Latin America: A Way Out

José Piñera was former Secretary of Labor and Social Security (1978-80) and of Mining (1981), responsible for Chile’s Social Security, Trade Unions and Mining reforms.

Currently, he is President of the (International Center for Pension Reform (

The Latin American paradox has always astonished me. United by geography with two of the world’s most successful nations, blessed with natural resources of every kind, lacking racial, religious or language differences giving rise to serious violence, and with an extraordinary culture characterised by its diversity and by its continuity, Latin America could be a continent of peace, stability and prosperity. But the region remains mired in underdevelopment and political instability.

The political and economic history of Latin America over the last two centuries is in direct contrast with that of the United States. The consequences speak for themselves, as the historian Claudio Véliz points out: “We are in a New World born at almost the same time to the north and to the south, settled by two great societies, springing from the two greatest empires of modern times. One group began poor, in the North, the other rich, in the South. In 500 years the positions have entirely reversed.”

The U.S.A. generated a GDP of $12 billion in 1820, by 1900 this had risen to $313 billion, and to $10 trillion by 2000, all measured in current money terms. How was this explosion of wealth achieved? In large measure it is due to the institutions and political philosophy bequeathed to the United States by the ‘Founding Fathers’ (Jefferson, Madison, Hamilton, Adams, Franklin and Washington among others). The Declaration of Independence, the Constitution, the Bill of Rights and the Federalist Papers are among the great works which gave such a firm and enduring philosophical, political, moral and economic foundation to the new-born nation.

My hypothesis is that the tragedy of Latin America is the result of its having been an “orphan continent”. The Liberators –Bolívar, San Martín, O’Higgins and Sucre among others– fought heroically to free their countries from Spanish political control. But it is one thing to know how to fight and another to govern.

The Liberators (and their successors) did not anchor the young republics in the values of individual liberty, did not establish the rule of law, and did not limited the delegation of authority by the people to their democratic representatives. On the contrary, they maintained – and in some cases, further improved on – the Spanish centralising tradition. Bolívar’s hero, symptomatically, was the authoritarian Napoleon Bonaparte and not a constitucional president like George Washington.

So, Latin America had ‘Founding Generals’ rather than ‘Founding Fathers’. The result is that the continent lacks, even today, the institutions and the principles of a true democracy in the service of freedom. That is why progress in this continent is so unsteady and so fragile. Like Sisyphus, we push the rock to the top of the mountain to see time and time again how it falls back down once more (although not always right back to where it started).

But the pessimism and fatalism of so much public discussion in Latin America is not justifiable. Many people content themselves with (or are resigned to) the mistaken belief that this continent will never be able to find a road to prosperity. To rationalise this belief they deploy arguments ranging from ‘race’ to ‘tropical climate’, passing through ‘terms of trade’, ‘Catholicism’ and every type of explanation attributing the blame to someone or something external.

Fredom Works

Three remarkable experiences of the last thirty years are, however, an eloquent sign that – also in Latin America – freedom does work and great steps forward can be made.

The first is the great success of the Chilean Revolution. During the 1970s Chile managed to transform its most severe twentieth century crisis into an extraordinary opportunity to realise a large-scale free market transformation. This revolution was not only the principal cause of the peaceful, gradual and constitutional nature of Chile’s return to democratic rule in 1990, but it is also responsible for Chile’s remaining today the most competitive and prosperous country in Latin America. A recent comparative study placed Chile ninth in the list of countries enjoying the greatest degree of economic freedom – at the same level in the ranking as the U.K. and Australia. The new economic model allowed the Chilean economy to grow at 7% per annum for more than 12 years, drastically reducing poverty levels and creating a middle class that has given a remarkable stability to the free market economy.

The second is the recent evolution of Mexico. Only ten years ago Mario Vargas Llosa characterised Mexico as the “perfect dictatorship”. Nevertheless, different Presidents and advisors – even within such an imperfect institutionality – had the vision to start opening room for freedom in economic, social and political fields. Entry to NAFTA was an inflexion point with highly positive consequences. Another landmark was the pension reform on the lines of the Chilean model: in no more than three years, 25 million Mexican workers now have a personal retirement savings account and are becoming owners of financial assets. There is still much to do to realize the potential of a great country such as Mexico, but it has started down the road in the direction of an open society.

