Competitiveness and Growth in Argentina: Appropriability, Misallocation or Disengagement?

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

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

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 • Constraints: • High relative price of investment • Labor market rigidities • 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.