1986. He also exercised the traditional presidential prerogative of choosing his successor, Carlos Salinas. That prompted the most serious split in the PRI for almost half a century. Cuauhtemoc Cardenas, a former governor of Michoacan and the son of Mexico's most revered president, had rallied much of the PRI's left wing against de la Madrid's liberal economic policies. When Salinas was revealed as the PRI's presidential candidate in 1988, Cardenas opted to run against him for a clutch of small left-wing parties. The election marked another milestone in the PRI's steady loss of credibility. Salinas was declared the winner with 50.4 per cent to 31 per cent for Cardenas, but only after the interior ministry's computers tallying the count shut down for several hours. Before the plug was pulled on the computer system, Cardenas had been ahead?O Massive demonstrations against electoral fraud took place across the country. Cardenas probably spared Mexico a bloj'dbath when he urged his supporters to channel their anger into forming a new Party of the Democratic Revolution (PRD).

 

Salinas: Perestroika Without Glasnost

Salinas made a determined attempt to rebuild the PRI system by restoring its lost reputation for economic competence while updating its mechanisms of political control. Though his father had been industry minister in the 1960s, Salinas seemed to be a new kind of PRI politician. He had a doctorate in political economy from Harvard. Although prematurely bald, he was aged just forty when he became president. He spoke softly, but with a hint of steel. He liked to describe himself as a consensus-builder and negotiator?1 But he was ruthless and hyperactive. He surrounded himself with a clutch of liberal economists with doctorates from American universities. They were charged with modernising Mexico. The finance minister, Pedro Aspe, brought inflation down and renegotiated the foreign debt, restoring stability and a modicum of economic growth after years of debt-induced stagnation. Salinas boldly challenged several political taboos: he put aside the PRI's history of anticlericalism by restoring relations with the Vatican, and ordered an end to six decades ofland reform, instead granting members of ejidos (communal farms) the right to obtain individual title to their plots. For these reforms, he secured the support of the PAN. In the most iconoclastic move of all, he challenged the deep-rooted anti-Americanism of Mexico's political leadership by opening negotiations for a free-trade agreement with the United States and Canada.

This whirlwind of economic modernisation attracted much praise abroad. But some of the reforms were less liberal (let alone 'neoliberal') than they seemed. Salinas left intact the state monopolies of oil and electricity, excluding energy as well as many services from NAFTA. Telmex, the telecoms company, was transformed from a public monopoly into a private one. Foreign banks were barred from the bank privatisation. The president relied on many of the institutions, levers of power and clientelistic networks of Mexico's corporate state. Private business was especially loyal. At a dinner in 1993 that would become infamous, Salinas sat down with two dozen of Mexico's richest businessmen, most of them beneficiaries of privatisations or other favours. He asked for $500 million for the PRI to fight the 1994 election. Most were happy to stump up their alloted $25 million.n Inflation was reduced partly through tht pacta, an incomes policy negotiated with business and with Fidel Velazquez, the general secretary of the Confederation of Mexican Workers (CTM), the main trade union. Under this arrangement, real wages halved in the decade to 1992. In that year, the CTM held its Congress in Mexico City's sports arena. It was an event worthy of the Kremlin's gerontocratic heyday. In front of a giant portrait of Salinas, scores of elderly union leaders sat in tiers on a podium, their heads protruding like coconuts in a shy. To well-orchestrated cheers, Velazquez was re-elected for an eighth consecutive six-year term at the age of 91. No vote was deemed necessary?3 In deference to Don Fidel, Salinas did not touch the restrictive labour laws.

Salinas did make a few gestures towards political modernisation. He set up a National Human Rights Commission. For the first time, the PRI surrendered its monopoly of state governorships, PAN victories being accepted in Baja California and Chihuahua. But in many other cases, Salinas would wait to see the strength of opposition protests. He sometimes intervened not to recognise an opposition victory but to force the 'winning' PRI candidate to resign, to be replaced by a presidential appointee. In all, he removed 17 governors in 14 of Mexico's 31 states?4 Salinas felt obliged to enact an electoral reform. This created a Federal Electoral Institute (IFE). Although nominally independent, it was still controlled by the interior minister, who chaired its general counciF5 The president could count on a pliant media, dependent on government money. Those he could not co-opt, Salinas coerced. Early on, he imprisoned the powerful leader of the oil-workers' union, ostensibly for corruption but in reality for having favoured Cardenas. The PRD complained that 250 of its activists were killed during Salinas's term. Officials continued to reject criticisms of the lack of political reform. 'There isn't a unique model for democracy,' Salinas insisted in an interview at Los Pinos, the modernist presidential complex in Chapultepec Park. 'What there is, is the requirement to respect freedoms and to allow equality of competition - that's what we're working on and that's what we're committed to.'76 A senior aide was more candid. Referring to the parallel between the government's economic reforms and the contemporaneous dismantling of communism in the Soviet Union, he said bluntly: 'The Soviet Union shows that it is not easy to do perestroika and glasnost at the same time. The worst of all worlds would be to be left with neither, and without a government or society that functions.' 77

