Latin America and the Caribbean
The economic deceleration that started in 2012 continued in 2013, with an estimated growth rate for the region below 3 percent. For 2014, growth forecasts are not more optimistic and, according to the IMF,24 the region is poised to grow at only 2.5 percent, below the trend of recent years. Overall, the region continues to suffer from strong headwinds related to weak investments, a fall in exports and commodity prices, and tighter access to finance that, to a large extent, fueled growth in recent years.
Building the economic resilience of the region will depend on its capacity to strengthen the fundamentals of its economy by boosting its level of competitiveness. However, regional productivity continues to be low and trailing other emerging or advanced economies. A lack of sufficient investments in growth-enhancing areas, such as infrastructure, skills development, and innovation, coupled with insufficient and delayed reforms needed to improve business conditions and the allocation of resources, result in a certain inability of the local economies of the region to move toward more productive sectors and thus, higher levels of competitiveness.
The need to boost competitiveness by undertaking the necessary investments and by fully and efficiently implementing structural reforms has become not only important but also urgent if the region is to be able to consolidate the economic and social gains that many countries have experienced in past years. Becoming more resilient and less affected by external fluctuations will depend on this.
Chile, at 33rd, regains the position it lost last year and remains the most competitive economy in Latin America, with a very stable profile. The country continues to build up its traditional assets, which are related to a strong institutional setup (28th) with low levels of corruption (25th) and an efficient government (21st); solid macroeconomic stability (22nd) with low levels of both public deficit and public debt; and efficient markets, despite some rigidities in its labor market that result from its persistent high redundancy costs (120th). Notwithstanding these strengths, the current economic context—with its potentially strong headwinds that result from the decline in the price of minerals—highlights the need for Chile to diversify its economy by moving toward more knowledge-based activities. In this context, the country still needs to make major efforts to address some of its traditional weaknesses. Important flaws in the country’s education system, notably in terms of its quality (71st)—especially in math and science (99th)—do not provide companies with a workforce that has the necessary skills to upgrade their production or embark on innovative projects; this is regarded as one of the country’s most problematic factors for doing business. This difficulty—together with low innovation investment, especially in the private sector (77th)—results in a poor innovation capacity overall (76th), which could jeopardize Chile’s necessary transition toward a knowledge-based economy.
Panama continues to follow Chile in the regional rankings and once again scores as the most competitive economy in Central America; it is among the top 50 in the world, despite a fall of eight places to 48th position. This drop is driven by a slight deterioration in the perceived functioning of institutions (74th), most notably in terms of their inability to fight corruption (94th) and raise government efficiency (55th); and the poor quality of the education system (83rd) with its inability to provide the right set of skills for an economy that increasingly needs a skilled labor force to sustain the sharp economic growth of past years. This skills shortage is perceived as one of the most problematic factors for doing business in the country, and is likely to remain a severe obstacle to business in the coming years, representing a bottleneck for Panama’s transition toward more knowledge-intensive activities. Notwithstanding these challenges to the economic agenda of the country going forward, Panama continues to benefit from important competitiveness strengths. As it did last year, Panama boasts impressive infrastructure (40th), with some of the best port (7th) and airport (7th) facilities not only in Latin America but in the world, positioning it as a strong transport hub for the region. Its financial market (22nd) and an assessment of its technological adoption (23rd), especially via foreign multinational corporations setting up in the country, remain strong, and its mobile broadband subscriptions (73rd) are increasing.
As in recent editions, Costa Rica continues to rise in the rankings, improving three positions to take 51st place. Overall, the country depicts a very stable profile, building on its traditional assets, although it does suffer from some persistent weaknesses. In terms of strengths, Costa Rica is fairly well poised to engage in a rapid transition toward more knowledge-based activities. The country boasts one of the best education systems in the region (21st); a fairly high ICT uptake (45th) with a high international Internet bandwidth capacity (36th) and many mobile broadband subscriptions (20th); and a fairly well developed capacity to innovate (36th) and solid access to technology (39th), thanks to the crucial role that FDI and technology transfer (5th) plays in the country. In addition, Costa Rica benefits from fairly strong institutions (46th), despite a strong sense that government spending may not always be directed toward the most productive activities (120th). Notwithstanding these important strengths, the country’s persistent weaknesses hold back its competitiveness. More precisely, its poor transport infrastructure (108th), difficulty in accessing finance either through equity (117th) or loans (118th), and some concerns about its macroeconomic performance and high budget deficit (116th) are all areas the country should address.
