Latin America´s Decade of Lost Productivity - Commentary on "Let’s Be Clear: This Will Not Be Latin America’s Decade" by José Antonio Ocampo

Ariel Coremberg
Professor Theory and Measurement of Economic Growth
University of Buenos Aires
ARKLEMS Growth, Productivity and Competitiveness Project
October 9, 2012

The XXI century began with a boom of commodity prices that have important impact on the Latin American region, especially in natural resource dependent economies.

Latin America showed an impressive economic growth resurgence after several years of stagnation, thanks to the boom on commodity export prices.

The region has been growing 3,7% at annual rate since 2002 to 2012, nearly the double during the previous depression period 1998-2001. 

As pointed out recently in this blog by Jose Antonio Ocampo, LAC shows several positive effects of this boom cycle as improvement of income distribution, poverty reduction, FDI inflows, deleverage and reduction of external debt and high external reserves.

Present GDP growth was not so impressive in comparison with the figures during the “Washington Consensus Era”1990’s decade, and very far from import substitution previous period (1950-1980). 

Moreover, LAC showed a dissapointing economic growth in comparison with Asia and inclusive with Africa in comparison with her high human capital and “quality” of education levels. 

At the same time, LAC suffers an impressive exchange appreciation as a consequence of the increase of export income due to commodity exports boom or from capital inflows that conspire against competitiveness and future growth.

As J. Ocampo pointed out, several structural phenomena showed a quite disappointing performance that explains this moderate growth: widened techonological gap, less export diversification, lower improvement in product quality, etc.

The present global economic crisis puts high level of uncertainty about sectoral growth strategies in developing countries. 

The current reversion of the world economy cycle casts doubts on the sustainability of the economic growth profile in LAC. Abnormally good conditions that Latinamerica has received during the commodities prices boom has seem to an end. 

Now it is the time to note what happened with the growth profile of Latinamerica during the commodities prices boom. What were the improvements in terms of human capital, quality of resource and productivity the region generated that could persist in the future?

The purpose of this note is to highlight Ocampo´s assertion of “This will not be Latin-America’s decade” from the structural-mesoeconomics point of view, with some evidence from source of growth methodology and databases.

First issue: the period under analyses is a key issue in order to analyse economic growth performance in the long run. The economic growth since the last crisis was an impressive 4.2%, but it is less if one takes into account maximum levels of GDP: 3.1%, nearly one third to half of the performance of Asia, Africa and Russia and other CIS countries. Remember a cannonincal lemma in economic growth theory: “small numbers matter”, one point of less growth could explain high gdp level gap between poor and rich countries in the long run.

Second issue: “Price Competitiveness matters”, get the prices right is one of the main issues in order to explain economic growth resurgence and growth acceleration episodes, as pointed out by Rodrik (2007),1 high real exchange rate is a partial substitute of industrial policy and domestic distorsions in developing economies, foster desirable structural change, and spur growth. So, since 2007, several Latin-American countries suffer an important appreciation of their domestic currencies, partially due to dollar depreciation in the world economy; some of them react with “inflation targeting” policies with moderate nominal appreciation and others of inflation regimes as Venezuela or Argentina.2

Third issue: “Productivity matters”. LAC “Dutch disease” has important consequences on not only competitiveness but also future growth of the region. The key variable that could compensate this fact is “productivity”. High productivity performance is the mirror of “cost reduction”, allowing increasing competitiveness at macroeconomic level and mainly in non-tradable sectors as manufacturing, compensating relative less price competitiveness without recurring to devaluation.

What happened with Productivity in LAC during the present boom of commodities prices?

The variable recommended by literature of measurement to capture productivity dynamics is Total Factor Productivity (TFP). Total Factor Productivity is a variable that reflects output dynamics in excess of inputs or factors of production. It is a “residual” variable that reflects several phenomena at macro level that encompass some of Ocampo issues: externalities, increasing returns to scale, complementarities, better organization of the economy and structural change towards more productivity level and dynamics sectors.

