Competitiveness and Growth in Latin America: The Chilean Case Matías Braun Universidad Adolfo...

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Competitiveness and Growth in Latin America: The Chilean Case Matías Braun Universidad Adolfo Ibáñez & IM Trust Ignacio Briones Universidad Adolfo Ibáñez Christian Johnson Universidad Adolfo Ibáñez September 2007

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  • Competitiveness and Growth in Latin America: The Chilean Case

    Matas BraunUniversidad Adolfo Ibez & IM TrustIgnacio BrionesUniversidad Adolfo IbezChristian JohnsonUniversidad Adolfo IbezSeptember 2007

  • Non-Binding ConstraintsWe dismiss the following as being material constraints Property rightsMacroeconomic unstabilityTax schemeInfrastructurePublic institutionsSelected scores at the WEF-Global Competitiveness Report 2006-2007

  • Selected binding suspectsPoor quality of EducationBad Income DistributionMicro Constraints on Growth: a) labor, b) energy constraints External sector and self-discovery Financial Constraints

  • MethodologyWe consider a factor to be a considerable constraint if three conditions apply:If, compared to a relevant group of countries, a measure of the relevant issue is shown to be significantly smaller in Chile. If there is an economic and statistically significant association between the measure of the particular concept and the rate of growth and/or the level of income.If we can show either shadow prices or behavior that is consistent with the hypothesis that there is a significant constraint steaming from supply rather than demand factors. For each candidate, we compute and rank

    Benchmark Groups

  • Our own implementation of GDMy=f(X) dy=y/XdXdX lower than benchmark (expected, desired, rich or fast-growing countries)y/X relatively large and in the right directiony/X X=>y and not the other way around (behavior or prices consistent with lack of supply instead of lack of demand)For X to be binding we need all 1, 2, and 3 to be true.Also, dy=y/XdX allows us to rank them

  • 1- Lack of resources: human capital

    Quantitative educational indicatorsQualitative educational indicatorsBehavior: Industry panel regression

  • Education: QuantityAverage years of Education (pop, 25+), 2000Percentage of Higher school attained (pop, 25+),2000 Both attainment and years of school in Chile are in line or over the countrys economic development.

  • Quantitative educational indicatorsGross tertiary enrolment is higher than LA and than the fast growing economiesIn line in 1990, over the expected value in 2004 Quantity is NOT a problem

  • Quantity. Indirect measures wage premiumWage premia and % of labor force with tertiary education completed At first sight Chiles wage premia looks highHowever, it is in line with its quantity of skilled workers (and also level of development and capital per worker)Quantity rather than quality?

  • Quantity. Indirect measures wage premiumSkilled wage premia roughly constant during the 1990sCeateris paribus, supply of high skilled workers has compensated the demand expansion. Supply was not a mayor constraint Wage premia secondary vs primary are converging. Quality?Wage premia in Chile 1970-2003

  • Quality: indirect measuresMincer> ex-post => negative quality effect at school levelMixed Results: No difference from national dataMincer > ex-post, Santiagos data

  • Quality: direct measuresPrueba TIMSS 2003Prueba Pisa 2000Chiles results in TIMSS and PISA test should be 15% higher (=1 standard deviation) In principle, economic effect could be large: 1% in in per capita GDP growth per year. (Hanushek and Kimko, 2000)However, quantity x quality= ok. Combined economic effect 0.4% in per capita GDP growth per year.Quality could be binding

  • Quality. Further tests: Industry panel approach2 specifications:A- Dependent variable is value added growth at isic3 level, over interaction of human capital intensity x availability + other control variablesB- Dependent variable is the share of isic3 value added (to GDP), over interaction of human capital intensity x availability + other control variablesIdea is to test behavior: given Chiles endowment of human capital, do its HK intensive industries are growing slowly than in other countries?

  • Quality. Further tests: Industry panel approach1985 - 2002 Chile was not different from other countries (value added growth an share) 85-95 binding= 0.4% GDP growth. 95-02 the oppositeAll in all, industrial behavior not consistent with the quality binding hypothesis. Latent restriction?

  • 2. Inequality

    High inequality in ChileEmpirical (weak) link (income inequality)= 0.5-0.8 % GDP gth.Asset inequality: 0.6 % GDP gth.

