> Posted by Sergio Guzmán and Michelle Romeu

According to Paul Krugman, “Productivity isn’t everything, but in the long run it is almost everything.” So says the new book The Age of Productivity, just published by the Inter-American Development Bank (IDB). This book draws attention to the low levels of productivity in Latin America, and asks: What are some of the root causes of low productivity in Latin America? Can increased access to financial services increase productivity? In the world’s current financial state, can higher productivity—in any region—contribute to the bettering of the economy as a whole?

One productivity barrier is too little credit. Without credit, productive parties have difficulties expanding, and improving their margins of productivity. Why, then, is credit so unattainable? In the Center’s paper, “Mexico’s Prospects for Full Financial Inclusion,” research showed that the cost of borrowing in Mexico was significantly higher than several other countries including Bangladesh and India. These high interest rates are a result of high labor costs and taxes (including a 15 percent tax on interest paid).

Taxes also create a problem because many Latin American countries, including Mexico, have complex and often disorganized tax systems. As noted in the book, firms in Latin America and the Caribbean take an average of 320 hours to file taxes, while in other countries such as the United States, it takes an average of 177 hours—and this time is a big business cost. Labor costs add up—not just for taxes, but also for financial services such as transactions via bank tellers. As suggested in the Center’s paper, if electronic and automated methods—such as ATMS or online banking—were increased in Mexico and the rest of Latin America, it could save time and reduce costs to everyone involved.

As the IDB stated, “If Latin American productivity were close to its full potential, the gap [between Latin America and the U.S.] would be closed and millions in the region would be out of poverty.” Could higher productivity in financial services cause a ripple effect in the Latin American economy as a whole? Could it lead to lower prices for financial services, making them more affordable? As a result of an increase in productivity, can these MFIs help microenterprises grow and potentially become small and medium-sized enterprises? If full financial inclusion is a goal we strive to achieve, these are all great questions to explore.

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