Is the Latin American Trap a Cultural Curse? This Is an Exemption Certificate for the CCP! If Transaction Efficiency Doesn't Pass 0.5, the Market Goes to Zero; Peru's Poor Aren't Lazy, It's That the Legal Door Is Too Expensive; Brazilian Bosses Can Only Rename Their Ice Cream Cones; Hong Kong's Corrupt Cops Changed Faces in Ten Years; Culture Is the Product of Institutions, Not Destiny!
This episode explores whether the Latin American trap is a cultural curse, analyzing its essence as a problem of institutions and transaction costs. Through cases such as dead capital in Peru, high taxes and cumbersome regulations in Brazil, and anti-corruption efforts by the ICAC in Hong Kong, it points out that culture is the result of institutional outcomes rather than an innate destiny, thereby debunking the CCP's excuses for exemption from responsibility.
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Observe me as I am, refuse fragmented cognition. Actually, some people have criticized me, asking what I'm talking about? Saying, "You just bash the CCP every day, can't you talk about something constructive?" Fine, today we will talk about something constructive, which is the question of how China can escape the Latin American trap. I think it's time to talk about this topic because China is currently sliding into the abyss of the Latin American trap. In the last two years, there has been a very, very popular saying inside the Great Firewall. What is it? It says the Latin American trap is a cultural curse, similar to how they describe people from Northeast China. Hey, these people inside the firewall love to attribute poverty to laziness, as if being fucking diligent would make you rich. I have never seen a Chinese person who isn't diligent. Anyway, the general idea is that the Latin American trap is because Latin Americans are lazy, believe in Catholicism, and have these big families, which is why they are poor. Therefore, this is innate. This argument is something the CCP loves to hear. Why? Because if you reverse the logic, what do you get? You get that Chinese people are diligent, follow Confucianism, and are a collective, so Chinese people won't fall into the Latin American trap. The real purpose of the cultural curse theory inside the firewall is to provide an exemption certificate for the CCP. So today, let's look at whether a country is locked by culture or by the friction costs of its institutions. I will divide this into two parts. In this episode, we will only do two things: calculate transaction costs and trust. Here, I must first mention something in economics that is very, very counterintuitive, which is that the division of labor is not the finer the better, because you have to pay for the division of labor. Adam Smith himself said it. What did he say? He said the division of labor is limited by the extent of the market. What is the extent of the market? Simply put, it's how many people you can sell your goods to and how far they can reach. For example, in a small village of a few dozen households, no matter how good the cloth you weave is, the whole village can't buy many bolts in a year. In this case, who would specialize in weaving? So what can everyone do? They can only farm a little and weave a little, right? Yes, that's it.
You do a little bit of everything; only when the market is large enough can you afford to do just one thing for your entire life. But who determines the scope of that market? The person who figured this out was a Chinese man named Yang Xiaokai. During the Cultural Revolution, he wrote an article titled "Whither China?" and was happily sent to prison for ten years. Later, he became a professor at Monash University in Australia, where he systematically calculated the concept of friction costs. Because Yang Xiaokai had truly witnessed what hell was like, he understood how transaction costs could destroy a country, and he was better able to intuitively build this calculation model. I have compressed his model into the simplest and most direct version; you can follow along as I calculate it. Now, let's assume there are only two people and two items—cloth and grain—and these two people only put in one unit of effort each day. The more specialized you are in one thing, the higher your efficiency, right? That is, the output per unit of time is higher. This is easy to understand, isn't it? Okay, now let's take this.
