From Mexico to Bolivia: The Struggle Against Neoliberalism

June, 2006

In the wake of oil expropriations in Bolivia and a revival of the leftist PRD in Mexico, there have been a number of articles in The New York Times, The Wall Street Journal and The Economist about the prospects for a resurgence of the Left in Latin America and what it would mean. After reading those articles, I believe that Central America is probably not in peril of returning to the authoritarian state-directed economic models of the twentieth century. Mexico may be. Let’s review some recent events.

Evo Morales won the presidency of Bolivia last December, and promptly announced that he would nationalize the country’s oil and gas resources; he redistributed some privately held estates; and he legalized coca as a crop (as distinct from cocaine). In May he sent the army to occupy the drilling facilities of foreign oil companies, not so much to actually run them – as Bolivia lacks the technical expertise to do so – but as a cudgel to extract greater taxes from foreign oil companies. This pleases his populist base, which hopes for a windfall from the foreign business community.

Morales signaled his solidarity with Venezuela’s Hugo Chavez and the Latin American Left when he announced that “tomorrow it will be the mines, the forest resources, and the land,” over which the Bolivian government will take control. (1) He further established his solidarity with the Left by blasting the United States in both direct and oblique terms – lashing out against both the proposed Free Trade of the Americas pact and “neoliberalism.”

I first heard the word “neoliberalism” when in graduate school six years ago, and have never really thought it was a term that accurately depicted free market economics. One of my professors explained to me that it represents a return to the unregulated free market economics of the nineteenth century, which was called Liberalism. Hence, the return to nineteenth century unregulated capitalism is “neoliberalism.”

Interesting isn’t it, that “neoliberalism” has become synonymous with the United States – not only with U.S. business, but loosely to the country and its culture as a whole. Never mind that the fastest growing source of foreign investment in Latin America is the Far East. In the land that invented “dependency theory,” to be against the U.S. is to stand as a symbol of resistance to foreign oppression. Regrettably, this is not only true for the working class and the poor, but for Latin America’s intellectuals. Only in the business community will you find people who value efficiency, advancement through merit, and the legal protection of personal rights and private property.

The label has simply become a slogan. It is inaccurate, however, because it does not really describe the political economy of the United States. In the U.S. none of the state regulatory structures that are interwoven into economic life were in place in the nineteenth century. There was no control over monopoly. (The Sherman Anti-Trust Act was passed in 1890 and not vigorously enforced until Teddy Roosevelt’s presidency after the turn of the century.) There was no agency to regulate rail and communications rates and access. The Pure Food and Drug Act would not be passed until the progressive reforms of the early twentieth century. There was no social security; no effective bank regulation; no Medicare; no child labor laws; no legal right to strike or to picket in front of an employer’s place of business. There was no federal mandate to provide universal education or monitor educational standards. There was no Environmental Protection Agency. There was no affirmative action. There was not a hint of the myriad of regulations and prohibitions passed in the last decade that established the state as the protector of individual safety and health. All of these things are part of the U.S. economic model today. So.... exactly how is the U.S. political economy “neoliberal?”

In truth, many of these protections do not exist in Latin America, and that may be the key to understanding why liberal economic reforms have not  been more successful. To the extent that economic liberalization is “neoliberal” in Latin America, it reflects the failure of host countries to build the political institutions and regulatory bodies that the U.S. put in place decades ago. That failure is internal and political; not external and economic, as the dependency advocates say it is. The statist reaction to that failure is also internal, and essentially backward-looking. The consolidation of power implied by the resurgent Left is unarguably indigenous, and is supported by historical class antagonisms.

One of the effects of globalization has been the spread of capital, industry and technology from developed countries to underdeveloped countries. A corollary flow of free-market ideas and technical expertise has come with it. When a cadre of young intellectuals trained at U.S. universities in business and public administration came into the political scene some twenty years ago, they contributed to a liberal reform movement that swept through Mexico and Latin America. The movement was “liberal” in the classic sense – toward free markets and limited government – and is referred to as “the Washington Consensus,” although it took different forms from Mexico to Argentina, Brazil and Chile. More than a decade later, many have pronounced the movement a failure, as about half of Latin America’s citizens still live in poverty and the benefits of these reforms have gone to a minority of Latin America’s citizens. As we said in United States following a decade of “supply side” economics, “The rich got richer and the poor got poorer.”

