Is the Latin Boom Bound to Fade?

Reflecting on the remarkable strength and breadth of the Latin American economy today, the question often posed by analysts is whether or not the region in some sense is “decoupling” from the business cycle in the U.S. where the threat of a subprime-induced recession looms ever larger.

While the issue is obviously a great concern in Latin America, I find myself drawn to a different set of questions that today’s prosperity in the region also brings to mind. 

Are we seeing in Latin America the manic phase of the familiar pattern of commodity-driven booms followed, inevitably, by a prolonged bust?  Or are the feverish economic conditions in Latin America today perhaps the precursor of an entirely different, more stable, more prosperous economic order in the region?   In the words of Douglas North and in the spirit of Acemoglu and Johnson and others, could it be that Latin American economies are leveraging the present abundance in order to develop “thriving markets, competitive and stable politics, and cultures that promote deep human capital accumulation for most of their populations?”  [1] 

This concern about the possibility of sustained economic growth is prompted by Martin Wolf’s recent op-ed in the Financial Times, a piece inspired in turn by an article in the latest Foreign Policy about Carlos Slim and the persistence of rent-seeking behavior in Latin America.  The FP article is entitled, provocatively enough, “How Slim Got Huge”.[2]

We have in economics abundant theoretical and empirical work to demonstrate that the breakthrough to sustained economic development must involve a transition from rent-seeking to entrepreneurship and innovation in the context of competitive and open markets.  We also know from the literature that the timing of the breakthrough can be measured in terms of research and development expenditures, demand-driven educational systems, and effective public-private cooperation to correct market failures which arise in the spread of knowledge.[3]

By the same token, it is clear that Latin America has not come remotely close to the doorstep of innovation-driven growth and development, dominated as its economies are and have been for so long by ineffective governments and entrenched elites thoroughly devoted to rent-seeking behavior.  This curse of rent-seeking is something to which natural resource abundant economies, e.g.., Latin American economies, are particularly vulnerable.

The Foreign Policy article cited by Wolf relates the story of Latin America’s archetype billionaire, Carlos Slim Helú, who has parlayed his stake in the former government monopoly,  Telmex,  into a business empire that has earned him a modest $60 billion net worth, sufficient to rank him (give or take a few billion) as the wealthiest man in the world.  (That honor in the latest Forbes survey actually belongs to one of the Ambani brothers in India, but who is counting?)

You can read the Winters article on Slim for yourselves and see what you think, but some of the big numbers that the author provides are eye-popping, to say the least, in terms of calling attention to the tremendous disparity of wealth in Mexico today.   For example, Slim’s net worth is an astonishing 6.6% of Mexican GDP compared to the much more modest 0.4% share of U.S. GDP represented by Bill Gates’ billions and the comparatively paltry 2.2% for John D. Rockefeller’s fortune at its zenith in 1937. 

Winters goes on to point out, and it is worth pondering, that the “secret to Slim’s success” lie not so much in terms of innovation, entrepreneurship, R&D, success in competitive markets etc.,  but is due instead to his political connections to the Salinas government in the early 1990s.  Telmex (which Slim bought for a modest sum in a competitive auction to be fair to him) still today holds a 92% share of Mexico’s fixed line telecommunications market.  Not totally coincidentally, Mexico has also lagged well behind the rest of Latin America, not to mention the more developed world, in terms of R&D spending in telecommunications which would seem to be a critical gap if Mexico is to keep pace with the rest of the world, let alone catch up. 

The point is not to enter into the debate about Carlos Slim and his business empire – which by the way is spreading over much of the rest of Latin America also through good political connections – but rather to call attention to the fact that the present boom in Latin America will only give way to sustained economic growth if somehow the prosperity of the present strengthens the future of the rule of law and institutions, encourages free entry into all markets, and rewards creative entrepreneurship. 

All of that happy chain of developments is pretty far away from what we see in most of Latin America today where connections to government and rent-seeking behavior (control over natural resources, quasi-monopolistic markets) in semi-closed economies is the surest path to wealth and fame. 

Intrigued by the Winters article, I looked into the annual Forbes database of billionaires to see what it might suggest to us about in whose hands wealth is accumulating in Latin America and whether or not this is due to success in competitive markets – creative capitalism – or to more familiar sorts of Latin American rent-seeking. 

A quick look at the latest 2007 Forbes list of billionaires is interesting for a lot of reasons, including the astounding growth in the numbers of Indian, Russian, and Chinese mega-rich who make the charts.  (Rent-seeking is not limited to Latin America, to be sure.  That is also another story.)   In terms of Latin America, one does see (luckily for the region, I think) that Carlos Slim really is an anomaly.  His fortune matches or exceeds that of the next ten Latin American billionaires combined. 

