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How to sail in a storm

Eduardo Lora is the principal advisor of the Research Department of the Inter-American Development Bank. He holds an M.Sc. in Economics from the London School of Economics. He has been associate member of Saint Anthony’s College of Oxford University, editor of Coyuntura Económica, and executive director of Fedesarrollo, Colombia’s leading policy research institution.

Since joining the Inter-American Development Bank in 1996, Lora has served as the coordinator of the Bank’s annual report, Economic and Social Progress in Latin America. His individual contributions to this report have included studies on structural reforms, income inequality, economic growth, social policies, and–this year–productivity and competitiveness.

Lora recently answered questions from IDBAmérica about how Latin America’s industries can progress in today’s harsh economic climate.

IDBAmérica: As the world economy enters a global slowdown, Latin American countries are facing overwhelming social demands that could jeopardize their recent reforms. Yet your report points out that governments must do much more to improve the business environment in order to attain higher economic growth rates. How do they meet these two challenges at the same time?

Lora: The present risk is precisely that there could be a reversal of the reforms. The problems our countries are currently going through are not as much the result of the reforms they have carried out, but rather of the ones they have failed to launch.

IDBAmérica: Pursuing reforms is difficult even in the best of times. If you had to advise a country on its priorities for taking action to raise its levels of competitiveness and productivity, which areas would yield the biggest impact in the shortest time?

Lora: One of the key issues is that a vast number of businesses have no access to credit. This problem can become worse when governments are forced to turn to their domestic financial markets to cover their financing needs. In many countries the lack of credit could be eased through legal and institutional reforms that would give creditors more confidence and sounder legal grounds to face the risks of debtors not honoring their obligations. Quite often, banks refrain from making loans not because they lack funding but because they fear that they won't see their money again, and that fear increases as economies sour.IDBAmérica: Chile and Costa Rica, two countries that have largely followed disparate economic philosophies over the past few decades, are the only two Latin American nations that have attained relatively high rankings in the Global Economic Report. How do you interpret that result, given that Chile was an early and enthusiastic free-market reformer while Costa Rica has been anything but that?

Lora: Appearances can be deceiving. Both countries share a strong rule of law, a firmly rooted system of institutions that favors private sector investment, and a relatively well educated workforce. These are the basic ingredients for innovation and higher productivity.

IDBAmérica: The report’s chapter on technological innovation grapples with the question of whether Latin American governments should use their economic clout to foster the development of new information technologies. How can they do it without creating white elephants? Is this a more productive use of public resources than, say, training teachers?

Lora: Among the world’s developing regions, Latin America stands out as the quickest to assimilate new information technologies. In part, this is because the region is considerably open to international trade. But it is also due to its discerning business leaders and the modernization of telecommunications that has taken place in many countries of the region. The challenge is to extend these achievements and reach the smaller businesses and producers. For that, you don’t need to subsidize computer manufacturers or the information technology sector. What you need is more companies with access to credit, job training programs with cutting-edge technology and governments that clear obstacles to the creation of new businesses.

IDBAmérica: In the chapter on industrial and investment policies you note that tax breaks have been effective in attracting foreign investment, but that their widespread use could prove destructive for the region. Where do you see signs of harmful effects? Are there policy alternatives that would avoid or mitigate such negative outcomes?

Lora: Tax incentives for car manufacturers have increased in a bid to lure new investors from one country to another. In some countries, mining companies pay lower taxes than other industries even though they are exploiting non renewable natural resources. These trends could be countered with agreements to limit such actions among countries that receive these investments. This would improve their bargaining position vis-à-vis large transnational firms. The bottom line is that the most important factor for attracting foreign investment is the quality of institutions. And in that field, the more countries compete, the better for all of us.

IDBAmérica: The IDB’s Research Department has buttressed some of its recent reports with data from regional opinion polls like Latinobarómetro. What trends have impressed you the most in those surveys over the past few years?

Lora: The most troubling trend revealed by these polls is that in recent years Latin Americans have been losing their faith in democracy as the best form of government. There’s also a backlash against the reform process, especially against privatizations, and a growing trend towards more state intervention in productive activities. We’re running the risk of slipping into the past. At this time, the challenge for our leaders is not to conform to current opinion trends but to clear the path and perceive the future.

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