Latin America: Region has come a long way but increased productivity key to continued growth.

I have often been accused of being an optimist.

And yes, I do think this is Latin America’s moment.  

A Mexican heads OECD, a Brazilian now heads the World Trade Organization; three countries of the region are G20 members; Mexico and Chile are OECD members and others (Colombia and Peru) are on the path to join, the region is a source of economic stability and considered part of the solution to serious global challenges such as food crisis and global climate change.

Latin America has come a long way.  

The issue is how to continue to move forward, because there is a sense that the region can do better.

Good evening, everyone. Before making a few points on how I see the region evolving, I want to thank the Woodrow Wilson Center for this invitation.

It is an honor to address this very distinguished group of Latin American experts.  President Tabare Vazquez, Ambassador Eduardo Medina Mora, it is great to see you all.

Latin America has come a long way

Between 2003 and 2011, about 70 million Latin Americans were taken out of moderate poverty and 75 million joined the ranks of the middle class.  Deep inequality, that Achilles heel of LAC, declined in the majority of countries. This is a remarkable achievement.

During that time, strong economic and financial policies, and favorable external tailwinds of a commodity super-cycle helped the Region recover quickly and well from the global economic crisis.  LAC grew at an average of 4.2 since 2003.  This year it is expected to grow by 3.5 percent, an improvement from last year’s 3 percent.  Some grew faster, a few slower. 

But overall, clearly the region has come a long way, this time it won a decade, when compared to its not so distant past of the lost decades.

Yet the region can do much better

For the nearly half of Latin Americans who are still moderately poor (17 percent) or not poor but vulnerable – to fall back into poverty with any shock – (35 percent), their expectations for shared prosperity are still to be met.

For this large segment of the Latin American population the problem is that progress is elusive not only for them, but even for their children.  

As our middle class report from last year reminded us, despite substantial upward income movements within generations, inter-generational mobility remains limited in Latin America.  Who your parents are, still determines substantially who you will be, limiting equality of opportunities. 

Where you live in Latin America also matters. While poverty and inequality has come down over the decade, the gap – in the same country – between the poorer and richer regions has not narrowed.   Chiapas and Oaxaca are still much poorer than Districto Federal or Nuevo Leon, and Alagoas and Maranhao in Brazil have more in common with Chiapas and Oaxaca than say Sao Paolo or Santa Catarina.  Same in Argentina where Buenos Aires has a per capita income at least 10 times the one from Formosa or Santiago del Estero.

Moreover, prosperity today cannot be at the expense of future opportunities available to future generations.  Air that is not clean today will have effects on the future health of our children.  Poor sanitation now will cause growth problems in future generations.  Disappearing biodiversity is lost forever.

In promoting shared prosperity and inter-generational equality of opportunity I am convinced that the region can, and must, do better.

And finally the remarkable past decade notwithstanding, when we take a long view, the region’s growth – with some exceptions – has not been high or sustained enough to bring about per capita income convergence with the developed countries.  Since the 1950s the per capita income of the region was overtaken by Japan, in the 1970s by the Asian tigers, and by the East Asian middle-income countries from the early 2000s.   As a result, the region has stagnated at around a third of the US per capita income throughout the last century. This is what our Chief Economist, Augusto de la Torre, has dubbed the One Hundred Years of Growth Solitude in Latin America.

Compared to industrialized nations, the region can do much better.

So should LAC then follow one of the Asian models?

No, it would not be a good idea; Latin America must chart its own course.

A couple of features stand out. 

First, between 2004 and 2011, domestic demand in South America and Mexico rose from an average of less than 98 percent to about 105 percent of GDP, while in South East Asia it actually fell slightly, by 1 percentage point, to 94 from 95 percent of GDP.

The external counterpart of its domestic demand-reliant, low savings growth is Latin America’s tendency to generate current account deficits (as opposed to strong surpluses associated with South East Asia’s export-led growth), which have been largely financed by foreign direct investment.

Second, conventional wisdom suggests that without a strong manufacturing sector, a country’s growth is impaired.  The truth is that we are finding that the competitiveness of manufacturing is closely tied to that of services.  This is good for urbanizing, middle income societies. In the case of many Latin American countries, the service sector is adding value and employing highly educated workers. 

These features suggest that Latin America’s path to strong growth should continue to make a smart use of foreign capital to substitute for low savings and to improve the quality of investment.  In today’s democratic Latin America, the quest for competitiveness based on cheap labor and undervalued exchange rates looks politically unfeasible and economically suboptimal.  A better model to follow may be that of Australia or Canada, commodity-rich countries that have found a way to higher growth evolving around domestic demand.

But if we want to do better, greater productivity will be the key.

Some point to stronger local currencies for the region’s growing competitive challenge.  While this is clearly a factor (hopefully a short term one) behind some Latin American countries’ lower competitiveness, so are structural factors: sluggish productivity and lack of dynamism at the firm level.

To sustain growth, the Region needs to increase productivity and adapt the productive structures to changing circumstances.   In some countries, improving logistics will be essential, in others modernizing infrastructure for the global market will make the difference.  In most countries the quality of education needs to improve.  In many others, bringing greater competition to service delivery will be critical.  In all, the state would need to be more efficient in leveling the playing field and providing opportunities and services to all citizens.

While the heterogeneity within the region and within countries suggests that there may be different reasons behind slow convergence, the responses to these questions can not overshadow the main message.

In fact, the region will need to find its own engines of growth by increasing productivity in sectors of the economy beyond commodities to continue the progress made in the social areas.

Conclusion

As some of you may know, I come from Turkey.  One might think that my country and Latin America have little in common other than a love of strong coffee and a passion for football.  But after a year and half as World Bank Vice President for this great region, it is clear to me that we hold much in common:  We don’t want to share poverty, we want to share prosperity.  We want to converge with the developed world, without repeating their mistakes.

And yes, I am an optimist: Latin America can do better, and will do better.

Thanks again for inviting me and I look forward to answering your questions.