Document of Fernand Braudel Institute of World Economics Associated with Fundação Armando Álvares Penteado N. 34 2004

Norman Gall is executive director of the Fernand Braudel Institute of WorldEconomics and editor of Braudel Papers. His photographs from four decades ofresearch on Latin America illustrate this essay, prepared for the internationalconference on "The Future of Democracy in Latin America," organized by theBraudel Institute and the Fundação Armando Álvares Penteado (FAAP).

Latin America's Struggling Institutions

Is Democracy Threatened?Norman Gall

Special Edition

To Market, El Alto Airport, La Paz, Bolivia, 1985.

Latin America is one of theworld´s privileged regions, withabundant resources in proportionto population. It has plentifulenergy suppliea; few ethnic,religious or linguistic conflicts,and is far from the main areas ofinternational tension. Democracyin Latin America was supportedby a favorable internationalclimate fostered since the 1970s,yet the advantages of democracyare reduced by the weakness ofinstitutions. But electoral systemsin Latin America have expandedand shown resilience after endingchronic inflation in recentdecades, despite the weakeningof political parties – a worldwidetrend– and the mediocrity ofpolitical leadership.

I have been engaged in reportingand research on Latin Americafor the past 43 years, with lots offield work in remote regions.There is much talk of retrocesso (going backwards), but the real retrocessolies in the denial of progress, a denial that has become a common featureof political and economic discourse that undermines the legitimacy ofevolving institutions. Societies have been modernizing much faster thanpublic institutions. For this reason, I will suggest three priorities inpublic policy:

• Increase the capacity of people to manage complex societies bycreating centers of excellence in education.

• Make political processes more representative and accountable.• Expand tax revenues to sustain modern government and finance

public investment.

This essay, prepared for an international conference on democracycommemorating the 16th anniversary of the Fernand Braudel Instituteof World Economics, will argue that the quality of human organizationto be achieved from investments in human capital and the strengtheningof institutions will go far toward shaping the future of democracy inLatin America. (For our conference program, see www.braudel.org.br).

1. The Challenge of ProgressThe challenge faced by these democracies today lies in the mediocrity

of their economic and institutional performance. The main obstacles tofurther advance lie in (1) low levels of taxation (except in Brazil, whichspends wastefully) that prevent them from financing the operations ofmodern government without resorting to heavy borrowing and chronicinflation, and (2) the maturing of their economies as a result ofurbanization, imposing burdensome maintenance costs with little chancefor improving productivity at present levels of organization and public

education. A new economic model is emerging, which demands a newpolitical strategy. The future of democracy will be influenced by thequality of purpose and creativity with which these difficulties are faced instriving to sustain economic stability and broadened opportunity.

Weak Public InstitutionsIs democracy threatened? Not immediately, but weak public institutions

could undermine the broad gains of modernization. The future ispromising if democratic institutions can be strengthened in comingdecades to overcome failings in systems of justice, public security,infrastructure and economic regulation. These are long-term undertakingsto meet needs that are widely recognized. While not overlooking theseneeds, this essay seeks to outline ways to improve the political mechanismsand provide the skills needed to sustain these long-term efforts. Themain uncertainties facing these efforts involve novelty and persistence.As Thomas Mann argued in The Coming Victory of Democracy (1938): “Theadvantage, or the apparent advantage, of the tendencies that are hostileto democracy is, above all, the charm of novelty -a charm to whichhumanity shows itself highly susceptible.”

The United Nations expects Latin America to enjoy moderatedemographic increase over the next half-century, suffering neither fromthe rapid aging and population losses foreseen for Europe nor the worstravages of the AIDS pandemic and civil wars that already are causingdramatic mortality surges in Africa. Meanwhile, the bulge in Latin

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America's young adult population (ages 15-29) ismoving up the demographic pyramid, having peakedin the 1980s. In coming decades, the share of youngadults in total population will fall from 28% in the1980s to 19.7% by 2050, reducing the pressing demandfor jobs seen almost everywhere today. A critical testfor Latin American democracies will lie in their capacityto make successful investments in human capital thatwill enable them to reduce inequality and to benefitfrom their strategic advantages in physical resourcesand population dynamics. The dangers and deficienciesexposed so far by the democratic process cannot cloudits benefits. They are: (1) greater freedom, (2) moreopportunities for human development and (3) moreleverage by most citizens in choosing politicalleadership and in deciding government policy.Throughout Latin America today, there are few placeswhere rulers are not chosen by free elections, wherepolitical debate is suppressed and where citizens feararbitrary actions by the security forces. But problemsof scale and credibility in the democratic process havenot been overcome, although the organization ofnational states has broadened horizons as never beforein human experience, thanks to technological advancesthat have penetrated widely.

Where Has All the Progress Gone?Denials of progress often appear in studies of

contemporary inequalities, either between nations orwithin the same society, that disregard the progressmade by poor people over a time line of several decades.More and more, this denial is incorporated into theculture of international agencies under pressures fromNGOs that have spawned an industry of denunciation.“Catastrofismo pays in the economics profession,” saysa World Bank veteran of many years of work on LatinAmerica. “No Latin American economist will say thatthings have improved vastly, even where they have.Nobody will listen to them. Being a prophet of gloomand doom, on the other hand, pays off handsomely.This is vicious, as it fans the flames of populism.” Atarget of all this scolding is the grotesquely misnamed“Washington Consensus,” which was no more or lessthan advocacy of a return to economic fundamentals toprovide a more solid base for progress by overcomingchronic inflation and restructuring the deficit-riddenpublic sector. Most staff members of internationalagencies lack the field experience that would enablethem to recognize and validate this progress.

Over the past half-century the progress has beenenormous. Since 1950 the population of Latin Americaand the Caribbean has more than tripled, while life-expectancy at birth rose from 51 to 69 years and infantmortality fell by more than 70%, from 126 to 36 per1,000 live births. Literacy and school enrollments haveexpanded hugely, although the poor quality of instructionwastes a large part of public investment in education.Improved transportation enables poor people to migrate,visit and trade over long distances. Near-universal accessto radio and television provides them with entertainmentand information never available to previous generations.Expansion of electricity grids enabled millions of familiesto buy refrigerators and other domestic appliances thatimproved food preservation and preparation, enhancingnutrition and reducing household drudgery. The spreadof cheap cell phones over the past decade developed thelogistical capacity and productivity of low-incomepopulations, especially in big cities. All theseimprovements have strengthened the vocation fordemocracy. Nevertheless, there persist classic problemsof distributing power and benefits between the One, theFew and the Many that have bred tensions in civilizedcommunities since ancient times. (See article on page 5.)

In a climate of slower growth in the world economy,Latin American democracies must address theirinstitutional problems more purposefully to providebroader opportunities for the undeveloped talent thatabides in their populations. These institutional advanceswould strengthen democratic practice and open newpossibilities for creation of wealth. Research oninstitutional development recently has become a growthindustry at universities and international agencies suchas the IMF and World Bank, with many platitudes butfew practical results.Modern research has failed toadvance beyond the simple truths stated by AdamSmith in The Wealth of Nations (1776):

Commerce and manufactures can seldom flourish long in anystate which does not enjoy a regular administration of justice,in which people do not feel themselves secure in the possessionof their property, in which the faith of contracts is not supportedby law, and in which the authority of the state is not supposedto be regularly employed in enforcing the payment of debts fromall those who are able to pay. Commerce and manufactures, inshort, can seldom flourish in any state in which there is not acertain degree of confidence in the justice of government.

“Reform Fatigue”Latin American republics soon may be afflicted by

“reform fatigue” if they fail to establish clear prioritiesin seeking justice and stability. Backward institutionsoften are entrenched in perverse incentives. We defineperverse incentives as the devices of law and customrewarding behavior that undermines the stated purposeof institutions. The crowded agenda of the 1990s putforward “first generation” and “second generation”reforms. The “first generation” reforms got rid of chronicinflation by strengthening public finances and monetarypolicy, opening economies to international trade andprivatizing state enterprises, many of whose losseswere diverting government resources from productivepublic investment. Huge budget deficits andhyperinflation may be a thing of the past (one hopes),but low investment and dismal public services are not.

Several “second generation reforms” have beenproposed and widely discussed, creating a congestedlegislative agenda in the fields of economic regulationand reorganization of government services in publicsecurity, education, health, the judiciary, taxation andpensions. These “second generation reforms” are verybroad in scope, involve detailed political negotiationsand remain controversial in their approaches and finalgoals. With benign aims, they tend to overload thepolitical system and threaten entrenched interests whilelacking the urgent public support that drove the struggleagainst inflation over the past two decades. We need tonarrow the agenda. This is why policy proposals outlinedlater in this essay will focus on education, politicalorganization and taxation in order to stress the issuesthat are most urgent and neglected.

Freedom and Wider HorizonsThe gains of poor people became clearer to me earlier

in a recent trip to Bolivia and Peru, revisiting placeswhere I did field research in the past. In 1970 and againin 1973, I conducted research on Peru’s land reform andeducation reform at the remote Hacienda Lauramarca,along the dirt road that crosses the barren mountains ofthe Department of Cuzco and slowly descends to thejungle outpost of Puerto Maldonado, two days’ journeybeyond. I saw “a gray-green feudal domain stretchingover 200,000 acres of rolling, windy puna of grass andstubble and glacial stone [with] a primeval and intricateconfusion of stone fences, each defining the Indians’subsistence plots.” The peasants had managed to buildseven schools, irregularly served by government

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Marajó Island, Amazon River Delta, 1979.

teachers. The schoolhouse at Mallma, at theeastern edge of Lauramarca, was “a sagging,whitewashed adobe structure with two tinywindows and a thatched roof, dark and dampand windy for most of the year,” near “the whiteslopes of Mount Ausangate, 21,000 feet high,which holds all Lauramarca in its spiritual andecological dominion. According to the Indians,the white mountain is a god who has abandonedits people. This feeling of abandonment hauntsthe people of Lauramarca, as they emerge fromtheir traditional ways into an incipient, perhapsstillborn modernization.”