To asses what went wrong with the liberal reform movement takes some time, and more importantly takes a willingness to stop thinking in terms of two alternative visions for society: socialism and “neoliberalism.” Alvaro Vargas Llosa, in his book Liberty for Latin America, addresses the failures as institutional. His prognosis is that until Latin America’s institutions are fixed or new institutions created, both leftist and “neoliberal” programs will fail in the future as they have done in the past. Latin America has never built the kind of institutional framework that the U.S. created during the Progressive Era, and built on in the 1940s and 1960s. Through all these “socialist” reforms, the U.S. maintained a free market system, with broad participation and democratic processes.

Perhaps we should call the return to socialist solutions in Latin America “neostatism.” That would be a system where all rights belong to the state, and may be assigned, temporarily, to private entities that are favored by the state. That is what state control of resources, investment, trade and foreign assets implies. The important point I want to take from Vargas Llosa’s work is the acknowledgement that the current wave of statist solutions is not a remedy for poverty and inequality. It was the dominant paradigm in Latin America for much of the twentieth century, and it did alleviate the extreme problems of inequality (through land reform, for example). It did not provide a sustainable model for solving those problems. State-run economies in Latin America faced the same problems as state-run economies in Eastern Europe. Even though liberal reforms have not resolved these same problems, they reflect a sustainable alternative to “neo-statism”: free market economics and democratic processes. This alternative has performed better than is perceived by the public. Here are a few statistics to support this statement.

Global growth in GDP in 1992 was 1.2%, and inflation was running at about 35%. During the following thirteen years of globalization and a “neoliberal” privatization movement around the world, global prosperity improved. During that time (from 1993 to 2006) the average annual rate of GDP growth increased to 3.9%, after adjusting for different countries’ purchasing parity. Inflation for the world as a whole slowed to 3.7% in 2005. Despite an increase in world population, GDP per person increased rose at an average yearly rate of 2.5%, adjusted again for purchasing parity. The number of people living in extreme poverty has been reduced by several hundred million people, and as a percentage of the total global population – from 22% in 1993 to 17.8% in 2001. (2)

To finance greater social spending, many governments have been privatizing government services and looking for more efficient delivery of public goods. This means, in effect, taking money out of the hands of protected “rent-seeking” client groups and putting it to work where it will help the people who need it most – or simply putting it to work in infrastructure projects that benefit everyone. The Economist sees the trend toward efficient services and public works spending surviving the current electoral shift to the left. They reason that the successes of the reformist economic paradigm will make it hard for the Left to build a consensus for a return to statist policies (“neostatism”). That implies a continuation of the status qu a continuation of liberal economic reforms in Latin America with the budget savings allocated for public welfare.

The irony of nationalization of private companies and confiscation of income and business assets is not just that it stifles future investment and lending. Socialists expect that. In fact, Latin intellectuals welcome closed, autarkic economies because they believe poverty is actually worsened by trade and investment with wealthy countries. The true irony is that the efforts at economic self-sufficiency create a host of parasitic client groups dependent on the government. The reality of parasitism is complemented by the idea of self-enrichment through political favoritism – the “rentier ethos” in government.

State ownership of industries and utilities, and laws that protect and subsidize these industries, exist to serve powerful labor unions and politically relevant client groups. They do not serve the society or poor. They do a disservice to the Latin people by discouraging accountability and efficiency in government. What the public gets are inefficient services and shoddy products, sold at inflated prices. Mexico’s state-run factories came to resemble the Soviet tractor factory whose inputs were worth more than the finished tractor. Privatization upgrades quality and provides cost savings.

Latin America now has its own source of “neoliberal” supporters, many of whom realize that foreign investment and technology will help them take advantage of the current commodity boom. Latin America has never been good at creating value-added industries (called “linkages”) to upgrade their industrial technological base. If they scare away foreign investors now for the sake of the quick riches of expropriation, they will suffer for it later. That realization may keep populist presidents outside of Venezuela from following through with campaign promises to turn back the clock to twentieth century.

