Automation, Productivity, and Human Capital in Latin America

Over the past decade, Latin America maintained impressive levels of growth even as the United States and Europe were rocked by economic crisis. And while the region's perennial social challenges -- including high levels of poverty, inequality, informal employment, and poor education -- also saw improvement, they remain a major impediment to more inclusive and better functioning economies.

A key lesson from recent years has been that while fiscal discipline and macroeconomic stability are necessary ingredients for economic expansion, they are not sufficient for tackling these deeper social issues. At the same time, we have learned that government efforts on their own aren't enough either -- sometimes for a lack of funding, but just as often due to a fundamental lack of innovation and effective implementation.

This reality is especially apparent when it comes to the kinds of technical and vocational training that could prepare Latin American students for higher-skill jobs. Study after study has shown a deep disconnect between the skills being taught in schools and those most needed by the private sector. Yet neither governments nor the market have solved the problem.

Data from the World Bank's Enterprise Surveys shows that the Latin American private sector struggles more than that of any other region to find the right talent. Over 35 percent of the region's companies say that an inadequately trained workforce is their primary impediment to expansion, versus just 22 percent in Sub-Saharan Africa or 17 percent in South Asia. Latin American companies also suffer from the longest periods of open vacancies.

Local governments have been attacking the problem for some time, with little to show for it. One of the oldest, Colombia's National Learning Service (SENA), was formed in 1957, and one of the newest, Brazil's Bolsa Escola program, has been in effect since 2001. Argentina, Mexico, and Chile have launched similar efforts, but even with big budgets and expansive bureaucracies, the same education underachievement persists.

The Andean Development Bank (CAF) released a study on this very issue, the Technical Education and Professional Development (ETFP) report. The ETFP found that small- and medium-sized firms (SMEs) generally had to offer their own training programs, since, especially for lower level positions, there are hardly any outside public or private efforts supporting their potential employees. It is also unclear how valuable government accreditation is for prospective employees -- while there is little solid evidence either way, the market seems to value the major private technical accreditation services offered by private companies, like the Cisco Networking Academy, Adobe certification, and Amazon Web Service accreditations.

The problem is more complex than many realize. Just joining the labor force is often no longer enough to start developing skills, especially in sectors where automation is replacing human labor. In these generally high-tech industries, the skills needed are much more sophisticated, requiring higher order creative problem-solving abilities as well as technical knowledge.

At the same time, while returns to highly skilled jobs are increasing, those benefits are not always clear to the individuals making education decisions. Here is one place that government could play a role: providing accurate, transparent, and easy-to-access information about which career paths are most in demand and what skills must be acquired to follow that path.

The regulatory environment is another challenge. The lack of clear regulation means that it can be impossible to tell quality institutions from the fraudulent. At the same time, successful schools and programs find it difficult to succeed and expand, given the less than transparent requirements involved. This dampens innovation across the board while putting students at risk.

Here again, policymakers have a clear role to play. Governments must be able to effectively evaluate the quality of new educational institutions, and crack down on those that are failing. Government programs are uniquely positioned to provide objective information and oversight, as well to provide the long term unemployed with skills training that can get them back into a productive place in the labor force.

As Latin America comes down from a decade of growth based on exporting commodities at high world prices, it faces the next challenge: transitioning to a higher-productivity economy. Maintaining macroeconomic stability will be crucial, as will be developing infrastructure and continuing to tackle poverty. But to create truly advanced economic sectors that can power a broader rise in living standards, it will be imperative to equip workers at all levels with the skills necessary to succeed. And we won't achieve that without a stronger technical and vocational sector.