Latin American Economic Liberation
MARCH 01, 1987 by JOS RIVAS-MICOUD
former Latin American diplomat who served in Europe and the United States. José Rivas- Micoud is a doctor of law and social sciences and a retired international banker. He has published numerous essays and articles in Europe. Latin America. and the United States. and has lectured extensively at colleges and universities.
The social and political contrasts presented by the two arms of the American hemisphere reveal intriguing insights about the different economic directions they have hereto followed.
The United States in the north enjoys a dynamic economy within a powerful democracy.
In Latin America in the south, numerous states are divided politically, underdeveloped economically, subjected to frequent social unrest, and plagued by inflation and poverty.
Why should one branch of the continent enjoy enormous affluence and power while the other languishes in misery and weakness when both attained independence almost simultaneously, and are endowed with a comparable abundance of natural and human resources? History gives the answer.
The 1776 North American revolution is usually presented as a political revolt of thirteen colonies against British role. The rebellion, however, responded to fiscal and economic motives, for it principally sought trading and fiscal freedoms. The ensuing breakup of political ties was an effect rather than the cause of the revolt. And the Declaration of Independence did not mention economic rights specifically only because they were implicit in the pursuit of happiness.
This erroneous emphasis assumes that the political liberties gained by the rebellion gave rise to economic freedom. The truth is rather the reverse. To assure and protect the economic liberties the colonists fought for, the United States needed to be politically independent. And though some people were reluctant about it at first, political links with Britain were severed.
The present United States political structures derive from the original struggle for a free market economy, and confirm that democracy thrives only when economic restrictions are removed.
The Paradox of Liberalism
Genuine liberalism restricts government’s role to the preservation of internal order and security, leaving individuals free to exercise their own initiative in society. Paradoxically, those original liberal notions reached modern America with an opposite connotation. Today, American “liberals” favor state intervention in the economy, government ownership or monopoly of numerous enterprises, and a vast state paternalism to combat poverty. But the altruistic objectives of “liberal” welfarism are often translated in practice into increased rather than decreased poverty.
Moreover, all central economic planning not only discourages private sectors, but also favors the spread of totalitarian ideologies. Whether nazism, communism, or fascism, every one-party rule from the outset demands total control of the economy. For the most effective way to control human minds and wills is through their pockets. And history has shown that without economic freedom, no political or social liberty can survive for long.
The Latin American Case
Unlike the north, the struggle for independence was essentially political in Latin America. The main objective was to break political ties with Spain and Portugal. In the process, the revolution hardly touched existing economic and social structures. The political independence in Latin America was not accompanied by a commensurate economic liberation.
Lacking the northern trading mentality, Latin American ruling elites persisted in a traditional iberian disdain for commerce and manual labor. Privileged minorities clung instead to allegedly nobler careers in politics, the Church, and the military. Toil and manual labor were left to lower classes. Thus sharp class distinctions remained as the social mark of Latin America. On one side, privileged minorities and land-owning oligarchs thrived on wealth and power, while on the other, poor and exploited illiterate masses sank into misery.
Tied to long-held advantages, most Latin American rulers favored the colonial protectionism that shut the area off from healthy competition. These barriers made local production inefficient and costly, and remained largely unmodified by Latin American political independence.
At that juncture, the two arms of the Western hemisphere followed opposite directions.
Geared to trade and economic liberty, the United States chose political union. Shackled by commerce limitations, Latin America split itself into numerous states even though all shared racial, historic, cultural, and religious roots.
While the United States was removing obstacles to the free flow of goods, services, and people, the new Latin American countries closeted themselves within rigid trade, customs, and exchange barriers.
The results are eloquent. Under a free economy within a huge national market, the United States has grown to unparalleled levels of affluence and power.
Largely isolated, the disunited members of the Latin American community continue to be subjected to regional conflicts, civil wars, and recurrent military rule. Rigid class distinctions have hindered the emergence of a meaningful middle class. Deprived of local markets of adequate size, Latin American industries did not attain rewarding proportions, and local production became largely confined to basic raw materials and agrarian exports.
In addition, Latin American governments claimed for themselves not only the proprietorship of natural resources but also the monopoly to exploit them. In the process, private enterprises in mining, communications, utilities, insurance, and banking were nationalized. Private sectors were thus relegated to secondary economic roles, though remaining as primary targets for taxation. The resulting and ever-growing operating deficits of state-run enterprises often forced governments to resort to the monetary printing presses that fuel inflation.
