This is another lecture about the importance of productivity now that generating decent economic growth has become more difficult than shipping your excess production to the United States. No Canada, sit. For a change, this lecture isn’t about you.
Instead, it’s about Latin America, which could do with a competitiveness boost about as badly as its northern cousin. But given all those trade agreements you’ve signed in the region, Canada, you might want to pay attention. And who knows? You might actually do some real business down there some day.
Economists at the Inter-American Development Bank, or IDB, are worried about a “Great Suppression.” They predict in their 2013 economic outlook, unveiled Tuesday in Washington, that global gross domestic product growth between now and 2017 will be 0.5 per cent less than the growth that occurred between 2003 and 2007.
In the U.S. and Europe, policy uncertainty and debt will keep economic growth short of potential, while China’s economy simply will slow to a more sustainable pace. A shock likely would further suppress growth because policy makers have run out of ways to counterstrike.
The IDB distributed loans and grants worth $11.4-billion (U.S.) to 26 Latin American countries in 2012. The institution also offers policy advice. And in 2013, it is advising its members that if they want to return to pre-crisis levels of economic growth, they are going to have to work harder to achieve more of it at home.
And that brings us back to productivity.
The IDB’s economics team, led by chief economist Jose Juan Ruiz, dug into 18 of the region’s bigger economies and compared the evolution of their income gaps with the United States. Only four of those countries – Panama, Dominican Republic, Chile and Brazil – managed to narrow the U.S.’s lead in per capita income between 1960 and 2007.
Mr. Ruiz’s team took the analysis deeper, studying micro-data to determine how much of the income gap was explained by total factor productivity – efficiency gains, essentially – and by increasing workers and capital. The finer analysis showed that only Panama and Chile narrowed the income gap with the U.S. through productivity increases.
The point is twofold: Productivity creates wealth, and Latin America is woefully unproductive. Economic growth will depend on the region’s policy makers overhauling the economies to make them more competitive. Lots could be done; Mr. Ruiz highlights two: Making the “informal” labour market more formal and boosting infrastructure.
On average, more than half of workers in Latin American and the Caribbean take their compensation under the table. (In Bolivia, Paraguay, Peru, Nicaragua and Honduras, the percentage is 80 per cent or higher.)
The IDB’s research draws a strong link between “informality” and productivity. Companies that dodge the tax system tend to be smaller and less productive than those that pay their taxes. They invest less in training and technology, and their workers come and go. And because these companies attempt to steer clear of the government, they have no formal record and therefore no access to credit.
Mr. Ruiz told a small group of reporters Tuesday that there must be a reason so many companies seek to avoid taxes. But rather than blame executives and workers, Mr. Ruiz said governments should adjust their tax policies to create an incentive to join the formal economy. He singled out Colombia, which recently reduced payroll taxes, while increasing other levies that factor less in companies decision making.
The IDB’s other piece of advice is infrastructure, infrastructure, infrastructure. The quality of Latin America’s roads, air ports, etc. is significantly worse than those of advanced economies and Asia.
Yet despite stronger growth in recent years, overall investment on infrastructure in Latin America has fallen about 2.5 per cent in the 2000s from the 1990s. The issue is money. Countries are failing to attract enough external financing, and they aren’t saving enough of their own money to finance construction themselves – the country with the highest savings rate in Latin America and the Caribbean saves less than the country with the lowest savings rate in Asia, according to the IDB.
To be sure, messing with the tax code and tackling local interests to make room for more foreign investment is asking for political trouble. Mr. Ruiz and his team at the IDB offer an incentive for politicians to take the risk: economic growth.
Between 2003 and 2007, economic growth in Latin American and the Caribbean averaged about 4.8 per cent. The region now is on track for growth of 3.9 per cent. If all countries in the region embraced the types of policy changes the IDB is proposing, Mr. Ruiz estimates growth would surge to more than 6 per cent.
Is that likely? Of course not. But it illustrates the need for policy discussion to move beyond fiscal stimulus, fiscal austerity and ultra-low interest rates. There are other growth-inducing measures that can be taken, and everyone, especially you Canada, should take note.