Latin American productivity problems

The Economist had a good feature story on this topic, here are a few points:

1. According to the IMF, Latin America will grow at only 0.9% this year.

2. Brazil may do -1.25%, while Argentina and Venezuela continue to deteriorate.

3. Given the location of South America, it is harder for those countries to plug into global supply chains.  Of the Latin countries, only Mexico has managed this, largely because of its proximity to the United States.  Yet even Mexico has grown an average of only 2.4% a year over the last twenty years.

4. Latin American productivity levels were closer to those of the United States in 1960 than they are today.

5. There is far too much labor in the informal economy.

6. Latin America as a whole invests only 3% of its gdp in infrastructure, compared to 6% for India and 9% for China.

Comments

"3. Given the location of South America, it is harder for those countries to plug into global supply chains. "

I have my doubts if there is any significant truth to this comment. China ships plenty of goods to the US and Europe, across further distances than Brazil has to.

Without any specialized knowledge, I would think that if I needed to regularly ship a few containers it would be trivial from the far east because of the existing levels of traffic. Would the same apply to Argentina?

China has network effects from proximity to Japan, Korea, Singapore, Hong Kong, etc. Unlike South America they don't have to go intercontinental distances to integrate with large, developed economies.

Note that South America is not only south of North America, it's very much to the east. All of South America except a thin strip of western Colombia is east of Miami.

Okay, but Brazil is a lot closer by sea to the huge European market than China is. And Rio is an amazing harbor. And Argentina / Uruguay have great river transport to the sea.

I went to South America in 1978 and it was vastly far ahead of where China was at that low point in Chinese development.

Steve,

China was very poor in 1978, but 1978 wasn't a low point. The low points were the "Great Leap Forward" and the Cultural Revolution. By 1978, China was recovering from the depths of Maoist folly. China's GDP crashed from $291 billion in 1959 to $230 billion in 1962 and recovered to $341 billion in 1966. It then fell to $321 billion in 1968. By 1978 China's GDP had grown to $622 billion. By 2011, China's GDP had grown to $13.957 trillion.

True, but South America is still closer to the US than either Asia or Europe. If you are a businessman, it's much easier to work with counterparts in Latin America during normal business hours than those in Europe or East Asia.

Even the Southern Cone is closer to the southern US than Central European economies. Some Latin American countries - primarily Caribbean Basin economies of Costa Rica, Panama, and Colombia - could integrate quite easily with the US economy.

Distance is not the issue here. It's the lack of value added industries. The major problem of South America is that their economies were never based on adding value going back to the Spanish Empire. They provided resources. Even Argentina in their golden age was commodity based. (Then again, so is Australia who really is punished because of geographic isolation from participating in local supply chains.) So they have nothing to contribute. In contrast, despite China's poverty coming out of Mao, China always had a skilled workforce, literacy, and a tradition of making things. They were already primed to contribute to the global economy.

Mexico is slowly moving up economically. Despite its problems, it has progressed a lot since 1985. Its leaders have made a lot of the right decisions to get Mexico moving up on the value chain. In twenty years, chances are good that Mexico will be developed enough that the lowest rung of low cost value added moves from there to the Caribbean basin - Central America, Colombia, and the Andean nations. That would start the chain of pulling South America into the regional supply chain. Of course, this could be accelerated - but the governments need to reform first.

"Cost to export (US dollar per container) in Brazil
Cost to export (US dollar per container) in Brazil was last measured at 2322.80 in 2014, according to the World Bank. Cost measures the fees levied on a 20-foot container in U.S. dollars."

http://www.tradingeconomics.com/brazil/cost-to-export-us-dollar-per-container-wb-data.html

"Cost to export (US dollar per container) in China was last measured at 823 in 2014, according to the World Bank. Cost measures the fees levied on a 20-foot container in U.S. dollars."

http://www.tradingeconomics.com/china/cost-to-export-us-dollar-per-container-wb-data.html

So yes, it does appear as if the shipping from Brazil to the US vs China to the US is substantially higher.

