Increasing the productivity of Latin American nations is critical to advancing not just their economies, but also their societies. So began Michael Fairbanks, keynote speaker at the recent HBS Latin American Business Conference. Fairbanks is CEO of ontheFRONTIER. Previously, he created Monitor’s Country Competitiveness practice, which was carved out of Monitor to become ontheFRONTIER in April, 2000. Fairbanks has consulted to Latin American heads of state, and senior executives at the World Bank.
Productivity, up to a certain level, is correlated with other, desirable human traits, such as tolerance for people unlike oneself, Fairbanks continued. He quoted Thomas Sowell, a fellow at the Hoover Institute, “we need to confront the most blatant fact that has persisted across centuries of social history: there are vast differences in productivity amongst people, and there are economic and other consequences of such differences.”
So, increasing the competitiveness of a Latin American nation should not focus on what Fairbanks called the “spurious” instruments of devaluation and restriction of competition.
Devaluation results in the purchaser of an export good capturing a lot of value, the owner of the export company capturing some value, but dramatically and adversely affects the purchasing power of the local wage earners.
Further, elimination of competition does nothing to improve the prosperity of developing nations. Competition leads to the emergence of lean, efficient companies who can compete in a global market. The existence of such companies creates many positive externalities, such as the attraction of foreign investment, and the lowering of unemployment rates. “Countries shouldn’t worry about [influencing] interest rates or inflation … good companies create a virtual cycle such that the macro environment straightens itself out … Argentina, for example, has to ask itself ‘does this country have good products?’,” continued Fairbanks.
Fairbanks then discussed the difficulty in accurately measuring how well countries are doing at increasing productivity and wealth generation. “Economists tend to recommend one of four things,” said Fairbanks, “stabilize, democratize, privatize, liberalize.” Cookie-cutter recommendations aside, he argued that a nation has seven forms of wealth. Three of which, natural resources, financial capital and infrastructure are relatively easily measurable.
The other four forms of capital, however, are not measured in current economic frameworks. Institutional capital relates to the wealth accumulated in property rights, and the rule of law, for example. “Argentina is one of the most corrupt business environments in the world,” argued Fairbanks. Interestingly, Fairbanks posited that the rule of law is more highly correlated with a nation’s prosperity than the existence of democracy.
“Human capital is the only form of capital in which there is the possibility of infinite returns,” continued Fairbanks. Knowledge capital forms a key part of a nation’s wealth. “[Last year] Brazil issued 93 international patents, whilst in California alone, the equivalent number was over 30,000,” Fairbanks remarked.
0Finally, cultural capital is also disregarded in current frameworks for measuring countries’ success. Fairbanks used the notion of a “radius of trust” to illustrate how, in general, Latin Americans tend to be more wary of newly formed business acquaintances than their American or Northern European counterparts. He went on to conclude that “flexible ethical standards – the difference between big lies and little lies – as well as low radii of trust” restrict Latin American economies’ growth potential.
Fairbanks saw the training provided by a general management-focused MBA program as being “the hope going forward.” MBA students are “action-orientated, pragmatic and integrators,” he concluded.