growth diagnostics in practice i applications to paraguay and peru ricardo hausmann
TRANSCRIPT
Growth Diagnostics in Practice IApplications to Paraguay and Peru
Ricardo Hausmann
Outline
The inadequacy of current practice A Growth Diagnostic framework First step: describe growth Second step: The decision tree Third step: Infer a syndrome and check it out
Traditional growth diagnostic I: Growth accounting Is unable to make any causal inferences Discards a lot of information (e.g. about prices) Decomposes growth into endogenous and
interrelated factors Changes in A and K are not independent
A
dA
k
dk
ss
ss
1
1
Traditional growth diagnostic II:Barro-style growth regressions
Parameter heterogeneity: mean effect is not effect in a given country.
Economics is mainly about prices and quantities But regressions normally have just quantities
There is much more relevant information about a specific country than that which can be used for a large cross-section of countries
Governments are pro-active to market failures But we do not observe the underlying failures, so coefficients on policies
are biased.
Variables are not policy levers Even if we get the perfect instrument, this is still a problem (e.g.
openess = Trade/GDP ? )
Traditional growth diagnostic II:Barro-style growth regressions Growth = a * Policy1 + b * Policy2
+ c * Policy 3 + d * ……… This assumes separability and linearity Assume instead that the relationship is Growth = a * (Policy1*Policy2*(Policy)2) Then the effect of one policy will depend on
the state of the others
The linearization assumption applied to making cakes
Milk
Water
Flour
Yeast
Eggs
Sugar
Ingredients are substitutes
The alternative view about making cakes
Milk
Eggs
Fluor
Yeast
Cocoa
Sugar
The barrel contains as much water as the lowest component allows.
Here the most binding constraint are… The eggs
Now we can move to growth diagnostics...
Low
social conflict
Self discovery
Infrastructure
Hum
an capital
Low
taxes
Financing
What is binding for the
barrel’s capacity ?
Different measures can beComplements or Substitutes
Low
social conflict
Self discovery + R
&D
Infrastructure
Hum
an capital
Low
taxes
Financing
Low social conflict
Self discovery
Infrastructure
Human capital
Low taxes
Financing
Multiplication SummationThe minimum
How do measures produce results ? © Rodrigo Wagner, 2006
Reality lies somewhere in
between. Growth
accelerations suggest it is
closer to complements
What is the impact of relaxing a constraint? If it is non-binding: very little If it binds: it depends on how far away is the
next constraint
Growth policies are analogous to non linear numeric optimizationFactor 1
Factor 2
0%
2%
2%
4%4%
6%
8%
If X is a binding constrain then …1. The (shadow) price of the constraint is high.2. Movements in the constraint should produce
significant movements in growth3. Agents in the economy must be engaging in
efforts to overcome or by-pass the constraint.4. Camels and hippos: Agents less intensive in that
constraint are more likely to grow / survive. • Rajan and Zingales
5. Ex ante risks imply high current profits, as static rents should be compensation for expected dynamic losses. High rents do not trigger entry.
If X is a binding constraint then
6. Fan belt effect: an initial binding constraint may have affected the rest of the economy causing now other constraints to become binding
7. There might be a constraint that is the consequence of a combination of factor (x,y,z)
8. You can learn something from international rankings, but be careful. Keep in mind both price and quantity.
A Bayesian interpretation of the process
How suprising is this signal given my priors? Note that a typical p-value is not the relevant
question We care about the opposite That’s why we should use Bayes rule
Which depend on our priors !)Pr(
)Pr()|Pr()|Pr(
i
XXiiX S
HHSSignalHipothesis
)|Pr( Xi HipothesisSignal
)Pr( XH
How suprising is this signal given my priors? We can condition that the country belong to a given
subgroup
That is why we often condition on the level of development or some other variable that we know is related
If the denominator is large, i.e. if some variable is normal, it will not change priors by much
),Pr(),Pr(),|Pr(
),|Pr(XS
XHXHSXSignalHipothesis
i
XXiiX
Three steps to growth diagnostics
I. Description
II. Nested symptoms: the decision tree approach
III. From syndromes to symptoms
First step:Describe the growth process
Describing the context of the growth problem
Long run pattern The world before 1960
Demographics Note events: accelerations, collapses Growth accounting & GDP composition by sector GDP vs. GNP:
natural resources and foreign capital intensity Exports performance and growth Politics, institutions and growth
150
02
00
02
50
03
00
03
50
0G
DP
pe
r ca
pita
(M
add
iso
n (
19
90
Inte
rnatio
na
l G
eary
-Kh
am
is d
ollars
))
1940 1960 1980 2000year
Paraguay: GDPpc in the long run: barely two decades of growth
200
04
00
06
00
08
00
01
00
00
1940 1960 1980 2000year
Paraguay gdp_pc_maddison Argentina gdp_pc_maddisonBolivia gdp_pc_maddison Brazil gdp_pc_maddisonUruguay gdp_pc_maddison
PIB per capita en Paraguay y sus vecinos, desde 1940
Paraguay: lousy comparative long-run performance
Evolución PIB per capita Real Mercosur (1990=100)
90
100
110
120
130
140
150
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Brazil
UruguayArgentina
Paraguay
Paraguay: lousy recent performance
Growth in Paraguay and neighboring provinces 1990-2000
Pais_Provincia Crecimiento 90-00 Ranking
Mato Grosso do Sul 2.1% 34Misiones 1.9% 38Formosa 1.0% 52Paraná 0.8% 55Salta 0.5% 57Corrientes 0.3% 60Chaco -0.3% 64Paraguay Total -0.5% 65
Ranks based on 72 Mercosur states and provinces
PIB per capita (dolares constantes 2000)
500
1000
1500
2000
2500
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Peru: a growth star?
