Government control sapped Bolivia's economic vitality [ cf. But jobs-destroying `shock treatment' is not the answer ]
How to Jump-Start Moribund Economies
LATIN AMERICA'S economic predicament results in part from the genuine concerns of Latin America's reformers. Appalled by social injustice, extreme poverty, and the lack of economic opportunity, they embraced state capitalism as a panacea when they achieved power in the 1960s. But government bureaucrats proved incredibly inept at running state enterprise. Ironically, they also adopted protectionist and monopolistic internal production policies, part of their mercantilist heritage, which enabled Latin American businessmen to wax rich and lazy in protected markets. So all sources of productive investment evaporated.
Two tragedies resulted - capital flight and people flight, which for many years we called the ``brain drain.'' Both had the same cause. When people feel that tomorrow will be worse than today, they move. People voted with their feet against incompetence and corruption. Not only rich people but the most motivated of the poor, the educated, and the technocrats, all joined in the exodus of money and talent.
The trials of Bolivia highlight the real issue in Latin America today - the lack of job opportunity. For this there is no magic. Stable jobs result from the creation of real value and contribution to the real needs of a society.
The lesson of the 20th century, driven home today in East Europe, is that governments cannot do that. Countries have to earn a living just as do people. Unless a country can produce wealth, add value in competitive terms, and trade in the world markets to earn the money to buy the products it cannot produce, it will remain helpless and hopeless.
There is another issue for Latin America. Governments get money either from taxes, borrowing, foreign aid, or using the printing presses. Latin Americans do not like to tax; they can no longer borrow; foreign aid is clearly insufficient to the extent that it is available at all. Running the printing presses does not work.
Bolivia's hyper-inflation, approaching 25,000 percent a year, was sadly emulated in other countries with equally devastating results. The poor are the ones that suffer.
The real question is why private capital hasn't returned. Even when the much maligned commercial banks forgave Bolivia of all of its commercial debt, allowing them to pay it off at 11 cents on a dollar, the old money did not return.
The solution has to be getting government out of businesses which it cannot handle and into the real function of governance: education and building infrastructure while giving the people the freedom and incentives to produce. This means reducing protectionism, opening borders to trade, and pressing forward with economic integration.
It means improving education and skills training. It means Latin America's private sector learning a lesson, that they have never really learned, that better education and higher wages for their people mean more internal consumers and more internal production and more wealth for all.
The most valuable natural resources of any nation are the brains and hands of its people. And Latin America's people are fiercely individualistic and entrepreneurial. If Bolivia's farmers are turning to the drug trade, it is not because of the lack of subsidized jobs in the mines. It is because of the lack of economic opportunity in the formal economy.
The studies of the informal economy by Hernando de Soto in Peru conclusively demonstrate that. Thus, rather than dissipating its money on subsidizing unproductive employment for which salaries can only be paid by running printing presses, the Latin American governments, like the East European regimes, must get down to the primary business of governing: educate the young, provide opportunities to produce, and release the creative energies of the people.
East Europe is learning this lesson painfully, and it would be a mistake to go backward in Latin America.