The Short-run Potential for Employment Generation of Installed Capacity in Latin America

The countries of Latin America have economies characterised by capital scarcity and widespread underemployment of their labour force. Hence, one would expect the capital stock that they do possess to be fully utilised. Yet the empirical data show extensive idleness of Latin America’s capital stock. Such capital idleness in the midst of capital scarcity is contrary to the most elementary commonsense. However, since production decisions in the Latin American economies are made by generally rational decision-makers, the causality of underutilisation must be found in factors causing divergence between the pursuit of private interests, be it profit maximisation or some other, and the pursuit of maximum social welfare. Distortions in the price system, such as minimum wages, maximum interest rates, overvalued exchange rates and import duties, are obvious candidates for culprits; but non-price elements need to be borne in mind too.