Returning to this region 30 years later, in2003, I found big changes, mainly in terms offreedom and wider horizons. The main regionalroads were paved, halving travel times betweenLa Paz and Cuzco. Most towns now are servedby direct-dial telephones and public internetbooths. Telephone andinternet service also nowreaches Ocongate, themunicipio to which Lauramarcabelongs. With agrarian reformcame land rights and freedomfrom feudal obligations suchas labor for the landlordwithout pay. Electricityarrived in 1993, followed bytelevision, inducing families tomove from isolated huts tonuclear villages on theexpanding network of localroads. More money circulatesnow in peasant communities,enlarging the national market.Primary and secondary schoolsproliferated in thesecommunities, giving morepeople access to the printedword. “In the old days, theywalked long distances alongmountain paths before dawnto spread out their wares in thelight of kerosene lamps at theSunday market,” said PadreAntonio SánchezGuardamino, a Spanish Jesuitwho has been Lauramarca’sparish priest for twodecades.“But now many ofthem have second – or third-hand Japanese cars and mini-trucks. They come to themarket as late as 8:30 a.m.” In a remarkablepolitical development, 25 peasants last Augustorganized a hunger strike to force a judicialdecision on a corruption case against the mayorof Ocongate. “They had a town meeting in 1995because a lot of money was missing,” PadreSánchez said. “The court case dragged on forfive years, with documents going back and forthbetween Cuzco and Lima. Finally the campesinos,having spent eight days and bitter cold nightswithout food inside the church, got a judge inCuzco to sentence the mayor to five years inprison.” Part of this political activity is due tothe spread of secondary education in the Andesover the past three decades. While much of thisschooling may be of poor quality, it was able toequip a new generation of rural leaders toexercise more influence than they could in thepast. Many are elected mayors of municipios

formerly dominated by mestizo merchants andlandlords. Meanwhile, Protestant sects spreadamong peasant communities, reducingdrunkenness and relieving comuneros ofobligations to spend heavily in support oftraditional Catholic fiestas. Throughout LatinAmerica, these evangelical cults haveproliferated, along with religious radio and TVstations producing an incessant stream of ferventpreaching. Religious fervor replaces politics inthe hopes of believers.

Rising ConsumptionThe expansion of institutions (however weak

they still may be), improved links with theoutside world and increases in consumption areeven more impressive in urban areas throughoutLatin America. Rising consumption by low-income people has been spectacular, accelerating

the long-term cheapening and diversifying ofconsumer goods that go back to 16th CenturyEurope. Because of the scale of its economy,Brazil has led the way in recent consumptionincreases. The rich make Brazil the world´ssecond-market for helicopters and executivejets and the fourth producer of private planes.For the middle class and poor, it ranks third insales of motorcycles, video rentals and thenumber of TV sets installed in homes. Thebiggest increases in consumption have beenamong the poor, known in marketing jargon asclasses C, D and E, embracing 110 millionindividuals, or 69% of Brazil´s population, 77%of urban households and 40% of consumerspending. After the Real Plan stopped chronicinflation in 1994-95, economic stabilityconsolidated real incomes and enabledmanufacturers and retailers to reduce their costs

and extend credit, as information technologyfacilitated transactions. A survey showed howbig Brazil´s low-income market had become:

• Brazil is one of the world´s fastest-growingcredit card markets, with 42 million cards issuedafter a 19% increase in 2003. The share of low-income customers rose from 5% in 1998 to 21%by 2003, with double the rate of use of upper-income groups. Between 1994 and 2003, theuse of cards in retail transactions rose by 423%,while payment with checks fell by 45%.

• The boom in consumer durables extendedcoverage of refrigerators (85% of all homes) andTVs (89%), largely restricting sales to areplacement market. With the world´s seventh-largest automobile output, 70% of purchasesare for “popular cars,” costing about US$7,000.In São Paulo alone, 1.5 million used cars are soldyearly, some of them for as little as US$150.

Roughly 60% of the carsregistered in the City of São Pauloare in its poor Eastern Zone.

• Brazil is the world´s second-largest market for cell phones,60% of them on prepaid plansfor low-income users, multiplyingfour-fold since 1999 to reach 40million units, roughly one forevery three adults, exceeding thenumber of fixed lines.

The Fernand Braudel Instituteof World Economics isconducting field research on low-income consumption in GreaterSão Paulo, whose populationincreased from only 31,000 in1870 to 18 million today, thefastest long-term urban growthin human experience. We see animportant process of adaptationin a migrant population to a newregime of low fertility, decliningchances for formal employmentand rapid expansion ofconsumption, despite endemicviolence in the metropolis, withsome 12,000 armed robberieson city buses and 10,000homicides each year. Our youngresearcher Maurício Santos, wholives in the peripheral region ofCidade Tiradentes, observes:“Clearly the low-income class isconsuming more. The paradox

lies in the fact that it´s easier to acquirepossessions, but people don´t feel that life iseasier, mainly because of the lack of jobs.” Withall these difficulties, our interviews revealattitudes very different from political discoursefocused on the idea of social exclusion oftenidentified with poor people of the periphery.Our interviews tell us of a strong trend towardadaptation and an openness to innovation.

Urbanization and DemocracySince first appearing in the Greek city-states

2,500 years ago, democracy always has beenrooted in urban life. It spread fastest asurbanization transformed human society in thelate 20th Century, along with gains in wealth,literacy and public health. Along with other lessdeveloped regions, Latin America is struggling tocope with the effects of the spectacular

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Continued on page 6

Buying and Selling, El Alto, La Paz, Bolivia, 1985.

urbanization of world population in the late 20thCentury, a one-time event in human experiencethat contributed to economic growth and thespread of democracy but poses daunting politicaland financial challenges for the coming decades.By 2000 Latin America had become moreurbanized than Europe, with three-fourths of itspeople living in towns and cities after its urbanpopulation grew more than five-fold since 1950.

Between 1950 and 2000, world populationreached six billion, multiplying 2.4 times, whilethe number of people living in towns and citiesgrew nearly four-fold to 2.9 billion, increasingthe share of urban population from 30% to 48%.The number of big cities, with at least fivemillion people, rose from eight in 1950, all inrich countries, to 39 in 2000, with nearly all theincrease taking place in poorer nations. In thesedecades, cities like Lima, Bogotá, Cali,Guayaquil, Santo Domingo, Managua, CiudadJuárez and Guadalajara multiplied roughly ten-fold in population. By 2000 sprawling megacitiessuch as São Paulo, Shanghai, Cairo and Delhieach contained more people than the entireworld did when agriculture was first invented,and about as many as Great Britain counted atthe time of the Industrial Revolution. An extremeprojection is for Dhaka, in Bangladesh, whosepopulation grew from only 417,000 in 1950 to13 million by 2001 and is expected by theUnited Nations to become the world’s second-largest metropolis, with 23 million people, by2015.

In Latin America, systems of secondary citiesare developing in the larger republics to sharepolitical and economic power with the capital.For example, the number of Brazilian cities withat least one million people grew from two in1950 (Rio de Janeiro and São Paulo) to 14 in2001 and, according to United Nationsprojections, should embrace 20 cities by 2015.In the late 20th Century, giant cities surged likecomets on the horizons of mankind, only formost of them to recede quickly into slowergrowth or stagnation. Big cities are hard tomanage. They are under taxed and under funded.Like many complex systems, most cities developspontaneously but then need management aswell as investment in infrastructure and humancapital to avoid degeneracy and disintegration.This is a basic problem of Latin Americandemocracy.

Human progress in the 20th Century was bredby the complementary forces of capitalism,democracy and education. Better organizationand technological advances raised productivityand enabled governments to spend more toexpand webs of cooperation and dependence.Rapid urbanization since 1950 was driven bythe fastest economic growth that the world everhas seen. Angus Maddison, a member of ourInstitute, divides the late 20th Century into twoperiods: a “Golden Age” (1950-73), when theworld economy grew at the unprecedented annualrate of 4.9%, and a “neoliberal order” (1974-2000), when real growth slowed to 3%, whichstill was double the pace of expansion in thecentury before 1950. Meanwhile, LatinAmerica’s economy grew by 5.3% yearly in the“Golden Age” but then slowed to 3% since1973, with annual increases in per capita grossdomestic product (GDP) falling from 2.5% to1%, a much lower rate than in any long periodsince 1870.

Democracy and Economic GrowthDuring these years of ”neoliberal order,”

Latin America suffered through the surge ofworld oil prices, which slowed internationaleconomic activity, leading to heavy foreignborrowing and the debt insolvency of the “lostdecade” of the 1980s. Despite great frustration,mortality continued to decline and big citieskept expanding, though at a slower rate.Governments were forced to clean up theirfinances to halt chronic inflation, which hadsurged into hyperinflation in Argentina, Brazil,Bolivia, Peru and Nicaragua. Inflation in thoseyears provoked widespread public indignation,which undermined military regimes andhastened the spread of democracy. While therewere spurts of growth in the 1990s, tensionsgrew with a large residue of unemployment inthe cities and a shift into informal economicactivity.

Despite a spurt of activity in 2003, there islittle promise of faster long-term growth in theworld economy. All economies have maturedwith the effects of aging, lower fertility, massiveentry of women into labor markets, establishmentof big welfare programs and nearly completeurbanization felt more strongly. Setting asideshort-term risks, the maturing of economieslowers the horizons for growth in Latin America.

Many economists argue that high long-termeconomic growth, of at least 5% yearly, isneeded to stabilize Latin American societies.My view is that high growth rates over a longperiod, while welcome, may not be achievable,since the high growth rates of the “Golden Age”were due to one-time events in humanexperience, such as urbanization and the surgeof population growth due to rapid declines inmortality in the initial phase of the demographictransition. Nor are these very high economicgrowth rates necessary, since current rates ofLatin America’s population increase are barelyhalf those of the “Golden Age” and are expectedby the United Nations to fall by 2050 to roughlyone-sixth of the surge levels of the decadesfollowing World War II. Major gains in percapita income can be achieved with much lowerrates of GDP growth. What is needed, at anyrate of economic growth, is a strengthening ofinstitutions for more productive investment ofcapital and better distribution of justice, securityand opportunity.

This brings into focus the vague notion oftotal factor productivity (TFP), used byeconomists as a residual to account for growththat cannot be attributed to physical inputs suchas labor and capital. The TFP concept can beuseful in giving weight to, if not accuratelymeasuring, the efficiency gains in economiesand societies that come with the strengtheningof democratic institutions – of justice, educationand security-that create conditions for moreproductive use of labor and capital. Accordingto recent calaculations by Samuel Pessoa of theFundação Getúlio Vargas, the major countriesof Latin America in the 1990s reversed theirannual TFP losses of 1.4% of the 1980s in whatmay be an upward regional trend with strikingnational variations. Brazil, Mexico and Peruimproved their TFP by roughly 3% yearly, whileVenezuela and Colombia went into a downwardspiral because of political turbulence.

The difficulties faced by democracies inreproducing the high rates of economic growthto which many countries became accustomed inthe second half of the 20th Century posesimportant political questions. All answers pointto a growing need for strengthening ofinstitutions to increase capacity for managementof democratic stability.

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Since the earliest appearance of republicanand democratic forms of government, in Ath-ens some 2,500 years ago, the unstable rela-tionship between the One, the Few and theMany – that is, between the ruler, the privi-leged and common citizens – has been thefocus of continuing tension and experiment.Dispute and dialogue over the One, the Fewand the Many pervaded development of repub-lican institutions in the West and today con-tinue in Latin America. Nearly all Latin Ameri-can republics recently overcame the historicproblem of dictatorship (the One) by estab-lishing orderly succession of elected Presi-dents, so that attention is focused now on theFew and the Many.

