The Becker-Posner Blog

Moving Left in South America-BECKER

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.

The Left's Resurgence in Latin America--Posner's Comment

Becker's analysis is masterful, leaving me little to add. Like him, I do not expect the rejection of free-market capitalism by Latin-American countries to endure. What happens in a democracy is that if the party in power does not deliver what the people expect, they will vote for another party, regardless of their views of sound policy--on which they probably have no settled views. Democracy is not a deliberative process (as many academics believe), in the sense that voters examine and discuss issues and so formulate a thoughtful, knowledgeable opinion on what policies are right for the nation or for them. Voters have neither the time, the education, nor the inclination for such an activity, as intellectuals imagine. All they know is results. So if the Right fails to deliver on its promises, the Left takes over, whether or not it has better or even different policies. Becker notes the discrepancy between left-wing rhetoric and the Left's actual economic policies when in power, which in Latin America as elsewhere tend to be more moderate than their rhetoric. Political identity is more than the resultant of a sober calculation of advantages, especially since voters know that a single vote will not swing an election. Political identity is more like being a fan, attracted to one team or another for reasons unrelated to any concrete benefits. The Latin American Left is defined in significant part, for historical and cultural reasons, by hostility to the United States and, by extension, to capitalism, of which the United States is the symbol; that hostility need not be expressed other than in words and largely symbolic actions. Cuba is widely admired in Latin America for having stood up to the United States--and Cuba is both a dictatorship and communist and so lends prestige to anti-democratic and anti-capitalist attitudes. Hence Castro's imitation by Huge Chavez. The appeal of left-wing rhetoric and, to a degree, leftwing economic policies in Latin America may be related not only to anti-Americanism and "crony capitalism," properly emphasized by Becker, but also to Catholicism. As Max Weber argued in his great book The Protestant Ethic and the Rise of Capitalism (an argument that has been challenged but not refuted), the rise of capitalism appears to have owed much to Protestantism. Protestants rejected the authoritarian and collectivist aspects of Roman Catholicism (huge cathedrals, monasteries, a large ecclesiastical establishment, extensive support of the poor, hostility to commercial values) and emphasized literacy, thinking for oneself, frugality, and hard work as signs that one was a member of the Elect. Generally it was the northern European, predominantly Protestant countries, that led the way in the development of the modern economy. Of course much has changed since the Reformation, or for that matter the nineteenth century; capitalism thrives in many Catholic countries, such as Italy and Spain, and including Chile. But in other Latin American countries, Catholicism may be feeding resistance to capitalist values. Pope John Paul II, though fiercely anti-communist, also emphasized the social-welfare tradition of Catholicism. And "liberation theology," though opposed by the Vatican, was and may still be an influential Latin American movement led by left-wing priests. But, to repeat, the "demand" for anti-American and anti-capitalist positions can, it seems, be largely satisfied by rhetoric and symbolic actions. Leftist governments intelligent enough to understand that they can benefit their constituents more by adopting capitalist policies than by nationalizing industry or redistributing wealth will do so, while employing leftist rhetoric to satisfy the constituents' emotional commitments.