Here is a comment by Maros Jank, the Brazilian president of the Institute for International Trade Negotiations (ICONE), on Evo Morales’s move to nationalize Bolivia’s oil production:

In this, the most recent chapter of a sad Latin American tradition, the economy  should deliver at least one important lesson: there really is no free lunch.  Nationalization by Bolivia should quickly turn into incompetent management and out-of-control pandering and employment for political reasons. Cheap populism rapidly changes into a production and investment crisis, with inflation picking up the pace, low growth rates and an escalating debt load. (3)

Marcos Jank is arguing from history, as am I. The privatization movement in Mexico, for example, got started in the early 1980s in response to the country’s debt crisis and de facto bankruptcy. It picked up steam in the 1990s under president Salinas de Gortari. Other Latin American countries followed suit, hoping to find sustainable economic policies that would avoid the spending-boom and inflation-bust cycles of the past. Privatization is not a panacea, however, and the persistence of poverty in Latin America creates a sense that liberal economic reforms have under-delivered, although I would counter that they have probably over-promised. With the disillusionment of the “neoliberal” reforms that Latin American states have taken over the last fifteen years or so, it is not surprising that “neostatism” is having a revival.

Despite popular animosity to “neoliberal” reforms, Latin American leaders continue to push for sustainable, market-based policies because they recognize that they are more effective than their socialist alternatives. That is why the authors at The Economist are sanguine about the effects of the current wave of populism in Latin America. They point out that liberalism has to some extent been institutionalized in more democratic and transparent politics, privatization of state industries, and commitments to free trade treaties.

Chile’s social security system is private, and Mexico’s Vicente Fox recently won a legislative victory to require greater employee contributions to the Mexican retirement system. The new pension reform law was greeted with protests by hundreds of thousands of people, who marched through the avenues of Mexico City. Despite its unpopularity, privatization continues in much of Latin America and Mexico because the results are generally positive.

Back to the case of Bolivia: the source of the pressure to restrain nationalization of the oil industry will not be from the U.S. but from Bolivia’s largest investor and trading partner, Brazil. Bolivia does not have the oil resources of Venezuela, and cannot afford to be quite as confrontational with the international business community. Leftist politics and heavy royalties on oil companies have already caused foreign investment in Bolivia to shrivel to about $84 million last year. (4)

Brazil’s president Lula de Silva has a lot of leverage with his neighbor because the Brazilian energy company Petrobras may be the only (certainly the major) remaining player to help Bolivia develop its oil and gas resources. Petrobras will not be eager to invest in Bolivia’s oil infrastructure if its executives believe that Morales will nationalize (confiscate) their plant and equipment in order to satisfy his populist campaign pledges. To prevent Bolivian socialism from becoming a Soviet-style equality of poverty, Bolivia needs the investment and expertise of foreign energy firms. Will Brazil be the country that exerts a “neoliberal” influence on Bolivia’s government?

Alvaro Vargas Llosa maintains that President Luiz Inacio Lula de Silva, elected as a leftist, will be a moderating influence on Bolivia. Vargas Llosa whimsically divides the Latin American Left into the “vegetarian” Left and the “carnivorous” Left. (5) The vegetarian Left is similar to European social democrats – it supports democracy, free markets, and greater social spending. The “carnivorous” Left, for which Venezuela’s Hugo Chavez could be regional spokesman, believes in authoritarian regimes with centralized state control of the economy.  His thinking is hard-core socialist, and the link between state power and “carnivore” style socialism is a matter of  historical record. Vladimir Lenin wrote that a “dictatorship of the proletariat” was necessary in order to exert the police power needed to confiscate and control private property, suppress bourgeois elements, and establish the state’s control over private industry. A century later, Hugo Chavez would justify consolidated power as necessary to stand up to the U.S. and its “neoliberal” allies (academic-speak for international banks and investors).

