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Ayau – Capitalism and Statism in Latin America

Manuel F. Ayau

University of Francisco Marroquin

"Capitalism and Statism in Latin America"

The Philadelphia Society

San Antonio, USA

October 4, 1997

(Permission to quote this speech must be granted by the Author)

 I believe that it is now recognized that to date, Latin America has not given
Capitalism a chance. South and Central America have suffered and lived under
what Adam Smith condemned as the mercantile system, better known later as
mercantilism, inherited from Spain and Portugal since colonial days, with the
few exceptional decades in the end of last century and beginning of the present.
Indeed, it is said that during that brief exceptional capitalistic period, Argentina
became one of the five most developed countries in the world in terms of
income per capita, and her neighbors were not far behind.

Those few decades were followed by the combination and succession of the
unfortunate events that dominated most of this century, and Latin America
abandoned the successful capitalistic policies prevailing in the leading countries,
and reverted to mercantilism under one name or another, some times under
elected governments and other times under dictatorships.

Then came the great depression, WWII, and keynesianism with its
macroeconomic tinkering; then the United Nations created The Economic
Commission for Latin America, providing prestigious auspices to
interventionists and the so called scientific economic planning. The popular
theories at the time were, among others, the Dependancy Theory, the Permanent
Deterioration of Terms of Trade and consequent Import Substitution, Inflation,
the Phillips Curve, etc. The World Bank and the IMP financed aggrandizement
of governments while contributing to the paradise for rent seekers; the U.S.
increased its government­to­government economic assistance which again
fostered the prominence of governments in economic affairs. Then, in 1961,
came the big push for more statism and redistributive policies with the creation
of the Agency for International Development (AID).

As Paul Craig Roberts and Karen Lafollette Araujo point out in their recent
excellent book, The Capitalist Revolution in Latin America, "The government
failures in Latin America are so great that they are acknowledged by … the
international organizations that financed the failed experiment with publicly
directed economic development".

Contrary to intentions, all of that assistance helped prevent the adoption of free,
open market economies, and thus contributed to the postponement of the
corrections that are now taking place, following the successful example that
Chile began in the middle seventies without AID, World Bank etc. Please note
that Chile did it while it was considered a pariah by the community of developed
nations who did their best to sabotage their successful efforts. Incidentally, this
tells us a lot about how unimportant are the effects of displeasing the
community of nations, for, in spite of their hostility, Chile stuck to its free
market policies and became an example to the rest of the world.

Then, when the world was going through the Cold War, the Soviet Empire, in
order to subvert governments friendly to the U.S. was intent on providing
economic and logistical support for revolutionaries such as Castro, the
Montoneros, the Sandinistas, et. al. Today as their sources of foreign support
are dying out, the revolutionary movements are crumbling unless they have
another source of income like in Peru and Colombia where the drug policies of
the U.S. make it possible to maintain private armies.

Last but not least, the universities were taken over: first by the governments and
then by the socialists and interventionists, when not outright communists. They
have given intellectual support and created a very socialistic culture in the
professional class, the lasting effects of which we shall suffer for a long time. It
is no coincidence that today our biggest challenge is to change the culture of the
inept and corrupt judiciary infested by lawyers trained in those universities.

The economic price of these recurrent and constant policy failures was, of
course, poverty; the political price was democratic representative governments.
The general discontent with the results and with those in power created the
climate and opportunities for revolutions and dictatorships. That’s why coups
d’etat were always so popular. Fortunately, the future looks brighter. As
Roberts and Lafollette point out in their book, "The region is at last shedding
the cultural attitude hostile to commerce, trade and work that made it socially
more acceptable to court privilege and peddle influence, than to compete in
markets." The nature of the solutions to our problems has changed and, not
surprisingly, the solutions being adopted are the same in the countries of the
developed world of Europe and the ex-socialist countries. Those policies are,
more open economies, flexible labor legislation, foster competitiveness, leave
the direction mainly to market forces, privatize government enterprises, stabilize
currencies, reduce deficits, etc. Why we could be talking of Germany, France,
or the U.S.. In other words, the problems of Latin America today are no longer
peculiar to the region, but more global. Thus, our countries are in the process of
rationalizing our economic and fiscal legislation to be more competitive, aware
that the opportunities for capital investment are more and more international,
and not confined to the developed countries. Latin America, following Asia,
seems on the way to becoming one of the great growth areas of the future. And
like in Asia, the process will be tenuous and erratic because it is not based on
principles, but on pragmatism.

Notwithstanding, this is a win win process, from which all, rich and poor
countries, will derive benefits, we must be on guard against the isolationists in
our midst, as well as the good intentioned interventionists in the international
meddlesome class. I refer to the intrusive international aid lobbies, the World
Bank, the IMF, and the governments that dispense funds conditioned on the
adoption of their politically correct recommendations.

Hopefully, countries like the Scandinavians, France and Germany will find it
harder to justify their largesse in view of their own present economic problems
and the fact the left wing ideological recipients of their assistance are dwindling.
They normally do not lend a hand to those on the right. On the other hand, the
assistance of the United Nations, the World Bank, the IMF, and U.S. Foreign
Aid Department, I don’t expect are going to disappear in the near future. Again
fortunately, in spite of some persistent hang ups, their policies are no longer
totally hostile to the market.

The economic model which is now being promoted by those international
development agencies is not the open market economy. It is the regulated
market, what Rupert Murdoch called neosocialism in a recent article in National
Review
, and Mr. Tarnowski, in the following issue claims that it would be more
appropriate to call it neo-fascism. And the political role model being promoted
is the politically correct version of the U.S. democracy with emphasis on a
welfare system that we cannot afford.

