Murillo |1

Jorge Alejandro Murillo

Mr. Casey Flores
ENG1201-101
1 June 2016

The Economical decay of Leftist Socialism in Latin America

Government systems determine where one country is going towards the future
and when it is getting there. Since the time of the Spanish colonies, the Central and
South American countries have struggled to maintain an upward growing trend in their
economies, and they have stepped out of the status of being considered 3 rd world or
developing countries. Of course, this region has lived times of great prosperity and
depression from the oil boom and the agreement of the Panama Canal to being given
back to the Panamanian people in the 1970s. On the other hand, Latin America has
suffered from political instability, economic downfalls and corruption throughout the
military dictatorships and post-civil governments hitting the entire economy and people
in this region. In the last decade, this region has experienced a change in government
politics, economics and general management of the countries. The self-named New
Socialism or the XXI Century Socialists consisted of leftist 1 heads of state who won
their elections appealing to populist strategies and unsustainable policies that are
affecting not only the countries economics with irresponsible federal spending,
increasing the national debt, implementing outrageous taxes and making business lose
their profit margin and market competiveness, all this causing the people pockets to be
1 LeftistPerson who follows the principles and views of the left political system derivate
from the early communism, which embodies a powerful central government that controls
every aspect of the country.

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endanger. All of these leaders that include presidents and ex-presidents like Mauricio
and Cristina Krishner Husband and wife who were presidents of Argentina, Rafael
Correa current president of Ecuador, Evo Morales Bolivian president, Hugo Chavez
former Venezuelan president and first activist of the left and socialism this and other
presidents and head of states have done this under the flag of the redistribution of the
wealth to the poor.
The term populism is sometimes misunderstood as consisting of only charismatic
political leaders who plea to the voter who pertains to the great majority of working and
lower class lines. However, it is much more than that according to Mitchell Seligson, a
professor of Political Science at Vanderbilt University and Board of the Inter-American
Program on Education for Democratic Values and Practices of the Organization of
American States, the definition of true Populism must include a core belief that the
institutions of classical liberal democracy, especially legislatures and courts, are
anachronistic, inefficient, and inconsistent with the true expression of the peoples will
(or at least the populist officials interpretation of it) (82). Clarifying what Seligson
claims about populism is the fact that these mostly South American governments like
the ones in Brazil, Venezuela, Ecuador and Bolivia tend to gain power with the popular
vote and when they establish a control in a powerful branch, like the executive branch,
they change the political, judiciary and military systems to best fit their political views
with people aligned with the regime.
To demonstrate this claim, the book Latin American politics and development,
this work includes examples and historical background about how the populism system
was and is implemented in Latin American countries. It has an example about the

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military in Venezuela. On July 31, 2008, acting under authority given to him by the
National Assembly, President Chvez promulgated a new Organic Law of the Armed
Forces. The renamed Fuerza Armada Nacional Bolivariana (Bolivarian National Armed
Forces) boasted a strengthened chain of command that allowed the president more
direct control over all four services. The law also enshrined protection of the Bolivarian
Revolution as a primary obligation of the armed forces (Myers 289). This new law
making showed the true face populism, presidents who seek absolute power in the
legislature to impose laws that just contribute their own regime and control, this just
leads into a big controversy that involves absolute power and how it can corrupt people
in a power position. The duty of the armed forces is to protect and ensure the peace
and liberties of the people, but in this case, they are like a personal guerrilla for the
governments philosophy and claims. To cite a more recent example, the Ecuadorian
newspaper El Comercio talks about how, Ecuadorian President Rafael Correa has
demoted the military coup officers, because they were against policies of his
government. He claims their loyalty is corrupted and unsubordinated against the people;
this promoted problems with veterans and passive members of the armed forces who
are in disagreement with the regime.
Latin American countries have a variety of products and services in their trade
portfolio, but they mostly depend on their natural resources like crops, fruits, sea
products and oil in some countries who possess this highly appreciated resource
according to the Inter-American Development Bank, this region is still dependent of the
international trade for most of its funding and most of their commercial relations with
bigger and wealthier regions such as the European Union, USA and China to mention a

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few. Petroleum is a good that moves the entire worlds economy, and countries who
have it tend to be more fruitful and productive than others; this is illustrated by wealthy
nations such as The United Arab Emirates or Qatar. According to the International
Monetary Fund, these Middle Eastern countries have a positive growth in their gross
domestic product; even though last year the oil prices have reached the lowest in
decades, they maintain a GDP of 4.5 or more and have reached a negative inflation.
Also these countries taxation systems are reduced so much that a citizen only
must pay minimal taxes to the state or federal government, contributing to the oil export
income of the government. In contrast, are Ecuador and Venezuela, two South
American countries with petroleum exports as their main good for trade and which they
are run by populist leftist presidents. Their GDP hit a healthy percentage of 4% to 6% in
2012 because of the high oil prices, but as for now, it has decreased in record time to
-5.6% in Venezuela as we see in the graphic below and to -4% in Ecuador with an
alarming inflation rate that can reach 100% in Venezuela in 2016. This is because of
the lack in effort to invest or have a good use in those resources when the oil price was
over a $100 a barrel of petroleum. Of course, politics does not have anything to do with
the international trade market; but it has a much to do with how the goods and services
are sold and purchased within the country.

