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Wednesday, July 27, 2005

Latin America's flickering democracy

Christian Science Monitor:

Polls show decisively that Latin Americans want better housing, food, education, opportunities, and democracy. And there are now some democratic and market-oriented leaders who know well what needs to be done. As Mr. Vargas Llosa says, 'Reform ultimately involves undoing more than doing.' Government must be small, less intrusive, more efficient, more honest. Entrenched and corrupt entitlement programs must be eliminated. There must be greatly improved education for everyone, better healthcare and environmental standards, and legal reforms that guarantee opportunity, property, and other rights to all people.
We ignore Latin America at our peril. Perhaps more importantly, we should analyze why these democracies fail, and how democracies in general can succeed. If we don't know that, our hopes for other regions successfully developing democracies seems risky. Obviously there are a lot of factors that cause a Democracy to fail. Primarily though, it seems that economic failure is the key, and this failure is often directly caused by Democracy itself. One of the risks of Democracy is that people will vote themselves greater entitlements than can be economically sustained. This leads to a rather quick collapse of the economy, and hence the government. The cycle here is viscious. First, government programs are enacted that demand high taxes to support. These taxes limit growth directly, but even worse they often encourage under the table economic deals and corruption in an effort to avoid those taxes. This in turn reduces the overall tax base, requiring even higher taxes to support the entitlement programs. The prevalence of under the table businesses also has the effect of pricing out foreign investment, as foreign companies, usually under serious scruntiny, are unable to compete on an equal level with their black market counterparts. Meanwhile, with all of this drag on the economy, poverty tends to increase making further social programs seem desirable, even necessary which in turn demands more tax. Obviously, this cannot go on forever, and it doesn't. Eventually these economies and governments collapse, leading to anarchy (minor is some case, much more serious in others) and usually trying again. How though can we prevent this from happening? Education might help. Explaining frequently and loudly that taxes need to be low for a developing country (developed nations can much better afford this 'luxery') and that economic growth is the only way out of poverty.


Blogger honestpartisan said...

Why can't the taxation that you deplore be progressive? Is your argument that progressive taxation would impoverish a country? Latin American countries have historically had some of the largest gaps between the rich and poor in the world without progressive taxation throughout most of their histories and it hasn't done much for their economies (compare with the success of export-oriented development in South Korea, Taiwan, Malaysia, etc.)

In fact, democracy in Latin American has frequently been the victim of wealthy Latin oligarchs, particularly in Guatemala in 1954 when democratically-elected Jacobo Arbenz was overthrown by land interests related to the United Fruit Company and in Chile in 1973 when democratically-elected Salvador Allende was overthrown by Pinochet, in part over horror over his redistributive policies.

You can debate the merits of various development strategies, but to blame faltering democracies on taxation strikes me as inaccurate.

7/27/2005 03:01:00 PM  
Blogger Dave Justus said...

This has nothing to do with progressive or not progressive taxation. Progressive taxation describes WHO pays the taxes, not how much taxes in total are collected.

Basically a developing economy cannot afford as high a tax rate (total revenue as a percentage of GDP) as a developed economy. To an extent, it doesn't matter if this is payed by the rich or the poor, if it is too much a drain the economy will falter.

Democracies do have a tendancy to overspend as politicians try and buy votes. This can quickly destroy an economy, especially when social institutions are not strong as corruption is quickly added to other problems.

7/27/2005 09:11:00 PM  

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