There are two ways to encourage struggling countries to reform: Throw money at their problems through foreign aid, or urge fundamental changes that will make them competitive.

President George W. Bush plans to attend a Special Summit of the Americas (search) in Monterrey, Mexico, from Jan. 12-13, 2004. The purpose is to welcome the dozen recently elected heads of state in the hemisphere and discuss ways out of the economic slump affecting the region. Bush should use the opportunity to press hemispheric neighbors to solve their financial woes through greater freedom and market competition.

According to U.S. summit planners, that’s exactly what the president will do. Unfortunately, back in Washington, Congress is poised to do just the opposite -- lawmakers are considering a bill that would double U.S. loans and development spending in Latin America.

Little surprise. As often happens, Congress and the White House are working at cross-purposes. Unfortunately for Latin American presidents looking for debt relief (search) and a free pass on earlier commitments to reform, the White House -- not Congress -- has the right idea.

A few Latin American countries, including Chile, have undertaken profound democratic and free-market reforms (search). But the majority of the region’s societies are neither free, nor accountable, nor competitive enough to take advantage of new loans and aid money. In fact, if any additional money is to be spent, it should help countries establish political freedoms, adopt market economics and strengthen the rule of law.

Of course, one of the problems with multilateral summits is that leaders often hammer out grand bargains, but never follow through on their promises. For instance, Argentina is committed to some 250-action items from earlier Americas summits, but has made progress on only about 50.

As a practical matter, presidents cannot enact summit pledges alone. They need public support as well as approval from their national legislatures. They also need the backing of a key but usually invisible force -- the economic elites who dominate commerce and influence legislators and Cabinet ministers.

Elites usually oppose reforms that might threaten existing monopolies (search) and personal patrimonies (search). Rather than confront the status quo and the entrenched interests that maintain it, presidents typically complain that institutional changes cost money their empty treasuries can ill afford. At summits, they plea for debt relief and development assistance to stave off painful decisions oligarchs (search) will not accept.

That’s one reason merely increasing aid won’t help. Still, U.S. Reps. Cass Ballenger, R-N.C., and Bob Menendez, D-N.J., introduced legislation in November to authorize $500 million per year in new U.S. development assistance to Latin America for the next five years. This legislation would create two social investment and economic development funds -- one administered by the U.S. Agency for International Development (USAID) and the other by the Inter-American Development Bank.

The funds would go toward public-private partnerships, improved quality of life, strengthened rule of law and efforts to reduce poverty among minority ethnic populations in Latin America.

But spending more money on problems does not necessarily solve them, particularly when recipients are not willing to help themselves. Congress currently invests close to $300 million a year in Latin America, two-thirds of which goes to stopgap environmental and public-health programs that neighboring countries could pay for themselves if they wanted to.

While the U.S. General Accounting Office says recent projects promoting democratic reforms and market economies have had modest success, these programs are hobbled by an aid bureaucracy that is more accustomed to running big-ticket give-away programs.

Until our hemispheric neighbors adopt policies that deepen democratic practice (beyond simply holding elections), open markets (beyond selling state monopolies to well-connected cronies) and strengthen the administration of justice so that all citizens play by the same rules, assistance used to build fish ponds and health clinics will do little to help such societies become sustainable.

As an example of projects that work, Bush can praise President Vicente Fox (search) for enacting Mexico’s first-ever Rapid Business Start-Up System, which cut procedures for starting small enterprises from 50 days to about 48 hours. He could also laud Chile for cutting its own tariffs and aggressively seeking free trade agreements around the globe.

When it comes to reform, talk may be cheap -- but it can ultimately work to make life better for millions in Latin America. We already know that more misguided spending won’t improve lives.

At the upcoming Special Summit of the Americas, President Bush should make it clear that local initiatives to change fundamental institutions are more important than handouts to prop up a faulty state.

Stephen Johnson is senior policy analyst for Latin America at The Heritage Foundation, a Washington-based public policy institution.