Chile and Panama Take Lead as Latin America’s Most Competitive Economies

Chile is the highest ranked Latin American nation in the World Economic Forum’s Global Competitiveness Report 2013–2014, published in September 2013, while Costa Rica leads the region in …

Chile is the highest ranked Latin American nation in the World Economic Forum’s Global Competitiveness Report 2013–2014, published in September 2013, while Costa Rica leads the region in a sub-index for innovation.

Overall, Latin America grew by three percent in 2012, slightly less than in previous years, but the rate remains steady in the region and greater than in many of the world’s more advanced economies, with further growth of three percent projected for 2013 and 3.4 percent for 2014.  This growth is being driven by a recovery in several export markets and robust internal demand based on fairly good access to financing, the WEF states.

Productivity Woes

The global financial crisis and ensuing developments have heightened the role of emerging economies in the global context, the WEF notes, accelerating the major economic transformations already underway, fueling rapid growth and lifting millions of people out of poverty.

However, Latin America continues to suffer from low levels of productivity and slow productivity growth rates which have led to a certain stagnation in competitiveness over the last year. On average, the ten highest ranked Latin America states have fallen 1.2 places in the WEF competitiveness index since 2012.

The most problematic factors for doing business among these countries are: corruption, inefficient government bureaucracy, inadequate supply of infrastructure, crime and theft, inadequately educated workforces and restrictive labor regulations. In order to heighten productivity in the region, action must also be taken to improve the functioning of institutions; the quality of infrastructure; the allocation of production factors through enhanced competition; and the skills, technology, and innovation base, the WEF states.

“Particularly important will be the ability of economies to create new value-added products, processes, and business models through innovation,” says WEF Executive Chairman Klaus Schwab. “Going forward, this means that the traditional distinction between countries being ‘developed’ or ‘developing’ will become less relevant and we will instead differentiate among countries based on whether they are ‘innovation rich’ or ‘innovation poor.’ It is therefore vital that leaders from business, government, and civil society work collaboratively to create enabling environments to foster innovation and, in particular, to create appropriate educational systems.”

Measuring Global Competitiveness

The WEF defines competitiveness as “the set of institutions, policies, and factors that determine the level of productivity of a country.” Its main competitiveness index is divided into three sub-indexes. The first, the Basic Requirements sub-index, measures the quality of institutions, infrastructure, macroeconomic environment, health and primary education, and is considered key for factor-driven stage-one economies such as Nicaragua.

The second, the Efficiency Enhancers sub-index, measures the quality of higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, market size, and is considered key for efficiency-driven stage-two economies such as Colombia and Guatemala.

Finally, the Innovation and Sophistication sub-index measures the quality of business sophistication and innovation, and is considered key for innovation-driven stage-three economies, such as Germany and the United States. There are no stage-three driven economies in Latin America, but Argentina, Brazil, Chile, Costa Rica, Mexico, Panama and Uruguay are all defined as in transition from stage two to three.

Chile Leads the Way

Chile has the most competitive economy in Latin America and the 34th most competitive on earth, according to the WEF rankings. Chile’s key strengths are its efficient government, strong institutions and low levels of corruption. It has solid macroeconomic stability, with a balanced public budget and low levels of public debt, and well-functioning markets with high levels of domestic competition and openness to foreign trade. Chile has also greatly strengthened its IT infrastructure, almost doubling its international Internet bandwidth capacity from 20 to 40 kb/s per user over the past year and expanding its number of Internet users to the 45th highest in the world.

Chile leads the region in the Basic Requirements and Efficiency Enhancers sub-indexes, but in order to progress further up the main index it must diversify its economy and move toward higher-value-added activities, the WEF says. Furthermore, to improve in the innovation sub-index – where it trails Costa Rica and Panama – Chile must address weaknesses in the educational system, especially in the areas of math and science, so as to produce a workforce with the necessary skills for innovative projects. More innovation-related investment in the private sector is also required.

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Panama’s Educational Progress

The Central American state of Panama follows Chile as the second most competitive economy in Latin America. Panama has consolidated its position as a major transport hub by developing excellent port and airport networks, while its financial market and technological adoption continue to improve as more multinational corporations set up operations in the country. Panama is the best rated country in the region for company spending on research and development and it has significantly improved the quality of its education which rose from 112th best in the world to 75th in the last year.

Costa Rica on the Rise

Panama’s neighbor Costa Rica rose three places in this year’s competitiveness rankings, the largest rise among the Latin American countries listed. This was largely due to its open economy and strong institutions, and its high-quality educational system which provides a skilled labor force. Costa Rica also has the best innovation rating in Latin America and the 31st best worldwide. The Central American state has the best rated scientific research institutions and the best university-industry collaboration in research and development in the region. It also leads Latin America in terms of availability of scientists and engineers. Challenges to be overcome include wasteful government spending, crime, poor transport infrastructure and difficulty in accessing finance.

Mexican Reforms Key to Further Growth

Mexico’s is the fourth most competitive state in Latin America, thanks to its relatively stable macroeconomic environment, a sound banking system, a large and deep internal market allowing for important economies of scale, and a reasonably good transport infrastructure. Following a period of political transition, government reforms of the labor market, education and the energy sector could help Mexico to make much needed improvements to further boost competitiveness, while the government must also tackle crime and corruption, enhance security and strengthen its institutions.

Brazil Takes a Tumble

The next highest ranked country in the region is Brazil, which slipped eight places in this year’s index due to a slight deterioration in some macroeconomic indicators, a tightening of access to financing, and a lack of progress in some of the most pressing challenges facing the nation. Brazil boats the highest rated capacity for innovation in Latin America and benefits from its large market size and its fairly sophisticated business community, with pockets of innovation excellence. However, it must improve the functioning of its institutions, government efficiency and corruption, while addressing the issue of low trust in politicians. More must also be done to improve the quality of infrastructure and education, and to open the economy to greater foreign competition in order for Brazil to move back up the rankings.

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