Wednesday, November 26, 2008

Globalization, Liberalism and Latin A...



Globalization, Liberalism and Latin America - Dirk Verhofstadt


First of all, let me confess that, unfortunately, so far I never had the opportunity to visit Latin America. The only knowledge I have about this part of the world comes from reading reports, newspapers and especially literature. Many of my favorite authors are from Latin America: Marquez, Vargas Llosa, Fuentes and Borges. They not only belong to the best writers of world literature. They also give a penetrating description of the problems, the frustrations and the dreams of the people of Latin America. I do not only consider them as wonderful novelists. I also refer to their essais, their biographies and their political and social views.

In A Fish in the Water Mario Vargas Llosa describes his unsuccessful bid for the Peruvian presidency in 1990. He supported a programme based on private entrepreneurship to be the driving force of economic development. He promised to put an end to state control of the economy, to discrimination and any kind of class privilege in Peru's multiracial society. He criticizes Alberto Fujimori, who won the election, as well as his regime for being authoritarian and destined to propagate backwardness. His story shows that it is not obvious to be a politician in Peru and I suppose in any other Latin American country. It seems that, more than in Europe, politics are a question of individuals, and that the media are very important in guiding the voters perception.

In his journalistic work News of a Kidnapping Gabriel Garcia Marquez outlines the atrocities of the Colombian drug trade. It chronicles the 1990 kidnapping of nine journalists by Medellin's powerful cocaine cartel and the events that eventually led to the surrender of the cartel's leader, the notorious Pablo Escobar. Drugs, violence and terror are still important threats for the young democracies in Latin America. This book convinced me of the necessity of a strong and independent legal system. Security is key to individual freedom. It is up to the government to provide it.

In his book La frontera de cristal Carlos Fuentes masterfully interweaves Mexican politics, economics, and history within individual stories, giving a brilliant update on relations between a poor country and the wealth in the world. He tells about the historical injustices involved in the American conquest of Texas, the War on Mexico, and the continuing hostile dependency on each other. The Americans need cheap labor and the Mexicans need jobs. The message in this book is quite clear. Americans want Mexicans when they need them. They need them for cheap labor they don’t want to do themselves. On the other hand they do not want Mexicans to become dependent on America, especially on what concerns their social system like health care and education. It’s a sort of economic slavery.

Jorge Louis Borges’ El hacedor is certainly one of the literary masterpieces of the twentieth century. The poems, the stories, and personal reflections reveal the interwoven existence of imagination and reality in the mind of the Argentinean writer. Borges describes the Making of the universe where converge an amalgam of times, places and cultures. This work reflects very well the enormous complexity and diversity of today’s Latin America. I believe it is very important to realize this complexity and diversity, especcialy when we talk further about globalization. A common feature in all these books is the wish of ordinary people for more freedom and justice, for a better life for themselves and their children and for a better future.

But the future does’nt look very bright. The world recession, amplified by 9/11, already started in 2000. We realize today that it brought us a lot of economical and human damage. Especially Argentina, Venezuela, Bolivia, Mexico and Peru were badly hit. The latest news tells us that the US-economy is improving and that also Europe is on the better hand. If this is the case, this would also be good news for Latin America. That is what CEPAL, the Economic Commission for Latin America and the Caribbean, predicts: increasing figures of growth in about all countries of the area. It does’nt alter the fact that today millions of people in Latin America still live in a state of poverty: no electricity, no drinking water, no schools, no housing. The past years have shown us how vulnerable Latin American economies are, and especially how dependant they are from the United States and the globalizing economy. One may wonder whether increasing globalization is good for the rest of the world and in particular for Latin America. Will globalization bring more prosperity ? Or will it enlarge the gap between rich and poor countries?

Experts from IMF and the WTO – who follow the so-called Washington consensus – tell us that globalization will automatically lead to more prosperity in all countries opening their borders for unconditional free trade development. Anti-globalist movements pretend that globalization, as we know it today, will increase the existing problems in the lesser rich countries and that the gap between rich and poor will rather increase than decrease. Anti-globalists position themselves against a free market and in favor of a stronger grip on the international economy by governments.

