December 31, 2001

December 31, 2001 | Commentary on Latin America

Don't Blame Capitalism, Argentina

A century ago, it was one of the seven richest nations on Earth.

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 tried.

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 1994.

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 poor.

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.

About the Author

Ana I. Eiras Senior Policy Analyst on International Economics
Center for Trade and Economics (CTE)