Still suffering some of the consequences of the global financial crisis, Barbados falls eight positions in the rankings to 55th place. As in the past, this drop is driven by the persistence of the credit crunch that is regarded as the most problematic factor for doing business in the country and that is severely hindering the capacity of local businesses to finance their activities by raising new equity (91st), loans (101st), or venture capital (101st) to support innovative projects. In addition, concerns about macroeconomic conditions (132nd) persist, as Barbados boasts one of the highest public deficits (140th) in the world, one of the lowest savings rates (136th), and public debt (128th) that is quickly approaching 100 percent of the national GDP. The need to stabilize its macroeconomic outlook and ease the flow of financing toward productive investments will be crucial to allow the country to recover the ground lost since the beginning of the crisis. On a more positive note, Barbados continues to benefit from a fairly skilled labor force thanks to a high-quality education system (15th) and high enrollment rates in secondary (19th) and tertiary education (42nd); well-functioning institutions (33rd), despite some concern about the government efficiency in managing public spending (57th); and solid infrastructure (28th).
Brazil drops one position and ranks 57th this year. This decline is driven by insufficient progress in addressing its persistent transport infrastructure weaknesses (77th) and a perceived deterioration in the functioning of its institutions (104th), with increased concerns about government efficiency (131st) and corruption (130th). Brazil also exhibits a weaker macroeconomic performance this year (85th), a further tightening of access to financing, and a poor education system (126th) that fails to provide workers with the necessary set of skills for an economy in transition toward more knowledge-based activities. Addressing these weaknesses, for Brazil as for other BRICS economies, will require implementing reforms and engaging in productive investments (see Box 3). This approach is not only important but has become urgent for reinforcing Brazil’s resilience. The country is poised to face strong headwinds related to recent shifts in the global economy, with a drop in the international price of commodities and potential outflows of capital that had come into the country from some advanced economies during the height of the financial crisis. Notwithstanding these challenges, Brazil still benefits from important strengths, especially its large market size and its fairly sophisticated business community (47th), with pockets of innovation excellence (44th) in many research-driven, high-value-added activities.
In spite of the drop of six places, Mexico (61st) has adopted important structural reforms in the past year. This fall in the rankings is driven by a deterioration in the perceived functioning of institutions (102nd); the quality of an education system that does not seem to deliver on the skill set that a changing Mexican economy requires; and its low level of ICT uptake (88th), which is crucial for this transformation. In addition, the results show that the benefits of the many adopted reforms intended to increase the level of competition and efficiency in the functioning of Mexico’s markets have not yet materialized, highlighting the need for effective implementation that should not be delayed. Recently some changes have been observed, notably in the telecommunications market. As more of these results start to become evident, the country will increase its competitiveness edge. In this process of improvement, Mexico can continue counting on its traditional strengths: its relatively stable macroeconomic environment (53rd), its large and deep internal market that allows for important economies of scale (10th), reasonably good transport infrastructure (41st), and a number of sophisticated businesses (58th), which is uncommon for a country at its stage of development.
Despite Peru’s drop of four positions to 65th place, the country continues to be positioned within the top half of the rankings. Concerns about the functioning of its institutions (118th), along with insufficient progress in improving the quality of its education (134th) and technological adoption (92nd), explain this decline, supporting the idea, highlighted last year, of a certain exhaustion of the sources of the country’s competitiveness gains of the past years. Among these gains are a very strong macroeconomic performance (21st) and high levels of efficiency in its goods (53rd), financial (40th), and labor (51st) markets, despite rigidity in hiring and firing practices (130th). Although Peru has recently benefited from strong growth thanks to the rise in the price of minerals, the country should build its resilience by addressing its most long-lasting challenges: it needs to strengthen its public institutions (127th) by increasing government efficiency (116th), fighting corruption (103th), and improving infrastructure (88th). In addition, building up Peru’s capacity to generate and use knowledge and thus diversify its economy toward more productive activities will require raising the quality of education (134th), which is now not capable of providing the skills needed for a changing economy; to boost technology adoption (92nd), including a broader uptake and use of ICTs (101st); and to raise its innovation capacity (117th), which remains low. These actions will require time to develop and bear fruit.
