LATIN AMERICA GOES SOUTH: Political Reform in Latin America

Thursday, October 21, 2004

Over the last quarter century, Latin America appears to have made remarkable political and economic progress—an undeniable shift towards democratic government and free market economics. Yet during the last five years, several Latin American countries have experienced one political and economic crisis after another. Why? Have democratic and free market reforms failed Latin America? Or are enduring problems of governmental structure still to blame? Peter Robinson speaks with Stephen Haber and Alvaro Vargas Llosa.

Recorded on Thursday, October 21, 2004

Peter Robinson: Today on Uncommon Knowledge: Latin America, good neighbors, bad policies.

Announcer: Funding for this program is provided by the John M. Olin Foundation.


Peter Robinson: Welcome to Uncommon Knowledge, I'm Peter Robinson. Our show today: the enduring woes of Latin America. Over the last quarter century, we've seen democracy and free markets establish themselves around the world, including in Latin America where one country after another that used to be ruled by an oligarchy or a military junta has become a democracy and moved toward free markets. With what result for Latin America? Well, over the last half-decade or so, economic stagnation and one political crisis after another. Democracy, free markets. In Latin America, they don't seem to work. How come?

Joining us, two guests: Stephen Haber is a fellow at the Hoover Institution and the editor of Crony Capitalism and Economic Growth in Latin America. Alvaro Vargas Llosa is a fellow at the Independent Institute and the author of Liberty for Latin America: How to Undo Five Hundred Years of State Oppression.

Title: Latin America Goes South

Peter Robinson: The Economist Magazine, "The United States championed the Washington consensus of free market economics which rightly or wrongly Latin Americans blame for five years of stagnation in the region." Rightly or wrongly? Which is it? Have free market reforms caused stagnation in Latin America? Alvaro?

Alvaro Vargas Llosa: There was never a real free market reform in Latin America. There was only partial free market reform, if at all. And I think the important thing to do now is to explain to people why privatizing state companies by way of just giving out monopolies to privileged entrepreneurs and business people has nothing to do with free markets.

Peter Robinson: The reforms in Latin America were partial or a fraud or how would you characterize it?

Alvaro Vargas Llosa: Both things. Both things. In some cases, partial. In some cases a complete fraud.

Peter Robinson: Steve?

Stephen Haber: The free market reforms were necessary but not a sufficient condition for growth. So they're a partial solution but not a complete solution.

Peter Robinson: But you give in general--you give Latin America high grades for making the effort? They have indeed moved in good faith toward free market reforms?

Stephen Haber: Across Latin America tariffs were reduced; non-tariff barriers to trade were reduced. Limitations on foreign direct investment were reduced or eliminated. So by any standard of what it means to liberalize your foreign economic relations, Latin America gets very high marks. It is the case however, that those reforms have not yet, with the exception of Chile, produced the outcomes that either Latin Americans or policymakers in the United States expected.

Peter Robinson: Expected. Not just hoped for but actually expected.

Stephen Haber: Yeah.

Alvaro Vargas Llosa: In some cases though, that was only true at the very early stages. In Argentina, for instance, the barriers did come down but immediately after that because of the creation of these trading blocks in South America, they went back up again. In Argentina, seven out of nine groups of tariffs went back up again. So it's not really that true that tariffs went down. What happened is they went down in an early period and they went back up again. And that's where the confusion lies.

Peter Robinson: Let me reframe the question then in terms of democratic reforms and free market reforms and what was expected as against the reality. You get to comment. 1980 in Latin America, organization called Freedom House which categorizes countries as free or un-free. Freedom House looks at Latin America in 1980 and says there are only five countries that it considers free--democracy being one component of freedom. Today that number has risen to twelve. Good news, bad news--why hasn't it--why do we see political instability and crises instead of some flowering of democratic, political culture.

Alvaro Vargas Llosa: Because we tend to look at freedom as something that needs to be kind of divided up into different segments and freedom is really one whole thing. You can have relatively, you know, relative political freedom and not have economic freedom like we did in the eighties. And you can have well, you know, some measure of economic freedom like you had under Pinochet in Chile and not have political freedom. And in the end, unless you have political institutions that guarantee freedom and a real free market that is economic freedom, the whole thing just won't work. The countries that have done best in Latin America are those where political freedom and economic freedom have been combined together.

Peter Robinson: So which Latin American countries have done the best?

Title: Pinochet to Pinot Noir

Peter Robinson: Give me the country that in Latin America is the freest by your standards. That is to say, the best political--set of political freedoms and the best set of economic freedoms and then give me the one that you think is the worst.

