Reviving growth in Latin America means building capability: This is how to do it

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: William Maloney, Chief Economist for Latin America and the Caribbean, World Bank

• Growth in Latin America and the Caribbean is too low to move the needle on socio-economic progress.
• Slow technological advancement has prevented the region from leveraging technology to innovate.
• Redressing the region’s long-standing shortfalls in educational, entrepreneurial and technical capabilities is essential for progressing growth in Latin America through better methods of production.

Countries of Latin America and the Caribbean are questioning their economic model. Chile’s President Gabriel Boric spoke of “burying” it, while Colombia’s Gustavo Petro warned of its “depletion.” While there is growing evidence that market-oriented approaches yield better development outcomes than the alternatives, the indisputable fact is that growth remains too low even in the region’s best-performing countries to generate prosperity and social mobility.

Before the pandemic, the gross domestic product grew on average by 2.2% from 2010-2018; forecasts today are scarcely better. The search for faster and more inclusive growth leads some back to inward-looking strategies, some to mission-based approaches inspired by true moonshots and some to doubling down on market-based reforms. Whichever option governments consider, redressing the region’s long-standing shortfalls in educational, entrepreneurial and technical capabilities is essential for progress.

Tech absence

Chronic deficiencies in the region’s ability to manage and build upon new technologies explain much of its historical underperformance across various industries. Far from being a curse, copper mining in Japan gave rise to major tech firms like Fujitsu, Hitachi and Sumitomo; in the United States, a copper-driven “learning network” of universities and professionals laid the foundation for future economic diversification.

Yet, there is no indigenous Hitachi in Latin America and the region’s mining industries grew technologically dependent, precisely, on the United States. The story is the same in high-tech manufacturing. Mexico started assembling electronics in Guadalajara in the early 1980s, roughly the same time as South Korea. Yet, there is no local analogue to Samsung.

That suggests that the region needs to focus less on what it is producing and more on how it produces: in particular, how it learns about better methods of doing things and new ways to leverage our comparative advantage, whether in natural resources, low-cost labour or green energy. Without question, poor business climates have impeded progress. However, there is also a need for more scientific personnel, capable entrepreneurs, well-trained workers and supporting networks and institutions who inhabit them and engage in the experimentation and innovation that drive growth.

The region entered the second industrial revolution technologically and entrepreneurially unarmed and in important ways, it remains so. In 1900, Chile and Argentina had roughly the same income per capita as agricultural and forestry exporters Denmark and Sweden, yet, only a fifth of their level of engineers as a share of the population.

These shortfalls are reflected in lags in adopting new technologies that plausibly account for much of the region’s divergence from advanced economies. Further, the overwhelming importance of immigrants to the region’s industrialization suggests a prior scarcity of entrepreneurs able to identify and take advantage of new industries and technologies.

These critical actors did not emerge automatically in Latin America and the Caribbean – not while a competitive leader in the global trade of natural resources or cultivating industry during the protectionist import substitution period. In the Asian miracles, this wasn’t the case either. Redressing capability shortfalls was a deliberate element of the productivity programmes of Japan and Singapore. A comparable effort is needed in the region.

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Improving the pipeline from the education system is critical to deepening the pool of entrepreneurs and accelerating social mobility.”— William Maloney, Lead Economist, World Bank

Building capacity

At the most basic level, the region’s chronically low-quality public education leaves too many behind and is a significant barrier to growth (and likely reshoring): 29% of firms report that growth is stymied by a lack of qualified employees, compared to 20% globally; half of all 10th graders cannot read an age-appropriate text; just over a third of 15-year-olds meet minimum standards in science and mathematics. Perennial shortfalls in mid-level technical graduates are now being addressed in Brazil, Chile, Colombia, Uruguay and Panama through short-cycle programmes comparable to community colleges in advanced countries.

Public worker training programmes remain costly and weakly aligned with private sector needs. Latin American and Caribbean universities fail to place among the top 100 of the world and continue to graduate relatively few engineers and scientists – 18% of graduates in Latin America and the Caribbean versus 25% for the world and 28% for East Asia. Further, they trail behind in working with the private sector and facilitating knowledge and technology flows, while East Asia dominates globally.

The World Management Survey suggests that both best and worst-managed firms in the region continue to lag substantially in managerial skills. Numerous studies, including for Latin America, have now demonstrated that consulting services can help firms improve their managerial practices, and raise productivity. But it is also necessary to cultivate the ability to quantify and manage the risks associated with innovation, as well as develop the institutions that mitigate the market failures associated with experimentation and discovery, and in risk finance. In the background, improving the pipeline from the education system is critical to deepening the pool of entrepreneurs and accelerating social mobility.

Strengthening entrepreneurial and innovation systems requires an urgent agenda of prosaic but often politically difficult reforms in education, firms and the financial sector. To manage the scope and complexity of these reforms, the quality of governance institutions at all levels needs upgrading.

This capability-building agenda is not a substitute for the existing “model.” Instead, it is a necessary complement to addressing traditional market failures, infrastructure deficiencies, poorly designed labour protections, shallow financial markets and reducing long-term economic uncertainty, limiting returns to innovation and investment. Similarly, brisk competition remains a necessary stimulus to innovate. And removing barriers to global economic integration e.g.through deeper trade agreements, remains central to accessing new technologies and exploiting scale economies, particularly as the region embraces the greening imperative and the possibility of nearshoring.

However, without strengthening capabilities across the spectrum, moonshots will remain grounded, the Latin Hitachi or Samsung will not emerge and genuinely inclusive, dynamic and sustainable growth will remain elusive.