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1Graph formulated by the International Monetary Fund, presenting Venezuela's Gross Domestic
Product for a period of 5 years.

Because of extremely aggressive economic policies, changes in the fiscal laws

by referendums and the deprivatization of privately owned goods, companies and media
channels are mostly the reason of this downfall in the populist economy. Leftist
governments like the Argentinian, Venezuelan and Bolivian gain approval ratings by
giving away products or subsidizing goods in their basic food basket or their index
basket, which refers to the indispensable products for a person or a family to live.
Subsidizing is the process in which the central government pays a part of the production

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and distribution costs in certain goods, to make it cheap and more affordable for their
people. As good as this sounds, countries like Argentina, Ecuador, Bolivia and
Venezuela are experiencing flaws in their budget due to the excessive subsidizing of
products like gasoline, propane gas, beef, and a couple of crop vegetables. For
instance, gasoline and cooking gas in Colombia, sells for an approximate price of $2.50
to $3.50 a gallon and about $14 to $17 dollars a propane cylinder in contrast with their
border neighbors Ecuador and Venezuela that have much cheaper prices for the same
goods that are about $1.45 to $2.10 for gasoline and $3.50 to $6.00 for a cylinder of
gas.
This causes not only smuggle of these oil derivatives across the border, but it
also sparks the government to control the market price. This therefore prohibits both fair
competition and improvement processes in the gas quality because the costs rise.
However, the deepest problem is the fact that because of the highly fluctuating oil prices
the governments have to pay more and more, leaving them with a deficit that is
uncontrollable and with the need to take more loans which increases inflation and
external debt.
Countries incur more expenses under the motto of redistributing the money and
assets to the people, meaning the working and low class population. This tends to
create laws or programs allowing them to create an unsustainable system to decrease
the inequality in social classes. The perfect example of this is the welfare program
named Bono de Desarollo Humano (human development bonus), established by the
Ecuadorian President Rafael Correa. This consists of giving $50.00 U.S dollars per
month to financially impoverished people in order to shrink the gap between poverty and

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the medium class population. A similar system was established by the Bolivian
government with the slight change in the amount of money they get. In theory, this might
be seen as a great alternative to help people caught up in financial struggle; but in
reality, this distribution of money tends to create procrastination, a lack of productivity
and a low desire to pursue education, and this also causes people to cheat the system
to get more of this government aid without need of it.
The Inter-American Development Bank, an entity that works with communities
and countries in sustainable developmental programs all through Latin America and the
Caribbean, declared that projects like this, that intend to decrease the inequality level in
a country, are irresponsible in a way because such programs

create both

unsustainability and more inflation and increase the federal spending. They can also
cause a bigger separation of the social class levels in the long run. The funds for this
program are financed with the revenue created by the taxes as well as the surplus from
the oil exports, but now with the oil market in the ground, the funds are insufficient and
almost impossible to catch up. Further, there exists the dilemma that consists of others
in the population who do not receive this aid questioning why their money in hands of
other people.
The leftist movement in Latin America has gained a lot of followers, not only from
people who share their ideals in the working class, but also from seemingly respectable
economists like Mark Weisbrot from the Center for Economic and Policy Research, who
wrote an article on how he believes this over taxation works in favor of the working
class, cutting earnings for wealthy and making them pay at least 15% or more in duties.
Due to those taxes, he also expresses that the government would have more liquidity to