PIB per capita (dolares constantes 2000)
500
1000
1500
2000
2500
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
…or just recovering from a growth collapse?
Peru’s long-run growth: a sustained growth collapse
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Gap GDP GNI
Rising gap between GDP and GNP
In both countries: demography and human capital would have predicted more growth Falling dependency ratios Higher female labor force participation Hence, rising workers per capita Greater schooling attainment Greater urbanization Global technological progress
Symptoms
Is it lack of finance? Paraguay
1997
19981999
2000
2001
2002
2003
2004
20052006
2007
2530
3540
4550
Lend
ing in
teres
t rate
(%)_
__EI
U
17 18 19 20 21 22Gross fixed investment (% of GDP)___EIU
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
1520
2530
35RL
ENDR
ATE
17 18 19 20 21 22Gross fixed investment (% of GDP)___EIU
Is it finance? Peru
1997
1998
1999
2000
2001
2002
2003
2004
20052006
2007
1015
2025
30RL
ENDR
ATE
16 18 20 22 24Gross fixed investment (% of GDP)___EIU
1997
19981999
2000
2001
200220032004
20052006
2007
1520
2530
Lend
ing in
teres
t rate
(%)_
__EI
U
16 18 20 22 24Gross fixed investment (% of GDP)___EIU
Is it human capital?Educacion Promedio al 2000 segun Fecha de Nacimiento
5.96.2
6.7
7.2
7.6
8.0
8.4
8.7
9.3
6.2
6.9
7.9
8.2
9.0
9.5
10.1
10.610.8
4.8
5.6
6.6
7.2
8.5
8.9
9.49.5
9.9
4.3
5.0
5.9
6.7
7.3
7.6
8.1
8.5
9.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
1,935 1,940 1,945 1,950 1,955 1,960 1,965 1,970 1,975 1,980 1,985
Paraguay Peru Mexico Colombia
Average schooling of cohort by year of birth
Is it human capital?
Retornos a la Educacion (MINCER)
11.7%
12.4%12.0%
12.7%
10.7%
11.4%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
1990 1992 1994 1996 1998 2000 2002 2004
Paraguay Mexico Peru Colombia
Mincerian returns to Education, Urban Males
Inferring a syndrome
What are stylized facts of growth collapses?
AFGAGOANT
ARE
ARG
ATG AUSAUT
BDI
BELBENBFABGDBGRBHR
BHS
BLZ
BMU
BOL
BRA
BRB
BTNBWA
CAF
CAN
CHE
CHLCHN
CIV
CMRCOG
COL
COM
CRICYP DEU
DMA
DNKDOM
DZA
ECUEGYESPFINFJIFRA
GAB
GBR
GHA
GMB
GNB
GRC
GRD
GTM
GUYHKG
HNDHTI
HUN
IDN
INDIRL
IRN
IRQ
ISL
ISR
ITA
JAM
JOR
JPN
KEN
KIR
KNA
KOR
KWT
LBR
LBY
LCA
LKA LSOMAR
MDG
MEXMLI
MLTMMR
MOZMRT MUS
MWI
MYS
NAM
NCL
NER
NGANIC
NLD
NOR
NPL
NZL
OMN
PAKPAN
PER
PHL
PNG
PRT
PRY
PYF
ROM
RWA
SAU
SDN
SEN
SGP
SLB
SLE
SLVSUR
SWESWZ
SYCSYR
TCD
TGO
THATTOTUNTUR
URY
USAVCT
VEN
VUT
WSM
ZAF
ZAR
ZMB
ZWE
196
01
970
198
01
990
200
0
1960 1970 1980 1990 2000LOCMAXTIMEX
MAXPCTIME LOCMAXTIMEX
Most growth collapses coincide with export collapses
Date of export collapse
Dat
e of
gro
wth
col
laps
e
AFGANT
ARE
BDI
BHS
BOL
BRB
CAF
CIV
CMR
COG
COM
DMA
DOM
DZA
GAB
GHA
GMB
GNB
GRD
GTM
HND
HTI
IDN
IRN
IRQ
ISR
JAM
KEN
KIR
KNA
KWT
LBR
LCA
MDG
MLTMWI
NAM
NCL
NER
NGA
NIC
NPL OMN
PER
PNGPRY
ROM
RWASAU
SEN
SLB
SLE
SLV
SUR
SYR
TGO
URY
VEN
VUTZAF
ZAR
ZMB
ZWE
0.2
.4.6
.81
.2 .4 .6 .8 1GAPXPC
GAPPCGDP GAPXPC
Collapses in exports were typically larger than those in output
Fall of exports
Fal
l of
outp
ut
In Perú, exports seem to explain the growth collapse and the recovery
1960
1961
19621963
19641965
19661967
19681969
197019711972
1973
197419751976
1977
1978
19791980
1981
1982
1983
19841985
1986
1987
1988
1989
19901991
1992
1993
1994
19951996
1997
199819992000
2001
20022003
2004
3.5
53
.63
.65
3.7
3.7
5L
YP
CL
CU
K
5.2 5.4 5.6 5.8 6 6.2LXPCKUS
Caida de Exportaciones 79-93: Causantes
trad-agric12.2%
minería metálica43.1%
petróleo23.4%
maquinaria y equipos2.1%
nt-pesca2.1%
nt-agric0.2%
textiles5.1%
químicos1.9%
mineria no metalica1.8% metalurgia y joyeria
0.5%
trad-pesca2.6%
otro5.0%
