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Some Remarks on Productivity in LA Santiago Levy..

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1 Some Remarks on Productivity in LA Santiago Levy.

2 In a half century, LA did not close the income gap vs US Fuente: Fernández Arias y Rodriguez Apolinar (2014).

3 South Korea certainly did! Fuente: Fernández Arias y Rodriguez Apolinar (2014).

4 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.

5 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”)

6 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 (manufactures, firms with 10 or more workers) Source IDB(2010).

7 Sector productivity comparisons, US vs. Mexico If “distortions” in Mexico were similar to the US, manufacturing TFP would be 36% higher.

8 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

9 Source: Fernández Arias y Rodriguez Apolinar (2014). Some evidence that LA invests inefficiently

10 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.

11 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.

12 What does task 2 imply? Thinking of human capital as a life-cycle phenomenon, beyond formal schooling. 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. ECD and Quality primary and secondary Pertinent technical education; School to work transition Permanent labor training 0 a 18 years 19 to to 65

13 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.

14 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.

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