The great leap southward

Canadian mineral exploration companies have historically thought of Latin America as their turf. It was the juniors of Vancouver and Toronto that made many of the discoveries there that are today productive mines.

So it’s not surprising to see Canadian companies crowding back to Latin America now that exploration money is easier to raise, and gratifying to see that most Latin Americans seem to be welcoming the explorers back. But it is useful, as a note of caution, to look at the contrast between Latin America at the time of the last mineral exploration boom and Latin America today. The comparisons are not all flattering.

In the mid-1990s, things were looking up in most of the region. The government of Rafael Caldera in Venezuela was restoring civil rights after a period of unrest; in Brazil the government of Fernando Cardoso had come to power with a mandate to strengthen the economy and stamp out corruption; in Argentina the electorate had returned the government of Carlos Menem to power in an endorsement of fiscal prudence and openness to investment; the United States and the International Monetary Fund had bailed out the Mexican peso, and the government of Ernesto Zedillo had begun work on economic reforms. Most of all, Latin America, which had turned inward for most of the century, was opening to the world.

And the world liked it: with a couple of exceptions, economies from Mexico to Chile grew faster than they had in decades. And economic expansion walked beside political liberty: the “strongman” style of government disappeared, even in its Paraguayan redoubt.

Today, as a consequence of hard economic times, many countries in South America seem to be turning their backs on the global economy. In Brazil, the Workers’ Party under Luiz Inacio Lula da Silva came to power in 2003 at the head of a left-wing, anti-globalization movement. The economic turmoil in Argentina through 2001 and 2002 sank a succession of interim governments, leaving a left-leaning Peronist, Nestor Kirchner, in power.

Up to now, both of those governments had acted responsibly, without wholesale economic changes. Kirchner, especially, had taken on corruption in government and sought to bring the architects of the country’s “dirty war” of the 1970s to justice.

Not so South America’s other populist, Hugo Chavez Frias of Venezuela. When he is not simply behaving like a superstitious rube, Chavez is systematically destroying the rule of law in Venezuela, a country where, over the last century, respect for constitutional government had grown deeper roots than in many other parts of Latin America.

If Venezuela sees a breakdown of civil society (the real kind, not the parade of pressure groups and vandals that has co-opted that name), the consequences for South America could be disastrous. Most progress in those societies depends on narrowing the gap between the very rich and the very poor, and on developing an educated, prosperous, and politically engaged middle class. That will not happen unless people can count on property rights, political liberty, and the rule of law.

And there are worries now that the old style of government-controlled economic development may be coming back, which would spell disaster for the financial position of South American governments. The governments of Argentina and Brazil have agreed to present a united front in negotiations with the International Monetary Fund over the Fund’s continued maintenance of their debt. Argentina went so far as to threaten to hold back a scheduled loan service payment if it weren’t allowed to borrow more. The Silva government, which has been economically prudent up to now but which does contain enough old revolutionists to upset the table if matters do not go their way, is seeking the IMF’s leave to spend on large infrastructure projects off the government’s balance sheet.

The fear is that the old profligate ways of government — buying votes and selling favours — may be back in South America’s two largest economies, and that the good habits of the ’90s may be lost. If that happens, the export industries, such as mining, may well be the first to be hit up to cover the government’s fiscal needs, which will hurt Latin America as a destination for mining investment. And that is the least of the evils: let a Latin American government try for nationalization, and watch the tap dry up instantly.

The countries that are sticking to the program — Chile, as always, but also Mexico, Peru, Ecuador, and the countries of Central America — are the ones most likely to earn foreign investors’ trust over the next economic cycle. It is good to see mineral exploration investment turning up again in Latin America. It will be best to see discriminating and prudent investment.