The "practice makes perfect" aspect is represented by 'a'. When 'a' is greater than one, what does that mean? It means your output equals the time invested raised to the power of 'a'. Once 'a' is greater than one, every time you double your effort, your output more than doubles. Conversely, if you cut your effort in half, your output must be cut by more than half, right? But as long as you are in a society with division of labor, what must you do? You must use your own goods to trade for others'. When you trade like this, losses occur. For example, if you buy a bolt of cloth from the market, the process is full of costs: shipping fees, customs duties, bribes, legal fees—after all these deductions, only 'k' amount remains in your hands. This 'k' is called transaction efficiency. Because you only traded for this one bolt of cloth, this 'k' must be between zero and one, right? So, let's first calculate the self-sufficient scenario. Suppose each person spends half their day growing grain and half their day weaving cloth. If 'a' is 1.5, then the grain produced in half a day is 0.5 to the power of 1.5, which is approximately 0.354 units. The cloth woven is also 0.354 units. Multiplying grain by cloth gives 0.125. What is this 0.125? Think of it as a score for living a self-sufficient life. Why multiply? Because if you have grain but no cloth, or cloth but no grain, you cannot survive. If you lack either, the score becomes zero. Now let's look at the division of labor. In this case, I spend my whole day either farming or weaving. In the farming scenario, I produce one unit, keep half, and take the other half to trade for cloth. After all the deductions along the way, it becomes 0.5 multiplied by 'k'. At this point, we have 0.5 units of grain left and have traded for 0.5k units of cloth. So, grain multiplied by cloth is 0.5 times 0.5k; the product of the two 0.5s is one-fourth, so it is k divided by 4. Comparing this score after the division of labor to the 0.125 from self-sufficiency, if the division of labor is to be better than
self-sufficiency, then 'k' must be greater than 0.5, right? Simply put, if more than half is eaten up on the road of trade, everyone would rather do everything themselves, and at that point, the market effectively drops to zero. The most drastic part is this: when 'k' rises from 0.49 to 0.51, the whole society doesn't just see a little more trade; it suddenly jumps from everyone being self-sufficient to everyone practicing the division of labor. Conversely, if the system becomes corrupt and 'k' drops back below the 0.5 threshold, the division of labor will collapse in large swaths back to a state of self-sufficiency. Therefore, the problem in poor countries is often not that people aren't working hard, but that 'k' is stuck below this threshold. The transaction costs that Coase and North talked about are this 'k', and what is the biggest part of 'k'? It is that you have to guess what the other party will do next every single day; this is a zero-sum game or a complex game. So, what does this 'k' actually look like in reality? Peruvian economist Hernando de Soto published a book in the year 2000 called "The Mystery of Capital." What did he do?
He took more than a hundred people to run through several developing countries, and where did he specifically choose to poke around? Well, it was the slums. What was he doing in the slums? Counting the belongings of the people in the slums household by household? How many were there? What was the conclusion after counting? The conclusion after counting was extremely shocking: the poor were not empty-handed at all; things like houses and small workshops were piled up in heaps. Soto himself estimated a total: in the hands of the poor in these countries, real estate without formal property rights added up to at least 9.3 trillion dollars. With so much wealth, why were they still poor? Because these things did not legally exist at all; without formal property certificates, houses could not be mortgaged to the bank, and workshops could not be broken down into shares and sold to others. This portion of equity was not recognized by the law, nor by the bank, and the court ignored it even more. Soto called this dead capital. At that time, the poor in Cairo could even use televisions and antibiotics; what they lacked was a set of enforceable property rights. Therefore, what separated the 80% of the people from the 20% of the elite was an invisible wall of law. Soto's team also conducted an experiment in Lima, the capital of Peru. What did he do? Well, he started a small clothing workshop himself. This workshop was very small, hiring only one or two local workers, and all procedures followed the formal legal process: no bribery, no back doors, running for a full six hours every day. As a result, after running for 289 days, he paid 1,231 dollars, which was equivalent to Peru's minimum wage for 31 months.
After all this hassle, the license was finally obtained. The same thing could be completed in a single morning in the United States. And if you wanted to legally build a house on wasteland, it was fucking ridiculous—you had to run through 52 government departments for over 207 approvals, running back and forth for six years and eleven months. If you wanted to get the complete property title for that piece of land, you had to go through a total of 728 procedures. Yes, this was the function of K. Chinese people are not unfamiliar with this at all. Look, rural homestead land in China belongs to the village collective, and farmers only have the right to use it, with no permission to sell it to city dwellers. As for mortgaging it to the bank, that had only been tried out in a few pilot areas, but later all of them failed because these farmers were simply too untrustworthy. Last year, the number of migrant workers going out to work nationwide was 180 million, but the houses back in their hometowns were considered worthless in the eyes of the bank. This was essentially the same thing as the private capital DeSoto talked about. Peru was just a wall at the doorstep, but once you stepped through that.
