LAC s Long-Term Growth: Made in China? 2da Mesa Redonda sobre Comercio y Desarrollo Sostenible 7-8 de noviembre de 2011 Montevideo, Uruguay Chief Economist Office Latin America and the Caribbean The World Bank 1
100 Years of Solitude High and sustained growth has eluded LAC for more than a century 90% 80% 70% Gold Standard Period GDP Per Capita of Relative to the US WihtdA Weighted Averages Interwar Period Import Substitution Lost Washington Decade Consensus Washington Dissensus in striking contrast, not only the East Asia Tigers and their growth miracle years, but also other EAP countries and China more recently. 60% 50% 0% 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 LAC High Performance EAP Japan China Low Performance EAP Notes: In Panel B, High Performance EAP includes Korea Rep., Taiwan, Hong Kong, and Singapore; Low Performance EAP includes Indonesia, Philippines, Thailand, and Malaysia; LAC includes the following countries: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay, Venezuela, Bolivia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Nicaragua, Panama, and Paraguay. The weights are calculated using the 2007 nominal GDP. Source: Penn World Tables. 2
Are the 2000s an exception to the rule? Growth and productivity picked up 7.0% 6.0% 5.0% Cyclical Adjusted Growth High-Income Latin America 4.0% 3.0% 2.0% 1.0% 0.0% 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Average TFP growth per year Avg 61-70 Avg 71-80 Avg 81-90 Avg 91-00 Avg 01-08 Avg 61-08 LAC 7 1.9% 0.4% -2.0% 0.2% 1.0% 0.3% Non - LAC 7 11% 1.1% 05% 0.5% -2.0% 01% 0.1% 12% 1.2% 02% 0.2% Argentina 1.3% -0.2% -2.5% 2.0% 1.4% 0.4% Brazil 2.9% 3.2% -3.3% -1.7% 0.5% 0.3% Chile 1.5% 0.5% -0.5% 2.9% 0.5% 1.0% Colombia 1.4% 1.0% -1.3% 0.0% 1.3% 0.5% Mexico 2.0% 0.3% -0.9% -1.6% 0.3% 0.0% Peru 2.4% -0.2% -3.8% 0.5% 2.9% 0.4% Venezuela 2.1% -2.1% -1.6% -0.5% 0.2% -0.4% EAP 3.1% 2.1% 2.3% 1.3% 2.0% 2.2% China -0.5% 0.9% 1.6% 3.4% 6.2% 2.3% United States 0.9% -0.4% 1.1% 1.0% 0.6% 0.6% Japan 6.7% 1.1% 1.4% -0.7% 0.9% 1.9% Notes: In Panel B, High Performance EAP includes Korea Rep., Taiwan, Hong Kong, and Singapore; Low Performance EAP includes Indonesia, Philippines, Thailand, and Malaysia; LAC includes the following countries: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay, Venezuela, Bolivia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Nicaragua, Panama, and Paraguay. The weights are calculated using the 2007 nominal GDP. Source: Penn World Tables. 3
During the 2000s, the China Connection developed Particularly, for a number of South American countries 100% Main Trade Partners 1990 90% 80% 70% % of Total Trade 60% 50% World UE15 LAC USA CHN 100% 90% 80% 70% Main Trade Partners 2009 0% Uruguay Peru Argentina Nicaragua Brazil Paraguay Panama Chile Mexico Grenada TTO Bolivia Honduras Jamaica El Salvador Venezuela Ecuador Guatemala Costa Rica Colombia % of Total Trade 60% 50% RoW EU15 USA LAC CHN 0% Paraguay Chile Peru Brazil Costa Rica Uruguay Argentina Venezuela Ecuador Mexico Colombia Guatemala Bolivia Panama Suriname Nicaragua Jamaica El Salvador Grenada Honduras TTO Belize Notes: For Panel B, the sample of UE15 includes: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and the United Kingdom; the sample of LAC countries includes: Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Grenada, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad and Tobago, Uruguay, and Venezuela. Sources: WITS and World Bank World Development Indicators (WDI). 4
During the 2000s, the China Connection developed 1 0.8 0.6 Output Co-Movement Between LAC-7 +URY and China 15-year rolling correlation of the Real GDP Growth ARG BRA COL MEX PER VEN CHL URY 0.4 0.2 0-0.2-0.4-0.6 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Notes: For Panel B, the sample of UE15 includes: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and the United Kingdom; the sample of LAC countries includes: Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Grenada, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad and Tobago, Uruguay, and Venezuela. Sources: WITS and World Bank World Development Indicators (WDI). 5
