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Latin America Has Put the Economic Cart before the Political Horse

By: Pedro García Otero - Aug 3, 2015, 11:38 am
Guatemalan economist Hugo Maul says Latin America rushed economic reforms without first improving political institutions.
Guatemalan economist Hugo Maul says Latin America rushed economic reforms without first improving political institutions. (Emisoras Unidas)

EspañolHugo Maul, a macroeconomics expert and the director of Guatemala’s National Economic Research Center (CIEN), has been instrumental to the economic growth of the Central American country over the last two decades.

Through the CIEN, Maul helped push four essential economic reforms in Guatemala, including opening up the electricity industry to competition, which led to an increase in household coverage from 38 percent to 98 percent in just 20 years.

The second was a telecommunications reform that brought Guatemala nearly 100 percent cell-phone coverage with some of the lowest rates in Latin America. Maul also supported prohibiting the central bank from coming to the government’s rescue with funds, producing an almost fixed exchange rate of GUA$7.70 per US dollar for 10 years now, and lower fiscal deficits.

Finally, another Maul reform allowed Guatemalans to pay for contracts using any currency, although the public continues using the quetzal because of the aforementioned stability.

Invited by local nonprofit Cedice-Libertad, Maul recently visited Venezuela, a country that has lately followed a completely opposite path of exchange controls, near hyperinflation, and a deeply unstable national currency. Nevertheless, both countries share a similar degree of institutional and political decay.

It is precisely this concern that led Maul to speak with the PanAm Post about the need for institutional reforms as engines of growth. Maul argues that the Washington Consensus back in the 1990s was too optimistic about Latin America’s rule of law, and that a more stable institutional framework must first lay the groundwork for an economic boost.

What has been the average growth of the Guatemalan economy after CIEN’s reforms were introduced?

A small one: 2.5 percent. At the time, we got carried away by our liberal faith in non-intervention and non-planning, and completely opened up the economy. We have free-trade agreements with 99 percent of our business partners, and the average tariff is only 5 percent.

However, we have not developed the basics that attract foreign investment: rule of law and security. Moreover, we have not invested in infrastructure. Those three things combined prevent investors from coming to Guatemala.

Nevertheless, letting the market operate achieved significant benefits: it diversified our exports, distancing Guatemala from the cycles of commodities prices, and the living conditions of the middle class have greatly improved.

You came to Venezuela to talk about the importance of institutions and rule of law. Until recently, they were not considered a growth factor…

I’m concerned with where Venezuela is heading. Among the oil-based economies, we can find very sad stories, such as Libya, where gangs of outlaws are fighting for the territorial control of oil.

Looking at Venezuela from the outside, one wonders what could prevent that from happening, when you have rich oil reserves and a society with groups fighting each other.

Then you have Kazakhstan, whose president remains in power after 25 years. His extremely corrupt administration cracks down on the opposition but in the Doing Business ranking, the country performs better than the average Central American nation.

Do you see Venezuela heading towards either one of those two scenarios, despite its democratic history and Western culture?

It makes me sad. I see Venezuela probably heading towards an economic transition, but I’m worried that politicians don’t understand the need to secure political order as a precondition for economic growth. Because of that, the country could eventually fall apart.

I think that institutions still exist in Venezuela. One should not think that because they belong to Chavistas we must tear them down and start from scratch. What Venezuelans should do is find the institutions that, although corrupt now, can become the basis for transition.

I believe there will be a transition, but one where power is still concentrated. I hope I’m wrong, but I don’t see a liberal democracy emerging in the near future. I’m also worried about hyperinflation; it could bring a major economic crisis, and the authorities may not be able to control the resulting social upheaval.

Does what you say about prioritizing reforms also include Guatemala? Your country is doing well economically, but at the same time it is at an important political crossroads.

Guatemala’s problem today is how to achieve the policy reforms that will grant the system stability. We will carry out the elections [in September], and it doesn’t matter who wins. If Manuel Baldizón emerges as president, he will have to govern with many limitations, amid criticism and strong international supervision.

The country needs to work on serious political and economic reforms within the next four to eight years. We are in a situation where, without political stability, any reform falls apart because of corruption or nepotism. We have to start with the basics by reforming our legal system.

In Latin America, guided by the Washington Consensus and the problems of the 1970s, we embarked on economic transformations before strengthening political reforms. That ended up generating political turmoil, contaminating the economic reforms and preventing them from working well.

Are you afraid of Baldizón?

Totally. I believe Baldizón is inspired by Hugo Chávez.

A Chávez clone?

Indeed, a clone. He has a controlling, messianic attitude. He is very articulate, but he has this crazy idea of what the country should be like, and with a majority in Congress, he could do anything he wants.

Guatemala has experienced economic growth, but has inequality also decreased?

Inequality may have improved or worsened a little. The remittances sent by migrant workers abroad have had a very important effect. They were like manna falling from heaven, because they allowed Guatemalans to significantly improve their living standards and social indicators.

Economic reform is a different issue from the growth generated by remittances, but it certainly works as a framework. The low incomes in the poorest sectors are due to the lack of a long-term development model based on productive capacity.

We need to be clear that the paternalist social programs have not reduced inequality either. Politicians have spent a fortune, and stolen a fortune, without any positive impact to show for it.

You mentioned the importance of legal reform, but in Latin America, when we want to change things, all we do is change a law, and everything remains the same.

The first lesson we have to understand is that when laws don’t work, it is because people don’t follow them. The first thing we need to do is enforce the law.

What would a legal reform with economics consequences entail?

We must restore confidence in citizens. Authorities cannot continue to think they are nothing but criminals looking to game the rules. That should lead to improvement.

And the other thing is to focus on the basics, which is defining and respecting property rights. There is a lot of work to be done in our countries regarding the rule of law.

Is a International Commission against Impunity in Guatemala (CICIG) possible in Venezuela?

I think so. It would be better if the courts were independent and strengthened through an domestic process. However, the truth is that when they are taken over by gangs, the CICIG is the weapon that the governments of the world must use to fights gangs that cannot be controlled domestically.

Translated by Rebeca Morla.

Pedro García Otero Pedro García Otero

Pedro García is the Spanish managing editor of the PanAm Post. He is a Venezuelan journalist with over 25 years of experience in local newspapers, radio, television, and online media. Follow him @PedroGarciaO.