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					                                    DEVELOPMENT AND FREEDOM 1




Manuel Hinds

April 19, 2011


Manuel Hinds

Mont Pelerin Society

April 19, 2011


What kind of social order does Latin America need to take advantage of the new global society
that is emerging in the twenty-first century?

In a recent book, Douglass C. North, John Joseph Wallis and Barry R. Weingast, describe progress
in terms of moving though three stages of social order: the foraging order, the limited access or
natural order and the open access order. According to them, development comes about when a
society evolves from a limited to an open access social order.

           All of human history has had but three social orders. The first was the foraging order:
           small social groups characteristic of hunter-gathered societies. Our primary concern is
           with the two social orders that arose over the last ten millennia. The limited access
           order or natural state emerged in the first social revolution. Personal relationships,
           who one is and who one knows, form the basis for social organization and constitute the
           arena for individual interaction, particularly personal relationships among powerful
           individuals. Natural states limit the ability of individuals to form organizations. In the
           open access orders that emerged in the second social revolution, personal relations still
           matter, but impersonal categories of individuals, often called citizens, interact over wide
           areas of social behavior with no need to be cognizant of the individual identity of their

    Paper presented in the Regional Meeting of the Mont Pelerin Society, held in Buenos Aires in April 14-17,
2011. It draws heavily from Manuel Hinds, The Triumph of the Flexible Society: The Connectivity
Revolution and Resistance to Change, Westport, Connecticut, 2003.
    Douglass C. North, John Joseph Wallis and Barry R. Weingast, Violence and Social Orders, A Conceptual
Framework for Interpreting Recorded Human History, Cambridge, Cambridge University Press, 2009., page
2. My emphasis.
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When describing the commonalities among open access societies, the authors include
impersonality; competitive access to political power (which makes them democratic); competitive
markets; the inability of participants to manipulate interests and, first of all, “a set of beliefs
widely held among the population…The specific nature of those beliefs differs across open access
orders, with the Anglo-American countries tending to emphasize equality before the law and the
East Asian countries tending to emphasize shared growth.”

The open access society meets all the requirements to be a modern, democratic and efficient
society. We could diagnose the problem of the Latin American countries—so devastated for such
a long time by the arbitrary populism that is the opposite of the impersonal world of modern
institutions—as having failed to become open access societies.

This diagnosis, however, could not be easily translated into a solution of the problem. Identifying
the lack of an open access social order in Latin America is more a description of the problem than
the isolation of the causes that have led to this result. One would expect that institutional
development would be endogenous in the long term. The real question is why did Latin American
countries fail to become open access societies.

In fact, this diagnosis would not throw light on the most important issue at hand: why do some
human groups develop into open access societies while other do not, even if subject to the same
stimuli—as it was the case during the Industrial Revolution, when some countries reacted to the
challenge of industry by industrializing while others could not carry out the transformation. Also,
the diagnosis would not explain why institutions cannot be exported from one country to another.
As it has been proven so many times in Latin America, just copying laws, or all the institutions of
a social order, is useless. All countries in Latin America have had for long sets of democratic
institutions as good or better than those that the now advanced countries had when they developed.
And yet, Latin American countries did not grow into advanced societies, mostly because the
institutions did not work in the region. These institutions were not effective because they had not
emerged from the values and the realities of the Latin Americans.

Furthermore, the diagnosis would not explain why some countries industrialized into the great
democracies of the West while other societies became industrial and powerful without being

    North, Wills and Weingast , ibid, pp. 112-113.

democracies or free markets. The latter included the Japan of the Meiji Restoration and the early
twentieth century; the Second Reich and Nazi Germany; and, more recently, China in what
concerns the political dimension. These societies had all the material features of an open access
society without the overall freedoms of the western democracies. Strictly, they were not open
access societies because the access to political and economic freedoms was not open, but they
were not limited-access societies, either. For most of their populations, their institutions were
impersonal, and they were organized based on a set of beliefs widely held among the population.

Finally, the diagnosis would not answer the question of why some groups become open access
societies and then decay into more primitive forms of organization. The Roman Republic, for
instance, was very close to be an open access society, with institutions so strong that have served
as models for other societies for thousands of years. And yet, at some point, Rome lost its
freedom and went into a long period of servitude under the Caesars, and then dissolved into
several successor states. Many of the democratic institutions—like the Senate—survived in name.
Devoid of sense in what had become an absolute monarchy, however, they became just carcasses
without any purpose or effect. That is, the same institutions can work very well in some societies
and not in others, or very well in some epoch and not in other epoch in the same society. They are
specific to the societies that invented them.

Yet, even if the diagnosis cannot be translated into policy, it has become the basis of policy in
many Latin American countries, which aim at establishing institutions without stopping to define
based on what values. In the bureaucratic world, this has meant passing more laws, regulating
everything, enlarging the government. The idea is that what is needed is impersonal and effective
institutions without paying attention to the values they may have imbedded. As expressed by
Samuel P. Huntington in a classical book:

         The most important political distinction among countries concerns is not their form of
         government but their degree of government. The differences between democracy and
         dictatorship are less than the difference between those countries whose politics embodies
         consensus, community, legitimacy, organization, effectiveness, stability, and those
         countries whose politics is deficient in these qualities. Communist totalitarian states and
         Western liberal states both belong generally in the category of effective rather than debile
         political systems…In all these characteristics the political systems of the United States,
                                                               DEVELOPMENT AND FREEDOM 5

           Great Britain, and the Soviet Union differ significantly from the governments which exist
           in many, if not most, of the modernizing countries of Asia, Africa and Latin America.

However, the problems of institutional development cannot be understood in terms of institutional
weakness and strength exclusively. Institutions are not homogeneous entities. They differ even
across developed countries. They could be democratic and tyrannical, they can be murderous and
they can be rigid or flexible. Some institutions may stop progress and some others could be
destructive. Industrialization and effective government can be attained with many of them.

The difference between those that lead to healthy, democratic social life and those that build
destructive states is not that some of them are impersonal or effective and the others are not.
Many of the institutions of vertical, tyrannical regimes were impersonal for most of the
population. The difference is in the values that animate the institutional life of each of them.
Some of them are organized based on the horizontal relationships of free individuals, while others
are organized on the vertical principle that the state is superior to the individual, and on the logical
consequence of this: that some people issue commands, and the rest obeys.