The third key experience is the global pensions revolution originating in Latin America. An experience born in Chile has become a model for the rest of the world. Today, there are eight countries in Latin America following this experience – 50 million workers with $100 billion saved in their pension accounts. Three former Iron Curtain countries (including Poland) have adopted the system of individual retirment accounts, bringing in a further 20 million workers. The idea has now begun to make inroads into developed countries which are threatened by serious problems in their state pension systems. President Bush has said publicly that he wants to introduce the Chilean system. And recently Sweden, the model ‘welfare state’ adopted personal mini-accounts for retirement savings. Hong Kong, one of the world’s most competitive economies, already has a similar system in place. If the Swedish and Hong Kong experiments can be extended in their respective regions (Europe and Asia), and if President Bush can implement his proposal, then this revolution will become a world model. As The Economist stated “Radical reform of social security is the next great liberal reform, easily as significant a change as privatization of state owned enterprises–also dismissed in its time as Utopian. On pensions, Latin America has led the way. Let the world follow.” (June 12,1999).

Limited Democracy and the Rule of Law

These three succesfull experiences have had a substantial positive impact throughout Latin America. In the decade of the 90s, countries of all kinds began to implement free market economic reforms and made undeniable progress, generating a better quality of life for their citizens. During the 1990s the region’s GDP grew at an average of 3.2% per annum, 2.2% higher than was achieved during the 1980s. But these reforms were tarnished by original sin: they were not fully consistent with each other nor with the domestic institutional and political structures. In my view this explains the greater part of the recent setbacks in Latin America.

Every lover of freedom – and for that very reason – adheres to a democratic system to elect a government. But there are democracies and democracies, and not every form of democracy is the same.

As Alexis de Tocqueville’s great work ‘Democracy in America’ maintains, democracy must always be on its guard against popular despotism. In Latin America a kind of ‘tyranny of the majority’, sustained by demagogy and populism, has led again and again to over-government, interventionism and invasive policies and actions. They have impoverish civil society and turned government – in the best of cases – in what Octavio Paz called a ‘philanthropic ogre’, and –in the worst – in an ogre at once corrupt, inefficient and oppressive.

Unfortunately Latin America has followed the opposite course to the United States, as Mariano Grondona has explained in his book ‘Los Pensadores de la Libertad’. In the case of the United States the economy did not come first. At the beginning there came men who prized moral independence. Then those same men demanded a political structure. Finally, within the framework that structure created for them, prosperity sprang forth. This is not just a sequence of historical events – it is the logical progression, for when prosperity happens first, without a moral or institutional framework, it cannot be sustained.

So it seems to me to be essential that a democracy should exist to serve freedom, and that government should have its powers limited. Democracy is a means of adopting decisions in those areas where it is necessary to adopt collective decisions – in effect a system for deciding “how” a government should be conducted, and not a method for deciding “what” a government should do.

To hand over a blank cheque to inherently inconstant majorities concerning virtually all the economic, social and political movement of a society is to institutionalise instability, to open the way to more serious abuses and to condemn a country to underdevelopment. As Frederic Bastiat would say, the law in those circumstances is but a step from legalised theft.

How is anyone to take rational decisions about work, savings, and investment, amongst others, if key variables (such as taxes, labor legislation, regulations and so on) can be altered by 50.01% of the citizens through a vote which – in countries with low levels of education – can almost never be said to show the characteristics of an “informed vote”?. In Latin America we see how one day President Chávez enjoys 80% support – and with it changes the Constitution and legislation – and the next year his support is halved. In Argentina, President De la Rúa triumphs one year and is deeply unpopular the next. Can these manic-depressive expressions of the ‘vox populi’ be described as the ‘vox Dei’? Of course not! The majority must rule within a constitutional framework that clearly limits and counterbalances its powers, and its rule must be confined to those matters that properly correspond to the role of government in society.

This is the great principle which has made the United States successful. Some might argue that North Americans are also volatile in their opinions, given that President Bush won office by the narrowest of margins and now enjoys much high approval ratings. Of course, since human nature is universal. But the crucial difference is that even with that level of popularity a President or a governing party cannot alter the Constitution or the key laws in the U.S.A. as a result of the wise and complex balance of power developed and institutionalised by the Founding Fathers. The United States has a two hundred year old constitution, acknowledged by all with enthusiasm and respect. The U.S. Constitution begins “We, the people…” and proceeds to pass certain powers to the government in order for it to be able to protect the freedom, the property and the safety of the citizens. Madison, Hamilton and Jay explain in The Federalist Papers how and why their Constitution created a sophisticated mechanism to balance powers between the three branches of the Executive, between the government and civil society, and between government and individuals.

We should be realistic enough in Latin America to recognise how far away we are from such a constitutional philosophy. Constitutions are frequently altered in Latin America by means of opaque negotiations with the final say in the process had by a clique of leading politicians, even though it may be dressed up as enjoying of popular support. Latin American practice—from the right to the left– is that those making up the government with their temporary majority reject the imposition of any limits to their powers. The economic teams in the Chilean government of the 1970s and 1980s, and in the Mexican administration in the 1990s, were exceptions to the Latin American rule.

