The Failure of State Planning in Latin America

… While in North America economists have considerable influence in finance, industry, and government, in South America their influence has been even greater. From Mexico to Argentina, from Brazil to Peru, state by state, each capital has its priesthood of economists. Economists’ sophisti­cated theories and well-researched studies have served to justify turning over ever larger control of Latin American resources to politicians and bureaucrats. The disaster of protectionism in Latin America finds its justification in works on “dependency theory” by top Latin American economists like Celso Furtado. His Economic Development in Latin America explains why protectionism is needed to escape from what he calls “traditional forms of external dependence.” His reasons for keeping out foreign manufactured goods are the same as those Frederic Bastiat refuted in nineteenth-century France, when France tried to keep out English manufactured goods. As long as there are domestic manufacturers facing foreign competition there will be economists marketing “new” defenses of protectionism.

For decades economists served up their theory that modern economies were far too complex to be left unplanned, far too advanced to be left unsupervised. With foreign goods securely excluded, economists presented studies designed to “rationalize” economies. With such theories and studies as justification, hundreds of Latin American companies have been nation­alized and most industries heavily regulated. Nationalization, economists argued, would help free their economies from foreign control and would keep future profits from leaving the country (though firms once nationalized generally stopped making profits altogether). Regulation, they said, would protect the consumer and prevent cutthroat competition and wasteful duplication.

With foreign competition locked out by protectionism, domestic compe­tition was that much easier to suppress. Protectionism and regulation made the cartelization of domestic industry inevitable. The consequences of these policies have been disastrous. The lesson? Efficiency should never be a goal. The “creative destruction” of market capitalism never looks particularly efficient, often hiding productivity and progress in mountains of apparent waste from failed entrepreneurs and energetic competition. The market economy is a process and requires only a few rules to protect property, enforce contracts, and adjudicate torts.

But, economists said the government should do more, and claimed skills in fine tuning Latin American economies, skills in rearranging them and preparing them for bursts of growth. Enormous construction projects were advocated to speed development. The economist/planners must have known that much would be lost to waste and corruption as politicians made their modifications, and bureaucrats administered the details of the projects. They should have known that the politically connected builders would artfully revise and expand their cost-plus contracts. Yet there was, insisted the economists, no alternative: the economy must have development plans and development projects.

In Brazil, 360 major companies are owned and managed by the government, including four of the ten largest. Economists with university training in “public administration,” “public finance,” and “urban planning” advise these firms, while others run the bureaus that regulate companies in Brazil’s private sector. In the political world, however, power shifts quickly to those most adept in its use. Though it was economists who provided the rationale for government ownership of private industry, and politicians who designed the laws to implement those theories, a third force has now risen to the top.

Influence and control have gravitated to a class of mixed-economy entrepreneurs, a breed of businessmen who flourish in mercantilism’s mixture of commerce and privilege. As happened in the United States, regulatory agencies were quickly captured by the industries they were supposed to regulate. And, businessmen not adept in manipulating their regulatory agencies were soon outmaneuvered by their more adept (and often less principled) competitors.

Over time government-owned and -regulated firms become umbrellas providing for and protecting “families” of private sector suppliers and subcontractors-umbrellas wide enough to shield ever larger troops of unionized laborers, working ever shorter hours for ever more pay. The lucky few who made it into the government workers’ unions learned, like their counterparts in management, to set their course by the stars of the developed world-and left their countrymen behind.

Hundreds of state-owned enterprises across Latin America pile up steady losses while steady profits flow to their politically connected “family” of dependent firms. When new technology or cheaper goods from foreign lands pose a threat, connected politicians and regulators are quick to come to the rescue, and quick to protect the status quo of the ancient regime. The YPF, Argentina’s nationalized oil company, for example, loses $350 million a year, and even managed to lose money even during the oil boom of the l 970s. (David Asman, “Liberation Argentine Style,” Wall Street Journal, May 4, 1987) But its private sector family of suppliers made fat profits selling overpriced parts, like perforation pipes, at twice world prices (after securing legislation that forced the YPF to buy domestic pipe, for which they are the only supplier). The state airline, Aerolineas Argentinas, loses $130 million a year, though its suppliers surely do well.

In his seven-month tenure as “Secretary of Growth Promotion” in Argentina, Manuel J. Tanoira found similar arrangements all across the Argentine economy. When Russian, German, and Argentine firms offered to take on a $300 million enlargement of Port Ingeniero White, the bureau­ crats in charge avoided even formally receiving the proposals, much less considering them. The bureaucrats were waiting for IMF money to be promised so they could administer the project themselves, and divide the fat contracts among the local engineering and construction firms (and they know they will eventually turn to these same firms for future employment). (Manuel J. Tanoira, “Confessions of an Argentine Privatizer,” Wall Street Journal,May 29, 1987, p. 27)

It was the same story for the toll roads private firms offered to build and pay for. Transportation bureaucrats at the Vialidad Nacional oppose all toll roads (and have even “liberated” some existing toll roads). Though they are able to block private construction of roads they seem unable to build any themselves. Their objection to toll roads is again a smokescreen for keeping the construction project and its lucrative contracts under their control.

If we step back for a moment from the Third World horror stories, we wonder how it all could have happened. From where did the idea come that government should or could do anything beyond providing defense, a court system and police (and perhaps quietly mismanaging a postal service and a few lighthouses)? The vast intrusion of government into private sector development received theoretical support from a few key theories of “market failure.”

Economists insisted that markets failed from time to time and that collective action, coercively funded, was a society’s only hope. A modern economy ought to have a modern plan, and not be at the mercy of the “chaos of the market.” Collectivization swept North America and Western Europe, but their wealthy economies and stable institutions had the wherewithal to survive until their governments eventually (and only par­tially) retreated from central planning. In Latin America the vogue of central planning, assisted by new international aid money, refueled the ancient mercantilist institutions that always cohabited their economies. Ironically, Spain of the sixteenth to nineteenth centuries avoided reforming its mer­cantilist institutions by ingesting a steady diet of gold and silver taken from Latin America.

Now [1987], in the second half of the twentieth century, Latin America’s own mercantilist institutions have survived only with the assistance of a similar infusion of wealth from Western banks and governments. The private sector, market-failure theories explained, acts only in its narrow interests, so governments must design and carry out development plans (with the help of economic advisers, of course). Great hydroelectric dams were needed (“too large for private enterprise,” claimed the econo­mists) jungles needed taming (“roads and dams to provide the infrastructure to spur private sector development”); airports were needed, as were railroads, ports, and gleaming new capital cities perched on desolate plateaus.

So it was theorized, so it was done; all these massive projects now stand in Latin America, along with thousands of smaller government­ engineered cousins: neighborhood and village projects, office buildings, shopping malls, factories, and steel mills. …

The economists, politicians, bureaucrats, and contractors have created much. From the rubble of the earth they have created a world where theories generate investigations that generate reports, followed eventually by projects that create jobs and provide services. All according to plan, but the plans have problems. … [Link to full pdf]

[Excerpt from “The Pen Is Mightier than the Plan” originally published in Essays in Honor of Paul L. Poirot (Foundation for Economic Education)]