WASHINGTON, Aug. 12 (UPI) -- Clearly, the International Monetary Fund's $30 billion bailout of Brazil will cost Western taxpayers money. The only question is whether it will do more harm than good to Brazil itself.
The "moral hazard" of such bailouts is only modestly to the Western banks that have lent money to the country, but far more perniciously to the political power structure within the country, which is able to finance its destructive policies unchecked.
The $30 billion bailout of Brazil last week bears strong similarities to the final $8 billion bailout of Argentina at the same time last year.
In both cases, there was a strong emotional appeal from the international aid community to rescue a country that had "obeyed" the IMF's dictates.
In neither case was there any evidence that the bailout would work, in the sense of not requiring yet another bailout within months, or a year at most.
In both cases, the country's gigantic level of foreign debt, and its feeble level of exports, suggested that its overall problems might be wholly intractable without a debt default.
In both cases, the country's political class visibly failed to assist in solving the problem and showed strong signs of gearing up to make matters worse.
In Argentina, the IMF-friendly (albeit very arrogant) Finance Minister Domingo Carvallo was losing power by the day and facing elections likely to be won by the Peronists, who were in a populist mood.
In Brazil, the incumbent president, Fernando Cardoso, who had achieved a measure of success against Brazil's economic problems, is coming to the mandatory end of his second presidential term. His successor will be one of three candidates, whose policies range from a modest deterioration in financial soundness to a huge left-wing gamble, via a populist whose real economic views are almost entirely obscure (and who I would thus tentatively rate as the best bet of the three.)
In reality, of course, none of the candidates for Brazil's presidency offers significant hope of doing more than staving off the inevitable default. Roseana Sarney, at the beginning of this year, offered the possibility of a more free-market future, but the political establishment quickly disposed of her.
In Argentina, both the Peronist and Radical parties are tainted with the failed policies of the last decade. The election next March currently seems most unlikely to throw up anything better.
This is hardly surprising, because the IMF policies themselves are flawed by compromise and woolly thinking and -- even if they were adopted in toto -- would have been unlikely to produce a successful turnaround.
In Argentina, not only did the IMF fail to force the government to run a budget surplus, reducing debt, during its glory years of the mid-'90s. The agency even encouraged the disgraceful December 2001 default on private Argentine savings, the second in just over a decade, which has now plunged the country into economic squalor.
An agency that cannot see the importance of secure middle-class savings in providing for the economic future is not fit to be given control over the management of such a delicate thing as a national economy.
In Brazil, the IMF has trumpeted the government's success in running a primary budget surplus (before debt service) of 3.5 percent of gross domestic product. But it has ignored the fact that this was only accomplished by raising taxes to extortionate levels (to the extent that anybody except salaried workers and foreign companies pays them) and keeping real domestic interest rates in double digits for three solid years.
Even the vaunted "primary budget surplus" is far from adequate to service Brazil's huge debts at its current usurious interest rates.
In neither country has the IMF significantly addressed the most important problem: a bloated, inefficient and utterly corrupt public sector.
Contrary to IMF policy, it is NOT a matter of indifference whether a budget is balanced by lower spending or higher taxes.
The one offers hope of a brighter future, returning resources to the private sector. The other starves the private sector in the interests of a corrupt and overblown bureaucracy, whose members, in both countries, are far better off than the average citizen, as well as enjoying job security -- in Brazil, this is even guaranteed by the 1988 Constitution -- and index-linked pensions.
In the last half century, there has been only one Latin American country that has made a quantum improvement in its international standing, and in the living standards of its people, while all the others have stood still, or, in most cases, horribly regressed at least relatively.
That country is of course Chile, and the improvement came under the dictatorship of Agosto Pinochet in 1973-88. Chile has continued to improve its standing since 1988 (albeit with some backsliding recently) but the more recent momentum has come simply as a result of not wholly destroying Pinochet's economic policies.
This does not mean that dictatorship, as a governmental system, is superior to democracy, although in a number of Latin American countries there are undoubtedly -- as I write -- gathering forces who believe that it is. I would not be at all surprised to see a military coup or two in the next couple of difficult years.
After all, other Latin American countries, notably Brazil in 1964-84 and Argentina in 1976-83, have had military dictators in power. While it can be argued that as finance ministers Roberto Campos in Brazil and Roberto Aleman in Argentina showed signs of pushing their countries in a Pinochetist direction, their reforms did not last, and those eras are now remembered more for their repression of dissent than for enlightened economic policy.
