Too many of Latin America’s businesses are uncompetitive—or outside the formal economy
Economist
IF PRODUCTIVITY growth in Latin America since 1960 had kept pace with the rest of the world, real incomes in the region would be 47% higher than they are, reckons the IDB. Part of the problem is that the region neither saves nor invests enough. According to ECLAC, in 2008 it saved 23% of GDP and invested around 22%, which is better than it used to be but not nearly as good as China’s investment rate of close to 40% of GDP. But Latin America lags even further behind in total factor productivity, or the efficiency with which it combines capital, technology and labour. Between 1975 and 1990 both labour and total factor productivity actually fell in both industry and services (meaning that businesses became less, not more, efficient). Since 1990 productivity in industry has grown more slowly than in East Asia, and in services hardly at all (see chart 2).
Measuring productivity is not straightforward, and economists often disagree about it. Augusto de la Torre, the World Bank’s chief economist for Latin America, reckons that since 2002 productivity has been growing in several countries in the region, including Brazil, Chile, Colombia, Costa Rica and Panama. Heinz-Peter Elstrodt, who heads the Latin American practice of McKinsey, a consultancy, says that privatisations in the 1990s spurred productivity growth but is not so sure that this has continued in recent years. Certainly, no one is claiming that, leaving farming to one side, Latin America is a world leader in productivity.
Some of the reasons why manufacturing and services in Latin America are relatively inefficient are structural: economic activity is dominated by a mass of small and inefficient service businesses, and perhaps as much as half the population works in the informal economy. The causes of this are deep-rooted, but they include poor infrastructure, badly designed taxes and regulations, a lack of competition, which means businesses have less need to innovate, and lack of credit.
Clogged ports and airports and poor road and railways connections meant that the region’s opening to foreign trade in the 1980s and 1990s brought less benefit than it should have done. Astonishingly, freight costs for exports from Central America to the United States can be higher than from China, for example.
Counting both private and public sources, investment in infrastructure totals only around 2-3% of GDP, of which a third is in energy and much of the rest in transport, according to Jordan Schwartz of the World Bank. He thinks the region needs to invest twice as much if poor infrastructure is not to hold back growth. As well as money, better organisation and co-ordination is needed. Road and rail transport to ports can be as important as dockside facilities in moving cargo swiftly, for example.
The quality of infrastructure across the region varies widely. Only Chile has a modern transport network comparable to China’s, and even there railways are neglected. But Chile has succeeded in attracting large-scale private investment in toll roads under a concession system. São Paulo’s state government in Brazil has done something similar. The federal government, after much delay, has put road improvements out for private management, but its insistence on low tolls has deterred investors. At the same time private investment has helped Brazil’s railway network to expand rapidly. The share of freight going by rail has risen from 16% in 1999 to 26% in 2008 and could reach 35% by 2020, according to a study by the Institute of Applied Economic Research (IPEA), a government-linked think-tank. Ports vary widely too: Montevideo in Uruguay, Panama and the main Colombian and Chilean ports are efficient, others much less so. Panama, which has embarked on a $5.25 billion scheme to expand its canal, has a chance of becoming a Singapore-style entrepot for Latin America.
Rules and regulations are often an even bigger brake on productivity. High payroll taxes in many Latin American countries penalise workers in the formal economy, and rigid and over-generous labour laws discourage the creation of formal jobs. New non-contributory pensions and social programmes, introduced with the best of intentions, have had the unintended consequence of dissuading workers from moving into the formal economy where they would have to join contributory schemes, as Mr Levy of the IDB points out.
If many Latin American companies are inefficient, it is partly because governments have allowed them to be so by not doing enough to stimulate competition. Private oligopolies and state energy monopolies still survive in Mexico, for example. It may not be coincidental that Chile is the one country in Latin America where since 1960 productivity has grown faster than in the United States: it opened up to international trade and reformed its economy earlier and more thoroughly than most other countries in the region.
Peru, though poorer, is going down the same path. In the 1970s its military government nationalised a big chunk of the economy and the private sector was further weakened by hyperinflation and terrorism. But since the early 1990s Peru’s economy has been growing rapidly. The corrupt authoritarianism of Alberto Fujimori, its president from 1990 to 2000, undermined many of the country’s institutions, but Mr Fujimori did create an effective competition authority. Possibly as a result, several new business groups have emerged—a rarity in a region where companies tend to be of long standing.
An example of the new breed is Grupo Interbank, based on a bank privatised in 1994. Its boss, Carlos Rodríguez Pastor, is the son of a former finance minister who grew up in the United States when his father was exiled by the military government. He recruited young Peruvian MBAs who were working abroad, promising them a meritocratic culture (“This group has no surname,” he says). Under their stewardship Interbank has turned into a retail bank in which revenues have grown tenfold, to $1.5 billion last year, and which has launched an insurance business. The wider group is now Peru’s second-biggest retailer and runs the country’s largest chain of multiplex cinemas and a fast-growing hotel chain as well as some smaller businesses. “In Peru you can go from zero to relevance in five years,” he says.
Keep it in the family
That lack of a surname makes Grupo Interbank an exception. In Latin America the family-owned conglomerate rules the business roost. A decade ago many management gurus regarded this breed as inferior to Anglo-Saxon equity capitalism. Yet many such firms have fared well and expanded abroad. According to McKinsey, publicly quoted family-controlled companies worldwide tend to perform better than average. In Latin America such firms cope well with volatility, says Mr Elstrodt. They can take decisions quickly but can also take a long view.
