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.