With slower growth, 3 new priorities for aid programs in Latin America

Amid a sharper than expected slowdown in economic growth in Latin America, experts argue current aid donors to the region and their implementing partners need to adjust their priorities to address emerging problems caused by the stagnation. Experts at a launch event for the International Monetary Fund’s latest Regional Outlook for the Western Hemisphere urged development stakeholders to pay attention to any potential changes or dissolution of the Venezuelan oil alliance Petrocaribe, which has used oil concessions to fund some social services in the region. Aid donors could see demand increase and be asked to step in to help offset fallout from changes to the oil alliance. Given the uncertainty around oil exports — and the services they fund — linking education to skilled labor and improving regional investment climates should also be priorities. As the region is heavily dependent on oil and agricultural export, a decline in commodity prices has mainly caused the slowed this year that is expected to continue, the IMF outlook says. What the region most needs now, the report’s authors and panelists said at the report launch, is to bolster its productive labor force to mitigate vulnerability to global market shifts. Though most Latin American economies have risen from low to middle-income status, the experts argued much of the labor and investment climate remains informal, and foreign assistance should shift from supporting basic services to targeted technical assistance. 1. Preparing for the end of Petrocaribe. The IMF has issued warnings to regional governments of a possible end to Petrocaribe, an alliance Venezuela formed to provide low-interest oil sales to other Caribbean and some Latin American countries, which, for some countries, funds a significant share of their social programs — upwards of 40 percent in the Caribbean island country of Grenada. As Venezuela faces financial distress amid declining oil prices, the fate of Petrocaribe is uncertain, and experts say the development community should prepare to step in. Since the cheap oil funds programs ranging from textbooks and free lunches, roads and buses, to financing for small farmers and businesses, “the end of Petrocaribe will have serious implications for the region,” Daniel Runde, director of the Center for Strategic and International Studies’ Project on Prosperity and Development, told Devex. In case of any fallout, aid agencies will need to step in to help fill the funding gap, noted Manuel Orozco, senior fellow at the Inter-American Dialogue. “If Petrocaribe goes awry, aid agencies will need to look into the effects of increased energy costs on the poor and how they can help to compensate, for example dealing with food aid programs or complementing aid for education that was subsidized by the oil revenue,” he said. 2. Linking skilled labor to education. Unskilled labor due to lack of vocational training is one of the main reasons the region has experienced an economic plateau, according to Orozco. People are employed, but that employment has not amounted to robust economic growth. “Latin America has a serious chronic structural problem when it comes to labor,” Orozco said, adding that regional policymakers have historically promoted unskilled agricultural labor. Latin America lags behind Asia in matching labor force with technological innovation, the panelists said, adding that the region’s workforce has struggled to keep pace with technologically-enabled growth areas for employment. Runde pointed out how many aid programs focused on education still take the form of basic aid — such as providing money for basic school materials — instead of workforce training. To better equip workers, aid agencies should work to promote technical training in countries’ curricula, modernize vocational schools and help universities become more responsive to job market demand. Nearly two-thirds of university graduates in Latin America and the Caribbean finish with liberal arts degrees, Orozco mentioned, questioning whether these degrees position students well in the economic climate. 3. Improving the investment climate. The Latin American and Caribbean private sector is still characterized by a high degree of informality, and as a result the region struggles to compete in the global economy, the panelists said. Formalizing the region’s workforce could help attract foreign savings and investment. Aid agencies, Runde explained, have a role to play in supporting the legal and economic frameworks to facilitate a transition toward greater labor formalization, strengthening the workforce through skills training and education reform, and identifying opportunities to increase workers’ access to capital and credit. While the Inter-American Development Bank, the World Bank and the U.S. Agency for International Development are all starting to explore new initiatives in formalizing labor to improve the region’s investment climate, the CSIS expert argued it’s not enough. Runde noted that priorities within large aid agencies can be tied to vested interests. “The issue is, it’s not enough money going where it should be,” Orozco commented. “There is something inherently problematic that is not being taken seriously. We have to start linking productivity to knowledge.” These issues are starting to gain more attention, he said, but given the economic trend highlighted in the IMF’s outlook, that shift needs to happen at a larger scale — and more quickly. Read more international development news online, and subscribe to The Development Newswire to receive the latest from the world’s leading donors and decision-makers — emailed to you FREE every business day.