The biggest surprise of all at the recent Summit of the Americas in Argentina was not the anti-Bush demonstrations, the anti-American rhetoric, or the refusal of delegates to move forward with the proposed Free Trade Area of the Americas, but that there were no real surprises.
With few exceptions, Latin Americans have reverted to feel-good nationalistic populism, while rejecting free-market growth strategies: They can feel good while doing poorly.
The Summit of the Americas was preprogrammed for failure, just as the region’s many free market-oriented reforms of the past decades were, despite their soundness.
The real problem in Latin America is that, with few exceptions, the rule of law — particularly on private property rights — doesn’t exist as we know it. Decisionmaking is marred by corruption and cronyism and mired in bureaucracy.
Most people know this. A recent public opinion survey in Argentina by the Fundacion Libertad and FORES, two nonprofit organizations, and the law school at Torcuato Di Tella University indicated 82 percent of the public rates the country’s judicial system as ineffective and 89 percent believes justice is applied unfairly.
Venezuela is little more than “Cuba light.” The rule of law in Mexico is “an empty, superfluous, and even suspect concept,” says Luis Rubio, president of the Center of Research for Development (CIDAC), a well-respected Mexican policy institute. And in Brazil, legal institutions have been in a “permanent state of crisis … [eroding] public confidence in values such as democracy and the rule of law,” observes Law Professor Augusto Zimmermann. The list goes on.
When the rule of law is weak and there is no respect for private property, efforts to promote free trade — and thereby spur economic growth and reduce poverty — are dubious at best. It is difficult to promote trade and investment in a country whose legal institutions are weak and corrupt; the risks are too great.
The results begin to show. Despite Latin American economic growth rates averaging more than 5 percent in 2004 and similar growth anticipated this year, “capital flows” are negative, meaning more money leaves than enters the region. This is not due to foreign debt but a continued lack of confidence among long-term investors. Not surprisingly, as Latin America expert Andres Oppenheimer has noted, “only 1 percent of the world’s investment in research and development currently goes to Latin America.”
If economic progress is the goal, the U.S. government and multilateral institutions like the World Bank need to push the region to take legal reform seriously. Every country in the region needs a legal system and regulatory environment that defines and protects property rights.
As a first step, political leaders should consult the work of economist Hernando de Soto of the Institute for Liberty and Democracy (ILD) in Lima, Peru. In capitalist economies, Mr. de Soto has shown, business operations rely on legal definitions of property and enforceable rules on transactions. These concepts are alien in much of Latin America. Indeed, Mr. de Soto has found, what people physically own in such countries often isn’t regarded as their property.
“Unlike assets in Western nations,” Mr. de Soto’s ILD colleagues observe, real estate and equipment in the developing world often serve “only as physical shelter or tools; they cannot be leveraged to produce additional wealth.” In effect, they are “dead capital,” leaving up to 70 percent of the people in some countries cut off from the economy, condemned to poverty.
The property rights reform he developed for Peru resulted in the legalizing an estimated 300,000 previously off-the-books businesses, moved 560,000 workers from the underground to the legal economy and raised annual tax revenues about $300 million. That should wake up the politicians.
If the U.S. government and multilateral institutions refocused their attention on reforms promoting the rule of law and protecting private property, future Summits of the America might look quite different. Instead of wasting time, Latin American leaders might embrace the kind of policies that would help the poorest while promoting democracy and human rights. In such an environment, a Free Trade Area of the Americas would be seen as welcome and mutually beneficial.
Alejandro Chafuen is founder and president of the Atlas Economic Research Foundation in Arlington, Va.