Having lived in Latin America for nearly four years now, it is evident to me that one of the most significant barriers to economic growth in this region is embedded in the cultural aspects of the Firm and the relationship it has with its employees. The combination of perverse legal employment “protections” and the mutual distrust of employers and employees lies at the heart of the wage growth and income disparity dilemmas that policymakers are finding unsolvable. Ultimately, the problem can be characterized by an unwillingness, both on the part of employers and employees to take a longer-term view of their own self-interest as it manifests itself in the work environment.

The root issue at-hand is that employers believe their employees are going to steal from them, and employees believe their employers are taking active advantage of them and not rewarding their efforts. These beliefs turn out to be self-fulfilling prophecies, and this cancerous relationship’s first casualty is production quality, and the second casualty is innovation.

The Chilean government become obsessed with “innovation,” though from its policies, it is quite evident that it knows very little about what that really means. They have adopted programs to subsidize foreign entrepreneurs, to promote the transfer of new technology to Chile, and while all of these are well and good, they do not even address the fundamental problem: that the structure of the Firm is driven by culture and tradition rather than by rational self-interest. Just as the greatest enemy of truth is certainty, the greatest enemy of innovation is tradition. Doing something the way it has always been done is the diametric opposite of innovation.

In the face of slowing global demand, economic growth becomes more difficult, but not impossible. Recently, Chilean president Sebastian Piñera declared that Chile would become the region’s first developed economy, but that there were many circumstances that would have to persist in order for that to happen by 2020, which was his stated goal. One such prerequisite is that GDP growth would have to be sustained at 6% or higher, while in the same interview he admitted that 2012 GDP growth in the country will be unlikely to exceed 4.5% due to the deteriorating situations in the US and Europe and the slower levels of growth in Chine.

This does not have to be. Economic growth does not simply happen or not happen based on external factors, but is rather driven by a single factor: the increase in the division of labour, which is driven by population growth, and productivity, the latter can be enhanced by new business practices, new technology, or changes in incentives. In order for Chile and other Latin American countries to continue growing economically during a global slowdown, they must look critically at the cultural assumptions driving their businesses and be willing to change them–even at great discomfort to both worker and Firm at first.

For the Firm, management must begin to trust and delegate. It must stop expecting the worst out of its employees, and must both engage them and give them proper incentive to become co-producers, co-innovators toward the Firm’s ultimate business objectives. Consequently, management must also decentralize itself, with managers shedding their stuffy blue suit / red tie and become familiar with their employees and their pain points, and then empower them to find their own solutions. This is of course anathema to executives in Chile who see themselves as having risen to the top of the pyramid and have earned the perks of not having to fraternize with the “little people.”

However, this elitism is not in management’s own self-interest, as there are numerous and diverse problems that they will never know about, and that their employees currently have no incentive to even discuss, perpetuating efficiency losses, and failing to adapt in real-time to changes in customer preferences. Moreover, the consumer in Latin America tends not to be a fan of the “local brands,” but rather views them as necessary evils that happen to provide the things they need. One does not frequently encounter brand loyalists for, say a cell phone company or a retailer. Nobody ever says “I absolutely love shopping at X store” or “I would never switch my cell phone service because Y is the best!” Instead, it is more common to hear “Well, I would change my cell phone provider, but they are all equally bad,” or “There’s not much point in shopping around, because all the retail chains carry the same stuff.”

When management is ignorant of the periphery of its organization (and in most industries, except perhaps mining, energy, and investment banking, the periphery is the main driver of revenue), it fails to innovate in the most lucrative areas of its core business. The same critique Hayek made of central planners in socialist economies applies equally to highly centralized firms in the private sector, namely that information is diffuse, and where decision making is centralized, the decision-makers (or planners) will fail to have sufficient information to make the correct decisions about production. These short-comings, then, are only enhanced by the increase of scale. As we witness a series of cross-border mega mergers in Latin America, it is concerning that the region could be heading in the opposite direction.

Management, though, is not the only problem. Employees bear responsibility in their plight as well. Failing to take initiative to make improvements is not only the result of a lack of proper incentive, but also out of laziness and a failure to find intrinsic reward in their work. This leads them to view work only as something that distracts them from their leisure, rather than a worthy end to be pursued for its own value, independent of financial remuneration. Such behavior results in a self-reinforcing mentality that is averse to work itself, and due to their already low salaries, they view themselves as pawns of a corporate machinery from which they get no benefit other than from a simple quid pro quo of money for time served. It is no wonder, then, that customer service is so appallingly inadequate in Chile and Latin America in general.

Ultimately, the Latin American Firm must move toward a model of co-production. It is unlikely that such a movement will be initiated by the workforce, and so it rests on the shoulders of management (hopefully at the behest of their shareholders) to be willing to take a risk and make a change. If it chooses to do so en masse, Latin America could very well become the economic powerhouse and cultural hegemon in 21st Century that the United States was in the 20th.