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Speeches & Transcripts

“Latin America: Facing the Challenge of Productivity to Sustain Progress”

May 11, 2012

Hasan Tuluy Seventh Annual Latin America Conference Miami, United States

As Prepared for Delivery

•Director Susan Kaufman Purcell, thank you very much. Good morning ladies and gentlemen. It is a great pleasure to be here with all of you this morning. It is great to be back in Miami - the most Latin American city in the U.S. - and it is great to be outside Miami airport, where I have spent many pleasurable hours connecting with cities in the region.
•It is now a little over four months since I took on the job as World Bank VP for Latin America and the Caribbean. In my travels, after dozens of meetings with presidents, ministers, CEOs from the private sector, and Civil Society leaders from the majority of countries, I am getting a better understanding of this complex and fascinating region.
•I therefore welcome and appreciate this opportunity to share with you some of my thoughts at this promising juncture for Latin America.
•During my travels, I’ve gotten a sense that there is a growing pragmatism in the region, anchored in the fact that sound economic policies, coupled with socially inclusive investments, have demonstrated that they work, and that together generate a virtuous cycle.
•After a decade of consistent and disciplined implementation of sound economic and social policy, together with the consolidation of critical institutions, we can confidently say that Latin America today is, overall, more stable, more equitable and growing.
•The region is more stable both politically and economically. Stronger, contested, and consolidated democracies - with few exceptions - are now the rule across the region.
•Macroeconomic and financial stability and resilience, built on fiscal discipline, and strong financial institutions, proved their strength during the recent global crisis. Inflation rates have been maintained in single digits and are expected to remain, on average, around 6.25% this year.
•Latin America is also less poor, more equitable, and with a growing middle class. By lifting 73 million people from moderate poverty while substantially reducing inequality – at a time when inequality is rising in China – and expanding the middle class (today almost one in three Latin American citizen are middle class), the region has clearly demonstrated that creating more opportunities for progress benefits the economy and vice-versa.
•Latin America has come a long way in developing safety nets. Home-grown Conditional Cash Transfers (CCTs) have become models to other countries, other Regions.
•LAC has also experienced important gains in gender equality and economic opportunities: 70m more women are in the labor force than in 1980; and in Latin America today, there are more girls than boys in secondary and tertiary education.
•And it is also a growing region. In the past decade (between 2003 and 2011), the average economic growth rate was close to 4%. In spite of the global slowdown, we expect LAC will continue to grow on average, between 3.5 and 4% in 2012 and 2013. Some countries like Panama and Colombia are projected to grow at 7% and 4.7%.
•Such robust growth rates – rates we have seen from Asian Tiger rates -- suggest a promising sign of effective decoupling from the downturns experienced by rich countries of Europe, Japan and North America.
•With robust growth, on average GDP per capita increased by almost 25 percent in the past decade (2002-2011), with the top six performers (Panama, Dominican Republic, Peru, Uruguay, Argentina and Chile) seeing an increase in per capita incomes of more than 40 percent.
•Foreign direct investment to Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay and Venezuela increased exponentially – from $40 billion in 2003 to nearly $140 billion last year.
•These are all good news.
•Yet, despite these impressive outcomes, important challenges remain, some external to the region, many internal and structural in nature. This is the unfinished agenda for Latin America.
•In a nutshell the challenge is to preserve stability in an integrated and volatile world, consolidate recent social gains, and continue to reduce social inequality and increase the region’s productivity and competitiveness to make growth sustainable.
Preserving Stability: Coping with External Volatility and Confronting Global Threats
•Considering the prolonged Euro-Zone debt crisis, the anemic U.S. recovery, and the prospects of a slower growth in Asia, countries in LAC will need to adapt quickly to changing global circumstances.
•Ironically, the region’s successes have created new challenges. For example the region needs to learn how to cope with global financial volatility and to manage and mitigate such external risks.
•Last month, our Chief Economist released his biannual report that highlighted the risks that come from significant increases in volatile capital flows. Mutual fund flows, for instance, saw an eight-fold rise between early 2011 and 2012 with repercussions on exchange rates and asset prices in key countries. An example in the report shows the potential magnitude of these risks: If one of the large international asset management companies, Vanguard for example, were to move 1% of its mutual funds to Colombia, that would amount to a capital inflow equivalent to 6% of that country’s GDP.
•But as the report also highlights, these risk factor could, but need not, hurt the region, provided that adequate mitigating measures are put in place. Exposure to external volatility does not necessarily mean more vulnerability. On the contrary, many countries – from Brazil, to Chile, or Peru, are highly open and exposed (integrated) to the global economy but still maintain low vulnerability, thanks to their healthy levels of foreign reserves and exchange rate flexibility and to their capacity to respond to external shocks from various fronts, including fiscal, monetary and macro-prudential.
•I commented on the good overall (average) performance. Intra-regional heterogeneity however, presents an additional challenge. Central America and notably the Caribbean had a poor growth performance before, during, and after the global crisis. Their levels of poverty reduction have been even weaker and they remain vulnerable to the growing threat of climate change impacts.
•In addition, Crime & violence poses a critical development challenge with potential destabilization effects in these countries. Links to drug trafficking and organized crime have made this a real challenge of citizen security, and a real development problem. Crime and homicide rates in Central American countries are among the highest in the world (82 homicides per 100,000 hab. per year in Honduras vs. only 1 in Spain). The aggregate cost of crime in Central America is today estimated to be as high as 8% of GDP.
Keep Reducing Inequality and Give Opportunity for All
•In spite of progress, LAC remains the most unequal region of the world. 149 million people – almost 1 of every 3 Latin Americans (28%) – still live below USD 4/day.