Salinas also tried to rebuild the PRI's support among the poor. Migration to the cities and the growth of the informal economy meant that millions of Mexicans had slipped through the ruling party's corporatist net of peasant, trade union and profeSSional organisations. To reach them, Salinas created the National Solidarity Programme (Pronasol). Over his six-year term, this swallowed $18 billion, or around 40 per cent of total public investment. It handed out mOlleyfor building health clinics, school classrooms, rural roads and community development projects. In an attempt to bypass what officials saw as a sclerotic bureaucracy and cut corruption, the money went mainly to mayors, backed by newly created Solidarity committees. The programme was closely identified with Salinas himself. Under its auspices, almost every week he would leave Los Pinos and criss-cross the country. In elaborately choreographed trips by plane, helicopters and convoys of 4X4S, he would whisk to half a dozen events in a day, opening drinking-water schemes or health clinics in dusty villages and handing out property titles in urban shantytowns. Poverty experts criticised the programme for not reaching the poorest and for its lack of co-ordination - the new clinics might lack doctors for example. But above all it was designed to be politically effective. It made Salinas popular and helped the PRI to win comfortably a mid-term election in 1991.78

In the end Salinas over-reached himself. Even before the end of his term, his attempt to rebuild the PRI and its regime began to unravel. Some of his advisers talked of turning the PRI into the Solidarity Party. Together with his choice of Luis Donaldo Colosio, a gentle and loyal associate, as the presidential candidate for 1994, this stirred fears that Salinas would seek to remain in charge, breaking an unwritten rule of the system. Undercurrents of corruption eddied around the presidential family. All this exploded into the open with three (still-unresolved) murders. The elderly cardinalarchbishop of Guadalajara was killed by drug traffickers as he arrived at the city's airport. Then Colosio himself was shot dead by a lone gunman at a campaign rally in Tijuana - a political assassination of a gravity unmatched in Mexico since the murder of Alvaro Obregon by a Catholic fanatic in 1928. Months later, Francisco Ruiz Massieu, the PRI's general secretary and former husband of Salinas's sister, was the victim of a contract killing in the centre of Mexico City.

These murders were not the only violent challenge to political order. On 1 January 1994, the date that NAFTA came into effect, several hundred Indian guerrillas seized the colonial town of San Cristobal de las Casas in the southern state of Chiapas in the name of the previously unknown Zapatista Army of National Liberation (EZLN). As Carlos Fuentes, the novelist, put it, just when Mexico was moving closer to North America its rulers were forcibly reminded that parts of their country still belonged to Central America. Chiapas had never known democracy - the PRI regularly won elections there with more than 90 per cent of the vote. Unlike in the rest of Mexico, the state's ranchers and coffee hacendados had successfully resisted land reform, and now Salinas had ended any chance of it. Militarily, the Zapatista uprising would be brief. After more than a hundred people were killed as the army drove the rebels out of San Cristobal and other towns, Salinas quickly declared a unilateral ceasefire. Far from shoring up authoritarianism as some of its critics feared, NAFTA constrained the regime's ability to unleash repression because it focussed the outside world's attention on Mexico. Initially, at least, the Zapatistas attracted widespread sympathy, thanks in part to the semiotic skills of their leader, a ski-masked former university teacher of Marxist philosophy who styled himself Sub-Comandante Marcos.79 They would gradually be rendered irrelevant, in large part because of Marcos's inability to adapt to the arrival of democracy.

