Why is productivity growth so low in Latin America and the Caribbean?

Hola Hola

Explanations of the low growth and insufficient investment in Latin America and the Caribbean (LAC) often focus on deficiencies in education, limited competition, and widespread informality. There is strong consensus that unless these areas are improved, the productivity of Latin American workers will remain low, as argued in a recent article by the Economist magazine.

Be that as it may, so far, discussions have overlooked other issues. For example, LAC’s urban productivity paradox of dense cities that are not particularly productive and its links to the region’s low-growth conundrum have received far less attention . This is an important oversight, not least because of the heavily urbanized nature of LAC’s workforce and the high concentration of workers in the region´s largest urban areas.  

A new report on the Evolving Geography of Productivity and Employment uses a “territorial lens” to take a fresh look at the problem of low growth in Latin America and the Caribbean. The report traces the evolution of LAC’s geography of productivity and employment with the help of new data and methods. It shows that three intertwined structural factors – the de-industrialization of cities, the high costs of distance between cities, and divisions within cities – have weakened the benefits of agglomeration economies and hence economic growth in the region.

Urban weaknesses

The report shows that while de-industrialization affected cities of all sizes, it left a particularly deep mark on the largest ones . As manufacturing employment contracted, employment in less dynamic, non-tradable services expanded with negative implications for productivity. Services of this type do not benefit from endogenous innovation and dynamic gains through international trade and benefit less from agglomeration economies, especially in the largest, often highly congested cities.

It did not help that, as reported in the study, during the past several decades, transport infrastructure received less investment than optimally needed along routes connecting the region’s most populous and productive places. Underinvestment in inter-city road networks is one of the reasons for the relatively high inter-urban transport costs, which have limited market access, knowledge spillovers, and opportunities for specialization, and hence economic growth.

Last but not least, the report shows that in large cities divided into distant and poorly connected low-income and high-income sections, the gains from agglomeration economies associated with sharing, matching, and learning are limited to neighborhoods in or near central business districts, where formal firms are located, consumer amenities are abundant, and residents enjoy better quality basic infrastructure and public services.

The reverse is the case in low-income neighborhoods, where the economy is mostly informal, consumer amenities are scarce, and basic infrastructure and public services are often deficient. The existence of dual urban economies –modern, high-productivity ones in central business districts and informal, low-productivity ones in low-income neighborhoods – results in efficiency losses that undermine economic growth .

While urban economies struggled to improve productivity, agricultural and mining areas performed much better. They benefited from investments and strong demand for commodities in China and other fast-growing economies, particularly during the Golden Decade (2003-13), resulting in a decline in territorial inequality in most Latin American and Caribbean countries during the last two decades.



What are policymakers supposed to do?

The report calls for blending the commodity-driven model of development in Latin America and the Caribbean with one that better develops and harnesses the skills of the region’s urban workforce . It recommends the implementation of policies at three territorial levels: local, regional, and national:

  • At the local level, it would be key to improve the competitiveness and livability of cities, as well as to reduce the barriers to the mobility of residents living far away from economic opportunities in the formal economy.
  • At the regional level, greater efforts must be made to better connect cities within and across countries.
  • At the national level, improving competition, education, innovation capabilities, and the doing business environment should remain priorities. Improving how countries manage and spend their resource rents will also help to move the outlined policy agenda forward.

The report sketches the contours of a strategy for accelerated, inclusive growth through a territorial lens. Individual countries must adapt it to their own circumstances and coordinate it across different territorial scales. The agenda is complex, but if implemented well, it has the potential to finally take Latin America into a new era of higher and more inclusive economic growth.


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