Latin America’s Challenges: A Sampling of Economists

Ilan Goldfajn and Eduardo Levy Yeyati have edited an e-book, Latin America: The Post-Pandemic Decade. Conversations with 16 Latin American Economists (VOX EU/CEPR Press, December 2021).

Much of the content is focused on immediate social, fiscal, and health issues facing countries of Latin America. Here, I’ll just offer a sampling of a few of the comments that caught my eye with a focus on longer-run challenges.

Ricardo Hausmann on Latin America’s difficulties with adopting new technologies

Over the past 60 years, the region has not shown a capacity to narrow the huge income gap it has with the advanced countries, except in short periods of unusually favourable international conditions. The region’s income per capita at market prices is less than 1/7 that of the United States, 1/4th when adjusted for purchasing power parity. The gains achieved during the 2004–14 commodity super-cycle have all been given back.

This lack of progress in closing the income gap is surprising in light of the fact that gaps in education, health, life expectancy, infant mortality, urbanisation, fertility rates and
female labour force participation have narrowed dramatically or even reversed, while gaps in investment effort are either small or negative. All this means that the gaps in physical and human capital have narrowed substantially. Policies have also become more market friendly: inflation is way down in the single digits (except in Venezuela and Argentina), credit ratings have improved, trade has been liberalised, public enterprises have been privatised and many other indicators of market-friendly structural policies have all been moving in the right direction, suggesting that the productivity with which physical and human capital are used should have improved, causing a convergence of iincome that should be even faster than the convergence in factors of production. And yet, we see no such narrowing of the income gap. Standard income or growth show a significant worsening of the productivity gap across the board, including in relatively good performers such as Chile, Peru, Colombia and Panama.

My interpretation of this state of affairs is that there is a growing technology gap: Latin America is particularly bad at adopting and adapting technology. … In my opinion, this is because technology adoption requires adaptation to local conditions, and this requires the production of other ‘ideas’ and the acquisition of missing knowhow. …One indication of efforts at the creation of productive ideas is investment in R&D and patenting. The OECD puts together statistics for R&D investment for its member countries and a few others. Fortunately, there are three Latin American OECD members. Unfortunately, these three countries – Colombia, Chile and Mexico – have the lowest reported rates of R&D spending in the OECD.

With patents, the numbers are even starker. For the region as a whole, the rate of patenting is 1/70th that of the United States, with the best performers – Brazil and Chile
– at about 1/40th of US levels. This is not a typical feature of middle-income countries: China’s patenting rate per capita is higher than the United States and Korea holds the world patenting record per capita, while Turkey, Eastern Europe and the former Soviet Union dwarf the best Latin American performers. Moreover, Latin America’s patenting rate is incredibly low when compared to the very large size of its university system and the rate at which it publishes scientific papers. While Latin America’s patenting rates average 1.5% of US per capita levels, its scientific publications average 13% of US levels, meaning that Latin America’s patenting rate is nine times smaller than would be expected given its scientific publications.

A final piece of evidence is the dearth of new exports in Latin America: while the export basket of fast-growing countries in East Asia and Easter Europe shows rapid diversification and sophistication – from garments, to electronics, to cars, to machinery, to chemicals and beyond – Latin America has been stuck in a narrow set of exports. Even Latin America’s own positive deviance – blueberries, soybeans, avocados and other fruits – speak about technological developments adapted to local conditions that allowed the region to deploy physical and human capital into new ‘ideas’.

Nora Lustig on lasting effect of the pandemic on inequality of educational outcomes across Latin America

Education may be Latin America’s most lasting scar from Covid-19. Our research suggests that the likelihood of today’s students completing secondary education may drop from a regional average of 61% to 46% (Neidhöfer et al. 2021). This average, however, hides striking differences across socioeconomic groups. While schools shut their doors to children of all backgrounds, their ability to continue learning depended on their parents’ income and educational level. Children in low-parental education households found it difficult, if not impossible, to continue their education at home due to lack of adequate equipment, connectivity and – above all – one-on-one coaching. Just as an example of such inequalities, the internet coverage for households whose head has less than secondary school in Bolivia, El Salvador, Honduras and Nicaragua is around 30%, while it is above 90% in families headed by adults with more than secondary education.

The probability of completing secondary school for children in low-parental education households could fall by almost 20 percentage points, from 52% to 32%. This low level
of educational attainment for children of disadvantaged families was last reported for cohorts born in the 1960s (!). In contrast, children from highly educated families will be hardly affected. The growing educational gap will damage social mobility and equality of opportunity for years to come unless we take the warning signs seriously and act fast.

Francisco Ferreira on Brazil and its public finances

Although I emphasised low (total factor) productivity growth as the main cause of the region’s disappointing long-term growth performance earlier, it is true that in many countries investment rates are also too low. I am not an expert on growth but, looking at a country like my own – Brazil – I have the impression that more public and private investment are both needed, and are likely to be quite complementary. After all, better ports and highways, reliable electricity supply and telecommunications would all lower the so-called Custo Brasil, and presumably encourage private investment.

What we need less of is public consumption – basically a polite name for all kinds of wasteful public expenditure that, as I suggested earlier, leave us with an OECD tax rate and Central American public services. Once we fix that – again, much easier said than done – then the state will have earned the right to ask for additional tax revenues – if those are needed. … Brazil is probably an extreme case of a bloated public sector in Latin America, perhaps followed by Argentina and Uruguay. The latest OECD revenue statistics for Latin America put Brazil’s overall tax-to-GDP ratio at 33.1% in 2019, just below the OECD average (33.8%) and well above the LAC average (22.9%). Even in Brazil, of course, taxation can still be made more progressive. Elsewhere, there is a likely case for both raising taxes in aggregate – hopefully all of it coming from the rich – and making public spending more efficient.

Rodrigo Valdés on the economic challenges in Chile

There are different hypotheses, of course, but let me offer one that applies to Chile. Potential growth has declined relentlessly in the last 20 years. Part of this was normalisation (it was extraordinarily high at some moment) and convergence (as you become more prosperous, you grow less). But what happened is much more intense than what these considerations can explain. In 1999, the IMF estimated Chile would grow by 7% in 2004 (five years out); in 2005, it expected 5% for 2009; currently, it predicts just 2% for 2025.

It is not (only) that the current and previous governments may have made mistakes or face unexpected shocks. Among the different macroeconomic drivers, only one has suffered a true sudden stop in the past couple of decades: the volume of exports. In per capita terms, exports increased fast until 1997 and have remained flat since 2008. From 1984 to 2000, Chilean exports consistently grew above world trade, and the opposite happened after 2006 (and this negative divergence has only increased). One possibility is that natural resource-based exports eventually do hit some ceiling. This appears to be the story at the micro level, as different industries show a similar pattern: birth, slow growth, take-off, consolidation. Of course, it is possible to discover new natural resources-based exporting initiatives, but it seems more promising to look to other areas. Export services, for example, seem to have been an essential step up in the growth trajectory of small open economies that reached developed status. In sum, our development strategy worked well for a while, but, at least for smaller countries, it now looks insufficient. How to transit to a new one is an unknown path full of perils.