The Economist recently reported some interesting observations about why Latin America has fallen so far behind the economic growth in East Asia.
One word — Worker Productivity
The chart on the right shows that in the past 30 years relative to the USA, workers in East Asia have increased their productivity faster and workers in Latin America and the Caribbean have not kept up with the USA and are way behind East Asia.
We’re talking about about 2% lower productivity growth EACH YEAR between Latin America and East Asia! Anyone who understands compound growth mathematics sees how significant this is.
At its core, productivity growth means getting more output from the same amount of inputs. And since we’re in a global economy, if others are increasing their productivity and you aren’t … you are going to become less competitive and therefore lose business to other more productivity workers … who will in turn be paid more for their increased productivity.
Much of this is structural:
- East Asia has chosen to focus on sectors (including manufacturing and agriculture) where productivity gains are typically higher. Latin America’s workforce is 60% in services.
- East Asia has more larger, formal economy businesses which benefit from economies of scale.
- Latin America, maybe surprising to some, has worse infrastructure (roads, ports, airports, etc.) Example: freight costs from Latin America to USA are more expensive than from Asia to USA
There are exceptions — Chile has consistently had higher productivity growth than the USA and so has Brazil more recently.
With less than 1/3 of Latin America works covered by social-security systems, many governments have created non-contribution social schemes to cover everyone else. Unfortunately, this discourages people from entering the formal economy.