The phrase “option for the poor” is a familiar one among American religious communities, and its advocates often urge us to listen to “voices of the South.” The problem is that to date among old-line and some evangelical and Catholic communities, such attentiveness has been selective. So far the “voices from the South” that have reached American ears via church channels have been those echoing liberation theology and dependency theory choruses. Their music pulsates with a throbbing beat of denunciations of first world exploitation, unfair trade, and capitalist malice. But a wholly different tune is being sung by other voices in the South, particularly in Latin America. These so-called neoliberal voices proclaim the benefits of freer markets, freer trade, and less government intervention in the economy.
If the economic restructuring underway in the Southern hemisphere is any indication, the neoliberal music is hitting the charts. In several less developed countries (LDCs), including Mexico, Argentina, and Brazil in this hemisphere, government officials are slowly dismantling their heavily statist economies and implementing free market reforms. In some instances, this restructuring is being carried through reluctantly and under pressure from international creditors such as the International Monetary Fund and the World Bank. But in many cases, frustration with socialist and dirigiste economic strategies has fueled a rethinking of the proper roles of state and society in development. The dramatic popular rejection of statism in Eastern Europe has intensified this process of reevaluation in Latin America, but it predates the fall of the Wall and is due in a significant degree to the efforts of the neoliberals.
De Soto’s Informal Sector
Probably the best-known Latin neoliberal is the Peruvian author Hernando De Soto. His book, The Other Path, has been a best seller throughout South and North America, and is considered a watershed contribution to the development debate. At the center of De Soto’s argument is his contention that the statist, redistributionist approach to development — however well-intentioned — has in fact produced a mercantilist economy that shuts out most ordinary people from legal economic pursuits. De Soto says that the chief obstacles to development in Latin America are massive bureaucracies and byzantine regulatory jungles that stifle individual initiative.
State intervention and excessive regulation, he explains, pose various costs to the society. First, there are the “costs of formality” (i.e., those associated with beginning and maintaining a legal enterprise). These include excessive taxation, labor time wasted in complying with bureaucratic procedures (De Soto discovered that companies devote 40 percent of all their administrative employees’ total work hours to this), and money spent in bribes and formal fees. Second, because entrance to legal enterprise is prohibitively expensive and time-consuming (he found that it took five full-time employees 289 days to fulfill legally prescribed procedures to incorporate a small clothing factory), many would-be businessmen give up and join the informal, underground economy. This, too, has a price. The costs of informality include such things as lack of security of property (and thus disincentive for investment); inability to advertise and the need to keep employment levels low (to avoid detection by the authorities); lack of legal redress of grievance if contracts are abridged; and lack of access to credit.
The mercantilist legal system, De Soto concludes, “may be the main explanation for the difference in development that exists between the industrialized countries . . . and our own.” The bureaucratic state creates an atmosphere in which economic actors are not rewarded for efficiency or quality products but for savvy in the manipulation of government favors. The voiceless poor, for whom the elaborate centrally-planned economy was ostensibly designed, are barred from society’s formal economic life. Unable because of prohibitively expensive and virtually incomprehensible bureaucratic regulations to start their own businesses, secure title to their land and houses, or obtain credit, the poor create their own informal economy which looks much more like capitalism than the formal one. De Soto says the poor have chosen the informal market economy over the formal statist one, and that economic development will come to Latin America when the leadership follows their lead.
Ayau Attacks “The System”
Like Hernando De Soto, Manuel Ayau of Guatemala often wondered why his country was so poor compared to those he had the opportunity to visit. He rejected dependency theory’s explanation and said he found his answers when he happened upon the writings of the classical liberal economists Ludwig von Mises and Friedrich Hayek. Their defense of the ethical underpinnings of the free society resonated with Ayau, a Catholic, and their warnings against excessive state interventionism were sensible. Ayau determined that the philosophy of economic freedom should have a hearing in his country. So with like-minded businessmen he founded the University Francisco Marroquin (UFM) in 1971, dedicated to the promotion of classical liberal economics. Nearly 4,500 students now attend UFM, and though it has the toughest admissions standards in the country, it must routinely turn away applicants. Apparently more Latin youth are enthusiastic about the free economy than some Americans may think.
