The global landscape these days is not a pretty one: collapsing commodity prices, weak demand in the OECD economies and a pronounced slowdown in many emerging markets, unpredictable capital flows affecting exchange rates, and a noticeable slump in world trade. This is clearly not a good time to be a Minister of Finance! This is the panorama that surrounds the Annual Meetings of the World Bank in Lima, October 8-10. The weak global picture is heavy on diagnostics of what is troubling many developing countries, but less robust on the side of policy solutions. Hence, the upcoming World Bank's High-level Seminar on Policy Lessons from East Asia and Latin America takes on added significance.
The connections between Latin America and East Asia have mushroomed over the past decade and the correlation between their respective growth rates has now reached a record-high level (WB 2014). Of equal importance perhaps are the lessons that each region can glean from the experiences of the other, both in good times and bad. Clearly, looking at East Asia, the highest growth region of the globe for many decades, one must marvel at the extensive investments in infrastructure and the export driven development strategies that have propelled growth in the early industrializer, like Korea, the second generation fast-growers like Malaysia and Thailand, and the most recent spate of rapid growers, including China and Vietnam. Lesson number one from East Asia is the extensive investment, led by government spending, on infrastructure that has led to low logistics costs and great levels of efficiency.
The contrast with much of Latin America is stark. Most economies of Latin America have seen their public expenditure dominated by social expenditures, and in some debt service, but few have put sufficient proportions of GDP into infrastructure, with the result that energy costs are relatively high, transport costs excessive, and port efficiency weak. The results are less visible when commodity prices are high; however, as export prices have declined sharply, these inefficiencies are noticeable. Just looking at Brazil, the region's largest economy, one sees public spending on infrastructure averaging less than two percent of GDP, a proportion totally inadequate for that economy and at level so low that private sector involvement is discouraged ( World Bank research shows that public and private investment in infrastructure are complementary, see Calderon and Serven, 2004). Economies that fail to invest in infrastructure are unlikely to maintain international competitiveness, an over-riding lesson from East Asian export-driven economies (see findings of the Commission on Growth and Development, 2008).
The second lesson that East Asia provides for other regions is the importance of productivity gains. Productivity is clearly the key to major economic gains (see Growth Dialogue, 2014). Whether driven by capital investment, skilled labor or technological innovations, no economy grows rapidly without strong performance in terms of total factor productivity. Latin America lags in this respect and despite gains in primary enrollments, there are questions about the absorption of skills; moreover, innovation levels lag those of East Asia by a large margin. Asia has larger firms, better connected to world markets, and hence facing more contestable markets. Firms need to reach global scale and global levels of efficiency in order to compete. Many fewer Latin American firms fall into this category. The Hyundai and Samsung experience of Korea has not been replicated, and despite efforts by BNDES in Brazil, for example, to create global firms with subsidized credits, the results have not been encouraging. Instead, many countries have implicit import restrictions that impede competitiveness and subject domestic consumers to higher costs and lower quality products and services.
Looked at from the other side of the Pacific, there are lessons from Latin America that carry import for Asian economies. A number of Latin economies have seen gains in income distribution and also many millions of new entrants into the new middle class. Some of these gains are due to employment and income gains, supported by some effective transfer programs. East Asia leads the globe in terms of manufacturing employment; yet, on many welfare measures the region lags behind. Learning from Latin America can help move people from the ranks of the just poor to the ranks of the new lower middle class, but this requires a shift in investment to basic housing and consumer durables. In light of current low trade volumes, a shift in aggregate demand to domestic sources may be both inevitable and good policy.
Finally, in the governance arena, many Latin American countries show excellent results with democracy and political accountability. While political pressures can add to the demand for current consumption at the expense of investment, transparency of public policy is a goal of most countries and is a clear incentive for foreign direct investment. Especially in a situation of less plentiful capital flows towards emerging markets, governance distinction is a decided advantage and a prelude to better regulation and more predictable rule of law.
Follow the debate today from Lima, the site of the Annual Meetings of the World Bank and the IMF in the World Bank flagship session on Balancing Sustainable Growth and Social equity: Lessons from Latin America and East Asia. It includes the Ministers of Finance of Colombia and Chile, the Vice Minister of Finance of China, and the Cabinet Secretary of the Philippines. They will share their lessons of experience and discuss how policy needs to change in this newer, less forgiving global economy or check www.growthdialogue.org for further insights on economic growth.