Posted on 11/20/2001 12:36:37 PM PST by jdege
Chapter 2
Over the past year, proponents of free markets and free people in Latin America suffered a variety of setbacks, but few were more illustrative than Alan García's political comeback in Peru.
Mr. García, a major figure in Peru's leftist APRA party, was the country's president from 1985–1990. During that time, Peru collapsed. The García government's wild spending practices left the Peruvian central bank furiously printing the local currency, the "inti," to pay the bills. A hyperinflationary spiral ensued; in 1991, according to HSBC, inflation was over 7,000 percent and in some months annualized over 10,000 percent. Meanwhile, Peru succumbed to the terror of the Maoist guerrilla group Shining Path, which Mr. García appeared helpless to contain.
While anarchical chaos and worsening poverty might have been chalked up to mere incompetence, there were also the charges of rampant corruption. Peru was literally a basket case, in every sense, when Mr. García finally left office - and the country - in shame in 1990 and Alberto Fujimori took over. Mr. García's dismal presidency should have driven him out of politics forever. But in the spring of 2001, he returned from self-exile in Colombia to run for president again. Peruvians who remembered his disastrous government also recalled his magnetic personality and his chutzpah, and they were not surprised by his return. What did amaze many, both inside and outside Peru, was Mr. García's success in the first round of balloting. He garnered enough votes to make it to the runoff. Although he was narrowly defeated in the second-round vote, his near triumph remained amazing and puzzling.
Mr. García's return to popularity - built, as before, on socialist prescriptions for enriching Peruvians - is discouraging for advocates of liberty. But it is also an opportunity to analyze Latin American democracy more deeply. If freedom is good for prosperity, why would masses of poor Peruvians - who, in daily life, are intensely entrepreneurial - be voting for less of it? Considering the general deterioration of most Latin American economies over the past 50 years, and the clear evidence of the link between market economics and development, there seems to be something irrational about voters' choosing socialism - a failed and corrupting model which tends to oppress people - over the free market. What are we to make of poor Latin Americans, who as local voters cling to antimarket sentiments even though, when they stream north to the United States, they are choosing less government for more opportunity? If voters are rational, something else must be going on.
The answer to this puzzle, in my estimation, is found in the widespread practice in Latin America of granting government unlimited power through the constitution. Latin America's experiment with reform over the past decade has demonstrated that efforts to adjust the economy without limiting government power are like working on the engine of a car that has no wheels.
BACKWARD, MARCH: THE GARCÍA PHENOMENON
Mr. García's 2001 battle cry against "neo-liberalism" resonated with a huge slice of the young Peruvian electorate. During the campaign, he acknowledged that many of his earlier visions of utopian socialism were not actually possible. Yet he promised that he could deliver new prosperity to Peruvians with a re-energized, benevolent state as provider.
It was not a unique suggestion. The García phenomenon in Peru has been repeated all over Latin America this year. While the region is no further behind than it was during the hyperinflationary stagnation of the "lost decade of the 1980s," it is rife with disappointment and therefore ripe for opportunists like Mr. García. Sandinista Daniel Ortega, for example, who ran Nicaragua as a military victor post-Somoza but was later run out of town by Nicaragua's voters, is today the leading candidate in the Nicaraguan presidential elections set for November. In El Salvador, the FLMN, a political party of former guerrillas, is likewise gaining in popularity.
-------------------------------------- Latin America's experiment with reform over the past decade has demonstrated that efforts to adjust the economy without limiting government power are like working on the engine of a car that has no wheels. --------------------------------------
Other leftist leaders, seemingly washed up by the failure of collectivism, also have seen their popularity surge this year. Brazil's Luiz Inacio "Lula" da Silva and Colombia's Horacio Serpa, both old leftist warhorses and more popular than their records would support, are two more examples of a renaissance of leftist politics. In Argentina, Raul Alfonsín, a former left-wing president who presided over Argentine hyperinflation and left office six months before his term was up because he considered the country "ungovernable," has resurfaced as a major influence in the presidency of Fernando de la Rua. In Venezuela, Hugo Chavez, has bragged about his admiration of Fidel Castro and Mao Tse-tung, his hostility to the market, and his belief in military solutions to domestic problems.
