(CMC) – Latin American and the Caribbean (LAC) countries require an ambitious growth agenda that focuses on overcoming large gaps in investment and productivity, according to a report by the Inter-American Development Bank (IDB).
The report, released on the final day of the at the IDB annual board of governors meeting, noted that while the global economy faces potential risks from higher interest rates and a correction to global asset prices, the region’s overall outlook is positive, with a 1.9 per cent growth rate expected this year.
This, however, is well below the growth rate expected for the world of 3.9 per cent, and Latin America and the Caribbean will continue to lag unless substantial policy changes are enacted on the economic front.
The report titled “A Mandate to Grow” notes that past drivers of growth such as positive demographic trends, increasing commodity prices, and available fiscal stimulus space are either reversed or restricted.
“For many decades now, Latin America has been accumulating a growth deficit,” said IDB Vice-President for Sectors, Santiago Levy.
“Macroeconomic stability is a good starting point to get an economy moving forward. But to grow more vigorously, we need to invest more and more productively, and we need to tackle the bottlenecks that limit growth, which include the design of tax systems, low savings, credit constraints and the lack of competitive markets that reward high productivity.”
The IDB says Latin America and the Caribbean certainly need more investments, particularly in infrastructure.
It noted that investment rates for the 1990-2017 period averaged 17 per cent of gross domestic product (GDP), well behind the 26 per cent rate for Emerging Asia.
Also, the region is 40 per cent less effective than Emerging Asia in generating GDP growth for every additional invested dollar. Latin America’s economy would be three times larger today if it had managed to match Emerging Asia’s investment rates and efficiency since 1990.
Challenges for the region include the low savings rates, with small and inefficient financial systems, pension systems that have low coverage, and on the fiscal front, low revenues and a bias against public investment relative to consumption.
The reports notes that at the heart of the productivity shortfall lie the size and lack of dynamism of the region’s firms.
Causes highlighted in the report include financial market imperfections, uneven taxation, poorly enforced labour market regulations, high entry costs, and other barriers to competition.
Financial markets need legal systems that provide adequate protection to creditors, and a more effective use of collateral and guarantees, as well as better information about borrowers. These problems prevent productive firms from financing good ideas and attain ideal size.
Tax authorities tend to focus on larger firms, so smaller ones have incentives to stay smaller to evade paying taxes. This problem is compounded when tax regimes provide special exemptions to smaller firms. Labour market regulations make firing difficult, and social insurance programmes make hiring costly, especially as a firm grows.
“Countries should revise tax and labour policies to ensure competition that provides a levelled playing field, in which more productive firms can thrive,” said Eduardo Cavallo, an IDB lead economist and co-author of the report.
“These reforms are difficult, of course, but the region would gain a big growth windfall in return.”