Economic heterogeneity and Latin America

by on April 8, 2007 at 5:57 am in Political Science | Permalink

A loyal MR reader tries to stop me from reaching #50:

Economic Development for the heterogeneous Latin America.  Or how the social, economic and cultural heterogeneity between and within Latin American countries affect their development prospects and/or strategies.  You have mentioned that a stronger (not bigger) state seems necessary; but does that mean different things for Bolivia, Guatemala, Ecuador and Peru, versus Colombia, El Salvador, Costa Rica, Paraguay and Argentina?

In response (non-response?) I’ll quote Jeff Sachs (this link is also an excellent piece on him):

I’m optimistic about Brazil.  And if you look at a map, being
optimistic about Brazil takes you a long way to being optimistic about
the whole of Latin America.  I don’t lose huge sleep over Latin America
- it’s at peace, it’s not riven by terrorism, it’s democratic and it
has made huge strides in human development.  What have been hugely
unequal and divided societies are becoming slowly more equal, and even
very deep ethnic and racial divisions are being ameliorated through
democratic politics.

I’ll add that Latin American states are usually a disaster when it comes to collecting taxes.  This might sound good from a libertarian point of view, but those governments instead resort to distortionary monopolies and corruption to raise revenue or capture political rents.  The solution is not higher taxes per se (governance improvements are also needed), but rather a series of sideways squiggles into the "greater accountability, more tax-based" modes of government.  That doesn’t come easy, and that is also why the usual recipe of privatization so frequently disappoints or backfires.  These territories have yet to build well-functioning nation-states.

Western-style neoclassical economics was designed for settings where national institutions are already in place.  In most of the world, they are not.  The question is not "market vs. government," but how to strengthen the norms and institutions that will build both markets and governments at the same time and in the right directions.  Along that dimension, Latin America is making real strides ahead, and that includes all of the countries listed in the initial query, with the possible exception of Bolivia.

#38 in a series of 50.

sa April 8, 2007 at 7:50 am

time to go long on the bovespa then?

Keith April 8, 2007 at 10:13 am

“time to go long on the bovespa then?”

That’s been a great bet since 2002.

But I’ve actually reduced my Latin American holdings, even though, like Sachs, I’m bullish on Latin American long-term.

It’s just so damn hard to tell the difference between a gain in value caused by a reduction in risk premiums versus a gain caused by a speculative bubble.

My own very seat-of-pants theory is that a good fundamental gain in value from a reduction in a risk or liquidity premium often causes a speculative bubble.

Randall Parker April 8, 2007 at 12:29 pm

What I want to know: will technological advances improve the ability of individuals to protect their own property in Latin America? Can technological advances partially substitute for government?

I’m thinking, for example, surveillance cameras feeding into a computer runs algorithms that can identify who has entered a house or warehouse as belonging there or not. Or electronic tags embedded in high value devices that make them easier to trace.

Or will government use of surveillance technologies automate the tracking of criminals so much that they get caught far more often?

David Zetland April 9, 2007 at 1:18 am

Solution:
1) Title (and redistribute?) property.
2) Tax property — and nothing else. More: http://another-brilliant-idea.blogspot.com/2007/01/optimal-taxes-for-ldcs.html

Result? A group of people with incentives to protect and improve property, which generates revenue. That will reduce, but not eliminate, corruption.

Just came back from Guatemala. It’s no failed state.

ç³–å°¿ç—… April 9, 2007 at 5:17 am
Arturo Galindo April 9, 2007 at 11:43 am

Tyler, I don’t agree on the view that the government vs markets debate is over in Latin America. Unfortunatelly this debate is very alive in the region and with a strong disruptive potential.

Take a look at Venezuela, Ecuador, Bolivia, and Argentina to some extent. In many countries many market are not allowed to function, and in others the dicotomy between markets and goverments is extremely evident. In Venezuela and Bolivia, governments have taken over many formerly privatized enterprises, and apparently more is to come. You can see the reaction of the private sector to these policies. While in most countries the currencies are appreciating in the Venezuela the Bolivar has been depreciating steadily. Price controls are once again all over the place. Price controls on beef for example have been in place. But this is not a problem only in Ecuador, Venezuela, Argentina and Bolivia, with explicit socialist government. Even in Colombia, in theory a right wing country, there are constant government imposed barries to the development o crucial markets. Interest rate on mortgages are regulated, as well as in other financial markets where usury laws are binding. Forced investments on financial institutions are in place. The situation is not as extreme as in other countres, given that the government has suppoorted the protection of private proverty, nontheless the message that markets should be allow to work hasn’t reached the highest government officials. So I think that the debate of governments vs markets is far than over in LAC. Hopefully, as in Brazil, the rest of the region ill able to live through the recent surge in socialism.

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