Signs of Competitiveness in the Americas 2013

A contribution of the Inter-American Competitiveness Network (RIAC)

OAS Cataloging-in-Publication Data

Signs of competitiveness in the Americas, 2013 : A contribution of the Inter-American Competitiveness Network (RIAC) to the Region / Executive Secretariat for Integral Development.

v. ; cm. (OAS official records ; OEA/Ser.D)ISBN 978-0-8270-6060-9 1. Competition--America. 2. Competition, International. 3. America--Commerce. 4. America--Economic policy. 5. Industrial productivity--America. I. Organization of American States. Executive Secretariat for Integral Development. Department of Economic and Social Development. Competitiveness, Innovation and Technology Section. II. Inter-American Competitiveness Network. III. Second Signs of competitiveness in the Americas report - 2013. IV. Ten General Competitiveness Principles. V. Series. OAS official records ; OEA/Ser.D.

OEA/Ser.D/XXVI.8 2013

Reproduction of part or all of this work without permission may be a violation of applicable laws. The Executive Secretariat for Integral Development, in its capacity as Technical Secretariat of the RIAC, supports the dissemination of its work and will normally grant permission to reproduce. For permission to photocopy or reprint any part of this work, please send a written request with complete information to:

Section on Competitiveness, Innovation and Technology, Department of Economic and Social Development, Executive Secretariat for Integral Development1889 F Street, N.W., Washington, DC 20006, USA , Fax: 202-458-3561 www.oas.org/[email protected]

The complete report is available at www.riacreport.org/2013

This publication was designed by Juan Sebastin Fonseca De la Espriella.

The individual documents, photographs and links to websites which were provided as inputs for this Report are property of each partner institution and member of RIAC.

As the 2013 Chair Pro Tempore of the Inter-American Competitiveness Network (RIAC), I would like to recognize the tremendous work carried out by the 34 countries and 10 support institutions which participate in the Network. The technical inputs and more than sixty experiences presented in this Second Signs of Competitiveness in the Americas Report are a testament of the level of commitment and efforts that each RIAC member has undertaken to strengthen our regions productivity.

All our countries have made great strides to implement programs and projects under the framework of the 10 General Competitiveness Principles of the Consensus of Santo Domingo in order to develop the necessary competitive advantages to confront the challenges we face as a region.

During 2013, and with the support of the OAS as RIAC Technical Secretariat, we have facilitated the exchange of best practices and cooperation between countries, expanded knowledge and exchanged lessons learned, consolidated spaces for specialized collaboration- such as the Group of Experts on Subnational Competitiveness, national forums, technical missions, dialogue sessions, as well as through the use of channels and tools in electronic media, including the electronic version of the Signs of Competitiveness Report www.riacreport.org-, virtual information meetings and the renovated RIAC web portal www.riacnet.org-, among other things.

Competitiveness is a countrys capacity to reach high levels of sustained GDP growth per capita, which translates into greater prosperity for its population. We believe that RIAC encourages member states to share best practices and serve as models for others, making progress working together. We encourage all of you to continue strengthening this platform of collaboration and collective learning as a regional public good.

With great satisfaction, there is nothing left for me to do but to thank you for the opportunity to serve as the Chair, finding the synergies which are the key to building a more innovative and competitive region. We are certain that Trinidad and Tobago will provide us with excellent leadership next year and we are committed to continue our collaboration in this important initiative.

KRISTELLE GETZLERExecutive SecretarySecretariat for Economic Affairs and CompetitivenessMinistry of the Presidency of the Republic of PanamaRIAC Chair Pro Tempore - 2013

Message from the RIAC Chair Pro Tempore - 2013

Kristelle Getzler

In a region that aspires to continue on the path of economic and social progress for its citizens, there is an abundance of knowledge and experiences that countries can share to collectively boost and enrich their efforts. The Signs of Competitiveness in the Americas Report contributes, in its second edition, to present a regional vision of the landscape of infrastructure and its challenges towards the future, in addition to collecting more than sixty initiatives aimed at creating more innovative, competitive and prosperous States, in the framework of the ten General Competitiveness Principles of the Americas.

The wealth of this Report is not as a compilation of case profiles between two covers but rather in the transformative power of an instrument that can be used through joint hard work to achieve the cooperation proposals and requests included in the experiences of this Report. No matter the size of the economy, all our countries have lessons to share and space to learn and improve. As RIAC Technical Secretariat, I express our great commitment to continue to support the exchange of knowledge and experiences among countries. I am convinced that if we move forward together we can participate under improved conditions in a global economy that is ever more competitive, and we will be better equipped to face future challenges.

My most sincere congratulations to the Republic of Panama for its leadership this year as Chair Pro Tempore of the RIAC and for making possible the preparation of this Second Report on the Signs of Competitiveness in the Americas 2013 with the collaboration of OAS Member States and the institutions that support the work of the RIAC (Development Bank of Latin America, CAF; Economic Commission for Latin America and the Caribbean, ECLAC; Inter-American Development Bank, IDB; Central American Bank for Economic Integration, CABEI; Compete Caribbean Program; Global Federation of Competitiveness Councils (GFCC), TEC de Monterrey, and CIFAL Atlanta).

And special appreciation also to Canadas Department of Foreign Affairs, Trade and Development for supporting the ongoing work of the RIAC.

Jos Miguel InsulzaSecretary GeneralOrganization of American States

Jos Miguel Insulza

Message from the RIAC Technical Secretariat

EXECUTIVE SUMMARY1013

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LANDSCAPE OF INFRASTRUCTURE IN THE AMERICAS

EXPERIENCES PRESENTED BY THE RIAC MEMBER STATES Progress in the 10 General Competitiveness Principles

50 - INFRASTRUCTURE

59 - SMEs, INNOVATION, AND ENTREPRENEURSHIP

-Economic Commission for Latin America and the Caribbean (ECLAC)-Tecnolgico de Monterrey, Mexico -Interview with Robert Puentes, Brookings Institution-Interview with Chelsea White, National Chair of Transportation and Logistics at Georgia Tech, Atlanta, United States-Barbara Kotschwar, Peterson Institute for International Economics (PIIE)-Interview with Manuel E. Bentez, Panama Canal Authority-National Innovation Council for Competitiveness (CNIC), Chile-Interview with Jamil Salmi, Expert on Higher Education-Interview with President Arturo Condo, INCAE Business School, Costa Rica-Orkestra- Basque Institute of Competitiveness and Deusto Business School -Strategy of the Central American Bank for Economic Integration (CABEI)

-Inclusion of Urban Transport through Aerial Cable - Colombia -Industrial Infrastructure in the City of Rochelle, Illinois - United States -Development of a Modern, Efficient, and Well-Maintained Infrastructure - Grenada -Expansion of the Panama Canal - Panama -Construction of the Metro in Panama - Panama -Urban renovation, Curund Project - Panama -Developing Infrastructure in Deprived Communities in East Port of Spain - Trinidad and Tobago-Infrastructure Development in the Western Peninsula - Trinidad and Tobago-Tourism Benchmarking and Competitiveness Strategy - St. Lucia -Port Logistics Center, Caucedo - Dominican Republic -Georgia Tech Logistics Innovation and Research Center - Panama -Direct Domestic Optical Fiber - Uruguay -National Competitiveness Council - Jamaica -Creation of the Council for National Competitiveness and Productivity - St. Lucia -Strengthening National Metrology Institutes in the Hemisphere - United States -Bicycle Sharing: An Option for Urban Mobility - United States

-Comprehensive Support for Entrepreneurship - Guatemala -National Institute for Entrepreneurship - Mexico -Start-Up Chile - Chile-Enterprise Development Center to Support MSMEs - Trinidad and Tobago-Driving the National Innovation and Competitiveness Agenda through the Idea 2 Innovation (i2i) Program - Trinidad and Tobago-BioGenerator - Comprehensive System for Bioscience Enterprise Creation in St. Louis - United States -Rutgers Food Innovation Center - United States -Manufacturing Solutions Center, North Carolina - United States -Center for Entrepreneurship and Technology Incubator, Northern Arizona - United States -Clemson University International Center for Automotive Research - United States -Science and Technology Program - Peru -Development Center for Micro and Small Enterprises - El Salvador -CrecES MIPYMES - El Salvador -Ms PYMES - Dominican Republic-Fund for Small and Medium-Sized Enterprises - Suriname-Business Ethics in Export Sectors Relevant to APEC SMEs - United States -Telesur Multimedia Innovation Lab - Suriname

