A study of labor productivity in four industries—steel, food processing, telecommunications, and retail banking—in the five largest Latin American economies—Argentina, Brazil, Colombia, Mexico, and Venezuela—finds that it is at only around 30 percent of world-class levels in three of the four cases analyzed (steel, food, and banking), but is much closer in telecommunications. The study also finds in all cases, except food, that labor skills do not represent obstacles to achieving higher productivity levels and that scale of production does so only to a low degree. Corporate managers in Latin America can close the huge current gap in productivity in the formal sector by adopting global best practice in the way they organize the functions and tasks of their companies. The structural factors that hinder productivity in the informal sector—much lower labor costs and lack of financing—will change only gradually. Thus, productivity increases in this large part of Latin American economies will be modest, and income disparity will probably increase.

During the past few years, the world has witnessed a radical change in the economic history of Latin America. After the fast growth of the 1960s and 1970s, the following decade...