The other path to capitalism

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FOR generations Latin Americans have found it convenient to blame U.S. capitalism for their economic woes. The norte-americanos were the exploiters, stealing precious natural resources from the South and, more recently, shamelessly encouraging Latins to get over their heads in debt.

In fact, Latin America’s problems began at home: the region has avoided the free market, alternating instead between collectivisms of the Left and of the Right, both favoring gigantic state-run industries. The predictable results have been corruption of business and labor leaders alike, class warfare, rampant inflation, and unpayable foreign loans.

The debt crisis of the Eighties shook the foundations of the corporate state, and in so doing created an opening for individual freedom and economic reform. Hernando de Soto, the Peruvian economist whose research suggested the potential of Latin America’s vast “informal” free market, first publicly raised the question, in articles and on television talk shows, “Why does our system make us poor?” People wanted answers; in his best-selling book, The Other Path, de Soto provided them.


“Owners of businesses,” he argues, “devote a large proportion of their resources to infiltrating the bureaucracy and protecting their interests rather than devoting themselves to improving output.” This was a reversal of the typical Latin intellectual argument: instead of liberation theologians attacking capitalism, here was a free-marketeer discussing the failings of Latin Catholic economics.

Other voices took up de Soto’s message. In Mexico, then-President Miguel de la Madrid began saying that government should be accountable to its citizens. Ruy Barreto and Amaury Temporal, leaders of Brazil’s Chamber of Commerce, began demanding free trade. Carlos and Ricardo Ball, who publish El Diario de Caracas, campaigned for fiscal reforms in Venezuela. Fernando Echavarria Olozaga proposed free-market solutions to Colombia’s economic problems in Bogota’s El Tiempo.

There has been help from the United States. The Washington-based Center for International Private Enterprise has promoted reform through studies, lecture tours, and exchange programs. The White House and major banks, having put up for years with Latin lobbying and Democratic schemes to micro-manage the debt crisis, finally made it clear to Latins that debt relief will be provided only to those governments committed to sound policies. Over the last year, freely elected presidents have taken office in Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Peru, and Uruguay. Their ambitious agendas suggest real prospects for reform.

Argentina’s President Carlos Menem has privatized the state telephone company and airline system. In his first hundred days in office, Brazil’s President Fernando Collor launched a free-trade program and an anti-corruption drive. In Peru, newly elected President Alberto Fujimori has sought de Soto’s advice.

Mexico has proved reforms can bring results. Working closely with the business community, President Carlos Salinas de Gortari and his economic team have adopted a mix of tax cuts, privatization, and increased foreign investment that, it is estimated, will enable Mexico’s economy to grow 3 per cent this year, on par with the Western European economies. Annual inflation is now 17 per cent, down from 160 per cent in 1988, and a Brady Plan deal has significantly reduced Mexico’s net transfer of resources abroad. In Chile capitalism has provided the foundation for a stable democracy, just as Milton Friedman said it would. Christian Democratic President Patricio Aylwin, elected in December, is continuing the fiscal restraint established by the “Chicago boys” (Pinochet’s economy minister, Hernan Buchi, and central-bank director, Hernan Somerville), Which licked the debt crisis.

The financial collapse of the Latin corporate state parallels the fall of Eastern Europe’s command economies. Indeed, that is one cloud on this bright horizon: Latins fear the industrial nations will throw all their support to the former Communist countries rather than looking south. What Latins must realize is that they could finance their own reforms if they were able to mobilize their quarter-trillion-dollar pool of offshore capital.

According to a Morgan Guaranty study, flight-capital assets of ten Latin American countries exceed $243 billion-dwarfing the $5.7 billion in total loan disbursements made last year by the Inter-American Development Bank. In an effort to stop the flight of capital, Brazil’s President Collor has frozen $15 billion in savings deposits for two years, and Argentina’s President Menem has postponed the redemption of $1.5 billion in government bonds. The deflationary “shock” both governments hoped would stabilize markets and lure flight capital back have had only qualified success, however, with recession and double-digit monthly inflation continuing. Hoping to stir Latin economies from this inertia, President Bush announced in June a plan to reward reforming Latin governments with reduction of official debt and the promise down the line of a hemispheric free-trade system. Even so, the reformers are under siege. As Hernando de Soto points out, reforms will always be challenged by traditional interests. Industrial and agricultural oligopolies, which with the church and state for centuries have formed a network of mutually supporting institutions, are resisting the elimination of their lucrative subsidies and protected markets. Entrenched bureaucrats and ultramontane Catholics join in viewing Latin America’s insertion into a competitive global economy as the prologue to a new era of poverty and dependence. The proximity of these special interests to the machinery of government presents a serious impediment to reform. Latin American Catholics are encouraged in their intransigence by Pope John Paul II, who clings to his belief, expounded in Mexico this May, that capitalism is a morally inferior way of organizing human affairs. Joining him in this attack is Opus Dei, the elite Catholic lay organization. Its activities in Latin America-which range from running barrio soup kitchens and child-care centers to organizing university political clubs and populist “action groups”-reinforce the papal view that the capitalist culture of greed disregards the poor. The Church has distanced itself from Candomble and Umbanda, popular Catholic movements with roots in native and African culture, whose millions of Latin followers are the backbone of the informal free-market sector.


In Bolivia, where evangelical rural entrepreneurs are demanding both economic and religious freedom, the Church is pressing the government to keep 240 of the nation’s non-Catholic churches designated as illegal organizations. Bolivia’s President Jaime Paz Zamora, a former Catholic seminarian, was rebuked by the bishop of La Paz, Jorge Sainz, for attending a national day of prayer sponsored by evangelicals, whom the bishop referred to as “an invasion of sects.”

As a result of this and other resistance, the near-term outlook is gloomy. In Brazil, Marxists and corporatists look to make gains in congressional elections due next month, further isolating President Collor and his small National Reconstruction Party. In Argentina, President Menem lost a key provincial election and a referendum on constitutional reform last month, and has responded by packing the supreme court and the Peronist party leadership. Another round of the blanqueo, the fabled decree that provides across-the-board tax forgiveness (used last by the military junta when the oil boom went bust), is likely, and it won’t help the cause of reform.

In Uruguay, the leftist Frente Amplio now runs the city government in Montevideo, where one-third of the nation’s three million citizens reside. Allied with the National Labor Confederation (orthodox Marxist-Leninist) and with former Tupamaro guerrillas, the Frente is challenging President Lacalle’s efforts to trim state employment rolls. But Foreign Minister Hector Gross-Espiell hopes that his EastSouth dialogue” and better economic relations with Eastern Europe can educate Left on the costs of collectivism and the need for reform.

If Latin America is to grow and prosper in the twenty-first century, it must attract permanent investment in productive free enterprise. For this to happen Latins must feel confident enough to invest their huge pools of flight capital in the reform process. To this end, the Collors, Menems, and Fujimoris must remove the structural impediments to reform and work to change the anti-enterprise bias of the Catholic Church. Otherwise, Latin America’s economies will remain “so near to God, so far from the United States.”

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