The Special Needs of Middle-Income Countries in the Context of

Development

Montevideo, UruguayDecember 10, 2009

Kei KawabataManager, Social Sector

Inter-American Development Bank

Inter-American Development Bank Member Countries

Source: World Development Indicators 2008, World Bank

High Income (non-OECD)The BahamasBarbadosTrinidad and Tobago

Upper Middle Income

ArgentinaBrazilChileColombiaCosta RicaDominican RepublicJamaicaMexicoPanamaPeruSurinameUruguayVenezuela

Lower Middle Income

Belize BoliviaEcuadorEl SalvadorGuatemalaGuyanaHondurasNicaraguaParaguay

Low Income

Haiti

MIC face a number of interrelated challenges:

• Low growth driven by low productivity growth • Still high levels of poverty• Poor quality of education • Low creation of good quality jobs and high informality. • Low coverage against risks (old pension, health,

accidents, disability..)• Low investment in science, technology and innovation• Exclusion of minorities and gender gaps• Weak institutional capacity and low tax base

GDPpc of average LAC country relative to US has declined since 1960..

GDP pc relative to US. US=100

0%

5%

10%

15%

20%

25%

1960 2005

Source: The Age of Productivity (Forthcoming). Development in the Americas, 2010

Raising productivity is critical to increase welfare and growth

Poor performance in terms of productivity, along with the persistence of large inequalities of opportunities, are central and related features of LAC.

Evolution of LAC’s GDP per capita and TFP relative to OECD*. Index: 1960=1

Evolution of TFP in Latin America and the Caribbean and the Rest of the World. Index: 1960=1

0.9

1

1.1

1.2

1.3

1.4

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

LAC

Rest of the World

0.5

0.6

0.7

0.8

0.9

1

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

TFPGDP per capita

* Excludes: Czech Republic, Iceland, Luxembourg, Mexico, Poland,

Slovak Republic, Switzerland and Turkey.

TFP – Total-factor Productivity (intangible that is other than labor and capital.

5

Closing the growth gap Closing the growth gap ………………....• Improved macroeconomic management in LAC and unusually favorable international

conditions allowed relatively robust economic growth between 2002 – 2008. Yet, over a longer perspective, growth of GDP per capita in LAC has lagged behind the rest of the world.

• LAC trade performance has been lackluster compared with, for example, that of developing countries in East Asia.

East Asia

LAC

510

1520

25%

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Share of the World Goods Exports:LAC vs. Developing East Asia

* Developing East Asia includes China, Indonesia, Korea, Malaysia, Singapore, Taiwan and Thailand

GDP per capita growth: LAC vs. Rest of the World

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

LAC

Rest of the World

6

Competitiveness is determined by several factors…

Basic RequirementsInstitutionsInfrastructureMacroeconomyHealth and Primary Education

Key forfactor-driven

economies

Efficiency EnhancersHigher Education and TrainingMarket Efficiency (goods, labor,

financial)Technological Readiness

Key forefficiency-driven

economies

Innovation and Sophistication Factors

Business SophisticationInnovation

Key forinnovation-driven

economies

Competitiveness factors have different impact depending on how close countries are to their innovation frontier (Aghion and Howitt)

World Economic Forum (Sala-i-Martin) has three stages of development:Stage 1: Factor-drivenStage 2: Efficiency-drivenStage 3: Innovation-driven

Equality of opportunities is critical for growth and sustainable poverty reduction

• Unequal access to education, health services, basic infrastructure, justice and housing reproduce structural conditions that are thedeterminants of social exclusion;

• Differences in race, ethnicity and gender are still important determinants of unequal access to opportunities in LAC.

8

Education Quality

Notes:1/ Score estimated using mean score, effect of socioeconomic index, and variability of socioeconomic status index (PISA 2006, Volume 2)2/ The OECD score excludes Mexico (included in the LAC group)3/ Scores for the LAC region are calculated as an average of the participant countries (Mexico, Argentina, Brazil, Chile, Colombia and Uruguay) in the 2006 test

Source: OECD PISA 2006

Fostering equality of opportunities requires accelerated progress in meeting the MDGs

Despite improvements, large inequities in access to quality services and in opportunities persist between and within countries.