My perception is that both are wrong. Neither neomarxist antiglobalists, nor neoliberal marketfundamentalists offer satisfactory solutions for less developped countries. Antiglobalists try to pretend that liberalism has been tried out and that it doesn’t work. They ask for new forms of nationalization, for subsidies and price controls. They claim to be the defenders of the poor while most of them protect specific interests. Most unions claim for more rules for multinationals. But by imposing high labor and environmental standards they extinguish the competetive advantages of small nations. On the other hand, market fundamentalists expect immediate and positive results from privatization. They look for deregulation and a minimum of government influence. They seem to forget that a free and liberal world means more than just economic freedom. Let me quote Mario Vargas Llosa: “development, the progress of civilization must be simultaneously economic, political, cultural, and even ethical or moral”.

Liberals support privatization. But they do not accept that public monopolies are turned into private monopolies in order to enrich a specific industry or company. Liberals support deregulation. But they do not accept the law of the jungle, the exploitation of people or the dismantlement of a basic social protection system. Liberals support a smaller state, but don’t want the government to withdraw on all fields of public life. An efficient state is necessary to strengthen its legal system in order to protect property rights and contracts, to provide security and freedom, to fight against monopolies, trusts, cartels, corruption and deals that forge fair competition. Radical economic reforms are not possible without strong legal rules. Liberalism never delivered prosperity in Latin America, simply because liberalism never existed in Latin America. Tonight I want to make clear that pure liberalism can bring solutions to today’s economic and social problems. Liberalism can bring more growth and prosperity as well as more freedom and justice. It is to the advantage of all the different countries of Latin America to join their efforts in order to achieve this.

Stating we need more liberalism may sound astonishing. One may think that today’s globalization can be seen as liberal evolution. People believe that problems like poverty, inequality of income, bankruptcies, unemployment, pollution and the disappearance of cultural diversity are the result of liberalism and free market economy. That is not correct. My statement is that today there is no liberal political awareness, that today there is no free trade, and that this is the reason why we are confronted with all those problems. This was clearly stressed during the WTO meeting in Cancun. The political situation in the United States, Europe and Japan is not liberal but protectionist. They do not implement the free market, they obstruct it. The United States apply import taxes on food, textile and steel, damaging other countries. A few examples: In 2001 the United States implemented an additional 30% taxation on foreign steel. This distortion of competition caused problems in steel producing countries like China, Russia and Brazil. In Europe farmers get subsidies for the production of cheap milk powder. The E.U. sells the milk powder to developing countries like Jamaica at fall back prices. Imported European powdered milk has led to a one-third drop in milk production in Jamaica over the past five years. The result is that local farmers are unable to sell their own milk on the local market. Another example is the European sugar fort. Europe supports the production of sugar beets, which makes it impossible for sugar cane to compete in our markets.

An immediate abolition of the European protection regime would lead to a fierce decrease of the sugar price in Europe, whereby cheaply produced sugar cane could be brought into the market place next to expensively produced sugar beets. More Europeans would choose for sugar cane, which would result in a greater demand on the world market. The world market price would raise, which would be to the advantage of the competitive positioning of developing countries. The biggest enemy for prosperity and development is protectionism. It hampers free trade and the industry to get the best value out of their offer.

All these examples show that rich countries like the US, the European Union and Japan are taking care of themselves rather than taking care of less developed countries. It also shows that a real free market would lead to a more fair market. According to the Swedisch historian Johan Norberg EU’s protectionism is the most destructive for the developing countries. The fact that US protectionism is following in a very close second place, gives the EU an excuse for not changing their policy. Protectionism is a continuing tragedy, causing unnecessary hunger and disease. According to Johan Norberg protectionism may lead to even greater problems in the future. He says: Quote “We in the West used to tell the developing countries about the benefits of the free market. And we promised wealth and progress would certainly come if they changed and adopted our ways. Many did, only to find that our markets are closed to them. No wonder, then, that Western countries are seen as hypocrites, producing resentment and a fertile ground for anti-American and anti-liberal ideas in many regions at a time when the West needs friends more than ever.”