- Exp 79 (US$ reales pc): 522- Exp 93 (US$ reales pc): 176- Caida de exportaciones pc: $346- 81% de la perdida de exps proviene de productos tradicionales
Recuperación de Exportaciones 93-05: Causantes
minería metálica63.6%
petróleo10.6%
otro0.8%
trad-pesca3.0%
trad-agric1.7%
metalurgia y joyeria1.6%
mineria no metalica0.7%químicos
3.6%
textiles6.4%
nt-agric6.1%
nt-pesca0.8%
maquinaria y equipos1.0%
- Exp 93 (US$ reales pc): 176- Exp 05 (US$ reales pc): 547- Aumento de exps pc: $346- 78% de la recuperación se debe a productos tradicionales
Interpretation
Peru’s growth collapse / recovery was caused by a collapse / recovery in exports
Exacerbated by a history of expropriation in the exportable sector that led to declines in market share Agriculture, fishing, mining, oil
Recovery associated with reestablishment of private property rights in old sectors under very generous terms Vicious circle?
Interpretation of Peru
Very little structural transformation, in spite of large changes in relative prices (terms of trade and real exchange rate)
Export sector is land and (foreign) capital intensive Mining expansion has created no net jobs GDP > GNI “No chorrea”
In a highly urbanized society No labor demand for tradables in cities
What about Paraguay?
Very short periods of growth in history 1965-1980
Associated with finding products that can be exported profitably Cotton, electricity, soybeans
Very peripheral position in the product space …but in spite of this, unexpectedly low structural
transformation Significant country dummy in probit regressions of
discoveries Very little movement to nearby products
Paraguay: interpretation
Little transformation in spite of Mercosur Privileged access to a much larger protected market Should have been a pretty effective “industrial policy”
Paraguay is the only country in Mercosur where the EXPY within Mercosur is lower than EXPY outside Mercosur
Of the top 15 Paraguayan exports, Argentina is a net exporter of all 15 and Brazil is a net exporter of 13. But Brazilian imports of the other 2 are a small fraction of Argentine exports of those goods
Hence, no discovery of regional complementarities
Paraguay: interpretation
Currently the country is growing Is it sustainable?
3,000.00
3,100.00
3,200.00
3,300.00
3,400.00
3,500.00
3,600.00
3,700.00
3,800.00
3,900.00
4,000.00
4,100.00
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
The country has very bad institutional indicators
AGO
ALB ARGARM
ATG
AUSAUT
AZE
BDI
BEL
BENBFA
BGD
BGR
BIH
BLR
BLZ
BOL
BRA
BWA
CAF
CANCHE
CHL
CHN
CIV
CMRCOG
COL
COM
CPV
CRI
CYPCZE
DEU
DJI
DMA
DNK
DOMDZAECU
EGY
ERI
ESPEST
ETH
FIN
FJI
FRA
GAB
GBR
GEO
GHA
GIN
GMB
GNB
GRC
GRD
GTM
GUY
HKG
HND
HRV
HTI
HUN
IDN
IND
IRL
IRN
ISL
ISRITA
JAM
JOR
JPN
KAZKEN KGZKHM
KNA KOR
LAO
LBN
LCA
LKALSO
LTU
LUX
LVA
MAR
MDA
MDG MEXMKD
MLI
MLT
MNG
MOZ MRT
MUS
MWI
MYS
NAM
NER
NGA
NIC
NLDNOR
NPL
NZL
PAK
PAN
PERPHLPNG
POL
PRT
PRY
ROM
RUSRWA
SAU
SDN
SEN
SGP
SLBSLE
SLV
SVK
SVN
SWE
SWZ
SYCSYR
TCDTGO
THA
TJK
TKM
TON
TTOTUNTUR
TZA
UGA UKR
URY
USA
UZB
VCT
VEN
VNM
VUT
YEM
ZAF
ZAR
ZMB
PRY
-2-1
01
2e
st. R
ule
of L
aw
2.5 3 3.5 4 4.5 5LYPPPK
est. Rule of Law est. Rule of Law
Composicion superficie plantada agricola2006
Algodón6%
Arroz c/ riego1%
Caña de Azúcar (Uso Indust.)2%
Girasol1%
Maíz11%
Mandioca8%
Maní1%
Poroto2%
Soja57%
Tabaco2%
Trigo9%
Total: 3,884,000
Composicion superficie plantada agricola1990
Algodón25%
Girasol0%
Maíz14%
Mandioca10%Maní
2%
Poroto3%
Soja33%
Tabaco0%
Trigo9%
Caña de Azúcar (Uso Indust.)3%
Arroz c/ riego1%
Total: 1,692,000
But people have been willing to expand the agricultural frontier
Area: 1,692,000 Area: 3.884,000
Soybeans: from 558,000 to 2.2 million
Paraguay: interpretation
