Breaking Away from Complacency: An Agenda for Resurgence

This book presents a long term vision of Latin American society and economies, within which current policy debates and actions must be anchored. It presents a set of multigenerational issues that must be tackled in order for countries in the region to reduce inequities, as well as raise their economic growth rates. The authors provide insight and advice regarding: budgetary policy and management, poverty reduction, macroeconomic policy coordination and integration, labor market policy, long-term macroeconomic reforms, innovation and technological development, infrastructure needs, regional cooperation and trade, and governance and political sustainability. This book provides an analysis of the challenges facing economic growth, equality, public safety, education, competitiveness and technology and innovation. In doing so, the authors analyze the reasons for Latin America’s underperformance during the past 30 years, highlighting the issues related to unsustainable economic, social and political policies. The analysis is based on an innovative instrumental-variable-based structural equation model, developed by the Centennial Group. It is used to project the infrastructure needs of 21 countries for 10 sectors through 2040 under alternate growth scenarios. Latin America 2040 presents a strategy to realize the vision for rapid economic growth and faster reduction in disparities during the next three decades by sharply raising their growth rates while achieving more inclusive societies. It offers an agenda for what Latin America’s national leaders, policy makers and private businesses must do to regain the regions past momentum and achieve a much needed resurgence. A Spanish translation of the book will be available in October 2011. A companion video, based on the key messages of the book, can also be viewed.

xiii LIST OF FIGURES, TABLES AND BOXES 2 Share of World Exports 3 Export Growth (annual percentage average) 4 Intra-regional Trade 1980Trade -2007 percent of total trade for the region unless specified) xiv Foreword During the past decade, most Latin American countries demonstrated sound macroeconomic management which, accompanied by significant social initiatives and substantial microeconomic progress as well as favorable international economic conditions, generally led to sustained growth and improved social conditions throughout the region. Although these factors helped Latin America weather the global crisis which began in 2008 relatively well, it was also evident that our region continues to be very vulnerable to external shocks and very dependent on what happens in the financial and commercial markets of the world economy. This strengthens our conviction that there is no room for complacency among Latin American leaders and policy makers regarding our current economic and social situation.
Indeed, the region still needs to address important structural challenges if it is to attain truly sustainable levels of social, economic, environmental, and political development. These challenges include the enormous social disparities that continue to prevail in the region, the low levels of domestic savings and investment, the excessive concentration on exports of raw materials and other low value-added commodities, and the relative lack of competitiveness and productivity of the region's industries, compared with other regions of the world. To a great extent, these structural challenges explain why Latin America has increasingly lost relevance in the world economy during the last 40 years, especially as the Asian economies have advanced most dynamically.
For these reasons, with the encouragement of its shareholder countries, CAF launched a year-long process to develop a vision for the longer-term social and economic development of our region, as part of its 40th anniversary activities. The basic idea is for diverse groups of policy-makers, academics, business executives, civil society, etc., to reflect on a series of development related topics from a Latin American perspective. The underlying premise is that there are no intrinsic barriers to Latin America's emulation of the success of East Asian economies in the past fifty years, and of China and India more recently, and that CAF has a proactive role to play in helping the region attain its potential.
To develop such a longer-term vision for Latin America and to learn from the Asian experience, we commissioned Centennial Group International to prepare a study called Latin America 2040: Breaking away from complacency, an agenda for resurgence. This study represents an important first step in developing a long-term vision for the region's development, and lays the groundwork for a revision of CAF's own corporate strategy for the long run. Centennial Group International presented the study at xvi FOREWORD a meeting of CAF's Board of Directors and other major stakeholders in early July of this year, where it was well received. This book is based on that study and reflects some of the comments and suggestions made at the meeting.
I believe that the study presents a compelling and yet realistic vision of what Latin America can become within the next thirty years-that is within one generation-should the national leaders, policy makers, and private businesses tackle the daunting policy and institutional reforms agenda identified by the authors. Indeed, the study exceeds my already very high expectations when we commissioned it, given the talent and experience of the 12-person team that worked on this project. I congratulate the authors for the candid but respectful manner in which they have: traced Latin America's underperformance relative to the dynamic economies of East Asia; explained in plain language the basic reasons for the differential economic and social performance of the two regions; and suggested what Latin America must do to regain its past momentum and achieve a much needed resurgence.
I recommend the book to everyone-within and outside the region-interested in the long-term economic, social and political development of Latin America. They will find the book both thoughtful and thought provoking. Finally, we are grateful to Mr. Enrique Garcia, President, and Luis Enrique Berrizbeitia, Executive Vice-president of CAF respectively for their inspiration and encouragement provided-and insistence on intellectual integrity demanded during the preparation of this work. Throughout the twentieth century and continuing today the region has been building modern physical and institutional infrastructure at national and regional levels, to leverage these natural advantages. Since the 1960s the region has also invested in regional infrastructure including the Pan American highway, which links Mexico in the north to Chile in the south (90 percent complete) and the regional hydro-electrical complexes in the Southern cone. It has set up numerous regional and sub-regional institutions and coordination mechanisms. Consequently, until the late 1970s, Latin America was generally regarded as the developing region with the greatest promise, while Asia was not only the poorest region, but also judged as both socially and politically fragile.

