How Can Latin America Improve Its Economic Productivity?

Q: A recent study by the Inter-American Development Bank found that stagnant productivity—not lack of foreign investment—is the main reason countries in Latin America and the Caribbean have lagged behind the developed world and emerging Asia when it comes to economic growth. The report said that the service sector has shown particularly poor productivity, largely due to high rates of informality. Do you agree that productivity is the most significant inhibitor of growth in the region? What can governments and companies do to boost productivity, and can the success of the Asian countries serve as a model? How should the region’s large informal sector be dealt with?

A: José Angel Gurría, secretary-general of Organization for Economic Cooperation and Development and a member of the Inter-American Dialogue: "The IDB's report quite correctly points to low productivity growth and low levels of economic efficiency as the most binding constraint on economic development for most countries in Latin America and the Caribbean. OECD studies confirm that even Chile—the regional champion—has experienced very slow productivity growth in the last decade. Furthermore, economic resources are frequently concentrated in the informal sector, where firms' efficiency tends to be hampered by their small size; informal firms also find it hard to invest in relevant training or to absorb new knowledge more generally. What can governments do? Many reforms that would boost productivity in the region are mainly changes in rules and regulations which do not require extensive financial resources to be implemented, but rather solid political determination and leadership. Better regulations that allow for faster entry and exit of firms (e.g. efficient bankruptcy laws), more competition in product markets and modern contracting frameworks for the delivery of high-quality infrastructure are all needed to increase the efficiency of resource allocation. Latin American countries should also improve the quality of education, which in turn makes economies better able to absorb and create knowledge, allowing for faster productivity growth. The good news is that you don't have to reinvent the wheel. Many OECD countries have faced (or are facing) similar problems and provide useful examples for solving these challenges. In fact, a recently launched initiative between the OECD and Latin America promotes dialogue precisely to share lessons regarding experiences of economic reform."

A: Pedro Cavalcanti Ferreira, professor in the Graduate School of Economics at Fundação Getulio Vargas in Rio de Janeiro: "The IDB study is right on the mark, although in some countries such as Brazil, education is also a serious problem. Scholars in the fields of development and growth have for some time pointed to low productivity as one of the main problems in the Latin American region. Some estimates show that for the same amount of resources—physical and human capital—Brazilian workers produce less than 60 percent than their counterparts in the U.S., and the numbers are not too different in other economies. There are, in most countries, too many tax distortions, a lack of adequate infrastructure, an excess of red tape in doing business, barriers to trade still higher than those found everywhere and poor property rights and enforcement of contracts. These factors hurt productivity and the efficiency of local firms. They are also some of the main causes of informality. Informal firms have no access to credit, invest very little and use poor technology, and hence remain small and inefficient, and their productivity grows very slowly. Tax reform and bureaucratic restructuring may have an impact on formalization, and hence on productivity. However, part of the informality problem has to do with education, as every year a large number of unskilled workers gets to the market with poor prospects of landing a job in the formal sector. Note, however, that many large firms (private and public) in the region are protected from competition and receive favored treatment from their government and so are not too efficient. Hence, informality is only part of the problem."

A: Tor Dahl, president of Tor Dahl and Associates and chairman emeritus of the World Confederation of Productivity Science: "Those of us who have studied and worked with productivity improvement always recognized the unique and challenging situation in Latin America. An economy can only grow in two ways: by increasing its work force or by increasing the productivity of its work force. More and more countries are now experiencing stagnation, or even the shrinking of its labor force as per capita income increases (people deciding that children are not needed to help them in old age) and better health produces an aging population of retirees. Productivity improvement then becomes the only way to grow. Think of the future you would want for your country. Such a future may include a long and healthy life, secure retirement, excellent education, an outstanding transportation system, freedom, justice and safety for all. All these characteristics cause productivity to increase. To make the vision real, we must identify the 'log jam' between this vision and the way things are, diagnose the root causes that produced every 'log,' and address them. The root causes are all the same: bad ideas. The cure is to replace them with good ideas. Every Latin country has a different log jam. Any attempt to address all these log jams in the same way (think re-engineering, lean six-sigma, balanced scorecard or whatever the current favored approach is) will fail. There is no shortcut to a correct diagnosis and the appropriate intervention and implementation of what will remove the logjam. Could you imagine a physician prescribing the same treatment for every patient that walked into her office? We know how growth can be ignited, sustained and improved. It is not rocket science. The focus has to be on productivity. The definition of productivity is: to do the right thing, in the right way, all the time. If you focus on productivity, you will get quality for free. The only way poor quality could happen would be if you were to do the wrong thing, or the right thing in the wrong way, or do the right thing in the right way for only part of the time. It is time for the nations of Latin America to diagnose the unique obstacles that keep them from realizing their dreams, to act upon that knowledge, and enjoy the satisfaction of doing the right thing in the right way all the time."