Soybeans (camel) is very un-intensive in infrastructure No need to process 24 private ports on the Parana river
But also un-intensive in labor In the US, 6 man-hours per hectare per year “No chorrea”
The country has been able to control foot and mouth disease …which is an indication of social capital
Has made an industry out of limited law enforcement Sacoleiros in Ciudad del Este
Are bad institutions binding or are there enough opportunities around them?
There is plenty of land for a sugarcane / ethanol expansion
CommodityHarvest
(H)
Very Suitable
(VS)Suitable
(S)
Moderately Suitable
(MS) VS+SVS+S+M
SH/
(VS+S)H/
(VS+S+MS)
Sugar cane 75 610 3994 4870 4604 9474 1.6% 0.8%
Soybeans 2200 6 536 3915 542 4457 405.9% 49.4%
Maize 410 178 3243 2952 3421 6373 12.0% 6.4%
Wheat 300 0 912 5311 912 6223 32.9% 4.8%
Sugar is very different from soybeans Needs to be processed locally Requires much more labor input
About a factor of 25 times including processing Would require much more infrastructure Tolerates smaller units of production
More Jeffersonian Mechanization improves working conditions
Paraguay: implications
Maybe the country is paying the price for its weak institutional basis
But there are plenty of investment opportunities that are already perceived as profitable Soybeans, meat
And a huge potential expansion in biofuels …which may create the incentives to “get
their act together” Stepping stone
Recommendation for Paraguay Just do it Focus on the public requirements of existing
opportunities Infrastructure, internationalization of ethanol
market, trade agreements, etc. This may generate a significant supply
response …and may facilitate other jumps
Stepping stone
Conclusion
Apparently similar diagnostics lead to very different emphases
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
15
20
25
30
35
RLE
ND
RA
TE
17 18 19 20 21 22Gross fixed investment (% of GDP)___EIU
Paraguay: falling dependency ratios. More potential workers per capita
.7.8
.91
1.1
Ag
e de
pend
ency
ra
tio (
depe
nden
ts to
wor
king
-ag
e po
pula
tion
)- W
DI (
2005
)
1960 1970 1980 1990 2000year
Paraguay: increasing female labor force participation
26
27
28
29
30
31
Lab
or fo
rce,
fem
ale
(%
of t
ota
l la
bor
forc
e)-
WD
I (2
005)
1960 1970 1980 1990 2000year
Paraguay: increased urbanization
35
40
45
50
55
60
Urb
an
popu
latio
n (
% o
f to
tal)-
WD
I (20
05)
1960 1970 1980 1990 2000year
Agricultural productivity has risen a lot, especially since 1970
100
01
500
200
02
500
Ag
ricu
lture
va
lue
adde
d pe
r w
orke
r (c
ons
tan
t 20
00 U
S$)
- W
DI (
200
5)
1960 1970 1980 1990 2000year
Educacion Promedio al 2003 segun Fecha de Nacimiento
5.949
6.180
6.701
7.152
7.604
8.049
8.353
8.749
9.303
5
5.5
6
6.5
7
7.5
8
8.5
9
9.5
10
1,935 1,940 1,945 1,950 1,955 1,960 1,965 1,970 1,975 1,980 1,985
Educacion al 2003
Paraguay: rising levels of school attainment
Average years of schooling by date of birth, household survey 2003
So, the problem seems to be in urban areas
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Agriculture Non-Agriculture Composition Total
1965-1980
1988-2002
Difference
Evolución PIB per capita Real Mercosur (1990=100)
90
100
110
120
130
140
150
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Brazil
UruguayArgentina
Paraguay
Paraguay had some lackluster growth in the early 1990s
2000=100
60
70
80
90
100
110
120
130
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
Water & Electricity Construction Commerce Other Services GDP
…but the growth was mainly in (KF-financed?) construction
PIB per capita (dolares constantes 2000)
500
1000
1500
2000
2500
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Peru: a growth star?
