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April 14, 2016
Latin America’s economical growth has been somewhat of a rollercoaster as between 2003 to 2008 it grew by 4.7% before declining to 2.4% during the global financial crisis from 2009 to 2010. Unlike many other regions of the world, Latin America’s economy actually grew to 3.5% between 2011 and 2013 however, another drop is expected in the region’s economy in 2014 with estimates that it will reach only 2.7% growth. This yo-yoing of economic growth for Latin America is predicted to continue between 2015 and 2018 where growth is expected to reach 3.3%. These percentages are merely averages taken from the countries across Latin Americahowever, what can be said is that Latin America’s mediocre growth performance can no longer be blamed on the global financial crisis and can now be regarded as a much more deep-seated issue.
High and sustained annual growth and stability usually translates into strong rates of productivity growth. Latin America is yet to see significant productivity growth in spite of annual growth which has been in relation to the other economies of the world, sustained and relatively high. In order to sustain high levels of productivity it is widely accepted that there are three important elements aiding this process. The first is human capital and the level of education and skills of its workforce. Second, the labour market where the interaction between firms and workers takes place must function well and thirdly, saving rates need to be high in order to act as support for investments, especially in infrastructure.
There can be seen large gaps between Latin America and other regions of the world in terms of human capital. In 2012, 62 countries participated in the Program for International Student Assessment exams which acts as a comparable educational achievement rating system between countries. Of the 8 Latin American countries being, Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru and Uruguay; all were in the lowest third of the rankings and 7 out of the 8, didn’t meet the minimum levels of basic mathematical competency. With data on workers’ skills being even scarcer, it is hard to paint an accurate picture of the current situation. However, with what little evidence is available, in general there is a trend of low investment in developing workers’ skills and shorter job tenure in comparison to developed countries. This has resulted in a general loss of job-learning time and a reduction in investment in workers’ training by companies.
Latin America has a high rate of informal employment with more than 50% of the region’s labour force being informally employed. High levels of informal employment usually results in great rates of company informality due to a country’s labour laws and tax regimes. Informal employment is subsidized by well-intended yet poorly designed social insurance programs which only add insult to injury. Informality is productivity’s adversary and with a high number of low-skilled, self-employed workers, there is a large amount of worker rotation. This has created a number of micro-entrepreneurs and a wide range of small and inefficient businesses. The dispersion of economic activity into small and sometimes illegal companies creates an environment that is not fit for applying modern management techniques such as on-the-job training and innovating which are key to increasing productivity.
Latin America’s savings rates are lower in comparison to other developing countries with the highest savings rate in Latin America saving less as a share of its GDP than the country with the lowest savings rate in emerging Asia. Low savings translates into low rates of investment particularly in infrastructure with there being an investment deficit of almost 2% in relation to Latin America’s GDP.
The growth rate is low in Latin America because there is no real reason for it to be high and whilst some countries may experience some short-term growth, these spurts are no substitutes for sustaining productivity rates. In the near future Latin America’s estimated growth will be challenging with the region likely to face economic issues and while countries face global monetary normalisation, they will need to accelerate their productivity growth. This is by no means a small feat due to complex policies related to taxes and labour or social insurance systems. What can be suggested is that some of these efforts and policies once put into action need time to bear fruit however, what is certain is that Latin America needs find its feet again and return fast growth to the region.
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