In fact, European and American farmers live a good life at the expense of poor countries, and also at the expense of Latin-America. I read the speech of European Commissioner Chris Patten for the Rio-Group-Ministerial in which he suggests that (quote) “social cohesion is the common interest” and “social cohesion should be the central theme to bring to the strategic partnership at the 2004 European Union/Latin American and Caribbean Summit in Mexico scheduled for the first half of next year”. By social cohesion he means more growth, free trade, investment, improvement in living conditions and the stuggle against social inequalities. One of the best means to achieve these goals is to stop protectionism. Maybe you could suggest your respective political leaders to ask him in Mexico to do so.

No doubt that in Cancun not only the US, the EU and Japan made mistakes. Also countries like Brazil, India and China protect their markets for countries with cheaper production costs. They hide behind dubious practices of rich countries. But it does not give them the freedom to behave the same protective way with even more poor countries. I have to admit that the example should be shown by the rich countries. If they would be prepared to open their markets and to banish all kinds of support, Brazil, India and China should do the same with less developed countries. Only a real free market and real liberalism will allow consumers to pay fair prices. Government support is necessary for education, health care and other basic needs. Governments should never give advantage to individuals, companies or countries. All this may sound as a nice theory, but it should actually take care of giving people the opportunity to develop themselves and to help them to take part in community life.

In his book In Defence of Global Capitalism Johan Norberg is convinced that countries implementing a free market develop more prosperity than countries protecting their markets, that economic freedom extends average life expectancy, that economic freedom fights corruption, that economic growth decreases poverty and does not increase inequality, that also poor people get a benefit out of growth and that progress is good for the environment. These are no fake allegations but reality. Countries opening up their borders to free trade are growing faster than those protecting their economy. Around 1820 poverty was spread fairly evenly throughout most countries. Then the industrial revolution took root, first in Great-Britain, later in Germany, the other Western European countries and the United States. It didn’t take long before these countries started to prosper. In the second half of the 20th century countries such as Japan, Taiwan, Singapore, Hong Kong, Malaysia and South-Korea had thrown open their borders and reached an equivalent level of welfare in a relatively short period. Today China, Vietnam, India and Chile are catching up very fast. Only countries steering a protectionist course are lagging behind and are still experiencing widespread poverty.

Fifty years ago Brazil was twice as rich as Taiwan. Taiwan opened its borders and market during the sixties. Today Taiwan is three times as rich as Brazil. Venezuela was ten times as rich as South Korea. Also South Korea opened its borders and market during the sixties. It became twice as rich as Venezuela. Fifty years ago Chile was as poor as Cuba. Today Chile is five times as rich. All these examples go against the predictions of antiglobalist theories. Norberg’s analyses not only unmasks the myth. It shows the potential for free trade to be a solution to many difficult problems in extremely poor countries. To make it clear: problems, correctly considered as important by antiglobalist movements can be fought by the system they refuse the most: a free market economy and a liberal democracy, real liberalism.

Liberalism does not mean that government should disappear for privatization. The efficiency of government is absolutely necessary for the creation of conditions and guidelines for fair competition between people and countries. Governments have tasks and responsibilities which cannot be taken over by private companies or organizations. If the goal is a free and fair society, politicians should pay attention to this and to five key elements: democracy, education, right of ownership, a real free market and international cooperation.

Democracy is essential for the freedom and development of mankind. “Political freedom is the participation of men in choice of their government, in the process of legislation, and in the control of administration.” These are the words of Friedrich Hayek, the Nobel Price winner of Economics. These are the basic principles of democracy and the evidence that liberals are democrats. A democratic legal order is still the best system to maintain as much individual freedom as possible allowing access to prosperity for as many people as possible. The past has proven that the political system supported today by most leftist anti-globalists is not efficient. One only has to remember the social, economical and ecological damages brought to ex-communist countries and to socialistic peoples republics.

