The Future of the Andean Region

Countries in the Andean region are undergoing an unprecedented period of political, economic, and social change. To examine these trends, on Tuesday, May 2, 2006, the Latin American Program hosted a seminar on "The Future of the Andean Region" with Marcelo Giugale, Director of the Andean Region at The World Bank, and Carol Wise, Wilson Center Public Policy Scholar and Associate Professor of International Relations at the University of Southern California. Giugale began by pointing out the need for greater understanding of the Andes, given the complexity of structural factors that shape current trends and the fact that news coverage of the region is often superficial and lacking in context. He identified three major trends that will occupy a new generation of political leaders in the region: 1) an irreversible process of political inclusion; 2) an irrepressible clamor for the better distribution of wealth; and 3) inescapable macroeconomic discipline that economic integration is bringing to the region.

Giugale noted the region's long history of political exclusion, indicating that only after World War II were literacy, language, gender, and property requirements for voting eliminated in most countries. The last 20 years has seen an enormous democratic opening, well beyond representative democracy to participatory democracy. The biggest symbol of this trend is the increasing number of indigenous leaders holding political office at the national and local levels. In addition, policymaking has come to involve more public consultation and participation. The most conspicuous process, he said, was decentralization, a process much deeper than "who spends what." Rather, decentralization has changed the function of the state in the Andes, making the political process more transparent and leaders more accountable to citizens. The result is that decision-making is slower and more cumbersome, but policies are ultimately more sustainable. Another indication of increasing political inclusion is the fact that the number of NGOs in the Andean region has doubled over the last fifteen years. Giugale cautioned that greater political inclusion also entails several risks, including avoiding overlapping expenditures and strengthening the institutional capacity of local governments. In light of the ways that the decision-making process has become more complicated, he said, political leaders should focus on a few main objectives.

Turning to issues of poverty and inequality, Giugale noted that 30 years ago, per capita income in OECD countries was three times that of the Andean region, whereas today it is six times greater than in the Andes. The region is also falling behind the rest of Latin America. Poverty and inequality have always been considered morally wrong, Giugale maintained, but increased focus on these issues stems from new evidence that they also hinder economic growth. In Bolivia, he continued, the upper quintile of the population averages $2,200 per year, while the lowest quintile only $60 per year. One and a half million Bolivians subsist on 16 cents a day or less, he said, helping to explain the popular enthusiasm for President Evo Morales' nationalization of the gas industry. Moreover, income inequality is sometimes not as bad as the inequality of access to services. Low social mobility coupled with high levels of political polarization increase the likelihood for conflict, he said.

Giugale identified three trends pulling the Andes towards greater equality and a decline in social tensions. First has been the collapse of fertility rates, from more than seven children per household to less than three. Second, a new appetite for the taxation of assets, particularly land and particularly at the municipal level, promises to provide a large source of revenue for governments. Finally, there is growing recognition that blanket subsidies, even to those who can afford to pay for services, redistribute wealth from the poor to the rich. Improved technology can help identify those who are poor in order to target subsidies to them.

Although less than one percent of world trade takes place in the Andean region, Giugale argued that these countries are headed towards greater economic integration. This trend is bringing greater macroeconomic discipline to Andean countries, improving the quality of private business environments, and reducing government corruption and red tape. Although competition from China hinders the development of certain Andean exports such as textiles and light manufacturing, he said, countries of the Andean region have the benefit of existing preferential access to the U.S. market as well as the possibility of concluding free trade agreements.

Carol Wise commented that the trend towards greater political inclusion is indeed positive and hopeful. She added, however, that this trend is not only a response to the history of exclusion in the region but is also a response to the failure to sustain economic reform and improve economic performance over the past twenty years. She argued that governments in the region need to "get serious" about reform at the micro level. She also added that the redistribution of wealth will require greater political will and the forging of a coalition for reform, not just economic integration. The macroeconomic discipline described by Giugale can be attributed more to modernizing influences than to integration, Wise argued. In fact, she pointed out that there is a lack of discussion and debate about the distributional benefits of free trade agreements with the United States.

During the discussion, Giugale added that the economic reform agenda referred to as the "Washington Consensus" was never intended to solve the problems of poverty and inequality. Rather, it was a mistake of the World Bank to view this set of reform policies as a substitute for progressive social policy and social assistance programs. He added that it is the fault of political leaders and the media for not explaining the benefits and shortcomings of free trade agreements with the United States as well as what would happen in the absence of such an agreement. Asked about strategies to reduce inequality, Giugale mentioned programs to reduce fertility; geographically-targeted, conditional cash-transfer programs; and subsidies for child care, to facilitate a second wage-earner in poor families.