¡Siempre hasta la victoria (del bloqueo)!

With former Senator Chuck Hagel’s nomination hearings for Secretary of Defense beginning today, I felt it might be interesting to look at what his views on the US military’s role in Latin America should be. Unfortunately, as far as I have read, no one has bothered to ask him anything about the surprisingly large role the US military plays there (I guess the Drug War isn’t that important?). In fact, the only bit on Hagel and Latin America that I have seen was this piece by Jennifer Rubin about his supposed weakness on the Castros. Since few things get me as fired up as the illogic of the Cuba embargo, I’m going to use this as an opportunity to go into a bit of detail about just how stupid it is.

Essentially, arguments in favor of continuing the embargo (or bloqueo, as it’s commonly known in Spanish) are that it dramatically weakens the Castros thereby increasingly the likelihood of a transition toward a democratic government and that it gives the US leverage in negotiations with Cuba. Conversely, they argue that lifting the embargo would strengthen the current government, weaken the US negotiating position, enrich the Castros with little benefit to the Cuban people and reward a violator of human rights and potential security threat to the US.

The problem with these arguments is that they bear little resemblance to objective reality. Simply put, if anything, the embargo strengthens the Castros far more than it weakens them. First, there is the obvious point that it’s difficult to argue for the efficacy of a policy that in more than 50 years has not led to a change in the Cuban government or even fomented a serious challenge to it. Cubans lack political rights, are getting poorer and there is almost no organized opposition to the regime. Even if one subscribes to the “any day now” philosophy of the embargo, there remains the fact that it serves as a potent propaganda tool for the regime, both domestically and internationally. Cuba’s economic woes are mainly the result of bad policy (believe it or not, planned economies are really, really inefficient), but the presence of the embargo allows the Castros to pin blame on something external and beyond their control. Si no fuera por el bloqueo works because many people, both inside and outside of Cuba, want to believe the model can work and because it plays on the strong current of anti-Americanism that runs throughout Latin America and is particularly (and justifiably) strong in Cuba. Whatever the Cuban government may say about the embargo, it benefits from its existence (even if the Cuban people suffer), so it hardly counts as leverage unless you really believe it’s about to topple the regime.

So would unilaterally ending the embargo strengthen the Castros further? It certainly might. It might also further enrich the ruling class as increased economic interaction with the US has in China and Vietnam (among a myriad of other things). Of course it could also make the lives of the average Cuban much better as well, as has happened in the aforementioned countries (and if the choices are oppressed and poor and oppressed and less poor, less poor is better, if not ideal). Furthermore, arguments in favor of maintaining the embargo because of Cuba’s human rights record or threat potential would hold up much better if not for the fact that we have robust trade relationships with countries with much worse records (China, Vietnam, Saudi Arabia) and who are bigger security threats* (China, Pakistan).

So long as Cuba has the sympathy of almost the entire world, and especially while it has an oil-rich benefactor in Venezuela, the embargo will most benefit the people it supposed to hurt (the Cuban governing class) and hurt those its supposed to benefit (the Cuban people in general, US interests in Cuba, international perceptions of the US). Arguments in favor of continuing the embargo either ignore this or hold Cuba to a standard that we don’t hold some of our most important allies to in order to justify it.

*In my opinion, Cuba isn’t a real security threat, and only ever was because of its role as a Soviet satellite state during the Cold War. However, it remains on the list of state sponsors of terrorism so I’ll acknowledge that, officially, the US does regard Cuba as a security threat.

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The Rentier State Strikes Again

Half-finished cars in outside of a state-run auto factory in Venezuela.

Half-finished cars in outside of a state-run auto factory in Venezuela.

The four main ALBA countries in Latin America (Venezuela, Cuba, Ecuador and Bolivia) are often treated as being fairly homogenous in both their politics as well as their economic policy. In some respects, like respect for traditional forms of democratic governance, they certainly, and unfortunately, do. In economic terms, however, they are much less similar than people often imagine them to be. In discussing the electoral prospects of Ecuadorian president Rafael Correa, Stephanie Leutert highlights the political impact of the upgrades to the country’s transportation infrastructure during his first term and I think indirectly highlights an important difference between Hugo Chávez in Venezuela and Correa and, to a lesser extent, Bolivia’s Evo Morales regarding their commitment to improving productivity.

When comparing Rafael Correa to his ALBA peers, the most important distinction to make, without a doubt, is his training as an economist in the United States. Correa has serious critiques of neoliberal economic models as a panacea of growth, but also seems to believe that market-based economic policy does have merit in many circumstances. Compare this to Chávez, who largely seems to view all economic questions through a purely political and ideological lens. This distinction between a real understanding of the economics and a political understanding of economics illustrates itself in the simple fact that these infrastructure improvements in Ecuador have actually been completed and appear to be of good quality, whereas in Venezuela one sees a myriad of promised improvements that have, either been white elephants, were never completed or were completed either over budget, with serious quality deficiencies or both (Caracas Chronicles does an excellent job chronicling these projects). Both leaders understand the political potential of these types of projects, but Correa clearly appreciates their economic benefits much more. You can see a similar dynamic playing in Bolivia, where Evo Morales continues to fight local Indian groups to build a highway through the TIPNIS, a national park and indigenous territory, and actively courts investment from Brazil and elsewhere.

