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Competitiveness:
The Business of Growth
2001 Report
Economic and Social Progress in
Latin America
Inter-American Development Bank
Research Department
Much evidence indicates that
Latin America lacks
competitiveness
Growth has been disappointing
GDP per capita Growth (%)
5
4
3
2
1
0
-1
1980s
1990s
Developed countries
East Asia
Middle East
Latin America
Rest of Asia
Africa
Source: IDB calculations.
Eastern Europe
…while income gaps with more
developed countries are widening
Average GDP per capita
Current US Dollars (PPP adjusted)
25,000
20,000
15,000
10,000
5,000
0
1975
1980
DEVELOPED
Source: WDI, World Bank (2000)
1985
EASIA
1990
1995-99
LATIN AMERICA
Factor productivity is not increasing
TOTAL FACTOR PRODUCTIVITY, 1990s
1.0
Developed
countries
East Asia
0.5
Middle East
-0.5
Eastern Europe
Annual rate of growth
%
0.0
-1.0
LATIN AMERICA
-1.5
Rest of Asia
-2.0
Africa
-2.5
Total Factor Productivity
…but falling, especially in the poorest countries
Developed
LATIN AMERICA
Productivity growth in the 90s
East Asia
Chile
Argentina
Uruguay
Dominican Republic
Peru
Barbados
Costa Rica
Bolivia
Brazil
Guatemala
Trinidad y Tobago
Panama
Ecuador
Paraguay
El Salvador
Mexico
Colombia
Nicaragua
Venezuela
Honduras
Jamaica
Haiti
-5%
-4%
Source: RES-IDB Calculations
-3%
-2%
-1%
0%
1%
Annual growth of Total Factor Productivity (average 90's)
2%
3%
As a result, poverty is not declining
Number of people living on less than $2 a day (%)
100
90
80
70
60
50
1987 1998
40
30
20
10
Source: World Bank
Europe and
Central Asia
Middle East &
North Africa
Latin
American &
Caribbean
Excluding
China
East Asia and
Pacific
Sub-Saharan
Africa
South Asia
0
Latin America ranks low in the international
rankings of competitiviness
Ranking median
country
Growth Competitiveness index
Developed countries
14.5
East Asia
30
Middle East
45
East Europe
43
Latin America
54
Rest of Asia
60
Africa
54
2
Source: World Economic Forum (2001)
3
4
Average index
5
6
…although a few countries rank high
Growth Competitiveness Index
Ranking
Chile
27
Costa Rica
35
T&T
38
Mexico
42
Brazil
44
Uruguay
Argentina
46
Dominican Rep.
50
Jamaica
52
Panama
53
Peru
El Salvador
55
Venezuela
Colombia
62
Guatemala
66
Bolivia
67
Ecuador
68
Honduras
Paraguay
70
Nicaragua
73
Source: World Economic Forum 2001.
49
58
65
72
2.5
3.0
3.5
4.0
4.5
5.0
…most rank low for their income levels
Growth Competitiveness Index
Ranking
Chile
27
Costa Rica
35
T&T
1%
38
Mexico
4%
42
Brazil
1%
7%
44
Uruguay
Argentina
46
17%
49
Dominican Rep.
50
Jamaica
52
7%
Panama
Peru
El Salvador
53
2%
55
58
1%
Venezuela
Colombia
10%
62
12%
65
Guatemala
8%
66
Bolivia
67
5%
Ecuador
7%
Honduras
Paraguay
70
29%
Nicaragua
Source: World Economic Forum 2001.
68
72
10%
2.5
3.0
3.5
73
4.0
4.5
5.0
Also the case for the largest economies
Growth Competitiveness Index
Ranking
27
Chile
4%
Mexico
Brazil
Argentina
Peru
Venezuela
10%Gap
Source: World Economic Forum 2001.
1%
44
17%
49
2%
55
Expected for income level
62
12%
Colombia
3.5
4.0
42
4.5
65
5.0
…implying that their growth potential is low
Competitiveness gaps (given income level) and growth in the 1990s
0.10
China
0.08
Growth of GDP per capita, 1990-99
Ireland
0.06
Chile
Dominican Rep.
0.04
Argentina
Uruguay
Costa Rica
0.02
0.00
Singapore
Paraguay
Colombia
Honduras
Venezuela
Trinidad and Tobago
Jamaica
-0.02
-0.04
Russia
-0.06
-0.08
Ukraine
-0.10
-1.5
-1
-0.5
0
0.5
Relative competitiveness
Note: Each dot represents a country.
Source: IDB calculations based on World Bank (1999) and World Economic Forum (2001). See Appendix 1.3.
