competitiveness and growth in argentina: appropriability, misallocation or disengagement?
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Competitiveness and Growth in Argentina: Appropriability, Misallocation or Disengagement?. Gabriel Sánchez and Inés Butler IERAL-Fundación Mediterránea September 21, 2007 – IDB Seminar. Argentina’s growth problems. Low trend growth Sporadic unsustained accelerations - PowerPoint PPT PresentationTRANSCRIPT
Competitiveness and Growth in Argentina: Appropriability,
Misallocation or Disengagement?
Gabriel Sánchez and Inés Butler IERAL-Fundación Mediterránea
September 21, 2007 – IDB Seminar
Argentina’s growth problems
• Low trend growth – Sporadic
unsustained accelerations
– Divergence from world growth
• Caused both by low investment and TFP growth
1960 = 100Figure 6a. Real GDP pc and long run trend
Source: IERAL based on Mecon
80
100
120
140
160
180
200
220
240
260
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
GDP pc Trend GPD
Growth
Factor Accumulation
TFP Growth
InvestmentResearch and
innovationResource allocation
Self-discoveryAllocative efficiency
Schumpeterian endogenous growth framework
Investment
Returns to economic activity
Cost of finance
Low social returns
Low appropriability
Human capital
Iinfrastructure
Government failures
Market failures
Internacional finance
Local finance
Domestic saving
Intermediation
Micro risks, property rights, corruption, taxes, transaction
costs
Macro risks, financial, monetary, fiscal & exchange
rate instability
Coordination failures
Information externalities
Capabilities for structural
transformation of exports
Open forest
Anti-export bias, insufficient foreign
market opening
Permanently binding constraints to investment I: Infrastructure
• Transportation and energy: scarce and costly• Telecommunications OK for development level• Poor investment / amortization ratios in public offer
firms in this area after 2002Figure 17. Investment and energy consumption by industry
Annual procentage change 2002 - 2006 Annual porcentage chang 2006 - 2007
Source: IERAL - Fundación Mediterránea based on MIPAr-97 and INDEC
0%
1%
2%
3%
4%
5%
6%
7%
8%
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
Energy consumption
Inve
stm
ent
0%
2%
4%
6%
8%
10%
12%
14%
16%
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
Energy consumption
Inve
stm
ent
Permanently binding constraints to investment II: Micro risks from government failures
• Poor rule-of-law and control of corruption, discretionary taxes and government intervention in goods and factor markets
• Poor market valuation of intangible assets– At least 10 times smaller than in OECD countries
• Institutional roots of government failures: hard to modify
Rule of Law Control of Corruption2005 1998 2005 1998Est. Est. Est. Est.
ARGENTINA -0,56 0,06 -0,44 -0,29BRAZIL -0,41 -0,17 -0,28 0,03CHILE 1,20 1,18 1,34 1,13CHINA -0,47 -0,35 -0,69 -0,20COLOMBIA -0,71 -0,72 -0,22 -0,67INDIA 0,09 0,13 -0,31 -0,24SPAIN 1,13 1,33 1,34 1,52UNITED STATES 1,59 1,66 1,56 1,89Source: World Bank, Governance indicators, 2006.
Table 24. Governance indicators
Country
Figure 18. Tax volatility and investment in Argentina
Source: IERAL of Fundación Mediterránea based on National Accounts
0,4%
0,6%
0,8%
1,0%
1,2%
1,4%
1,6%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
10%
12%
14%
16%
18%
20%
22%
24%
Tax volatility Investment rate (right)
Latent constraints to investment I: international financeTable 10. Saving-investment relationship: Argentina, raw data
Corr (I/Y,S/Y) β (I/Y,S/Y)1890 -- 1900 -0.29 -0.151900 -- 1910 0.43 0.701910 -- 1920 -0.62 -0.821920 -- 1930 0.79 0.431930 -- 1940 0.22 0.141940 -- 1950 0.30 0.131950 -- 1960 0.23 0.101960 -- 1970 0.94 0.941970 -- 1980 0.93 0.841980 -- 1990 0.96 1.021990 -- 2000 0.54 0.742000 -- 2006 0.72 0.661991 -- 2006 0.48 0.361991 -- 1998 0.74 0.851999 -- 2001 -0.66 -3.322003 -- 2006 0.93 1.08
Source: IERAL - Fundación Mediterránea based on Mecon
Notes: Corr(I/Y,S/Y) is the correlation of I/Y and S/Y. b(I/Y,S/Y) is the OLS time series coefficient from a regression of I/Y on S/Y with a constant.
