WASHINGTON, Oct. 27 (UPI) -- The arrest of Mikhail Khodorkovsky, chairman of Yukos in Russia, the ouster of president Gonzalo Sanchez de Lozada in Bolivia and the stiffing of international lenders by the Nestor Kirchner government in Argentina all demonstrate one thing. Far from having ended, history is rolling back the free market reforms of the 1990s, as the international landscape grows ever darker.
To deal with the bleak reality of Latin America first. Sanchez, the owner of Bolivia's largest mining company, was elected with a tiny majority in June 2002 against two leftist candidates, Manfred Reyes Villa, a former military officer, and Evo Morales, the leader of Bolivia's coca growers union. Sanchez had been a notably reformist finance minister in the 1980s and a notably reformist president in the middle 1990s; he was in many ways the darling of the "Washington Consensus" since he favored privatization, assisted Washington in the attempt to stamp out coca production and yet did little to streamline the Bolivian state. The result was a prolonged period of economic decline, which has resulted in Morales and his policies of socialism, renewed nationalization and opposition to Washington riding high.
The immediate reason for Sanchez' ouster, opposition to the opening of the Bolivian gas pipeline that runs through northern Chile, is typically economically suicidal. To develop, Bolivia needs exports, foreign exchange and links to the outside world; Morales and his supporters have whipped up a sterile leftist nationalism that offers no way out. As elsewhere in Latin America, there is no democratic constituency for decent economic policy, and the future is thus bleak.
In Argentina, the policy of the Kirchner government towards foreign bondholders is cynical in the extreme, and threatens to subject the country to decades of impoverishment. It is not sufficient for Kirchner to sign an agreement with the International Monetary Fund, keeping Washington and the international institutions nominally on side while he further plunders the Argentine middle classes. To develop, Argentina needs to attract foreign investment, both debt and equity, and to be able to raise capital abroad. In the current negotiations, Kirchner is proposing a write-down of outstanding private sector Argentine debt to a present value of around 8 percent of its original amount, a shockingly low figure given the country's wealth (though the 8 percent figure, which depends on discounting the payments to be received at an appropriate rate of return for Argentine debt, is artificially depressed -- a more appropriate estimate would be around 20 percent recovery, or 80 percent write-off.)
This is not a case of "odious debt" -- the military regimes of 1976-83 were relatively cautious in their borrowing; the debt was mostly incurred under the free spending democracies of the late 1990s. Essentially, Argentina is robbing the international financial system of close to $100 billion, and the IMF and World Bank are letting them get away with it. Again, not a place one would put money for the next decade or two.
For believers in a true free market, Russia seemed enormously promising in 2001-03. This was not due to following Western prescriptions; Russia had abandoned "Washington Consensus" economic policies on its default in 1998; the startling economic recovery after 2001 owed more than anything else to the institution in January 2001 of a flat 13 percent income tax, a policy formula far more appealing to the Republican right than to the social democrats of the International Monetary Fund.
Admittedly Russian business leaders had almost all achieved their posts through methods that did not bear close inspection, but they appeared to be making genuine attempts to increase the transparency and shareholder friendliness of their operations, a trend that had been rewarded by a 65 percent rise in the Russian stock market in 2003.
Khodorkovsky was the poster child for this trend. Genuinely well qualified for the post to which had ascended by the murky means of a "wild privatization" in 1995, he spent huge time and effort after 1999 on his company's image among international business partners and shareholders, through building transparency and a reputation, by Russian standards, for fair dealing. He also polished his own image in the Western policy community as a moderate though outspoken opponent of President Vladimir Putin, who had aspirations more to the role of global business statesman than to power in the Russian political system. With Khodorkovsky at large, and in charge of Yukos, lovers of free enterprise, and potential investors in Russia, could convince themselves that in spite of his murky connections in the former KGB, and his intolerance of powerful opponents, Putin was a genuine friend of the West, who saw free markets as Russia's salvation and a move to Western style free enterprise democracy, by all means "guided" by Putin and his cronies, as being Russia's likely long term direction.
No longer. A country that arrests its largest business tycoon, on unspecified charges of "corruption" that are very likely true, but no more true than of any other wealthy man in that turbulent society, is not heading towards any variety of capitalism that Adam Smith would recognize. Essentially, Putin is by this arrest telling the capitalist classes that nobody is safe, that wealth will come to them only by courtesy of Putin himself and the central nomenklatura. Without security of property, neither domestic entrepreneurs nor foreign investors can be sure that they will not be next on Putin's list. This is neither capitalism nor socialism; of the various evil economic nostrums tried during the twentieth century it is closest to the fascism of (in ascending order of economic and political unpleasantness) Spain's Francisco Franco, Italy's Benito Mussolini and Germany's Adolf Hitler.
Under Fascism, property is not owned by the state, but it is owned at the whim of the state's rulers. Money is made, not by capitalist competition, but by being awarded favors by the all powerful ruling elite. Fascist states contained a number of extremely rich men, but their existence was always at the sufferance of the rulers, and if they transgressed politically, neither their property nor, in extreme cases, their life was protected. Economic growth was not allowed to burgeon from the free actions of free men, it was an explicit objective of the state, and economic activity was permitted only to the extent that it furthered the economic objectives of the state.
It has to be said that economically, Fascism worked a lot better than Communism, because it retained a good deal of economic incentive in the lower reaches of the system. In its mild form, in particular, in Franco's Spain, it allowed a level of economic growth that that country had not experienced in four hundred years of economic decay. Indeed, in Spain it merged after 1960 into a form of genuine capitalism, with the pampered Falangist tycoons such as Juan March becoming the wealthiest capitalists. However, Spain after 1960 was only marginally a police state, and Franco in his later years was very careful not to administer the kind of shock to the economic system that the arrest of Khodorkovsky has formed.
A better parallel to Putin's Russia is Hitler's Germany, or at best Mussolini's Italy or inter-war Japan, where property rights, and the liberty and persons of major capitalists, were highly insecure and the state's interests almost wholly predominant in all major business activity. Italy was a moderately successful economy in the 1920s, much less so in the 1930s, while Germany, after successfully deploying unutilized resources after Hitler came to power in 1933, was already an economically failing state by the time of the Austrian Anschluss in 1938. The Volkswagen "People's Car" was never made until after the war, while the infrastructure spending, on prestige projects such as the Frankfurt-Mannheim autobahn, is rendered less impressive when you remember that the speed record on that magnificent new road was achieved not by a Mercedes or a BMW but by a British 1938 Lagonda V12 saloon, complete with cocktail cabinet in the back seat, which traveled 101.5 miles in an hour, including a stop to change a tire! Only war, the conquest of economically productive countries such as Czechoslovakia and France, and the sublimation of all needs to the demands of military victory, made the Nazi economy superficially impressive.
At this level, Fascism doesn't work, and both foreign investors and lovers of freedom and democracy should be chillingly aware that it is at this level that Putin has now shown he chooses to operate. If private property is to be held on sufferance of the state, then foreign companies seeking to invest in Russia should be very well aware that the welcome mat currently proffered may be whipped away at any time. Equally, whether or not Putin undertakes actions, such as failing to ratify the Kyoto treaty, that are in the interests of the U.S. or of domestic business, he is running an autarkic state, and his overall objective is the power of that state, not the welfare of its people.
In the 1930s, the arrival of the dictators, and the collapse of the Latin American economy, followed the onset of the Great Depression. This time, it appears to be happening the other way around. How strange!
(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