In modern democracies, we return continu-ally to the dilemmas and opportunities facedby earlier republics. “It was in the Aristotelianand civic humanist channel that the stream ofrepublican tradition was to flow,” John Pocockargued in The Machiavellian Moment: FlorentinePolitical Thought and the Atlantic Republican Tra-dition. “The classical republicanism to whichJohn Adams [in the American Revolution] stilladhered was basically a Renaissance rephras-ing of the political science set forth in Aristotle'sPolitics, and it had a high degree of capacity fordealing with the social phenomena of the 17thand 18th centuries.”

The model for the city-states of the ItalianRenaissance was the wealthy, imperial andaristocratic republic of Venice, which main-tained political stability for six centuries undera complex formula of power-sharing underwhich the One, an elected Doge, ruled for lifeunder the influence of the Few, following “theprinciple that that the doge should never actcontrary to the advice of his councilors,” ac-cording to the historian Frederick Lane. “Thethrong of nobles around the doge when hetook office were men accustomed to acting asjudges and as his councilors. The growth ofpopulation and traffic made it necessary forevery doge to have such a group to assist in thegovernment.”

But “the little people” (populo minuto) de-manded more power. The populo minuto werethe shopkeepers and artisans that establishedthemselves in Venice and other prosperingcities, forming guilds as specialists in printing,glassmaking, jewelry, pharmacy, carpentry,shipbuilding, armaments, music, painting andother crafts and seeking a role in government,achieving political victories with parallels inthe rising cities of Flanders and Germany.People rising from poverty are the engines ofhuman progress, more so than those inheritingwealth and knowledge, who seldom are drivento discovery.

This story is repeated many times, with manyvariations, in the development of political in-stitutions. Venice was a magnet for migrantsthat enlarged the populo minuto, just as otherprospering cities drew newcomers who de-manded rights and powers at other times andplaces: Florence and other Italian Renaissance

cities; Amsterdam in the 17th Century; Lon-don in the 18th and 19th Centuries and NewYork and São Paulo in the 20th Century.

The “civic humanism” that emerged fromthe violent politics of the Italian city-states ofthe 15th Century revived Aristotle's argumentthat “the best political community is formed bycitizens of the middle class, and that thosestates are likely to be well-administered, inwhich the middle class is large, and stronger ifpossible than both the other classes [which]prevents either of the extremes from beingdominant.”

Throughout history, these emerging classesplayed a critical role in shaping forms of gov-ernment and the divisions of power that led tothe consolidation of democracy. In contrast tomodern democracies, it was hard for towns-men in the Italian city-states to avoid perform-ing public duties. Siena in 1257 recorded 860paid employees, excluding military, out of amale population of roughly 5,000, doing jobsranging from night watchmen to tax assessorsto keeping donkeys, pigs and lepers off thestreets. Everyone paid taxes. “The fact thatthe numerous poor paid their small sums in

direct taxes and also endured hunger andsqualid surroundings is not surprising,” DanielWaley wrote. “Taxation was for all. Whatseems to require more explanation is the verysubstantial sums paid by the powerful. Tosome extent this must have been due to pres-sure from those who ranked immediately be-low them in power and wealth.”

Struggles over taxation formed the crucibleshaping new political institutions in the West.States nearly always seek to live beyond theirmeans. Pressures for more and more taxesarose mainly from the cost of wars, includingthe interest on loans to pay for them. Each newadvance in military technology, making war-fare more expensive, brought innovations inpublic finance. The creation in 1265 of the firstfunded public debt, the Monte Vecchio, mostlyan accumulation of forced loans, roughly coin-cided with advances in ship construction, navi-gation and naval armaments that enabled Veniceto expand and protect its trade empire. Thesefinancial devices spread quickly to other Italiancities. Several of them, at war with each other,desperately sold offices, taxed heavily andraised forced loans to avoid being sacked bytheir mercenary troops who had not beenpaid.

According to William McNeill, “efficient taxcollection, debt-funding and skilled, profes-

sional military management” made the differ-ence in Europe. “States that lagged in develop-ing an efficient internal administration of armedforce, like Florence and Genoa, continued toexperience sporadic outbreaks of civil vio-lence. Venice, the most successful innovatorin the management of armed force, entirelyescaped domestic upheavals, through it barelysurvived external attack provoked by theRepublic's long series of diplomatic and mili-tary successes on Italian soil.”

The warlike monarchs of France and Spain,drawing upon the resources of larger states,taxed and borrowed even more as their grow-ing armies, using more advanced cannon inwhat became known as the Gunpowder Revo-lution, ended the sovereignty of Italy's city-states. Over 200 years the size of armiesdeployed in battle grew tenfold. In the 18thCentury, Britain was almost continuously atwar. To pay for these wars, annual tax rev-enues more than tripled and public debt grew15-fold. In The Sinews of Power: War, Money andthe English State, 1688-1783, John Brewer ex-plains how Britain laid the foundations of mod-ern public finance with administrative reformsthat increased transparency and gradually re-duced corruption thanks to “undisputed pow-ers of national taxation; the presence of acommercialized economy whose structuremade it comparatively simple to tax, and thedeployment of fiscal expertise that made bor-rowing against tax income an easy task….Publiccreditors invested in public securities pre-cisely because they were secure.”

To pay these debts, a highly-trained corps oftax collectors was organized: “The work per-formed by these excise officers was technical,complex and time-consuming. Entrants to theservice were required to pass both a writtenand practical test and to complete a period ofpupilage…. Carrying their books, seven in-struments, pen and special inkpot attached totheir lapels, officers often worked long hours.Their supervisors worked for even longer.”Institutional developments like these, drivenby pressures of warfare on an ever-largerscale, enabled western governments to har-vest increasing shares of national income astaxation, first to pay for wars and more re-cently to finance democratic welfare states.

As societies became more complex, abso-lute monarchs had to share power withemerging interests, hastening evolution to-ward national democracies. Eventually, uni-versal public education, health care and pen-sions became basic rights. As a share of GDP,general government spending rose in the richcountries from roughly 13% in 1913, on theeve of World War I, to 46% by 1996. WhileLatin American republics tried to keep pacewith the rich countries in assuming the re-sponsibilities of modern government, theyhave not been able to mobilize the resourcesneeded to perform these functions by thestandards of the western democracies thatthey emulate.

The One, the Few and the ManyRepublics and Democracies

People rising from pov-erty are engines ofprogress, more thanthose inheriting wealthand knowledge.

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Continued from page 4

Siglo XX tin mine, Catavi, Bolivia, 1966.

2. Democracy in Latin AmericaThe strength of Latin American peoples’

vocation for democracy has been proven byrecent experience. Brazil since 1989 conductedseveral orderly and clean elections for Presidentas well as for state and local offices, becominga worldwide pioneer in electronic voting.Argentina provides a tragic lesson of howpopulism and chronic inflation can destroy thesocial and economic fabric of a prosperouscountry. Populism in Argentina has beenpromoted by the Right and the Left, by civilianand military regimes, producing spiralingdisorder. However, over the past two decades,Argentina persisted in seeking democraticsolutions despite hyperinflation, collapse ofdollar convertibility and the failures of the Radicaland Peronist parties. Chile restored andconsolidated democratic practice, with skillfuleconomic management during three Presidentialadministrations since 1989, after the inflationarydisorder of the Allende years and then 16 yearsof military dictatorship.

Peru may have made a low-level adjustment,with acute dissatisfaction, in its struggle forstability. But mortality rates continue to decline.Recorded levels of personal violence are low.The big urban problem, of course, is jobs, butthis problem remains unsolved by all but a veryfew rich or poor countries. Meanwhile, afterliving through the convulsions of hyperinflation,a guerrilla insurrection, the El Niño andFujimori’s autogolpe and flight into exile, Peru’speople have chosen a return to democracy withlow inflation and a stable currency. Guatemala’sfragile democracy was threatened by themenacing tactics of a former dictator, GeneralEfrain Ríos Montt (1982-83), who presidedover one of the bloodiest massacres in LatinAmerica’s history, in seeking election despite aconstitutional prohibition excluding formerdictators from public office. Ríos Montt´s bidfor a political comeback was rejected decisively

by voters in the first round of an election thatawarded the presidency to Oscar Berger, aconservative former mayor of Guatemala City.In Venezuela, a struggle continues over effortsby opponents of leftist President Hugo Chávez,a friend of Fidel Castro and Colombia’s guerrillas,to oust Chávez by either constitutionalreferendum or violent means to end economicdisorder and decline. A deal brokered by foreignmediators, under the aegis of the Organizationof American States (OAS), provides for a recallreferendum under a clause inserted inVenezuela´s newest constitution by Chávez´sfollowers.

According to Joseph Schumpeter, “thedemocratic method is that institutionalarrangement for arriving at political decisions inwhich individuals acquire the power to decideby means of a competitive struggle for thepeople’s vote.” In Latin America, this democraticmethod has been applied widely over the pasttwo decades in the decentralization ofgovernmental powers, with direct election ofgovernors and mayors and increased transfer ofrevenues to states and municipalities. Since1980, the number of republics providing fordirect election of mayors rose from three to 17.

Participation in politics has increased bycreating thousands of elected positions inprovinces, states and municipalities. However,governmental decentralization also has meant apower shift that has weakened national partiesand led to proliferation of local movements,that in many cases expanded and strengthenedcivil society. The 163 seats in Colombia’sChamber of Deputies are spread among 39parties, mostly representing regional and specificpolicy interests and ending the traditionalhegemony of the Liberals and Conservatives. InBolivia, the Popular Participation Law of 1994provided for direct election of 310 mayors andcouncils and for transfer of 20% of centralgovernment revenues to these municipalities.Five local and indigenous parties won 64 of the130 seats in Bolivia’s Chamber of Deputies in

the 2002 elections. In Venezuela as in Colombiaand Bolivia, much of this governmentaldecentralization was enacted as a defensivemeasure by traditional parties to strengthen thelegitimacy of the political system, producingunexpected results that still are being assimilated.However, broad public support for theseinnovations has been sustained despite recentpolitical turbulence.

The modern history of democracy embracesperiods of expansion and retrenchment. A decadeago, in The Third Wave: Democratization in theLate Twentieth Century, Samuel Huntingtonidentified three phases in the spread ofdemocracy since the French Revolution andNapoleonic Wars. By 1926, democratic formsof government were established in 33 countries,followed by a period of relapse into authoritarianrule in 22 countries during the two decades thatended in World War II. The Great Depressioninterrupted democratic government in 11 LatinAmerican countries. A second wave ofdemocratization (1945-62) added or restored41 countries to the roll of democracies in theworld, after which another relapse, lasting until1975, again truncated democratic governmentin 22 nations. Since then, democracy hasflourished as never before.

