Why Latin nations are poor

The World Bank's "Doing Business in 2006" survey measures regulatory burdens and property rights in 155 countries. This year's results demonstrate clearly that despite persistent claims that Latin America has tried the "free-market" model and found it wanting, the region is stubbornly stuck in a statist time warp, says Mary Anastasia O'Grady.

For example, take Mexico, which has enormous oil reserves and open trade with North America. Its economy is sadly under-performing. Mexican businesses face crippling regulation and inadequate legal protections, weakening the potential for market competition, investment and productivity gains.

In the category that deals with "hiring and firing," Mexico ranks 125th out of the 155 countries surveyed, not least because it costs a firm almost 75 weeks of wages to fire a worker.

Mexico also ranks 125th in "protecting investors" against fraud, self-dealing and other corporate abuses.

Correspondingly, it ranks 100th in the "enforcing contracts" category, meaning that when two parties strike a deal, neither knows whether it will hold up.

Peru gets a better overall rating than Mexico, but it can hardly be said to encourage entrepreneurship:

In "starting a business," Peru ranks a low 106th because of red tape.

Firing a worker costs almost 56 weeks of wages, discouraging employers from hiring and risking huge costs if business takes a turn for the worse.

A medium-sized business in Peru can expect a tax burden reaching almost 51 per cent of gross profits, which is part of the reason Peru has the 133rd worst tax burden.

The correlation between economic freedom and prosperity is clear from reading the World Bank ratings. As one would expect, overtaxing and over-regulating economic activity stunts growth, as do weak property rights. Much of the region's stagnation is attributable to burdens inflicted by government, says O'Grady.

Source: Mary Anastasia O'Grady, Why Latin Nations Are Poor, Wall Street Journal, November 25, 2005; and Doing Business in 2006, World Bank, September 2005.

For text: http://online.wsj.com/article/SB113287927625106145.html

For World Bank report: http://www.doingbusiness.org/

For more on International: http://www.ncpa.org/pi/internat/intdex1.html

FMF Policy Bulletin/ 06 December 2005