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83 EXPERIENCES PRESENTED BY INSTITUTIONS AND PROGRAMS

69 - DEVELOPMENT OF HUMAN CAPITAL

73 - REGULATORY FRAMEWORK, BUSINESS CLIMATE, AND TRADE

81 - ENERGY

MESSAGE FROM TRINIDAD AND TOBAGORIAC Chair Pro Tempore 2014

ACKNOWLEDGMENTS

-International Creativity Park - Colombia -Supporting Inclusive Businesses in Value Chain Competitiveness - United States -Education Enhancement through Information Technology - St. Lucia -Basic Education Enhancement Project - St. Lucia -Skills for Inclusive Growth Project - St. Lucia -Infoplazas- Panama

-Business and Investment Climate - El Salvador -Support for Regulatory Improvement Projects - Mexico -Fund of Funds - Mexico -MiEmpresa: Online Services and Transactions - El Salvador -Rapid Business Openings Portal - Mexico -One-stop Window for Construction Projects - Guatemala -Support Platform for Exports, PAEX - Bolivia -Exportar Ms - El Salvador -Western Hemisphere Border Management Reform - United States -Single Registry for Secured Transactions RUG - Mexico -Development of a National Competitiveness Strategy - Honduras -Competitiveness Agenda 2012-2013 - Peru -Second Congress of the Dominican Industry - Dominican Republic -Microcredit Program - Suriname

-Contribution of the Inter-American Committee on Ports (CIP / OAS) Port Expansion Plan - Colombia Logistics Model for the Port of Valparaso - ChilePort Security and Development - HaitiMonitoring System for Quality Brands - MexicoInclusion of Women in Ports-Related Work - Peru Biological Monitoring Project in Four Pilot Ports - Venezuela -Radical Innovation Summit, OAS-ARTCA Project-Pan-American Advanced Studies Institute (PASI), OAS-ARTCA Project-Compete Caribbean Program -CAF Sustainable Cities Program -Mesoamerica Project - LAC Flavors Event -Juventud Emprendedora Queretaro, Mexico-Center for Economic Development Innovation Inspired by Technology, Puerto Rico

-Energy for Sustainable Development - Belize -Development of Renewable Energy, Energy Efficiency, and Electricity - Suriname

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09A CONTRIBUTION OF THE INTER-AMERICAN COMPETITIVENESS NETWORK (RIAC) TO THE REGION / WWW.RIACREPORT.ORG/2013

SIGNS OF COMPETITIVENESS IN THE AMERICAS REPORT - 2013

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EXECUTIVE SUMMARY The second edition of the Signs of Competitiveness in the Americas (SCA) report is a product of the collaboration between Authorities and Councils on Competitiveness of the Americas and the institutions that support the work of the Inter-American Competitiveness Network (RIAC). It is comprised of two main sections, one which offers a panorama of infrastructure, the challenges and opportunities we face as a region; and a second, which includes more than sixty experiences of countries and institutions related to the ten general principles of competitiveness.

The Competitiveness Decalogue forms part of the Consensus of Santo Domingo approved by representatives from thirty countries in October 2011 during the Annual Meeting of the RIAC. The Meeting took place within the framework of the V Americas Competitiveness Forum (ACF) in the Dominican Republic and adopted the Consensus and its principles as a central element to the 2020 vision for the Americas.

The Secretariat for Economic Affairs and Competitiveness in the Ministry of the Presidency of the Republic of Panama, as Chair Pro Tempore of the RIAC and host of the VII ACF, chose the theme of infrastructure as a priority for 2013. Therefore, the institutions that support the work of the RIAC as well as other collaborators have prepared special contributions for the report, the majority of which focuses on the central theme of VII Americas Competitiveness Forum: Infrastructure and Technology: Shaping the Countries of Today.

The multilateral and academic institutions that contributed technical documents and experiences for the report are the Economic Commission for Latin America and the Caribbean ECLAC, Tec de Monterrey, the Central American Bank for Economic Integration CABEI, the Development Bank of Latin America CAF, and the Compete Caribbean Program.

The National Council of Innovation for Competitiveness (CNIC) of Chile and Orkestra Basque Institute of Competitiveness Deusto Business School, as well as Barbara Kotschwar from the Peterson Institute for International Economics (PIIE), also produced documents on infrastructure.

Some of the speakers of the Americas Competitiveness Forum in Panama shared their expertise through interviews for this section. They are the international specialist in Higher Education, Jamil Salmi; the Director of the Metropolitan Policy Program at the Brookings Institution, Robert Puentes; the President of INCAE Business School in Costa Rica, Arturo Condo; the Schneider National Chair in Transportation and Logistics at George Tech in Atlanta, Chelsea White; and the Sub-Administrator of the Panama Canal, Manuel Benitez. The contribution of the Economic Commission on Latin America and the Caribbean (ECLAC) demonstrates that investment in infrastructure projects contributes and increases coverage and quality of public services, access to markets for goods and inputs, and welfare in general. Therefore, the development of infrastructure constitutes a central element of the economic system of a country. ECLAC confirms that the reduction in infrastructure investment in the region has caused a growing deficit of infrastructure and related services, and with the exception of telecommunications, the provision of services is below that of developed countries and other emerging economies. The result of this delay becomes a reduction in productivity of economic agents and of competitiveness of industries and economies in the region. Amongst the main challenges for Latin America and the Caribbean is the lack of comprehensiveness in addressing policies regarding infrastructure and services, institutional and regulatory barriers , lack of sustainability criteria, and limitations on access to finance, as well as the lack of effective public-private partnerships.


Tec de Monterrey indicates that the development and competitiveness of Latin American economies cannot have a solid and sustainable basis for the long-term if there is no viable infrastructure that is functional and sustainable. It is argued that the true sense of infrastructure should be centered on its function. Infrastructure in this context is key, not only for economic growth but also for its impact in overcoming poverty and inequality. As part of the strategies to address the needs in infrastructure, the Tec de Monterrey recommends also investing in soft infrastructure, i.e. institutional development and human capital, as an integral part of infrastructure programs to advance hand in hand with investment in big projects.

The National Council of Innovation for Competitiveness (CNIC) of Chile highlights that those technological systems we know as infrastructure are the structures over which the collective lives of people are organized. As technologies evolve they generate possibilities for growth and opportunities for some players while producing loss of power and obsolescence for others. This reflection from the CNIC tells us that any current infrastructure project has to come with a greater degree of consciousness over its impact and resulting technologies in peoples lives. Hence the importance of, beyond resolving technical problems, taking charge of human concerns, the implications of coexistence, for the environment and the changes it is undergoing. Amongst the considerations from the CNIC are proposals for fundamental change in policy, in the way we understand and develop technology, in the type of education for engineers. The end goal should consider new forms of learning and generate development from schemes more closely linked to the concerns and values of communities.

Barbara Kotschwar from the Peterson Institute for International Economics (PIIE) provides a comparative view between the conditions of infrastructure development in Latin America and the Caribbean and some Asian countries, and provides evidence on the impact that costs and deficiencies in infrastructure represent in terms of trade for regional partners. She discusses three important roles for infrastructure: as a platform for development, as a factor in the promotion of trade, and finally as enhancing competitiveness, especially for MSMEs. Among the findings she indicates that inadequate infrastructure is a barrier to trade, growth and competitiveness.

ORKESTRA Basque Institute on Competitiveness talks about knowledge infrastructure, characterizing innovation as a social process. The paper focuses on two key elements: the production and dissemination of knowledge, and on education, skills generation, and training. On the role of universities in the innovation process, they indicate that in addition to education and research, its third mission - transmission of knowledge - has evolved to include technology transfer activities, creation of new businesses, and management of intellectual property and knowledge. They recommend that universities in emerging countries have a differentiated strategy, with a basis on profiles adjusted to the economic and business structures of their country or of the region. Amongst the new type of research institutions that have recently been created, you find more flexible organizations with interdisciplinary specialties centered on the goal of resolving concrete problems and less concerned about the advancement of knowledge in itself. Knowledge infrastructure is a key component to all innovation systems.