Days after Ernesto Zedillo took over as president on 1 December 1994, the cracked edifice of salinismo came tumbling down. The political turmoil of an electoral year had caused Salinas and Aspe to abandon their previous macroeconomic prudence. Monetary policy was loosened and the government began to finance itself with tesobonos (short-term dollar debt). The political violence gave investors the jitters: money was flying out of the country. When Zedillo took office on 1 December, outstanding tesobonos were equal to twice the value of the Central Bank's reserves.80 Once again, as it had at the end of each presidential term since 1976, political handover coincided with economic turmoil, pointing to the regime's post-Tlatelolco instability. Three weeks later, after a botched attempt to widen the exchange-rate band under which the peso had gradually devalued against the US dollar, Zedillo's government let the currency float. After weeks of drift, with the help of loans from the United States Treasury and the IMF, the government managed to stabilise the economy and recovery quickly followed. But the cost had been heavy. The exchange rate was stabilised by means of high interest rates, wage controls, and increases in VAT and in government-controlled prices. The economy slumped: GDP contracted by 6 per cent in 1995, but domestic demand fell by 14 per cent and would not recover its level of 1994 for three years. To make matters worse, many of the newly privatised banks faced collapse. Many of their new owners were inexperienced; in one or two cases they were corrupt. They lent recklessly, in some cases to insiders and/or in dollars. Having benefited from lax regulation under Salinas, they received generous treatment from Zedillo when they got into difficulties. In essence, they were allowed to pass to the government their non-performing loans, some of which were to their own directors. And the government offered unlimited deposit insurance. The Zedillo administration did belatedly tighten supervision and accounting standards, and lifted the ban on foreign commercial banks. By 2006 foreign banks accounted for more than four-fifths of the system. In all, the bank bailout cost the taxpayer around 20 per cent of GDP.81

The bailout reflected the government's weakness. It was 'the best deal we could get. We spent years battling to make the economic numbers add up and to restore confidence', according to Liebano Saenz, Zedillo's chief of staff.82

The new president was an unexciting technocrat, lacking Salinas's political skills. But he had some important qualities: he was honest and decent, he believed in economic reform and he was a democrat. 'The time has come for democracy to extend to all areas of life in our society,' he said in his inaugural address to Congress.83 Right from the outset, he said that he preferred the rule of law to the unwritten rules of presidential supremacy, that he would maintain a 'healthy distance' from the PRI and that he would not choose his successor.84 This amounted to a voluntary abdication of authoritarianism. He would later partially retreat from this, but it was far too late for any significant restoration of presidential power. Zedillo took two other crucial steps towards democracy. Within days of his taking office, Congress approved a judicial reform that created an independent and powerful Supreme Court. In 1996, after painstaking negotiation achieved consensus on the main points among the three main parties, the Federal Electoral Institute was reformed to become wholly independent of government, along with its sister organis-!!tion, the electoral tribunal. The government also pushed through a reform granting independence to the Central Bank. It took timid steps to loosen the state monopoly over energy, but beyond a few private companies building power stations these didn't amount to much in practice.

In February 1995, in the depths of economic turmoil, Zedillo broke another of the unwritten rules of the system: he ordered the arrrest of Raul Salinas, Carlos's elder brother, for the murder of his former brother-in-law, Ruiz Massieu. The murder investigation degenerated into a gothic farce. But, months later, the Swiss authorities froze about $130 million they found in secret bank accounts belonging to Raul, some opened with a false passport. Swiss officials claimed that some of this money came from the drug trade. There had been whispers for years that Raul had been enriching himself through embezzlement and influence-peddling. A federal investigation found that some of the money in the accounts had been transferred by Carlos Salinas while president.85 In 2005, Raul Salinas was released from prison on bail after an appeal court quashed his conviction for murder, but he remained under investigation in Mexico and France for illicit enrichment.86

Zedillo could restore Mexico's fortunes but not those of the PRI. If the 1982 debt crisis damaged its reputation for economic competence, this was destroyed by the 1994-5 debacle. As most Mexicans saw their living standards plummet, they were angered by the bailout of the billionaire bankers and by the revelations of corruption at the top. The PRI itself turned against the economic reforms, which had radically reduced the scope for political patronage. At a party convention in 1996 to shouts of 'down with neoliberalism' new rules were approved which required the party's presidential candidate to have held elected office - a changed aimed at disqualifying the reforming technocrats. In the mid-term election of 1997, for the first time the PRI lost its majority in the lower-house of Congress. Cuauhtemoc Cardenas gained partial retribution for 1988 when he was elected as the first-ever governor of the Federal District (the inner core of Mexico City), a post that had hitherto been filled by presidential appointment. In 2000, after 72 years in power, the PRI would finally lose the presidency.

