and gas value-added continued to grow as a consequence of ever-increasing
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RUSSIA'S SHARP ELBOWS
output and/or ever-increasing prices. But oil and gas output is ultimately
constrained by geology, and prices go down as well as up. Production from
oil and especially natural gas reservoirs decays at a rate that requires a
never-ending stream of new wells to keep production constant, not to mention
rising. Without endless price increases, flat oil and gas output implies
stagnant value-added per worker. Oil and gas investment has slowed in recent
years; a stagnant standard of living could result. To be sure, to counter
that risk, the Russian government is using some of its oil and gas revenues
to directly or indirectly finance acquisition of nonenergy productive assets.
The list is long—steel, aluminum, manganese, titanium, tankers, and aircraft.
But these are largely technologies originally developed a century earlier.
Moreover, these industries are poised to serve as "national champions"
rather than profit-maximizing organizations. A Russian presence at the cutting
edge of twenty-first-century technologies has yet to be felt, although
President Putin and his advisers announced ambitious plans in 2005 for
special, albeit state-controlled, technology zones.
T
T
he sharp fall in the value of the ruble following Russia's collapse into
bankruptcy in 1998 forced the conversion of a grossly uncompetitive
economy built up under generations of central planning into a marginally
competitive one. With output per hour so low across Russia's vast territorial
expanse, continuous shedding of grossly overmanned factories brought many
industries to the margin of international competitiveness. Russia's substan
tial pent-up demand for consumer goods, combined with the possibilities
of large foreign investment, would no doubt have propelled consumer goods
output, if only investors had been able to count on ownership rights.*
Despite defined codes, property rights in Russia remain tenuous. In recent
years the Duma has promulgated major pieces of legislation to support
the rule of law. And the formal legal structure that rules today's Russia
is a marked improvement over the black-market economy of the early
1990s. It is one thing, however, to change the law; it is quite another to enforce
the new rules. Putin used selective enforcement of new or existing
*A markedly "overvalued" ruble, of course, would doubtless inhibit such investments.
331
THE AGE OF TURBULENCE
statutes to take government control of energy assets. This selective enforcement,
rather than any shortage of new rules, is the problem. There is little
difference in legal certainty between a nation whose laws inhibit individual
rights to property and one in which full legal rights are selectively enforced
according to political priority. A right selectively enforced is not a right.
Civilized societies have built up a vast set of cultural imperatives and
conventions governing people's interactions with one another and the state.
Very few are written down, and most of us are not fully aware of the extent
to which societal forces, religion, and education direct even the minutest of
our choices day by day. To be sure, our legal system is also based on these
values, but of necessity in only general terms.
Thus, a nation such as Russia may rewrite its legal code, but to reorder
the cultural code is a task that will span years, if not generations. Consistent
with Gorbachev's reports of his discussions with Putin, this may explain,
but scarcely sanctions, the authoritarian thrust of recent Russian politics. In
Russia if the "system" is not working, you tighten the political reins by
eliminating political pluralism and the messy democratic process that drives
it. Stability and political calm are highly valued over the seeming chaos of
highly competitive markets for goods and services or the democratic battles
for political power.
Capitalism, the engine of material well-being, thrives best with competitive
politics. Authoritarian rule does not offer the necessary safety valve
that in a capitalist society makes it possible to resolve disputes peacefully.
The global economy—which must move forward if the world's standards
of living are to continue to rise and poverty to retreat—requires capitalism's
safety valve: democracy.
R
R
ussia is destined to play a role in the further evolution of global capitalism.
Whether that role will be limited by a slow-growing domestic
economy sapped by Dutch disease, and a suboptimal allocation of capital
resources so typical of authoritarian regimes, will be determined over the
next couple of decades. Certainly, to date, Russia appears to have weathered
the Dutch disease more like a developed nation than like a developing one.
So I would never count Russia out. As a graduate student, I was always im
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RUSSIA'S SHARP ELBOWS
pressed by the significant proportion of major mathematical insights footnoted
with Russian names. Such a culture, I thought at the time, deserved
a far more sophisticated economy than the Soviets were able to produce.
Modern Russia has another shot at economic eminence. Much depends on
whom Putin anoints as his successor. With its energy and military assets,
Russia will be a major player on the world scene for decades ahead. Yet it
is far too soon to conclude what type of player it will be.
333
SEVENTEEN
LATIN AMERICA
AND POPULISM
P
P
edro Malan, the finance minister of Brazil, sat across the table from
me at a December 1999 meeting in Berlin. He was typical of the
many highly competent Latin American economic policymakers
who attended that first meeting of the Group of Twenty an organization of
finance ministers and central bank governors that had been put together
after several tumultuous years in global finance. While we already knew
one another, establishment of the group was seen as a way to help make
sure that emerging-market countries were fully involved in discussions of
global economic developments.*
As central banker in 1994, Malan, under the leadership of Brazilian
president Fernando Henrique Cardoso, was one of the architects of the
Piano Real, which successfully brought the nation's roaring inflation to a
halt after it had surged more than 5,000 percent during the twelve months
between mid-1993 and mid-1994. I greatly admired Pedro. But I couldn't
*The G20 finance ministers and central bankers include the monetary authorities of the G7
nations (Canada, France, Germany, Italy, Japan, the United Kingdom, the United States),
twelve other countries (Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia,
Saudi Arabia, South Africa, South Korea, Turkey), and the European Union.
LATIN AMERICA AND POPULISM
let go of a nagging question about the country: How could an economy be
so mismanaged as to require so drastic a reform? Even Cardoso himself
now says, "When the job fell to me, who in their right mind would have
wanted to be president of Brazil?"
