Will Latin America Finally Embrace Markets?
Piecemeal Reforms Fail to Address Faulty Foundations
Much talk has been made lately about the Left’s recent defeats in countries throughout Latin America: Argentina, Brazil, and Venezuela most notably. These countries have been characterized by leftist governments that had the luxury of exploiting commodity prices during the early-to-mid 2000s to finance their profligate social programs.
Various experts saw this new “pink tide” as a viable alternative to free-market models of economic organization. However, the game has completely changed as of late. These very governments now find themselves on the ropes not only because of low commodity prices, but also due to increasing degrees of corruption and economic malaise — largely the result of years of economic interventionism now taking its toll on these nations’ economic and institutional foundations.
Essentially, the commodity price booms only masked the institutional rot that was dwelling underneath the economic house of cards many of these countries were already built on. Once prices plummeted, these governments could no longer maintain their artificial economies and quickly saw significant political reversals.
A Positive Trend or Just Another Phase of a Vicious Cycle?
While there seems to be a receding “pink tide” going across Latin America, claims of Latin America going toward a long-term set of free market policies and eschewing socialism for good are a bit premature if one takes into account the region’s history.
As Nicolas Cachanosky has demonstrated, Latin American countries tend to go through certain economic cycles in which more interventionist governments start out riding the wave of commodity booms to finance government largesse from the outset. In the short term, populist economic models (in the Latin American context) make for good politics, but in the long term, the results are nothing short of disastrous.
In many cases, these governments engage in reckless spending and expansive monetary policies that create fiscal and inflationary death spirals. On top of that, price controls and arbitrary expropriations of industries generate widespread shortages and subsequently lead to the rise of black markets. At this juncture, these governments either become more radical — blaming these failures on capitalism (despite all evidence to the contrary) — or they take a more market-oriented approach, at least on the surface, promoted by institutions such as the International Monetary Fund (IMF) and the World Bank.
Latin America’s Overall Structural Problems
Unfortunately, the market reforms that some of the more level-headed governments undertake only hack at the branches and still leave many structural problems intact. This can largely be attributed to the institutional inertia present in economies where mercantilism has been the order of the day. Often, these reforms are based on the faulty premise that government is “inefficient” in its collection of tax revenue. It is then assumed the government thus must turn to flawed “privatization” measures and tax increases that will supposedly get the government’s fiscal house in order.
But, Latin American countries’ problems go much deeper than just marginal tax policies and money being spent on the right programs. Many Latin American countries have considerable structural problems with regards to the state’s fundamental role in the economy. Many of these countries have too much government intervention — stiff tariffs, subsidies to politically connected sectors, onerous business licensing, import restrictions, outdated union laws, loose monetary policies, and high levels of taxation — that make it difficult to achieve sustained economic growth.
These fixtures can largely be attributed to the renowned Argentine economist Raul Prebisch, the Keynes of Latin America, and his advocacy of import-substitution industrialization. Instead of promoting pro-growth policies that reduce the state’s role in economic affairs, many Latin American country has embarked on pursuing this path of neo-mercantilism allowing the state to slowly creep in and gradually undermine economic progress. Eventually, years of interventionism take their toll by creating economic distortions and lackadaisical growth. Many radical political movements would then use such stagnation to channel popular discontent and campaign against the “capitalist” order.
Cachanosky sagaciously notes how the radical left capitalizes on the lackluster results of the flawed “structural reforms” and mounts popular campaigns against capitalism. More than just sub-optimal results in terms of economic development, the economic status quo in most Latin American countries is one that is characterized by rampant corruption and the concentration of wealth in the hands of a politically-connected few. Venezuelan economist Hugo Faria demonstrates how this is essentially a vestige of Latin America’s colonial order and exclusionary institutions that have characterized it for hundreds of years.
From the beginning, the left has had fertile ground to channel popular discontent into successful campaigns. Unfortunately, the solutions proposed by these radical elements not only make matters worse, but they ironically concentrate more power in the hands of the political class. And in short order, the populist cycle ends up repeating itself all over again.
While defeats of radical and socialist-lite governments are a much welcome development for the Latin American region, these countries can’t rest on their laurels. They should be striving to pursue free-market reforms as much as possible. If not, they will only be repeating the all too familiar mercantilist/socialist cycle that has condemned the region to its decades-long state of underdevelopment.
This article was first published in the Mises Institute.