1
1.5
The largest firms are too small
Regional Comparison of the Size of Large Firms
Developed countries
East Asia
Latin America
Brazil
Mexico
Chile
Argentina
Venezuela
Colombia
Peru
El Salvador
Costa Rica
Panama
Nicaragua
Honduras
Guatemala
14,000,000
3,982,546
1,174,702
6,280,798
4,603,380
1,683,048
1,326,523
735,729
248,746
179,218
53,282
46,597
36,748
30,753
28,288
18,018
10,000
100,000
1,000,000
10,000,000
100,000,000
Average value of assets for the 25 largest firms (Thousand US dollars)
Source: Calculations RES-IDB based on WorldScope and América Economía
…even for the size of the economies
The size of “large” firms vis-a-vis the size of the economies
13%
Brazil
Mexico
Chile
Expected for economy’s size
Argentina
98%
Gap
Venezuela
211%
Colombia
Peru
164%
100,000
1,000,000
10,000,000
Average assets of 25 largest firms (US$ Thsd)
Source: IDB calculations based on WorldScope and America Economia.
However, export competitiveness
has improved substantially
Latin American Export Growth in the 1980s and 1990s
(In percent)
Mexico
Dominican
Republic
El Salvador
Costa Rica
Suriname
Nicaragua
Argentina
Guatemala
Peru
Chile
Ecuador
Uruguay
1990s
Panama
1980s
Colombia
Brazil
Honduras
Bolivia
Belize
Paraguay
Venezuela
Jamaica
Trinidad & Tobago
Barbados
Haiti
-15
-10
-5
Source: IDB calculations based on COMTRADE.
0
5
10
Growth rate
15
20
25
…and Latin America has become a
magnet for foreign direct investment
Developed Countries
Average of country
ratios
Latin-America
Average by region
East Asia
East Europe
Rest of Asia
Total Inflows of FDI by Region, 1997-99
(Percent of GDP)
Rest of Africa
Middle East and
North Africa
Source: IMF (2000).
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Is the lack of competitiveness due to
deficiencies in the markets of the
main productive factors?
Credit
Human resources
Infrastructure
Technology
Is it lack of credit?
Lack of financing is obstacle #1 to
Latin American business development
Major Obstacles to Business Development in Latin America
(Percentage that thinks it is the principal obstacle)
Financing
Taxes and regulations
Policy instability
Inflation
Exchange rate
Street crime
Infrastructure
Practices against competition
Corruption
Organized crime
Judiciary system
0
5
10
Source: World Business Environment Survey (WBES) and IDB calculations.
15
20
25
30
35
Financial liberalization has taken big
strides
•
•
•
•
Banks privatized
Most interest rates liberalized
Reserve requirements reduced
Capital adequacy ratios adopted in all
countries
• Supervision strengthened.
…and it has paid off
Financial Liberalization Index and Private Credit/GDP in Latin America
44
0.9
0.8
0.7
40
Financial
Liberalization
Index
38
36
0.6
34
0.5
32
Credit/GDP (%)
0.4
30
0.3
28
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Source : World Bank (2000) for Credit/GDP and Table 5.1 for Financial
Liberalization Index.
Credit/GDP (%)
Financial Liberalization Index
42
But it has not been enough:
Credit is still scarce in Latin America
Developed
PRIVATE CREDIT / GDP
100
90
80
70
60
50
40
30
20
10
0
East Asia
% of GDP
Middle East
LATIN
AMERICA
Rest of Asia
Africa
1960's
1970's
1980's
1990's
Credit markets are underdeveloped
Credit to private sector (as % of GDP)
14%
Chile
Expected for income level
Gap
Brazil
35%
Colombia
93%
Mexico
153%
Argentina
188%
Peru
172%
Venezuela
10%
316%
20%
30%
40%
50%
60%
70%
80%
90%
The main remaning problem is
weak creditor protection
• Governments often interfere in financial
contracts:
– Maximum interest rates (11 countries)
– Mandatory investments (7 countries)
– Credits targeted to some sectors (5 countries)
• Collateral pledge/recovery is burdensome
• Creditors poorly protected in the event of
bankruptcy
• Law is unstable/unclear or not enforced.
Effective protection of creditor rights is low
in many countries
Effective Creditor Rights Protection Index (0-1)
East Asia
Developed
countries
Latin America
Panama
Trinidad & Tobago
Belize
Bolivia
Chile
El Salvador
Venezuela
Costa Rica
Nicaragua
Dominican
Republic
Argentina
Uruguay
Brazil
Paraguay
Ecuador
Jamaica
Haiti
Guatemala
Peru
Mexico
Colombia
0
0.05
0.1
0.15
0.2
Source: Galindo and Micco (2001) and La Porta et al. (1997,1998).