According to Total Economy Database (TED),3 the region shows a performance of 0.6% at annual rate, during the recovery period (2002-2008), nearly the third and half magnitude of the performance of the region during the previous recovery period (1990-1998), other regions as Asia, Africa, Eastern European and Rusia and other CIS countries.

But this is a recovery period. Acoording to issue 1, the relevant period of analyses for economic growth profile is the comparison between cyclical maxima. In this case, LAC showed a negative TFP: -0.2%. If the period extended up to 2011, the negative performance is higher: -0.42%, showing that the level of present TFP is still less than the maximum level reached during the 1990’s decade (1998). Furthermore, this negative TFP is very far away from the figures of China, India but also from more moderate but positive rates as the rest of Asia, Africa, Eastern European, Rusia and CIS countries showed.

If we look at more detail, we could find that main countries of LAC showed moderate negative TFP rates from 1998 to 2008: Brazil, Chile, Mexico, Uruguay, Colombia, Costa Rica. An impressive TFP gain in Peru (1.7%) and moderate positive rates in Bolivia, Ecuador and Venezuela: (proximately 0.5%). 

Argentina showed a null TFP. TED database adopt series from ARKLEMS+LAND project4 but it does not adjust by the effect of change of occupational categories in labour composition. Taking into account also those effects, ARKLEMS+LAND5 measured a negative TFP slowdown for the case of Argentina.

So Latin America showed a “lost productivity decade” during the last boom in export commodities prices, at the same time of price competitiveness drop.

Without naming those effects as some kind of natural resource curse or “dutch disease” in the region, it is worth to recognize that some of the lost of price competitiveness is exogenous to the region: dollar depreciation in the world economy.

On the other hand, consequences on productivity are mostly due to an endogenous response to exogenous events and incentives from economic policy regimes.

Some countries take advantage from export commodities prices boom, by important increase in investment rates to compensate of backwardness infrastructure. It is expected that TFP could show positive rates in the future after capital intensity catching up.

Other countries support demand driven policies, in order to compensate backwardness in social safety nets but after reducing output gap, without taking care on inflation and a negative impact on insufficient investment and capital-output ratios to support the increase in aggregate demand.

To sustain economic growth of an economy intensive in natural resources, it is necessary to make a structural change, higher value added and upgrading in product quality in every industry and export diversification as Ocampo pointed out

Moreover, in order to sustain future strong productivity gains, long run growth and welfare, LAC needs to improve productivity in every sector but with a clear macroeconomic impact. 

So, “putting relative prices right” or “peaking the leader” policies are not enough to support a growth strategy.

The key variable to sustain this kind of policy is: productivity.

1Rodrik, Dani (2007), The Exchange Rate and Economic Growth: Theory and Evidence, Harvard
University, John F. Kennedy School of Government.
2Coremberg, Stanley, Valdecantos (2012): Natural Resource Boom in America Latina. Dutch Disease or Sustainable Development?, work in progress.
3Van Ark, B.; Levanon, Chen, B. and Chen, V. (2011): “Performance 2011: Productivity, Employment, and Growth in the World's Economies”, Total Economy Database, The Conference Board.
4See Coremberg (2012): THE ARKLEMS+LAND Database. Measuring Productivity in Unstable and Natural Resources Dependent Economies: Argentina. WorldKLEMS 2nd Conference, Harvard University.
TED adopted almost all the series from ARKLEMS project: this series are adjusted by several effects: the impact of global crisis 2008-2009, the severe draft of the decade effects on crops, the impact H1N1 flu on services, etc.
5The only relevant difference with TED is labour composition: ARKLEMS also include occupational categories so labour composition showed a recovery from minimum levels several years after the 2002 crisis thanks on the increase of formalization of labour force during the present period, Coremberg (2012), which impact in a relative higher labour composition effect of ARKLEMS than TED database.
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