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Presentation by Angel Gurría, OECD Secretary-General
VII Ibero-American Forum
Mexico City
29 November 2006
I am grateful to the organisers of the Ibero-American Forum for this invitation to share some thoughts on economic development in Latin America. It is an intriguing topic, especially if viewed from the perspective of international comparisons in an effort to understand why it is that some regions develop faster than others.
The current economic outlook for Latin America is encouraging. Various international bodies all put growth in the region for this year at 4 to 5 per cent. In Mexico and Brazil the pace will be slower, but still positive. The OECD concurs with this analysis.
This improved outlook for growth is the result of supportive international conditions as well as the reform agenda adopted in the past few decades by the countries of the region and the fact that those reforms, particularly the opening up of trade and macroeconomic management, are here to stay.
However, to succeed in building any real possibility of strengthening economic growth, stable majorities are needed. Chile illustrates this point well. The last thirteen national elections in Chile were all won by the coalition party, Concertación. One administration was able to build on what the previous one had put in place, expanding, adjusting and improving it.
Regrettably, building majorities in this way has not been the rule in all of the countries of Latin America. At least in Mexico, the lack of consensus on certain aspects of the economic agenda has profoundly limited the possibility of higher growth. That is what happened with fiscal reform, which was necessary under President Zedillo, urgent under President Fox and can be postponed no longer under President Calderón.
The two great disappointments
Growth in the region has not been enough to make up the historic lags in Latin-American countries. Of all of the emerging economies, Brazil and Mexico are among those that have seen the pace of growth slow over the last ten years. While China and India were taking off, with average growth of more than 6 per cent in the period 1998-2005, Mexico barely topped the 3 per cent mark while Brazil did not manage even that much. With such dismal performances, both Mexico and Brazil are missing out on very valuable development opportunities; missed opportunities which, unfortunately, do not figure as prominently as they should in the balance sheet.
Quite clearly, the drivers of growth that explain the performance of other regions are not as strong in the Latin-American region. Public investment in all areas is insufficient and ineffective; policy implementation, too, is less than optimal and an evaluation culture needs to be firmly established.
One of the indicators that best reflects an economy's competitiveness and innovation capacity is productivity. It is a telling fact that this indicator shows significant increases in the countries with the highest growth at international level -- like Finland or Korea -- even during cyclical downturns.
On this score, too, Latin America does not compare very well. Labour productivity has shown no great change in recent years.
Moreover, after Africa, Latin America is still the region with the greatest disparities in income distribution. This disparity is both the cause and the consequence of poor economic performance. In fact, no country has ever kick-started development without resolving the disparities issue. Along with this, one has to add that enduring poverty is also a barrier to growth.
In Europe, disparities have been successfully counterbalanced by tax systems, which are consequently a paramount instrument for redistribution, but this does not happen in Latin America.
Is there such a thing as a Latin curse? Are countries like Mexico and Brazil forever doomed to be underdeveloped while other economies like Korea and China overcome the barriers and join the rich countries' club?
Of course not.
Spain and Portugal are two Latin economies that have successfully taken off in the last few decades. Not so long ago -- in the mid-twentieth century -- the economies of Spain, Mexico and Portugal were highly comparable. However, starting in the 1960's, Spain and Portugal managed to make their way out of underdevelopment and, since the advent of democracy, both countries have seen spectacular take-offs.
How did they do it? What do, or did, the "Latin Americans" of Europe have that Latin Americans do not?
Both countries, as democracies with a firm base in Europe, managed to leave behind the low standards they had been stagnating in. Half way through the twentieth century, income in Spain was 50 per cent of that in Europe. Today it is nearly the same. Portugal followed a similar path, with income standing at 80 per cent of the European average by the end of the 1990s.
For Mexico, part of that firm base is membership of the OECD -- which prompted the co-ordination of its public policies, but the key component is the North American Free Trade Agreement (NAFTA), which has not enabled the country to take off for once and for all.
That is because the European Union and the NAFTA are two different concepts of regional integration and have worked in different ways. The results, too, have differed.
What the latter countries -- Spain, Portugal and Mexico alike - all have in common is that each has succeeded in putting its own house in order: reducing inflation, lowering levels of debt and increasing exports. Moreover, these three countries have also been successful in attracting substantial amounts of foreign indirect investment.
The key is to press on with the reforms
For Spain and Portugal, membership of the European Union is a constant source of regeneration and reform. For Mexico, the Free Trade Agreement has ceased to be so.
Migration is a reflection of this situation. From being countries of emigration in the 1960s and 1970s, Spain and Portugal are now destination countries for large flows of immigrants. Today, the immigrant population accounts for a high percentage (11%) of the total population of Spain. Meanwhile, Mexico is still sending emigrants to the US.
The greatest difference is the dizzying speed with which the Spanish economy has developed in different areas compared with Latin-American economies. Second generation reforms, which involve a more competitive environment, improvements in human capital and the transformation of judicial systems were not consolidated in the case of Latin-American countries. That is why macroeconomic stability is encouraging, but unless progress is made in the outstanding areas, it is not enough.
One of the areas in need of immediate institutional reform appears to be the operation of the judicial system. A judicial system that lacks transparency, legal certainty and efficiency involves a very high cost for the operation of the economy and, what is more, on the trust needed for society to operate. This is an Achilles' heel that has to be confronted with decisiveness.
Moreover, in Spain and Portugal, major progress has been made on the level and quality of public spending under headings as important as education and health. In Mexico, there is still a great deal left to do, which explains why the dynamism that this driver of growth ought to produce has not developed.
The standard of education of the population of Mexico has risen and investment in education has grown significantly. However, there has been no success in increasing quality or improving performance. There are countries, like the Slovak Republic, which manage to deliver much better results with very similar levels of spending.
Another driver of growth lacking in Mexico is infrastructure.
Since Spain became a member of the European Union, it has substantially improved its infrastructure. Over 50 per cent of the increase in investment was financed by money from the structural and cohesion funds, representing a cash injection of over EUR 150 000 million for Spain from 1986 to 2013, or an average of around EUR 6 000 million per year.
Meanwhile, official development assistance from the United States to Mexico for the period 1983 - 2004 totalled USD 780 million, or an average of USD 35.5 million dollars per year, only a small portion of which was for infrastructure. This difference in investment is reflected in Europe's lead in this area.
Conclusions
The optimistic outlook for the current economic situation in Latin America should not disguise the region's disappointing performance over the last few years, or the enduring poverty in which much of the population of Latin America is living. Latin America can and should have higher growth and better growth.
As in many other cases in Latin America, the problem is with policy implementation, not policy design. Gradual change coupled with flexibility and pragmatism is what has worked best in the region to date. Why not continue along this path?
This said, more than any other measure, what is needed is progress on the reform agenda and on building sound, efficient institutions. That is what will make the difference. If any external impetus can be put to use, so much the better, if not, we cannot just sit still while the world continues to progress at such great speed.
We know where we have to invest and we also know that our decisions have to be closer to the mark. It is a question of political will. I hope that is one ingredient that we will not be lacking at this important time for the region.
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