OECD's Ángel Gurría sees need for more structural reform in Latin America

OECD's Ángel Gurría sees need for more structural reform in Latin America

Economy & Policy People Funds Corporate & Sovereign Strategy Interviews

At first glance, Latin America and the Caribbean (LAC) would seem to have all the ingredients for economic success. Huge swaths of arable land, abundant mineral resources and an ample supply of energy would seemingly make it the envy of emerging nations.

Despite such a rich endowment, the region seems to careen from boom to bust. Between 2000 and 2014, high commodity prices fueled robust growth, peaking at 5% in the mid-2000s, according to data from the Organization for Economic Cooperation and Development (OECD). But the last couple of years have been a struggle as commodity prices fell as China slowed and higher US interest rates reduced dollar inflows from exports and investment. The region managed a meager 0.6% growth in 2018 and likely will expand just 1.6% in 2019, according to an estimate by the World Bank.

Why has sustained economic success been so elusive? For Ángel Gurría, secretary general of the Paris-based OECD, the answer lies in the region’s inability to “take the necessary structural adjustments and measures.” The last economic cycle, he says, is very telling. Instead of taking advantage of the wealth generated by the commodity boom of the 2000s, the region failed to invest in education, healthcare or social inclusion, the kind of human infrastructure that drives productivity.

The consequences go far beyond the 2015-2016 recession, says Gurría, a former minister of foreign affairs and minister of finance in Mexico. It will have a lasting impact on the region’s fortunes for some time to come. “You need 5% growth sustained over a whole generation to catch up” to more developed regions, he says. “That’s not happening.”

Figuring out how to drive productivity is key, according to Gurría. “Most LAC countries have been middle-income economies for various decades, mainly because of their inability to raise productivity levels,” he says. “Despite significant heterogeneity across countries on average, LAC countries have stayed in the middle-income range for 65 years and, under the current growth pace, it would take another 40 years to reach sustainable high-income levels.”

It takes political will to accelerate the pace, he says. Countries must avoid frequent shifts in policies that unnerve private investors. Countries need rule of law and the capacity of individual nations to cope with internal and external economic challenges. This not only promotes stronger democracies, Gurría says, but is essential to attract the kind of capital from private investors needed for advancement.

“You can’t disappoint investors too many times,” he says. “Investors have shareholders, and they have long memories. They can lose money, but they are only going to lose money once.”

Gurría says access to credit and developed capital markets is imperative. While Chile has a level of available domestic credit to the private sector in line with the OECD average, other LAC nations lag. On average, 138 companies trade on stock markets in each LAC country, far less than the OECD average of 974. This limits access to finance for investment, a key for boosting productivity and creating jobs.

There’s even less financing for small and medium-sized firms, which if not addressed could leave the region in “very deep trouble,” given that SMEs generate 90% of the region’s jobs, he says.

The region must also implement policies to adapt to changing demographics. A quarter of the population is between the ages of 15 and 29, and this provides a window of opportunity as it keeps a limit on state expenditures in healthcare and pensions, Gurría says. But it won’t “last forever,” he warns.

By his estimates, a rapidly aging population will bring new economic and social challenges in three decades time that will require policy adjustments such as providing long-term care and improving social insurance and security systems.

Pension reform is crucial. Chile is the standout in the region. It reformed its social security 30 years ago, he says. Brazil and Mexico, on the other hand, are going to have “very serious problems with the next generation of people who are retiring,” he adds. The question countries should ask about social security reform, he says, is whether “it is going to make you bankrupt, or are you going to have a generation of old poor?”

With the economic recovery so sluggish, the temptation will be for countries to postpone structural reforms, but Gurría says that would be a mistake. “It is never the best time,” he says. “You have to go for labor reform, education reform, pension reform, competition reform, skills and the future of work.”