The variety of the responses to the Industrial Revolution, the differences between the creative and
the destructive regimes that arose from it, the possibility of institutional decay and the fact that
institutions cannot be exported show that it is people that give life to institutions. These have life
only as long as they frame what people want to do, in the way they want to do it. They frame
people’s actions within their values of the people’s themselves. Thus, to be alive, institutions
must arise from the people’s values.

In fact, values provide the only means to differentiate certain realities that can be described only in
value terms, like the difference between Nazi Germany from democratic Switzerland, even if in
purely material grounds they would be difficult to differentiate. Values are also the only means to
explain why the institutions of one and another of these, and any other countries, were built. And
these differences, those that exist between the destructive, vertical and the creative, horizontal
regimes are not minor. They are more important than the differences that exist between developed
and developing countries.

    Samuel P. Huntington, Political Order in Changing Societies, New Haven: Yale University Press, 2006, pp.

Looking at the history and the problems of Latin America from this perspective, one gets the
impression that the problem is not that of a lack of institutions but, instead, one of lack of life in its
original institutions, which, like those of the industrial democracies, were based on the principles
of freedom and individual values.        Certainly, the solution is not to create more legislation,
expecting, for instance, that competition—violated by the state itself in so many instances—would
flourish under a law of competition, or that creativity can be legislated. In fact, most of the now
advanced countries developed with much simpler legislation than that now existing in developing
countries. With fewer and shorter laws these countries had a much stronger institutional life that
Latin America.

In this paper I argue that the problem is one of values. Latin America has not developed and is not
yet in a firm path to development because there is a serious flaw in the set of values that has
underpinned the region’s behavior for the last many centuries: a weak conviction about the
benefits of freedom, which set the region into a low-level institutional and economic equilibrium.
This problem is related to but is different from that of developing an institutional setting, which is
the most common prescription for Latin America. This problem should be resolved to give life to
the institutions needed for the development of rich and democratic societies. Without making a
strong commitment for a free society, democratic institutions would remain carcasses and the
region would find it impossible to turn its countries into the creative societies that would flourish
in the twenty-first century.

I develop these ideas in four chapters. The first looks at how the old institutions of patronage, not
the constitutions and laws written in sterile paper, shaped the institutional life of Latin America.
In Chapter II I review how this social order turned Latin America rigid, unable to absorb in a
creative way the social transformations required by the Industrial Revolution. In Chapters III and
IV I look at the urgent need to solve the problem of values if Latin America wants to avoid being
left behind in yet another big transformation of the global economy.

It could be argued that there are too many differences between Latin American countries in terms
of institutional development to discuss the subject for the region as a whole. In fact, there are
some marked differences. Costa Rica is the country with a longer uninterrupted democratic
institutional record in the region, dating back to the late 1940s. Chile has made enormous strides
in the development of open access institutions in both the political and the economic dimensions.
                                                          DEVELOPMENT AND FREEDOM 7

Other countries, like Mexico, Peru Uruguay and Colombia have progressed in this respect
substantially, too. Yet, even in the case of Chile, progress has been very recent, at least in the
political dimension. Only in 1990 the country was under a military dictatorship, which stood in
power for almost seventeen years. In the case of Mexico and Peru, the perspective of falling under
populist regimes in the near future obscures their undeniable institutional progress. Colombia is
just emerging from its institutional crisis of the 1990s.       Uruguay and Brazil had military
dictatorships just a few decades ago. Thus, while recognizing that many countries have made
enormous progress in the recent past, taking the long perspective makes it legitimate to speak of
the Latin American institutional problems. It will take a long time, and further progress in many
dimensions, to classify a Latin American society as a modern, developed one.


                  The power of social order
Institutions are so important because of their crucial role in the management of progress and, in
general, of social change. It is because of this that the weakness of the democratic institutions of
Latin America has resulted in the overall underdevelopment of the region.

We associate order with steadiness and permanence, and chaos with change. Yet, the single most
important factor determining the existence of order in a society is its ability to organize itself in
the pursuance of common goals—which is, in itself, a dynamic process, a process of change.
Development starts when societies acquire this ability, and progress proceeds as it matures. Thus,
change is the source of social order. Societies introduce order through institutions, which may
take the form of rules and regulations—such as the constitution and the body of laws—or that of
organizations in charge of performing certain duties—such as the court system, the government,
and business enterprises.

These institutions facilitate social and economic growth mainly because they take care of all
routine transactions in society, establishing rules to perform them and allocating clear
responsibilities for the people in charge of applying them. Because of the existence of such
institutions, people do not have to worry about the means to send communications to other people,
or ponder on whether stealing is good or bad, or worry every day on how to organize the

distribution of food. This liberates the energies of society for the pursuance of goals related to
growth, taking advantage of the routines embedded in the existing institutions.

With growth, activities that had been challenging in the past become part of the routine of society,
and institutions take care of them. In this way, for example, a matter that is the subject of scientific
speculation at one stage of the process, becomes engineering knowledge in the next, and from
there it becomes production techniques. The wider the institutional basis, the more a society can
apportion its energies to grow. Thus, growth builds on the stock of order already established in
society, and results in higher, more complex levels of order. Expressed in another way, the
existing social order is a stock, which was built with the flows of the creative activity of the past.
Order, the ability to organize on top of organizations already in place, is a capital asset, it has an
economic value, it is the foundation of the wealth of a country.

Like any capital asset, social order must be renewed continuously. Social changes of any kind—
such as the introduction of new technologies or improvements in the educational level of the
population—pose challenges to existing institutions, because they modify the relationships and
transactions these institutions were set to regulate and channel.

In normal times, institutions struggle to adapt themselves to these new relations, redefining their
objectives to broaden their scope. Successful adaptation results in stronger institutions, and in a
sense of accomplishment that generates more energy, focusing it in the direction that has proven
successful. Under the right environment, change is like blood, which pushes and expands the veins
and arteries, strengthening a living body. Within some boundaries, the higher the level of activity
channeled through the institutional setting of any given society, the stronger these institutions
become, and the more complex the challenges that such society can take and overcome.