Colombia climbs three positions to reach 66th place. It continues to depict a fairly stable competitiveness profile with results similar to those of previous editions across most dimensions, with two notable exceptions that account for this year’s improved performance. The first is the country’s level of technological adoption (68th), most notably of ICTs (66th). The second is the development of its infrastructure (84th), which remains, nevertheless, the second most problematic factor for doing business in Colombia, after the high level of corruption (123rd). Overall, the country benefits from stable macroeconomic conditions (29th) with a manageable fiscal deficit, low levels of public debt, and inflation that is under control at around 2 percent; financial services that are relatively sophisticated by regional standards (53rd); a large market (32nd); and fairly high levels of education enrollment both at secondary (62nd) and tertiary level (61st), especially when compared with those of other countries in the region. On a less positive note, Colombia continues to suffer from weak institutions (111th) and, as already mentioned, significant levels of corruption (123rd). Despite its improvement, the quality of transport infrastructure is still low (108th). Finally, as is the case for many other countries in the region, Colombia will have to diversify its economy and become less dependent on revenue from mineral resources. In this transformation, the country will need to improve the quality of its education system (90th), which continues to drop, especially in areas such as mathematics and science (109th); it will also need to build a more robust innovation ecosystem (77th), which will require not only more and better public investment but also a decisive recognition on the part of Colombian firms of the need to innovate by undertaking the right set of investments in areas such as R&D (84th) as well as on-the-job training schemes (73rd) and ICT adoption.
Climbing eight places and establishing itself in the middle range of the rankings this year, Guatemala is positioned at 78th place, following Panama and Costa Rica in the Central American rankings. The country’s rise is led by improvements in its level of competition in the goods market (54th) thanks to the reduction of red tape for new businesses and better infrastructure (67th), although these remain a challenge. Within Central America, El Salvador (84th) continues its ascent, climbing 13 ranks; as does Honduras (100th), which rises 11 positions, while Nicaragua remains stable at 99th position.
In South America, besides Chile and Brazil, the situation remains relatively stable and in need of important changes to improve competitiveness. Uruguay (80th) manages to improve its performance, while Bolivia (105th) loses seven places, unable to consolidate last year’s gain. Paraguay falls one place to 120th position; Argentina (104th) remains stable; and Venezuela (131st) closes the regional rankings, ahead of only Haiti (137th).
Argentina (104th), after several years of falling in the rankings, this year remains stable, albeit at a very low position. One of Argentina’s major concerns is to build its economic resilience in a rapidly changing global economic context characterized by lower commodity prices that can drastically affect the Argentine economy. Overall, the country continues to face adverse macroeconomic conditions (102nd) that affect its access to credit (134th). It also suffers from a weak institutional set up (137th), scoring poorly in terms of corruption (139th), government inefficiency (142nd), and government favoritism (143rd). In addition, inefficiently functioning goods (141st), labor (143rd), and financial (129th) markets continue to hinder the country’s potential, which is enormous thanks to a relatively large market size (24th) with the potential for important economies of scale and scope, its digital readiness (61st), and its high university enrollment (15th) of more than 78 percent. These assets are not being fully utilized amid the negative framework conditions that hamper the potential of the Argentine economy.
Venezuela (131st) continues to be immersed in a deep macroeconomic (139th) and institutional (144th) crisis. A very unstable macroeconomic environment with high levels of inflation, public debt, and deficit coupled with a weak institutional set up, high levels of corruption, and an inefficient government as well as malfunctioning markets that do not allocate resources effectively result in this poor performance. These deficiencies hinder the country’s capacity to leverage some important assets, such as its relatively well educated population, with a high percentage of the population enrolled in tertiary education (16th), and relatively good ICT penetration with more than half of the population using the Internet (60th).