Freeman

ARTICLE

Uruguay: Welfare State Gone Wild

APRIL 01, 1969 by HENRY HAZLITT

Mr. Hazlitt is the well-known economic and financial analyst, columnist, lecturer, and author of numerous books. This article will appear as a chapter in a forthcoming book, Man vs. the Welfare State, to be published by Arlington House.

If there were a Nobel prize for the most extreme or worst example of the welfare state (and if such out­right communist states as Russia and China were made ineligible), which country has done most to earn it?

The decision would be a hard one. Among the outstanding candi­dates would be Britain, France, Sweden, and India. But the British case, though the most familiar, is certainly not the worst; it is the most discussed and most deplored because of the former eminence of Britain in the world.

The tragedy certainly reaches its greatest dimensions in India, with much of its 500 million popu­lation always on the verge of famine, and kept there by an in­credible mixture of economic con­trols, planning, welfarism, and socialism, imposed by its central and state governments. Moreover, India has always been a poverty-stricken country, periodically swept by drought or floods result­ing in human misery on a cata­strophic scale, and it is often diffi­cult to calculate just how much worse off its governmental policies have made it.

Perhaps the most dramatic ex­ample of a country needlessly ruined by "welfare" policies is Uruguay. Here is a country only about a third larger than the state of Wisconsin, with a population of just under 3 million. Yet that pop­ulation is predominantly of Euro­pean origin, with a literacy rate estimated at 90 per cent. This country once was distinguished among the nations of Latin Amer­ica for its high living standards and good management.

Uruguay adopted an elaborate state pension system as early as 1919. But its major troubles seem to have begun after March, 1952, when the office of president was abolished, and Uruguay was gov­erned by a nine-man national council elected for a four-year term, six members of which be­longed to the majority party and three to the leading minority party. All nine were given equal power.

What is so discouraging about the example of Uruguay is not only that its welfare programs persisted, but that they became more extreme in spite of the suc­cessive disasters to which they led. The story seems so incredible that instead of telling it in my own words, I prefer to present it as a series of snapshots taken by dif­ferent firsthand observers at in­tervals over the years.

***

The first snapshot I present is one taken by Karel Norsky in The Manchester Guardian Weekly of July 12, 1956:

"Uruguay today offers the sad spectacle of a sick Welfare State. It is living in a Korean boom-day dream…. No politician comes out with the home truth that this country’s wide range of welfare services has to be paid for with funds which have to be earned. Demagogy is used as a sedative. The result is that the foreign pay­ments deficit is increasing, in­ternal debt soaring, wage de­mands accumulating, prices rising, and the Uruguayan peso rapidly depreciating. Nepotism is rife. Now one in every three citizens in Montevideo, which accounts for a third of the country’s 3 million inhabitants, is a public servant, draws a small salary, is supposed to work half a day in a Govern­ment office, and more often than not spends the rest of his time doing at least one other job in a private enterprise…. Corruption is by no means absent….

"The foreign payments deficit has been running at a monthly rate of about 5 million pesos. The public servants are asking for a substantial increase in salaries. The meat-packing workers are on strike for higher pay and a ‘guar­anteed’ amount of a daily ration of four pounds of meat well be­low market price….

"No politician here can hope to get a majority by advocating aus­terity, harder work, and the sac­rifice of even some of the Welfare State features."

I should like to pause here to un­derline this last paragraph, for it illustrates what is perhaps the most ominous aspect of the wel­fare state everywhere. This is that once a subsidy, pension, or benefit payment is extended to any group, it is immediately regarded as a "right." No matter what the crisis facing the budget or the currency, it becomes "politically impossible" to discontinue or re­duce it. We will find this repeated­ly illustrated in Uruguay.

***

The next snapshot I present was taken by S. J. Rundt & Associates of New York nearly seven years later, in April, 1963:

"In one of his first statements the new President of the National Council admitted that Uruguay is practically bankrupt…. He made it pretty clear, however, that the country’s welfare system of long standing will remain more or less unchanged.

