Free Enterprise or Decline? The Future of Latin America

0:00Successful public life and also at the same time held strongly to free market principles. The public life extends, or I should say starts, when he was ambassador to the Netherlands. He's also served as secretary of the Navy. Ambassador Mittendorf was also the U.S. representative to OAS and was recently named ambassador to to the European Economic Community. As you probably know, he's also had a remarkably successful career in business in the financial and banking community. On the private side, although my knowledge is somewhat limited, Bill, I know that you're an art collector and connoisseur and also a composer.

0:52We thought we would have a small band here and have a march, but given the space constraints, we couldn't do that. So with that, let me allow you to begin your talk on free enterprise or decline in the future of Latin America. Yes, well, I appreciate it, Steve, and you know, what we need in addition to the Ludwig von Mises tie is a Ludwig von Mises march, a victory march, an upper march, yeah. That isn't a bad idea. I could probably write one like that, but it would have to be joyous, wouldn't it? Because he believed in principles of growth and the only true foundation of any kind of growth, actually. Like all of us, I knew von Mises at New York University, and he was a very modest man, and his wife is still such a great asset and supporter.

1:46And I had the privilege of studying at Harvard under, well, one of my professors was Schumpeter who gave a graduate course in the summer of 45 and 46, rather, and I enjoyed taking his course because he was, he had opened my eyes to a lot of economic principles that were not taught in ECAA at Harvard, which was primarily and almost entirely a Keynesian course. The whole idea was that the business cycle would improve and you would cut deficit spending, and then it would decline and then you would increase deficit spending.

2:33But somebody forgot to turn the spigot off and deficit spending went on both times. In practice, Keynesianism, it doesn't work, or it works too well. I mean, it's always, the spigot is always open, and so all the theories that we had at Harvard were going out to solve all the problems of the world, it just didn't work out too well, and now we run these huge deficits. Anyway, can I assume that everyone here is a friend of the Austrian School of Economics? They're all libertarians. I was reading about some of the material that you or Murray had sent me recently, and reading about Carl Menger's seminal work in 1873, when he really laid the groundwork for the whole Austrian school, it seems to me.

3:22And from which he didn't enunciate it as clearly as it was later enunciated, but he at least and so that at least people could begin to talk about that, quote that, rather than Marx and Keynes and all this other nonsense that people, you know, and fashionable cocktail parties are sending, Nismo, and all these fashionable things that people like to talk about, and the trendy left, right? We've got to get some trendy right stuff going, and we don't have enough heroes, and we don't have enough heroes, and we don't have enough heroes. And we've got to build up our heroes, have we? We've got to build up our heroes. And people in cacti, our parties, like to talk about, you know, major works and when they might have occurred that might have laid the groundwork, what makes it look like they're on the inside, coupled with the tie and the march.

4:16So, at any rate, my talk today is free enterprise or decline, the future of Latin America. I think one of the things I've learned in my travels around Latin America and the Western Hemisphere under the carrying this activity with the Organization of American States is the majority of the countries in the hemisphere are a long way removed from free enterprise economies. So, Hernando de Soto, who all of us know here and worked with, and he's with the Institute for Liberty and Democracy in Peru, and I think we all know his studies on the informal society. He said the best it can be said for the majority of the countries in Latin America is that they have some combination of Colbertism and mercantilism, the mercantile system. Colbertism, I had to look up, is defined as the policies of Colbert.

5:06Some of you may know about him. He was a minister of Louis XIV in the 17th century, and he called for the support and and Establishment of Industries by State Aid or Protective Tariffs and the Creation of Monopolies. And the mercantile system had the idea of a country exporting the largest possible quantity of products while importing as little as possible in an effort to achieve a nation's supremacy, sort of an extension of war, over other states as a central policy ingredient. So we had cobertism and mercantilism, which dominate the Latin American psyche at the moment, economic thinking. This having been said is not a question of decline from free enterprise, since it never has really been established in Latin America, except sporadically and in pockets, primarily in Central America. One must presume that the often avowedly socialist or Marxist proponents of covertism and mercantilistic policies in Latin America have never read Marx's glowing advocacy of free world trade in the opening page of the Communist Manifesto, curiously

6:08One of the enduring contributions of the Austrian School of Economics has been its advocacy of private property and its cornerstone role for free enterprise and democracy. I think what most people take for granted in this country is private property and private property rights. This is not an overriding right in Latin America. In fact, you go back to the Barbarossa influence, that the property below the ground does not belong to you. Mr. Anthony Fisher, founder of the Institute for Economic Affairs in London, has been credited by Mrs. Thatcher and the press for creating the climate of opinion which made her election possible, and he recently wrote Democracy tends not to work because people don't understand that there's a law of economic cause and consequence.