Recent Economic and Political Developments
After suffering repeated economic crises from the 1970s to the early 2000s, Latin America, along with most other regions, entered a new era of economic progress and robust growth during the past eight years. This improved economic performance has generated a welcome combination of self-satisfaction and optimism in the region after almost two decades of pessimism. The following indicators illustrate the recent progress: • Despite expected major variations between countries, the region as a whole enjoyed an aver- • Unlike previous periods of high growth, the latest episode was not accompanied by higher inflation or external imbalances. This hard won price stability should yield major benefits over the longer term through increased consumer and investor confidence, hopefully leading to higher savings and investments rates (provided that they are accompanied by improvements in business climate and deepening of financial systems).
• During the last few years, good progress was achieved in another major social and economic problem plaguing the region: huge disparities in incomes and living standards. Since 2003, there was a noticeable decline in absolute poverty and a reduction in inequities in many countries including the two largest economies, Brazil and Mexico.
• The region as a whole has weathered the latest global economic and financial crisis reasonably well though Mexico and some countries in Central America were hard hit initially. Unlike the OECD countries and some developing regions (such as Central and Eastern Europe), overall Latin America suffered a much more modest slowdown in economic activity. Its financial systems withstood the storm quite well. Many countries have recovered well, though the region remains exposed to the volatility of global conditions. Having finally secured macro-balances and price stability that had eluded it for so long, the region can now focus on policies and issues important for its longer-term growth and well being. This is the focus of this book.

Longer Term Performance and Comparison with East Asia
The above-noted progress in absolute terms during the past few years is both real and laudable.
But, it must not obscure the fundamental longer-term trends and issues that Latin America faces.
A review of Latin America's longer-term performance paints a much more sombre portrait. It portrays a region that has essentially been stagnant relative to the rest of the world through the 1990s, and only keeping pace with others since. It is a region that suffers the highest disparities in the world, and that is steadily losing, and may have already largely lost, its long standing position as the world's most advanced and prosperous developing region. Consider the following facts: • In 1965, Latin America accounted for 6.6 percent of global GDP. Forty years later, in 2005, it had only 5.8 percent ( Figure 1). In other words, while Latin America's real per capita income rose between 1965 and 2005 by 91 percent, so did it for the world as a whole, leaving the region no better (and actually worse) in relative terms after forty years. While the region generally did better than the world in the 1960s and 70s, it experienced lower average real GDP growth than the world since the 1980s (though the trend now seems to be reversing itself) Note: These GDP shares are based on Madisson's historic GDP numbers, which are calculated in 1990 International Geary-Khamis dollars to reflect purchasing power parity. As such, they differ slighly from the shares presented in the text, which are calculated based on nominal GDP in the goven year, but the trends remain the same. For example, Latin America's share of world GDP in 1965 is 6.6 percent using nominal terms and 8 percent using Madisson's PPP terms.

