Guatemala City. If someone were to ask you to invest your money in a Central or South American country, would you? With all the news about expropriations, increasingly restrictive regulations and the like, most would consider a Latin American investment a recklessly unattractive business venture.
Specifically, in Guatemala, judge from the following: expropriation—there is an agrarian law which authorizes the government to expropriate any "unused" or "unproductive" land; regulation—The Labor Code dictates that 90 percent of a company's workers must be Guatemalan (with a few legal exceptions).
And there are many more examples of investment-discouraging legislation. Guatemala, as well as most other Latin American countries, has a legal system based on the Napoleonic Code in which the only sources of law tend to be the statutes (as opposed to precedents). The courts interpret and apply them but have much less leeway than Anglo-Saxon courts in deciding cases.
In the light of so many legal deterrents which are the focus of the news media, why are thousands of foreign businesses (mainly from the U.S.) entering the market in countries such as Guatemala? Are they risk lovers or just dumb? These are hardly likely theories but they do leave the question unanswered. What follows is an attempt at explaining this behavior.
Expropriation: Businessmen are in business to maximize the present value of their future income stream. In other words, a firm is worth today what it will earn in the future discounted by current interest rates. In the United States, where expropriation is unlikely, the present value of a business represents its discounted returns for many years. In a Latin American country, where expropriation is more imminent, higher future earnings will be required to get the same present value. How high these earnings will have to be depends on how long the entrepreneur expects to operate before he is intervened. The shorter the expected life of the investment, the higher the rate of return must be to induce the businessman to invest. The threat of expropriation reduces investment to a level below that which would be undertaken in a more certain atmosphere.
Regulation: Foreign investors are harassed by all sorts of regulations. Paperwork is lengthy and bureaucracy is demanding. A corporation takes months to be authorized and it will be forced to operate under many constraints such as having to use local raw materials and labor when otherwise cheaper or better factors of production would be used. This usually means higher prices for consumers.
Foreign entrepreneurs must also contend with local competition which often is not hampered by this discriminatory legislation.
I am quite sure, however, that even after stating the "higher rate of return" reason, most people would still consider the legislation too restrictive to make an investment worthwhile.
I contend that there is behind-the-scenes information which is not readily available to the average investor but which it pays the serious entrepreneur to discover. This is that the gap between nominal and enforced legislation is larger in Latin American countries than in the United States. Using the examples of the agrarian law and Labor Code, they are less likely to be effectively enforced in Guatemala than similar laws in the United States.
So, in practice, Guatemalan businessmen have more freedom of action than you would be led to believe just by looking at the nominally restricting laws or by comparing the situation with American laws and their de facto enforcement in the U.S. I believe this gap exists because the more restrictive the existing regulations, the more incentives they create for businessmen to offer bribes to government officials to relax their enforcement (to the detriment of respect for all laws).
Laws are restrictive nominally because that is what gets politicians into office by liberal minded voters. The laws are lax in their enforcement because, aside from typically inefficient bureaucracy, that is what makes money for bribe-accepting government officials. The politicians and bureaucrats have such a good deal going for them that I am not surprised that there is such a shameless scramble to get on the gravy train of public administration.