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Venezuelans line up outside a supermarket as teh country continues to suffer from widespread shortages. (Photo: Mesa de la Unidad)
Wednesday, April 6, 2016

Latin America: The Free-Market Moment

Making grassroots capitalism succeed where populism has failed.


The pendulum in Latin America is swinging away from the authoritarian populism and failed statist policies that gripped many countries for much of the last two decades. Once guided by the late Venezuelan caudillo (strongman) Hugo Chávez and fueled by a commodity boom that filled state coffers, big-government solutions are now failing dramatically in key countries. For free-market advocates to appeal to skeptical populations, they must offer grassroots capitalism that values people, property, education, and enterprise.

Today, major economies managed by leftist governments have slipped into recession because they could not cope with the steep decline in export income due to the falling demand for oil, natural gas, and other raw materials. Resulting fiscal deficits have magnified the damage caused by profligate spending and ineffective bureaucracies. Costly income-transfer programs have proved incapable of sustaining social progress. Populist political parties that operated with little accountability are now being exposed for their corruption and economic mismanagement.

The economic giant Brazil has settled into a deep recession, and a far-reaching corruption probe has swept up former President Luiz Inácio Lula da Silva and threatens to oust President Dilma Rousseff. Venezuela’s democratic opposition won a landslide victory in December, taking control of the parliament from the heavily entrenched Socialist Party, founded by Chávez himself. In November, Argentina’s voters turned to a center-right, free-market-oriented president named Mauricio Macri after a decade of populist authoritarian rule under Presidents Nestor and Christina Kirchner. As the global economic cycle exposes the shortcomings of statist policies, the public has turned to democratic institutions to demand accountability and a change in direction.

Over the past year, anticorruption probes and protests in Guatemala have caused high-ranking government officials to resign, including President Otto Pérez Molina. In Bolivia in February 2016, voters handed Evo Morales his first electoral loss, voting down a constitutional amendment that would have allowed him to run for a fourth term. In Ecuador, an economic downturn forced President Rafael Correa to make unpopular decisions to close the fiscal deficit, causing him to scrap plans to seek a third term.

This predicament for populism is as much a challenge as an opportunity for leaders and potential leaders offering free-market solutions. In many cases, populists came to power only after “capitalist” formulas did not produce meaningful results in tackling fundamental problems.

Some center-right leaders advocated free-market policies to produce macroeconomic growth, but they failed to follow through effectively to ensure that poor majorities could share in economic opportunity. Other leaders failed to prioritize access to education and other basic social services as investments that would unlock the potential of those on the margins of society to make them stakeholders in their market economy. Some leaders allowed their governments to be hampered by corruption and cronyism.

Although free-market orthodoxy emphasizes responsible macroeconomic policies, tapping global trade, and attracting foreign investment, today emphasis must also be put on internal reforms that speak to peoples’ priorities. To make the most of this free-market moment, would-be leaders must cultivate a popular consensus around a new brand of grassroots capitalism: policies that generate sustainable growth with free-market solutions; consciously extend economic opportunity and political freedom to the very poor; generate decent jobs and social mobility; incentivize entrepreneurship to unlock the potential of those outside the formal economy; and fortify the rule of law to fight that corruption, crime, and violence that debilitates societies.


After turbulent years of polarizing leadership, antidemocratic practices, rampant corruption, hostility to the private sector, and economic stagnation, several Latin American nations now appear to be seeking alternatives to authoritarian populism. The public’s loss of confidence in leftist leaders provides an important opportunity for free-market-oriented democrats to offer solutions. However, the opportunity will be squandered if advocates of market-oriented policies ignore their skeptics, repeat their mistakes, or fail to enlist the support of citizens at all levels.

Many Latin Americans are skeptical of privatization, neo-liberalism, free-market capitalism, or conservativism. This prejudice has two primary origins. First, for nearly 60 years, leftist leaders have built political movements by attacking these ideas as exploitive policies meant to concentrate wealth or surrender sovereignty to foreign interests—chiefly, the United States. The Cold War origins of this dogma are evident; when Chávez criticized the legacy of “the Empire,” he had the United States—not imperial Spain—in his crosshairs. Although many people in Latin America recognize this class-warfare rhetoric as self-serving propaganda, most are genuinely skeptical that these policies will produce significant benefits for the beleaguered middle class or working poor.

Second, although such policies have produced success in stabilizing economies, generating growth, reducing poverty, and promoting individual freedom, in some cases the opportunities have not been shared freely, broadly, or profoundly. For example, some rightist governments compromised their legitimacy by resorting to antidemocratic measures and human rights violations. Chilean dictator Augusto Pinochet, who came to power through a military coup d’état in 1973 and ceded power in 1990 only after being defeated in a popular plebiscite, is a dramatic example of this scenario.

A more recent example is Peruvian President Alberto Fujimori, who governed from 1990 until his forced resignation in 2000 due to a political corruption scandal. As a result, some Latin American populations have a long history of associating economic liberalization and fiscal discipline with authoritarians on the right. A crucial lesson: economic opportunity is enhanced when it is accompanied by political liberty and shared freely.

Too often, the fruits of economic reform were sacrificed to cronyism and corruption. One example of this is Carlos Menem, a center-right president who led Argentina from 1989 to 1999. Menem embraced and implemented liberal economic policies, reducing limits on foreign trade and privatizing state-run enterprises, including airlines, telecommunications, and energy production.

While these policies succeeded in boosting economic activity in Argentina, many of the benefits were lost to the corruption typical of crony capitalism. Many Argentineans believed that Menem’s government was more preoccupied with rewarding allies than expanding economic opportunity for all. The benefits of economic liberalization must be shared broadly.

In countries such as Bolivia, Ecuador, and Venezuela, free-market policies became intertwined with political systems designed to control—rather than share—power and prosperity. Although politicians espoused democratic values and economic freedom, power and privilege were reserved for an isolated economic elite and their political partners. Generally, the political class in these countries doled out privileges to supporters rather than making opportunity available to all.

Although most political leaders were committed to fighting poverty, they failed to prioritize reforms that consciously empower the individual. Consequently, the poor majority had little chance of becoming productive stakeholders in their country’s economy. Over time, this distorted brand of capitalism became closely identified with a small, discredited political class that saw the poor as an interest group to be managed. Particularly in countries striving to be democratic, a fair share of opportunity must be accessible to those at the bottom of the economic ladder.

Those leaders who failed to recognize the importance of sharing economic opportunity freely, broadly, and profoundly invited populists to take it by force. For leftists, mobilizing that poor majority—including those locked out of the formal economy and indigenous persons estranged from society—became the key to taking political power. A cadre of populist leaders—Hugo Chávez, Evo Morales, and Rafael Correa—garnered popular support by pledging to smash the political and economic status quo. Once in government, they used their mandate to constrict the private sector, which they regarded as a potential source of political opposition.

In short, because reputed free-market advocates failed to practice what they preached, they sowed the seeds of their own misfortune. That is a vital lesson that leaders should heed for the future.

Roger F. Noriega, a former US ambassador to the Organization of American States and assistant secretary of state for Western Hemisphere affairs (2001–05), is a visiting fellow at the American Enterprise Institute (AEI) and managing director of Visión Américas LLC, a Washington, DC–based firm with US and foreign clients.

This column is based on a recent AEI report. Republished with permission from the
American Enterprise Institute.


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