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Latin America's Grope for Growth

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Economic Solutions Elude the Region

WASHINGTON, D.C., OCT. 11, 2003 (Zenit) - The dismal economic performance of many Latin American countries has policy-makers scratching their heads over where to go next. Some recent reports try to come up with solutions.

On Wednesday the World Bank released a study, "Inequality in Latin America and the Caribbean: Breaking with History?" Presenting the report, David de Ferranti, World Bank vice president for Latin America, commented: "Latin America and the Caribbean is one of the regions of the world with the greatest inequality."

"This inequality slows the pace of poverty reduction, and undermines the development process itself," he explained. In fact, the richest one-tenth of the population of Latin America and the Caribbean earns 48% of total income, while the poorest tenth earns only 1.6%. In industrialized countries on average the top tenth receives 29.1%, while the bottom tenth earns 2.5%. Income distribution is also notably more unequal than in Asia and Eastern Europe.

In the area of education the report noted that in Mexico the average person in the poorest fifth of the population has 3.5 years of schooling, as compared with 11.6 years for the average person in the richest fifth.

The World Bank's research team drew data from 20 countries based on household surveys covering 3.6 million people, and reviewed extensive studies on inequality in Latin America. The report outlined four broad areas for action to ameliorate inequality:

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-- Build more open political and social institutions that allow the poor and historically subordinate groups, such as Afro-descendants and indigenous people, to gain a greater share in society.

-- Ensure that economic institutions and policies seek greater equity, through sound macroeconomic management and equitable, efficient crisis resolution that avoids the large regressive redistributions during crises, and that allows for saving in good times.

-- Increase access by the poor to high-quality public services, especially education, health, water and electricity, as well as access to farmland and the rural services the poor need to make it productive.

-- Reform income transfer programs so that they reach the poorest families, including use of measures that are conditional on keeping children in school and attending health services, so as to improve their lifelong income-earning capacity.

Guillermo Perry, the World Bank's chief economist for Latin America and the Caribbean, and co-author of the study, insisted that in order to help the poor, the region's public institutions "must be truly open, transparent, democratic, participatory -- and strong."

Stimulating investment

Another recent World Bank report, "Doing Business in 2004: Understanding Regulation," looks not just at Latin America but also at the preconditions needed to facilitate business activity. The study, released Tuesday, analyzes data from more than 130 countries. It assesses each country's laws and regulations on starting a business, hiring and firing workers, enforcing contracts, getting credit and closing a business.

The report gives a number of examples on problems facing businessmen. For example, it takes two days to start a business in Australia, but 203 days in Haiti and 215 days in Congo. Enforcing a simple commercial contract can be done in seven days in Tunisia and 39 days in the Netherlands, but takes almost 1,500 days in Guatemala.

"In much of Africa, Latin America, and the former Soviet Union," the report argues, "excessive regulation stifles productive activity. And government does not focus on what it should -- defining and protecting property rights."

Two decades of macroeconomic reform have not slowed the rise in poverty in Latin America, notes the study. Resolving this is not just a simple matter of creating jobs, which the state could do. This solution has been tried, and has failed, says the report. "What is needed is to create productive jobs and new businesses that create wealth."

The report does not favor eliminating all government regulation. "The optimal level of regulation is not none, but may be less than what is currently found in most countries, and especially poor ones," it concludes.

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Foreign investment

Tips on stimulating investment may well be needed, as the World Investment Report for 2003 reveals. The report, published Sept. 4 by the U.N. Conference on Trade and Development (UNCTAD), revealed that foreign direct investment inflows to Latin America and the Caribbean declined in 2002 for the third consecutive year, falling in 28 of 40 economies.

Flows fell by a third to $56 billion -- the lowest since 1996. The report blamed the decline on a mix of global factors, gross domestic product contraction, financial crises, devaluations, and political uncertainties in a number of the region's economies. Investment this year is likely to show only a slow improvement, concluded the report.

In 2002, the largest recipient of foreign investment was Brazil, with inflows of $17 billion, down from $22 billion in 2001. Investment in Mexico plunged to $14 billion in 2002 from $25 billion a year earlier. And in Argentina, last year's $1 billion worth of inflows was only 10% of the average annual inflows received during the decade 1992-2001.

Doubts over policies

UNCTAD is not convinced, however, that greater foreign investment is necessarily the solution to Latin America's economic woes. The reforms in recent years that have opened the region's economies to market forces have given disappointing results, stated Rubens Ricupero, UNCTAD secretary-general.

Ricupero made his remarks Oct. 2 during the release of the "Trade and Development Report 2003." The report shows that after two decades of reform, many countries are facing the same balance-of-payment and debt problems that had contributed to the earlier crisis.

The report identifies a number of causes behind the failure to achieve greater success:

-- Exchange rate-based stabilization policies relying on capital inflows have led to appreciating and unstable currencies and to high interest rates, with damaging consequences for capital formation.

-- Rapid trade and financial liberalization has caused a swift deterioration in external balances; and as imports have soared and service payments have risen, growing indebtedness has increased vulnerability to external shocks.

-- Foreign investment, even when bringing needed technology and skills, has also contributed to financial instability.

-- High interest rates have damaged fiscal balances, even as governments have reduced expenditures.

The report also considers that rapid liberalization in Latin America, along with increased dependence on external capital flows, has come at a high price in terms of structural change and technological upgrading. According to the report, many countries have suffered a "premature deindustrialization," marked by labor shedding and sluggish growth.

Yet, the report holds out hope that the growth contraction that hit Latin America in 2002 can be reversed this year. Still, much rides on overcoming the fragility of the Brazilian economy, it notes.

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In an Oct. 3 commentary on the report, the Financial Times noted that UNCTAD is a frequent critic of the policies of the International Monetary Fund and World Bank. The latest criticisms of market liberalization long promoted by these bodies and by the United States "is likely to prove controversial both in Washington and Latin America," observed the newspaper. Not so controversial is the region's desperate need for an economic jump-start.