0.25
0.3
0.35
0.4
0.45
0.5
…discouraging credit
Private Credit and Effective Creditor Rights
120
100
Coefficient: 89.6
t-statistic: 4.87
R2=0.38
80
Private credit
60
40
Panama
20
0
-20
-40
Ecuador
Nicaragua
Uruguay
Belize
Jamaica
Chile
Venezuela
El Salvador
Haiti
Colombia
BrazilRica
Costa
Mexico
Peru
Paraguay
Guatemala
Dominican Republic
Argentina
Bolivia
Trinidad & Tobago
-60
-0.4
-0.2
0
0.2
Effective creditor rights
0.4
Notes: Figures adjusted by GDP growth, government deficit, inflation and income per capita (log).
Source: La Porta et al. (1997,1998) and Galindo and Micco (2001).
0.6
0.8
…and increasing credit volatility
Volatility of Real Credit and Effective Creditor Rights
35%
Brazil
30%
25%
Nicaragua
Argentina
Real credit growth
20%
15%
Coefficient: -0.16
t - Statistic: -3.63
R2: 0.29
Mexico
10%
5%
0%
-5%
-10%
-15%
-0.4
Jamaica Venezuela
Guatemala
Uruguay
Costa Rica
Peru
Colombia
Bolivia
Paraguay
El Salvador
Dominican Republic
Ecuador
Panama
Chile Belize
Haiti
-0.2
Trinidad & Tobago
0
Notes: Figures adjusted by standard deviation of real GDP growth.
Source: Galindo and Micco (2001).
0.2
0.4
Creditor rights
0.6
0.8
Strengthening creditor rights is
essential to expand credit and
improve competitiveness
Is it lack of human capital?
In Latin America, education is not growing
fast enough
Developed
countries
Average Years of Education - Pop > 25 yrs
10
9
East Asia
8
7
Middle East
6
Eastern
Europe
5
4
LATIN
AMERICA
3
2
Rest of Asia
1
0
1960
1965
1970
1975
1980
1985
1990
1995
1999
Africa
Workers are still concentrated in low-wage
sectors, where cost competition is tough
Evolution of Export Market Share 1980-1998
(In percent)
50
Low wage
45
40
35
Medium wage
30
25
20
High wage
15
Notes:Average for Argentina, Chile, Colombia, Mexico and Peru. Excluding Tobacco and Oil
sectors.
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
10
This makes some costs troublesome
Contribution to Social Security by Employers and Employees 1999
(Percent of Gross Wages)
Average OECD
Germany
Japan
United States
Latin America Average
Argentina
Uruguay
Colombia
Brazil
Costa Rica
Bolivia
Mexico
Peru
Paraguay
El Salvador
Chile
Ecuador
Nicaragua
Guatemala
Venezuela
Dominican Republic
Guyana
Panama
Barbados
Honduras
Bahamas
Trinidad & Tobago
Haiti
Jamaica
Source: Social Security Administration
0 (1999)
5
10
15
20
25
30
35
40
45
50
This makes some costs troublesome
Cost of Mandatory Job Security Provisions in Latin America and the Caribbean,
1999 (In monthly wages)
Average OECD
Germany
Advance notice
Japan
Indemnity for dismissal
United States
Average LAC
Bolivia
Ecuador
Peru
Costa Rica
Honduras
Chile
M exico
El Salvador
Brazil
Argentina
Venezuela
Dominican Republic
Panama
Nicaragua
Uruguay
Paraguay
Jamaica
Colombia
0.0
0.5
1.0
Source: Ministries of Labor in Latin America and OECD(1999).
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
What can be done?
• Reduce payroll taxes and contributions
• Strengthen the link between
contributions and benefits
• Instead of penalizing firms for firing
• …make them support employees’ saving
plans
• Remove barriers to labor productivity
Removing barriers to labor productivity:
Education
• The main problems: late enrolment and
early drop outs
• Main strategies:
– demand incentives
– education systems more responsive to the
users
Removing barriers to labor productivity:
Training
• The main problem: centralized training
systems are too costly and ineffective
• Main strategies:
– Education policy to ease transition between
school and work
– Tax policies to encourage private training
– Separate training regulation and provision
– Condition public funds to the programs
that improve trainees’ hiring possibilities.
Is it lack of infrastructure?
Latin America is leader in
infrastructure privatizations
Private Capital Participation in Infrastructure, 1990-99
0
100
200
300 US $ Mll
LATIN AMERICA
East Asia and the Pacific
Europe and Central Asia
S. Asia
Middle East
Africa
Source: PPI, Proyect Database, World Bank.