This process, however, is nonlinear. As much as change can lead societies into order and progress,
it can also destroy institutions and, with them, the fabric that holds society together. This happens
when the pace of change overwhelms the existing institutions’ ability to adjust. People start to
create relationships that bypass those institutions, disrupting the social order and threatening the
stability of society. Social relations overflow the institutions created to channel them, producing
results that people consider chaotic, unfair, or both. When a regime’s institutions are turned into
carcasses, the regime loses legitimacy. The adjustment to the changing conditions then tends to
take place in a catastrophic fashion, and society sinks in chaos.
                                                           DEVELOPMENT AND FREEDOM 9

Such erosion takes place in all societies, including the most developed ones. Actually, it is a
precondition for the process of creation of a new, superior form of social order that would be
consistent with the opportunities opened by the new technologies. Yet, in some societies the
erosion of the old bonds may lead not to a renewal of social order but to chaos. It is in those
societies that fundamentalism, the obsessive desire to go back to the past, emerges, easily leading
to destructive regimes. Not all countries where fundamentalism appears are led to destructiveness.
However, it creates severe problems in all of them.

At the time of the independence of Latin America the then existing social order was being
challenged all over the world by the emerging Industrial Revolution. Some countries—the now
developed countries—industrialized within one century, going through a radical transformation of
their institutional setting, which not only changed but also strengthened enormously. Doing that
required destroying all, or parts, of the previously existing institutional setting, and developing a
new one, almost from scratch. Latin America could not take this step. It failed to discard its old
institutional setting, which was based on patronage. Some of the essential realities of its social
order remained in place throughout the last two centuries. The region’s vulnerability to populism
is one of these features.

                   The Sisyphus Damnation
On December 18th, 2005, Bolivians elected Evo Morales as their new president. He had run on a
slogan saying “Long live to coca, death to Yankees”. When celebrating his triumph, he promised
to put an end to capitalism and neo-liberalism and establish a socialist regime. According to him,
his arrival to power was not a normal inauguration; it marked the beginning of a true revolution
that would make justice to the indigenous population, to the poor and dispossessed at the expense
of the foreigners, the capitalists and the white people.

He and his followers portrayed his political posture as something quite innovative in the political
life of Bolivia. Yet, Morales’ triumph and declarations brought back reminiscences of a distant
past. Except for one thing—his defense of coca—his ideas were very similar to those proffered by
Victor Paz Stenssoro when taking over power 53 years before, in 1952, at the head of a popular
uprising. They also resembled the populist discourse of Hernán Siles Suazo, Paz Stenssoro’s vice-
president and successor in the 1950s, and his predecessor in the 1960s and the 1980s (Paz
Stenssoro was president four times and Siles Suazo twice). They were also similar to the words

uttered by Colonel David Toro Ruilova in 1936, who, after a military coup that led him to power
announced the arrival of “military socialism”. They also reminded the words of Colonel German
Busch Becerra, who dethroned Toro in 1937 and promulgated a constitution that stressed the
primacy of collectivism over private property. Gustavo Navarro, a radical politician, had used the
slogan “land to the Indians, mines to the state” as far back as the 1920s.

Bush issued a decree that prevented the mine owners from removing capital from the country. He
also expropriated the holdings of Standard Oil without compensation. Paz Estenssoro carried out
an agrarian reform that gave the Indians most of the land on the country’s highlands; nationalized
the tin mines; and created the Mining Corporation of Bolivia, a state-owned enterprise that would
manage the mines in the future. Morales nationalized all the country’s gas holdings and gas
processing facilities.

All these governments depleted the coffers of the Bolivian treasury, depressed private sector
investment and led the country into deep economic and political crises. Rather than providing
resources to the people, the nationalized companies made huge losses that destabilized the
countries fiscally. These governments generated high rates of inflation. No one, however, came
close to what Siles Suazo achieved in a second presidency in the 1980s—generating a
hyperinflation that was the fourth worst in the history of the world. Each of these caudillos lost
his popularity as a result of these problems and had to leave government, voluntarily or

In their wake, more responsible governments took over and restored fiscal discipline and
economic growth, only to be replaced by the next wave of populist governments. This waving,
back-and-forth movement, in which responsible governments rebuilt the country after the previous
populist administrations dilapidated its resources, only to see their works destroyed by subsequent
populists, resembled the destiny of the mythical Sisyphus, who was condemned by the Greek gods
to push forever a boulder up a mountain, only to see it roll down again. This cycle repeated itself
for 200 years, since the country became independent from Spain.

In an ironic turn of events, Paz Stenssoro started the last round of stabilization when he took over
from his former vice-president and successor Hernán Siles Suazo, who was leaving the presidency
in 1985 while hyperinflation raged. Paz Stenssoro, who had pushed down the boulder so many
times, for once pushed it up, setting it ready for Evo Morales to push it down again.
                                                          DEVELOPMENT AND FREEDOM 11

Bolivia is the poorest country in Latin America. Political maturity, however, is not a secretion of
higher income in Latin America. The same story could be told about most countries in Latin
America, including the richest. Their ups and downs have been similar to those of Bolivia, even if
the income per capita of many of them was much higher. The cycles have repeated themselves
until very recently all over the region, until today in several countries. With the sole exception of
Costa Rica, all countries in the region suffered from military dictatorships or civilian authoritarian
governments in the last twenty to thirty years.

At the core of this uniformity is the long prevalence of populist caudillos in the history of all Latin
American countries.

The appeal of populist caudillos is deeply rooted in the social order that all Latin American
countries shared in the distant past. For centuries, patron-client networks have determined the
shape of the Latin American economy in a symbiosis that ultimately prevented the creation of a
social order based on impersonal institutions.

The symbiosis began during the colony, when economic success depended on the favor of the
Spanish Sovereigns and their representatives in the region. There were three main ways to
become rich: mining, plantations and commerce. Getting into all of them required the explicit
authorization of the sovereign. Thus, the idea that riches flowed from the government became
natural for both rich and poor Latin Americans.

Moreover, the other side of patronage—the dependence of the average person on the patron—was
also imbedded in the colonial plantation organization. At the time, the scarcest resource was
labor.   Indians refused to work for the Spaniards or the mestizos.           The institution of the
Encomienda, which existed all over Latin America, allocated Indians to the patrons of the
plantations.   The Indians were forced to work for the patron in exchange for the patron’s
protection and religious guidance. The workers in the plantations, as well as all other workers in
all sectors, learned to expect protection and welfare to flow down from the state to their patrons,
and from their patrons to themselves. In exchange for their freedom.