"The ‘social laboratory of the Americas,’ Uruguay has launched a legislative program which goes much further toward the complete `welfare state’ than any similar plan in this hemisphere…. The government grants family allow­ances based on the number of children; employees cannot be dis­missed without proper indemnifi­cation; both men and women vote at the age of 18….

"An elaborate and all-encom­passing state pension system was introduced as early as 1919. Fi­nanced by payroll deductions of 14 to 17 per cent, which must be matched by employers, a pension is available to any Uruguayan at the age of 55 after 30 years of work, or at 60 after ten years. At retirement, the worker draws his highest salary, plus what has been deducted for pensions…. Em­ployees obtain free medical service and are entitled to 20 days of annual vacation with pay. The government takes care of expect­ant and nursing mothers.

"The overwhelming expenses of a super-welfare state (where nearly one-fifth of the population is dependent on government sal­aries) and the uncertain income from a predominantly livestock and agricultural economy have left their marks. Today, Uruguay is in severe financial and fiscal stress….

"Inflation is rampant…. Local production has declined sharply. Unemployment has risen. There are many severe strikes. Income from tourism has fallen off markedly….

"So far as exchange controls and import restrictions are con­cerned, Uruguay has tried them all.

"In an effort to prevent an­other buying spree in 1963, the new Administration decreed an import ban for 90 days on a wide array of goods considered non­essential…. All told, the ban applies to about one-third of all Uruguayan importations…. The smuggling of goods, mainly from Brazil and Argentina, has become one of the foremost headaches of Montevideo planners….

"Capital flight during 1963 is estimated at between $40 million and $50 million….

"The budget deficit in 1961 nearly doubled to 210 million pesos. The situation turned from bad to worse in 1962 when the Treasury recorded the largest def­icit in 30 years…. Press reports cite a red figure of 807 million pesos. The Treasury is said to owe by now nearly 700 million pesos to the pension funds and roughly a billion pesos to Banco de la Repub­lica. The salaries of public officials are at least one month behind schedule….

"Labor costs in Uruguay, the Western Hemisphere’s foremost welfare state, are high. The many contributions toward various so­cial benefits—retirement, family allotments, sickness, maternity, accident, and unemployment in­surance—vary from industry to industry, but the general average for industry as a whole is at least 50 per cent of the payroll. In some sectors, the percentage is much higher….

"Social unrest is rising….Widespread and costly strikes have become the order of the day. As a rule, they involve demands for pay hikes, sometimes as high as 50 per cent."

***

Our third snapshot was taken by Sterling G. Slappey in Nation’s Business magazine four years later, in April, 1967:

"Montevideo,—Two hundred imported buses are rusting away on an open dock while Uruguayan government bureaucrats bicker with each other over payment of port charges. The buses have not moved in nearly four years.

"Scores of men listed under false female names receive regu­lar government handouts through Uruguay’s socialized hospitals. They are listed as ‘wet nurses.’

"At many government offices there are twice as many public servants as there are desks and chairs. The trick is to get to work early so you won’t have to stand during the four to six hour work­day that Uruguayan bureaucrats enjoy.

"It is rather common for gov­ernment workers to retire on full pay at 45. It is equally common to collect on one retirement while holding a second job or to hold a job while collecting unemployment compensation. These are a few of the facts of life in Uruguay—a nation gone wild over the welfare state….

"Between 40 and 45 per cent of the 2.6 million people in this once affluent land are now dependent on the government for their total in­come. These include youthful `pensioners’ who have no great problem getting themselves fired or declared redundant, thereby qualifying for large retirement benefits….

"At any given moment eight to ten strikes are going on, in a na­tion which until fifteen years ago called itself ‘the Switzerland of Latin America’ because its people were so industrious, busy, and neat. Montevideo is now one of the world’s filthiest cities outside the Orient. The people have so little pride left they litter their streets with paper and dump their nastiest garbage on the curb….