•Today even the most equal country in LAC, Trinidad & Tobago (Gini 0.4) is more unequal than the most unequal OECD country, Turkey (Gini 0.409). And disparities are even more profound among most vulnerable groups, such as indigenous people and rural women.
•Intergenerational mobility remains low, and middle classes continue to opt out of social contract (switch to private education, security, etc.)
•Overall social spending in Latin America remains relatively low and not particularly progressive. It is, in fact, biased in favor of the rich. In Honduras, for instance, the poorest quintile receives 57% of what the richest quintile receives.
•Looking forward, even those successful Cash Transfer Programs need to gradually be transformed and shift from social assistance towards social insurance systems and employability programs.
•LAC countries, except Brazil, have some of the lightest tax burdens. Less than 4% of state revenue comes from personal income taxes, as compared to 27% in industrialized nations. Before direct taxes and transfers, the Gini coefficient of many European countries is not very different from LAC’s.
•There is still a lot to be done in this area.
Increasing Productivity and Competiveness for Sustained Growth
•On several occasions, in opinion pieces and other speeches, I said that if the region is to make of this decade “the decade of Latin America and the Caribbean”, the key challenge will be to tackle its low levels of productivity and competitiveness. This is what I call “the Battle of Productivity.”
•The strong performance of the past decade should not mask the fact that LAC’s growth performance over the 20th century was rather dismal – per capita income has stagnated at 30% of the US. In contrast, East Asian tigers’ per capita income – like China, Singapore or Korea – increased from 15% to more than 70% in the last 50 years.
•Dependence on natural resources – the region’s comparative advantage – is still significant. The issue is how to build on this wealth, avoid the Dutch-disease, and break the reliance on “high volume, low value-added” production and move to higher value added chains.
•Low productivity is the root cause of Latin America’s chronic low-growth; not just in manufacturing but also in service industries like construction, information technology and logistics. But this can be changed; and challenges can be turned into opportunities to leapfrog ahead.
•Addressing the logistics and infrastructure gaps. Today the costs of logistics in LAC are 2 to 4 times the average in OECD countries or Tigers. Better logistics can play a key role to become more competitive. LAC's installed electricity capacity was about 17% below that of the Tigers in the 1980s. Now it is almost 50% below. And yet demand is projected to grow at nearly twice the GDP growth, calling for investments of some $20 billion per annum. LAC can build greener, more competitive and sustainable energy sources.
•Low productivity also reflects under-investment in innovation; Brazilian firms, for example, spend around 4 percent on 'intangible assets' compared to as much as 12-13 percent in the UK, US and Japan. Growing innovation, R & D will also make LAC more productive and competitive.
•Another factor is the persistence of a long tail of small, poorly performing firms. In Colombia, for example, the most productive manufacturing firms (90th percentile) are 5 times more productive than the least productive firms (10th percentile) – and much of this difference is explained by firm size: large firms are 3 times more productive than small ones. Reallocating resources to larger, more efficient firms would almost double productivity in manufacturing in most Latin American countries and almost triple productivity in service industries in Mexico and Brazil.
•Human capital is another important constraint to the region. The percentage of population with tertiary education rose from 9.5% in 1990 to 14.2% in 2009 in LAC; while the Tigers grew from 10 to 20% in the same period. And the quality and relevance of education - for employability - needs to be dramatically improved.
•Agricultural productivity is an exception to this trend. LAC has experienced the highest growth in agricultural productivity among developing regions (except for China and economies in transition). From 1961 to 2007, productivity growth in agriculture was highest in Costa Rica (3.7% per year), followed by Argentina (2.2%), Venezuela, Colombia, and Mexico (all about 2%), and Uruguay (1%). This is a good example to follow.
•And of course, there is the need to mobilize additional investment. Average investment during the past decade in LAC was only around 20% of GDP, compared to 29% in East Asia. We cannot count on public investment alone – domestic and foreign private investment plays an important role, not only to increase and leverage capital, but also to attract know-how and spur innovation.
The Time to Respond Effectively is Now
•After confronting recurrent debt crises in the 80's and 90's, LAC countries put in place comprehensive reforms that made them fiscally sound, credible and able to adopt countercyclical measures when necessary.
•Now is the time to transform the State, a State that delivers, a State that is efficient in service delivery not only in the capitals but at sub-national level, a State that responds to citizen’s demands and better targets transfers to the people that most need that support.
•A smart State, that supports innovation, high quality education, facilitates private sector expansion and levels the playing field for everybody in society.
•A State that increases tax collection because citizens realize that it delivers for them.
•Smaller countries —because of scale- could reinforce integration, - both of physical and social infrastructure, but also of the policy and regulatory framework- addressing common issues in an integrated fashion (Crime & violence, disaster management, competitiveness).
•And of course, creating and maintaining those intangible assets that foster and secure investment and growth: clear and predictable rules, simplified regulations and strong and credible institutions.
Bound to Succeed
•Over the past decade LAC has demonstrated that macro financial discipline, growth promotion, and delivering socially inclusive policies are compatible and possible, a balance that today Europe is still searching for.
•By focusing on the productivity agenda, by tackling the above challenges, LAC countries can seize the opportunities and break through “the middle income trap” and assure continued growth with opportunities.
•LAC’s global prominence and influence (G20, Rio+20) will permit the region to become part of the solution to many key global challenges: food crises, climate change.
•In an environment of expanding inclusivity and democracy, future progress toward productivity and competitiveness is bound to stick and be more sustainable in the long run.
•We at the Bank – together with our regional partners – believe that this can indeed be the “Decade of LAC” and are looking forward to continue our contributions to the region’s search for more and better opportunities for all.
Thank you