The caudillos capitalized on this attitude of dependency. Beneath their highflying rhetoric, what
sustained the power of the caudillos was a simple deal: people delivered their freedom to the
caudillo in exchange for material goods—just as it had been with the king and Spain. That is, in

spite of their democratic protestations, Latin America chose to live under the archaic social order
of feudal Europe.

Of course, networks of clients were not exclusive of Latin America. They are universal. They
exist even in mature democracies. All developed societies have passed through a period in which
patron-client networks dominated their politics. Yet, the fact is that, while the United States, the
British Dominions and West European countries overcame the power of patron-client networks
and became free and democratic societies, political change in Latin America was associated not
with this transition but with the evolution of the patronage networks—which changed superficially
but not in essence until very recently.

Some aspects of this dire reality have not changed in some countries since the early years of
independence. At least one of the modern caudillos, Fidel Castro, is as bloody or more so than the
sinister caudillos of the early nineteenth century, like Juan Manuel de Rosas in Argentina and Dr.
José Gaspar Rodríguez de Francia in Paraguay. The Castro dynasty has been in power for over 50
years in Cuba—beating the Somozas, who stayed only 43 in Nicaragua. Hugo Chavez makes no
secret of his pretensions to remain in power for decades. Daniel Ortega got a sentence from the
Supreme Court saying that the provision that forbids reelections in Nicaragua does not apply to
him. The idea of being presidents for life seems to tempt Evo Morales and Rafael Correa, who are
not different from other, equally populist, caudillos of the last two centuries.

There is a dimension in which the threat of populism is worse than in the first century after
independence.    During the nineteenth century, what was at stake in the fights between the
caudillos was the identity of the people who would take advantage of the control of the
government to grant privileges to their own supporters. The twentieth century brought with it the
new ideologies of state predominance that aimed at transferring to the government all political and
economic powers, subordinating individual rights to the overall power of the state. Fascism and
communism became a threat for all Latin American countries, and an ugly reality in Cuba. Lately,
as communism was discredited by the fall of the Soviet Union, Hugo Chavez from Venezuela
created the Socialism of the Twenty-First Century, a multinational populist movement with no
well defined ideology but very clearly oriented toward the creation of totalitarian states.

This raised the stakes in the Sisyphus cycles. It introduced the possibility that everything, not just
the people in the government but also the entire economic and political system could change with
                                                         DEVELOPMENT AND FREEDOM 13

the political party in power.   With this new development, the level of uncertainty, an important
deterrent of investment and economic activity in general, increased significantly during the last

The rising of the stakes is part of the natural evolution of populism. Populist regimes squander the
countries’ resources to give the impression of progress and fund their patronage networks. For
this, they must control the country politically and economically. This requires structuring the state
in such a way that both the economic and the political powers are concentrated in the
government—discarding freedom and other individual rights in the process. Thus, by accepting
populism—which essentially is made of false promises of instantaneous, effortless progress—
Latin Americans renounced to freedom—which is the ultimate source of progress.

The arbitrary power of the patronage networks, the uncertainty caused by their fights and the
instability produced by the replacement of some caudillos for others in government cut in the bud
the possibility of creating a social order that would sustain the complex interactions between
anonymous actors characteristic of an industrial society. That is, the acceptance of populism, and
the symmetrical rejection of freedom, led Latin America to miss the Industrial Revolution.

This was a crucial failure. The industrial society is not just bigger and richer than the feudal
society it replaced. It is completely different in almost all the dimensions of human relations.
Industrialization was revolutionary not because the inventions that propelled it were astonishing
but because it transformed society in fundamental ways, leading to an unprecedented explosion of
creativity and wealth. This is what Latin America missed.


Why did Latin America fail to escape from the patronage networks to create a new, modern,
industrial social order, as so many other countries were able to do? In this chapter, I argue that
this failure was the result of having made the wrong choice when confronted with the most crucial
decision a society can make: how to harmonize the permanence that is necessary to support
change with the changes themselves.

In every society, there is a tension between permanence and change, two basic elements of social
life. In the previous chapter we focused the discussion on the relationship between order and
change—how social order builds on previous sets of order—and saw rigidity as a negative trait of

a social system. Certainly, rigidity is a negative feature of a social system taken as a whole. Yet, to
be functional, a social order needs some permanent elements, some aspects that would never
change. It is precisely the set of permanent elements that gives identity to a society and, more
importantly, what lends an essential predictability to its behavior. What is the use of a social order
if it is not stable, if one cannot be sure that it will last? Growth and change need those permanent
elements to flourish. We live inserted in time and stable connections between the past and the
future are essential to calculate if it is worth investing today to get benefits in the future. This is
true not just in economic terms but also in every other aspect of life. To build on an existing
infrastructure—the secret for developing an advanced society—makes sense only if such
infrastructure is to last.

Thus, society can work only when there is a minimum level of predictability that allows people to
believe that they will be able to reap the benefits of their current actions. Institutions, the complex
system for rules of behavior structuring societies, give this minimum level of predictability. To
introduce predictability, institutions have to restrict the ways open for individual behavior. At the
same time, they have to allow for individual freedoms to satisfy the people’s craving for growth.
This poses a contradiction in terms of the requirements for a social organization to succeed in the
long term: change is the engine of social order but permanence is its mainstay. Resolving this
contradiction is the key to creating a society out of a conglomerate of people.

It is in the solution that different societies find this conflict between a predictable social order, as
given by stable unifying ideas, and social change coming from individuals pushing for a
redefinition of such ideas that we can find the key to the difference between societies that develop
strong and flexible institutions and those that either blow up into destructiveness or attain a low-
level development equilibrium.

Societies can take one of two basic positions in their search for predictability. The first position is
that of societies holding as their ultimate objective the achievement or preservation of a certain set
of circumstances. These can be defined in many ways, most frequently in terms of a certain pattern
of income distribution; or of a certain distribution of the relative power of the different sectors of
society; or of a certain way of organizing economic activities; or of a rule like saying that the
government will give each family a house and a job. People in these societies derive the sense of
stability from the permanence of this state of affairs and consider that their governments are
                                                          DEVELOPMENT AND FREEDOM 15

legitimate only to the extent to which they keep it in place. That is, for them, stability is defined in
a primary, objective, material way. They tell individuals, Your circumstances will not change. To
deliver on this promise, governments in these societies have to restrict the economic and political
freedoms of their citizens, preventing them from straying into creating activities or relationships
that could disrupt the existing balance.