7:13To help the poor, you must have economic growth. Simplistic, well-intentioned hope that government can improve the lot of the poor has been the main reason for government's self-defeating disastrous growth. To make democracy work, he says, it's necessary that the public be better informed. And the von Mises Institute continues to make its contribution for informing the public In 1984, economic activity in Latin America and the Caribbean expanded by 3 percent, and this was in sharp contrast to about a 1 percent decline over the prior two years, 1 to 3 percent decline. Nevertheless, the 3 percent last year is only half of the growth rates that were recorded in the Decade of the 1970s, during that period of the whole $100 recycling period when they were borrowing heavily from the banks and to finance their growth, the import of capital.

8:11More of the growth rate of 1984 slowed down or dropped in eight countries of the region and nearly half of these eight have been unfavorable for two or three years. I would also like to add that the recent economic growth was not matched by any per capita growth because of the high population growth rates, that's another thing that's often In Latin America this tremendous population explosion will see a doubling of the city of Mexico City to 31 million by a little after the end of this century. It will be the largest city in the world by a margin, I would suspect, and a doubling of the population of Mexico by, what is it, John, the year 2010.

9:21The Peso has gone from less than a hundred to the dollar to, what is it now, it must be 800,000 to the dollar in four years. Inflation is something like 8,500%. And that's world-class inflation. People don't recognize that what that's done is that even makes the German inflation or the fiat money inflations in the past look like amateur night, doesn't it? And, of course, that's what it's done, is it absolutely eroded, if not destroyed, the standard of living and per capita incomes of the Bolivians. I would say it's down to $100 a year now, something like that. It's got to be the poorest country in the hemisphere right now. And yet, it should be one of the richest when you analyze their resources. Isn't that right, John? I mean, they probably have more per capita potential resources than any other country in the hemisphere.

10:11So, the economic growth in the region in 1984 was mostly determined by foreign demand, principally exports to the United States. We took 96% of the growth of exports from Latin America in 1983 and 56% of all the growth in exports from Latin America last year. So we, because of our growth here and our huge trade deficit have absorbed and last In the last year, we had a $22 billion trade deficit with Latin America, and that figure will be higher this year, and characterized by underutilization of installed domestic production capacity. I should note that the vulnerability of this type of growth is very obvious. On a per capita basis, gross domestic product in Latin America and the Caribbean declined 10% over the last two or three years to approximately the 1977 levels, so they retraced all the way back.

11:05For the reason as a whole, average domestic prices were up 170% last year after registering 130% the year before and 80% the year before that. And so these developments are undoubtedly the result of these countries' efforts to prevent a sudden drop in economic and employment activities by means of excess creation of fiat money, the old pattern, fiat money inflation. Earlier this year, for example, Bolivia closed its banks because it couldn't print any more money. Why couldn't it print money? Because it cost more. They couldn't pay the printers. They didn't have any money to print the printers in England. They just didn't even have the money to pay for the paper. It was tragic. And I was recently informed by a member of The most positive feature of the region's growth in 1984 was the strengthening of the external accounts last year.

12:19They increased their balance of payments surplus on a merchandise basis in 84 by 25% over the $30 billion surplus worldwide that they recorded in 83, reducing their current account deficit to a fraction of the amount at the beginning of the decade and closed the year with a strong international reserve buildup of nearly $11 billion. Nevertheless, the region still hasn't retained the international reserve positions it had before the debt crisis hit, which of course is a salient factor since one of the measures of credit worthiness is the number of months of imports that could be financed out of foreign exchange reserves. The surplus on mercantile merchandise trade of $38 billion generated in 1984 resulted from a combination of growth in the value of exports and a moderate 4% growth in the total value of imports.

13:11The imports in effect haven't been growing at all. And most of the growth over the last two years in the external account has come from increasing exports or maintaining exports and reducing to very little if nothing their imports. The level of imports recorded in 1984 represented a drop of nearly 40% from the level at the start of the decade. Nevertheless in 1984 the region still had a nearly almost an $800 million deficit in the balance of payments account even though they added $11 billion to their reserves due due to the transfer abroad of $39 billion primarily related to debt service expense. Thus, the $11 billion increase in international reserves resulted from a net capital inflow to the region of $11.8 billion primarily associated with so-called forced lending under IMF auspices in relation to debt restructuring, that is, when the Citibank Chase run around and get these regional banks in and everybody goes back and lends them the interest.

