Latin America: tackle twin challenges of inequality and low productivity to raise living standards
19/01/2016-Education, social protection and entrepreneurship are among the areas where priority action is needed to halt the slowdown in economic growth and tackle inequality across Latin America, according to the OECD.
After a period of relatively robust growth, the region has been hit by falls in global commodity prices, weaker activity in China and the beginning of monetary policy normalisation in the US. These external factors, combined with a backlog of urgently needed structural reforms, have slowed the rate at which Latin American countries were catching up with living standards in the advanced economies.
While acknowledging progress, the OECD’s Better Policies report on Latin America notes that income inequality in the region remains 65% higher than in high-income countries, 36% higher than in East Asian countries, and 18% higher than in sub-Saharan Africa.
Higher productivity growth is critical to closing the gaps in living standards, the report says. Although Latin Americans spend more time working than the OECD average, this is more than offset by the huge gap in productivity levels. The report calls on Latin American governments to develop a strategy for lifting productivity as well as tackling inequality.
OECD Secretary- General Angel Gurría said: “Policy-makers need to focus on a more inclusive concept of productivity growth. Better education, health and infrastructure, combined with pro-competition structural reforms, can deliver win-win results, so that everyone in Latin America can benefit from the greater wealth created.”
Developing the skills of young people and preparing them for lifelong learning increases social cohesion and labour productivity. More than half of 15-year-olds in Latin America do not acquire the basic skills needed to perform well in the labour market. Student outcomes are also more dependent on socio-economic background than the average in OECD countries. In Brazil and Costa Rica, for example, the likelihood of poor children getting a secondary education is almost half that of those from rich families. Initiatives such as the Bolsa Escola school-allowance programme in Brazil or the Oportunidades/Prospera cash transfer programme in Mexico are promising initiatives to help tackle this problem.
Creating high quality jobs is also crucial. Despite improvements over the past decades, many jobs in Latin American countries are still characterised by low pay, strenuous or hazardous working conditions and long hours. This is particularly true for the large share of the labour force employed in the informal economy. The OECD recommends that countries step up active labour-market programmes, enhance social protection schemes, safety standards and labour regulations, and improve the enforcement of employment laws.
Reducing barriers to entrepreneurship, trade and investment, strengthening the rule of law and stamping out public and private sector corruption are also crucial. The report cites Chile’s development of coherent and transparent investment promotion strategies as an example to follow.
Encouraging innovation is important. On average, OECD countries registered 132 patents per year per million inhabitants in the early 2010s, compared with 0.9 in Latin American countries. The report recommends enhancing knowledge flows between research institutions and firms and encouraging business R&D through an effective mix of grants and tax incentives. Particular attention needs to be paid to the needs of small businesses which are generally further behind large firms in benefitting from innovation than is the case in OECD countries. Initiative such as the Proyectos Asociativos de Fomento programme in Chile can make an important difference.
The report also calls for Latin American countries to upgrade their infrastructure. Weak transport links are an impediment to productivity growth and social inclusion in the region. Logistics costs in the region represent 18-35% of a product’s value, compared to around 8% in OECD countries.
The report is released as the OECD prepares for the launch of its Latin America and the Caribbean Regional Programme in June 2016 at the Ministerial Council Meeting that will be presided by Chile.
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