Gasoline Prices--Posner's Comment

There were a number of interesting comments. Let me respond to some of them--first noting that the absurd $100 rebate proposal is dead. Congratulations to Congress. One comment proposes a "Manhattan Project" to develop substitutes for fossil fuels. I am sympathetic in principle, because I am concerned both about global warming and about the instability of many foreign oil-exporting countries and the political leverage that these countries enjoy; for example, Iran's implied threat to reduce oil exports is probably a factor in the reluctance of China to support sanctions against Iran with respect to its nuclear program. But better than a government-planned and -funded project would be, in my opinion, heavy gasoline taxes. They would give private industry strong incentives to discover good substitutes and also means for reducing carbon-dioxide emissions and indeed removing carbon dioxide from the atmosphere. The Manhattan Project was necessarily a public project because of its scale and because of security concerns; in general, private enterprise is more successful at innovative projects than government is. Several comments express an understandable concern with the impact of high gasoline prices (and taxes that would maintain those prices at high levels) on people of moderate financial means who are already committed to a long commute in a gas-guzzling car. One answer is to phase in higher gases gradually--say a 10 percent increase per year--which would give people time to adjust. Another answer is to make high gasoline taxes revenue-neutral, meaning that other taxes would be cut, and the cuts could be targeted on lower income groups (including higher earned-income credits for people whose incomes are so low that they pay no income tax). A number of comments question my contention that the American people cannot be "educated" to accept the need for high gasoline prices. I stand by my contention but emphasize that I was not meaning to suggest that people are dumb. There is such a thing as rational ignorance. It just does not pay most people to become well informed about how markets work. Perhaps this is a deficiency of our educational system; it is not a sign of stupidity. To put the point in economic terms, there are costs of becoming well informed, and especially about issues on which the individual's influence is very small the costs are likely to exceed the benefits. What makes economics a very interesting and challenging field is that many of its findings are counterintuitive. Naturally people not steeped in a subject reject counterintuitive assertions. That is a rational reaction. Two comments require me to qualify economic assertions made in my posting. One comment points out correctly that requiring that cars be more fuel-efficient does not necessarily eliminate the incentive to take other measures of fuel conservation, such as switching to public transportation. However, most people need to have a car even if they would be willing to commute via bus or train. If forced to buy a fuel-efficient car, they may decide they might as well commute by car (since gasoline is cheaper for them by virtue of the greater fuel efficiency), though left to their own devices they might have preferred to drive less and substitute public transportation. Second, it was correctly pointed out that heavy gasoline taxes will reduce the incomes primarily of those countries that have high production costs. That is, as prices rise, reducing demand, the first production to be withdrawn from the market will be the costliest, and that may be domestic production, North Sea production, and other "friendly" production, rather than production from Saudi Arabia or Iran, which have low costs of production. Finally, with respect to the oil companies' "obscene" profits. I do not thnk excess-profits taxes are sensible. But in any event, anyone inclined to impose such taxes should note two things: most profits of U.S. oil companies are actually earned abroad, rather than from sales to people in the United States; and the income taxes paid by the oil companies rise with increases in their profits.

Response on Gas Hike-BECKER

A few comments on some thoughtful posts. One of you commented on the most controversial part of my discussion: how the optimal tax to cover pollution and congestion costs is affected when gas prices go up for reasons other than taxes. Externalities are usually taught as being a constant amount per unit consumed, so the optimal tax to incorporate these externalities would be the same, as the comment argues, regardless of how much is consumed in the aggregate. But the assumption of a fixed externality per unit may not be right. An alternative approach assumes that the externality depends only on the level of market consumption. That is the approach I took without an adequate explanation. This assumption seems a better approximation for congestion costs, and perhaps even for local pollution costs. So while I did qualify my conclusion about the optimal tax per gallon possibly being lower with the increase in gas prices, I should have been clearer that this is only a possibility. There is some confusion in the comments between an excess profits tax and a tax, possibly even a progressive tax, on corporate profits. I believe so-called excess profits taxes involve a degree of social engineering that sets a terrible precedent. If a cyclical industry like oil sometimes experiences high prices and profits, and an extra tax is called for then, should the industry not get an extra subsidy when prices and profits are low? Should we do this also for other commodities, like copper and corn? There is more than enough incentive to subsidize the politically powerful-we do not need to add to these incentives. I do believe the evidence is powerful that NIMBY considerations affected not only the building of oil refineries but also of nuclear powered electricity plants, disposal arrangements for nuclear waste, wind power off of Cape Cod, and many other development during the past several decades. Is it any accidents that refineries are so concentrated in the Gulf, and hence refinery capacity is vulnerable to hurricanes, terrorism, and other risks? This is one region where politically it was possible to build refineries up to the 1970's.