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Competitiveness: The Business of Growth 2001 Report Economic and Social Progress in Latin America

This report by the Inter-American Development Bank Research Department examines the lack of competitiveness in Latin America, with disappointing growth and widening income gaps. It analyzes factors such as falling productivity and the high number of people living in poverty. The report also highlights the low international rankings of competitiveness for most Latin American countries, despite some exceptions. It explores the reasons behind this lack of competitiveness, including deficiencies in credit, human resources, infrastructure, and technology. The report concludes by discussing the improvements in export competitiveness and the increase in foreign direct investment in the region.

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Competitiveness: The Business of Growth 2001 Report Economic and Social Progress in Latin America

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  1. Competitiveness:The Business of Growth 2001 ReportEconomic and Social Progress in Latin America Inter-American Development Bank Research Department

  2. Much evidence indicates that Latin America lacks competitiveness

  3. Growth has been disappointing

  4. …while income gaps with more developed countries are widening

  5. Factor productivity is not increasing

  6. …but falling, especially in the poorest countries Developed LATIN AMERICA East Asia Productivity growth in the 90s Chile Argentina Uruguay Dominican Republic Peru Barbados Costa Rica Bolivia Brazil Guatemala Trinidad y Tobago Panama Ecuador Paraguay El Salvador Mexico Colombia Nicaragua Venezuela Honduras Jamaica Haiti -5% -4% -3% -2% -1% 0% 1% 2% 3% Annual growth of Total Factor Productivity (average 90's) Source: RES-IDB Calculations

  7. As a result, poverty is not declining Number of people living on less than $2 a day (%) 100 90 80 70 60 50 1987 1998 40 30 20 10 0 China Excluding South Asia Europe and Central Asia Middle East & Sub-Saharan North Africa Pacific East Asia and Africa American & Caribbean Latin Source: World Bank

  8. Latin America ranks low in the international rankings of competitiviness

  9. …although a few countries rank high Growth Competitiveness Index Ranking Chile 27 Costa Rica 35 T&T 38 Mexico 42 Brazil 44 Uruguay 46 Argentina 49 Dominican Rep. 50 Jamaica 52 Panama 53 Peru 55 El Salvador 58 Venezuela 62 Colombia 65 Guatemala 66 Bolivia 67 Ecuador 68 Honduras 70 Paraguay 72 Nicaragua 73 Source: World Economic Forum 2001. 5.0 2.5 3.0 3.5 4.0 4.5

  10. Chile 27 Costa Rica 35 T&T 38 1% Mexico 42 4% Brazil 44 1% 7% Uruguay 46 Argentina 17% 49 Dominican Rep. 50 Jamaica 52 7% Panama 53 Peru 2% 55 El Salvador 58 1% Venezuela 62 10% Colombia 12% 65 Guatemala 8% 66 Bolivia 67 5% Ecuador 68 7% Honduras 70 Paraguay 29% 72 Nicaragua 10% 73 5.0 2.5 3.0 3.5 4.0 4.5 …most rank low for their income levels Growth Competitiveness Index Ranking Source: World Economic Forum 2001.

  11. Also the case for the largest economies Growth Competitiveness Index Ranking 27 Chile 42 4% Mexico 1% 44 Brazil 49 Argentina 17% 55 Peru 2% Expected for income level 62 Venezuela Gap 10% 65 12% Colombia 3.5 4.0 4.5 5.0 Source: World Economic Forum 2001.

  12. …implying that their growth potential is low Competitiveness gaps (given income level) and growth in the 1990s 0.10 China 0.08 Ireland Singapore 0.06 Chile Dominican Rep. 0.04 Uruguay Argentina Costa Rica 0.02 Colombia Honduras Paraguay Growth of GDP per capita, 1990-99 Trinidad and Tobago 0.00 Venezuela Jamaica -0.02 -0.04 Russia -0.06 -0.08 Ukraine -0.10 -1.5 -1 -0.5 0 0.5 1 1.5 Relative competitiveness Note: Each dot represents a country. Source: IDB calculations based on World Bank (1999) and World Economic Forum (2001). See Appendix 1.3.

