Latin America’s poor

With the recent election of leftist Evo Morales as the president of Bolivia, it seems as though socialism is about to regain its foothold in Latin American nations. Morales joins with Brazil’s Lula da Silva, Argentina’s Nestor Kirchner and Venezuela’s Hugo Chavez as populist leaders who favour — at least in their rhetoric — leftist economic and social policies. There is good reason for these leaders to adopt such a stance. Capitalism, after all, has traditionally not worked in the Latin American nations. Since independence from Spain in the 1820s, these nations have tried four times to become part of global capitalism and always failed. They did everything by the book: restructured their debts, liberalised trade, privatised government assets, made debt equity swaps, and overhauled their tax systems.

But the expected prosperity did not come — productivity did not increase nor did poverty levels drop. Instead, the Latin American countries persisted in their traditional patterns of strong underground economies, economic inequality, powerful mafias, political instability, capital flight, and pervasive lawlessness. Part of the reason for this is that most of these nations are land-abundant countries with a history of protection aimed at distributing income from the agricultural to the industrial working class. But the traditional focus on land, reinforced by social and political privilege, created reactionary elites ill-equipped to join the industrialising world. This was exacerbated by industry entering Latin America by import substitution, with high tariffs, discriminatory regulations, and non-tariff barriers to imports. All this has resulted in economic liberalisation creating greater inequality in Latin America.

Indeed, it is noteworthy that one of the few economically and politically stable countries in the continent, Costa Rica, is relatively small and had adopted market policies in tandem with measures aimed at social equity (among them the early abolition of capital punishment). But most Latin American nations have remained weak economically, finding it difficult to cope with macro-economic shocks, even though these shocks have been no different in size in relation to the countries’ Gross Domestic Product (GDP) than the Asian nations’. The crucial difference is the export-oriented economies of the latter. Additionally, the Latin American nations were defined by mismanagement, profligacy, corruption, and open-ended borrowing — a combination guaranteed to lead to economic disaster and, as was often the case in the region, coups.

The habit of revolutions, at least, appears to be pass?, which shows some sign of political progress. But the election of leftist presidents suggests that there is still a long way to go. Capitalism is far from a perfect system, but it is a better system than socialist ones, which have always failed to deliver economic prosperity or, for that matter, political freedom. But capitalism has not delivered the expected benefits in Latin America, and its leaders, rather than adopting leftist solutions, need to figure out why this is so.

The eminent Peruvian economist Hernando de Soto, whose research team has done an in-depth study of this issue, has argued that the failure of capitalism to take off in Latin America is rooted in an irrelevant legal system that does not let people, especially poor people use their property as assets to build capital. So property reform may be the key to unlocking that continent’s potential. Returning to defunct 20th-century ideologies, however, may only guarantee that Latin America’s poor stay poor.