"Besides controlling meat and wool production and supplying meat to Montevideo, the govern­ment also entirely operates:

"Fishing; seal catching; alcohol production; life and accident in­surance; the PTT—post office, telephone and telegraph; petro­leum and kerosene industry; air­lines; railroads; tug boats; gam­bling casinos; lotteries; theaters; most hospitals; television and radio channels; three official banks; the largest transit company…

"In 1950 the Uruguayan peso, South America’s most solid coin, was worth 50 cents. During a six-day period last February, the value of the peso slumped from 72 to the $1 to 77.

"Cost of living went up 88 per cent in 1965. During 1966 the in­crease was something like 40 to 50 per cent.

"To keep pace the government has increased its spending, ground out more paper money and lavish­ly passed out huge pay raises —some as high as 60 per cent a year…

"One fiscal expert diagnoses Uruguay’s troubles as ‘English sickness’ which, he says, means trying to get as much as possible out of the community while con­tributing as little as possible towards it.

"Until President Gestido took over, Uruguay had been ruled for fifteen years by a nine-member council in a collegiate system of government. It was idealistic, un­workable, and rather silly from the start. It quickly fragmented, mak­ing the government a coalition of seven different groups. Every year a different member of the council took over as president, or council chief.

"The collegiate system was a Tammany Hall patronage-type of group. Instead of each party watching the opposition, all took care of their friends and got their cousins government sinecures.

"The western world has rarely seen such patronage, nepotism, favoritism."

***

The return to a Presidential system brought hopes that Uru­guay’s extreme welfarism could now be mitigated. But here is our fourth snapshot, taken by C. L. Sulzberger for The New York Times of October 11, 1967:

"Montevideo,—Contemporary England or Scandinavia might well take a long southwesterly look at Uruguay while murmuring: `There but for the grace of God go I.’ For Uruguay is the welfare state gone wild, and this fact, at last acknowledged by the govern­ment, brought about today’s po­litical crisis and the declaration of a state of emergency.

"This is the only country in the Western Hemisphere where the kind of democratic socialism prac­ticed in Norway, Labor Britain, or New Zealand has been at­tempted. Alas, thanks to warped conceptions and biased applica­tion, the entire social and eco­nomic structure has been set askew. Here charity begins at home. One out of three adults receives some kind of pension. Forty per cent of the labor force is employed by the state. Political parties compete to expand a ridic­ulously swollen bureaucracy which only works a thirty-hour week….

"The cost of living has multi­plied 32 times in the past decade. Gross national production has ac­tually declined 9 per cent and this year will take a nose dive….

"Instead of having one Presi­dent, like the Swiss they elected a committee and, not being Swiss, the Uruguayans saw to it the com­mittee couldn’t run the country. The result was a system of self-paralysis….

"Anyone can retire on full sal­ary after thirty years on the job, but with full salary worth one thirty-second of its worth ten years ago, the pension isn’t very helpful. To compound the confu­sion, trade unions make a habit of striking. Right now the bank employees refuse to handle govern­ment checks so neither wage-earn­ers nor pension-receivers get paid….

"This was a needless tragedy. Uruguay has proportionately more literacy and more doctors than the United States. It is underpopu­lated and has a well-developed middle class….

"Uruguay should serve as a warning to other welfare states."

***

Our fifth snapshot was taken by S. J. Rundt & Associates on Au­gust 6, 1968:

"The mess continues… and seems to perpetuate itself…. The government is getting tougher and Uruguayans more obstreperous. The powerful and sharply leftist, communist-led 400,000 member CNT (National Workers Conven­tion) is on and off 24-hour work stoppages in protest against the lid clamped on pay boosts by the price, wage, and dividend freeze decreed on June 28…. The cur­rently severe six-month drought has brought a gloomy brownout, after a 50 per cent reduction in electric power use was decreed…. The near-darkness helps sporadic anti-government rioting and ter­rorist activities. A leading pro-government radio transmitter was destroyed by bombs…. Train ser­vice has been severely curtailed and at times no newspapers are published…. Last year there were 500 strikes; the dismal record will surely be broken in 1968….

