Prosperity & Weak Property Rights
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BY VENETA ANDONOVA ZULETA
Governments are not always the most effective mechanism for guaranteeing private investment. In many countries governments are unable to enforce property rights, whatever the degree of protection promised by the law. (...)
There are at least two alternative private paths to prosperity. Firstly, businesses can adopt production technologies that are less sensitive to institutional voids. These are cheaper, mobile versions of existing technologies, so they can reduce exposure to the hold-up problem. Secondly, entrepreneurs can implement employee ownership, together with other motivational strategies, in order to preserve the ownership itself. Employees are thus encouraged to support the current allocation of property rights instead of challenging it. (…)
TECHNOLOGY
Most efforts by governments and international organizations today focus on changing institutions by direct intervention, transforming the fundamental political and social rules of a society. However, it might be useful to consider changing institutions indirectly by introducing technologies that are less sensitive to an adverse business climate so that, through market dynamics, they can make institutions more market supportive. (…)
New mobile forms of technology can transform the future of poor nations. (…) In fact, wireless telephony can afford access to information and telecommunications services in previously isolated and institutionally underdeveloped regions often with scarce government presence. It is built on cheaper, easily re-deployable infrastructure, and may achieve a high degree of connectivity in hostile institutional environments. In addition, mobile networks can be constructed faster than land-line networks, they need fewer subscribers to reach a minimally efficient scale, and their modules are mobile and easily transportable. So, from an institutional perspective, the difference between land-line and wireless telecommunications networks lies in the size of the sunk costs, the asset mobility and the investment risk related to the hold-up problem. (…) These characteristics make wireless telephony a suitable technology for unfriendly business environments.
The success of wireless telecommunications in countries at the bottom of the lists for institutional excellence demonstrates that economic progress is not exclusive to champions in ambitious and often externally-directed institutional reforms, but also to those countries whose production technologies suit their level of institutional development.
In
HUMAN RESOURCES POLICIES
The second mechanism … by which entrepreneurs can enhance economic prosperity in developing nations whose governments frequently fail to provide credible guaranties for investor rights, is the use of inclusive human resources practices.
In hostile environments, the volume of economic activity is limited and exchanges are carried out in intimidating settings. A precarious business climate directly influences the relationship between employers (owners) and employees. The latter are able not only to enhance the value of capital but also to destroy it without necessarily suffering punishment because enforceability of property rights is lacking. As a result, employee ownership, together with other motivational strategies, can be used to preserve the value of assets for capital owners when these suffer from weak property rights protection. Ultimately, better protection of investors’ interests translate into greater economic activity and enhances growth. (…)
The Case of Hacienda
In the area where Hacienda Gavilanes is located, paramilitary armies are particularly active. Spurred by government plans for a peace process, paramilitary leaders are actively purchasing land from landowners unable to manage their farms as a result of the coffee and sugar cane crises. A recently-imposed local tax on land puts additional strain on landowners who frequently find themselves forced to sell to the leaders of regional armed groups that are notorious for promoting drug trafficking and violence.
Hacienda Gavilanes started as a sugar cane farm located in Risaralda, a mountainous region in
Hacienda Gavilanes became a client of the cooperative. The landowner no longer pays daily wages to the workers, but negotiates with Cofudeco on compensation for the completion of certain tasks. This arrangement creates incentives for time-saving innovations, and workers have come up with several proposals for improving the processes. Moreover, workers have the opportunity to attend courses related to their daily tasks. The acquisition of new skills is highly valued by the workers and helps them develop a sense of belonging and psychological
ownership.
In addition, the members of Cofudeco have access to credit because the cooperative guarantees their personal loans. Access to credit has allowed workers and their families to purchase groceries, home appliances and motorcycles. Additionally, they can have a bank account with a credit card. All these benefits increase the cost of leaving the labor cooperative, strengthen workers’ commitment to the farm and guarantee unchallenged ownership over the assets.