14:12That's how they added to their reserves last year. That accounts for the entire $11 billion increase in their reserves last year in Latin America. In recent developments, if anything, the foregoing should indicate to the most casual observer that the problems associated with the debt crisis are very far from being over. Now, there have been some pundits that have said the debt crisis is over. I mean, I've seen a couple of New York Times articles and what have you. Well, who in this room would believe that? For goodness sakes. Mexico, for example, cut its oil prices last week in an effort to boost the sales, which account for about 7% of export earnings. June exports were only half of the million and a half barrels a day exports that they had a year or two back. In addition, revenue from non-oil exports has declined from a year earlier. Capital flight is on the rise again, and that's Inflation is exceeding government projections as a result, largely due to the accelerated

15:12deficit spending financed by accelerated monetary emissions just prior to the recent elections. Now this is very ominous. Last weekend in Otapec in Mexico, it's a little resort town near Mexico City, I understand, At the invitation of President de la Madrid came together ten of the Latin American countries for the purpose of discussing how to handle the external debt. Now, this is sort of a continuation of the Cartagena process. Now, I think from some of the reports I read in the Wall Street Journal that came out of it and some of the other reports I had, this is not necessarily a plus because I think I don't have any documentation on this yet, was the possibility of setting up some sort of a debtors cartel. I think this could be ominous.

16:09Ominous because several countries can pay and will pay and should pay. Some countries like Venezuela have $12 billion in reserves and they're increasing. Ecuador is back on the upswing. Colombia is on the upswing. They can pay. Paraguay has done very well, very little debt. Central American countries, God knows, were pumping enough dough in there, they're in a position to pay, with the exception, obvious exception of Nicaragua, of course, which even if it could pay, wouldn't probably want to, following the Castro line. Speaking of Castro, speaking of the Castro line, the most hypocritical Advice on how to evade economic consequences on the debt problem is coming from Fido, calling for a debtors' cartel assumption of the debt by the U.S. government.

17:04Why doesn't the United States monetize the debt, he says. This advice is hypocritical in the extreme, not only because this advice is coming at a time in which he's attempting to reschedule his own debt, but also because Cuba's own debt is among the most onerous in Latin America. The Soviet Union's hard currency debt is $3.4 billion, and that's five times its hard currency exports, including re-exports of Soviet oil. They buy some of its cheap Soviet oil and export it around to make a hedge profit. Cuba also owes the Soviet Union $22 billion. As you know, the Soviets are pumping in there a little over $4 billion a year, $10 to $12 billion a day. Soviet willingness to reschedule this data is part of an overall social relationship between Moscow and Havana, which involves the provision of non-economic services to Cuba, the type which few countries would be willing to grant.

18:01In short, the Soviet proxies of Cuba have become the Hessians of the 20th century in support of international terrorism and narco-terrorism. International Tyranny and Narco-Terrorism, as you know, in Ethiopia, Angola, their Hessian forces are everywhere, especially in Nicaragua. While this overview of the Latin economic situation may help us to understand the status quo, i.e. the economic consequences of past policies, it does little in terms of helping us understand the economic causes so that we can better the economic policies for the future. The problem with it's becoming more and more obvious throughout the hemisphere that without a free dynamic, free enterprise system, governments can neither stimulate nor sustain economic growth nor diversify their economies to foster economic development.

19:00What they did in the past was they papered over the socialistic, mercantilistic programs by borrowing the money from abroad. The borrowed 361 odd billion dollars, or whatever it is, as the old countries had built up these substantial surpluses on a short-term basis in deposits, demand deposits in the banking system of Germany, the United States, Japan, Britain, etc. Those monies in turn were lent out after 1973 at longer and longer credits to the Latins and in the United States.

20:02Worthwhile Projects, many times they put it into, after 1979 in particular, they put it into balance of payments, shortfalls, maintain the capital income standard living as they hoped. Too often in the past one heard the truism that first must come a proper infrastructure when it comes to aid or financial support for a country, and that's a truism. When you hear that over and over again, you've got to first develop the infrastructure. But that led to vastly overblown bureaucracies of government-owned means of production far beyond such basic infrastructure requirements as roads, utilities, and communications. I see where the Mexicans are now selling off a number, are trying to sell off a number of parastatals, they're in the hotel business, travel agency business, you name it, I mean And it has nothing to do with the infrastructure, restaurants, bars, what have you, there's hundreds and hundreds of these parastatals that the government has gotten into throughout Latin America.

