TEACHING FREEDOM

Mary Anastasia O'Grady is a courageous journalist who is willing to take on dictators, ex-presidents, their cronies and others who are enemies of freedom in Latin America. Mary has been a senior editorial page writer at The Wall Street Journal and editor of the weekly "Americas" column, which deals with politics, economics and business in Latin America and Canada. She was recently elevated to the editorial board at The Wall Street Journal. She spent more than a decade in the investment industry with a number of firms, including Merrill Lynch. She joined The Wall Street Journal in August of 1995. She has been a senior editorial writer there since December of 1999.

Mary Anastasia O'Grady: A New Birth of Freedom in Latin America

Mary Anastasia O'Grady of The Wall Street Journal delivered the following remarks the fall of 2005 to friends of The Fund for American Studies at a leadership conference held in New York City.

It's a little bit nerve-racking to be with a group like this because I think most of you probably know as much or more than I do about political economy and the institutions of a free society. So I'm going to share a few of my observations on Latin America, which I hope will be new and informative for you.

It would be a lot easier if I were giving this speech in Mexico. There and in many other Latin American countries, the ideas of classical liberalism are not quite so well known.

I remember a few years back speaking to a group of Mexican businessmen about Hayek and being shocked to learn that they said they too considered themselves Hayekians. And it was only later that I learned that they were talking about Selma, and I was talking about Nobel Laureate and free-market economist Friedrich.

So that's what you're up against in Latin America when you dare wade casually into the subject of classical liberalism.

It's a pleasure to be here because I know that you share the values of freedom and free-market economics that we hold very dearly at the editorial page of The Wall Street Journal .

Fund President Roger Ream reminded me recently of a conversation that he and I had a few years back at a Mont Pelerin Society meeting when he shared with me some ideas he had about work to be done in Latin America. My response was something to the effect that the best place to work on promoting ideas of freedom for Latin America would be Washington, D.C. Our nation's capital is a place, particularly in the policy world with respect to Latin America, where there is a real need to do some educating about what it is that makes this country different than the rest of the world. In other words, what are the institutions that explain America's success.

Over the years that I've been covering Latin America, I have never ceased to be amazed at some of the terribly counterproductive policy prescriptions that come from the U.S. - both from government and non-government institutions - and are shipped off to Latin America. I think one reason for this is that many of the individuals who are considered "specialists" in the region are educated at Latin American studies programs at U.S. universities; so many of those programs emphasize socialist prescriptions in development economics. They are not institutions of higher learning that expose their students to the ideas of free markets and limited government, the ideas that would actually benefit the region.

The central problem nowadays is that too many students are taught that Latin America is poor because there is income inequality. Focusing on eliminating this inequality through wealth redistribution is seen as socially "just." Tragically, things like markets and profits are, more often than not, viewed as sinful.

So, I would hope that at some point there could be more serious economic education in this country, especially for Americans who are going to work at institutions supported by the U.S. taxpayer, such as the State Department, the International Monetary Fund (IMF), and the World Bank.

Having said all of that, let me get to what I want to talk about tonight, which has to do with the influence the U.S. has in the region. Because the American government has the money - that is it is the main source of foreign assistance - it is able to influence policy in Latin America. But all too often that power is not used constructively, either because policymakers do not understand the problems or they don't have the right incentives to do the right thing.

Let's talk about Venezuela. There's a sense of panic about Hugo Chavez and worries that his government represents a big shift to the left and that Latin Americans are now embracing a more socialist ideology. One way this is explained, is that Latin Americans, because they're Catholics, tend to be collectivists. Therefore, they reject free markets and want socialism.

I think that this is a gross misunderstanding of what is actually going on in the region. This misunderstanding worries me because if we don't grasp the real problem, we're not going to have learned anything from this experience, even when Hugo Chavez is no longer in power. There is no question that Chavez is a danger to the region. He foments hatred, he specializes in class warfare, his government is repressive, and he is mobilizing dangerous groups, making him a menace not just to his own country but to his neighbors. All of this needs attention from the United States.

But I think it would be a mistake to read the situation as Chavez representing a popular thirst for socialism. There is something much more fundamental about what's going in Latin America that we haven't understood and that is that underdevelopment and poverty in the region have left the majority of the population feeling bitterly disenfranchised. Chavez in many respects is merely a manifestation of that fact.