Workers are also given considerable freedom to decide and suggest how to perform different tasks. This arrangement stands in sharp contrast to the widespread feudal relationships in the area. Another local innovation is the ongoing process of ownership sharing. Cofudeco is gradually becoming the owner of working tools such as machetes and knives, and its members plan to buy a tractor. Apart from capital accumulation and monetary rewards, Cofudeco members receive fringe benefits in the form of literacy programs and improved housing conditions for themselves and their families.
As the manager of Cofudeco states, “by offering jobs and social security, the farm has improved its security conditions”. In fact, today this is the only farm that does not have a hired guard and one of the few economically sustainable farms in the area.
Several challenges in implementing this strategy should be recognized. Ownership and profit sharing might not be necessary for settings with an abundant labor supply and with alternative mechanisms for moral hazard control, such as reputation or monitoring. In general, however, the greater the dependence on specific skills, the more appropriate are ownership and profit sharing. Specific skills are an indispensable part of almost all production technologies including agricultural activities, which is the largest production sector in most developing nations. While ownership and profit sharing might not be strictly necessary, some means of reducing the divergence of interests in the employment relation is required.
One method is to use efficiency wages. If the investment needed for monitoring workers is given to them in the form of efficiency wages, then the opportunity cost of both shirking and illegal activities will rise. As a result, the moral hazard problem will be under control and the employees will be strongly committed to the status quo assignment of property rights. In addition, efficiency wages are class-neutral as they maintain the traditional roles of owners and workers. Finally, improvement of the overall business climate as a result of private organizational and reward policies will take place only if entrepreneurs adopt these massively. Sporadic use of such mechanisms may have a local impact but will make hardly any difference on a national level and will not change the general country-level perception of investors’ rights protection. Entrepreneurs should probably first be made to see that protection of their assets is to a large extent in their own hands.
CONCLUSION
In spite of receiving relatively little attention in the literature these days, there are private paths for promoting market relations, improving the institutional environment and enhancing economic growth. Such private initiatives have the potential to transform developing nations without generating resistance, as they are free from the perception of imposition.
Veneta Andonova Zuleta is a professor at the Universidad de los Andes in Colombia. This column is based on an excerpt from a longer article in the Journal of Globalization, Competitiveness and Governability published by
Honduras: Good Potential
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Thanks to key factors such as CAFTA, reforms aimed at making investment easier and growing investments in infrastructure, foreign and local investors are generally optimistic about the outlook for
"In general, the business outlook is very promising," says Mario Vargas, Country Manager, DHL Express Honduras. Coca-Cola - another major foreign investor in
FAST GROWTH
Local Honduran business executives are also bullish. "There's been more liberalization and more incentives," says Juan M. Canahuati, the president of Grupo Lovable, a major textile and apparel exporter and one of the largest employers in
Thanks to growing exports, foreign investments and local activity,
And both manufacturing and agriculture - the largest sector of the economy - grew at high levels as well, expanding by 10.6 and 11.4 percent, respectively. Textile manufacturing is the cornerstone of the Honduran economy.
FREE TRADE, GOOD LOCATION
Venezuela: Still Negative Outlook
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BY CHRONICLE STAFF
First the good news: Venezuelans rejected a constitutional reform that would further radicalize the country's economy. Then the bad news: It really won't make much of a difference. Venezuelan president Hugo Chavez can bypass the results through decrees, local business leaders say.
"He has the enabling law [so] he can do whatever he feels like," says Ian Stein, general manager of the British-Venezuelan Chamber of Commerce. In February, the Chavez-controlled national assembly passed the Enabling Law, which gives the president the authority to issue decrees in economic and other matters. The law gave Chavez an initial period of 18 months. "After the 18 months, it's anybody's guess, but judging from [past] results, he will perhaps extend it for another year," Stein says.
"Despite this defeat, he will continue to exercise significant power over Venezuelan institutions and the economy," Credit Suisse analyst Alonso Cervera said in a commentary today. "Mainly for this reason we do not expect major changes from an economic policy standpoint in the near term."