The “third wave” of democratization began inthe mid-1970s with a leftist military revoltagainst the old Portuguese dictatorship’shandling of its colonial wars in Africa; withpeaceful transitions from dictatorship todemocracy in Spain and Greece, and withadoption by Brazil’s military regime (1964-85)of a new policy of “slow and secure” distensão(decompression) that led to a return to civilianrule. Many of these transitions to democracy, inLatin America and Eastern Europe as well as inSpain, Turkey and South Korea, mobilizedconservative leadership. In Brazil, civilianpoliticians supporting the military regimecontinued in key roles after 1985 in a revitalizedCongress and as ministers, exploitinginstitutional weaknesses to shift allegiances and

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To School, Collique, Lima, Peru, 1973.

develop new opportunities with each change ofgovernment. According to the 2002 UnitedNations Human Development Report, 81countries took “significant” steps towarddemocracy since 1980, with civiliangovernments replacing 33 military regimes.

Much of this progress was engendered bybenign changes in the international climate.The spread of democracy was reinforced byglobalization and increased access toinformation. In Latin America, much has beenmade of the pivotal role of the United States,which in the past has been criticized for failingto promote democracy. However, in recentdecades this has changed. In 1974, the U.S.Congress began to show increasing concernabout human rights violations, a theme quicklyadopted by President Jimmy Carter as a keyforeign policy issue. In 1984 the ReaganAdministration created the NationalEndowment for Democracy. Later that yearJulio Maria Sanguinetti, following hisinauguration as the first elected President ofUruguay since 1971, said: “The vigorouspolicies of the Carter Administration were themost important outside influence on Uruguay’sdemocratization process.” U.S. diplomatsintervened to warn against military coups inPeru, El Salvador, Honduras and Bolivia, aswell as in Korea and the Philippines, and wereactive in promoting and restoring democracyin the Dominican Republic, Portugal, Chileand Poland, among other countries. Morerecently, neighboring countries banded togetherto stop a military coup in Paraguay. OnSeptember 11, 2001, the General Assembly ofthe Organization of American States, meetingin Lima, Peru, adopted an Inter-AmericanDemocratic Charter that provides fordiplomatic machinery and procedures to restoredemocracy “in the event of an unconstitutionalalteration of the constitutional regime thatseriously impairs the democratic order in a

member state.”Under these improved conditions, the Third

Wave since 1974 has spread democracy moreprolifically than earlier ones, helped in manyways by the United States. In Latin America,democracy has continued to expand, withoutreversals, in contrast to the experiences ofTurkey, Pakistan, Thailand, Nigeria and otherAfrican countries. Democracies in Latin Americahave dealt more effectively with chronic inflationthan military regimes and have gained supportas a result.

Support for DemocracyA survey of 17 countries by Latinobarómetro,

a Chilean polling organization, was summarizedby The Economist (August 17, 2002), findingsome hopeful signs: “Despite the economicturmoil gripping many of their countries, LatinAmericans are becoming somewhat moresupportive of democracy, but they have littletrust in political parties and believe thatcorruption is widespread and worsening. Theyhave lost faith in privatization, and want thestate to take a more active role in regulating theeconomy, but in most countries they have notmoved more generally to the left.” People remainlargely centrist, shifting to the right since 1996only in the most turbulent countries (Colombia,Guatemala, Honduras, El Salvador, Nicaragua,Venezuela). Only in Paraguay did more than30% prefer authoritarian rule.

When the Latinobarómetro poll was repeatedin 2003, it showed substantial year-to-yearvolatility and a decline since 1996 in thoseendorsing the proposition that “democracy ispreferable to any other form of government.”But nearly two-thirds still said that democracy isthe best form of government and the only pathtoward development, with 57% saying thatdevelopment can only be achieved through amarket economy. Indeed, 44% said that largecompanies are performing well in building a

better society and 51% found that executives ofthese companies could provide better leadershipthan the present political class. But there alsowas much ambivalence. In Brazil and Peru, 69%and 60% saw democracy as best, but nearly asmany said that they would accept authoritarianrule if it would solve economic problems.Throughout Latin America there is great fear ofunemployment, with 23% saying they havedifficulty making ends meet. Of those ineconomic hardship, 47% supported democracy,against 57% of those who can save from theirearnings.

Although scholars have produced a vastliterature on the nature and prospects ofdemocracy, Kurt Weyland of the University ofTexas notes: “Political science has not advanceda unified, coherent theory of democraticstability.” The expansion of Latin Americanelectorates came with long-term urbanization.In Peru, the number of votes grew from only324,000 (5.5%) in a population of six million in1931 to 12 million (46%) out of 26 million in2001. In 1931, illiterates were excluded. Voterswere mainly mestizos with little schooling. Inrural Amerindian regions, few voted: only 14,000in Cuzco (surging to 458,000 in 2001) and only10,000 in Puno (reaching 522,000 in 2001).Since voting started in 1850, electoral fraud wascommon.

Violence and vote-buying were organized bycandidates hiring mobs from among the urbanpoor to take balloting places by force. Rurallandlords, doubling as political bosses in manycountries, herded peons and other dependentsinto polling stations. In Brazil, control of judgesand police chiefs decided elections. In 1872,only one million of nine million Brazilians wereeligible to vote and only 20,000 did so. Accordingto Richard Graham, “elections and violenceoften went together. While the result of electionsoften could be easily predicted at the nationallevel, local struggles for certain men were of

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Entering the mine, Siglo XX, Catavi, Bolivia, 1966.

Trikki Indian girl, Oaxaca, Mexico, 1967.

desperate importance.” Losers often werepersecuted and winners gained patronage andinfluence above and below their station in thehierarchy. The total of federal, state and localjobs in 1920 was about 200,000, which equaledthe votes needed to win the 1919 presidentialelection.

Given this history, it is extraordinary thatLatin American electorates grew so fast over thepast two decades with so few incidents of fraudand coercion. Since 1945 Brazil’s electorategrew 19-fold, from 5.9 million to 119 million.Fiscal parasitism expanded with growth of thepolitical system. The numbers of the Fewmultiplied, under bizarre election rules thatleave them unaccountable to the Many for longperiods. Between elections, politics tended tobe reduced to exotic and arcane machinationswithin what became known as “the politicalclass.” The costs of competition and the quantityof insiders increased as parties in Congressproliferated, with individual politicians flyingflags of convenience. After Brazil´s 2002elections, one-fifth of the members of theChamber of Deputies switched parties to alignthemselves with the winning side. From themid-1970s until 1994, deformities in the politicalsystem were financed by foreign borrowing andchronic inflation. Under the Real Plan (1994-99), efforts to correct these deformities werefunded by increased taxation as well as byforeign money. This mix is still unstable.

Reversals and FrustrationsReversals in the democratic process can be

expected. In its first 150 years as a republic,Bolivia suffered 170 military coups. Along withthe rest of Latin America, Bolivia recentlyachieved government by consent of thegoverned, a precious heritage of westerncivilization, in contrast to the military rule thatprevailed in most of the region in the 1960s and1970s. Bolivia enjoyed two decades ofconstitutional democracy since 1982, embracingsix orderly successions by freely-electedPresidents. It overcame hyperinflation to gain

stability of its currency and prices. Over thepast two decades, infant mortality was halved,school enrollments grew fast and networks oftransportation, communications, electricity andbasic sanitation expanded dramatically to raiseliving standards in a very poor country. However,President Gonzalo Sánchez de Lozada, whoheaded the effort to end hyperinflation in the1980s and carried out major political reforms inthe 1990s, was forced to resign in October2003, after a bloody popular revolt marked bystreet battles and road blockades ended hisefforts to reduce a huge public deficit (8.5% ofGDP) while seeking to negotiate the claims ofcoca farmers, landless peasants and unemployedworkers from the collapsed state miningindustry. None of these claims have beensatisfied. The Bolivian sociologist RobertoLaserna calls this “a populist trap.” The politicalbanner of the revolt was protest against exportingnatural gas through a port on the desert coast of

Chile, which wrested the territory fromBolivia in the War of the Pacific (1879-84), leaving Bolivia with no access to thesea. The October revolt deprived Boliviaof its chance to become a major hub ofenergy supplies in the Americas, providingits government with a secure, long-termflow of badly needed hard currency.

The climax of the revolt was theblockade of La Paz at the entrance to thecapital at the suburban community of ElAlto, cutting off food and other supplies.When I first visited La Paz in 1965, ElAlto was little more than a cluster ofadobe huts beside the airport, at the edgeof the altiplano. By the time I did adetailed study in 1984-85 for the WorldBank, El Alto de La Paz: The Origins andProspects of Poverty in Bolivia, El Alto wasbecoming an independent municipalityof 300,000 people. When I returned againin 2003, El Alto had become a majoractor in national politics, with apopulation of 700,000. This fast growthwas not simply the swelling of poverty.This is not a city sinking into hopelessnessand destitution. El Alto embraces

impressive infrastructure development,commercial expansion and solid homeconstruction. But its growth is based on aninformal economy in which petty traders competefiercely with each other and travel laboriously atlow cost, in trucks and buses, far and wide inBolivia and neighboring countries to exploitdifferences in local prices, free of regulation andtaxation, a trade that flourished in recent decadeswith improved transportation. While few taxesare paid, demand for public services grows fast.El Alto´s brand of populism is embodied in thenew Congress, roughly half of whose membersare of indigenous Aymara and Quechua stock.Yet its revolt leaves Bolivia adrift economicallyand politically, again deeply wounded by theweakness of its institutions.

Over the past two decades, Mexico´s politicalregime evolved from an overpoweringPresidency to a limited Presidency, now forcedto share power with a Congress and state

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Lázaro Cárdenas, President of Mexico (1934-40), Oaxaca, 1967.

governors beyond its control; from a one-partysystem sustained by manipulated elections to amulti-party system with free elections. The threeyear-old Mexican government of PresidentVicente Fox ended 70 years of one-party rule bythe Institutional Revolutionary Party (PRI). InMexico as in Brazil, changes in both the politicaland financial systems were triggered by the debtcrisis of the 1980s. When Mexico defaulted onits huge foreign debt in 1982, its public deficithad reached 16% of GDP and nobody knewhow much the government was spending or howmuch it owed. According to Hector AguilarCamín, “Mexico has a State that spends like amillionaire and collects taxes like a beggar, withmany responsibilities and little income. TheState is a specialist in not collecting what itshould collect so as to avoid political problemswith those who owe taxes.” As in Brazil, thereorganization of public finances anddemocratization of politics went together in aprocess that still continues. Fox and his NationalAction Party (PAN) suffered major losses inmid-term Congressional elections in July 2003,reflecting their failure to break a legislativedeadlock in order to fulfill their campaignpromises of freeing the economy and acceleratinggrowth. They have maintained economic stabilitybut are stalemated in tax reform and inestablishing clear rules to attract privateinvestment to overcome severe shortages in theelectricity sector.

