Everyone in Bolivia is focusing on the shift toward “participatory democracy,” from the previous “representative democracy.” Some embrace this change enthusiastically, while others view it warily. What is clear is that the traditional political parties have disintegrated here, as they have in many other countries in the Andean region, including Peru, Ecuador, and Venezuela.

It is also clear that new political parties are unlikely to arise anytime soon. Due to exclusion and corruption, the old system has been completely discredited. The MAS, which backs Evo Morales, is proud of its alternative organizational framework, based on linking various social movements and associations rather than forming a political party.

So where does this leave representation? Bolivia is institutionalizing a cycle which begins with protest marches, followed by negotiations with the government, and then ends in promises/governmental actions. These cycles are not necessarily new, as they played a key role in demand making in recent years. In fact, the inability of the governments of Sanchez de Lozada and Carlos Mesa to fulfill promises made during the negotiation phase led in large part to their downfall.

But with the election of Evo Morales, these dynamics have changed in meaning. Rather than arising from the opposition, these protesters and their organizations are now part of the ruling MAS, institutionalizing this protest cycle as the main means of interest intermediation. And, the nature of demands has changed. And rather than focusing on big issues of political and social inclusion, or of national redistribution of resources, these protests tend to focus on specific group or individual needs. For instance, this week the marches in La Paz involved teachers and sellers of used clothes, each wanting an improvement in their own economic situation.

This transformation of interest intermediation - due to the decline in political parties - concentrates power in the Executive branch, and in Evo Morales. Other moves by the government - including the undermining of the judiciary - have added to this effect. What Evo does with this power remains to be seen. It may allow him to address historic injustices and issues by bypassing old elite and interest group issues. But, it may also lead to new patronage networks, inefficiency, corruption, and in the end renewed frustration by those wanting to see real change in Bolivia.

 

I am in Bolivia this week. In my meetings so far in La Paz, one common theme is the general support for Evo Morales. While there is significant frustration with the government, interviews with representatives from indigenous groups, from the middle class, from academic institutions and foundations, and with foreign diplomats (not to mention taxi drivers), show a general support for Morales and for his position as President. Almost all see him as genuine, as representative, and as capable of negotiating with the various interests within Bolivia.

Instead, people place blame elsewhere. Significant blame is placed on Morales cabinet and on his closest advisors. Many see them as being too radical in some cases, or not radical enough in others (especially on issues of particular interest to each group). They are also blamed for centralizing power. Instead of following through on Evo´s promise of broad participation, many view his closest advisors as making top-down and closed door decisions, much like governments in the past. Some even see the undue influence of foreign advisors, particularly Venezuelan, on government policies.

The continued support for Evo, despite the limits on actual policy changes in the first year and half of his government, questions the alarmist views often seen in the press. While frustrations continue, and marches are frequent through the downtown of the capital, there isn´t a sense here (at least in La Paz), of crisis or real unrest. That said, a few people see this as the lull before the storm, which will occur when the real negotiations happen (or more likely don´t happen in their view) within the Constituent Assembly, which is currently scheduled to conclude their process in August.

The one area of real triumph for market-oriented reforms in Latin America was inflation. Unlike the uneven record on poverty, inequality, and economic volatility, structural adjustment and austerity programs of the early 1990s ended high and hyper inflation. These programs brought the Latin American average from 235% per year in the early 1990s to less than 8% by the turn of the century. Low and steady inflation has been a crucial element for attracting both foreign and domestic investment, increasing economic production, and encouraging the economic growth of the last several years.

But heterdox economic policies - reminiscent of Sarney’s Brazil, Alfonsin’s Argentina, and Garcia’s Peru (the first time around) - have reemerged. In both Argentina and Venezuela, the Kirchner and Chavez governments are using wage and price controls on basic goods as key parts of economic policy. Venezuela has gone a step further to reintroduce public control and management of “key” industries, including telecommunications, oil, and now perhaps steel and the banking sector. These policies are bringing back worries of inflation and leading to shortages in basic goods.

