Forty Third Lecture - Angel Gurría

Forty Third Lecture - December 6,  2010

"Presentation of the Latin American Economic Outlook 2010"

Speaker: Angel Gurria, OECD Secretary General

Excerpts and notes from the XLIII Lecture

On the relationship between the OECD and Latin America:

The Organization of American States is a very important and valued partner of the OECD. Our collaboration has enabled the OECD to grow closer to Latin America and the Caribbean, a region with which the OECD seeks stronger ties...

Chile was the second Latin American country to be admitted into the OECD after Mexico ... In addition there are 8 or 9 Latin American countries that are full members of the OECD Development Centre including the Dominican Republic, Costa Rica and Colombia. As you know, the president of Colombia has made a public expression of interest to join the OECD itself, which honors us and is very important to us. We are working very closely with Brazil, not necessarily with a view to incorporate Brazil... but Brazil is one of the 5 countries with which we collaborate on a project called Enhanced Engagement which include Brazil, China, India, Indonesia , and South Africa ...

There is an initiative launched by Spain with Mexico and Chile to work for the benefit of all Latin American countries on 4 themes: public services, investment or standards and policies to attract investment, innovation policy, and fiscal policy. We’ve already held a few seminars ... the idea is to disseminate throughout Latin America -through the OAS, through the IDB, through the Spanish government's own capabilities- best practices in those 4 areas, enabling countries to take advantage of the ability to implement the experience of all OECD members that closely resemble many of the countries in Latin America; middle income countries which have structures that resemble those of the OECD’s lower middle income countries."

On the economic performance of Latin America:

"The Latin American region is faring better than developed countries. OECD countries this year will grow slightly more than 2 percent ... Latin America is growing at around 5% on average this year ... we're talking about a growth rate that reflects the region’s improvements in growth, but also in terms of unemployment, in terms of the financial system."

OECD countries offer us little growth, high unemployment and high deficits ... however, even a slight recovery of these countries really helps our region, for example, there has been a slight recovery in the U.S., so Mexico –which has a high dependency on trade with the U.S.- is already growing at 5%. "

On the Latin American Economic Outlook 2011:

"The central theme is the middle-income sectors of our societies, defined as those with more than 50% and less than 150% of the average income. It is not therefore necessarily the middle class family as we understand it, with a certain degree of comforts and needs that are satisfied but something that is strictly statistical...

In many cases we are talking about people who earn between US$2 and US$3 a day and, therefore, we can hardly say they are middle class if compared to the couple that owns a small apartment, obtained a car loan and has ability to have a minimum of things. We're talking about much more vulnerable people. Why? Because those are the numbers we have in Latin America, and they are the majority ... as Latin America has the worst income distribution of all continents.

It’s not that the income is lower, but that the distribution of such income is the worst if you compare the higher income with the lower income. So when you make the comparison, if one takes the mid-point ... one captures a large part of the population which can’t be properly considered middle class. We are talking about 62 million people in Bolivia and Brazil, Chile and Mexico. More than half of them are in the informal sector, another severe problem ... that is, people who get sick ... and do not have access to health care, pensions or unemployment benefits and are at risk of falling below that lower 50% below which we call the most vulnerable, most deprived group. The middle sectors are closer to the vulnerable groups than they are to their affluent counterparts.

Our Outlook makes some very specific recommendations on… how to protect our people from sliding into downward social mobility, how to create social safety nets, and how to help the poorest homes.”

Currently, Latin America’s long-term growth prospects are positive, but important challenges for the future remain. The measures that led to macroeconomic stability now need to be institutionalized. Sustainability of external and fiscal balances needs to be secured against political pressures for short-term gains. The financial sector needs to deepen financial markets while maintaining sound lending practices.

Three key features of Latin America’s economic situation must be taken into account when designing a pragmatic social-protection reform: high levels of labor informality, a relatively young (although rapidly ageing) population and limited fiscal resources. Thus, given the predominance of labor informality – even among the middle sectors – social insurance for many people will have to be provided by means other than via formal employment. Such policies must encourage participation in contributory systems by the informal middle sector – people who are both able to save and likely to desire social-protection coverage.

Access to adequate and affordable health care is one of the main social protection challenges in Latin America. In this it needs to be recognized from the outset that in health care coverage is not the same as access. Despite successful steps towards universal provision of health care in the region, the problem of segmentation remains and in some cases has even worsened. A two-tier contributory and non-contributory system, where lack of resources means the lower tier is characterized by low quality, compounds the problem of low contributory coverage.
Regarding fiscal policy, if the perceived quality of public services is low, the middle sectors are driven to seek alternatives from the private sector, even where the extra cost is a significant additional burden on household budgets.

The current moment is in many ways timely for reforms. Most countries in Latin America and the Caribbean have weathered the international financial turmoil with a new-found resilience, increasing citizens’ confidence in the quality of economic management in their countries.

Expanding middle sectors and their contribution to domestic demand have played a part in the region’s economic resilience. In this context, the middle sectors have the potential to become an agent of change in the region.

On how to achieve more just and stable societies:

"The fundamental issue ... that further explains the possibility of staying in these middle sectors and moving up rather than run the risk of moving downward is obviously education ... but that includes developing research and innovation ... We work to enable women to be both mothers and professionals, and then... technical education, adult education, higher education and, of course, all matters pertaining to assessing and then updating and innovating education itself.

In addition to social safety nets and education, there is the issue of the quality of public services to strengthen what I call the social contract between the State and its citizens ... It is very threatening and worrying that our people are so concerned about their problems and unmet material needs, that they would be willing to give up a little democracy in exchange if it were possible...

The problem is that people feel dissatisfied with the quality of services they are receiving ... I presented the first and second Outlook reports in this very room and back then we said that, in addition to the inequality of income, Latin America is a continent where taxes are less efficient as a means to improve income distribution. Because in Europe and the United States, after taxes and social security contributions have been paid, inequality is reduced by one third or by half, while in Latin America it remains happily unchanged, right?

This theme of the middle-income sectors must be the basis on which to build the new Latin America. It should be the source that feeds the army of new university students, new coaches, new experts, new engineers, new physicists, new computer experts that will make the region competitive and help it to maintain its market spaces."

About the immediate future of the economy:

"The post-crisis period will be very difficult for many reasons, but there is a very important one: so much was lost. So many jobs, capital, exports, and so much wealth were lost that countries are fighting it out. That is, they are trying to recover by any possible means. The international scenario is one of low growth, high unemployment and high deficit, all together. What happens in this environment?

We are already seeing a rebirth of trade protectionism, investment protectionism, and a new form of protectionism that the finance minister of Brazil called war of currencies - that is, manipulating exchange rates to obtain very short-term profits in exports or competition- without regard for the fundamental questions of economies."


Excerpts and notes from the lecture in Spanish