The Way To Economic Progress; G. Velasco

THE WAY TO ECONOMIC PROGRESS AT present in economics, there is no subject so popular as the plight of the underdeveloped countries, if one is to judge by the number of studies and books about it. I am not at all sure, however, that this interest is a healthy one-that it will turn out to be beneficial to the underdeveloped countries. This doubt stems from my belief that, from an economic point of view, underde veloped countries are fundamentally similar to developed ones. According to my definition, an underdeveloped country is a poor country considered to have a possi bility of becoming less poor. Now, a poor man wishing to make his way up in the economic scale does not have to follow rules different from those followed by a man who is already well-off but wants to become richer. If there is any difference in these Dean of the Free Law School of Mexico, Dr. Velasco is a former president of the Mexican Bankers Association, and founder of the Mexican Institute for Social and Economic Research.

This article, based on remarks at the annual meeting of the Mont Pelerin Society at Princeton University in September 1958, was first published in the November 21, 1958 issue of U. S. A. magazine, P. O. Box 134, Lenox Hill Station, New York 21, New York. 177 178 GUSTAVO R. VELASCO rules, it is only that the poor man will have to work harder, to be more careful in his conduct, and to be thriftier. Similarly, I find that underdeveloped countries are not subject to a set of economic principles different from those to which the advanced countries are subject. The problems of the former are fundamentally similar to those of the latter. Certainly, these problems are very much like those affecting Great Britain, the United States, and France a century and a half or two centuries ago, before the Industrial Revolution took place. It is by no means my intention to play down the dif ferences of all kinds-economic, political, and social which exist between Mexico and the United States, for instance. But I believe the scientist should look far deeper than the tourist into the real situation, discern ing the similarities as well as the true differences.

To cite a simple illustration: Two years ago, my good friend, Professor Louis Baudin of Paris, France, visited us in Mexico City. As he and I were driving from the air port to a hotel, he saw lines of people waiting to go into movie houses and asked whether we had price control over admission tickets. Indeed, the municipal authorities have imposed a maximum price of $4.00 (32¢ in United States money). Of course, this control has increased the demand for seats. Incidentally, it also forces us Mexicans to travel to the United States to see our movie star Can tinflas in Around the World in 80 Days~ because this pic ture cannot be shown in our country at the official price. There may indeed be a special problem for underTHE WAY TO ECONOMIC PROGRESS 179 developed countries in international politics. But on the economic plane, I believe their problem is a general one and that it applies to all nations, poor and rich alike.

I am loath to speak in the currently fashionable way of "economic growth" or "economic development" be cause, as Professor S. Herbert Frankel of Oxford U ni versity rightly said in a recent lecture in Mexico City, there is a tendency in our underdeveloped countries to think that our problems will be solved if we grow physi cally, i.e., if we just build enough new factories or engage in new activities, regardless of whether they will be profitable or whether they are being created artificially through protective duties or subsidies, and thereby in reality decreasing instead of increasing the income and well-being of the people. I therefore prefer to use the term "economic progress." And if critics assert that this term is neither special nor new, I would reply that this is an advantage and not a disadvan tage. On concrete grounds, I would say that the similarity between the underdeveloped and advanced nations is made greater by the tendency to follow social and eco nomic theories fashionable at a given moment. Perhaps because the capacity of underdeveloped countries to de velop original thinkers is still limited, we imitate the more prosperous nations, not only in their many good features but also in their dubious and even frankly bad ones.

To me, this is conclusive proof that it is not facts, not realities, which determine the actions of men, but rather 180 GUSTAVO R. VELASCO the ideas which they form of things, the theories which they fancifully elaborate in order to guide their conduct and to be supposedly "better off." Mexican Welfare State Mexico is beset by each and every one of these fanciful theories. We have the Welfare State. It is growing daily and creating all sorts of difficulties. For instance, there is resistance to a bus fare increase of five centavos (two fifths of a cent in United States money) in Mexico City. The people have become accustomed to not paying for economic goods and services, or to paying less than their cost, so that the inevitable rise in fares becomes a politi cal instead of an economic question. This leads to a very serious political situation because the government, vic tim of the same mentality, neither speaks out clearly nor acts forcibly.

