Venezuela’s nationalization of the telephone company CANTV and the electric utility Electricidad de Caracas have demonstrated once again how insecure are property rights, not just in Venezuela, but in Latin America as a whole. Latin Americans pay for their disdainful attitude to those rights, in every paycheck they get, because the lack of secure property rights is a major cause of the continent’s pathetic productivity growth.
There’s one great way, long term productivity growth, to distinguish between countries that are growing rapidly for the long term and those which are just enjoying high commodity prices or a cyclical boom and will relapse thereafter. Productivity growth tells you whether the local economy is just having a good year or whether its growth is fundamental, enabling it to change its place among the countries of the world, and over the long run enter an altogether higher league. If next year you can make more stuff with the same number of people, working for the same number of hours, you will get richer.
The evidence here on Latin America is quite clear. The Groningen Group’s Total Economy Database has statistics including productivity growth (more precisely, Gross Domestic Product per person-hour) on a comparable basis for a number of economies, mostly those of middle income or higher. Wealthy countries, such as the United States, the EU or Japan mostly have productivity growth in the 1.5%-2% per annum range over the last 20 years, with Germany being a little below this since 1990 because of the costs of reunification and the US a little higher since 1995 because of the huge amounts of capital that have been hurled at the economy. (As mentioned in past columns, US labor productivity growth has since 2005 become very slow, as the economy’s capital-intensiveness lessens following the end of the housing boom and the capital-fueled increase in productivity goes into reverse).
Some countries, notably in Asia, and restructuring Eastern Europe, have productivity growth higher than this, with Estonia, Slovakia, South Korea and Taiwan having particularly stellar records of prolonged productivity growth. Generally, you would expect poorer countries to have faster productivity growth than rich countries, because the “catch-up effect” allows them to increase productivity to the rich countries’ level, while rich countries are constrained by the overall level of technological advance.
Latin America, on the other hand, has a productivity record consistently worse than any other in the database (Africa may be as bad, but Groningen does not have productivity data for Africa). Chile is a marginal exception, with productivity growth of 2.4% per annum in 1985-2005, presumably the result of Augusto Pinochet’s economic reforms (while merely middle-of-the-pack as a human rights abuser, Pinochet was in a class of his own as an economic manager). However even in Chile, backsliding has been apparent since 1998, with the advent of an openly Socialist government in 2000 being accompanied by the reduction in productivity growth to a sluggish 1% per annum, little more than half the rate in the rich West.
Elsewhere in Latin America, the story is worse. In spite of its economic reform programs, Brazil has managed only 1.0% per annum in the last 20 years, slightly worse in 2000-05. Argentina, also around 1% after 1980, reverted to negative productivity growth in the middle 1990s, and has been negative over the last decade, while Colombia, whose productivity grew at 0.6% in 1985-2005, has seen a slowdown since 2000.
Most disgraceful of all have been the performances of Mexico and Venezuela. Mexico’s labor productivity peaked in 1980, and is still more than 10% below its 1980 level, having seen almost no recovery in the last decade. Venezuela is still worse; its labor productivity peaked as long ago as 1970, and it is now fully 43% below that level. It’s not all Hugo Chavez’s fault, either; productivity has declined by a rapid 2.2% per annum under Chavez, but it declined by 1.5% per annum year after year for the 28 years from 1970-1998, more than a generation. During that period, Venezuela had democratic governments – Christian Democrat, Social Democrat, whatever the electorate asked for, productivity and therefore living standards inexorably declined, by a rate more or less the same as its rate of increase in the West. High oil prices, low oil prices, it made no difference, Venezuela kept on becoming steadily more incompetent at supporting itself. It’s always asking a lot of an electorate to postpone short term gratification for long term goals, but frankly by 1998 the Venezuelan electorate had some excuse for irresponsibility.
Since Latin American productivity growth is so poor, significant economic growth occurs only through population growth or a rise in commodity prices. The continent slips further down the international league tables, being overtaken first by the emerging Asian tigers, recently by Eastern Europe, and shortly by China and India.