Emerging and developing world
Latin America World 5 EXECUTIVE SUMMARY to 11.2 percent.
• In general, the ups-and-downs of Latin America's importance in the world economy have followed the cycles of commodity prices rather than reflecting sustained self-generated development.
• In 1981, Latin America accounted for 35 percent of emerging and developing country GDP.
In 2011 • Perhaps the single most troublesome longer-term issue is that Latin America has been the most prosperous developing region for almost a hundred years, but it suffers from the highest disparities of income, even higher than in Africa. Despite the recent progress cited above, the disparities today essentially remain as large as forty years ago. These disparities are a hidden and ticking time bomb that can destroy the very social and political fabric of the region.
There are two basic messages here. First, most countries in Latin America-with the exception of Chile-have stopped converging with the United States (in the last few years Brazil has regained growth momentum but it is too soon to say whether this is a longer-term trend). Second, Latin America is gradually but steadily surrendering its leadership of the developing world to Asia.

Are Latin American Economies Mired in the Middle-Income Trap?
The inability of the Latin American economies to further close the productivity and income gap with developed countries during the past forty plus years suggests that the region has become mired in the "middle income trap" (Box 1). Their persistent subpar performance is a sharp contrast to that of most Asian economies.
Asia's recent superior performance can be explained by many "technical" aspects, such as its much higher savings and investment rates, better human development, export orientation, better global competitiveness and cost of doing business rankings, etc. However, we believe that Latin America's fundamental problems arise from deeper structural weaknesses, lack of an effective longterm development strategy, past focus on short-term issues and, above all, an ideological approach to policy.
Few countries sustain high growth for more than a generation, and even fewer continue high growth rates once they reach middle-income status. Some features differentiating growth beyond middle-income from growth from low-income to middle income are clear. Growth tends to become more capital intensive and skill intensive. The domestic market expands and becomes a more important This seems to be what has happened to Latin America. For example, Mexico's economy grew at an average annual rate of about 6.6. percent over the 30 years from 1950 to 1980 but slowed to an average annualized rate 2.4 percent in the subsequent 30 years, from 1980 to 2010. Likewise, Brazil's growth averaged about 7.1 percent a year in the thirty years from 1950 to 1980 but slowed to average of 2.0 percent from 1980 to 2000 (although it has improved substantially in recent years). In many Latin American countries, wages are too high to be globally competitive in basic manufacturing . The collapse of the region's garments producers after protection was withdrawn is proof of that. Yet, Latin America does not have the research and development capabilities that allow it to develop new products in advanced areas (exceptions are by now familiar: For example, Embraer in Brazil).

Importance of the Middle-Class in Fuelling Growth
In some middle-income countries, the domestic market can complement export markets as the economy matures and the local market becomes large. In most countries, domestic consumption typically starts to grow quickly when incomes per capita reach around US$6,000 in PPP terms. This did not happen in Latin America, perhaps because of its relatively small middle class.
Compare Brazil with South Korea, for example. Brazil's growth started to slow after 1980, when it had reached a per capita income level of US$7600 (PPP). At that time, its middle class, defined as households with incomes of between US$10 and US$100 per capita per day, was just 29 percent of the population. This made it impossible for the middle class to drive further growth. In contrast, South Korea's income per capita reached US$7700 (PPP) in 1987. By that time, South Korea's evenly distributed growth had produced a sizeable middle class, which accounted for 53 percent of the population.
The country capitalized on the demand from this large middle class to grow its service industries and create the building blocks for a knowledge economy. Today, 94 percent of Korea's population is middle class.
The middle class can provide an impetus for growth in ways other than just consumption demand.
For example, the middle class typically values and demands a high-quality education for their children.
The causal channel is less important than the suggestion that distribution plays an important role in sustaining growth.

