14 October 2016 Christian Daude Towards a New Strategy for Latin America: Productivity as an engine of growth  14 October 2016 Christian Daude OECD Economics Department

Background During the last decade, Latin America grew very fast and made important social progress thanks to extremely favourable external conditions. However, these conditions are no longer present and growth is slowing down sharply. New sources of growth are urgently needed to help Latin America move back to a stronger, more inclusive and sustainable growth path. Improvements in productivity are key to boost growth in the region.

Latin America has made great progress over the past decade Poverty headcount ratio (Poverty line of 3.10 USD PPP per day) Source: World Development Indicators, World Bank.

Strong growth supported the improvement in living standards Gross domestic product, constant prices Source: OECD EO99 database

Recently, growth has slowed sharply Gross domestic product, constant prices Source: OECD EO99 database

Lower commodity prices have contributed to weaker growth Evolution of selected commodity prices Source: OECD EO99 database

Inequality remains high and the tax and transfer system has limited effects Gini coefficient (0=perfect equality; 1=perfect inequality) Difference in Gini coefficient (Disposable income – market based income) Source: OECD (2016), Promoting Productivity for Inclusive Growth in Latin America.

Boosting productivity is key Evolution of GDP per worker relative to the U.S. Source: Own calculations based on World Bank World Development Indicators.

What constrains productivity growth? Poor human capital and skills development Low investment in innovation and R&D Informality in economic activity Functioning of product, labour and financial markets Lack of competition Low participation in GVCs

Poor human capital and skills Percentage of students not attaining basic skills in math (in 2012) Note: Students do not attend basic skills when they are below 420 points in math exams in PISA. Source: OECD, PISA 2012 Database

Low investment in innovation and R&D Gross domestic expenditure on R&D (% of GDP, 2013) Source: OECD Main Science and Technology Indicators Database

Barriers to entrepreneurship are high (Scale 0 – 6, with 6 being the most restrictive, 2013) Source: OECD Product Market Regulations database.

High barriers to trade and investment (Scale 0 – 6, with 6 being the most restrictive, 2013) Source: OECD Product Market Regulations database.

Administrative burdens for sole proprietor firms, PMR score 0 to 6 It is crucial to promote productivity diffusion from frontier to lagging firms Administrative burdens for sole proprietor firms, PMR score 0 to 6 Cost of bankruptcy, % of estate Resources remained trapped in low-productive and non-viable firms Source: OECD Product Market Regulations database, Doing Buisneess database.

High level of skills mismatch Index of Qualification Mismatch (2012) Source: Randstad Workmonitor (2012)

Higher cross-border trade intensity is needed Trade intensity and country size (GDP) Source: Kowalski et al (2015) Even controlling from country size, most of LA countries are among the least connected in trade networks

Participation in Global Value Chains is very low Backward GVC participation ratios, cross-country comparison (as a percentage of country’s gross exports, 2011) Source: Kowalski et al (2015)

In particular, intra-regional integration in GVCs is very low Backward participation Forward participation Source: Kowalski et al (2015)

It is key to improve trade facilitation Latin America and the Caribbean’s trade facilitation performance OECD indicators, Latest available data, where 2 = best performance Source: Kowalski et al (2015)

Reforms are key Diversification is key to boost growth and reduce resource dependence Fostering productivity growth and inclusive should be top priority Product and labour market reforms are crucial to make domestic markets more competitive and to enable faster diffusion of technology Innovation and skills policies Trade policy and effective regional integration