As a region, Latin America and the Caribbean has proven relatively resistant to the global downturn of recent years, but could boost competitiveness by pushing through overdue reforms. The region should focus on improving its institutions, infrastructure, competition and, importantly, the area of skills, technology and innovation.

According to the latest edition of the World Economic Forum’s Global Competitiveness Report, which ranks 148 countries around the world, these are the top ten performers in the region.

  1. Chile (34th out of 148 worldwide), one position down from last year, remains the most competitive economy in Latin America. This is thanks to its traditional strengths: a strong institutional set-up with low levels of corruption and an efficient government, solid macroeconomic stability with a balanced public budget and low levels of public debt, as well as well-functioning markets with high levels of domestic competition and openness to foreign trade. In addition, Chile has made great strides forward with information and communication technology, almost doubling its Internet bandwidth capacity and expanding the number of Internet users. Notwithstanding these strengths, the country is held back by weaknesses in education (in particular in math and science) and investment in innovation.
  2. Panama.  After three years of sharp rises, Panama consolidates its position at 40th place overall, the most competitive economy in Central America, and second in Latin America. The country has been relentlessly improving its infrastructure, with one of the best port and airport networks, supporting its overall economic development strategy of becoming a major transport hub for the region. It’s also making persistent improvements in its financial markets, and the way it adopts new technology. In addition, Panama has also made progress in addressing some of its most pressing issues, notably in terms of improving education. Challenges remain in terms of strengthening its institutions, fighting corruption and crime, improving trust in politicians and bolstering the independence of the judiciary system.
  3. Barbados. Despite a slight improvement in score, Barbados falls three positions in the rankings to 47th place. This drop is driven by the persistence of the credit crunch that is hindering the capacity of local businesses to finance their activities. In addition, and closely related to this concern, macroeconomic conditions, although slowly improving, are still worrisome, and the capacity to innovate remains low. On a more positive note, Barbados continues to benefit from a fairly skilled labour force thanks to a high-quality educational system and high enrolment rates in secondary and tertiary education, well-functioning institution, and solid infrastructure.
  4. Costa Rica continues to rise in the rankings this year, climbing three positions to 54th place in the world thanks to improvements in its ability to innovate. Overall, the country continues to benefit from a fairly open economy and strong institutions, despite rising concerns about the wastefulness of government spending and fairly high costs associated with crime and violence. It also has a high-quality educational system that provides a skilled labour force, as well as a relatively high rate of technological adoption and business sophistication. Notwithstanding these strengths, Costa Rica still suffers from poor transport infrastructure; difficulty in accessing finance, and from an only moderate capacity to innovate, which will be crucial for the country’s economy to move up toward higher-value-added activities.
  5. Mexico ranks 55th overall. It continues to benefit from a relatively stable macroeconomic environment , a sound banking system, a large and deep internal market allowing for important economies of scale, reasonably good transport infrastructure , and a number of sophisticated businesses, particularly for a country at its stage of development. At the same time, the country has started to undertake some important and long-overdue reforms in the labor market and education. Moreover, further reforms in the goods and service market intended to increase levels of competition in key strategic sectors, notably in the energy sector, are expected. Pressing challenges include domestic competition, a skills gap due to a poor-quality educational system, and labor market rigidities. In addition, to boost its competitiveness Mexico should strengthen its institutions, tackle corruption, boost security and foster both information communication technologies and innovation.
  6. Brazil comes in at 56th place this year, hampered by a slight deterioration in some of the macroeconomic indicators, a tightening of access to financing, and the lack of sufficient progress in some of the most pressing challenges the country faces. Persistent sources of concern include the functioning of its institutions, government efficiency and low trust in politicians. Competitiveness is also held back by a lack of progress in improving the quality of overall infrastructure  and education, coupled with an economy fairly closed to foreign competition. Notwithstanding these challenges, the country still benefits from important strengths, especially its large market size and its fairly sophisticated business community. Going forward, Brazil should not postpone further necessary reforms to further leverage its numerous and important strengths.
  7. Peru remains stable at 61st place following a strongly positive trend that led the country up in the rankings more than 20 places in recent years. Strengths include a very strong macroeconomic performance and high levels of efficiency in the goods, financial and labour markets, despite some rigidity in the hiring and firing practices. In order to move forward, Peru will have to address some of its most long-lasting challenges by strengthening the robustness of its public institutions, increasing government efficiency, fighting corruption and improving infrastructure. In addition, poor educational quality has generated a deep skills gap in the economy.  Coupled with a low capacity to innovate, limited R&D investment and a weak scientific research system, this hinders Peru’s capacity to diversify its economy.
  8. Colombia. At 69th place overall, Colombia continues to show very positive macroeconomic conditions, with a balanced public budget, low levels of public debt and inflation that is under control at around 3 percent, financial services that are relatively sophisticated by regional standards (52nd), a considerable market size and fairly high levels of education enrolment. However, Colombia continues to suffer from weak institutions and considerable corruption. The country’s low-quality transport infrastructure is largely the result of a complex topography. Moreover, despite the rapid economic growth from high oil revenues in recent years, the need to diversify its economy will require improving the quality of the educational system (86th), which does not yet respond to the productive needs of an increasingly sophisticated business environment, and its innovation capacity, which is pulled down by low private R&D investment and the poor quality of scientific research institutions.
  9. Ecuador is at 71st in the ranking, after climbing 15 places thanks to major improvements in infrastructure development, education quality and innovation, although challenges remain in this area. In addition, despite a low country credit rating, Ecuador benefits from stable macroeconomic conditions that have facilitated access to finance for companies. In spite of this positive trend, the country still faces significant challenges, notably in terms of weak institutions, and a lack of independence within the judicial system that creates mistrust in the overall legal framework. The inefficient functioning of the goods, labour and financial markets because of insufficient competition, as well as high rigidities and mistrust in the banking system, remain problematic.
  10. Guatemala, at 86th in the world, follows Panama and Costa Rica in the list of Central American economies. Despite fairly well-functioning goods and financial markets, thanks to its openness to trade and a sound banking system, the country continues to suffer from security-related and corruption costs that hamper its institutions. In addition, the combination of a poorly performing educational system and weaknesses in the areas of science and digital are hindering Guatemala’s ability to shift towards higher-value-added activities, despite increasing efforts to boost the country’s information technology profile.

Author: Beñat Bilbao is a Senior Economist at the World Economic Forum

Image: A general view of Sao Paulo, the biggest Latin America city, April 5, 2011. REUTERS/Paulo Whitaker