By: Staff Writer
April 12, 2024
The World Bank said in a new report that the Latin American and Caribbean (LAC) rebounded fully from the COVID-19 pandemic but is now fighting to move further into the modern era by allowing competition to take firm hold and allow the private sector to flourish.
Latin America and the Caribbean (LAC) has reached a critical juncture. While the region has made significant progress in economic stabilization over recent decades, growth has stalled, undermining progress. Urgent action is needed to reverse course. In a new report, “Competition: The Missing Ingredient for Growth?” the World Bank highlights potential areas for action, emphasizing that leveraging competition policies and institutions is key to any impactful growth strategy.
The report said: “While LAC has shown less dynamism than any other region of the world, it has fully recovered GDP lost during the COVID-19 pandemic, total employment is close to full recovery—although not for all groups—and poverty has fallen below its pre-pandemic level (mainly due to the influence of Brazil and Mexico). Yet, the region confronts a global environment that is still difficult. The US economy has outperformed all expectations and seems poised to achieve the holy grail of a “soft landing,” quashing inflation without inducing a recession, but Europe remains depressed and China, LAC’s largest market, continues its unpredictable but sluggish behavior.
“On the fiscal front, government spending remains elevated. High interest rates, while falling in many countries, keep pressure on debt service. Transitory transfers to vulnerable individuals and businesses during the pandemic are continuing to recede—albeit incompletely, while in many countries, other spending has not fallen or has increased. Overall, progress on debt reduction remains limited: the debt-to-GDP ratio increased considerably in 2023 compared to 2022 and remains above the 2019 level of 59 percent. In classic “twin deficits” fashion, persistent current account deficits largely reflect fiscal imbalances.”
It also said: “Despite solid macroeconomic management in the region, prospects for growth remain low, not only because of global conditions, but also because of long unaddressed structural issues. Regional growth remains constrained by low capital accumulation and low productivity growth over the longer term. Further, despite the enthusiasm for nearshoring, foreign direct investment (FDI) remains below levels of 12 years ago in real terms and greenfield investment announcements continue to fall, including in Mexico.
“Increasing the competition that LAC firms face has the potential to stimulate growth and improve consumer welfare. Competition from low-cost consumer imports can help raise the standard of living of families across the income spectrum. Competition also has the power to nudge domestic producers into adopting new products and technologies, improving productivity at the firm level. The global integration of markets has contributed to more competitive environments, facilitating the diffusion and adoption of innovations that enhance efficiency. At the same time, competing in dynamic and challenging domestic markets is the best way for firms to prepare for exporting.”
The report added: “Despite these positive impacts, foreign competition often harms local industries and jobs. Therein lies an apparent trade-off in policy-making: whether to protect existing jobs and firms at the cost of foregone growth, or to spur firms to strive for the highest form of technology available and enhance their performance, ensuring that consumers get the best products available at the lowest possible prices.
“This is a false dilemma. Greater domestic competition induced by competition authorities yields unambiguously positive results and overall higher welfare. And, while the outcomes from greater external competition are more ambiguous, this is due mainly to the lack of preparedness of firms in LAC to compete with those at the forefront of global productivity. So, a pressing priority is to help these firms and their workers be better prepared -only that will protect them in the face of global competition forces. Moreover, high market power and business political power too often feed into each other with undesirable outcomes for society. This vicious cycle must be broken. To bring industries closer to the frontier and enable societies to reap the gains from greater competition, competition and pro-competition policies must be paired with efforts to put in place good innovation policies and working national innovation systems -including improved education and skill-training systems-, alongside deliberate actions to rebalance power.”