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Sunday, July 4, 2010

Ramon Diaz and the Spread of Liberal Ideas in Uruguay

Uruguay, a country of approximately 68,000 square miles located between two giants, Argentina and Brazil, was one of the most prosperous Latin American countries at the beginning of the twentieth century. Today, its GDP ranks low on the continent, amounting to $11 billion in 2003. A brief overview of its history will explain this decline.

Until the beginning of the nineteenth century, Uruguay was a Spanish colony. It served the military purpose of halting the Portuguese expansion in the River Plate. Curiously, internal armed unrest did not prevent the economic boom that took place between 1852 and 1875. Floods of immigrants, attracted by the possibility of making a fortune, prompted a population growth of 5.2 percent in annual terms. If this rate had continued until today, Uruguay would have a population of 200 million people instead of 3.5 million.

In the late 1800s, legislation led to the development of a free-banking system and the adoption of the gold standard. But the orientation of economic policy changed with the creation of a bank endowed with a monopoly on the issuance of currency. It was one of the first acts of government inter-vention in the production of goods and services.

The growth of the state in the economy was nurtured by the thought and actions of President Jose Battle y Ordonez at the beginning of the twentieth century. Public monopolies were set up for electricity, insurance services, and the provision of mortgages. Battle desired nothing more than to collect economic dividends for the benefit of the state and society. He supported worker strikes and had social legislation passed in an attempt to regulate the labor market. The eight-hour-work-shift law was the first of its kind in the world. High taxes were imposed on the agricultural sector, which produced most of the country’s exports.

The two world wars were not favorable to the nation because the increase in the price of commodities was counteracted by transport difficulties. In the period 1913-21 the GDP failed to grow. By then, Uruguay had already abandoned the convertibility of its currency to gold.

In 1931 an exchange-control system began to regulate the foreign currency produced by exports and used for imports. Businessmen devoted time and effort to obtaining import quotas as barriers to markets increased. The introduction of a multiple exchange-rate regime gave the authorities the means to subsidize some activities and tax others. The vested interests created by the system explain its permanence until 1970.

The performance of the economy can be divided into two periods: 1943-55, in which foreign-trade transactions were minimal and the economy grew inward (also called import substitution) at an annual rate of 4.16 percent, and the years 1955-74, in which the GDP shrank at a rate of – 0.01 percent, a period marked by high budget deficits, runaway inflation, and devaluation of currency.

By the mid-twentieth century, the welfarestate tradition was firmly rooted in the country. The “Benefactor State” grew increasingly inefficient. Emir Rodriguez Monegal, a prominent Uruguayan intellectual, pointed out that its paternalism promoted passiveness among the people and weakened the spirit of entrepreneurship.

Furthermore, the 1959 Cuban revolution attracted young Latin Americans, who looked on Cuba as a symbol of social revolution and popular resistance linked to anti- U.S. sentiment. A number of classical-liberal intellectuals tried to start a mass movement for the defense of political autonomy and human rights; they hoped to imbue the culture and media with their ideas. But freemarket economic principles were associated with the influence of the developed countries, and being “imported” principles, they were outwardly rejected.

In 1966 the acceleration of inflation and the increase in social tensions led to the adoption of a new constitution. Seven years later, amid increasing economic turmoil, the armed forces closed Congress and established a civilian-military regime, which ended in 1984.

Seeking a Space for Liberal Ideas

Ramon Diaz played a significant role in opening up a space for the discussion of freemarket ideas. Born in Montevideo on May 30, 1926, for many years Diaz taught political and international economy in the state university, the only university in Uruguay until 1985. (The first private university was created in that year.) As a lawyer and an economist he achieved success both in the private and public sectors.

His encounter with the Mont Pelerin Society, the organization of classical liberals, in 1967 was vital. He was introduced to the economist Arthur Shenfield; Antony Fisher, promoter of liberal ideas and founder of the Atlas Foundation; Milton Friedman; F. A. Hayek; and Alejandro Chafuen, who later became president of Atlas. After this meeting he methodically studied philosophy and history, mainly through books by Edmund Burke and Hayek, whom he greatly admired. He also began to publish books and articles on economic issues.1

Meeting foreign intellectuals was important to Ramon Diaz. When he joined the Mont Pelerin Society he was confirmed in the belief that he was on the right path and that his position was not Utopian. After the first meeting he attended in Vichy, he had annual or biannual contacts with liberals from different countries of Europe and America. Later on, at the end of the 1980s, he became president of the Mont Pelerin Society and did his utmost to follow Hayek’s vision of the organization.