  • 2. Inequality

    High growth coupled with high but stable inequality. Binding? Not clear.Channels:Political making process? NoSocial unstability? NoCapital market? NoConclusion: NOT binding

  • 3- Micro Distortions on GrowthA) Labor Market RegulationsPolicy-induced price distortions and regulations in some sectors World Economic Forum Competitiveness Reports indicate that by far labor regulation is a problem

    B) EnergyExperiences such as the oil shock of the recent years, the shortage of gas from Argentina during the last few years, and the low levels energy investment in the economy were circumstances that might be constraining Chileans future growth prospects.

  • A) Labor Market RigiditiesLabor market would be binding constraint to Chilean growth?Evidence supporting the view that labor regulation and labor market rigidity (Job security Indexes) does not affectEmployment growthInvestment Industrial production growth Substitution of Labor and Capital And what about Investment Climate Survey?Labor regulations does not affect employment growthLabor regulations does not affect production

  • B) Energy Constraints

  • WorldscopeData ENIAEnergy is consistently a relevant factor in the productive processRobust Elasticity

  • B) EnergyBUT: Is Energy really a Problem? NoWB Inv. Climate SurveyNot binding forSalesEmploymentproduction

  • B) Chile: Is Power Supply a Problem? NoBased on official projections, the Chilean economy will require additional energy in an amount close to 400-450 Mega WattsPlanned infrastructure will satisfy demand (see annex.)Many actions taken by the Energy Minister to decrease our energy dependence in short and long run:Efficient use of energy from households, firms and government agencies (Programa Pais Eficiencia Energetica: PPEE)Promoting a tripartite agreement between Chile, Argentina and Brazil to make energy swaps in case of shortageTo control the use of hydro resources, to avoid leakages, etc.

  • B) Energy: ConclusionEnergy supply is important for However from World Banks Investment Climate Surveyenergy has not been an obstacle for the operation and growth of businessesAnd supply planned power infrastructure is in line Energy will not be a binding constraint for growth in Chile

  • 4-External sector and self-discoveryDespite its outstanding growth rate and its relevant size, the export sector is still very concentrated in a few primary products. This lack of diversification could be hampering Haussmanns Self-Discovery process and thus constraining Chiles future growth.

  • 4- External sector and self-discoveryChile shows a level of open forest that is lower than expected from the growth equation

  • 4-External sector and self-discoveryChiles current export basket is very periphericalexport sophistication is lowspecialized in activities with few new applicationshowever, output and export growth has been highThe ability of the economy to transit to a new development stage is not for grantedChiles nearby efficient frontier favors:agricultural-based manufactures, shipbuilding, industrial chemicals, non-electric machinery, and forestry-based manufactures

  • 4-External sector and self-discoveryIt is Chiles ability to move to these sectors where future growth probably lieseducation quality, and energy, and financial constraints, can play an important role Given the low density of its open forest, Chile will likely require the other determinants of growth to be much more enhanced than in other countries without this condition

  • 5. Financial Constraints

  • Chiles Financial System is Large

    And is not perceived as a constraint for growth

  • Financial Development has a large effect of GrowthAcross countries [King and Levine (1993)Across countries and time [Levine, Loayza, and Beck (1998)]Across industries [Rajan and Zingales (1998)] Across firms [Demirguc-Kunt and Maksimovic (1998)]

    A one standard deviation increase in financial development is associated with around 1% faster growth per year.

  • There is behavior consistent with financing being a constraint in ChileFirms are more sensitive to internal cash and less to investment opportunities than elsewhere, particularly the young, small and intangible. More tangible industries grow disproportionaly faster in ChileYoung and small firms were more severely affected during the post-Asian Crisis growth deceleration period. However, large, listed firms appear not to be particularly constrained in Chile.Internal Cash/ Inv. Opp. SensitivitySmall, Young Firms and growth decelaration

  • 6. Conclusion

  • Bad Local Finance and Poor Quality of Human Capital make the Self-Discovery constraint much more critical

    Constraints on Growth: Summary

  • 6. Conclusions

    Not bindingQuantity of EducationGeneral InstitutionsFinance for large, old, and collateral-rich firmsBindingSelf-DiscoveryFinance for small, young, and collateral-poor firms Quality of EducationEnergy (future)