Alvaro Vargas Llosa: I'll name three. Chile by far the best. Poverty in Chile has gone down from 36% of the population to 18% in the last ten years.

Peter Robinson: You'll agree with that?

Alvaro Vargas Llosa: …combined political and economic freedom.

Stephen Haber: I would agree with that. And in fact, Chile with the exception of the Pinochet years has a long history of democratic governance.

Alvaro Vargas Llosa: The nineteenth century in particular.

Peter Robinson: Can I ask--let me just to be clear on the history of Chile--the good economic news starts under Pinochet himself, does it not?

Stephen Haber: Yes.

Peter Robinson: He institutes free market reforms.

Stephen Haber: But what you need to understand is that for a long time, Chile--it's not that Chile has been an outlier since the 1980's. Chile was unusual in Latin America in that it did not have internecine Civil Wars in the nineteenth century. It has a long history of democratic governance and of all the other institutions that go with democracy, real political parties, for example.

Peter Robinson: So under Allende, the movement to the left in the sixties--starts in the sixties, becomes sheik in the university in Santiago and under Allende, what you're getting is in historical terms, an aberration in Chile in history.

Stephen Haber: That's correct.

Peter Robinson: And what we see now is Chile back on its long term course. Is that a fair statement?

Alvaro Vargas Llosa: That is true. I will also go beyond that. You have interesting cases in Costa Rica and Uruguay. Both countries have very…

Peter Robinson: Good news cases?

Alvaro Vargas Llosa: Well yes, but they have--they both have kind of statist--what you could call statist economies. A lot of government intervention. A lot. I mean, much more than really should be acceptable in a Latin American country that needs to develop itself. And yet, because they have a history of, you know, a measure of stability--they have a judiciary that's more independent than in other countries and so on. That's political freedom. Let's call it that for a moment. They still have a certain development that is better than in other countries. And they don't have all that much economic freedom. So that's--I'm just trying to go back to your first point, how important political freedom is to creating an environment where there is stability, there's long-term planning, there is, you know, just people able to organize their future in a stable way.

Stephen Haber: …for a minute. When we think about democracy, it's shorthand not just for the right to vote.

Peter Robinson: Right.

Stephen Haber: It's shorthand for a whole set of institutions in the United States that reinforce each other in all kinds of sometimes unpredictable ways.

Peter Robinson: Private property, independent judiciary…

Stephen Haber: Independent judiciary, separation of powers within government. State governments, municipal government…

Peter Robinson: Competing blocks of government power.

Stephen Haber: …in which the President of the United States not only has to think about congress but he also has to think about the judiciary. But the central government then also has to think about the rights of states--state governments and to think about the rights of municipalities. All of these interact through parties. The federal nature of the government gets reflected as the existence of states--is reflected in the way representation exists in congress.

Peter Robinson: Right.

Stephen Haber: All of this unfolded over a period of time. What doesn't exist in most Latin American countries is that whole complex of institutions that evolved over the course of time in the United States, that support democracy.

Alvaro Vargas Llosa: What you've had in Latin America is governments trading property rights in exchange for funding. You had that in the fifteenth and the sixteenth century. You have that now. You had the Argentina and the Mexican governments giving, for instance, during the privatization of Social Security in Latin America. What they did is they gave the right to certain private funds to manage the pensions of the, you know, the citizens in exchange for funding. That well it says they forced them to buy government bonds. And so 90% of the pension funds in Latin America or at least in countries like Argentina and Mexico were really invested in government bonds. So they traded property rights for government bonds and that created too much power…

Peter Robinson: Next, the effects of culture and history on governance in Latin America.

Title: Statist Rights

Peter Robinson: What you've said Steve suggests that the difference between the United States and Latin America can be expressed as follows: the United States comes out of the Anglo Saxon, the English tradition, common law--by the time the Founding Fathers come along, you've got the jostling for power between the King and the House of Lords and the House of Commons. You've got this notion of separation of powers, countervailing balances and so forth and Latin America comes out of Spanish culture. Now in the twenty-first century, the question is wait a minute; Spain and Portugal, the colonial powers that stamped Latin America with the statist mold are themselves no longer statist. They're doing fine. Why can't Latin America get with the program?

Stephen Haber: The difference between Latin America and the United States is not the difference between Anglo-Saxon and Spanish culture. I'll refute that with one simple word: Guyana. Guyana was a British colony. Guyana is not a flourishing democracy with a thriving economy.

Peter Robinson: I withdraw my diagnosis. It's television. We have to keep it moving along. Let me push you to the question why can't Latin America get with the program? That's the question.

