Stabilize South America

While the Israeli-Palestinian fight has taken center stage, South America is slipping into a state of turmoil that directly threatens American national security.

Argentina is in economic and political free fall, with widespread anger at the policies imposed from the outside and the political system that produced the present chaos. Peru is seeing the resurgence of the Shining Path, the militant Maoist guerrilla group.

Ecuador's two past presidents were forced out of office; one was declared insane by Congress and the other overthrown by the military. Bolivia has undergone massive political riots in the past two years.

Colombia is at war with two guerrilla armies, has an inept and corrupt military, a paramilitary whose atrocities more than match the depredations of the rebels, and politicians who seek salvation in American help – both economic and military.

The latest developments in Venezuela – the overthrow and then immediate return to power of President Hugo Chávez – add fuel to the tense situation. The struggle between President Chávez and his opponents will continue, and armed confrontations – even an all-out civil war – cannot be ruled out. Both Cuban President Fidel Castro's influence there and Venezuela's tough line in OPEC will remain, making life more difficult for the United States. Last but certainly not least, Colombian guerrillas will likely find support across the border with Venezuela.

The US cannot afford an unstable Venezuela. As global events have demonstrated, countries in political disarray form breeding grounds for discontent, violence, and ultimately terrorism. Furthermore, now that the conflict in the Middle East threatens to entangle the region, America's dependence on Venezuelan oil is stronger than ever. Thus the Bush administration must ask itself why South America, and Venezuela in particular, descended so quickly into chaos, and what can be done to stabilize them.

The most crucial step is to realize that many of Latin America's current woes have been caused directly by American and international policies. In order to improve the situation there, these policies must be changed.

With the cold war over and tolerance for regional dictators waning, the establishment of both electoral democracy and a free market has become the US goal. The simultaneous pursuit of these two objectives is driven by the assumption that they are not only compatible but complementary. As the market is freed, its benefits percolate throughout the economy and reach the whole of society. As the population becomes more affluent, democratic institutions and practices prosper and sink roots. That is the assumption.

Reality, however, cares little for theoretical assumptions about human behavior; the catastrophic failure of communism is proof enough. But under the sway of economic gurus who have more in common with communist ideologues than with rational students of human behavior, America has coupled the two goals and demanded their implementation.

This policy creates a Catch-22 situation. Freeing the market means, above all else, making the economy safe for foreign investment. Doing so requires measures that benefit a small number of people while creating hardships for a much larger group. The theory proclaims that, in time, everyone will benefit, but no one knows when that will be – if ever.

The actual impact of such a policy is that the middle class grows impoverished and that opportunities are diminished accordingly. This situation produces a dynamic process that undermines both goals. The measures aimed at creating a free market weaken or destroy the middle class. Without a sound middle class, no electoral democracy is stable.

Mexico under the former ruling PRI, Chile under Augusto Pinochet, and Spain under Francisco Franco are examples of countries that successfully liberated their markets. But they did so under despotic political rule, and that is a model America can no longer accept.

Now that democracy is a priority, the US must realize that blind insistence on market-liberalization measures without regard for their political impact can generate enough instability to undermine any fledgling democratic regime. Without abandoning either goal, American policymakers must decouple them.

The private sector cannot be expected to concern itself with political objectives, so it is up to governments and international institutions to guarantee that the freeing of markets does not impair democracy. There are already some proposals on the table, like the Special Drawing Rights the International Monetary Fund could extend for building infrastructure. But whatever the tools to be used, attention must be paid to the political impact of liberalizing measures.

MARKET liberalization should follow a case-by-case pattern instead of its present blanket approach. Had this been done in Argentina and Venezuela, those disasters could have been averted. Would doing this be easy? No. Would it be controversial? Definitely. Are there alternatives? No.

America must now concern itself first and foremost with creating and maintaining stability in Latin America. To do otherwise would be downright dangerous.

• Francisco José Moreno is president, and Alejandro Eggers Moreno is vice president, of Strategic Assessments.