  13. The largest firms are too small Regional Comparison of the Size of Large Firms Developed countries 14,000,000 East Asia 3,982,546 Latin America 1,174,702 Brazil 6,280,798 Mexico 4,603,380 Chile 1,683,048 Argentina 1,326,523 Venezuela 735,729 Colombia 248,746 Peru 179,218 El Salvador 53,282 Costa Rica 46,597 Panama 36,748 Nicaragua 30,753 Honduras 28,288 Guatemala 18,018 10,000 100,000 1,000,000 10,000,000 100,000,000 Average value of assets for the 25 largest firms (Thousand US dollars) Source: Calculations RES-IDB based on WorldScope and América Economía

  14. 13% Brazil Mexico Chile Argentina 98% Venezuela 211% Colombia 164% Peru 100,000 1,000,000 10,000,000 …even for the size of the economies The size of “large” firms vis-a-vis the size of the economies Expected for economy’s size Gap Average assets of 25 largest firms (US$ Thsd) Source: IDB calculations based on WorldScope and America Economia.

  15. However, export competitiveness has improved substantially

  16. …and Latin America has become a magnet for foreign direct investment Developed Countries Average of country Latin-America ratios Average by region East Asia East Europe Rest of Asia Total Inflows of FDI by Region, 1997-99 Rest of Africa (Percent of GDP) Middle East and North Africa 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Source: IMF (2000).

  17. Is the lack of competitiveness due to deficiencies in the markets of the main productive factors? Credit Human resources Infrastructure Technology

  18. Is it lack of credit?

  19. Lack of financing is obstacle #1 to Latin American business development Major Obstacles to Business Development in Latin America (Percentage that thinks it is the principal obstacle) Financing Taxes and regulations Policy instability Inflation Exchange rate Street crime Infrastructure Practices against competition Corruption Organized crime Judiciary system 0 5 10 15 20 25 30 35 Source: World Business Environment Survey (WBES) and IDB calculations.

  20. Financial liberalization has taken big strides • Banks privatized • Most interest rates liberalized • Reserve requirements reduced • Capital adequacy ratios adopted in all countries • Supervision strengthened.

  21. …and it has paid off

  22. But it has not been enough:Credit is still scarce in Latin America

  23. Credit markets are underdeveloped Credit to private sector (as % of GDP) 14% Chile Expected for income level Gap Brazil 35% Colombia 93% Mexico 153% Argentina 188% Peru 172% Venezuela 316% 10% 20% 30% 40% 50% 60% 70% 80% 90%

  24. The main remaning problem is weak creditor protection • Governments often interfere in financial contracts: • Maximum interest rates (11 countries) • Mandatory investments (7 countries) • Credits targeted to some sectors (5 countries) • Collateral pledge/recovery is burdensome • Creditors poorly protected in the event of bankruptcy • Law is unstable/unclear or not enforced.

  25. Effective protection of creditor rights is low in many countries

  26. …discouraging credit

  27. …and increasing credit volatility

  28. Strengthening creditor rights is essential to expand credit and improve competitiveness

  29. Is it lack of human capital?

  30. In Latin America, education is not growing fast enough

  31. Workers are still concentrated in low-wage sectors, where cost competition is tough

  32. This makes some costs troublesome Contribution to Social Security by Employers and Employees 1999 (Percent of Gross Wages) Average OECD Germany Japan United States Latin America Average Argentina Uruguay Colombia Brazil Costa Rica Bolivia Mexico Peru Paraguay El Salvador Chile Ecuador Nicaragua Guatemala Venezuela Dominican Republic Guyana Panama Barbados Honduras Bahamas Trinidad & Tobago Haiti Jamaica Source: Social Security Administration (1999) 0 5 10 15 20 25 30 35 40 45 50

  33. Cost of Mandatory Job Security Provisions in Latin America and the Caribbean, 1999 (In monthly wages) This makes some costs troublesome Source: Ministries of Labor in Latin America and OECD(1999).