21:05I might say that 70% of the industrial production of the major debtor countries is owned by the government. If you take Argentina, Brazil, Bolivia, Mexico, I had a debate with a professor down in Texas, Professor at the University of Texas in Austin, who claimed that it couldn't be possible that Mexico could have more than 25% of their industrial production owned by the government. Well, he sent him some figures and he was shocked and he's been an economic professor and a brilliant man, of course, but just hadn't focused on that issue and I find it shocking to think that the parastatal approach and mentality has gone up by such orders of magnitude in the last decade. Some of it heavily financed by this borrowed capital that they forget. Some of it has had its genesis back to the Alliance for Progress, when we exported socialism to the hemisphere.

21:54We did a lot of good things, we did a lot of bad things with that. We made money too easy, and they were able to afford to get away from the free enterprise and the free market approach, and all because we had good intentions. We talked about infrastructure and building all these projects for them, and they got

23:13accepted and enforceable property rights with the ability of individuals to enjoy the fruits of their labor without confiscatory systems of taxation or arbitrary seizure of power. 360 major expropriations in Latin America since 1960. We've made some studies of all the heavy energy companies and what have you. And just a shocking figure. And I would say that the average compensation was far below the investment value, the true market value. In some cases, they were pleased with the results, glad to get out, but I would say, in most cases, not. So, once burnt, twice shy, we had 50% of all of our overseas investments in Latin America right after World War II. And because of the Calvo Doctrine, the Indian Pact Decision 24, and so many of these other disincentives for foreigners to invest, foreign exchange controls, inability to take money back out again, what have you, That figure has dropped from 50% of our overseas investments to 13% and that's going south.

24:15Is it preordained that we should just be avoiding that hemisphere and putting all our money into the Pacific Basin when we go overseas or into Europe where there's a more favorable climate towards investment and property rights? And who's shooting who in the foot? Is it all because the gringo is such a bad guy? or is it because these folks have made the climate not only unattractive for us, or the Europeans or the Japanese investors, but unattractive, especially for their own people? And that comes to the whole question of flight capital, it goes with it. And I'll mention the vast amounts. In fact, so much of this money that's gone in there has gone right out again. And I'll document that in a moment. So when the government owns so much of the means of production and pursues policies that significantly distort free market decision making. The overall economic growth suffer and the international commerce goes with it. Latin America must work toward a better balance

25:12between the government and free enterprise, so heavily skewed toward state ownership. Unfortunately, we seem to be losing the semantic battle in the minds of Latins when we extol the virtues of free enterprise. I've been to all 31 countries. I've talked to, I guess, The problem is that it starts at the schools. The Marxist teachers have infiltrated the primary schools in many Latin countries. And from that key position, they take advantage Marxism is the natural state of affairs in any society. Therefore, anyone who is opposed to it must be against humanity. Each one of us has at one time or another felt a guilt trip for being for a free enterprise or for, quote, capitalism, end quote. How many of us feel a little bit like we're out of step with humanity sometimes in a dialogue, one Foreign-private direct investment becomes economic imperialism in the Marxist-Leninist lexicon and this economic imperialism opposes, quote, a new international economic order

26:56In the Marxist lexicon, we are in a zero-sum game where, if one group is to attain greater wealth, another group must lose it. None of this helps to encourage the much-needed new capital to come in to create the jobs so desperately needed in countries with unemployment levels ranging up to 30% to 40% or higher. In fact, one wonders if Marxists in countries with non-Marxist governments don't hope to keep unemployment levels high in the hopes that the resulting unrest helps bring them to power. And I might add, once they get to power, there's a greater incentive to implode the economy much further down.

27:42Why? First of all, nobody can object because they have the police statement and they have control of the guns, the block committee system, the East German model comes in and takes over for each state and the total right of assembly is gone. So there's no counterrevolution that could ever come about in a Marxist system. It hasn't been one since 1917, never will be one. It's false optimism to say because the communists have taken over now and the economy goes bad, the people will rebel and object to it. That's absolute sheer nonsense. And if anybody's ever lived in or visited a communist country for more than a weekend and not been just exposed to the propaganda of the literacy in the hospitals And all the wonderful things that Marxists talk about when you come in there as a guest for those countries and you see just a little fringe at the top of the 5% who are living high on the hog at the expense of the 95% who are living in far greater poverty than

28:33they did before. It doesn't mean that they weren't well-meaning in bringing in the Marxists or helping to bring in the Marxists as they did when they threw out Somoza or threw out Batista. They were well-meaning people, including a number of friends of mine, because I was in and Business in Cuba in the fifties, but I found out one thing that all revolutions first eat their young, and all those friends of mine, including Larry Lunt and others, either were killed or spent fifteen, sixteen years in the slammer under the greatest, unique amounts of torture, and they were the ones that brought Castro to power, they were the intellectuals, they were the dreamers, and because he was tough and he recognized they And he figured they were damn fools enough to be for me on an ideological basis and I don't want them around the day after I take over because they'll be damn fools enough to go for the next guy, against me, and he put them in the slammer.

