UTAH (By Alejandro Chafuen, Daily Herald) November 24, 2005 — The biggest surprise of all at the recent Summit of the Americas in Argentina was not the anti-Bush demonstrations, the anti-American rhetoric, or the refusal of delegates to move forward with the proposed Free Trade Area of the Americas, but the fact that there were no real surprises.

With just a few exceptions, the countries of Latin America have reverted back to nationalistic populism that makes people feel better, while rejecting free-market growth strategies. That way they can feel good while doing poorly.

The Summit of the Americas was preprogrammed for failure, just as the many market-oriented reforms of the past decades were doomed to failure in the region, despite their soundness.

The real problem in Latin America is that, with few exceptions, the rule of law — particularly with regards to private property rights — doesn't exist as we know it. Decision-making is marred by corruption and cronyism and mired in bureaucracy.

Most people know this. A recent public opinion survey in Argentina by the Fundacion Libertad and FORES, two nonprofit organizations, and the law school at Torcuato Di Tella University indicated that 82 percent of the public rates the country's judicial system as ineffective and 89 percent believes justice is applied unfairly.

Venezuela is little more than "Cuba light." The rule of law in Mexico is "an empty, superfluous and even suspect concept," says Dr. Luis Rubio, president of the Center of Research for Development, a well-respected Mexican think tank. And in Brazil, legal institutions have been in a "permanent state of crisis ... (eroding) public confidence in values such as democracy and the rule of law," observes law professor Augusto Zimmermann. The list goes on.

When the rule of law is weak and there is no respect for private property, efforts to promote free trade — and thereby spur economic growth and reduce poverty — are dubious at best. It is difficult to promote trade and investment in a country whose legal institutions are weak and corrupt; the risks are too great.

The results are beginning to show. Despite economic growth rates in Latin America averaging more than 5 percent in 2004 and similar growth anticipated this year, "capital flows" are negative, meaning more money is leaving the region than going in. This is not only the result of Latin American foreign debt, but the result of a continued lack of confidence among long-term investors. Not surprisingly, as Latin America expert Andres Oppenheimer has noted, "only 1 percent of the world's investment in research and development currently goes to Latin America."

If economic progress is the goal, the U.S. government and multi-lateral institutions like the World Bank need to push the region to take legal reform seriously. Every country in the region needs a legal system and regulatory environment that defines and protects property rights.

As a first step, political leaders should consult the work of economist Hernando de Soto of the Institute for Liberty and Democracy in Lima, Peru.

In capitalist economies, De Soto has shown, business operations rely on legal definitions of property and enforceable rules governing transactions. These concepts are alien in much of Latin America.

Indeed, De Soto has found, what people physically own in such countries frequently isn't regarded as their property.

"Unlike assets in Western nations," De Soto's colleagues observe, real estate and equipment in the developing world frequently serve "only as physical shelter or tools; they cannot be leveraged to produce additional wealth." In effect, they are "dead capital," leaving up to 70 percent of the people in some countries cut off from the economy, condemned to poverty.

The property rights reform program he developed for Peru resulted in the legalization of an estimated 300,000 businesses that previously operated off-the-books, moved 560,000 workers from the underground economy to the legal economy and generated some $300 million a year in additional tax revenues.

That should wake up the politicians. If the U.S. government and multi-lateral institutions would refocus their attention on reforms that promote the rule of law and protect private property, future Summits of the America might look quite different. Instead of wasting time, Latin American leaders might embrace the kind of policies that would help the poorest of the poor while promoting democracy and human rights.

In that type of environment, a Free Trade Area of the Americas would be seen as a welcome and mutually beneficial development.