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

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

Much evidence indicates that Latin America lacks competitiveness

Growth has been disappointing

…while income gaps with more developed countries are widening

Factor productivity is not increasing

…but falling, especially in the poorest countries
Developed LATIN AMERICA Productivity growth in the 90s East Asia 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% Source: RES-IDB Calculations Annual growth of Total Factor Productivity (average 90's)

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

Latin America ranks low in the international rankings of competitiviness

…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. 2.5 3.0 3.5 4.0 4.5 5.0

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

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

…implying that their growth potential is low
Competitiveness gaps (given income level) and growth in the 1990s 0.10 China 0.08 Ireland 0.06 Singapore Chile Dominican Rep. 0.04 Argentina Uruguay Costa Rica 0.02 Colombia Paraguay Honduras Growth of GDP per capita, 0.00 Trinidad and Tobago Venezuela Jamaica -0.02 -0.04 Russia -0.06 -0.08 Ukraine -0.10 -1.5 -1 -0.5 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.

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

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

However, export competitiveness has improved substantially

…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 Rest of Africa Total Inflows of FDI by Region, (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).

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

Is it lack of credit?

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 5 10 15 20 25 30 35 Source: World Business Environment Survey (WBES) and IDB calculations.

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

…and it has paid off

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

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%

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.

Effective protection of creditor rights is low in many countries

…discouraging credit

…and increasing credit volatility

Strengthening creditor rights is essential to expand credit and improve competitiveness

Is it lack of human capital?

In Latin America, education is not growing fast enough

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

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) 5 10 15 20 25 30 35 40 45 50

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

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

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

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.

Is it lack of infrastructure?

Latin America is leader in infrastructure privatizations
Private Capital Participation in Infrastructure, US $ Mll 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.

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

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

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.

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

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%!

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

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

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

Is it lack of capacity to assimilate new technologies?

Latin America is not a laggard in the technological race
Internet Hosts and Personal Computers by Region, 1999 811 Developed Countries 353 Latin America 23 Internet Hosts (per 10,000 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).

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

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.

…but further progress may be more difficult
Education is concentrated in a few Training systems lack dynamism Credit is scarce for small firms Weak intellectual property rights Obstacles to business creation

Latin American governments hinder the creation of new firms

Strategies to accelerate the adoption of the new technologies
Focus on the big determinants: education and training, credit, property rights, obstacles to business creation But also: Improve environment to innovate (R&D, innovation clusters) Modernize industrial and investment policies.

Synthesis: What is missing:
Deeper credit markets Strengthen creditors protection Better use of existing human capital: Reduce payroll taxes and ease hiring and firing More education and training: More performance incentives, less centralization More and better infrastructure: Make regulation more independent and effective

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

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

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