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Latin America: Boosting Innovation Investments is Key to Sustained Growth

September 9, 2010

  • Americas Conference looks at innovation opportunities to boost the region's prosperity
  • World Bank experts to present report on commodity dependence and regional economic prospects

WASHINGTON DC, September 9, 2010 - Long considered the silent engine of prosperity in the rich world, innovation is roaring onto Latin America's economic scene as policy makers rapidly realize its critical role in spurring sustained wealth and growth in the region.

An influential group of Latin American presidents, policy makers, experts and business leaders will convene in Miami next week to discuss precisely how to increase the region's investments in innovation, which is lagging far behind the world's average. OECD countries spend around 1 percent of GDP on research and development, the cornerstone of innovation, while Latin American economies devote to it only about half of that.

Government and business leaders are becoming increasingly aware of the risks of not injecting additional funds into innovation initiatives, experts say.

Some adverse consequences of keeping innovation in the backburner include less vigorous growth, diminished productivity and loss of markets, which in turn have an impact on job creation and salaries across the board, notes World Bank innovation expert Jose Luis Guasch.

"A glaring consequence of neglecting innovation is that the region's productivity is lagging behind the United States and emerging Asian economies, which can erode export growth," says Guasch, who has been advising Latin American governments and business on good innovation practices.

This is particularly worrisome in Latin America's current juncture where a great deal of the region's recovery and growth –expected to surpass 5 percent in 2010- can be credited to an increased demand for commodities from Asia and China in particular.

Right now boosting productivity and adding value in the production chain –a seal of innovation- may not be seen as pressing issues, but once the commodity boom peaks and the currently high prices stabilize the story can be totally different, warns Guasch.

"Latin America's challenge is to invest the windfall profits from the export bonanza in human capital and innovation to bring people's standards of living on a par with OECD's countries and some emerging economies in Asia," the expert argues echoing an upcoming commodity flagship report, to be launched prior to next week's conference.

Chile and Mexico are the only two Latin American countries to have joined the OECD's exclusive club of nations boasting some of the highest per capita GDP on the planet.

The rest of the region has had difficulty catching up to the growth rate of emerging economies such as the Asian Tigers, which jumped from 15 to 60 points as a percentage of the United State's GDP while Latin America's remained at 25 percent over the last 50 years.

Innovation, an unappealing term outside its economic context, has become a household name when attached to specific success stories around the world.

Apple, Google, Microsoft, among many others, are often cited as innovators that have contributed to changing the way we communicate and to the fortune of their companies and economies in the rich North. Further south, success stories are more difficult to come by, but a few stand out and have become models of innovation in Latin America and beyond, experts say.

Chile discovered the beauty of innovation in the eighties when salmon farms began replacing the less cost-efficient traditional methods of catching the fish in Chile's Patagonian lakes. These days Chile produces about 31percent of the world's farmed salmon with revenues of $2.1 billion in 2009.

Innovation however is not only about adding value to raw material production by incorporating a manufacture value. Recently, biotechnology has been adopted to improve production of traditional natural resources in Chile.

Leaching in Chile's vast cooper mines is now done with a genetically engineered bacteria that has replaced the traditional method that involves pouring a mix of water and acid to get through the various layers of rock covering the copper.

"This is far more efficient and environmentally friendly than obtaining the copper via traditional leaching and has a cascading innovation effect through the whole industry," noted Jose Pablo Arellano, chief CIEPLAN economist and former CEO of Coldelco, Chile's mining giant.

Chile's embrace of innovation has reached beyond the public sphere to bring into the mix the private sector as well, with a little help from the National Council for Innovation.

As a result of these efforts there is an increased awareness of the importance of innovation for a country to achieve continued success and to promote the wellbeing of its citizens, notes Arellano.

"The most successful countries have done this as a private-public effort where business, government and academia join efforts to produce the best results," says Arellano.

In other parts of Latin America innovation is also being pursued at full speed. Mexico, for instance, has strengthened research agency CONACYT while other countries have created or expanded their science and technology ministries. Brazil's Agricultural Research Corporation Embrapa has been credited with boosting farming in the country's savannas -vast lands that a few years ago were deemed unsuitable for farming.

Despite these efforts, innovation in the region is by and large a disparate group of individual initiatives rather than a strategic and comprehensive public policy program, so Bank and leading regional experts suggest that more needs to be done to have a viable system in place.

Special attention should be given to the transfer of knowledge to small and medium businesses, known as Pymes, which make up 70 percent of the total business universe in the region.

"Spurring innovation in Pymes is key to pushing the change agenda in Latin America as they are the main production and source for job creation," says Guasch.

In the meantime, "innovation" is rapidly transforming itself into a word that can be easily found in the lexicon of government and business leaders.