  34. What can be done? • Reduce payroll taxes and contributions • Strengthen the link between contributions and benefits • Instead of penalizing firms for firing • …make them support employees’ saving plans • Remove barriers to labor productivity

  35. Removing barriers to labor productivity:Education • The main problems: late enrolment and early drop outs • Main strategies: • demand incentives • education systems more responsive to the users

  36. Removing barriers to labor productivity:Training • The main problem: centralized training systems are too costly and ineffective • Main strategies: • Education policy to ease transition between school and work • Tax policies to encourage private training • Separate training regulation and provision • Condition public funds to the programs that improve trainees’ hiring possibilities.

  37. Is it lack of infrastructure?

  38. Latin America is leader in infrastructure privatizations Private Capital Participation in Infrastructure, 1990-99 US $ Mll 0 100 200 300 LATIN AMERICA East Asia and the Pacific Privatizations New investment Europe and Central Asia Operation Management with major private capital expenditure S. Asia Middle East Africa Source: PPI, Proyect Database, World Bank.

  39. …in all main infrastructure sectors Source: Private Participation in Infrastructure data base web page, World Bank (2001).

  40. 12% Chile 5% Mexico 39% Argentina 7% Brazil 17% Colombia Peru 12% 2.8 3.0 3.3 3.5 3.8 4.0 …but infrastructure is still below international standards Infrastructure Index: electricity, water, roads, telephones Expected for income level Gap * Includes electricity generation, acces to improved water source , paved roads and telephone mainlines.

  41. Privatization has brought benefits:THE CASE OF TELECOMMUNICATIONS Privatization has (with respect to previous trends): • Increased the number of lines by 7% • Reduced waiting lists 60% • Reduced faults per line 30% • Accommodated increased traffic: international traffic grows 15% yearly.

  42. Some countries have caught up with the international standard Telephone Mainlines and Mobile 36% Argentina 18% Chile Venezuela 1% Colombia 22% Brasil Expected for income level Gap 45% México Perú 8% 2.5 2.8 3.0 3.3 3.5 3.8 Source: IDB calculations based on ITU (2000)

  43. But problems remain:THE CASE OF TELECOMMUNICATIONS • The cost of local calls has increased 14% • Huge telephone penetration gaps remain • There are 5 times more telephones per capita in the developed world than in Latin America • Penetration in the richest quintile is 7-10 times higher than in the lowest quintile • Monopolies in the sector are obtaining returns of up to 45%!

  44. Privatization in electricity has been uneven Private investment in the electricity sector, 1990-99 Chile Argentina Brazil Panama Colombia Trinidad & Tobago El Salvador Divestiture Dominican Republic Jamaica Greenfield Projects Peru Operation Management with major private capital expenditure Bolivia Costa Rica Guatemala Nicaragua Honduras Venezuela Mexico Ecuador 0 50 100 150 200 250 300 350 400 450 US Dollar per capita Source: PPI database, World Bank (2000).

  45. 33% Chile 73% Argentina 24% Brazil 36% México 59% Colombia 61% Perú 2.5 2.8 3.0 3.3 3.5 3.8 4.0 …and much remains to be done Electricity generation Expected for income level Gap Source: IDB calculations based on World Bank WDI (2001)

  46. Privatization is not enough • Introduce competition as soon as possible • Grant independence to regulatory authority • Regulate according with institutional capabilities

  47. Is it lack of capacity to assimilate new technologies?

  48. Latin America is not a laggard in the technological race Internet Hosts and Personal Computers by Region, 1999 811 Developed Countries 353 Internet Hosts (per 10,000 23 Latin America people) 44 PCs (per 1,000 people) 20 East Asia 43 18 East Europe 50 6 Middle East 32 3 Africa 10 Log scale Source: ITU (2000).

  49. México 1% Argentina Chile Brazil Colombia Venezuela Peru 2.2 2.4 2.6 2.8 3.0 3.2 3.4 Internet adoption is going fast Expected for income level Internet Hosts/populatiom Source: IDB calculations based on ITU (2000)

  50. The initial stages of information technology adoption have been fast Because: • Enough market freedom • No lack of education among entrepreneurs • Up-to-date telecommunication systems in the large countries.

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