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Claudio Loser: A future uncertain

Sep 1, 2013

Latin America’s advances in recent years have not been enough to move it beyond a mediocre rate of growth. It will take bold efforts for the region to escape the so-called middle-income trap over the next quarter century. By Claudio Loser

Over the past 25 years, Latin America has struggled to achieve a firm basis for sustained economic growth.

This is not to deny considerable progress in many areas over this period: macroeconomic performance, including a successful battle against inflation; greater financial resiliency; and, increased free trade and integration with the rest of the world.

But such advances have not been enough to move Latin America beyond the mediocre economic growth that characterizes the so-called middle-income trap, where growth plateaus amid a loss of competitiveness. Moreover, the region has fallen behind other emerging markets. (Figure 1)


 


The 2008/9 global economic crisis affected Latin American economies less than many other regions. By and large they recovered well, but the pace of growth has once again weakened.

A key underlying factor in Latin America's poor performance over the decades has been the region's productivity, as reflected in the measure of total factor productivity. (TFP is defined as the contribution to GDP growth not explained by increases in the labor force or in the capital stock.)

While Latin America has registered reasonable growth rates in capital and labor, TFP has remained virtually stagnant over the past three decades (Figure 2). In contrast, TFP in Asia has grown rapidly.


 


The poor TFP performance reflects a number of factors, most importantly, the low level of competition, the limited incentives for higher productivity, poor education, and low savings and investment rates.

Latin America has made significant progress in terms of reducing poverty. The percentage of indigent poor (with income levels below $2.50 a day) has been cut in half since 1990. However, income distribution in the region shows high concentration, with the highest - albeit declining - Gini coefficients of any region.

The region has made progress in education in almost all countries. Public spending in the sector, as a proportion of GDP, is higher than in most other developing and emerging regions. These efforts have expanded the number of students at school, but there is little evidence that the quality of teaching has also improved.

Also problematic is the region's low relative technological readiness. This is a result of poor coordination between research institutions and universities with enterprises; the decrepit state of infrastructure; a lagging business environment, as captured in the World Bank ease of doing business indicators; and a regulatory environment that has resulted in a high degree of informality.

Policies and conditions in the region have been consistent with a rate of growth below average for emerging and developing economies. With stable or declining commodity prices, Latin America may well see lower growth. It is therefore essential that policymakers redouble efforts to break away from the middle-income trap and to converge with other emerging economies.

The next quarter century

Projections can be made for the next quarter century, on the basis of a world growth model. As a long-run model, the results and assumptions are stylized, but provide a context for policy formulation and reform.

The global economy measured $72 trillion in 2012. By 2038 the global economy may reach $200 trillion, with per capita incomes close to $22,000 as compared to $10,000 today. Latin America, under a business-as-usual scenario with no changes in policies, may grow at most at 3% in the long term, but it will have fallen behind world growth (at 3.6%). Latin America's economic weight may slowly fade in relevance.

If Latin America could enter the club of "productivity convergers" and undertake the reforms needed for growth to catch up, the difference to the region by 2038 could be enormous. Real growth could accelerate to 4.7% due to faster TFP growth, equivalent to that of the rest of the converging emerging countries.

Compounded over a quarter century, regional output could be almost four times higher and per capita incomes almost three times higher and well above the world average. The region's share of the global economy in 2040 would be 11.3% versus 7.5% under business-as-usual. (Figure 3)

 



There is no reason why Latin America cannot do well. However, only through its own efforts will the region prosper. To do so, policies must be adopted to achieve growth and inclusion.

Given the diversity of the region and differing characteristics of individual countries, a detailed strategy for the entire region is unfeasible, but a broad approach can be defined that comprises three complementary pillars: more social inclusion; higher productivity; and greater competition and openness. Actions under these pillars must be supported by improved governance and accountability.

To implement the policies under the broad strategy described above, authorities must focus on several priority areas: promoting pragmatic policies for equity and inclusion; developing human capital; fostering technology development and innovation; improving the business climate; attaining higher savings and investment rates; upgrading and integrating infrastructure; advancing regional cooperation and trade in a global context; improving governance, institutions, and policy implementation; and, dealing with issues such as security, and the environment.

Ultimately, Latin America has the capacity to mobilize its human and physical resources towards these ends. But it will take commitment, hard work, and the pragmatic implementation of policies for the region to avoid the fate of the middle-income trap. LF

Claudio Loser is president of Centennial Group Latin America, senior fellow at the Inter-American Dialogue and a former director of the IMF's Western Hemisphere department.



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