Development

The Middle Income Trap in Latin America: ongoing OECD-World Economic Forum partnership

 

Annual Meeting of the World Economic Forum

Private Session: Prioritising Policy for Inclusive Productivity

Remarks by OECD Secretary-General Angel Gurría

Congress Centre, Davos, 18 January 2017

 

 

Dear Luis Alberto Moreno, President of the Inter-American Development Bank, Dear Richard Samans, Head of the Centre for the Global Agenda, Member of the Managing Board of the World Economic Forum, ladies and gentlemen,

 

It is a pleasure to address this private session on Prioritising Policy for Inclusive Productivity and to specifically outline the results of the fruitful OECD-WEF collaboration on the Middle-Income Trap Project. This work is parallel and complementary to the work achieved by the Research Department at the IADB on the Priorities for Productivity and Income.

 

The middle-income trap in Latin America

 

It is widely recognised that the middle-income trap is traced to the inability of countries to undergo a process of structural change towards innovation and more knowledge-intensive production.

 

High levels of inequality may impact growth negatively by causing a lack of investment in human capital among low income families. Informality is also negatively correlated to productivity given that informal firms do not invest in workers´ skills. Both of these factors can affect economic performance, as shown in our Productivity-Inclusiveness Nexus report.

 

We believe that efforts to address productivity and inequality challenges would have a better chance of succeeding if we looked at the synergies and trade-offs emerging from these two elements.

 

Policy priorities of the OECD-WEF project

 

It is against this background that the OECD Development Centre is leading a project, in collaboration with the World Economic Forum (WEF), to develop a new policy prioritisation tool to help policymakers in Latin America prioritise reforms focused on overcoming the middle-income trap.

 

Past OECD experiences have shown that there are different pathways for middle-income countries to move to high-income status. These include higher trade integration to global markets, as is the case of Portugal and Spain; or boosting innovation policies in the case of Korea and Israel.

 

In addition, preliminary results show that to overcome the middle-income trap Latin America must prioritise policy actions to improve the rule of law, the taxation system, access and quality of education, investment, access to finance and economic diversification, and reduction of gender gaps. These are specific areas in which we identify numerous challenges.

 

Although education has improved significantly in the last decade, still two out of three young Latin Americans do not have the skills needed to obtain productive jobs. Low rates of completion of tertiary education is a major challenge: while 41% of the population aged 15-64 began tertiary education, only 14% completed it on average across LAC countries.

 

Additionally, close to 60% of Latin American exports are commodity and natural resource-based. The taxation system, which represents around 22% of the region’s GDP versus an OECD average of 34%, is based mainly on indirect taxes and does not contribute enough to reducing inequalities and promoting entrepreneurship.

 

In OECD countries, after taxes and social spending are taken into account, the Gini coefficient is reduced by close to 20 percentage points in OECD economies, while in most of the Latin American economies that reduction is only below three percentage points.

 

Reducing gender gaps is another crucial area of action. According to OECD analysis, men in Pacific Alliance countries (Peru, Colombia, Chile, Mexico) are 20 percentage points more likely to be in the labour market than women. The Gender Policy Review of Mexico that I just launched shows that only 47% of women in working age are part of the labour force, in comparison with a 67% average in OECD countries.

 

Building better institutions and public governance in the region is also a key aspect to increase the effectiveness of policy, fight corruption and rebuild trust. Almost 60% of Latin Americans stated in 2015 that they were not at all satisfied (19%) or not very satisfied (37.5%) with the functioning of democracy, with only 10% being very much satisfied.Only 36% of Latin Americans trust election outcomes.

 

These challenges will need to be addressed in order for the region to overcome the middle-income trap and achieve more inclusive and sustainable growth.

 

Next steps forward

 

Looking ahead, we are working with the WEF to extend this research by including new variables derived from the Forum’s Executive Opinion Survey. The Survey assesses the perspectives of more than 14,000 business leaders and their countries’ business and political environment, in order to analyse policy priorities for low-income countries, and to test novel empirical methodologies.

 

It is also clear from our recent report on the Productivity-Inclusiveness Nexus that the rise in inequality has likely had an adverse impact on productivity growth. This points to the need for a multi-dimensional approach to addressing the twin-challenge of promoting better productivity performance and reducing inequalities, including at the micro level.

 

Ladies and Gentlemen, I am very happy that our collaboration with the WEF is bearing fruit in this important project aimed at helping Latin America escape the middle-income trap. Though numerous challenges remain, it is vital that we continue to work together with the countries in the region to help them implement better policies for better lives. Thank you.