Latin America appeared to make substantial progress in handling its macro economy in the 1990s. Following the emerging-market textbook for economic development, the region’s major countries brought down inflation and public deficits, at least initially. Yet these efforts turned out to be superficial; sustained economic growth remained elusive. Mexico, Brazil, and now Argentina have lurched from one financial crisis to another.

There is little doubt that Argentina’s collapse into economic chaos at the end of 2001 was caused in part by mismanagement of public finances. Less debated is the role of microeconomic factors, yet microlevel barriers were responsible for a failure to improve productivity and thus contributed to the country’s eventual inability to sustain the peso peg against the dollar.

Good macroeconomic management is critical if an economy is to achieve a sustained increase in productivity—the key determinant of growth and wealth. Fiscal and monetary stability eases interest rates, makes investors more confident, and thereby helps companies raise their productivity. But stability isn’t enough. Our microlevel analysis of several Latin American countries shows that sectors and companies within them perform very differently even under the same macroeconomic conditions.

Productivity problems are rife in Latin America. In Brazil, for example,...