The authors rule out many of the usual explanations for the region’s lagging performance. Compared with the rest of the world, Latin America does not suffer from massive unemployment, a lack of basic education, a capital shortfall, a staggeringly high birthrate, or an utter lack of democracy. Quite the contrary, say Cole and Ohanian, professors at UCLA, and economists Riascos, of the Banco de la Republica de Colombia, and Schmitz, of the Federal Reserve Bank of Minneapolis.
The Latin American employment rate is about 70 percent of the rate in Europe and the United States, a significant gap, but not enough to explain the region’s economic stagnation. Argentina’s and Chile’s over-25 populations in 1990 had 7.8 and 6.2 years of schooling, respectively, the authors say. Latin America has not experienced a major deficiency in the amount of capital available for investment in recent decades, and Latin American governments on average have been almost as democratic as those in Western Europe over the past 15 years, according to research cited by the authors.
So what is wrong?
The inefficiency of Latin American economies can be traced, in part, to government policies, the authors say, including tariffs, quotas, multiple exchange-rate systems, regulatory barriers to foreign products, inefficient financial systems, and large, subsidized state-owned enterprises.
In one of several instances when barriers were lifted—foreigners were allowed to invest in Chile’s previously nationalized copper industry—copper production grew by 175 percent in 10 years. Individual mines became more efficient, and Chile’s relative productivity increased from 30 percent to 82 percent of the U.S. level. The 1991 privatization of the Brazilian iron ore industry, after nearly 20 years of negligible growth, sent productivity soaring more than 100 percent by 1998. One key to the growth of the industry, the authors say, was changes in work rules that had limited the number of tasks a worker could perform. Machine operators, for example, were prohibited from making even trivial repairs to their machines. With looser rules and private ownership, output increased by 30 percent.
In contrast, the authors say, the nationalization of the Venezuelan oil industry in 1975 led to a decline of 70 percent in productivity and 53 percent in oil output in less than 10 years.
Why would a government choose to make its economy unproductive? The answer, the authors contend, is that a small part of society would be harmed by economic changes, and this group has sufficient resources to block their adoption.
Governments have an incentive to make it virtually impossible for foreign competitors or even local entrepreneurs to start businesses that compete with incumbent, low-efficiency producers. “When competitive barriers are eliminated and Latin American producers face significant foreign competition, they are able to replicate the high productivity level of other Western countries,” the authors conclude.