The editorial section of the report also features interviews with distinguished experts in infrastructure, education and logistics, who contributed their ideas to the VII Americas Competitiveness Forum. Jamil Salmi emphasizes that there exists no world-class universities in Latin America or the Caribbean, no excellence in teaching, no research and scientific production. He identifies the governance of public universities as one of the great challenges and recommends focusing on talent creation and the transformation of teaching and learning methods to improve quality. The Director of the Metropolitan Policy Program at the Brookings Institution, Robert Puentes reflects on the importance of infrastructure development to support economic growth and prosperity. He explains the concept of global fluency of metropolitan areas and provides recommendations on how to promote competitiveness through urban planning. The Schneider National Chair in Transportation and Logistics at George Tech in Atlanta, Chelsea White analyzes the evolution of value chains and the position of countries in the Americas amongst the world in terms of logistics and competitiveness. He also discusses the importance of attracting and retaining creative talent as an economic development strategy. The President of INCAE Business School in Costa Rica, Arturo Condo, points out that the three main weaknesses of education in Latin America and the Caribbean are quality , quality and quality in three dimensions . He offers proposals on


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how to experiment with new forms of governance in schools through greater localization of management and the involvement of parents and communities. He also offers some thoughts and ideas as to why entrepreneurs are not seen as role models or heroes in the social and professional mind frame of the countries of the region. The Deputy Administrator of the Panama Canal, Manuel E. Bentez comments on the impact the expansion of the Panama Canal will have on international trade and logistics. He also shares some lessons that Panama has accumulated as part of the learning and experience that has been generated with the Panama Canal expansion project.

Other institutions of the RIAC contributed their programs and practices which are included in the second section of this report, after the profiles of experiences of countries. CAF, Development Bank of Latin America shares with us an update on its Competitive Cities Program in Cuenca, Ecuador, Fortaleza in Brazil, and in Barranquilla, Colombia, cities which have achieved, based on productive development strategies and public-private partnership, substantive progress in innovation and entrepreneurship.

The Compete Caribbean Program describes the latest developments of their experiences in the design of a donor coordination effort to address competitiveness priorities in the Caribbean and the important results achieved so far.

The Mesoamerica Project contributes an initiative with support from the Inter-American Development Bank (IDB) called LAC Flavors, which is involved primarily in the promotion of trade in the food sector for SMEs in the Mesoamerican region.

The Inter-American Committee on Ports presents a group of initiatives and experiences in six countries in the region focused about the promotion of port competitiveness.

The OAS-ARTCA Project shares collaborative efforts in science and technology to promote education and collaborative innovation in the Americas.

The section on Experiences in the Americas of this report provides an overview of the initiatives developed by eighteen countries: Belize, Bolivia, Chile, Colombia, Dominican Republic, El Salvador, Grenada, Guatemala, Honduras, Jamaica, Mexico, Panama, Peru, Suriname, St. Lucia, Trinidad and Tobago, United States and Uruguay.

The experiences that are included in this section refer to the 10 General Competitiveness Principles and in particular to the central theme of VII Americas Competitiveness Forum; principle number five regarding the development of infrastructure - across and within countries - modern and efficient.

The experiences presented by countries are grouped into five subsections: (i) Infrastructure; (ii) SMEs, Innovation, and Entrepreneurship; (iii) Development of Human Capital; (iv) Regulatory Framework, Business Climate, and Trade; (v) Energy.

In general, the content in the summary of each experience refers to its primary objective, relevance, results and highlights specific opportunities that exist for collaboration with other members of the RIAC. In every experience we indicate what each institution can offer (i.e. information sharing, technical assistance, or experts), and what would be desirable to receive from other countries (i.e. knowledge about similar experiences and successful methodologies that add / or supplement to components of the program, etc.). This process seeks to increase the impact of projects in each country and to provide feedback on the work and mechanisms needed to ensure the success of regional cooperation initiatives.

The original text of the experiences reported by countries and institutions is available in the full version of the Signs of Competitiveness in the Americas report - www.riacreport.org/2013 -.

LANDSCAPE OF INFRASTRUCTURE IN THE AMERICAS


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DIAGNOSIS AND CHALLENGES OF INFRASTRUCTURE AND TRANSPORTATION IN LATIN AMERICA AND THE CARIBBEAN

Prepared by the Infrastructure Services Unit ISU/NRID/ECLAC

ECONOMIC COMMISSION FOR LATIN AMERICA AND THE CARIBBEAN

The adequate availability of infrastructure, as well as the efficient provision of related services, represents one of the most important aspects of development policies. By virtue of demand for greater competitiveness in international markets and economic and social development, via an increase in the productivity of economic agents, countries need to expand and modernize their infrastructure in accordance with international technological standards. This also includes achieving adequate levels of coverage in every territory and effectively satisfying needs related to the provision of infrastructure services at the national as well as regional levels.

By reducing costs associated with mobility, investments in infrastructure projects contribute toward increasing coverage and quality of public services (for example, healthcare, lifetime education, recreation), thereby improving access to goods markets and consumables provided to the population, creating an ideal environment for increasing general welfare.

Services in networks of energy, transportation, telecommunications, and potable water and sanitation infrastructure constitute a linchpin of the economic structure of territories and their markets. They are concrete mechanisms for coupling national economies with the rest of the world, making the transportation of cargo and passengers possible, as well as transactions within a specific geographic and economic space.

In this way, the development of adequate and efficient infrastructure constitutes a central element for the integration of a countrys and a group of countries economic and territorial system, increasing collaboration and interaction between different markets, businesses, and institutions, and generating economies of scale as well as economies of agglomeration, which translate into greater productivity of the factors of production. This is related to the advantages of specialization that a country can obtain in the segmentation of the productive process, in accordance with the new parameters of economic organization the process of globalization has disseminated internationally. Alongside this, infrastructure allows a country to alleviate a possible deficit in the supply of certain natural resources, it facilitates the development of new comparative advantages (generating new activities), and it grants greater dynamism to tourism.

The presence of problems in the provision of infrastructure services in Latin America and the Caribbean generates a large field of action to improve implementation and maximize the positive effects previously noted.


I. The stress of economic infrastructure in Latin AmericaEconomic infrastructure in Latin America has been exposed to high levels of stress in the last decades, especially due to the volatility and decline of investments directed toward the sector amidst continued growth in their demand. A decrease in infrastructure investments has caused two types of effects:

a) An increasing lag in the supply of infrastructure and related services involving not only developed countries but also other developing economies, which in the early 1970s exhibited levels of service provision below the average of Latin American countries.

b) With the sole exception of telecommunications, service provision has been deficient compared to that observed in other emerging economies.

Total investments in infrastructure in Latin America decreased from an annual average of 3.5% of GDP, in the 1980s to an average of 2.2% of GDP in the 2000s. As a consequence, infrastructure in general, in particular transport infrastructure, presents important deficiencies. One of the reasons explaining this lag is that the total investment in transportation in the region was cut by half during the last two decades and GDP represented less than two thirds of its level in the mid-80s, unlike that of Asian countries, which during this period increased their investment in infrastructure. See graph 1.

GRAPH 1LARGEST ECONOMIES OF LATIN AMERICA: INVESTMENT IN INFRASTRUCTURE, 1980-2010(As a percentage of GDP)

Source: ISU/NRID/ECLAC based on data by Perrotti and Snchez, 2011.

According to the ISU/NRID/ECLAC, the region needs an average annual expenditure of 6.2% of its GDP to reach required infrastructure investment flows and satisfy the final needs of businesses and consumers during the period 2012-2020. That is, if the region continues to invest 2.2% of GDP, there will be an undefined gap of 4%.

This delay in the availability of infrastructure (and the efficient provision of services) has reduced the productivity of economic agents, the competitiveness of industries, and of the regions economies, translating into important limitations in advances toward economic development. Also, the inadequate development of transport infrastructure, upon interfering with the physical integration of territories and markets, has weakened the diverse initiatives undertaken for the purpose of regional integration, which often lack institutional support for implementation.