Thus, the government has to assume the control not just of political but also of economic
matters—fusing in this way economic and political power into a single magnitude. Without such
control, the government would not be able to keep in place the desired state of affairs, or further its
attainment. This is the origin of the one-dimensional state. The feudal and mercantilist societies
for most of continental Europe were of this kind. The Communist and Nazi regimes that evolved
from them are the extreme forms of this social organization. They justified their totalitarian
control of society on the creation of the state of perfection. They told individuals, Your
circumstances will not change once we get to our paradise. What they fixed was the set of
circumstances that would prevail in that paradise.

The second position is that taken by societies wanting to have certainty regarding the rules of the
game—which means certainty regarding individual rights. In these societies, everything can
change as long as these rights are preserved. They tell individuals, Your circumstances may
change, but your rights will always be preserved. People in these societies derive their security
from the certainty that their integrity as individuals will always be protected. This is the mandate
to their governments. Society develops multidimensions and flexibility. This was the route taken
by the countries that adjusted harmoniously to the Industrial Revolution.

There is no nothing in between these two basic positions. By giving priority to maintain an
achieved or dreamed material status, countries taking the first position are ready to sacrifice
everything in the pursuance of their concrete objective. Individual rights take second priority when
colliding with this objective. Giving priority to individual rights is also an exclusive proposition. If
such a priority has been established there is no given status, social dream, or ideal that can have
more importance than those rights. The first position focuses on keeping stable the outcomes,
while the second one focuses on keeping stable the processes; the first looks at the ends, the
second at the means.

The choice of priorities gives shape to the mechanisms that society uses to keep social order in
place. The maintenance of a certain state of affairs is associated with a vertical order—that which
relies on hierarchies—and the maintenance of individual rights with a horizontal one—that which
emerges among equals. We may visualize the vertical social order as a pyramid, the horizontal one
as a web. The stability of the pyramid depends on the strength of its vertical structures—that is, on
the coercive power of the central decision makers—while that of the web depends on the strength
of the individual links tying one person to the next. That is, vertical societies depend on
authoritarian structures, while horizontal ones on social cohesion.

The priority given to individual rights—which restrict the power of the state over the individual—
leads to self-government—which empowers individuals to defend and extend their liberties. In this
way, the microliberties give birth to complete freedom and self-determination. The fully
democratic societies of the twentieth century developed in this way—from the micro to the macro.
While the opposite process also happens—the reinforcement of the microfreedoms by the
macroinstitutional setting—experience also shows that democratic institutions are easily eroded
without the support of the population values. The social cohesion that makes freedom and
democracy possible is thus rooted in the individual.

Latin America chose the first position—that of demanding fixed material circumstances. This
choice is obvious in the repeated success of populists making exorbitant promises, many of them
plainly unbelievable, even in countries with high educational levels by developed countries’
standards. This gave a extreme rigidity to the region.

While the region’s economic interests evolved through time, the linkage of economic success with
political control was never severed in most of the region.        Industrialization started in Latin
America in the twentieth century, not based on the freedom of markets but on its opposite—the
creation, by the government, of a protected haven for the new domestic industry. In this way,
industrialization, rather than helping in the political and economic modernization of Latin
America, became a new and important factor in perpetuating the symbiosis between government
and private sector that had characterized the colonial times and the first century of independence.

This path to industrialization confirmed in Latin Americans the old idea that using the government
to grant privileges to political associates was the nature of capitalism and the free market. When
the ideological opposition to capitalism emerged in the shape of communism and fascism in the
                                                         DEVELOPMENT AND FREEDOM 17

first two or three decades of the twentieth century, the model they attacked was not that of the free
market, which they had never experienced, but instead the old model of market privileges
inherited from the colony.

Protected, the new industry could not compete abroad. While it was sold on the idea that it would
reduce the region’s dependence on commodity exports, the new industry in fact increased such
dependence, as the revenues from those exports were used to import not finished goods but raw
materials and components for the domestic industry. In this way, when commodities experienced
booms, the domestic industry also boomed, and imports of materials grew. When commodity
exports declined, however, it was not that easy to reduce imports because that would depress
industrial production and employment.       Thus, countries ran huge current account deficits in
fruitless efforts prevent an industrial collapse. Such collapses took place anyway all over the
region for many decades, generating currency and debt crises, until they peaked in the huge debt
crisis of the 1980s.

This should have destroyed populism. However, the randomness of the most important economic
variable, commodity prices, has confounded the Latin American citizens for a long time regarding
the success of responsible or populist economic policies.


Having failed to industrialize, Latin America’s economic performance remained dependent on
commodity production and exports. The international prices of these commodities introduced
randomness in the Latin American politics as the population (and some international experts),
have tended to attribute to the economic skills of the governments in power the high rates of
growth associated with booming commodity prices, as well as the low rates of growth associated
with low commodity prices. Thus, the fate of political parties and their ideologies have come to
depend on the random movements of commodity prices. Randomness has played in such a way
that in the recent past people in many countries people have come to believe that populist policies
are the best.

The history of the last 40 years shows this very neatly. Figure 1 (see the Statistical Annex at the
end of the text) shows two of the cycles of these prices. During the 1970s, most of Latin America
grew very fast, propelled by a commodity price boom in the early years of the decade and then by

heavy borrowing, justified on the idea that commodity prices had increased permanently. People
believed that the high rates of growth were the result of the populist policies prevailing in those

In the 1980s, as the commodity prices boom turned into bust, most Latin American countries went
into deep financial and external debt crises, exposing the consequences of the populist excesses of
the 1970s.   This period coincided with the fall of the Soviet Union, the global collapse of
communism, and a wave of triumphant liberal political and economic ideas.            The populist
governments and the military dictatorships fell, democratic institutions were revitalized, and
governments began to design and implement liberal programs of political, social and economic
reforms. Briefly, for a few years, it seemed that Latin America had at last matured into modernity.
Populism seemed to have disappeared. Institutional democracy seemed to have arrived.

Yet, in many countries, maybe the majority of them, the evolution toward freedom and democracy
was conditional. It was contingent on immediate performance in economic terms. People did not
choose freedom as the fundamental cornerstone of their new social order. They just gave it a try—
a short one in many countries.

