While Latin America has reason to be proud of its economic growth in recent years, the region needs to implement a series of reforms to make it much more competitive.
Here are our 10 top recommendations:
1. Improve Institutions. As the Swiss-based World Economic Forum says: “Excessive bureaucracy and red tape, overregulation, corruption, dishonesty in dealing with public contracts, lack of transparency and trustworthiness, and the political dependence of the judicial system impose significant economic costs to businesses and slow the process of economic development.” WEF is speaking in general terms, but these complaints clearly describe most of Latin America today.
2. Lower Corruption. Despite the economic growth in recent years, corruption remains at dangerously high levels throughout Latin America. Part of the problem is the lack of a professional civil service, but the region also has weak law enforcement and judiciaries that enable corrupt officials to act with impunity.
3. Better Education. Quality higher education and training are crucial for economies that want to move up the value chain beyond simple production processes and products, WEF rightly points out. Improving Latin America’s wealth starts with decent education for the majority that today can’t afford private schools.
4. Improve Security. Crime and insecurity remain a major problem in most countries in Latin America. Part of the problem is corrupt law enforcement, but also the fact that even honest police officers are underpaid and under-trained. The insecurity is adding an unnecessary cost to the private sector in the form of private security, higher insurance premiums and losses from theft.
5. Improve Infrastructure. The cost of exporting from Latin America is unnecessarily high because of inefficiencies in infrastructure. A study by the Inter-American Development Bank shows that the region’s exports to the United States pay freight rates that are, on average, 70 percent higher than those from the Netherlands, in part because of inefficient ports. If those ports were to improve to U.S. levels, that would lower costs about 20 percent. But seaports aren’t the only problem. Latin America also suffers from inadequate roads (especially in the case of Colombia) and airports (especially in the case of Brazil). Part of the problem is a lack of investment by the region’s governments. Latin America currently invests only about 2 percent of its GDP on infrastructure instead of 5-6 percent, as it needs to, as Luis Alvarez Satorre, president for Latin America, Europe, Middle East and Africa for British Telecom, has pointed out.
6. Liberalize Imports. Latin America needs to remove protectionist barriers to imports. Countries such as Brazil and Argentina (which have significant protectionist measures in place against imports) are only hurting their own consumers and companies, who have to pay more for products that aren’t locally produced. If Latin America were to reduce tariff rates to U.S. levels, that would reduce transport costs by 9 percent, the IDB estimates.
7. Reduce & Simplify Taxes. Latin America needs to lower its tax rates from today’s average of 27. 3 percent (higher than the 25 percent worldwide average, according to KPMG) to 17 percent, like countries such as Chile and Singapore have implemented. Meanwhile, the tax system needs to be dramatically improved. It takes an average of 187 hours per year to prepare, file and pay corporate taxes in the United States, but the average in Latin America is 544 hours, with Brazil setting a world record of 2,600 hours, according to a Latin Business Chronicle analysis of data from the World Bank.
8. Improve Health Systems. Latin America should provide universal health coverage for its citizens. However, rather than just beefing up public hospitals, governments should provide coverage at both public and private hospitals. Latin America’s private hospitals generally are far superior to their public counterparts. As WEF points out: “A healthy workforce is vital to a country’s competitiveness and productivity.”
9. More Privatizations. Although Latin America already went through a significant privatization process in the 1990s, it still has several state assets that can easily be sold off, helping to finance social spending. There’s no reason why, for example, Chile’s copper giant Codelco (the world’s largest copper producer) should remain in state hands. Meanwhile, Brazil can easily sell off Banco do Brasil (Latin America’s largest bank) as well as more of its shares in Petrobras (Latin America’s largest company).
10. More FTAs. Last, but not least, Latin America needs to increase the number of free trade agreements it has with the outside world. Brazil again remains a laggard and a stark contrast to countries such as Mexico and Chile, which have seen their exports and economies benefit from a large number of FTAs within and outside of the region.
These recommendations will open up markets and let entrepreneurs thrive, thus reducing poverty and boosting wealth.
About the Author: Joachim Bamrud is the executive editor of the Latin Trade Group and a former editor-in-chief of Latin Business Chronicle and Latin Trade magazine.