The Productivity Gap
in LAC
Lessons from 50 years
(IDB WP # 692)
Eduardo Fernández-Arias
Inter-American Development Bank
2016 World KLEMS Conference
Madrid, May 23 and 24
Outline
•
The Stylized Facts of Total Factor Productivity (TFP)
•
The Overall Impact of TFP growth: Productivitydriven Economic Development
•
Is Investment Productivity-enhancing?
The Stylized Facts of TFP
Aggregate Productivity as TFP: why is it the
right productivity measure to look at?
• TFP as parameter A residual from
a
Y
 K  1 a L
y   A  h
 Ak a h1 a f
N
N
L
• TFP important. It “explains” 86% in country
income variation: why does it vary?
• TFP amenable to policy reform (easier than
engineering factor accumulation)
Aggregate Productivity as TFP
• TFP reflects
– Market and public efficiency, not only technology
– Quality of education (multiple of h)
• TFP does not reflect
– Cyclical phenomena (HP detrended), so our TFP
is structural
– Labor force participation rate (L is labor force)
Three key stylized facts
1. LAC’s productivity is not catching up with the
frontier, in contrast to East Asia and others
2. LAC’s productivity is about half its potential
3. Slower growth in LAC is due to slower TFP
growth: The income gap with the US is
increasingly due to the productivity gap
Productivity is not catching up, the gap is opening
Productivity Catch-up
(Productivity Index relative to U.S., 1960=1) - Contrast with selected regions
1.6
1.5
1.4
1.35
1.3
1.2
1.1
1.0
0.92
0.9
0.86
0.8
0.78
0.71
0.7
0.6
2010
2008
2006
Source: Authors' Calculations based on Feenstra, Inklaar and Timmer (2013) and Barro and Lee (2013).
2004
Typical Twin
2002
2000
1998
1996
1994
Typical East Asian
1992
1990
1988
1986
1984
1982
LAC region
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
Typical LAC
Typical ROW
LAC income would double if TFP were not subpar
Relative productivity in LAC countries
(% of U.S. productivity, 2010)
100
90
80
70
60
52.0
50
40
30
20
10
0
Honduras
Bolivia
Source: Authors' Calculations based on Feenstra, Inklaar and Timmer (2013) and Barro and Lee (2013).
Paraguay
Relative GDP per capita
Jamaica
Ecuador
Brazil
Peru
Colombia
Typical LAC
Uruguay
Argentina
Costa Rica
Guatemala
Dominican Rep.
Chile
Mexico
Venezuela
Panama
Relative TFP
The opening of the income gap is due to
faltering productivity, not factor accumulation
Latin America and the Caribbean
1.20
Gain in physical
factors
accumulation
1.10
1.16
1.12
Gain in
human
capital
accumulation
1.00
Total
Loss
0.92
0.90
Loss of
productivity
0.80
0.71
0.70
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
GDP pc LAC /GDP pc US
TFP LAC / TFP US
Capital-Labor Accumulation LAC vs. US
Human Capital Accumulation LAC vs. US
Subpar productivity is by now as important as
lower capital per worker to explain the income gap
Contribution to closing the output per capita gap
(Typical LAC country versus U.S.)
12.7
15.8
90
7.7
100
70
21.0
42.6
60
50
40
48.0
% of Output per capita gap
80
30
37.1
20
15.2
10
0
Labor employment intensity (f)
Source: Authors' Calculations based on Feenstra, Inklaar and Timmer (2013) and Barro and Lee (2013)
2010
2008
2006
2004
2002
2000
1998
1996
1994
Human capital (h)
1992
1990
1988
1986
1984
1982
Physical capital (k)
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
Productivity (A)
The overall impact of TFP convergence
TFP and Economic Development:
the overall dynamic effect of TFP gap is dominant
• TFP-led increased returns cause more physical
capital accumulation as firms maximize profits
• Assuming h and f exogenous, intensive form:
1
1 a
yA 
a
1 a
hf
where κ=K/Y depends on price distortions (cost of
financing, return appropriability), not TFP
With endogenous investment, the productivity
factor is predominant (not so business barriers)
Contributions to Output per capita gap. LAC typical country vs. U.S.
(Endogenous physical capital)
15.8
90
7.7
100
22.4
4.5
70
37.2
60
50
40
65.5
20.2
% of Output per capita gap
80
30
20
26.9
10
0
Labor employment intensity (f)
2010
2008
2006
2004
2002
2000
Source: Authors' Calculations based on Feenstra, Inklaar and Timmer (2013) and Barro and Lee (2013).
1998
Human capital (h)
1996
1994
1992
1990
1988
1986
Impediments to investment (kappa)
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
Productivity (A)
Is investment productivity-enhancing?
Disentangling the reciprocal effects between
productivity and physical capital accumulation
• Capital accumulation is endogenous as firms
maximize profits:


max 1   Ak h1  pK r   k
k
– Exactly
where
– Or approximately
A  Ak   A0 k 
log kit  c   log Ait   log hit   log pK ,it  it
• Productivity is endogenous to capital
accumulation:
log Ait  b   log kit   it
If LAC had East Asian productivity elasticity to
investment, if would have surpassed its TFP
TFP in LAC and East Asia (relative to the U.S.)
1
0.9
0.80
0.8
0.7
0.66
0.6
0.5
0.52
0.4
2010
TFP EastAsia / TFP USA
2008
2006
2004
2002
2000
1998
1996
1994
TFPalt LAC / TFP USA
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
TFP LAC / TFP USA