This highlights the fundamental difference between these countries; in Venezuela, because of its oil, there is less necessity for Chavez to increase the productive capacity effectively than for Correa or Morales (Cuba is something entirely on its own at this point). While both Ecuador and Bolivia produce a large amount of hydrocarbons, and both leaders have been aggressive in extracting more money out of that production, the simple fact is that neither country can depend on them to the degree that Venezuela can. Correa or Morales can use oil and gas revenues to pay for some social programs, but they cannot expect to pay for everything using them as a cash cow the way that Venezuela can. Chávez has been able to paper over the declining productivity of the Venezuelan economy because of high oil prices. Correa and Morales cannot do that to the same degree, and therefore face much stronger incentives to do more than pay lip service to increasing productive capacity or face the political perils of an underperforming economy.

Commodity production doesn’t make you poor

I just finished reading Victor Bulmer-Thomas’ The Economic History of Latin America Since Independence, and while I found the whole thing very informative and well-written, the most interesting part to me was his discussion of labor markets during the export-oriented era of economic governance in Latin America that lasted from the middle of the 19th Century until the beginning of the Great Depression. Essentially, labor markets during this era were exceptionally unfree and this played no small part in explaining much of Latin America’s poor economic growth both then and later.

In Latin American history and development classes, this era is often characterized as a time when Latin American governments were operating on the basis of Ricardian trade theory of comparative advantage where countries specialize in whatever they are relatively better at producing (i.e. Britain produces textiles and Portugal wine) and then trade with the other. The idea is that overall more of each good is available and the overall welfare for both is improved. Latin America certainly attempted to follow this line of reasoning, at least as far as trade policy went, and in classes on the region, its failure to achieve significant growth is usually attributed to some combination commodity price volatility and foreign intervention. I think understanding the labor market is crucial to breaking the myth (and one of my biggest pet peeves about how the region is taught) that Latin America is poor because it is a commodity producer.

One of the key assumptions of the Ricardian Model is that labor is free to move between industries within a given country, allowing workers to move into the higher paying industry until both come into equilibrium. In practice in Latin America, however, labor was highly restricted so as to prevent real wages from rising. This meant debt peonage, coerced labor and, in certain countries, outright slavery. This sort of labor market was good for landed elites, who were paying below market wages but still earning world prices on the goods they were producing, but, obviously was bad for most others. Additionally, by artificially holding down wages, it prevented the sort of productivity gains that the relatively small labor market should have spurred as rising real wages increased the relative returns to capital, leading to increased capital accumulation. The end result of this is that Latin America was extremely under-industrialized at the beginning of the 20th Century compared to other countries with similar per capita incomes.

Bulmer-Thomas compares Latin America’s performance throughout the 19th Century to the United State, the European periphery and Canada, Australia and New Zealand. Particularly in the Commonwealth countries, there was a similarly low population, which put upward pressure on wages. However, instead of artificially suppressing wages, these countries invested in capital as higher wages generated higher relative returns to capital, becoming much more efficient and increasingly sophisticated producers. Interestingly, all three are still major commodity producers, yet have first world living standards while Latin America has languished. Meanwhile, the US provides an example of both paths as the northern states focused on capital accumulation while the South, even after the Civil War, relied heavily on share cropping and other forms of coerced labor and remains a dramatically poorer region even today.

It is certainly over simplistic to say that Latin America is poor today because of  distorted labor markets in the 19th Century, but I think it is an important and underreported factor in the divergence of Latin America and first world commodity producers. Commodity price volatility certainly was a major obstacle, but Latin American political economy throughout the era was set up as a rent seeking exercise for the dominant landed class which led to distortionary policies that made the region less productive and less resilient than it could have been.

What am I missing?

Protesters in Buenos Aires during a cacerolazo against Cristina Kirchner's goverment in 2012. (La Nación)

Protesters in Buenos Aires during a cacerolazo against Cristina Kirchner’s goverment in 2012. (La Nación)

Reading this piece about the authoritarian leanings of a subset of the kirchnerista movement (followers of late former president Néstor Kirchner and his wife and current president Cristina Fernández de Kirchner) in Argentina* sparked a recurring question l have about these types of governments’ intellectual supporters; what are they seeing that I’m not? Specifically, how does someone from the left look at Argentina or Venezuela and see it as a desirable model, especially compared to Uruguay, Chile or even Brazil?