How much of these costs are self inlicted, how much from geography and how much is from something in between? Cabotage and inefficient ports would self-inflicted. Poor economies of scale would in-between. Proximately not self inflicted, but still the consequence of self inflicted costs.

This may be due to volume. There is a lot of container traffic between Asia and North America, so the infrastructure has been built up over the years and lots of steamship lines compete there. There is a lot less traffic from South America to anywhere else. This is something that would decline in time if export volumes grow.

So while the freight cost is a disadvantage, it's not a permanent disadvantage since it is not based on actual distance. Santiago, Chile is around 5600 miles to Los Angeles. Guangzhou is over 7200 miles away.

What the heck, life is good.

https://www.youtube.com/watch?v=q4K41Qt_eIU

Silly economic policies. That's it. Latinoamericans still think that Marxism or socialism is the way to go.

http://www.devilsdictionaries.com/blog/how-leftist-economic-recipes-hurt-brazil

http://www.devilsdictionaries.com/blog/brazil-is-the-winner

http://www.devilsdictionaries.com/blog/is-low-inequality-good-case-study-of-argentina

Not in Mexico, Colombia, or Peru.

6. How could big government spending wasted on infrastructure be a good thing?? It would starve the economy of needed workers hindered profit making!

Isn't that the argument used in the US for not fixing US infrastructure to keep the gap between US and both European and China infrastructure quality from widening further?

In case of South America, with its high level of corruption (See Brazil), we all know what will happen if government decides on a "keynesian"-like policy...

In this case then, keynesian = "kleptocracian" ;)

This might be true, but that is not the crux of the comparison with China and India, where there is at least as much corruption. The infrastructure spending there is also wasteful, but at least in China that infrastructure has been of some use anyway.

My fear is that India growing fast merely because it it headed towards Latin-American living standards, where it will then stagnate. Latin America doesn't need to grow in order to acheive this.

The three biggest reasons, by far, are the

1. Over-reliance on commodities exports;
2. Terrible infrastructure and infrastructure policy/maintenance;
3. Low investment as a percentage of GDP.

#3 in particular is apparent if you look at this chart I found from the IMF. Chile is the highest of the countries, but even still it's significantly below China and South Korea in investment - and the trend isn't getting better. Latin America in general has a low investment rate, comparable to some countries that are much richer and more productive than they are.

#1 is tricky to resolve. They either need to do land reform and major infrastructure build-outs along the lines that East Asian countries did (as Joe Studwell of How Asia Works documented), or they need to encourage more of their incredibly poor rural populations to migrate into the cities where they won't be as much of a productivity drag on the whole economy.

#2 would require them to put more money into actual infrastructure and maintenance, which somehow seems to be very difficult (I'm assuming corruption is a factor). It doesn't help that some of them already have very high tax burdens as percentages of GDP (like Brazil), so raising taxes further to build infrastructure is unpopular. That would leave private sector investment as a possibility, except that most Latin American governments don't have a history of being reliable partners in that regard.

Brazil may spend a lot less on infrastructure compared to China... But Brazil spends a lot more on welfare ("social spending")...

Of course, there are other factors... Compare education in Brazil and China... OK, don't do that. Too depressing.

Catholic Economics.

It's a real pattern, even though it's not terribly strong. In the 1970s, Catholic countries tended to have high inflation.

"But Brazil spends a lot more on welfare"
- exactly.

I wouldn't object to commodity exports if that's where there comparative advantage is. Also, the share of the labor force devoted to agriculture is currently around 15%. The benefits from labor release aren't decisive.

All kinds of trouble. Except for the Southern Cone, most of Latin America varies from pretty crime ridden to horribly crime ridden. Land titles are commonly fuzzy, court systems ineffectual, and public agencies produce a river of regulation which businessmen have to adjust to by going off the books or by keeping up political contacts.