29:28And that's what happened to my friend Larry, who sold me a farm in Rhode Island and a lot of combined efforts of Congressman Gilman, Claver and Pell, and a lot of us, we finally got the guy out of the slammer. But it was a tragic, tragic case, a broken family and everything else, an American.

30:12In the 1960s and during the same period, total government spending as a percentage of GDP doubled from 23% to 46%. And then came the famous bank nationalization of Lopez Batillo, for which they were going to build a statue, if you recall, in the square there in Mexico City. He trumped up these crowds. I hadn't been there that time. They trumped up these crowds, running around screaming, The greatest terror they ever saw, nationalized banks. It was a very popular, populist type of thing to do. But my goodness, it absolutely destroyed Mexico, because the 24% of the industrial production that those banks controlled were the profitable companies left in Mexico that had not had flight capital, and they had modernized, what have you.

30:59And of course, once the government took over with all this bureaucracy and layering, that was the end of that game. Following 1982 and the bank nationalization, the great majority of Mexico's major industries were under government control, and the government share of total capital formation had already reached 50%. The good sign for positive change is that some of the empirical research that has been conducted on the macroeconomic consequences of status solutions so long favored in most of Latin America is beginning to receive wider publicity and beginning to affect the thinking Andrew Feltenstein and Kei-Chung Chu, relative price distortions and inflation in the case for Argentina, 1963-76, published by the International Monetary Fund, for example, estimated that in Argentina, government transfers to cover public enterprises' losses, the losses from government enterprises, were proportionally ten times as inflationary as the financing of private enterprises.

32:00100% of the state's enterprise's losses through commercial bank borrowings, 10 times as inflationary, primarily because it's assumed that only in the former case are the losses translated into high powered money through central bank financing or the government deficit. Because the state of Argentina owns the vast majority, 60, 70% of the state owned enterprises' industrial production, and since most of these enterprises operate enormous losses which which only the government printing presses can make up, inflation rate there last year was 700%. There's this coal company down there on which a half a billion dollars has been invested. It had revenues last year of 30 million and overhead of 90 million. And I'm sure it's layered with every general's ex-cousin in there.

32:48That's just one of 330 such enterprises down there, and when I see the IMF putting the in the hair shirt on Argentina. I can't be optimistic. Yes, it's a plus, but I can't be optimistic until they start selling off some of the parastatals, because as long as they're running these huge deficits, I don't know if any of them, do you know if any are making money? And as long as that hemorrhaging is taking place and they're going to have to continue the presses to pay for those, well where is the balance going to come in and the Future. Other devastating, equally devastating findings are discussed in public enterprises in mixed economies by Robert Floyd and Clive Gray and H.P. Short. For 25 developing countries for which data was available, Short estimates the average overall public deficit before reduction of government transfer payments, current transfers, at 5.5% of GDP through the in the 1970s. He further estimates that the overall deficit in developing countries increased by 2.5 percentage points of GDP between the late 1960s and the mid-70s. Defining budgetary

33:56burden of public enterprises, the residual of government transfers and loans, less the loan service payments by the enterprises, Short estimates this burden to average 3.3% of GDP for 34 developing countries. It's unbelievable. That compares with the 4.4% estimate for the In spite of these trends, which amount to a fight for survival on the part of free enterprise in many parts of Latin America, there are several counter-trends. A good example was seen in Peru by the studies by Hernando de Soto where you're seeing the The Informal Society spring up on a rapid scale. He estimates that it takes a person six months to set government approval instead of a simple business in Peru.

34:51An informal economic system has grown up to rival the more traditional business. According to De Soto, an informal economy developed and grew despite the tremendous handicap of being illegal. He estimates that the informal economy of Peru now accounts for 90% of Lima's garment industry, 25% of its furniture industry, 60% of housing, and even a good part of the automobile and truck industries. All illegal. The informal Peruvian economy, says the study, has grown so fast that it now accounts for 60% of the overall total Peruvian economy, and almost none of this output is counted in the official $22 billion figure for their GDP. Perhaps most important is the free enterprise system's ability to create jobs in Peru.

