Latin America’s Stymied Innovators

SANTIAGO – First, there was one disappointed foreign entrepreneur. In December, Israeli venture capitalist Arnon Kohavi, whose firm had been lured to Chile by a government program to promote startups, announced that he was leaving. “A handful of monopolistic families control the country,” Kohavi declared to an online magazine. “Worse, these families don’t care about anything except their money. They don’t have to: the country’s natural resources are a disadvantage here, because the rich don’t need to work hard.”

Though the interview generated a buzz in the startup business community, establishment papers were quick to dismiss Kohavi’s criticism as sour grapes. But Kohavi was not alone. One month later, Argentine entrepreneur Martin Varsavski, a bit of a guru in the tech world, had this to say about Chile: “The tendency is to copy old models rather than create new ones. Entrepreneurship has to do with non-conformity, and Chileans lack that. It is a small society of embarrassed people who are uncomfortable being different.”

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Are Kohavi and Varsavski on to something? I certainly think so. And what they are on to applies not just to Chile, but to much of Latin America.

The region’s challenge is to transform its huge natural-resource wealth into the kind of wealth that does not run out, because it is constantly enlarged by human creativity. In recent years, a natural-resource boom fueled growth. Resource-rich countries in South America did well (even when, like Argentina, they had misguided policies). Resource-poor countries in Central America and the Caribbean stagnated.

But, with the crucial exception of Mexico, the composition of Latin American exports has not changed much in the last quarter-century. Contrast that with Singapore or Ireland, whose export baskets today bear little resemblance to those of 1985.

In a series of recent papers, Ricardo Hausmann of Harvard has shown that as countries get richer, their economies diversify: they widen their set of productive skills, and start making new things while continuing to make what they have always made. The more skills, the wider the range of what can be made in the future. Hausmann shows that a diversified economy is a strong predictor of future growth, which implies that Asia will grow much faster than Latin America for decades to come.

To understand Latin America’s weakness, it helps to go back to Kohavi and Varsavski. Natural-resource abundance bears at least some of the blame. Why run risks and innovate if you don’t have to? As Chile’s finance minister in 2006-2010, I spoke to local business audiences dozens of times, and received countless questions (sometimes less than friendly) about tax policy and labor-market regulation. I do not recall a single question about incentives for innovation or technology adoption.

This is not the optimal economic response to commodity abundance. Chile is well endowed with natural resources, but not that well endowed. Canada, Norway, Australia, and New Zealand have much larger per capita commodity exports than Chile. Yet that has not kept these four countries from diversifying their economies and developing the capacity to produce many complex, non-commodity goods.

Lack of domestic competition is also to blame. Innovators in Latin countries often face high prices for key inputs like energy or Internet access, provided by large local firms that may not be monopolies, but that sure act like they are.

Mexico is the poster child for this problem, but it is far from the only example of it in the region. Aggressive pro-competition policies – certain to be resisted by powerful business groups – are the order of the day. In the last few years, Chile has taken some promising steps in this direction. More are needed.

Last but not least is the persistence of a culture that impedes innovation. The firm started in a garage by two kids with big brains and little money is an American ideal that does not travel well, especially when heading south.

However good your startup business plan may be, obtaining the necessary financing is nearly impossible if you do not have the right connections or did not attend the right school. Bogotá, Buenos Aires, Lima, and Santiago have their networking parties and incubators. But all too often they resemble an alumni reunion for posh academies, rather than a gathering of hungry, lift-yourself-up-by-your-own-bootstraps types.

And, if their startup fails, young entrepreneurs don’t tell the story with pride at the next party, as they might have done were they in Palo Alto, Helsinki, or Tel Aviv. In Latin America, bankruptcy and fraud are still inextricably linked in too many people’s minds.

The big question is how quickly such an anti-innovation culture can change. Optimists point out that, once upon a time, Asia’s top-down culture was viewed as inimical to innovation and economic growth. That view is now a distant memory. Kohavi and Varsavski are not the only ones hoping for a similarly unexpected turn of events in Latin America.