With economic growth in Latin America set to disappoint over the next year, the focus on reforms that that would increase productivity in the region has become ever sharper.
José Juan Ruiz, the IADB’s chief economist, told Emerging Markets on Friday that his institution had developed a model that estimated the gains from these reforms.
It found that if Latin America were able to close the gap in total factor productivity with other emerging countries, such as the Asian economies, the increase in growth every year would be 1.8 percentage points.
Ruiz said that even more interesting is what would happen if all countries implemented individual reforms at the same time. “We would get an additional 0.5% which would bring the dividend to 2.3%. This would put Latin America on an equal footing with Asia,” he said.
Ruiz said there were numerous components, but the keys were investment in education, health and social inclusion and infrastructure, enhanced integration into world economy, and labour reform.
The critical issues on the list most often mentioned are education and infrastructure. On the education point, the issue is not coverage, with Latin America providing near universal schooling, but quality and finding ways in which education actually meshes with labour demands.
In Chile, deputy finance minister Alejandro Micco said “improving education at every level, from initial to university and technical schools, is critical if we are to remain competitive and encourage innovation”.
Closing the gap
Chile modified its tax system last year in order to fund a sweeping education reform. The goal is to increase the tax haul from 18% to 21% of GDP. The 2015 budget includes a 10.2% in increase in education spending.
Requiring even greater investment in the region is infrastructure and Ruiz said it was not only about airports, ports and roads. The numbers are staggering, with multilateral and investment banks agreeing that the region needs to invest more than 3% of GDP annually on infrastructure if it hopes to close the gap with emerging economies in Asia.
“Latin America is the most urbanised region in the emerging world, with nearly 80% of people living in cities. Cities has grown very fast in the last 20 years and they don’t have the infrastructure to become sustainable cities in terms of productivity,” he said.
The IADB forecasts growth in the region this year at 2.2%. Ruiz said there would be little improvement in the external factors. “When you have a friendly external environment, Latin America grows at something like 5%, but when you have a less friendly environment it begins to grow below potential, at 1% or 2% or even negative.
The main drivers are commodity prices, external interest rates and growth of the world economy. “Today we do not have any reason to assume that these three factors will be stronger than they have been recently,” he said.