Squeezed between state bureaucracies and privileged oligarchies, private savings and in vestments languished, and capital flight abroad mounted. Inevitably, when unleashed inflationary pressures triggered wage and price controls, real Latin American growth became adversely affected and unemployment grew.
The evidence of the American hemisphere is conclusive.
The adoption of a free market economy not only sustains and develops political liberty, but also promotes economic growth and prosperity. Conversely, state intervention in the economy leads to bureaucracy, inefficiency, and corruption in the short term, and to poverty, social injustice, and political unrest over longer periods.
The Debt Crisis
Flooded with petrodollars in the 1970s, impulsive international bankers joined shortsighted Latin American officials to finance massive projects which often responded to nationalistic pride rather than to sound economic reasoning.
Notwithstanding past imprudence and errors of lenders and borrowers, the Latin American debt burden has grown to pose a formidable threat. Strained Latin American financial reserves cannot meet existing payment schedules unless they are rescheduled and considerable infusions of new credits are added.
To assure, however, that new financings will not be throwing good money after bad, all new credits should be conditioned to the implementation of growth-oriented local policies that allow greater economic roles to private sectors in the borrowing countries.
The current equation in Latin America involves an economic frame built by official controls and regulations, by numerous government-owned monopolies, and by large military expenditures. This frame holds a picture of anemic savings, feeble investments, large un employment, chronic fiscal deficits, unabated inflation, and widespread poverty.
To improve the picture, something drastic must be done with the frame. For the reversal of deteriorating conditions will come only after Latin American states undertake a realistic program to attain the final Latin American economic liberation.
The treatment must comprise prescriptions that may be unpalatable to politicians and bu reaucrats. It must begin with a prompt shift of Latin American government roles. From being state capitalists, they must switch to becoming mere overseers of a totally free market economy.
Latin American states should gradually but decisively transfer government-owned enterprises to the private sector as soon and as widely as possible. Such privatization should look for local sources when available or to foreign investors when necessary. The public sector should retain only what is essential to assure an orderly transition and to prevent abuses and frauds.
To promote savings and to encourage investments, sensible tax reform with realistic fiscal incentives should be enacted. And to reduce fiscal deficits, military spending should be drastically cut. The resulting savings could be diverted to eventually eradicate illiteracy in vast areas of Latin America through better education.
To expand local markets and to foster international trade, artificial exchange rates and protectionist barriers should be eliminated.
The removal of artificial exchange rates and trade barriers would soon establish propitious conditions for the development of a free, stable, and unified Latin American currency. Additionally, the dismantling of inter-state trade and exchange barriers should soon result in a freer and wider interchange of capital, labor, and production within the whole region.
Despite past attempts such as that of Bolivar in Panama in 1824, and more recently that of the Latin American Free Trade Association and of the Andean Pact, Latin America continues disunited economically, financially, politically, and socially. But the hour for a genuine Latin American integration may be at hand.
A Private Inter-American Bank
To accelerate such integration, Latin American leaders should encourage the promotion and establishment of a privately-owned inter-
American commercial bank. This new private inter-American bank would have branches and operations in every country in the hemisphere. Its capital should be subscribed and paid by private investors Of all American states. The bank’s management should be under the control of its board of directors with members from the private sector freely elected by the stockholders without any official interference or pressure.
The inter-American bank would operate actively in all banking fields and in foreign exchange, would extend credits in local and foreign currencies, and perform all banking services of large banks headquartered in financial centers like New York, London, Frankfurt, Paris, and Tokyo.
The United States can play a pivotal role in such Latin American endeavors by persuading other industrial countries to liberalize trade and facilitate Latin American exports. For only when they earn sufficient foreign exchange will Latin American borrowers be able to discharge their foreign obligations and pay for needed imports.
These prescriptions may appear ambitious atfirst. They will probably encounter great skepticism, when not resistance, from the vast interests that currently benefit from the existing restrictions that would be eliminated in a freer market. But common sense begins with the recognition that to share and enjoy wealth, it has to be created or produced beforehand.
The United States has convincingly proved that the best scenario to create wealth lies wherever individual self-interests are freely allowed to take risks and reap rewards in a market economy. It also shows that when free economies are firmly entrenched, political freedoms become inevitable.
Learning from this example, Latin American leaders should now move boldly to help remove all barriers and obstacles to a free market in the region. For once Latin American economies are unshackled, their rapid recovery would soon silence all critics and skeptics. And the ensuing popular support would add irresistible momentum to an irreversible historic trend; a trend toward the eventual integration of all America.