Door, would things get better? Well, there was a ready-made example for this, and Brazil was the answer. Brazilian businesses were formal, with licenses and account books, yet they were still bitten to death by these friction costs. Let's look at the world's data: a Brazilian company spent 1,501 hours a year just calculating things related to tax reporting and tax payment. Taking 1,501 and dividing it by 8—that is, calculating based on 8 hours of work a day—an accountant spent 187 full days in a year doing nothing else at all except playing around with fucking tax reports. What kind of running a business was this? Wasn't this just working for the tax bureau? And how long did the same thing take in the United States? 175 hours. Why was it so absurd? Because Brazil's tax collection was completely chaotic, with three levels of government each collecting their own: one set for the federal government, one set each for the 26 states plus one federal district, and then one set each for more than 5,500 cities, adding up to a total of over 60 types of taxes. With so many rules, nobody could clearly explain anymore.
What was it calculated based on? In the end, they could only go to court. Brazil's National Council of Justice did its own statistics: the money tied up in tax lawsuits alone amounted to a whopping 5.44 trillion reais, which was about 75% of Brazil's entire GDP for a year. What else could businesses do in such a place? Well, they had to use all their brains on very strange things, such as changing names for things. When McDonald's sold soft-serve cones and sundaes in Brazil, the Brazilian tax bureau said this was ice cream, but McDonald's said that wasn't right—this was dairy products, and the milk content inside already exceeded 51%, while the ice cream machine's function was only to freeze it and pump in a little air. Why did they have to argue so bitterly about this? Because according to Brazil's tax law, the federal turnover tax on dairy drinks was zero, but ice cream was not. Then the Brazilian government started a lawsuit with McDonald's. The lawsuit started in 2018, but until today, whether a soft-serve cone was ice cream had still not been judged. So everyone could imagine: when the smartest minds in a country were all doing this, this country...
Is it possible for a country to develop a complex division of labor system? Employment follows the exact same logic. In 1988, Brazil began amending its constitution, requiring the maximum weekly working hours to be cut from 48 hours to 44 hours, and raising the minimum overtime pay from at least 20 percent extra to at least 50 percent extra. The most brutal part? Dismissals. Brazil has something called the Length of Service Guarantee Fund, where employers must deposit 8 percent of an employee's salary every month into an account under the employee's name. If an employee is laid off without cause, the employer must also pay an additional penalty equal to 40 percent of that account balance. Before the constitutional amendment, this ratio was 10 percent. Well, if you factor in the 13th-month salary, paid leave, employer association apportionments, and work-related injury insurance, how much does an employer actually have to shell out for every 100 yuan of contract salary? 165 yuan. For a boss, the choice becomes very simple: avoid signing contracts whenever possible. By the beginning of this year, informal employment accounted for nearly 40 percent of the total employment in Brazil, and the Brazilians...
...could no longer stand it themselves. Then, by the end of 2030, they started amending the constitution again to reform the tax system, but the state and municipal governments will take until 2033 to complete the transition, so reforming just one tax takes ten years. The question is, since everyone can see these friction costs, why doesn't the state cut them itself? Well, North and Weingast published a paper in 1989 about Britain's Glorious Revolution, which answered this exact question: if a king who holds the machinery of violence wants to make merchants believe he will not rob them, what does he have to rely on? Either you rely on decades of trustworthiness to build a reputation, or you rely on a system that ties his hands before the fact, preventing him from defaulting on his debts. But if the king goes to war or encounters a regime crisis, his discount rate immediately skyrockets. Once the discount rate is this high, well, it means the future is worthless in his eyes; even if he could borrow cheaper money later, it is far inferior to defaulting directly today. Well, the cost of defaulting today is the lowest. Therefore, the king's choice is...
...very simple: he starts looting, confiscating property, and selling privileges—doing whatever makes money the fastest. Charles I of the Stuart dynasty in the 17th century did exactly that. The parliament's countermeasure was simply refusing to approve the funds. The consequence of the king being even more desperate for money was that he went straight to plundering. The more you plunder, the more parliament refuses to approve. After the Glorious Revolution in 1688, the powers of taxation, spending, and auditing belonged to Parliament. Following that, the judiciary also became independent. Then, in 1694, the Bank of England was established specifically to manage the national debt. Squeezed by this institutional framework, the king lost the ability to unilaterally default on his debts. Well, it wasn't that his power disappeared, but his capacity was gone. Therefore, North and Weingast pointed out that the interest rate on British government borrowing plummeted from around 14 percent in 1690 to what? To around 3 percent by the mid-18th century. They then drew a conclusion—what conclusion? They claimed that Britain relied on cheap money to literally wear France down to death.
