Comparing Latin America’s Economic Models: Left vs. Right
It is very difficult to conduct social science experiments, particularly in economics. Beyond some developments in experimental economics that involve lab tests, conducting economic experiments is practically impossible, especially for macro issues. However, fortunately, historical developments provide us with some natural experiments from time to time.
Perhaps the most surprising recent example of a natural experiment is the economic development of Hong Kong, Taiwan, and Macao, as compared to continental China’s economic development since 1949.1 This historical example allows us to contrast, within one culture and for economies with the same or similar initial conditions, the effects of a policy of total economic control with the effects of economic liberalization. As the reader already knows, the economic effects of communism were devastating in continental China, whereas the effects of economic liberalization in Hong Kong, Taiwan, and Macao were positive.
Natural Experiment in Latin America: Two Economic Visions
This article will discuss a natural experiment, similar to the aforementioned example, that has been taking place for years in Latin America. For more than a decade, a leftist interstate coalition has been forming under Venezuelan leadership. In a similar period, a rightist liberal political coalition has formed, with leadership shared among several countries.
These two political coalitions have each developed a common area of commerce. Much as the political visions of Latin American political coalitions are antagonistic, they naturally have very different visions of how trade should work and how institutions should control trade.
The two economic blocs this article will investigate are the Bolivarian Alliance for the Peoples of Our America–Peoples’ Trade Treaty (ALBA) and the Pacific Alliance. The countries that make up these economic blocs are these:2
- Bolivarian Alliance for the Peoples of Our America–Peoples’ Trade Treaty
- Venezuela (joined December 2004)
- Cuba (joined December 2004)
- Bolivia (joined April 2006)
- Nicaragua (joined February 2007)
- Ecuador (joined June 2009)
- Pacific Alliance
- Chile (joined March 2012)
- Colombia (joined March 2012)
- Mexico (joined March 2012)
- Peru (joined March 2012)
The two economic blocs are Latin American. Accordingly, culture is not a significant variable.
Additionally, the trade blocs began with a similar standard of living and income per capita, so the initial conditions do not have a significant influence on the final result.
Below we can see that in 2008 (the beginning of the period of analysis), the two economic blocs had very similar socioeconomic indexes. Both GDP per capita and the Human Development Index were at very similar levels.
The difference in economic performance between the zones is therefore due to the policies implemented in each bloc. This is a natural experiment in which countries are separated into similar groups and a different treatment is applied (in this case a different economic policy). Let’s look at the main policies promoted by each of the blocs.
The Economic Vision of ALBA: An In-Depth Analysis of Socialism
ALBA was created in 2004. Its headquarters are in Venezuela, and its main driving force has been the Venezuelan government. The large countries that have been part of this initiative have been primarily those that have self-identified as socialist of a twenty-first-century variety.3
Since its creation, this trade bloc has sought to challenge “traditional” free trade agreements. It was founded to counter the principal proposal of the time, which was to create the Free Trade Area of the Americas (the FTAA, or, in Spanish, ALCA):
Peoples’ Trade Agreements are instruments of solidarity and complementary trade between countries intended to benefit the people as opposed to free trade agreements that seek to increase the power and dominance of transnational corporations.4
As the main means of economic integration and trade, ALBA proposes to create “great national” companies as opposed to the transnational corporations of a capitalist system. Great national companies are publicly owned, and various ALBA countries can participate in them. The objective of these public companies is to gear their production primarily toward trade with other ALBA countries.5
ALBA countries encourage fair trade through so-called fair prices. In this framework, the price of an item sold by one member to another has nothing to do with a market price, but is rather a price that has been politically determined.
ALBA’s ultimate objective is for trade to be conducted exclusively between ALBA nations. This resembles the trade between socialist countries in the twentieth century. Hugo Chávez himself defined ALBA as socialist in 2010:
The goal is independence; the path, revolution; and the flag, socialism. ALBA is, therefore, that: Independence, Revolution, and Socialism.6
The failure of this economic bloc is demonstrated not only by the statistics presented below, but also by the fact that countries currently do not want to be part of ALBA. Ecuador left ALBA in August 2018 and is taking steps to join the Pacific Alliance. Bolivia, for its part, left ALBA in November 2019. The only large countries that remain in ALBA as of 2020 are Cuba, Nicaragua, and Venezuela.7
The Economic Vision of the Pacific Alliance: An In-Depth
Article from Mises Wire