An important part of the problem is the result of policies applied at the end of the 1980s when public investment in infrastructure took on a passive role, which meant, in most cases, public investment was visibly reduced and

1

1 Based on an update by Perrotti, Daniel and Ricardo J. Snchez (2011), La brecha de infraestructura en Amrica Latina y el Caribe, Serie Recursos Naturales e Infraestructura, N 154, ECLAC, Santiago de Chile.


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responsibility for the development of the sector was awarded to private parties who focused on the most profitable segments of the activity and were far from contributing financial resources demanded by the countries and development needs. The weakening of the public sector meant not only a decrease in public investment but also represented the States mitigated use of instruments and tools for strategic planning.

In the last decade, the situation seems to be turning around since the issue of infrastructure and the efficient provision of related services has become of great relevance in the discussion of development policies, in development agendas, and in cooperation on regional integration.

II. Coverage and quality of infrastructure services

Beginning in the mid-80s, coverage and quality of services related to the availability of physical infrastructure and telecommunications networks improved in most countries of Latin America. The expansion was stunning, for example, in the cellular phone and Internet market, reaching one of the highest development indexes at the global level. Coverage of electrical, water and sanitation services also grew, and diverse port reforms were implemented whose concessions made way for an important modernization of the principal ports of the region (see box 1). Nevertheless, the roads sector, despite improvements in the provision of trunk highways, did not experience major changes, while the railway sector has deteriorated; the lag in these areas continues to be a factor of great concern.

Road transportation infrastructure has become a complex scenario characterized by difficulties related to a growing demand for transportation infrastructure and a stalled supply, and to the appearance of numerous bottlenecks, among which stand out: lack of ground interconnections in the main corridors; insufficient ground transportation from the main production centers to markets of transformation, consumer markets and export markets; physical limitations in the capacity of bridges; access problems to the main cities; and physical and organizational deficiencies at border crossings. Also, the sectors development faces problems related to what has been called cream skimming, a term that alludes to the concentration of private investment in the most profitable segments of the network and mainly in activities and improvements of the existing network, which has repercussions for the slow growth in the sectors capacity. Furthermore, there are problems of delinquency and violence against the security of persons, equipment and goods (highway piracy), high levels of accidents, problems of funding, and almost no operational capacity for the preservation of tertiary roads, which are stressed by diverse irregular practices. 2

2 Snchez, Ricardo J. y Gordon Wilmsmeier (2005), Transportation Services Infrastructure in Latin America: Recent Experience and Problems, Natural Resources and Infrastructure Series, No. 94, ECLAC, Santiago de Chile.


Box 1: Technological performance of container terminals in Latin AmericaAn analysis of performance, out of a sample of 16 container terminals, in nine countries of Latin America and the Caribbean for the period 2005 2011, shows that a majority of terminals has increased their productivity during this period due to an improvement in their technological efficiency and efficiency of economies of scale. The increases in technological efficiency have their origin in port reforms that facilitated the implementation of technological advances, especially in port superstructure and important management changes.

Figure 1 Evolution of productivity and efficiency in container terminals of ALC 2005-2011

Source: Wilmsmeier, Tovar and Snchez (2013). The change in total productivity of factors measured through the Malmquist Index (tfpch) was observed to correspond on average to some 3% of the increase in total productivity of the factors in the period of seven years. The growth of the tfpch arises as a consequence of two movements: an improvement in technical efficiency (effch) of 4.5%, as well as a reduction in the effects of technological change (techch) of some 1.4% (border offset).

An improvement in effch is, in turn, the result of two movements, on the one hand an improvement in efficiency of scale (sech) of 3.8% (businesses have been approaching their minimum efficient scale) and an improvement of pure technical efficiency (pech) (management) of 0.6%. Nevertheless, changes in performance also reveal important differences between the different terminals under study, strictly related to the different levels of investment in infrastructure and management, and with the location and role of every terminal within the regions port system.

Malmquist Productivity Index and breakdown

Changes in technological efficiency and breakdown

E ch

Pech

Sech

2005/2006

2006/2007

2007/2008

2008/20092009/2010

2010/2011

0.90

1

0.80

1.20

0.70

E ch

Techch

Tfpch

2005/2006

2006/2007

2007/2008

2008/20092009/2010

2010/2011

0.90

1

0.80

1.20

0.70


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Similarly, on matters of port infrastructure and services, it is relevant to highlight the following: i) the region shows a contrast between the continued growth of traffic supported by increases in asset productivity and scarce growth or improvements in sea access infrastructure, logistics, and inland connectivity; and ii) the main ports in Latin America and the Caribbean present, in general terms, an adaptation to the evolution of economic activity in recent years, though a certain slowness in the completion of necessary reforms has been observed with concern to make its development sustainable toward the future. In comparison, the inland connectivity of countries presents setbacks and failures in organization that increase overall logistics costs and pose an obstacle to improving competitiveness and the productivity of regional economies.

The insufficient development of transportation infrastructure is translated into elevated logistics and transportation costs. Various studies have conducted the exercise of estimating these costs. On one hand, the World Bank and the Inter-American Development Bank (2009) estimate that the logistics costs in countries of Latin America are between 16% and 25%, which contrasts negatively with the average of 9% registered in OECD countries. Both organizations recognize these costs are greater than traditional trade barriers (for example, tariffs), which erode the competitiveness of Latin American producers and increase the cost of access to imported goods. Thus, for example, it is noted that ad valorem tariffs in the area of foodstuffs oscillate between 3% and 12%, but when the product reaches the end consumer, the logistics component.

The problems that affect road infrastructure are not the only ones present in transportation infrastructure. It is possible to identify other problems such as: regulatory restrictions in all modes of transportation and intermodal transport, connectivity problems, deficiencies and missing links in railway networks, inability of the railway network to support the weight of trains employed

in full capacity, or to operate trains of greater size or greater speed; insufficient ground access in the main ports of the region, combined with inadequate depth and shortage of yards.

Similarly, on matters of port infrastructure and services, it is relevant to highlight the following: i) the region shows a contrast between the continued growth of traffic supported by increases in asset productivity and scarce growth or improvements in sea access infrastructure, logistics, and inland connectivity; and ii) the main ports in Latin America and the Caribbean present, in general terms, an adaptation to the evolution of economic activity in recent years, though a certain slowness in the completion of necessary reforms has been observed with concern to make its development sustainable toward the future. In comparison, the inland connectivity of countries presents setbacks and failures in organization that increase overall logistics costs and pose an obstacle to improving competitiveness and the productivity of regional economies.

The insufficient development of transportation infrastructure is translated into elevated logistics and transportation costs. Various studies have conducted the exercise of estimating these costs. On the one hand the World Bank and the Inter-American Development Bank (2009) estimate that the logistics costs in countries of Latin America are between 16% and 25%, which contrasts negatively with the average of 9% registered in OECD countries. Both organizations have highlighted that these costs have reached a greater weight than traditional trade barriers (for example, tariffs), eroding the competitiveness of Latin American producers and increasing the cost of access to imported goods. Thus, for example, it is noted that ad valorem tariffs in the area of foodstuffs oscillate between 3% and 12%, but when the product reaches the end consumer, the logistics component sometimes surpasses 50% of the final price. The economic agents most affected by elevated logistics costs are small businesses (those

3

3 World Bank and Inter-American Development Bank (2009), A Renewed Agenda for Regional Cooperation: Infrastructure, Energy Efficiency and Integration, Policy Note, Second Meeting of Finance Ministers, July 3, 2009, Via del Mar, Chile.4 Op. cit.5 World Bank and Inter-American Development Bank (2009), A Renewed Agenda for Regional Cooperation: Infrastructure, Energy Efficiency and Integration, Policy Note, Second Meeting of Finance Ministers, July 3, 2009, Via del Mar, Chile.

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that stand out for their importance to job creation), representing 48% of the total value of their sales. On the other hand, according to Gonzlez, Guasch and Serebrisky (2008) the logistics costs in Latin America vary between 18% and 32% of the value of the product while in the United States it is around 9.5% and in Singapore 8.5%. Finally, a more recent study (Martinez Rivas, 2010), estimates logistics costs between 10 and 15% of the final product; nevertheless, the author calculates that in the case of developing countries this figure may exceed 20%.