Source: IERAL from Fundación Mediterránea based on INDEC
Figure 10. Savings and investment in Argentina
20
40
60
80
100
120
140
160
180
200
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Bil
lons
of
Pes
os
Fixed investment National savings
• Financial autarky: a historically binding constraint (Taylor, 1998).
•Investment currently tied to domestic savings
•Not binding thanks to devaluation, high export prices, new taxes and political discretion
•Uncertain sustainability
Latent constraints to investment II: poor financial intermediation
• Argentine firms are financially constrained, but compensate it with high internal funds. – We see it in our econometric analysis
(not shown here).
• Constraint becomes binding if other constraints are alleviated and/or internal funds decline
Countries % GDP, 2005Argentina 11.4%Colombia 21.1%Brazil 32.7%India 41.2%United States 57.9%Chile 70.1%Rep. of Korea 93.5%China 112.2%Spain 146.0%
Table 11. Domestic Credit, claims on private sector
Source: IERAL - Mediterranean Fundation based on IMF (IFS)
1994-98 1999-02 2003-06 1994-06Real Interest Rate 9,3 18,7 0,2 9,4Net Interest Margin 3,4 6,9 4,4 4,8
Structural transformation of exports
Low social returns Low appropriability
Open forest Market failures
Coordination failures Information externalities
Government failures
Insufficient foreign market opening, anti-export bias, time inconsistent export
taxes
Self-discovery shows little value
1975 - 2000
Source: IERAL-Fundación Mediterránea.
Figure 22. Export sophistication relative to per capita GDP – Selected countries
3 000
4 000
5 000
6 000
7 000
8 000
9 000
1975 1980 1985 1990 1995 2000
EX
PY
0.5
1.0
1.5
2.0
2.5
3.0
EX
PY
/ G
DP
EXPY Arg EXPY Bral EXPY Chi
Table 26. Relative export price. Argentina to OECDOverall and New Exports (NE)
Total Total without NE NE MOA MOA NE MOI MOI NE1994 0.866 0.871 0.817 0.853 0.808 0.854 0.7792005 0.809 0.799 0.855 0.757 0.805 0.786 0.787
Source: IERAL - Fundación Mediterránea based on
New exports (starting after 1993) account for 20% of all current exports, but…
Barriers to self-discovery I: option value
• Open forest, diversification & export similarity with OECD are relatively OK
• Recent discoveries reflect proximity rather than value
• 25 most attractive goods not yet exported are far in the product space
1975 - 2000
Source: IERAL-Fundación Mediterránea.
Figure 26. Open forest Dynamics in Argentina, Brazil and Chile
400
600
800
1 000
1 200
1 400
1 600
1 800
2 000
1975
1980
1985
1990
1995
2000
Tho
usan
ds
Argentina Brasil Chile
Table 32. Capabilities and opportunities for structural transformation
ProdyStrategic
valueDensity
Export share
Relative price
OECDHighest Strategic Value 15008,1 19369,6 0,144 2,8 0,69Highest Density 7768,6 8490,5 0,219 0,4 0,89Highest Prody 27211,1 13325,2 0,124 0,3 0,65Discoveries 9222,1 13527,1 0,208 18,3 0,86Min relative prices oecd 18712,5 14758,1 0,158 1,2 0,28Min relative prices oecd (MOI) 18811,0 15717,7 0,148 1,3 0,29Traditional 6076,1 13225,8 0,165 71,7 0,80
Barriers to self-discovery II: domestic and foreign trade policies
• Domestic trade policy: anti-export bias + time inconsistency
• Barriers to access EA & LATAM matter for high PRODY and convergence (EU as well for the latter).
Table 33. Foreign barriers to entry, selected goods
Average Maximum Average Maximum Average Maximum Average MaximumHighest Strategic Value 4.1 30.0 4.6 15.0 11.6 80.0 11.5 30.0
Highest Density 1.7 72.7 6.7 38.0 3.9 40.0 7.9 30.0
Highest Prody 2.7 43.5 4.1 17.0 8.0 30.0 9.9 27.0
Discoveries 1.2 43.5 3.6 25.0 10.0 30.0 8.9 35.0
Min relative prices oecd 3.8 38.0 13.5 34.0 4.0 25.0 10.1 70.0
Total 6.1 7.9 8.6 9.7
LAC TariffsNAFTA Tariffs UE Tariffs Asia Tariffs
Table 34. Domestic taxes on imports and exports, selected goods
Average Maximum Average MaximumHighest Strategic Value 11.5 25.0 5.0 5.0 1.17
Highest Density 4.4 16.0 5.7 10.5 1.11
Highest Prody 8.4 18.0 5.1 18.9 1.14
Discoveries 14.1 35.0 7.3 25.9 1.23
Min relative prices OECD 11.2 20.0 5.0 9.8 1.17
Total 10.3 18.0 11.1 40.0 1.24
Domestic Tariffs Export Taxes Relative price of import
Barriers to self-discovery III: coordination & information externalities
• Scant diffusion of new exports: discover only goods where pioneer can introduce barriers to entry by herself– With protracted monopoly, need lower profits to cover costs of discovery
• The most valuable goods are not discovered
Table 36. Concentration of new exports at the firm level1994 2004 Change
Numbers of firms exporting NE 412 2 245 1 833 Major firms of each NE product represent in value (%)*Simple average 69.3 70.3 1.0Weighted average 62.5 65.4 2.9Median 74.9 78.3 3.4
In number of firms, they represent (%) 21.1 3.9 -17.2* For each product it is selected the sole largest firm.
