No Room for Entrepreneurs

By MARY ANASTASIA O'GRADY
October 8, 2007 - WSJ

Economist Joseph Schumpeter (1883-1950) may be best known for his innovative work showing the link between entrepreneurial discovery and economic progress.

But as Carl Schramm, president of the Kauffman Foundation of Entrepreneurship has pointed out, Schumpeter's insights about risk-takers didn't make him an optimist.

In a speech last year to European finance ministers in Vienna, Mr. Schramm explained Schumpeter's fears: He "worried that entrepreneurial capitalism would not flourish because the bureaucracies of modern government and big corporations would dampen innovation -- the process of 'creative destruction' would be too ungovernable for a modern, Keynesian-regulated economy to tolerate." As a result, Mr. Schramm said, Schumpeter thought that "the importance of entrepreneurs would fade over time as capitalism sought predictability from governments who would plan economic activity as well as order social benefits."

Mr. Schramm's comments caught my attention because they so accurately describe Latin America. There the entrepreneur has been all but run out of town by the bureaucracies that Schumpeter feared. Growth has suffered accordingly.

The World Bank's annual "Doing Business" survey, released last week, demonstrates the point. The 2008 survey, which evaluates the regulatory climate for entrepreneurs in 178 countries, finds that Latin America and the Caribbean was the slowest reforming region this year and that it "is falling further behind other regions in the pace" of reform.


The average time it takes to start a business -- one of 10 factors measured -- in Latin America and the Caribbean is 68 days, longer than anywhere else. Compare that with the Organization for Economic Cooperation and Development, where business start-ups take less than 15 days. Other common problems in the region are weak minority-shareholder rights, slow legal regimes and punishing tax systems.

Yet as bad as the regional averages are, entrepreneurs in Venezuela probably view them with envy. When it comes to the ease of doing business Venezuela now ranks six places from the bottom world-wide, between Eritrea and Chad. It also finishes dead last among the region's 31 countries -- and that includes Haiti. In the category of "employing workers" Venezuela ties with Bolivia at No. 177. The authors note that it is "not possible" to fire a Venezuelan employee. "Starting a business" takes 141 days and in ease of "paying taxes" it ranks No. 174.

Keeping Venezuela company in the cellar are Ecuador, which finishes 27th in the region, and Bolivia, which comes in 28th. Only Suriname, Haiti and Mr. Chávez's oil paradise have more hostile business climates.

To understand how Argentina went from being one of the world's top-performing economies during Schumpeter's lifetime to the basket case it is today, this report is instructive. The resurgence of Peronist economics helped it slide 16 places lower than its 2006 ranking. Not only has it failed to carry out any meaningful reforms but in the past year it complicated the insolvency process. And its tax system remains punitive: A company that pays all its taxes coughs up the equivalent of 113% of its profit. Argentina finishes 22nd in the region but ahead of Costa Rica, which comes in 24th. Guatemala, El Salvador and Nicaragua are all better places to be an entrepreneur than Costa Rica.

Brazil earned about the same ranking as last year. It made improvements to its legal regime but lost ground to more aggressive reformers in the category of "trading across borders." It also takes last place world-wide for the time it takes to comply with the tax code (2,600 hours) and ranks 137th in the "paying taxes" category.

Sluggish reform in the region has led some analysts to conclude that democracies in the developing world cannot overcome the obstacles to modernization presented by the political economy. Yet there are regional successes that prove that where there is political will, there is a way.

Take Mexico. In last year's report it jumped almost 20 places world-wide thanks to a reform-minded treasury ministry under former President Vicente Fox, which lowered tax rates and made property registration easier. It now has the fifth-most pro-business climate in the region. If the government of Felipe Calderón keeps its reform promises, more improvements should be on the way, though its price controls on bread and tortillas are not a good sign.

This year's superstar is Colombia. It is among the top 10 reformers world-wide and ranks 12th in the region. It made enormous progress in "trading across borders" by reducing the time goods spend in terminals, extending port operating hours and making more selective customs inspections. It also strengthened investor protections, adopted an electronic tax filing system and progressively lowered the corporate tax rate to 33% in 2008 from 35% in 2006. Much more work is needed but the moral of the story is that with leadership, such as that which President Álvaro Uribe has provided, reform is possible.

But the opposite is also true. Chile has fallen nine places since its No. 24 ranking in the 2006 report, suggesting that the center-left coalition running the country is not attuned to the importance of entrepreneurial freedom.

The most important lesson for Latin America from the World Bank's report is that its competitors around the world are working to unleash entrepreneurial spirits, and doing nothing is not an option. As Mr. Schramm told his Vienna audience, "Schumpeter saw what a century of evidence would prove: Socialism has not sustained economic growth." Now, if only more Latin American policy makers would catch on.