Monday, March 22, 2010

Lack of Productivity a Drag on Growth in The Caribbean And Latin America

Low productivity growth is the main reason most countries in Latin America and the Caribbean have lagged growth rates of both advanced countries and peer countries in East Asia, according to a study by the Inter-American Development Bank (IDB).

The study, which analysed how efficiently nations are utilising their productive resources, looked into productivity gains and losses, relative to the United States, for a sample of 76 countries, including 17 from Latin America and the Caribbean. Chile was the only country in the region to increase its productivity against the United States since 1960.

Half of the 20 worst performing countries in terms of productivity in the sample are from Latin America and the Caribbean.

Breaking against the commonly held notion that the region’s growth suffers from insufficient investment, the study shows that Latin America and the Caribbean could greatly accelerate their economic growth and narrow the income per capita gap against industrialised nations with policies that promote a better use of existing resources in the economy.

“More than additional investments, countries in the region need to make better use of the existing stock of physical and human capital,” said IDB economist Carmen Pagés-Serra, who co-ordinated a team of researchers for the upcoming IDB book: The Age of Productivity: Transforming Economies from the Bottom Up.

“There is a huge, untapped opportunity for policymakers in the region to invest in reforms and sensible policies that can allow the region to quickly catch up with other regions of the world,” said Santiago Levy, Vice President of Sectors and Knowledge of the IDB.

Economic growth and income per capita in the region could dramatically improve, for example, with increased credit, simpler and better distributed tax regimes, better transportation, and a better tailored social policy to reduce labour informality.

The study analysed productivity in several sectors of the economy in the region.

Agriculture is the fastest growing sector, yet its growth is still below the world average. But the bad news really lie is in the dismal performance of the service sector, which employs about 70 percent of the region’s workforce and is increasingly dragging down aggregate productivity in the region.

Latin America’s productivity growth in both industry and, particularly in services has underperformed compared to East Asian and industrial countries.

The case of the service sectors is the most dramatic. In this large part of the economy, productivity fell sharply during the 1980s and has remained stagnant for the last 15 years.

The gap is large relative to East Asia, where productivity in services has grown by about 2.5 percent a year in the last 15 years, and also relative to high-income countries, where productivity in services has increased by about 1.4 percent a year.

Had productivity in the service sector grown at the pace it did in East Asia, economy wide productivity growth in the typical country of the region would have almost doubled.

It has become commonplace for policymakers in the region to focus on boosting exports and improving the quality of tradable goods as a strategy to improve competitiveness and income levels.

However, this study suggests that increasing productivity in the service sector is key for boosting economic growth in Latin America and the Caribbean in coming years.
“Given the size of its tertiary sector, the region urgently needs to implement policies to increase productivity of this industry,” said Pagés.

Chief among the reforms is to tackle the high rates of informality in this sector, which gives small firms – the vast majority of which are very inefficient – an unfair advantage in the market place against formal companies. By being informal, these small companies are shielded from the competition of better and more productive business models. These firms survive because they evade taxes, utilising productive resources that would otherwise go to more efficient sectors of the economy.

Simplified tax regimes coupled with measures to reduce evasion and lower corporate taxes could reduce the level of informality in the economy. The study also recommends governments expand credit for companies, a move that would not only pave the way for more innovation but also help reduce the level of informality in the economy.

Source: BarbadosAdvocate

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