Pinochet had a number of advantages, which enabled him to put in place policies that both worked and lasted. He was president for 15 years, long enough for reforms both to be enacted and to show lasting beneficial effects.
He was remarkably immune to the siren songs of popularity and was prepared to undertake policies that he believed right, even if they brought unpopularity in the short term. And, being more or less an international pariah, at least in aid-agency circles, he was wholly free from control by the World Bank and the IMF.
All three factors appear to me necessary in a reforming Latin American leader, in order for the reforms to have any chance of long-term success. But start with the third factor first, for it underlies the other two.
It is not a coincidence that, apart from Chile, most Latin American countries had their economic glory years, at least relative to Western living standards, before World War II. Before the formation of the IMF and World Bank in 1944, if a country made a mess of its economic policies, the international banking system stopped lending, and there was a rapid decent into an extremely painful recession, which presumably had a salutary effect on the economic good sense of the inhabitants.
One thinks of the Porfirio Diaz regime in Mexico from 1876-1910 and the oligarchy in Argentina from 1860 to 1930 as examples of Latin American regimes that enormously increased the wealth of their countries and peoples. They did so by running sound, free market economic policies, being highly hospitable to foreign investment and keeping in the good books of the international banking system.
The Barings fiasco of 1890 in Argentina is the exception that proves the rule. Thereafter, Argentina was cut off from international finance, and impoverished, for nearly a decade, until the rock-solid economic policies of President Julio Roca (1898-1904) restored her standing and raised her living standards to a level equaled by only a few Western countries at that time.
I have written elsewhere that I favor the privatization of the World Bank and the IMF, and the return of their primary economic monitoring function to the international banking system.
Apart from the dubious, indeed to a great extent counterproductive, quality of their financial advice, the existence of the World Bank and the IMF, and their policy of providing bailout funding whenever things get too difficult (even if, occasionally, a bailout is suspended for several months of difficult negotiations, as currently in Argentina) mean that economic policy in Latin America will always be limited to the bare minimum necessary to receive bailout funding from the international institutions.
Latin American countries will not elect a Fidel Castro, because that would endanger their access to money, but they will elect a succession of Juan Perons, who will divert funds as far as possible to their personal Swiss bank accounts, while providing the necessary level of "bread and circuses" to the masses to be re-elected, and looting the middle class whenever possible.
While the IMF and World Bank continue to exist, genuine reform in Latin America that would effect a long-term improvement in the living standards of its citizens is impossible, absent a military dictatorship that is long-lasting and, like Pinochet, of exceptional quality.
If military dictators appear in Latin America in the coming years, the well-meaning social democrats of the World Bank and IMF should recognize that they bear a heavy responsibility for the appearance of a phenomenon they so loathe.
Even if the IMF and World Bank were to disappear tomorrow, it is unlikely that the forthcoming elections in either Brazil or Argentina would produce a government of sufficient economic rigor and long-term stability to effect reform.
In both countries, things must get worse before they get better; for in both countries, the electorate as a whole appears to believe that an evil "liberalism" is responsible for their current plight.
However, if the IMF and World Bank were to disappear, so that the next political cycle produced for the Brazilian and Argentine electorates a true picture of the costs of autarky and populism, then it is probable that the following elections, in 2006-7, would throw up at least one candidate in each country who had some chance of making things better.
Of course, by that time, the West's money in both countries would be irretrievably lost, but hey, what are Western taxpayers and banks for?
All this may sound hard-hearted. One is condemning Brazil and Argentina to half a decade of economic squalor and hopelessness, in order, perhaps, to produce something better at the end of it. Yet it must be understood that the postwar consensus, backed by hundreds of billions of dollars of taxpayer money, has completely failed, and the quicker it is scrapped the better.
For even the bleeding-hearted among readers must remember that in Latin America, not only has the Washington consensus squandered money on misguided governments, it has also produced, over a period of nearly 60 years, societies that have the highest GINI (inequality) coefficients in the world.
Providing bailouts to the governments of Latin America has rewarded evil and suppressed good; it has also proved intolerably damaging to any reasonable concept of social justice.
(The Bear's Lair is a weekly column which is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90's 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.)
