A Decade of Development
Thinking: What Have we learned?
IDB, September 2004
Guillermo Perry
Chief Economist, Latin America and the Caribbean Region
The World Bank
Relative Per Capita Economic Growth in LAC
Moderate in the 60s, 70s and 90/98;
negative during 80s and 99/03.
HIGH SENSITIVITY TO CAPITAL FLOWS REVERSALS
Real GDP per capita growth
4
3.5
3
2.5
2
1.5
1
0.5
0
-0.5
-1
Latin America vs World
1960s
1970s
1980s
Latin America and the Caribbean
Source: World Bank
1990-98
World
1999-03
Reducing vulnerabilities
• Limit currency and maturity mismatches in
Government and corporate balance sheets:
–
–
–
–
–
Overcome fear of floating
Long term capital markets in domestic currency
Public debt management and composition
Hedging markets
Prudential Regulation (or Market Based Capital Controls)
• Reducing deficit and pro cyclicality biases:
– Pro cyclicality leads to deficit biases and poor quality of
expenditures
– Reasonable fiscal rules (a la Chile or a la Brasil)
Growth and Reforms: How Disappointing?
Reforms did pay, but we oversold them
Impact of Different Factors on Growth: 1980s vs 1990s
7.0
6.54
6.0
5.16
5.0
3.99
3.83
4.0
3.48
3.0
2.70
1.93
2.0
1.42
1.27
1.0
0.0
-0.16
Convergence
Reforms
Cyclical
External
Venezuela
Peru
El Salvador
Ecuador
Costa Rica
Colombia
Chile
Brazil
Bolivia
Argentina
-2.0
Mexico
-0.77
-1.0
Source: Loayza, Fajnzylber and Calderon (2002)
LAC countries deficient performance
in TFP growth
Anual TFP growth
1.5
1
0.5
1970-79
0
LAC
-0.5
-1
-1.5
-2
OECD
East Asia
1980-89
1990-99
Innovation: the major driver behind high
growth episodes
LAC countries not among the superstars
5.0%
Predicted & Observed R&D/GDP
4.5%
4.0%
Israel
3.5%
Finland
3.0%
2.5%
2.0%
Korea
1.5%
1.0%
China
India
0.5%
Argentina
0.0%
4
5
6
7
Mexico
8
Log GDP per Capita
Fuented: Lederman y Maloney (2002)
9
Costa Rica
10
11
:
Higher social returns to R&D than to
physical investment at any level of
development
120%
5
4.5
100%
4
Rate of Return
3
60%
2.5
2
40%
NIC
JAM
BRA
CRI
MEX
ARG
CHL
KOR
US A
FIN
1.5
1
20%
0.5
0%
2000
0
7000
12000
17000
22000
Constant 1995 PPP US$ /capita
Returns to R&D
Source: Lederman and Maloney (2002)
Returns to Investment
R&D/Inv
Optimal R&D/Investmtent
3.5
80%
Innovation requires active
policies
• Technological change depends on the quality of the
institutions and policies (macro environment, labor market
flexibility, property rights and contract protection, easy
entry and exit of firms, international economic integration)
• Technological change is skill biased: it requires improving
coverage and quality of education
• Given non-appropriability and high externalities, technical
change requires specific support:
– Intellectual property rights protection
– Competitive subsides for private R&D
– Incentives for improved University/Firms linkages
– Sectorial innovation clusters
– Risk Capital
– Promotion of new activities? (Rodrik, Haussman)
Excess inequality: Does it limit growth?
Gini coefficient: distribution of household per capita income, regions of the world, 1990s
60
LAC
50
Asia
40
Developed
Eastern Europe
30
20
10
0
1
Source: Authors’ calculations based on UNU/WIDER-UNDP World Income;
Inequality Database, Version 1.0, September 2000.
Excess inequality can limit growth
• Lost Investment opportunities:
– Unequal access to credit
– Unequal access to education
• High levels of crime and violence
• Weak institutions (property rights)
• Weak response to external shocks
Summary
• The critical importance of balance sheet
vulnerabilities
• The association between pro cyclical and deficit
biases in fiscal policy
• The need for active innovation policies
(and pari-passu skill improvements)
• The pervading importance of good institutions
• The (likely) negative association between high
inequality and growth