Not sure what the enthusiasm for 'land reform' is, unless you mean clarifying land titles. Agriculture has been for a generations an economic sector of declining importance and Bolivia, Honduras, and Nicaragua are the only countries where more than a quarter of the workforce is in agriculture.

All,

A rather good discussion of this subject can be found over at "The Money Illusion - Brazil on the short end of a 7-1 score" (http://www.themoneyillusion.com/?p=27257). Read Scott Sumner's observations and the comments. I wrote the following comment.

"Brazil’s poor performance isn’t that much of a mystery. Check out Brazil’s PISA scores. See “Brazil’s scary PISA results” (https://www.insidehighered.com/blogs/world-view/brazils-scary-pisa-results). Quote

“In a few words, the results of the PISA are disastrous: Brazil performs below the average in mathematics (ranks between 57 and 60), reading (ranks between 54 and 56) and science (ranks between 57 and 60) among the 65 countries and economies that participated in the assessment.”

By contrast, China is near the top of the PISA tables.

The Economist has more “Weak and wasteful schools hold Brazil back. But at least they are getting less bad.” Quotes

“A decade on, it is clear that the shock was salutary. On December 7th the fourth PISA study was published, and Brazil showed solid gains in all three subjects tested: reading, mathematics and science (see chart 1). The test now involves 65 countries or parts of them. Brazil came 53rd in reading and science. The OECD is sufficiently impressed that it has selected Brazil as a case study of “Encouraging lessons from a large federal system”.”

“One reason the poor learn so little is that a big chunk of school spending is wasted. Since teachers retire on full pay after 25 years for women and 30 for men, up to half of schools’ budgets go on pensions. Except in places such as São Paulo state, which has started to take on the unions, teachers can be absent for 40 of the year’s 200 school-days without having their pay docked. More than a tenth of spending goes on pupils who are repeating grades: an astonishing 15% of those graduating from secondary school are over 25.”

Brazil’s poor economic performance is the predictable result of a low-skill population combined with a very extensive (and deeply self-serving) public sector. China has highly skilled people (at least directionally) and a public sector focused on results (infrastructure, etc.)."

....And what about the absurdly high levels of inequality (no wonder left wing ideologies are popular!) and (as a consequence or cause?) the high amount of corruption... which would make Greece look like... Germany (?!). At least these are my priors...

6. The U.S. spends less that 2% of gdp on infrastructure. Even in an industry in which the U.S. supposedly excels, communication, has dismal levels of investment in fibre optics as compared to other advanced economies. As I've pointed out many times, owners of capital have become high stakes gamblers rather than investors in productive capital - private "infrastructure" suffers from the same underinvestment as public infrastructure. Sure, wealthy owners of capital will come together and support investment of public funds in a new football or baseball stadium, but not better transit or broad band.

Better broadband and transit? Given that most of the country seems to have little trouble all watching HD content on Netflix or other streaming services every night, I'm not sure what penalty the U.S. might be paying for 'underinvesting' in broadband. And transit? Please save us from more transit 'investments' like the California HSR or the Washington DC streetcar system:

"WASHINGTON — It cost $200 million. It’s delayed. And it might never pick up a paying passenger.
Last week, D.C.’s transportation chief indicated the oft-troubled D.C. streetcar could be mothballed."

http://wtop.com/dc/2015/03/future-of-d-c-streetcar-remains-in-limbo/

There is more fiber deployed in the US than any other country. FTTH has not caught on yet because we already had an extensive cable network.

http://www.vox.com/2014/11/29/7281809/american-broadband-pretty-good

"There is more fiber deployed in the US than any other country."

Not difficult for a country that has 10 million square kilometers and 320 million people. What about on a per capita basis?

TallDave provided a link that answers that question and many others. Spoiler alert - the U.S. has a greater percentage of fiber-to-the-home broadband than all G7 countries except Japan (which is an extreme outlier). This is especially impressive give the low population density in the U.S. as compared to most other G7 countries.

