Why Latin America Can’t Compete in Manufacturing (2009)

Josino Moraes
Latin America Economic Researcher
www.josino.net
email: josinomoraes@hotmail.com


There are many factors explaining this phenomenon. I will try to point out the main ones
upon taking the basic data from Brazil  Mutatis mutandis, I think, it is grosso modo
similar for the rest of this subcontinent.  

A related and interesting question is why most countries in Latin America can compete
for the commodities and other aspects. In fact, the agribusiness and other primary
products like fruit, fish, etc, are very competitive. Besides, this subcontinent is also very
competitive regarding export of emigrants looking for job opportunities, drugs, she-
males, and prostitutes, but these topics are not taken in this context.

Hence, there are seven economic plagues closely related to manufacturing in Latin
America:

1. Tax burden. The worst case is Brazil where it is bordering 40%, double that of the
rest of the Latin America countries, without practically any public service benefits. There
is an abundance of high salaried persons in the public sector.

2. Interest rates. The reason for such sky-high rates is due to the sustained increase of
public debt;

3. State-owned monopolies. In the cases of Brazil, Mexico, Venezuela, and Argentina,
most of them are in the main branch of production, i.e., the energy sector. In so doing,
Venezuela is a curious case of historic local populism: as they are “rich” when regarding
oil so people practically don’t need to pay for gas!;

4. Labor relations. Again, Brazil is the worst case. There is a specific federal judiciary
branch which generates millions of lawsuits against the manufacturing companies. It is a
portion of production costs;

5. Bureaucracy. Latin America has some of the worst bureaucracies in the world. Many
World Bank studies are emphatic in this matter. Making business, opening and closing
companies, etc, is quite hard in this dark part of the world. The tax system is one of the
most inefficient, and paying taxes is time consuming. Hundreds of new rules are created
on a daily basis and at times, customs officers can go on strike;

6. Unions. They are an important factor in obstructing any possibility of competing. The
main contributing factor to their existence is the important influence of Marxism in Latin
America beginning in the 20th century. They hinder any increase of productivity in the
cities. For instance, buses must have an assistant to the driver just to charge the tariff,
and gas stations must have employees to serve people. Europe is also a good example
of the bad influence of unions. The root of all of these was social democracy that
generated communism in the past. As a consequence, Europe has historically had double
the unemployment rate of the United States.   

7. Property Rights and Juridical safeness. These concepts are qute relative (dubious)
in the case of Brazil. In our rural areas we have the NST ( Movimento dos Sem-Terra -
Movement of People Without Lands). It has been exported to Paraguay. They invade
private properties sometimes even of foreign companies, destroy facilities, etc. In the
urban areas, if the state takes a house from you, for instance, you get a prerogative
order, a writ, that almost never will be paid back. It’s a kind of a savage state.

Basically, these are the main tangible economic factors.  These factors are more easily
manageable in the agricultural business than the manufacturing business. I did work in
both sectors. As a matter of fact, many Brazilian farmers cross over the borders to
Bolivia and Paraguay to produce grains. Besides, natural resources, including mining, are
significant factors helping competitiveness in the area.

The manufacturing sector partially works in the intra-Latin American commerce. For
example, multinational automakers have plants to produce parts in Mexico, Brazil, and
Argentina to raise the scale and reduce costs, just as the sophisticated parts come from
outside the region.  Tariffs for importing manufactured goods, like cars, etc, from the
industrialized world or Asia drastically attempt to protect the fragile local manufacturing
sector. Notwithstanding, China, for instance, has been displacing Brazil in its export of
these goods to Argentina. In vain, Brazil protests on grounds of the Mercosul Treaty.

An interesting case is the fail of maquiladoras in Mexico. The advance of Juarez’s Cartel,
along with other criminal groups, in the traffic of drugs and local power on the US-
Mexican border has been a logical consequence of this new reality.

Northern Brazil has had a similar minor experience – Zona Franca (tax-free) de Manaus –
although focusing more on the Brazilian domestic market. There was no significance
either.   

Regarding the main intangible factors, we can point to the local culture, that of the
vagabond and envy. These factors are also much more manageable in the agribusiness.

The tragic is that neither does agribusiness generate job opportunities, due to its
current high productivity level, nor the manufacturing sector which would be fundamental.