Inter-American Development Bank - PowerPoint Presentation

Slide1

Inter-American Development Bank

Research Department

Competitiveness:

The Business of Growth

2001 Report

Economic and Social Progress in Latin America

Slide2

Much evidence indicates that

Latin America lacks competitiveness

Slide3

Growth has been disappointing

Slide4

…while income gaps with more developed countries are widening

Slide5

Factor productivity is not increasing

Slide6

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

Haiti

Jamaica

Honduras

Venezuela

Nicaragua

Colombia

Mexico

El Salvador

Paraguay

Ecuador

Panama

Trinidad y Tobago

Guatemala

Brazil

Bolivia

Costa Rica

Barbados

Peru

Dominican Republic

Uruguay

Argentina

Chile

East Asia

LATIN AMERICA

Developed

Annual growth of Total Factor Productivity (average 90's)

Source: RES-IDB Calculations

Productivity growth in the 90s

…but falling, especially in the poorest countries

Slide7

Source: World Bank

Number of people living on less than $2 a day (%)

0

10

20

30

40

50

60

70

80

90

100

South Asia

Sub-Saharan

Africa

East Asia and

Pacific

Excluding

China

Latin

American &

Caribbean

Middle East &

North Africa

Europe and

Central Asia

1987

1998

As a result, poverty is not declining

Slide8

Latin America ranks low in the international rankings of competitiviness

Slide9

…although a few countries rank high

49

50

52

53

55

58

62

65

66

67

68

70

72

73

42

38

35

27

44

46

2.5

3.0

3.5

4.0

4.5

5.0

Chile

Costa Rica

T&T

Mexico

Brazil

Uruguay

Argentina

Dominican Rep.

Jamaica

Panama

Peru

El Salvador

Venezuela

Colombia

Guatemala

Bolivia

Ecuador

Honduras

Paraguay

Nicaragua

Ranking

Growth Competitiveness Index

Source: World Economic Forum 2001.

Slide10

…most rank low for their income levels

49

50

52

53

55

58

62

65

66

67

68

70

72

73

1%

7%

4%

1%

7%

2%

1%

10%

12%

8%

5%

7%

29%

10%

42

38

35

27

44

46

2.5

3.0

3.5

4.0

4.5

5.0

Chile

Costa Rica

T&T

Mexico

Brazil

Uruguay

Argentina

Dominican Rep.

Jamaica

Panama

Peru

El Salvador

Venezuela

Colombia

Guatemala

Bolivia

Ecuador

Honduras

Paraguay

Nicaragua

17%

Ranking

Growth Competitiveness Index

Source: World Economic Forum 2001.

Slide11

Also the case for the largest economies

Growth Competitiveness Index

Source: World Economic Forum 2001.

27

42

44

55

62

65

1%

4%

17%

10%

2%

49

3.5

4.0

4.5

5.0

Chile

Mexico

Brazil

Argentina

Peru

Venezuela

Colombia

Ranking

12%

Expected for income level

Gap

Slide12

…implying that their growth potential is low

Competitiveness gaps (given income level) and growth in the 1990s

Paraguay

Venezuela

Colombia

Argentina

Honduras

Uruguay

Jamaica

Costa Rica

Chile

China

-0.10

-0.08

-0.06

-0.04

-0.02

0.00

0.02

0.04

0.06

0.08

0.10

-1.5

-1

-0.5

0

0.5

1

1.5

Relative competitiveness

Growth of GDP per capita, 1990-99

Source: IDB calculations based on World Bank (1999) and World Economic Forum (2001). See Appendix 1.3.

Note: Each dot represents a country.

Ukraine

Russia

Trinidad and Tobago

Dominican Rep.