Stephen Haber: It's something that Alvaro mentioned, right, which is the difference between Latin America and the United States isn't that there haven't been attempts to create the kinds of arrangements that Alvaro is talking about. It's that they always get whittled away by the nature of American institutions which compete away these kinds of arrangements. In Latin America since there's no…

Peter Robinson: Why can't Latin America get with the program?

Alvaro Vargas Llosa: It can. It's perfectly possible. Some countries have done it. You've had recent reformers like Ireland, New Zealand in the nineties where even the left wing parties have managed free market reform. It's perfectly feasible and possible. But you were right to point out to these cultural differences. Culture--it's not ethnic. It's cultural and there's a big difference between the two things.

Peter Robinson: That's what's going on in Chile. If you--the very point of saying that Chile has had fundamentally a stable government and pretty good economic growth going back a century and a half at least, Chile has been different from all--on the one hand, that's very good news for Chile but on the other hand, isn't it disheartening for the rest of the continent because it looks as though somehow or other it's all cultural. It's stamped on these countries somehow that they're founded…

Alvaro Vargas Llosa: But culture can change. It can be modified. Spain did so. Spain in 1975 when Franco died was a very backward country. Its culture was very backward. It was anything but an environment where you could foresee kind of free market economy developing. And it did. Even though they still have a very big state--too big for my taste but they still--I mean, they do have a situation in which, you know, people are born into an environment where they feel their property rights are protected and so on and so forth and government is limited.

Peter Robinson: Alvaro, in your book, you lay out five principles of oppression. This gets to the question of what's gone wrong. Let's go through them very quickly. Corporatism, explain what you mean by that?

Alvaro Vargas Llosa: Well the government doesn't look at society as individuals but really as groups or corporations of collective entities that they can control--the government can control. So some corporations are more equal than others to use a famous formula by Orwell.

Peter Robinson: And that goes back how far?

Alvaro Vargas Llosa: Oh centuries. It goes back to the Incas. It goes back to the Aztecs, even before that. It goes back centuries and centuries. It's the history of Latin America.

Peter Robinson: You buy that?

Stephen Haber: I think corporatism is a symptom of a broader range of issues. The fundamental problem I think is something we talked about before and it goes to this issue of oppression. And that is that you've never until recently in some countries with the exception of Chile and Costa Rica--there's not a tradition of governments being limited by their own political institutions, which has meant that governments of whatever ideological stripe, both conservative and Marxist, both nominally centralist or nominally federalist, have been unconstrained in their authority and discretion. And that has been a recipe for weak property rights in Latin America. And the weak property rights play themselves out in a number of ways. The first is that property's not safe from expropriation. That's an obvious one. But if property's not safe from expropriation, populations have no incentive to make the institutions that enforce private property rights stronger. So in United States, you enforce your property rights to the judiciary, the property registries, through the police. Imagine you had a government now that had no limits on its authority and discretion. Do you really want to have efficient police, property registries, and government?

Alvaro Vargas Llosa: Those are the four other principles of oppression, yeah.

Peter Robinson: Now onto the question of reform.

Title: Sanctify Yourself

Peter Robinson: And so now we go to Alvaro and you lay out four categories you talk about of reforms. The first and second categories; you present these as closely related, cleansing the law is the way you describe it and sanctifying the poor. Sanctifying the poor sounds like something a priest ought to do. I want to know how a hard-headed political reformer--what do you mean by these two?

Alvaro Vargas Llosa: Okay. Cleansing…

Peter Robinson: Cleansing the law, cleansing the law.

Alvaro Vargas Llosa: We have not established in Latin America the difference between the law and the legislation. We think that the law is anything the government or the president decides it is. And well in countries like the United States and Britain and others, that's not the way it works. What you have is the law which is a higher principle than the legislation, meaning that the government can only go so far in a, you know, in its legislation and cannot go beyond certain limits which are really the rights that citizens have over and above the power of the state. We haven't established that in Latin America. So the government does anything it wants to do. Anything it decrees is the law and therefore, the rights of the citizens are very precarious. They're just subject to whatever the government wants.

Peter Robinson: Here you have one of the fundamental concepts. It takes centuries to get fleshed out in European history. How on earth do you get that fundamental concept implanted where it doesn't exist?

Alvaro Vargas Llosa: Well you learn from the experience of the world around you. That's important. I mean, the countries that have succeeded best are those where that principle has been established. And you also learn from that second bit you mentioned, which is sanctifying the poor. Whenever you establish a situation in which the government can do anything it wants, what you find immediately is a reaction from the people. And you find a reaction by way of simply just evading the law, just going around it to see, you know, not obeying it, not complying with it.

