By Alvaro Vargas Llosa
I received a generous letter from the executive chairman of the
World Economic Forum this week telling me I had been selected as a
Young Global Leader 2007 by an international jury presided over by
Queen Rania of Jordan.
A friend of mine joked that I am now "a dupe of the worldwide
conspiracy of the New World Order". I quipped back that I would
rather think of myself as a classical liberal mole among the
conspirators.
The Federal Reserve Bank of Minneapolis Quarterly Review
recently reprinted a little-known paper on Latin America written by
a team of four economists led by Harold Cole and Lee Ohanian, and
published in a specialized journal in 2005.
Unlike most studies about why some countries remain poor, this
one goes beyond conspiracy theories and actually shows what the
problem is.
First, the economists compare 12 Latin American countries with
22 nations elsewhere that are culturally similar but much richer.
They then eliminate a number of possible explanations for Latin
America's poor performance.
Some analysts think the region is stagnant because a relatively
small number of people actually have work. But Latin America's
employment rate is 70 percent that of Europe's - a small gap
compared with the huge gap in output.
Low productivity
The problem is not that too few people are working but that they
are not producing enough. For the last 50 years, the productivity
of an average Latin American has amounted to one-third of the
productivity of a US worker.
By contrast, 50 years ago a European used to produce a bit more
than a third of what a US worker produced and today the proportion
is 80 percent. So, what accounts for Latin America's low
productivity? Could it be a lack of physical capital - i.e. too few
machines per worker?
The ratio between physical capital and output in Latin America
has been relatively similar to that of the United States for the
last 40 years, so that cannot be the reason. The difference must
lie in the efficiency with which Latin Americans use their labor
and their capital. But what explains that difference?
A traditional view maintains that education sometimes called
"human capital" is the key factor. However, the authors found that
education and labor skills have been climbing faster in Latin
America than in Europe and in Asia since 1960. Education helps a
country compete once it is on a par with other nations, but Latin
America's improving education has not been reflected in the
region's economic performance in the last half-century.
Multiple barriers
The crucial element is the complex web of barriers that hurt
Latin America's ability to compete, creating all sorts of
disincentives for making more efficient use of technology and
increasing productivity. Some of these barriers relate to the
outside world tariffs, quotas, multiple exchange rates and
excessive regulations against foreign producers.
Other obstacles are domestic government-owned enterprises,
barriers to entry into certain industries, and inefficient
financial systems. There have been many times in the last 130
years, for instance, in which Latin America's trade barriers were
almost four times higher than Asia's.
Why has Latin America created more barriers than other regions?
The authors choose to leave it as an open question, suggesting it
might make an interesting subject to pursue. But the reason is
probably this: Vested interests in the political, the business or
the labor communities have been in a stronger position in Latin
America than elsewhere to get the political and legal institutions
to protect them.
The persuasive view that transpires from the study is that
economic development is, first and foremost, an act of legislative
purge seeking to remove obstacles. It sounds a lot easier than it
is.
(China Daily via agencies January 19, 2007)