Ireland

Singapore

Slide13

The largest firms are too small

18,018

28,288

30,753

36,748

46,597

53,282

179,218

248,746

735,729

1,326,523

1,683,048

4,603,380

6,280,798

1,174,702

3,982,546

14,000,000

10,000

100,000

1,000,000

10,000,000

100,000,000

Guatemala

Honduras

Nicaragua

Panama

Costa Rica

El Salvador

Peru

Colombia

Venezuela

Argentina

Chile

Mexico

Brazil

Latin America

East Asia

Developed countries

Average value of assets for the 25 largest firms (Thousand US dollars)

Regional Comparison of the Size of Large Firms

Source: Calculations RES-IDB based on WorldScope and América Economía

Slide14

…even for the size of the economies

13%

98%

164%

211%

100,000

1,000,000

10,000,000

Brazil

Mexico

Chile

Argentina

Venezuela

Colombia

Peru

The size of “large” firms vis-a-vis the size of the economies

Average assets of 25 largest firms (US$ Thsd)

Source: IDB calculations based on WorldScope and America Economia.

Expected for economy’s size

Gap

Slide15

However, export competitiveness has improved substantially

Slide16

…and Latin America has become a magnet for foreign direct investment

Total Inflows of FDI by Region, 1997-99

(Percent of GDP)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Middle East and

North Africa

Rest of Africa

Rest of Asia

East Europe

East Asia

Latin-America

Developed Countries

Source: IMF (2000).

Average of country

ratios

Average by region

Slide17

Is the lack of competitiveness due to deficiencies in the markets of the main productive factors?

Credit

Human resourcesInfrastructureTechnology

Slide18

Is it lack of credit?

Slide19

Lack of financing is obstacle #1 to Latin American business development

Major Obstacles to Business Development in Latin America

0

5

10

15

20

25

30

35

Judiciary system

Organized crime

Corruption

Practices against competition

Infrastructure

Street crime

Exchange rate

Inflation

Policy instability

Taxes and regulations

Financing

Source: World Business Environment Survey (WBES) and IDB calculations.

(Percentage that thinks it is the principal obstacle)

Slide20

Financial liberalization has taken big strides

Banks privatizedMost interest rates liberalized Reserve requirements reduced

Capital adequacy ratios adopted in all countriesSupervision strengthened.

Slide21

…and it has paid off

Slide22

But it has not been enough:

Credit is still scarce in Latin America

Slide23

Credit markets are underdeveloped

Credit to private sector (as % of GDP)

93%

14%

35%

153%

316%

172%

188%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Chile

Brazil

Colombia

Mexico

Argentina

Peru

Venezuela

Expected for income level

Gap

Slide24

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 burdensomeCreditors poorly protected in the event of bankruptcyLaw is unstable/unclear or not enforced.

Slide25

Effective protection of creditor rights is low in many countries

Slide26

…discouraging credit

Slide27

…and increasing credit volatility

Slide28

Strengthening creditor rights is essential to expand credit and improve competitiveness

Slide29

Is it lack of human capital?

Slide30

In Latin America, education is not growing fast enough

Slide31

Workers are still concentrated in low-wage sectors, where cost competition is tough

Slide32

This makes some costs troublesome

Contribution to Social Security by Employers and Employees 1999

(Percent of Gross Wages)

Source: Social Security Administration (1999)

0

5

10

15

20

25

30

35

40

45

50

Jamaica

Haiti

Trinidad & Tobago

Bahamas

Honduras

Barbados

Panama

Guyana

Dominican Republic

Venezuela

Guatemala

Nicaragua

Ecuador

Chile

El Salvador

Paraguay

Peru

Mexico

Bolivia

Costa Rica

Brazil

Colombia

Uruguay

Argentina

Latin America Average

United States

Japan

Germany

Average OECD

Slide33

This makes some costs troublesome

Cost of Mandatory Job Security Provisions in Latin America and the Caribbean,

1999 (In monthly wages)

Source: Ministries of Labor in Latin America and OECD(1999).

Slide34

What can be done?

Reduce payroll taxes and contributions

Strengthen the link between contributions and benefitsInstead of penalizing firms for firing…make them support employees’ saving plans Remove barriers to labor productivity

Slide35

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

Slide36

Removing barriers to labor productivity:

Training

The main problem: centralized training systems are too costly and ineffectiveMain strategies:Education policy to ease transition between school and workTax policies to encourage private training

Separate training regulation and provision Condition public funds to the programs that improve trainees’ hiring possibilities.

