CAF recommends boosting productivity for better development

The lag of Peru and other Latin America countries – compared to leading Nations in Asia, Europe and North America – is mainly due to the low level of productivity, which is the main economic growth and development driver.

This is stated as such in the Economy and Development Report (EDR) 2018 “Institutions for Productivity: towards a better business environment,” presented in Lima by CAF-development bank of Latin America- where it is stressed that the region presents such a lag due to low productivity and innovation, inefficient distribution of jobs and capital across companies.

CAF’s representative in Peru, Manuel Malaret, explained that the EDR focused on factors which affect productivity across companies, such as labor relations, the degree of competition, access to inputs, cooperation between firms, and financing.

“The purpose of this year’s EDR is to analyze the productivity issue as a critical factor for the development of our countries. In the recent history of Latin America, there were two convergences of policies, which have generated interesting and positive results for macroeconomic stability and the reduction of inequality. We think that henceforth our efforts must be directed at the promotion of productivity and we propose that CAF member countries also converge in this new productivity pact,” he added.

In reference to the local case, during the presentation of the study, Manuel Toledo, Chief Economist of CAF, argued that the construction sector in Peru reports a productivity of 36% per worker against that of the United States, followed by personal services, manufacturing, and mining. On average, for 10 sectors, productivity in Peru is 23% per worker (year 2010).

He highlighted the major breakthrough Peru has shown in recent years in rising from a per capita income of 11%, against that of the United States, in the first five years of this century, to 21% in 2014. "The low level of income per inhabitant of the countries in the region is explained by the low labor productivity which, on average, is 26% vis-à-vis that of the United States. Meanwhile, labor productivity in Peru was 17% against that of the United States, during the 2004-2014 period,” he pointed out.

Employment and productivity

According to the EDR, public policy should be directed to reducing informality by strengthening the capacity of the State to monitor compliance with standards associated with formality and punish noncompliance; to manage and design systems of taxes and levies that are more transparent and easier to handle for companies and workers; and to manage labor re-training programs that facilitate reassignment of workers to formal jobs.

In this regard, Toledo added that Peru has the fourth highest percentage of average hours worked among the countries of the region, reporting 4% more average hours worked against the United States. The product per hour worked in Peru in relation to the United States is 17%, the lowest compared to Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, or Mexico.

He stressed that Peru has an employment rate that exceeds that of the United States in 1%, being the third highest in the region, and its rate of informality decreased from 77% to 53% between 2011 and 2015. Unemployment is also structurally low (3.6%). “There is approximately a 5-year difference in the average seniority in the workplace among formal workers (8 years) and informal workers (3 years), while the average for Latin America is 3 years,” he added.

Promoting competition

On the other hand, the specialist said that Peru shows similar levels to the Latin American average for Government effectiveness, quality of regulation, rule of law, and corruption control. It also shows similar values to that of the OECD indicators for action against anti-competitive practices, effectiveness in blocking these practices, and promotion of competition. However, it shows a clear lag in research integrity, also being the most deficient in relation to Brazil, Chile, Colombia, and Mexico.

He specified that in Peru, 51% of companies in the service sector consider that permits and licenses represent an obstacle to operate in the market. In contrast, the result in the manufacturing sector is only 29%. The Latin America average is 42% and 35%, respectively.

On the other hand, according to the OECD, Peru is the second country in the region with less legal entry barriers (0.4). The index also measures the easiness to obtain licenses and permits where Peru (3.7) is below the Latin American average (4.6), but above the OECD average (3.1).

According to the 2009 Service Trade Restrictiveness Index, Peru has higher restrictions than the OECD countries (10 vs. 8.2), and the European Union countries (9.7), but lower than the average for Latin America (13.5). In addition, Peru (1.9) is currently the only country with tariffs at the same level or even below those observed in most developed countries. The average for Latin America is 6.9.

Improving business financing

The EDR also helps design and implement an institutional reform agenda to improve the environment where companies operate, as well as encourage innovation, efficiency in resource allocation, and a better production integration.

Peru has the fifth largest credit market (measured as the credit for the private sector as a percentage of GDP) in the region with 36%. This is lower than the average in Latin American (50%) and the OECD (147%). The country also presents low results in the survey on financial knowledge levels with 70% of wrong answers. Moreover, the fact of not having credit history was the third most mentioned cause for refused credit in this country.

In this regard, CAF and other institutions are implementing programs to promote financial inclusion and education in those countries, as this is another aspect in which the region needs a lot improvement in order to generate an expansion in the financial system beneficiaries.

The EDR also proposes regulations to encourage public-private partnerships, especially in key infrastructure services, as well as policies that underpin productive clusters that can promote synergies among companies and strengthen ties within value chains. Likewise, it suggests safeguarding basic institutions, such as the protection of property rights and contract and law compliance.

The 2018 EDR presentation was attended by Hugo Perea, Deputy Minister of Economy; Socorro Heysen, Superintendent of Banking, Insurance and AFP; Elmer Cuba, Macroconsult partner; Manuel Malaret, CAF representative in Peru; David Mayorga, academic Vice-Rector of the University of the Pacific, and Pablo Lavado, Professor of the Department of Economics at that university.