Development of transportation and trade is not always held back by inadequate infrastructure; some analyses of the obstacles to international overland transportation of freight within MERCOSUR have concluded that the relative weight of institutional problems was greater than that caused by the physical infrastructure shortcomings. Among these institutional problems are red tape, delays and uncertainty over international clearance, the lack of continuity in public organizations and public servants, multiple and overlapping national standards, non-compliance with sub-regional regulations, the buildup of overtime and extra costs in border operations and loading and unloading operations in the points of origin and destination, varying degrees of professionalism among transport companies in different countries, the excessive number of freight transshipments at borders, one-way highly seasonal traffic and with frequent ballast-only return trips, and asymmetrical tax treatment and tax pressures among countries.

III. Main ChallengesUpon contrasting the marked importance of the efficient and adequate provision of infrastructure services for economic and social development with the size of the infrastructure deficit in the region, it turns out to be of utmost importance for the different countries and integration group efforts to occupy themselves with aligning infrastructure policies and maximizing their effects in relation

to development. It is necessary and ever more urgent that countries devote their efforts to the creation, preservation, and expansion of transport infrastructure and the sectors support activities, especially in relation to transport infrastructure.To maximize the contribution of infrastructure services to the development agenda, the main challenges facing the region can be summarized as follows:

The physical limitations in the provision of infrastructure and services.The dispersal and multiplicity of public views with respect to infrastructure and services, and the resulting lack of comprehensiveness in policy approaches in their different processes (conception, design, implementation, follow-up, financing, and evaluation).The presence of institutional and regulatory failures or obstacles in the administration of policies and the organization of markets.The absence of sustainability criteria in infrastructure services policies, especially transportation.Access to financing, the quality and success of public-private partnerships, the regulation of institutions and accounting, and the conditions of operation and maturity of infrastructure markets complete the range of questions that must be reviewed.

Finally, it is of utmost importance that investments in infrastructure and related services be analyzed and executed taking into account the following: i) the level of coverage provided: ii) the quality of services; iii) sustainability; iv) coordination with complementary infrastructure services (in the case of transportation, inter-modality). Also, it is important to consider that investments in infrastructure must take into account not only the expansion of capacity but also its upkeep.

6 Gonzlez, Julio, Jos Luis Guasch and Toms Serebrisky (2008), Improving logistics costs for transportation and trade facilitation, Policy Research Working Paper No. 4558, World Bank, Washington, D.C.

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INFRASTRUCTURE FOR COMPETITIVENESS: BUILDING LATIN AMERICAS FUTURE

This year, the VII Americas Competitiveness Forum and the Inter-American Competitiveness Network focus their attention on infrastructure and technology as key elements for the future development of the countries of the region. This decision is not trivial, it is the full acknowledgement that the development and competitiveness of Latin American economies and the whole world cannot have solid foundations if they cannot rely on a viable, functional, and sustainable infrastructure, and as a result progress will not be sustainable in the long term.

Competitiveness and Infrastructure

The changing international financial situation has forced the reassessment of strategies for promoting the sustainable development of countries. Those actions that refer to the promotion of competitiveness are not exempt from doubts about their effectiveness: in the last decade, international institutions such as the World Economic Forum (WEF) and the Institute for Management Development (IMD) have been adjusting their definition of what competitiveness is. Even more importantly, they have conducted important analyses about what indicators are to be used to measure it. An important question arises: To what extent will promoting competitiveness achieve sustainable growth and bring acceptable levels of wellbeing to the population?

The latest reports on the global economic performance show that, contrary to what was expected, emerging countries have entered a deceleration phase. According to projections by the International Monetary Fund (IMF), the prognosis for global growth for 2013 (WEO report, July 2013) is about 3%, a similar rate as in 2012. This is due in large part to the lower

rhythm of growth of some emerging nations that are considered key in global markets that have felt the negative impact of the slow recovery of advanced countries, credit restrictions (given the volatility of financial markets), and the uncertainty in the price of assets. According to the Inter-American Development Bank (IDB), in the case of Latin America growth projections for 2013 fell in Brazil (0.2%), Chile (0.2%), Mexico (0.2%), Paraguay (0.1%), and Peru (0.1%), and they held steady in Colombia and Guatemala.

Among the factors that cause this negative effect, according to IMF analysts, are: the lack of infrastructure to support the risks of a volatile economy; high dependence on external demand; a reduction in prices of raw materials; and vulnerability before internal policies that do not respond to the new fiscal and monetary needs.

Faced with this landscape, a paradigm to consider is to make emerging countries more competitive by translating this objective into productivity and investment attraction. However, recognizing that competitiveness is a complex concept that encompasses diverse dimensions (the WEF measures it in 12 pillars, broken down into 333 variables and opinion surveys, while the IMD does it using 4 critical integrating factors with more than 300 variables and opinion surveys), it is difficult for decision makers to select the most urgent route to follow.

Whichever definition is selected to measure competitiveness, the infrastructure component appears as the platform on which to conduct economic, political, and social activities to make possible, in a framework with other critical elements, the creation of an environment that fosters productivity and generates wealth.


According to an analysis conducted for Mexico in 2008 by the Social Studies and Public Opinion Center of the House of Representatives (Working paper No. 60, 2008), a very close relationship was found between a countrys global competitiveness ranking in the WEF and IMD indexes and its infrastructure sub-index. It is worth mentioning that the components of both indexes differ conceptually, since to IMD infrastructure includes indicators such as healthcare and education, in addition to basic, technological and scientific infrastructure, while to WEF healthcare and education constitute a separate pillar that includes general infrastructure in addition to electricity, highways, and telephone communication.

When developing the methodology to build the Subnational Competitiveness Index of Mexican States, Tec de Monterrey decided to follow the approach of the IMD. This approach has a broader definition of infrastructure which better matches the characteristics of Mexico as an emerging country its high geographic heterogeneity that causes the portfolio of resources of every region to be different, coupled with a cultural diversity that makes more difficult the implementation of standardized public policy actions. The concept of infrastructure adopted by Tec de Monterrey alongside the other 3 critical factors generated an approach that made it possible to have a methodology to identify the competitiveness profile of each State in Mexico and locate their relative position. Additionally, Tec de Monterrey index built in 2012 seeks to identify the factors that determine the competitiveness of the States in the long term, defining 19 indicators that explain 90% of the shift in the Global Competitiveness Index. These factors represent the competitiveness (infra) structure of the states.

Infrastructure for competitiveness

Infrastructure is where competitiveness and the effective operation of economies is founded and sustained. As such, the concept is part of the

different measurements and competitiveness indexes that are built at the national as well as the subnational levels, but as has been already noted with different meanings.

The IMD positions infrastructure as one of its four competitiveness pillars and includes elements that go beyond basic infrastructure, by including technology infrastructure, scientific infrastructure, healthcare systems, environment and education.

In the Global Competitiveness Report, the WEF considers infrastructure as one of its twelve pillars, but only includes physical elements (highways, railways, airports, telephone services, etc.), while other elements such as education, healthcare, and innovation are included in different pillars.

Before this landscape, it was necessary to define what we refer to by infrastructure, and what infrastructure is essential to achieve development and wellbeing. The dictionary of the Real Academia Espaola defines infrastructure as the set of elements or services considered necessary for the creation and operation of any organization in our case, the economies of Latin America.

If we follow this definition, we see that to ensure the development and operation of an economy, much more than steel and concrete is needed. The true meaning of infrastructure must be based on its function.

Infrastructure is key not only for economic growth, but also for its impact on overcoming poverty and inequality. The fulfillment of the Millennium Development Goals, for example, would not be possible without adequate infrastructure, physical as well as organizational and institutional. At the other extreme, innovation and technological development will not be possible without a solid base that includes not only laboratories and research centers but also human capital and institutions for development.


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Functional Infrastructure

It is necessary to understand infrastructure as something functional, whose goal is to facilitate the production and distribution of goods, services, and the transportation of people. What is required for this is not just physical structures, but a set of elements that include human resources, institutions, and rules that determine policies, administrative practices, and operations to interact in the market while defining transaction costs.

Infrastructure includes hard and soft elements. Hard infrastructure refers to traditional elements (steel and concrete) such as highways, ports, airports, dams, ducts, canals, bridges, etc., while soft infrastructure refers to human capital as well as the institutions that make possible the operation of economies, and they include social and cultural systems, the financial system, economic regulation and the system of government (administration of justice, safety, etc.), as well as healthcare, social safety and educational systems.