 

Fox: Gridlocked Democracy

Vicente Fox was ideally equipped to end the rule of the PRI. A farmer who had been the manager of Coca-Cola’s Mexican operations, Fox came late to politics. In 1991 he was denied victory in an election for governor of the central state of Guanajuato by fraud; he won four years later and almost immediately launched a presidential campaign. His popularity obliged the PAN, a party of conservative lawyers, to choose this rough-edged businessman as its candidate. He was thick-skinned, determined and a natural media performer. His campaign was simple but devastatingly effective: he promised el cambia (‘the change’), but not adventurism. He appealed to democrats across the political spectrum.

On the face of things Fox’s victory seemed to set the seal on Mexico’s transition from authoritarian politics and an inward-looking state-dominated economy to an outward-looking, rivatized liberal democracy. But in many ways he turned out to be a disappointing president, partly because that transition was both more complicated and less complete than it appeared.87 Fox stoked expectations, promising more economic reforms and growth of 7 per cent a year, but was unable to deliver much of either. Just as he moved into Los Pinos, Mexico’s economy was hit by two blows from outside. In the United States the dotcom bubble burst, slowing industrial production on both sides of the border. NAFTA had helped Mexico recover swiftly after 1995, but it had tied the country’s fortunes ever more closely to those of the United States’ economy. At the same time, China joined the World Trade Organisation, marking the arrival of a powerful competitor to Mexico for footloose manufacturing plants. These twin blows caused three years of economic stagnation and the loss of some 700,000 jobs, most of them in the maquiladora (assembly) plants producing goods for export. The private sector responded, cutting costs. Although some maquiladoras, especially in low-value businesses such as textiles and toys, moved to China, Mexico continued to attract investment in higher-value goods, such as cars and electronics. Growth picked up in the second half of Fox’s term. But the economy continued to be held back by many vestiges of the corporate state. Labour productivity remained low, at only about a third of that in the United States. Despite NAFTA, much of the domestic economy was dominated by monopolies or oligopolies. Some were state-owned, such as Pemex, the grossly overmanned and inefficient oil firm. Others were privately owned, such as Telmex, the dominant telecoms firm. The cost of restricted competition was tangible: on average, telecoms costs were higher than in China or Brazil as well as in the United States; in 2006 Mexico had fewer telephones per head than Brazil although it rivatized eight years earlier. Electricity costs are disproportionately high too, despite big subsidies to the state-owned power companies.

NAFTA has tended to accentuate the gap between the prospering north of the country and the backward, poorer and more indigenous south. Public policies failed to bridge the gap. Although Fox promised an ambitious programme of infrastructure development (mainly roads and electricity) for the south, called Plan Puebla-Panama, not much happened. The government did nothing to encourage alternatives to subsistence farming nor to reform education so that it offered equality of opportunity. In some cases, this was not for want of trying. Fox sent reforms of energy, taxes and labour laws to Congress. But the PAN lacked a legislative majority, and the president lacked the political skills to fashion consensus. There was an underlying political problem. Unlike in Spain or even in Chile, the end of authoritarian rule was not accompanied by a concerted effort to fashion new democratic political institutions. Power has rapidly seeped away from the presidency – to state governors and mayors, to an independent media and above all to Congress and the party leaders. In principle, that is both democratic and positive. The problem is that there are no rules to encourage co-operation among these different actors.

Yet as he left power in 2006, Fox could point to some solid achievements. During his presidency Mexico enjoyed greater political freedom than perhaps at any other time in its history. He maintained economic stability: inflation dropped to just 3.7 per cent in 2006; in the second half of his six-year term, growth picked up, averaging almost 4 per cent a year. A few years of singledigit inflation transformed the financial markets with surprising speed, as Guillermo Ortiz, the Central Bank’s governor noted. In 2000, the credit-rating agencies began to award investment-grade status to Mexican government debt. In 1999, the maximum term of government bonds was one year, and most were either denominated in US dollars or linked to inflation. In October 2006, the government was able to issue a thirty-year peso bond whose yield was not linked to inflation. A conservative fiscal policy meant that in 2006, the government only absorbed 16 per cent of national savings, down from 80 per cent in 2000. That has helped everyone else borrow more cheaply. Bigger Mexican companies can now raise money cheaply with peso bonds of their own. The banks finally started lending again as interest rates came tumbling down. A re-organised government housing fund, together with bank mortgages, triggered a house-building boom. Across Mexico, new housing estates sprouted. A quietly expanding middle class saw tangible benefits from stability. At the same time, innovative social policy helped to tackle extreme poverty. The Zedillo government replaced Salinas’s Solidarity programme with a less politicised and more effective targeted anti-poverty scheme called Progresa. This gave a small monthly stipend to mothers provided they kept their children in school and took them for regular health checks. Normally each Latin American president feels the need to re-invent the wheel. But Fox kept Progresa, changing its name to Oportunidades, and expanded it so that by 2006 it was reaching 5 million families, or around a quarter of the total population.

