UNU-MERIT CONFERENCE 26-28 November 2014. Macro and micro lessons from the Latin American natural resource-based growth process. JORGE KATZ jorgekatz39@gmail.com or jorgekatz@terra.cl FEN,University of Chile
Topics to be examined 1. Stylized facts. 2.Aggregate convergence has not taken place, independently of the macroeconomic policy regime countries have adopted. We have developed into 1/3-2/3 societies. 3.Convergence is taking place, however, in natural resource based activities, but associated to episodes of Dutch Disease, and of Tragedy of the Commons. 4.Four major current sources of concern: I. How to deal with the Chinese threat. II. Volatility of the world economy. III. The global fiscal balance of the economy and the need for public goods. IV Environmental sustainability and social inclusiveness.
Stylized facts descring the Latin American scenario 1.Per capita GDP has not converged to OCDE levels.(12 and 35 thousand U$S) Convergence is taking place in natural resource based industries due to the China effect and the new GM technological paradigm. 2. Much higher structural heterogeneity prevails. The ratio of GDP per capita between upper to lower quintile is 20-25 times in LA as against 6-8 times in OECD. The upper 30% lives better than the average european 3.The rate of capital formation has fallen vis a vis the 1970 s. 4.Macroeconomic volatility is higher than in the 1970 s. 5.The economy has restructured into natural resource based sectors & services. Manufacturing is no longer the locus of modernity 6.Terms of trade have improved due to the China effect, but low and medium tech local industries can not compete with Chinese products. 7. Imports of K goods have increased but domestic R&D efforts have not. 8. The new growth regime involves the expansion of the natural resource exploitation frontier but with frail institutions for environmental protection and for social inclusion.
GDP Per Capita Relative to the United States (PPP at current prices) 80 70 Taiwan 60 50 40 30 Argentina Korea Chile 20 10 Brasil 0 Source: Penn Tables. A.Heston et.al. Univ. of Penn.
Income per capita lags behind OECD countries 50000 45000 40000 current international dollars 35000 30000 25000 20000 15000 10000 5000 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 year Argentina Brazil Chile Mexico Denmark Finland Ireland Korea, Republic of Source: Astorga & Katz, in Dutrenit and Sutz.
Average income per capita top quitile and lower quitile Heymann,Ramos) Pib/habit. Top quitile Low quint. Argentina 11.775 45.749 1.832 Brasil 7.679 35.981 920 Chile 10.631 49.915 1.769 Mexico 9.046 39.021 1.383 Paises G7 29.015 71.051 11.354 Anglosaj. 30.473 82.880 9.321 EU-Japon 28.285 65.434 12.277
27 Latin America: Gross capital formation, 1970-2011 Gross capital formation in LA 1970-2011 (En porcentaje del PIB) 25 23,5 23 21,3 21 19 17,6 18,5 17,6 17 15 1971 1972 1973 1974 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 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Fuente: Basado en datos de CEPAL. Source:R.french davis 7
TPF in Latin American. (Aravena et.al. Cepal, 2006) 5 4 3 2 1 0-1 -2-3 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 PTF sin ajustar PTF ajustada
Differences in TPF across LA countries. (Aravena et.al. ECLAC, 2006) 6 5 4 3 2 1 0 Argentina Bolivia Brasil Chile Colombia Costa Rica Ecuador Mexico Peru Venezuela 1950-2005 Capital Trabajo PTF
The average regional scenario as ilustraste by the case of Chile Productivity growth is very low
Latin American macro volatility. (Macro volatility induces a defensive micro of low I and R&D expenditure) 8 Figure I.2 Latin America (19): GDP and aggregate demand, 1990-2004 (annual growth rates, %) 6 4 2 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004-2 -4 GDP growth Aggregate demand growth Source: R.Ffrench Davis