"Of a population of around 2.6 million, the number of gainfully active Uruguayans is at the most 900,000. Pensioners number in ex­cess of 300,000. Months ago the unemployed came to 250,000, or almost 28 per cent of the work force, and the figure must now be higher….

"The government closed at least three supermarkets and many stores for having upped prices, as well as such institutions as private hospitals that had violated the wage-price freeze decree. But de­spite rigid press censorship and Draconian anti-riot and anti-strike ukases, threatening punish­ment by military tribunals, calm fails to return."

***

Our sixth and final snapshot of a continuing crisis is from a New York Times dispatch of January 21, 1969:

"Striking Government employees rioted in downtown Montevideo today, smashing windows, setting up flaming barricades and sending tourists fleeing in panic. The po­lice reported that one person had been killed and 32 injured.

"The demonstrators acted in groups of 30 to 50, in racing through a 30-block area, snarling traffic with their barricades, and attacking buses and automobiles. The police fought back with tear gas, high-pressure water hoses and clubs….

"The striking civil servants were demanding payment of monthly salary bonuses of $24, which they say are two months overdue."

***

These six snapshots, taken at different intervals over a period of twelve years, involve considerable repetition; but the repetition is part of the point. The obvious re­forms were never made.

Here are a few salient statis­tics to show what was happening between the snapshots:

In 1965 consumer prices in­creased 88 per cent over those in the preceding year. In 1966 they increased 49 per cent over 1965. In 1967 they increased 136 per cent over 1966. By August, 1968 they had increased 61 per cent over 1967.

The average annual commercial rate of interest was 36 per cent in 1965. In 1966, 1967, and August, 1968 it ranged between 32 and 50 per cent.

The volume of money increased from 2,924 million pesos in 1961 to 10,509 in 1965, 13,458 in 1966, and 27,490 in 1967.

In 1961 there were 11 pesos to the American dollar. In 1965 there were 60; in 1966, there were 70; in early 1967 there were 86; at the end of 1967 there were 200, and after April 1968 there were 250.

Uruguay’s warning to the United States, and to the world, is that governmental welfarism, with its ever-increasing army of pensioners and other beneficiaries, is fatally easy to launch and fatally easy to extend, but almost impossible to bring to a halt—and quite impos­sible politically to reverse, no mat­ter how obvious and catastrophic its consequences become. It leads to runaway inflation, to state bank­ruptcy, to political disorder and disintegration, and finally to sup­pressive dictatorship. Yet no coun­try ever seems to learn from the example of another.

 

***

What Is Capitalism?

American capitalism is "private ownership of the means of production and distribution." This is the very simplest of defini­tions, but it gets to the heart of the question with the two words, "private ownership." There are other facets, however. American capitalism has three great pillars which support it: private property, the profit motive, and the open market where all are free to compete in the production and sale of goods and services.

CARROLL REYNOLDS, Indiana Economic Education Foundation 


Download File

ASSOCIATED ISSUE

April 1969

comments powered by Disqus

EMAIL UPDATES

* indicates required
Sign me up for...

CURRENT ISSUE

July/August 2014

The United States' corporate tax burden is the highest in the world, but innovators will always find a way to duck away from Uncle Sam's reach. Doug Bandow explains how those with the means are renouncing their citizenship in increasing numbers, while J. Dayne Girard describes the innovative use of freeports to shield wealth from the myriad taxes and duties imposed on it as it moves around the world. Of course the politicians brand all of these people unpatriotic, hoping you won't think too hard about the difference between the usual crony-capitalist suspects and the global creative elite that have done so much to improve our lives. In a special tech section, Joseph Diedrich, Thomas Bogle, and Matthew McCaffrey look at various ways these innovators add value to our lives--even in ways they probably never expected.
Download Free PDF

PAST ISSUES

SUBSCRIBE

RENEW YOUR SUBSCRIPTION