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Commentary

Market Reform—Idiocy, Myth and Reality
Latin America: Misery feeds on macroeconomic neglect; a truly free market needs strong institutions.


     
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Guide to the Perfect Latin American Idiot, a book that I coauthored with Cuban novelist Carlos Alberto Montaner and Colombian journalist Plinio Apuleyo Mendoza, has become a bestseller in Latin America. It is an attempt, using some humor, to point out the inability of our political and intellectual class to renounce the old myths that for years have provided us with wrong explanations for our miseries. It also challenges a perilous new myth, which claims that Latin America is experiencing a free-market revolution.

The Latin American experiments in economic reform—lowering inflation, reducing the number of state-owned enterprises and showing some hospitality to foreign investment—are bold but limited, giving rise to powerful populist oppositions and weakening the case for the free market precisely because they are so incomplete.

If fewer state-owned enterprises, reduced inflation and increased foreign investment were enough to bring about stability and prosperity—indeed a capitalist revolution—then Latin America would have enjoyed widespread prosperity a long time ago. If competent macroeconomics are sufficient for a free and prosperous society, why is Latin America still backward?

The answer lies in a simple but often misunderstood paradox. Economic reforms without complementary institutional reforms have bred mercantilistic systems in which the vast majority still are denied the opportunities and benefits of economic growth.

There are two great weaknesses in the current reform process: The reformers are confusing private enterprise with free-market capitalism, and they are focusing on macroeconomic management without considering institutional frameworks.

Private ownership is not a panacea for an economy. Ill-conceived privatizations have replaced public monopolies with private monopolies, transferring the ownership of certain sectors of the economy while still protecting markets and scandalously fueling corruption. One example is communications.

Throughout Latin America—particularly in Peru, Mexico and Argentina—telephone users suffer high rates and poor service because state telephone monopolies have been sold to private monopolies. Users then wrongly deduce that capitalism is the cause of this abuse. They fall to understand that this is what happens when you transfer a closed market from public to private control.

This happens in a variety of service industries. Public transport in Buenos Aires is privately owned, but each route is monopolized by one company, thereby turning Argentinians against the idea of privatization.

The inadequacies of these privatizations are being used by enemies of reform in Latin America, such as the powerful Colombian telephone union that controls most of the 14,000 workers of Colombian Telecom, the state-owned telephone company. To defend state ownership and block privatization, the union points out the flaws of Peru's privatized telephone monopoly.

Protecting these private monopolies has also led to the equally dangerous perception that liberalization means giving privileges to the rich. Of the 15 Mexicans featured in Fortune's latest list of the richest people in the world, there is not one who has not benefited (however legally) from state-granted privileges. Meanwhile, Mexicans see little reason to bless a reform process that has left them impoverished and disenfranchised.

Throughout the region there are also so-called strategic areas of the economy where privatization is not even contemplated. The best example of this is oil. Consider the Venezuelans: Despite a phenomenal $250 billion generated in the last 20 years by their state-owned oil company, an estimated 80% live below the poverty line. And yet even the suggestion of privatizing Venezuelan oil is met with hysteria, as is the case with oil in Mexico and copper in Chile.

On the macroeconomic front, some Latin American countries have made bold changes but at the same time they have blatantly ignored the importance of institutions—justice, private property, solid money and democracy. The result is a reform process with weak links that invite disaster.

Lack of institutional reform is widespread. Private property rights are often either ignored or eschewed by government. During the 1980s, in a silent process, Peruvian peasants privatized 60% of the land that had been collectivized by the socialist agrarian reform of the 1970s, yet formal property titles are still not available for the 4 million parceleros in the Andes.

In Mexico, property rights, a crucial institution in any free society, can hardly be present under Article 27 of the constitution, which states that "the nation" is the owner of all the land. The heralded reform of the collectively owned ejido has not translated into property rights for peasants.

In Peru, there can be little trust in the country's institutions when the judiciary was disbanded in a coup d'etat by the president himself in 1992, to be replaced by a new, politically dependent court. This institution made no attempt to prevent Peru from becoming, according to a 1996 Amnesty International report, the country with the most political prisoners in Latin America after Cuba (around 1,100).

Latin America has never given liberal reform a serious try. The Latin American idiot instead always attributes our failures to conspiracies—the Monroe Doctrine, United Fruit, the International Monetary Fund, the World Bank. The latest enemy is neoliberalism—free-market reform. Once again, the blame is in the wrong place.


Alvaro Vargas Llosa is Senior Fellow of The Center on Global Prosperity at The Independent Institute. He is a native of Peru and received his B.S.C. in international history from the London School of Economics. His Independent Institute books include Global Crossings: Immigration, Civilization, and America, Lessons From the Poor: Triumph of the Entrepreneurial Spirit, The Che Guevara Myth and the Future of Liberty, and Liberty for Latin America.

Copyright Los Angeles Times

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