Executive Summary
Since 1980, income levels in Latin America and the Caribbean (LAC) have failed to converge with those in the United States, unlike in emerging Asia and emerging Europe, which have seen rapid convergence. A key factor contributing to this divergence is sluggish labor productivity growth in LAC. Unlike firms in Eastern Europe or Asia, which have narrowed the productivity gap with US firms, firms in Latin America have experienced declining productivity. This decline has been widespread across various sectors and firm types.
Part of the productivity issue stems from the presence of a large informal sector, consisting of small and unproductive firms. The productivity growth in the informal economy is inherently low. In LAC countries, the informal sector has not declined over time, whereas in Asia, the fast-growing formal sector has absorbed much of the informal sector. More crucially, weak productivity growth in the formal sector has been a significant factor. Stagnant productivity in the LAC formal sector has limited the overall economic growth.
Key Points:
Introduction
Latin America and the Caribbean (LAC) have faced challenges in achieving sustained productivity growth, which has hindered economic convergence with advanced economies. The region's formal sector has experienced slow productivity growth, while the informal sector remains large and unproductive. Digital technologies and AI offer promising avenues to address these challenges, but there is a risk that LAC may fall behind in AI adoption compared to advanced countries and frontier emerging markets.
Low Productivity Growth in LAC
Since 1980, LAC has seen little improvement in productivity growth relative to the US. Unlike emerging Asia and Europe, which have rapidly converged with advanced economies, LAC has lagged behind. This divergence is primarily due to weak productivity growth in the formal sector, which has been broad-based across industries and firm types. The informal sector, consisting of small and unproductive firms, has also contributed to low productivity growth. Despite efforts to reduce informality, the informal sector in LAC has not declined over time, unlike in Asia where the formal sector has absorbed much of the informal sector.
The Role of Technology Diffusion
Technology diffusion plays a critical role in driving productivity growth. However, in LAC, digital technologies and AI have not been widely adopted, leading to limited productivity gains. The formal sector in LAC faces challenges in adopting and integrating new technologies, which can be attributed to various factors such as lack of infrastructure, regulatory barriers, and skill gaps.
The Potential of AI
Digital technologies and AI have the potential to significantly enhance productivity in the formal sector, foster its expansion, and reduce informality. AI can help in areas such as automation, data analysis, and process optimization, which can drive efficiency and innovation. By leveraging AI, LAC can accelerate its convergence with advanced economies.
Exposure to AI Through Labor
The impact of AI on the labor market is another critical aspect. AI can lead to job displacement but also create new job opportunities. Policymakers need to prepare the workforce for these changes by investing in skills development and education.
Exploring AI’s Role in Growth Convergence
To better understand the potential of AI in fostering growth convergence, the paper explores how AI can contribute to reducing the productivity gap between LAC and advanced economies. This involves examining the current state of AI adoption, potential barriers, and policy recommendations to facilitate broader AI integration.
Labor Market Implications of AI
The adoption of AI in the labor market can have both positive and negative impacts. On one hand, it can lead to increased efficiency and productivity. On the other hand, it can cause job displacement and require significant reskilling of the workforce. Policymakers must address these challenges by implementing policies that support workers through retraining and job transitions.
Adoption of AI in LAC
Despite the potential benefits, LAC faces several challenges in adopting AI. These include a lack of preparedness, limited investment in AI, and concerns about the social and economic impacts of AI. The region hosts few AI technology producers, and there are concerns about the ethical and social implications of AI.
Policies to Achieve the Full Potential of AI
To fully leverage the benefits of AI, policymakers should focus on several key areas: