New World Bank report unpacks why productivity in the region has stalled, and what can be done about it

Productivity is at the center of long-term development. It drives higher wages, better jobs, and greater competitiveness. Yet for Latin America and the Caribbean (LAC), productivity has become a persistent weakness, preventing the region from closing the income gap with advanced economies.

The World Bank’s Competition and Productivity Growth report explains the core challenge in Latin America: market entry is blocked by multiple layers of regulation, both for local entrepreneurs and foreign investors.

Stuck in a Low Productivity Equilibrium

Despite improvements in education and infrastructure, labor productivity in LAC has fallen further behind the U.S. benchmark.

• In 1960, LAC’s GDP per worker was 35% of U.S. levels. By 2019, it had dropped to 28%.
• Between 1995–2019, LAC averaged 0.8% annual productivity growth, while OECD countries grew at 1.7%.
• From 2015–2019, productivity growth in LAC slowed to just 0.3% per year, the lowest of any global region.

These trends are not cyclical. They are structural.

The report notes that even in countries with relatively stable macroeconomic environments, like Peru, Costa Rica, and Uruguay, productivity remains stagnant, indicating that the issue runs deeper than inflation or fiscal imbalances.

The Competition Problem: Few Winners, Fewer Contenders

Latin American markets are more concentrated than those in OECD economies, particularly in tradable sectors like manufacturing, transport, and retail.

• In LAC, the top four firms in a given market capture 60% of total sales, compared to 40% in the OECD.
• In Brazil and Peru, market concentration ranks among the highest in the world.
• From 2005 to 2015, concentration increased in 10 of 11 LAC countries. In contrast, it decreased in most OECD countries during the same period.

This matters because high market concentration reduces pressure to innovate or invest in efficiency. Dominant firms face little threat from new entrants and can continue operating despite low productivity levels.

Firm-Level Productivity: Enormous Gaps, Little Convergence

The data reveals extreme productivity dispersion between firms.

• In many sectors, the top 10% of firms are 25 times more productive than the bottom 10%.
• Yet these highly productive firms don’t grow. Many fail to attract the resources or market share needed to expand.
• Conversely, low-productivity firms survive, particularly in protected or informal sectors.

This disconnect suggests that market signals are not working, resources are not flowing to the most efficient actors.

Misallocation: Capital and Labor in the Wrong Hands

Misallocation is one of the region’s most costly inefficiencies.

• In Chile, correcting capital misallocation could raise aggregate productivity by 30%.
• In Brazil and Colombia, combined misallocation of labor and capital reduces potential output by over 50%.
• Resource allocation is not responding to firm performance. Instead, access to finance, government relationships, or regulatory barriers determine who scales.

This is particularly damaging for young firms, which tend to be more innovative. Without the ability to access credit or compete fairly, these firms are often crowded out.

Three Layers of the Problem

1. Administrative burden on start-ups
   • Entrepreneurs in Latin America face complex, costly procedures just to launch.
   • The report highlights that it can take over 60 days to get a business license in the region, four times longer than in South Asia.
   • The cost of opening a business was 35% of income per capita, compared to just 4.3% in Europe and Central Asia.
2. Barriers in service and network sectors
   • Key sectors like telecom, energy, and transport are heavily regulated or dominated by entrenched firms.
   • These sectors often block new players through licensing restrictions, legacy rules, or strategic behavior by incumbents.
   • Even well-intentioned regulations can have unintended effects, lowering contestability and tilting the playing field.
3. Barriers to trade and investment
   • Despite decades of trade liberalization, tariffs and investment restrictions still act as exogenous barriers to market entry.
   • The report notes these distortions often arise from outdated industrial policies or protectionist lobbying.
   • As a result, new domestic firms struggle to scale, and foreign firms hesitate to enter.

These high barriers limit firm entry, reduce competitive pressure, and suppress innovation. Incumbents face little threat, and new ideas struggle to reach the market. Until these barriers are addressed head-on, productivity can remain stuck.

What Can Be Done?

The report outlines a clear but ambitious reform agenda:

1. Strengthen competition enforcement
   Equip regulators with modern data tools and independence to tackle anti-competitive behavior.
2. Reform SOEs and procurement rules
   Reduce distortion in key sectors and allow more space for private actors.
3. Simplify entry and licensing requirements
   Streamline business registration and eliminate duplicative regulations.
4. Address informality
   Expand access to social protection and formalize labor markets.
5. Enhance financial access
   Develop instruments tailored to young and innovative firms.
6. Boost trade openness
   Align tariffs and standards with global benchmarks to increase external competition.