In his new book "Liberty for Latin America" Alvaro Vargas Llosa traces the politics of the region over the past 500 years. He looks at the Mayans, the Incans, the Aztecs, the Conquistadores, the liberators of independence, the 20th century of economic nationalism and right through to the so-called "market liberalization" of the 1990s.

And all of those periods, Vargas Llosa notes, are connected by a common thread: oppressive government. Latin America has never known freedom. No matter what you read in the papers about how they've had a free-market revolution and have rejected it, it's not true. Latin Americans have never experienced freedom.

What has happened in Latin America instead is that the populations have been caught in the struggle between corporatism and communism. It's not unlike what has occurred in Europe. There's a very powerful corporatist - one could even say fascist, in economic terms - mentality and there is a strong, hard left that occasionally is communist and at other times socialist. The power struggle in the region has largely been characterized by these two competing ideologies of collectivism.

Argentina and its Peronist party are instructive. The party has a hard left (in which the current president of the country has his political roots) and it has a hard right (which is led by a man by the name of Eduardo Duhalde who was for a short period of time, president) and they're fighting with each other. But this is not a struggle between liberalism and statism. This is an ideological war within the context of statism. And these two factions have been fighting with each other since the 1970s. Tragically, this is pretty much what passes for political debate in the country.

Variations of this Argentine problem are replicated all over the region. Using "public choice" to analyze the cycle of populism that we are witnessing, one notes that in all of these so-called democracies you have concentrated interests which are represented by domestic producers. Most of these economies are "closed" so local producers are very powerful, as are public sector labor unions and teachers unions. These interest groups control the economy even though they are extremely concentrated, narrow interests and do not represent the wider needs of the population.

To understand how this problem feeds populism, consider what happens when the dispersed interests of the population - the majority - become frustrated. At election time, they try to reflect their frustration at the polls but since government is the center of all power, all they can really do is ask for more government. This is what leaves us with the cycle of populism and eventually leads to a Chavez government.

I have witnessed this problem first hand in a host of countries around the region. Since the end of the Cold War and Soviet meddling in the region, more often than not, barriers to liberalization have been erected by the elements within the "business" community.

In the mid-1990s, El Salvador began a very aggressive privatization program. The country was trying to privatize the state-owned telecom company but not in the way that, for example, Argentina did it. (The Argentineans turned the state monopoly into a private monopoly, and the industry remained uncompetitive.) El Salvador wanted to have a very competitive telecom market that would support the evolution of a more competitive economy.

I remember talking to a senior government official and I remarked that it must be really difficult dealing with the FMLN - the former guerrilla group that became a political party after the ten-year civil war.

He corrected me: "Well you know, they're really not the problem. They're actually interested in people being better off and if you sit down and talk to them they are open to ideas." He went on to say that the barriers to deregulating were coming from the old business interests in Central America. "They are very entrenched, very powerful, and they don't want to give up any of their privilege," he told me.

This anecdote, I believe, perfectly describes what Latin America is up against as it tries to modernize. The old guard that benefited from an almost feudal economic structure doesn't want competitive markets. The resistance to economic liberalism does not only come from the hard left. It also comes from the traditional business interests in these traditionally protected economies.

If we want to deal with Hugo Chavez, we have to recognize that what he represents is a frustration among Latin Americans who have never been able to break free of this corporatist model. They've been told that, for example, the private telecom monopoly in Argentina is what free markets are all about. But even after so-called liberalization, they did not experience equality under the law or open competitive markets. Argentina's labor unions and its domestic producers blocked real liberalization.

It's not good enough just to denounce Hugo Chavez and Fidel Castro and say that communism is bad; we have to think about how the region actually develops the institutions by which you have a free and competitive economy. We must emphasize economic mobility, more than economic inequality, and to alter the past we have to deal with special interests that have a long tradition of privilege that no one has ever been able to challenge?- even though they operate in some sort of democratic process.

A similar phenomenon can be observed in Mexico, where large monopolies still control key sectors of the economy. The country's largest fixed line telecom company is also the country's most recognizable symbol of this problem. Its owner, Carlos Slim, ironically spends his free time flying around Latin America lecturing governments on how to fight poverty.

Yet without competition in telecom, Mexico is not likely to overcome poverty. The cost of doing business is just too high, which in turn affects investment, competitiveness and growth.

This goes for the rest of the economy as well. A rigid infrastructure built of monopolies is inconsistent with the flexibility needed to create jobs and wealth. This is a fact, no matter how many platitudes Mr. Slim offers the poor.

