Peter Tarson
Throughout the 20th century, Latin America has been haunted by a spectre: the spectre of bank nationalization. Banking and credit are essential for development, even the low-capital, decentralist development models often advocated by indigenous sovereignty groups. However, the highly risk-averse private banking sector is often unwilling to invest in the risky and low-return infrastructure and agriculture projects necessary for sustained growth. Several governments have attempted to circumvent this problem by placing all or most of the lending sector under direct public ownership. In what follows, I will survey bank nationalization attempts in Costa Rica, Mexico, Peru, and Chile, and assess the stability and distributional effects of nationalized banking in these nations’ differing political environments.
Costa Rica was the first country to nationalize its banks in Latin America, and it is the only country surveyed whose largest bank at present is a national bank. After a disputed election result sparked a civil war in 1948, expatriate (but forever patriot) José Figueres Ferrer took control of the country militarily and implemented a series of radical reforms, from enfranchising women and black people to abolishing the armed forces, a policy still in effect today. José Figueres Ferrer nationalized the banks of Costa Rica just six weeks into his time in power. In addition to socialist arguments that bank profits belong to the public whose labor produces them, Figueres emphasized the empirical rationale that profit maximizing behavior from financiers favors speculation and underinvestment in actual production. Unlike many other Latin American progressive statesmen, his primary support base was not organized labor or the rural peasant class, but rather a heterogenous coalition of small-scale urban entrepreneurs and academics who had formed the pre-war Social Democratic Party, and his ultimate decision to nationalize the banks was heavily motivated by this group, which sought to use their growing businesses to finance a welfare state and limit the appeal of communism. Preventing a recurrence of the 1947 capital strike, a banker-led protest against tax increases to fund teacher salaries, was another priority. Traditional elites, lacking political leverage after the war, largely acquiesced to Figueres’s expropriation.
The effects of nationalization were mixed. Interest rates were kept low via subsidy for targeted sectors such as rural women’s enterprise and the cooperative industry, and a formal program of sector-specific quotas, topes, allowed bank management to ration credit. Despite Figueres’s initial misgivings, the board of directors quickly became a politically appointed body (though appointments were staggered and offset from election years to limit the reach of any current government). As a result, the banks began to abuse the subsidy system to focus credit towards sectors currently enjoying political power, to such an extent that, by 1981, 90% of money lent by the banks reached 10% of borrowers. Additionally, the tope regulations became a primary site of corruption within the system, with quota-violating credit offered to politically connected consumers for market rate bribes. However, Costa Rica’s public throughout this period have accessed credit at a statistically higher rate than much of the developing world, and agricultural and industrial loans rose from 31% of total lending before the nationalization to over 60% every year between 1953 and 1980. While bank nationalization did not prevent the political elite from distorting lending policy, it helped to prevent the rise of a separate banking elite, which helped the government maintain greater independence in development policy and public spending than was possibly in countries like Mexico, which had strong existing “bankers’ alliances” with established political power.
Despite having entrenched banking classes with political parties (or intra-party factions) dedicated to their interests, Mexico, Chile, and Peru also attempted bank nationalizations during the 1970s and 80s, but they were overturned within a decade and were far less successful than their Costa Rican predecessor. Mexico, facing an external debt crisis and falling oil prices, nationalized its domestic banks in an effort to secure credit and curb capital flight. While the swell of international oil loans weakened domestic bankers enough that they could not stop the proposal, the banker-aligned finance minister Silva Herzog was able to prevent significant deviations from profit-seeking bank management. In fact, large volume borrowers (over 500 million pesos) grew from 13% of the finance sector’s clientele to 51% after the nationalization, and the share of loans in agriculture fell by 2.4%. The banks were re-privatized by 1991. Chile, under the far-left Unidad Popular government, nationalized its banking sector in 1970, but faced significant legal obstacles to doing so and eventually military removal. Peru, whose banking sector retained more power than in either Chile or Mexico, faced violent resistance to nationalization and eventually had to concede private ownership of several banks.
From domestic political opposition to heavier IMF and foreign bank involvement, all three of these governments faced challenges Costa Rica did not, but I believe that one of the most decisive reasons Costa Rica’s nationalization was so successful was its clear and empirically measurable set of goals, which appealed to most sectors of society. For Peru and Chile, partisan political messaging was a central motivator, and in Mexico, nationalization was largely a policy of last-resort crisis management. However, with his concrete message of increasing credit access to specific sectors, Figueres provided clear criteria for evaluating and refining his policy. The partial privatization of Costa Rican banks in the 1980s was in many ways the nationalization’s greatest success. Facing the weight of corruption and US pressure to radically reshape its banking system, Costa Rica soberly designed decentralized, cooperative private banks, including the Banco Popular, a worker-owned mandatory savings bank with net worth over 5 billion US dollars in 2016. By preventing the rise of a powerful banking class and setting depoliticized, empirical standards for Costa Rican banking policy, Figueres was instrumental in allowing Costa Rica to increase necessary competition while centering the public good and preserving popular sovereignty. However, the privatization has not fixed everything—elite borrowers managed to force highly targeted bailouts from the national banks, deepening the nation’s class divisions, and inequalities in household credit have grown over the 2010s.
Even now, with no purely nationalized bank systems left in Latin America, the case for bank nationalization remains deeply attractive. The inefficiencies of Costa Rica’s national banks stemmed mostly from corrupt and politicized management in the turbulent new democracy. By contrast, the Banco de Brasil, Brazil’s nationally owned developmental bank and 2nd largest bank by assets, was progressively but technocratically managed during the country’s 1970s growth, and illustrates that Costa Rica’s shortcomings are not inevitable. Additionally, the necessity of regulating corporations in non-profit-maximizing ways is not going away. If banks can always fund the highest profit investments, or a powerful independent banking sector can use its political allies to roll back developmentalist policies, building durable infrastructure and a diversified economy becomes very difficult. In addition to ordinary development needs, our world faces an imminent climate crisis that requires large amounts of capital to finance low-return investments, a difficult sell in a more globally integrated financial market than Figueres in Costa Rica or Garcia in Peru ever faced. Nowhere is this clearer than modern, privatized Chile. Unable to nationalize banks, Chile’s social-democratic Concertación government carefully designed a system of currency conversion barriers and reserve requirements that effectively prevented instability in the 90s and 2000s. However, this regimen proved too onerous for foreign business, and market pressures forced its repeal. Now, Gabriel Boric’s government is defenseless against a capital flight of 9% of GDP, as domestic banks evade his environmental and pro-labor policies to invest in less regulated ventures abroad. Using this crisis, the capital sector has pressured Boric into violating his environmental commitments to indigenous Mapuche communities and using military force to control their lands, escalating a violent conflict that has lasted half a century. If national sovereignty can be threatened by financial capital strikes, enforcing human rights treaties and climate commitments becomes nearly impossible. Regulating speculation directly can drive away foreign transactions in an age of deregulated global commerce. Nationalizing domestic banks, on the other hand, preserves international openness while ensuring there is always capital on hand for essential projects, developmental or humanitarian.
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