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Three Myths That Hold Back Latin America

By: José Niño - @JoseAlNino - Apr 29, 2016, 7:37 pm
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Venezuelan social democratic governments of 1958-1998 did not create wealth, but rather inherited it. (Aipop.org)

EspañolIn Latin America today, especially in Venezuela, there is a focus on corruption and public money “mismanagement.” Though this criticism is often to the point, it overlooks the white elephant in the room: the ideological trend of socialism and populism.

Rather than facing the real cause of the malaise affecting most of the region, many in the press, academia, and politics denounce “corruption” and waste of resources.

  • Read more: 7 Reasons Why Latin American Populists Are On the Retreat
  • Read more: Argentina Has Shown Latin America How to Beat Populism

Instead, the current debate should focus more on the free-market policies that respect individual rights. We only need to look at countries that have taken the opposite path, like Venezuela and neighboring countries.

There are several misconceptions clouding our judgment that need to be dispelled.

Mismanagement: Who Creates Wealth?

In a way, it makes sense to blame mismanagement of public resources for Latin America’s stagnation.

However, it’s based on the false premise that funds managed by state technocrats or enlightened leaders can usher in development.

It implies that government has the ability to manage resources and efficiently create wealth. But an economy cannot work without a free market where prices act as signals for resource allocation.

The Venezuelan social-democratic era (1958-1998) is often brought up as a model for how a “well-managed government” or “good socialism” works. It was considerably more stable than the regime Venezuela is facing today, but the seeds of its own destruction were sown during that period.

The truth is that Venezuela’s economy acquired a solid footing between 1930 and 1960 when the country maintained fiscal responsibility, openness, low taxes and few price controls.

Thanks to the capital accumulated during that time, Venezuela enjoyed an unprecedented stability. The later social-democratic administrations of 1958 through 1998 did not create wealth, but rather inherited it.

Unfortunately, these leaders squandered those revenues in public projects and inefficient social benefits. To make matters worse, the Venezuelan government decided to nationalize the oil industry in 1975, which created a wasteful state apparatus that has become a fundraiser for populists.

As a result, from 1958 to 1998, Venezuela’s GDP was  -0.13 percent. In other words, the Venezuelan population grew more than that wealth they collectively produced, and therefore, the country sunk into poverty.

Corruption Is Just A Symptom

Many analysts and experts mistakenly believe that the rampant corruption that characterizes Latin America is the region’s cause of unrest.

Actually, corruption is just the result of interventionist policies that increase the power and size of the state to lord over people’s needs.

It is easy to talk about corruption, which is merely a symptom of the real disease — an oversized state — without providing an alternative to addressing the existing problem.

When offering a solution, many often refer to government run by enlightened experts or officials.

Crony capitalism and rent-seeking through  privileges granted by the government are the disastrous results of an administration that operates out of its rightful role in society. When a nation exceeds its limitations, that becomes an incentive for businesses to resort to corruption.

Instead of creating commissions or Byzantine bureaucracies to investigate corruption, states must simply strive for the rule of law, repealing all bad legislation so that equality before the law and free competition flourish in society.

“Good Socialism”

Last but not least, the notion that there is a bad and good brand of socialism is a myth that has lasted for a long time and has received broad support in the region.

The desire for it is based on the assumption that a benevolent state can lead a country to prosperity.

The sort of “good socialism” that many propose, as pointed out by the Cuban journalist Carlos Alberto Montaner, is nothing more than socialism lite that sooner or later becomes full-scale socialism, as in Venezuela’s regime today.

In his great work Socialism, the illustrious economist Ludwig von Mises demonstrated the impossibility of that model because of the lack of a pricing mechanism that can allocate resources efficiently.

Without a profit and loss system, the market cannot discover what goods and services should be produced. In a free market, gains and losses have a social function that shows whether companies are doing their job of meeting the needs of consumers.

As described, social democracy is tempting in its respect for democratic values and economic organization, which has some free market mechanisms.

These mechanisms allow some degree of economic growth and development. However, the failure of this “good socialism” lies in the interventionism that lingers in the system. As a cancer, social democracy degenerates into socialism and ends up devouring the economy.

The free market is an integral approach, it can not be applied piecemeal.

We should avoid failed systems that focus on coercion and central planning, which have a history of leading countries to misery and stagnation.

What Venezuela and the rest of the region need are governments based on the rule of law, where individual rights and private property are protected, free trade and equality before the law.

Otherwise, Latin America will forever remain underdeveloped, a region with a lot of potential but too many flaws that prevent progress.

To achieve prosperity, we must first discard these myths and revolutionize our economic and political discourse.

José Niño José Niño

José Niño is based in Dallas, Texas. A citizen of the world, he has lived in Venezuela, Chile, and the United States and is a former member of Students For Liberty’s Executive Board. Follow @JoseAlNino.