Remarks by Angel Gurría, OECD Secretary-General, delivered at the 24th Ibero-American Summit Veracruz 2014, Presentation of the Latin American Economic Outlook 2015
9 December 2014, Veracruz, Mexico
(As prepared for delivery)
Mr. President Santos, Dear Rebeca Grynspan, Alicia, Enrique, Luis Alberto:
Welcome to Mexico. It is a great pleasure for me to take part with all of you at this launch of the Latin American Economic Outlook 2015 (LEO 2015) here in Veracruz, one of the focal points of our region's history, in the context of this 24th Ibero-American Summit.
This report is the product of close collaboration between the CAF, ECLAC and the OECD, and on this occasion we are very grateful as well for the support provided by the Ministry of Foreign Relations of Mexico, AMEXCID, the Ministry of Foreign Affairs and Cooperation of Spain, and the Swiss Agency for Development and Cooperation.
The issues addressed in these studies are geared to the Summit programmes. Consequently, on this occasion we have focused on "Education, Skills and Innovation for Development", a triangle of inputs that are crucial for the inclusive and sustainable growth of our economies.
Allow me to situate this study briefly in the region's current economic setting and to share with you some of its conclusions and recommendations.
The economic setting: a slowdown and lower potential growth
After a phase of impressive growth, Latin America and the Caribbean are now experiencing a slowdown. The average growth rate for the region in 2014 is likely to be around 1.4%, the lowest in the last five years. In fact, if that forecast is correct, this will be the first time in the last 10 years that Latin America has grown more slowly than the OECD average.
But beyond this cyclical picture, the key question is whether we are witnessing a permanent adjustment in the region's potential growth capacity. Our analysis suggests that this is indeed the case: in fact, Latin America's growth potential today is lower, and is much closer to 3% then the 5% that we calculated just a few years ago. This in turn could frustrate efforts to reduce poverty and inequality in the region.
Despite the significant progress of recent years, around a third of the Latin American population still lives in poverty.
More than half of the emerging middle class is living in constant vulnerability, with incomes of less than 10 dollars a day, and many are working in the informal sector. Latin America is still the most unequal region in the world, and the only one with an average Gini coefficient of around 0.5, which places it in the "very high inequality" range.
This situation explains the recent upheavals and social tensions that have manifested themselves in various countries of the region (Argentina, Brazil, Chile, Mexico). It also reflects the erosion of trust in public institutions, in political parties, and even in democracy itself. It is a source of concern that only 39% of Latin Americans are satisfied with the way their democracy is functioning (Latinbarómetro 2013).
It is for these reasons that Latin America is being urged to engage in a new round of structural reforms that will help to boost its productivity, enhance its competitiveness, and build more inclusive and sustainable economies. While the most urgent changes are in the fiscal area, the rule of law and the informal economy, our report also proposes movement on three fronts of strategic importance for long-term development: education, skills and innovation.
Education, skills and innovation: knowledge for development
First of all, Latin America needs to make some fundamental changes to improve its education systems. Although some countries have made important progress, particularly in terms of education coverage and spending, there are still some enormous challenges facing the sector.
On the PISA tests, Latin American students aged 15 and 16 still receive among the lowest scores, representing a gap of more than two years of schooling in comparison with OECD countries. Educational inequality is another great challenge: in fact, a third of the performance differential among Latin American students can be explained by the socioeconomic level of their families.
To address these educational challenges, the study calls for expanding the coverage of early education, promoting investments that will benefit the most disadvantaged students, and improving the teacher accreditation mechanisms in secondary and tertiary education. We also suggest measures to improve the governance, the distribution, the efficiency and the transparency of resource utilisation in the schools.
Efforts to improve education must also be accompanied by moves to adapt educational content to the skills requirements of the labour market. Latin America is among the regions that have the greatest difficulty in supplying the skills demanded by businesses.
According to the LEO 2015 report, the likelihood that a Latin American firm will encounter severe problems in meeting its human capital needs is three times as high as that for a firm located in South Asia, and 13 times higher than that for a firm in the Asia-Pacific region.
The lack of adequate skills leads to poor performance on the part of the Latin American workforce, and this goes a long way to explaining the region's low productivity and slow growth in per capita GDP compared to other economies, especially those in Asia.
While 28% of the per capita GDP discrepancy between Latin America and the OECD can be explained by years of schooling, when skills performance is added the differentials in human capital quality explain nearly 60% of this gap.
To strengthen the link between skills supply and demand, the region's technical and vocational training systems will have to be further developed and strengthened. This will require mechanisms for recognising and certifying skills, and involving the private sector in the design and delivery of an apprenticeship system.
The OECD has some very successful experience (for example in Germany, Austria and Korea) that could be useful for aligning training systems with the skills required by the labour market. We are promoting a "Skills Strategy" that will help several countries in the region, and Spain and Portugal as well, to identify and develop the needed skills.
The third key element is innovation. Latin America has among the world's highest endowments in ingenuity and creativity, but our countries still lag behind in their capacity for innovation. According to estimates by the OECD Development Centre, Latin America's knowledge-based or "innovation" capital amounts to only 13% of GDP, compared to 30% in the OECD.
Gross spending on research and development in Chile and Mexico is only 0.4% of GDP, while in Korea it is 4.4% and in Israel 3.9%.
We are not going to get very far with such low levels of innovation. The countries of Latin America need to foster the creation of better, more modern and more effective national innovation systems.
This effort must include a regulatory and fiscal framework that will encourage participation by businesses in innovation; physical and ICT infrastructure that will facilitate the development of platforms for investing in knowledge and innovation; programmes to support innovation among SMEs, and start-ups in particular; a strategy for linking investment promotion with innovation policies; and a well-educated and properly supported workforce that can make use of existing innovations and generate new ones.
Industrial policy over the coming decades should focus on developing skills in new technologies and on innovation geared to environmental sustainability.
To sum up, we have to move to a higher level of well-being. We have to construct the instruments, the systems, the programmes, the institutions and the workforce to achieve stronger growth that is more inclusive and more sustainable. As the ardent Ibero-Americanist Alfonso Reyes once said, "Our America should live as though it were always getting set to achieve the dream that its discovery inspired among
European thinkers: the dream of Utopia, of the happy republic.”
We hope that the LEO 2015, the work we are pursuing in and with Latin America on progress indicators, and the growing collaboration with the SEGIB, the CAF and ECLAC will help to make that dream a reality.