How can Latin America close its wealth gap and raise competitiveness?

While recent falls in commodity prices have contributed to the slowing of economic growth in Latin America and the Caribbean – this year the IMF expects the region to grow by less than 1%, down from almost 3% just two years ago – the strengthening recovery in the United States offers an opportunity to recover by leveraging the trade and investment links of some countries. To do so, the region will need to address some fundamentals of economic competitiveness.

The latest edition of the World Economic Forum’s Global Competitiveness Report offers some encouraging news for the region. Several countries have made impressive progress in the last year on financial market development, one of 12 “pillars” of competitiveness which comprise the Global Competitiveness Index: Colombia, Guatemala, Peru, Mexico and Uruguay are all among countries which also made substantial steps forward in this area.

Taken as a whole, however, the region’s performance in the Global Competitiveness Index has been broadly stagnant over the last five years. Out of 22 countries in Latin America and the Caribbean, only one – Chile, in 35^th – ranks in the top third of the 140 economies assessed globally by this year’s edition of the Index. Nine of the 22 are in the bottom third, with Venezuela (132^nd) and Haiti (134^th) the worst performers.

What are the region’s top priorities for improving competitiveness? Issues with institutions dominate the concerns of executives who participated in a survey that informs the Index: inefficient government bureaucracy and corruption feature among the top three “problematic factors for doing business” in 14 and 12 respectively of the region’s 22 economies.

Not every country is affected. Chile is one of the regional leaders on institutions, scoring 32^nd in the world on this pillar of competitiveness. Among the indicators which make up this pillar, Chile is considered to have the world’s fourth most reliable police service.

Elsewhere, however, declines in the institutions pillar help to explain the dramatic year-on-year falls of three of the region’s countries: Brazil (which loses 18 positions to come in at 75^th in the overall Index), El Salvador (down 11 to 95^th) and Bolivia (down 12 to 117^th).

In particular, the region’s largest economy – Brazil – is rated among the worst three countries in the world on three of the indicators that comprise the institutions pillar: public trust in politicians, diversion of public funds and burden of government regulation; only Venezuela and Paraguay post lower scores.

Despite this poor performance, neither corruption nor inefficient government bureaucracy are the top concern about doing business for executives in Brazil. That list is topped by tax rates, with Brazil also ranked among the worst three countries in the world on measures of the extent to which the taxation system undermines incentives to work and invest.

High tax rates are a concern across the continent, also topping the list of problems for doing business in Colombia and the Dominican Republic and making the top three in a total of eight of the region’s countries. On the disincentivizing effects of taxation, another of the region’s largest economies – Argentina, 106^th in the overall Index – scores even lower than Brazil.

Next among the most-cited issues, each making the top three problems for doing business in six of the region’s countries, are restrictive labour regulations and an inadequately educated workforce. Labour market issues do appear to be a region-wide concern, with no Latin American or Caribbean economy featuring in the global top 60 on the labour market efficiency pillar. The region’s most competitive economy, Chile, has dropped a couple of places in this year’s overall Index due in part to more rigid hiring and firing practices, and is among the countries where restrictive labour regulations tops the list of executives’ concerns.

Structural reforms to improve education and the functioning of labour markets are especially necessary given the region’s need to diversify away from dependence on commodities and build resilience against external economic shocks. The same applies to tackling the persistent challenge of low levels of savings and investment, necessary to address an inadequate supply of infrastructure – a concern which makes the top three in four of the region’s countries.

A potential win-win for the region is that many of the reforms that would boost productivity, such as improved infrastructure and on-the-job training, could also help to spread the resulting prosperity more fairly – a priority for a region where the need to close wealth gaps is especially acute.

The Global Competitiveness Report 2015-2016 is available here. 

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Author: Gaëlle Marti, Project Specialist, Global Competitiveness and Risks, World Economic Forum 

Image: An aerial view of the construction site of the Panama Canal Expansion project is seen during an organised media tour by Italy’s Salini Impregilo, one of the main sub contractors of the Panama Canal Expansion project in Panama City March 23, 2015. REUTERS/Carlos Jasso