December 31, 2001 | Commentary on Latin America
But that was long ago, well before it was racked by a lengthy
recession and a climbing unemployment rate. Today, Argentina is a
shell of its former self. The street riots that broke out just
before Christmas left more than two dozen people dead and forced
President Fernando de la Rua's government to resign.
And the new leaders, members of the Peronist political party,
say they know what's to blame for their woes: free-market reforms.
They claim that U.S.-backed capitalism, supposedly forced upon the
developing world throughout the 1990s, has failed. But it could not
have failed in Argentina -- because it's never really been
Things looked a little brighter more than 10 years ago, when
President Carlos Menem took office. He aligned his government with
the U.S. free-market philosophy and executed an aggressive economic
liberalization plan. He privatized state-owned enterprises,
discarded price controls, deregulated the banking system and
removed restrictions on foreign investment. These steps brought
high economic growth and helped cut the number of families living
below the poverty line from 38 percent in 1989 to 13 percent in
But these reforms alone, good as they were, could never have
created an adequate environment for capitalism to flourish in
Argentina. To achieve prosperity on a long-term basis, Menem's
government should have reduced, first, the cost of doing business
in Argentina. Argentina's stubborn 18 percent unemployment rate is
deeply rooted in the rigidity of its labor market. Every thing that
in the United States is a negotiable benefit -- vacations, health
coverage, bonuses -- is a legal mandate in Argentina. In addition,
all businesses, from large corporations to the street-side booths
that sell ties, face high taxes and burdensome regulations. And by
keeping trade barriers high, Argentina supports a few inefficient
local industries at the expense of consumers.
Some observers may point out the fact that some countries, such
as France, Sweden and Norway, have taxes and regulations just as
burdensome (if not more so) than those afflicting Argentina. But
that brings us to a crucial element of true capitalism: Property
rights. To be specific, none of the countries listed above has a
problem protecting those rights -- and Argentina does.
According to the "2002 Index of Economic Freedom," co-published
by The Heritage Foundation and The Wall Street Journal,
Sweden's judiciary is independent and guarantees its citizens a
fair legal process. The same holds true in France and Norway. But
Argentina's courts can't be relied on to protect private property.
Small wonder, then, that individuals trying to decide where to
invest their money are more likely to opt for Sweden, Norway or
France than for Argentina. Yet not a single Argentine government
since the 1930s, "capitalist" or otherwise, has made protecting
property rights a cornerstone of its reforms.
Unfortunately, this rule-of-law problem isn't unique to
Argentina. Of the 161 countries graded in the 2002 Index, only 45
offer "very high" to "high" protection of property rights, while
116 countries offer weak protection. Relatively speaking, economic
activity can sustain itself in less than a third of the world. No
wonder, according to the World Bank, 70 percent of the world is
Chile and Poland exemplify how Third World countries can achieve
economic success and improve living standards by strengthening
their rule of law. In the late 1980s, both countries boasted a
"moderate" protection of property rights, but progressed, as
reported by the Index, to a high level of protection of property
rights in the 1990s. In that same period, per capita income
improved steadily. In Chile, GDP per capita today is more than
double the 1989 level, while in Poland it grew by 50 percent.
The Third World needs to embrace capitalism in its entirety, not piecemeal. Partially opening markets, in response to a crisis or to U.S. pressure, is not building a "capitalist" society and, as such, will never deliver prosperity. Let's hope Argentina's next government understands that -- or the next round of resignations is only a matter of time.
Ana I. Eiras is a policy analyst for Latin America in the Center for International Trade and Economics at The Heritage Foundation.