I believe there is actually more core fiber-miles per capita here than anywhere else, but again that's partly just because this is a big relatively low-density country. The same is true for our roads and bridges.

Posted from Rayward's telegraph connection via Morse Code.

Institutions. Latin American economies are limited by the corruption and capriciousness of their political systems. Why build what the caudillos may take away tomorow?

Also, US drug policy is a huge problem for them, especially in that it inverts incentives in ways they are particularly vulnerable to. Note they do manage to export drugs to the United States despite the lack of "supply chains" -- incentives matter.

The drug platforms are fairly close in, comparatively speaking. Honduras and Mexico.

The politically incorrect answer is that there are cultural differences in Latin America which hamper growth as measured by Yanks.

Incidentally, I plan to retire in Latin America, hopefully a globally-integrated Cuba. They are some of the most pleasant people on the planet, and the rate of double-crossing is like 1/50th of what it is in New York.

Don't let the door hit your tuchus on the way out.

Asian style high infrastructure investment is contingent on high savings rates. Latin American saving rates are low for middle income countries.

% of investment in infrastructure is pretty meaningless. It depends on the level of infrastructure they have.

Mexico infrastructure, for example, is light years ahead of India. So why would they be investing more?

And contextually dependent.

In most of these Latin American countries, you're looking at a trivial amount of economic activity taking place inland in most cases. Same with population density. Cheaper to ship in almost every case, even when we're looking at MC.

Not the case in India and China.

http://econbrowser.com/wp-content/uploads/2007/01/sachs.png

Perhaps another point to consider (I haven't read the Economist article, so maybe this is mentioned) is that historically, many of the nations in Latin America appear to have had (by comparison with North America and the UK) weak judiciaries/judicial systems: that is, the ability to (say) enforce a contract has not been as obvious as it has been in common law nations. Latin American nations have plenty of laws, but their enforcement is not always as aggressive as one might wish. This realization has to cast a shadow on on any investor's intentions, with a correspondingly glum effect on economic activity.

The Index of Economic Freedom says about Brazil "The judiciary is inefficient and subject to political and economic influence. The court system is generally overburdened, and contract disputes can be lengthy and complex."

It has been found that contract enforcement has very little effect on economic outcomes. What has large effect is property rights... which, incidentally, most latin american nations are very, very weak in.

"4. Latin American productivity levels were closer to those of the United States in 1960 than they are today. "

That was the golden age! Everything after 1980 sucks. Those lucky Latin Americans.

#3 Brazil actually could ship iron ore to China cheaper than the Chinese could by using (some were Chinese built) chinamax bulk carriers. China promptly banned these.

https://en.wikipedia.org/wiki/Valemax#Initial_career_and_ban

"On 31 January 2012, the Ministry of Commerce of the People's Republic of China officially banned dry bulk carriers with capacity exceeding 300,000 tons from entering Chinese ports in order to protect the domestic freight industry. ... The ban was officially lifted in July 2015."

"Yet even Mexico has grown an average of only 2.4% a year over the last twenty years."

Actually, the size of Mexico's overall economy has more than doubled since 1994 (when it was in a bubble) and quadrupled since 1995 (when the bubble popped). If this figure was meant to refer to per capita growth the assertion is closer to true but still wrong; the economy has grown by a factor of 1.84 from 1994 to 2014, which works out to 3.1% a year over the last 20 years (5.2% a year over the past 19). And frankly, a sustained increase of 3.1% a year for 20 years in per capita GDP looks pretty good to me. If they do that well over the next 20 years then by most measures they would probably be considered a developed country.

http://data.worldbank.org/indicator/NY.GDP.MKTP.CD/countries?page=4

Yes, this is true. I agree.

Brazil actually could ship iron ore to China cheaper than the Chinese could by using (some were Chinese built) chinamax bulk carriers. China promptly banned these.

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