It may be argued that a few countries in the region made small gains in further freeing economic resources, protecting property rights, and reining in overreaching government in recent years, but the vast majority of countries where liberalization was inching along appear to have hit barriers that threaten to turn back the modest gains of the past decade. Some have already regressed.
BLAME THE LAW
Alan García's roaring return to the political scene this year had regional experts rushing to proclaim the end of liberalism for Peru and, by extension, all of Latin America. A plethora of explanations surfaced, including claims that Latin Americans reject economic freedom en masse. Experts on culture were on the scene to prop up the theory that the values of Latin Americans - with Roman Catholic and Indian tribal roots - clash with the notion of individual freedom. Latins, we are told, are collectivist and want government to protect them from savage capitalism. Just what kind of a transformation they undergo to arrive in the U.S. as immigrants brimming with entrepreneurial verve has never been explained.
There is no question that the threat of a lurch back toward the left in Latin America is real. Although Hugo Chavez's militarization of Venezuela's civilian government remains an exception at this time, this year's election results indicate that the ideals of the left are back in vogue.
This implies, however, that Latin Americans are against freedom, and the evidence suggests just the opposite. In Peru, for example - a country with a flourishing informal market because government regulation is so suffocating - it is hard to make a convincing argument that what voters want is a wider role for the government in their economic affairs.
It is far more likely that what resurrected Mr. García's political career was merely a highly rational response to the incentives found in the Peruvian constitution, which designates the government as the slayer of all inequalities in both law and economics. Confronted by the enormous inequality produced by an all-powerful government - and even though many are not aware of the culprit's identity - the economically disenfranchised vote for those who promise to use their power to right so many injustices.
-------------------------------------- The combination of "majority rules" and unlimited government power conspires to create a vicious cycle of populist promises followed by corrupt and disappointing leadership in Latin America. --------------------------------------
Yet the outcome is counter-intuitive because the government, charged with ensuring egalitarianism, has supreme power over the individual. This produces two negative outcomes. The first is that whenever the government deems it necessary, it can rescind individual liberties for the good of the nation. In other words, the government has unlimited power to do whatever it considers necessary for the "public good." This leaves democracy in Peru, as in most Latin American countries, defined almost solely as "majority rules." The second negative outcome is that the enormous power also invites corruption and the granting of special privileges, and thus creates more inequality.
The combination of "majority rules" and unlimited government power conspires to create a vicious cycle of populist promises followed by corrupt and disappointing leadership in Latin America. Elected leaders have the power - even the responsibility under the law - to transfer wealth arbitrarily, and it is thus natural that voters elect those who promise the most generous transfers. The pattern is constantly repeated despite the hard evidence that transferring wealth cannot produce prosperity and instead actually destroys wealth by scaring off investment and discouraging risk-taking while fostering corruption.
Healthy institutions, which might contain government by checks and balances, cannot develop under such conditions because elected leaders have no interest in limiting their own power. Thus, each "reform" of the constitution expands the power of politicians who have their own incentives to retain their power to transfer wealth.
DEVELOPMENT ECONOMICS AND THE LAW
There is nothing culturally unique about Latin America's dysfunctional democracies. In fact, Frederic Bastiat, the famous 19th century French economist, statesman, and author, presciently described modern-day Latin America and the disastrous effects of what he called "The Fatal Idea of Legal Plunder" in his book The Law, first published in 1850:
Under the pretense of organization, regulation, protection, or encouragement, the law takes property from one person and gives it to another; the law takes the wealth of all and gives it to a few - whether farmers, manufacturers, shipowners, artists or comedians. Under these circumstances then certainly every class will aspire to grasp the law, and logically so.
