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World Bank Report Slams Colombian Business Practices

Americas: Why Latin Nations Are Poor by Mary Anastasia O'Grady, Nov. 25, 2005, Wall Street Journal.

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.

By platano on Nov 26, 2005, 00:54 in Politics & the war.

thur says on Nov 26, 2005, 04:07:

The basic idea... The basic idea in this neoloberal economic view is that a 'hire & fire'-culture (less labour laws) is good and it seems to be a 'magic formula' to achieve economic growth. Even in Europe (i.e. Germany) the talk of the day is about creating a more flexible workforce. However there are different opinions about whether flexibility is for the good of the people or more for the good of company profits.

- pbase.com/thur

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utopiacowboy says on Nov 26, 2005, 12:45:

Well it does seem clear that the current formulas that they are using do not work so why not try something different? If that doesn't work, then try something else. I am all in favor of practicality versus ideology.

Disclaimer: any comment I make is inane and is not to be taken seriously, and is so patently ridiculous that no one should take it seriously, even as an insult.

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platano says on Nov 26, 2005, 13:55:

Damn right! Slavery in Colombia worked... for the slave-owners!

plátano

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Sr Tertius says on Nov 26, 2005, 17:37:

Neoliberal ideology And then people wonder why the WB is not so welcomed in the 3rd World, with their fake objectivity based on politically laden scales. I guess you are #1 in "hiring and firing" if you can be put on the street expiditiously, huh? Hmmm... there seems to be something missing in the picture... maybe something called "labor rights"? No, wait, in neoliberal doublespeak that is known as "labor burden"... right, because the only agents are the "entrepreneurs", labor is a commodity, things to buy, sell, trade as easy and quickly as possible. No, no ideology there, no sir.

Because, y'know, deregulation has NEVER been tried in Latin America... Colombia went into the recession of 98 because, I don't know, bad luck maybe? or maybe the market deregulation reforms of the Gaviria administration? How about Argentina under Menem... December 01 was a wild party in BsAs. Incredibly enough, the neoliberal ideologues insist on deregulations proven to be disastrous for Latin American nations.

"The correlation between economic freedom [e.g. deregulation, freedom is for fries] and prosperity is clear from reading the World Bank ratings"

Oh, yeah, look at El Salvador or Honduras, powerhouses of economic growth in Central America! Meanwhile, look at poor Venezuela and Argentina... with double digit growth rates... hmmm... yes the correlation is as clear as it is negative.

And maybe someone could remind the author that labor unions are an essential component of any democratic society. I guess democracy is such a burden... maybe we should get rid of it, don't you think??

"El que a hierro mata..."

"When the finger points to the moon, the fool looks at the finger" (Chinese proverb)

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platano says on Nov 26, 2005, 17:59:

Sr. Tertius, you say "democracy is such a burden"... no... Democracy in Colombia is a political phenomena. If you extend it to the economic arena, well, the Colombian owners can't have that! You can't have the Colombian people sharing the profits. That sounds communistic to the owners.

The workers are not risking their capital like the owners are. The workers do live with the risk of being fired at any moment, but from the owners' point of view that doesn't mean they should be sharing in the wealth. Colombian workers are just powerless pawns in an economic machine... getting paid just enough to get back to the factory the next day. It is a form a slavery... but instead of owning the slaves, they rent the slaves with wages.

No, democracy in Colombia is a political phenomena, not an economic one. The Colombian owners and Colombian rulers say they believe in democracy; they encourage people to talk among themselves... as long as they don't organize to affect the economic relationships or disturb the bottom line.

plátano

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Sr Tertius says on Nov 26, 2005, 18:13:

Platano: It depends on who you ask... If you ask Bush or Uribe, they would probably say that they are expanding freedom and democracy through deregulations, it's the "ownership society" (is that how they call it these days?) Freedom, of course, doesn't include the freedom to organize and demand just conditions of work and decent wages.

Political and economic democracy are constitutive elements of the Republic of Colombia. It's written in our Constitution: the right to work is as fundamental as the right to live or to express ideas freely. Well, yes, we all know very well the long road it takes for Colombian laws to translate into practice, but fortunately we have a president that is pushing the most progressive elements of our legal system into fruition.

Wait, no, we actually don't.

"El que a hierro mata..."

"When the finger points to the moon, the fool looks at the finger" (Chinese proverb)

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platano says on Nov 26, 2005, 18:34:

El salario mínimo es de esclavitud... hay derecho a esclavitud? Artículo 25.- El trabajo es un derecho y una obligación social y goza, en todas sus modalidades, de la especial protección del Estado. Toda persona tiene derecho a un trabajo en condiciones dignas y justas.

The reality is wage slavery with a wage bordering on poverty for 40% of the Colombian population. The salary increase offered to Colombians for the minimum wage is 4.5%. But the cost of living, the cost of gasoline, the cost of transportation, goes up 10% so the purchasing power of the Colombian salary goes down and the poverty rate increases. All the while Uribe and friends are getting rich. This infuriates me! And they want to re-elect Uribe? ¡Las guevas!

plátano

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juancegomez says on Nov 27, 2005, 18:37:

...... Skipping several random bits here and there that probably would deserve to receive replies in another moment (just not this one)...

I agree that neoliberalism is far from being applicable to Colombia in its best conditions, and in general happens to be rather negative, especially when the theory is contrasted with the cold, hard facts.

However, in order to change this, we need more than just an anti-neoliberal president that waves little red flags and watches Telesur.

We need to change not just a person but a form of government and of doing business...perhaps simply an entire form of living.

We need a change, something that completely turns around established traditions and yet manages to keep their positives (small as they may be), without making risky sacrifices that might just throw us off for a few more decades or centuries.

Obviously, it's harder to do this than it is to say it (especially in such abstract terms...not that being overly specific is necessarily better though).

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