Remarks on Competing in the Global Economy

As prepared for delivery

Despite relatively strong economic growth in recent years, regional growth rates in Latin America and the Caribbean have fallen short of what is needed for the region to fulfill its potential. As the experience in other emerging regions of the world demonstrates, including the transition economies of Europe as well as the dynamic Asian economies, it is possible to achieve more rapid growth than has been experienced in most of Latin America, while reducing poverty.

The fact that growth and poverty reduction are below the region’s potential can be attributed to Latin America’s relatively poor performance on a number of factors linked to increasing economic competitiveness. Business climate reform, infrastructure, and education are particularly important. Freer trade will also help bring about improvements in the region. By opening markets, governments provide incentives for firms to increase their competitiveness and reduce inefficiencies.

Business Climate

The region has made some important improvements to its business environment in the past year. Brazil’s new bankruptcy law, for example, halved the average time for going through bankruptcy from ten years to five. Meanwhile, Ecuador abolished certain property registration taxes, streamlined the procedures and cut the cost to register property, and reduced the time to start a business by a quarter.

Nevertheless, the fact remains that it still takes more days to start a business in Latin America than in any other region of the world except Sub-Saharan Africa. According to the World Bank’s report Doing Business in 2006, which provides a global ranking of 155 economies on key business regulations and reforms, Latin America and the Caribbean continue to lag Eastern Europe and OECD countries, which are aggressively courting entrepreneurs with far-reaching reforms that streamline business regulations and taxes.

While the pace of reform in Latin America is increasing, slow and bureaucratic courts and high and complex taxes remain a burden in most countries in the region. For example, resolving a simple dispute in Guatemala takes 1,459 days—the longest of any country surveyed. Meanwhile, a business in Venezuela typically makes 64 separate tax payments a year and spends more than 800 hours complying with all tax requirements.

Streamlining bureaucracies requires leaders to challenge the status quo, and in doing so, they may challenge vested interests in the public sector. But failing to do so is a recipe for sluggish growth, as investors seek environments that welcome capital.

Addressing these obstacles to doing business will allow firms to grow faster and create more jobs. An increasing number of those jobs will be in the formal economy because the benefits of being formal will outweigh the costs. More formal jobs also mean more protections for workers, including pensions, safety regulations, and health benefits.

Labor and tax reforms that improve the business climate can be politically difficult, but labor markets should be structured to promote job creation—not to discourage employment. And a comprehensible, predictable, and fair tax system is part of environments that attract employers. We can all benefit from steps to develop and energize an entrepreneurial economy.

Infrastructure

Since the 1990s, Latin American countries have experienced a downward trend in public and private investment in infrastructure, including roads and transport, energy and telecommunications, and water and sanitation. This has led to a growing "infrastructure gap" compared to other parts of the world. Whereas Latin America’s estimated infrastructure stock (paved roads, electricity generating capacity, and telephone workers) was 140 percent of East Asia’s infrastructure stock in 1980, it is now less than 60 percent of East Asia’s stock. This gap has led to a rising cost of doing business, reduced export competitiveness, and bottlenecks for growth, job creation, and poverty reduction. Recent World Bank research indicates that improving the region’s infrastructure to the level of Korea could result in annual per capita growth gains of 1.4 to 1.8 percent of GDP, as well as reducing inequality by 10 to 20 percent.

Fiscal reforms and wise debt management can free up government resources for infrastructure development, but government resources are limited. Public-private partnerships can leverage government resources to create infrastructure, and some potentially promising policy proposals in this area have emerged. Brazil’s and Chile’s public-private partnerships aim to use public funds to catalyze higher levels of private investment. Such efforts are essential.

President Bush has recognized the importance of infrastructure development in Latin America. At the recent Summit of the Americas, he announced the availability of U.S. funds to launch an Infrastructure Facility of the Americas, to be housed at the Inter-American Development Bank (IDB). The facility will rate project proposals from private and public sponsors in order to give private investors an objective basis for assessing risk relative to returns, create opportunities for public-private partnerships, and leverage public investment with greater efficiency.

