This post is a summary of three articles. The first with the title above, published in October 2012 at http://www.economist.com/blogs/freeexchange/2012/10/growth. The second with the title of, "When will fast growth return to Latin America? It was published in May 2014 at http://www.brookings.edu/blogs/up-front/posts/2014/05/09-growth-return-latin-america-levy. The third with the title of, "Brazil`s economic model: In need of a revamp." Published https://economics.rabobank.com/publications/2014/january/brazils-economic-model-in-need-of-a-revamp/.
The question of whether the Mexico economy might one day regain the top spot in the Latin America has once again become an interesting one. In a recent report Benito Berber, Latin America strategist applies Solow growth accounting to a series of forecasts on Mexico and Brazil, with striking results. Solow splits the factors to economic growth into three categories: human capital or (worker skill levels), physical capital, and total factor productivy. Brazil may have become too dependent on commodity-led growth. While moving resources to the commodity sector allowed Brazil to exploit a comparative advantage, many now see limited opportunity to improve total factor productivity, something which is usually limited to manufacturing. Mr Berber concludes that under a low growth estimate for Brazil and a high growth estimate for Mexico, the countries cross economic paths in 2022. This is of course highly speculative, forecasting a decade ahead is difficult. Yet that such outcomes seem reasonable is remarkable given the conventional wisdom just a few years ago. If the Mexican economy is to one day take over the Brazilian, it would be a boon for liberal economics in the face of Brazil`s more statist approach. Yet do not expect Brazil to give up the top spot easily. Indeed, a friendly rivalry may benefit both countries`s reform agendas.
From 2003 to 2008, Latin America experienced an annual average growth rate of 4.7%. As a result of the global financial crisis, during 2009-2010 the region`s growth rate declined to 2.4%. However, for the period 2011-2013 it increased to only 3.5% and for 2014 the expectation is that it will drop again to 2.7%. It is thus increasingly clear that Latin America`s mediocre growth performance can no longer be attributed to the global financial crisis, but, rather, is a reflection of deeper issues intrinsic to the region. Unless these challenges are tackled, it is unlikely that Latin America will repeat the growth performance observed in the first years of this century. In the context of macroeconomic stability, high and sustained growth is associated with productivity growth, and in this that Latin America faces its greatest challenge. Unfortunately, the region`s achievements in terms of better macroeconomic management have yet to translate into improved productivity numbers. Why does productivity lag behind in Latin America? There is broad agreement that three elements are critical for raising productivity. First, a country`s human capital, the education and skills of its workers must be high. Second, the labor market, where the interactions of firms and workers translate into how much value is produced, must function well. Third, saving rates must be high in order to support investments, particularly in infrastructure. Evidence points to large gaps between Latin America and other regions of the world in indicators of human capital. The PISA exams provide measures of educational achievement comparable between countries. The Latin America countries all fell in the lowest third of the rankings, and seven out of the eight fell below the minimum levels of competency in mathematics. Data on workers`skills are even scarcer, but there are show low investments in developing workers`abilities. Measuring performance in labor merket is even more difficult, but a central feature of latin America is its high rate of informal employment. On average, more than half of the region`s labor force is informally employed. Informality is an enemy of productivity. The resulting dispersion of economic activity into a myriads of small and often illegal firms is an environment that is hardly conducive for exploiting economies of scale and scope, access to credit, applying modern management techniques, training workers, and innovating, in short, for increasing productivity. Finally, the region`s saving rates are low compared to other developing countries. The country with the highest saving rate in L. A. saves less as a share of GDP than the country with the lowest saving rate in emerging Asia. Because high and persistent current account deficits can not be sustained for very long, low savings translate into low rates of investment, mainly in infrastructure. It is estimated that to develop an infrastructure comparable to that of its competitors, L.A. should be investing 2% more of its GDP than what it currently does. While in some countries demand management may yet produce short-term growth spurts, these policies are not substitutes for addressing the factors behind stagnant productivity. In the years ahead accelerating growth in L.A. will be doubly challenging. On the macro side, countries have to pay attention to fiscal issues. On the micro side, L.A. countries need to urgently accelerate productivity growth, which is not an easy task as policies to do are complex.
The recent performance of the Brazilian economy has been disappointing. GDP grew by only 0.9% in 2012, after the low 2.7% of 2011, and the economy is likely to have grown by only 2.5% in 2013. In this economic report we conclude that consumption and commodity exports can not continue to drive growth. To reinvigorate its economic model, Brazil needs to increase investment and productivity. While strong external demands thus contributed to growth, Brazil`s growth became increasingly domestic driven. Despite a record cut in interest rates between the summer of 2011and 2012, gross fixed investment fell by 4%. Meanwhile, in 2013 comsuption growth, which until recently continued to remain vigorous, has also weakened. Does this mark the end of the Brazilian growth model? The short answer seems yes, as the factors that boosted growth in the preceding decade are unlikely to drive growth as much in the coming years. The quality of the labor force will also determine Brazil`s future growth. Brazil needs to raise investment, and savings, to deal with supply constraints. Increasing investment, productivity and the quality of the labor force is likely to be difficult, given `s weak track record. We will have to look at a number of structural issues. Dealing with these problems could open the door to faster growth.