The revival of democracy in Peru came withthe election in 2001 of President AlejandroToledo, a Stanford-educated economist ofIndian stock who succeeded Fujimori’s corruptand authoritarian rule. Toledo’s support soonfell to 7% in opinion surveys. His discredit hasbeen blamed on weakness of character, to raisinghis salary to $18,000 monthly amid widespreadpoverty and to carrying on a well-publicizednight life while refusing to recognize a teenageillegitimate daughter despite pleas for DNAtests. Toledo faces hard budget constraints,with tax receipts only 12% of GDP.The benefitsof fiscal and monetary stability and recenteconomic growth are undermined by a stream ofpetty corruption scandals and by what someobservers call an “explosion of democracy.”Fiscal austerity worsened frustrations associatedwith decentralization of governmental authorityand aggressive mobilization of civic and interestgroups, leading to road blockades and a one-month national teachers’ strike.

The Cuzco summit of Latin AmericanPresidents issued this warning: “The increaseand worsening of poverty, aggravated by a newperiod of prolonged economic stagnation,constitutes a fundamental threat to democraticgovernability, leading to deterioration ofinstitutional stability and social peace.” ButCaretas magazine commented: “The Peruviancase is different because it is not accompaniedby an economic crisis as in other nations. On thecontrary, inflation is minimal, the exchange rateof the currency is stable, the economy and hardcurrency reserves have grown and certainimportant investments in mining and gas arepromising. Nevertheless, the popularity ofPresident Toledo has fallen like a stone and thecredibility of public authorities is declining….Weface a contagion of frustrations, provoked notonly by the secular misery of large swaths of the

population and by socioeconomic inequalities,but also by irritations planted by the governmentitself. Grandiloquent promises breed indignationwhen not fulfilled and hand battle flags to theopposition.”

Dissatisfaction and CitizenshipCan political dissatisfaction be seen as a sign

of progress? “Disillusion with democratic rulersand nostalgia for authoritarian ones were anessential first step in the process of democraticconsolidation,” Huntington wrote in The ThirdWave. “Democracy does not mean that problemswill be solved; it does mean that rulers can beremoved…. Disillusionment and the loweredexpectations it produces are the foundations ofdemocratic stability. Democracies becomeconsolidated when people learn that democracyis a solution to the problem of tyranny, but notnecessarily to anything else.”

The end of easy financing, from chronicinflation or foreign loans, places new burdenson the tortuous development of citizenship.Here we confront the evolving entanglementsof the One, the Few and the Many that enlivenedpolitics after the Independence Wars of the1820s. Brooke Larson wrote in her magisterialessay on Andean peasants and nation-making inthe 19th Century:

Reforms gradually paved the way toward exclusivistpolitical systems, fragile civil societies and incipientcapitalist economies. Implicitly reforms were governedby a dual set of goals: to bring Indians into theeconomy as subsistence laborers, but to lock them outof the nation as citizens.

In many Latin American countries, rule by oneclique or another prevailed long afterIndependence and denunciations of “oligarchy”survived through the 1960s. However, LatinAmerican oligarchies rarely were monolithicand often fought among themselves, as did the“magnate” families in the cities of the earlyItalian Renaissance, leading in most cases toendemic instability. In Colombia since the mid-19th Century, it has been common to speak ofa “Liberal oligarchy” and a “Conservative

oligarchy,” but these labels were blurred byregional differences, family feuds and localrivalries that often turned violent.

Since Independence, the Spanish Americanrepublics proclaimed affinity with the politicalideals of the French and American revolutions,but citizenship remained a problem. Brazil wasthe last nation in Latin America to abolishslavery (1888), but was no worse on issues ofcitizenship. Brazil’s monarchy was overthrownin 1889 by a military coup in a climate of publicindifference. In 1891, the constitution of theFirst Republic (1889-1930) abolished the State’sobligation to provide primary education, anunfunded and unfulfilled legal mandate on thebooks as a dead letter since 1824. The historianJosé Murilo de Carvalho explained how politicalrights lagged behind social legislation, becloudingissues of citizenship: “The People had no placein the political system, neither under themonarchy nor the Republic. For them, Brazilwas an abstract reality.”

Starting in 1930, social legislation leaped aheadof political rights under Getúlio Vargas, whodominated Brazilian politics for many years, inphases of revolutionary reform (1930-37), theEstado Novo dictatorship with fascist trappings(1937-45) and electoral democracy (1950-54).In Father of the Poor? Vargas and his Era, the lateRobert Levine, a member of our Institute, posedin a masterful way the contradictions of populismand dictatorship, even as Vargas “personallyshaped the modern Brazilian state” and became“the first politician to extend dignity to theBrazilian people.” As government grew at alllevels, Levine wrote, “Vargas organized regionalagencies to deal with drought, electric powerand commodity production. Decrees preparedthe way for civil service reform and a nationalminimum wage....The government awardedpensions to selected workers, as well as jobprotection and workers’ compensation. A federaluniversity system was started....The country’snew roads led to jobs, leading to massivemigrations of population, whereas decades earlierfew ventured beyond their birthplace exceptwhen driven by famine.” Yet Vargas’s strongmanrule distorted and truncated political institutions,

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Traffic cop, Caracas, Venezuela, 1969.

as did the two decades of military rule thatfollowed the class struggles of the 1950s andearly 1960s.

After military rule ended in 1985, the civilianpolitical class enacted a new Constitution thatenlarged, on an unsustainable scale, the sociallegislation pioneered under authoritariangovernments to compensate for repression ofpolitical rights. After his election in 1994,President Fernando Henrique Cardosoannounced that his administration wouldrepresent ‘the end of the Vargas era’ in Brazilianhistory. Cardoso meant that he hoped to curbthe state domination of Brazil’s economy andthe acquired rights of corporatist interest groups,both of which fed chronic inflation. Cardososought to erase the stigma of inflation thatafflicted Vargas. According to Levine:“Pensions, a cornerstone of Vargas’s socialprogram, were so eaten away by inflation that bythe 1950s in many cases it was not worth thecost of a bus fare for pensioners to pick up theirretirement checks.”

From 1960 to 1992, world prices multiplied17 times, the worst global inflation ever recordedfor a similar period. During those decadesinflation in Latin America became such a chronicdisease that its consumer prices multiplied not17 times but 14 million times their 1960 level by1992, while Brazil’s price level multiplied 22billion times since 1960. In the annals of worldinflation, no other country had lived so long (34months) with monthly price increases above20%, thanks to techniques of indexing wages,prices, taxes, debts and bank balances.Indexation worked until the infernal machine ofinflation accelerated and threatened to race outof control again in 1994. Under the threat ofhyperinflation, Cardoso gained his politicaltriumph by launching the Real Plan, Brazil’seighth try at stopping inflation since 1985,which ended indexation, reorganized publicfinances and cut annual price rises from 5,115%in mid-1994 to nearly zero in 1998. Otherdemocratic governments, in Chile, Bolivia, Peruand Argentina, have subdued chronic inflationin the 1980s and 1990s, a historic achievement.

3. The myths of LulaThe new government of President Luiz Inácio

Lula da Silva and his Workers´ Party, or Partidodos Trabalhadores (PT), will test the strength ofdemocracy, as well as the competing appeals ofpopulism and effective government. So far, itsefforts have focused on a basic truth: TheBrazilian people will not accept a return to theinflation and instability of the 1980s and early1990s. A corollary of this truth is that peoplewant better government, which the PT is findinghard to provide. However, its success so far incontrolling inflation and restoring internationalcredit, as well as the sympathy inspired by thenew President, a man of the people preachingredemption from hunger and poverty, hasmuffled political opposition.

Lula has attracted more international attentionthan any Latin American leader since the rise ofFidel Castro in Cuba in 1958-59. He became asymbol of social mobility in a nation of 175million people that is now one of the world´smost dynamic markets. A sensation was createdby the election to the presidency of Brazil of aformer lathe operator and union leader from SãoPaulo´s ABC industrial suburb, with only afifth-grade education, born in extreme povertyin the back country of Brazil´s drought-proneNortheast.

Fifty years after migrating to São Paulo as aseven year-old boy in the back of a crowdedtruck called a pau-de-arara (parrot´s perch), Lulawon a runoff election in October 2002 with amajority of nearly 20 million votes, in the biggestlandslide in Brazil’s history, mastering the art ofcampaigning in his quest for the presidencyafter three previous defeats. With a big lead inthe polls since the start of the campaign, Lulaand the PT frightened financial markets in aprogram presented in April 2002 by his futureFinance Minister, Antônio Palocci, promising a“necessary rupture of the present economicmodel, based on opening and radicalderegulation of the national economy and itssubordination to the interests and humors of

globalized financial capital.”In June, Lula toned down this pledge of rupture

in a Letter to the Brazilian People with promisesof low inflation and fiscal prudence, mixed intoan inspired media campaign that radiatedindignation, confidence and, yes, happiness.But financial markets still feared the worst. Therisk premium on Brazilian bonds rose from 700to 2,400 basis points (24% above interest onU.S. Treasury bonds). The value of the real fellfrom R$2.35 to nearly R$4 to the dollar. But bythe end of 2003, the new government clawed itsway back to stability. Annual inflation fell to9%, the real strengthened to $2.90 and the riskpremium fell to 468, its lowest level since 1998.The price of this consolidation was interestrates that peaked at 26.5% and governmentspending cuts that provoked a recession andrising unemployment. Despite his rejection of“continuísmo, open or disguised,” Lula so far haspursued the same fiscal and monetary policiesas the previous government. His reward hasbeen more trust by Brazil´s people and adulationon his many foreign journeys.

Since he took office in January 2003, Lula hasspent more and more time making speeches andtraveling while leaving the management ofgovernment, and messy dealings with Congresson his reform program, to a nucleus of aides inthe Finance Ministry and presidential palace.According to La Razón, a Bolivian newspaper,Lula is “the new Latin American political star.”His state visits have taken him to India andseveral Latin American republics; to the WorldEconomic Forum in Davos, Switzerland; the G-8 summit in France; to the United Nations; fourmeetings with President Bush; five countries ofsub-Saharan Africa and another five in theMiddle East (Libya, Syria, Egypt, Lebanon andthe Gulf). He was the main attraction at themeeting of Latin American Presidents in Cuzco,Peru. When he lectured in July at a conferenceon Progressive Governance at the LondonSchool of Economics, outshining the otherparticipating presidents and prime ministers,the clamor for tickets was such that it wasmoved to from a 400-seat amphitheater to anauditorium for 1,000 people, while 500 morewatched outside on closed-circuit TV outside.“Lula wants to change Brazil, but I seriouslythink that he can change the world,” rhapsodizedAnthony Giddens, LSE´s president and aleading sociologist.

