The Liquidity Trap: Latin America's Free-Market Past

The story is well known in economics lore: A famous academic, one of the world's leading proponents of deregulation and free markets, is invited to Chile, which is in economic trouble. He and his followers propose a series of measures to open the economy, including easing banking restrictions, freeing credit, and eliminating tariffs. Their prescriptions are followed, and, as foreign capital pours in, the Chilean economy booms and becomes a model for the region. Or another version: In Mexico the president turns against the policies that have left the country heavily indebted and starved for domestic investment. He places a group of young foreign- trained economists and engineers in the trade and finance ministries, and they move rapidly to free up key areas of the economy and renegotiate Mexico's external debt. One of the most striking results of their reforms is a dizzying rise in inflows of foreign capital. In both cases foreign politicians, journalists, and bankers praise the reforms for spurring a transformation: from traditional, corporatist economic dogmas and their long history of poverty and economic stagnation to Anglo-Saxon-style competition and free markets.

These may sound like stories of modern Latin America, but both are old. The Chilean example does not refer to the "Chicago boys" of the 1970s and 1980s, nor does the Mexican example describe the Harvard-, Stanford-, and Columbia-trained technocrats whom President Miguel de la Madrid Hurtado pushed forward in the mid-1980s. The foreign expert who so beguiled the Chileans was the French academic Jean Gustave Courcelle-Seneuil, one of Europe's high priests of free-market capitalism, who was invited to Chile from 1855 to 1863 to advise the government. Among other reforms, his followers slashed tariffs in 1864 and even privatized the nitrate mines acquired from Peru in 1882 during the War of the Pacific. The brilliant Mexican technocrats were the cient'ficos, a party of idealistic young men who controlled key posts during the administration of President Porfirio D'az in the 1890s. Under the expert guidance of JosŽ Y. Limantour, the sophisticated and forceful finance minister, their policies resulted in huge capital inflows, mostly into mining and railroad ventures, and a dramatic increase in Mexico's exports.