FUNCTIONAL INFRASTRUCTURE

Landscape in Latin America

Latin America represents an important challenge on matters of infrastructure. It comprises more than 22 million square kilometers and almost 600 million people. According to data from the World Bank, 79% of the population lives in urban areas and only 21% of roads are paved; only 4.4% of electric power generation is from renewable sources, while 54% is generated by hydropower

and a third still comes from hydrocarbons such as oil and natural gas (WB, World Development Indicators).

After decades of low investment in Latin Americas infrastructure, a slight recovery has begun in recent years. That is, however, not enough: most countries range from 1.5 to 4.5% of GDP, and most of it continues to be public investment (CAF 2012, Infrastructure in the Integral Development of Latin America). On the other hand, spending on research and development in Latin America barely reached 0.78 of GDP between 2005-2010 (WB, World Development Indicators).

Faced with this situation, growth also has been less than expected for most emerging countries. It has been argued that one of the factors to blame is the lack of adequate infrastructure.At the same time, progress in infrastructure projects as important as the expansion of the Panama Canal must be recognized. This represents, from a functional approach, not only a physical structure but also a set of institutional, organizational, and governance factors that are ultimately going to influence global trade.

Finally, challenges on matters of urban development cannot be left out. With a growing population in urban areas, the subject of mobility, sustainability, the provision of public services (water, energy, etc.) will become essential. Planning of urban densification must accelerate and the growing global risks derived from climate change must be taken very seriously. The search for resilience in productive and urban systems must become a priority.

Some Recommendations for the Development of Infrastructure

To better solve the needs of transportation, energy, access to potable water, communication, healthcare, education, etc., sizable investments of public and private resources are needed. So, to simply recommend greater investment becomes naive. The challenge is to come up with new strategies to solve the problem


of transportation, improve the systems of sanitation and public health, foster innovation, among others.

Faced with this panorama, the new public-private investment frameworks represent an opportunity to increase participation by private investors for the development of hard infrastructure. As emerging economies, the region also has access to resources and support from international organizations that foster the development of infrastructure. Nevertheless, the challenges facing Latin America in infrastructure for innovation, technology and competitiveness in general must also be directed to the development of so-called soft infrastructure.

Large works of infrastructure, like the expansion of the Panama Canal or the Inter-American highway, for example, are necessary. But we must not lose sight of the function of infrastructure in the development of economies this is why the development of institutions and human capital must go hand in hand in setting the foundations of a competitiveness that is characterized by true social sustainability.


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What are some components of competitive infrastructure that could serve as a platform for enhancing productivity and prosperity?

Goods trade is the exchange of physical products. It is one of the single most important processes to create the modern economies in which we live. Without goods trade, communities would be forced to subsist solely on the goods it could produce from local inputs, whether they be raw materials or manufactured products. Goods trade allows markets to compare their own inputs and products to what is available among all of their trading peers.

We talk about trade all the time in terms of national deficits and trade balances. What we dont talk about is metropolitan areas and how they connect to, and trade with, one another. So, the infrastructure conversation really should be derivative of a larger economic goal: the stimulation of trade. In this way, we should think about infrastructure in service of economic growth and prosperity. If the economic ambition is to increase goods trade, exports, or to create a more productive economy, that leads to a series of infrastructure investments. In terms of a metropolitan areas exchange of goods, this means freight infrastructureroads and rails, ports and everything in between. Understanding goods trade relationships is the first step.

Within your work at Brookings, you often refer to the term global fluency when you talk about U.S. Metropolitan areas. Is this term applicable to countries in Latin America and the Caribbean?

It is certainly applicable. As economies become more global, and as the trade of goods and services becomes a central component of how metropolitan economies function, global fluency is important. This refers to the level of global competence, practice, and of reach, that metropolitan areas exhibit in an increasingly interconnected world economy. It helps you to better adapt a city to optimize benefits of globalization. I do think it matters beyond the United States because of the changing global dynamic and the rapid growth in Latin America. Understanding global connections is a big piece of global fluency and the global orientation of markets is vital. How do you view the expansion of the Panama Canal in terms of its impact on trade and logistics in the hemisphere?

All along the Atlantic coast, metropolitan areas are in an arms race to expand their ports and to increase access to their ports from roads and rails. The expansion of the Canal promises bigger ships and better cargo loads. But what

Interview with Robert PuentesSenior Fellow, Brookings Institutions Metropolitan Policy Program

Director of the Metropolitan Infrastructure Initiative at the Brookings Institution.

Has written multiple articles on transportation and infrastructure, urban planning, growth management, and housing.

Keynote Speaker, VII Americas Competitiveness ForumPanama City, Panama

Presents his perspective on key components of competitive infrastructure in Latin America and the Caribbean, specifically regarding the Panama Canal and the construction of commuter trains.

Robert Puentes


is lost in that arms race is what this newly expanded canal means for the larger economy. We cannot simply assume that all metropolitan areas will immediately acquire new freight business when the Canal opens. These are billion dollar assumptions that ignore fundamental questions like: What does it mean for goods trade? Building infrastructure itself does not necessarily mean an increase in economic growth competitiveness. Its less predicated on ship size and more focused on economy size or economy orientation.

What are your thoughts on commuter trains and on how to build infrastructure that would improve life quality and efficiency in the next ten years?

Today, transportation analysts increasingly consider accessibility to be a better measure of system performance than traditional mobility. It is at least as important for metropolitan residents to be able to access a range of activities, such as jobs, via the transportation system, than it is for systems to simply move vehicles faster and reduce travel times. One important way workers get to work is via public transit - a metropolitan train system or commuter train. So we have to start thinking about these investments as a way to start improving access to economic opportunity. The challenge in many areas is getting low-income residents from out on the suburban fringe into the urban core, where jobs and education opportunities are.

What key lessons on urban planning that promote competitiveness can you draw from good practices in the United States and around the world?

The number one lesson we have learned is places have to build on existing strengths. This means cities and metropolitan areas need to focus on what they already do well, and they need to improve these processes rather than merely chasing the economic development idea of the day. Second, in light of the recession, we are reminded of the need to focus on a productive, rather than consumption

economy. This means a clear focus on boosting manufacturing, advanced industries, global trade, and technological innovation. The third thing, related to that, is a need to trade globally. Trade is becoming increasingly important to global and national economies, thanks in part to the growth of metro areas in Latin America and Asia. Lastly, we need to focus on transformative investments. People must not be afraid to make large investments, especially when it comes to infrastructure. The Panama Canal is a perfect example of a large-scale investment that has proven to be a driving factor for the economy.


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In terms of logistics, what priorities do countries need to address to be more competitive in coming decades?

Competitiveness involves more than just logistics. It involves a lot of other things, including both physical and information infrastructures for moving goods and information. In many Latin American countries there is a need for physical infrastructure improvements. We see a trend in supply chain management that involves real-time control, based on real-time data. Ultimately, we also need an information infrastructure in place to support this trend. Let me also mention the innovation ecology, the laws and regulations that affect the movement of goods in and out of a country and more generally the capacity to innovate. In order to make use of an efficient logistics industry, you need goods to move both imports and exports. An advantage Latin America has is the increasing wage structure in China. Supplier footprints for supply chains for U.S. and European markets are moving to Mexico, the Caribbean, and Latin America. These regions need to provide a healthy supplier base for the rest of the world. This also requires an investment in people and in an educational process that develops innovative-savvy skills.

In terms of the value chain and logistics, what are Latin Americas key strengths and weaknesses?

An advantage is the regions proximity to sea shipping. That does not reduce the need for good road or rail infrastructure, which is certainly a weakness in some parts of the region. Latin America also has an advantage just because it can be a fun place to be. It can become a hub for innovation and investment if it can attract and retain the creative knowledge worker. An obvious strength that Panama has is the Panama Canal, a potential place for value-added innovations. A weakness that Panama has is also the Panama Canal. It is easy, with a resource that can create wealth due to a commodity or special location, not to feel the need to continuously innovate. The Panama Canal is possibly a double-edged sword in that sense.

Interview with Chelsea (Chip) White III, Ph.D.Schneider National Chair in Transportation and Logistics, Georgia Institute of Technology

Director of The Trucking Industry Program and former Executive Director of The Logistics Institute at GIT.

