Wednesday, April 2, 2008

Latin America: Boosting Productivity Is the Key to Sustaining Growth

According to the World Economic Outlook, from the IMF, Latin America’s economic growth should decrease to 4.9% in 2007 from 5.5% in 2006. The slowdown is mostly associated with lower commodity prices and weaker global demand. The slowdown should affect the whole region with the exception of Brazil and Chile.

Latin countries have made considerable progress in strengthening macroeconomic policies, reducing their vulnerabilities to negative external shocks. However, the region will hardly decouple from the United States. In turn, Latin America would be hit harder than other regions in the event of a slowdown in the United States.

A key constraint on Latin growth is that the region display lower productivity than other regions. The challenge for 2007/08 period is to boost investment (to increase productivity) even at the cost of a current account deficit. In other words, the IMF urged Latin American governments to speed changes to labor laws and use revenue gains from commodity prices to diversify their economies. The report makes use of Zettlemeyer and Berg, Ostry and Zettlemeyer to support their claim that Latin countries need to raise their productivity levels.

As explained by Jeromin Zettlemeyer Latin America’s per capita output growth has been systematically lower not just than growth in East Asia and Pacific (EAP) but also South Asia (SA) and Middle East/North Africa (MENA). Only in the 1970-80 period did Latin America outperform South Asia and the Middle East. Even during the years of 2002-2005, a period of very strong growth among all emerging economies, Latin growth was the slowest among all developing regions.

For Berg, Ostry and Zettlemeyer, Latin growth since 1970 has been disappointing because of declines in total factor productivity (TFP). Between the 1970s and 1980s, the growth in capital, labor and human capital reached almost 3% per year but the negative TFP suggested that such a growth rate of output (around 5%) could not be sustainable in the next decade without any reforms. It is only during the 1990s, as displayed in figure 4, that total factor productivity (TFP) growth turned positive – but remained at a far lower level than proponents of structural reform expected.

The main message from the World Economic Outlook is that the “liberalize, stabilize and privatize” reforms of the 1990s did not transform Latin America into East Asia. The structural reform agenda of the late 1980s and early 1990s failed to bring about a convergence in Latin living standards with those of the advanced economies.

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