CHAPTER ELEVEN
Help Latin America and Help Ourselves
WHO NEEDS LATIN AMERICA? “We don’t,” most American businessmen would say. But it is the wrong answer. Latin America, rather than Japan, holds the key to the U.S. trade deficit.
Whatever may be wrong with American industry—and many things are surely wrong—it is not “lack of international competitiveness.” Since the overvaluation of the dollar was corrected nearly five years ago, U.S. industry has turned in a stellar performance, especially in exporting to Western Europe and Japan. A host of industrial exporters—South Korea, Brazil, Taiwan, Singapore—became bigger players in world trade. Yet the U.S. has regained the share of the world’s manufactured-goods exports it held before the overvaluation—as large a share as the U.S. ever held except in the immediate post-World War II period.
Nor can the U.S. trade deficit be blamed on “excessive imports.” Manufactured-goods imports account for a smaller share of America’s GNP—9 percent—than they do in any other developed country except Japan. And the Japanese are now “out-sourcing” at such a furious rate that the import share of manufactured goods in Japan’s GNP is likely to match the U.S. figure within four or five years.
What then explains the massive American trade deficit? Its main concern is the collapse of the world’s food and raw materials economy in the past decade.
World’s Largest Producer
The U.S. is the world’s largest producer and exporter of agricultural and forest products, and about one-third of the trade deficit is directly traceable to this collapse in prices and demand. Another third or so is owing to the impact of the raw-materials depression on what traditionally was one of U.S. manufacturers’ best foreign customers—Latin America. Indeed in most Latin American countries U.S. imports traditionally accounted for half or more of all manufactured-goods imports. (By the way, most of Japan’s export surplus is far less a result of industrial prowess than of the raw-materials depression; Japan—the world’s largest raw-materials importer—is the main beneficiary.)
The trade deficit will not be eliminated by increasing exports of manufactured goods to Western Europe and Japan. Indeed if Japan removed all restrictions to U.S. imports, U.S. exports would at most grow by $5 billion—as against a trade deficit with Japan of $50 billion. And the U.S. will be hard pressed to maintain current export volume with the developed world in the years ahead, when world manufacturing competition is bound to intensify.
We also cannot realistically expect food exports to bounce back. For a few short years ahead there may be sharply increased demand to assuage almost certain famine in the Soviet bloc, but food relief on a massive scale can be maintained only for a few short years. Yet the U.S. trade deficit cannot continue indefinitely, and perhaps not even for many more years.
The interest payments on the debt due our suppliers already greatly exceed our capacity to earn foreign exchange to service them. While the foreign creditors can convert their dollar claims into U.S. assets—that is, buy American businesses and real estate—and most economists consider this to be harmless and perhaps beneficial, “buying America” clearly will not be tolerated long politically.
There are, in effect, only two ways to cut the trade deficit. In the wrong but traditional way, a very sharp recession cuts domestic consumption by 10 percent or so. The alternative: a revival of Latin America as a customer for U.S. manufactured goods.
It would be a great deal easier to turn around Latin America than to turn around Eastern Europe, the region on which most attention is focused now. Latin America is home to 300 million people—almost as many as in the Soviet bloc. In sharp contrast to the Soviet bloc, Latin America comfortably feeds itself and has a substantial surplus of both food and industrial raw materials. In the larger countries there is an excellent supply of well-trained engineers, entrepreneurs, accountants, economists and lawyers. And they did not have to become moral eunuchs to get an education or to get and hold a decent job.
Nor do the educated people of Latin America have to be “reeducated” to function in a free economy. Until the raw-materials depression hit, Latin Americans worked effectively in a market economy and participated in rapid economic growth. And there is enormous pent-up demand for goods of all kinds.
Finally, Latin America, unlike the Soviet bloc, has an adequate supply of capital. Indeed, Latin America probably has three times as much capital—or more—than it has foreign debt. There is only one thing wrong with it: It is not in Latin America. It has been driven out systematically—and often purposefully—by government policy.
But if the money that is now in Miami and New York, Zurich and Geneva—but also in the mattresses of virtually all but the poorest families in Latin America—could be enticed into productive investment at home, every Latin American nation, save perhaps the smallest and poorest, would have all the capital it needed for rapid economic growth. And the holders of Latin America’s capital are willing, and indeed eager, to invest their money at home if only their governments were to stop expropriating savings and investment through inflation and punitive taxation, and were to stop discouraging productive investment through the granting of monopolies to military and governmental enterprise. As a result of these policies, even the shoeshine boys in Buenos Aires and Sao Paulo demand to be paid in dollars.
What needs to be done is clear enough: Stop inflation by turning off the spigot of government spending; dismantle the grossly overstaffed and unproductive monopolies owned by the government or the military (especially in Brazil and Argentina) or by the government’s political cronies and the ministers’ relatives (especially in Mexico); cut excessive nominal tax rates that discourage honest enterprise, but increase actual tax collection.
That these things can be done, and without political catastrophe, has been shown by two of the smaller countries: Chile under Augusto Pinochet’s dictatorship, and (reasonably) democratic Bolivia. And there is now widespread demand throughout the region for a return to sanity.
Mexico has taken some fairly big steps in the right direction, especially in dismantling protection for governmental monopoly industries; the immediate results have been most impressive (including a more than two-fold increase in Mexico’s purchases from the U.S.). The first priority of the new government inaugurated in Brazil last week is to sell more than a hundred unproductive, overstaffed and loss-making government enterprises. And the albatross of the foreign debt that the Latin American countries incurred when the raw-materials economy collapsed has largely been removed—it has been written down in all but legal fiction.
Latin America’s turnaround is, in other words, no longer a matter of economics, but largely of the political will. It requires, above all, the backbone not to cave in—as did the governments of both Argentina and Brazil in both 1988 and 1989—at the first protest by a powerful group such as the labor unions or the army. The things that need to be done will at first be painful and unpopular. But within a year they will begin to produce results and to enjoy wide popular support.
But the U.S., too, has a crucial role to play: to stop the well-meaning but destructive policies it has pursued for almost 40 years. Maybe Latin America needs fairly small short-term loans to help assuage the pains of the transition. But the favorite “aid” policies of the past four decades—government-to-government aid; military aid; World Bank loans—must not be continued. They are largely to blame for the current crisis of the continent.
Antientrepreneur Bias
These policies encouraged government spending. They paid for bloated government bureaucracies and for military establishments that are, in many countries, four or five times as large proportionately as that of the U.S.—and without any foreign threat. They diverted capital from productive investment into “prestige projects”—steel mills, for instance—without domestic markets that, in their own way, were not too different from the monstrosities of Stalinist planning. Above all, these policies all had a strong antibusiness and antientrepreneur bias. To continue them would be like pushing drink on an alcoholic.
What Latin America needs from the U.S. is trade, not aid. It needs political support for policies that reward enterprise and discourage monopolies and protectionism, policies that stress savings rather than spending, and economic growth rather than growth of the bureaucracy.
And these policies also are needed precisely because the U.S. needs Latin America.
[1990]