Table 37. Correlations between discovery and diffusion at the sectoral level
Change in
Number of new exports by sector
95%Confidence interval
Exports due to increase in number of enterprises -0,493 -0.831 - 0.113Share of exports of the pioneer -0,165 -0.625 - 0.379Share of exports of the end leader -0,094 -0.578 - 0.440Herfindahl index -0,516 -0.813 - -0.005N.B.: HS 6-digit Source: IERAL de Fundación Mediterránea
Research and innovation
Low returns to economic activity
High cost of finance
Low social returnsLow
appropriability
Low human capitalLow engagement in world flow of
ideas
Government failures
Market failures
Poor local finance
Low venture capital
Poor public financial support
R&D taxes, capital income taxes
Spillovers
Low complementary
investment
Barriers to trade and FDI
Barriers to creative destruction
Specialization in activities with lower catch-up
scope
Research and innovation: scarce but with low social rate of return (SRR)
• Low SRR suggests small gap with world technology frontier
• But Argentine TFP is 0.51 world frontier TFP
• What is missing? Argentina’s frontier is smaller than world frontier?
R&D spending as % of GDPCountries 2004Argentina 0.44Brazil 0.91Chile 0.70Colombia (2001) 0.17Spain 1.07USA 2.66Source: RICyT
Table 38 Innovation indicators
Panel 1992-2001
R&D intensity 0.001(0.05)
Innovative 0.006capital goods (1.10)
Capital/labor growthTime dummy -0.0301998 (1.73)
Time dummy -0.0212001 (1.24)
Time dummy 0.0322002 (2.02)
Constant 0.024(1.85)
Observations 84R-squared 0.16Standard errors are clustered by county. Year, country, and product dummies included in all estimations. Probit coefficients are marginal effects. Absolute value of t statistics in parentheses.* significant al 5%; ** significant at 1%
Source: IERAL from Fundación Mediterránea based on Hausmann et al. (June 1996)
Table 40. Social returns on innovation in ArgentinaDependent variable: Labor productivity growth
Binding constraints on research and innovation I: disengagement
• Disengagement from world flow of ideas during past 30 years – Decline in Argentina’s technology frontier prompts observed transitional
decline in TFP relative to the world frontier
Source: IERAL - Fundación Mediterránea based on Mecon
Figure 16c. Argentina’s participation in FDI flows to the World and to Latin America
0.0
0.5
1.0
1.5
2.0
2.5
1997
1998
1999
2000
2001
2002
2003
2004
2005
0
5
10
15
20
25
30
35
Arg / World Arg / LAC (right)
as a % of total
Brasil EEUU UE Resto1995 10 33 33 24 2000 24 28 22 27 2006 32 15 15 32
Source: IERAL - Fundación Mediterránea based on INDEC.
Table 43. Capital goods imports by country of origin
Source: IERAL-Fundación Mediterránea based on PWT 6.2
Figure 30. Relative price of investment in Argentina vis-a-vis the US
50
60
70
80
90
100
110
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
Binding constraints on research and innovation II: human capital
Table 44. Innovation indicators
2004 2004Argentina 3.00 Argentina (2002) 0.64Brazil 1.55 Brazil 0.36Chile 3.26 Chile 1.13Colombia 0.63 Colombia (2002) 1.57Spain (2003) 8.42 Spain (2001) 0.90USA (1999) 13.94 USA 0.60Source: RICyT
Researchers per 1000 members of the labor force
Graduates on engineering per 1000 members of the labor
Argentina Brazil Chile Spain Colombia Paraguay26.4% 3.9% 3.0% 14.3% 4.6% 24.5%10.0% 18.6% 60.3% 23.5% 1.3% 0.0%61.3% 76.9% 32.4% 62.0% 88.4% 59.1%2.4% 0.7% 4.3% 0.2% 5.7% 16.4%
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Source: IERAL - Fundación Mediterránea based on RICyT.