We have inflation-not yet a hyperinflation such as we had in 1916 when our money system was completely wrecked-but sufficient to have multiplied the money supply by 17 times and to create almost an eight-fold rise in prices during the last 22 years. This inflation (perhaps because we, like the Germans, were once badly burnt) has led to widespread dissatisfaction and to lack of con fidence in the Mexican peso. In our country, we have labor unions with special privileges and exemptions from ordinary legislation. We have corrupt labor leaders, participation of unions in politics, minimum wages, and continuous pressure by THE WAY TO ECONOMIC PROGRESS 181 unions and government to raise nominal wage rates, sup posedly "to improve workers' living conditions" and make "a more just" distribution of national income. Finally, we have had land reform with the disappear ance of the old "haciendas," and the revival of the semi communal system of land ownership that existed during colonial times. Of course, this tremendous change-I would almost say "upheaval" -resulted in a sharp drop in agricultural production from which we have been emerg ing only in the last twelve years, but which has left us with a heritage of very difficult problems.

As you can see, underdeveloped countries may be poorer and weaker from an economic point of view than the developed ones, but the painful symptoms from which they suffer are the same and the disease is the same, no matter whether it is called "interventionism," "stat ism," or "collectivism." In the problem of inflation, I would say that we occupy a middle position; we are not among the worst offenders. We do not belong within the better group of nations. In spite of this, we have had continuous inflation since 1936, with prices steadily going up although lagging behind the increase in the supply of money according to the official price indices. Our inflation has sometimes proceeded at a more rapid pace, as it did between 1937 and 1946; sometimes more slowly, as it did between 1946 and 1952 (I cite the years coinciding with the changes of our government admin istration); or still more slowly, as it has since 1952. Never theless, the fact is that we have been unable either to 182 GUSTAVO R. VELASCO stop inflation or even to approach a rate of "merely 3 per cent a year" which is looked on by some economists as not too harmful.

Worse still, the effects of this long inflation have been cumulative, especially the psychological ones. Although I believe the job can be done, few people think that the trend will be reversed, that prices will cease to rise, and that the government will succeed in preventing another devaluation of the peso. Generally and basically, I believe that Mexico has had and still has inflation because it has lived beyond its means. More specifically, I find that the underlying causes of our inflation are: 1. The Welfare State 2. The desire for economic betterment 3. The desire for economic development Permit me to comment briefly on the foregoing causes of inflation: • Our budget, i.e., our traditional budget, has been balanced over the last six years. But outside this budget, we now have dozens of independent establishments and economic agencies providing economic goods or services free or at less than cost. Some of these agencies have deficits because of inefficient management; others must be subsidized to make ends meet; most of these agencies or establishments go in for extensive development and in vestment plans. In many cases, the Bank of Mexico has had to grant loans or absorb their issues of securities either directly or through a development bank called THE WAY TO ECONOMIC PROGRESS 183 N acional Financiera. Naturally, it also helps to sustain them by pegging their prices and buying them when offered for sale.

• In relation to the desire for economic betterment, the labor unions exert constant pressure-and so does the government-toward the raising of money wage rates. In Mexico, collective labor agreements have to be revised every two· years. In general, unions succeed in securing approximately a 15 per cent rise every time. Of course, I do not believe that this is a direct cause of inflation. It is still necessary for the monetary authorities to add to the money supply. But this union pressure has created the climate in which the money authorities have made the increase and have relaxed their measures against credit expansion. • .The desire for economic development does not, I be lieve, per se produce inflation, and it does not have to be accompanied by inflation, as has sometimes been said in our underdeveloped countries. (Incidentally, I must here remark that we in the underdeveloped countries accept all the bad theories propounded in the advanced countries and even add some of our own!) Inflation arises from economic development as the result of a tendency to overinvest, both on the part of the government and of private enterprise. As I pointed out, the building of new plants-whether profitable or not-is confused with real economic progress.

There is a plain connection between the Welfare State and inflation. It is interesting to note that in Mexico they appeared simultaneously, or more exactly, synchronously.

