Returning economic growth across Latin America could mask serious economic challenges for future generations, according to the World Economic Forum’s Inclusive Development Index (IDI). The index seeks to provide leaders with a more accurate picture of an economy’s health based on inequality, debt and environmental burdens placed on future generations as well as economic growth.
The 2018 assessment was undertaken following two decades of solid economic activity. During this time, expansion of access to education and government transfers contributed to reducing the level of income inequality in Latin America. While these developments and measures have helped to narrow the income gap between skilled and unskilled workers, Latin America remains among the most unequal regions in the world.
“Economic approaches need to emphasize the well-being of future generations and inclusion as key priorities for Latin American economies, and many countries lag behind their peers according to the Inclusive Development Index. As countries move out of recession, they should seize the window of opportunity for speeding up reforms to this end,” said Margareta Drzeniek-Hanouz, Head of Future of Economic Progress, Member of the Executive Committee.
The index’s findings provide a fresh lens through which to examine the region’s economic challenges. While 2017 finished on a positive note with recessions ending in Brazil and Argentina, modest rises in economic activity and efficiency over the past five years and a projected growth rate of 1.7% in 2018 will be insufficient to alleviate the region’s sustainability concerns and support a robust rise in median living standards.
The World Economic Forum believes that building inclusive societies is essential for long-term economic growth. With elections in Brazil, Chile, Colombia, Costa Rica and Mexico in 2018, governments are urged to prioritize proactive strategies to further reduce levels of inequality and ensure the well-being of future generations.
According to the index, the most inclusive Latin American economies are Panama, Uruguay, Chile, Costa Rica and Peru. Panama made great strides in reducing its carbon intensity of GDP, down 39.7% from five years ago. The country also has the second highest level of labour productivity in the region after Chile.
Adjusted net savings, which measures the true rate of savings in an economy after taking into account investments in human capital, depletion of natural resources and damage caused by pollution, has declined in one-half of the Latin American economies ranked in the index, with Bolivia, Brazil and El Salvador performing the worst on this indicator.
Moreover, public indebtedness as a share of GDP, which roughly illustrates the scale of borrowing by the current generation against the capacities of future ones, has increased in every country, notably in Brazil (+16%) and Mexico (+14.9%) over the last five years.
Although income inequality has declined in 14 out of the 16 Latin American countries ranked in this year’s IDI, the region accounts for 11 out of the 25 developing economies with the highest levels of income inequality.
Latin America’s largest economies
Ranking 23rd, Argentina’s overall score is supported by its performance on inclusion and intergenerational equity and sustainability. The indicators of economic growth and labour productivity are on the decline as the IDI data predate the current recovery. While Argentina’s income and wealth inequalities are relatively low compared with other Latin American countries, these disparities have been shrinking in recent years. The net income and wealth Gini indicators have dropped nearly 5% and 10%, respectively, over the last five years. Furthermore, the median household income in Argentina ranks in the top quintile of emerging economies in the sample. Although the employment rate is relatively low compared with the regional average, it has increased slightly despite the recent recession.
Mexico’s performance, ranking 24th among emerging economies, is driven by its higher score on intergenerational equity and sustainability. Through the lens of the IDI framework, this is in part due to a higher savings rate and low carbon intensity in national production. The country performs comparatively well across the board on growth and development factors, ranking 13th out of 74 emerging economies. It performs in the top quintile among Latin American countries in terms of labour productivity. In contrast, inclusion measures illustrate high levels of economic disparity, although they have shrunk over the last five years.
Brazil ranks 37th out of 74 emerging economies on this year’s IDI. Brazil’s overall score in the index is pulled up by its performance on intergenerational equity and sustainability. The country benefits from a highly favourable dependency ratio and relatively low carbon intensity. With the IDI data reflecting the period preceding the economic recovery, growth and development indicators, such as GDP per capita growth, labour productivity and employment rates, are trending negatively. Nonetheless, median household income levels appear to have improved throughout this period. Wealth concentration in Brazil is among the highest in both Latin America and emerging economies and has increased slowly over the past five years. With the Brazilian economy slowly recovering, growth and development factors in the IDI are expected to improve; trends may also be affected by the growth-enhancing reforms proposed by the government to address its fiscal constraints.
The Inclusive Development Index
The IDI is published by the World Economic Forum’s System Initiative on Shaping the Future of Economic Progress, which aims to enable sustained and inclusive economic progress. It seeks to achieve this through deepened public-private cooperation, thought leadership and analysis, strategic dialogue and concrete cooperation, including by accelerating social impact through corporate action. The Latin American countries ranked in this index are Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala Honduras, Mexico, Nicaragua, Panama, Peru, Paraguay and Uruguay.