Latin America continues to show signs of weakness despite the unquestionable advances made in terms of macroeconomic stability after the deregulation reforms of the 1990s, the sustained growth in the last couple of years, the unprecedented emergence of democratic governments, and the favorable business climate. In addition to the acute social inequality that continues to generate tension throughout the region, a series of other factors conspire against Latin America’s full-fledged inclusion in the competitive new world order. They also impede its ability to deal more effectively with the world’s most dynamic economies, especially China and India. Experts clamor for social, fiscal and financial reforms, as well as reforms of the labor market. They agree that a real difference can be made when there is a national policy for investing in education, and raising public and private sector spending on research and development.
With the notable exception of Chile, which is the only country in the region that has an outstanding spot in global indices of competitiveness, Latin America’s ratings fall far short of China’s. Last year, China achieved significant progress in its rating by the International Institute for Management Development (IMD), jumping to the 19th spot from the 31st spot a year earlier. Based in Switzerland, the IMD annually evaluates the competitiveness of 61 countries. Its rankings are based on four major aspects of competitiveness: Economic performance, government efficiency; business efficiency, and infrastructure. Each one of those factors contributes 15% to the overall rating. India, which is the second largest power in Asia, ranked 29th.
According to the IMD, the top five economies in the world, in terms of competitiveness, are the United States, Hong Kong, Singapore, Iceland and Denmark. Chile occupies the 24th spot. In Latin America, Colombia ranks as the second most competitive and the country that has improved the most in the past year. Colombia jumped from the 47th spot to the 40th position. However, the region’s overall weakness can be clearly seen in the distant rankings of the three largest economies: Brazil is in the 52nd position; Mexico is 53rd; and Argentina is 55th, although it improved by three spots. The index ends with Venezuela, in the 61st position.
In the case of the Index of Global Competitiveness of the Global Economic Forum, Chile confirmed that it was the leading economic performer in the region, ranking 27th among the 117 countries covered by the index. Chile also outranked its neighbors by a wide margin. Chile not only ranked higher than 13 of the 25 members of the European Union, but it was the only Latin American country that surpassed any European Union member-state. Argentina, which ranked second in the region and 54th in the world, was seven spots behind Greece (47th), the weakest country in the E.U.
When it comes to competing against other emerging regions, Anita Kon, professor at the Pontifical Catholic University in São Paulo, believes that one of the main barriers facing Latin American countries is the fact that in other economies such as China, Europe and Eastern Europe, there is a long-term effort to plan structural reforms aimed at development. Even after there are changes in governmental leadership, these goals and yardsticks are not abandoned; they continue to be pursued. “In Latin America, political instability and changes in the government almost always lead to the abandonment of the initiatives taken by previous administrations, where they have existed. When plans are started up again, the priority is on the short term, and they do not wind up being carried out in their entirety,” says Kon.
Another barrier to competitiveness is that there is no conscious decision to orient production towards markets that are outside the region, notes Jorge Fallas, director of the Center for Research into Economics and Finance at the Andres Bello University in Santiago de Chile. “Without doubt, this is more evident in the cases of the economies of Brazil and Argentina [which are trying] to maintain a protected market in MERCOSUR. They still have the view that regional integration must be deepened, and that this could be enough to improve growth. Unfortunately, the main economies of the region have had a history of great instability and lack of contractual compliance, which makes them not very reliable partners.”
Another obstacle is the greater dependence of the region on exports of raw materials and industrial products that don’t require much skill and have very modest prospects for future growth. “This makes them complementary to the economy of Chile, in many cases. Tthat is what happens with the copper that Chile sells to a country. Profits are made from this exchange, but they need to advance towards exports of more finished products.”
Another important barrier is the low level of domestic investment, continues Fallas. According to his figures, investment as a percentage of GDP is about 20% in Latin America, compared with 40% in China and 35% in the emerging nations of Asia overall. “Since external financing of domestic investment is limited, the high deficit in the current account produces instability. This means that they must make a greater effort at domestic savings, which depends on having an appropriate system of incentives.” Until the beginning of the 1990s, Latin America had the highest inflation rates in the world. “They eroded the savings of many people in the region, which had an influence on the financial system’s low level of market penetration.”
In a recent seminar in Mexico, Rodrigo Rato, director general of the International Monetary Fund, argued that the nations of Latin America should develop common priorities regarding essential policies for developing their competitiveness. Rato said that there are reforms in five areas that can mutually reinforce themselves when it is time to stimulate productivity and growth, and promote success in a globalized world. The first kind of reform is tax reform that broadens the base of tax revenue generation and makes it more equitable. It also achieves a lasting reduction in the debt, and permits governments to tend to their social needs and to the infrastructure.
The second category is financial sector reforms aimed at promoting internal savings and developing the efficient use of savings. Third, there are market reforms for improving flexibility and promoting the development of human capital. Opening the door wider to the forces of competition leads to innovation and change. A business environment that is fair and transparent provides incentives for investment and job creation.
For Kon, the key priorities are to reform education, and invest in training for skills in the workforce. Such measures lead to an improvement in human capital and global economic productivity. “With the exception of Chile, Argentina and Uruguay, Latin American countries have a relatively low average level of education and skill development, which makes it difficult to introduce technologies that are more modern and to improve incomes.”