However, I think the truly important point to focus on is the significant growth in extreme wealth in Latin American in recent years and the sources of this wealth.  The Forbes 2007 list of the wealthiest counts in its ranks 36 Latin Americans (including Slim and no fewer than 20 Brazilians) whose fortunes if they could be lumped together (imagine that possibility) would together sum to $153 billion, or roughly 7% of Latin American GDP.    This is a significant increase from 2000 when Forbes counted a comparable number of billionaire Latin Americans (31 in all), but whose combined fortunes were a mere $62 billion equivalent to 3% of GDP.   In other words, an enormous share of the Latin American wealth generated in recent years has piled up in the hands of a privileged few who may or may not be playing a useful role in turning the present boom into self-sustained economic growth.  At the same time, we are not seeing a tremendous growth in the ranks of the super-rich in Latin America either, a factor which could indicate successful recent patterns of emerging entrepreneurship.   (Think of the people behind Google and how wealthy they probably were seven years ago.)

Obviously,  an economist would not likely criticize a Kuznetsian process of income concentration in the hands of an entrepreneurial class of Latin Americans whose creative gifts were opening up new industries and new sources of employment for many, as one could argue Bill Gates has done in the United States.  (John Rockefeller was probably another story.)   This sort of inverted U pattern of income concentration followed by greater equality as competitive markets distribute the wealth is built into our growth models and stands to reason.   Yet I wonder just how many of these mega-rich in Latin America owe their wealth to innovation and success in competitive markets rather than to their connections to government and/or control over natural resources.

One way to think about this is the following.  If the business success in Latin America we are seeing is due to competitive excellence driven by new products, where in the world are the truly global Latin American brands that we can easily identify?  Where are the Latin American equivalents of LG, Daewoo, Hyundai, or even Lenovo?  I can think of (maybe) Embraer as a true global brand and maybe Juan Valdez, but what other world-beating products appear to be coming out of Latin America that one could say represent a flowering of innovation and entrepreneurship in the region without which the present boom, as strong as it is, will inevitably give way to an ensuing bust?  


   

[1] Douglass C. North et al, A Conceptual Framework for Interpreting Recorded Human History. NBER Working Paper 12795.
[2] Brian Winter: “How Slim Got Huge”, Foreign Policy, Nov/Dec 2007, pp. 35-43. 
[3] Andres Rodriguez-Clare, Inter-American Development Bank Working Paper, “Microeconomic Interventions After the Washington Consensus”, February 2005.

3 Responses to "Is the Latin Boom Bound to Fade?"

  1. AG   November 17, 2007 at 4:35 pm

    Thomas – It seems your intuition is correct. But as you point out, rent-seeking is common across the developing world. In fact, it would be possible to look at the US and Western Europe and find some evidence of past rent-seeking showing up in the present in a time-series analysis. But to your original question – although it is impossible to predict when or if the resource boom falters and ends in another miserable bust, it is possible to determine whether the resource gains have been employed in a way that would develop or “promote deep human capital accumulation for most of their populations.” Stability and markets are great, but in order to make the leap forward, there must be human capital development. The stability and markets may be instrumental in keeping the human capital in Latin America, but if the resource boom sours, stability and markets wont be able to mitigate – human capital will. Maybe you can shed more light on this area? Have resource rich LA countries increased spending in education and know-how? Or has the bounty been absorbed by the rent-seekers and luxury imports?

  2. Guest   November 18, 2007 at 2:28 pm

    I see no consistent trend anywhere in Latin America to re-channel the present surplus into R&D or into education. The two areas, as you know, are linked closely. Right now, in most of Latin America, we have a failed or failing educational system. Latin American students score poorly on international exams. Most Latin American children have miserable primary school educations and then are filtered out before they get to high schools. Higher education systems are actually reasonably well supported in Latin America, but not demand-driven, i.e., they are not doing a very good job of preparing Latin Americans to work in the knowledge economy.The biggest gap is probably in innovation policies and R&D which, except maybe in Chile, most Latin American economies lag very badly. Even the Chileans do not have things right yet.By that I mean, what we would expect to be seeing in Latin America if R&D spending were adequate would be an expansion of exports into the global economy which incorporate (unlike pure commodities) a reasonable degree of technological sophistication. By and large, you are not seeing that in Latin America. The Brazilians are claiming some success, on a small scale. The Chileans, as mentioned, are probably in the forefront. Everyone else is in a tie for last place.

  3. mangy cat   November 25, 2007 at 7:28 pm

    On latino brands (or the lack thereof):Few more entertaining sports than digging your teeth into a Bimbo`s bun