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What Happens to Truth

Is There a Way Out for Latin America?

July 1, 1989 -

To the question, "Have Peru's problems become the most explosive in Latin America?" Enrique Zileri, Lima newspaper editor, gave this stark reply:

Except for Central America, yes. Peru embodies many of the most acute problems of the Third World. We have suffered eight years of terrorism from the Shining Path guerrilla group and others. We are faced with a huge foreign debt and all of the accompanying complications, including a decline of new investment. Inflation has accelerated. Population growth continues. Our long tradition of military intervention adds a further worry. 

When asked about the future for democracy in Latin America, Enrique said:

If the situation continues as it is, the outlook is bleak—really bleak—although for a time it looked promising. Garcia is seen as a troublemaker, a rebel, and our economy is seen as a mess. But look at Mexico and Argentina, not to mention Brazil. Everybody is in a mess. (World Press Review, January 1989) 

One cause of Latin America's distress is well known. These countries are saddled with an impossible debtload that is a serious drag on future economic development. For example, Argentina, Brazil and Mexico, with a total international debt of $278 billion (U.S.), suffered a combined net outflow of capital (loans minus repayments) of $20.7 billion in 1988 alone. (New York Times, January 15, 1989.) Such a situation is untenable.

This perverse economic situation is singled out by those who are quick to blame all Third World poverty on the rich countries. Their solution invariably is a pro-socialist and anti-capitalist one. There is, however, compelling evidence to suggest that Latin American difficulties are to an even greater extent caused by wrongheaded and corrupt domestic policies. In fact, as long as these countries continue to blame the Western nations for their poverty and distress they will not begin to do what must be done.

Internal corruption is one of the most serious causes of Latin American poverty. One dimension of that is the outflow of massive amounts of capital. According to one report, by 1982 an estimated $87 billion of Mexican, Brazilian and Argentinean capital was earning interest in foreign bank accounts. The clue to the source of this money is provided by a recent confrontation between the Mexican government and the 220,000 member oil workers' union.

This union has a long history of cozy relations with those in power, enabling its officials to operate above the law and channel large amounts of money into their own pockets. Its leader, Joaquín Hernández Galicia, also known as La Quina, acted as a medieval despot. He single-handedly made all major decisions for the citizens of Ciudad Madero, home of the union's headquarters. He appointed mayors and judges, selected policemen, congressmen, issued taxi licenses, chose coroners and became the dispenser of favours which included selling jobs with the government and the government-owned petroleum company (Pemex) at the rate of $200 per employee. The list of this union's misdeeds includes blackmail and the threat of strikes or slowdowns of the entire Pemex operation. With that kind of power, La Quina and his corrupt associates were able to profiteer immensely, until the government led by President Carlos Salinas de Gortari decided to get tough with them. The result was a shootout between La Quina's men and the military, followed by a court conviction of the unionists for illegal possession of weapons, complicity, murder, fraud, and "inexplicable enrichment."

Although a major player, La Quina's role in Mexico is not unique. It is a symptom of an illness that is deeply ingrained in this and other Latin American countries. It is to be hoped that initial victory by a determined Salinas will be followed by more of the same.

Another Path for Peru?

While the situation in Peru is almost as dismal as in Mexico, there is at least one positive development. A contender in the forthcoming election in 1990 is the well-known and widely-respected novelist Mario Vargas Llosa. When the current and hugely inept president Alan García Pérez announced plans to nationalize all the Peruvian banks, Vargas Llosa led a demonstration that crystallized strong public opposition to the government's move. Ever since, Vargas Llosa, who is fluent in Spanish, French and English, has thrown himself into the political arena with a program that represents a drastic departure from the destructive policies of the past.

Vargas Llosa is a close friend and associate of Hernando de Soto, an economist, entrepreneur, and author of The Other Path: The Invisible Revolution in the Third World, a study of the Peruvian economy. De Soto, who is the founder of the Institute for Liberty and Democracy (ILD), has carefully studied the functioning and extent of the informal or underground economy operating in Peru. The ILD traces the country's rampant poverty to bad public policies and widespread corruption. De Soto and his associates found that nearly half of Peru's gross national product is generated in the underground economy. They concluded that poor Peruvians anxious to make a living and run a business are forced into the underground economy simply because the public policies and laws are designed to reward only those who know how to play the political game, including the payment of bribes and befriending politicians and administrators. As an example, to establish a small sewing shop in Lima required 289 days of dealing with eleven different government agencies and departments, at a cost of $1,231, 32 times the monthly minimum wage. (Two bribes had to be paid without which the entire process would have come to a halt.) The combination of a heavily politicized formal economy and a very large informal one, both functioning under extremely adverse conditions, means however that the economy is seriously hobbled and unable to function efficiently.

De Soto believes that the current economic system in Peru is not capitalist, but rather a form of mercantilism that stifles personal initiative and destroys political freedom. He is convinced of the need to free the people of Peru from the corrupt and inept control of the state. To do so he proposes that all informal businesses be transferred to the formal economy and that the laws and regulations be simplified and made applicable to all.

The original Spanish version of The Other Path is a runaway best-seller in Latin America. (An English translation is also now available.) If the advice in this revealing book is put into practice, the bad news from this part of the world is bound to improve.