For instance, when I look at Venezuela, I see a country with a decimated productive capacity, 20% inflation, rampant crime, and a complete disregard for the rule of law (not least, the constitution that the current government’s supporters drafted just 14 years ago) that is borrowing huge sums of money at rates above 15% in spite of the trillion dollar oil boom over the last decade that has buoyed the economy. I don’t see anything that would be much of a model for anyone, much less Europe, and yet there are very intelligent people who do see something valuable and worthy of replication, perhaps even in Europe. The situation is similar in Argentina, except without the oil and not as advanced in its interfering in the economy or circumventing the rule of law, though the government is moving quickly on both fronts.

On the other hand, one can look at countries like Chile between 1990 and 2009 and Uruguay over the last decade and see examples of governments that are clearly left-of-center, but pragmatic in their economic policies. Chile in particular, has had consistent, strong economic growth over the last two decades even while other countries in the region suffered dramatic crises that erased entire half decades of growth. Moreover, the poverty rate has fallen and stayed down, all while maintaining a robust (though still not ideal) democratic system that remains in the process of reforming itself. Uruguay presents a similar case. It possesses Latin America’s oldest and in many ways, most robust, welfare state, and the current president was a left-wing guerrilla fighter during the 1960s and 1970s. Yet he has governed economically in a manner similar to the Socialists in Chile (i.e. broadly in a neoliberal fashion) and recently described the indefinite reelection so popular among Latin American presidents of the left and right (including among chavistas and kirchneristas) as being “monarchic.” None of this is to say that these countries don’t have their problems but they do illustrate that it is possible to achieve economic growth and work toward a more equitable society within a democratic framework and without intervening dramatically into the economy.

So what do they prefer about the more heavy-handed approaches? Typically, the main argument in favor of a more chavista or kirchnerista model–whether the person making it endorses or merely tolerates their undemocratic tendencies–is that they can achieve similar levels of growth without the pernicious effects of capitalism on inequality. However, as a paper by Birdall, Lustig and McLeod entitled, Declining Inequality in Latn America: Some Economics, Some Politics demonstrates, it’s the Social Democratic model epitomized by Chile and Uruguay that has done a better job of reducing inequality and increasing social spending over the last decade. And it’s not clear at all that, even in the short run, these alternative models are better for growth, notwithstanding the likely scenario (at least from my view) that the arbitrary meddling with the economy will stunt future growth as investment disappears and the productive capacity stagnates or declines.

So I return to my initial question, what makes these models more attractive to a certain class of intellectuals? What is it that they see that don’t? Is it a situation more along the lines of what Scott Sumner outlines here where these people are projecting how they would prefer the world to be rather than reacting to the world as it is (or vice versa for me)?

* For the record, I find this argument a bit overwrought. I could be wrong, since I have very little contact with any kirchneristas, but I tend to believe that most people choose to see undemocratic actions by the president as a necessary evil rather than a feature of the model.

ALBA sin Chávez, does it even matter?

While browsing the OAS News Clips page today, I saw an interesting article headline that read, “Diputados del FMLN afirman que proyectos Alba seguirán con Chávez o sin él.” I found this, along with the contents of the article to be very interesting, namely, because I am still not entirely sure what ALBA (Alianza Boliviarana para los pueblos de Nuestra América) actually does in terms of concrete economic policies.

The telling line in the article is toward the end when a FMLN (Frente Faribundo Martí para la liberación nacional, the main leftist party in El Salvador) deputy admits that he personally does not know how either ALBA or firms working with it operate, but affirms that it is necessary to maintain it and protect it from its detractors from the right. Part of why he is unable to be more specific about how ALBA functions is because, by and large, it doesn’t do much. A quick perusal of its website finds a lot of links to positive news about the various member states and their leaders, but precious little information about actual programs or even plans for programs that are less than three years old (and many of those are simply dead links). Even the few proposals that do exist are full vague references to economic solidarity and complementarity but little on how they would go about actually achieving these goals.

As it generally functions right now, ALBA is totally unsustainable and of little mutual economic benefit. The biggest program operated under its auspices is PetroCaribe, which is essentially an arrangement where Venezuela sells subsidized oil to allied countries in exchange for the political benefits it gives to the Venezuelan government in those countries. While it is certainly beneficial to those countries to receive cheaper oil than what they would be able to get on the open market (especially when they receive more than they consume and can sell the rest at market prices, like Cuba does), it encourages them to remain more oil-dependent than their economies can actually afford to be. It also is totally unsustainable from a Venezuelan standpoint. A decade of selling subsidized oil, at home and abroad, has been a major contributor to Venezuela’s declining production. Rather than selling the oil at market prices and reinvesting in new technology and other training in its oil sector, Venezuela is instead effectively spending that money to buy political support outside its borders.

Like much of the non-OPEC international economic diplomacy Venezuela has led under Chávez, ALBA is more for show than actual results. ALBA may be directing some investment within its member states and increasing some trade, but mainly it is a way to initiate show projects that offer little long-term economic value to the countries involved, as the comments from that FMLN deputy inadvertently make quite clear.