This story was later re-examined by two economic historians, one named Sussman and the other named Yafeh. In 2006, these two fellows recalculated a century of British government borrowing costs, and the conclusion was that for a full 40 years after the Glorious Revolution, British interest rates were both high and unstable, spiking whenever a war broke out, and the British government didn't borrow any cheaper than countries with much worse property rights protection. In other words, the constitution had been changed by that time, but the market actually didn't buy it—at least not for the first forty years. So what finally made the market trust the British government? It was a very, very crude fiscal technology called earmarked funds. How did this thing work? It was actually extremely simple and crude: every time parliament approved a loan, it simultaneously had to legislate and designate a specific tax. The revenue collected from this tax was used exclusively to pay off that specific debt first, and no one could touch it for any other purpose. It was repaid year after year like this; even if you changed the king, it made no difference—it still had to be paid back. Through this, the market slowly began to trust them.
If you take this ruler to China, isn't Charles I just like the Journey to the West? When a regime feels it cannot survive until tomorrow, it will do everything Charles I did—things like 'ocean fishing,' 'coastal fishing,' or messing with social security. Therefore, the most expensive part of transaction costs is actually not shipping or taxes, but trust. To put it bluntly, if you hand your goods to a stranger, how do you know they won't cheat you? Let me tell you something interesting. An economic historian at Stanford University named Greif did a fascinating study. What did he do? He took two groups of merchants in the Mediterranean during the 11th and 12th centuries and thoroughly figured this problem out. Who were these two groups? One was the Jewish merchants living in the Islamic world, known as the Maghribi traders, and the other was the Genoese merchants living in Italy. They were on the same sea, trading the same goods, and facing the same dilemma: the goods had to be handed over to overseas agents to sell, and only the agent knew exactly how much money was made. In other words, if the agent had malicious intent and cooked the books, you, being thousands of miles away, would never find out. The Maghribi traders' solution was to stick together. How did they do it? Once it was discovered that an agent had cheated any merchant in the alliance, the news would spread across the entire Mediterranean through letters. From then on, no member would ever use him again for the rest of his life. Therefore, the Maghribi traders didn't need to pay their agents high wages, nor did they need courts. The situation in Genoa was the exact opposite. After Genoa established its city-state at the end of the 11th century, the families spent every day doing one thing—fighting. Literally, they were fucking fighting each other every day. Merchants were also wary of one another. This led to a different situation: when an agent was fired by one boss, other bosses could still hire him; there was no collective blacklisting. In the absence of such a mechanism, Genoese merchants had no choice but to pay their agents more, and they were forced to pressure the city-state to build formal laws and courts, establishing various systems—notary systems, commercial court systems, and transferable bills of lading—all of which were developed one by one during the Genoese era and later in Western European commercial cities. So, what was the outcome? As trade expanded, you had to do business with strangers outside your circle. At this point, the Maghribi letter network became ineffective because the other party wasn't even in your circle, so you couldn't blacklist them. Thus, the Maghribi traders were eventually locked within their own group, while the Genoese court system allowed them to do business with anyone, and it fucking grew larger and larger. So what did Greif say? Cultural beliefs aren't about what you eat or what you believe in; they are about what you expect others to do when they encounter you, and this expectation can be rewritten by institutions.
This is what Chinese people are most familiar with—the Wenzhou gang, the Chaoshan gang, the Putian network—they are all like the Maghribi traders, based on being from the same hometown or clan. Essentially, if someone breaks the rules, the internal group starts blacklisting them, but outside the circle, you have to rely on the courts. And you know how Chinese courts are. The CCP itself is just a large-scale Maghribi alliance, right? Loyalty is maintained through collective punishment and blacklisting—isn't that the same old trick? Outside the Party circle, you can't sign a contract with any stranger that the other party would dare to trust. If you take Greif's two groups of merchants and put them in today's context, you have two types of trust: one is only trusting family and fellow countrymen, which is called particularized trust; the other is daring to trust people you don't know, which is called generalized trust. That's why Chinese people always say Americans are very naive. I also hope that one day Chinese people can become as naive as Americans, as naive as Taiwanese people, because this is the prerequisite for crossing that threshold. If you want to escape the Latin American trap, this kind of simplicity between people is a necessity.
