Carlos Ball
AIPE

The Rule of Law
Introduction to the session on the Global Prospects for the Rule of Law

The Philadelphia Society
New Orleans
April 27, 2003 

Good morning, ladies and gentlemen. My name is Carlos Ball. This is our last session, and I want to congratulate Ed Meese and Bill Campbell for designing an excellent program and inviting an outstanding group of speakers. 

I should start by saying that I’m not a lawyer, but a journalist, and according to one of my nephews, I am not even very popular with lawyers and law professors. He claims that his application to a Law School in Caracas was rejected because of a talk I gave there a few days before his application was considered. True or not, it was perhaps a blessing in disguise. I don’t think law diplomas are very useful in a country without rule of law. But then, Venezuela today is very different from the country I grew up, and since our two distinguished speakers will be talking about the global prospects for the rule of law, I’ll take just a few minutes to tell you about the socialist destruction of a prosperous South American nation. 

Not long ago, looking through the papers of my late brother Luis Henrique, I found a truly amazing story, which to me clearly shows the mistaken road Venezuela has followed. That road was not only chosen by our local politicians, but encouraged and supported by multilateral agencies and the State Department. We could call it, a road to serfdom.   

My brother Luis Henrique was nine years older than me, and the story in his papers that I found fascinating relates to his visit to our mother at the hospital, the day I was born, in July 1939. He writes that during his visit to the clinic, he said hello to a young lady walking out with a newly-born baby in her arms. He recognized her as a worker in my father’s factory. And I was very impressed to learn that, in 1939, my father’s company paid 95% of the workers’ medical expenses, and all of them received medical attention at the very best private clinic in Caracas. There was no socialized medicine in Venezuela. Only after the war, the U.S. State Department pressured the government to establish a social security organization to centralize not only pension funds, but also healthcare. Then, the United Nations recommended the appointment of Dr. Salvador Allende to oversee the creation of the Venezuelan Social Security Institute, which to this day handles both pension funds and medical services. The payroll taxes imposed on corporations soon eliminated all private sector efforts to offer healthcare benefits to employees, and private clinics became accessible only to a select group of Venezuelans, those with higher than average incomes. 

I’m not trying to imply that Venezuelan political mistakes are the fault of a Chilean communist like the despicable Salvador Allende or State Department socialists. But it is obvious that in 1948 we did not have in the government someone with the knowledge and stature of Ludwig Erhard, who that same year told the Allied commanders in occupied Germany to take a hike, when they wanted to keep the price controls imposed by Hitler since1936.

 Despite the glorious role played by Simón Bolívar and his army in the independence of much of South America in the early 19^th century, Venezuela remained a poor, agricultural country until the 1930s, when thanks to the oil boom it became one of the fastest growing economies. An important ingredient in the sharp increase in prosperity was that the value of our currency, the bolívar, had been fixed to one gram of gold since 1879, and remained so until 1961. Private commercial banks issued the currency until 1940, when a central bank was established. But the new central bank was not a government agency, rather a mixed enterprise with 12,000 private shareholders owning 50%, and the selection of the chairman was not a political decision. Thanks to a wise monetary policy, inflation throughout the 1950s, our golden age, was under 1%, and our economic success was reflected by the great number of immigrants arriving from Europe and other Latin American nations.

 Low inflation is a clear demonstration of a government’s respect for property rights. But for Latin American politicians, the easiest way to steal is by inflating the currency, harshly hurting the poor whose assets are mostly in cash and saving accounts rather than in real estate and investments.

 Venezuela’s first Constitution of 1811 had similarities with the U.S. Constitution; it was written to protect the citizens rather than to empower bureaucrats in building the road to Utopia. 25 constitutions later, the document is now a long list of socialist dreams that will bankrupt any government that tries to abide by the constitution.

 Another significant historical factor is that Venezuela inherited the old Spanish law declaring that the subsoil, that is the underground resources, belongs to the State and not to those that own the property above.

 Mexico has a similar law that allowed President Lázaro Cárdenas to expropriate the foreign oil concessions in 1938. Then Standard Oil, Shell, Gulf, Mobil, and others concentrated their investments in friendly Venezuela. For that reason, I believe that Lázaro Cárdenas’ dead body should be given a place of honor in Venezuela’s national pantheon.

