Thought some of you who are interested in starting a business in LA might find this article worth reading. It's from the Wall St Journal last week.
Why Latin Nations Are Poor
By MARY ANASTASIA O'GRADY
November 25, 2005; Page A11
With hysteria mounting about the political shift leftward in Latin America and 11 presidential races in the region over the next 13 months, the World Bank's "Doing Business in 2006" survey merits a read. We mentioned it two weeks ago but a fuller airing is in order.
The annual report, by the research side of the bank, measures the regulatory burden and property rights in 155 countries. This year's results demonstrate clearly that despite persistent claims that the region has tried the "free-market" model and found it wanting, Latin America is stubbornly stuck in a statist time warp.
When it comes to burdensome government and weak property rights, Latins don't fare as badly as Africans but their freedoms lag behind those in much of Asia and the former Soviet satellites of Europe.
It's been 20 years since Hernando de Soto's Lima-based Institute for Liberty and Democracy published "The Other Path," documenting the burdens that the Peruvian state was heaping on the backs of the struggling underclass. But in two decades little has changed in a region mostly known for caudillo government and its capacity to disappoint. More than ever, the Latin predatory state is driving entrepreneurs underground and forcing the most industrious citizens to emigrate, mostly to the U.S.
Take for example Mexico, which has enormous oil reserves and open trade with North America. Its economy is sadly underperforming. Mexican Finance Minister Francisco Gil Diaz has managed the macro side of things exceedingly well. But on the micro side, Mexican businesses face crippling regulation and inadequate legal protections, weakening the potential for market competition, investment and productivity gains.
In the category of the World Bank report that deals with "hiring and firing," Mexico ranks 125th out of the 155 countries surveyed, not least because it costs a firm almost 75 weeks of wages to fire a worker. Mexico also ranks 125th in "protecting investors" against fraud, self-dealing and other corporate abuses. Correspondingly, it ranks 100th in the "enforcing contracts" category, meaning that when two parties strike a deal, neither knows whether it will hold up.
Peru gets a better overall rating than Mexico, but it can hardly be said to encourage entrepreneurship. In "starting a business," Peru ranks a low 106th because of the red tape Mr. de Soto wrote about so long ago. Firing a worker costs almost 56 weeks of wages, discouraging employers from hiring and risking huge costs if business takes a turn for the worse. A medium-sized business in Peru can expect a tax burden reaching almost 51% of gross profits, which is part of the reason Peru has the 133rd worst tax burden. "Enforcing contracts" takes 381 days on average, leaving Peru in 114th place in this category.
Argentina, still saddled with Peronist labor laws, has an even less flexible labor market than Peru, at 132nd in "hiring and firing." Moreover, a medium-sized company must theoretically pay almost 98% of its gross profit to the tax man, which explains a high rate of tax evasion.
In 25th place globally, Chile has the best business climate in the region but is inexcusably behind Malaysia, Estonia and Lithuania. It badly needs to advance reforms undertaken in the 1980s, but instead the Socialist government of Ricardo Lagos has yielded to union activists by increasing labor law burdens.
Colombia -- at 66th -- has dreadful ratings in "hiring and firing" (130th) and in "paying taxes," where a medium-sized business has a total payable tax of 75% of gross profits. Venezuela doesn't enforce contracts (129th), doesn't protect investors (142nd) and makes paying taxes a bureaucratic nightmare (145th). There are some notable improvements among small countries. Honduras gets better marks for making property registration more efficient. El Salvador has quickened "business entry" but still ranks far down the list in this category due to the cost of starting a business.
The correlation between economic freedom and prosperity is clear from reading the World Bank ratings. As one would expect, overtaxing and overregulating economic activity stunts growth, as do weak property rights. Much of the region's stagnation is attributable to burdens inflicted by government.
Why hasn't democracy in Latin America produced change? The answer can be found in public-choice theory -- a school of economics made famous by Nobel Prize winner James Buchanan. Public choice views politics as a market, where the highest bidders have the power to "purchase" what they want. Deregulation may be best for the majority, but politicians don't have an incentive to do it when their most powerful, best-organized constituents -- the ones who put them in office -- prefer the status quo. That includes not only labor unions but rich, established oligarchs and government bureaucrats. Most Latin countries don't have large enough middle classes to counter these oppressive forces, thanks to the twin curses of overregulation and weak property rights.
At the cost of a civil war, El Salvador has had some success in awakening the power elite to the need for change. But most of the region is more like Mexico, where labor unions and a handful of wealthy individuals -- like telecom mogul Carlos Slim and media giant Ricardo Salinas Pleigo -- see no need to reform a system that serves them so well.
On reviewing the World Bank study, it is worth noting that external forces also militate against reform. The International Monetary Fund, the U.S. Agency for International Development, World Bank loan officers and the United Nations provide easy money -- "aid" -- to support failed governments and an entrenched ruling class. "Conditionality" has been a dismal failure. IMF assistance to Argentina worked against challengers to Peronism in the 2003 election and ensured victory for the present anti-market government.
Rich-country bureaucrats also often tie their handouts to objectives favored by rich-country pressure groups, such as environmental and labor "protections" that in the name of "social justice" add more red tape and further destroy individual initiative. All the while, Godzilla government is leaving Latin America's underclass living in the shantytowns and favelas with little opportunity or hope.