After his London triumph, O Estado de S.Paulo explained editorially that “Lula doeswell in the palaces of the world because hispersonal history fascinates the dignitaries withwhom he comes into contact. An aura ofcuriosity and respect surrounds him, which noother leader of today seems to deserve. Healso benefits from the stereotyped vision ofBrazil that prevails abroad. Those who imaginethat Brazilian society is rigidly stratified,offering poor people few opportunities toadvance, have more cause to embrace withsuch good will a President with Lula´sbiography, who speaks only Portuguese.Foreigners even are charmed by the blundersthat his loquacity and love of improvisationtend to produce.” In October Lula was inSpain, receiving the Prince of Asturias prizefor “his commitment to the needy that makeshim a model for the world.” His message in

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Schoolgirl, Lima, Peru, 1973.

speech after speech was: “Ethical developmentdemands that the international communityshow solidarity with marginalized people. So Iwill keep fighting for a global fund to eradicatepoverty.” During his first year as President,Lula spent 185 days away from Brasília, 68 ofthem on foreign trips, making 236 speechesbut giving no press conferences. His handlersaggressively isolate Lula from informal contactswith the media.

Lula seemed to enjoy all this traveling around,making speeches and receiving adulation. Butnow the fun is over. Lula knows that the noveltyand charm of his electoral triumph will meanlittle if he fails to produce results for his people.A consensus across the political spectrum holdsthat, while economic stabilization has beensuccessful, social policy has been failing.Recognizing these first-year failures, Lula andthe PT carried out a cabinet reorganization inJanuary 2004 to bring more experienced managerinto the government and to consolidate theirsupport in Congress. Meanwhile, the PT isstruggling to deal with the effects of a sordidscandal involving the kidnap-murder in January2002 of Celso Daniel, the PT mayor of the SãoPaulo suburb of Santo André, who was slated tobe Lula´s campaign manager. Daniel´s murderhas been linked to disputes over siphoning ofcampaign funds from Santo André to the PT,involving senior party leaders who now are keymembers of Lula´s presidential staff in Brasília.

In his inaugural speech, Lula announced afood security program, Fome Zero (Zero Hunger):“We will end hunger in our country. We willtransform the ending of hunger into a nationalcause….We will give special emphasis to ourPrimeiro Emprego (First Job) project to createopportunities for young people who face suchdifficulty in entering the labor market.” FomeZero became the political banner of the newgovernment´s first months, but it was basicallya recreation of existing programs that for manyyears have distributed food, cooking gas, schoolallowances and other resources to poorcommunities throughout Brazil. Promoted withaggressive marketing and worldwide publicity,Fome Zero sank into bureaucratic confusion andunderwent a series of reorganizations that stillcontinue. The federal government spends 66%more for lunch money (auxílio-alimentação) for656,000 public employees than it spends for themillions of poor people supposedly benefitingfrom Fome Zero.

After a year in office, the government hasbeen unable to announce a strategy for its FirstJob program. In the 2002 election campaign,Lula promised to create 10 million new jobswhile his main opponent, José Serra, pledged tocreate eight million jobs, a kind of vow oftenmade by politicians in Latin America andelsewhere. These populist promises are empty,since governments cannot create jobs for millionsof people. They only can create better conditionsfor employment. Brazil lost 20% of its factoryjobs since 1994 in a worldwide shrinkage ofindustrial employment, as firms produce moregoods with fewer workers. Informal employmentis growing throughout the world, especially inLatin America with its rigid labor laws, highpayroll taxes and low levels of education. Peopleare searching for new kinds of activity. Manyshow great ingenuity in this search. Government

can support their adaptation to new conditionsby providing better education, more flexiblelabor markets and economic stability, part of abroader program of institutional development.

Lula takes great pride in becoming Presidentwith only five years of schooling, and may feelthat other poor people can do likewise, whichhas led him to neglect public education, themain instrument both for developing institutionsand advancing social justice. Brazil’s pupilsranked last among 15 year-olds in 32 countriestested for reading comprehension in 2000 bythe Organization for Economic Cooperationand Development (OECD). The EducationMinistry’s National System for EvaluatingPrimary Education (SAEB) found no gains inpupil learning since 1991. Of every 100 Brazilianpupils who begin the eight years of primaryschool, only 41 finish, despite huge increases inenrollments over the past decade. Nearly one-fourth of Brazil´s adult working population in2000 had not finished the fourth grade. Three-fourths of those earning at or below the monthlyminimum wage (US$83) had not finishedprimary school. Lula likes to ridiculeintellectuals, which may seem strange, sincethere are so many intellectuals in the PT. “I saythat politics has no secrets,” he said in Brasíliaa few days before his LSE speech. “If there´sone thing that nobody needs to know aboutpolitics, it´s a university degree.”

Despite his educational handicap, Lula couldbecome a great Education President by strivingto improve Brazil´s failing public schools. Toachieve this, he would have to embark on thedifficult political task of pressing the educationalestablishment to strengthen school managementand supervision, improve teaching of reading inthe primary grades and enrich the content ofsecondary education. To do this, the governmentwould have to lead institutional change on avery large scale, involving many millions ofstudents, teachers, administrators and parents.It also would have to overcome the traditionalresistance to innovation in several key areas ofpublic policy of entrenched interests in teachers´unions and universities, which have been

mainstays of PT support., along with otherpublic sector workers.

If Lula were an educator, he would go ontelevision to give the Brazilian people a simplearithmetic lesson in support of his ambitiouspension reform, the effect of which was reducedby Congress, saying: “Brazil spends 12% of allits production of goods and services on pensions.The big deficits go to pay for public employeesretiring early. This is a disgrace. It is roughlywhat European countries pay for pensions formuch older and richer populations. If we can cutpension spending by only 1% of GDP, then wecould increase spending per pupil in primary andsecondary education by more than 25%. TodayBrazil spends only $150 per year for each pupilin the Northeast and $400-$500 in Rio de Janeiroand São Paulo. What can we achieve by spendingsuch miserable sums on our children´seducation? Do we care so little about the futureof our children and our country?”

Lula and the PT have been slow to recognizethe problems of institutional development, aswell as the progress achieved by previousgovernments. Most of these problems lie outsidethe electoral calendar and take time to solve.Failure to attack these problems tends to reducepublic policy to denunciation and charity. Yetimportant electoral gains could be harvested byLula and the PT if they made government moreecumenical by seeking consensus on key issues,like education and public security, and recruitingmore capable people from different sectors andparties to devise and carry out long-term policiesto be carried out by successive administrations.They already have done this in the effort tocontrol inflation, with great political benefit.

4. Institutional DevelopmentFor all his revolutionary rhetoric of the past,

Lula is being assimilated by the metabolism ofBrazilian politics. Yet he is making democracymore ecumenical in recognition of recent gainsin social mobility. Lula saw what Brazilianswanted: stability with more social justice. Thestruggle is only beginning. It is too early to

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Fishermen, Bahia, Brazil, 1978.

predict the outcome. The tensions betweenpopulism and effective government in Brazilfeed into broader issues faced by democracy inLatin America. The demands of stability, securityand opportunity are frustrated by failure todevelop institutional capabilities to deal withfiscal constraints, entrenched privileges andmisallocation of resources. Here are some ideason how to overcome obstacles to institutionaldevelopment in the critical areas of publiceducation, political organization and taxation.

4.1 Centers of Excellence in EducationAround 1960, in 14 Latin American countries,

only 1.7% of children of school age finishedprimary school. Despite the idealism invested inrural education by the Mexican Revolution,four-fifths of Mexico’s 20,000 rural schools hadonly three grades. In Guatemala, only 5.2% ofrural children reached the third grade. Of the12.7 million children in rural Brazil, only fivemillion were in school. Of those in school, mostdropped out in their first year. In Ten Keys to LatinAmerica (1962), Frank Tannenbaum explainedthe tasks facing governments trying to meetmodern educational needs:

The central government must find, build, rent orappropriate schools for the 50% or more of the schoolpopulation now without schools. It must find, educateand draft double the number of teachers it now hasand place them on the national payroll. It must printtwice as many books and notebooks, procure twice asmany pencils and blackboards. It must double thenumber of school inspectors, bookkeepers, clerks,supervisors and normal schools for the training ofteachers. It must do all this and a great deal more, andit must do it in a hurry….The means must be foundto double the education budget, although in somecountries it already is large.

Four decades later, these gigantic tasks mostlyhave been accomplished, even if at dismal levelsof quality. While schools, teachers and educationbureaucracies have materialized, pupils still failto learn. Was this enormous investment a wastedeffort? Probably not, since public schools haveprovided socialization and access to learningthat, while grossly deficient, would not otherwisebeen available in stressful urban environmentsswollen by migration from rural areas. But LatinAmerican schools clearly are failing to producethe critical mass of educated people needed tomanage complex societies and to start newenterprises that would create jobs and accelerateeconomic growth. The minds of its nextgeneration of citizens are exposed to theincompetence of underpaid and untrainedteachers.

In our Reading Circles in public schools of theperiphery of Greater São Paulo, young educatorsfrom the Fernand Braudel Institute of WorldEconomics discuss the classics of world literaturewith gifted adolescents who struggle to learn inan environment where laxity and disorganizationflourish. In these schools we see the waste oftalent, the opportunities lost and thecontributions to society never made because ofboring and empty lessons, chronic teacherabsenteeism, abrupt and rapid staff turnoverand violence, vandalism and deafening noise inthe corridors. Supervisors rarely visit the schoolsand almost never enter a classroom. While São

Paulo’s schools may be among the most violentin Latin America, disorder and failure to learnare features of many other school systemsplagued by perverse incentives. With officialschool days limited to four or five hours in mostcountries, real daily teaching time can averageless than three hours over an academic year.

One of the main challenges facing democracyin Latin America is the notorious reluctance ofpoliticians, with rare exceptions, to investproductively in public education. According toLatinobarómetro: “Education is one of thestrongest factors explaining support fordemocracy.” Among people with universityeducation, 65% support democracy, againstjust 49% of those with only primary schooling.“Never before has access to education been sobroad as it is today,” the survey added. “Moreeducation and better incomes for more peopleproduce more critical citizens. More educationoften is largely responsible for popular protestsagainst corruption and poor governmentperformance.”