 By 1958, Venezuelan oil exports accounted for nearly 60% of the international oil trade, there was more American investment in Venezuela than in the rest of South America combined, and our standard of living surpassed Spain and Italy. 45 years later, I’m sorry to say, our national statistics are much closer to those of Cuba and Haiti.

 What happened? You will be surprised to hear that there was more respect for the rule of law and property rights during the military dictatorship of the 1950s than under the later, freely elected, democratic administrations.

 We should also recall that OPEC’s founding on September 17, 1960 was the idea of the Venezuelan energy minister, Juan Pablo Pérez Alfonzo, who convinced four Middle East rulers to form a cartel to secure “a steady income to the producing countries." Interestingly enough, the model of production quotas designed by Pérez Alfonzo for OPEC was based on the rulings of the Texan Railroad Commission, to which he dedicated years of study.  

 The immediate result of the involvement in OPEC and of President Rómulo Betancourt’s announcement that no new oil concessions would be granted was that foreign oil companies pulled back their investments and in 1961 the bolívar suffered its first devaluation of the 20^th Century. After frequent devaluations, starting in 1986, the bolívar has lost 53,000% against the dollar in the official market and even more in the black market. That black market surged upon the recent imposition of exchange controls, in which dollars are made available only to the friends of the Chávez administration.

 From 1961 to 1971, Venezuela’s share of the international oil trade dropped by half, to 30%, as the Arab countries and Iran greatly increased their foreign concessions. Then in 1969, Betancourt’s social democratic party lost the presidential election, but used its congressional majority to keep control over the judicial system. A law was passed making judicial appointments a function of electoral results. The judiciary soon became politicized and corrupt, discarding the notion that the law is something permanent, uniform, and universal.

 In 1974, Carlos Andrés Pérez was elected president, and proceeded to nationalize both the oil industry and the independent Central Bank. Venezuela’s share of the international oil trade continued to drop steadily until reaching 3% today. But one of President Chávez’s top concerns has been strengthening OPEC. In typical doubletalk, Chávez says: “from its birth, OPEC has been an instrument in the fight for liberty, for justice and for peace.”

 Perhaps the peace President Chávez has in mind is reflected by his appointments, such as the current chairman of PDVSA, the state oil company, Mr. Alí Rodríguez, a former director general of OPEC, who in the 1960s was a guerrilla leader and the terrorist in charge of blowing up oil pipelines.

 If asked to describe Mr. Chávez, I would do so by quoting from Adam Ferguson: “the most important difference between a savage and a civilized man is that the savage does not recognize property rights.”

 President Chavez not only rewrote the constitution, but controls Congress, appoints the justices of the Supreme Court, chooses the members of the Electoral Board, and keeps repeating that he plans to govern for 21 years. Why not? His model figure, Fidel Castro, has been in power for 44 years, since the times of President Eisenhower.  Our tropical version of the Welfare State has reduced the income per capita back to the level of 1950, but most Venezuelans see Chávez as a freak, not as the logical result of 40 years of socialist policies.     

In this session we are going to hear from two very distinguished speakers from the Czech Republic and Argentina. 

Dr. Martin Palous is the current ambassador of the Czech Republic in Washington. I hardly need to remind this audience that the newly-elected president of the Czech Republic is Dr. Vaclav Klaus, a fellow-member of the Mont Pèlerin Society in the tradition of Ludwig Erhard of Germany and Luigi Einaudi of Italy. Earlier this month, I heard Dr. Klaus say that the Czech membership in the European Union is a marriage of convenience, not a marriage of love. It is refreshing to hear the new Europe. 

Ambassador Palous was a founding member of the Civic Forum, the most important political body in the successful transfer of power from a totalitarian government to democratic Czechoslovakia, after the Velvet revolution. He was elected to the Federal Assembly in 1990. He has served as Deputy Foreign Minister and also as professor of foreign relations and Vice-Dean of Charles University, the same university from which he received his degree in chemistry in 1973, and went on to study philosophy and social sciences. In 1993-94, he was a visiting lecturer at Northwestern University in Chicago. 

Professor Ricardo Rojas is a Judge at the Buenos Aires Criminal Court and former Secretary Attorney of the Argentina Supreme Court. He teaches Economic Analysis of Criminal Law at the University of Buenos Aires, is a member of the board of Directors of the ESEADE (a graduate school of business administration and economics), and also a member of the board of directors of the Friedrich von Hayek Foundation in Buenos Aires. I am happy to add that Judge Rojas is also a columnist for my news service AIPE.