Democracy is the only system whereby rulers have to report to the representatives of the people. Their political continuity depends on the result of elections. The Indian Nobel Prize winner Amartya Sen found out that there is no famine in democratic countries. The most terrible famine-stricken period out of our contemporary history happened in China between 1958 and 1961. An evidence and result of the ruling planned economy implemented by the communist central government. 30 million Chinese died. From the beginning Mao refused to acknowledge this catastrophe, and continued to believe in his dogmatic rule. There was no democratic opposition, no freedom of press. The government was being mislead by the propaganda of local party officials who tried to save their job and disguised what was really happening. The essence of democracy is the presence of counterforces obliging political leaders to take up responsability. That is why we have to counter any decision or initiative of a president or any ruler willing to abolish political opposition or freedom of press.

Some politicians believe that in a democratic system they are allowed to remain unpunished when disdaining the public opinion. I realise that some Latin American countries are used to declare a state of national emergency rather fast. Most of the time it is a way to stop any form of counterforce which is not a good sign for democracy. The most important reason for the existence and continuation of democracy is that laws can be implemented according to the will and the need of the people, and that those same laws can be enforced by the ruling authorities. That implies the existence of an independent legal system protecting civil rights as well as freedom of press. I agree with José Piñera, President of the International Center for Pension Reform, that a free, strong and independent press is a gauge of the vigor of civil society. And that it is regrettable that in almost every country in Latin America, the press is too close to power and is not an effective counterbalance. What you need are independent political parties, movements and groups. In order to diminish the private influences, I support the idea of public financing of political parties, movements and groups, electoral campaigns as well as limitations on electoral expenditure. The fight against political corruption starts with financial transparency of political parties and movements.

A second element is making education available to everybody. In my opinion, this is essential for further development of Latin America. Education, research and development are the real gates to the future. To compete in the global economy, Latin America needs a labour force able to compete with Asia – in skills and therefore in productivity. Better educated labour forces will encourage multinationals to invest more in your countries. Personally I belief it is the government’s task to make sure that education reaches also the poor. Therefore I support public programs as Bolsa-Escola, a scholarship program for the poorest families. It allows their children to replace the hardness of working by the hope of learning and staying in school. More than 20 million children benefited from Bolsa-Escola programs in Latin America in 2002. But this public responsibility may not reject approaches that imitate the market advantages of competition and consumer choice.

In Chile the level of education grows very fast thanks to healthy initiatives like private schools combined with the distribution of education vouchers. Another tool to improve the quality of education is decentralization. In Nicaragua education vouchers as well as decentralization have been successful. Education is not just a system to pass on knowledge. It should also pass on values. In his essay Latin American Liberalism published in The Independent Review, Alavaro Vargas Llosa mentioned that, in general, Latin Americans are given an education that, in addition of being of a poor quality, is intensely collectivist and fraught with all the prejudices against the individual, as inherited from the egalitarian tradition. Young generations must learn to accept and trust words like company, gain and profit. They have to adopt entrepreneurship. In the end, more companies, more gain, more profit and more entrepreneurship means more welfare and more income for the state. More money also for social security, health and education.

A third essential element is the attribution and protection of the right of ownership. Peruvian researcher Hernando de Soto made very interesting studies about this. Millions of migrants establishing themselves in the puéblos jovenes in Peru, in the favelas in Brazil, in the ranchos in Venezuela, in the barrios marginales in Mexico, in the bidonvilles in Haïti and in the shantytowns of the former British colonies, automatically enter a world without any official legislation. They have their own social rules, which in no means mean that they are not active. On the contrary. Nowhere else is there so much activity and entrepreneurship as among poor people. And poor people do not only work for and among poor people. They also fill gaps in the legal economy. They drive busses and taxis without a license, they take on jobs on the side hotels and restaurants. They do construction work. They take on jobs in non-registered shops, in offices and in factories. This leads to De Soto’s surprising conclusion that the legal unofficial world is the norm. His conclusion is not only surprising but important: the poor are not the problem, they are the solution.

