One of the more interesting and disturbing developments during the past several years is the leftward movement of several governments in South America, including Venezuela, Bolivia, Argentina, and others. They may soon be joined by Mexico and Peru since both countries shortly have elections where avowedly left wing candidates are favored to win. What makes this development so noticeable is that much of the rest of the world is moving in the opposite direction. China and India, with 40 percent of the world's population, are moving away from socialism and communism. Poland and the other countries of central Europe have also rejected state controls of their economies and have transited toward capitalist economies.
What factors made Latin America, Asia, and Central Europe take such different paths? One part of the explanation is that the language used by Latin American politicians is often more anti-capitalism than elsewhere, even when policies are not so different. For example, while Lula Da Silva, the President of Brazil, comes from a left wing confrontational union background, he has followed rather conservative fiscal and other economic policies since being elected in 2002. Although Michelle Bachelet, the recently elected President of Chile, is a leftist Social Democrat, she is closely aligned with the Concertacion party, which has controlled Chilean politics since 1990. This party is not conservative, but it has generally followed the neo-liberal economic policies of its predecessor that emphasize free trade and competition. These policies have made Chile the fourth largest economy of South America, even though it has one of the smaller populations.
Hugo Chavez of Venezuela clearly fits the mold of a leader explicitly taking his country to the left, for he expanded government control over its important oil sector and other industries, restricted various freedoms of the Venezuela people, and cultivated close relations with Cuba and other left wing governments. Recently elected President Evo Morales of Bolivia has already announced his plans to greatly extend government control over Bolivia's sizable natural gas industry, its major source of export revenues. The paradox is that Petrobas, the government-run energy company of Bolivia's neighbor Brazil, has been one of the heaviest investors in Bolivia. President Nestor Kirchner of Argentina is a less flamboyant leftist than Chavez or Morales, but he also rode to power on opposition to neo-liberalism and competitive markets.
One legitimate reason for the opposition to capitalism in Latin America is that it frequently has been "crony capitalism" as opposed to the competitive capitalism that produces desirable social outcomes. Crony capitalism is a system where companies with close connections to the government gain economic power not by competing better, but by using the government to get favored and protected positions. These favors include monopolies over telecommunications, exclusive licenses to import different goods, and other sizeable economic advantages. Some cronyism is found in all countries, but Mexico and other Latin countries have often taken the influence of political connections to extremes.
In essence, crony capitalism often creates private monopolies that hurt consumers compared to their welfare under competition. The excesses of cronyism have provided ammunition to parties of the left that are openly hostile to capitalism and neo-liberal policies. Yet when these parties come to power they usually do not reduce the importance of political influence but shift power to groups that support them. A distinguishing characteristic of Chile since the reforms of the early 1980's is the growth in competitive capitalism at the expense of crony capitalism. This shift more than anything else explains the economic rise of Chile during the past 25 years that has made Chile the most economically successful of all Latin American nations.
An additional factor behind the recent resurgence of left wing parties in Latin America is the unequal access to education and financial capital that has produced an unusual degree of income inequality in most of these countries. Leftist ideologies take advantage of the discontent this causes among intellectuals and the poor, and promise a redistribution of assets and better education opportunities for the poor. Promises of redistribution have figured prominently in the speeches of Chavez, Lula, Morales, Peronists in Argentina, and Andres Manuel Lopez Obrador, former mayor of Mexico City and a leading candidate to be Mexico's next president. When it is discovered that left wing governments usually do not end up helping the poor very much, they tend to be voted out of office.
Authoritarian policies and government nationalization programs become more prominent in all regions, including Latin America, when energy prices rise for a prolonged period. This is especially important in explaining Chavez' strong economic position since Venezuela is a major exporter of oil, but it is also relevant to the Bolivian situation, and even to Mexico. Democracy and competitive capitalism are less likely to flourish when oil and other natural resources bring in considerable revenue to the government even without sensible economic policies. The paradoxically negative effect on economic performance of increased revenue from natural resources has been frequently noticed, and is sometimes called the "Dutch disease", although that originally referred only to the decline in manufacturing after the discovery of large reserves of natural resources.
Latin America has an influential socialist intellectual tradition, but it is not clear how important that has been in the current leftward shift of governments. After all, the Congress party of India, a party with a strong socialist background, engineered India's reforms toward a freer economy. Moreover, socialism is less dominant among Latin intellectuals than a few decades ago, with the growing influence of writers like Hernando De Soto and Mario Vargas Llosa.
Chile's success during the past twenty-five years and Cuba's disastrous economy has influenced many Latin economists and some writers, but this has had less influence on election outcomes than I would have expected, even in Chile. Still, I believe that the leftward move in Latin American governments indicates only a temporary tiring of neo-liberalism. The overall trend during the past several decades in practically all countries of this region has been toward more open economies with greater competition within industries, with much more reliance on private enterprise, and with a reduced role for government mandates, government-run enterprises, and cronyism. Since these policies have provided greater benefits to all classes than the socialist policies of a Fidel Castro or a Hugo Chavez, the vast majority of people that live under such leaders will be, or in Cuba have been, disappointed by the unfulfilled promises. They are likely to come back to parties that support more market policies as long as free elections are preserved.