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65 America, institutes are more concentrated on inputs rather than outputs, which make allocation of resources inefficient (more R&D programs, more human resources are wasted without considerable outputs). All these weaknesses lead to inability of local governments to support innovative projects. But some of the states have founded the way to partly solve this problem through creating special institutions like Ministry of Science, Technology and Productive Innovation (Argentina), National Innovation Council for Competitiveness (Chile). From the other hand, all these new institutes make institutional environment in Latin America even more complicated and demand more horizontal and vertical coordination. In addition to that, it is not enough to create institutes for supporting innovation activities and attracting investments, it is also essential to make interaction channels between educational institutes (e.g. universities) and businesses.
Banking System
The effectiveness of banking system in Latin America has declined over the last ten years.
Liberalization of banking system in Latin America started in 1990s, this process included privatization, deregulation and openness to foreign competitors and resulted in growing cross- border capital market activity. However, there is still lack of financial integration among Latin American region, the regional integration is less advanced than in other emerging economies9. The integrity of banking system influences the inflows of foreign direct and portfolio investments, so for Latin America improvement in financial sector is one of the rooms for development.
Market
As we can see in the Figure 10, Trade Freedom is growing over the last years, while Monetary Freedom is declining. Latin America is currently increasing its share in international trade. However, in spite of the fact that exporting activity is growing, with growing amount of trade agreements, last years, non-tariff barriers imposed by governments are rising, which indicates the increasing of protectionism. Another problem of Latin American market is lack of integrity, meaning that the majority of Latin American exporters are weakly involved in international trade networks. Only 5% of domestic exporters generate about 80% of export10, the rest exporters are much less active.
As to monetary policy, it is complicated due to national currency depreciations. In addition
9 International Monetary Fund 2016 report “Financial Integration in Latin America”, https://www.imf.org/external/np/pp/eng/2016/030416.pdf
10 Cluster Report – Trade Integration in Latin America and the Caribbean, IMF Country Report No.17/66, March 2017
66 to that, on the territory of Latin America different monetary regimes are implied, which makes inflation rates vary significantly across the regions. In the Figure 11 there is a graph, which indicates, how different countries deal with inflation and how the results vary over the last two years:
Figure 11: Inflation rates in selected Latin America and the Caribbean economies under different inflation regimes, Source: OECD report “Latin American Economic Outlook 2017”, Chapter 2
Taxation system
In the Figure 10, there is a slight decline in Tax Freedom in Latin America, which indicates the decreasing capacity of governments to maintain fiscal policies. Nevertheless, this trend may be explained by lower economic growth, which results in fiscal imbalances; the level of taxation in Latin America is still quite low, as they are in other developing economies.
Labor institutions
As it is indicated in the Figure 10, labor institutions in Latin America are deteriorating over the last decade, which may be a good signal for investors. Main challenges Latin American labor market is facing last decade are connected to increasing unemployment rates, lowering real wages because of the inflation, discrimination and violation of human rights, maintaining safety standards and promoting formal jobs11.
Infrastructure and business regulations
Latin America performs quite well, showing the high level of efficiency and transparency of Dealing with Construction Permits and Starting a Business. In the Figure 12 there is comparative
11 Cluster Report – Trade Integration in Latin America and the Caribbean, IMF Country Report No. 17/66, March 2017
67 graph reflecting difference in dealing with construction permits between Russia and Latin America:
Figure 12: Dealing with Construction Permits (average scores calculated by the author on the basis of data from World Bank)
Judicial system
According to World Bank, Enforcing Contracts in Latin America varies around 50 at 100- points scale, which indicates low development of judicial institutions (for comparison, in Russian Federation this index is higher than 70). According to results of the research conducted by American consulting company Gallup, the resident’s confidence in local judicial system in Latin America is one of the lowest in the world, results are shown in the Figure 13:
Figure 13: Regional confidence in judicial systems around the world, Source: Gallup, available online: http://www.gallup.com/poll/178757/confidence-judicial-systems-varies-worldwide.aspx
Corruption
In the Figure 14 there is a map, where you can see the evaluation of countries using CPI (the darker color - the higher level of corruption). Latin America is one of the highly corrupted areas
68 in the world, but still less corrupt than Russia.
Figure 14: Corruption Perception Index in the world, Source: Transparency International, 2017
Property rights
Only small list of Latin American countries performs high level of property protection regulations, meaning that there is a lack of transparency and security of property rights. But, the situation in Latin America is comparable to situation in Russia and other emerging economies with low IPRI.
Political institutions
In the Figure 15 there is a map, which indicates degrees of political freedom in the world.
From examining this map, we can conclude that Latin American countries have a high level of political freedom, which definitely characterizes their institutional quality as high.
Figure 15: Political freedom and civil liberties index, Source: Freedom House, 2017
Surprisingly, Latin America can be considered as a region, which showed extremely successful development of institutes in terms of independence on politics. Strengthening of free institutions is continuing last decades and nowadays, Latin American countries have comparatively high indexes of political freedom.
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