What Makes East Asia Different from Latin America?
Latin America's loss of its long standing position as the most prosperous and promising developing region is best illustrated by comparing its economic and social development relative to East Asia in general, and the so called NICs more specifically.
Between 1965 and 2011, the real per capita income of the NICs grew at an average annual rate of 5.6 percent, while Latin America recorded a real per capita growth rate of only 1.8 percent. As a result, in terms of per capita income, the NICs-that lagged well behind Latin America in 1965 (US$2,087 vs. • Political leaders in East Asia are intensely focused on economic issues and are not preoccupied with geo-political issues or ideological debates. This is in sharp contrast to Latin America. • All successful East Asian countries, as well as China and India, have achieved major gains in total factor productivity (TFP) while Latin American countries have remained relatively stagnant. From 1980-2012, the two largest economies (Brazil and Mexico) have even regressed somewhat (Figure 3).
• East Asian countries have much higher savings and investment rates than Latin America (savings are 46 percent of GDP in developing East Asia vs. Latin America's 21 percent 4 ).
• East Asia has placed much greater emphasis on human development and put a high premium on meritocracy in its education system. It has achieved, in relative terms, much higher educational standards, and graduates a significantly higher number of engineers, scientists and doctors than Latin America.
• East Asia's investment, public as well as private, in infrastructure has been much higher than in Latin America, and it has deeper financial markets, particularly non-bank financial institutions. • Intra-regional trade (over 55 percent of total trade) and investment (FDI) flows in East Asia approach European Union levels and are much higher than in Latin America (around 20 percent, excluding the US). Unlike the EU, these flows are market-and not policy-driven thanks to extensive production networks developed by private businesses. Latin America has few if any such production networks (except between Mexico and the US).
Latin America in 2040: Under "Business as Usual" Scenario How would Latin America look if the trends of the recent past were to persist over the next thirty years?
According to our model of the global economy, under the "business as usual" scenario, Latin America would grow at about 3 percent a year (in real terms), and 2.3 percent on a per capita basis. to narrow the historic difference in its growth rate with that of Asia?
While it is not realistic to assume that Latin America can suddenly grow at the same rate as the leading economies-China and India-we have developed a scenario under which the region cuts by half its current differential with East Asia (and China and India) and lifts its growth to about 6 percent in market exchange rates (or 4.7 percent in real terms) a year between now and 2040 (we assume that Mexico and Brazil would manage to escape the middle income trap and move from being nonconvergers to join the convergers category).
Under this scenario, the size of the region's economy by 2040 (in real terms) would be almost four times its current size. Its share of global GDP at market exchange rates would rise to 14 percent, not including a possible impact of a secular appreciation of the currencies of the region on the basis of increases in productivity. This will allow the region to retain its position as one of the most prosperous developing regions (though this will still not allow the region to catch up with the NICs).
If Latin America can develop along such a "prosperous scenario", it would sharply reduce poverty within 20 years. Currently, under the World Bank's US$1.25 a day poverty threshold, the region had some (60) million poor in 2008. If the region sustains income growth at 6.5 percent, some 3 million people could be lifted out of poverty every year. Equally important, as discussed below, this higher economic growth can be achieved only by successfully tackling the current inequities. This success, combined with rising average per capita income, would bring a much greater sense of optimism and commitment to shared prosperity amongst all segments of society. It is the only way to ensure social cohesion and peace in the region.
The region's leaders and public must embrace and strive for this scenario of a more equitable and prosperous Latin America. Only then will the region continue to close the gap with OECD countries and keep pace with the successful Asian economies.