Clearly, Latin American governments lack thefinancial and human resources for massiveimprovement of public education on a nationalscale. However, most can upgrade selectively.To create the critical skills needed for futurepolitical and economic development, centers ofexcellence can be established in provincial orregional capitals. These centers of excellencewould be endowed with enriched and challengingcourses, special training for selected teachersand modern libraries, information technologyand sports facilities. Standards could be craftedfor entry by students and teachers to thesecenters on a competitive basis. To restructureperverse incentives, successful principals andteachers can be rewarded financially. Successfulstudents can be rewarded with nationalscholarships. Degrees of success can bemeasured by competitive examinations and bycompetition between provincial and regionalcenters of excellence, which would create newstandards for other public schools. Theseperformance standards would be monitored atthe national and regional levels by people from

outside the education bureaucracies,representing community organizations,legislatures, the private sector and internationaldonors. Absolute equality in public educationnow is beyond the reach of governments ofnearly all rich and poor countries. However,centers of excellence at least would educatemore people to manage government and businessmore effectively. They also may help LatinAmerica emerge from its marginal andinsignificant role in the development ofknowledge and technological advance.

4.2 A Democratic CharterWe should not expect altruism in politics, so

we need fair and coherent rules. But LatinAmerica’s party and election rules are anarchipelago harboring a wide variety of habitatsand species. Archaic political systems havefailed to accompany the modernization ofsocieties. The lack of clear rules breedsdistortions that often misrepresent the will ofelectorates and weaken voters’ belief in thelegitimacy of government decisions. This hasundermined the credibility of parties inArgentina, Brazil, Bolivia, Peru, Ecuador andVenezuela. Latinobarómetro notes “a large doseof political cynicism in the region. While 42%say they would vote for a political party, only11% voice confidence in parties.” In Peru,according to Julio Cotler, “there is widespreaddisillusionment with the political class for itsnoncompliance with the fundamental principleof accountability. Public disenchantment hasaccelerated the decomposition of politicalidentities and contributed to the increasedvolatility of electoral preferences and to socialdisorganization…. Disenchantment with`democracy´ became so widespread that amajority of Peruvians openly rejoiced at PresidentFujimori´s palace coup in April 1992.”

The problem of representation is central todemocratic rule of complex societies. In LatinAmerica today, presidents tend to bedemocratically elected, while legislators still ineffect may be chosen by oligarchies, who controllocal fiefdoms, aggravating tensions between

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Peasant leagues, Pernambuco, Brazil, 1968.

the Few and the Many. Recent research stressesthe importance of fair electoral laws as a key tostability. Election of single representatives ofstandardized districts, uniform in populationsize, can correct distortions. To create moreeffective standards of representation, respectingthe different conditions of individual republics,it may be helpful to organize a convention ofexperts and political practitioners from differentcountries, under the aegis of international bodies,to draft a Democratic Charter as a non-bindingframework to serve as a useful reference in themodernization of democratic systems.

The weakness of parties is especially acute inBrazil, where party discipline never existed inwhat has become by far Latin America´s mostcomplex polity, thanks to the size of itspopulation and territory, its decentralizedfederalism and its far-flung system of big cities.Election laws favor the proliferation of smallparties and frequent switching of allegiances.Presidents cannot form stable majorities inCongress and must bargain individually withlegislators to win their votes on critical issues.During the 1991-94 term of Congress, most ofthe 502 deputies switched parties.

Weakness of political institutions iscompounded by malapportionment of seats inCongress. Brazil and Argentina present the worstinjustices in apportioning legislativerepresentation among states and provinces,giving the poorest and least populated regionsenormous leverage in bargaining for specialtransfers of money from the central government.Solution of the fiscal problems of Brazil andArgentina has been blocked by this distortedrepresentation in Congress. Malapportionmentof seats in Congress in Argentina is worse thanin Brazil, but Argentine parties are older andstronger. The loose and atomized structure ofBrazil´s political system permitted the emergenceof new parties after military rule ended in 1985,not least Lula´s PT. Argentine party loyalties arestronger because national and provincial bossescontrol access to the ballot. Radicals andPeronists, the traditional parties, reemergedvirtually intact after successive waves ofrepression under military regimes, battling eachother in a kind of non-ideological clan warfare.

Despite the difficulties, big political decisionswere made recently by Latin American republics.The biggest of all made by new democraticregimes was to stop chronic inflation, whichplagued several countries and led tohyperinflation in Argentina, Bolivia, Brazil andPeru. As a corollary to economic stabilization,these countries became more open to foreigntrade and privatized money-losing stateindustries. Several republics have decentralizedtheir structures of government. With localauthorities granted more autonomy, the needfor clear, uniform and balanced rules offederalism becomes clear. Brazil´s Congresspassed a Fiscal Responsibility Law in 2000 thatlimits spending, borrowing and hiring ofemployees by federal, state and municipalgovernments.

In 1990-94, nine republics reformed theirelection laws, but huge distortions remain.Election districts often are too big, increasingthe cost of campaigns and freeing members ofCongress of accountability to a local andidentifiable constituency. In Brazil´s legislative

elections, voting is state-wide and city-wide. InMay 1985, two months after the return to civilianrule, Congress amended the constitution toenable its members to change parties at will andto allow the proliferation of parties by abolishingnational threshold quotas for representation inCongress. Elections and political fund-raisingare personalized, since candidates can run againstseveral members of their own party as well asthose of other parties in an open list system. InSão Paulo, all 55 members of the City Councilare elected in a single district of six millionvoters. They are entitled to hire 21 “advisers”each, but have no local allegiances andresponsibilities. Neighborhoods of 200,000 or500,000 people have no identifiablerepresentative.

Academics have amassed a huge literature onproblems of democracy in Latin America, butfew suggestions appear on the improvement ofpractice. The classic questions are: How canweak political institutions be strengthened whilethe influence of parties is declining worldwide?How can political parties accurately meet andreflect the demands of voters? Given theweakness of parties, what are the bonds thatmobilize political action? How universal shouldsuffrage be? Should voting be compulsory? Whatare the consequences of universal compulsoryvoting? How can democracies provide enoughlegislative support for presidents to makegovernment effective while guaranteeingminority rights? What are the causes andconsequences of prolonged legislative gridlock?Why are some systems immobilized by toomany parties? To what political actors do peopleturn in desperation? What constitutes anemergency? Under what conditions, if any,should a president govern by decree? What roleshould Congress have in the budget process?How can unfair apportionment of legislativeseats be corrected? How can parochialamendments to major legislation be limited?Under what conditions should voters beconsulted in referendums? How can state andlocal governments be empowered as agents ofdemocracy without becoming free riders, adding

burdens to public finance? How can taxationand budget transfers to needy regions be sharedfairly without generating abuses?

Unlike other political systems, democracy maybe abused by those in power, but is open topeaceful correction. Correction in LatinAmerican democracies may lie in greatersimplicity and uniformity. Simplicity should bea goal of democratic processes. The simplicityof electoral systems may increase with theliteracy of their constituent populations.Minorities have more leverage for a strangleholdon processes and outcomes if political systemsare ruled by arcane technicalities. By simplifyingwe can develop elegance and efficiency, inspiringadmiration and confidence.

4.3 Taxation and DemocracyA slogan of the 18th Century struggle of the

United States for independence from Britainwas: “Taxation without representation istyranny.” The slogan can be inverted to read:“Representation without taxation is a farce.” Asthe Bolivian sociologist Roberto Lasernaobserved: “Democracy cannot be consolidatedwhile citizenship is conceived merely as aconsumer of rights. Taxation measures thecommitment and responsibility of citizens, andgenerates the resources needed for operation ofthe State. It is critical to expand the country´stax base and make citizens responsible for theachievements and problems of the State.”

In colonial Spanish America, an elaborate butfutile system of fiscal controls was created bythe Madrid monarchy. Royal orders and decreesprescribed in great detail how tax accounts wereto be kept to avoid evasion and embezzlementin a loose system in which collection often wasfranchised to tax farmers. Taxation was basedmainly on foreign trade. a dependence thatpersisted in republican times well into the 20thCentury. At the time of the First World War, noLatin American country obtained less than 50%of public revenue from customs duties, a reliancethat reached 70% in many republics, with percapita revenues in 1913 as low as US$8 in Braziland US$4 in Bolivia, Mexico, Peru and Venezuela.

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Santo Domingo, Dominican Republic, 1967.

The biggest share of taxes went to pay publicdebt. Meanwhile, low taxation led to even moreborrowing and inflationary finance as politicaldemands on governments and social complexitygrew. Governments relied increasingly on theinflation tax (seignorage), or the profits gainedfrom printing more money, but were punishedby collection lags and corruption that reducedthe real value of taxes in an inflationaryenvironment.

Low taxation has been a structural feature ofLatin American economies since independence,except for Brazil recently. Brazil is the greatexception in Latin America with its impressiveadvances in taxation. Many Brazilians nowcomplain that their tax burden, 36% of GDP, istoo high for a country in their per capita incomeclass. However, this level of taxation enablesBrazil to pay for past and present errors anddistortions in its fiscal structure, the heavyinterest burden on its public debt and wastefulallocation of resources, generating very littlepublic investment. Mailson da Nóbrega, a formerFinance Minister, argues that “public spendingin Brazil, especially so-called social spending,basically benefits the non-poor.”

By contrast, Argentina’s tax burden was only15% of GDP in recent decades. Mexico,Colombia, Peru and Bolivia collected only 12%-14%, or less than half the share of GDP taxed inthe United States and Japan (30-33%) and one-third of European taxation (40-50%), all ofthese much wealthier countries, and even one-third less than that of India (20%). Taxation atthese low levels deprives Latin Americangovernments of enough resources to sustain thefiscal commitments of modern societies. Thecost and scope of these commitments expandedradically in the late 20th Century, especially ineducation, health, regulation and for physicaland organizational infrastructure fortransportation, communications and energysupplies.

Civilization exacts its price. A question to beasked of all democracies is whether citizensshall pay for the maintenance and expansion ofmodern societies, or if the acquired rights of

voters entitle them to remain free riders in aprocess financed by others. This questionembraces a wide range of specific issues, frompensions to paying for vital supplies of drinkingwater and electricity. As F.A. Hayek trenchantlyobserved:

Mere existence cannot confer a right or moral claimon anyone against any other….Rights derive fromsystems of relations of which the claimant hasbecome a part through helping to maintainthem….Only expectations produced by long practicecan create duties for the members of the communityin which they prevail, which is one reason whyprudence must be exercised in the creation ofexpectations, lest one incur a duty that one cannotfulfill.

In all countries, rich and poor, democracylives under constant pressures and threats bredby demands of the Many for distribution of thestate’s limited resources. Aristotle describedthe problem long ago:

What is to be the supreme power in the state? Is itthe multitude? Or the wealthy? Or the one bestman? Or a tyrant? Any of these alternatives seemsto involve disagreeable consequences. If the poor, forexample, because they are more in number, divideamong themselves the property of the rich, – is thisnot unjust? No, by heaven (will be the reply), for thesupreme authority justly willed it. But if this is notinjustice, pray what is? Again, when in the firstdivision all has been taken, and the majority divideanew the property of the minority, is it not evident,if this goes on, that they will ruin the state?

