The necessary digital transformation in Latin America (Note)

Purpose of the article: To understand the extent to which digital transformation can be a driver of growth in a region where the economy has been sluggish for several years. It also aims to identify the challenges that the region must overcome in order to successfully complete this transformation.

Summary :

• From 2014 to 2019, GDP growth in Latin America and the Caribbean (LAC) averaged only +0.5% per year, and in 2020 the region recorded the sharpest decline in economic activity relative to other regions of the world.

• The region’s total factor productivity is now below its 1960 level, and its contribution to GDP in recent years has been negative.

• Digital transformation represents an opportunity to increase growth potential through the productivity gains it could generate.

• Countries in the region face many challenges in accelerating digital transformation. Infrastructure, modernization of the education and training system, digitization of businesses, and cybersecurity should be among the priorities of governments.

In the years 2000-2014, the increase in the pace of growth in Latin America and the Caribbean (LAC) gave rise to a certain optimism. Unfortunately, this illusory growth, mainly due to rising commodity prices, gave way to disillusionment. Against a backdrop of falling international prices, recent years have revealed the region’s structural weaknesses (lack of diversification in the productive fabric, macroeconomic imbalances, structural poverty, lack of competitiveness, etc.).

The Covid-19 crisis has further reinforced this sad reality. But while the prospects for recovery are relatively limited, it is necessary to identify the levers that will increase growth potential. It is in this context that the digital transition offers a window of opportunity that LAC cannot afford to miss.

1. The region caught in the middle-income trap

Although the years 2000-2013 generated a certain amount of optimism in the region, with average annual growth of around +3.2%, this remained below the global average (over 5%). Nevertheless, this period was marked by improvements in many indicators, such as the Human Development Index and the poverty rate. However, the following years broke this fragile momentum. Growth fell to an annual average of +0.5% between 2014 and 2019, penalized by falling commodity prices. Poverty then increased and some countries returned to their old demons (inflation, repeated recessions, volatility, political instability, public debt crisis, etc.).

In 2020, LAC was the region hardest hit by theCovid-19 crisis, which resulted in the worst economic depression in 120 years with a 7.5% decline in GDP (vs. +3.5% globally). Although the IMF forecasts growth of +4.1% in 2021 and +2.9% in 2022, the recovery will be very disappointing and below the global average (+5.5% and +4.2%). According to the Economic Commission for LAC, the region will only return to its pre-crisis GDP level by 2023.

2. Digital transformation stimulates productivity gains

Digital transformation (DT) refers to the use of new information and communication technologies (NICT) to collect, store, analyze, and exchange information (according to the French government’s definition). It improves productivity gains[1] and growth potential. DT could therefore play a key role in the post-COVID recovery.

Broadband, cloud computing, the Internet of Things, big data, e-commerce, artificial intelligence, robotization, etc., increase business productivity. They enable tasks to be automated, processes to be simplified, teleworking to be used, customer data and relationships to be better managed, logistics to be optimized, etc. In addition, the digital economy promotes the digitization of government, which is necessary to facilitate entrepreneurship and reduce the bureaucracy that weighs on businesses. According to the World Bank’s Ease of Doing Business ranking, in 2019, it took about three times longer in LAC than in OECD countries to start a new business.

The multifactor productivity[2] of LAC is now lower than its 1960 level. Between 2003 and 2016, its contribution to GDP was even negative (-0.5%)[3]. In terms of labor productivity, growth remained weak between 1950 and 2019, and the gap with developed countries widened.

Regional productivity is hampered by specialization in low value-added sectors (raw materials) and low use of ICT in the rest of the economy. Only 18% of businesses used e-commerce[4] and 40% of micro-enterprises did not have an email address. A 1% increase in the Latin American Development Bank’s digitalization index would lead to a 0.32% increase in GDP thanks to productivity gains[5].

In terms of digitalization, LAC lags significantly and persistently behind developed countries, even though it is making progress. In 2018, the Latin American Development Bank’s digitalization index was 51/100 (compared to 34 in 2010) and 72 on average for OECD countries (compared to 54 in 2010). The pandemic has accelerated digitalization, as shown by the explosion of e-commerce and teleworking, which remains limited (only 22% of jobs can be done remotely, as informal employment still accounts for nearly 50% of jobs in the LAC region).

3. Accelerating digital transformation to rebuild a dynamic and resilient economy

According to projections by the Latin American Development Bank, in 2030, LAC will have the same level of digitalization as OECD countries in 2015. In other words, the region is lagging behind by about 15 years, hence the need to accelerate digital transformation.

First, it is necessary to increase investment in telecommunications infrastructure. Before the COVID-19 crisis, Latin American countries invested $483 PPP[9] per capita in broadband (very high speed) network infrastructure, compared to $852 for OECD member countries. In 2019, this represented 68% of fixed internet connections and less than 50% of mobile internet connections, with download speeds more than twice as slow as the OECD average (32 vs. 71 Mbps).

