Why is South America poorer than North America?
I’m watching Copa America Centenario 2016 and the same as last year I’m thinking about differences in the development of countries in South and North America.
I prepared a list of the biggest economic problems of South America.
1. Corruption
South America has a massive problem with corruption. In Corruption Perceptions Index 2015 made by Transparency International, we can see that South America is much more corrupted than North America. The result? Limited investments and tougher conditions for entrepreneurs.
2. Drugs
It is not only a social problem but also an economic one. Many of the most productive young people have gone into the profitable drug industry rather than other less profitable businesses. “Easy money” works like a magnet in poor regions. It caused that legal businesses can grow in a limited way because of lack of a well-motivated team of employees.
3. Poor political leadership
Populism is an illness of politics. Unfortunately, South America had the plague of this kind of political problems. Nationalizing, cronyism and lack of freedom caused a poor financial and economic condition.
4. Economic freedom
South America is not a leading continent in economic freedom index. It’s a bit below the world average. Only Chile, The Bahamas, Colombia, and Saint Lucia are in “mostly free” category. The others countries of South America are below. Economists discovered a correlation between economic freedom and economic growth — higher economic freedom index = stronger economic growth. Maybe new political class changed it for the better?
5. Religion
I know that it could be controversial, but I think that this factor also could be significant. The Catholic church isn’t as good stimulant to grow wealth as a Protestant, and Latin America is mainly Catholic. To explain it better, I’ll use a quote from Wikipedia:
“Industry, frugality, calling, discipline, and a strong sense of responsibility are at the heart of their moral code. In particular, Calvin rejected luxury. Therefore, craftsmen, industrialists, and other businessmen were able to reinvest the greater part of their profits in the most efficient machinery and the most modern production methods that were based on progress in the sciences and technology. As a result, productivity grew, which led to increased profits and enabled employers to pay higher wages. In this way, the economy, the sciences, and technology reinforced each other. The chance to participate in the economic success of technological inventions was a strong incentive to both inventors and investors. The Protestant work ethic was an important force behind the unplanned and uncoordinated mass action that influenced the development of capitalism and the Industrial Revolution. This idea is also known as the protestant ethic thesis.”.
In which country in North and South America lives the most Protestants? ;)
6. Colonialism model
Spanish/Portuguese colonialism was different than British/French. In the north (French Canada and New England) the main method of increasing population was Indentured servante labor system. Poor Europeans would be paid passage to North America and have to work for the benefactor for a period of 5 to 7 years. After that time, they became free citizens. Through that time, they could collect enough money to buy a plot of land or start they own business. That’s how America’s capitalism germinated. South America was dominated by kind of archaic feudal system with very large plots of land and lack of middle class.
Conclusion
I hope that now you have wider POV of South America. The economy is a very complexed mechanism, and it’s hard to choose one or two the most important elements of the problem, but I think that economic freedom is the key to a revival of this beautiful continent. I will keep my fingers crossed for my Latin’s friends!
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