The economic and political hopes of citizens in Latin America depend on governments being able to create an environment that will unleash an entrepreneurial spirit, argues Susan Segal.
It seems that much of the news coming out of Latin America these days is about leftward lurches and the latest respective government action to undermine the market economy. But, the desirability for democracy and economic growth are not the issues up for a referendum in this year of elections, rather citizens are trying to find future leaders that will build consensus to address one of the most pressing problems that continues to plague the region: poverty.
And, according to surveys, most of Latin America's poor believe that starting a business, not receiving government handouts, offers their best hope to lift the curtain of this socio-economic disease. For these aspiring risk-takers, the future depends on gaining access to the market, not rolling it back.
Entrepreneurs create businesses large and small. They create jobs, enable social mobility, innovate, and serve as an inspiration to others. Underpinning these achievements is the drive to construct something lasting, withstand risk and persevere. The creation of businesses and jobs not only supports economic growth but provides hope that each person can have a job and ensure a better future for their children. A ll this seems so straightforward, and yet more often than not governments have choked off these engines of progress. Governments have the responsibility to create an environment in which entrepreneurship can flourish, where small and medium sizedbusinesses can grow. Accomplishing this requires a massive reduction of red tape, greater labor flexibility, and more predictable enforcement of laws.
Entrepreneurs’ first challenge is opening a business. In Latin America, on average, an entrepreneur must tackle 11 separate legal procedures averaging 63 days per procedure. Compare that to the United States, where on average the same entrepreneur only needs to confront five different procedures. Even when compared with other countries, aspiring entrepreneurs in Latin America face a more daunting task than their counterparts. According to the World Bank’s Doing Business in 2006, it was significantly more difficult to establish a formal business in Brazil (17 bureaucratic steps), Argentina (15), and Chile (9) than in Australia and New Zealand (2 each), or Malaysia (9).
These burdens bring a real cost to the bureaucracy as well. Stifling the ability of individuals to achieve their goals builds distrust, disenchantment, and—most important in countries lacking resources for social programs—undermines the government’s own capacity to raise revenue to spend on needed social programs.
Labor reform and flexibility is the second major hurdle. Labor market flexibility permits the creation of jobs in the formal sector. In my past life as a venture capitalist, this was one of our greatest concerns. New businesses generally have limited resources. When hiring people implies a legal or financial obligation greater than available resources, it becomes an almost impossible situation.
In the World Bank labor inflexibility index, which measures the ability of private businesses to hire and fire employees, Latin America ranks as one of the most inflexible regions. It is four times more difficult to hire a new worker and thus expand production in Argentina than in New Zealand or China, six times more difficult in Brazil than in those countries and three times more difficult in Mexico. Not only does this prohibit development but it also contributes to the growth of an informal economy and perpetuates a vicious counterdevelopment cycle.
Predictable rules of the game are also critical. They create the confidence for both foreign and domestic investment. Businesses flourish in predictable environments, the result being more employment, more growth and more investment. Again, in my career as a venture capitalist, I was willing to take risks, but having a predictable environment, including a transparent and functioning legal system, in which to make those decisions was critical. I’ll admit that we sometimes invested in situations that were not optimal. However, for significant inflows and investment to occur, there needs to be an institutional framework that has predictability at its core.
The economic and political hopes of citizens in the region depend on governments being able to create an environment that will unleash this entrepreneurial spirit. It is not an easy task, to be sure. All of the reforms described above mean reforming institutions, laws and practice that in some cases have been around for decades and even centuries. But in this, the year of elections in Latin America, citizens are pinning their aspirations for growth and a better life for their children on leaders accepting this challenge.
Susan Segal is president and CEO of the Council of the Americas, a business organization representing over 175 companies that have invested in Latin America, and the Americas Society, a non-profit organization promoting the understanding of the political, economic, and cultural issues in the Americas. Prior to her current position, Segal was a founding partner of her own investment and advisory group focused primarily on Latin America and the Hispanic US. Previously, she was a Partner and Latin American Group Head at JPMorgan Partners/Chase Capital Partners and a Senior Managing Director focused on Emerging Markets Investment Banking and Capital Markets at Chemical/Chase Banks. This column originally appeared in the June issue of News & Views from AS/COA. Republished with permission.