MORE TAXES AND INFLATION
Price controls will remain and taxes will increase, Stein predicts. The price controls are aimed at reducing inflation, but have only made the problem worse, experts say.
Even the question of Chavez' mandate - one of the most controversial parts of the reforms that were rejected Sunday - could be bypassed, experts say. One of the reforms would have made Chavez eligible for re-election indefinitely. Chavez's current mandate ends in 2013. "Still, he could seek to change this restriction via a constituent assembly before the end of his term," Cervera says.
Chavez himself vowed to continue his reforms. "I won't change a comma in the reforms," he said after the referendum results, according to local newspaper El Universal. He also said the rejection was a defeat - for now.
"While President Chávez is in power, his leftist revolution is set to continue—albeit at a slower pace than his constitutional changes would have permitted," U.S.-based consultancy Global Insight said in an analysis today.
CENTRAL BANK AUTONOMY
The referendum over 69 changes to the constitution included reforms that would formally lift the central bank's autonomy (and control over international reserves), reduce the work day from eight to six hours and give the government greater discretion in expropriating private property. One proposal included taking out references to the guarantees for private property (article 112 of the constitution) and instead create a "Socialist Economy."
Last week, Chavez threatened to expropriate companies that belonged to the largest business chamber in
"When I saw and heard the president of Fedecamaras practically threatening us, that they'd do everything they have to do to avoid the reform's approval - well buddy, if you want to, go ahead, because I'm going to take away every business you have," Chavez said in a televised speech, according to the Canadian Press.
Despite the rejection, the central bank has already lost its autonomy, Stein argues. "There's no autonomy," he says. "That's already decreed, it's already a fait accompli." One effect is that economic information from the bank is now restricted, Stein points out. "We cannot access information from the central bank as far as economic results [are concerned and] monetary information is being curtailed."
BANK PROFITS FALL
The move against the central bank comes as Chavez has implemented a new business tax on all bank transactions, while the banks have to go through more hurdles to access overnight funds, Stein says. Last week, Chavez also threatened to nationalize Spanish banks in
"Government intervention on the banking system is intensifying, seriously affecting banking activity," David Olivares-Villagomez, vice president for Latin America banking at
Venezuelan banks are subject to a number of controls, including floors and caps on interest rates, mandatory lending buckets, controls on commissions and fees, and a high cash reserve requirement -- all factors, that when combined, constrain the banks' activities, he points out.
The constitutional reform would not have had a fundamental effect on the country's monetary policy, nor even have any immediate effect on the banking system, because the negative effects of the interventionist government have already been felt system wide for a while, Olivares-Villagomez argues.
Although they continue to see profits, the rates are falling, Moody's points out. Core profitability (measured as pre-provision profits as a percentage of average risk assets) has fallen from 9.2 percent in 2004 to 4 percent this year, particularly because low interest rates have lead to margin compression, Moody's says.
BOOMING ECONOMY
Meanwhile,
"Venezuelan consumers are in a frenzy [and] banks, retailers and many private firms are posting record profits," Walter Molano, chief of research at BCP Securities, said in a recent commentary. "Gasoline prices are only a few cents per gallon, and Venezuelans are buying the largest imported cars that they can get their hands on. The backlog for automobiles is growing, and consumers are taking whatever they can get. "
Retail sales grew by 43.8 percent in July compared to a year earlier, while automobile sales jumped 44.5 percent in August, he points out.
The boom is helping push
FOREIGN TRADE
Chavez was asked by Uribe to help mediate a hostage deal with Colombian terrorist group FARC, but when Uribe withdrew his request due to lack of progress, Chavez threatened to retaliate by freezing all relations with its neighbor.
Colombian-Venezuelan trade last year reached $4 billion and could reach $5.5 billion this year, Exclusive Analysis points out. "Colombian exports to
A trade spat with
The problems with
Despite the consumer boom, many small- and medium-sized companies in
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