CHANGES IN INDUSTRIAL STRUCTURE RESULTING FROM TRADE LIBERALIZACION AND MARKET DE-REGULATION POLICIES. Argentina Brasil Chile Colombia México 1970 1996 1970 1996 1970 1996 1970 1996 1970 1996 I 15.6 13.1 18.8 22.8 14.9 10.2 10.7 10.5 13.3 13.9 II 9.9 12.1 9.9 8.7 7.7 2.0 2.9 6.5 5.5 10.8 III+IV 36.2 45.7 35.8 42.4 43.2 56.2 45.7 51.2 46.8 46.5 V 38.2 29.0 35.5 26.1 34.2 31.6 40.7 31.8 34.4 28.8 Metalworking activities. (Machinery and equipment) I Industria metalmecánica (excluyendo automóviles, CIIU 381,382,383,385); II Equipo Vehicles de transporte (CIIU 384) III+IV Alimentos, Natural resource bebidas y processing tabaco (CIIU industries 311,313,314); (en el caso chileno, CIIU 372 ha sido excluido); y IV Foodstuffs, Industrias forestry, procesadoras mining, acuaculture, de recursos horti and naturales fruticulture, (CIIU, gas 341, and 351, oil, etc. 354, 355, 356, 371, 372) V Industrias Low skilled tradicionales labour intensive intensivas industries. en mano (Shoes, de obra clothing, (CIIU 321, 322, etc.) 323, 324, 331, 332, 342, 352, 361, 362, 369, 390. Source: ECLAC, UN
Commodity prices 2000-2011 (Is China a bubble or a new model of the world economy?) 250 80% 200 Var. interanual (eje derecho) Índice 60% 40% 150 20% 100 0% 50-20% -40% 0-60% I 00 III 00 I 01 III 01 I 02 III 02 I 03 III 03 I 04 III 04 I 05 III 05 I 06 III 06 I 07 III 07 I 08 III 08 I 09 III 09 I 10 III 10 I 11 Source: R.Jenkings
Unit labor costs 100=2000 200.0 Colombia 175.0 Brasil 150.0 Chile 125.0 100.0 Perú Uruguay Argentina 75.0 50.0 25.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Argentina Brasil Chile Colombia Perú Uruguay Source: R.Frenkel and M.Rapetti.
The Real exchange rate vis a vis US. has worsened 275.0 250.0 225.0 200.0 175.0 150.0 Argentina 125.0 100.0 75.0 50.0 Uruguay Chile Perú Colombia Brasil 25.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Argentina Brasil Chile Colombia Perú Uruguay Source: (R.Frenkel and M.Rapetti, 2011)
Low R&D expenditure as a % of GDP, and scarce incidence upon domestic productivity growth. 4 3 2 1 0 0.43 0.69 1.14 1.34 2.68 3.95
Different macroeconomic policy regimes have failed to induce catching up. Brazil and Chile opted for an inflation targeting regime in the 2000 s. Argentina instead opted for a high and competitive real exchange rate (RER) regime. Brazil y Chile suffered the appreciation of the exchange rate and increasing commoditization of industrial output and exports. Argentina expanded growth and employment across the board,but could not keep inflation at bay. X s came from old plants, without much new investment. None of the three managed to close the relative productivity gap with the international frontier. Macro policies seem to be a necessary, but not a sufficient condition for that.
Argentina: exchange rate management after the 2002 devaluation. Source: Katz & Bernat,2011
The expansion of Exports. (Argentina, Brasil Chile) 170 160 Argentina Brazil Chile 159,4 150 140 130 120 119,0 116,3 120,8 129,6 121,0 141,6 138,2 134,9 133,1 128,7 124,2 138,4 138,1 131,8 134,6 132,2 125,4 125,4 123,2 110 100 100,0 105,0 90 2003 2004 2005 2006 2007 2008 2009 2010e Source: Katz & Bernat, 2011
Annual inflation rate, Argentina, Brazil and Chile. 25% 22,0% 23,1% 20% Argentina Brazil Chile 15% 12,3% 13,0% 13,8% 10% 5% 9,3% 7,6% 6,1% 3,7% 2,4% 1,1% 5,7% 3,7% 9,8% 3,1% 2,6% 4,5% 7,8% 7,1% 5,9% 4,3% 5,6% 2,5% 0% -1,4% -5% 2003 2004 2005 2006 2007 2008 2009 2010e After 2006 Argentina could not avoid moving into an inflationary regime and could not substain its previous exchange rate policy
Neither Argentina, nor Brazil or Chile, managed to close the relative productivity gap in manufacturing 60 ARG BRA MEX COL PER CHI 50 40 30 20 10 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98
But convergence is taking place in natural resource based sectors 1. Agricultural products : Soybean, wheat, maize.(argentina, Brazil, Bolivia, Paraguay, Uruguay) 2. Mining activities. (Chile, Bolivia). 3. Oil and gas.(ecuador, Colombia). 4. Aquaculture. (Chile) 5. Forestry products (Chile, Brazil, Uruguay). 6. Horto, fruticulture & wine.(argentina, Chile, Uruguay), show : New state of the art facilities have been erected featuring new process and production organization technologies. Subcontracting activities and KIBS have expanded and sophisticated natural resource based clusters are rapidly growing.