Peter Robinson: The poor may be powerless but that doesn't mean they have to cooperate?

Alvaro Vargas Llosa: No, they're creative. They're--and they want to survive. They want to create wealth and they want to build houses and they want to engage in trade. They want to do things. And if the government stands in their way, they will go around it. So sanctifying the poor simply means just observing what people do, how they react to the legislation that comes through and if there is a disconnect between the two, it means that the legislation--it means the government, the state is basically not obeying the law because the law is much closer to the people than the legislation is.

Peter Robinson: If a black market exists, that is to say there's a lot of economic activity taking place outside the legal framework.

Alvaro Vargas Llosa: It means there are too many regulations. There are too many taxes.

Peter Robinson: You bring it inside.

Alvaro Vargas Llosa: The government is interfering too much.

Peter Robinson: Okay.

Alvaro Vargas Llosa: What we have to do is remove that from the people because otherwise they will--you will not get them to comply.

Peter Robinson: How do you change it?

Stephen Haber: One thing that's usually prescribed, for example, is I'll give everybody titles, get the government out of the way but here's the problem.

Alvaro Vargas Llosa: There are a number of ways to change it but first I think a crisis will come up at some point. That's very important. In all the big changes in history, there's been a crisis before that.

Peter Robinson: There's been one crisis after another.

Alvaro Vargas Llosa: I know and we're going toward another one. And there will be one at the end of this decade. I can foresee that. And, you know, we better take that chance. Crises... Leadership. That's extremely important. You know, the countries that have changed in the last decade or so were countries where leadership, you know, great leadership emerged at some point. New Zealand with the Labor Party. Ireland with the entire political class.

Peter Robinson: Next, measuring progress in Latin America. Can we at least say that the days of military coups and the rule of generals are over?

Title: Suffering From Epauletsy

Peter Robinson: Within dim and fading memory, Latin America was run by military guise very substantially. And that has gone. So let me ask you at least this much. Has the continent made this much progress? Is that old game over or could a coup take place tomorrow in Argentina? Has the business class, the political class decided at least we're beyond that and we won't let it happen again.

Alvaro Vargas Llosa: For the moment but you know what, in the past we've had waves of, you know, democratization. And that, you know, proved to be reversible. I mean, we've had situations which most of the--90% of the continent was under democratic rule and suddenly we went back to…

Peter Robinson: So you think even this…

Alvaro Vargas Llosa: …military.

Peter Robinson: What about that?

Alvaro Vargas Llosa: I think the key to this is reform. If you have a situation where basically the basic structure, economic, political and so forth is maintained, you know, from government to government to government, it won't make much difference whether it's military or civilian, whether it's democratic or authoritarian. What you will have is one crisis after the other. They key to this whole thing is reform so that the people participate in the system much more than they do now, that this is not simply a system run by an oligarchy or people close to power. And that's where my critique of people like Silva comes into--if he wants his revolutionary instincts to turn into sound policies, he should turn them toward the system that has been ruling his country since Independence Day. He should, for instance, engineer a really true separation of the state and business. There's no separation in Brazil between the two. It's just permanent crony capitalism between the two.

Peter Robinson: Give me your reforms. How would you change the…

Stephen Haber: Look, I would actually give Silva in Brazil very high marks. And I'll tell you why. He is an opposition government, right? This is a Marxist Party which comes to power but doesn't treat the former government or the political system itself as illegitimate. Right. The government of Luiz Inácio Lula da Silva takes all the existing political institutions of Brazil; congress, the presidency, the courts, and it works within them. That's democracy. Democracy isn't just when you have people in power whose policies you like.

Peter Robinson: Steve. Steve, I'm asking how would you reform…

Stephen Haber: What I'm saying to you is that…

Alvaro Vargas Llosa: …we need to make it work.

Stephen Haber: It's this we need to make it work stuff…

Peter Robinson: Oh that's a reform in itself?

Stephen Haber: No it's…

Peter Robinson: …if they treat the institution seriously.

Stephen Haber: I want you to listen to the syntax. We need to make it work. The notion, the underlying notion is that there's some group of people who know better than others. And who, when they get to power, will fix everything. This is…

[Talking at same time]

Stephen Haber: Let me finish.

[Talking at same time]

Alvaro Vargas Llosa: …power where it shouldn't be, to let the people decide.