Lack of secure property rights is certainly one explanation for Latin America’s poor economic record. If property rights are insecure, even on a long term view, the required rate of return for foreign and domestic investors increases, and capital flees to Miami. Individual defaults, such as those in Argentina, land expropriations, as in Bolivia, or random and unjustified nationalizations, as in Venezuela, cause risk premiums to rise across the continent, since investors recognize correctly that there is no sharp dividing line between the overtly hostile governments of Hugo Chavez in Venezuela, Evo Morales in Bolivia and Nestor Kirchner in Argentina and the grumblingly acquiescent ones of Michelle Bachelet in Chile and Luis Inacio “Lula” da Silva in Brazil. After all, the Chavista Manuel Lopez Obrador lost less year’s Mexican election by less than a percentage point. Lack of investment resources thus becomes a problem for the entire continent, forcing productivity growth to low or even negative levels.
Lack of property rights is however insufficient as an explanation for poor productivity growth; it begs the question: why do Latin American electorates vote for governments that fail to protect property rights? Part of the reason may be circumstance. It is likely that foreign companies have been protected in Eastern Europe partly by the realization that nationalizing a major foreign investment would jeopardize the nation’s chances of entering the EU and joining the rich countries’ club. No equivalent protection exists in Latin America. Nevertheless, the insecurity of property rights in Latin America is so chronic that there must be some further explanation.
Culture may be part of the explanation, but ethnic differences don’t appear to be (political correctness does not cause me to rule out this explanation a priori; one must examine the evidence.) One of the worst productivity performances is exhibited by Argentina, which is 97% ethnically European, thus from a region with an adequate if not spectacular productivity performance.
One factor that certainly seems to apply is education deficiencies. Looking at four Latin American countries, Argentina, Mexico, Brazil and Venezuela, and comparing them with three Eastern European countries of comparable wealth and rapid productivity growth, Poland, Slovakia and Bulgaria one is immediately struck by two contrasts. The Latin American countries have much higher population growth, all over 1% per annum compared to near zero or less in Europe, with Venezuela highest at 1.38% per annum. They also have a considerably lower literacy rate, 97.2% for Argentina and 86-93% for the others, compared with 98.6% for Bulgaria and over 99% for Poland and Slovakia.
The two factors are connected. Commentators complain incessantly about the “demographic deficit” in countries such as Bulgaria, Japan and Italy, in which the population is declining and retirees are increasing as a percentage of the total but that demographic deficit is fairly easily solvable by later retirement and lower social security payments. It is nothing like as serious as the opposite problem, when the population is increasing at a rapid rate.
Rapid population increase makes education very expensive, and, as we see in Latin America, makes it miss a significant percentage of young people, mostly those brought up in large poor families in shanty-towns or the deep countryside. Also, because population pressure puts considerable strain on housing, land and infrastructure, rapid population growth produces shanty-towns, excessive and uneconomic subdivision of landholdings and high unemployment among the young males who are the principal recruits of crime, drug addiction and terrorism.
Whereas old people deprived of resources quickly cease to be a problem (brutal but true) young people deprived of resources stick around to pose a social problem for half a century or more. It is not a coincidence that China only began to grow richer once the “one child policy” had restricted population growth and caused parents to devote much greater educational and other resources on their now precious children.
With rapid population growth and inadequate resources for education and infrastructure, it is little wonder that Latin America has among the highest inequality in the world. Society is unable to provide the rapidly increasing population with enough resources to sustain a stable home and working life, so inevitably a seething underclass is created. In turn, if the society is democratic, that underclass regards the system as irretrievably hostile, and so follows the siren song of radical populists or guerilla movements. Deprived old people are not nearly so likely to choose radicalism or guerilla war.
Naturally property rights, particularly those of foreigners or the remote “rich” are regarded as fair game for expropriation. It is not an accident that “land reform” is primarily a Latin American problem, as is hyperinflation wiping out middle class savings, as increasingly is expropriation of foreign investment.
Latin America’s problems thus appear insoluble, but they’re not. The “Washington Consensus” policies of the 1990s were a waste of time and money without finding a solution to the population dilemma. On the other hand, China’s example demonstrates that a firmly enforced “one child policy” pursued for a decade or so across the Latin American continent would very likely produce remarkable and gratifying results.
-0-
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)