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Latin America’s Missing Middle: Rebooting inclusive growth

Latin America’s Missing Middle: Rebooting inclusive growth. The Dialogue. May 22, 2019. Latin America’s GDP per capita gap to developed economies has not narrowed, while other emerging economies have caught up. GDP per capita (constant PPP), indexed to OECD average. 100. OECD.

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Latin America’s Missing Middle: Rebooting inclusive growth

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  1. Latin America’s Missing Middle: Rebooting inclusive growth The Dialogue May 22, 2019

  2. Latin America’s GDP per capita gap to developed economies has not narrowed, while other emerging economies have caught up GDP per capita (constant PPP), indexed to OECD average • 100 • OECD • Import substitution industrialization • Commodity supercycle • Lost Decade • Liberalization • 50 • 45 • 40 Middle Income • Benchmarks • 35 • Latin America • 30 • 25 • 20 • 15 • 10 • 5 • 0 • 1960 • 1965 • 1970 • 1975 • 1980 • 1985 • 1990 • 1995 • 2000 • 2005 • 2010 • 2015 • Source: The Conference Board Total Economy Database™ (Original version), November 2018, McKinsey Global Institute analysis

  3. The region needs to fill in two missing middles to restart the virtuous cycle of growth Demand Productive and well-paying jobs • A. Missing middle of firms • B. Missing middle of consumers Government enablers • Latin America needs to expand the pool of modern, globally competitive firms to raise productivity and increase the number of high-wage jobs. • More productive jobs with higher wages and rising middle-class prosperity increase demand and spur new investment. Supply New investment to meet demand

  4. A. Latin American economies have fewer large and mid-sized firms than faster growing peers • Over $500 Mn • $100 Mn to $500 Mn • $50 Mn to $100 M • Firms per $1 Tn GDP in Latin America and other EM indexed to Benchmarks • Index, Total is share of firms compared to Benchmark average, average 2015-2017 • 2015-17 Firms • Number (‘000) • 2015-17 Avg Revenue • $ Million Latin America average Benchmarks average 1.1 370 • 27 • Indonesia 561 0.5 • 45 • Chile 309 3.8 • 48 • Brazil 200 1.3 • 50 • Argentina 207 2.0 • 56 • Turkey 257 0.7 • 56 • Philippines 344 3.0 • 62 • Mexico 364 34.4 • 70 • China 237 7.3 • 74 • India 590 1.1 • 82 • South Africa 178 0.7 • 86 • Peru 202 1.2 • 97 • Colombia 280 2.2 • 121 • Thailand 182 3.2 • 153 • Poland 2.2 213 • 174 • Malaysia 11.2 188 • 187 • Russia 65 100 • Source: McKinsey Corporate Performance Analytics database; WB WDI; McKinsey Global Institute analysis

  5. B. Modest productivity gains have not fed through to higher wages in Mexico, whereas in Brazil average wages rose strongly but not sustainably Components of growth, income view 2000-2016 contribution to GDP growth, % Employed labor share4 All other income ∆ Average Wage ∆ Employees at constant wages Profits, mixed income, VA taxes • Peru • 5.2 Latin America • 2.8 • Colombia • 4.2 • Chile • 3.9 Advanced • 1.6 • Argentina • 2.5 Other EM • 4.8 • Brazil • 2.4 • Mexico • 2.1 • China • 0.3 • 4.7 • 9.5 • Source: GGM; World Bank WDI; INEGI; IBGE; DANE; The Conference Board Total Economy Database™ (Original version), November 2017; McKinsey Global Institute analysis

  6. B. As a result, Latin America’s consumption share from the bottom 50 percent and bottom 90 percent of the population remains the lowest in the world. % of total consumption by region and income percentiles, 2017 • 1-50th percentile • 51st-90th percentile • 91st-100th percentile • Latin America and Caribbean • 100% • Sub-Saharan Africa • 100% • North America • 100% • South Asia • 100% • East Asia and Pacific • 100% • Middle East and North Africa • 100% • Europe and Central Asia • 100% • Source: World Data Lab, McKinsey global institute analysis

  7. What is needed to expand the missing middle and accelerate the virtuous growth cycle? Productive and well-paying jobs Demand • Build competitive capabilities and expand number of modern firms: • Create conditions to attract investment and technology with a priority on policy stability and building out the value chain with local spillover • Create competitive markets through more competition, innovation, access to land and finance, and ease of doing business • Leapfrog economic development through a sound digital industrial policy • Raise income and purchasing power for the bottom 90 • Design flexible labor policies to keep wage growth in line with productivity and reduce non-wage labor costs • Proactively skill the future labor force through better coordination among public, private, and university systems and on-the-job training • Empower economic participation of marginalized populations by improving public service delivery in health, education, childcare, energy, transportation Government enablers Supply • Make inclusive growth a national priority • Unite public and private efforts for inclusive growth with a clear objective and a communication plan to galvanize public support • Prepare for delivery by establishing new collaborative and adaptive governing mechanisms with a mandate for inclusive growth New investment to meet demand

  8. Digital spring provides an opportunity to reboot reforms Billion dollar startups (unicorns) and firms that went public or were acquired by global firms • Source: CBInsights “The Global Unicorn Club”, LAVCA, online search

  9. Thank you • Link to our report from the McKinsey Global Institute website: • www.mckinsey.com/mgi

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