What Cues Can South America Take From Europe?

Over the past few years Greece has probably made the news more than ever before. Whether it be protesters in the streets, election results, or the announcement of some new government policy, whatever happens in Greece seems to be written about in all corners of the world. Just recently the fierce rhetoric of a relatively obscure populist left-wing party made international headlines and fueled new speculations about the future of one of the world’s major currencies, if not the world economy and financial markets. The eventual ascent of that same party, Syriza, to Parliament has all eyes both on the Old Continent and across the world focused on its plan of action. Mind you, we are talking here about a country whose GDP represents less than 0.4% of the world economy.

In the meantime, incessant government intervention into the economy has caused major upheaval in several countries in South America. Venezuela is currently experiencing the worst depression in decades, Argentina’s economy is in shambles once again on the heels of its most recent default, and since the World Cup bubble popped Brazil has equally dipped into recession. These countries dwarf Greece in terms of population as well as contribution to world GDP, and some of their resources make them important players in global commodity markets. Yet aside from some news outlets’ reporting on Venezuelans having to stand in line for hours for even the most rudimentary items or the mysterious death of a federal prosecutor in Argentina, major media are hardly paying attention.

The latter, far from being the result of a massive media cover-up, reflects a general sentiment in South America. Here in Chile, for instance, nobody in their right mind would dream up some theory about the aforementioned woes causing a spillover effect that might bring the entire continent to its economic knees. Unlike in Europe, xenophobia has not been on the rise here, nor have there been any incidences of heads of state being compared to blood-thirsty dictators. As much as some populist leaders like to speak of a “Latin American brotherhood”, in truth the misery even in neighboring countries is hardly discussed except in case of any personal ties.

While it would clearly not be a fair comparison to put the South American economy on equal footing with that of Europe, the events that have unfolded in recent decades can certainly serve as valuable lessonsEurope-SouthAmerica for the continent. The mere suggestion that one day, Europe’s economic fate would seemingly come to hinge on the outcome of Greek elections would have seemed outright preposterous as recent as the nineties or even in the early 2000s. Indeed it would be like predicting that two decades from now, all of South America would be trembling at the prospect of a severe recession in Guyana.

Still, a lot more can be drawn from European history than simply a long list of don’ts. Going further back just a few centuries can literally provide a blueprint for sustainable growth and pave the way for prosperity on a continent too long haunted by the destructive and backward forces of socialism. Historians and other scholars have written extensively on “the European miracle” and its foundations. As it turns out, the terminology belies an astonishingly simple recipe; defense of property rights and decentralized power structures limited by competing jurisdictions in their ability to intervene in and expropriate resources out of the market.

Whilst academia and politicians would have us believe economics is an incredibly complex field of study that should be left safely and exclusively in the hands of the “experts”, historical evidence proves them utterly wrong. In fact, the more power is centralized into the hands of these conmen, the lower the odds of the kind of sustainable economic growth that has permanently lifted millions out of poverty, and continues to do so to this day.

Political leaders and their outdated and misplaced allegations of imperialism cannot be allowed to stand in the way of free people and free markets in South America. In the words of Ron Paul: “An idea whose time has come cannot be stopped by any army or any government”!


The State of Freedom in Chile

Perhaps one would not know it for some of the articles that have appeared on this website, but libertarians have plenty of reason to be optimistic about Chile. The country’s economy consistently ranks as by far the freest in Latin America, reaching tenth place in the world in the most recent ranking. Free market type policies have lifted millions of Chileans out of poverty over a time span of mere decades while making its capital city a major hub for international business. And despite recent allegations of large-scale corruption regarding political campaign contributions, on the whole corruption is virtually unheard of.

FreedomSuch a success story literally sets Chile apart from every other nation on the continent, as evidenced by the fact that it is set to become its first developed country by the end of this decade. Yet its unrivaled success has all but silenced critics. On the contrary, it seems like the very prosperity that made Chile the envy of Latin America has lulled some would-be free market advocates to sleep, while proponents of state intervention are running on all cylinders. “Free” education and healthcare and Keynesian economic stimulus – read: more wealth confiscation – are just some of the talking points among those aiming to perfect society by way of scribbling words on pieces of paper.