 

Calderon By A Whisker

The presidential election of 2006 reflected the fine balance in Mexico between progress and frustration. The campaign was dominated by Andres Manuel Lopez Obrador, the candidate of the centre-left PRD. As governor of the Federal District, he kept himself constantly in the public eye, with new roads, non-contributory pensions for the elderly and a daily early-morning press conference at which he set the political agenda. He combined this practical action with lacerating criticism of Fox and of the rich and powerful in Mexico. He promised to govern for the poor, and railed against the bankers and businessmen who he said had benefited from crony capitalism. He slammed the economic policy of the past two decades as 'a failure' that delivered 'zero per capita growth' (in fact, per capita income did grow between 1983 and 2005 but at the unimpressive rate of around 0.5 per cent a year). He said he would maintain fiscal balance ('you can't have deficits') but implausibly said he would finance a big increase in public investment merely by cutting bureaucratic waste.88

For many months, as Lopez Obrador led the opinion polls, the only question in Mexican political circles was whether he would be a second Hugo Chavez or a second Lula. In reality, the answer was neither. He resembled Argentina's Nestor Kirchner in his profound lack of interest in the world beyond his own country; he took pride in not having a passport. His political mentor was Echeverria. Lopez Obrador had spent his formative political years in the PRI, leaving to join Cardenas in 1988. His detractors saw in L6pez Obrador a throwback to the PRI's authoritarian populism of the 1970S. In a country where politics was long dominated by backroom deals, Lopez Obrador was a politician of the public plaza in the tradition of South America rather than Mexico. He sometimes showed scant regard for the law, and two of his senior aides were implicated in corruption. However, when Fox's government tried to remove him from the presidential race by bringing criminal charges against him in 2005 for a minor violation of planning law by the city government, the effort rebounded. It was widely seen as disproportionate, politicised justice and merely boosted his popularity. But Lopez Obrador made mistakes of his own, such as insulting Fox and staying away from a first campaign debate. For all his political skills, he was a polarising figure who scared middle-of-theroad democrats. Many of them switched their support to Felipe Calderon, who had beaten Fox's own nomInee to be the candidate of the PAN. Though lacking in oratorial charisma, Calderon was a solid and well-prepared politician. Fairly or not, he portrayed Lopez Obrador as a 'danger to Mexico', a second Chavez; Fox and the country's top businessmen weighed in on his behalf.

When Mexico voted on 2 July, Calderon (PAN) won with 35.9 per cent of the vote against 35.3 per cent for Lopez Obrador (PRD), a margin of just 233,831 votes out of 42 million. The PRI's Robert Madrazo, an old-style political boss but an economic pragmatist, polled a meagre 22.2 per cent. So confident of victory had Lopez Obrador's campaign been that Manuel Camacho, one of his closest aides, wrote in an article published the day after the election that the voting had taken place 'in exemplary fashion' and that 'democracy is going to win'.89 Nevertheless, when the result was adverse, Lopez Obrador immediately cried fraud, though he never produced any plausible evidence. He demanded a vote-by-vote recount, even though two counts of the votes had produced a similar result. To get his way, he launched a campaign of 'civil resistance'. For seven weeks, his followers camped out in the Zocalo and along Reforma, Mexico City's grandest avenue. The electoral tribunal ordered a recount of 9 per cent of the ballot boxes - those in which Lopez Obrador's campaign claimed that most irregularities had occurred. But this only shaved 10,000 votes from Calderon's margin of victory.9o Even so, Lopez Obrador refused to concede defeat. 'To hell with your institutions,' he cried, calling Fox 'a traitor to democracy' and Calderon a usurper. He proclaimed himself Mexico's legitimate president.