Secondly, it is essential to create a culture of alternation in power: this would permit the members of the governing class to ‘internalise’ that certain excessive attributes may be used and abused by other governments. It hurts to leave power, everywhere, but in Latin America it is treated as equivalent to civil death. President Menem, whose first administration was a real success in Argentina, increased public spending and introduced populist measures during his second because he aspired to an unconstitutional third term. The first administration of President Fujimori in Peru was also a success, but when he tried to exercise his mandate for a third time he corrupted almost all institutions, produced a dramatic crisis, and ended up a fugitive in exile. President Cardoso used up the last year of his first administration to change the Brazilian Constitution and run again, instead of introducing the pension reform which Brazil so badly needs. And so on.

If there is no real commitment to the alternation of power, every presidential election year in Latin America is conducted at the expense of the future. The unhealthy addiction to power leads to a desire to govern with the aim of staying in office and not of leaving long-term achievements.

Thirdly, the conditions have to be created for a strong and independent civil society to develop and consolidate. Governments have to create a framework of freedom and equity within which individuals can attain happiness in their own ways. It is not government’s role to try to micro-manage people’s lives. Citizens should enjoy an open playing field in which to seek an unlimited number of voluntary arrangements and associations to help them in their quest for happiness. A free, strong and independent press is a gauge of the vigour of civil society. Regretably in almost every country in our region, the press is too close to power; this takes many forms, both open and discrete, but generally the press is not an effective counterbalance to power.

Fourthly, how can an economy and a free society prosper without the rule of law? This has been a serious failing in Latin America. Inefficiency, politicisation, out of date laws and procedures – and in some countries corruption – have led more to the rule of men than to the rule of law. There needs to be a Chinese wall between government and judiciary, but it is clear that this is lacking. Even Presidents who are trained jurists forget their principles once in power and fail to resist the temptation to interfere in judgements – whether on grounds of political expediency or of personal ambition (such as a prohibition on re-election…).

Education, Education, Education.

A further key element in the modernisation of politics is the pending educational reform in Latin America. As I have proposed elsewhere, the right way forward is not for a government-educator, but for a governmente that subsidises demand (the voucher solution) and encourages competition and transparency in supply. Without a radical improvement in the quality of education it is obviously difficult to attain a democracy in the service of freedom.

It is especially serious the fact that citizens have an abysmal lack of understanding of economics. How can it be explained that congressmen pass laws making the labour market less flexible, knowing that this will generate unemployment and lead to workers’ salaries being lower over the long run? Because opinion polls show that the population does not grasp the link between less flexible labour markets and higher unemployment.

In Latin America, as in the rest of the world, legislation will continue to manufacture poverty for as long as citizens fail to understand the origins of the wealth of nations and as long as the electorate – whose votes determine politicians’ chances – does not understand basic economics. With widespread ignorance of how an economy works, elections will always by won by those who propose increased legal privileges for workers, higher taxes on companies and on ‘the rich’, higher public spending, more subsidies and sinecures for interest groups etc. Perhaps the undertaking with the highest social returns in Latin America today would be to create a ‘Citizen’s Prosperity Foundation’ whose mission would be to educate citizens in the fundamental principles of economics.

Towards an American Community

A closer relationship between the United States and Latin America would help considerably in addressing all these challenges.

Let me be clear. I much prefer our traditional values, our cultural background and our unique way of life. But I greatly admire the Founding Fathers who bequeathed to the United States a combination of political institutions and an economic system which have made it the most successful open society in history. And we can learn from that experience precisely because the strenght of own values and culture allows us to do it without surrendering our essential core.

The relationship between the U.S.A. and Latin America is changing. NAFTA has been a spectacular success for Mexico and now Chile will also have a Free Trade Agreement with the U.S.A. Rather than being the conclusion of an exercise in becoming closer, I hope it will only be “the end of the beginning”. There are innumerable initiatives which could spring from greater trade integration. By a kind of intellectual osmosis we can integrate into our own reality a number of basic economic and political concepts – just as the North Americans will benefit from learning about our culture and way of life. With 40 million people of Hispanic origin in the United States the process is already under way.

My dream is an ‘American Community’ of independent nations, cherishing their own cultural identities but joined together in a common market for trade and investment, and with free movement of people and of ideas. An ‘American Community’ would comprise 830 million people and a GDP (at PPP) of $13 trillion.

We have to dare to dream once more. As the poet Carl Sandburg said at another critical moment, “The republic is a dream. But nothing happens unless first a dream.”

José Piñera

President of the International Center for Pension Reform (

As former Secretary of Labor and Social Security (1978-80) and of Mining (1981), responsible for Chile’s Social Security, Trade Unions and Mining reforms.