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Successful Latin American countries will have to learn to live with appreciated currencies.
With interest rates in the developed world likely to stay low for a while, money will continue to flow into the region’s more promising economies. This will make them less competitive.
There is little they can do about it – accumulate reserves, impose capital controls and taxes, keep banks from credit sprees, increase productive efficiency. But these are either unsustainable measures or long-term reforms.
The reality is that living in – or exporting from – places such as Bogotá, Lima, São Paulo and Santiago will be more expensive in US dollars. It will be harder to sell products in the US and in any other country that keeps its currency tied to the US dollar, notably China. That is why success in trade will depend more on new products. While getting additional free-trade agreements will still be good, creating new brands will be even better.
The problem for Latin America is that, on the whole, it has not excelled at innovation – either at doing new things or at doing the same things in a new and better way. It has been slow to acquire, adopt and adapt technologies that exist elsewhere. It invests too little in research and development, provides few tax incentives and does not protect intellectual property well, and its universities are disconnected from its businesses.
This is reflected in the minute levels of patent registration, declining total factor productivity compared with the US, few companies acquiring quality certifications and a commercial penetration that has been stagnant for decades – only about 5 per cent of world trade has a Latin American as partner.
Even before the credit crisis of 2008, the years of abundant financing saw only a handful of new Latin American business lines come to market – premium foods, medical tourism, aeronautical engineering, software development and call centres.
It could be called the curse of commodities. Why risk new ventures in a region where good old natural wealth is abundant and pricey?
Ironically, some of the best recent innovations in Latin America happened in commodity industries – the technological revolution in Argentina’s soyabean production; efforts at environmental sustainability in Peru’s mining.
Can Latin American creativity be unleashed, regardless of sector? It will take years to fix the problems that smother innovation in the region, but the new global reality will make change unavoidable. Will there be a single formula?
No. Latin American countries differ in terms of technological stock, efficacy of tax systems, quality of human capital, legal predictability and institutional capacity.
But successful innovation strategies show some common features that point the way.
They are priorities of the state (they do not change from government to government); they are not based solely on markets; all relevant stakeholders are engaged (big and small, public and private); somebody is accountable for results; they are part of a broader effort of integration; they are well funded; they are continuously evaluated and adjusted; they begin with quick wins (usually in the area of quality standards); they include reforms in tertiary education; and they operate within a reliable legal framework.
Interestingly, more private innovation in Latin America will call for better public action. From venture funding to skills improvement, the state will have a new role to play. Rather than taking the exclusive leadership, as it tried in the past – with poor results – it will become a catalysing partner in multi-agent efforts. In some cases, it will contribute resources; in others, reforms.
The writer is the World Bank’s director of poverty reduction and economic management for the Latin America and Caribbean region