IMF: Latin America may have another “lost decade” without reforms increasing productivity

Latin America risks having another “lost decade” without policies that unlock growth potential, the International Monetary Fund (IMF) assesses in the report “Economic Outlook, The Americas,” released Wednesday, November 2.

“The major economic and social dislocations caused by the pandemic have accentuated the productivity problems of Latin America and the Caribbean [LAC] and increased the prospects of a new ‘lost decade’.”

According to the document, “after a period of solid economic growth and social progress in the early 2000s, LAC countries have experienced weak economic performance since the end of the commodities supercycle in 2014-2015.”

According to the agency’s staff, “LAC growth challenges have been exacerbated by the pandemic, and in the absence of policies that unleash the region’s growth potential, we may experience another lost decade, as occurred in the 1980s and 1990s.”

The IMF further warns that “global structural changes, such as increased automation, the adoption of new technologies to address climate change, and a slowdown in trade integration, could increase global volatility for several decades, amplifying the need to enhance the resilience of LAC economies.”

The fund’s research indicates that “informality, burdensome regulation, problems in the tax structure, poor governance, and antiquated insolvency frameworks that do not make it easy to start and close a business are identified as major obstacles that limit the productivity of businesses in LAC.”

The monetary fund points out that “econometric estimates indicate potentially high aggregate productivity gains from removing some of these obstacles, particularly those that help reduce informality.”

The report indicates a relationship between vulnerability to economic shocks and the factors that affect productivity.

“Some obstacles affecting LAC productivity performance also explain the region’s vulnerability to economic contractions. For example, high levels of informality are associated with high and sustained declines in productivity following adverse economic shocks.”

For the IMF, “a comprehensive reform agenda that simplifies and modernizes business and labor regulations is key to unlocking LAC’s potential by boosting productivity and promoting formalization while increasing the region’s resilience to economic shocks.”

Other essential initiatives would be “improving the design of rules-based tax systems that allow for more efficient and progressive taxation while preserving the goals of fiscal sustainability; reducing the costs of starting and closing a business by strengthening insolvency frameworks, and addressing the region’s long-standing difficulties in the quality of education is key to promoting improvements in human capital accumulation and increasing productivity.”

The document adds that strengthening social safety nets and retraining programs, especially those that encourage formalization and improve human capital, should also be an essential part of the policy agenda to ease labor market transitions.

The report considers it important to strengthen the capital taxation structure “to make it less distortive and boost productivity.”

According to the document, “taxing interest, dividends, and capital gains fairly simplifies the system, avoids distortions in asset allocation, and, in some cases, can broaden the tax base.”

In the IMF’s view, “a corporate tax design that better captures economic returns through a cash flow tax, where investments can be fully deductible, could also stimulate high-quality investment projects.”

Similarly, the report continues, “the use of rules-based, cost-centered tax incentives, such as accelerated depreciation and tax credits for research and development, rather than profit-based incentives (special zones, temporary exemptions) could also stimulate innovation.”

With information from Valor Econômico