10 Questions for Sebastián Edwards

Sebastián Edwards, the Henry Ford II Professor of International Economics at the Anderson School of Management, studies the elements of macroeconomic crises and success stories. From 1993 to 1996, he was chief economist for Latin America and the Caribbean at the World Bank. His latest book, "Left Behind: Latin America and the False Promise of Populism," explains, among other things, why Venezuela's domestic policies are worse than they look, how Brazil can avoid an economic future that looks like the 2010 World Cup and why Chile is Latin America's brightest star. His next book — his second novel — will appear in March in his native Chile and throughout the Spanish-speaking world.

What's wrong with populism?

Everything.  About 20 years ago, the late Rudi Dornbusch and I defined it as a set of policies that aim at obtaining short-term gain and neglecting long-term sustainability. Populist experiences invariably end in inflation, shortages and crisis.

[Venezuelan President Hugo] Chávez is a quintessential populist. He governs through referenda. He has absolute disdain for the traditional political parties in Venezuela. The rhetoric, of course, is "we the people" against "them," the oligarchs and the Evil Empire – the "devil," which is George W. Bush and the rest of the United States.

How strong has populism's appeal been across Latin America since Chávez was elected?
 
There's been a significant move in that direction. But I think what is important is that we do not equate "the left" with populism. That is fundamental. There is a new left that has been very prominent in Latin America, and the three main representatives of that left are President Lula [of Brazil], President Bachelet and President Lagos, who preceded President Bachelet in Chile. There is a modern left and a populist left, and the modern left is as anti-populist as the right.
 
If we limit ourselves to the issue of ameliorating poverty in Venezuela, has Chávez been successful?

This is the type of question that makes the social sciences interesting and challenging, and sets it apart from mere journalism. There's no doubt that poverty has been reduced in Venezuela very significantly, but it's not clear how much he has achieved. When Chávez came to power, oil was below $20 a barrel, and it got to $147 a barrel. It's now hovering around $80. When you have that order of magnitude of increase in the price of your main export, then, of course, good things are bound to happen. The calculations that we have made suggest that all of Venezuela's progress — including the reduction in poverty — is due to the increase in the price of oil and not policy improvement. What we are seeing today is that many of the achievements that Venezuela posted two or three years ago are going down the drain due to inflation: shortages, a lack of water and power outages, among them.
 
The real question is what would have happened in Venezuela if, instead of Chávez, they had had someone like Lula, with a Bolsa Família or Bolsa Alimentação [antipoverty programs] or some of the conditional transfer programs that Brazil had, with no inflation and an increase in international investment.
 
What would have happened?
 
My guess is we would have seen a very fast growth. Venezuela has not grown during the Chávez period faster than the average Latin American country in spite of the fact that it has had the best international conditions overall.
 
What makes a country start to perform better than average?
 
Efficiency and growth in productivity are at the center of the experience of every country that has taken off. And there is sort of a cycle of successful growth, in which something triggers an improvement in productivity. That may be a change in government, going from a dictatorship to a democracy. It may be the end of a war. It may be generalized optimism because the country wins the World Cup. Something happens that unleashes what Keynes called "animal spirits," vast productivity improvements.
 
When a country starts becoming more productive, that catches the attention of investors. And they check it out and if they see that it has promise, they start investing, first, in a timid way. And then if the country strengthens its institutions, investment increases. So you have a cycle that starts with productivity growth — which is almost magical because you're getting growth without investment, without new machines, without new infrastructure, without new ports or power plants.
 
Then investment comes in. After that, it's investment again, adding productive capacity. And then if a country is successful and lucky, a new round of increased productivity takes place. Chile was able to go through all three and even a fourth phase of this positive productivity cycle.
 
What are the prospects for others?
 
It seems that we are going to see a two- or three-speed Latin America. Some countries will make it, probably a handful. A lot of countries will be kind of stuck in the middle, and a few countries are going to continue to be left behind.
 
The countries in the middle, the second speed, are interesting to think about. Why will they end up that way, even without falling into the populist trap that you discuss?
 
In the 21st century, the world is a little bit like the world of Alice in "Alice Through the Looking-Glass," where if you run as fast as you can, all you do is stay where you started. If you are satisfied with being in the penultimate place in the league of how much kids learn in math and science — if you don't care that there's a lot of corruption, the judiciary is not very transparent, the rule of law is lacking and you don't want to get up in the morning and compete with the Chinese — then you're going just to be a 3-percent growth country, while the rest of the emerging world is going to be growing at 6 percent, 7 percent.
 
The World Cup is an interesting metaphor. Besides Brazil and maybe Argentina, no one thought that Latin America was going to get anywhere. When we got to the round of eight, there were four Latin American countries, and everyone was excited. It turns out that the first team faded away, and a Cinderella team, Uruguay, finished fourth.
 
There's a lot of interest now in Brazil, and the question is whether it's going to be like the World Cup. They've done better than people thought they were going to do. But now the problem is the world is so competitive that you really need to make significant improvements, especially in your educational system.
 
What is ahead for Chile, your own country, with its new right-of-center president, Sebastián Piñera?
 
Chile did very well during the 20 years of the left-of-center coalition. The coalition had its run, and alternation is part of the democratic game. So no one should be particularly worried about this; there's a big sense of continuity. The new government basically argues that it's possible to move in the same direction at a faster clip.
 
It is highly possible that in 10 years Chile will have an income per capita not different from what Portugal has today. Portugal is sort of in the lower rungs of what we consider to be advanced countries. Of course, there's a need to reignite "animal spirits" in Chile as well, and this is what the administration is trying to do. Whether they will be able to accomplish this is a different story.
 
Your debut novel, "The Mystery of the Tanias," did pretty well there, a bestseller. Are you going to write a second one?
 
I just finished my second novel. It's coming out in March in all of the Spanish-speaking world.
 
Wow.
 
Yeah, there aren't too many economists who write novels. I did the first one because I had this bug. I gave up being a writer before I gave up being a soccer player — I always thought it was too difficult. I had no talent for soccer, but I think I do have a talent for being a writer. It developed much later.
 
What's the new novel about?
 
I decided to do something that's more difficult than the first one. The second one – it doesn't have a title yet – is narrated in third person, and it all happens in one day, so that forced me to do it quite linearly, although, of course, it has flashbacks. It happens just before the Cuban missile crisis. It's a love triangle, a mystery and a betrayal. It was fun writing it, too.

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