Under-five mortality by mother’s educational level

0

20

40

60

80

100

120

140

160

Bolivia

2003

Brazil 2

006

Colombia

2005

Domini

can R

epub

lic20

07

Ecuad

or 20

04

Haiti 2

005/0

6 Hon

duras

2005

Nica

ragua

2001

Peru20

00

No education

Primary

Secondary or higher

10

Priorities

• Improve quality of teachers• Use of technology to improve teaching and

learning• Focus on basic skills • Expand access and retention in post-secondary

education• Expand access for early childhood• Institutional reforms

Improve quality of teachers• Teacher quality: increasing gap between MIC countries in the Region and OECD

countries

• Teacher training, certification and alternatives routes into teaching

• Performance, compensation, and teaching career (incentives)

• Pedagogical compensatory approaches to reduce learning

Use of technology• Increase investment of MIC countries in the Region in ICT in schools

• Rigorous impact evaluations, in particular on student learning still a pending issue

• How to change pedagogical practices of teachers: support, coaching, training

Focus on basic skills • MIC countries in the Region need to align skills to both the demands of the labor

market and the technological change in industries

• Pay attention to basic skills both cognitive and non-cognitive not just for productive jobs, but for citizenship

• Reform secondary schools: open to demands of economy and society

Post-secondary education • Growing demand for tertiary education in MIC countries, coverage still low

• Salaries for high school graduates decreasing relative to college graduates in MIC countries

• Financial support along with quality assurance for post-secondary education, in particular technical and technological courses

Why invest in Nutrition and ECD?

HUMAN CAPITAL FORMATION

• Window of opportunity from 0-3 years: never again in the life-cycle are returns to investments this high

• Investments at early ages improve cognitive skillls, psycho-social skills and health have effects over the life cycle through to the next generation

• Heckman (Nobel prize in economics): labor market returns to psycho-social skills formed through ECD (self-regulation, impulse control, team work …) are higher than those from improved cognitive skills.

» Implies huge spillover effects for society re: crime, obesity, teenage pregnancy, drug-addiction, etc.

Why invest in Nutricion and ECD?

Costs of Inaction:• Chronic malnutrition (stunting) of children younger than 3

implies a loss of 20% in labor market productivity (WB Repositioning Nutrition)

• Anemia deficiency limits child cognitive development and physical productivity in adulthood by 10%. (Aguayo 2003, Hunt 2002, E. Pollitt 1995)

Returns to investments in nutrition and ECD:

• Analysis of Behrman et al. estimates a of return of 165% in labor income (after costs and discounts for time)

• Costs lower than benefits

Sustainable poverty reduction (MDG1) is achievable only by tackling disparities in labor opportunities

• Disparities in labor opportunities stand behind large differences in earnings and productivity:

– between 1990 and 2008, extreme poverty fell from 22.5% to 12.9%, partly as a result of improved macroeconomic stability, increased remittances in some cases, and a new generation of targeted programs ( CCTs);

– however, sustained poverty reduction requires raising the productivity of poor workers.

• Unequal access to high productivity jobs is a major barrier that needs to be overcome:

– more than half of LAC workers are in the informal sector in insecure, unstable, low productivity jobs, with no social security coverage or training opportunities.

• More and better formal firms are needed to create more high productivity formal jobs with social security coverage.

16

Low female labor force participation hurts growth and accentuates poverty

• Raising Chilean female LFP to the regional ave would:– reduce poverty in Chile by 15% and extreme

poverty by 20%– Increase per capita GDP by about 10%– These effects are more pronounced if they the

increased LFP occurs among young women• Equality of opportunity for women, indigenous peoples

and afro-descendents is about more than fairness: it generates more rapid poverty reduction and promotes growth

Source: IDB, WB and Sernam. 2007. Como capitalizar el potencial económico de Chile ampliando las opciones laborales de las mujeres.

Low coverage against risks

• Latin America copied the Bismarkian model of protection against risk (Social Security Schemes associated with salaried work) …. but coverage is still very low.

• It was thought that coverage would increase with development but this has not been the case…

Social Security coverage is low and in most cases it has declined. It is particularly low for own account workers.