Higher EducationNon profit private Overall
Table 45. Allocation of research personnel2004
GovernmentEnterprises
CountryUniversity professors
Chemical engineers
Peru (***) 0.29 sdCosta Rica 0.34 sdUnited Kingdom (*) 0.48 0.88Nicaragua (***) 0.54 0.54Portugal 0.55 2.21Germany 0.56 0.53Brazil (**) 0.57 sdArgentina 0.81 2.02United States(*) 0.84 2.18China 0.98 1.59Mexico 1.12 sdCanada 1.48 sdNOTES:* year 2004** year 2003*** year 2002Source: IERAL - Fundacion Mediterranea based on ILO and INDEC - EPH.
Table 46. Relative wages of university professors and chemical engineers vis-à-vis industrial workers. 2005
Binding constraints on research and innovation III: poor IPRs
• Low research intensity in a cross-section of countries is almost entirely explained by differences in software piracy rates
• Market valuation of firms’ investment in intangible assets is 10-30 times smaller than in OECD
Source: IERAL-Fundación Mediterránea
Figure 31. Cross country deviation from average R&D and contribution of Software Piracy Rates (SPR)
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Argentina Australia Brazil Chile Malaysia UnitedStates
R&D deviation Contribution of SPR
Transition between steady-state productivity gaps, 1980-2000
• Klenow and Rodríguez-Clare (2004):– All countries have same long-run growth rates thanks to
technological spillovers– Investment and research only determine proximity to
world technological frontier– Divergence can only occur as transitional dynamics
• Argentine transition in steady state productivity gap b/t 1980 (64%) and 2000 (51%)– Can only be explained by transitional change in research
intensity from 0.94% (1980) to 0.4% GDP (2000)– Cannot be explained by transition in capital per effective
worker
Binding constraints on allocation
Primary Industrial Service Primary Industrial Service1993 9.9% 15.7% 74.3% 11 928 20 697 16 5121998 9.7% 13.9% 76.4% 14 232 25 162 18 7142003 9.4% 13.4% 77.2% 15 946 22 591 16 7562006 8.4% 13.1% 78.5% 16 140 24 573 17 282
Source: IERAL - Fundación Mediterránea based on Mecon
Sectoral employment GDP / LTable 48. Sectoral Structure of Employment
Table 51. PIB /L growth, sectoral and overallPrimary Industrial Service Overall
1993-1998 19.3% 21.6% 13.3% 14.7%1993-2001 29.2% 10.2% 5.4% 7.1%1993-2006 35.3% 18.7% 4.7% 8.5%1999-2001 4.6% -5.8% -2.9% -3.0%2003-2006 1.2% 8.8% 3.1% 3.9%
Source: IERAL - Fundación Mediterránea
Table 50. Productivity decomposition analysis
1993-1998 2.61 ( 95%) 0.36 ( 13%) -0.23 ( -8%)1993-2001 0.73 ( 85%) 0.22 ( 26%) -0.10 ( -11%)1999-2001 -1.22 ( 81%) -0.19 ( 12%) -0.10 ( 7%)2003-2006 1.01 ( 78%) 0.48 ( 38%) -0.21 ( -16%)1993-2006 0.59 ( 94%) 0.33 ( 52%) -0.29 ( -47%)
Source: IERAL - Fundación Mediterránea
Within Between Interaction
o Constraints:
o High relative price of investment
o Labor market rigidities
o Financial constraints
The growth and competitiveness agenda for Argentina
• Investment in infrastructure• Reduction of microeconomic risks via macro stability and
institutional improvements• Reduction of relative price of investment
• Remove barriers to FDI and and capital good imports from high-knowledge countries. Improve ITCs.
• Increase availability of researchers for the business sector.– Also improve IPR regime.
• Policies and public-private cooperation to overcome market failures that deter valuable self-discoveries. Strategic investment in ISPGs.– Also avoid time inconsistent trade policies and negotiate opening of
LATAM and EA markets
• Improve access to domestic and international finance.
Constraints on growth stability
• Domestic savings and government failures that cause macroeconomic and external volatility– Currently not binding– They depend on favourable export prices, new taxes,
devaluation and political discretion rather than on an adequate institutional design.
– Can become binding constraints to stable growth again in the future.
– Not enough to secure a regime shift towards bigger growth.
• Stable but low growth associated with low growth of real wages fails to eliminate the latent demand for social insurance.