Ayau believes that the most economically successful countries “have the highest degree of economic freedom. That is their common denominator, not culture, not size, not resources, not ethnic origin or language.” But instead of promoting economic freedom, Ayau laments, governments in Latin America have created “The System.” This is his term for the bureaucratic behemoth De Soto describes. It results, Ayau posits, from the government’s “accepting responsibility for a prosperity it cannot produce.” In trying to do good, he says, the state only ends up overreaching itself. Moreover, he doubts that the government is as disinterested an economic participant as the statists suggest. Rather, he claims, officials often use their positions for personal gain, and economic policies become motivated primarily by political considerations, which lead to “inevitable economic malfunction.”
Chelminski on Government Intrusions
Another businessman-turned-advocate, Vladimir Chelminski of Venezuela, is a vocal critic of his nation’s “System.” Chelminski directs the Caracas Chamber of Commerce but also writes on the problem of Latin underdevelopment. He is particularly critical of excessive government interference in pricing, labor, and trade policy.
Chelminski asserts, for example, that the state sometimes hurts the poor more than it helps them when it imposes price controls to combat inflation. Price controls, he explains, can exacerbate inflation by discouraging production (because producers make less money) and encouraging consumption (because goods are artificially cheap). Moreover, price controls are typically set on the most essential products and services (presumably to protect the poor). But this results in new investments being diverted from essential industries into unregulated, nonessential ones that are more profitable. A black market in essential products develops in response to supply shortages, and poor people may end up spending more money for the goods they need than they would have absent the controls.
Chelminski notes that well-intentioned government interventions in the labor market can also hurt the very people the officials mean to help. In efforts to promote a “fair wage” and job security, many Latin regimes have passed minimum wage laws and labor regulations that make it very difficult for employers to fire their workers. In both instances, unemployment can be exacerbated. New workers have difficulty entering the labor market, and investors may be discouraged by labor security laws from risking capital to start new businesses (and thus provide new jobs). For, Chelminski asks, who will risk his capital to create new jobs if a business failure results not only in the loss of one’s initial investment but also in hefty additional penalties to compensate fired laborers?
Chelminski reserves his strongest denunciations for the Latin governments’ protectionist trade policies. He argues that the key difference between Latin America and East Asia is that the former sought economic autarky while the latter pursued open and aggressive foreign trade. For Chelminski, the East Asian miracle holds important lessons that Latin governments must heed, not the least of which is that it demonstrates that the “periphery” has not impoverished itself by trading with the “core.” Chelminski’s arguments find empirical support in a 1987 World Bank analysis of 31 LDC’S trade policies. It indicated that the economic performance of outwardly-oriented economies (as found in East Asia) was “broadly superior in almost all respects” to that of the inwardly-oriented economies (as found in Latin America).
Julio Cole on Inflation
One of the most costly accompaniments of “The System” the neoliberals decry is Latin America’s ubiquitous inflation. Americans, who feel pinched when inflation rises above 5 percent, probably find Latin America’s astronomical rates hard to grasp. But Latinos understand, and of them, none better than the Bolivians. In the mid- 1980s, Bolivia experienced what economists call “hyper-inflation”: for the 12-month period August 1984 through August 1985, inflation soared to a mind-boggling 20,000 percent. Thus, Bolivian neoliberal Julio Cole’s opinions about inflation carry a certain poignancy.
Cole, a professor of finance at Guatemala’s UFM, is a “monetarist.” That is, he asserts that inflation is primarily the result of misguided federal monetary policy. Cole believes, in brief, that Latin governments overspend themselves and resort to increased printing of money to cover their debts. This loose monetary policy sparks inflation, which then gathers its own momentum. This interpretation of inflation puts Cole at odds with “structuralists,” who contend that the problem results from increasing import and food prices (caused themselves by increasing demand, coupled with supply rigidity). Cole examines these possible links and concludes that the empirical record is, at best, unclear on such a relationship. He reports, for example, that in the 1970s the three countries with a consistently upward trend in real food prices (Costa Rica, Ecuador, and Venezuela) were not high inflation countries. Uruguay experienced very high inflation but declining food prices. And in the 1960s, out of the top five inflation countries, only one (Chile) showed increases in real food prices.