But by then, most Mexicans had stopped listening to him. His actions in defeat seemed to prove right the fears of his detractors. His attempt to emulate Bolivia's Evo Morales and use street protests to topple an elected president failed. His followers did not make up the mass social movement he claimed. Talking to those camped out in Reforma, it was clear that many of them were clients of the political machine he had built while governor of the Federal District. There was much irony and little truth in his claim that the 2006 election was a repeat of 1988. The truth was that Mexico's independent electoral authorities passed a severe test in 2006, with only a few glitches. The irony was that many of Lopez Obrador's closest aides were, like him, former PRI officials who had been complicit in the fraudulent campaigns of the past. In the view of Hector Aguilar Camin, a historian, the protests of 2006 were those that the PRI didn't stage when it lost power in 2000. 'Alternation in power had happened very cheaply for us. It's the first protest against this young democracy, done by the ex-priistas of the PRD.' 91 It passed almost unremarked by Lopez Obrador that the PRD had secured its best-ever result in Mexico's Congress in the 2006 election. The party's six state governors, and many of its legislators, began quietly to work through the institutions he disdained, negotiating legislation with the new government.

The narrowness and disputed nature of his mandate meant that Calderon faced a difficult task in governing Mexico, let alone pushing through pending reforms. But he had certain advantages. Unlike Fox, Calderon was a party man through and through. Aged only 44 in 2006, he had much political experience, having headed the PAN's congressional caucus. A lawyer, he also had technocratic credentials, having studied economics and, at Harvard, public administration. He faced a more favourable economic situation than Fox had inherited (although once again a new government in Mexico took office with the US economy decelerating). Such was Mexico's financial strength that the peso and stockmarket sailed through the election and its aftermath without blinking. Even without further reform, Mexico's economy could grow at a steady 4 per cent or so over the next few years, according to Francisco Gil, Fox's finance minister.92 He drew a parallel with Spain, which like Mexico opened up its economy and cast off authoritarian rule. Like Mexico, Spain suffers from weak productivity but has achieved sustained economic growth by combining manufacturing exports to a large and rich neighbour (the European Union, in its case) with dynamic construction and tourism industries and a strong banking system. Spain, however, had stronger institutions and a more educated population than Mexico when it embarked on democracy. And Mexico needs to grow faster than Spain if it is to achieve a rapid reduction in poverty. Such is the lack of opportunity that each year during Fox's government some 500,000 Mexicans risked the increasingly hazardous border crossing to migrate to the United States. The task facing Calderon was to create a more dynamic economy by demolishing the remaining vestiges of the corporate state and to help to fashion more effective democratic institutions.

In the quarter of a century since the 1982 debt crisis, and especially in the past dozen years, Mexico has changed radically. It is a much more democratic, pluralist and open society than it was under Salinas, let alone under Lopez Portillo. Yet the economic reforms remained partial, and their success was only partial too.
 

1.     Visits in 2005

2.     Interview with Nicolas Eyzaguirre, finance minister, Santiago, 2005.

3.     Bosworth, Barry P, Dornbusch, Rudiger and Laban, Raul (eds) (1994), The Chilean Economy: Policy Lessons and Challenges, The Brookings Institution, Washington DC, p. 23.

4.     Dornbusch, Rudiger and Edwards, Sebastian, 'Exchange Rate Policy and Trade Strategy', in ibid., p. 81.

5.     Solimano, Andres, 'The Chilean Economy in the 1990S: On a "Golden Age" and Beyond', in Taylor, Lance (ed.) (1999), After Neoliberalism: What Next for Latin America?, University of Michigan Press, p. 115.

6.    Interview

7.    Lagos, Ricardo (2003), Conversaciones en el Camino, Ediciones B, Santiago, PP, 48-9.

8.    Speech to the Third Ministerial Conference of the Community of Democracies, Santiago, April 2005, reproduced in Lagos, Ricardo (2005), The 21st Century: A View from the South, First, London, p.55.

9.    Interview with Vittorio Corbo, Central Bank president, Santiago, January 2005.

10.  Financial Times, 6 May 2006.

11.  Angell, Alan, 'Democratic Governability in Chile', unpublished paper supplied to the author.

12.  Solimano, 'The Chilean Economy in the 1990s, p. 123; SalmonChile (undated), La Acuicultura en Chile, TechnoPress SA, Santiago, Chapter 1.