A Shared, More Ambitious Vision for the Region
Given Latin America's rich natural endowments, there is no reason why Latin America cannot do as well as East Asia. Indeed, as demonstrated by the successful Asian countries, the region's destiny is firmly dependent on its own actions. Only through its own efforts will the region prosper.
To do so, all concerned-governments, bureaucracy, the business community, academia, think tanks, media and other opinion makers as well as multilateral agencies active in the region-must adopt a focus on simultaneously achieving a much more inclusive and equitable society and much higher economic growth. The region's leaders must aim much higher, be pragmatic and focus singlemindedly on achieving this vision.
Such a vision, and a commitment to realizing it, must be shared both within the countries themselves and across the region as a whole. This commonly shared vision must be accompanied by a very different mindset across the political and social landscape: abandonment of the past ideological divides and adoption of pragmatism, as has been the case in East Asia.
A main characteristic of the economic history of Latin America has been the emphasis on ideology and ideological policies, as opposed to Asia's emphasis on outcomes. In the past, policies have been formulated on the basis of economic theories under the assumption that results would follow automatically over time. Over the last quarter century two schools of thought have prevailed. According to both the standard reform-oriented Latin American model and the alternative heterodox model, if policies are right, growth will follow ultimately. In the first case the assumption is that markets will provide an adequate response to policies. The heterodox model questions the market approach of the Washington Consensus but also assumes that the alternative interventionist policies will yield growth and equity.
Under both ideological camps, no significant modification of policies was considered irrespective of the results. More often than not, popular support for the policies collapsed over time because of the ideological adherence to a rigid interpretation of what would be the "right" economic model and policies even when they failed to produce expected results, mainly because of a narrow interpretation of the models.
A major lesson of the Asian success in the past fifty years is that Latin America needs to pursue a more pragmatic and non-ideological set of policies, based on strong market principles and measured government intervention, but with the understanding that the policies should be aiming at attaining commonly agreed social objectives and economic outcomes. Under this pragmatic approach, policies and the right mix of government-private sector association would be adjusted as needed to realize the outcomes sought under the shared vision (while respecting the principles of good governance, transparency, and with a good understanding of the costs of these policies).
Of equal importance, there must be a consensus on policies and objectives within the region to achieve effective complementarities between individual economies by helping integrate across the region. This is in contrast to the current practice, where polices in one country are often introduced at the expense of others rather than seeking to exploit the comparative advantages of each country for an effective integration with the rest of the world.

Realizing the Shared Vision
Given the diversity of the region and differing resource endowments, human capital, structure and efficiency of individual countries as well as vastly differing institutional capacities, it is neither prudent nor possible to lay out a detailed strategy for achieving this common vision across the entire region.
That can only be done at the level of each individual country.
However, learning from the region's own experiences in the past forty years and contrasting them with East Asia, it is possible to define the broad contours of the strategy required to achieve this more ambitious vision. In our view, to realize the above vision Latin America needs to adopt a strategy that comprises three complementary pillars: • More inclusion • Higher productivity • Greater competition and openness (within Latin America and towards Asia) 13 EXECUTIVE SUMMARY Importantly, actions under these three pillars will need to be underpinned by improved governance and accountability for results.

Achieving a More Inclusive Society
Latin America has recently made important strides in improving the conditions of its poor.
Nonetheless, income and wealth distribution remains highly skewed. Politically and socially the current situation is unsustainable over the long term. Tackling  is much more inclusive, will there be realistic prospects of high sustained and sustainable growth over time for Latin America, as has been achieved in Asia.
Thus, striving for a more inclusive society promises a win-win situation, and not one where there is a trade-off between growth and equity. The fundamental approach to achieving a more inclusive society will involve the removal of numerous current structural inequities by: • Providing access to quality education and other public services including rural infrastructure, • Breaking the current economic dominance by entrenched vested interests, and • Ensuring jobs and finance to those who are today left at the margins of the society.
Such an approach must be clearly additional to the ongoing efforts in countries such as Brazil and Mexico that have been generally successful in reducing poverty and indigence.
Towards this goal, this book focuses on four priority areas: i) basic and secondary education; ii) infrastructure; iii) "inclusive" innovation and technological development; and iv) governance.
This list is by no means comprehensive but, in our view, includes the most critical issues requiring immediate attention by the region's political leaders and policy makers.
At the same time, Latin America must pay much more attention to the looming problems of environmental degradation, rising crime, and corruption. These issues, however, are not covered in this book.