Channels of growth spillovers Very important so far have been (of relatively short-lived nature): China s demand for LAC s exports Indirectly, China s role in driving commodity prices up The intensification of trade and other economic linkages matter for sustainable (longer-term) growth to the extent that they translate into: Factor accumulation (physical and human capital) Productivity growth Can LAC leverage this connection further? 6
Channels of growth spillovers CanLAC leverage this connection further? For long-term growth, technological diffusion and learning become key determinants of productivity improvements Directly: Technology embodied in physical and human capital Indirectly: Knowledge dissemination through Trade flows: Tech-content of imports Feedback from importing nations Capital flows Migration flows: diffusion of tacit technological knowledge 7
Diffusion of technology through the trade channel The Degree of Intra Industry Industry Trade (IIT) For long-term growth, not only about the degree of openness matter, but also the structure/dynamics of trade connections. IIT can be a proxy for technology diffusion and knowledge spillovers: 1 Intra-Industry Trade and Productivity 1. Vertical IIT: trade involves products in the same sector but at different stages of the production process (e.g. imports of intermediate goods) ade Index Intra-Industry Tra 1990 0.9 0.8 0.7 06 0.6 0.5 0.4 0.3 y = 6.4757x + 0.4273 (3.14) (0.04) 2. Horizontal IIT: trade of differentiated products might help firms keep up with the technology frontier of their competitors 0.2 0.1 0-3% -2% -1% 0% 1% 2% 3% 4% 5% Average TFP Growth per year 1970-2008 EAP LAC Oh Others Notes: Fitted regression lines are added to these figures and the estimated equation is also reported. Standard deviations are shown in parenthesis. Sources: WITS and Penn World Tables. 8
A particularly telling connection for growth prospects East Asian Tigers and Japan l Trade % of Total 100% 90% 80% 70% 60% 50% Main Trade Partnes 1990 Japan was a fast-growing neighbor with impressive essve technological oogc progress that acted as a growth pole for East Asian economies. World UE15 USA EAP JPN 1 0.8 0.6 Output Co-Movement Between EAP and Japan 15-year rolling correlation of the Real GDP Growth HKG KOR IDN MYS THA SGP 0% Indonesia Thailand Korea Malaysia Philippines Taiwan Singapore HongKong 0.4 0.2 0-0.2-04 0.4 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Notes: For Panel B, the sample of UE15 includes: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the United Kingdom; the sample of EAP countries includes Hong Kong, Indonesia, Korea Rep., Malaysia, Philippines, Singapore, Taiwan and Thailand. Sources: WITS and WDI. 9
An exploration of the nature of growth dynamics Compare and contrast exercise of these two connections We focus on one source of long-term growth: The connection to growth poles and the potential for/existence of spillover effects. And the role that factor accumulation and domestic policies can play at fostering spillover effects from this connection. 130 120 110 100 90 80 70 t TFP: LAC-7 vs. East Asian Tigers Simple avg, Index base 100 =1970 EAP, 2000 LAC LAC-7 EAP PPP Converted GDP Per Capita 2005 International Dollars Per Person LAC - 7 (1990): $6175.4 EAP (1960): $2149.9 t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 t+11 t+12 t+13 t+14 t+15 t+16 t+17 t+18 t+19 t+20 Notes: LAC-7 includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. EAP includes Hong Kong, Indonesia, Korea Rep., Singapore, Taiwan, and Thailand. Sources: LCRCE Staff calculations based on Penn World Tables. 10