Own account Salaried Workers

Brazil 17.4 → 16.9 69.5 → 73.3

Chile 23.5 → 19.5 76.7 → 77.4

Colombia 8.5 → 7.4 52.3 → 54.5

Costa Rica 46 → 37.1 78.2 → 73.8

Mexico 0.19 → 0.09 66 → 63.7

Peru 2.8 → 1.5 37.6 → 28.7

Source: Auerbach, Genoni and Pagés (2007)

Innovation Systems in LAC

R&D Expenditure as percent of GDP

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Finl

andi

aJa

pon

Cor

eaU

SAO

CDE

EU25

Chi

naIrl

anda

Espa

ña

Bras

ilC

hile

Am. L

atin

a &

Car

ibe

Arge

ntin

aM

exic

oC

osta

Rica

Vene

zuel

aBo

livia

Rep

. Dom

inic

ana

Pana

ma

Uru

guay

Col

ombi

aPe

ruTr

in. &

Tob

.N

icara

gua

Para

guay

Ecua

dor

Hon

dura

s

perc

enta

ge 199520022006

The LAC region has notably inferior levels of R&D expenditures than developed countries

Innovation Systems in LAC

LAC: Major gaps in the stock of researchers

Researchers per 1000 labor force: OECD and Other Countries

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Finland Japan USA OECD Korea EU25 Ireland Spain China

199520022006

Researchers per 1000 labor force: Latin America and the Caribbean

0.0

0.5

1.0

1.5

2.0

2.5

Chi

le

Arge

ntin

a

Uru

guay

Braz

il

LAC

Mex

ico

Boliv

ia

Col

ombi

a

Pana

ma

Ecua

dor

El S

alva

dor

199520022006

Innovation Systems in LACUSA, Japan & Korea

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

USA Japan Korea

Pate

nts

gran

ted

by U

SPTO

1995

2008

Latin American and the Caribbean

0

20

40

60

80

100

120

Braz

il

Mex

ico

Arge

ntin

a

Vene

zuel

a

Chi

le

Colo

mbi

a

Cos

ta R

ica

Baha

mas

Ecua

dor

Uru

guay

Trin

. & T

ob.

Peru

Barb

ados

Pate

nts

gran

ted

by U

SPTO

19952008

LAC: Few patents granted by USPTO 1995-2008

Innovation Systems in LAC

Great Improvements in internet usage in LAC, but much remains to be done to reach OECD levels

LAC compared with other countries: Internet users per 100 inhabitants

0

1020

30

40

50

60

70

80

90

Finl

and

Kor

ea

Uni

ted

Stat

es

Japa

n

Irela

nd

Spai

n

Chi

na

Indi

a

Bar

bado

s

Jam

aica

Bah

amas

Bra

zil

Cos

ta R

ica

Chi

le

Uru

guay

Per

u

Col

ombi

a

Arg

entin

a

Pan

ama

Mex

ico

Vene

zuel

a

Dom

inic

an R

ep.

Trin

idad

& T

obag

o

El S

alva

dor

Beliz

e

Boliv

ia

Gua

tem

ala

Par

agua

y

Ecu

ador

Hon

dura

s

Nic

arag

ua

20002007

IDB’s Institutional Priorities

1. Social Policy for Equity and Productivity–Building well-articulated safety nets for the poor, compatible with productive insertion in labor markets (beyond CCTs);–Improving the functioning of labor markets to reduce informality, increase productivity and expand coverage of social security;–Raising quality and equity of education (pre-school, secondary);–Promoting equity in health outcomes and addressing new challenges posed by the epidemiological transition;–Investing in STI and strengthening national and regional innovation systems–Tackling gender and diversity issues: labor market outcomes for women, narrowing gaps in indigenous groups’ education and health outcomes, legal frameworks against discrimination.

24

The IDB seeks to provide better financial and non financial solutions to meet these challenges

• Addressing the low quality of education challenge

– Promoting early child development– Promoting better teaching – Improving the relevance of education (to meet the

needs of firms)

• Addressing the high poverty challenge

– Helping countries to implement and improve programs of transfers to poor families with investments in human development (CCT).

The IDB seeks to provide better financial and non financial solutions to meet these challenges

• Addressing the low quality of employment challenge through – Better labor training – Better labor regulations, institutions and social

protection mechanisms– Better active and passive labor market policies.– Promoting growth

• Addressing gender and minority gaps– Reduce school-leaving among indigenous peoples

and African-descendants– Access to quality training and inter-meditation

services

Inputs from:Santiago Levy, Vice-President Sectors and Knowledge (VPS)Marcelo Cabrol, Chief Education (EDU), SCL, VPSJaime Vargas, EDU (Argentina)Carmen Pages, Chief Labor Markets (LMK), SCL, VPSFlora Painter, Chief Science and Technology (SCT), SCL, VPSGustavo Crespi, SCTPablo Angelelli, SCT (Uruguay)Andrew Morrison, Chief Gender and Diversity (GDI), SCL, VPSFerdinando Regalia, Chief Social Protection and Health (SPH), SCL, VPSSuzanne Duryea, SCLFidel Jaramillo, VPC/CAN