Productivity Growth in the Americas



Productivity Growth in the Americas

John B. Taylor

Under Secretary for International Affairs

United States Treasury

At Brazilian American Chamber Of Commerce

Fortaleza, Brazil

March 12, 2002

Thank you for inviting me to this meeting of the Brazilian American Chamber of Commerce. It is a pleasure to discuss economic issues with people from the private sector.

I would like to focus my remarks today on productivity growth. Of course I do not need to tell business people about the importance of productivity growth. Productivity is simply the amount of goods or services a worker can produce in a particular period of time-a day, or a week, or a year. Successful firms must monitor productivity closely. There are strong incentives to raise productivity because with higher productivity the same amount of goods or services can be produced at lower cost. In a competitive environment higher productivity eventually leads to higher real wages for workers.

In fact, for an economy as a whole economic progress itself is based on productivity growth. Higher standards of living cannot occur without productivity growth. We cannot reduce poverty without productivity growth. The higher productivity is in a country or a region, the higher income per capita is in that country or region. You can see that by comparing the richer and the poorer countries in our own hemisphere.

In the United States productivity growth has been the subject of an enormous amount discussion and research in recent years. And I do not mean simply academic research and discussion.

The Federal Reserve Board, for example, under Chairman Alan Greenspan's leadership, has devoted a great deal of resources to the study of U.S. productivity growth: Getting better data, using more sophisticated statistical techniques, looking for changing trends, assessing the importance of new technology. And the Fed takes this research into account when deciding whether to raise or lower the federal funds interest rate.

Productivity growth has changed trends for the better in the United States in recent years. Productivity had been trending around 1 percent per year during the period from the mid-1970s to the mid-1990s. The trend now appears to be at least 2 percent, perhaps higher. During the recent economic slowdown in the United States productivity growth has held up remarkably well compared with earlier slowdowns and recessions in the United States.

I am happy to say that the United States is now coming out of the recent slowdown. The fourth quarter of last year showed positive real GDP growth, and recent data on production and employment indicate that the U.S. economy has turned the corner. Once the recovery is underway, we have strong evidence to believe that productivity growth will remain closer to the improved trend of recent years.

For the countries of Latin America as a whole productivity growth has also improved. Data published by the Inter-American Development Bank (IDB) indicate that the 1990s were better than the 1980s in terms of productivity growth, reflecting many economic reforms, especially in the macroeconomic areas. Productivity growth was 0.7 percent per year in the region as a whole in the 1990s after averaging below zero in the 1980s.

However, I believe there is room for much more improvement in productivity growth. During the period that productivity growth was 0.7 percent in Latin America, it was 1.7 percent in the developed countries, and 2.7 percent in the East Asian countries. That 1 percent or 2 percent productivity difference could have made a huge difference in living standards in the region. As I indicated productivity growth in the United States is projected to be at least 2 percent in the next few years. Productivity growth in Latin America can and should be higher than 2 percent-or more than triple what it was in the 1990s.

The average trend in productivity in Latin America hides important difference between countries. In fact, productivity growth varied substantially across the region in the 1990s. According to the IDB, productivity grew by 2 percent annually in Chile, about the same as the United States. And the economic reforms in the early 1990s in Argentina led to similar high productivity growth, but of course the events of recent economic crisis are preventing that trend from continuing for the time being. According to the same IDB report, productivity growth was also strong in Uruguay. However, in Brazil productivity growth was close to zero-actually slightly negative according to the data we have-for the 1990s as a whole.

Why do I think productivity growth can improve so much in Latin America? The observed differences between regions and countries certainly point in that direction. Experience and research during the recent years have taught us many new things about productivity. Productivity will grow if capital-including human capital-per worker grows or if technology improves.

The main reason why I think that the productivity potential is so much higher in Latin America is that there is so much room to increase capital-including human capital-and to adopt cutting edge technology in use around the world today.

Research has shown that a better business climate-a more consistent rule of law, better control of corruption, fewer obstacles to starting a business-will raise productivity. Quantitative studies show that there is room for improvement here too. For example, in Latin America on average it takes 12 legal and government administrative steps to start up a business. In Canada it takes 2 steps to start up a business; in the United States it takes 4 steps.

Excessive taxes and regulations are obstacles to raising productivity growth that can be reduced or removed. According to a recent survey, 66 percent of business people in Brazil believe excessive taxes and regulations hinder investment. In Chile, however, only 12 percent of business people see overtaxing and regulation as a serious problem. Recall that productivity growth was negative in Brazil in the 1990s and 2 percent per year in Chile over the last decade.

Inefficient government intervention in labor markets may also reduce productivity. According to the Inter-American Development Bank, the costs of job restrictions are higher on average in Latin America (nearly 3.0 months of wages per worker) than in the OECD countries (1.7 months of wages).

There is wide agreement that better education is key to productivity growth. Although the labor force in Latin America grew at similar rates as East Asia in the 1990s, the rate of educational improvement was slower than in the countries of East Asia, and it even slowed further in Latin American during the past decade. There are of course important educational success stories. For example, here in Brazil the Bolsa Escola program, which provides funds to families with low incomes, whose children attend school has led to higher enrollments.

In conclusion, by reviewing some key facts and recent studies on productivity growth in the hemisphere, I hope I have convinced you that the goal of substantially raising productivity growth is important and feasible. I mentioned some of the obstacles to raising productivity growth. And I have also noted that the substantial gains in terms of higher living standards and reduced poverty that would come with the reduction or removal of these obstacles.

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