Sharply Enhancing Productivity
The key to achieving a higher growth rate on a sustainable basis and to converging with the developed economies lies in sharply enhancing productivity and competitiveness of Latin American economies. Unfortunately, as noted above, the region has not been able to improve its total factor productivity. Indeed, the two larger economies-Brazil and Mexico-have even regressed. This must be reversed.
Improved productivity and competitiveness would in turn help Latin America to achieve much higher economic growth than it has managed in the past forty years (or even the last five years), while loosening the historic dependence of its economic fortunes on the ups and downs in international commodity prices. This will require much more emphasis on: • Improved human capital, • Better business environment, • Much higher investment rates necessary to transform the structure of production of goods and services in light of the changing global economic environment, and • More innovation and technological development.
In our view, a better business environment is the key to unlocking the virtuous cycle of greater efficiency and competitiveness, higher business confidence, increased private investment, higher domestic savings and improved productivity. India's recent higher investments, savings and the resultant economic growth rates can be traced back to the major economic reforms undertaken starting in 1990 that significantly improved the business climate. With most of Latin America is finally enjoying macro economic stability, improvements in the business climate could add equally impressive results albeit with some time lag.
Again, without attempting to be comprehensive, this book presents suggestions in three priority areas: i) infrastructure (particularly physical connectivity and energy); ii) tertiary education, innovation and technological development; and iii) governance.

Promoting Greater Competition and Openness to Neighboring
Economies, Towards Asia, and to Global Economy The third pillar of the new strategy for the region should be the promotion of much greater competition, both in internal markets and with external sources. Given the relatively smaller share of trade in total GDP, Latin American countries must give the highest priority to enhancing domestic competition, starting with dismantling of monopolies-whether public or private-and enforcement of well-structured competition laws. In parallel, there is a need to promote and facilitate much greater openness to other countries in the region, closer links with fast-growing Asia that is emerging as the new center of gravity of the world economy, and dismantling of remaining barriers to trade and investment with the global economy as a whole.
For many decades, Latin America was characterized by an overwhelming presence of government in economic activity (as was the case in many other regions of the world), well beyond a regulatory role. The situation changed dramatically starting in the 1970s in Chile, and in subsequent decades in many countries including Argentina, Brazil, Colombia, Mexico, and Peru. Most importantly, during this period there was a major effort at privatizing many activities that were not considered as central to the role of the state or of strategic relevance. There were many different methods pursued for the sale of government assets, some of them seriously flawed. In some circumstances, public monopolies were replaced by private monopolies. Several industries continue to be dominated by one or very few companies and, frequently, the dominance in the market is accompanied by restrictions on imports 15 EXECUTIVE SUMMARY of goods and services, or limitations to investment in specific areas, and thus helps consolidate the monopoly power of the companies. Improved domestic competition thus remains a work in progress in the region. While it is beyond the focus of this book to deal in depth with the specific area of domestic competition, the consolidation of the competitiveness and productivity aspects of economic policy rest in significant part on the opening of markets. A further push in the process of privatization, of improved regulations and opening of markets, as well as government sector productivity enhancements would go a long way in helping the region in attaining a more effective growth path in the future.
In parallel with measures to enhance domestic competition, Latin American economies must also pursue two avenues to improve their trade performance in support of accelerated growth: regional cooperation leading to expanded intra-regional trade; and continued diversification of export markets beyond North America and Europe and of export products beyond the dominance of commodities and fuels (except in the case of Mexico).
Latin America lags far behind Europe and Asia in regional cooperation, particularly as measured by intra-regional trade. There are three basic reasons for which the Latin America region should seriously consider significantly enhancing intra-regional trade, including through improved regional cooperation: i) to permit the economies to specialize, an important strategy to escape the middle income trap; ii) to overcome the reality that Latin America economies-with the exception of Brazil and Mexico-are small by global standards and thus do not have domestic markets large enough to permit the economies of scale needed by firms to be globally competitive; and iii) to allow local firms to take advantage of their superior knowledge and understanding of the needs of customers in the neighboring countries compared to the competitors from other continents.
Latin America must gradually reduce its dependence on the slow-growing economies of North America and Europe and develop much closer ties with the world's fastest growing region: Asia. The region also stands to make significant gains by increasing the value-added of its output and exports and, within manufacturing, to move up the technology ladder-a critical measure for getting out of the middle income trap and making progress toward high income status. Finally, dismantling of remaining barriers to trade with and investment from the global markets as a whole will be a very powerful vehicle to curb the current monopolistic power of large companies, to increase competition at all levels, and to spur innovation. This book includes specific suggestions actions in these areas.