Soybean production (Tons) and productivity (Tons/acre). Comparative perspective 1995-1996 2006-2007 Producction Tons Argentina Brazil China India EEUU 12.480 24.150 13.500 4.476 59.174 46.500 59.000 16.200 7.690 86.770 Harvested Area. Acre Argentina Brazil China India EEUU 5.980 10.950 8.127 4.817 24.900 15.900 20.700 9.300 8.100 30.190 Yield per acre. Argentina Brazil China India EEUU 2.087 2.205 1.661 0.929 2.376 2.925 2.850 1.742 0.947 2.874 Source: USDA
Expanding the natural resource exploitation frontier has resulted in major environmental consequences Salmon farming in Chile as an example. 600 000 round tons 500 400 300 200 100 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Norway Chile UK Canada Faroe Island Australia
Negative environmental effects reflect a negative response from the ecology.
Main policy issues now facing Latin America. I will mention just four: 1. How to deal with the Chinese threat?.. China is today the major source of demand for natural resource based industrial commodities. It affects world prices and terms of trade.. China is today a major source of supply of low and medium tech industrial goods. The trade balance has become strongly negative.. China is now aggresively entering energy, mining, agricultural and capital markets, taking agricultural land on lease, exploring gas and oil reserves, and offering financial help. How should the region deal with this?. How to negotiate with China in a beauty context scenario?.. What impact should different countries expect from changes in the Chinese domestic policy scenarios.
II. How to deal with a more volatile world environment. Trade and FDI. III How to reconcile short term financial equilibrium and long term structural issues? IV. How to deal with the problems of a natural resource based growth model 1. Trade liberalization forced the return to natural comparative advantages leaving less space for macroeconomic policies aiming at catching up. 2. The inflation targeting regime adopted out of fear of inflation and to attract FDI does not care for structural change and social inclusion. 3. The apreciation of the exchange rate has deteriorated the competitive position of emerging nations. 4. Capital goods imports have substituted for local machinery prodution and also for R&D efforts. 5. Environmental protection has deteriorated due to overexploitation of natural resources 6. Manufacturing activities have lost share in GDP and the expansion of the natural resource exploitation frontier with scarce provision of public goods is having negative consequences upon the environment and also upon social inclusivness.
Monetary, fiscal and exchange rate policies are needed to sustain the RER, but financing is also required for industrial and social policies. A competitive RER is needed for growth but it affects the rate of inflation. For such reason fiscal and monetary interventions are needed to keep inflation at bay. These interventions should aim at maintaining the global balance of the economy, but considering that resources are needed to build up of local technological capabilities and competitiveness, and also to improve social equity. This demands coordination between short and long term policies sustaining the global balance of the economy but financing the building up of domestic technical capabilities and improving social inclusion.
Industrial and social policies are required to improve competitiveness and social inclusion. There is a widely accepted view that industrial and natural resource based growth are somewhat incompatible. However, natural resources demand location specific specialized equipment and knowledge intensive services which can not be brought from abroad. Natural resources soil, water, the bio-sphere - are in constant change and transformation in response to an increasing rate of exploitation. The dialogue between economics an the ecology demands collective understanding, regulation and public goods. The expansion in the rate of exploitation of natural resources with inadequate supply of public goods produces environmental degradation and welfare loses at the community level.
The current Chilean macro/micro policy package as an option to deal with the situation, but denigrated by the international press. 1. The current Chilean policy appears as a valuable attempt to bring together macro stability and social reforms : a tax reform collecting 3% of GDP to be used to improve Education. 2. The FT and The Economist have denigrated it by calling it the new mediocrity. Is it right? 3. The question then emerges : How can economic growth, structural change and social inclusion be made compatible with macro stability in the present age of financial equilibrium policy thinking?