ECONOMY-LATAM: One Hundred Years of Catching Up

By Emad Mekay Reprint | | Print |

Emad Mekay

WASHINGTON, Oct 15 2001 (IPS) - Latin American economies will need 100 years to catch up with industrialised countries if they do not address rampant corruption, weak rule of law and poor education, says the Inter-American Development Bank (IDB).

“The rate of income growth in Latin America is so slow that it would require about a century for the region to attain the current income levels of developed nations,” the bank says in a new report, “Competitiveness: The Business of Growth”.

Officials at the Washington-based multilateral lender say secondary education and the quality of public institutions are “critical areas that need major strengthening if Latin America and the Caribbean is to close the growing gap with developed countries in competitiveness and productivity.”

The 2001 report, which also focuses on economic and social progress in the region, acknowledges advances over the past decade but notes the region’s productivity, a key to growth, lags behind more dynamic economies in Asia, the Middle East, and Eastern Europe.

Business development and productivity are hindered by “crime and corruption, severe deficiencies in infrastructure, and other problems,” including weak rule of law, the report says. Regulatory frameworks and practices must be made more predictable and the justice system must be made more effective for business to flourish.

The IDB has touted regulatory and judicial reform as part of a ‘second generation’ of structural adjustment for borrowers since the mid-1990s. Social activists have scored its approach as advancing such issues as intellectual property rights and fraud and bankruptcy protection while neglecting civil, political, social and cultural rights.

According to the report, however, the former issues are key to stimulate productivity and generate economic surplus.

The trouble with this argument, says Stephanie Weinberg, an activist with the Washington-based Development Gap, is that “the benefits of most of these policies tend to be captured by elite and large-scale corporations. “This doesn’t translate into reduced poverty, which can be reduced through medium and small business – not large ones.”

The IDB notes that corruption has rendered credit inaccessible to many businesses and contributed to financial sector instability.

“Evidence throughout this report shows that the quality of institutions is one of the principal reasons why productivity gaps between countries are widening,” it says.

“The region is clearly geographically part of the Western world and has most of the values of Western societies,” says Eduardo Lora, principal adviser in the IDB’s research department. “However, it has not developed what’s essential for development in the Western world – the rule of law and the control of corruption.”

Lora says corruption discourages investment and saps productivity. Lack of protection for financial creditors and various forms of interference by authorities also are among the major problems.

“You can say this is a problem so deep that you cannot change it without altering the whole political system,” says Lora. “We do not take such a radical approach. We try to identify things that can be changed and may be there as a result of the lack of law.”

IDB President Enrique Iglesias, in a preface, says the region has taken “great strides” in opening markets and tearing down fences that once protected national industries from foreign competition, privatising state enterprises, and clipping tariffs. Nevertheless, poverty persists.

The report acknowledges that in the view of many economists, the 1990s saw an increase in the concentration of income, limiting the favourable impact of growth on poverty to the point that Latin America maintains the world’s widest divide between rich and poor.

The region’s growth in average incomes stood at a modest 1.5 percent annually compared to two percent in developed countries and 3.5 percent in some Asian countries, according to the IDB.

“Currently, 170 million Latin Americans – one of every three people – live on less than two dollars a day,” it says.

International indicators of competitiveness – which measure macroeconomic policies, the quality of public institutions and technological development – suggest that Chile and Costa Rica are two rare success stories.

IDB economists say that, to create more winners than losers among Latin America’s population of 520 million people, bureaucratic hurdles that impede the creation of new firms must be removed and property rights must receive greater protection.

The report’s authors also say credit, human resources, new information technologies, and infrastructure for ports, electricity, and telecommunications are key productive factors that can be put back on track by changing public policies. For example, policy must seek to improve efficiency at Latin American ports, which the bank describes as among the world’s most wasteful.

According to the IDB, an overall lack of credit is the biggest obstacle to business growth, followed by excessive taxes and regulations.

“In Latin America, imported goods spend an average of seven days in customs warehouses, twice as long as in the most advanced countries,” the report says. The remedy, according to the bank, is streamlined and predictable rules and procedures and a greater role for private enterprise in customs handling and logistics.

Education also needs drastic improvement, since “only 20 percent of the working age population has received secondary education,” according to the bank, which says the result is a shortage of skilled labour needed to increase economic productivity.

The report acknowledges that consumers in the region “are paying higher prices” for privatised telecommunications services than they did when the region’s telecom operators were state-owned. It attributes this to narrow competition.

Likewise, the report describes Latin America as a “world leader” in power sector reform, meaning that governments have sold off billions of dollars in state assets to foreign investors, yet also acknowledges that “competition remains limited and prices high, except for large industrial consumers.”

Business development also is hampered by poor technology development, the bank says. Only one of every 20 people in Latin America can access the Internet, compared to one in three in the United States.