Last March an OECD report made the headlines in Chile for categorizing the country as among the most unequal in terms of income distribution. Such reports provide the kind of ammunition used by interventionists to beat the drum for all manner of reforms, including the recently approved educational reforms. Given the relative lack of government meddling in daily Chilean life – at least on the scale people in most developed nations have become accustomed to – some are eager to seize every opportunity to promote the supposed virtues of government planning.

To be fair, much of this sentiment stems from resentment against the iron first with which economic reforms were implemented by Augusto Pinochet’s military junta. Looking to break with the socialist policies pursued by his predecessor Salvador Allende and its disastrous consequences, the commander and his ilk considered “the Chicago Boys” to be the only group of economists worthy of their trust. Taking his cues from them, the policies subsequently introduced succeeded in reversing the downward trend and revived an economy previously characterized by soaring inflation and deficits coupled with plummeting saving and investment rates.

Since its return to democracy in 1990 Chile has almost exclusively seen left-wing administrations. For the better part of this era, however, economic policies have generally favored the free market over central planning. It is precisely this trend that is a thorn in the side of those who wish to see more top-down decision making, their main spokesperson being Michelle Bachelet. Fortunately their rhetoric does not go so far as to demonize international trade or private property, but it does tend to blame the free market for inequality in just about every aspect of life. This flawed line of thinking is most prominently and frequently used to justify more state control of healthcare, education and the labor market.

The latter, of course, can hardly be said to be a uniquely Chilean phenomenon. Still, it is imperative to the cause of freedom to promote this understanding of the philosophy of liberty; that rather than foster inequality, voluntary trade has historically been – and still is – the most powerful force against it. Not to mention the fact that trade, not coercion, is simply the morally preferable thing to do.

Lessons Unlearned From Brazil’s Recession

As she was sworn in for her second term last week Dilma Rousseff publicly stated government spending would have to be cut. Yes, you read that right; the leader of the Workers’ Party just said her own administration is spending too much taxpayer money. It might be a day late and a few billion dollars short, but could it be Brazil’s president just had her Eureka moment?

ReaisYears of spending billions of dollars on stadiums and infrastructure for a 4-week event has left the Brazilian government with little to brag about. While the world has moved on to other things the World Cup’s relics lie mostly unoccupied in a land of poverty, police corruption and gang violence. After the artificial boom created by said event the bubble has definitively burst. Yet to hear one of South America’s most adamant cheerleaders of government intervention admit to it is remarkable to say the least.

Government figures show Brazil’s economy had already fallen into a recession before the World Cup even got underway. This year the central bank expects the economy to grow by a dismal 0.38 percent while inflation hovers north of 6.5 percent, well above the 4.5 percent target rate. Industrial production is forecast to expand by no more than 0.7 percent, with the country’s current account deficit widening to $78 billion. Predictable though the downturn may be, its sheer magnitude is forcing the Dilma administration to consider some rather uncharacteristic measures. Or is it?

The budgets of a few dozen ministries and some secretariats may be cut by one-third, reportedly amounting to some $700 million in savings, the new Finance Minister Joaquim Levy was quick to add expenses listed in the constitution will be unaffected – a constitution about as thick as Ayn Rand’s novel Atlas Shrugged, by the way. In addition taxes on imports, credit, cosmetics and fuel are set to be raised. To make matters worse, an income tax reduction already approved by Congress was recently vetoed by Dilma herself.

Naturally, the fact that Brazil’s tax burden of 36% of GDP is far higher than that of other middle-income countries cannot be allowed to keep failed economic policies from going full steam ahead. The logic on which excise taxes or protective tariffs on imported goods rest, i.e. that raising prices of certain goods discourages their consumption, suddenly loses all its validity when it comes to such activities as human labor or investment. Can Brazilians really be expected to keep working just as hard despite essentially working two out of five business days just to sustain a giant bureaucracy? Can a society really be expected to achieve any sort of meaningful growth when forty percent of its productivity is sucked out of it?

It is obviously too late to take all of the resources spent on the aforementioned projects and redirect them into the private sector, where they would have contributed to sustainable economic growth. It is not too late, however, to reverse the trend and stop adding fuel to the fire. Besides, imagine how much more expensive that fire will be considering rising fuel taxes!

As the famous quote attributed to Thomas Edison goes, “I have not failed, I’ve just found 10,000 ways that will not work.” The latter can also be said for the idea of taxing and spending one’s way to prosperity. Edison’s point, however, was that making mistakes can be useful if one learns from them. Unfortunately that message does not seem to have reached Brasilia.