Having suffered the consequences of so much privilege going to so few, the "excluded classes," he argued, would rebel, saying that
part of the tax that we pay is given by law - in privileges and subsidies - to men who are richer than we are. Others use the law to raise the prices of bread, meat, iron or cloth. Thus, since everyone else uses the law for his own profit, we also would like to use the law for our own profit. We demand from the law the right to relief, which is the poor man's plunder. To obtain this right we also should be voters and legislators in order that we may organize Beggary on a grand scale for our own class, as you have organized Protection on a grand scale for your class. We have other claims. And anyway, we wish to bargain for ourselves as other classes have bargained for themselves.
This, of course, was a remarkable description of what was to come to pass in Latin America. Privilege for some sparked demands for privileges for many others. After a time, not only was the entitlement system unable to fund itself, but perhaps more important, the underlying notion that success was predicated on gaining privilege rather than on actually producing wealth ate away at the most basic incentives needed to produce risk-takers and attract capital. This phenomenon is repeated all over the world, but in Latin America it has been institutionalized.
DEMOCRACY: MORE THAN JUST MAJORITY RULE
Democracy's great attraction is the notion of selfgovernment carried out by way of representative government, popularly elected. But Bastiat argued that universal suffrage would shrink in importance if equality under the law were to replace a system of privilege. "In fact," he asked,
if the law were restricted to protecting all persons, all liberties and all properties; if law were nothing more than the organized combination of the individual's right to selfdefense; if law were the obstacle, the check, the punisher of all oppression and plunder - is it likely that we citizens would then argue much about the extent of the franchise?
This is an enormously important point, for while self-described statesmen of our time seem to believe that the most important quality of a democracy is that each man casts a vote, Bastiat rightly foresaw that it is equality under the law that would be the single most crucial factor for a just society. Today's Latin American democracies witness great rates of participation at the polls, but poverty, privilege, and corruption still prevail. Universal suffrage alone has not managed to produce what is truly needed: equality under the law.
-------------------------------------- It is...likely that what resurrected [former President Alan] García's political career was merely a highly rational response to the incentives found in the Peruvian constitution, which designates the government as the slayer of all inequalities in both law and economics. --------------------------------------
It is indeed ironic that so much effort is put into the cause of political freedom today and so little into the cause of economic freedom. As Fredrick Hayek wrote in The Road to Serfdom, "We have progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past."
SOCIALISM AS LEGALIZED THEFT
Bastiat warned of the tendency to pervert the law in order to legalize what he called "plunder." It is hard to imagine that he was not writing about so many modern Latin American democracies when he said, "Sometimes the law defends plunder and participates in it. Sometimes the law places the whole apparatus of judges, police, prisons and gendarmes at the service of the plunderers, and treats the victim - when he defends himself - as a criminal. In short, this is legal plunder."
To identify legal plunder, Bastiat recommended seeing "if the law takes from some persons what belongs to them and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime." He also cautioned that
Socialists desire to practice legal plunder, not illegal plunder. Socialists, like all other monopolists, desire to make the law their own weapon. And when once the law is on the side of socialism, how can it be used against socialism? For when plunder is abetted by the law, it does not fear your courts, your gendarmes and your prisons. Rather it may call upon them for help.
No one could overcome socialism, he went on, as "long as legal plunder continues to be the main business of the legislature."
Thus, in his tiny book, Frederic Bastiat laid out the cycle of destruction that would engulf Latin America some 150 years later and explain why reckless politicians like Alan García can resurrect themselves. The constitutions are written so as to legalize plunder, and once they have succeeded in doing so, they become the perfect tool for socialists. Challenging the power of socialism with such law is, in the words of Bastiat, "illogical, in fact, absurd."