Unfortunately, commodity prices acted against the nascent beliefs on freedom and democracy in
the same way in which they had acted against dictatorships. As shown in Figure 1, these prices,
which had caused the boom of the 1970s and the bust of the 1980s had a very short boom in the
early 1990s and then fell from 1997 to 2003—precisely when the liberal reforms were supposed to
accelerate the growth of the region. As it always had happened, the depressed commodity prices
caused a recession in Latin America. With that recession, down came the beliefs on freedom and
liberal ideas, which by that time had become the odious neo-liberalism invented in Washington to
oppress Latin America.

Then, as populism was coming back to the region, commodity prices went up again in 2004,
leading to a long boom that, with an interruption in 2009, has lasted up to the moment of this
writing.   The population in many countries became convinced that the booming economic
situation of the region was caused by the good populist economic policies and that the previous
recession had been caused by the bad liberal policies. Some other countries did not fall for
populism. In those, the coincidence has been of high growth with liberal policies while the
                                                              DEVELOPMENT AND FREEDOM 19

previous low growth had been associated with the populist policies. But still the idea that liberal
policies are bad is almost general throughout Latin America.

It has been a typical case of coincidence interpreted as causality. People did not notice the close
correspondence that existed between the exogenous commodity prices and the performance of
most of the Latin American economies, even if this correspondence has existed throughout the
history of the region.

With the exception of Chile, productivity does not seem to be increasing in the region and may be
falling in some rapidly growing countries. Latin America still lags behind the developed world
and the leading Asian countries in terms of the business environment’s conduciveness to growth.
Most countries in the region have not invested enough resources in the high skills required for
competitiveness in industry, or in creating the institutional setting that must frame a modern
economy. Most of their governments are grossly inefficient. No Latin American industrial
company has been able to compete globally against companies from developed countries in
complex, industrial products in the way Korean, Singaporean and Indian companies are doing. No
Latin American university has become a world class institution of learning and research. There is
no equivalent to Bangalore in the entire subcontinent. Naturally, Latin America lags behind the
developed world in terms of innovation and knowledge, the ultimate sources of wealth.

As a result of this, the region’s GDP per capita declined from 38.8% to 28.8% of the average of
the rich OECD countries from 1980 to 2009 (see Figure 3 in the Statistical Annex). The rapid
growth caused by the subsequent commodity prices boom has closed the gap a little. However,
this improvement is likely to be reversed if, as it happened the 1980s, the prices of commodities
fall and remain depressed for a long time.

This may trigger another change in governments across the region.                    Certainly, most Latin
American countries seem to be moving toward democracy. Some of them, like Uruguay, Chile,
Costa Rica, Brazil and Colombia seem to have gone beyond the point of no return in this direction.
Yet, nothing can be taken for granted today. The period of democratic enthusiasm has coincided

    Tables 2 and 3 in the Statistical Annex show regressions of the rates of growth of Latin America’s exports
in current dollars and GDP per capita in 2005 PPP dollars as dependent variables and the rate of growth of
commodity prices as the independent one. Figure 2 shows how the projections based on these regressions fit
the actual data of the dependent variables.

with an unprecedentedly long boom of commodity prices. Just twenty years ago Venezuela also
seemed to have become a solid democracy, and it has become one of the most conspicuous
defections to the side of populism. The rise to power of Hugo Chavez and his Socialism of the
Twenty-First Century coincided with a long period of low oil prices. He consolidated his power
during a period of rising oil prices.

The new democratic devotion will be tested only after the boom becomes a bust, and economic
conditions deteriorate, something that is very likely to happen as a result of the region’s
dependence on the volatile commodity prices. Some of the populist regimes may fall. However,
populism may return to some countries now managed quite responsibly—like Peru and Mexico,
where it has made deep inroads despite an excellent economic performance in the former and a
reasonably good one in the latter. Reality may deliver a good performance, but populism can
always promise a better one.        And, all over Latin America, people seem to be willing to
compromise their freedom in exchange for a potential improvement in economic performance.

                   The new technological revolution
The current political trends in Latin America are crucially important for the future of the region.
A new transformation, as deep as the Industrial Revolution, is taking place.             Rather than
multiplying the power of the muscle, as the Industrial Revolution did, the new revolution aims at
multiplying the power of the mind—individually through the power of computers and through the
association with other minds across the world through the Internet and similar networks. One of
the manifestations of this new revolution is the ability to coordinate complex tasks at a distance,
which has triggered globalization. This is shifting the global allocation of resources and wealth as
much as the Industrial Revolution did. For the second time in two hundred years, Latin America
is facing the opportunity to get ahead in this reallocation. It, however, is in danger of missing this
second transformation.

Of course, as it happened in the nineteenth century, the region could attract the kind of investment
that would facilitate the production and exportation of commodities for newly industrializing
countries—Europe in the nineteenth century, China and India in the early twenty-first century.
However, populism and the continuous political and economic fluctuations tend to repel the kind
of investment that could integrate the region into the new global production chains in activities
with higher value added.
                                                          DEVELOPMENT AND FREEDOM 21

Avoiding a repetition of the failure to adjust to the Industrial Revolution would require filling the
vacuum that led to this failure—that is, Latin American countries would have to develop an
institutional setting that would be appropriate for the new, globalized world that is emerging in the
new century. In the next chapter I discuss the features that must characterize this social order.


                  The Requirements
There is no doubt only the most flexible societies will succeed in absorbing creatively the
technological revolution that is transforming the world, for two reasons. First, because of the
transformation itself. Shifting from one social order to another one requires a lot of flexibility,
especially if the transformation involves drastic reallocation of production across the world.
Second, because the new order itself will have to be extremely flexible. The rate of innovation is
increasing at an exponential rate in all areas of knowledge. Societies with inflexible social orders
are likely to fall into chaos as their institutions collapse under the sway of new relationships.

Chaos is the direct route to fundamentalism as people try to restore social order based on the most
primitive forms of government—tyrannies based on fanaticism. This is what happened in pre-
communist Russia and pre-Nazi Germany when their archaic institutions were overwhelmed by
the changes brought about by the Industrial Revolution. This is why fundamentalism has become
so powerful in the Middle East. Authoritarianism brings about rigidity; rigidity brings about chaos
when confronted by rapid social change; chaos brings about tyrannies and more rigidity.

Thus, flexibility is at a premium in the midst of this transformation. And it comes with freedom
and individual values as the core foundation of a society.