The region also requires public-sector investments in basic services, particularly in healthcare, adds Kon. This “makes possible an improvement in living conditions, which results in greater and better possibilities for work and for income generation and consumption.”
Fallas says that it is also necessary to provide greater incentives to private initiative. This means “a reduction in the bureaucracy and greater stability in the rules, and respect for private property. In this regard, there has been very little progress; a lot is still left to be desired. In addition, you have to stimulate a higher level of saving, which permits you to finance higher levels of investment.”
Despite its privileged spot in the global rankings, Chile did not celebrate when IMD announced the results of its 2006 index. Chile was one of five economies on the list that declined the most this year, dropping from 20th spot in 2005 to 24th spot because of the advance of China, Malaysia, Japan and Estonia. Other factors in its decline included exchange rate volatility and the country’s low productivity rate. Enrique Manzur, a professor at the University of Chile’s school of business and management, warns that his country must not content itself with its leadership position in the region. Nor should Chile compare itself with its neighbors. “Chile competes with small countries that are extremely competitive. Chile cannot copy the strategy of Brazil. It must be more aware about what countries like Finland, Ireland and New Zealand are doing.”
According to Manzur, Chile’s weaknesses continue to be the bad quality of its national infrastructure, especially in science and technology education. Measured by those standards, Chile resembles its neighbors. “The perception in the IMD is that the Chilean educational system is deficient, occupying the 50th spot among 61 countries that were analyzed. Among other things, this is manifested in the very few possibilities that exist for exporting technology as well as the very low percentage of investment in research and development, which is less than 0.7% of GDP.” An additional factor, adds Manzur, is “private sector debt,” since the lion’s share of the spending in R&D is done by the government and, to a lesser degree, by universities.
Kon agrees with this diagnosis and adds that investing in R&D is especially valuable for lowering the gap with more advanced countries. However, Kon proposes that this effort should be adapted to the specific conditions of each country’s socio-economic environment. “In Latin America, channeling investments into technology should focus not only on those areas of technology that are leading edge or more competitive overseas but also toward appropriate short-term technology for generating jobs for those workers who have less education. In the medium term, this approach generates possibilities for increased incomes and economic savings.”
Returning to Chile, Manzur argues that future challenges are complex, and the country must go beyond reforming the educational system towards developing the necessary competencies and skills required by an economy that is becoming more and more globalized and more competitive. “You have to be sure that there is a reliable source of energy that is consistent with the growth needs of your country, and which also takes the environment into consideration. You also need to promote investment in R&D through three-way collaboration between the State, universities and the private sector.” He stresses that there needs to be a clear association between the people who come up with scientific advancements and those who need to make changes so that improvements in productivity can be achieved.
Improving the quality of work is another important task that remains to be done in Chile, adds Manzur. “Nowadays, people who work comprise only a little more than one-third of the total population. This has obvious economic consequences when it comes to generating greater wealth. Whenever the level of employment rises, this not only reduces unemployment but also increases the workforce. That is to say, the workforce incorporates segments that are staying outside the labor market today — especially women and people who are less qualified.”
However, some people remain optimistic. “If we were to make major improvements in our infrastructure and knowledge base, which would be tied to our educational policies, Chile would make a great leap forward,” says Pedro Hidalgo, director of the University of Chile’s graduate school of economics. “There are greater possibilities for investing more in this area if you take into account the current debate about what is the best thing to do with the surpluses that Chile is generating from the unprecedented price of copper. That’s because of its role as the world’s largest producer.”
It would be very difficult for Latin America to achieve the same levels of competitiveness as China and India, argues Fallas. “You have to realize that the most vigorous economies of the world are in Asia and in the countries of the English-speaking world. We have serious deficiencies when it comes to managing a second language, which would be English. In addition, although immigration to developed countries can benefit countries through financial remittances, it damages our country’s growth by reducing the value of those people who have the greatest initiative — the people who make the effort to emigrate and who have a significant level of education.”
In contrast, Kon believes it is possible to reduce the gap with the Asian giants in those countries that have the most diversified manufacturing structures, such as Mexico, Chile, Brazil, and Argentina. The potential also exists in those countries that have potential for exploring a natural raw material that is an industrial input in the global economy, as in the case of Peru and Bolivia. “In this sense, the development of economic competitiveness depends enormously on the priorities of public-sector assistance policies, while the distribution of governmental resources should be directed especially toward establishing conditions for infrastructure and toward other stimuli that involve legal, foreign-exchange and monetary policy.”
In the case of Brazil, stresses Kon, priorities have moved more towards macroeconomic policy that stabilizes the economy. “The high rates of interest, while declining, have been established with the goal of stabilizing prices and attracting foreign investment in the financial sector. However, they make it difficult to resume production, job growth and demand, as well as to invest in modernization that improves national and international competitiveness.”
On the other hand, Kon believes that regional authorities have an unavoidable responsibility. “Governmental priorities about applying resources have focused strongly on the preservation of political power in the short term, to the detriment of effective policies for development.”