BREVIS EGADE Business School, #20 [English] by EGADE Business School

BREVIS Reporte de Economía y Negocios en América Latina

Year II, Issue. 8 | April 24, 2017

Dr. Alberto Ortiz and Dr. Jorge Mendoza Professors of Economics EGADE Business School del Tecnológico de Monterrey aortizb@itesm.mx | jorge.mendoza@itesm.mx

TO INCREASE PRODUCTIVITY, IMPROVE THE QUALITY OF MANAGEMENT PRACTICES

country’s production is determined by production factors—capital and work—and how efficiently these factors are used. This efficiency, or total productivity of the factors, is determined by the level of technological knowhow and the workings of the institutions that allow capital and work to be used to their highest potential. In Mexico, several studies over the last three decades have shown that productivity has fallen behind, and an accumulation of production factors has led to sustained low growth. According to the McKinsey Global Institute, low productivity performance in Mexico is the result of the mediocre performance in the traditional sector made up of small and informal businesses that have increased their employment levels, counteracting the productive dynamism of the modern sector. McKinsey believes that it is essential to increase the productivity of businesses in the traditional sector and to create opportunities so that the most-successful organizations in this sector can become formal, modern businesses, by creating an environment that fosters entrepreneurship, growth, and innovation, while at the same time discouraging informal employment and simplifying business formalization. It also proposes fostering production and full-time employment growth in the modern sector and suggests a need for significant improvements in education, infrastructure, and company access to capital, as well as reducing energy costs. The structural reforms approved by the

Mexican Congress seek to create conditions that encourage the accumulation of factors and an increase in productivity, but according to recent studies, these efforts would probably work better with improved efficiency in business management. Slightly more than ten years ago, a group of scholars led by Nicholas Bloom from Stanford University and John van Reenen from the London School of Economics launched an empirical research project on the links between productivity and business-management practices. This group has developed research instruments and has collected and analyzed information on the adoption and use of different management practices in businesses in different economies around the world, to study the pertinence of a new hypothesis, that the quality of business-management practices can account for differences in productivity and general economic performance. The four main areas of business management that these studies have assessed are: (1) operations management, The quality including managerial techniques used in the of the transformation of input into goods and sermanagement vices; (2) monitoring of organizational performance, meaning how well performance practices monitoring systems inform management accounts for about day-to-day operations; (3) establidifferences in shing goals, which shows how the strategy is linked to operations, and (4) talent manaproductivity gement, which shows how the employees and general are managed and encouraged.

economic performance”

If in Mexico we would like to learn about the links between our managerial practices and our productivity, we need to diagnose their current state, with measurements that we don’t have today. Therefore, we propose creating these measurements to: (i) identify the types of practices used by the different businesses in Mexico, (ii) understand their causes and enabling factors, and (iii) measure the impact of these practices on the organizations’ productivity and economic performance. ❚

1 BREVIS

BREVIS Macroeconomic developments in Latin America In Mexico, for the ninth consecutive month, annualized inflation continues on the rise; the figure for March was 5.35 %, the highest since July 2009. The largest increases were in energy, at 17.09 %; and food, beverages, and tobacco, at 6.49 %. Banxico continued to tighten monetary policy; at the March meeting, the benchmark rate was increased 25 basis points, to 6.50 %, representing a total increase of 350 basis points since December 2015. Banxico handed over to the Treasury a surplus of 321 653 million pesos from 2016, 34.5 % higher than the surplus sent from 2015; 70 % of the total amount will be used to cover Public Sector Financial Requirements (RFSP), and the rest will be used for the Financial Revenue Stabilization Fund (FEIP). Meanwhile, the Mexican Stock Exchange recently reached an all-time high of 49 531.85 points in April, accumulating a gain of 7.34 % for the year (as of April 19). Initial figures for the current year indicate that Brazil faces a difficult road out of recession. Industrial pro-

duction registered an annualized fall of 0.8 % in February. In addition, the labor market figures are alarming, with the unemployment rate reaching a historic level of 13.2 % in February, which represents a total of 13.5 million people without a job. The Central Bank’s decision to reduce the benchmark rate to 11.25 % is expected to stimulate economic activity; the reduction represents a total decrease of 300 basis points since October 2016, when the relaxation cycle of monetary policy began. Further reduction of the interest rate is expected for the coming months, in line with inflation reduction. In March, prices continued to fall, and the annualized rate was 4.57 % In Chile, economic activity faces a difficult scenario. During the fourth quarter of 2016, the annualized growth rate of economic activity was barely 0.5 %. In addition, the 43-day strike in Chile’s main copper mine, responsible for 20 % of the national production, contributed to a 17 % fall in the sector in February. It will certainly have repercussions

Low Productivity, a Drag on Economic Growth

on the country’s economic activity, contributing to a possible fall in GDP during the first quarter of the year. The unemployment rate in the country was registered at 6.4 % for March, accumulating three consecutive months of increase. To contribute to economic recovery, and given that inflation is within the targeted level—with an annualized rate of 2.7 % recorded in March— the Central Bank reduced the benchmark monetary policy rate by 25 basis points, to 2.75 %, at its last meeting.

