Confidence in government institutions, the key to growth in Latin America

Three out of four people in Latin America have little or no confidence in their governments and around 80% believe that corruption is widespread in government institutions. These figures have taken a turn for the worse since 2010, when they were 55% and 67%, respectively. Public lack of confidence is on the rise, broadening the gap between government institutions and the public, while also jeopardizing social cohesion and weakening the social contract.

The Economic Outlook for Latin America 2018 "Rethinking Institutions for Development" says that institutions should rekindle with society and better meet its demands and aspirations, in order to reinforce a model of inclusive and sustainable growth in Latin America and the Caribbean (LAC). The region must focus more on institutions that are trustworthy, capable, transparent and innovative, so that we may continue on the road to greater inclusive development. 

The report has been produced jointly by the Development Center of the Organization for Cooperation and Economic Development (OECD), the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), and CAF - development bank of Latin America, in collaboration with the European Commission. 

After five years of economic slowdown and a two-year recession between 2015 and 2016, LAC is now gradually recovering. According to the report’s figures, the region’s gross domestic product (GDP) is expected to grow between 2% and 2.5% in 2018, after having grown just 1.3% in 2017. These forecasts vary considerably in the region, with countries in Central America that stand out against the rate of growth in Mexico, South America and the Caribbean. The main factors of the economic recovery are an improvement in the global economy and several domestic factors. In any case, this recent economic performance is nothing like that which the region experienced during the expansive phase in the first decade of the 21st century. 

The three organizations point to the crucial role played by institutions to overcome the middle-income trap - the slowdown in growth that occurs after middle income has been reached- in which most economies in Latin America and the Caribbean currently find themselves. Countries in other regions that successfully escaped this trap invested in solid institutions, increased their incorporation into the global economy and, in some cases, received substantial external funding to back public investment.

The weakening of the region’s economic performance in recent years has had an impact on living standards and could jeopardize the remarkable socio-economic progress achieved in previous decades. Today, 23% of Latin Americans still live below the poverty line, and about 40% belongs to the vulnerable middle class. 

At the same time, the report highlights the rapid expansion of the middle class as one of the major socio-economic transformations of recent times in LAC. Thirty-four point five percent of the population could be considered as middle class, the consolidated estimate for 2015, up on the figure of 21% in 2001. If subjective measures of belonging to social classes are used, even more Latin Americans consider themselves as being "middle class", although their level of income would put them in the low-income category. The influence of the middle class on the political agenda, driven by higher aspirations, growing expectations and changing demands, may be even greater than statistics suggest and may explain the growing dissatisfaction with the quality of public services. 

The report says that confidence in institutions and satisfaction with public services has deteriorated, thereby weakening the social contract in the region. For example, the number of people satisfied with health services fell from 57% in 2006 to 41% in 2016, well below the OECD figure, nearly 70%. The number of people satisfied with the education system dropped from 63% to 53% over the same period. This has contributed to social discontent and the reluctance of people to pay taxes, also known as 'tax morality'. In 2015, 52% of Latin Americans said that they were prepared not to pay tax if they were able to, six percent up on the figure for 2011. Social dissatisfaction with public services is even greater amongst the poorer and more vulnerable sector of the population, because they do not have access to better quality services, which are usually more expensive and only provided by the private sector. 

Based on this evidence, the Economic Outlook for Latin America 2018 calls on governments to redesign their institutions and restore the link between the state and the people, based on three main pillars:

• Firstly, more solid institutions are needed to overcome the middle-income trap and increase productivity by investing in infrastructure, skills, technology and research and development to boost innovation, competition and provide better jobs. The region needs to diversify its manufacturing base and increase its added value. Greater regional and global integration is a key factor, in particular taking advantage of the promising discussions between regional integration organizations such as the Pacific Alliance and Mercosur, and between the region and other trading blocs.
• Secondly, to reestablish the social contract in LAC, it is first necessary to enhance credibility and improve the capability of states to fight corruption, provide better services and respond to people’s demands. Foment a culture of integrity at all levels of government and improve regulatory frameworks to promote greater responsibility. As far as improving the capabilities of states is concerned, the report highlights successful cases in the region, ranging from better tax collection practices to improving administrative skills, in particular by introducing meritocratic recruitment procedures for hiring government officials, establishing solid centers of government (administrative departments close to heads of government to ensure that there is coherence between various sector policies) and improving public management cycles.
• Finally, the use of new technologies to encourage innovation in the public sector may help to reestablish contact between the state and the people and to prepare for future challenges. This implies, for example, greater involvement with the community by introducing new technological platforms, promoting open government policies and making greater use of big data analyses when creating public policy.

The report will be released by Stefano Manservisi, Director-General for Cooperation and International Development of the European Commission; Christian Leffler, Assistant Secretary General for Global Economic Affairs of the European External Action Service; Mario Cimoli, Deputy Executive Secretary of the Economic Commission for Latin America and the Caribbean;  Mario Pezzini, Director of the Development Center of the OECD and Special Advisor to the Secretary General on Development; and Gonzalo de Castro, Senior Executive, CAF - development bank of Latin America.