35:37An estimated two out of every three jobs are now in the informal illegal society. Another factor De Soto points out is that the South American economies often have two kinds of private sectors, one that is seriously burdened by excessive regulation hampered by the bureaucratic inefficiency, but is officially sanctioned. The second, which is by far more in accord with free market principles, but whose existence is barely acknowledged, almost illegal. This difference is made clear by an experiment documented by a study group from De Soto's Institute for Liberty and Democracy in which he tried to set up a legal garment firm without easing the way with bribes.

36:31And it took a lawyer and three others 301 days of full-time work dealing with 11 government agencies to complete the paperwork, which, when laid end-to-end, measured 102 feet. One of the researchers then tried the same experiment in Tampa, Florida. It took three and a half hours. But the awkward thing is, nobody gives a damn. I mean, you can't go to some high official and say, look, it's taking forever to get through the bureaucracy here and we could bring in jobs. Nobody gives a damn. That's the problem. A friend of mine from Occidental Petroleum, Bob Mahaney, a friend of John's and mine, we went to, and Dave Martin, we went to President Celia Suasso early on in his administration, and they were willing to, Occidental Petroleum offered to spend hundreds of millions, approaching a billion dollars, Bolivia, for oil exploration and what have you, and to work for the pipeline into Brazil and what have you.

37:31The project was nixed because there were two communists in the administration who felt that this would be very bad to give away, quote, the national patrimony to the big gringos from the north or whatever, some such perception. And so sometimes you wonder if anybody gives a damn about helping the people. What would a billion dollars in that bankrupt country would have accomplished? Think about it. And you thought somebody would have cared. The Mexican government, under the leadership of President de la Madrid, also has taken steps so late to deal with excessive government involvement in the economy.

38:22In the last issue of Reason Magazine, Mexico continues down a denationalization road the The trend began last fall when over 100 state-owned firms were sold back to the private sector. In February, the federal government stock took another step when it announced the sale of 202 more firms, and closing in on 332 more. That's about a quarter of the firms owned by the government so far. Of course, the hard nuts are going to be the big ones, because so often when I talk to the Latins and my friends, they say, sure, we agree with you, Bill, we'd like to sell off these parastagals. Do you want to buy a steel mill that's losing 30 million a year? We'll give it to you, right? Not give it to you, but you can let it go for very little. Who's going to buy it? That's the problem.

39:08So Latin America needs vast amounts of capital for progress or indeed to maintain the present standard of living. Otherwise, they're going to be in a free fall. They are in a free fall. According to the IDB study, between now and the year 2000, in Latin America and the Caribbean will have to create 100 million new jobs since half the population is under 20. And the birth rates are running at 3% with Mexico is up to almost 6%. So the average cost for creating a new job in the region is estimated, what would you say, $12,500 maybe compared to say $50,000 or more here, but still $12,500 cost to create a new job. That leads to an approximation of one and a quarter trillion dollars in capital will have to be generated in the next 15 years. One and a quarter trillion. That's in order for them to maintain the present standard of living with 100 million new jobs going to be created because of this population explosion right in America. Now, how does that figure

40:08compare to all the money that came in, all that free almost huge volume of lending over For the last 10 or 15 years, following the oil shocks of 1973 and 1979, how would you guess that compares, that one and a quarter trillion? Well, that's at least double if not triple all the money they've been able to borrow in the borrowing splurges of the 1970s. Is it possible when that credit is gone? How many of you are going to send your savings out from the First American Bank down there to invest in any of those countries

41:44The Decade of the 1970s was the decade of commercial bank lending, nearly $300 billion, in that decade, then the decade of the 1980s must be the decade of foreign direct investment. That's the solution. They must take in partners, investments. They've got to start developing equity interests. Why? Because regarding future prospects for official aid, it's not going to come. The World Bank, I mean, there are going to be incremental support coming from obviously they're going to continue to be lending from the, but not on the scale that that we saw in the 60s from the International Monetary Fund and the other big multinational lending institutions. Is Citibank and Chase and Riggs Bank going to make the kind of bank loans they made in the 70s? Is that lending potential there? No, absolutely not. In 1980, the United States institutions, the United States had a transfer of capital abroad of

43:36The United States are grappling with the issue of controlling their own government deficits right now, unlike in the 70s. We're running not only huge deficits here, but huge trade deficits. And that's got to come to an end. And it's beginning to. The Congress has been to talk about protectionism. I see it everywhere. Not only against Japan, but in other areas. It can spill over. But also they're talking about reducing, eliminating, reducing at least the budget deficits. It's unlikely that the industrialized country central banks will be accommodating as accommodating towards these deficits as they were in the 1970s. Probably the classic understatement of all time, wouldn't you agree? Furthermore, it's now widely recognized that Latin America will not... will just only be able to service...

