Galt’s Gulch South of the Border - Part 2
by Michael Cobb
Freedom and responsibility are two sides of the same coin. In part one of this article, we looked at the macro factors and theoretical basis that underlie the challenge business owners and entrepreneurs in the region. In part two, we will dig into the specific issues that spring forth from these basic foundations.
Realize that while different, much of the business climate in Latin America feels similar in many ways. If we are not careful, these similarities can lull us into complacency. But the differences are enough to kick our behinds if we fall asleep at the wheel even for a moment. Vigilance is key. The freedom to operate in a much less regulated environment requires a responsibility to cover all the bases all the time. Not an easy task, but one well worth the effort.
Just today I was reminded that I really do work in the wild, wild West. At our Gran Pacifica project, we lease about one third of our 2500 acres to cattlemen who graze their stock in the dry season. This morning, I received a report of a fire in the cattle areas. It seems that some cattle rustlers set a blaze to push the cattle off the property and also cover their tracks.
Cattle rustlers mind you. This is 2012. Incredible isn’t it? I have little doubt that if the folks leasing the land catch up with the crew, there may be justice met out at the end of a rope, by a bunch of guys with cell phones, iPods, and who work in glass shrouded office buildings. Talk about juxtaposition.
But here’s the point of the story. Would your business plan include the possibility of fire because of cattle rustlers? Would you really think to have that contingency in there? We do. We have large green irrigated areas called a golf course that shelter and protect the homes and condominiums in the residential development. We also installed fire hydrants throughout the neighborhood.
Are we psychic? No. We simply have learned a few things over the years and we make sure we pay attention to those lessons. Experience is key, but so is humility. It is critical to acknowledge and accept that “you don’t know what you don’t know.”
Another example of not knowing how to plan for the crazy possibilities is something that happened to me back in 1998. We were building some condos on Ambergris Caye, Belize and the entire country ran out of cement for 2 months. What little there was cost a fortune. Incredible isn’t it. No block, no mix, no cement. Delays cost time and money. Try factoring that contingency into projections and timetables.
At a basic level entrepreneurs in Latin America will face systemic challenges that are obvious and present themselves almost immediately. Accounting and legal systems are the first to be encountered as new and different. The root of the legal system in Latin America, except Belize, is Civil Law, or as it is sometimes called, Napoleonic or Roman Law. The United States and Canada by contrast use Common Law from England generally, except Louisiana and Quebec who use a civil law system inherited from France.
Civil Law is based on the existing written code and a direct, literal interpretation of what is specified in a document. The spirit of the law or contract is not relevant. I know of cases thrown out of court because a plaintiff misspelled the name of a company or mistyped the registration number. Details count in the extreme.
One spillover effect of this legal system is that accounting systems become bureaucratic and cumbersome as well. If you want to have a corporate audit performed, you will need originals of every receipt, check, payment voucher, etc... Copies will not do. If you don’t stay on this document collection from day one, going back in time to get “new originals” will become the bane of your existence.
Civil Law also requires that all official paperwork be signed in original and in person. This means that you have to either be physically present or give a power of attorney to someone who can sign for you. Giving someone else the power to transact your business obviously poses risks that you’ll have to weigh against the necessity of being present. Remote control business is very difficult for this one reason in particular.
Understanding the real labor costs is important too. Sure the hourly wage is low, but once you factor in the social loads including vacation, 13th month, social taxes, etc…. your actual cost may be 30-40% higher than the base wage. Additionally severance rates can accrue at a rate of one month for every year. This system has the perverse effect of encouraging people to work for 3-4 years and then quit to collect a huge check.
Hiring the right number of people is also difficult to predict at times. In many places business have to make twice-monthly filings for taxes, in person. On top of that everything is produced in triplicate and requires huge amounts of paper shuffling. I can be difficult to factor for the amount of bureaucratic loss and inefficiency in this type of system. But not taking a WAG is even worse.
There is another route to take, but one I’d shy away from. Some folks choose is to stay off the books and under the radar. I was speaking with Ajay Patel the former Dean of Wake Forest Business School, last night and we were discussing this exact issue, that is, why so many businesses choose to enter and stay in the informal economy.
Hernan DeSoto the famous Peruvian economist details the trails and tribulations of starting a business following the rules precisely. In some countries of the region it can take over 1000 days to start a business. His charts of the time lines and analysis in The Mystery of Capital are fascinating. This text is well worth the reading for any budding entrepreneur coming to the region.
The temptation to bribe to clear the path of this bureaucratic slag is huge. The seduction of working the system the way the locals do is tempting, but always remember, you are not local. Please allow me a Soapbox Moment on the issue.
There was a guy who was buying property in Central America who bragged to me that he was paying “Incentive fees” to get his deal done. 3 things popped to mind immediately.
Once you pay, you might as well go get a big green US Dollar sign tattooed to the middle of your forehead telling everyone that you pay bribes. Pay once. Pay forever. You are marked and believe me, there is nothing a corrupt official likes more than a Gringo business that pays. They know that we don’t know how to play this game and we way over pay for everything.
There is also the fact that paying a bribe is against the law. It’s called the Foreign Corrupt Practices Act and it proscribes a fine and possible jail time for US citizens who pay bribes overseas. I know it’s the long arm of the law, and actually isn’t fair since most other countries permit their citizens to bribe. But it is the law and my guess is that you don’t want to go to jail.