Keynesianism in Chile

Last week Chilean president Michelle Bachelet announced an “especially anti-cyclical” government budget for 2015. Utilizing the usual rhetoric of creating jobs and stimulating the economy, the first budget in her second term is set to increase by a whopping 9.8 percent. The new budget’s “historical increase in public investment” – mind you, these are the words of a Socialist Party president – will be directed mostly toward social reforms.

La_MonedaThe increase in spending is supposedly covered by a landmark tax reform passed last month raising corporate taxes and closing tax exemptions. These funds, confiscated from those who could make actual investments to meet market needs, will be used to ramp up spending on health care by 85 percent and education by 10.2 percent. In addition, Bachelet pledged to pump more money into developing certain remote regions and consolidate social welfare schemes, stating her administration’s goal to have 1,700 of the poorest families on the dole by next year.

The latter, of course, is typical of the redistributionist ideology; the fundamental difference between giving a man a fish to feed him once and teaching him how to fish so that he may become more self-reliant. As always the irony of striving first and foremost to make the poor and destitute more dependent on others for their sustenance seems to be lost on most people. Growing up, children are expected to become better able to take care of themselves and take on more responsibility as they get older – I personally recall a story or two about my older sister looking after me when we were kids. Yet when government takes this inherent human instinct and turns it on its head, nobody bats an eye.

In her press conference president Bachelet administration claims the stimulus will create 139,000 jobs. What she left out, however, is how many jobs will be destroyed or never created because of the tax hikes. After all, there is no way of knowing how many more or fewer jobs would have been created if the government had not decided to extract more resources from the voluntary sector. Nor does Bachelet specify what types of jobs will be created. Since jobs created by an institution that does not have to make a profit are not subject to the discipline of the market, the creation of these jobs might actually harm the economy and the people rather than help them. And all of this is assuming the tax hikes will even create enough revenue to cover the increased spending.

Rather than help sustainably grow the Chilean economy, the new budget represents the State’s clenching fist on an economy that is already struggling. The slowdown in the Chinese economy and the Finance Minister’s announcement that there will be no stimulus has lowered demand for copper, Chile’s main export product. With Chinese demand for copper dropping the commodity’s price has fallen by over 6 percent in recent weeks. If the U.S. dollar keeps strengthening the way it has for the last 12 weeks the price of copper is expected to fall further.

The good news for the Chinese is that it seems their economy will be allowed to run its (semi-) natural course rather than get a temporary monetary fix, which is inevitably followed by a correction. Unfortunately the Bachelet administration either does not understand that or is simply doing what is politically expedient. Either way it is telling to witness a socialist president in Chile implement more interventionist policies than the so-called communist Chinese. The difference will be that when the Chinese economy bounces back, it just might be a more sustainable recovery.

What’s Really Growing in Argentina?

Traveling through Argentina recently I was taken aback by the abject depression that seems to have taken the country and the people in its grip. Even after spending barely two days in the country I left with a negative taste in my mouth. More than the many buildings, modes of transport, streets and sidewalks in severe states of disrepair the overall feel of the place really stood out in my mind. And it is not that I was expecting to see a prosperous, bustling country either.

Moneda_ArgentinaFor some time now it has been clear that the Argentine economy is rapidly disintegrating. The people are struggling to cope with an estimated inflation rate of over 50 percent, a rate the Kirchner administration has been stubbornly underreporting to the point to where international authorities have openly questioned the numbers. Other persistent problems include seemingly permanent fiscal deficits, international reserves drying up, and the ongoing devaluation of the peso. Government spending as a percentage of GDP now hovers around 50 percent, contributing to last month’s second sovereign debt default in a mere 13 years. Meanwhile the previous one is still haunting the state budget.

In late 2001 the Argentinian government declared the world’s largest sovereign default, triggering the worst economic recession in history. Unemployment spiked to 20 percent causing widespread riots and looting, not to mention political instability– five different presidents held office in a mere two weeks. Eventually the debt was restructured and most bondholders agreed to a debt swap even if the new bonds were worth only 35 cents on the dollar. A small minority holding some 9 percent of Argentine debt did not take the deal. Consequently these hedge fund “holdouts”, in Argentina less affectionately referred to as “vultures”, have been involved in a legal battle with the government that has gone all the way to the U.S. Supreme Court.