Alright, let's get back to the point. Many people think that the stronger the trust between acquaintances, the stronger the trust in the whole society. In reality, it's the exact opposite. Scholars have done calculations using Poland as an example, showing that the more a person is embedded in a circle of relatives and acquaintances, the less they trust strangers. So, what destroys generalized trust? I have repeatedly seen two things in economic literature: in societies with greater wealth inequality, people feel more insecure, and the more insecure they feel, the more they retreat into their families or gangs to find protection. Latin America has both of these. So, what creates generalized trust? It's not about participating in more clubs or doing more charity work; it's about having police and courts that are fair and uncorrupt, plus a social safety net that covers everyone. Chinese people are also very familiar with this. A famous scholar, Fei Xiaotong, published a book in 1948 called 'From the Soil,' where he described a type of order called the 'differential mode of association' (chaxugeju). It means taking oneself as the center and pushing outward in circles; the further out you go, the less trust there is in that social structure.
Now, let's compare how the CCP fulfills this trust structure. You all know about the Peng Yu case in Nanjing in October 2006, right? A young man helped an elderly woman who had fallen, and then he was sued in court. How much was the first-instance judgment in September 2007? In September 2007, the CCP's fucking stupid judiciary sentenced him to pay over 45,000 yuan in compensation in the first instance. The reasoning written in the verdict was absolutely ridiculous; it was something that clearly wasn't written by a human brain. It said that if you were truly doing a good deed, you should have gone to catch the person who hit her, but instead, you went to the hospital with her, which was contrary to common sense. Later, both sides reached a settlement, and whether he hit her or not was never resolved, but that verdict spread across all of China. From then on, whether or not to help someone up became a nationwide dilemma. Whether strangers dare to lend a hand depends on how the court rules, and trust itself relies on fair police and courts. But what if the police themselves are corrupt? We won't even talk about this fucking place under the CCP; let's talk about Hong Kong in the early 1970s, which was the same way.
First, let's talk about why corruption is so hard to cure. Because the essence of corruption is a voluntary transaction between two people: the one giving the money is willing to give, and the one receiving is willing to receive. There is no victim on the scene to report the case, so if no one reports it, it is almost impossible to detect. The receiver is also guaranteed a profit; if anyone refuses to take it, they are blocking everyone's path to wealth and will eventually be squeezed out. In the end, it becomes a situation where everyone takes bribes, and it's a Nash equilibrium: whoever stays clean first dies first. In 1973, the assets under the name of Peter Godber, a Chief Superintendent of the Hong Kong Police Force, exceeded 4.37 million Hong Kong dollars, which would be about 50 million Hong Kong dollars today. At that time, the British Hong Kong government for the first time invoked Section 10 of the Prevention of Bribery Ordinance enacted in 1971, demanding he explain within a week where this money came from. As a result, on June 8, Godber used his airport pass for police personnel to flee directly back to the UK. The people of Hong Kong exploded, taking to the streets to shout against corruption and demanding the arrest of Godber. Following that, Governor Murray MacLehose established a department in February 1974 called the Independent Commission Against Corruption (ICAC). This department reported directly to the Governor and was not under the jurisdiction of the police force. Then, in 1975, Godber was extradited back to Hong Kong and sentenced to four years. Why is this Section 10 so powerful? Because in ordinary criminal cases, the prosecution must prove who sent the money or what the benefit was, and must also prove the defendant's motive, such as intentional bribery. But corrupt officials have already laundered the money through N channels, so regarding these points, the prosecution basically cannot provide any effective evidence. However, Section 10 reverses the burden of proof: the prosecution only needs to prove that the person is a civil servant, or has been a civil servant, and then prove that their standard of living or the assets they control do not match their official salary. That is enough. Next, it is the defendant's turn to explain where the money came from. If they cannot explain it clearly, or if the judge does not believe them, the money is directly confiscated as a criminal asset. See? It's the defense that has to provide the proof again.
