November 19, 1998

A Latino Rite Of Passage

Eric Ellis, Brasilia

It is a defining moment in Latin America's history as it makes a painful political and economic transition to a civil society. Eric Ellis reports.

The thousands of yuppies who revel in increasing numbers in the impromptu bars by Brasilia's Lake Paranoa would consider themselves unlikely representatives of a defining era in world history.

As unlikely perhaps as a frail old tyrant knocking on heaven's door in a London hospital ward might believe of himself. Or, more unlikely still, a dubious purveyor of Italian delicacies in Melbourne. But all portray the fragile transition of a continent struggling, and succeeding so far, to establish a civil society - with the democracy, the rule of law and the economic emancipation that human history has shown flow from that.

As they throw back their beloved Brahma cerveja and coconut cocktails, the Brazilian yuppies' hope for the future is in sharp contrast to the travails of an older generation, Chile's General Augusto Pinochet and fugitive Mexican banker Carlos Cabal Peniche.

Not so long ago, none of this would have happened. In hyper-inflationary Brazil, there was neither the money, the confidence nor much of a middle class to develop a critical mass of yuppiedom.

In Mexico, the separation between the Institutional Revolutionary Party -with the world's longest unbroken grip on power - and the country's corrupt banks (and its drug barons) could only politely be described as blurred.

And in Chile, Pinochet ruled through an army notorious for its brutality.

Today, a Latin America that always seems to be on a journey of some sort is as hopeful as it has been for a generation, and as anxious, as it faces an extremely difficult six to 12 months.

The IMF and the world's leading industrialised nations, led by the US, have drawn the proverbial line in the sand in Brazil in making $US42 billion ($66 billion) available to shore up Latin America's and the world's eighth largest economy

It is overwhelmingly assumed by analysts and authorities, including US Treasury Secretary Robert Rubin, that if the Brazilian economy fails as Asia's has, the Americas will fail with it - and, as a result, North America, too. The implications beyond that are almost too shocking to contemplate: at their most extreme, a sustained global depression which, as one glib US commentator put it, would make the 1930s seem like boom years.

That sober view was reinforced this week by the Paris-based Organisation for Economic Co-operation and Development.

"If [Brazil's currency-stabilising] Real Plan were to be abandoned in a disorderly fashion, including an immediate burst of inflation, the risk of a severe contraction of real economic activity would be very serious indeed," it said.

The OECD said the Latin American economies would slow in 1999 but would resume solid growth if the Asian contagion was limited, depending on whether Brazil fended off devaluation of the real.

The preferred scenario was that of a 1998-99 transition period, with low growth in Argentina and the Andean countries and negative in Brazil and Venezuela, followed by a recovery that gained momentum thereafter, the OECD said.

Whether Brazil's IMF plan is a stay of execution, or cause for hope, depends in part on Washington.

The messages so far are encouraging. "Once risk perceptions come down, people begin to look again at the fundamentals, and the fundamentals are not that bad," says Jorge Mariscal, director of Latin American equity research for Goldman Sachs & Co.

International co-operation on Brazil has been in sharp contrast to the inaction on Asia last year when US President Bill Clinton dismissed the crisis as a glitch.

Compared to the chronic patients in Asia's economic hospital, Brazil has been tended by American doctors in intensive care ever since Russia toppled in August.

The reasons are simple enough, according to an analysis from Carlos Lozada, an Atlanta-based Latin American specialist and former consultant to the Inter-American Development Bank. It's a case of fighting an American war on someone else's turf.

Mindful of the September market slump and the hedge fund blowout that followed Russia's meltdown, Lozada estimates American banking sector exposure to Brazil at $US25.6 billion at June 30 this year.

This is by far the largest exposure by US banks to any developing economy, dwarfing the highly touted $US6.2 billion exposure to Russia, and more than 1 times the total loan exposure to Mexico.

Should capital keep fleeing Brazil, which it did at a pace of $US600 million net per day in September and $US223 million net a day last month, the risk of loan default would grow. Hence the multibillion-dollar assistance package.

Such has been the strength of American assurances to Brazil, the attitude of Brazilian President Fernando Henrique Cardoso re-election team last month could best be described as cocky.

And if US efforts falter, there's always Europe, Brazil's second biggest investor, to call on.

