Foreign and Defense Policy, Latin America

What’s the matter with South America?


The European Union and Spain criticised the Bolivian government’s nationalisation of a local unit of Spain’s Red Electrica Española, raising questions about the security of investing in the South American country.

Bolivia’s leftist President Evo Morales on Tuesday ordered the army to take over the Cochabamba headquarters of power transmission company Empresa Transportadora de Electricidad (TdE).

The move follows Argentina’s decision to expropriate Spanish energy group Repsol’s major stake in YPF.

Critics of the deep magic of free-market, entrepreneurial capitalism — of “neoliberalism” — often point to South America as place where its supposed wonder-working power has come up short over the past 30 years. But too often nations there talked the anti-statist game better than they played it. And now many are playing the old game of state intervention. But where countries embraced markets, economies improved. Economist Scott Sumner:

It’s certainly true that neoliberal reforms have not worked miracles in Latin America. But a major part of the reason is that despite reforms such as trade liberalization, most economies in that region remain strikingly statist. Among Latin American nations, Chile has by far the best record of neoliberal reforms. It ranks tenth on the Heritage Index of Economic Freedom and is the only Latin American country, other than St. Lucia, to make the top 30. In contrast, Argentina ranks 135th. Chilean incomes were barely half those of Argentineans in 1980, but by 2008, Chile had actually become slightly richer.

Argentina did some neoliberal reforms in the early 1990s and grew rapidly between 1991 and 1998. But Argentina slipped into a highly deflationary monetary policy in the late 1990s. The resulting depression led to a backlash against neoliberalism, and a more left-wing government moved Argentina back toward statism after 2002. One lesson of both Argentina after 1998 and the United States after 1929 is that even a fairly efficient free-market economy cannot easily adapt to deflationary monetary policies.

The following chart, from Sumner, shows per capita income in terms of purchasing power parity. All data are from the World Bank and are expressed as a ratio to U.S. per capita income. And it illustrates how one country moved forward, and the other shifted into reverse:

But I am sure many national leaders, especially those from countries with a thin democratic-capitalist legacy, look favorably at China’s state capitalism and hope to replicate its success formula: authoritarian government + state control of leading sectors.

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