Bastiat was not alone in differentiating between democracy and socialism. Writing in 1848, Alexis de Tocqueville noted that
Democracy extends the sphere of individual freedom, socialism restricts it. Democracy attaches all possible value to each man; socialism makes each man a mere agent, a mere number. Democracy and socialism have nothing in common but one word: equality. But notice the difference: while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude.
Hayek echoed these sentiments when he warned that socialism "has persuaded liberal-minded people to submit once more to that regimentation of economic life which they had overthrown because, in the words of Adam Smith, it puts governments in a position where ‘to support themselves they are obliged to be oppressive and tyrannical.'"
UNLIMITED GOVERNMENT
In Latin America today, most nations have mandatory voting systems, yet poverty and inequality persist. Why? Because voting rights on their own do not create a just society. For that, the power of government must be limited.
America's great economic success is no accident. The founding fathers worried deeply about the power of government and worked hard to constrain it. James Madison fretted about the consequences of a "majority rules" democracy that lacked sufficient checks on the elected government. "But what is government itself but the greatest of all reflections on human nature?" wrote Madison in Federalist No. 51.
If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing government, which is to be administered by men over men, the great difficulty lies in this: You must first enable the government to control the governed; and in the next place, oblige it to control itself.
The U.S. Constitution is brief by any standard, but that is not its only redeeming feature. It is also heavy with "negative rights"; that is, it is largely about what the government may not do. This contrasts sharply with most Latin American constitutions, which give government wide powers and responsibilities, meticulously detailed.
-------------------------------------- Today's Latin American democracies witness great rates of participation at the polls, but poverty, privilege, and corruption still prevail. Universal suffrage alone has not managed to produce what is truly needed: equality under the law. --------------------------------------
A prime example of government run wild per order of the constitution is Brazil. Downloaded from the Web, it is over 200 pages long. It says that among the government's "fundamental objectives" are to "guarantee national development," to "eradicate poverty and substandard living conditions and to reduce social and regional inequalities," and "to promote the well-being of all."
Brazil's citizens, under the terms of their constitution, have the right to "education, health, work, leisure, security, social security, protection of motherhood and childhood, and assistance to the destitute." They have a constitutional right to a "salary floor," irreducibility of wages, and a year-end salary bonus. They have the right to "overtime that must be at least 50% higher than that of normal work" and "annual vacation with remuneration at least one third higher than the normal salary." And they are guaranteed "free assistance for children and dependents from birth to six years of age, in day-care centers and pre-school facilities."
In the culture section of the Brazilian constitution, we learn that the government is charged with protecting Brazil's cultural heritage by means of "inventories, registers, vigilance monument protection decrees, expropriation, and other forms of precaution and preservation." In the section dedicated to sports, the constitution specifies that "The government shall encourage leisure, as a form of social promotion."
It is indeed remarkable that in Brazil today, despite so many guaranteed "rights" of health and wealth and happiness, many Brazilians remain miserably poor. Yet, even as Brazilians make no progress, the government's wide constitutional responsibility allows it to grow ever more interventionist and invasive. It cannot create wealth, so it must take it from others in order to fulfill its mandate.
Of course, Brazil is not alone by any stretch of the imagination. The constitution of Peru has a separate section entitled "The Economic Regime." Article 59 says that the state "stimulates the creation of wealth" and "offers opportunities of advancement to those sectors that suffer from any type of inequality; in this respect, it promotes small business in all of its forms." Article 58 specifies that private initiative is "exercised within a social market economy. Under this regime, the state guides the development of the country, and acts principally in the areas of promotion of employment, health, education, security, public services and infrastructure." Another sign of the government's great distrust of freedom is Article 66: "Natural resources, whether renovated or not, are patrimony of the Nation. The State is sovereign in their utilization." The Mexican constitution has similar restraints on the nation's natural resources, as do most other Latin American constitutions.