Cole’s writings call the government to account, for if his monetarist interpretation is correct, officials are not as helpless in the face of raging inflation as they may wish to appear. Rather, he argues, since monetary growth “is due mainly to factors that are, or can be, controllable by the monetary authorities,” the blame for inflation lies largely on the state’s shoulders. Like that of the other neoliberals, Cole’s work reminds readers that faulty government policies have painful human consequences.
In sum, neoliberals are skeptical of the state’s economic foresight and have greater confidence in the wisdom of private entrepreneurs and free citizens. They advocate a fundamental reconstitution of Latin economies from statist to market orientations. While they recognize that this transition will be painful, they believe that perestroika from the top down will not suffice. Rather, the success of the “capitalist revolution” hinges upon the triumph of free market ideas among the general populace — who will bear the brunt of austerity and restructuring. Consequently, the neoliberals are taking their message to the people by translating and publishing works of classical liberal economists, holding free market seminars, establishing schools like the UFM, and even advertising their ideas on billboards and radio spots. According to Marxist-turned-neoliberal author Mario Vargas Llosa, the task is really one of cultural transformation. He argues that in Latin culture “people have traditionally been asked to abdicate individual initiative and imagination in return for having all their needs met by centralized institutions.” Now neoliberals must convince Latins that “as free people,” they have to solve their own problems; they must realize that “if the state is in charge of solving everything,” the region will remain underdeveloped.
Alejandro Chafuen on Catholic Culture
Observers critical of the neoliberal agenda contend that Catholicism is rightly suspicious of capitalism, and consequently free market institutions will find no firm cultural foundation in Latin America on which to rest. An Argentinean Catholic, Alejandro Chafuen, challenges this interpretation in his book, Christians for Freedom. In the preface he writes:
It is not unusual to find Catholic authors who oppose economic freedom. Some believe that the free market contradicts Christian teachings. Others subscribe to a notion that a free economic system cannot achieve “desirable” ends. Still others reject it on the authority of their priests, pastors, or moralists whom they happen to meet in daily life.
In contrast, Chafuen asserts that Christian principles Wilson Department of Government and Foreign Affairs at undergird free economic systems. He revisits the teachings of the medieval Catholic scholars and concludes that far from endorsing the sort of statist policies those in the liberation theology camp advocate, these writers defended the principles of free economy. Chafuen describes the School men’s favorable attitude toward private property and relates that they were suspicious of common ownership. Man’s fallenness meant, they thought, that “evil men would take more and add less to the barn of common goods.”
The Schoolmen thus rejected socialist schemes and were also suspicious of state-oriented systems that at-tempted to enforce the “social function” of property. Chafuen writes that the Schoolmen believed that in a society where the government tried to do this, the “people would struggle to accrue favors of the law rather than to satisfy the consumer.” (On this point, Hernando De Soto sounds very much in line with Catholic social teaching.) Chafuen also demonstrates that the Schoolmen were, in today’s terms, monetarists, because they supported balanced budgets and believed they could be obtained by “cutting spending, reducing subsidies, and dismissing courtiers.” Such advice is remarkably relevant to contemporary policy makers.
For Chafuen, Latin America’s Catholicism is hardly an insurmountable obstacle to the adoption of more market- oriented policies. In fact, most of the neoliberals presented here are Catholics!
A war of ideas is underway in Latin America as the neoliberal movement challenges the long-entrenched statist consensus. Old debates about market-oriented versus state-oriented development schemes have taken on a new vitality throughout the underdeveloped world. The voices of the South no longer speak with one accord (if indeed they ever did) and American Christians seeking to “side with the South” would do well to listen to the new neoliberal voices.