Liberty for Latin America, by Alvaro Vargas Llosa, Farrar Strauss & Giraux, 2005
Lessons from the Past
The problem in Latin America isn't too many market reforms, it's too few, argues Alvaro Vargas Llosa.
BY JOACHIM BAMRUD
Despite aggressive market reforms in the 1990's, Latin America failed to significantly reduce poverty or create sustained economic and political stability. Some experts and policymakers - like former World Bank chief economist Joseph Stiglitz and Latin American presidents Hugo Chavez and Nestor Kirchner - blame the market reforms for those failures. Latin America needs more, not less, statism, they will argue.
Others - including U.S. policymakers and multilateral institutions like the IMF - argue that Latin America should stay the course towards further reforms of the kind implemented in the 1990's.
Peruvian journalist and economist Alvaro Vargas Llosa disagrees with both camps. In his new book Liberty for Latin America Vargas Llosa argues that the reforms of the past decade were at best superficial, at worst directly harmful to the goal of creating capitalism and prosperity in the region.
While a majority of governments did, in fact, implement reforms such as privatizations, market liberalization and stricter fiscal policies, Latin America still had to overcome one of the worst legacies from both the Spanish conquistadores and Indian kingdoms: The rule of influence.
A lack of an even playing field, built on a rule of law rather than rule of influence, partly explains why there are so few self-made millionaires in Latin America. Take a look at the Who's Who of corporate business in most countries in Latin America and you'll find few, if any, rags-to-riches entrepreneurs.
The Spanish colonialists, especially, made an art of the rule of influence, restricting commerce to those who had paid the royal court their dues.
"Although trade barriers were lowered, Spanish monopolies were strengthened at the expense of American Creoles and natives," Vargas Llosa writes about 18th century Latin America. "Only Cubans were permitted to participate in transatlantic trade. The rest of Latin America was confined to intercolonial trade and taxed so heavily that it was impossible to compete with metropolitan interests."
And Brazil, colonized by Portugal, followed a similar course, allotting land to political associates.
This system of rigid wealth transfer stifled the colonial society and created a social divide that lasts to this day and a concentration of property that
still constitutes a visible characteristic of the Latin American economy.
And that infamous Latin American bureaucracy? Largely the work of the Crown in Spain, which passed almost one million laws and norms during three centuries of colonial rule - much of it largely useless and irrelevant to the reality of Latin American economies, the author argues.
Such an environment made it difficult to create or boost wealth.
The energy was geared not toward producing wealth but toward bending
the law to one's advantage (or preventing others from doing so).
Latin America again suffered during the 1980's when populist statist policies were the norm, finally leading to the debt crisis and the "lost decade".
Then the truth became evident; import substitution had failed miserably to
achieve development, its single most important goal from the very
beginning...The planned, deliberate reallocation of resources was no longer able to sustain the growth of targeted sectors and, through them, of the
overall statistics of the economy, themselves fractured, elitist, unreal
reflections of society, not representative of the individuals' and the families' plight across each nation.
Vargas Llosa rightly criticizes both the local governments and multilaterals like the IMF for these failures. The IMF typically pressed for devaluations of currencies and tax hikes, neither of which helped create sustained economic growth. In the end, aid from the IMF, World Bank and the Inter-American Development Bank have helped keep Latin America under-developed by strengthening statism, postponing adequate solutions and displacing political responsibility, he writes.
And the United States comes in for some unusual attack for its famed Alliance for Progress initiative, a cornerstone of the Kennedy administration.
The Alliance for Progress stated in its very charter that most of the $20
billion would come from public funds...The origin of the money was as
much a problem as the destination, because funds provided by a foreign
government tend to go to programs blessed - if not run - by the receiver
country's authorities. Even when they do not, the result is favoritism and
discrimination in the marketplace, not competitive capitalism.
Added to that, were continued protectionism in the United States, with Roosevelt protecting agriculture, Eisenhower protecting oil and successive presidents by and large maintaining tariffs and nontariff barriers that have not helped make the case for free trade in Latin America, Vargas Llosa points out.
But the key problem, he argues, is that Latin America never really implemented the radical reforms it needed to shake off its statist past.
Latin America today is in many ways a twenty-first-century snapshot of
Western capitalism suddenly stopped halfway into its formation, right in
the middle of that labyrinthine tangle made of exclusive bargains stuck
between the privileged corporations and the political authorities, before
individual rights followed from the struggle.
Yes, young, U.S.-educated technocrats symbolized the new face of Latin America, but the old guard still dominated corporate life, Vargas Llosa argues. Rather than boosting new entrepreneurs, the wave of privatizations that dominated the region helped cement the power of the established players.
And the lack of extensive property rights - especially for the poor - have kept the poverty gap in place, Vargas Llosa argues, supporting the widely known premise of his fellow countryman, Hernando de Soto in his 1989 book The Other Path.
While no one can dispute the breadth of reforms such as privatizations - the most extensive anywhere in the world - the quality of those reforms were inferior to those successfully undertaken in, for example, Ireland in the 1990's, Vargas Llosa says. Limited reform under political guarantees for horizontal property rights goes a long way in comparison with extensive reform under precarious judicial institutions and fragmentary property rights, he says.
Another key impediment to the success of the market reforms of the 1990's was the still-high levels of corruption in Latin America.
Three factors stemming from the failed reforms of the last decade...have
strengthened corruption: the expansion of opportunity for public officials,
the further weakening of civil society and the absence of a judicial
system worthy of its name.
So, what then, is the solution? How can Latin America truly progress towards more capitalism and less poverty? Vargas Llosa suggests four key reforms that can be simply stated like this:
Subjecting the laws to a new standard that does not favor particular groups while discriminating against the rest;
Look at the gap between formal and de facto law and learn from that gap;
Empower the justice system;
Provide a gentle and secure transition for those who currently depend on the government for their substistence or for health and education.
Demands for improved justice are, of course, not new. But Vargas Llosa puts the lack of judicial reform in perspective:
An essential reason why "capitalist" reform failed is that it attacked the
size of the state - the symptom - without attacking the role of the
government as the source of the rules governing the economy and life in
general, with the result that the size actually increased...Under a system
in which no government limits the freedom of the people but in which,
through the courts of justice, it protects every single citizen's life, property, and right to conduct business as he or she pleases, the crisis of
legitimacy suffered by the Latin American state in the nineteenth and
twentieth centuries is unthinkable.
Vargas Llosa also argues for privatizing the public health and education systems as a tool to reduce the dependency on the state. A majority of Latin Americans depend on these services, yet they are typically run inefficiently and plagued by corruption. Vargas Llosa thus proposes government subsidies enabling the poor to have access to private health and education providers. He also suggests phasing out those subsidies gradually.
Vargas Llosa deserves praise for writing such an original, thought-provoking and constructive critique of Latin America's failed reforms. While we don't expect Chavez nor Kirchner to read the book or follow its recommendations, we do hope other policymakers in Latin America - as well as their U.S. and multilateral allies - heed the call for the book's radical reforms.
Only popular capitalism of the kind espoused by Vargas Llosa can help Latin America move away from its statist past and towards a prosperous future.
Originally published in Latin Business Chronicle, December 2005
Copyright © Joachim Bamrud.