Institutions to take a leap in productivity

The challenges to improve productivity in Latin America do not focus on what, but on how. The lag in the region is mainly due to a very low productivity of all the sectors that make up their economies, rather than the fact that the region has, in comparison with developed countries, a strong concentration of its resources in sectors of particularly low productivity. This is one of the findings of the diagnosis made in the CAF Economy and Development Report (RED 2018) - development bank of Latin America, which was presented in Bogotá during the CAF Conference: Productivity and Innovation for Development.

The efficiency with which at the level of companies and in the economy as a whole physical and human capital is used to produce goods and services -as productivity is defined-, in the case of Latin America it presents weaknesses that can be Associate problems in the process of entry and exit of companies, low innovation or productivity growth of those that survive, and an inefficient distribution of employment and capital among companies, including those in informality; It is detailed in the report.

“The problem of productivity is transversal: in all the sectors that make up the economy there is a considerable lag with respect to the leading countries. This is partly due to an important degree of productive informality that is present in most sectors. But also, to productivity problems within the formal segment linked to an inefficiency in the allocation of resources between companies, and especially to their relatively low productivity. For example: in 9 of the 10 sectors studied, the average product per worker in the region was below 50% compared to that in the United States, ”said Pablo Sanguinetti , vice president of Knowledge at CAF.

The RED 2018 focuses on factors that transversally affect companies such as the degree of competition, access to inputs and cooperation between firms, labor relations, and financing. The evidence shows that Latin American economies have on average markets where the level of competition is lower compared to more developed regions, which is reflected in high price margins, especially in the services sector. To improve this aspect, it is very important to increase the capacities of competition agencies, reduce barriers to entry to companies, and deepen trade and international integration that are still limited by para-tariff and logistic barriers.

Access to inputs in the quantity, quality and variety necessary is essential for companies to reach high levels of productivity and improve their ability to innovate. In this sense, and by virtue of its role as a supplier of inputs directly and indirectly, the RED 2018 highlights the relevance of some services such as retail, transport and energy, whose poor functioning represents a limitation for the development of all the industries. To improve access to inputs and cooperation between companies, international trade is a great ally. Likewise, a regulation that encourages public-private partnerships is especially desirable, especially in key infrastructure services; as well as policies to support productive clusters that can favor synergies between firms and strengthen links within value chains.

The report also notes that the assignment of the labor force in Latin America shows an important gender gap, a bad match between the skills of the workers and their tasks and, especially, a huge concentration of the labor force in informal and low productivity jobs. The existence of a salary gap of between 20% and 30% between formal and informal positions for workers of similar characteristics, is indicative that the assignment of workers to informal positions reduces productivity.

“Public policy must be determined to reduce informality, and in order to achieve this, the strengthening of state capacity is essential. Ability to monitor compliance with the rules associated with the formality and punish its breach; ability to administer and design contribution systems, taxes and records that are more transparent and easy to manage for businesses and workers; and ability to manage labor re-training programs that favor the reallocation of workers to formal positions, ”added Sanguinetti.

Finally, the document concludes by pointing out the lag of Latin America in terms of indicators of development of the financial system and arguing its main implications for productivity. In the improvement of this area, the importance of adjustments in some regulatory aspects such as bankruptcy procedures is highlighted. Improvements in the design of laws in this regard, such as those adopted by Brazil, for example, may have an impact on the better functioning of the credit market.

Inclusion and financial education is another aspect in which the region has a lot of room to improve. This would allow not only an expansion in the beneficiaries of the financial system but also a better use of the available instruments. Given these potential benefits, institutions such as CAF - development bank of Latin America - are promoting programs to collaborate in measuring levels of financial education, as well as with the implementation of programs to increase financial inclusion in countries. < / p>

To make the leap in productivity requires an adaptation of the institutional framework that translates into a better productive environment that encourages more innovation, more efficiency in the allocation of resources and greater productive integration. This institutional change is complex and demands for important political consensus not always easy to reach. Through RED 2018, CAF aims to provide knowledge about which initiatives are most useful for building bridges and moving forward in the way of achieving greater development in the countries of the region.