LATIN America and the Caribbean face complex economic challenges that require immediate attention, as highlighted in a recent press conference led by William Maloney, the World Bank’s chief economist for the region. Presenting the Bank’s economic review titled “Competition: The Missing Ingredient for Growth?” Maloney delved into the intricate web of factors influencing the region’s economic prospects, from fiscal pressures to demographic shifts and weak competition policies. Maloney opened the conference by dispelling the notion that the region’s sluggish growth is solely attributable to the pandemic or high interest rates.

“These low levels of growth are not the result of the pandemic and not purely the result of high interest rates,” he asserted, shedding light on the deeper structural challenges hindering progress. “During the decades of the 2010s, we grew at 2.2 per cent while the rest of the world was growing at 3.1 per cent.”

He revealed that while the recovery is still incomplete, the fiscal and debt situations remain challenging. Deficits persist at high levels due to robust spending and heavy debt service obligations, thereby constraining the region’s capacity for investments and exacerbating current account deficits. Despite this, a few countries have managed to return to pre-2019 levels of debt. Furthermore, higher interest rates have placed stress on the banking sector, to some extent. Social indicators are showing signs of improvement, with employment largely recovering, albeit less so for low-skilled workers. Aged workers have exited the labour market and have yet to return, contributing to workforce dynamics. However, wage recovery remains sluggish for women and highly skilled workers. Additionally, poverty levels are approaching those of 2019, and while there is a slight improvement in inequality, it is primarily due to the lagged wage gains for highly skilled workers. New data on poverty in the Caribbean, released this year, reveals that Jamaica, Suriname, St Lucia, and Grenada all exhibit relatively low poverty levels compared to regional and global standards.

Addressing the pressing need to reignite growth, Maloney discussed emerging opportunities during the conference. Foremost among these is nearshoring. He brought attention to the escalating tensions in China and the increasing fragility of global value chains, stressing the imperative to relocate production closer to home. Latin America emerges as a promising destination in this context.

He observed that total foreign direct investment (FDI) flows to Latin America and the Caribbean (LAC) increased in 2022 but remained below the levels of 2010. This comes as Asia continues to experience growth over time. Despite enhanced macroeconomic management across the region, six years of US tariffs on China have theoretically made other destinations more attractive. Moreover, a decade of rising Chinese wages has rendered Latin American wages comparatively cheaper. Additionally, it has been three years since the region became aware of the fragility of its value chain. However, Maloney pointed out additional challenges impacting the region’s nearshoring opportunities. These include the ageing population, as indicated by the dependency ratio, which shows a decline in the birth rate and a rising old-age dependency ratio. He warned that this trend would lead to increased health and pension costs, reduced fiscal space, and a decline in female labour force participation.

“For better or worse, women end up bearing the responsibility for the care economy in general,” he reasoned, highlighting the gendered implications of these demographic shifts.

Another significant challenge is the escalating crime and violence in the region. The data revealed that Latin America and the Caribbean have the highest homicide rates globally, standing at 22.7 homicides per 100,000 people. This is ten times higher than in Asia, five times higher than in North America, and surpasses the levels of countries with similar poverty and inequality. Organised crime, which is spreading throughout the region, is identified as a major contributing factor.

“Even in countries where it was previously less evident, crime and violence have become the principal social problem for 20 percent of Latin American Caribbeans. This has big impacts on growth and the quality of life of our citizens. In the most violent countries, some studies have shown that a ten per cent reduction in crime and violence would be worth about one percent more in growth,” Maloney noted.

He further highlighted the attractiveness of Asian destinations to foreign direct investments, citing higher education levels and lower violence rates as factors that may steer investors away from Latin America and the Caribbean. He highlighted collaborative efforts involving the World Bank, the Inter-American Development Bank (IDB), and the Development Bank of Latin America and the Caribbean (CAF) to deepen understanding and tackle the issue.

Maloney also mentioned another critical element missing in the region’s growth strategy: Competition, and the importance of leveraging its policies to revitalise the economy, regain investor confidence, and stimulate innovation. Comparing growth patterns, he noted that emerging markets and developing economies achieved five to six percent growth over two decades due to capital investment and productivity gains, whereas Latin America lags behind with inadequate capital investment and notably low productivity growth, potentially linked to weak competition.

Addressing a common argument regarding the trade-off between competition and job creation, Maloney argued against its validity. He stressed that the objective is to foster a dynamic economy where new, more productive firms leverage innovative technologies to offer better employment opportunities to workers. He suggests that strengthening domestic competition authorities in regions where they are weak can unequivocally lead to increased productivity, sales, and wages.

“In Peru, for example, when the domestic competition authorities eliminated barriers to regional competition, that not only obviously increased competition throughout the region, but when municipalities could no longer put barriers to trade in their municipalities, it led to an increase in productivity and sales,” he cited.

A similar positive outcome was observed in Mexico, with measures to combat anti-competitive behaviour. However, Maloney acknowledges a significant challenge facing the region: the underfunding, lack of independence, and perceived weakness of competition agencies in Latin America and the Caribbean (LAC). He highlights a survey by the World Economic Forum on the effectiveness of anti-monopoly policies in ensuring fair competition. According to the survey, the United States scored 5.6 on a scale of 1 to 7, Europe scored 4.2, and Latin America scored 3.3. However, he noted that import competition presents a more nuanced scenario. Drawing lessons from the “China shock”, which involved a significant influx of Chinese imports over the last two decades, Maloney highlighted various outcomes in different countries. In Mexico, weaker firms that couldn’t compete underwent contraction, while stronger firms expanded—an outcome he deems desirable. Similarly, in Peru, increased access to technology embedded in imports enabled domestic firms to enhance productivity, a positive development. Conversely, in Chile, there was a decline in innovation, with only firms close to the frontier expanding research and development for new products.

“The lesson to take from that is not that we need to be protectionists but to be more innovative; it’s exactly the reverse,” he underscored. “Increased competition needs to go hand in hand with building stronger firm capabilities and stronger institutions if we’re going to increase growth.”

He highlighted the overall ecosystems and support systems for firms, drawing comparisons to renowned innovation hubs like Silicon Valley in California and Route 128 in Massachusetts. Maloney pointed out the tight linkage between Stanford University and Silicon Valley, as well as Harvard and MIT with high-tech firms around Boston, which the Latin America lacks.