Latin America is one of the regions with the lowest productivity growth, which is a matter of concern, since the changing population structure will reduce the expected rate of growth for the region in the coming years. Latin America grew an average of 2.9 % during the 2000–2015 period. It is estimated that on average, 78 % of this growth was due to the growth of the labor force, given the population pyramid in the region. The remaining 22 % was due to productivity growth. In other words, while labor grew on average at a rate of 1.7 %, productivity did so at a rate of only 0.6 %. If this trend continues, considering that the number of persons entering the labor force every year is in decline, the rate of economic growth in the region will be reduced significantly in the coming years.

In Colombia, the Central Bank reduced its benchmark rate by 25 basis points in March, to 7 %, which equaled the reduction in February. Inflation is expected to reach the target of 4 % by the end of the year; currently, there have been nine consecutive months of reduction, which was registered at 4.69 % in March. On the other hand, the rate of growth of economic activity registered during the last quarter of 2016 was 1.6 %, well below the average growth recorded in the last 15 years, which was 4.11 %. ❚

The table shows the growth of GDP per employee, giving the average by region and for a selection of countries, as well as for the United States, as a reference point. Within the region, it is important to highlight the productivity growth in Panama and Peru; it increased at an average rate of 4.5 % and 3.1 %, respectively; both countries were successful in closing the productivity gap with the United States. In spite of this growth, both countries achieved an increase of only 13 % and 4 %, respectively, in relation to the United States.

with the United States, the largest of the countries shown. It is imperative that Latin America direct its attention to developing strategies to increase its productivity. Among other strategies, it should consider increasing the quality of its educational programs, strengthening the rule of law, providing incentives for the generation of formal jobs, and improving the business environment. ❚ Average growth GDP per employee 200-2016

GDP per employee, relative to US 2000

Latin America

0.6 %

29 %

26 %

-3

Argentina

0.9 %

21 %

20 %

-1

Brazil

0.6 %

30 %

27 %

-3

Chile

1.0 %

45 %

43 %

-1

Colombia

1.1 %

26 %

25 %

1.1

Mexico

0.0 %

42 %

34 %

-8

Panama

4.5 %

29 %

43 %

Peru

3.1 %

17 %

21 %

U.S

1.3 %

100 %

GDP per employee, GDP per employee, relative to US relative to US 2016 Difference

In the rest of the region, GDP per employee grew at a much lower rate, or not at all, as is the case of Mexico, where there is an 8 % increase in the productivity gap MGI(2017). Where Latina America´s Growth Will Come From?

Source: Own estimation with data from WDI, World Bank. GDP per employee dollars PPP, 2011.

Brazil Reduces Its Public Deficit

Raw Materials Revalued Although the prices of the main raw materials exported by Latin American countries have shown a moderate recovery since 2016, it is far from reaching the average levels of the period between 2010 and 2013, the highest in the commodity cycle. The price for soybeans, Brazil and Argentina’s main export product, has shown an increase of 8.4 % from its lowest price in February last year. Copper, Chile’s main export product, shows a price gain of 28.3 % since January 2016. The biggest gain has been in crude petroleum, whose price has increased 130.2 % in the last twelve months. ❚

Export Commodity Price index (January 2010=100) 250 200 150 100 50 0

2010

2011

Soybean

2012

2013

Crude petroleum

2014

2015

2016

Copper

2 Source: Bloomberg, spot price. Through March 31, 2017. Crude petroleum refers to MME (Mexican Export Mix)

BREVIS

Brazil managed to reduce the public deficit as a percentage of GDP in 2016. While a deficit level of 10.2% was reached in 2015, the strategy implemented was able to reduce the deficit to 8.9%, according to the Central Bank of Brazil. However, it remains high relative to the level recommended internationally, of no more than 3%.

Meanwhile, government debt rose again in 2016, to 69.5% of GDP. The Brazilian economy undoubtedly faces difficult challenges this year to improve macroeconomic figures, especially when little or no growth is expected for the year. ❚

80 70 60 50 40 30 20 10 0 -5

2010

2011

2012

2013

2014

2015

2016

-10

Government Budget/GDP

Government debt/GDP

Source: Central Bank of Brazil.

BREVIS

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