PIB per capita (dolares constantes 2000)
500
1000
1500
2000
2500
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
…or just recovering from a growth collapse?
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Gap GDP GNI
Rising gap between GDP and GNP
1960
1961
19621963
19641965
19661967
19681969
197019711972
1973
197419751976
1977
1978
19791980
1981
1982
1983
19841985
1986
1987
1988
1989
19901991
1992
1993
1994
19951996
1997
199819992000
2001
20022003
2004
3.5
53
.63
.65
3.7
3.7
5L
YP
CL
CU
K
5.2 5.4 5.6 5.8 6 6.2LXPCKUS
Peru Log of GDP pc vs. Log of Real Exports pc
Caida de Exportaciones 79-93: Causantes
trad-agric12.2%
trad-mineria43.1%
petroleo23.4%
maquinaria y Equipos2.1%
nt-pesca2.1%
nt-agric0.2%
textiles5.1%
químicos1.9%
mineria no metalica1.8% metalurgia y joyeria
0.5%
trad-pesca2.6%
otro5.0%
- Exp 79 (US$ reales pc): 522- Exp 93 (US$ reales pc): 176- Caida de exportaciones pc: $346- 81% de la perdida de exps proviene de productos tradicionales
Composition of the export collapse 1979-1993
Recuperación de Exportaciones 93-05: Causantes
trad-mineria63.6%
petroleo10.6%
otro0.8%
trad-pesca3.0%
trad-agric1.7%
metalurgia y joyeria1.6%
mineria no metalica0.7%químicos
3.6%textiles6.4%
nt-agric6.1%
nt-pesca0.8%
maquinaria y Equipos1.0%
- Exp 93 (US$ reales pc): 176- Exp 05 (US$ reales pc): 547- Aumento de exps pc: $346- 78% de la recuperación se debe a productos tradicionales
Composition of the export recovery 1993-2005
II. The decision tree approach
The decision tree approach
Start from very broad classes of constraints Sequentially refine them as you go
Low FinanceLow returns
Appropriability Coordination
Lack ofcomplementary
factors
Savings Intermediation
Low investment
Ex ante
Ex post
Human Capital
Infrastructure
What symptoms should we see if the constraint X is relatively important ?
CoordinationMarket fail.
Ex ante
Hu
man
Cap
ital
Infr
astr
uct
ure
&
pu
bli
c g
oo
ds
(geo
gra
ph
y ?
)
Ex
ante
ris
ks
Tax
Lo
w p
rop
erty
ri
gh
ts,
crim
e &
co
rru
pti
on
Lo
w R
&D
Lo
w S
elf
dis
cove
ry
Low infrastructure wrt comparable
countries
High static markups & low
entry; in industries with entry costs
Expropriation
Low sophystication (EXPY) and few new industries
Inward migration high skills
Political risk, social risk
Social unrestGrowth
responds to new indus
High deposit interest rate
High spreadHigh returns to
educationTax policy risk
High taxes: Top marginal tax rate,
corporate tax, VAT
Open conflict
If it's high risk, then low profits
Procyclical mincerian returns
Growth elastic to infrastruct.
ChangeLabor market risks
Restrictive labor regulations
Corruption (illegal tax rate)
(Kaufman)
High operating expens /assets
Low tertiary for level of
developmentCongestion
History of expropriation
Inflation taxHigh protection
costs (ICA)
High correlation of growth with
TOTMonopoly
powers: high (P/E) ratio of
banks
Returns decrease as education grows
Port quality. High losses in transport
(ICA)
High expectation of loosing future
profits
High returns to coordination
activities
Low growth and investment
Lack of complementary factors
Cost of doing business
Low lending interest rate
Binding Finance Binding social returnsL
ow
ag
gre
gat
eS
avin
gs
Bad
fin
ance
Negative relation between growth
and current account.
Few products "nearby" to
move (openforest low)
Investment elastic to interest rate
Access to external finance (EMBI, Default risk, CAD, Unsustainable
debt)
Lack of investment response to interest rate change
Ex postGovernment failure
Growth Diagnostics : What signals are likely if X is binding?
Short loan duration, credit rationingShocks to
infrastructure (hurricane, war)
Monopoly power, high markups.
Regulated entry
Low appropriability
Large negative cash flow from banks Normal cash flow from banks (dC/C - i)High lending interest rate
Is it returns or finance?
( - r)
Low FinanceLow returns
Appropriability Coordination
Lack ofcomplementary
factors
Savings Intermediation
Low investment
Ex ante
Ex post
Human Capital
Infrastructure
Is it low finance ?
High cost of domestic lending Difficult access to foreign finance
Soverign risk, CAD, Foreign debt. Movements in cost of finance significantly affect
investment Investment vs lending rate
Net Cash flows: dlog(Credit) – lending rate vs time Camels and Hippos: Rajan and Zingales
CoordinationMarket fail.