In order to catch up with developed countries, the region would need to invest USD 160 billion between 2021 and 2025, compared to the USD 100 billion currently planned (i.e., USD 12 billion more per year). Furthermore, in 2019, 2G and 3G still accounted for 66% of connections, and the rollout of 5G will be very slow
(7% of connections in 2025 compared to 48% in North America and 34% in Europe[10]). It should be noted that in 2019, 34% of the regional population, or more than 250 million people, did not have access to the internet, compared to only 13% in high-income countries[11]. However, this rate is falling rapidly, as it was still 49% in 2014.

Itis urgent to modernize education and training. Indeed, NICTs are accelerating the process of destroying obsolete sectors in favor of creating new ones. According to the Economic Commission for Latin America and the Caribbean, in the coming years, 16% of jobs are at risk of disappearing, replaced by technology (gross figure without taking into account new jobs created by NT).[12]. Workers in obsolete sectors are therefore more exposed to the risk of unemployment, hence the importance of reallocating human capital, without which it will be more difficult to benefit from the productivity gains generated by DT.

The education system must guide students towards the higher value-added activities of the future, yet many schools do not even have access to an internet connection (26% compared to 5% in OECD countries)[13]. Furthermore, in 2019, 58% of school principals with 15-year-old students felt that their teachers were not sufficiently trained to integrate ICT into their various lessons[14]. Professional training must also be strengthened, as more than half of adults did not have sufficient knowledge to perform basic computer tasks.

Modernization necessarily involves equipping schools (with computers and software), strengthening study programs adapted to the new needs of the labor market, and, of course, training teachers and workers in the use of NICTs. Given the low budget margins available to LAC countries, certain expenditures should be redirected toward these investments. It should be noted that distance learning tools can reduce the costs of training teachers and workers. At the same time, the region can rely on development banks or aid programs (Europaid for the EU), some of whose funding lines are specifically dedicated to projects related to education and employment.

Beyond the economic aspects, governments must promote the use of NICTs and innovation. Government leadership is essential to bring about cultural change. People need to be made aware of the opportunities available to them (better employability, wages, and working conditions). Businesses also have a role to play, recognizing that investing in employee training can make them more competitive and innovative.

In addition, companies should be supported in their digitalization process. NTIC must include micro-enterprises, which represent 90% of the business fabric and 28% of the region’s GDP. The deployment of NICTs can improve the competitiveness of SMEs, facilitate their internationalization, and promote innovation, but it faces a lack of financial and human resources. Once again, the thorny issue of financing arises, but some actions are feasible without placing an excessive burden on public finances. Countries can, for example, open preferential credit lines to finance the digital transformation of their businesses. At the same time, organizations such as chambers of commerce can strengthen face-to-face or distance training for employees and entrepreneurs. The latter need to understand why and how to integrate NICTs. Development aid programs are also very useful. For example, the Europaid program launched a call for tenders in 2018 to promote the DT of SMEs in Guatemala.

Cybersecurity is a major issue in a context of growing hacker attacks. According to Deloitte, between 2017 and 2018, 40% of companies in LAC were victims of cyberattacks. However, in 2020, only one in five countries in the region had developed a national cybersecurity strategy, while LAC performs poorly in the global security index ranking (the first major country, Mexico, appears in^63rd position out of 175).

Digitalization is the subject of national plans in most countries, but these are not necessarily well calibrated or properly implemented. The Digital Agenda for Latin America and the Caribbean was created to promote cooperation and encourage the exchange of best practices.

Conclusions

In the context of the post-COVID-19 crisis, digital transformation appears to be a unique opportunity to increase the growth potential of Latin America and the Caribbean, thanks to the resulting productivity gains.

However, despite some notable progress, the region continues to lag behind OECD countries. It is therefore all the more important to put in place a policy aimed at significantly accelerating the digital transition. Investment in infrastructure, modernization of the adult education and training system, cybersecurity, and regulation are among the main pillars on which the digital strategy must be based.

Bibliography

« Perspectivas económicas de América Latina 2020 transformación digital para una mejor reconstrucción » (Economic Outlook for Latin America 2020: Digital Transformation for Better Reconstruction), 2020, Economic Commission for Latin America and the Caribbean (UN).

“Digitalization: A key to future growth in Latin America,” 2018, Latin American Telecommunications Study Center.

“Digital Divide and Opportunities for a Regional Digital Market in the Post-Pandemic Era,” 2020, CAF

“Productivity: SMEs and Digital Transformation,” 2020, Latin American Development Bank.

“The urgent need for digital transformation in Latin America,” 2020, Entrepreneur.

“The Mobile Economy,” 2020, GSMA

“Individuals using the Internet (% of population) – Latin America & Caribbean, High income,” World Bank

“One in four companies in Latin America suffered cyberattacks in the last two years,” 2021, Semana

“This is the state of digital security in Latin America and the Caribbean,” 2020, El Espectador.