Yearender: Latin American countries strive to avoid middle-income trap

Latin American and the Caribbean countries, though having registered economic growth in recent years, were striving for not bogging down in the so-called middle-income trap and for alleviating inequality in the region.

After more than a decade of economic growth and increasing of government spending on programs that helped lift millions out of poverty and expand the middle class, the region seems to backslide with its economic growth slowing down or even contracting.

MIDDLE-INCOME TRAP

A total of 29, among 33 countries in the region, are considered middle-income countries, besides one low-income and three high-income countries, according to the Inter-American Development Bank.

Many countries were plunged into the so-called "middle-income trap," where traditional manufacturing advantages are lost due to rising wages but the ability to produce high value-added products has not yet been developed, said Jesus Valdes Diaz de Villegas, an economist at Mexico's Iberoamerican University.

One of the results is the fast growth of unemployment rate, which reached 6.7 percent this year, leaving more than 1.7 million people out of work, according to a report released recently by the International Labor Organization (ILO).

"Economic growth patterns should be modified before their driving engines lose steam. We cannot wait until a crisis occurs, or the social costs may be too high," Regis Bonelli, a researcher at Brazil's Getulio Vargas Foundation warned.

Another effect of the economic downturn is that it pushes more people into the informal sector, where people work in the underground economy, either for themselves or others with low wages, poor working conditions and zero social protection.

The sector has some 130 million workers, according to Jose Manuel Salazar, regional director of the ILO.

These effects worsened the middle-income quagmire, with a lack of a well-educated, skilled workforce that can both demand higher salaries and generate jobs for others through innovation and entrepreneurship.

Blaming it for "long-standing structural problems," Salazar recommended that countries diversify production, promote business growth, and create "more and better jobs," among other measures.

Fighting the informality trap and its related social and production pitfalls is crucial, according to the ILO.

"The salaries of the workforce may be increasing but without a corresponding change in technology ... which leads to a reduction in economic competitiveness," said Diaz de Villegas.

Fortunately, some countries are seeking for solutions to be lift out of the quagmire. In Brazil, "a national integrated policy" to combat poverty has helped to rapidly formalize the country, the ILO reported, adding "over the past decade, job creation in the formal economy has been three times as rapid as in the informal economy."

"The middle-income trap is a persistent challenge for Latin America, which needs to purse a greater degree of productive diversification, upgrading and integration," said Mario Pezzini, director of the Development Center at the Organization for Economic Cooperation and Development (OECD).

CHINA'S EXPERIENCE

China has made effective efforts in tackling such problems as those faced with the Latin American and the Caribbean countries, and can offer valuable lessons in terms of devising proper plans to avoid the middle-income trap, local experts said.

China's economy enters a "new normal" of slower growth and industrial upgrades, which is "a wake-up call and an opportunity for the region's development strategy," Pezzini said when addressing earlier this week "Latin American Economic Outlook 2016."

"Latin American and Caribbean economies need to first pursue innovative development policies to better cater to growing Chinese domestic demand," he suggested.

"Latin America will only escape the middle-income trap through true economic discipline as exemplified by Asian countries like China," said David Lozano, an economic researcher from the Center for Multidisciplinary Analysis at the Autonomous National University of Mexico.

This cannot be achieved through structural reforms alone. It would require a true shift of public policies and passing of new economic laws aligned with the new needs of each country within a broader international context, he added.

Lozano suggested that Latin American and Caribbean countries "should maintain a development plan to pursue a vigorous and inclusive growth. This will allow them to safeguard the rule of law and social justice." Endi