Ex ante
Hu
man
Cap
ital
Infr
astr
uct
ure
&
pu
bli
c g
oo
ds
(geo
gra
ph
y ?
)
Ex
ante
ris
ks
Tax
Lo
w p
rop
erty
ri
gh
ts,
crim
e &
co
rru
pti
on
Lo
w R
&D
Lo
w S
elf
dis
cove
ry
Low infrastructure wrt comparable
countries
High static markups & low
entry; in industries with entry costs
Expropriation
Low sophystication (EXPY) and few new industries
Inward migration high skills
Political risk, social risk
Social unrestGrowth
responds to new indus
High deposit interest rate
High spreadHigh returns to
educationTax policy risk
High taxes: Top marginal tax rate,
corporate tax, VAT
Open conflict
If it's high risk, then low profits
Procyclical mincerian returns
Growth elastic to infrastruct.
ChangeLabor market risks
Restrictive labor regulations
Corruption (illegal tax rate)
(Kaufman)
High operating expens /assets
Low tertiary for level of
developmentCongestion
History of expropriation
Inflation taxHigh protection
costs (ICA)
High correlation of growth with
TOTMonopoly
powers: high (P/E) ratio of
banks
Returns decrease as education grows
Port quality. High losses in transport
(ICA)
High expectation of loosing future
profits
High returns to coordination
activities
Low growth and investment
Lack of complementary factors
Cost of doing business
Low lending interest rate
Binding Finance Binding social returnsL
ow
ag
gre
gat
eS
avin
gs
Bad
fin
ance
Negative relation between growth
and current account.
Few products "nearby" to
move (openforest low)
Investment elastic to interest rate
Limited access to external finance (EMBI, Default risk, CAD,
Unsustainable debt)
Lack of investment response to interest rate change
Ex postGovernment failure
Growth Diagnostics : What signals are likely if X is binding?
Short loan duration, credit rationingShocks to
infrastructure (hurricane, war)
Monopoly power, high markups.
Regulated entry
Low appropriability
Negative cash flow from banks (dC/C- Normal cash flow from banks (dC/C - i)High lending interest rate
Brazil: real lending rate 2006
Albania
AlgeriaAngola
Argentina
Armenia
AustraliaAustria
Azerbaijan
BahrainBangladesh
Belarus
Belgium
Belize
Bolivia
Bosnia and Hercegovina
Botswana
Brazil
Bulgaria
Burundi
CambodiaCameroon
CanadaCape VerdeChad
ChileChina
ColombiaCongo (Brazzaville) Costa RicaCote d'Ivoire Croatia
CyprusCzech RepublicDenmark
Dominican Republic
EcuadorEgyptEl Salvador
Equatorial Guinea
EstoniaFinland
France
GabonGeorgia
GermanyGhana GreeceGuatemala
Guinea
GuyanaHaitiHonduras
Hong KongHungary
Iceland
IndiaIndonesia
IranIreland
IsraelItaly
Jamaica
JapanJordan
KazakhstanKenya
Kuwait
Kyrgyz Republic
Laos
Latvia
LebanonLesothoLibyaLithuania Luxembourg
MacedoniaMadagascarMalawi
Malaysia Malta
Mauritius
MexicoMoldova
Morocco
Mozambique
Myanmar
NamibiaNetherlands
New Zealand
Nicaragua
Nigeria
NorwayOmanPakistan
PanamaPapua New Guinea
Paraguay
Peru
Philippines Poland
PortugalQatar
Romania
Russia
Saudi Arabia
Senegal
SingaporeSlovakiaSlovenia
South AfricaSouth Korea
SpainSri Lanka
SudanSwaziland
SwedenSwitzerlandSyria
Taiwan
Tajikistan
Tanzania
Thailand
The Gambia
Trinidad & Tobago
Turkey
Turkmenistan
Uganda
Ukraine
United Arab Emirates
United KingdomUnited StatesUruguay
VenezuelaVietnam
Yemen
Yugoslavia
Zambia
Mexico
Brazil
01
02
03
04
05
0L
RA
TR
EA
L
-1 0 1 2 3 4LAGDPPC
LRATREAL LRATREALLRATREAL
Sovereign risk in Brazil pre-2006 was high
Algeria
Argentina
Australia
Azerbaijan
Brazil
Bulgaria
Chile
China
Colombia
Czech Republic
Ecuador
Egypt
Greece
Hong Kong
HungaryIndia
Indonesia
IranIsrael
Italy
Kazakhstan
Malaysia
Mexico
New Zealand
Nigeria
Pakistan
Peru
Philippines
Poland
Portugal
RomaniaRussia
Saudi Arabia
Singapore
SlovakiaSouth Africa
South KoreaSpain
Sri Lanka
Taiwan
Thailand
Turkey
UkraineVenezuela
VietnamMexico
Brazil
20
40
60
80
So
vere
ign:
Ove
rall
risk
sco
re (
100=
high
)__
_EIU
6 7 8 9 10 11LYPCP
Sovereign: Overall risk score (100=high)___EIUSovereign: Overall risk score (100=high)___EIUSovereign: Overall risk score (100=high)___EIU
Sovereign Risk: Brazil and Mexico
2040
6080
100
Sov
ere
ign
: De
bt (
100
=hi
gh)_
__E
IU
1996 1998 2000 2002 2004 2006year
Brazil Mexico
Source: Economist Intelligence Unit.