44:27Last year there were 38 billion dollars, an economist down there, who I respect, and he estimates that Argentine capital abroad is about 27 billion dollars, and that much of this capital left the country during the early 1980s, despite the fact that real interest rates, and you know, often they say we're decapitalizing the rest of the world with these huge capital inflows in the United States because our real interest rates are higher than theirs. The truth of the matter is that their real interest rates in their

45:27For the world's eight largest borrowers over the year 7482, calculations show an increase in debt of $317 billion, and while the current account deficit adjusted for changes in official reserves amounts to only $207 billion. Thus, there seems to be a capital outflow of $110 billion, the degree to which borrowing During finance, this capital outflow differs among countries. For Brazil, only 12% of the inflow was compensated by outflows. For Mexico, 45%. For Venezuela, almost the entire inflow was absorbed into outflows. In other words, 100% flight capital from Venezuela.

46:19And according to his figures, this trend has to be reversed in Latin America if it's to to grow at all. Unfortunately, too many of the Latin's economic policy makers are constantly surprised by the obvious. The solution to Latin America's problems with flight capital is very simple. It's that those policies of governments that have economic consequences must be in harmony with the criteria used by the rational investor. What are these criteria? The rational investor is interested, one, in a positive rate of return on an after-tax The policy areas that need to be tested for their degree of harmony with the rational investor's criteria are monetary policy, tax policy, and regulatory policy.

47:08Moreover, the relationships among the three broad policy arenas I've just mentioned must be tested for what is known in logic as the fallacy of composition, I.E. with the purpose of ensuring that the soundness of each policy considered in an isolation is additive or mutually reinforcing in a positive direction. The bold and courageous economic reforms, now in a way in Argentina, if adhered to, hold promise for an eventual solution to that neighbor's economic determination. The present monetary reform, for example, involves permitting only that level of monetary emission, Adherence to this policy is basically consistent with a non-inflationary monetary environment, which in turn would eliminate the perceived need for indexation, hopefully.

47:58But we all know that these policies have been tried before, and after six or seven months, timbers start to creak. Why? The kind of economic policy-making criteria I have just elaborated are, of course, at the heart of what the media has called, as labeled, Reaganomics. In fact, what Argentina is doing in the monetary sphere would appear to be consistent with the ideas of monetary Money is the creature of law, and the original issue of money should be maintained as an exclusive monopoly of national government. Money possesses no value to the state other than given it by circulation. Capital has its proper place and is entitled to every protection. No duty is more imperative on the government than the duty it owes the people to Furnish Them with a Sand and Uniform Currency and a Regulating the Circulation of the Medium of Exchange so that Labor will be Protected from a Vicious Currency and Commerce will be Facilitated by a Cheap and Safe Exchange.

49:17By the Adoption of these Principles, Lincoln said, the long-felt want for a uniform medium will be satisfied. The Taxpayer will be saved immense sums in interest, discounts and exchanges, the financing In the banking of all public enterprise, the maintenance of stable government and ordered progress in the conduct of the Treasury will become matters of practical administration. The people can and will be furnished with a currency as safe as their own government. Democracy will rise superior. In my opinion, the best way to make the currency safe as their own government is to have it gold-backed. And there's no reason why it shouldn't be gold-backed. In my opinion, we should go back to that policy that we had years ago here, and you can see that throughout the world the tremendous run-up of inflation is documentable to the period immediately after 1971.

50:11Borrowing is only one of the three types of international monetary transfers. The others are direct aid and government-to-government or multilateral and foreign direct investment. And I believe foreign direct investment is, which brings with it management skills and which brings with it in turn markets back up in the investing countries area and it creates jobs. To me, foreign direct investment should be the principal role of all governments to try to attract that capital.

50:59I see signs that some of our USAID programs are now encouraging more and more a climate for investment. I met yesterday with Jacques Delot-Rosier and he's doing everything he can to promote that concept, the IMF, and I see at the World Bank a lot of progress being made in that direction. President Reagan is certainly taking the lead on that. George Shultz has made a number of speeches, including the important speech that he made at the OAS General Assembly last November in Brasilia on this subject. And I see awakening in attitudes in Latin America in the four years that I've been exposed to Latin America, back with Latin America again.

