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Stagnant Productivity Stems Growth

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Stagnant productivity is causing poor growth in Latin America and the Caribbean, the IDB says.

BY JANE BUSSEY

CANCUN, Mexico – Like seeking the Holy Grail, economists have long sought the explanation for the chronic poor performance of the economies in Latin America and the Caribbean.

A new report from the Inter-American Development Bank tackles this issue, arguing that the main impediment to higher economic growth is the failure to use existing productive resources efficiently. Devastating financial crises and the lack of investment have not been the major contributors to the gap in economic performance, according to the report, which was released Saturday during the annual meeting of the Inter-American Development Bank.

DISTURBING PICTURE

The report, now published as a book entitled The Age of Productivity: Transforming Economies from the Bottom Up, paints a disturbing picture of where the region stands relative to the rest of the world, but offered concrete proposals of how to overcome the stagnant growth. The per capita gross domestic product in the 17 countries in Latin America and the Caribbean included in the report has been falling relative to the United States since 1960 and today is only 70 percent relative to what it was at that time.

“What explains the lagging growth in the region is that the growth in productivity has stagnated,” says Santiago Levy, vice president of sectors and knowledge at the IDB.

“Without doubt the economic crises were important,” Levy says “But even without these crises, the region is growing more slowly than the rest of the world because of the lagging growth in productivity.”

PRODUCTIVITY LAGGARD

Carmen Pagés-Serra, an IDB economist who was editor of the report, says that if the region had reached a productivity rate equal to the United States, the countries would be twice as wealthy today on the average as they actually are. Chile was the only country in the region that increased its productivity against the United States in the past five decades. Of the 76 countries studied in this report, half of the 20 worst performing countries in terms of productivity were from Latin America and the Caribbean.

Pagés-Serra says that while countries focus on boosting exports to increase their economic growth, boosting productivity – producing the same goods or the same service in less time with fewer resources – would add more growth to countries.

The IDB study argues that government policies and business practices could boost productivity, factors that lie within the control of governments, policymakers and corporations.

PRODUCTIVITY BOOSTERS

Improving transportation, improving commerce and streamlining the tax process are all steps that have immediate affects on productivity, the report says. The lack of coordination for investment and infrastructure projects can also hold back productivity, Pagés-Serra says, citing the chicken-and-egg dilemma of hotels not building in a new resort area without an airport, while the government hesitates to construct the airport without the hotel investment.

Another reasons for the low productivity is the proliferation of micro-businesses – often just one person – that make up the Latin American economies. “Latin America has more people working on their own than any other region,” Pagés-Serra says, adding that more medium-sized and large companies are more productive because the companies can tap into credit markets to expand and also adopt innovative techniques in manufacturing and services. Informal companies have an advantage against larger companies because they pay no taxes, but they contribute much less productivity growth to the economy.

MISGUIDED POLICIES

The authors also cite misguided social policy, noting that when governments offer remedial health care services, this can act to dissuade workers from seeking full-time jobs, while increasing the tax burdens of larger companies, which have to pay for these parallel health services.

The report tries to dislodge the idea that countries in the region have fallen behind because of lack of investment. Levy also notes that the problems lie within the countries since Mexicans who migrate to the United States increase their productivity without any extra training.

Since the start of the global era, countries seek to become more competitive, but this IDB report said that higher productivity would lead to increased standards of living.

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