"We hope very much that this will be a confidence-creating one that will contribute to overcoming difficulties in Brazil, and it will reduce the contagion effects that we have seen," said Germany's Bundesbank president Hans Tietmeyer.

If Brazil dictates Latin America's economic future, how Chile handles the Pinochet issue could determine how serious the region is about the quality of its democracy, and assessing its murky past.

Latinos like to air an old gag of the 1970s and '80s when the CIA were, er, active in Latin politics. The joke asks why there has never been a military coup in the US. The answer is that Washington doesn't have a US embassy.

Pinochet's arrest has discomfited not only old CIA operatives retired to Maine but Latino democrats from Bolivia to Brazil who preside over parliaments, bureaucracies and armies still littered with cronies from days most would prefer to forget.

Latin America's transition to democracy was revolutionary, but it was a gradual revolution, helped along by the end of the Cold War.

When they came to power, a new breed of democrats such as Chile's President Eduardo Frei and Argentina's Carlos Menem were confronted by a Hobson's choice between just reconciliation and stability.

They mostly chose the latter, often enabled via amnesties. According to Human Rights Watch Americas, in Latin America the norm has been impunity, with no accountability for human rights atrocities.

Of the major Latino powers, Argentina has probably moved the most to reconcile its recent past, and this before the Pinochet dramas. President Menem has moved to dismantle a series of laws and amnesties enacted immediately after General Galtieri's junta collapsed.

Former generals and officers have been arrested and Argentine authorities have co-operated with the same Spanish judge who wants Pinochet extradited to Madrid over the extent of a regional co-operation against dissidents, a probe that could reach to Washington.

Like the European Union, democracy is a condition of entry for Mercosur, the regional free trade bloc.

But Menem has baulked, too, usually around election times. And advisers to Frei in Chile say he would like to consign Pinochet to the past, but he faces a Right-led Congress of life-long Pinochet cronies who threaten the passage of next year's budget if appropriate action is not taken to win the general's release.

So, for the most part, archives and vaults across the region remain closed and the world awaits what Britain's Law Lords decide on Pinochet.

There are many in Mexico who wish the vaults would stay closed on Carlos Cabal Peniche, Mexico's Christopher Skase, who was arrested at his mansion in Brighton, Melbourne, last week posing as an Italian food supplier.

They are government officials and senior members of Mexico's Institutional Revolutionary Party (PRI) suspected of corrupt links to the 41-year-old financier who was tracked through six countries by Mexican police before his arrest. PRI's opponents in Mexico's leftist opposition-controlled Congress have discovered bank documents that directly link Peniche to illegal payments to PRI in the 1994 election which brought the current President Ernesto Zedillo to power.

It was the collapse of Peniche's empire that many Mexicans believe precipitated the 1994-95 tequila crisis and the first of the modern massive IMF bail-outs.

Peniche has threatened to blow the whistle on PRI. He was a close friend of Zedillo's disgraced predecessor, Carlos Salinas de Gortari, who nodded through two controversial bank privatisations to Peniche.

Salinas's brother Raul, implicated in a money-laundering and drugs scandal, used Peniche's banks to make secret transfers.

Those bank sales were rubber-stamped by a committee headed by Zedillo's former finance minister, now head of the Banco de Mexico central bank, Guillermo Ortiz, whose resignation is now being sought by Mexico's cranky Congress.

For Zedillo and the PRI, which has been in power for more than 70 years, Peniche is a headache. Zedillo has been a reformist president, taking a leaf from Taiwan's Lee Teng-hui in democratising while seeking to retain power.

If his Government is seen to go soft on the Peniche probe, he faces damaging charges, as presidential elections approach, that his reforms are simply window-dressing, that his administration is little different from the corrupt PRI governments of the past.

But if he pushes harder, he faces revolt from within the strongest political force in Latin America, with the attendant difficulties this would bring for the economy.

The issues facing these Big Four are mirrored elsewhere. The shaky democracy of Colombia's new cleanskin President Andres Pastrana seems to face as many difficulties from leftist rebels as it does from drug cartels, while in Venezuela one-time coup leader and populist Hugo Chavez looks set to win his country's presidential election.

The yuppie generation is not yet secure anywhere in Latin America.

It's a case of fighting an American war on someone else's turf.