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Making Latin America More Competitive

Jaime Daremblum

After many years of boom-and-bust volatility, Latin American and Caribbean economies finally seem to be moving toward a trajectory of stable growth. They have generally become more resilient, as was evident during the recent global financial crisis. Smart fiscal management and increased foreign trade have better prepared countries to weather storms that would have previously driven them under. The average inflation rate in the region is presently in the single digits, despite the disaster in Venezuela, where annual inflation may reach 45 percent (according to private analysts). Fiscal deficits have fallen, tariffs have been slashed dramatically and the non-tariff barriers to trade have been reduced even more.

Prior to the 2008 global crisis, the countries of Latin America and the Caribbean (hereafter, “Latin America”) were experiencing their best economic performance in a quarter-century, which was fueling the growth of a broad middle class. According to The Economist, some 15 million households emerged from poverty between 2002 and 2007. Indeed, it is not unrealistic to expect that, sometime fairly soon, a majority of the region’s population will belong to the middle class. This trend could spur profound changes in the hemisphere as a whole, since the middle class functions as the engine that generates new business opportunities. More importantly, large middle classes would promote political stability in a region still menaced by populist radicalism.

In short, Latin America is on the right economic path, but we shouldn’t celebrate just yet. A good part of its pre-2008 economic growth stemmed from favorable external factors, such as high commodity prices and low interest rates. It is worrisome that, with only a few exceptions, Latin American governments did not take advantage of the commodity boom to push for labor and tax reforms that would have enhanced productivity and made their economies more competitive. China’s insatiable appetite for raw materials has boosted Latin American exports, but it has also reduced the sense of urgency about structural reform. The region must diversify its production base, which has long been its Achilles’ heel.

During the pre-2008 expansion, Latin America’s growth rates were relatively high, but still below those in Asia. Latin America has also trailed Asia in poverty reduction, and its levels of income inequality continue to be the steepest in the world. No doubt, the region has come a long way. But not every country has enjoyed the same success, and significant problems remain. The World Economic Forum (WEF) notes that only five countries in Latin America – Barbados, Chile, Mexico, Trinidad and Tobago and Uruguay – are presently at (or transitioning to) the most advanced stage of development. According to WEF rankings, the world’s 50 “most competitive” economies include only three – Chile (No. 30), Puerto Rico (No. 42) and Barbados (No. 44) – from Latin America.

To increase its overall competitiveness, the region must significantly improve its human-capital infrastructure. That means, among other things, doing much more to support education and technological innovation. Two countries that have made real progress on the educational front are Brazil and Mexico. Both have pioneered programs of conditional cash transfers that incentivize school attendance. These investments have begun to bear fruit; indeed, they are directly related to the growth of the Brazilian and Mexican middle classes.

The next step for Brazil, Mexico and other Latin American countries is to supplement these cash-transfer programs with a more ambitious approach to higher education. In his new book, The Great Brain Race, former U.S. News and World Report education editor Ben Wildavsky reminds us that universities are competing fiercely to attract the most brilliant minds. Every year, 3 million students travel abroad in search of a better education and better opportunities. That number represents an increase of 40 percent over the last 10 years.

Unfortunately, Latin America is lagging in (1) the competitiveness of its universities and (2) the number of its students who attend the world’s best schools. Last year, the Times of London published a ranking of the top 200 global universities. Only one Latin American university – the National Autonomous University of Mexico – made the list, and it ranked 190th. Similarly, the number of Latin American students attending U.S. universities is relatively low. India has 103,000 students enrolled in U.S. universities, China has 98,000 and South Korea has 75,000, while Mexico has only 14,000, Brazil has 8,000 and Venezuela has 4,600.

These figures appear in “Open Doors 2009,” a report from the Institute of International Education, which also reveals another disparity: the number of Asian students attending graduate school in the United States is well above the number of Latin American students. And while Asian universities emphasize engineering and the hard sciences, Latin American universities tend to focus more on the social sciences.

Diversity of knowledge is to be welcomed, of course, but information technology (IT) is the industry with the largest worldwide growth potential. Fortune magazine predicts that in 2015 there will be 2.25 billion personal computers in use around the globe, up from 775 million today. Many parts of Latin America are unfortunately behind in their IT readiness. Only a few countries have grasped that such readiness is crucial to compete in today’s economy. According to a recent report, the region will experience a shortage of 126,000 computer engineers this year.

Latin America has garnered well-deserved praise for its achievements. But unless the region addresses its educational and technological shortcomings, it risks falling behind in the 21st-century global economic competition.

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