Growth poles and technology diffusion The degree of intra industry industry trade with growth poles th China Intra-Ind dustry Trade Index wit 100% 90% 80% 70% 60% Intra-Industry Industry Trade and Total Trade with China 2009 SLV JAM NIC MEX LAC-7 Caribbean Other South America Central America Japan Intra-Indu ustry Trade Index with J 100% 90% 80% 70% 60% Intra-Industry Trade and Total Trade with Japan 1990 50% 50% GTM THA DOM IDN CRI PHL TTO COL BRA HND VEN MYS PRY GUY BOL ARG CHL PAK LKA ECU URY PER BGD NPL 0% 0% 50% 0% % of Total Trade with China 0% 5% 15% 25% 35% 45% 50% % of the Total Trade with Japan HKG TWN KOR Source: WITS. 11
Growth poles and technology diffusion Composition of imports fromgrowth poles 100% Share of Factor Intensity Categories in Imports LAC and China, 2009 100% Share of Factor Intensity Categories in Imports EAP and Japan, 1990 90% 90% 80% 80% % of Total Trade with China a 70% 60% 50% % of Total Trade with Japan 70% 60% 50% Technology intensive products Human-capital intensive products Unskilled-labor intensive products Natural-ressource intensive products Primary products 0% 0% Pana ama El Salva ador Guatem mala Guy yana Ch hile Costa Rica R Dom. Rep. R Jama aica Hondu uras Urug guay Venezu uela Colom mbia Nicara gua Peru P Bol ivia Parag guay Ecua ador Argent tina Br razil Mex xico Hong K ong Philippi ines Korea Rep. Singap pore Mala aysia Indon esia Thail land Notes: Only countries with more than 5% of total trade with China are reported. The factor intensity classification of product of Hinloopen and Van Marrewijk is used. Source: WITS. 12
Growth poles and technology diffusion Composition of exports to growth poles % of Primary Exports to China 100% 90% 80% 70% 60% 50% Primary Exports and Total Export to China 2009 ECU URY ARG HND VEN BRA PER GUY GTM BOL COL DOM NIC PAN TTO MEX SLV JAM CHL PRY LAC-7 Caribbean South America Central America GRD CRI 0% 0% 50% % of Total Trade with China to Japan % of Primary Exports t 100% 90% 80% 70% 60% 50% Primary Exports and Total Trade to Japan 1990 BGD NPL LKA HKG MYS PHL TWN 0% 0% 50% KOR THA % of Total Trade with Japan Jp IDN Source: WITS. 13
The overall degree of intra industry industry trade There is little evidence of technology diffusion through trade in the connection to LAC-China, C which seems s to rely extensively e on comparative advantage forces this is a broader pattern characterizing trade dynamics of many LAC countries. LAC countries 100% 90% 1990 2009 80% 70% 60% 50% 0% Cos sta Rica Grenada Mexico Brazil El Sa alvador Arg gentina Jamaica TTO Gua atemala Co lombia Uruguay Ho onduras Nic caragua Chile Peru E cuador Bolivia Pa araguay Ven nezuela EAP countries 100% 90% 1990 2009 80% 70% 60% 50% 0% Hong Kong Malaysia Thailand Taiwan Philippines Korea Rep. Indonesia Sources: WITS 14
Growth poles and technology diffusion The FDI channel playing an even more limited role The Japan-Tigers connection Large FDI flows driven by pull and push factors Flows over time shifted to labor-intensive to capital- and technology-intensive industries FDI flows reinforced trade connections with the development of value chains Growing connections among Tigers The LAC-China connection Very limited flows and mostly concentrated t on resource-intensive r i sectors Recently: small investments appeared in manufacturing and transport Few connections developing among LAC countries that export to China Overall, little l evidence that China is fostering productivity i growth in the LAC region as Japan did for the East Asian Tigers. Some have argued that this is due to an excessive commodity-dependence ( curse ) 15
But there are some hopeful signs in LAC Commodity production per se is not inferior to others there is some spotty but trobust evidence of some bright spots in LAC: some commodity sectors are benefiting from technological innovation, generating cross-sectoral linkages, value upgrading, and employment. Biotechnological revolution and connectivity in Argentina, Brazil, and Uruguay Climbing the quality ladder in metal production in the region Clusters of activity (employment, SMEs) around copper production and salmon farming in Chile The central point is that it is not necessarily what you produce and trade but how it is being produced and whether it is generating positive spillovers to the rest of the economy. Source: Mandel (2009). 16
