Sebastian Edwards

October 10, 2011

By Paul Feinberg

Sebastian Edwards, professor of global economics and management at UCLA Anderson, has said that the economic history of many Latin American countries reads like a novel authored by Gabriel Garcia Marquez, in possession of a certain "magical realism." In his new book, "Left Behind - Latin America and the False Promise of Populism," Edwards shed light on the region's political and economic histories - sans the magic - providing readers with a region-wide view of where Latin America has been and where it might be going. As Anderson plans to launch its latest degree program, the proposed Global Executive MBA for the Americas, Anderson's Henry Ford II Professor of International Economics, sat down to discuss the economic future of Latin America.

As Anderson launches a new executive MBA program in Latin America, we've been talking to everyone from administrators to faculty to alumni working in the region, and there is a fair amount of excitement and optimism regarding its future. But when reading your book, it gives the feeling you were not as enamored with opportunities there as others seem to be. Is that accurate?

Well, the book is written with a long-term perspective and a sense of reality. It covers, in one way or another, over 200 years of Latin American history and looks into a more distant future. And when you do this, you cannot fail to conclude that Latin America is not Disneyland. The region provides opportunities and challenges, but it is not a sure bet. What we - at Anderson and, more generally, at UCLA - certainly want to do is contribute to dealing successfully with this challenge through our educational programs and a mission to train managers and executives.

And it's not as if Latin America is a singular monolith - we're talking about a number of different countries.

Of course. It's a very diverse society. There are countries with a failed state, where there are no institutions, where corruption is rampant and where two years after an earthquake (Haiti) people are still desperate. Then you have another country (Chile) that suffered a much worse natural disaster, and it wasn't in the news three months afterward, because they pulled themselves together. From Haiti to Chile, from tiny Honduras to Brazil - it's an extremely diverse region.

The point I make in the book is that during the last decade or so Latin America solved half its problem - that of a very unstable macroeconomic environment. The region's history is replete with currency crises and triple-digit inflation or inflation in the thousands, which is very hard for us to imagine. That is gone. We now have stability. Currency values are predictable. Inflation in almost every country is single-digit; in some countries, it's even lower than in the United States.

With stability, you can plan ahead. The problem with inflation is that prices keep going up, so you don't know the costs that you - as an entrepreneur - will face. And you don't know if the prices for the goods you're selling are going up because there's generalized inflation or because the goods have become more attractive in the marketplace or because they are more competitive. The price system is supposed to provide signals that allow firms to react and change their behavior if needed. Inflation takes away that fundamental property of the prices, which is to transmit signals. And inflation is gone; currency crises are gone, which is one part of the equation.

And the other half of the problem?

There are tremendous challenges to getting the other half of the equation right. Now Latin Americans have to become really productive, so they can compete successfully in the global marketplace. They need to expand the range of their exports and diversify away from commodities. In order to do this better, management practices and techniques are needed. That's where Anderson comes in. We're going to train good Latin American managers and make them excellent, the best in the world. Then the potential of the region is going to become a reality. Having said that, I have little hope for Venezuela, Nicaragua or Bolivia. The problem is that these countries' political leaders are implementing populist policies and are trying to kill the market through the elimination of competition. There are also systematic violations of property rights.

What are the greatest challenges facing the region as its various countries attempt to become productive?

In different countries, different problems are the more salient ones. Moreover, they change through time. Five years ago, for example, the drug trade was an irritant and an annoyance in Mexico. Today, it's the central social and political issue.

If I were to think of a single problem that presents itself throughout the region, it's the dismal quality of the educational system. The problem with education is that it's hard for voters to evaluate. When, as a result of trade openness, people realized that the quality of goods produced in Latin America was low, they did what they had to do: they stopped buying local goods and began importing them. So, local producers were forced to improve quality, and now the goods produced in Latin America are as good as those you can import.

If you are a middle class parent, who do you compare your kid's educations to? Also, you can't import education. The best Latin American country does poorly on international standardized tests. The quality of education is very poor, and teachers' unions stand in the way of any truly innovative reform. And that's a very serious problem.

What will the next 25 years look like in Latin America?

I venture to say in the book that there will be a three-tiered Latin America. First, there will be a group of countries that will basically continue to fail and do very poorly. These are mostly the countries that insist on taking shortcuts and not implementing modern pro-market, pro-competition and pro-transparency policies. If you don't have competition, there will be no innovation. If there's no innovation, there will be no progress. These are countries that currently have populist regimes.

Then, there will be a core, middle group of countries that will move forward but at a rather mediocre rate. That means the gap between these countries and the more successful countries in the world, in terms of growth, will become even wider.

Then, there will be a small group of countries that will do very well and will increasingly distance themselves from the rest of the region. That group is going to include Chile, probably Costa Rica, maybe Peru and hopefully Brazil. What is needed in Brazil, since they finally got rid of inflation and instability, is that they become truly competitive.

In your book, you say that education reform is essential for Latin American countries - like Brazil - to truly become competitive and fully participate in the world's economy. You note that in a 2006 international educational survey of standardized tests in science, only six Latin American countries chose to participate and all fell into the lower half of the survey. Brazil, for example, ranked 51st out of 57 countries. What would happen if Brazil went from 51st to, say, 35th?

That would take a generation. A generation ago, Latin America started in earnest to go back to the markets, after long dictatorships that varied from country to country. Unfortunately, at that time, no serious efforts were made to improve the quality of the educational system.

If these countries had started to focus on education the day they returned to democracy, today they would be in a position to start harvesting the fruits of that investment. It does take a long time, but education is fundamentally important, because it changes people. Not only does it add marketable skills but also it changes people's culture and their approach toward innovation and productivity. That is the most important thing about it.

Along with education, what else does Latin America need to become competitive over the next generation?

Most Latin American countries have a rather low savings rate. The problem, of course, is that countries need to save in order to finance investments. And investments are required in order to add to the capital stock, buy new generation machines and improve infrastructure in a way that matches the needs of the country.

In addition, in order to grow in a sustainable way, workers' skills need to improve through time. That's where education comes in; better skills require a modern, efficient and effective educational system.

Finally, economic growth requires innovation. That is what we call productivity growth.

If one takes a long view, a one-generation perspective, there is a question mark on whether a large number of Latin American countries will be able to deliver on all three of these requirements for growth. Those that do it will succeed and become members of the exclusive club of overachievers. The challenge, of course, is to get as many countries as possible moving into the upper tier.

If Chile, Brazil and Costa Rica are doing well in 25 years, to what extent do they pull the rest of the region along with them?

I think that if enough countries actually move into the upper tier, and this upper tier does very well, then there's going to be a positive spill-over effect.

There's likely to be an imitation effect. People in the "so-so" group will ask what the successful countries did and will try to follow their path. In that sense, benchmarking is very important. One of the points that I make in the book is that a successful Latin American country should stop comparing themselves to the region itself. Why be satisfied with having a better educational system than Colombia, where, because of the war and the drug trafficking, many schools can't even open? It is not so hard to be the best Latin American country. For some time now, I have been arguing that the Latin American countries should benchmark themselves with Australia, New Zealand and Canada, advanced commodity exporting countries. And that can make a huge difference.

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