13.   Interview

14.   World Economic Forum, press release, 28 September 2005, Geneva.

15.   According to Ricardo Lagos, interview with the author, Santiago, January 2005.

16.   Ibid.

17.   Interview

18.   'Chile: Testing times for Michelle Bachelet', The Economist, 24 June 2006.

19.   Speech to the Community of Democracies in Lagos, The 21st Century, P.54.

20.   See Sola, Lourdes and Whitehead, Laurence (2006), Statecrafting Monetary Authority: Democracy and Financial Order in Brazil, Centre for Brazilian Studies, University of Oxford, Introduction pp. 1-11.

21.   Cardoso, Fernando Henrique (2006), A Arte da Politica: A Hist6ria que Vivi, Civilizayao Brasileira, Rio de Janeiro, p. 140.

22.   The term was coined by Guillermo O'Donnell. See Chapter 11, p. 283.

23.   Weyland, Kirk, 'The Brazilian State in the New Democracy', in Kingstone, Peter R and Power, Timothy J (eds) (2000), Democratic Brazil: Actors, Institutions and Processes, University of Pittsburgh Press, p. 40.

24.   Cardoso, A Arte da Politica, p. 108.

25.   Lamounier, Da Independencia aLula, P.258.

26.   Power, Timothy, 'Political Institutions in Democratic Brazil: Politics as a Permanent Constitutional Convention', in Kingstone/Power, Democratic Brazil, p. 21.

27.   Much of the political science literature on Brazil published in the second half of the 1990S was deeply pessimistic even as the country's prospects were being transformed. That was because it was based on fieldwork conducted during the 1980s or early 1990s.

28.    Cardoso/Winter, The Accidental President, pp. 175-7.

29.    Ibid., p. 180.

30.    Cardoso, A Arte da Politica, p. 141.

31.    Ibid., p. 208.

32.    World Bank (2006e), p. 140.

33.    Cardoso/Winter, The Accidental President, p. 167; Cardoso, A Arte da Politica, Pp,130-5.

34.    Lamounier, Da Independencia aLula, p. 205.

35.    Ibid., p. 213.

36.    'Brazil: Inactive Workers, Inactive Congress', The Economist, 27 June 1997; 'Reforming Brazil: Is it for Real', The Economist, 17 May 1997.

37.    Study by IPEA, a government-backed think-tank, cited in Cardoso, Eliana, 'Brazil's Currency Crisis: The Shift from an Exchange Rate Anchor to a Flexible Regime', in Wise/Roett, Exchange Rate Politics in Latin America, p.72.

38.    ECLAC/CEPAL, Panorama Social de America Latina, 2005, P.130. Some of this increase was gobbled up by pensions.

39.    Interview

40.    Cardoso, Eliana, Brazil's Currency Crisis, P.76.

41.    Cardoso, A Arte da Politica, PP.388 and 415.

42.    Cardoso, Eliana, Brazil's Currency Crisis, Pp.70 and 82.

43.    Cardoso, A Arte da Politica, PP.363-6.

44.    'Brazil 2015: A Reform Agenda', presentation by Armando Castelar Pinheiro, IDB, Washington DC, 4 October 2005.

45.    Cardoso, A Arte da Politica, pp. 12-13.

46.    'Brazil's Presidential Election: The Meaning of Lula', The Economist, 3 October 2002.

47.    This anecdote was told to the author by Julio Maria Sanguinetti, a former president of Uruguay.

48.    'Poor Man's Burden', Barry Bearak, New York Times Magazine, 27 June 2004.

49.    Having governed it for the best part of two decades, in 2004 the PT lost an election for mayor of Porto Alegre to Jose Foga<;:a, a PMDB member and supporter of Cardoso.

50.    'Brazil's Presidential Election: From Pauper to President', The Economist, 31 January 2002.

51.    Meeting attended by the author, London, September 2003.

52.    'Brazil: Love Lula if You're Poor, Worry if You're Not', The Economist, 30 September 2006.

53.    The Economist, 24 February 2006.

54.    Ibid.

55.    Palocci resigned after an aide admitted leaking details of the bank account of the caretaker at a house in Brasilia rented by several of the minister's former associates from Ribeiriio Preto. The leak was an attempt to smear the caretaker, who had contradicted the minister's testimony to a Congressional committee that he had not visited the house. See 'Corruption in Brazil: House Calls', The Economist, 23 March 2006.

