Journal Issue

Investment and Productivity are Key to Latin America’s Prospects

International Monetary Fund. External Relations Dept.
Published Date:
November 2006
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Latin America and the Caribbean have recorded impressive growth in recent years, but it should have been stronger, Mexico’s President Vicente Fox and Finance Minister Francisco Gil Diaz said in opening the first joint conference of the Latin American and Caribbean Economic Association and the Latin American Meeting of the Econometric Society. The event, held in Mexico City November 2–4, spotlighted what needs to be done to boost growth, maintain stability, and enhance social welfare.

In search of higher growth

How can the region turn relatively strong growth into dynamic, sustained growth? Central to this transformation, said Robert Lucas (University of Chicago), are higher returns on human capital accumulation. Once these higher returns are recognized, people will invest more in themselves and in their children, and that, in turn, will lead to higher per capita income. Policies and institutions, he emphasized, should be geared toward raising the return on human investment. Income transfers simply cannot produce the kind of sustained increase in per capita income that is needed.

Jeffrey Sachs (Columbia University) argued that the region’s priorities should be investing in better-quality education and health care and facilitating technological innovation, including through greater trade openness. The region continues to lag behind Asia—a situation he attributed to time lost in pursuing inward-oriented policies and in remaining focused on market reforms rather than on productivity-enhancing technological progress.

Inefficiencies in the labor and financial markets mattered, too. Jose Scheinkman (Princeton University) found that excessive regulatory burdens and weak institutions encourage informality in economic activity, and informal activities tend to perpetuate themselves, hindering advances in productivity. Arturo Fernández (Instituto Tecnológico Autónomo de México) called for regulatory reforms to help shift resources from the informal to the formal sector, while Andres Velasco, Chile’s Finance Minister, called for pathbreaking research on industrial organization and labor economics for the region.

Taming volatility

In recent decades, recurrent crises have set back the region’s quest to boost per capita income. The current expansion, however, has been on firmer ground, according to Anoop Singh, who presented the IMF’s economic outlook for the region (see page 328). He underscored that the current benign external environment affords an opportunity to entrench macroeconomic stability through fiscal reforms that reduce budget rigidities, improve equity through tax and labor market reforms, and reduce structural impediments to investment and entrepreneurship.

While acknowledging the region’s relatively solid performance, Guillermo Calvo (Inter-American Development Bank) called on policymakers to remain alert to the possibility of sudden stops in capital inflows if the current environment deteriorates. The region has adjusted reasonably well to competition from China and India, Guillermo Perry (World Bank) observed, but more could be done to promote trade and investment with the two countries and to accelerate the region’s shift toward natural resource and knowledge-based sectors.

Amid progress in strengthening monetary policy institutions, multiple sessions took up central banking issues. Andre Minella (Banco Central do Brasil) and Claudio Soto (Banco Central de Chile), for example, presented quantitative models of inflation targeting for their home countries. Further work, they said, is under way to improve the usefulness of these models for monetary policy analysis.

Enhancing social welfare

Pension reforms in the region have garnered much attention, but have they produced fiscal benefits? The answer, Laurence Kotlikoff (Boston University) suggested, lies in whether government consumption has declined, the distribution of resources across and within generations has improved, and the incentives to work, save, and join the formal economy have increased. Unfortunately, he said, nothing much has changed, and the reforms have imposed substantial social costs. A true accounting, however, awaits systematic assessments of these reforms.

In a provocative lecture on the welfare implications of health investments, Gary Becker (University of Chicago) estimated that very large gains have accrued from reducing mortality. Between 1970 and 2000, these gains amounted to $95 trillion for the United States and $240 trillion for the advanced economies. His calculations suggest potentially substantial welfare gains from enhancing the quantity and efficiency of health investments. For Latin America, where inequality is high, this seems to argue for increasing access to quality health care for all, especially the young.

More broadly, Mauricio Cardenas (Fedesarrollo) raised concerns about severe inequities and inflexibility in fiscal expenditures and about conditional cash transfer programs. These programs were meant to be temporary but now risk becoming permanent. That, he warned, would leave fiscal policies in the region even more inflexible.

Rishi Goyal

IMF Western Hemisphere Department

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