Upon the discovery that a relative in South America has accumulated a huge amount of debt on several credit cards over years of under- and unemployment, I asked a Brazilian friend what he made of it. Easy, he said: Given the astronomical unemployment rate, lots of people must live beyond their means, so they use credit cards.
The problems at the “base of the pyramid” have been known a very long time. I bear them in mind in reacting to any news from Latin America, whether it’s politics, natural disasters, immigration, even tourism.
Recently the Inter-American Development Bank announced a 5-year initiative to extend financing in 6 “priority areas” to reach 360 million people, about 70% of the population, who live on less than $300 a month:
- Financial Democracy (going beyond conservative risk assessment for loans)
- Enterprise Compact (investments to create jobs)
- Basic Infrastructure (promote innovative technologies to increase access)
- Housing for the Majority (relieve inadequate and insecure housing)
- Digital Connectivity (increase digital literacy, lower access costs, improve ICT coverage)
- Identifying the Majority (I.D. cards, birth certificates)
The IDB has budgeted amounts for each priority area. For example, it will create a $1 billion lending program for small businesses. However, without knowing where the money will be spent, it is impossible to even speculate on its impact on any of the 26 countries in Central and South America and the Caribbean.
The government of each country is driving the bus, even if the IDB fills the tank. That’s the rub. Optimism is hard to come by. Read the IDB’s acknowledgments slowly, so your eyes don’t glaze over:
Years of economic reforms have failed to extend the benefits of a formal market economy to the majority of people in the region.
The human and economic costs associated with inadequate housing in the region are enormous… poor sanitation, contagious disease, domestic violence, and high levels of psychological stress.
Life outside the financial mainstream is expensive for the region’s majority. Families don’t have access to competitively priced financial services to save, borrow, leverage their assets, mitigate risk or transfer resources.
Corruption, fraud, and lack of integrity undermine economic and social development, and represent one of the greatest dangers to the effectiveness of the Inter-American Development Bank’s (IDB) development efforts.
If there were a single collective wish for improvement in any Latin American country, my bet is on Corruption. Everyone has stories; I heard about how patrol officers had to supply their own pencils in the wake of budget misappropriation. The IDB has attempted to address corruption and whistle-blowing, and established an independent unit, the Office of Institutional Integrity.
The pervasiveness of corruption explains much of why economic reforms have failed and private sector investors are skittish. Presidents elected on anti-corruption platforms can’t deliver. In Peru, the popularity of Alejandro Toledo (who has a Ph.D. in Economics from Stanford) plummeted despite modest improvements with his economic reforms. He was replaced this month by Alan Garcia, a previous president, whose opponent won 46% of the vote with the strong support of Venezuela’s socialist president, Hugo Chavez. In Bolivia, Gonzalo Sanchez strongly favored American investment, but was foiled by anti-American sentiment after the 2002 discovery of natural gas reserves. Sanchez needed plans with political viability. Economist Jack Powell, consultant for former Bolivian administrations, described the dilemma about one possibility
… the Bolivians might establish a government corporation to handle the gas. Most object that the government has always been corrupt — and I agree — and the “profits” would end up in the pockets of politicians.
Ultimately, Sanchez was replaced by Fidelista Evo Morales. Morales has no cure for corruption, either, but he nationalized resources with great drama.
The IDB is probably underappreciated for many projects, such as the new “Llama y Vive” campaign of hotlines to prevent human trafficking, a joint project of the Bank, the Ricky Martin Foundation, and the International Organization for Migration. However, it seems the Bank can do little more than go through the motions when it comes to the big stuff, a boy with his finger in a dike overwhelmed by Katrina.
The President of the Inter-American Development Bank, Luis Moreno, wrote with heaps of sugar this month in the Miami Herald about what Latin American governments can do. He suggested they eliminate the red tape and corruption which hinders small businesses, and modernize civil registries and land-titling systems. He also admired innovations in ways to loan money to the peons:
Latin America’s thriving microfinance sector is a leader in this trend. In addition to extending millions of small loans to people shunned by traditional banks, microfinance institutions are now offering debit cards, housing loans and money transfer services aimed at leveraging the remittances Latin American immigrants send home, which last year rose to $53.6 billion.
Con respeto, this “thriving microfinance sector” deserves scrutiny. Unless the employment rate increases along with a boost in income, credit card debt will merely increase exponentially: rent and doctor bills will take precedence. Enforcement of yankee-like consumer protection regulations is a dream.
Development is not a sexy subject, and I applaud anyone who has read this. We’re more familiar with what to do about corruption in this country. I don’t know the extent development aid from the U.S. comes with conditions. I’m certain of this:
Any frustration we have about our development aid funding off-shore bank accounts of corrupt politicians cannot begin to approximate the tired fury of the hapless populations by whom they were elected because the other candidate was even worse.
And this:
If anyone knew how to curb corruption, we’d know it by now.
