Remarks by Angel Gurría, OECD Secretary-General, delivered at the 2012 Canning Conference: Latin America on the Global Stage
London, Tuesday 23 October 2012
(As prepared for delivery)
Ladies and Gentlemen,
It is a great pleasure to be at Canning House once again. In these fast, changing times in which the world is adding one billion people almost every ten years, it is reassuring to have places where we can take a pause and think about the underlying global dynamics. Both Canning House and the OECD are still sources of analysis and debate on short and long term trends. Our collaboration is essential for policy-making.
Latin America has made considerable progress in the past decade and most of its countries have shown impressive resilience throughout the crisis. However, this relatively favourable economic performance is not yet enough to face the region’s challenges. The region still has to tackle many structural challenges to turn stability into long term and inclusive growth.
Latin America: strong resilience, however…
The idea of Latin America as a region resilient to the global crisis is hardly news by now. We all know of the superior growth performance that the region has registered during the last years, especially when compared to advanced economies. Latin America’s GDP growth for this year is projected to be 3.2% and 4.0% in 2013, in contrast to 1.6% and 2.2% in the OECD. This should carry on in the immediate future, even if Latin America is moving towards a scenario of more subdued growth.
In general, prudent macroeconomic management and the reliable external demand from some of the region’s trade partners (notably, China) have contributed to these trends in growth. However, they are by no means guaranteed and volatility in the economic prospects is again a feature in the economic landscape. In Brazil, for instance, consensus forecasts for 2012 have moved from 3.3% in January to 1.6% in October. Even drastic corrections are being registered in the case of Argentina.
Latin America’s experience shows that sound macroeconomic management is not enough to guarantee growth. The region still needs to address significant structural challenges. For example, high commodity prices are leading some countries in the region to accentuate an economic model based almost exclusively on primary goods, and this is making the region vulnerable.
Most Latin American economies exhibit a rather low level of sector diversification on their exports. Commodity industries are often characterized by their limited capacity to disseminate positive externalities, in terms of employment creation or knowledge spillovers, over the rest of the economy. Non-commodity exporters, on the other hand, face their own kind of challenges derived from high commodity prices. Here, the rise of commodity prices have deteriorated the terms of trade for some of these countries.
Less commodities, more knowledge-based productivity.
Latin America must seek new ways to enhance the competitiveness of non-commodity sectors without creating barriers to trade. Here, productivity enhancement policies can go a long way in reducing the duality of regional economic systems, and extending productivity gains over a larger share of economic activities.
Examples of these policies are a balanced effort through investments in infrastructure, innovation, or education. All of them areas where Latin America presents large shortfalls compared to other regions. For instance, Latin America invests around 2% of GDP in infrastructure. However, satisfying the new demand for infrastructure in the region will require a ratio of 5% of GDP up to 2020.
Investment in innovation is another illustrative case: Latin America only invests around 0.6% of GDP in R&D, while the same ratio for OECD countries is around 2.3%. If the region is expected to raise productivity levels to improve competitiveness, these figures need to increase substantially.
Another focal point of action should center on the role that Small and Medium Enterprises (SMEs) can play in the economy. Our annual flagship report on Latin America, the Latin American Economic Outlook, this year addresses this issue. SMEs are a fundamental component of the productive fabric in Latin America, accounting for around 99% of businesses and employing around 67% of employees. But on the other hand, they contribute relatively little to GDP, which reflects their low levels of productivity.
Any effort towards a significant change in economic specialisation and greater productivity must take these enterprises into consideration. This should be done through a wide-ranging support package, that involves the many limitations these productive units face: access to finance, low levels of internationalisation, informality, etc.
It’s time for an inclusive Latin America
The Latin American economies have to design and implement successfully "Productivity Enhancement Policies" oriented to improve one of the greatest weaknesses of the whole region: its uneven income distribution. So far, other policy initiatives (fiscal, education, health) have not delivered the expected results.
Diversifying the economy into more knowledge-based sectors, or fostering small-size entrepreneurship can also contribute to tackle the fundamental issue of social and economic inequalities. This is even more important if we reflect on the fact that measures implemented up to this point have barely borne any fruits.
First of all, it is clear that growth per se has not been enough to correct the problem of inequality in Latin America. The long cycle of growth that the region has enjoyed during the last decade has led only to very mild improvements in Gini coefficients* across the region. In most instances, reductions in this indicator have been marginal and inequalities remain high.
Traditional policy efforts to tackle inequality have proven unsuccessful as well. Taxes remain an impaired tool for income redistribution, for several reasons: foremost, revenues remain very low compared to international standards. According to our “Revenue Statistics in Latin America” publication, fiscal revenues in the region only add up to 19% of GDP (on average).
This contrasts with the 30% average of OECD economies. In addition, tax systems in the region remain highly dependent on commodity-related revenues, with direct taxes comprising a much less important share. In all, fiscal systems in Latin America remain characterised by an unequal distribution of the tax burden.
Education is another illustrative example. The greater financial effort that many countries have committed to the provision of public education has not eliminated the existing deficiencies in quality. The OECD’s Programme for International Student Assessment (PISA) shows that almost 50% of Latin American students fail to reach the minimum acceptable level in reading tests, against a rate below 20% in OECD economies. Also, family background remains a key explanatory factor to predict education achievements. In this context, the process of social mobility through education becomes very difficult.
All of the above tells us that a renewed effort to tackle inequality needs to be adopted. A comprehensive policy approach that focusses on the productive structure can guide the structural transformation of Latin America towards sectors that would facilitate productivity gains and more competititive exports. In addition, a more fine-tuned policy mix that incorporates the productive structure can also help to provide more and better-quality jobs, and in general a more equitable distribution of the benefits of growth, thus complementing the efforts the region has undertaken in other policy areas.
Ladies and Gentlemen:
Latin America’s recent improvement is not a mirage. Most of the countries in the region have made remarkable progress in strengthening their public finances, improving their business environments and reducing extreme poverty. However, most of their structural challenges are still there. It is time to change the model.
As Andrés Velasco, Chile’s ex-Finance Minister, has put it, the region’s central challenge is “to transform its huge natural-resource wealth into the kind of wealth that does not run out.” And I would add: and re-orient all their policies to reducing income inequalities.
The OECD is working with many Latin American countries in this direction. As a Latin American but also as Secretary-General of this Organisation, I am confident that by working together, we will achieve this objective sooner rather than later.
Thank you very much.
*The Gini coefficient, a standard measure of income inequality that ranges from 0 (when everybody has identical incomes) to 1 (when all income goes to only one person).
For more information about inequality, read Divided We Stand: Why Inequality Keeps Rising.