Since capital and people can choose a country when moving into the region, the key policy implication is that services exporting countries must put a high premium on retaining and attracting people and promoting FDI inflows. Citizen security, the rule of law, and the quality of life are obviously crucial in this regard. This policy implication is of course of general importance beyond Central America, given that raising the production of high-quality, employment-intensive tradable services will have to be a key component of the growth agenda in most LA countries.

# **VII.  Focusing policy**

This final section deals with the general issues in policy, rather than with specific policy packages. The first sub-section shows that many key gaps continue to prevail and need to be addressed. The second sub-section switches glasses, briefly summarizing what it is that a demandfocused analysis brings to the growth policy discussion that is new. The third sub-section discusses the non-trivial policy implementation challenges the region faces given its institutional weaknesses and the current world environment.

# **1. Sharpening the supply-side glasses**

Figure 34 shows a wide range of competitiveness-relevant variables where the region lags significantly relative to its comparator group (CG).<sup>36</sup> These include the quality of the region’s rule of law, both in terms of outcomes (homicides, organized crime) and capacity (the police, the judiciary, and the legal and contractual framework in support of private firms); the functionality of its markets (particularly the labor market, which is arguably linked to lags in the quality of regulatory and tax regimes); the quality of its infrastructure (particularly in terms of its air, sea, land, and internet connections);<sup>37</sup> and its preparedness for rapid change and innovation (as measured by R&D expenditure, the number of new patents or the digital skills of the population, and the governments’ inability to provide a long-term vision). Since these supply gaps do not necessarily constitute a binding constraint on growth and they are as much a cause as a consequence of growth, the expected growth returns from filling the gaps are uncertain. Nonetheless, they clearly point toward potential bottlenecks that must be assessed—and, if needed, addressed—as a matter of priority.<sup>38</sup> 36 The figure was constructed using the World Economic Forum’s Global Competitiveness Index (excluding those associated with macro policy and the financial sector), which classifies indices of 130 indicators into seven categories: (i) Rule of law (security, violence, quality of police and the judiciary); (ii) Market support (the quality of laws and regulations in support of market activities); (iii) Infrastructure (transportation and communications); (iv) Social capital; (v) Innovation (the country’s and the state’s preparedness for change); (vi) Health and human rights (the attention to basic human needs and rights); and (vii) Trade openness (the country’s openness to both foreign goods and foreign factors).

37 For a recent assessment of LA’s shortfalls in infrastructure, which highlights the costly implications for growth and welfare of gaps in transport infrastructure, see Perry, Guzmán and Benavides (2020).

38 To better tailor policies to country circumstances, avoid unhelpful “laundry lists” of ill connected actions, and help identify areas more amenable to reform and with larger expected impacts, policy makers can use a variety of tools 46