Carlos André Pérez is usually known as the Venezuelan president who, in the early ’90s, sought to apply some sound economic policies on the country and steer it away from her headlong rush into Socialism. However, his attempts were clumsy, sudden, and, at the time, gave the concept of free markets a bad name in Venezuela. His approach caused large riots and even Hugo Chavez’s attempted coup in 1992. 

What is less remembered is his first term in the late 1970’s whereby he expropriated the iron and petroleum industries and plunged Venezuela further into the Socialism that alarmed him a mere decade later.

Shortly after his first inauguration in 1974, I walked into an elevator in Ciudad Guayana and saw someone standing at the buttons asking “qué piso?” I thought he was joking. But no, he was one of thousands who now were “employed” thanks to a presidential decree which compelled building managers/owners to install a flesh and blood “operator” in each elevator which, up to then, was perfectly controlled by a mere push of a button with the floor’s number inscribed. 

With one “presidential decree” we were all thrust to the 1935 Waldorf Astoria, sans the luxury, with uniformed elevator operators handling the controls, only these controls were push button automatic, not manual.

It “looked good” in the sense of, “Wow! Look at all these new jobs!” But an elementary school kid could also see what was not seen: the other jobs or capital improvements that were set aside in order to budget for unneeded elevator push buttoneers.

This is illustrative of how the “seen” does not necessarily reflect reality, but rather an illusion.

A few years ago, McKinsey & Company, the well-known and highly regarded global consulting firm, published a paper, Where Will Latin America’s Growth Come From?, which delved into the reasons why seeming economic growth in that massive and resource-rich continent was actually an illusion, or at most, was less than met the eye.

One of several disquieting indices is that Latin America (Mexico, Central and South America, and the Caribbean) whose sovereignty exceeds 13% of the earth’s area, constitutes a mere 7% of the world’s Gross Domestic Product (GDP). The comparable figures for The United States are 6% and 15%, respectively, an almost perfectly inverse relationship: half the sovereignty and double the GDP.

In addition, there is little if any measurable economic growth in Latin America. While global annual growth averaged 3.5% in the last three years, Latin America’s averaged 1%.

For the most part, McKinsey’s conclusions and recommendations are rather predictable, not to say pedestrian.

For example, the report criticizes the weak enforcement of “stringent regulations”. Which is it: weak enforcement, or stringent regulations? Why not take the more politically incorrect position of recommending the lifting of Latin America’s sclerotic regulatory empires?

McKinsey rightly, but inconsistently, criticizes the monstrous labor laws that make it very difficult for employers, and employees, to act freely, whether this means firings or re-assignments. 

And here is an eye-opener: 

“Service sectors, too, suffer from poorly enforced regulations that encourage informality and therefore constrain productivity growth. Informality arises as many firms have strong incentives to avoid becoming formal because of high taxes, poor auditing capabilities, and low levels of sanctions. Inefficient informal players stay in business and prevent more productive, formal companies from gaining market share, constraining overall productivity. ….the substantial cost advantage that informal companies gain by avoiding taxes and regulations more than offset their low productivity and small scale, and distorts competition. Regulations are therefore needed that reduce the cost of formal employment … and raise the risks of noncompliance (for example, better monitoring and prosecution of informal operations)….” (emphasis mine)

Bravely spoken.

In sum, what McKinsey skates around is that there is an “informal” (underground) economy in Latin America that is not measured and that avoids the implacable obstacles and barriers to business set up by the bureaucratic Latin American regimes. This underground economy is so efficient and pervasive that it depresses the “regulated” economic performance. 

Would it not make more sense then, to imitate and replicate that “informal” economy? To find why it succeeds? To reduce the regulations that ensure it continues unabated? But no, McKinsey recommends tossing a massive wet blanket on that economy and bringing it to heel along with the rest of the slow-moving, molasses of business that operates under “stringent” regulations. 

In other words, “inefficient” informal players hinder more efficient formal ones, according to the report. Could it be that the “informal” players are very efficient? They’ve figured out how to make a living by setting themselves free from the heavy regulatory load imposed by clueless bureaucrats and politicians who believe that forcing the hiring of employees to push elevator buttons will increase employment overall. 

Could it be that such “inefficient” informal players cannot be measured since they are underground, after all?  I wonder what Latin America’s true GDP is. Could McKinsey apply its considerable talent and figure out a way to measure Latin America’s informal (underground) economy and incorporate it to the conventional measurements? 

When it comes to Latin America, I believe the standard measurements are an illusion.

I have utmost respect for McKinsey and such consulting firms in general. Having cut my teeth at Arthur Andersen I do appreciate the hard work and effort required to prepare a report addressing a business entity, let alone a massive region of the world. However, the professions do tend to have conventional views, despite their reputation as beings who know how to “think outside the box.”

But modern consulting firms take far too little account of the folks who, because of circumstances (regulations and obstacles) imposed on them, must either die or learn pretty quickly to live by their wits.

This brings us to the picaresque, whose etymology hearkens to Spain.

We will look at this term and its implications to Latin America next time.

(The McKinsey report has other observations worthy of further discussion. We’ll return to it in future posts.)