What makes volatile countries settle down and grow in a stable way? Is it a change of institutions, opening the door to trade, or the end of a war? Perhaps it's none of these. As crazy as it sounds, simply reaching a set level of income may be enough.
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Economic growth can happen under almost any kind of government, though there are few models that seem to guarantee steady, equitable increases in living standards over the long term. Take South America. In the past century, countries there have tried just about every model there is, from disorderly Weimar-style democracy to dictatorship. Most often, they have swayed back and forth between various flavors of left-wing populism and right-wing authoritarianism. In the meantime, they have managed to grow, but only fitfully.
For some countries, however, the political pendulum has stopped swinging. In Brazil, Chile, Peru, and Uruguay, roughly the same sequence of events has resulted in relative stability. First, a center-right government has taken power and instituted the kinds of policies that warm the hearts of international investors: flexible exchange rates, fiscal balance, and tight monetary policy. Then, a center-left government has been elected. These new leaders have maintained the policies of their predecessors but, crucially, have also legitimized those policies by pursuing priorities that spread the gains of investment-led growth: education, health care, social programs, and other forms of redistribution.
It's no coincidence that these four countries are now among the most promising on the continent, from an economic perspective. They and Colombia (more about it later) attracted the biggest inflows of foreign direct investment per capita in 2011, and the five are the only ones rated as "investment grade" by Standard and Poor's. But why did this transformation happen when it did?
Here's a theory. As people's incomes rise, they're less likely to be swayed by political extremists. Neither populist promises of a chicken in every pot nor severe measures to suppress dissent are particularly appealing. The people are too well off to be persuaded by advocates of revolution, which makes approval of undemocratic crackdowns similarly unlikely. They just want to hold onto what they've got and enjoy their civil and economic freedoms.
The question is: How much do people have to earn for their economic situation to anchor them in the political center? Remarkably, this question may have an answer in South America. In the four countries that made the transition to stability, the completion of the sequence outlined above occurred as average purchasing power reached $8,500 per year at 2005 prices, as computed by the World Bank. In those four cases, the first election after crossing the $8,500 threshold ushered in the center-left government that would confirm the country's path of steady, equitable growth.
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