Stephen Haber: Right, right. I know. The problem with all these notions always is that once that group of--who gets the power that knows how to do it right like let's say Fidel Castro. What will now check their authority? If you have not laid down fundamental political institutions that check the authority of anyone in power…

Peter Robinson: Hold on. Stop. Are you saying that the fundamental political institutions as they already exist in Latin American countries are just fine? They simply need to be made to work?

Stephen Haber: They are moving in--they are--Brazil's a great example. They are moving in the right direction. And the point I was trying to make about the United States is that American democracy as we live in it today was not created in the space of a year, or ten years…

Peter Robinson: Patience? You're arguing for patience?

Stephen Haber: It is a slow--democracies are fragile beings.

Alvaro Vargas Llosa: Yes, you need patience. I mean, I don't want for a moment to give the impression that I'm, you know, I'm in favor of the strong man who comes and solves everything overnight.

Peter Robinson: Right, right.

Alvaro Vargas Llosa: No way. These institutions in this country and others in Europe were the product of a very long evolution. And there's no way of denying that. But Latin America has a structure that is really--has been kind of building up over the centuries. And that needs to be attacked. It needs to be removed.

Peter Robinson: Finally, some advice for the Bush Administration.

Title: Things Go Better Without Coca

Peter Robinson: What do you advise the President of the United States to do as regards Latin America?

Stephen Haber: To pay a lot more attention.

Alvaro Vargas Llosa: Stop the drug war.

Peter Robinson: Stop the drug war?

Alvaro Vargas Llosa: And conditioning any kind of political relationship to the drug war.

Peter Robinson: That has come to dominate our relationship with Latin America.

Alvaro Vargas Llosa: Yes, at least with half of Latin America. Yes.

Stephen Haber: Certainly with Colombia, it's come to dominate.

Alvaro Vargas Llosa: And Peru and Bolivia and sometimes even Mexico.

Stephen Haber: That's right. I think casting--I would sort of…

Peter Robinson: You want to stop at the drug war? Would you go with that?

Stephen Haber: I would ex--I wouldn't say stop the drug war. I would say remove the focus away from the problems, quote, that Latin America generates for the United States like drugs.

Peter Robinson: Right.

Stephen Haber: And think about being a partner with Lat--a real partner with Latin American countries in order to help Latin America grow and democratize. The administrations tend to pay attention--and Carter was an ex--a notable exception to this. The U.S. government has tended to pay attention to Latin America only when Latin America generates obvious problems for the U.S. That's the wrong time to be paying attention. One thing for example the United States could do is really reduce tariffs on Latin American agricultural exports to the United States.

Alvaro Vargas Llosa: I say eliminate them altogether and protection…

Peter Robinson: Should we--can we extend NAFTA?

Alvaro Vargas Llosa: …and subsidies.

Peter Robinson: Can we extend NAFTA to Latin America?

Stephen Haber: Sure.

Peter Robinson: And will the Latins buy into that?

Stephen Haber: I think so.

Alvaro Vargas Llosa: Oh, of course they will.

Peter Robinson: Okay.

Alvaro Vargas Llosa: That's what Lula is arguing for. Lula da Silva from Brazil. He's arguing for--he's calling the U.S. hypocritical. Well, call him at his word, you know.

Peter Robinson: All right. Last question. Prediction: Average per capita income in the United States last year, just under $38,000. Average per capita income in all of Latin America, tremendous variation among the countries but if you take the region as a whole--average per capita income just over $6,000. That's a ratio of 6 to 1. A decade from now, where will that ratio be? Steve?

Stephen Haber: If things go well in Latin America, 5 to 1.

Peter Robinson: 5 to 1.

Stephen Haber: It takes a very long time to overcome per capita income differences of that magnitude. If Latin America outgrows the United States at, you know, 40%--a 40% faster rate than the U.S., you're close to a gap of 5 to 1.

Peter Robinson: Alvaro?

Alvaro Vargas Llosa: Since the Second World War until now, so say the second half of the twentieth century, Latin America grew at a faster pace than the United States and Europe. And it never caught up. It never even got close because we have a system in which even when you grow by, you know, four percent, five percent, six percent a year which is not bad, by first world standards certainly, you just don't make all that much progress because of the structure of the system. It only benefits, you know, a top layer of the society. So I say we will be pretty much at exactly the same, you know, exact same position as now. We need to reform the structure and the system so that four percent and five percent growth which is what we're having now, which is, you know, considerable, really means something. It really varies the composition of society in terms of wealth.

Peter Robinson: Steve Haber, Alvaro Vargas Llosa, thank you very much.

Alvaro Vargas Llosa: Thank you.

Peter Robinson: I'm Peter Robinson for Uncommon Knowledge. Thanks for joining us.