The Illusion of Growth in Latin America

Despite its geographical breadth and abundance of natural resources, Latin America is a minor economic player on the global stage. Currently, its GDP corresponds to approximately 7% of the world total, a proportion that has remained relatively stable since the 1970s.

However, the most worrying part of this situation is Latin America’s chronic lack of growth. Recent data published by the IMF show that the region grows significantly less than the world average. In the last three years, global growth averaged 3.5% annually, while Latin America grew at 1%. The Latin American growth index, at 1%, is below the average of developed countries (approximately 2%) and much lower than that of countries with economies rated as emerging (around 4.5%).

What explains this complex and frustrating situation? There are some obvious issues related to politics (e.g., populism, lack of consistent national projects, an unclear vision of the structural elements of local economies) and social aspects (inequality, lack of access to the consumer market by the lower classes, a relatively small middle class). However, I would like to focus on the issue of productivity.

Looking very conceptually, economic growth can be largely explained by two components: the size of the labor force (i.e., the number of active workers in an economy) and its productivity (i.e., how much added value each person contributes through their work).

A recent study by McKinsey Global Institute (a “think tank” linked to the McKinsey & Co. consulting firm), analysed these issues to explain the growth of Latin American national economies between 2000 and 2016. The result is surprising, especially considering that these years Latin America saw a strong expansion of regional economies, due to the appreciation of prices of basic goods.

What is noteworthy is that for most countries in the region (with some exceptions, such as Colombia), around 70% of growth is explained by increases in the labor market. It’s especially surprising if we consider that this period was marked by greater inclusion of workers in the formal market, while only 30% is explained by higher productivity. If we look at the Chinese economy performance in the same period, we note that 94% of its growth is explained by the increase in productivity -- and only 6% by labor market expansion. And this is not low growth for China, since its GDP grew by more than 10 times in this cycle, from 1 to more than 11 trillion dollars!

In summary, the productivity of Latin American workers is low. But what are the key variables associated with productivity growth? Mainly two: one in the short term, and the other in the long term. They are not completely independent. In the short term, the adoption of technology is essential: new machinery, more robust and developed systems, automation, robotization, better production processes. In the long term, worker training and qualification is essential.

This brings us to one of the main Latin American tragedies: poor-quality education. If we look at the education indicators of the region, we see that practically all countries are in the same boat: they offer poor (public and private) education that generates people who are practically illiterate in the fundamental cognitive components of language, mathematics, and science.

This deficiency has already had an impact -- and will become even greater -- on the productivity of the region’s workers. In economic terms, productivity in Latin America has been stagnant for many years. The example that is always used as a benchmark for this topic is the comparison between the productivity of Brazilian workers and their Korean peers: in the 1970s, a Brazilian produced 10% more than a South Korean. Today, he produces a third. In other words, a Korean adds, on average, the same value as three Brazilians.

How did it come to this? The answer is simple: education. South Korea, since the 1950s, has invested heavily in education, and trained increasingly qualified people as a long-term bet.

So far, we’ve talked only about the problems. Now let’s talk about how to tackle them.

The most effective solution: Intraregional trade

Intraregional trade is vital to achieving economic prosperity, social progress, and political stability in Latin America. Increasing it can create more and better jobs, bring millions out of poverty, and improve standards of living across the region.

That’s why intraregional trade should be a central objective of every national and supranational agenda. However, it seems like Latin American countries do not want themselves as trading partners.

The Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), Alicia Bárcena Ibarra, said in an event held last year in Buenos Aires that intraregional trade had experienced one of its biggest drops in recent history, although this type of trade is precisely what could boost the economies of the region. “We (Latin America) tend not to buy each other’s goods, yet intraregional trade is precisely what we need that can take us to the productivity level of the developed countries. It is far from its historical level of 21%, which we reached when Mercosur [1991] was formed. Now it’s only 15.5%," she said. 

Unsurprisingly, intraregional trade is far below that of most other regions by international standards, accounting for just 16% of Latin America and the Caribbean (LAC) total exports in 2017. In the developed economies of Europe and Asia, that total exceeds 50 percent.

There are various reasons for this, including Latin America’s poor logistics and transport infrastructure (only 23% of the roads in the region are paved); its gigantic size (over 20 million square kilometres); conflicts over energy and natural resources among many South American nations; and the gravitational pull that the United States of America exerts on many countries in the region.

This is the scenario we face in the region. The processes that will lead us to the fourth industrial revolution have already begun and shows signs of intense acceleration. Companies are beginning to prepare for digital transformation, developing their infrastructures, investing in digital solutions, and seeking to be more competitive in an increasingly globalized and disruptive world.

On the other hand, will the prominent leaders of Latin America -- the great political decision-makers, those who should think about creating long-term wealth, improving social conditions and reducing inequalities -- understand the bottleneck for development for the 8.42% of the total world population that lives in the region? Are they making the right decisions and prioritizing the really important issues?

Stevie Clark blogs at School Supplies and has worked as a support staff educator. She’s well-versed in issues of education policy.