How can fiscal resources be raised to increasesecurity and opportunity in these societies?

There are two areas of weakness. One is thelow collection of taxes on income (individual andcorporate) and on property. Governments relytoo heavily on turnover taxes, which tend to beredundant, cascading to high and oftenunenforceable levels in the course of productionand distribution. Revenues from income taxesare very low (less than 5% of GDP) in Brazil,

Mexico and Colombia, especially when comparedwith wealthier federations such as Australia,Canada, Germany, Spain and the United States,which depend heavily on income taxes. In richcountries, the total of people paying incometaxes is roughly equal to the number of voters,while in Brazil there are 115 million voters butonly eight million taxpayers because there are somany poor people exempt from personal taxation.In the United States, income taxes generate 51%of government revenues, against only 17% inBrazil. Nearly half of U.S. income taxes are paidby the wealthy (earning more than $200,000yearly), while in Latin America the rich easilyevade income taxes. Meanwhile, property taxesare low or non-existent. While towns and citieshave grown fast in recent decades, creating newdemands for local government services, propertytax assessments have lagged far behind marketvaluations. Rural land escapes virtually alltaxation. While taxation theory allots propertylevies to municipalities on the ground that localknowledge strengthens enforcement, efforts toincrease local tax collection often meet ferociousresistance.

A second weakness is that the major LatinAmerican republics recently have been engagedin the worldwide trend toward governmentaldecentralization, which in Brazil, Argentina,Bolivia, Peru, Colombia, Venezuela and Mexicohas meant developing new forms of distributingresources from central governments to regionalauthorities with huge differences in wealth andmanagement capacity. Since the 1980s all thesecountries have been struggling with forms offiscal federalism for transfers of funds from centralto regional and local governments in order toresolve political and economic imbalances.

The weakest link in Latin America´sdemocratic development is the municipality, aweakness that contrasts strikingly with the criticalrole of the free municipality in Europe´s politicalmodernization over the centuries. Europe´smunicipalities were independent financially, withfew social obligations, while Latin America´sare dependent on transfers from national andstate governments as they assume increasingroles in public health and education whilecollecting few taxes.

However, with technical support from federalagencies, Brazil´s municipalities increased taxcollections in the decade since passage of the1988 Constitution three times faster than thefederal government and twice as fast as thestates. Municipal tax collection is concentratedin state capitals and the big cities, the largest ofwhich remain in permanent fiscal crisis, alongwith most of the world´s megacities. Most ofthe increase in tax collections was generated byinvestment in information systems.

Argentina, Bolivia, Chile, Colombia, CostaRica, Mexico, Nicaragua, Peru and Venezuelatried to raise their level of taxation in the 1990s,in some cases with backsliding after initialsuccess. Brazil conducted the most successfuleffort in Latin America, both in the long-termand in recent years. Since 1947 Brazil increasedits tax burden from 14% to 36% of GDP, a long-term rise punctuated by relapses during surgesof chronic inflation (1958-64 and 1982-94).Peru increased its tax income from roughly 13%of GDP in the early 1950s to 20% in 1980, onlyto fall back to 8.5% of GDP in the escalating

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Mapuche Land Seizure, Cautín Province, Chile, 1972.

political turbulence and inflation of the late1980s. The latest increase in Brazilian taxationcame during the stabilization that began in1994. The alternative to raising taxes under theReal Plan would have been default by thegovernment on payments of its public debt, itsswollen pension obligations and federal transfersto states and municipalities. Since 1994 the taxburden rose from 24% to 36% of GDP, whilemonthly inflation fell from roughly 50% in 1994to less than 1% in 2001. Furious political battlescontinue over distribution of resources. Thesedisputes so far have been conducted within theframework of a strengthening of the institutionsof public finance that has taken place since themid-1980s, with gradual clarification ofinformation, limits and obligations that reacheda climax with passage of a Fiscal ResponsibilityLaw in 2000. Without these legal instruments,Brazil´s governments would have little chanceof containing inflation.

Many Brazilians complain that their tax systemis unfair, redundant and too complicated. Poorpeople are less aware of what they pay, sinceindirect taxes are embedded in retail prices.Efforts to reform the system repeatedly haveended in impasse and failure, with the newgovernment, after long negotiations withCongress and state governors, succeeding onlyin protecting and slightly increasing federalrevenues. While reform of tax laws is a gradualand piecemeal political process, public financescan be strengthened by investments in taxadministration, mainly in information systemsand training, in a bureaucracy that must be seen

as apolitical. To this end, Brazil´s federal taxagency has funded advanced degrees for careerpersonnel. Appraisals of tax liability should bemade on the basis of financial transactions andapparent standards of living. “Taxes on financialtransactions, while controversial, are extremelyefficient, hard to evade and entail low collectioncosts,” says Everardo Maciel, former head ofBrazil´s federal tax agency (1995-2002). “Apartfrom this, they provide valuable information forother forms of collection.”

Taxation and the viability of democracy aretied together through sharing of burdens to endfiscal parasitism, shifting public spending awayfrom consumption and toward productiveinvestment. The dangerous alternative is a returnto the debt traps and serial defaults of the past,reviving chronic inflation, destabilizing politicsand impoverishing society. Since winningindependence in the 1820s, Venezuela hasdefaulted on foreign debts nine times, Mexicoeight times, Colombia and Brazil seven timesand Argentina five times.

While public debts declined in the first half ofthe 1990s, thanks to renegotiations under theBrady Plan, they have risen sharply again sincethen. In Argentina, public debt rose from 30%of GDP in the early 1990s to 150% by 2002,when it again defaulted. Brazil´s public debtsrose from 33% of GDP in 1996 to 58% in 2003.This swelling of debt was caused bycompounding of very high interest rates, whichrose from 19% in 2002 to 23% in 2003, and bythe need to pay for perceived risk of default andby federal absorption of state government debts

as part of the fiscal stabilization effort. Intereston public debt rose from 2.8% of GDP in 1996to 9.5% in 2003, or more than double the hugeprimary budget surplus (4.3% of GDP) thatBrazil had to generate just to prevent publicdebts from increasing at an explosive rate.Economists predict that the debt burden willdecline slightly in 2004, thanks to lower interestrates and more economic growth. But it will bevery hard for Brazil to sustain debt payments onthis scale for long. It would be futile for LatinAmerican republics to remain trapped in thecasino of international bond markets, with itsmanic-depressive cycles of liquidity anddroughts, and erratic pricing of debt. Whyshould the debt of unstable country like Ukrainehave a risk premium of only 3% over U.S.Treasury bonds, while Brazil now pays 5% andhad to pay a 24% premium during the 2002 pre-election panic? Countries can defend againstthese violent swings only by consolidating theirpublid finances, a process that is underway inmuch of Latin America.

Chile provides a democratic model for reducingpublic debt. After its military regime defaultedon its foreign public debt in the 1980s, Chile´sdemocratic government, after coming to powerin 1989, reduced its debt from 54% of GDP in1990 to 21% in 2002. It improved tax collections,contained spending, obtained more revenuefrom reformed state enterprises, prohibited theCentral Bank from lending to the governmentand prohibited provincial governments fromborrowing. For Chile, the survival of democracywas at stake, following the disorder under the

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leftist government of Salvador Allende (1970-73) and the repression of the military dictatorshipof Augusto Pinochet (1973-89). This is the paththat other democracies will have to pursue.Brazil and Peru, among other countries, haveembarked along this route and face testingtimes.

* * *

This essay has proposed three paths of advancefor consolidating democracy in Latin America:(1) creating centers of excellence in education;(2) restructuring party and election rules toimprove the quality of representation, and (3)increasing taxation to pay for moderngovernment. These goals may seem veryambitious at first. Yet they would be lessdaunting if we take into account the progressachieved over the past half-century, especiallyin recent decades. An obstacle to furtherachievement is a lack of conviction that we cando better. Lack of conviction feeds upon andreinforces the weakness of institutions.

The advance of the welfare state in WesternEurope and the United States contrasts with thepost-colonial experience of Latin America interms of levels of wealth and skill, the role ofcitizenship and the culture of taxation. Indeed,Latin American republics have sought to borrow,borrow, borrow without being able to tax, lackingthe pressures of wars that drove the developmentof public finance in Europe. These difficultiesaggravated distortions in the distribution ofresources among the One, the Few and the

Many, in the form of onerous interest paymentsand endemic fiscal fragility.

Can Democracy Endure? This is the title of askeptical essay, still unpublished, by my friendWilliam McNeill, who views the rise ofdemocracy in the West in terms of themobilization of populations and resources forwar, as in the struggle of a handful of Greekcities against the Persian empire, in the AmericanCivil War, Bismarck´s Germany and World WarsI and II, the latest of these fought as an ideologicalstruggle of democracy against tyranny, leadingto the spread of democracy worldwide in thelate 20th Century. Of the French Revolution,McNeill writes:

Ideals of liberty, equality and fraternity embodiedin universal male suffrage were accompanied byuniversal conscription of young men for war. As aresult, hastily trained and vastly enlarged Frencharmies were able to defeat successive coalitions oftheir European foes.

In Latin America, except perhaps for Bolivia´sdisaster in the Chaco War with Paraguay (1932-35), mobilization for war contributed little ornothing to creation of democratic institutions.However, these republics were adoptingEuropean social legislation well before the idealsof democracy were spread during and afterWorld War II. Indeed, both Europe and LatinAmerica are struggling to sustain the heavyfiscal burdens of welfare states with only minorcommitments to military spending. In LatinAmerica, rigidities imposed by social legislation

– exaggerated payroll taxes, job security andpublic sector pensions – divert resources awayfrom strategic investments in education andinfrastructure and create obstacles to the labormarket flexibility needed for adaptation byfamilies and nations to changing conditions inthe world economy.

My optimistic view is that the forces ofcooperation in human experience ultimatelyhave proven stronger than the forces ofdissolution. Otherwise, civilizations would notexist and humanity would not have evolved. Inmodern democracies, we continually return tothe dilemmas and opportunities faced by earlierrepublics. Most democracies and republics liveturbulent lives. We remain exposed to thechallenges posed by the civic humanism of theRenaissance. They involve an old struggledescribed by Machiavelli, in the language ofcivic humanism, as a tough-minded moralistconcern with problems of liberty and corruption.This is why conviction is so important.Conviction in pursuit of justice, learning andopportunity enhances the prospects for survivaland even excellence in the development of ourinstitutions. Poverty and injustice are old storiesin Latin America, as elsewhere, but we havebeen moving forward, not backward, in a climateof rapid change. Belief in the prospect of furtheradvances can mobilize resources into moreproductive organization of politics and society.

Incaic plowing, Hacienda Lauramarca, Cuzco, Peru, 1970.

We are grateful to Deborah Wise Unger for hergifted editorial assistance in preparing this special issueof Braudel Papers.

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