TCS Daily

Why Doesn't Latin America Takeoff?

By Carlos Ball - December 29, 2004 12:00 AM

Latin American has never experienced individual freedom. Alvaro Vargas Llosa, in his new book "Liberty for Latin America: How to Undo 500 Years of State Oppression" (Farrar, Straus & Giroux), blames the Latin tragedy on government coercion, mercantilism, special privileges, redistribution of wealth and politicized laws. What is urgently required south of the border is individual freedom, respect for private property, rule of law, and limited governments.

No matter what yardstick is used -- per capita income, poverty, the size of the informal economy, unemployment, capital flight or emigration data -- Latin America continues to be backward, underdeveloped and poor. Why? This Peruvian author, currently a research fellow at The Independent Institute in Oakland, California, tells of the tremendous damage caused by the economic nationalism that became fashionable in Latin America after the Second World War, when the authorities sped-up development by means of social engineering.

The economic nationalism promoted by the U.N. Economic Commission for Latin America and the Caribbean (ECLAC) blamed poverty on unfair terms of trade -- selling raw materials cheap and importing costly finished products. The supposed remedy was to protect domestic industry with high tariffs, import quotas, exchange controls, and periodic devaluation of the currency.

Vargas Llosa asks: what possible incentive could there then be for companies, operating in highly protected markets, to become efficient and use new technology? Such policies only favored certain business elites, which soon understood that what it took to be successful was not necessarily to please the consumer, but rather to please cabinet ministers, politicians, and government officials responsible for taking most economic decisions. That explains why top Latin American "capitalists" still today tend to support state intervention rather than a free market.

But it was not long before the politicians began to get their hands on the so-called basic and strategic industries, such as oil, electricity, telephones, minerals, banking, fisheries, airlines, etc. By 1982, there were more than a thousand state-owned corporations in Mexico, the government of Argentina had 350 companies, and Venezuela had nationalized its oil industry, which ended several decades of tremendous growth and prosperity. The deterioration of public services was not long in coming, and soon people had to pay bribes if they didn't want to wait two or three years to get a phone.

The inefficiency of state-owned corporations, plus the cost of the private monopolies and oligopolies created by rent-seekers, devastated the middle class and made the poor more dependent than ever on government handouts. But remember that the justification for such infamous economic policies was their supposed benefits to the common people, when in fact the opposite took place.

Unfortunately, the Inter-American Development Bank, the World Bank, the IMF and Washington, by promoting and supporting bad policies, have contributed for decades to Latin America's backwardness. While capital flight in Latin America reached $68 billion in the 80s, between 1982 and 1989, the IMF lent $54 billion to the underdeveloped world on condition that taxes were increased.

Economic nationalism collapsed and the remedy applied was the so-called "neoliberalism" of the '90s, whose true objective is described by Vargas Llosa in Lampedusa's famous words: "if we want everything to continue as it is, it is necessary for everything to change." Evidently, the elites did not want to lose their power and rents, which is why the reforms undertaken were quite different from what they appeared to be. Privatizations, for example, in many cases simply transferred public monopolies to private hands, to the detriment of the consumer and the discredit of capitalism. If in doubt, pay attention to the discourse of the region's new left, like Venezuela's Chávez, Argentina's Kirchner, and Brazil's Lula, who blame it all on globalization and cold-hearted capitalism.

The main thesis of this book is that investment, production and growth are manifestations of development, not its causes. What really promotes development -- as economists such as the late Peter Bauer clearly demonstrated -- is individual freedom (which includes the freedom to buy and sell, import and export whatever one wants), respect for private property, limited governments, and the rule of law.

Individual freedom has never existed in Latin America. During colonial times, almost a million laws and regulations were passed and after independence, as "the State represents the interests of the people... it is not necessary for all members of society... to assume responsibility for their own lives." Vargas Llosa blames the Latin American tragedy on the oppression of State corporatism and mercantilism, the redistribution of wealth and politicized laws. In Latin America, there is no real system of justice. What we have is a political system, and the courts support whatever the politicians require.

After examining the cold facts behind the façade of falsehoods constantly voiced by politicians and bureaucrats, both local and multilateral, Latin America's backwardness turns out not to be such a mystery after all.

Mr. Ball is editor is editor of AIPE, a Spanish-language news organization based in Florida, and adjunct scholar with the Cato Institute.


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