Policy Crimes

STANFORD – When the Berlin Wall fell a quarter-century ago this November, pundits led by Francis Fukuyama proclaimed – the triumph of democratic capitalism over all rival systems. America’s economic success and the collapse of communism fed the narrative. The long political, intellectual, and, at times, military confrontation that we knew as the Cold War was over.

Indeed, at a meeting in Warsaw in the winter of 1990, General Wojciech Jaruzelski, Poland’s President and communist party boss, declared to me and my cabinet colleagues that The forces of history have inevitably led us to capitalism. He could not free himself of the Hegelian dialectic, but he now admitted that communism had gotten history’s end point entirely wrong.

A couple of decades later, various forms of capitalism have worked wonders for some former communist and socialist countries. Poland is an excellent example of a successful economic and political transition.

But capitalism is far from flourishing everywhere. North Korea, which never had a transition and maintains heavy-handed central planning, is an economic basket case. And soft socialism combined with subsidized national champions is decaying in France.

Moreover, in many countries, capitalism arrived without democracy. China is an obvious example of capitalist success and lagging political reform. For these countries, honest competition at the ballot box, free and open debate, and respect for minority rights – the foundation of liberal democracy – are not currently on the agenda. The champagne corks were popped prematurely in 1989.

Indeed, precisely because liberal democracy did not triumph worldwide, many pressing crises now require attention and action. But we must also focus – in the media and in the classroom – on the less dramatic but nonetheless dangerous attacks on democracy and democratic values, including in the Americas, where statist regimes and others have been attacking freedom of speech and of the press.

As a result, policy disputes can become criminal. In a pernicious recent example, Venezuela’s President Nicolás Maduro, in a nationally televised speech, ordered the country’s attorney-general and public prosecutor to take action against the Harvard economist Ricardo Hausmann for daring to ask,

Hausmann was right to ask that question. Research overwhelmingly shows that successful economic development requires inclusive property rights, the enforcement of contracts, and even-handed rule of law. Venezuela currently has none of these ingredients.

So it is not surprising that massive government deficits financed by explosive monetary growth have caused the currency to collapse, with multinationals writing down the value of their Venezuelan subsidiaries each time the official exchange rate is lowered. Nor is it surprising that, with inadequate foreign exchange, the country is having difficulty paying its bills, or that price controls and police-state regulation have severely worsened food shortages. Finally, amid widespread speculation that Venezuela may indeed default on up to $80 billion of foreign debt, it is not surprising that yields on its sovereign debt have hit 15%.

Venezuela, with some of the world’s largest hydrocarbon reserves, should be enjoying an era of prosperity amid high oil prices. But corruption, political control of the national oil company, and nationalization of foreign-owned oil assets have caused exactly the opposite. (Disclosure: I serve on the board of one such company, ExxonMobil, which is awaiting the results of arbitration in international court.)

The combination of authoritarian rule, extreme populism, socialist ideology, and incompetence under former President Hugo Chávez and Maduro has wreaked havoc on Venezuela. But when Hausmann, a Venezuelan citizen and former government minister, discusses an important question that is being asked by investors around the world, he is not merely chastised, but threatened. The implication is clear: Speak out and you may be jailed.

This is not the first such treatment of a prominent economist in Latin America. A decade ago, it was Domingo Cavallo, who, as Argentina’s finance minister, had pegged the peso to the dollar to bring down the 1,000% inflation that was destroying the economy – and the fabric of society. When he abruptly ended the peg in 2001, a severe recession followed, and he was arrested and jailed. Fortunately, international outrage, including a campaign organized by North American economists, helped to free Cavallo.