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Book Review: The Capitalist Revolution in Latin America

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The Capitalist Revolution in Latin America
by Paul Craig Roberts and Karen Lafollette Araujo (New York: Oxford University Press, 1997); 214 pages; $25.

The mass media has focused public attention on the dramatic attempts to implement market-oriented reforms in Eastern Europe, Russia, and other countries in the former Soviet Union. Less attention has been given to another part of the world — Latin America — an area that has moved toward more free-market reform than anywhere in the nations formerly in the Soviet bloc.

The story of this economic and political transformation south of the United States is now told in a new book, The Capitalist Revolution in Latin America, by Paul Craig Roberts and Karen Lafollette Araujo. Dr. Roberts is an insightful and eloquent defender of economic and individual freedom. Long known as a leading expert on Marxism and the Soviet economy, in 1990 he co-authored with Ms. Araujo Meltdown: Inside the Soviet Economy, in which they explained why the Soviet socialist system could not be reformed. And in 1995, he co-authored with Lawrence Stratton The New Color Line: How Quotas and Privilege Destroy Democracy, in which they demonstrated how the emergence of the idea of collectivist racial rights is threatening the principle of individual freedom in America. (See the review in Freedom Daily, May 1996.)

The tragedy of Latin America, they explain, is that for 500 years, the countries in this part of the world have lived under nothing other than mercantilism, central planning, and authoritarianism. During the several centuries of Spanish rule, the authorities in Madrid imposed strict controls on economic life. Through a hierarchy of power, every facet of production, consumption, and exchange was monopolized and regulated, either directly by the state or through political privileges bestowed on various individuals and groups throughout Latin America. And the tax burden was excruciatingly oppressive.

The monetary rewards from political control over the various economic activities of the society were so great that there were even public auctions to buy positions of regulatory and taxing authority from the Spanish crown. Corruption, bribe taking, and outright theft were the most lucrative channels for the acquisition of wealth. The only alternative avenues for riches were the Catholic Church and the black market.

The spirit of individualism, free enterprise, and open competition were unknown. While there were some attempts to limit the power of the state over economic affairs in the 19th and early 20th centuries — most notably with great success, albeit temporary, in Argentina — the 20th century reinforced the heritage of political and economic collectivism. In our century, Latin America has been dominated by socialism, fascism, interventionism, and the welfare state.

Using Mexico as their primary example, the authors explain the various ways in which Latin American countries functioned with what they call “blocked societies.” A blocked society is one in which markets are closed, regulated, or monopolized by the state, leaving little or no room for individual free enterprise and unhampered product and market innovation. Survival in the “blocked economy” requires connections; bribes; and payments of regulatory, licensing and various tax fees for access to markets, resources, capital, and a work environment undisturbed by strikes and regulatory harassment or confiscation. The costs of succeeding in such a blocked economy are much higher than in a freer market, slowing innovation and product development, greatly increasing the prices of goods and services, and decreasing their availability to the consuming public.

Each sector of the Mexican economy was allocated as a privileged fiefdom controlled by an industrial cartel, a trade union monopoly, or a bureaucracy of the state — or sometimes a combination of all three. Vast sums of money were siphoned off at every stage of every production process as politically acquired profits. High-level and middle-level government officials, trade union bosses, and privileged businessmen lived like kings awash in wealth, while many in the rest of the society lived impoverished lives. Social status was not based on success in competitively making better and cheaper products for the enhancement of people’s standards of living, but rather on the basis of the number of family and personal connections one had with those in the higher reaches of political power and control.

In the post-World War II period, what provided a large percentage of the plunder for these politically privileged segments of Latin American society were loans and investment grants that added up to almost $500 billion by international organizations such as the World Bank, the International Monetary Fund, the Inter-American Development Bank, and the U.S. Agency for International Development.

The authors describe the ideology of central planning, interventionism, and social engineering that served as the rationale for government-directed development schemes. Especially under the influence of the Swedish socialist Gunnar Myrdal (who for many years served as the head of the United Nations Conference on Trade and Development), economists in the United States and Europe cooked up one fallacious theory after another to justify why markets could not be trusted or relied upon for economic development. Instead, according to these American and European “experts,” only central planners and government officials could raise Latin America from poverty to prosperity.

The international agencies fostering these ideas and serving as the conduits for wealth transfers from industrialized societies to Third World nations, offered lucrative jobs, perks, and traveling privileges at other people’s expense for those employed in designing and supervising the implementation of development planning projects. The whole scheme became a huge scam paid for by the taxpayers of the industrialized countries and by the poor of the Third World nations, who languished in poverty because capitalism was strangled by their own political rulers, who were benefiting from these gargantuan international redistributions of wealth.

The inevitable crises of the interventionist state occurred in a growing number of Latin American countries in the late 1970s and in the 1980s. Many of those nations were faced with financial bankruptcy and political chaos. In that setting, an important ideological change occurred, the authors explain, especially in Chile, Argentina, and Mexico. Governments came to power that began to reverse the trend toward collectivism. Ministers were appointed who privatized state-owned industries and various social services. Taxes and international trade restrictions were reduced or abolished. Regulations and controls over domestic production and exchange were loosened or repealed. Government spending was also reduced.

Dr. Roberts and Ms. Araujo do not claim that any of these Latin American countries has become a bastion of laissez-faire capitalism. Far from it. Indeed, they carefully enumerate all the radical changes that still need to be implemented if those countries are to be truly free societies at some point. And they emphasize that constitutionally, culturally, and ideologically, the premises of the interventionist-welfare state are still deeply embedded throughout Latin America.

In spite of all that still needs to be done, they argue and hope that the partial freeing of market forces in Latin America can serve as an important demonstration for the peoples throughout the region that a free and prosperous future can be theirs if only they continue to move in that direction.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).