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A new path for growth

In a new book, MIT political scientist Ben Ross Schneider sets out an agenda for growth with greater equality in Latin America.
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The last three decades have represented a time of tectonic change in much of Latin America: Many authoritarian governments have been replaced by democracies, and free-market principles have supplanted many of the command economies of the past. Overall, these “shifts in the role of the state in Latin America have been epochal,” as MIT’s Ben Ross Schneider writes in a new book on the state of capitalism in the region.

But the redevelopment of many of those states has not gone quite as politicians, policymakers, and economic theorists might have anticipated, as Schneider asserts in the book, “Hierarchical Capitalism in Latin America,” just published by Cambridge University Press. Many industries in the region, he contends, lack dynamism, since they are controlled by entrenched multinational firms or agglomerations of “business groups.” As a result, Schneider thinks, economic inequality remains higher than it should be.

“A lot of the conventional wisdom was that with market reforms, Latin America would gradually evolve into something that looked like the United States, in terms of corporate governance and labor markets,” says Schneider, the Ford International Professor of Political Science and director of the MIT Brazil program. “But it is something quite different — a different set of institutions, and a different form of capitalism.”

Schneider sets out a reform-minded agenda, noting the importance of both education and job opportunities — and observing that the persistence of comfortable relationships between entrenched business and government may prevent new growth opportunities from surfacing.

The dominance of business groups

Schneider’s book is based on economic data, archival research on policy and business, and many interviews. “I thought it was a good time, after all of the reforms of the 1980s and 1990s, to study what we have now,” he says, adding: “We need to look more at what the private sector has been doing and thinking, not just government policy.”

Schneider’s research helped confirm the extent to which sprawling, often family-run business groups, with arms in many industries, dominate many national economies. These groups do not really have an equivalent in the U.S. or Europe, Schneider notes, and often grip business sectors so tightly that competition is seriously limited.

By the 2000s, the 20 largest firms in Chile, for instance, were responsible for half of the country’s GDP; in Colombia in 2006, 28 business groups controlled 90 percent of the 523 largest nonfinancial firms. A notably low proportion of Latin American companies trade on public stock markets, even in countries such as Brazil and Chile where such markets have grown recently.

Among other consequences, the influence of both business groups and multinational firms means that there is relatively little bottom-up growth in, for example, many types of manufacturing. It also creates a cozy, mutually reinforcing stasis between business and policymakers — hurting workers, who do not have wide choice among employers and, with little leverage, experience short tenures in the jobs they do obtain.

Such corporate structures, and the resulting lack of competition, affect the incentives for workers to acquire education — one reason the education sector is smaller in Latin America than it is in the U.S., Europe, and much of Asia.

“One reason individuals don’t invest so much in skills is because job tenure is so short,” Schneider says. “And many individuals who have invested in their skills are not getting jobs commensurate with their skills.”

‘We should understand them in their own terms’

As a general remedy, Schneider would like to see a balance between job-creation policies, investment in education and research — and, if political circumstances ever allow it, a reduction in political interference from entrenched business interests.

“You’ve got to have a combined approach,” Schneider asserts. “What’s missing is more the job-creation side.”

“Hierarchical Capitalism in Latin America” has been well received by other scholars. Torben Iversen, a political scientist at Harvard University, calls it a “rich and agenda-setting study” that poses “a stark challenge … to those who advocate simple solutions such as continued liberalization or renewed state intervention.”

Schneider himself describes the book as a “first cut” at a number of issues, hoping it will provoke a more extended discussion about the exact contours of capitalism in the region, and the policies that might help broad-based growth.

“I wanted to get this debate started,” he says. “I’m arguing these countries may be on a separate trajectory that’s unique to them, and will result in a different constellation of institutions and strategies. We should understand them in their own terms.”

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