With the lag that already existed and the impact of the pandemic and post-pandemic, many countries need more than 100 years to reach the productivity levels of developed economies, but it is possible to do so.
That is one of the conclusions of the report “Investing in productivity growth” by the McKinsey Global Institute (MGI) of the firm McKinsey & Company, which analyzes the performance of 125 economies in this area over the last 25 years and, in In particular, the stagnation observed in Latin America, explains Santiago Carbonell, Partner and Office Manager of that organization in Guatemala.
The executive explains the main pillars for productivity growth and what the region and Guatemala need.
What does the study consist of and what is the situation in the region?
It is an understanding of productivity and its increase. Apart from developed countries, productivity in the world can be seen in three parts or lanes:
The last 25 years, globally, have been very successful in terms of increasing productivity, but unfortunately this has two stories: one, of economies that have been very prosperous and productive (the developed ones); the emerging ones, which have been in the fast lane; and the slow ones, among which is most of Latin America.
Before we thought that even if it were a slow way, developing countries were going to reach the standards of developed countries, but what is shown is a slowdown and then we are further away. The conclusion is that it will take us 100 years or more to catch up with developed countries.
This opens a very important call for countries like Guatemala and that is that we have to increase production and to do so we have to invest in infrastructure, education and services, mechanize productive sectors such as agriculture and manufacturing so that they are more competitive and can take advantage of the new globalization and nearshoring.
Why are Latin America and Guatemala unable to advance at a good pace?
There are several factors, because apart from the fact that we need more investment in infrastructure and new businesses, the displacement of agriculture to the cities has also increased. This is important because some economies in the region and Guatemala in particular, are economies with a high rural population that is moving to urban areas and their productivity is not sufficient.
The other is that the service economy is not growing at adequate levels, which includes professional work, consultancies and others. And in the case of manufacturing we are not investing at the speed that they are doing in countries where it is more sophisticated, advanced and productive.
“For many years it has been believed that the recipe for growth is based above all on productivity, and it is very necessary, but it has to change because while the demographic bonus is being lost, production must be more efficient”
Santiago Carbonell, socio McKinsey & Company
What are the figures of these delays?
From 1997 to 2022, the average productivity of the economy multiplied approximately six-fold, going from regarding US$7,000 to US$41,000 per employee, which is equivalent to an annual growth rate of 7.3%. The average rate of global productivity growth was 2.3% annually during that period, but only China and India contributed almost 50% of the total.
However, the growth rates of Latin America, the Caribbean, the Middle East, North Africa and Sub-Saharan Africa were similar to or lower than those of advanced economies, leaving them behind. And Latin American countries such as Guatemala, Paraguay, Ecuador, Brazil, Mexico and Argentina are in the so-called “slow lane.”
According to data from The Conference Board, in the 5 years prior to the Covid-19 pandemic, no Latin American country reached the level of productivity sufficient to enter the accelerated lane and less than a third of countries accelerated their growth. In the case of Guatemala, the compound annual growth rate (CAGR) between 1997 and 2022 was barely 0.6%, without changes, when comparing between 2014 and 2019.
They mention that there are pillars of growth, what are they?
For many years it has been believed that the recipe for growth is based above all on productivity, and it is very necessary, but it has to change because while the demographic dividend is being lost, production must be more efficient. Sustainable and inclusive growth is also required, which is environmentally sustainable. The five important components for emerging economies are:
- High investment in capital, between 20% and 40% of GDP invested in projects.
- Deployment of this investment in the maintenance of good infrastructure in cities, with movement times (mobility) favorable for the economy. Also, mechanized agriculture.
- Expansion of the service sectors, tourism investment and back office.
- Manufacturing must be more productive and global (not more mechanized, as today).
- Solid institutions with a lot of innovation and education that allow us to take advantage of that investment.
Of these five components, which should be prioritized in Guatemala and how to do it?
I would prioritize two, investment in infrastructure and the development of the community of services in the city. And in the long term, investment in education to develop the best talent in Guatemala. I think that is what gives the most return on the investment.
What specific factors did you find in Guatemala and what does the country need to improve productivity?
Investment is needed in general, mainly public and private infrastructure. That is, roads, ports and others, which translate into productivity, but also plants, factories and other buildings.
The study says that we will move forward, if there is a decision on the part of the entire society, to work together in pursuit of local and foreign investment to be able to take the leap.
Does the need for investment also include educational aspects and addressing the issue of the rural population moving to the urban area?
Part of the necessary plan is to help with education and employment to all those people who are arriving in the cities, to make a good fit with the service economy in the region.
So, an important part is education, since talent must be created to attract that investment and make entrepreneurs settle in these countries. Hence, governments, universities, the productive sector define what they need and begin to train people in what is needed so that we are more competitive.
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