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A clear view of Latin America’s future: An interview with William Maloney

Latin Trade | 

Latin America urgently needs to decide how it will deal with a new breed of highly indebted, near insolvent zombie firms, and with a group of opaque banks that will come out of the 2020 recession. It is a disturbing prospect that adds to an already bleak picture of slow growth, inequality and increasing poverty.

Hard as it might be to hear, never expect anything but precise, accurate diagnostics, and clear, potent—and sometimes controversial—solutions, from William Maloney, Chief Economist for Latin America at the World Bank. A deep revision of the industry organization model, and of the longstanding barriers to rapid accumulation of human capital, are some of the recommendations he has to offer.

Maloney is not a novice in Latin America. Has been an analyst of regional issues for decades and his knowledge clearly shows in his interview with Latin Trade.

 In addition to the usual macro monitoring at the Bank, are there fundamental new issues that will be included in regional discussions this year?

 Aside from the ongoing macro-concerns about recovery and rising inflation, three issues, arising from or highlighted by COVID, are worrying. First, World Bank Pulse surveys suggest that in some countries of the region, up to 60% of firms say they are in arrears as a result of the pandemic. This could potentially dampen investments in capital and knowledge coming out of the recovery and, given the relatively slow insolvency resolution mechanisms in the region, leave a residual of zombie firms. Further, to the degree banks forbore debt payments, we have seen some de-transparentization of the financial sector where the level of non-performing loans is less easy to track. Both raise the potential for sector instability and we need to be vigilant on both fronts.

Second, LAC schools were closed more days than almost any other region leading to a loss of 1–1.5 years of schooling, with the biggest losses accruing to students without access to computers or connectivity. Unremedied, this will have long term adverse effects on growth and social equity. We need to keep schools open this year.

Third, even before COVID19, LAC was underperforming: from 2010–2019, the region grew 2.2% per year while the world grew at 3.1%. As discussed in our semi-annual report, this implies the region needs to make progress on a range of growth promoting reforms, but in a context of greater fiscal tightness.

What are the issues that need more attention from professional economists in the region? What topics still have significant theoretical or empirical knowledge gaps?

In the face of low growth and weak diversification, there are questions about the efficacy of the market-based model and calls for industrial policies, for instance, to alter the structure of LAC economies. This obscures longstanding questions about why we’ve performed so poorly relative to other countries with similar endowments and industries. For example, the U.S. and Japan both leveraged mining into dynamic diverse economies: Sumitomo, Hitachi and Fujitsu all began as copper companies, yet there are few analogous success stories in mining-rich LAC.2 Nor, despite decades of electronics assembly in Mexico have we produced a teléfono Azteca comparable to the Samsung Galaxy. We need to understand what’s missing from the existing model, what reforms are critical, and where we need to experiment more – in managerial upgrading, entrepreneurship eco-systems, articulating research institutions with the private sector, preparing companies to export, among other areas.

We need to understand the longstanding barriers to rapid accumulation of human capital. 30% of businesses report deficient worker skills as an impediment to growth, yet a recent UNESCO report shows we’re making only slow progress on basic education; only 30% of Latin American high school graduates meet the minimum standards in science.

In the context of fiscal tightness, we will need to understand what mechanisms will crowd in private sector participation to close the persistent infrastructure gap that impedes potential for increased exports and nearshoring.

More generally, improvements in the quality of governance would rebuild public trust in government and allow better use of fiscal resources for growth and equity purposes. Our estimates suggest that on average 4.4% of GDP is lost in poorly targeted (particularly energy) subsidies, outdated procurement practices, and weak human resource policy. This is a nascent agenda that needs to be fleshed out.

What are the main policy recommendations for the region on environment, and on the reduction of poverty and inequality?

The Bank is actively working on country-specific projects to adapt to the dislocations that many communities are facing as a result of changing climate. On the mitigation front, despite the fact that LAC contributes relatively little to global carbon emissions, we will need to prepare, both in policy and in certification mechanisms, to meet the likely Carbon Border Adjustment Measures on other trade restrictions, particularly in agriculture and in production from the Amazon. But the region has a comparative advantage in the green economy and hence opportunities to actively pursue. It has: the cleanest energy matrix in the world, which gives an edge to traditional sectors, and offers opportunities in new sectors such as green hydrogen; mining resources such as lithium that are central to the decarbonization agenda; forests that can transform the region into a global carbon sink; and, as the world first net food exporter, the potential to lead in low-emissions food. It is important to remember that in addition to shifting incentives, for instance through carbon taxes or redirecting extant energy subsidies towards green projects, both the adaptation and mitigation agendas are fundamentally technology-adoption agendas and hence improving the functioning of LAC’s innovation systems is an important complement.

On the distribution and poverty front, providing opportunities for upward advancement through increased access to well-functioning educational institutions remains central. Again, improving primary and secondary education, and facilitating access to vocational programs, and certifying the quality of tertiary programs are all critical.

What are the Bank’s main policy recommendations for the poorest country in the hemisphere, Haiti?

The deteriorating conditions since 2015 and the tragic events of 2021 have layered heightened risks of instability on top of the long-term conditions of fragility and poverty in Haiti. While recognizing that addressing core drivers of Haiti’s persistent fragility and development constraints is a multi-generational endeavor, the current context could potentially provide openings for dialogue and change and the emergence of new actors and agendas. The Bank is focusing on five main priority areas for policy action, namely: maintaining macroeconomic stability; improving statistics to better inform policies; rebuilding the social contract; creating greater economic opportunities and better jobs through private-sector-led growth; and reducing vulnerabilities and building resilience.

Read this article and more in Latin Trade’s March 2022 magazine issue, by clicking here.

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