Some Remarks on Productivity in LA

1. Some Remarks onProductivity 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 isfullydue to TFP, as in relativeterms the Regionaccumulated more human and physical capital. • Korea’sspectaculardevelopmentisdue to: • TFP increasedbetween 2 and 3 times more than in LA, and • factor accumulationwasalsobetween 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 ifithadincreased as in the US, 1.4 times higher. • Beyond short run macro issues and worldcommoditycycles, LA’sgrowthproblemismostly a productivityproblem. • The importance of focusingonproductivityevenstrongernow, as conditions in the worldeconomynot as favorable to LA as in the lastfewyears.

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

10. A productivity agenda: two tasks with different times Task 1. Channelresources to theirmostproductive use TFP Task 2. Increasequantity and quality of human capital • Task 1 yieldsresults in short run, althoughitsrelevancevariesfrom country to country. Itmayalso be part of task 2, ifitimproves the returns to education and to the acquisition of skills. Also, criticalforcohorts of workersalreadyin the labor force. • Task 2 probably more long run (butskillacquisition in labor marketmayreallymatter). Essentialforlongtermproductivetransformation. • Lack of clarity in publicpolicy agenda leads to inconsistentefforts.

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? 0 a 18 years 19 to 24 25 to 65 • 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. Pertinent technical education; School to work transition Quality primary and secondary ECD and Permanent labor training

13. Raising productivity is difficult • No silverbulletnor “magicwand”. Unlikelythatany single policyreformwill be enough (labor, credit, trade, industrial, etc.). • Cannot be achievedonlywithgood macro policy (butverydifficult to achievewithoutit). • Cannot be achievedonlybyphysicalinvestments (butitislikelythatinvestmentwill be lessdynamic and more inefficient in itsabsence). • Requires a re-think of policyinstrumentsusedforredistribution, particularlythosefocusedon the labor market, to avoidcostlytrade-offsbetweenredistribution and productivity. • Requires substantive changes to sensitivepublicpolicies in areasliketaxation and education. • Whilethere are general principles (task 1 and task 2), there are no “recipes”; needspecific country focusgivenlargeheterogeneitybetween LA countries. • Needspragmatism, a scarcecommodity in a Regioncharacterizedbypolicydiscussionswithstrongideologicalcontent.

14. Needsan integral viewthatalignsallinstruments of publicpolicy in the samedirection. • (Need to expelPenelopefrom Macondo!) • In the end, a country’sproductivityis a reflection of itsinstitutions, policies, programs and regulations; which in turn are a refelction of a soial and politicalcontext. • Productivity, then, is a social phenomenon. Itreflectshowsocitiesorganizethemselves to educate, produce and redistribute. Itreflectsif incentives are aligned in the direction of producingwealthorextractingrents. • LA has laggedbehing Asia and has notclosed the income gap vs. the US notbecausethosecountrieswork more, butbecausetheirinstitutions and policieshavebeenmuch more conducive to createquality human capital and to channelresources to theirmostproductive use.