Some Remarks on
Productivity in LA
Santiago Levy.
In a half century, LA did not close the income gap vs US
Latin America vs. US
1.30
(Argentina, Bolivia, Brasil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela.)
Gain from factor
accumulation
1.20
1.22
1.10
1.00
Net loss
0.98
0.90
0.80
TFP loss
0.70
0.72
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
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
0.60
TFPAL Vs. USA graph / TFP US
TFP
Factor Accumulation
Capital-Labor Accumulation AL Vs. USA graph vs. US
(human and physical capital)
Fuente: Fernández Arias y Rodriguez Apolinar (2014).
GDP
pc AL Vs. USA graph /GDP pc US
GDPpc
South Korea certainly did!
Korea relative to US
8.26
Total Gain
Gain from factor
accumulation
3.77
1.80
TFP gain
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
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
8.60
8.20
7.80
7.40
7.00
6.60
6.20
5.80
5.40
5.00
4.60
4.20
3.80
3.40
3.00
2.60
2.20
1.80
1.40
1.00
0.60
GDP
GDPcpc South Korea Vs. USA graph /GDP pc US
Capital-Labor
Accumulation South Korea Vs. USA graph vs. US
Factor Accumulation
Fuente: Fernández Arias y Rodriguez Apolinar (2014).
TFP South
TFP Korea Vs. USA graph / TFP US
• The lag vs. the US is fully due to TFP, as in relative terms the Region accumulated
more human and physical capital.
• Korea’s spectacular development is due to:


TFP increased between 2 and 3 times more than in LA, and
factor accumulation was also between 2 and 3 times higher.
• If TFP in LA had increased as in Korea, today its income per capita would be 2.4
times higher; and if it had increased as in the US, 1.4 times higher.
• Beyond short run macro issues and world commodity cycles, LA’s growth
problem is mostly a productivity problem.
• The importance of focusing on productivity even stronger now, as conditions in
the world economy not as favorable to LA as in the last few years.
Three basic stories
Story 1: Misallocation of physical and human capital Y = A{.}F(K,hL),
• Aggregate TFP is weighted average of firm’s TFP, with weights being share of
resources absorbed by each firm.
• Misallocation reflects obstacles to resources flowing to it most productive use;
“distortions” needs to be interpreted in a broad sense.
• Large list of obstacles (“distortions”): factor markets, product markets,…, but also
market failures not corrected by the State.
• Function A{.} very complex; affects intensive and extensive margins.
• Physical and human capital accumulation potentially a function of A{….} so that
Y = A{.}F[K(A), h(A)L] but this needs more work.
• Pay-off to removing obstacles (“distortions”) potentially large in short to medium
run, but eventually peters out as economy approaches frontier (although frontier
can be endogenous to “distortions”)
Evidence suggests LA has more “distortions” than US
Without “distortions” (in a broad sense) MRP of K and L same in all firms in all sectors.
Dispersion in MRP of K and L (p90 – p10)l
El Salvador 2005
Ecuador 2005
Argentina 2002
China* 2005
Chile 2006
Bolivia 2001
Mexico 2004
Uruguay 2005
United States* 1997
Source IDB(2010).
Colombia 1998
Venezuela 2001
0
50
100
150
200
250
300
350
(manufactures, firms with 10 or more workers)
1/1024
Sector
productivity
comparisons,
US vs. Mexico
1/256
1/16
1
4
16
Productivity relative to the average sector. Average sector=1.
Mexico 2004
US 1997
• If “distortions” in
Mexico were similar
to the US,
manufacturing TFP
would be 36%
higher.
Story 2: Investment in human capital Y = A*{h}F(K,L)
• Emphasis on low quality of human capital in LA.
• On schooling evidence from PISA, but less evidence about skills.
• More recently, emphasis on motivations and mechanisms for acquisition of skills
cognitive and non-cognitive).
• A bit of puzzle with evidence about returns to education and narrowing skills
differentials.