Overall, trade and financial connections are unlikely to spur growth if not accompanied by: Investments Human capital formation Innovation capacity Appropriate institutional and policy environment % of GDP 35% 25% 15% 5% LAC-7 EAP Investment Decade Average 0% 1960's 1970's 1980's 1990's 2000's Notes: In Panel A, EAP includes Hong Kong, Indonesia, Korea Rep., Malaysia, Singapore, and Thailand. In Panel B, EAP includes Hong Kong, Indonesia, Korea Rep., Malaysia, Singapore, Taiwan, and Thailand. Both in Panel A and B, LAC-7 includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. Sources: WDI, Penn World Tables, and The International Energy Agency (IEA). 17
Human capital plays an important role in explaining the (low) degree of positive spillovers The existence of skilled labor with high educational and technical capabilities (e.g. welltrained engineers and skilled managers) is key for knowledge spillovers (Schiff and Yang 2010). Borensztein, de Gregorio, and Lee (1998) finds that positive growth effects from FDI requires a minimum threshold of human capital in the host country. 37.5 23.1 14.2 9.5 LAC-7 2010 7.9 LAC-7 1990 16.4 51 40.3 29.7 40.7 20.3 East Asian Tigers 2010 9.7 East Asian Tigersg 1990 10 19.3 40.9 29.3 Source: Barro and Lee (2010). 18
Quality of education: Investment per student in LAC yields less learning Mathematics sc core in PISA 2006 550 500 450 400 350 IDN AZE MAC URY Education Gap ROM SVK TUR ARG CHL CZE HKG FIN KOR NLD NZL CHE AUS BEL JPN EST AUT DNK SVN DEU ISL IRL FRA GBR NOR POL SWE HUN LTU LUX ESP LVA USA GRC HRV PRT ITA THA BRA MEX JOR BGR COL TUN ISR 300 KGZ 0 5 10 15 20 25 30 Expenditure per student, primary (% of GDP per capita) Sources: OECD, UNESCO, and World Bank. 19
Domestic policies can also play an important role in fostering spillover effects. East Asian Tigers put in place a wide set of policies to actively seek for foreign technology [World Bank (1993)]: Fostering imports of capital goods Incentives to foreign training Incentives to FDI inflows In addition, East Asian Tigers followed an exchange rate policy geared at fostering export competitiveness: Feasible with relatively closed capital accounts (impossible trinity concerns) 20
Domestic policies can also play an important role in fostering spillover effects. The asymmetries in the degree of trade and financial openness give rise to additional constrains for policies i LAC. The region needs to make a larger productivity-enhancing policy effort to compensate for structural impediments (low domestic savings and high degree of financial i globalization) li to a competitive exchange rate. 1 Financial Openness Partial Liberalization 0.8 0.6 0.4 0.2 EAP LAC-7 0 197 73 197 75 197 77 197 79 198 81 198 83 198 85 198 87 198 89 199 91 199 93 199 95 199 97 199 99 200 01 200 03 200 05 Notes: In Panel A, EAP countries are Hong Kong, Indonesia, Korea Rep., Malaysia, Philippines, Taiwan, and Thailand. Sources: Kaminsky and Schmukler (2002) and Lane and Milesi-Ferretti (2007). 21
Main messages and results Comparing the LAC-China and Tigers-Japan connections lead to a mixed evaluation So far, China has not been a conduit for technological diffusion and knowledge spillovers There is no meaningful intra-industry trade between LAC and China Exports are concentrated in natural resources Imports from China are concentrated on unskilled-labor l intensive i goods 22
Main messages and results There are some bright spots in several LAC countries/sectors: mode of production of commodities is escaping the enclave syndrome LAC needs a larger productivity-oriented policy effort to compensate for structural impediments to competitive exchange rate The Tigers followed a different model: high domestic savings and limited integration into non-fdi international markets Could the region turn natural resource abundance and the China Connection into a blessing? Diversification avoiding the enclave syndrome Institutions avoiding corrosive effects of rent-seeking 23
Thank you 24