51:48I mean, I remember the first CES meeting I went to, and I think John coached me on that. You know, the attack on the gringo was unbelievable. Everything, you know, we don't want to be exploited by the big gringo from the North. We don't want foreign direct investment, you know, and this type of thing. You know, that type of perception and the term exploitation, all those terms come out of the North-South dialogue, these new international order type discussions. But I don't see that anymore. I've seen that fade out. People are now talking openly about changing their domestic policies, getting rid of the Paris statals. President Alphonse Sine has made a number of good quotes on that recently, so has Mr. Madrid, and he's doing something about it. Brazil has set up a commission to explore the idea of setting up, of getting rid of of some of the parastatals if they can, think-fund buyers, and there is progress throughout the hemisphere.

52:44I don't know anybody now that is talking about expanding government ownership. On the other hand, new ideas have to be injected. The often quoted statement is, well, who's going to buy the stuff? Well, that isn't necessarily true. I believe that in some cases you can develop the ESOP programs on a modified basis, can be useful in selling to the employees. We saw the Whirton Steel case here, a bankrupt company in Pittsburgh, and you saw that when the employees took it over and made the necessary cuts, the effort took off and I think it became President Friedrich, the most successful, highest profit margin steel company in America, leading.

53:35In other words, what a turnaround. And I do believe that we saw the case in Guatemala, a number of cases down there. There are 50 now, employee stock ownership programs now down there, and the numbers should expand to 500 in a few years, companies. We saw there one of the plantations there that the employees owned had a share in agricultural production and along came the gorillas and the employees shot at them and chased them out because they didn't want to be taken over because they had a stake in the place And they even asked if they could have deducted from their payrolls some more guns because these guerrillas were all over the place.

54:31And the president even commented on that because it has been a very successful program, that particular one. And it shows that people will work and protect what they have if they know they have a stake in it. And I believe that throughout Latin America this whole idea of privatization through employee purchases is a very good possibility and it keeps them on their jobs and what have you. There are 8,000 corporations in America, some of the most successful companies here, almost 10% of our workforce has already gone into an employee stock ownership program here and I see it expanding here and down in Latin America, just like the La Perla project that I mentioned, which is a 9,000 acre coffee plantation in Guatemala with about 1,500 employees and the families down there.

55:23I've got some details on it if you're interested in any of the background on that. I have some photographs of showing these folks with all their guns as these guerrillas attack on a regular basis. They're always attacking. And, at any rate, I feel that, in fact, I talked to Joe Rosinos, who's the representative of the Solidarity Union in Guatemala about this, and he said, he said, we can clearly see that the true message, what the true message of ownership and invested interest in the free enterprise system means in viewing the La Perla model. There's no greater significance to the concept of defending the free enterprise system than a worker laying down his life to defend the company in which he's a co-owner. If we want to prevent further Nicaraguas or El Salvador's, he says, the American government must address the problem of economic and social justice in Latin America. Promoting broad capital ownership is as an alternative to Marxist philosophy in Latin America. They are actively

56:18pushed now as foreign policy objectives. It can go a long way in giving people a vested interest in protecting the free enterprise system. And Norman Curlin, who's been very Marx and Engel stated that you can sum up the entire philosophy of Communism in a single sentence, abolish private property. The entire case of Marxist-Leninism disappears if we prove to the world that private property is essential for providing economic and social justice and for providing human dignity to people in the third world. Marx was wrong. However, we cannot simply attack him on the basis of the problems he was focusing on, but rather on the basis of the means that he would use. The solution is not to make enemies of the owners, but to make owners of the non-owners. And there's a simple litmus test for evaluating the economic reform efforts Research Now and Away in Latin America, and that is, do the proposed policy changes create the incentives and opportunities to acquire private property for all parts of our population?

57:34And the degree to which this question can be answered positively will determine whether or not Latin America is on its way to encouraging sustainable growth and recovery. So I see some trends in that direction. I think that this is something that we can, this is the greatest message of America, and we can export that. Why not? We're the greatest public relations operators here in the United States. You know, we can sell soap and toothpaste and all the rest. Why can't we sell the wonderful message of free enterprise and private property and dignity of the individual and the worker and Having a Stake in His Own Outfit. Why are we, the greatest media salesmen in the world, not able to combat the most bankrupt philosophy that the world has ever known, Marxism, Leninism, that's just spread throughout all the schools, most of the primary schools in Latin America and throughout a number of them in Europe?

58:36Why are we such lousy salesmen? We really are. And that's where I think Ludwig von Mises was like a light in a dark room, a beacon light. And that's where I think the von Mises Institute can be the light that becomes a light to light up the whole world. And I think there's a real exciting prospect ahead, not just following the liberalizing Thank you for listening. I hope you enjoyed it. I hope you enjoyed it. I hope you enjoyed it.