Classical-liberal ideas would take a long time to spread in Uruguay, and in the 1960s no one believed that anyone there would embrace them. Any proposal favoring such ideas, especially one suggesting the introduction of market competition, was considered contrary to the welfare of society and disparaged as “capitalistic.”

In 1968 Diaz was appointed vice minister of industry, and during his term of office he promoted successful efforts to bring down the rampant inflation. In 1970 he was elected director of the planning and budget office, but he resigned in October because the government, bowing to election-year pressure, refused to support some of his economic proposals. He felt deceived and decided to try other ways to make Uruguayans understand the country’s economic problems and possible solutions. He committed himself to creating a new trend in public opinion.

New Journal Founded

In January 1972 Diaz founded the monthly economic journal Busqueda {Search) as a medium for spreading liberal ideas. He had proposed the project to a group of economists, but they were skeptical about its chances for success. He went ahead anyway, with the financial support of close friends, editing the publication through 1989. Firmly believing in his mission, Diaz supported the magazine himself when funds were lacking. At the beginning of the journal’s life, he and Ramiro Rodriguez Villamil did all the work, including writing the articles. Initially, few cared about the new journal that was supposed to shift the economic opinion of the country. It featured articles based on liberal philosophical ideas and analysis of the consequences of a large, heavy, and clumsy state. In every issue Diaz recorded his thoughts, sometimes signing his articles with an anagram of his own name or Adan Perez for Adam Smith. Busqueda soon had 1,000 subscribers, who turned out to be the journal’s main source of revenue. Although it was supposed to be a monthly publication, Busqueda was not issued on a regular basis until 1980, when the professional journalist Danilo Arbilla joined the staff.

Apart from setting up Busqueda, Diaz devoted time to studying Uruguayan economic history in an attempt to reinterpret it. 2 He brought to light the liberal ideas contained in the first constitution of 1830 and showed how classical-liberal principles inspired economic policy during the first 45 years of the nation’s existence.

The first Uruguayan constitution was oriented toward the protection of individual rights, notably the right to property and the freedom to work in any economic activity provided that the general interest was not harmed. Diaz traced the change in thinking to a 1917 constitutional amendment, which added public enterprises to the structure of the state. The idea that private individuals should own only small and medium enterprises and that important industrial enterprises should be owned by government became prevalent in the country.

Diaz also stressed that late-nineteenth century Uruguayan governments strongly favored a stable and healthy currency. This was due to the discipline required to maintain convertibility in the gold-standard regime. During the last quarter of the 1900s, however, the fear of worthless paper money was replaced by the fear of insufficient credit. This marked the beginning of a period in which the state became omnipresent and omniscient.

Continuation of Results

Thirty years after Diaz began working as a journalist and as a university professor, the process he started cannot be stopped. Other voices have joined him, and his ideas have spread throughout the universities and the media in Uruguay. Young professionals study abroad and bring back new ideas of economic liberty. A liberal think tank, the Center for Economic and Social Policy Research, has been established in Montevideo. In 1990-93 Diaz served as governor of the Central Bank of Uruguay during the presidency of a political leader who supported liberalism. Today he teaches the economic history of Uruguay and introductory economics at the University of Montevideo. He is also a columnist for El Observador (The Observer), a newspaper in Montevideo.

Although the process of changing opinion in a liberal direction has been slower than hoped for, nobody can deny that Ramon Diaz’s mission was fulfilled. Today, thanks to his great contribution to the intellectual heritage of his country, more people understand classical-liberal ideas and the benefits
of the free market.

1. Among them: “The Political Economy of Nostalgia” in F. A. Harper, ed., Toward Liberty: Essays in Honor of Ludwig von Mises on the Occasion of his 90th Birthday (Menlo Park, Cal.: Institute for Humane Studies, 1971); “Uruguay’s Erratic Growth,” in Arnold C. Harberger, ed., World Economic Growth. Case Studies of Developed and Developing Nations (San Francisco: Institute for Contemporary Studies, 1984); and “Capitalism and Freedom in Latin America,” in Michael A. Walker, ed., Freedom Democracy and Economic Welfare: Proceedings of an International Symposium, Canada, 1988.
2. Ramon Diaz, Histona economica del Uruguay (Montevideo: Taurus, 2003).