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IDB report urges Latin America and Caribbean to take steps to increase productivity and competitiveness

A report by the Research Department of the Inter-American Development Bank has identified secondary education and the quality of public institutions as the two critical areas that need major strengthening if Latin America and the Caribbean is to close the growing gap with developed countries in competitiveness and productivity.

"The number one priority should be to universalize secondary education through a mix of supply and demand incentives," according to Competitiveness: The Business of Growth, the 2001 report on Economic and Social Progress in Latin America.

The report noted that despite improvements during the 1990s, the region’s competitiveness and productivity, the keys to growth, are in general lagging behind more dynamic economies in Asia, the Middle East, and Eastern Europe.

"The rate of income growth in Latin America is so slow that it would require about a century for the region to attain the current income levels of developed nations," the report said.

The report also recognized serious deficiencies in three areas of the region’s institutional framework: the rule of law, the control of corruption, and the effectiveness of public administration.

In a fourth area, regulation, the region is relatively advanced, "well above the world average, although lower than the averages of the developed countries and East Asia," the report said.

Iglesias notes progress

In a preface to the report, IDB President Enrique V. Iglesias noted the "great strides" Latin America and the Caribbean have taken in the past decade in modernizing economies, resolving macroeconomic problems, and reforming sectors such as electricity and telecommunications.

"Despite these reforms, however, economic growth in Latin America is still not sufficient to reduce income gaps with respect to the developed world and to solve the region’s problems with poverty," he added. "Although substantially better than in the 1980s, growth in the region reached an annual average of only 3.3 percent during the 1990s."

"Increasing the supply and making more productive use of financial resources, physical capital, human resources, and technology is at the heart of the ‘business of growth,’ which should be profitable as much for workers and for society as a whole as it is for firms themselves."

The 2001 report on Competitiveness: The Business of Growth evaluates the best policy responses to achieve competitiveness, cautioning that there is "no single idea or recipe" to make markets function correctly. The report focuses on competitiveness in the areas of credit, human resources; infrastructure for ports, electricity, and telecommunications; and new information technologies.

Importance of secondary education

The report draws a direct relationship between the region’s poor performance in secondary education and the relatively low productivity of its labor force.

In contrast to primary education, which is widespread in Latin America and the Caribbean, "only 20 percent of the working age population has received secondary education," according to the report. The result is insufficient skilled labor needed to increase economic productivity, the report said.

"Latin America has gone from an average of three years of education four decades ago to around five years today," the report said.

A skilled labor force is needed because "Latin America does not have a comparative advantage in unskilled labor," the report said. "Indeed, a worldwide comparison finds that Latin America has an abundance of workers with primary education, and cannot compare with regions filled with truly unskilled labor — workers with no schooling at all."

Urging the region to "bring education to the top of the agenda," the report suggests a policy mix that will reward poor families that keep their children in school, make schooling available outside work schedules, and reward school performance through the distribution of funds. Given the low level of education and productivity of the current work force, training systems face an immediate challenge ─ one that should be met by making training institutions more responsive to the needs of firms.

In the area of labor relations, the report urged a dialogue between policymakers and organized labor to promote skills that will lead to greater productivity, higher incomes, and mobility.

Latin America’s strengths

The report said telecommunications sector reforms, including privatizations, have contributed to a 15 percent annual expansion in telephone traffic in Latin America during the past 20 years. System malfunctions have been reduced by 30 percent and waiting lists for telephone service by 60 percent.

Similarly, in the electric power sector, the report described Latin America as a "world leader" in power reform, observing that the region now has "the largest share of private electricity projects among all the developing countries" and these are reducing costs through competition.

Nevertheless, the report said, major improvements in regulatory systems are needed in both the telecommunications and electricity sectors to promote new investments and enhance productivity. It characterized the region’s ports as among the most inefficient in the world and a drag on productivity.

In information technology, Latin America and the Caribbean rank second in the world, trailing only the developed countries and slightly ahead of East Asia, in the number of Internet hosts per 10,000 people and in the number of personal computers, the report said.

An overall lack of credit is considered the biggest obstacle to growth by the region’s business community, followed by excessive taxes and regulations, according to the report, which recommended the removal of bureaucratic hurdles that impede the creation of new firms and greater property rights protection. It also noted that the region suffers from a lack of investment in research and development and an absence of links between new technologies and the productive sector.

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