Sovereign risk: debt EIU
Movements in the binding constraint should have large effects
r
finance
Finance Demand(investment)
Finance Supply 1
Finance Supply 2
Brazil: interest rates and investment 2000-2006
20002001
2002
2003
20042005
2006
50
55
60
65
70
Len
ding
inte
rest
rat
e (%
)___
EIU
18 19 20 21Gross fixed investment (% of GDP)___EIU
Mexico: interest rates and investment 2000-2006
2000
2001
2002
20032004
2005
2006
51
01
52
0L
endi
ng in
tere
st r
ate
(%)_
__E
IU
19 19.5 20 20.5 21 21.5Gross fixed investment (% of GDP)___EIU
The decline in investment happened in the context of falling interest rates
-1.5
-1-.
50
Ne
tCre
ditG
row
th
1995 2000 2005 2010year
Brazil Mexico
Source: Economist Intelligence Unit.Using BP03 (Bank loans US dollars)as Cand LRAT(Lending interest rate) as i
Net cash flows [dC/C - i ]
Negative cash flows in Brazil have been very large
Systematizing the search for Camels & Hippos
Ricardo Hausmann & Bailey Klinger
Camels & Hippos
You can infer binding constraints by the revealed structure of production:
If a country surprisingly under-specialized in products intensive in roads, then road infrastructure may be the binding constraint
This identification strategy can be systematized using exogenous measures of industry dependence on a given factor
Camels & Hippos: Example
Take the Rajan & Zingales (1998)’s measure of an industry’s dependence on external finance.
Tobacco (-.45) and apparel (0.03) are the camels: they do not require much external finance, as investors can finance operations more easily through cashflows.
Textiles (.4) and plastic products (1.14) are the hippos: they are intensive in external finance
Camels & Hippos: Example
Rajan & Zingales provide this measure of an industry’s dependence on external finance for almost 40 industries
Using UNIDO INDSTAT, we can measure the % of total value added of country C that is in industry I
Camels & Hippos Example
Regress this % of total value added on: Industry dummies Industry dummies interacted with GDPpc (to
capture differing patterns of production across different levels of development)
The industry’s intensity in external finance The industry’s intensity in external finance
interacted with a dummy variable for the country of interest
Camels & Hippos Example
This interaction term tells you if the country’s production is concentrated in industries intensive in external finance or not
Controlling for the fact that most industries dependent on external finance are found in countries with higher GDP per capita
Camels & Hippos Estimated coefficient on country/external
dependence on finance interaction
-0.015 -0.01 -0.005 0 0.005 0.01 0.015
Russia
Pakistan
Egypt
El Salvador
Colombia
Relatively more hippos: firm access to external finance less likely to be a binding constraintRelatively more
camels: firm access to finance more likely to be a binding constraint
Camels & Hippos Example
This type of analysis could be repeated for any constraint, as long as you can get data on an industry’s intensity in that good
But, is it insufficient aggregate savings or poor financial intermediation?
No FinanceNo returns
Appropriability Coordination
Lack ofcomplementary
factors
Savings Intermediation
No investment
Ex ante
Ex post
Human Capital
Infrastructure
Is aggregate savings the binding constraint ? How to distinguish it from bad financial intermediation? Is the interest rate paid by the government
through the capital markets high? Independent of the banking system, is the marginal
cost of savings high? Are deposit rates high ?
Why do banks pay high rates? Note: high deposit rates makes banks riskier
and financial intermediation more limited Adverse selection
Are real deposit rates high?