In Mexico, you also have a cement industry that is not quite a monopoly but it's close to it; domestic air transportation is a monopoly; electricity, oil, and the beer industry are also in need of anti-trust attention.

In Nicaragua the old-guard is also fueling the left. Daniel Ortega - a friend to Fidel Castro and Hugo Chavez - is a real threat to stability. But Ortega would not wield even a fraction of his power if it weren't for the alliances he has with the right-of-center party run by former President Arnaldo Aleman. Aleman has been imprisoned for embezzlement from the public treasury but he is now running his political mob from prison. To save himself, he's been making deals with Ortega. Tragically too many "anti-communist" Nicaraguans have thrown their lot in with Mr. Aleman. Economic liberalism has had no advocate in this battle.

In all of these examples we can see a common problem: That is that while the hard left seems to be on the rise, its success, in one way or another, is often fueled by "business" interests out to protect their privileges.

The way to think about this, I believe, is in the context of public choice theory. Think about the problems that we have in this country with, say, the sugar industry, where just one or two people can wield an awful lot of power over a whole free trade deal. Then put that in a Latin American context: you don't have a middle class; most of the population is very poor; and you have concentrated power in special interests that are blocking the liberalization of the economy. Look at the problem this way and you'll see why Latin America makes Sisyphus look like an achiever. It's a cycle that is going to be very hard to break.

It is also true that there are things that U.S. policy toward the region can do to support reformers. Ideas matter and I think the work that The Fund for American Studies does is vitally important. But the U.S. also has to think more realistically about the public choice problem. In particular, I would hope that we start to appreciate the fact that gradualism doesn't work. When reformers get in power they have to be encouraged to do things very quickly. To the extent U.S. policy supports rapid, simplified reform, we will begin to see better results. The experience of Eastern Europe taught us that the countries that did things very quickly made more progress.

I also think there are three main U.S. policy positions that have damaged Latin America and ought to be revisited. Please note that I'm not blaming the problems of Latin America on the U.S. Most of the region's problems are homegrown. But the U.S. can have a heavy influence in the reform process.

First we need to scrutinize the work of the IMF more closely. Now that the gold standard is no more, the IMF doesn't really have a job any more. It is encouraging that Asia has largely dispensed with IMF intervention. This means that if the IMF ever leaves Turkey, Latin America will be its only client. And if Latin America learns to live without it, the IMF is going to be officially obsolete. Think about what this means for the IMF bureaucracy, which is in business to perpetuate itself.

More immediately, what those of us interested in a growing Latin America must understand is that the IMF's activities are often not only a benign waste of money; the IMF is actually distorting the political process in the countries where it works. This distortion often works to the detriment of development.

The IMF sets certain conditions and it tells countries that they must meet those conditions in order to get financial support from the IMF. But there is no evidence to suggest that the conditionality has ever worked. Indeed, experience shows that more often than not, countries don't meet required conditions, and they are seldom held accountable.

If you have a government making bad decisions, building up debt or what have you, and the IMF rides in with a bunch of money to bail it out, the result is that the IMF ends up empowering bad government. The government avoids the default, pays off the U.S. investors and patches things up. This alleviates the pressure to carry out reform and the same political status quo can proceed with yet another cycle of mismanagement. Bailing out bad government should not be U.S. policy.

This phenomenon of bail outs has been very damaging to the people of the region. Take for example, Argentina. Several years ago there was a moment when the anti-market, anti-freedom government of President Nestor Kirchner might have had to default to the IMF. It wanted to roll over a loan, yet it had violated contracts and the rule of law, and it had not kept promises to negotiate in good faith with creditors.

The Argentine government told the IMF that it would default unless the IMF guaranteed the rollover of the loan. In fact, a default might have been good for the political debate going on in the country at the time because a financial crisis might have allowed competitors to come to the front with new ideas. But the U.S. Treasury didn't want to have a default, preferring "stability" over the risk of some unpredictable crisis. So rather than face a default (which would also have triggered the first-ever accountability on the part of the bureaucrats at the IMF and possibly a shuffling of power in Argentina) the Bush Administration decided to placate the Argentine government and roll over the loan. This was good for the incumbent Argentine president and good for "stability" in the country. But it was very bad for political competition, for those who hoped for change and, most tragically, for the Argentine people.

This is just one example of how the IMF's meddling - and U.S. policy - actually has distorted the political process and removed productive incentives.