                  Individual Rights and Flexibility
In the long run, comprising periods of steady and turbulent technological progress, history has
demonstrated that countries giving first priority to individual rights not only attained the objective
of protecting those rights, but they also achieved better results in terms of attaining better objective
conditions of life than the societies in the other set of countries. This was natural because this kind
of society is more amenable to change and progress for several reasons.

First, the social order of societies giving first priority to freedom and individual rights is quite
resilient because it is based on something that can always be preserved. The social order of
countries aiming at attaining or preserving a set of circumstances is fragile and prone to collapse
into chaos because it is based on something that is naturally ephemeral.

Second, the rule of individual rights neatly reconciles the need for a social order with the
possibility of change. Society does not see change as a threat, but as the normal manifestation of
the freedom of the individual. In contrast, the population wanting to keep in place a state of affairs
naturally develops a negative attitude to change. Anything that disturbs the social and political
equilibrium is seen as immoral and illegitimate.

Third, societies basing their stability on individual rights tend to develop self-reliant individuals.
For this reason, the overall adjustment of horizontal societies takes place day by day, through the
infinite adjustments that individuals make in their daily activities. In contrast, societies based on
the maintenance of a status quo tend to develop individuals who think that the government has to
resolve their problems. Economic success comes to depend on political power because
governments can grant subsidies and protection to some individuals and not to others or appoint as
managers of the state enterprises only people of a certain party. Equally, the government has the
power of vanquishing someone not only politically but also economically. This turns political
conflicts into all-or-nothing affairs, in which the winners take all, politically and economically,
and the losers lose everything. Within such an environment, political violence becomes rational
for all parties, creating a fertile field for cold-blooded destructiveness to emerge. That is why one-
dimensional, vertical societies, where the state controls the economy, are also prone to
catastrophic revolutions.

Fourth, since multidimensional societies are free from these all-or-nothing incentives, they are also
free from the propensity to violence that they elicit. That is, multidimensional societies are not just
more conducive to change, but they are also less likely to fall into destructive infighting because
losses in one dimension of life can be compensated with gains in another. This happens not just
because people can move from politics to economics or the other way around, but also because
they can move from national to local politics, or from any starting point to independent
institutions, such as universities or civil society organizations. This cannot happen in vertical
societies where all power, national and local, political and economic, has to be concentrated to
                                                         DEVELOPMENT AND FREEDOM 23

ensure the unity of society. The multidimensionality of life also facilitates political compromise
enormously, as politicians can give advantage to their opponents in one dimension in exchange for
gaining an advantage in another. Compromise is easier when there are many issues at hand than
when there is only one; also, it is easier when there are many layers of power than when there is
only one, overwhelming central power.

Fifth, technological change has moved in the direction of the horizontal way of organization.
There is nothing more horizontal than Internet or the social networks that are spearheading the
new ways to generate value added.          The opportunities are immense, but they can be taken
advantage of only in freedom.          Internet and these networks thrive on the ability to freely
coordinate complex tasks at a distance. This is the social order of the future. The institutions that
will survive healthily are those that would combine the social order with unprecedented freedom
to create value.

In fact, it is important to note that the trade off between permanence and change is a feature of the
one-dimensional society. In this kind of society, it is necessary to choose between what is going
to be kept and what is going to be changed. Differently, there is no trade off between stability and
change in the multidimensional society, because what is unchangeable is the way changes are

All these features of the multidimensional societies make them much more amenable to change
than those of the one-dimensional ones. They also make the social order of the former much more
resilient to change than the latter.

Since we know for sure that change is going to take place in the long run, we can be sure that the
horizontal, multidimensional order is by far the best, not just because it is compatible with
freedom, but also because it tends to be more successful in terms of material and humane progress.

If flexible societies have the advantage in the long run, why do so many societies choose vertical,
rigid forms of organization?

In short, vertical order is the most common because it is the easiest to obtain. The vertical order
subordinates the diversity of a conglomerate to the will of a central decision-maker. It uses
coercion to create uniformity out of diversity. The horizontal order is much more difficult to
obtain because it does not create uniformity. Rather, it harmonizes the strains of diversity to

produce a collective will, leaving diversity in place. Reducing the dispersion of the results of
diversity to an acceptable range requires a very strong basis of self-control on the part of the
individuals—ultimately rooted in shared values of respect for the individual freedoms of everyone

That is, the social interest that is essential for running a free, democratic, flexible horizontal
society flows naturally from the centrality of the idea of individual freedom as a sacred right of all
human beings. Verticality is the only way to create social order when such self-control does not
exist. This has been the case of Latin America.

                  The Latin American Reality
In the long-term perspective, it can be noted that the Latin American countries shared all the
dimensions of rigidity we discussed in the previous paragraphs.

First, its political equilibrium has been quite volatile because the things that people expect to be
permanent—the economic circumstances, the position in an organization, the rate of growth of the
economy—are intrinsically unstable, particularly in times of deep economic transformation like
the one we are living through. It is not reasonable to expect that the domestic circumstances will
remain the same when the external ones are changing day by day.

As it has been told so frequently, in the new century people are likely to change job positions, and
even professions, several times during their lifetimes. Institutions aiming at assuring people that
they will retain their jobs in whatever circumstances are likely to run into trouble and compromise
the countries’ ability to adjust to changing world circumstances.

Moreover, populist governments, while promising to attain and maintain unchanged these
circumstances, in reality turn them much more volatile than granted by the world circumstances.
They tend to run with very high rates of inflation, which devalue real incomes until salary
increases are mandated, only to be devalued again by higher inflation. They also tend to run into
high fiscal and current account deficits, which then result in financial and debt crises.

