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Accelerating Economic Growth and Strengthening the Middle Class in
Deputy Director and Senior Fellow, Project on Prosperity and Development
Having spent a long and distinguished career as economists for the
The conversation, moderated by Erol Yayboke, has been edited for purposes of brevity and clarity.
EY: Thank you both for joining us. So, let us start at the beginning. Why did you decide to write this book?
RC: This book is a long-term strategy to incentivize accelerated economic growth. While
Our book shares the evidence that social opportunities are dependent on rapid economic growth. A larger world economy equates to more opportunities, more investment, more employment, all of which alleviates poverty and grows the middle class.
There is a path for an accelerated growth over the next 20 years during which many Latin American countries can become developed economies with over
Many development banks and development specialists think that we need to prioritize poverty. We, however, focus on the middle class since ultimately the actual basis for sustained growth is hinged upon their resilience.
EY: As you were describing the genesis of the book, the saying “a rising tide lifts all ships” came to mind. International development is not just poverty-focused development banks. It is also finding new solutions or technologies that can transform our approach to global challenges.
One of the points that was made in the book was about accelerating some of the trends that we are already seeing. For instance,
OM: We focus on accelerating growth because we lived through a period of high growth. That led to the case of
A key driver of growth is infrastructure investments. The region has significant gaps in infrastructure and some countries have wage gaps of up to 120 percent of GDP. This is despite some infrastructure investment during the economic boom. Of course, any talk of infrastructure development should look at financing. Hence, a section focusing on financing infrastructure and building on recent successes in countries like
Even before the pandemic, many Latin American countries had no fiscal space for infrastructure.
Another important point is “the
We also discuss how economic growth should be harnessed to consolidate and strengthen the middle class. One key finding is that the
EY: A key takeaway here is that until Covid-19, many of the countries in the region were in a decent fiscal situation but did not necessarily have the capital for infrastructure development. This is what makes the IDB and the
RC: The gap in public goods in
Of course, you can be more technocratic and do a finer analysis to see what the best return on investment we can get. Let us consider an anecdote from 1896 Spain. The government decided to build the first high-speed train between
Over the last 30 years,
EY: I am glad you mentioned digital infrastructure because I think this relates to the challenges posed by the Covid-19. The digital divide is growing significantly, including in advanced countries such as
How does Covid-19 impact your findings (if at all)? How do we build back for a post-Covid-19 world?
OM: In the end, you do wish that the book had reflected on Covid-19. Outside the region, people are trying to get back growth, and everybody is contemplating a large fiscal stimulus. This is true for the Latin American context except there are opportunities for infrastructure. There are two advantages for a fiscal push for new infrastructure. First, it is a kind of temporary spending, because when you want to do this fiscal push you don't want all of a sudden to commit to expenditures that in the future you will have to maintain.
Second, it generates employment. In the book we define “future spaces.” Per country, we have identified spaces of up to 10 percent of GDP, which means it can help cover all the fiscal impact of Covid-19. It can also help cover infrastructure bills. To that end, we identify strategies to help countries realize this relief. Worth noting is we don't measure the social infrastructure gap in terms of health and education, but they are a necessary investment. Thinking about recovery, you must focus on helping your economy and the opportunities that the Covid-19 shock is creating. One of these opportunities is nearshoring. We can attract investments to facilitate nearshoring through better infrastructure that integrates intra- and inter-country manufacturing and market hubs. Alternatively, a sector that holds potential is food and agriculture, one of the few sectors still growing despite Covid-19.
The economic crisis triggered by Covid-19 highlights one of the more prevalent issues among the middle class, which is the lack of a social insurance. States were often more focused on poverty-alleviation measures, gain growth, and progress. Initiatives like conditional cash transfers help bring people out of poverty. But the same states are not as much geared toward the middle class, particularly regarding ensuring social insurance. Social insurance can help with health coverage, pensions, and unemployment insurance for the middle class. While some countries have a social welfare system, it only covers a small portion and is expensive. Naturally, this net needs to be cast wider.
EY: It is great for us to be here and say there should be more infrastructure spending, but we all recognize that money does not grow on trees. Could you talk to us a little bit about how we finance the infrastructure agenda?
RC: This is a key question in our book. Not only do we provide ideas for short- and long-term strategy in terms of how to accelerate growth, but we also offer suggestions to do so in terms of financial needs. Most countries in
We propose that
EY: I was glad about the book's focus on domestic resource mobilization and public expenditure. When I was in
OM: It is important that we don't discuss raising the tax rate. In fact, we recommend reducing tax rates in some countries and considering more exemptions. We also discuss fiscalization (to reduce retailer fraud and tax evasion) and electronic invoicing. We emphasize that instead of increasing tax rates, be more effective in enforcing (or collecting) existing tax laws. The key here is effective public policy, developed through a robust political discussion.
EY: I'd love to talk about the political side as well. When lots of people think about big infrastructure and the type of fiscal stimulus that you are talking about, and the reform of the taxation systems, they talk about leakage. How can this be done in a way that address corruption concerns?
RC: Corruption is a problem, but it is not the biggest problem. Corruption must be addressed with more institutional transparency. At the IDB, we have been working on this issue, including through an online reference tool that anybody can visit and look at what exactly has been invested and where. You can compare the investment parameters for two similar deliverables and check for unusual variances. The tool is helpful for NGOs and watchdogs and for tracking ongoing projects combatting corruption.
But anti-corruption efforts and strengthening institutions are a work in progress. More important is the need to have consensus around development policies as these policies have long-term consequences for sustained economic growth and progressive investments.
Corruption in development projects does raise legitimate concerns and hampers political consensus. The region is very polarized, and policy continuity is not easy to achieve. We are optimistic but also realistic in our expectations.
We are hopeful that promoting sound infrastructure investment strategies is perceived to benefit everybody, regardless of political ideology. This includes fighting poverty with a growing middle class and more public investments. Our book calls for people to pay what they need to in exchange for that.
EY: Okay, so I am a nerd. I love getting up in the morning and reading about accelerating economic growth and strengthening the middle class in
OM: It becomes hard to gain the big picture when we fractionalize the policy discussion and only discuss exemptions or certain investments. The book brings together issues surrounding fiscal planning, poverty, investment strategy, infrastructure, and the private sector all at once. The full picture gives us the benefit of having a comprehensive and coherent policy toward middle class-centered economic growth.
EY: I agree, and if I might add, this book is not to say that we should forget about poverty. In fact, we should provide social safety nets.
However, following Covid-19, perhaps there is an opportunity to refocus not just on the most vulnerable people, but also on building robust economic growth in the middle class.
RC: Thank you, Erol. As always, this was a stimulating conversation.
70 percent of why
Our book proposes a more effective way to fight poverty and produce more quality employment and opportunities overall. Due to the pandemic
Growth is more important than ever to get back on track, but once we get back on track, our main messages include: Don't accept mediocrity; instead, reach for long-term growth and prosperity. Believe that
EY: “Do not accept mediocrity” is inspiring advice–one which we can all take into our lives and in our jobs. Thank you, Osmel and Rafael, for writing this important and relevant book given the times we live in, and for your willingness to talk about it. I wish you both the very best of luck and look forward to having you back again at CSIS soon.