56.    See Hunter, Wendy and Power, Timothy J (forthcoming), 'Rewarding Lula: Executive Power, Social Policy, and. the Brazilian Elections of 2006', Latin American Politics and Society.

57.    Data from Instituto de Pesquisa Economica Aplicada (IPEA), available at www. ipeadata.gov.br

58.    In March 2007 Brazil's statistics institute issued a new set of national accounts that measure the contribution of services to GDP more accurately. Under the old methodology, annual average growth during Lula's first term was 2.6 per cent, only slightly higher than in the Cardosa period. Where possible, this part uses the new GDP figures.

59.    World Bank (2006e), p.74.

60.    Cardoso, A Arte da Politica, p. 168.

61.    Thomas, Hugh (1993), The Conquest of Mexico, Pimlico, pp. 296-8.

62.    Krauze, Mexico: Biography of Power, p. 697.

63.    Poniatowska, Elena (1992), La noche de Tlatelolco, Ediciones Era, Mexico City, P·llO.

64.   The poem was written especially for a book of interviews with survivors prepared by Elena Poniatowska, a young journalist who would later become one of Mexico's best-known writers, and which when it was published in 1971 made the first dent in the regime's wall of silence concerning the massacre. Poniatowska, La noche de Tlatelolco, p. 163.

65.    Krauze, Mexico: Biography of Power, pp.736-7.

66.Ibid., p. 681. 67, Ibid., p.743.

67.    Preston, Julia and Dillon, Samuel (2005), Opening Mexico: The Making of a Democracy, Farrar, Strauss and Giroux, Chapter 4; Aguilar Camin, Hector (2004), Despues del milagro, 16th edition, Ediciones Cal y Arena, Mexico City, Chapter 1.

68.    Preston/Dillon, Opening Mexico, Chapter 6. In 1994, Arturo Nunez, the head of the IFE, admitted that the computer system had been forced to fail. See Dominguez, Jorge I and McCann, James A (1996), Democratizing Mexico: Public Opinion and Electoral Choices, Johns Hopkins University Press, PP.151-2.

69.    Interview.

70.    Preston/Dillon, Opening Mexico, p. 481.

71.    Congress covered by author. See 'Mexico: Ring In the Old', The Economist, 14March 1993.

72.    Preston/Dillon, Opening Mexico, p. 219.

73.    Gomez Tagle, Silvia, 'Public Institutions and Electoral Transparency', p. 89, in Middlebrook, Kevin J (2004), Dilemmas of Political Change in Mexico, Institute of Latin American Studies, London, and Center for US-Mexican Studies, San Diego.

75.    Interview with the author, Mexico City, July 1991.

76.    Interview with the author, Mexico City, July 1991.

77.    'Mexico: Salt of the Earth', The Economist, 19 October 1991.

78.    'The Clash in Mexico' and 'Mexico: The Revolution Continues', The Economist, 22 -January 1994.

79.    PrestonlDillon, Opening Mexico, pp. 245-50.

80.    Haber, Stephen, 'Why Institutions Matter: Banking and Economic Growth in Mexico', paper available at www.stanford.edu/-haber/papers; World Bank (2001), P·242.

81.    Interview with the author, Mexico City, September 2006.

82.    Preston/Dillon, Opening Mexico, p. 261.

83.    Rubio, Luis and Kaufman Purcell, Susan (1998), Mexico Under Zedillo, Lynne Rienner, Boulder, Colorado, p. 14.

84.    PrestonlDillon, Opening Mexico, P.305.

85.    Financial Times, 15 June 2005; El Pais, 26 June 2005. Raul Salinas claimed iri an interview with the Financial Times in 2005 that the money was an 'investment fund' that he was managing for a group of Mexican businessmen, but he gave no explanation as to why it was held in private Swiss accounts.

86.    The following paragraphs draw on Reid, 'Time to Wake Up'.

87.    Press conference attended by the author, Mexico City, May 2005; 'Mexico: Will the Real Andres Manuel Lopez Obrador Please Stand Up?', The Economist, 28 May 2006.

88.    'Triunfo ciudadano', Manuel Camacho Solis, El Universal, Mexico City, 3 July 2006.

89.    The tribunal criticised Fox and the businessmen for their campaign interventions, though it is hard to imagine these would have provoked comment in many other countries.

90.    Interview

91.    Interview

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