Serves on the boards of directors for Conway, Inc. (NYSE: CNW), The Logistics Institute: Asia Pacific, The Industry Studies Association, and the Bobby Dodd Institute.

Former member of the board of ITS America and the ITS World Congress.

Served on the faculties of The University of Virginia (1976-1990) and UM (1990-2001).

Keynote Speaker, VII Americas Competitiveness ForumPanama City, Panama

Presents his perspective on logistical development and the impact of information technology on infrastructure in Panama and the greater region of Latin America.

Chelsea White


How do the Americas compare themselves with the rest of the world?

North America and the EU have a lot of regulations and political climates that are relatively consistent across the region. Latin America is different: it is more diversified in terms of access to water, climate, and in terms of tax structures. Also, there is a lot of variability in terms of the countries being easy to do business with, in labor market efficiency, the economic bases of the country, and industries that generate the most GDP. Another distinction is that many Latin American countries are small, which suggests all kinds of interesting challenges. The need for cooperation- particularly from an economic perspective- is much stronger than the need for cooperation from a country with a large land mass.

In your experience, what models and practices should be considered by Latin America and the Caribbean to both improve existing value chains and generate new opportunities?

There are two ways of looking at economic development. The first approach involves figuring out what industries will create jobs and wealth in the future, and then investing in those. The second approach involves investing in people. Why dont we work on turning our country, our place in the world, into an interesting place to be for creative, highly-educated individuals and then let them chose the industries? This means finding, attracting, and retaining the talent and providing the enabling venture capital and infrastructures.

Taking into account the rapid advance of technology and communications, what are some priorities you recommend to high level authorities and competitiveness councils of the region for the next decade?

Excluding Brazil, Latin American countries are relatively small. In terms of regional interactions, I recommend developing a coordinated body to oversee both sea and land transport for the region. Further, I recommend developing an intermodal network. There is a need for coordination and cooperation in terms of moving goods, money, and information.

What are two areas in which you think it is possible to advance through cooperation among private and public actors from various countries in the region?

To speed up policymaking processes is a challenge everywhere. The first area I would like to see advanced is physical and information infrastructure. The second area I would like to see advanced is in the investment of people- innovators, entrepreneurs, and those who can generate wealth not only for themselves but for society. If you gave me a third issue, I would say innovation ecologythe legal system, the tax system, the economic incentive system in place that will attract not only companies and organizations, but also creative knowledge workers.


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Latin America stands at a crossroads. A decade of favorable international economic conditions has spurred significant growth in many of the regions economies. Sound macroeconomic policies and targeted programs have lifted more than 73 million Latin Americans out of poverty, growing the middle class by 50%. As Chinas growth has started to moderate and commodity prices have curbed their climb, those tailwinds have started to turn. Latin Americas challenge is to find a strategy that will prepare it to maintain and build upon the gains from the last decade while confronting headwinds in a highly competitive international economy.

One of the regions key challenges in competing in a tightly globalized international economy is a major infrastructure gap. This was recently underlined by Brazilian President Dilma Rousseff who, in a speech launching a major railway upgrade, declared Brazilian railway infrastructure to be two centuries behind. The spirit of this statement (even if the magnitude is somewhat exaggerated) applies to the entire region. Inadequate infrastructure remains a key barrier to trade, growth, and development for Latin America.

In this paper we focus on the infrastructure most directly connected to trade. The means for getting goods to marketrail, roads, airports and ports and electrical grids are the physical or hard

component. The soft component encompasses the networks of policies and regulations that are a necessary supplement for the system to perform well. If done properly, improvements in infrastructure can have a significant positive impact on trade, growth, and development.

A panorama of Latin American infrastructure

For most Latin American countries, transport costs are a greater barrier to foreign markets than import tariffs. The Inter-American Development Bank (2008) in a seminal study has calculated that, on average, a 10% cut in trade costs would raise exports by more than 60%. Table 1 illustrates a number of competitiveness indicators that illustrate how the region performs in terms of transport infrastructure-related outcomes, compared to East Asian countries. A full version of Table 1, with data by country, is included in the Appendix which is available in the full version of this paper in the RIAC portal.

Barbara KotschwarPeterson Institute for International Economics September 24, 2013

Latin America and the Caribbean infrastructure: Building Blocks to CompetitivenessSummary for the 2013 RIAC Signs of Competitiveness Report

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7 According to World Bank statistics.8 Quoted in Leahy, Joe.2013. Brazil risks lost decade as it bungles infrastructure boost: Transport investment still lags far behind other large economies, Financial Times, September 22.

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Table 1. Trade-related Transactions Cost Indicators, 2012

An immediate takeaway from this table is the significant difference in the cost of transporting a 20-ft container from Latin America versus developing East Asia. On average it takes USD$1279 to export and USD$1633 to import a container from Latin America than from Asia. This cost takes into account customs fees, administrative and other fees and inland transport.

Table 2 examines quality of transport infrastructure indicators from the World Economic Forums Global Competitiveness Index. Disaggregating hard infrastructure into its different components, a few results become apparent. First, Latin America performs poorly compared to developing East Asia and to the OECD average. Second, the performance is poorest in rail and roads, the latter being one of the main modes of transport for goods.

Table 2. Hard infrastructure quality

These figures make a compelling case for placing an upgrade of Latin Americas infrastructure front and center on the public policy priority agenda. Better infrastructure increases the ability to move goods, services, and ideas within countries and to exchange goods, services, and ideas from one country to another. It decreases transportation costs, reduces inventory and logistical costs, thereby expanding markets. Improved infrastructure benefits producers and consumers and makes the region more attractive to foreign direct investment (FDI). Improved infrastructure also allows for a more equitable distribution of benefits by enhancing


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the populations ability to take advantage of important health and education services essential for development. Infrastructure has an important role to play in reducing rural poverty; by connecting farmers and/or small business owners in isolated geographic pockets to mainstream markets, infrastructure helps combat their social and economic exclusion.

Infrastructure plays three main roles:Infrastructure as a development platformEconomists have found a positive link between improved infrastructure and growth. Various studies have pointed to the quality and quantity of infrastructure as an important factor in explaining the growth differential between East Asia and other developing countries. Caldern and Serven (2004) find a positive growth impact from improving the quality and quantity of infrastructure. Effectiveness in the use of infrastructure was found to explain about a quarter of the growth differential between Latin America and East Asia and more than 40% of the differential between low and high-growth countries. Infrastructure supports growth and poverty reduction both directly, by serving as a production factor and indirectly, by facilitating technological progress. An increase in the stock of infrastructure capital has a direct impact on the increase in the productivity of other factors (Straub and Terada-Hagiwara (2011). Improving infrastructure can also have an equity boost. Better access to roads and sanitation can lower a countrys Gini coefficient. Improving transport infrastructure increases access to economic activity, thereby mitigating income inequalitynot an insignificant offering in a region marked by highly unequal income distribution.

If all Latin American countries were to upgrade their infrastructure to match the regional infrastructure leader, they could augment their growth by an estimated 1.1 and 4.8 percentage point per annum and reduce their Gini coefficients by between 0.02 and 1.0. Reaching the standards of a median East Asian country

would provide even greater gainsgrowth boosts of between 3.2 and 6.3% per year and Gini reductions of 0.05 to .13.

Infrastructure as a trade boosterGlobal supply chains have become more integrated over the past decades, and production is increasingly segmented across countries and continents. Poor quality infrastructure may effectively exclude some countries from supply chains of time-sensitive, highly complex manufactures, which tend to have a higher added value. Hummels (2007) has calculated the tariff equivalents of trade delaysthe delays related to customs and inland transport, the time goods spend waiting in portsand finds that Latin Americas tariff equivalent of time is 8.9%, versus the applied tariff of 7.0%; for East Asia and the Pacific it is 6.9% over an applied tariff of 5.6%. The Inter-American Development Bank estimates that transport costs are more than four times greater than tariff costs in Latin America. Mitigating or eliminating these cost differentials will help reduce the cost difference between Asian and Latin American goods. Bolstering infrastructure can be a big step to helping increase the regions integration into the global supply chain, a goal of, among others, the Pacific Alliance.

