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 low productivity levels, which is the main driver of economic growth and development.

This is one of the conclusions of the 2018 Economy and Development Report (EDR) “Institutions for Productivity: towards a better business environment,” presented in Lima by CAF Development Bank of Latin America. The report underscores that the region’s falling behind is due to low productivity and innovation, as well as 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 productivity as a critical factor for the development of our countries. In the recent history of Latin America, there were two instances of policy convergence, which have yielded interesting and positive results for macroeconomic stability and reduction of inequality. We think that henceforth our efforts must be directed at the promotion of productivity, and we propose CAF member countries to join 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 productivity of the construction sector in Peru is 36% per worker vs. 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 Peru’s major breakthrough in recent years in rising from a per capita income of 11%, vs. the United States, in 2000-20005, to 21% in 2014. “The low per capita income level of countries in the region is explained by low labor productivity which, on average, is 26% vs. the United States. Meanwhile, labor productivity in Peru was 17% 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, with 4% more hours worked in average compared to the U.S. The product per hour worked in Peru in relation to the United States is 17%, the lowest among Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, and Mexico.

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

Promoting competition

Furthermore, the specialist said that Peru performs similarly to the regional average in terms of 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-trust practices, effectiveness in preventing these practices, and promotion of competition. However, it shows a clear lag in research integrity, also the lowest compared 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.

In addition, according to the OECD, Peru is the second country in the region with fewest legal entry barriers (0.4). The index also measures the ease 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 regional average (13.5). In addition, Peru (1.9) is currently the only country with tariffs similar to or even below those observed in the 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 business environment, as well as encourage innovation, efficiency in funds allocation, and 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 was also a low performer in the survey on financial knowledge levels, with 70% of wrong answers. Moreover, not having a 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 there is room for improvement here in order to expand 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.