-------------------------------------- The best incentive for governments to reform is open trade. In an open trading environment, governments also have to compete, and this means they must contain their interventionist instincts. --------------------------------------
The trouble is not so much that Brazil or Mexico or Peru has so many pernicious laws; the United States has flirted with much foolishness. The main problem is the fact that so much of the law is enshrined in the constitution, making reform a monumental task. As an example, in Brazil, constitutional amendments require a two-thirds majority, passed twice in each of the two legislative chambers - a huge political undertaking.
UNLIMITED GOVERNMENT: THE ENGINE OF CORRUPTION
When the majority rules, government power is unrestricted, and wealth is concentrated, candidates like Mr. García have an automatic advantage because they can promise to strip the rich and clothe the poor. Yet the same unlimited power that allows the candidate to make such believable promises also provides opportunities for massive corruption.
That is why the great Latin American "reformers" of the 1990s, including Carlos Saul Menem, Alberto Fujimori, Carlos Salinas, and Fernando Henrique Cardoso, so bitterly disappointed their electorates. Being pragmatic, they used their expansive power to move toward greater private-sector liberty, but they also held on to unlimited discretion and subsequently fell victim to allegations of widespread corruption within their regimes.
-------------------------------------- The U.S. Constitution is...heavy with "negative rights"; that is, it is largely about what the government may not do. This contrasts sharply with most Latin American constitutions, which give government wide powers and responsibilities, meticulously detailed. --------------------------------------
In analyzing these disappointments, too many observers have confused the once-promised liberalization with the pseudo-liberalization of the 1990s. One example comes to mind: A Uruguayan once argued to me that the Argentine corruption scandal in which IBM allegedly won a contract illicitly from the state-owned bank, Banco Nacion, was an example of how privatization causes corruption. The real lesson in that scandal was that had Banco Nacion been sold, the company would have been under market pressure to grant the contract to the most competitive bidder.
Unfortunately, rather than blame the shortcomings of the 1990s reform process on unchecked government, many have blamed the market itself. This charge persists despite the fact that all-powerful government displays a penchant for corruption. This is also a convenient argument for socialists who desire a return to more government control over the economy, and it has energized their campaigns.
Unlimited government fosters corruption and concentrated wealth. This gives way to more demands from the many for "fairness," and thus to more populism, which creates still more poverty and corruption. The popularity of Alan García suggests that this is a cycle that may be impossible to break without first limiting the power of government.
THE WAY OUT: COMMERCE AND COMPETITION
Changing the unlimited power of government in the developing world will not be easy. After all, to do so, politicians will have to poison their own water; that is, they will have to agree to limit their own power - something that is unlikely to occur without powerful incentives. The best incentive for governments to reform is open trade. In an open trading environment, governments also have to compete, and this means they must contain their interventionist instincts.
There is nothing new about the link between commerce and limited government. As Hayek noted in The Road to Serfdom,
The gradual transformation of a rigidly organized hierarchic system into one where men could at least attempt to shape their own life, where man gained the opportunity of knowing and choosing between different forms of life, is closely associated with the growth of commerce. From the commercial cities of northern Italy the new view of life spread with commerce to the west and north, through France and the southwest of Germany to the Low Countries and the British Isles, taking firm root wherever there was no despotic political power to stifle it.
In other words, open markets help shape democracy because trade allows a wider segment of the population to become players themselves and accumulate economic means. Indeed, an increase in trade openness in Peru, since the late 1980s, may explain why Mr. García was not able to win the April runoff. More Peruvians today than in 1985 have an economic stake that would suffer under retrograde government, thanks to a more open economy.
Throughout history, nations that have expanded trade also have expanded their political freedom and prosperity. This is an important fact to keep in mind as the U.S. watches the Western Hemisphere slip backward toward populist socialism. No amount of international aid or First World rhetoric can replace the influence that market forces, launched by an increase in trading activity, would have on the formation of responsible, limited government in Latin America. Maintaining the status quo of protectionism and isolation almost guarantees the continuation of populist demagogues, socialist poverty, and regional instability.
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