Many family firms now have stockmarket listings, which has imposed greater financial discipline, improved their corporate governance and made them more open. Such companies generally have professional managers, and the younger generation of family owners has become more forward-looking. In Peru, for example, some of the best companies are starting to appoint innovation managers, according to Felipe Ortiz de Zevallos, a consultant. “Family owners used to say, ‘let the gringos innovate, we live for the fiesta’. The younger generation is more Protestant in style,” he says.
Or take Grupo Bimbo, a Mexican firm that is the world’s second-biggest baker (after Kraft). It is publicly quoted but 70% of its shares belong to four founding families. Although Mexico still accounted for almost half its total sales of $8.6 billion last year, 43% came from the United States and 12% from the rest of Latin America. It also has a small operation in China. Entering the United States was a defensive move, in an industry that in North America is consolidating, but expansion in Latin America and China represents “10-15 year bets”, says Roberto Cejudo, Bimbo’s finance chief. In these countries “our objective is to develop the market for wrapped, sliced bread, and for that you need innovation, know-how and time.”
Giving and taking credit
Perhaps the biggest cause of Latin America’s low productivity is lack of credit that would allow businesses to expand and modernise. Total credit to the private sector in Latin America has averaged just 31% of GDP over the past four decades, less than half the figure in East Asia and in the rich world, according to the IDB. This constraint, at least, is starting to weaken. The conquest of inflation and achievement of macroeconomic stability, together with the improvement in sovereign-credit ratings, is allowing more borrowing to take place, though so far mainly in the form of consumer loans and mortgages.
But capital markets are developing too, thanks partly to pension reforms in the 1990s, creating privately managed pension funds which in many countries became the first institutional investors. Blue-chip companies in Mexico and Chile, especially if they are exporters, are no longer at much of a financial disadvantage compared with their rivals in rich countries. For example, Grupo Bimbo raised $2.5 billion last year to buy a business in the United States that belonged to Canada’s Weston Foods.
Medium-sized firms across the region have a tougher time. In Brazil businesses find it hard to get loans from private banks for longer than a year, and interest rates remain high. In real terms the Central Bank’s benchmark rate, the Selic, is now only around 6%, down from 11% in 2001. But market rates are higher because the banks are required to lodge up to 60% of their sight deposits with the Central Bank and because of taxes. Many firms finance expansion from retained profits or from state banks, especially the BNDES, which provides ten-year loans at around half the Selic rate.
During the recession state banks across Latin America played an important role in providing emergency financing when private credit temporarily dried up. The BNDES has almost doubled its annual lending (to 4.5% of GDP) since 2007, thanks to a large cash injection from the federal government to boost its capital base. Mr Coutinho, the BNDES’s president, hopes that in due course the private banks will start to provide long-term loans again. That will require savers to switch to longer-term instruments. “The last step [in Brazil’s economic stabilisation] is for the saver to trust in the future of the country,” he says.
That prospect remains distant in Argentina, where the banking system has yet to recover from the default and devaluation of 2001-02. Private credit amounts to only 13% of Argentina’s GDP, and deposits are very short-term. Confidence has been further damaged by violations of property rights and by the opaque decision-making of the governments of Cristina Fernández and her husband and predecessor, Néstor Kirchner. Argentine companies have no choice but to try to survive, generate cash and get it out of the country, a management consultant says.
Elsewhere, as credit takes off some worries about home-blown bubbles are emerging. A study by Tendências, a consultancy, found that Brazilians are now devoting 26% of their incomes to repaying debt.
In Brazil the expansion of credit and capital markets has been linked to a decline in the informal economy. The construction industry, for example, used to be almost entirely outside the formal sector, but thanks to a booming property market housebuilding companies have listed on the stockmarket and their suppliers have entered the formal economy in turn. Between 2003 and May 2010 the number of formal jobs in construction alone increased from 1.5m to 2.5m. But in Mexico and Colombia the share of the informal economy may still be growing.
At the bottom of the pyramid, many Latin American countries are seeing a boom in microcredit. The best example is Peru. A recent study of the industry shows that over the past two decades microloans have expanded at an annual rate of 19%. In 2009 there were more than 220 lending institutions, 1.8m borrowers and total outstanding loans of $3.8 billion, accounting for 11.2% of financial-system credit to the private sector. But Richard Webb, one of the authors of the study and a former governor of Peru’s central bank, cautions that there is no clear evidence that more microfinance means less poverty, or that it automatically brings borrowers into the formal economy. “The idea of separate formal and informal sectors is wrong,” he says. Rather, “there are degrees of formality.”
José Sevilla (not his real name) would go along with that. He lives in a large house in a dusty but aspiring suburb on Lima’s southern edge and runs a business with one of his sons slaughtering and wholesaling chickens. After various ups and downs he formalised his wholesale business in the 1990s. He also has three chicken restaurants, set up with loans from a bank and Mibanco, a big microlender. In all, his turnover is about $1.8m and he employs 31 people, making his a medium-sized business. But few of his restaurant staff are legally registered.
No comments:
Post a Comment