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WebMemo #332 on Latin America

September 4, 2003

Is Neoliberalism Dead In Latin America?

By

Is "neoliberalism"-the foundation for civil liberties, markets, and democracy -sputtering in Latin America? Are populist dictators and closed economies making a comeback? Senior policy analyst Stephen Johnson argues that progress toward democratic rule and free markets needs to go beyond the adoption of elections and openings to international trade in most of the region's countries. His article, "Is Neoliberalism Dead in Latin America" was featured in the June 2003 edition of Perspectiva, a Latin American magazine on politics, economics, and society published by the Instituto de Ciencia Política-ICP (Colombia), Centro de Divulgación del Conocimiento Económic-CEDICE (Venezuela), Instituto Ecuatoriano de Economía Política-IEEP (Ecuador), Fundación Libertad (Argentina), and the Center for International Private Enterprise-CIPE (United States). The article is reprinted below. Access Perspectiva online.

Premature obituaries are nothing new. Even the great American writer Mark Twain read an erroneous account of his own death and was inspired to write "reports of my demise have been greatly exaggerated." And so it is with the popular supposition that neoliberalism has run its course in Latin America. Not only is it alive, but core aspects of it-political and economic freedom-have yet to be fully implemented.

Unfortunately, "neoliberalism" is one of those catch-all terms that means different things to different people. To Marxists looking for a new cause, it means policies that enrich multinational corporations as they trample over the world's poor and the environment. To anti-globalists it is western expansionism. To economic fundamentalists it is the infallibility of the market.

Since none of these definitions allows for nuance and nobody agrees on what is "neo" about the term, it may be better to examine the status of liberalism in Latin America with its supporting pillars, democracy and economic freedom. After all, neoliberalism derives from the classic liberalism of 18th century moral philosophers who proposed that individuals should be free to do as they see fit and own and dispose of property as they wish with minimal state interference.

Slow Progress in Latin America
For historical reasons, liberalism and supporting pillars of democracy and markets came late to many Latin American states and have had troubled histories in others. Core traditions such as the belief that sovereignty resides in the state and that only strong leaders can impose order seemed reasonable at the time of independence when minority European elites were pretty much the state and ruled over an uneducated populace.

But follow-on immigration, better education, and the need to keep up with economic progress elsewhere brought changes that challenged these traditions. In parts of Latin America that had known mostly dictatorship, a wave of democratization and preliminary market reforms swept through the region in the 1980s. Now all American states except Cuba have competitive elections and liberalized trade regimes.

What's more, countries that were marginally democratic have become more so with enhanced protection of human rights, freedom of speech, and preliminary efforts to decentralize governing authority. Even the Organization of American States, once a club of dictators, is now a forum that promotes markets and democracy.

But Argentina's fiscal collapse, political infighting in Guatemala, conflict over the dictatorial policies of President Hugo Chávez in Venezuela, and chaos in Haiti's nominal democracy make it seem that liberalism has been tried and doesn't work. While polling data collected by Latinobarómetro shows that Latin Americans clearly favor democracy over other political systems, they are largely disappointed with the results.

That's because democracy and markets-liberalism's twin pillars-have only evolved through first generation reforms-the election of public officials and the replacement of import substitution economies with more open trade. Without further development, there is little more these inputs can do to encourage free and prosperous societies.

Beyond Elections
For democracy to be successful, more needs to be done to redefine the purpose of authority, enhance citizen representation, and establish the rule of law. Lingering structures from authoritarian times still work against greater freedom. They include:

  • Bottleneck bureaucracies-powerful centralized national institutions that try to control a vast range of activities from maintaining an army to filling potholes in village streets. They are usually more dedicated to perpetuating their own existence than protecting liberties and doing the people's work. Typically, huge volumes of decisions must flow through a small number of offices, which means government moves at a snail's pace. Powerful presidents and ministries often try to impose agendas that are out of touch with public desires or try to make decisions without access to primary sources of information. They usurp the authority of local officials while weak legislatures and judiciaries fail to curb their excesses.
  • Piñata politics. The national government is the prime tax collector. Provinces and municipalities usually have little or no collection authority and so must rely on transfers to fund their operations. Although transfers may be distributed on the basis of need, favoritism or national political agendas creep into the decision-making process. More, transfers are not accountable to local constituents and come with conditions attached. Thus they may be easily diverted and are not always available for programs locals may want.
  • False representation. Throughout the region, legislators do not directly represent constituents because the chain of responsibility is blocked by complex electoral formulas. In most countries, party leaders, not voters, choose candidates who are placed on lists and elected according to the proportion of votes collected by each party. In places like Colombia and Paraguay, senators are elected at-large nationally and therefore do not answer to any particular jurisdiction. In Nicaragua recent constitutional changes allow outgoing presidents and losers in presidential races to become unelected assemblymen. México's senators and deputies may only serve one term, so constituents cannot reward them if they do well, or defeat them if they serve poorly.
  • Passive publics. Acquiesence to strong leadership also reduces incentives for citizens to participate in public decisions, thus eliminating a needed check on government excess. In Mexico, politicians still make promises, but are reluctant to present specific choices to voters. A member of the Fox Administration recently complained, "The public doesn't expect to be consulted on how to do things. Most people want to believe their leaders will simply make things better."
  • Impunity rules. Passive publics allow politicians considerable latitude to make decisions with impunity as long as they make good on a few promises. They let them insulate themselves from prosecution if they commit crimes and allow them to apply laws against the defenseless, those who won't pay bribes, and against those who oppose them. Venezuelan scholar Carlos Sabino points out that lacking the rule of law, Germans of the Weimar Republic democratically elected one of the worst tyrants in history-Adolf Hitler. Also without a social contract, the citizens of Haiti and Venezuela are subject to the arbitrary decrees and the capricious behavior of elected authoritarians, although patience with them seems to be running out.

