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The productivity puzzle

Early in the 1990s, Latin America and the Caribbean seemed poised for a strong economic rebound after the "lost decade" of the 1980s. All the stars were aligning in its favor: many of its countries were pursuing market liberalization and structural reforms, new technologies flourished, international interest rates and private capital flows smiled on emerging markets.

Nevertheless, the region’s performance was underwhelming. In the first sentence of its 2001 Report on Economic and Social Progress, Competitiveness: The Business of Growth, the IDB’s Research Department calls Latin America’s economic growth "disappointing." Regional GDP rose at an average 3.3 percent a year in the 1990s, while Latin Americans’ incomes grew at an even feebler 1.5 percent, below the rates achieved by industrialized nations and some countries in Southeast Asia. As the report points out, Latin America’s income growth is so slow it would take the region a full century to reach the current income levels of developed countries.

The IDB Research Department’s latest report looks at the probable causes of this sad outcome. In previous years the IDB reports grappled with other problems that hamper development in Latin America and the Caribbean: the influence of often-overlooked geographical and demographic factors, the weakness of public institutions, the persistence of economic inequality, and the huge toll taken by financial volatility on the region’s boom-and-bust cycles.

Competitiveness: The Business of Growth analyzes how Latin American and Caribbean countries use factors of production (credit, labor, infrastructure and new technologies) and finds serious deficiencies and baffling paradoxes. For instance, the report notes that as a consequence of the paucity of credit and the deficit in key infrastructure sectors such as transportation, energy and telecommunications, Latin America’s largest firms are much smaller than their counterparts in industrialized nations and Southeast Asia. Their stunted growth limits the number of jobs they can create, an effect that is amplified at the level of small- and medium-size enterprises, which have even less access to loans and face greater obstacles in coping with inefficient ports, unreliable electricity suppliers, and unresponsive telecommunications systems.

As was the case in previous major analyses conducted by the IDB’s Research Department, this report relies on international indices and regional opinion polls to illustrate some of its findings. From the Global Competitiveness Report produced by the World Economic Forum, which this year, at the IDB’s request, included 20 Latin American countries, it draws the fact that most of the region’s economies rank very low in terms of their technological capabilities and the quality of their macroeconomic environment and their public institutions. Half of the Latin American economies in that survey turned out to have competitiveness indicators that are lower than their income levels would otherwise warrant—implying that their potential for future growth is impaired.

Another disturbing trend is gathered from the World Business Environment Survey produced by the World Bank and the IDB. In that poll, Latin American entrepreneurs complained more bitterly than their peers in other regions about the problems they face in dealing with the scarcity of credit, complex regulations and tax systems, unstable economic policies, uncertainty related to inflation and exchange rates, crime and corruption. These opinions might be highly subjective, but they reflect a deep discontent with the region’s business environment among key economic actors.

In its various chapters Competitiveness: The Business of Growth discusses a number of policy options available to governments to correct many of these flaws, warning that there is no single prescription to make each of the markets for the principal productive factors function properly. It points out that the lack of capital or technological prowess are not the toughest hurdles to overcome, but rather the laws and rules that make up each country’s institutional framework. For instance, Latin America’s supply of private credit—which is only a third of the size of that in developed countries, measured as a portion of GDP—is shackled not only by macroeconomic instability but by institutional deficiencies, such as the absence of adequate protection for creditors, legal caps on interest rates, government-mandated lending to certain sectors or activities and unpredictable judicial systems. The report also notes the development of other institutions, such as those working on microcredit, which have succeeded in granting small firms and individual entrepreneurs greater access to loans. Consolidating those achievements will require improvements in the regulation and the supervision of the region’s financial systems, as well as in the laws that govern them.

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