Institutions Matter

Despite having rich mineral and land resources, a favorable climate, and enjoying a head start on the building of democratic and free nations, Latin America lags behind its rapidly developing Asian counterparts and even further behind the West. Weak institutions and scant regard for the rule of law are two of the chief reasons for the region’s lack of progress.

With the resurgence of former coup d’etat leaders Hugo Chávez in Venezuela and Lucio Gutiérrez in Ecuador, and of socialist leaders like Brazil’s Lula, Argentina’s Kirschner, and Uruguay’s Tabare Vasquez, it is hard to ignore the Latino’s never ending affair with populist leaders . So, despite de so-called neoliberal reforms of the 90s, the left is alive and thriving in Latin America.

Since winning independence, Latin American countries have had weak and unstable democracies at best, and recurrent phases of military dictatorships with small outbursts of socialist experiments. Besides the well-known cases of Pinochet and the much idealized Allende regime, Latin America suffered through the likes of Leopoldo Galtieri and Roberto Viola in Argentina, and Manuel Noriega in Panamá, to name a few. Between right and left, democratic and totalitarian regimes, only one word can capture the atmosphere of the region, instability, and if one instance epitomizes this, it was when Ecuador had five presidents in one week in 2000. Yes, five!

Through public choice theory, Nobel Laureate James Buchanan has long argued that stable public institutions are fundamental to a flourishing society, and that they should foster individual economic activity instead of impeding it. Public institutions are sustained and strengthened by constitutions, which should, at best, take into account the economic realities which they are intended to serve.

While the U.S. Constitution has lasted more than 200 years, Latin American constitutions tend to have much shorter lives. Governments change the constitution fleetingly with knee-jerk reactions to the changing of the day. This is no way to rule a country and it leads to political instability and confusion which makes it difficult to pass along customs through strong institutions. For example, with twenty-one constitutions, only 17 out of 83 Ecuadorian presidents have finished their constitutional term without being forced to resign. So far, the average number of constitutions for the Andean countries since their independence is 20—Venezuela having the greatest number of constitutions (24) and Colombia having the least (16).

Obviously, unconstitutional deeds seem to be more frequent than constitutional ones, even while constitutions are being changed to fit the political demands of the day. As an Ecuadorian political analyst says, “If there exists something worse than a bad constitution, it is a society where every politician is thinking about a new one”. Though constitutions do change frequently, their essence of setting up the state as the source of public well being has never changed. If anything, new constitutions have beefed up the power of the state.

Further, constitutions throughout Latin America, as a rule, are composed and approved by constitutional assemblies, which are more often than not made up of current legislatures that are highly politicized. That does not lend itself to the drafting of stable, long-term documents. What results from these processes are documents full of compromises and petty regulations, which pander to the whims of the current political climate.

Instead of adopting succinct constitutions with principles such as the one Argentina had in the second half of the 19th century, Latin America continues to adhere to lengthy diatribes, which seek to regulate every nook and cranny of an individual’s life as if the individual was the one to fear instead of the state.

Latin American constitutions always prioritize Ordem e Progresso (Portuguese for Order and Progress). That was reflected throughout the region in the attempt to “foster” development via significant government infrastructure investments and import-substitution mercantilist strategies, which involved government purchases of controlling interests in key primary industries such as energy and even some manufacturing ones to supposedly grow and achieve technological progress. These inward growth strategies led to nothing but misery. In most cases these government-driven initiatives for progress have encouraged the region’s endemic corruption.

It doesn’t have to be this way. A half century with Juan Bautista Alberdi’s classical liberal constitution made Argentina a rival of the U.S. economy at the end of the 19th century. Indeed, at the beginning of the 20th century, Argentina was the seventh richest economy of the world. The secret motor for growth Argentina took advantage of was not “development strategies” or strengthening exports at the expense of imports: it was the establishment of the rule of law. Latin America apparently lacks this secret motor.

According to the World Bank report, Doing Business in 2005, enforcing a contract in Latin America involves 35 procedures, takes 465 days and costs US$1,343. Obviously, doing business in the region is more than complicated and incentives and legal protections are barely present. In the most regulated environments, the informal economy proved to be larger.

What’s more, judicial independence in the region hardly exists. Throughout the region, only 25% of the population has confidence in the courts. In Ecuador, for example, courts have been manipulated by major political parties since the end of the 1970s, and at the beginning of this year the executive branch took advantage of a majority in parliament to flout the constitution and pack the supreme court with judges partial to the president’s interests. This was all done to wipe off charges against former president Abdalá Bucaram who has now returned to the country and promises to lead a Chávez-type revolution in Ecuador.

Politicians throwing chairs and bottles of water at each other, being chased out of session by gas bombs, the president hiding in and strengthening military surveillance around his palace, supreme court president being called a “homosexual”—in the Latin American context, an insult—by fellow politicians while trying to conduct business as usual, are not surprising developments in Ecuador where the constitution has become a dead letter.

It seems that Latin American constitutions continue to confirm the famous Austrian liberal economist Freidriech A.Hayek’s principle that customs and traditions like voluntary civil associations (i.e. marriage or social clubs) and commercial relations precede formal constitutions; and if a constitution fails to reflect those customs and traditions it is invalid, and will become irrelevant. Latin American constitutions commanded people to place public interests above self-interest and in the name of this principle, which directly violates universal individual rights such as the right to life, liberty, and property; they left the door open for the state to abuse its coercive power. And today we see all this resulting in protectionist trade policies, inefficient state education systems, bankrupt pension systems, and many more bad public policies that result in the region’s failure to achieve progress.

A minimum condition for progress is having a constitution that does not thwart the primacy of the rule of law. Latin Americans are experiencing the hollowness of freedom without the rule of law. Rights, wealth, and security are not guaranteed without it. Granting collective rights and redistributing wealth as most Latin American constitutions do, is a set up predestined to fail.