Slide37

Is it lack of infrastructure?

Slide38

Latin America is leader in infrastructure privatizations

0

100

200

300

Africa

Middle East

S. Asia

Europe and Central Asia

East Asia and the Pacific

LATIN AMERICA

Private Capital Participation in Infrastructure, 1990-99

Source: PPI, Proyect Database, World Bank.

US $ Mll

Privatizations

New investment

Operation Management with major private capital expenditure

Slide39

…in all main infrastructure sectors

Source: Private Participation in Infrastructure data base web page, World Bank (2001).

Slide40

…but infrastructure is still below international standards

Infrastructure Index: electricity, water, roads, telephones

* Includes electricity generation, acces to improved water source , paved roads and telephone mainlines.

12%

5%

39%

7%

17%

12%

2.8

3.0

3.3

3.5

3.8

4.0

Chile

Mexico

Argentina

Brazil

Colombia

Peru

Expected for income level

Gap

Slide41

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.

Slide42

Some countries have caught up with the international standard

36%

18%

1%

8%

45%

22%

2.5

2.8

3.0

3.3

3.5

3.8

Argentina

Chile

Venezuela

Colombia

Brasil

México

Perú

Telephone Mainlines and Mobile

Source: IDB calculations based on ITU (2000)

Expected for income level

Gap

Slide43

But problems remain:

THE CASE OF TELECOMMUNICATIONSThe cost of local calls has increased 14%

Huge telephone penetration gaps remainThere are 5 times more telephones per capita in the developed world than in Latin AmericaPenetration in the richest quintile is 7-10 times higher than in the lowest quintileMonopolies in the sector are obtaining returns of up to 45%!

Slide44

Privatization in electricity has been uneven

0

50

100

150

200

250

300

350

400

450

Ecuador

Mexico

Venezuela

Honduras

Nicaragua

Guatemala

Costa Rica

Bolivia

Peru

Jamaica

Dominican Republic

El Salvador

Trinidad & Tobago

Colombia

Panama

Brazil

Argentina

Chile

Divestiture

Greenfield Projects

Operation Management with major private capital expenditure

Private investment in the electricity sector, 1990-99

US Dollar per capita

Source: PPI database, World Bank (2000).

Slide45

…and much remains to be done

33%

61%

59%

36%

24%

73%

2.5

2.8

3.0

3.3

3.5

3.8

4.0

Chile

Argentina

Brazil

México

Colombia

Perú

Electricity generation

Source: IDB calculations based on World Bank WDI (2001)

Expected for income level

Gap

Slide46

Privatization is not enough

Introduce competition as soon as possibleGrant independence to regulatory authority

Regulate according with institutional capabilities

Slide47

Is it lack of capacity to assimilate new technologies?

Slide48

Latin America is not a laggard in the technological race

Internet Hosts and Personal Computers by Region, 1999

Africa

Middle East

East Europe

East Asia

Latin America

Developed Countries

Log scale

Internet Hosts (per 10,000

people)

PCs (per 1,000 people)

Source: ITU (2000).

811

23

20

18

6

3

353

44

43

50

32

10

Slide49

Internet adoption is going fast

1%

2.2

2.4

2.6

2.8

3.0

3.2

3.4

México

Argentina

Chile

Brazil

Colombia

Venezuela

Peru

Internet Hosts/populatiom

Source: IDB calculations based on ITU (2000)

Expected for income level

Slide50

The initial stages of information technology adoption have been fast

Because:

Enough market freedomNo lack of education among entrepreneursUp-to-date telecommunication systems in the large countries.

Slide51

…but further progress may be more difficult

Education is concentrated in a few

Training systems lack dynamismCredit is scarce for small firms Weak intellectual property rights Obstacles to business creation

Slide52

Latin American governments hinder the creation of new firms

Slide53

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.

Slide54

Synthesis: What is missing:

Deeper credit markets

Strengthen creditors protectionBetter use of existing human capital:Reduce payroll taxes and ease hiring and firingMore education and training:More performance incentives, less centralization

More and better infrastructure:Make regulation more independent and effective