More broadly, how did Latin America bolt from one economic crisis to
another, and from civilian to military rule and back, in the 1970s, 1980s,
and 1990s? The simple answer is that, with too few exceptions, Latin America
had not been able to wean itself from the economic populism that had
figuratively disarmed a whole continent in its competition with the rest of
the world. I was particularly distressed by evidence that despite the indisputably
bad economic outcomes of populist policies undertaken by almost
all Latin American governments at one time or another since the end of
World War II, these results had not seemed to dampen the impulse to resort
to economic populism.
Clearly, the twentieth century was not kind to the United States' southern
neighbors. According to the eminent economic historian Angus Maddison,
Argentina began the century with a real per capita GDP greater than
that of Germany and almost three-fourths that of the United States. By the
end of the century, however, Argentine per capita GDP had declined to
half or less of those of Germany and the United States. Mexico's, during the
century, fell from one-third to one-fourth of U.S. per capita GDP* The
economic pull of its northern neighbor was not enough to avert the slide.
During the twentieth century, the standards of living of the United States,
Western Europe, and Asia each rose almost a third faster than those of
Latin America. Only Africa and Eastern Europe did as poorly.
The dictionary defines "populism" as a political philosophy that supports
the rights and power of the people, usually in opposition to a privileged elite.
I see economic populism as a response by an impoverished populace to a
failing society, one characterized by an economic elite who are perceived as
oppressors. Under economic populism, the government accedes to the demands
of the people, with little regard for either individual rights or the
economic realities of how the wealth of a nation is increased or even sustained.
In other words, the adverse economic consequences of the policies
These per capita GDPs are all reported in real terms.
335
THE AGE OF TURBULENCE
are ignored, willfully or inadvertently. Populism is most evident, as one
would expect, in economies with high levels of income inequality such as
in Latin America. Indeed, inequality in all Latin American economies is
among the highest in the world, far greater than in any industrial country
and, notably, higher than that of any of the economies of East Asia.
The roots of Latin American inequality lie deep in the European colonization
that, from the sixteenth through the nineteenth centuries, exploited
slaves and indigenous populations. Its remnants today are to be
seen, according to the World Bank, in large racial disparities in income. As
a result, Latin America was fertile ground for the emergence of economic
populism in the twentieth century. Grinding poverty exists side by side
with economic affluence. The economic elites are invariably accused of using
the power of government to pad their own money belts.
The United States is mistakenly perceived to this day to be a prime
cause of economic misery south of its border. For decades, Latin politicians
have railed against American corporate capitalism and "Yankee imperialism."
Particularly nettlesome to Latins has been a century of U.S. economic
and military dominance and the use of "gunboat diplomacy" to assert
American property rights. President Theodore Roosevelt in 1903 went a
step further, abetting a revolt that detached Panama from Colombia, after
Colombia refused permission for the United States to build a canal through
Panama. It is no wonder that Pancho Villa became a hero to Mexicans. Villa
had been terrorizing American settlements on the border, and an extended
U.S. military incursion into Mexico in 1916 (led by General John Pershing)
failed to apprehend him.
The broader Latin response was best captured by Lazaro Cardenas's
act of defiant anti-Americanism that propelled him to become possibly the
most popular Mexican president in the twentieth century. In 1938, he expropriated
all foreign-owned oil properties, mainly those of Standard Oil of
New Jersey and Royal Dutch Shell. His action had dire long-term consequences
for Mexico.* Yet Cardenas is remembered as a hero, and the family
*Petr6leos Mexicanos (PEMEX), the government-owned oil monopoly successor to those foreign
firms, is faltering. Unless the company obtains heretofore prohibited foreign assistance in
deepwater drilling, its aged reserves will decline.
336
LATIN AMERICA AND POPULISM
name, almost alone, fell just short of electing his son Cuauhtemoc to the
presidency of Mexico in 1988.
Since the end of World War II; indeed going back to Franklin Roosevelt's
Good Neighbor Policy American foreign policy has made attempts to improve
our negative image. Moreover, most objective analysts, I suspect, would
credit postwar U.S. investment as an overall contributor to Latin America's
prosperity. But history hangs heavy in the region. The beliefs that pass from
one generation to another, a society's culture, change very slowly. Many
twenty-first-century Latin Americans, in my experience, continue to rail
against the United States. Venezuela's Hugo Chavez in particular has
worked assiduously to fan anti-American feelings.
Economic populism seeks reform, not revolution. Its practitioners are
clear about the specific grievances to be addressed, but its prescriptions are
vague. Unlike capitalism or socialism, economic populism does not bring
with it a formalized analysis of the conditions necessary for the creation of
wealth and rising standards of living. It is far from cerebral. It is more a
shout of pain. Populist leaders offer unequivocal promises to remedy perceived
injustices. Redistribution of land and the prosecution of a corrupt
elite who are allegedly stealing from the impoverished are common curealls;
the leaders promise land, housing, and food for everyone. "Justice" is
also coveted and is generally redistributional. In all of its various forms, of
course, economic populism stands in opposition to free-market capitalism.
But this stance is fundamentally wrong, and is based on a misconception of
capitalism. I and many others, both inside and outside the region, would
argue that economic populists have a better chance of achieving their goals
through more capitalism, not less. Where there has been success—where
living standards for the majority have increased—more open markets and
increased private ownership have played a crucial part.
The best evidence that populism is primarily an emotional response
and not one based on ideas is that populism does not seem to recede in the