184 GUSTAVO R. VELASCO Socialism Breeds Inflation We began to tryout socialistic measures in 1935 under President Cardenas. The next year, the budget had a large deficit and the only way to cover it was through an overdraft in the amount that the Bank of Mexico was authorized to lend to the government. Over the years, budget deficits were the most important cause of our in flation. And though during the present Administration, the traditional budget has been balanced, it is a fact that the so-called social and government banks and economic agencies are still being helped by the Bank of Mexico. Often, discussion of the Welfare State centers around the subjects of social insurance and medical services. However, the concept of the Welfare State, at least as I understand it, embraces much wider subjects. I think we have this admirable scheme (admirable, of course, if the government could be a sort of third-dimensional Santa Claus) whenever the government provides some goods or services free-in whole or in part-or when it forces some members of the community, such as property own ers of housing, to provide services and goods free to others, such as tenants.

If this concept is correct, then in Mexico we have not only general social insurance and medical services for those persons embraced by the Welfare State (up to now, artisans, domestics, and agricultural workers are not cov ered by the insurance system), but also a multitude of other prestations socialesJ as the French say rather ele gantly, or of "handouts" as in American slang.

THE WAY TO ECONOMIC PROGRESS 185 There is a particular point about the Welfare State that I, as a lawyer, am greatly interested in bringing out. I believe that the Welfare State is incompatible with the Rule of Law, or, to use the European expression as it is written in French, with "L'Etat de Droit et Ie Principe de Legalite." Unfortunately, in our century, the legal profession and teachers of law have failed miserably-as Professor F. A. Hayek has stressed-in their duty to defend this prized feature of Western Civilization. T he Silent Opposition I can bear witness to this. Last year, I attended a meet ing of the International Association for Juridical Science, held under the auspices of UNESCO at the University of Chicago, which dealt with the Rule of Law. One of the subjects discussed there was "The Welfare State and the Rule of Law." The official conclusion-set forth in a report-was that there is no conflict, no incompatibility, between the two ideas.

Among the distinguished gathering of leading profes sors of constitutional and administrative law at the UNESCO conference, I was the only one to speak out publicly against the report, though several of the per sons present told me privately that they were in agree ment with my view. Perhaps I spoke up because, even though I am not an economist, I am proud to be counted among "the ignorant and vociferous minority" -as the delegate from Poland called some economists who, he 186 GUSTAVO R. VELASCO proclaimed, are the only ones to oppose the Welfare State. It has been said very rightly that free enterprise can take an awful lot of punishment. I believe it was Bene detto Croce who wrote that the spirit of freedom is al ways reviving and assuming new forms despite all obstacles. Permit me to point out that a healthy strong man can indulge in a great deal of alcoholism or lead a most dis solute life before the ill effects finally get the better of him; but a frailer man, or an adolescent beginning de velopment, can take no such liberties without suffering immediate bad results.

Such is the case with the underdeveloped countries. Measures causing only some inconvenience or harm to giants like the United States or Great Britain may well prove fatal for us. The advanced, well-developed coun tries have more social and political stability, and even stronger traditions, than we, although even in Great Britain, which is the motherland of constitutional gov ernment and of the Rule of Law, we have seen the weak ening effects of socialism and of the Welfare State. As a final point in considering the economic progress of our underdeveloped countries, permit me to say that it is up to the developed countries to set good examples for us. Parents should not lead disorderly lives and then blame their children for imitating them. We have already one bad enough example wherein the State was going to wither away and the people would rise to unheard-of stages of prosperity and happiness. Surely if India has a socialistic development plan and if Egypt THE WAY TO ECONOMIC PROGRESS 187 expropriates the Suez Canal, it is not solely because of this single bad example.

I am aware that the task before us is a common one, and that it devolves on us all-great or small, developed or undeveloped-to preserve and perfect our civilization. But I also believe that if the greater nations of the West wish to regain their leadership, they must first of all be our spiritual and intellectual guides. They must again believe sincerely and practice wholeheartedly the princi ples of freedom under which they led the world until a generation ago. The way to achieve economic progress, for poor and rich nations alike, is to follow the principles of economic freedom.