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Memos From the Developing World: Creative Latin-America

Successful Latin American countries will have to learn to live with appreciated currencies. With interest rates in the developed world likely to stay floor-low for a while, money will continue to flow into the region's more promising economies. This will make them less competitive. There is not much they can do about it -- accumulate reserves, impose capital controls and taxes, keep banks from credit sprees, increase productive efficiency. But those are either unsustainable measures or long-term reforms. The reality is that living in, or exporting from, places like Bogota, Lima, Sao Paulo or Santiago will be more expensive in US dollars. It will be more difficult to sell our products in the US and in any other country that keeps its currency tied to the US dollar, notably China. That is why success in trade will now depend more on new products. While getting additional free-trade agreements will still be good, creating new brands will be even better.

The problem for Latin America is that, on the whole, it has not excelled at innovation, at doing new things or at doing the same thing in a new, better way. It has been slow to acquire, adopt and adapt technologies that already exist elsewhere. It invests too little in research and development, provides few tax incentives, does not protect intellectual property well, and its universities are disconnected from its businesses. This is reflected in minute levels of patent registration, declining total factor productivity (vis-à-vis the US benchmark), few firms acquiring quality certifications (less than a quarter), and a commercial penetration that has been stagnant for decades (only about five percent of world trade involves a Latin American country as a partner). Even the pre-crisis years of abundant financing, saw only a handful of new Latin American business lines come to market: premium foods, medical tourism, aeronautic engineering, software development, and call centers.

It's the curse of commodities, you may say. Why risk new ventures in a region where good-old natural wealth is abundant and pricey? Ironically, some of the best, recent innovations in Latin-America happened in commodity industries -- think of the technological revolution in Argentina's soybean production, or the efforts at environmental sustainability in Peru's mining sector. Can Latin-American creativity be unleashed, regardless of sectors?

It will take years to fix the problems that smother innovation in the region, but the new global reality will make change unavoidable. Will there be a single formula? No. Our countries differ in terms of technological stock, efficacy of tax systems, quality of human capital, legal predictability, and institutional capacity. But successful innovation strategies show some common features that point the way forward: they are priorities of the state (they do not change from government to government); they are not based solely on markets; all relevant stakeholders are engaged (big and small, public and private); somebody is accountable for results; they are part of a broader effort of integration; are well-funded; they are continuously evaluated and adjusted; they begin with quick-wins (usually in the area of quality standards); they include reforms in tertiary education; and they operate within a reliable legal framework.

Interestingly, more private innovation in Latin America will call for better public action. From venture funding to skill improvement, the state will have a new role to play. Rather than taking the exclusive leadership as it tried in the past (with poor results), it will become a catalyzing partner in multi-agent efforts. In some cases, it will contribute resources; in others, it will contribute reforms.

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