Improved Governance: Focus on Results and Accountability
As with many developing economies, Latin America's Achilles heel is its poor governance in all its facets. Indeed, this overarching issue is the biggest hurdle to Latin America achieving a sustaining a more inclusive society and higher economic growth rate over the next thirty years.
A closer look at each and every crucial issue facing the region reveals that the most underlying problems are rooted in poor governance, and that without fundamental improvements in governance it will not be possible to tackle these issues effectively.
Most political scientists equate good governance with democratic governments. In our view, while a democratic political system is indeed highly desirable and Latin America has made marked progress in that direction, governance comprises of many facets that go well beyond the political system. The various facets of governance are intertwined with each other like pieces of a jigsaw puzzle.
Our own definition of governance comprises all facets of governance that affect economic management: role and focus of governments; importance given to economic and social development by the top political leaders and policy makers; delivery of quality and universality of basic public services (law and order, rule of law, education and health services); and focus on results and enforcement of accountability.
Specifically, Latin America must transform the following ten facets of governance in order to kick start the economies to achieve higher economic growth and make the societies much more inclusive: • Make economic and social development the primary focus of the political leaders and policy makers, not just in words but also in reality • Reverse the deterioration in political governance, while strengthening democratic institutions • Make governments smarter, more focused and more credible • Decentralize, where possible, both the authority and accountability for most public services to local bodies as close to the people as possible • Modernize and make more effective all institutions involved in economic management • Reform the civil service to meet the needs of modern economies and of democratic, more open and more inclusive societies • Improve the quality, honesty and credibility of all public services including the police, judiciary, education and health services • Actively promote and enforce competitive markets and prevent capture of state organs by big business • Inculcate a code of self discipline and ethical behaviour within the business community • Implement agreed policies and priorities, monitor results and enforce accountabilities at all levels of government (national, state and municipal).
Undertaking such a transformation of governance will require Latin American leaders to emulate the four characteristics that have distinguished East Asia from other developing regions: • Sharp and primary focus of political leaders and policy makers alike on economic issues • Ability to implement policy decisions • Insistence on achievement of results on the ground, and • Enforcement of accountability These and other facets of governance are discussed in more detail in the relevant sections of the book.

Advocating a More Ambitious Vision of Latin America:
CAF is in a unique position to help the region lift its sights and aim higher. It can fill a major void in the region that currently has no clear, ideologically-neutral and credible advocate for a more ambitious vision of long-term social and economic development of the region. Such a vision also must be 17 EXECUTIVE SUMMARY anchored in a clear strategy on how to realize it.
CAF is well positioned to do this: it is the only multilateral institution owned exclusively by countries within the region (except for Spain); is the largest multilateral donor in its countries of operations; has a reputation for not being wedded to any particular ideology; has a well-deserved image of being a "friend" of the member countries; and its leadership has direct access to the top decision makers throughout the region.
CAF can and should help forge the needed consensus amongst top political, policy and business leaders of the region: that the current economic and social prospects are both unsustainable and unacceptable politically as well as socially; that the region needs to focus much more on higher, more inclusive and sustainable growth; and that to do so the countries must adopt different strategies and policies in addition to adopting a different mindset.
Towards that end, CAF should become a vocal and persistent advocate of this new and more ambitious vision of Latin America. CAF leadership would need to assume a leading role in this effort, starting with face-to-face meetings with the political leaders and key policy makers. A major shortterm objective would be to help start a pragmatic, evidence-based and ideology-free dialogue on the region's economic performance amongst the top political leaders and decision makers in the region.
In addition, CAF could consider the following steps: • Discussion of the proposed new vision at forthcoming meetings of the region's political leaders, policy makers and top business executives.
• Launching of a coordinated media campaign to educate general public and build a grass roost support for the proposed changes in strategy, policy and mind set.
• Creating a network of professionally led think tanks with necessary critical mass of experts and each focused on a few of the critical issues highlighted in this book. CAF supported think tanks would be regional-and not national-in their focus.
• Reporting to the heads of state at their regular Annual Summits on the progress being made by Latin American economies relative to other regions of the world as well as on any common social and economic agenda adopted by them.

