The left is in trouble in Latin America. Sebastián Piñera’s recent election as Chile’s first elected center-right president in decades owes much to the inability of the center-left coalition that governed Chile after 1990 to rejuvenate itself. Yet across Latin America there is, as the Washington Post’s Jackson Diel perceptively observes,  a sense that the left’s decade of dominance is unraveling.
Future historians may trace the beginning of this decline to the refusal of Honduras’s Congress, Supreme Court, Administrative Law Tribunal, independent Human Rights Ombudsman, Supreme Electoral Tribunal, two main political parties, and Catholic bishops to allow ex-President Manuel Zelaya to subvert Honduras’s constitutional order “from within” Chávista-style in 2009.
In truth, however, the populist-left is wilting because their economic policies are collapsing. The most prominent example is Venezuela. Hugo Chávez’s regime was recently forced to devalue the currency, thereby undermining the purchasing power of ordinary Venezuelans’ bolivars in an already recessionary inflation-riddled economy. He is also rationing basic commodities such as electricity.
To Chávez’s south-west, his close ally, Ecuador’s Rafael Correa, has been rationing electricity for the past three months, partly because he can’t find anyone willing to invest in electricity production. That’s hardly surprising, given that Correa’s government defaulted on a third of its foreign debt in 2008, thereby destroying his nation’s credit-worthiness. Even the president’s own brother – recently accused of corruption – is doubtful whether Correa will finish his presidential term, given the depth of public discontent.
Things aren’t much better with Latin America’s other populist-left poster-child – Bolivia. Evo Morales was easily reelected as president in December 2009. But Bolivia’s economic situation is steadily deteriorating. As the Economist  reports, gas production is sliding in this oil-industry dependent country because foreign investors have been scared off by Morales’s leftist economic policies. Moreover, the gas industry’s nationalization in 2006 has introduced all the usual inefficiencies associated with state-owned enterprises. Morales’s government is consequently forecasting significant deficits for 2010.
Despite these problems, the populist-left may prevail for some time. Their political opponents are fragmented, disorganized, and often associated with the corruption and oligarchic political-economic arrangements that have long dominated much of Latin America.
But while they wait for the populist-left’s fantasies to crumble, those Latin Americans seeking alternatives to the populism of the present and the oligarchy of the past may like to spend some time thinking about the best economic path for a post-Chávez-Correa-Morales Latin America.
In institutional terms, the path to prosperity is no secret. It consists of secure property rights, rule of law, constitutionally-limited government, and open markets.
A good example of this is the famous comparison drawn by economic historians between Argentina and Australia. In 1900, both were among the world’s wealthiest nations. Both are immensely blessed with natural resources, and have similar population-sizes. Today, Australia remains one of the world’s most prosperous nations. Argentina is an economic basket-case.
One explanation is that Australia has maintained respect for rule of law, property rights and constitutionally-limited government, and began its radical abandonment of protectionism almost 30 years ago. By contrast, Argentina has experienced military dictatorships, regular violations of property rights, struggles with adherence to rule of law, and has great difficulty opening its markets.
But there is something even more important for successful transitions away from poverty and arbitrary rule than the right institutional settings.
One scholar who understood this was the nineteenth-century French philosopher Alexis de Tocqueville. In his famous Democracy in America, Tocqueville noted that institutions which promote political freedom and economic prosperity will not prevail unless particular moral habits are also widely embraced. These included practices such as self-reliance, creativity, and freely associating with others to produce civil society (rather than government or NGO) solutions to problems.
Cultural change, however, is extremely difficult. How do you persuade millions to alter habits deeply ingrained in their historical consciousness?
One answer is to change incentives. A society in which businesses are incentivized to be entrepreneurial wealth-creators will be very different from one in which companies are incentivized to become vassals of a favor-dispensing political class.
But it is equally important to persuade people that, for example, adhering to rule of law is good not just because it is efficient, but also because it meets the demands of natural justice. If people lack a moral sense for such things, they find it harder to resist the efforts of politicians to shift incentive structures back to them.
Economic and institutional reform is easy compared to moral rejuvenation. But all will be needed in post-populist Latin America if it wants to embrace the path of hope rather than slouch down the road to despair.