Rodrigo Rato, who had credibility as the Finance Minister in Spain, is now running the IMF. He recently gave a speech about the importance of institution-building in the developing world. But sadly he missed the connection between how the IMF bails out bad government and how institutions are built. If someone as bright and talented as Mr. Rato is failing to recognize this, I'm afraid we have a long way to go in tackling the problem.

If the U.S. cares about these countries it will do more to rein in the IMF and let "creative destruction" in politics work. So far there's no evidence that's going to happen.

The second U.S. policy that merits scrutiny is the U.S. drug war. Not only is it not working, but it's not a benign failure. Poor countries, with their frail institutions and very weak law enforcement, are unable to bear the burden of this U.S. policy. Like the IMF, the drug war is actually damaging the potential for these countries to build institutions.

Unfortunately, at this point, the drug war is an industry in Washington; lots of people have jobs from it, lots of private sector companies make money off of it. But it is not effective and it's placing a very expensive burden on countries that cannot bear such costs. I believe that it is an immoral and indefensible policy, and it is going to wind up costing the U.S. in terms of the instability it is generating in the region.

If we have a drug problem in this country we have to deal with it in this country; we can't expect poor, weak countries to deal with our demand for drugs by taking on the impossible task of snuffing out supply.

Lastly, is the issue of free trade, which is obvious to everyone in this room. If there's one way to alter the status quo of the political economies in these countries - where domestic producers are very powerful and it's not in their interest to restructure the economy - it's with open markets.

Obviously, unilateral opening is the best thing they could do. But the reality is that the powerful people in Latin America are not going to open markets unless they see an opportunity to export to another market in exchange for opening. This is why the U.S. should take a leadership position and push more aggressively for open markets in the region.

By the way, that has not been the effect of the Free Trade Area of the Americas (FTAA). In my view the FTAA was really just another dumb idea from Bill Clinton, who needed a "big" idea for his 1994 Summit of the Americas and improvised with the promise of an FTAA. It is true that Mr. Clinton was building on his predecessor's long-term vision of opening markets in the region but the promise of a negotiation has been a disaster for the region.

What Mr. Clinton failed to recognize was that by floating a U.S. negotiation proposal, the FTAA "idea" had the effect of halting unilateral liberalization that had already started in the region. Countries decided that if the U.S. was going to come and negotiate with them, they wanted to have high tariffs and lots of leverage in the talks. So they just stopped the process of opening. The region lost ten years of unilateral liberalization of the region and today, in the year when the agreement was supposed to be completed, there is no FTAA and markets are still too protected.

The one country that went ahead with unilateral liberalization is Chile and a story that President Ricardo Lagos told me confirms the negative effect that Clinton's FTAA proposal had on the region's trade agenda.

I had asked Mr. Lagos - then a senator - how Chile managed politically to achieve unilateral opening. He told me the country's uniform tariff helped a lot because it meant that in an opening, everybody gained something. As the uniform tariff comes down, producers lose some protection but they also gain in a lot of other areas where low-priced imports are important to them. Because of this, there was minimal resistance to further opening. I asked him if the political forces in favor of opening met resistance. He said there were a couple of guys in the administration who advised the president not to do it. The reason: The FTAA was coming and high tariffs would be a preferable position from which to negotiate.

This, of course, is a confirmation that the Clinton FTAA set up all the wrong incentives for trade progress in the region.

On trade policy, I believe the U.S. could advance liberty in the region if it would do three things. First it should push ahead on the Doha Round of free trade talks. Second it should try to unilaterally open agricultural markets in the U.S. to regain its image as a leader in free trade. There is a big opportunity to get at this problem with the farm bill coming up in 2007. Lastly it should see what it can do on a bilateral basis with Brazil to open markets. Brazil is the monster economy in Latin America and thus the most important one for the U.S. to try to bring along.

In closing, I want to stress that Latin Americans, like people all over the world, hunger for freedom. But without the magnificent foresight of our Founding Fathers, who stressed limited government, most people in the region find themselves stuck in a cycle of populism that is driven not only by "statists" but also by the "corporatist" right. Thanks to the realities of public choice, it is going to be very hard cycle to break.

The U.S. cannot force this process but it can think more realistically about how its foreign policies and its influence, either help the freedom seekers or hinder them. Thus far, I think U.S. policy has come down more on the side of hindrance. We can change that. But first, we have to diagnose the problem correctly.