Story 3: Investment in physical capital Y = A{K}F(K,L)
•
•
•
•
•
•
Often the view held implicitly by many policymakers
View associated with Kaldor and others, with economies of scale relevant
Relatively little empirical evidence
Emphasis also on infrastructure as impediments to TFP growth
Less emphasis on quality of investment and composition
More of a macro story about uncertainty, savings, access to capital markets
Some evidence that LA invests inefficiently
Plotting A{K}
5.2
Advanced economies
5.0
4.8
log (TFP)
Asian Tigers
4.6
Latin America
4.4
4.2
4.0
3.8
23
24
25
26
log (K)
Source: Fernández Arias y Rodriguez Apolinar (2014).
27
28
29
A productivity agenda: two tasks with different times
Task 1. Channel resources to their most productive use
TFP
Task 2. Increase quantity and quality of human capital
•
Task 1 yields results in short run, although its relevance varies from country to country. It
may also be part of task 2, if it improves the returns to education and to the acquisition of
skills. Also, critical for cohorts of workers already in the labor force.
•
Task 2 probably more long run (but skill acquisition in labor market may really matter).
Essential for long term productive transformation.
•
Lack of clarity in public policy agenda leads to inconsistent efforts.
What does task 1 imply?
•
Systematic revision of all elements of the economic environment, particularly with regards
to labor, credit and taxes.
•
Key question: does policy X contribute to resources flowing to their most productive use?
•
This is a big task, as we are talking about a large quantitty of policies, programs, regulations
and institutions (many X’s!), behind which there are deeply rooted social agreements,
powerful vested interests, and strong ideological beliefs.
•
Empirical evidence for some LA countries shows that some policies foster the creation and
survival of unproductive firms, limit the growth of productive firms, promotie
informality,……, although a lot depends on context and the institutions of each country.
What does task 2 imply?
•
Thinking of human capital as a life-cycle phenomenon, beyond formal schooling.
0 a 18 years
ECD
and
Quality primary
and secondary
19 to 24
25 to 65
Pertinent technical education;
Permanent labor training
School to work transition
•
Education quality is central. Available indicators (PISA) show great lags vs. Asia and OECD.
•
Need for revision of education and training programs. Technically complex and pollitically
difficult.
•
Tasks 1 and 2 are complementary. Focusing on task 2 but ignoring task 1 will waste resources
(engineers as taxi drives), or lose them (brain drain).
•
Conversely, focusing only on task 1 will eventually lead to slow growth for lack of human
resources for productive transformation.
Raising productivity is difficult
•
No silver bullet nor “magic wand”. Unlikely that any single policy reform will be enough
(labor, credit, trade, industrial, etc.).
•
Cannot be achieved only with good macro policy (but very difficult to achieve without it).
•
Cannot be achieved only by physical investments (but it is likely that investment will be less
dynamic and more inefficient in its absence).
•
Requires a re-think of policy instruments used for redistribution, particularly those focused
on the labor market, to avoid costly trade-offs between redistribution and productivity.
•
Requires substantive changes to sensitive public policies in areas like taxation and education.
•
While there are general principles (task 1 and task 2), there are no “recipes”; need specific
country focus given large heterogeneity between LA countries.
•
Needs pragmatism, a scarce commodity in a Region characterized by policy discussions with
strong ideological content.
• Needs an integral view that aligns all instruments of public policy in the same
direction.
• (Need to expel Penelope from Macondo!)
• In the end, a country’s productivity is a reflection of its institutions, policies,
programs and regulations; which in turn are a refelction of a soial and political
context.
• Productivity, then, is a social phenomenon. It reflects how socities organize
themselves to educate, produce and redistribute. It reflects if incentives are aligned
in the direction of producing wealth or extracting rents.
• LA has lagged behing Asia and has not closed the income gap vs. the US not
because those countries work more, but because their institutions and policies
have been much more conducive to create quality human capital and to channel
resources to their most productive use.