Economic failure in Latin America

January 14, 2004

Free Market Foundation

Latin America is falling behind economically, according to economist Paul Holden of the Enterprise Research Institute.

Between 1980 and 1990 per capital income in Latin American and Caribbean countries fell by about a third.

In 1980 per capita income in Latin America averaged just 18.7 percent that of incomes in countries belonging to the Organisation for Economic Co-operation and Development (OECD), but now it is only 13 percent.

This is a result of the failure to attract foreign investment and of barriers to new business:

High-income OECD countries had foreign direct investment close to 10 percent of GDP in 2000, compared with an average of less than 5 percent in Latin America.

The cost of business registration in Latin America as a percent of per capita GDP is startling; in Bolivia it is 300 percent while in the United States the cost is trivial.

The informal sector in 1998 accounted for nearly 60 percent of total employment in Latin America due to the inability to enter into long-term contracts.

One reason markets are not working in Latin America is a lack of governance, which feeds corruption and a general disregard for the rule of the law, says Holden.

Source: Paul Holden (Enterprise Research Institute), Did the Market Economy Fail in Latin America? The Second Generation of Institutional Reform, Economic Reform Feature Service, Fall 2003, Center for International Private Enterprise, U.S. Chamber of Commerce.

For text http://www.cipe.org/pdf/publications/fs/holden2.pdf

For more on South America http://www.ncpa.org/iss/int/

FMF Policy Bulletin\6 January 2004