1. Competitiveness and Growth in Argentina: Appropriability, Misallocation or Disengagement? Gabriel Sánchez and Inés Butler IERAL-Fundación Mediterránea September 21, 2007 – IDB Seminar

2. Argentina’s growth problems Low trend growth –Sporadic unsustained accelerations –Divergence from world growth Caused both by low investment and TFP growth

3. Growth Factor Accumulation Investment TFP Growth Research and innovation Resource allocation Self-discovery Allocative efficiency Schumpeterian endogenous growth framework

5. Permanently binding constraints to investment I: Infrastructure Transportation and energy: scarce and costly Telecommunications OK for development level Poor investment / amortization ratios in public offer firms in this area after 2002

6. Permanently binding constraints to investment II: Micro risks from government failures Poor rule-of-law and control of corruption, discretionary taxes and government intervention in goods and factor markets Poor market valuation of intangible assets –At least 10 times smaller than in OECD countries Institutional roots of government failures: hard to modify

7. Latent constraints to investment I: international finance Financial autarky: a historically binding constraint (Taylor, 1998). Investment currently tied to domestic savings Not binding thanks to devaluation, high export prices, new taxes and political discretion Uncertain sustainability

8. Latent constraints to investment II: poor financial intermediation Argentine firms are financially constrained, but compensate it with high internal funds. –We see it in our econometric analysis (not shown here). Constraint becomes binding if other constraints are alleviated and/or internal funds decline

9. Structural transformation of exports Low social returns Open forest Low appropriability Market failures Coordination failuresInformation externalities Government failures Insufficient foreign market opening, anti- export bias, time inconsistent export taxes

10. Self-discovery shows little value New exports (starting after 1993) account for 20% of all current exports, but…

11. Barriers to self-discovery I: option value Open forest, diversification & export similarity with OECD are relatively OK Recent discoveries reflect proximity rather than value 25 most attractive goods not yet exported are far in the product space

12. Barriers to self-discovery II: domestic and foreign trade policies Domestic trade policy: anti-export bias + time inconsistency Barriers to access EA & LATAM matter for high PRODY and convergence (EU as well for the latter).

13. Barriers to self-discovery III: coordination & information externalities Scant diffusion of new exports: discover only goods where pioneer can introduce barriers to entry by herself –With protracted monopoly, need lower profits to cover costs of discovery The most valuable goods are not discovered

15. Research and innovation: scarce but with low social rate of return (SRR) Low SRR suggests small gap with world technology frontier But Argentine TFP is 0.51 world frontier TFP What is missing? Argentina’s frontier is smaller than world frontier?

16. Binding constraints on research and innovation I: disengagement Disengagement from world flow of ideas during past 30 years –Decline in Argentina’s technology frontier prompts observed transitional decline in TFP relative to the world frontier

17. Binding constraints on research and innovation II: human capital

18. Binding constraints on research and innovation III: poor IPRs Low research intensity in a cross-section of countries is almost entirely explained by differences in software piracy rates Market valuation of firms’ investment in intangible assets is 10-30 times smaller than in OECD

19. Transition between steady-state productivity gaps, 1980-2000 Klenow and Rodríguez-Clare (2004): –All countries have same long-run growth rates thanks to technological spillovers –Investment and research only determine proximity to world technological frontier –Divergence can only occur as transitional dynamics Argentine transition in steady state productivity gap b/t 1980 (64%) and 2000 (51%) –Can only be explained by transitional change in research intensity from 0.94% (1980) to 0.4% GDP (2000) –Cannot be explained by transition in capital per effective worker

20. Binding constraints on allocation o Constraints: o High relative price of investment o Labor market rigidities o Financial constraints

21. The growth and competitiveness agenda for Argentina Investment in infrastructure Reduction of microeconomic risks via macro stability and institutional improvements Reduction of relative price of investment Remove barriers to FDI and and capital good imports from high-knowledge countries. Improve ITCs. Increase availability of researchers for the business sector. –Also improve IPR regime. Policies and public-private cooperation to overcome market failures that deter valuable self-discoveries. Strategic investment in ISPGs. –Also avoid time inconsistent trade policies and negotiate opening of LATAM and EA markets Improve access to domestic and international finance.

22. Constraints on growth stability Domestic savings and government failures that cause macroeconomic and external volatility –Currently not binding –They depend on favourable export prices, new taxes, devaluation and political discretion rather than on an adequate institutional design. –Can become binding constraints to stable growth again in the future. –Not enough to secure a regime shift towards bigger growth. Stable but low growth associated with low growth of real wages fails to eliminate the latent demand for social insurance.