Aid officials recommend free trade but not unilateral removal of import
restrictions, which, considering that small countries do not have sufficient
internal competition to force their economies to allocate resources efficiently,
need more than large countries, the pressure of international competition. They
don’t recognize free trade as an exercise of property rights, as an exchange of
what is rightfully theirs of people who happen to live in different political
jurisdiction. They recommend privatizing but follow it u p with bureaucratic
regulations. They don’t recognize it as the exercise of the right to serve and be
served in peaceful endeavors.

When Congress in Guatemala was passing a law getting rid of all intervention in
the electricity market, the AID office and the World Bank insisted on
introducing a clause at the last minute which, in effect, says that Congress shall
pass another law within six months regulating what it was liberating. I have a
copy, on AID stationery, of the first draft of the regulatory law which, by the
way, is already on the books, and, which although admittedly much better than
what we had before, undoubtedly will cause power costs to be higher than they
would be and create future opportunities for corruption; for, as George Stigler
pointed out, the regulated end up controlling the regulators.

I could cite many more examples of their economic advice, a half-way house to
the market economy, but I would end with a few words about the political and
fiscal advice their official are giving, accompanied, of course, by their grants
and loans.

They continue to insist on government controls citing so-called market failures.
Their model of "managed trade" appeals to the privileged classes and other rent
seekers who have exploited government privileges over the years. to the nihilists
and socialists who lament the collapse of the Soviet Empire, and to the labor
unions who are united attacking the so-called "neo-liberals" who want to free the
economy. Like Leonard Read, founder of The Foundation for Economic
Education would say of these officials, "they leak at the seams."

The political role model being promoted is the image of what the politically
correct historians would have us believe about how the U.S. came to be the
great country it is. Their policy advice is driven by egalitarianism. They
represent the U.S. as a country committed to equality of results from the time of
its origin, more than to equality before the law. Whereas we learn from reading,
for example, Basic Symbols by Willmoore Kendall and George Carey, the idea
was, since the Mayflower Compact, to entrust the government to "enact,
constitute, and frame, such
just and equal laws, Ordinances, Acts,
Constitutions and Offices
,…" At the very time when the progressive income
taxation is being reconsidered even in the U.S. international development
agencies recommend redistribution via income tax and "social" expenses.
Evidently, they do not appreciate the urgent need of proper incentives to capital
formation nor its social and welfare effects. (As a matter of historical interest,
the majority of income tax laws in Latin America were established at the
instigation of AID, as a precondition for economic assistance.)

I am further persuaded by Basic Symbols that the quest for equality of results in
the U.S. is, historically speaking, recent. The word equal referring to individual
people does not appear in your Constitution nor in those symbols that preceded
it. It appears only in your Declaration of Independence, albeit in a different
context, referring to men in general, to "peoples that identify themselves as one
(the Frenchmen, the Englishmen, etc.), and not to the equality of every man as a
unique individual person."

I am of the opinion that many things that work in a democratic federal
democracy do not necessarily work in a politically centralized democratic
country. I am inclined to believe that the federation of largely sovereign states
jealous of their autonomy is a more effective balance of power than the tripartite
division of governmental powers which, without the federal ingredient, has
proven easy prey to the executive branch. I would not be surprised if
Federalism were more effective in checking local pressure groups than antitrust
legislation. Now that there is more and more centralization of power at the
expense of the states, with the federal government involved in everything,
Washington has become a city of lobbyists, as in Latin America, where success
depends not on serving consumers in the market but in the lobbies exchanging
favors. It is no longer a good model to recommend, and much less to copy.

The Constitution of the U.S., which was principally to be an instrument to
govern relations between states, is perhaps not as good a model as is generally
considered for a non-federal government. It is true that it has been copied all
over the world, but only in Switzerland has it perdured. Maybe a better model
would be, for instance, the Constitution of Virginia or Massachusetts. It seems
that the international advisors are not even aware of the fact that the word
democracy does not appear in the founding documents of the United States.

My reading of history is that the character of the U.S. model was, until this
century and with few exceptions, that of a representative republic, of individual
responsibility and self-reliance and not of dependence on the state. Americans
overwhelmingly were proud and not ashamed of extraordinary financial success,
rejected robbing Peter to pay Paul, and were mind-your-own-business types.
During the rise of the U.S. to a great power, until WWII, the ratio of
government revenue to GNP was much less than 10% in peacetime. The
political advisors to our countries, in this sense, are not typical Americans. They
dogmatically recommend raising taxes in order to have a "better"-meaning
higher-ratio between revenues and GNP, as if this magic proportion had a
meaning of its own.

I have dwelled on the influence of aid dispensing agencies, because of their
disproportionate influence in making policy in Latin America. I am sure that their
advice would be considered improper intervention if it were not accompanied
by generous financial assistance. I am also sure that in the U.S. such
intervention in local affairs would be considered improper, if not illegal. The
mistakes of Latin America are definitely our own, and not due to these
international agencies, for we could certainly send them packing. But because
politicians are politicians, they like foreign taxpayers money and frequent trips
abroad. And so to keep the moneys coming, they uncritically comply. I do not
want to imply that the officials in charge of financial aid are self serving, but they
are crusaders, and I am not sure which is worse. In the context of
macroeconomic figures, the amounts of the grants are not very large, but at the
margin they are very effective.

We must resign ourselves to the fact that we don’t live in a perfect world. Latin
America is going the right way. It promises more freedom and prosperity than in
the past. And this prosperity will also be good for the U.S. and the world,
because in a freer world, we are all better off when our neighbors are better off.

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