Bureaucracy—Latin America’s Enduring Nemesis. A column by Jerry Haar.

The mid-year status of Latin America, both economically and politically, is not particularly positive; and the outlook for the next six months is not encouraging.

In the economic domain, the IMF reports that growth is projected to slow to 1.6% this year after a remarkable 4% in 2022. Underlying inflation remains stubbornly high, disproportionally hurting low-income households who spend most of their earnings on food. Additionally, the estimated relative and absolute levels of poverty and extreme poverty have remained above those recorded in 2019.

Politically, a little more than a decade ago the region tilted right of center; today the left —both democratic and authoritarian—dominates the political landscape and holds the presidencies of the region’s largest nations. Sadly, these regimes infuse their governance with a penchant for populism, corruption, and managerial incompetence.

On the bright side, economic and political change are inevitable; although for certain nations —Cuba, Venezuela, and Nicaragua — it could take an exceedingly long time. Lamentably, where change will not occur—regardless of political and economic conditions and the ideological orientation of the government in power — is bureaucracy.

In a 2022 assessment of bureaucracy in Latin America, the Atlas Network and the Adam Smith Center for Economic Freedom at Florida International University created an Index of Bureaucracy in Latin America and measured performance among 11 nations in the region, 90% of the population. The empirical data highlights the increasing hurdles that the administrative state places on micro, small and medium-size enterprises in particular—these companies forming the backbone of free enterprise in the Americas. The study divides economies into three sectors of activity —primary (extraction of raw materials), secondary (manufacturing) and tertiary (industries that facilitate the transport, distribution and sale of goods produced in the secondary sector).

The study illustrates that small and medium-size firms — the most representative of the private sector in the Americas–allocate an average of 548 hours/year to comply with legal requirements of bureaucratic procedures in their countries. To gain a clear perspective of the extent of bureaucratic labor costs for firms, one must note that according to the OECD, between 1,363 and 2,255 hours are worked per year, meaning that the bureaucratic-administrative burden on these enterprises represents in these countries between 25% and 40% of the annual working time of an employee.

Another intriguing findings of the research on bureaucracy is that: “…….the more numerous, complex, frequent, and changing the processes are, the more companies tend to outsource them to specialized agents.” As a result, in many cases informal, opaque, and even non-legal channels emerge, fostering a system of perverse incentives and networks of corruption. The result is weak trust in the rule of law and social cohesion.

The average time devoted to bureaucratic compliance is as follows:  54% for procedures related to the administration of operations (298 hours/year); 30% (165 hours/year) for procedures related to the administration of employment, and the remaining 16% (85 hours/year) for other bureaucratic procedures.

It is illuminating to note the dispersion that emerges from the Index’s survey based on time by country. It ranges from 180 hours/year in Brazil to 1,062 hours/year in Venezuela — a difference  of almost six times. Another wide difference is one of eight hours/year in Peru compared to 1,119 hours/year in Chile, a difference of almost 15 times — this pertains to the manufacturing sector.

Examining the full results by productive sector, more than half the countries (Brazil, Costa Rica, Mexico, Uruguay, Peru, and the Dominican Republic) were most affected in their primary sector. In 4 of 11 countries (Argentina, Colombia, Ecuador, and Chile) it was the secondary sector, and in 1 of 11 countries (Venezuela) the tertiary sector.

However, the average of the results by productive sector is as follows: primary, 544 hours/year; secondary, 703.3 hours/ year; and tertiary, 509 hours/year.

Although the World Bank suspended their Doing Business rankings a few years ago, it is nevertheless worthwhile to review their results of the last year of publication. A main finding of the report is that Latin America fares poorly. For example, it takes 203 hours to pay taxes in Honduras and 318 days to secure a construction permit in Argentina. The bureaucratic hassles surrounding construction permitting are especially daunting in Latin America. In Peru and Chile it can take up to 15 weeks, and there is a huge amount of paperwork. Moreover, unlike other Latin American markets where applications can be submitted electronically, all permits, plans and documents must be printed, signed and issued in hard copy. Another area laden with red tape is import licensing. Argentina maintains an extensive and complex compendium of import licensing requirements and restrictions. For example, in January 2020 Argentina moved 300 tariff lines from the automatic import licensing system to the non-automatic import licensing system.

As director of the Adam Smith Center, Carlos Diaz-Rosillo, asserts that bureaucracy is one of the greatest obstacles to achieving prosperity in the entrepreneurial structure of any country. This includes hyper-regulation, the vast number of controls and procedures that limit productive activities, commerce, and innovation, and slows down economic growth, both for individuals and for society at large.

If Latin America is to see the fruits of reform policies, across all economic sectors, social classes, the public sector and private enterprise — with the priority being micro, small and medium-size firms — then it needs to institute sweeping changes where it matters most — namely, the bureaucracy.

*Jerry Haar is a professor of international business and executive director for the Americas in Florida International University’s College of Business. He is also a global fellow of the Woodrow Wilson International Center for Scholars in Washington, D.C.

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