Writers for The Economist argue that because true socialism requires such concentration of power in the hands of the state – the central state authority, and not the decentralized provincial authorities – it may actually be more difficult to implement in Bolivia now that a decade of liberal economic and democratic reform has passed. Establishing centralized control will be challenging in a country with strong regional loyalties and an existing but fragmented socialist party. Even socialists like their freedoms, and it is unlikely that local autonomy will be surrendered to the national government quickly or easily. The most important question facing the Western Hemisphere this summer is whether this reasoning will apply to Mexico. Interestingly, it may not be Bolivia but Mexico that poses the greatest potential threat to the reform scenario!

Mexico has presidential elections on July 2^nd, and there is a race building for the presidency between López Obrador, the former mayor of Mexico City, and Felipe Caldéron, a moderate conservative of the PAN. Disillusionment with Vicente Fox’s presidency may bring a populist reaction, and with it the election of López Obrador, the PRD candidate. Obrador is a “dinosaur” – a creature of the pre-reform bureaucratic state. It is encouraging that his mandate is unclear, and that Felipe Calderón leads him in the Zogby International pre-election polls by about five percent, and has a real chance to beat him. (6) This would give the PAN a mandate to continue the unfinished legacy of the  liberal economic reforms initiated in the 1980s after Mexico’s economic collapse.

By contrast, the PRD has advocated a closed economy and return the “rentier” state that benefited politically well connected groups at public expense for decades. The PRD program would turn Mexico back toward the policies of government subsidy and ownership of industry; government control over wages and prices; government control of financing; and the renewed intrusion of the Mexican bureaucracy into national policy as an actor for its own economic interests - an interest group unto itself.

Interestingly, it is the PRI candidate, Roberto Madrazo, who probably had the best chance to win the election early on, now trails both candidates. He proposed a balanced program, including the continuation of liberal reforms, yet publicly sided with the Left. He is now lagging in the polls because he neglected to forge the important alliances within the PRI that helped his PRI predecessors achieve a “consensus” government. For more on the history of the PRI and the consensus style government of the Revolutionary Family, see my paper “Mexico in Transition,” here in our Bookshelf section.

 What is troubling about the Mexican election is the “carnivore” socialist rhetoric coming from the dinosaurs in both the PRI and PRD party leadership. The two parties have announced a united front against the PAN, and said they will reject the election results if Felipe Calderón wins, threatening to send their supporters into the streets by the thousands. If elected, Obrador has pledged to return the PRD to its revolutionary roots of the 1930s, and to purge (you guessed it) “neoliberal” advocates from his government.

Manuel Camacho of the PRD said to the Financial Times that:

“... there are going to be demonstrations on a scale rarely seen in Mexico and that will make it very hard to govern, no matter who wins.” (7)

Interesting, isn’t it, that the parties which supposedly represent “the people” have a blatantly anti-democratic agenda – from Mexico to Bolivia. Their leaders are in an untenable position as democratic reformers – advocating greater power to the state; the abrogation of property rights; and subversion of the rule of law to political expediency. Yet what can  they do when their popular base demands anti-democratic reforms? It may be asking too much of Evo Morales and López Obrador to ignore the demands of their parties and client groups altogether, but we should expect political elites to moderate those demands. After all, a trait of leadership is to ignore pressure to do the wrong things.

American and Latin academics could help! They could stop characterizing liberal policies as a form of imperialism, and stop presenting reform as a false choice between “neoliberalism” and socialism. For a more sophisticated understanding of Latin America’s alternatives, I would recommend they read Alvaro Vargas Llosa’s book.

Sources:

(1)   Tucker Herbert, “Expropriation in Vogue?” The Stanford Review, 5/12/06, 8.

(2)   Bill Emmott, “A Long Goodbye,” The Economist, 4/1/06.

(3)   Marcos Jank, “ALCA vs ALBA” Latin Business Chronicle, (downloaded from http://www.latinbusinesschronicle.com/reports/opinion/052906/jank.htm, 6/1/06)

(4)   Wall Street Journal, 5/26/06, A6

(5)   Álvaro Vargas Llosa, “No Left Turn,” The New York Times, Op-ed, 12/27/05. (Also reprinted by The Independent Institute and Venezuela’s Daily Journal.)

(6)    Manuel Suarez-Mier, “Democracy at Risk South of the Border,”  The Wall Street Journal, 5/26/06, A11

(7)   Manuel Suarez-Mier, A11