Realigning CAF Operations to Described Strategy:
As a leading advocate of a new, more ambitious vision for Latin America, CAF must also align its own operations to help realize this vision. But, in doing so it must not stray away from two key reasons for its past success: remaining pragmatic and focusing its core agenda on activities in which it already has or can develop a comparative advantage.
Keeping these factors in view, CAF should carefully review its potential assistance under each of the three pillars of the proposed new strategy for the region: a) achieving a more inclusive and cohesive society; b) helping achieve and sustain higher productivity and economic competitiveness; c) and enhancing competition and openness, including through greater regional cooperation and openness to Asia.
In addition, CAF must give greater priority to environmental and climate change issues.
CAF operations already are aimed to achieve many of these adjustments. Therefore instead of starting anew, in many areas CAF will need to make only modest adjustments or put greater emphasis on some existing activities (e.g., infrastructure development and regional cooperation). But, there are also some areas that are not yet covered adequately by CAF and need to be added to the array of its core activities (articulation of a new vision for the region; addressing inequities; and promoting stronger links with Asia).
CAF should consider the following areas for particular emphasis under the above three pillars: • Achieving a More Inclusive Society: Five priority activities fit well with CAF's existing strengths and should be emphasized more in its operations: • rural roads • 24/7 power supply to all • widespread access to the internet • low cost housing • micro-finance In addition, CAF should consider adding two aspects of education that will involve only modest investment of CAF resources but could have a major impact on the quality of education in the region over the long term: a) training of teachers (including primary school teachers); and b) a program to systematically measure education quality at the primary, secondary and tertiary levels across countries. If the results from these activities are positive, over the longer term CAF could consider adding education to its core activities, as is currently the case with infrastructure and regional cooperation.
• Sharply Enhancing Productivity: Historically, this has been CAF's core area of focus, with heavy emphasis on infrastructure development.
• The focus on infrastructure development should continue but with renewed efforts to assist the region increase overall infrastructure investment level to 4-5 percent of GDP, including through private sector participation • CAF's past excellent work on the region's competitiveness should be followed up with similar work at country level, and a special initiative to enhance the business environment on an urgent basis.
• Two other new areas for CAF support should be considered to meet priority needs of the region: a) privately sponsored, funded and managed tertiary education institutions (professional colleges, universities) and vocational schools; and b) a network of technological research and development institutions and centers of excellence that also act as a bridge between the region's top universities and businesses.
• Fostering Greater Competition, Regional Cooperation and Openness: Fortunately, CAF is already both a leading advocate of regional cooperation in the region and a major source of financing for regional projects.
• This traditional work should be reinforced by: a) regular analytic studies demonstrating benefits of regional cooperation; b) public advocacy of greater regional cooperation; and c) concrete support for initiatives to promote regional cooperation (e.g. above-proposed 19 EXECUTIVE SUMMARY regional think tanks, networks of research and development centres.) • In the area of regional projects, CAF could focus more on projects that would: a) create physical connectivity between two or three countries at a time (roads, bridges, energy trade) rather than on Pan-American projects that require sustained political support and commitment from a large number of countries with different political philosophies; b) focus much more on trade logistics (border crossings, customs procedures); and c) create a network of ports and airports to facilitate trade along the Pacific within Latin America and with Asia.
• CAF also needs to become a leading advocate of greater competition within the countries, stronger links with fast growing Asia, and of much greater openness to rest of the world and of.
• Finally, CAF should act as an intellectual bridge between Latin America and Asia, perhaps by developing a closer institutional relationship with the Asian Development Bank.
Over time, as more and more countries put in place the above recommended reforms and the region achieves the much higher investment and domestic savings rates anticipated in this book, CAF may need to reconsider the volume of its own financial support-both to public and private sectors-to underpin and support the much higher investment levels and financial needs of the region. But, that should come after, and not before, the countries have improved their investment and savings performance through domestic policy and institutional reforms.