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perform projects for their people. On the contrary, a high amount of taxes are
unattractive for international investment and national investment as well. In the case of
the populist governments, the level of taxation for enterprises and high earning sectors
are extremely high. According to Cuadernos de Economia a book written by Werner
Kristjanpoller and Rodolfo Salazar who are members of the industry department and
professors in the Universidad Federico Santa Maria of Chile, companies look for
countries with low tax rates and financial security to keep their revenue in that country,
making the banking system stronger. Foreign investments have proven to have a
positive effect upon the income inequality in a country in the long run. This is because
they tend to keep investing and growing within that country, and they keep a great part
of their assets in there as well as employment positions and opportunities for citizens.
Countries like Ecuador have experienced a rapid exit of investors and investment
due to the tax policies; for example, a 5% tax to the exit of dollars from Ecuador costs
companies millions of dollars because they buy raw materials for the assembly or
production outside of Ecuador and import them to create composed goods. To put it in
other words, if one were to travel outside of the country and spend a hundred dollars in
the credit card, one would have to pay five dollars to the federal government just for that
purchase. This extra expense creates the need to raise their prices making them not
competitive against other enterprises located in countries like Peru or Colombia, who
are border neighbors of Ecuador and offer low tax rates and incentives for foreign
investors that promote employment and growth in their economy. In the last few years,
countries with aggressive taxation have made it almost impossible to create wealth.

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Jomara Murillo, an Ecuadorian MBA graduate with a concentration in

international business from Wright State University, expresses in the interview that
Jorge Alejandro Murillo conducted for this paper, Countries with a left wing government
do not close their doors to commerce, but their environment is not fit for appropriate
investment, making it virtually impossible to attract capital to sustain the economy.
Because of these nonsense taxations, common people tend to seek the opportunity to
take out their capital to countries with a more stable financial system as mentioned
before and external capitals avoid Ecuador and countries align with left ideals like El
Salvador and Argentina like is illustrated in the graphic below.

2Statistical graph of the percentage from foreign investments in each country in Latin America.
Source Latin American & Caribbean Economics Commission (CEPAL).

One of the most scandalous elements of the Latin American New Leftist
philosophy is the notion of targeting the wealth of people and enterprises via the
deprivatization of real estate and assets, and sometimes, even via the prohibition of
moving funds out of the country. People seek financial security, and sometimes their

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own country would not insure it. To demonstrate this, One of President Chvezs first
decisions was to replace the president of PDVSA with an individual from his inner circle
(Myers 296). PDVSA is the largest oil company in Latin America, and it originated in
Venezuela and is managed by the private sector in its majority. As Myers expresses, the
deprivatization of the biggest and the most productive oil extraction and refinery
enterprises was taken from private ownership to public, in an instant. This was not
forbidden even by the law; on the contrary, Chavez made 69 reforms to the constitution
that gave him more power over the ownership rights and the banking system, making
his government an authoritarian one. Almost everyone agrees that Venezuela, which
has been unable to develop what are the worlds largest oil reserves, is in deep trouble
(Drezner n.p). PDVSA was one of the three biggest oil companies, competing with the
companies in the Middle East according to an article in Forbes. At the present, the
Venezuelan firm is known to be working only at 35% of its capacity due to lack of inputs
necessary for production as well as the lack of investment to improve and continue to
keep up with the competition.
The government control over the countrys production and companies is not well
received by the business and entrepreneur people. Moreover, Ecuador and Bolivia have
taken over mass media channels such as TV channels, newspapers and radio stations.
In the example in Ecuador, president Correa ordered to alienate two of the major TV
channels, five radio stations and one newspaper. He claims this mass media
businesses were corrupt media and, as for today, he still maintains them under the
control of the government. Bolivia had started a program where the government is
taking land that has not been used for private owners and giving it to an assembly of

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farmers. This not only harms the private ownership of land, but also violates the law.
This creates the effect of stepping over some people to make others happy, and
creating a civil disagreement and a weakened financial system. This is because banks
are not able to grant mortgages on land since it is not certain that the land is going to
remain in private hands.
To conclude, the evidence has make it clear that the most obvious mistakes,
flaws and conflicts created and instigated by over a decade of populist Latin American
governments with leftist policies, with Venezuela as its flagship. The nation has led
these extreme changes, and countries like Argentina, Bolivia, El Salvador and Ecuador
have followed with their decaying economies and citizen well-being. Proof of this failed
system is the multiple protests going on in Venezuela and Ecuador in addition to all of
the petitions presented to the United Nations and international organizations to oversee
the will of the Venezuelan people trying to constitutionally impeach President Chavezs
successor Nicolas Maduro. Argentina has moved towards the recovery of their
democratic system by the election of the right wing politician Mauricio Macri, who has
already opened the countrys commerce with Europe and North America. A lot has to be
done to recover the economic well-being in these countries for their people to create a
country which grants and ensures all the liberties and rights to its citizens. The only
thing these populist leaders had right is the fact that the people will be heard, and they
certainly will fight for their own well-being without the interference of a controlling central
government which just worked for itself and its allies. Bolivia has moved a step closer to
demote the proposal for an indefined presidential period that would allow president
Morales to remain in power. Latin America is a region with an enormous potential to

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grow economically and structurally, but only good, selfless leaders can take this
countries to a thriving state.

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