Second, people see change as a threat. This has become clear with the strong opposition that
exists in Latin America against globalization. Certainly, such opposition exists all over the world,
and specifically in the liberal developed countries. Nevertheless, this opposition has not been
successful in shaping the developed countries’ policies, while it has been quite successful in
                                                        DEVELOPMENT AND FREEDOM 25

shaping it in many Latin American countries, where protection remains important in many

Third, the revealed preference of the Latin American population, so inclined to government
intervention (excepting in Chile) is against self-reliance. There is a tendency to blame all the
problems of Latin America on other countries and abstract entities (such as the international

Fourth, Latin America has been prone to internal infighting because, as political and economic
power have been so tied to each other in the government, losing politically frequently means
losing economically as well. In fact, what many people see as the most important institutional
step in Latin America in the last two decades is that the left has not destroyed the market and
expropriated the assets of the private sector when winning the elections in some countries. This,
of course, is a good thing, a demonstration of institutional respect for some fundamental rights.
However, the fact that these events have elicited such celebration shows how deep was the
previous lack of trust in the institutions.    They also show how fragile are the institutional

All these problems have depressed investment for many years all over the region and are still
depressing it in many countries. They cannot be resolved issuing new laws or creating other
government-controlled institutions. The current caudillos have ignored, bypassed or destroyed all
the institutions that tied their hands. Chavez has passed laws that give more deputies to his party
even when getting much less votes; he has been governing by decree to avoid the control of
parliament; and he has closed or taken over the media opposed to him. With these and other
actions he has violated the spirit of the Venezuelan constitution. Yet, he can do it, and ask, so
what? The same could be said of many other current caudillos.

Thus, the fundamental problem of Latin America is not one of institutions but one of values, and
particularly a deficient commitment to freedom and individual rights.

Latin Americans tend to like freedom when they think that it would lead them to an easy material
progress. Certainly, freedom is associated with material progress in the long run. Yet, its benefits
will not come if it is chosen for the sake of those benefits and is under a permanent test to see
whether it delivers higher rates of growth, year by year. Such a continuous test defeats the main
strength of freedom and individual rights as the foundation of a social order: the solid promise

that, whatever happens, the freedom and the other individual rights of the citizens will not be
violated. What security could people feel if, as it has happened so frequently in Latin America,
people know that freedom and individual rights could be taken away if economic growth does not
increase relative to the past or to neighboring regimes? This has been the tragic mistake of Latin
America—its weak, conditional commitment to freedom and individual rights.

Resolving a problem of values is admittedly difficult. Yet, developing a modern, advanced,
democratic and humane society cannot be done without resolving this problem. Trying to get
shortcuts, as Latin America has done for two hundred years, would only lead to the same outcome
of the last two hundred years—a new failure to integrate into a deep social and economic
transformation that will shape the world of the future. Without solving the values problem, Latin
America will spend another century depending on low-value added commodities.

Symmetrically, if Latin America resolves the values problem, institutions will come naturally.
They will be designed by the Latin American themselves, as the institutions of all successful
countries have been designed. It this happens, Latin America would become a set of mature
societies. It is the only way to do it.
                                                               DEVELOPMENT AND FREEDOM 27

                                             Statistical Annex

                              Figure 1. Real prices January 1970-January 2011

                       4.0                                              12



    January 1970 = 1

                       2.0                                              6              Metals
                       1.5                                                             Food
                                                                        4              Oil


                       0.0                                              0
                             M10 1977

                             M12 1982

                             M11 1995

                             M10 2008
                              M1 1970
                              M8 1972
                              M3 1975

                              M5 1980

                              M7 1985
                              M2 1988
                              M9 1990
                              M4 1993

                              M6 1998
                              M1 2001
                              M8 2003
                              M3 2006

NOTE: Commodity prices were deflated by the US CPI. SOURCE: International Financial Statistics, IMF. Deflated by
the US CPI.

Notice that the boom that started in 2003 has been much stronger in terms of the percent increase
in the prices than the one that started in 1970—even if the graph gives the appearance of the

  Figure 2. Rate of growth of Latin American exports and GDP per capita 2005 dollars PPP,
                        actual and predicted with commodity prices.

                                                                              Total LA exports









                                                                                GDP per capita







SOURCE: World Economic Indicators, World Bank for exports and International Financial Statistics for commodity
prices. Find details of regression in Annex I.
                                                    DEVELOPMENT AND FREEDOM 29

Figure 3. Income per capita PPP 2005 prices of developing countries as a per cent of the rich
                               OECD members, 1980-2009



                              35.0%                           East Asia & Pacific

                                                              Europe & Central
   % of OECD rich countries

                                                              Latin America &
                              25.0%                           Caribbean
                                                              Middle East & North
                              20.0%                           Africa
                                                              South Asia
                                                              Sub-Saharan Africa


SOURCE: World Development Indicators, World Bank

Table 1. Exports and commodity prices

Regression results.

Dependent variable: Annual rate of growth of exports of Latin America 1993-2008

Independent variable: Annual rate of change of commodity prices 1993-2008


         Regression Statistics

Multiple R             0.859640913

R Square                  0.7389825

Adjusted R Square      0.721581333

Standard Error         0.057964031

Observations                      17


                             df             SS              MS             F        Significance F

Regression                         1    0.142683236     0.142683236    42.4674112   9.74367E-06

Residual                          15    0.050397434     0.003359829

Total                             16     0.19308067

                        Coefficients   Standard Error      t Stat       P-value      Lower 95%       Upper 95%     Lower 99.0%   Upper 99.0%

Intercept              0.060323614      0.015057976     4.006090526   0.001145045   0.028228298      0.092418929   0.015952083   0.104695145

Commodity prices       0.590466009      0.090608097     6.516702479   9.74367E-06   0.397339423      0.783592594   0.323469963   0.857462055

Source: Exports from the World Development Indicators, World Bank. All commodity Price
Index, International Financial Statistics, IMF.
                                                                     DEVELOPMENT AND FREEDOM 31

Table 2. GDP per capita and commodity prices

Regression results.

Dependent variable: Annual rate of growth of GDP per capita PPP of Latin America 1993-

Independent variable: Annual rate of change of commodity prices 1993-2008


        Regression Statistics

Multiple R            0.747245774

R Square              0.558376247

Adjusted R Square     0.528934663

Standard Error        0.015774315

Observations                     17


                            df             SS              MS             F        Significance F

Regression                        1    0.004719183     0.004719183   18.96556433   0.000565766

Residual                         15    0.003732435     0.000248829

Total                            16    0.008451618

                       Coefficients   Standard Error      t Stat       P-value      Lower 95%       Upper 95%     Lower 99.0%    Upper 99.0%

Intercept               0.01000998     0.004097873     2.442725494   0.027430436   0.001275569       0.01874439   -0.002065276   0.022085236

Commodity prices      0.107384557      0.024658062      4.35494711   0.000565766   0.054827142      0.159941973   0.034724327    0.180044788

Source: GDP per capita Purchasing Power Parity, from the World Development Indicators, World
Bank. All commodity Price Index, International Financial Statistics, IMF.

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