Privatizations
New investment
Operation
Management
with major
private capital
expenditure
…in all main infrastructure sectors
Private Capital Participation in Infrastructure, 1990-99
Telecomunications
Transport (ports,
airports and railways)
Total
Water and sanitation
Energy (electricity
and gas)
0
5
10
15
20
25
30
35
40
45
LAC Private Participation in Infrastructure (as % of developing countries)
Source: Private Participation in Infrastructure data base web page, World Bank (2001).
50
…but infrastructure is still below
international standards
Infrastructure Index: electricity, water, roads, telephones
12%
Chile
5%
Mexico
Expected for income level
Gap
39%
Argentina
7%
Brazil
17%
Colombia
Peru
12%
2.8
3.0
3.3
3.5
* Includes electricity generation, acces to improved water source , paved roads and telephone mainlines.
3.8
4.0
Privatization has brought benefits:
THE CASE OF TELECOMMUNICATIONS
Privatization has (with respect to previous
trends):
• Increased the number of lines by 7%
• Reduced waiting lists 60%
• Reduced faults per line 30%
• Accommodated increased traffic:
international traffic grows 15% yearly.
Some countries have caught up with
the international standard
Telephone Mainlines and Mobile
36%
Argentina
18%
Chile
Venezuela
1%
Colombia
22%
Brasil
Gap
Expected for income level
45%
México
Perú
8%
2.5
Source: IDB calculations based on ITU (2000)
2.8
3.0
3.3
3.5
3.8
But problems remain:
THE CASE OF TELECOMMUNICATIONS
• The cost of local calls has increased 14%
• Huge telephone penetration gaps remain
– There are 5 times more telephones per capita
in the developed world than in Latin America
– Penetration in the richest quintile is 7-10
times higher than in the lowest quintile
• Monopolies in the sector are obtaining
returns of up to 45%!
Privatization in electricity has been uneven
Private investment in the electricity sector, 1990-99
Chile
Argentina
Brazil
Panama
Colombia
Trinidad & Tobago
El Salvador
Dominican Republic
Jamaica
Peru
Bolivia
Costa Rica
Guatemala
Nicaragua
Honduras
Venezuela
Mexico
Ecuador
0
Divestiture
Greenfield Projects
Operation
Management
with major
private capital
expenditure
50
100
150
200
250
US Dollar per capita
Source: PPI database, World Bank (2000).
300
350
400
450
…and much remains to be done
Electricity generation
33%
Chile
73%
Argentina
24%
Brazil
Gap
Expected for income level
36%
México
59%
Colombia
61%
Perú
2.5
Source: IDB calculations based on World Bank WDI (2001)
2.8
3.0
3.3
3.5
3.8
4.0
Privatization is not enough
• Introduce competition as soon as possible
• Grant independence to regulatory authority
• Regulate according with institutional
capabilities
Is it lack of capacity to assimilate
new technologies?
Latin America is not a laggard in the
technological race
Internet Hosts and Personal Computers by Region, 1999
811
Developed Countries
353
23
Latin America
44
Internet Hosts (per 10,000
people)
PCs (per 1,000 people)
20
East Asia
43
18
East Europe
50
6
Middle East
Africa
Source: ITU (2000).
32
3
10
Log scale
Internet adoption is going fast
Expected for income level
Internet Hosts/populatiom
México
1%
Argentina
Chile
Brazil
Colombia
Venezuela
Peru
2.2
Source: IDB calculations based on ITU (2000)
2.4
2.6
2.8
3.0
3.2
3.4
The initial stages of information
technology adoption have been fast
Because:
• Enough market freedom
• No lack of education among
entrepreneurs
• Up-to-date telecommunication systems
in the large countries.
…but further progress may be more
difficult
•
•
•
•
•
Education is concentrated in a few
Training systems lack dynamism
Credit is scarce for small firms
Weak intellectual property rights
Obstacles to business creation
Latin American governments hinder the
creation of new firms
Number of Procedures to Start Up a Firm
Colombia
Mexico
Brazil
Ecuador
Chile
Argentina
Uruguay
Panama
Peru
Latin America
Developed countries
United States
Australia
New Zealand
Canada
0
Source: Djankov, et al. (2000).
2
4
6
8
10
12
Number of Procedures
14
16
18
Strategies to accelerate the adoption
of the new technologies
• Focus on the big determinants:
education and training, credit, property
rights, obstacles to business creation
• But also:
– Improve environment to innovate (R&D,
innovation clusters)
– Modernize industrial and investment
policies.
Synthesis: What is missing:
• Deeper credit markets
– Strengthen creditors protection
• Better use of existing human capital:
– Reduce payroll taxes and ease hiring and firing
• More education and training:
– More performance incentives, less centralization
• More and better infrastructure:
– Make regulation more independent and
effective