Strengthening the financial sector to encourage savings is another way governments can help increase the availability of private-sector resources for infrastructure investment. It will also improve the availability of financial services required to structure funding arrangements that attract private capital to the long-term commitments generally needed for infrastructure projects.

Education

According to a recent IDB report, Latin America has made progress in expanding access to education. Average years of education across the region have increased from 3.5 years in 1960 to more than 6 years in 2000. More children—from all socioeconomic and ethnic backgrounds—attend school now than at any other time in the past. As a result, workers entering the labor force today have more years of education than previous generations.

However, a gap continues to separate Latin America and the Caribbean from its competitors. Average levels of education in the OECD are well above—more than three-fold in some cases—indices observed in Latin America and the Caribbean. Whereas Latin America and the Caribbean are approaching universal coverage and completion of primary schooling, other nations are moving towards universal coverage and completion of secondary schooling. This is an important distinction because estimates show that workers in the knowledge economy require 12 years of formal education to ensure a decent standard of living and to keep pace with the demands and changes of an increasingly globalized labor market.

The lack of progress is particularly stark when comparing the region to Korea. In 1960, average years of education in Korea stood on par with levels found across Latin America and the Caribbean. Fueled by sustained and rapid economic growth and the use of public policy to mitigate inequalities, Korea more than doubled its average years of schooling for the population aged 15 and above, demonstrating that accelerated educational progress is possible.

Providing good educational opportunities to all citizens is a challenge for every society. Our own experience in the United States has shown that spreading educational opportunities broadly contributes to productivity. Partnerships among business, academia, and labor can strengthen educational opportunities and can foster R&D and an innovation-based economy. The U.S. government has shown the importance it places on education by making investment in people a requirement for countries chosen for Millennium Challenge Account funds.

Effect of Freer Trade on Competitiveness

Freer trade will also help bring about improvements in the region. By opening markets, governments provide incentives for firms to increase their competitiveness and reduce inefficiencies.

Free trade agreements (FTAs)—whether bilateral or regional—are potent tools to implement reforms that will accelerate growth and increase competition. The FTAs the U.S. has negotiated in the region promote the rule of law, transparency, and open trade regimes. They establish rules that foster investment and innovation, protect knowledge and creative industries, help counter corruption, improve the quality of service sectors, and lower costs.

The link between free trade and competitiveness is seen clearly in the case of the U.S.-Chile Free Trade Agreement. In just the first two years since the FTA’s entry into force, trade rose by a stunning 84 percent. Chile climbed to be the U.S.’s 29^th largest export market (from 35^th). Chile’s benchmark stock-market index (IPSA) has risen by 47 percent since the FTA entered into force.

We also expect major improvements in the business climate and competitiveness from our FTA with Central America and the Dominican Republic, and, when fully completed, our agreements with the Andean countries. In these cases, our regional free trade agreements will do much to foster integration and therefore greater investment, both foreign and domestic, as companies begin to see these regions as unified markets.

Conclusion

In his recent State of the Union Address, President Bush demonstrated his commitment to competitiveness by launching the American Competitiveness Initiative to encourage American innovation with investments in R&D, education and entrepreneurship.

Competitiveness is one of the most important issues facing Latin America. The hard-won macroeconomic stability in the region is a necessary but insufficient condition for the type of growth that lowers poverty levels significantly. The areas I have mentioned—business environment, infrastructure, and education—are examples of areas on which the region can focus to improve its competitiveness. The steps that individual countries in the region are making illustrate that it can be done. Freer trade will also help bring about improvements.

By working with the private sector and civil society to build a consensus for comprehensive structural reform and then carrying those reforms out, Latin America’s leaders will improve their countries’ competitiveness and the lives of their citizens.