Based on the market prizes of brick, wood, windows, etc., De Soto and his team calculated the value of all property of the poor in Third World countries and the former communist world. They came up with the astonishing amount of 9.300 billion dollars! Almost as much as the value of all corporations listed on the most important stock markets of the world’s richest countries. Or 46 times more than all World Bank and IMF loans to developing countries. Or 93 times all the financial development help given by all developed countries these past 30 years.

It’s a fact that poor people have no access to official property giving them the possibility to estimate and establish the legal and economic values of their belongings. Today they are unable to create added value or to secure property in a developed market place. In the Western World every property is officially registered. It is part of numerous laws, regulations, charters and authorities controlling the system. Property means economic potential. It can be registered in contracts or as shares. It allows to keep address data for taxation. Official property stimulates other legal production of water, electricity and telephone. It creates a legal relationship between citizens and government and protection of transactions. Ownership of real estate can be moved, shown and traded.

In most of the Latin-American countries the black economy is flourishing. One of the reasons is the enormous bureaucracy and the many rules to start private company. One of the consequences is that a lot of people work illegally. Their property rights are real but unofficial. By the attribution of property rights they should be integrated into a legal and official environment. And this must happen in a simple and cheap way. Fair laws avoid underground economies, artificial income-differences, mafia, instability, flight capital and a lack of respect for the law. Another mean to create added value is to bring down the cost of legal work in order to avoid unofficial revenues such as the payment of bribes.

The fourth condition is to impose a real free market. Alvaro Vargas Llosa explains that collectivism – or disdain of the individual – has been ongoing in Latin-American countries. He also refers to the pernicious switch from state enterprises to state-protected monopolies, as is the case of the telephone systems in Mexico, Argentina and Peru. These reforms have not been liberal but a caricature of liberal reforms. Those cases have aroused the idea that privatization is of no benefit to the consumer and does not encourage productivity. One of the effects is that political opponents of free a market are in favor of programmes based on populism, nationalism and anti-liberalism.

A real free market is not compatible with private monopolies, formation of trusts, cartels and price agreements. Here lies an important task for the government. The government must guarantee free competition. It has to provide a series of legal provisions concerning social protection, minimum wages, security and health. We need a new and stronger relationship based on mutual trust between private initiatives and the government. Not a patronizing government that discourages all initiatives by to many rules and taxes. But a government that stimulates private initiative and entrepreneurship. I do not belief in the recipes of so called extreme liberals or libertarians that plea for a minimal state or even the elimination of the state. We need an efficient government that provides a framework in wich individuals and companies corresponding their possibilities.

A real free market means also the elimination of all practices that forge competition like tariff duties and subsidies. Most of the time they are required by lobby groups like unions and employers organizations. In his essay Alvaro Vargas Llosa gives some strong examples. Chicken producers in Guatemala succeeded in getting the government to impose tariff dues and import quotas. Brazil placed extremely high tariff dues on the import of computers. In Columbia, Federcaffée, the union of coffee growers and sellers, had a chair in the executive office, allowing them to pass regulations affecting their own business. Most governments try to protect their own industry and farmers by giving them advantages or they try to obstruct the import of products from other countries by charges. In the end all those measures harm domestic consumers.

Of course I understand that Latin-American countries protect their markets as long as rich countries and unions in the US, the European Union and Japan protect their own. The best way to force rich countries and unions to open their borders for Latin-American products is by intense cooperation. And cooperation is my last point.

