Over the past three years, Latin America has enjoyed its strongest cycle of economic growth since the 1970s, with an average growth rate of more than 4%. However, it continues to be the region with the most inequality in the entire world. It suffers the disgrace of having more than 200 million people living in conditions of poverty. How can this reality be changed?
To answer this question, more than 400 political and corporate leaders attended the World Economic Forum (WEF) in Santiago de Chile at the end of April. They agreed that the principal challenge of Latin American nations — and one of the key motors for overcoming this inequality — is to democratize quality education. They also stressed the importance of making stronger investments in infrastructure, and in research and development, without losing focus on reforms aimed at economic deregulation. Their goals are embodied in the so-called Santiago Consensus, a road map for promoting economic growth and improving the distribution of wealth.
Ever since the end of the 1980s, a term frequently heard in policy circles is “Washington Consensus,” meaning a paradigm for promoting development based on orderly growth, healthy fiscal accounts, low inflation and trade deregulation. Today’s models for assisting free enterprise, such as the World Economic Forum (WEF) in Davos, Switzerland, incorporate an additional factor – social policy.
In the debates about Latin America at this year’s WEF, much of the discussion was about “social change” and “equitable productivity.” “We really need to build social policies within the interior of the region,” said Pamela Cox, the World Bank’s vice-president for Latin America and the Caribbean. José Grubisich, managing director of Braskem, the Brazilian petrochemical giant, noted that “It is not enough simply to bring growth to our economies. We must focus on how to provide macroeconomic stability, and combine growth and investment in order to reduce poverty.” Grubisich is also the WEF’s co-president for Latin America.
Over the past three years, Latin America has continued to be the star pupil for the Washington approach, achieving growth rates that average above 4%. This compares with annual growth rates of only 2.2% between 1980 and 2002. Yet the region still suffers from a heavy burden. For the last three years, estimates of poverty and indigence (extreme poverty) have trended downward but the latest available data from 2005 showed that 39.8% of the population in Latin America and the Caribbean still lived in poverty – or about 209 million people. Meanwhile, 15.4% of the population, or 81 million people, lived in extreme poverty. The good news is that this represents a decline of more than 4 percentage points from 2002, when 44% of the population was poor and 19.4% lived in extreme poverty.
Just before this year’s meeting, the WEF published LatinAmerica@Risk, a report prepared by more than 20 corporate figures, academic institutions and think tanks. The report said that social and economic inequality is “the greatest global risk the region faces.” According to the WEF, globalization has led to greater real inequalities, measured by stratification of income, than in faster growing regions elsewhere around the world.
In its press release, the WEF confirmed that “many Latin Americans continue to suspect that global prosperity is leaving them behind. This sort of view remains despite the declining rate of extreme poverty.” According to LatinAmerica@Risk, inequality in the region is a complex phenomenon that has deep historic routes. However, the report also notes that “there are no unmovable structures that prevent the region from following in the economic footsteps of successful developing countries in Asia.”
What steps must be taken? At the WEF, 90.4% of all corporate executives, politicians and academics from America, Europe and Asia said that education was the main challenge for the countries of the region. Next in importance, 65.4% pointed to the “protection of natural ecosystems,” while 63.5% cited “private- and public-sector promotion of investments in research and development” as critical.
Rebeca Grynspan, Latin American regional director of the United Nations Development Program, emphasized the responsibility of the business community in the realm of education. “The private sector needs to place education much higher up on its agenda,” she said. “Not only is there not enough investment in education in the region, but there is also the problem of unequal resources between well-off communities and lower-income communities. This factor is expanding the gap between the rich and the poor throughout Latin America.” Many participants at the Forum pointed to the example of Ireland. Ever since the 1950s, investment in education in Ireland has been a key to sustaining its new requirements for human capital, which eventually led to strong inflows of foreign direct investment in information technology, financial services and pharmaceuticals.
Although Latin American poverty rates as a whole have been cut, LatinAmerica@Risk notes that the perception remains that inequality is growing. According to data from Latinobarómetro, which measures public opinion about attitudes, behavior and social values in the region, 70% of the total population characterizes income distribution as either “unjust” or “very unjust.”
Companies have to invest in high-quality, efficient infrastructure — the kinds of investments that have an impact on economic growth and reduce poverty and inequality. In a report entitled, “A comparative analysis of the attractiveness of private-sector infrastructure investments,” analysts studied 12 countries in Latin America. They concluded that Chile, Brazil and Colombia are the most attractive destinations for investments in bridges, highways, roads, power plants and ports.
Argentina, Venezuela, Bolivia and the Dominican Republic offer the worst conditions for private-sector capital investments in infrastructure. Chile scored highest on the index of attraction for private investments in infrastructure, with a grade of 5.43 points. That index, which ranges from zero to seven points, looks at each country’s level of macroeconomic environment, its political risk, its legal structure and the state of development of its financial markets.
Participants agreed that private investment is critical for improving the region’s infrastructure. However, they said that the public sector should have the responsibility for creating a long-term approach to development, including clear definitions of the roles of both public and private sectors. Enrique Garcia, managing director of the CAF, the Andean development corporation, summed things up this way: “When resources are scarce, the public sector should invest only where the private sector is incapable of doing so, or is not prepared to do so.”
At the WEF, it also became clear that inequalities reflect differences in the distribution of assets and access to capital. Generally speaking, poor people in Latin America need a lot of help to become property owners, especially because of their poor access to credit mechanisms.
Some analysts go further, arguing that income differences are due largely to anti-competitive behavior in the poorest countries. “If a country wants to develop in such a way that everyone has access to income, it must expand competitiveness within its markets, and it must prevent the development of anti-competitive practices,” notes Claudio Agostini, professor of economics and business at the Alberto Hurtado University in Santiago.
In practical terms, the key goal of this approach is to protect consumers from anti-competitive practices that raise prices, reduce production, and have a negative effect on innovation and economic growth. Agostini believes that it is important to understand that there are some things competition policy can do, and some things that it cannot accomplish. On the one hand, free competition permits each individual to make the best use of his or her capabilities. However, “It does not guarantee a minimum income. Competition maximizes the income of society as a whole but it does not redistribute it in accordance with social preferences about equality and inequality. To do that, you have to use tax policy and social spending policy, not a country’s framework for regulating competition.”
Given that the main goal of this sort of policy “is economic efficiency, the well-being of specific participants in a market is irrelevant and it [the well-being] must not be protected,” Agostini notes, adding that free-competition policies “must not be used to defend small companies, generate jobs or improve incomes. That approach can lead to wrong decisions, as history provides plenty of proof.”
The challenges facing Latin America are enormous, but there is light at the end of the tunnel. One way to measure progress is the region’s compliance with the first U.N. Millennium Development Goal – eradicating extreme poverty and hunger by 2015. Last year’s drop in Latin America’s rate of extreme poverty brings the region two-thirds of the way toward reaching that goal. The region is now well positioned to fulfill its commitment to cut extreme poverty in half by 2015.