And oh, yes, there is also that one other thing called doing what’s right simply for the reason that it is right. Corruption corrupts two people, the person receiving and the person paying. As a libertarian I don’t really care what happens to the other person, but I do have to live with myself. Take the more difficult path and work within the stated rules. It will take longer, but in the long run, it will far better serve your interests.
Remember too that the legal system is not your friend. Understand this now or do business at your peril. In almost any case between you and a local, I’ll give you one guess who will win. This is not 100% true but assume it is and prevent any and all legal cases whenever possible. The one caveat is that a case between two gringos is a toss up. If the other side bribes the judge, you might lose even though all the evidence is in your favor and in the US or Canada, there would be no way you’d lose. This is the reality. Accept it and do whatever you can to stay out of court.
There are other practical factors that come into play when starting and running a business in Latin America. A big one is language. We may all be speaking English together, but we literally may be speaking two different languages. Subtext and point of reference is the hard part to gauge. It’s frustrating to have someone say “yes” they understand and then not have your expected result occur.
My favorite example is very foreign coming from the outer reaches of the galaxy. In Star Trek IV – The Voyage Home the doctor, Bones asks Spock what it is like to be dead:
McCoy: You really have gone where no man's gone before. Can't you tell me what it felt like?
Spock: It would be impossible to discuss the subject without a common frame-of-reference.
McCoy: You're joking!
Spock: A joke [pause] is a story with a humorous climax.
Get ready to do some laughing (or crying). Bilingual is one thing. Bicultural is entirely another. Finding a Radar O’Reilly to run your operation? A pipedream.
There are also the time and efficiency issues that confound and confuse what would appear to be the simplest of transactions or operations. Time is not generally respected as important in the region. Meetings start late, lines are long, and nobody except you seems to mind. Accept it and deal with it.
Here are some tricks to “deal with it.” A wise man said, “Wait quickly” and this is a fantastic strategy. I switched to a Mac so that I could open my computer up and be working in 10 seconds. Waiting for a meeting is no big deal now. Another tip is to hire a driver who is really your “wait in line” guy. These tricks, along with a Blackberry, a magazine, and a notebook to scribble thoughts down in help, but wont mask all the frustrations. That’s where the “accept it” part comes in.
One last example is a visual one. Our company mails post cards from Belize to prospective clients. Recently I looked at the postcards printed and ready to be stamped and mailed. This is what I saw:
Can you spot what is wrong? Look at the address label position. It’s down at the bottom of the right side. I doubt that once the letter gets to the automated USPS system that it can be read and will end up in the trash can resulting in postcard, stamp and time wasted.
The business relevance to that specific example is important. How do I know that I need to instruct my staff where to place the address on a postcard. We’re born knowing that, aren’t we? Just kidding, but did anyone ever teach you where to put the label, or is it something you learned through osmosis growing up. The point is, how can you know what you don’t know? How do you know what things you have to show and teach. The default is to show and teach everything, but that’s not really practical.
So here we are full circle back to the main thrust of the two articles. We don’t know what we don’t know. But we can expand our radar screen, live on our toes, pay attention to things we normally wouldn’t in North America and learn from our mistakes. Plan on making a bunch of them. And remember humility, an openness to believe that crazy stuff is going to happen. Believe that the rumors of rustlers in the area is not just a crazy story, but a blip on the radar screen to be addressed seriously. There is no rest for the weary in this part of the world. Freedom requires vigilance and responsibility. Accept it and enjoy it.
So here’s the bottom line as I see it. Follow the rules 100%. Play by the system even though it’s a pain in the butt. Understand that the legal system is stacked against you. Remember that there will be selective enforcement of the rules and regulations and you’ll probably be singled out to be audited, taxed, and forced to comply with rules most locals don’t.
The best solution is to beat them to the punch. Pay your taxes, keep immaculate records, follow the rules to a “T.” When they show up invite them in to do their job. Be sure to offer coffee and ask about their families. Humility and human kindness will work a magic that nothing else will. Remember, you are a guest in their country. Act like one and things usually go pretty well.
As a footnote here are some excellent reads for Expat Entrepreneurs in the region.
The Mystery of Capital by Hernan DeSoto, mentioned above, is a great read for entrepreneurs coming to Latin America. The Pan American Dream by Lawrence Harrison is by far my favorite book and produced the most “ah hah” moments giving clarity to confusion. Harrison describes the cultural factors that affect the macro economic development of the region, but these frameworks apply at the micro level just as well.
Another book that actually deal with the US specifically but has incredible spillover insights, is The Roots of Poverty by Ruby Payne. In her work she identifies many of the cultural elements found in the class structure in the United States. That may sound odd, but we do have an upper class, middle class and lower class. The traits and beliefs that they (we) display are in many cases consistent with the attributes of class structure in Latin America. The caveat is that the class structure is much stronger and more rigid in the region and these attributes can be amplified.
Finally, Don’t Stop the Carnival by Herman Wouk is a must read, especially if the Caribbean is your choice of business locations. If you have yet to make a foray into business in the region, you will likely laugh your way through the book at the misadventures of Norman Paperman and his resort hotel on the fictional island of Amerigo. On the other hand, if you have already engaged in business here, you may cry yourself to sleep.