Venezuela’s inflation for 2006 topped 17%, the highest in Latin America. Most expect it to surpass 20% this year. Argentina too has seen increasing inflation, from a negative rate in the late 1990s to 10% last year. As worrisome, Kirchner fired the head of the national statistics agency, INDEC, briefly replacing her with a more malleable political appointee until public clamor forced the promotion of a INDEC senior employee.

Shortages in these economies are as important, and hamper both consumer-led and manufacturing-led growth. A recent Wall Street journal article argues that Chavez’s threat to nationalize the steel and banking industries has as much to do with the issue of shortages as with nationalism. News articles, as well as personal conversations, show that shortages and economic bottlenecks are again appearing in Argentina. These mismatches are hampering growth, not to mention the quality of life of individuals within the country.

Poverty, inequality, and equal opportunity are key issues for the future of Latin American nations. Government programs to directly improve the health care, education, and resources of the poor are important and laudable. But, these governments should not overlook the dire effects of inflation on poverty and inequality. Inflation hits the poor the hardest. They are the ones least likely to receive compensatory pay raises, and are those unable to hedge their savings in indexed accounts or abroad. High inflation will wipe out any benefits of direct assistance programs, leaving individuals certainly no better off and most likely in a much worse situation. This means that as governments are designing programs for the poor, they need to include measures to keep inflation low – be that independent monetary policy, controlled deficits, and better financial regulation. Only with this combination will governments be able to truly help those at the bottom of the pyramid.

A quick note to readers: this blog will be undergoing some design upgrades in the coming days. If something looks different or temporarily broken, that’s why. Posts and comments will continue to display and work while we do this even if the layout looks different. Thanks for your interest and comments in the meantime.

Yesterday Mexico’s microfinance group Compartamos, backed by Acción International and the IFC, went public on the Mexico stock exchange. Where once only the largest companies and wealthiest elites had access, credit markets are now increasingly receptive to middle and even lower class Mexicans. The fantastic growth of mortgage-backed security industry in Mexico since 2000 has made house and even car financing increasingly available to the middle class. Government policy has pushed these changes, but it has also come from the market itself – specifically the quest of Mexico’s internationally-owned banks to develop new customers and new profits.

These banks have not reached out to Mexico’s lower classes, in large part because Mexico does not have laws like the U.S. Community Reinvestment Act, requiring lending in lower income areas. Instead, separate financial institutions are reaching out to the lower classes. These include microenteprise oriented banks (like Compartamos) as well as more traditionally oriented financial institutions like Banco Azteca (tied to Ricardo Salinas Pliego’s Elektra stores).

The combination of mortgages and microenterprise in Mexico means a vast increase in access to credit. This is important for Mexico’s future growth, and for addressing issues of inequality, poverty, and unequal opportunity. But, access to money is not Mexico’s only problem. Both of these new credit markets need substantial regulation in order to be both effective and sustainable. Credit to the middle classes is not an entirely new phenomenon. The mortgage and car loan market boomed in Mexico in the early 1990s, only to be devastated by the 1994 peso crisis. In fact, these loans represented a large percentage of the subsequent US$550 billion FOBAPROA government bail out of Mexico’s banks.

Mexico is unlikely to undergo an economic shock as severe as the 1994 crisis. The peso now floats, and government finances are more balanced and transparent. Financial regulation too is better – but still not strong enough. Imagine addressing the turbulence of the U.S. sub-prime mortgage market without the solidity of the U.S. Federal Reserve. Mexico will hit economic bumps at least as (and likely much more) serious than what the United States is now facing, and its current financial institutions are not well enough prepared. For Mexico to support both the microfinance and mortgage finance markets, increasing the strength and independence of its financial regulatory structures is key. Only with these institutions in place will the new found access to credit allow Mexico to grow and to flourish.