Trade Is Not Enough
Opening internal markets to foreign trade, restraining public spending, and privatizing inefficient state industries are not enough to establish a free market economy or capitalism, although capitalism gets the blame for any failure of partial reforms. These and other measures, known as the Washington Consensus, were widely adopted in Latin America in the early 1990s and for awhile helped reduce deficits and boost foreign investment. Economies grew where tariffs were lowered, but poverty and unemployment increased, even discounting the effects of civil conflict in the northern Andean countries.

To be sure, economic performance would have been much worse without these reforms, but real progress is not possible until the underlying structure of the regions' economies are truly liberalized. Here's why:

  • Restricted competition. Most economies are still closed internal systems that seek to shield the industries of a minority elite while placating the middle class and poor with social programs. Complicated business laws, overregulation of industries, and restricted access to credit keep prospective competitors from starting new enterprises. While, increased foreign trade benefits already established industries and contributes to economic growth, it fails create enough jobs to keep up with population increases.
  • Excessive regulation. Complex steps to establish legal enterprises that range from months to years freeze out all but those who have the financial resources to navigate the system. Ambitious labor laws that mandate end-of-year bonuses and extravagant severance payments in the absence of unemployment insurance unfairly restrict small businesses that can't meet these demands. Only businesses with near or complete monopoly power can thrive in such constrained environments.
  • Poor tax policy and lagging property rights. Steep value-added taxes, though easy to collect, elevate retail costs and depress sales. Argentina taxes its own exports, further restraining domestic growth. Throughout the region, inadequate protection of property rights keeps poor citizens from titling real estate denying them the right to sell it or use it as collateral for credit.
  • Scraps for the poor. Subsidies and price controls help the poverty stricken make up for unemployment or the informal status of their micro-enterprises. These programs consume large portions of the national budget, and never help informals make the transition from benefit recipients to tax payers. In the United States, President Lyndon Johnson's "war on poverty" helped create a permanent underclass of welfare dependents, lacking incentives to get the poor back on their feet. In many Latin American countries, non-competitive business environments still keep budding entrepreneurs from participating in the legal economy.

The Road Ahead
While liberalism is not dead in Latin America, it is at risk of not succeeding as long as democracy and free markets are only partially adopted. And while authoritarian regimes seem to be reappearing with alarming frequency, it is also fair to say that caudillos and populism are dinosaurs in an age of international interdependence, expanding trade, and global markets.

For liberalism to flourish, democratic gains must go beyond elections to put authority in its proper place-at the service of all free individuals. Governments must be decentralized so that officials at local, district, and national levels handle only those matters that correspond to them and to their expertise. Executive branch leadership should be balanced by equally strong legislatures and judiciaries.

Representation in national assemblies should be direct and largely district specific. Primaries, not party leaders, should decide who runs in general elections. No law should exempt a politician from prosecution for a crime. And citizens should demand choices, not promises from their leaders and representatives.

To grow their economies and extend prosperity to the poor, countries must streamline their commercial codes to minimize state interference in commerce except to promote business creation and competition. Thanks to the efforts of Hernando de Soto and his Institute for Liberty and Democracy, Peru established a system that reduced the time to license small businesses from 289 days to one. As a result, costs to business owners were cut from $1,200 to $174 and between 1991 and 1997 more than 500,000 new jobs were created.

Value-added taxes should be minimized in favor of low, simple, and fair personal and corporate income taxes. No one should make the mistake of complicating taxes like the United States. Finally, labor laws should be revised to eliminate demanding provisions that scare employers away from hiring the workers they need.

Authoritarian states resemble parents that never permit their children to leave home, while liberal societies expect citizens to grow up and pursue their own dreams. Authoritarian leaders still appeal to Latin America's majority poor, for whom forceful, charismatic personalities seem to offer the only hope of change. Liberalism's democracy and markets won't be viable alternatives until reforms to establish them are fully implemented. True prosperity is only possible when all Latin Americans enjoy equal rights and equal opportunities to earn a living, run for office, or start a business.

Stephen Johnson is Senior Policy Analyst for Latin America in the Kathryn and Shelby Cullom Davis Institute for International Studies at The Heritage Foundation.

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