Growth is not enough

03/04/2006 | Lucien Chauvin

Latin America’s economic boom is in danger of failing if growth is not made more equitable, argues Hernando de Soto

Interview by Lucien Chauvin
Latin America’s economic boom is in danger of failing if growth is not made more equitable, argues Hernando de Soto

First generation macroeconomic reforms have worked and improved conditions for investment and trade, at least for certain sectors of Latin American countries. Mineral and commodity prices are high, and new markets have opened for new products. Finally, China and India are consumer markets that are increasing our exports and supplier markets that are reducing the prices of various products that we consume.

To keep this momentum going, the first thing we need to do is make growth more equitable. This boom really touches only a fragment of Latin America’s population and has actually increased the Gini factor (which measures inequality). It is not that the poorest sector of the population has not grown, but expectations were much higher, and the information revolution has made the have-nots very well aware of what the haves have gained.

There is no society that can prosper without equity. I think it is important to realize that the increasing anger of those who have not obtained more grows not because they are poor, but because they realize that they are excluded from participating in this growth.

The recipe for bringing Latin America’s poorest people into the market essentially has to do with law. A market
economy is a market of legal exchanges, an economy of contracts in which property rights over goods and money are being exchanged continuously. If your property rights and your capital are not documented, you cannot participate in either the national or global economy. You can only participate in the local economy, which means no economies of scale and no economies of scope.

One of the problems that Latin America has is that Chile, the one very successful model that should be a source of inspiration, is not and cannot be inspirational because the architects of Chilean reform will not be recognized by Chile’s current leaders.

Stalemate

The biggest challenge facing Latin America lies with politicians. On the one hand, you have the right wing that knows the success of the West’s formula but does not know how to disseminate it and does not care about the excluded. On the other hand, you have a left wing that cares very much about the excluded, but does not believe in the formulas because they are associated with growth for only the few.

Somebody at the decision-making level will have to break the impasse. Brazil’s [president Luiz Inacio] Lula da Silva may be on the way to doing it. Even Hugo Chavez may end up doing it, once he figures out that it cannot be done through old-style socialist or communist reforms. 

The problem is that Latin leaders simply have not figured out how to sell these reforms by making them inclusive.
The population associates privatization with private appropriation of assets by local and foreign elites. This is because privatization is essentially the transfer of property from the public to the private domain. But the excluded of Latin America, who have no legitimate property rights, cannot make the distinction between the transfer of property and a transfer of sovereignty. To those who own property, it is simply an exchange of the management of property rights. Until this is realized and the word privatization is changed and the concept behind it understood, second generation reforms will only be seen as part and parcel of a process that took place in the late 1980s and the 1990s, which only benefited the few. 

Essentially, it has to do with politics, and it means that second generation reforms must be framed in the context of guaranteeing property rights for all.

Free trade agreements in the region might help governments implement second generation reforms, but probably not directly because the only people who will benefit from free trade – which I agree with and would like to see global agreements and not only bilateral pacts on tariff barriers – are those who can legally operate. If you are going to export you need to fill out a bill of lading for goods and services, which requires you to provide an address and indicate the name and particulars of your company. This establishes your identity and makes you accountable. According to our calculations, 60% of Latin Americans cannot do this.

If we don’t make the necessary political changes, I see us in trouble. The division of classes cannot be ignored. We see it in Peru today. It is not candidate [Ollanta] Humala that is the news, but the fact that he is tapping into a large reservoir of resentment that is very strong. If that continues and politicians do not find modern ways of responding, we will probably go back to the confrontational and adversarial models that characterized a lot of Latin America in the last 30 to 40 years.

We can meet the challenge of including those who today are excluded by putting emphasis not on charity but empowerment.

Hernando de Soto is head of the Lima-based Liberty and Democracy Institute, ranked as one of the top 10 most influential think-tanks in the world. He was named as one of Time magazine’s most influential people in 2004

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