What Paraguay Will Need.

News came last week that Brazil and Argentina were discussing forming a common currency. Since Argentina’s inflation in 2022 was 95% while Brazil’s was only around 6%, this is unlikely to work well. However, so many Latin American countries are now run by market-hating leftists that a full-scale attempt at economic integration, to remove the influence of the hated U.S. dollar, must be a possibility. The desired model, of stable prices and wages and controlled trade, would strongly resemble the Soviet Union’s Comecon. Compared to the current messy single-country socialism, it would have some advantages.

Comecon was formed in 1949 and included all the countries of the former Soviet bloc, plus Mongolia, Cuba and Vietnam from later dates. Its objective was to coordinate central planning across member states, using a mythical “transferable ruble” for pricing and pushing individual countries to specialize in particular sectors. This worked better in some cases than others. Bulgaria happily agreed to specialize in agriculture, as it had done under the Nazi German autarky system in the 1930s but Romania, led by the Stalinist Nicolae Ceausescu, refused to abandon its heavy industry ambitions. As a result, in the early 1990s when I visited both countries, Bulgarian agriculture was quite effective, with pleasant wine and fruit offerings, whereas Romania was a collective farmed desert – the contrast in crossing the border by train at Ruse was startling.

In Latin America, the conditions are now ripe for a similar arrangement. Most major countries in the region, notably Mexico, Brazil, Colombia, Venezuela, Peru, Bolivia, Ecuador, Nicaragua, Chile and Argentina, are run by hard-left governments, generally dubiously elected and even more dubiously perpetuating themselves in office, who hate capitalism and the United States with a passion. Free trade areas that were set up under previous market-friendly regimes have been abandoned or are being rendered nugatory. The continent has vast natural resources, including deposits of metals such as lithium that are essential for the electric vehicle madness to which the West is committing itself. However, under current economic arrangements it has suffered from low growth, periods of appallingly high inflation and exploitation by the United States and more recently by China.

A unified approach to economic development would thus make sense. In politically better times, that approach might have taken the form of an economic community similar to the early years of the European Union, with free trade between members and a common tariff against the outside world. Over time, that might have evolved to have a common currency, although establishing a common currency between even two members, one of which has inflation near triple digits, is a recipe for financial explosion and economic disaster.

However, the capitalist approach to a common economic future is not the only one, as Comecon displayed for nearly half a century. Given that the participating countries’ governments do not believe in capitalism and are pretty shaky in their commitment to democracy and popular consent, a regional Comecon, the Latin Bloc, however damaging to living standards it might be, is a highly politically appealing alternative.

The central mechanism of such a system would be the adoption of central planning by the economies concerned. While small business might be allowed to continue existing, each economy would not be allowed to export or import except through state-controlled trading companies. That would give the various states control over the pricing and quantity of imports and exports, necessary if inflation and trade deficits were to be avoided. Each country would retain its own currency for transactions with third parties, but there would be a central currency, the Latin Peso, for trade within the bloc. Prices for that trade would be set in Latin Pesos; individual countries’ currencies could revalue or devalue against the Latin Peso, according to their own domestic situations, but would not be able to alter the prices at which goods were sold to each other.

Each country within the system would then have quotas for its own production, which would be agreed with the system’s central commissariat. States would control all major resource producers and the largest factories, so the quotas would apply to the vast majority of production, although as in much of the original Comecon there would be a margin left for small producers of consumer goods, which would not generally be exported and the import of which would be tightly restricted.

Through this mechanism the Latin Bloc would control the output of all the region’s major commodities, thus controlling a substantial and in some cases majority share of their global output. Through setting common prices for Bloc exports, the Bloc could thus exploit its oligopoly position. Similarly, there would be no possibility of a glut of a Bloc-controlled resource, since the Bloc management would control all its major sources within the Bloc.

Like Comecon, the Latin Bloc would be an inefficient allocator of resources, with consumer goods in short supply and periodic crises in production of even the Bloc’s most important resources. For ordinary citizens of the Bloc, it would reduce living standards below the modest level under present arrangements, although the central planning system might allow Latin America’s current appalling inequality to be reduced. For ordinary citizens, it would have only one advantage: provided the Bloc’s overall trade balance was adequate, with sufficient international demand for the Bloc’s resources to pay for necessary imports of resources in limited supply within the Bloc, there would be little inflation, with prices remaining constant year after year in terms of Latin Pesos (and fluctuating only modestly in each country with the exchange rates set by individual countries against the Latin Peso).

For those controlling the Latin Bloc system, it would have three advantages, two fairly modest and one overwhelming. The first modest advantage would be that it would avoid the inflation crises endemic in Latin America due to overspending governments; resource allocations would be set by the Bloc, so national country governments could overspend only at the expense of their own consumers, and in general would have to agree spending with the Bloc controllers. The second advantage would be higher export prices; with the Bloc having a large market share in many scarce commodities, it would be able to rig those commodities’ prices in its favor in a way quite impossible for individual Latin American countries, even those as large as Brazil and Mexico.

The third and most important advantage for the Latin Bloc’s commissariat would be its level of control. With modern monitoring and AI systems, control would be possible at a level undreamed of in the old Comecon, with only moderate recourse to the brutalities of the secret police. The Bloc commissariat would thereby be able to fulfil the World Economic Forum’s dream, at least on a regional scale. The Bloc’s residents would own nothing and be happy – and if they were not happy the universal surveillance system would pick the fact up quickly and the police would pay a visit. Gran Hermano te esta mirando!

Individuals in the Latin Bloc unhappy with this imposition could spend the next half century regretting their utter foolishness in electing authoritarian socialist governments across an entire continent. Countries left out of the system, for example Paraguay, currently quite sensibly managed, would have only one choice: to revert to its glorious past of 1865, when led by Francisco Solano Lopez and with a population of only 450,000, less than Brazil’s National Guard, it launched a war simultaneously against Argentina, Brazil and Uruguay, marching undauntedly outwards in all three directions.

Alas, on that occasion it was unsuccessful, but in the 1930s Gran Chaco War against Bolivia it had more success, so it could reasonably hope that on this occasion, faced with a tottering Stalinist dictatorship, Paraguay could finally achieve its objective and, in one direction or another, capture an ocean port though which its trade could flow unimpeded. Once it had done so, its main problem would be the huge flow of refugees escaping the Latin Bloc tyranny – Asuncion would quickly become the trading capital of Latin America, and Guarani a major international language of commerce.

We can only hope that the currently socialist countries of Latin America will not get their act together quickly enough to form the Latin Bloc, and that their revolted electorates will soon overcome the rigging of their electoral systems and restore free market governments. U.S. policy should then be to ensure that those free-market governments stay in place, alternating with moderate oppositions through properly monitored and regulated elections with paper ballots. Otherwise, more than two decades later, belated validation will come to this column’s claim of 2002: that the George W. Bush administration made an irretrievable mistake in deciding to invade Iraq and not Venezuela: much closer, equally endowed with oil and with a more religiously compatible populace.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)