While this year’s default differs from 2001 in many ways it is impossible to truly grasp the former without understanding the far-reaching ramifications of the latter. Former Economy Minister Roque Fernández even goes so far as to argue the government has effectively been in default since 2001 as it never resolved that situation. Whatever the case may be, the common denominator is the victim: the Argentinian people. Historical evidence of its many defaults suggests they typically result in at least a 10 percent drop in GDP.

Nonetheless, the Kirchner administration has had the audacity to place signs at sites of taxpayer-funded projects proclaiming “Aquí tambien la nación crece” (here too the nation is growing). The sad truth is the only indices indicating growth in Argentina are the ones that should show the opposite; think government spending, the money supply, and the fiscal deficit. Unfortunately the Kirchner administration has been too busy childishly denying reality and trying to shift the blame for the economic malaise on the “vultures” to do anything constructive for the people they claim to represent.

But there is hope. In the midst of all the chaos Bitcoin is making headway as an inflation hedge. A Subway franchisee in Buenos Aires recently decided to start taking Bitcoin, and the country’s first Bitcoin ATM is now a reality. The old adage holds true in Argentina today: you can fool some people sometimes, but you can’t fool all the people all the time. Especially in the information age.

Is Brazil Sitting On a World Cup Bubble?

Just hours before the opening ceremony of the World Cup last Thursday, protesters clashed with police in the streets of São Paulo and Rio de Janeiro. Striking airport workers and teachers also made the headlines, seemingly confirming the concerns many Brazilians have about civil unrest during the tournament.

Now that the spotlight is on Brazil for an entire month, different groups of disgruntled citizens are expected to attempt to garner international attention for their cause. The first protests were largely sparked by the billions of taxpayer money that have been spent on stadiums and infrastructure in a country that has yet to join the ranks of the 100 wealthiest nations in the world.

In order to be able to claim that the stadiums were financed by private construction firms, Brasilia lent money to them at astonishingly low interest rates less than half the going rates. Coupled with the fact that politicians are notorious for their cozy relationships with the construction sector, it is no surprise that no self-respecting Brazilian believed these claims. An Audit Court report released last May found $275 million in alleged price-gouging for the Brasilia stadium alone.


Prime example of a white elephant: Arena da Amazônia in Manaus

Just like four years ago in South Africa, the stadiums have become known as “white elephants” for their huge cost before, and uselessness after the tournament. The city of Brasilia has no major professional team to use the stadium after the World Cup, while the $270 million Arena da Amazônia in Manaus is so remote construction materials had to be shipped up the Amazon River as no trucks could reach the place. Naturally no team would even consider playing their home games there, yet Brazilian politicians decided to have their cronies build a stadium there.

Needless to say, the surge in government spending in the last months and years has artificially and temporarily boosted the economy. As those who understand Austrian Business Cycle Theory know, however, the subsequent market correction is inevitable. Regardless of the outcome of the Copa this correction, and the government’s response to it, will have a much greater impact on the lives of Brazilians.

Just as we have seen with the expansion of the Brazilian economy, it will likely take some time for the bubble to deflate. Besides, with the presidential elections just around the corner, the incumbent Dilma administration will not shy away from injecting more stimulus into the economy if need be. Still, the government’s role in the economy will have to shrink considerably if the country is to see more steady economic growth in the future.

Though last decade saw some rapid economic growth the expansion has slowed down considerably in recent years, averaging only about 2.5 percent. At the same time, inflation has been hovering around 6 percent. But monetary policy is not the only area where government intervention is hampering the economy; according to the World Bank’s Ease of Doing Business Index setting up a new business in Brazil currently takes a whopping 107 days and 13 procedures. Another ranking that puts the country squarely in the bottom half of the world is public spending as a percentage of GDP, which is well above 20 percent in Brazil. This is in large part due to astronomical spending on pensions for government workers where the country ranks second in the world.

If the Workers’ Party’s Dilma Rousseff is reelected in October there is little hope for such change, however. Just last month she bypassed Congress and signed a decree granting state powers to social movements designated as part of “civil society” by a special committee. While the election procedures for the committee remain unspecified, it certainly represents a political tool to favor some groups and viewpoints over others. In the months leading up to the elections, that could prove to be very useful for Dilma and the Workers’ Party.