A fifth essential condition is more international cooperation. Latin-America is confronted with a lot of problems but has one special strong advantage. Whereas the more advanced societies are aging rapidly, the Latin-American countries are rejuvenating at the same rate. All countries of the Rio-Group count 540 million habitants. This number will grow to 590 million in 2010, to 660 million in 2020 and to 720 million in 2030. A young population and a growing number of consumers is an important trump for the future. Latin-America will become an increasingly important market for economic superpowers as the United States, the European Union, Japan and China, insofar the countries of the Rio-Group work together. Only if you form one front you can force other economic superpowers to open their markets for your products. Therefore the importance to work as much as possible multilateral and to reduce bilateral agreements. Today starts an important meeting of the Free Trade Area of the Americas in Miami. The most serious obstacle to the successful conclusion of this Free Trade Area of the Americas is the domestic policy of the United States. It’s necessary to realize the unwillingness of the US government to discipline its highly subsidized agricultural sector. The massive subsidies granted by the US, to its agricultural producers of grain, rice, corn and meat are a clear sign to the sector’s unmatched political power. The US does not seek a real free trade system from trade negotiations, but is only interested in commercial advantages. This attitude harms exporters from, sugar producers in Brazil, corn farmers in Mexico, rice farmers in Honduras, and so on.

This was the reason why I understood and even sympathized with the attitude of the developing countries in Cancun. For the first time a cohesive of 21 countries, including 14 Latin-American countries, tried to reinforce their position and were determined to get the US and EU to live up their Doha pledges. A united Group of 21 could play a major role in preventing the US and the EU to maintain their unfair competition. But these past weeks the US attacked the new formation and tries to split up the G21 by backroom coercion, by threats to terminate new and ongoing trade negotiations. So, under pressure the US was able to detach Colombia, Ecuador and Peru from the G21. These countries announced their intentions to pursue a closer relationship with the US on trade liberalization. Also Mexico and Chile counts to much to their preferential relationship with its NAFTA-partners. This attitude is comprehensible but on the long run it would be better to act united with the other members of the Rio-Group and to shape one economic bloc to have more impact world-wide. Only united you can force the US and the European Union to real changes and to cut back their unfair competition. I can only hope that the Latin American countries in Miami will be united in claiming the elimination of tariff dues and subsidies. And of course I support the same claim against the EU and Japan.

In fact I want to hold a plea for a Latin American Community of independent nations, and as José Piñera describes it, cherishing their own cultural identities but joined in a common market for trade and investment, with free movement of capital, goods, services, people and ideas. A Latin American Community would comprise 540 million people. More than the European Union and more than the United States. An intense trade integration between the Latin American and the Caribbean countries could lead to a further cooperation. Maybe to a sort of Latin American Union, with a common trade policy and on the long term a common currency. By the way, common currencies are the best guarantee against speculation. I know that my proposal to build a sort of Latin American Union sounds utopian, but realize that 50 years ago the European Union started from scratch. After 2000 years of struggle, violence and terror, after two World Wars, the European nations realized that the only way to achieve peace and welfare could come from cooperation. I hope that the Latin American leaders follow the same road.

A Latin American Union would not only be a good tool for more welfare but also a strong mean for a fair world. It’s absolutely necessary that the different regions in the world get more influence in world policy. The composition of the Security Council of the United Nations is not longer acceptable. As you know the US, Russia, China, the United Kingdom and France are the fixed members of this Council. I propose a better balance and representation. Why can’t we accept a Council with one representative from North America, Europe, Africa, Russia, the Arabic world, China, India, South East Asia and Latin America? Representatives of the different regions in the world should also be involved in the strategy and policy of other international organizations such as the World Bank, the International Monetary Fund and the World Trade Organization. Today those organizations work to much as an extension of the economic and financial interests of the United States and Wall Street.

The idea of a Latin American Union probably still seems utopian. Nevertheless I believe that there are a lot of opportunities. A Latin-American Union would mean a world player, just like the European Union. As it was for the Europeans, history was very hard to the Latin Americans. But together we can work for a new world order. A world in which freedom and social justice stand central and where the only concern is welfare for all human beings, irrespective their origin, gender or nationality.

Dirk Verhofstadt




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