Infrastructure as a competitiveness enhancer Finally, infrastructure improvement will most directly help enhance the competitiveness of the firms who use that infrastructure to get their goods and services to market. For example, the IDB estimates that a 10%cut in freight costs could boost plant productivity in Brazil and Chile by 0.5 and 0.7%, respectively. Hummels explains that the cost of delays is not only in the barriers to trade in existing products, but in the opportunity cost of products that are not exported as a result of the costs of transporting the goods.

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9 Straub and Terada-Hagiwara find that the growth impact is mainly through the direct effect of factor accumulation rather than through enhanced productivity. 10 The Gini coefficient is an indicator of the equality of a countrys distribution of income. It ranges from the extreme equality value of zero, where all members of the system have the exact same income, to extreme inequality at 1.00 (where only one person has all the income).11 These delays are attributed to the hard as well as soft aspects of infrastructure: In addition to physical transport infrastructure, Hummels mentions other factors that may contribute to these delays, including land size and distance of ports from economic activity, customs delays due to poor coordination, communication and information management, low skill level of customs and inspection staff, and corruption.

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Enhanced infrastructure could have a sufficient cost reduction effect to make internationalization possible for more companies, particularly smaller ones that had been previously excluded from the market. This is particularly important for Small and Medium Enterprises (SMEs), which often operate on very thin margins. SMEs are essential to competitiveness and growth. SMEs are an important force in most economies. A robust set of SMEs helps to stimulate competition, diversify economic activity, provide jobs for local people, and ideally, bolster innovation by providing local entrepreneurs entry into the global economy. Generally they employ about 35-45% of the workforce and contribute 30-40% of national value added (DHL). Infrastructure is important for SMEs, particularly those that are or have the potential to internationalize. According to a recent study conducted by DHL, 80% of SMEs with 50 to 249 employees and 66% of SMEs with 10 to 49 employees are international, meaning that they engage in export, import, foreign investment, subcontracting, technical or commercial cooperation activities.

According to this study, inadequate transport infrastructures and insufficient supply of private distribution and logistics services will constrain competitiveness by limiting efficient product and service delivery. SMEs are normally less well equipped to overcome inefficiencies in public infrastructures than larger companies. For that reason, the development of services in transport, packaging and distribution, as part of a set of policy measures directed at fostering a well-functioning business environment, is particularly important to SMEs internationalization and growth.

In sum, infrastructure upgrades can spur growth, stimulate trade and help firms reach their full competitiveness potential. Inadequate infrastructure, on the other hand, is an obstacle to trade and growth, presents market distortions that decrease efficiency and reduce competitiveness. Many Latin American governments have pledged large-scale infrastructure programs to upgrade lagging roads, ports, airports and railroads. This is an important first step. Individually, and across borders, countries and institutions should make closing Latin Americas infrastructure gap a main priority.

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12 Technical cooperation is defined as, for example, sharing know-how, technologies etc. Commercial cooperation is defined as marketing, distribution, among others.


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What do you expect to be the most important impact as a result of the expansion of the Panama Canal on trade and logistics in the Americas and the world?

The expansion of the Canal will affect the capacity of countries in Latin America and the world to access principal markets in a more competitive manner. The Canal will permit the passage of a new generation of container ships that promise, through economies of scale, a tremendous reduction in unitary costs of transporting merchandise, as well as an important reduction in CO2 emissions per unit of transported product. There is much interest in the expansion of the Canal, from a wide range of countries but especially from countries in Asia and South America. At the same time the United States is undergoing an energy revolution with the use of natural gas, which also has a positive impact on the environment as it replaces the two other types of fossil fuels that we use today such as bunker (fuel oil) and diesel. Natural gas is 25 percent cleaner than other fossil fuels in terms of CO2 emissions. The Panama Canal will allow for the first time the passage of LNG (liquefied natural gas) carriers to markets in Asia and South America. This will grant access to countries in the region to this new type of fuel coming from the United States.

When you consider the impact of infrastructure, it is not just about the construction of the work itself. What other components have you considered in the interior of Panama as complementary in order to benefit from the expansion of the Canal as a catalyst for improvement in regards to productivity, innovation, and quality of life in your country?

When we designed the program to expand the Panama Canal we identified a need for human capital formation in Panama. At that moment, we succeeded in having the national government create a National Institute of Professional Formation and Training for Human Development (INADEH) to attend to the need for an increase in the number of qualified individuals. It is interesting to see how the project of the expansion of the Canal has produced economic development across the country. Demand today for trained human resources comes not only from the expansion of the Canal but also from other projects that have sprung up around it. We are referring to investments in logistics: the expansion of the airport, construction of other airports, ports, and highways. These investments require trained human capital. In this sense, I think that the formation of human capital, which is multiplied as the expansion of the Panama Canal advances, is part of the added benefits of this project.

Interview with Manuel Bentez Sub-Administrator of the Panama Canal

Appointed as Sub-Administrator of the Panama Canal in August of 2012.

Holds a degree in Electromechanical Engineering from the Technological University of Panama and is a graduate of the Executive Development program at Cornell University.

Previously served as Executive Vice-president of Operations for the Panama Canal.

Keynote Speaker, VII Americas Competitiveness Forum Panama City, Panama

Presents his perspective on the expansion of the Panama Canal and the effect this will have on competitiveness in the region.

Manuel Bentez


One of the big questions in terms of infrastructure has to do with the mechanisms to measure the impact of public goods with a return on investment sufficiently attractive for the private sector. From the experience of the Panama Canal, do you have any methodologies or lessons to share in this regard?

The need to invest in the formation of human capital is very important. We simply dont have enough engineers. We have to focus on investing in the formation of human resources in order to have specialized technicians. We sometimes dont see this type of investment as an investment. Governments and states often times see it solely as expenditure as there is no immediate return. However, when you enter into a project of this magnitude, in 6 or 7 years we can already see and measure a multiplier effect. The country sees the benefits; there is a greater capacity to create employment, greater economic development, and an increase in GDP. We have experienced this in Panama in the last couple of years. That is why it is essential to invest in the formation of human capital. It is an investment that needs to be done and where the benefits will be seen. In my opinion this is one of the key lessons that I have taken away from this project.

With advancements in technology and mass media, the traditional schemes for commerce and value chains are evolving rapidly and at all levels. Bearing in mind these developments and the changes generated by the expansion of the Canal, what would be the five priorities that you would recommend high authorities and councils of competitiveness to focus on in the region during the next ten years to take advantage of these opportunities?

There are several countries that are making improvements in their infrastructure to take advantage of the additional capacity that the expanded Canal will offer them. At the same time, there are some countries within Latin America that are changing to different types of infrastructures. Chile for example has strategically decided to change to natural gas and in this manner, through the Panama

Canal, acquire new routes to import natural gas. Likewise, the United States is looking to commercialize its production of natural gas through the Panama Canal. Each country is preparing its infrastructure and their strategies. In this sense we can say that the expansion of the Panama Canal is a game changer, as it offers new opportunities to different countries, whether they are consumers or producers, thereby changing the conditions of competitiveness in various chains.

Could you indicate to us if you see any other complementary sector where there might exist opportunities for collaboration between Panama and other countries in the region?

The experience that we have gained in Panama in terms of construction of infrastructure and managing large projects can be shared with other countries.

I also think that our region should make use of technology to allow us to operate in a more integrated manner. This is something that would help the competitiveness of the region and make the movement of goods more agile. Therefore, I think that to the extent we can integrate in terms of customs and logistics, using technology, the region could be more competitive. Latin America produces a lot of goods and it is important that we integrate and act as a region in a coordinated manner.


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A NEW WAY OF TAKING CHARGE OF INFRASTRUCTURE AND TECHNOLOGY NATIONAL COUNCIL ON INNOVATION FOR COMPETITIVENESS, CHILE

We may understand technology as a set of artifacts that serve a human purpose, that create in us some measure of satisfaction, that help us in our jobs, or allow us to expand our capabilities. The truth is we could not understand humans apart from the technologies that have shaped them throughout history: the wheel made it possible to move things which, until that moment, were impossible to drag along; the use of nails and hammers changed the way in which wood was assembled; and power plants, as well as transmission and distribution systems, opened new possibilities for life in cities.

We speak of technological systems to refer to that organized set of components and artifacts which subject t

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Signs of Competitiveness in the Americas 2013