In the ICAC archives, there is a case called the 'Detective Case.' Who is this person? The ICAC records don't write his name; from beginning to end, they just call him 'the Detective.' But it certainly wasn't the 'Five-Hundred-Million-Dollar Detective' Lui Lok, because he didn't steal that much—he couldn't compare to Lui Lok, having only about 16 million Hong Kong dollars at the time. The most brilliant part of the trial was his wife. She took the stand and said that the couple had long since lost their affection for each other and that the houses under her name were her own. Then the judge dug up the will, and looking at it, it showed that if the wife died, 55% of the assets went to the husband, but if the husband died, the wife only got one-sixth of the assets, and there was a number behind that, with another 30% going to two children the husband had with a mistress. That will was the only explanation needed; it meant the assets were clearly the husband's. In June 1979, this guy was sentenced to two years, and the 16 million Hong Kong dollars were confiscated. But having the clause wasn't enough. The ICAC kept investigating and found that the whole system was fucking corrupt. On October 28, 1977, over a hundred police officers stormed the ICAC headquarters, and without saying a word, started beating people, seriously injuring five ICAC staff members. This left MacLehose with no choice. Seeing that the situation was too chaotic and the crime rate was rising across the board, he was forced to announce an amnesty. Everyone knows the content of the amnesty: any corruption committed before January 1, 1977, as long as it hadn't been investigated yet, would no longer be pursued. Because in a situation where everyone is taking money, you can't arrest everyone, because if you did, there would be no one left in the police force. The amnesty was like drawing a line; the old debts before the line were wiped clean, but the new debts after the line would not be tolerated. At that moment, everyone's expectations changed on the same day, and only then did the situation flip from one where everyone was taking money to one where no one dared to take it.
Speaking of this, someone will definitely ask, does China have such a provision? Yes, the laws of the Chinese Communist Party (CCP) also have the crime of unexplained sources of huge property. Essentially, it means that any difference in wealth whose source cannot be explained is treated as illegal gains. The maximum sentence is ten years, which is almost the exact same approach as Article 10 in Hong Kong. So why doesn't it work effectively in the hands of the CCP? Because the trigger is not in the hands of an independent institution. What is Hong Kong? It is the Independent Commission Against Corruption (ICAC) proactively investigating cases; as long as they find property disproportionate to salary, they prosecute. What is the CCP? Under the CCP, the discipline inspection commission first decides on a whim whether to take someone down. Once the decision is made and the person is detained, what is the purpose of this charge? It is fucking used to deliver a final, fatal blow. If this provision were to actually work, the prerequisite must be that officials' property is disclosed in advance. However, officials' property disclosure has never been implemented at the national level to this day. Instead, Xu Zhiyong, who held up signs demanding property disclosure, ended up in prison. What is even more fundamental? At that time, Hong Kong could draw that distinctive line, but the CCP cannot draw it. Why? Because under the CCP, corruption is not a disease of the system; corruption is the reins of the system. The situation they want to construct is that everyone must have dirt on them, and everyone must obey. If a line were really drawn to make everyone clean, then this ruling foundation would cease to exist. Therefore, what is the essence of the CCP's anti-corruption? It is forever a gun in the hands of Emperor You Xi, not a machine like Lady Justice that fires at anyone indiscriminately.
Speaking of this, is the Latin America trap a cultural curse? The answer came out in the first half. In Peru, the poor are not lazy; rather, the door to legality is simply too expensive. Bosses in Brazil are not stupid either; it's just that the rules are in complete chaos, forcing them to rename ice cream cones—absurdities like that. Hong Kong police were not born greedy either; they were locked into a situation where everyone took bribes. Change the set of rules, and in less than ten years, won't a completely different face emerge? Therefore, culture is the outcome of institutions running their course; it is not a destiny given at birth. What the CCP fears the most is precisely this conclusion, because once culture is not destiny, today's appearance of China can no longer be blamed on the ancestors, but only on the system. Where is this illness now? Everyone already knows. So why can some countries pull themselves across this threshold, while other countries spend a hundred years and still fucking get stuck at the bottom? This depends on the country itself—on what? On whether this country's word counts. In the next episode, we will talk about how countries like South Korea, Japan, and Taiwan jumped across it, as well as how the threshold that Argentina's Milei is currently sawing apart with a chainsaw is actually being dismantled. We will continue to chat about these things next time. Alright, that is all for today's broadcast with everyone. If you like the program, please click the bell icon below. If you support me, you can join the membership channel. Every subsequent in-depth seasonal program is welcome to join Hairentong. See you in the next episode.