TCS Daily

Populism and Institutional Ruin

By Martin Krause - April 10, 2006 12:00 AM

Are illiberal trends in Latin America regional or just isolated situations in each country?

The possible electoral victory in Perú of a former military officer with clear inclinations to Venezuelan strongman Chávez; the unstable situation in Ecuador; the successful campaign of a left-of-center candidate in Mexico; the reelection of Lula in Brazil; the access to power of Evo Morales in Bolivia -- all -- seem to indicate a return of populism with a new dress. What these candidates have in common is, of course, a preference for omnipresent government intervention, and not only in the economy.

Nevertheless, there are others who are clearly different. Alvaro Uribe in Colombia, Elías Saca in El Salvador, Michelle Bachelet in Chile.

So, is there a regional trend or not?

After reviewing a number of indicators such as indexes of economic freedom, globalization, transparency, rule of law, regulatory opacity, human rights, competitiveness, access to technology and others, it seems clear Latin America lags behind in many of these, with the exception of Chile.

The common factor among all these countries is an old disease by the name of "populism." What is that exactly? It is not easy to understand for people outside the region. In fact it is the predominance of charismatic leaders who care only for power, how to get it and how to keep it. Some say they do it without regard to ideology but that is not correct: as shown above, one can easily find populist leaders on one side or the other of the ideological debate.

All of them, though, have a personalized way to administer power and that is what really counts. Personal relations and loyalties become the center of concern. It is essential for any of these leaders to have friendly people at the Supreme Court, chairing the houses of Congress, controlling the political party, the unions, and the media. Sometimes, achieving this requires dirty maneuvers to which control of secret service operations is essential. And certainly all this requires money, and a lot of it, that is why any public policy is also viewed in terms of revenue for political operations. Granting privileges, protections, subsidies may have a justification as policies but they are also a clear source of financing for the ones who gives them away. A parallel "business" structure is built alongside the traditional and formal structure of government.

Populism is the absence of constraints, of rules of conduct in the public arena which is the other side of corruption. Populist leaders built their own constituencies, their own political structures, and their own mafias at the same time.

The result of this is what is usually called "lack of institutions." Governmental decisions are at the whim of the populist leaders, subject to his ideas or his interests -- undermining legal stability. Things can change radically from one day to the next. President Kirchner in Argentina decides to ban exports of beef, no matter all the efforts of producers and exporters to open new markets. Tomorrow he may open them again. How are producers going to invest in a process that takes, at least, three years to mature?

Appropriate business conditions are bought at a price. It is a cost producers must count as any other business cost. No wonder Latin American producers lack competitiveness or they have it only when they are based in cheap and abundant resources.

How did Chile manage to overcome these difficulties? It is probably still a mystery, but also a hope, showing that building "institutions" is possible.

Dr. Martin Krause is the Professor of Economics and Dean of ESEADE Business School in Buenos Aires, Argentina.



Chile improved because of Pinochet PLUS criticism
The Leftist hated Pinochet coup, plus the Chicago Boys reforms, is the main reason Chile is so much better off. Yet the constant demonization of him, while overplayed, has had the benefit of his rule avoiding most excesses of other dictators.

Pinera's privatized pension plan and an "ownership" culture surely help quite a bit, too (though this can be called part of the Chicago School reforms.)

the ends justify the means hey

Latin America is growing faster than the USA. And is getting rid of debt faster as well.
I travel to Brazil a lot. That country is growing much faster than the USA. And, it is erasing debt faster than the USA.

I actually fall on the side that one or two Chavez's are good for the contient. Despite the talk, the residents know the evil of old Hugo and the economic destruction he and his policies have dumped on Venezuela.

In fact the countries on his side are there solely because the inane war on drugs. Their poor farmers have so few cash crops except for drugs that they are electing leaders who will stick up to the US and hoping that they do not wreck the economy too bad.

There is an easy way to fight "Populism" and that is the old fashioned way: TRADE.
The US can do these three things to stop the spread of (lets call it like it is) Communism in Latin America. They will not be easy but will absolutely work:
1. Stop tariffs on agriculture related products. That goes double for the big three: sugar, citrus and tobacco.
2. Cut back the war on drugs and legalized pot. Then we can clean out the prisions and hopefully get some cash into the drug republics.
3. Cut back on subsidies to large corporations for doing external business and just cut corporate taxes.

Who knows, if the US does these things, it might even destroy Communism in Cuba. But, the USA really does not want to despite any Bush talk to the contrary.

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