LATIN AMERICA
Within the broad framework of ‘the West’ there have, of course, grown up different kinds of political economy. A particularly instructive case is that of Latin America, because two different and opposing models have been tried. The first, which the economist Hernando de Soto has described as ‘mercantilism’, has the longer and less glorious tradition. Originating with the Spanish and Portuguese colonial administrations, subsequently perpetuated by corrupt authoritarian regimes of Left and Right, and then all too frequently sustained by international bodies promoting ‘development economics’, it was based on centralized economic power wielded in the interests of powerful individuals and groups and protected against foreign competition. It bears the main responsibility for the fact that Latin American countries have not enjoyed the advancing prosperity of North America. Mr de Soto’s pioneering study of economic conditions in Lima, Peru, showed that as a result of corrupt, unpredictable over-regulation it was now the so-called ‘black economy’ which was operating to sustain the needs of the people for housing, markets and transport.[114]
Most Latin American countries had to spend much of the 1980s paying off debts incurred in order to finance the misdirected policies of the 1970s. But, with Chile leading the way, followed by Mexico, Argentina, Brazil and now Peru, there has been a fundamental change of direction away from ‘mercantilism’ and towards limited government, sounder finances, privatization and deregulation. Significantly too, this new direction apparent in Latin America, like the successful Asia-Pacific economies, has occurred often in spite of rather than because of advice and assistance from international institutions.
Chile, of course, because of the international hostility directed towards General Pinochet’s regime, was forced to take unilateral action to restore its economic fortunes by applying liberal economic prescriptions. These have subsequently continued under democracy. Monetary growth was curtailed to bring down hyperinflation; tariffs against imports were cut; foreign investment was welcomed; privatization was promoted (350 state companies have been sold) — even to the extent of bringing privatization to bear on the social security system. The beneficial results have been widely felt. Export-led growth has been consistently strong. Moreover, Chile’s economy is better balanced and more diversified and so more able to withstand adverse conditions: almost complete reliance on copper exports has given way to the export of computer software, wine, fish, fruit and vegetables, to such an extent that the European Community is clamouring to keep Chile’s products out. It is a remarkable transformation and a dramatic demonstration of how liberal economics makes the difference.
Mexico’s experience is similar. For decades the quasi-authoritarian corporatist regime kept Mexicans poor. At the time of the ‘North-South’ Summit, which I attended at Cancún in 1981, Mexico was still determinedly misdirecting investment into large capital projects, hiding behind tariff barriers and pursuing redistributive social policies. It was, indeed, a highly appropriate location for the Third World rhetoric of which so much was then heard. But the country I since visited in 1994 had, under President Salinas, undergone a huge and welcome change. Inflation had been brought down, the public finances were in order, tariffs had been cut, trade union powers had been curbed and 996 of the original 1,155 state-owned companies had been sold, merged or closed down — including the sale of eighteen state banks, representing the largest mergers and acquisition process ever executed in the financial services sector anywhere in the world. The recent Mexican currency crisis, which had ripple effects both within and beyond Mexico, was the result not of these reforms but of a traditional pre-election monetary splurge. When this ran up against the constraint of Mexico’s pegged exchange rate there was a flight of capital and the peso collapsed. What this experience establishes is that micro-economic reforms need sound money and orthodox finance if they are to be securely established.
At the time of my second visit in 1994, however, Mexico was on the verge of concluding its agreement on a North American Free Trade Area (NAFTA) with the United States. Such an initiative would have been unthinkable in earlier years when anti-American feeling and protectionist leanings were dominant. The NAFTA initiative has a wider significance. In the past, regional trade agreements in Latin America were generally a means of closing borders to wider international trade competition: nowadays, as with the Andean Group (Venezuela, Colombia, Ecuador, Peru and Bolivia), the Central American Common Market and the southern grouping of Mercosur (Brazil, Argentina, Paraguay and Uruguay), they are seen by the participants as vehicles for freer trade.
Whatever the Argentineans thought about it at the time, defeat in the Falklands War provided a shock which brought first democracy and more recently, under President Menem, the economic benefits of free-market policies. Inflation has been brought down. A far-reaching privatization programme has been undertaken. Subsidies, regulation and tariffs have all been cut. Economic growth has sharply accelerated.
Brazil — the world’s fifth largest and sixth most populous state, with enormous natural resources — undoubtedly has the greatest potential. Even when in the past fundamentally unsound policies were pursued, its growth rate testified to this. A serious start has now been made with policies to curb inflation and government borrowing and to promote privatization — though there is much still to do in order to limit the worst excesses of over-government and its concomitant corruption. Economic optimism tempered with political caution is also the appropriate reaction to events in Peru. Free-market economic policies are beginning to yield results, with a successful privatization programme and strong economic growth; but political stability will be necessary if the full benefits of free-enterprise economics are to overcome the legacy of ‘mercantilism’.
THE ASIA-PACIFIC REGION
The most successful economies in the world are in the Asia-Pacific region. They have the highest growth rates with output doubling every ten years, and savings ratios running at over 30 per cent of GDP which provide ample resources for investment. It is, of course, necessary to distinguish between systems, cultures and states. For example, Japan’s emphasis on decision-making by consensus, its social orderliness, its intricately interlocked financial and industrial complex and its relatively underdeveloped distribution system distinguish it from the classic model of Western capitalist economy. South Korea’s economy is similarly dominated by industrial conglomerates with close relationships with government.
But the picture is by no means uniform throughout the Asia-Pacific region. The rapid economic advance in China, though triggered by government decisions at the end of the 1970s to allow first in agriculture and then more generally the rise of a de facto private sector, is now advancing with a momentum of its own and independent of central government. Not only is its course unplanned: its final destination is unpredictable. Indeed, the Chinese people have shown themselves to be uniquely entrepreneurial throughout the region — as witness the success of Singapore, Malaysia and Taiwan. In Hong Kong Chinese flair operates within a British framework of political and financial institutions. With only six million people, Hong Kong’s lightly regulated and free-trading economy has the eighth largest share of world trade.