Academic journal article The McKinsey Quarterly

Latin American Productivity

Academic journal article The McKinsey Quarterly

Latin American Productivity

Article excerpt

Better standards of living rest on better productivity and that, in turn, on improved managerial practice

A study of labor productivity in four industries -- steel, food processing, telecommunications, and retail banking -- in the five largest Latin American economies -- Argentina, Brazil, Colombia, Mexico, and Venezuela -- finds that it is at only around 30 percent of world-class levels in three of the four cases analyzed (steel, food, and banking), but is much closer in telecommunications. The study also finds in all cases, except food, that labor skills do not represent obstacles to achieving higher productivity levels and that scale of production does so only to a low degree. Corporate managers in Latin America can close the huge current gap in productivity in the formal sector by adopting global best practice in the way they organize the functions and tasks of their companies. The structural factors that hinder productivity in the informal sector -- much lower labor costs and lack of financing -- will change only gradually. Thus, productivity increases in this large part of Latin American economies will be modest, and income disparity will probably increase.

DURING THE PAST FEW YEARS, the world has witnessed a radical change in the economic history of Latin America. After the fast growth of the 1960s and 1970s, the following decade brought the debt crisis, high inflation, recession, and decreasing standards of living. Today, the policies responsible -- import substitution, protectionism, and heavy regulation -- are giving way to genuinely market-oriented policies -- albeit with varying speed and depth -- in one country after another. At long last, privatization, deregulation, and lower trade and capital barriers have started to replace state monopolies, private cartels, mercantilism, and hyperinflation.

Latin America has, for example, become one of the most aggressive privatizers in the world. Per capita proceeds from the massive sale of state assets are bigger than in any other developing region of the world. Even when compared with industrial countries, privatization revenues in relation to the GDP are much higher. As a result, privatization is one of the key drivers of the modernization of these economies: it affects -- and is fundamentally turning around -- a significant share of each.

Economic reforms

In the past, Latin American countries have often been known for their lax monetary and fiscal policies. Big deficits were regularly financed by printing money, which inevitably led to high inflation rates and chronic devaluations. More recently, tight and responsible monetary policies have considerably reduced these formerly huge fiscal deficits. Not all the countries, however, are following the same path. Chile, Argentina, Colombia, and Mexico are consolidating their fiscal equilibrium and trimming down their inflation. By contrast, Venezuela and Brazil have, since 1992, reverted to substantial deficits that are again fueling inflation.

Trade

Another consequence of the current flurry of economic reform is that trade barriers have fallen dramatically, from an average of 50 percent "ad valorem" to less than 15 percent in the last 5 years. Non-tariff restrictions have also been substantially reduced. Not surprisingly, international commerce has surged in these formerly isolated economies. Imports have tripled and exports have doubled since the opening of economic borders. Exports of manufactured goods to the developed world have been growing even faster, changing the historical pattern of Latin America as a supplier of only raw materials.

Foreign direct investment

This "virtuous" behavior has allowed the region to capture a significant part of the increasing flow of capital to the world's emerging economies. Today, in fact, Latin America is receiving more money per capita than any other developing region.

Timing

Not all the countries in the region, of course, have implemented theft reforms at precisely the same time or to exactly the same degree. …

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