Albania
Algeria
Angola
Argentina
Armenia
AustraliaAustria
Azerbaijan
Bahrain
Bangladesh
BelarusBelgium
Belize
Benin
Bolivia
Bosnia and Hercegovina
Botswana
Brazil
Bulgaria
Burkina Faso
Cambodia
CameroonCanada
Cape Verde
Chad
ChileChina
Colombia
Congo (Brazzaville) Costa Rica
Cote d'Ivoire
Croatia
Cyprus
Czech Republic
Denmark
Dominican Republic
Ecuador
Egypt
El Salvador
Equatorial GuineaEstonia
Ethiopia
FinlandFranceGabon
Georgia
Germany
Ghana
Greece
GuatemalaGuyana
Haiti
Honduras
Hong Kong
Hungary
Iceland
India
Indonesia
IranIreland
Israel
ItalyJamaica
Japan
Jordan
Kazakhstan
Kenya
Kuwait
Kyrgyz RepublicLaos
Latvia
Lebanon
Lesotho LibyaLithuania
Luxembourg
Macedonia
Madagascar
Malawi
MalaysiaMaltaMauritius
MexicoMoldova Morocco
Mozambique
Myanmar
Namibia
NetherlandsNew Zealand
Nicaragua
NigeriaNorway
OmanPakistan
Panama
Papua New Guinea
Paraguay
Peru
Philippines
Poland
Portugal
Qatar
Romania
Russia
Rwanda
Saudi Arabia
Senegal
Seychelles
SingaporeSlovakia
Slovenia
South AfricaSouth Korea
Spain
Sri Lanka
Sudan
Swaziland
SwedenSwitzerland
Syria
Taiwan
Tajikistan
TanzaniaThailand
The Gambia
Togo
Trinidad & Tobago
Tunisia
Turkey
Turkmenistan
Uganda
Ukraine
United Arab Emirates
United Kingdom
United States
Uruguay
Venezuela
Vietnam
Yugoslavia
Zambia
-10
-50
51
0R
AT
2R
EA
L
7 8 9 10 11LYPCP
Real deposit rates and deposit cashflow as % of GDP (2004-2006)
Algeria
Argentina
AustraliaAustriaAzerbaijan
Belgium
Brazil
Bulgaria
Canada
ChileChina
Colombia
Czech Republic
DenmarkEcuador
Egypt
FinlandFranceGermanyGreece
Hong Kong
Hungary
India
Indonesia IranIreland
Israel
ItalyJapan
Kazakhstan
Malaysia
Mexico
Netherlands
New Zealand
Nigeria
Norway
Pakistan
Peru
Philippines
PolandPortugal
Romania
Russia
Saudi Arabia
SingaporeSlovakia
South AfricaSouth Korea
Spain
Sri Lanka
SwedenSwitzerlandTaiwan
Thailand
Turkey
Ukraine
United KingdomUnited States
Venezuela
Vietnam
-10
-50
51
01
5R
AT
2R
EA
LS
M3
-10 0 10 20 30DCASHFLOWGDPSM3
Insufficient deposit flow
More than enough
Real deposit rates: Brazil and Mexico
-50
51
01
52
0R
AT
2R
EA
L
1998 2000 2002 2004 2006 2008year
RAT2REAL RAT2REAL
Brazil
Mexico
CoordinationMarket fail.
Ex ante
Hu
man
Cap
ital
Infr
astr
uct
ure
&
pu
bli
c g
oo
ds
(geo
gra
ph
y ?
)
Ex
ante
ris
ks
Tax
Lo
w p
rop
erty
ri
gh
ts,
crim
e &
co
rru
pti
on
Lo
w R
&D
Lo
w S
elf
dis
cove
ry
Low infrastructure wrt comparable
countries
High static markups & low
entry; in industries with entry costs
Expropriation
Low sophystication (EXPY) and few new industries
Inward migration high skills
Political risk, social risk
Social unrestGrowth
responds to new indus
High deposit interest rate
High spreadHigh returns to
educationTax policy risk
High taxes: Top marginal tax rate,
corporate tax, VAT
Open conflict
If it's high risk, then low profits
Procyclical mincerian returns
Growth elastic to infrastruct.
ChangeLabor market risks
Restrictive labor regulations
Corruption (illegal tax rate)
(Kaufman)
High operating expens /assets
Low tertiary for level of
developmentCongestion
History of expropriation
Inflation taxHigh protection
costs (ICA)
High correlation of growth with
TOTMonopoly
powers: high (P/E) ratio of
banks
Returns decrease as education grows
Port quality. High losses in transport
(ICA)
High expectation of loosing future
profits
High returns to coordination
activities
Low growth and investment
Lack of complementary factors
Cost of doing business
Low lending interest rate
Binding Finance Binding social returnsL
ow
ag
gre
gat
eS
avin
gs
Bad
fin
ance
Negative relation between growth
and current account.
Few products "nearby" to
move (openforest low)
Investment elastic to interest rate
Access to external finance (EMBI, Default risk, CAD, Unsustainable
debt)
Lack of investment response to interest rate change
Ex postGovernment failure
Growth Diagnostics : What signals are likely if X is binding?
Short loan duration, credit rationingShocks to
infrastructure (hurricane, war)
Monopoly power, high markups.
Regulated entry
Low appropriability
Low net cash flow from banks High net cash flow from banks (dC/C - i)High lending interest rate
What constrains aggregate savings? Crowding out
High interest rates Limited access to foreign finance Bank lending to government as % of total bank
assets Unsustainable and/or high public debt. High taxes plus redistribution to agents with los
savings propensity
Public debt interest payments as % of GDP
05
1015
Deb
t int
eres
t pay
men
ts (
% o
f GD
P)_
__E
IU
1998 2000 2002 2004 2006 2008year
MexicoBrazil
Algeria
Argentina
Australia
AustriaAzerbaijan
Belgium
BulgariaCanada
Chile
China
Colombia
Czech Republic
Denmark
Ecuador
Egypt
Finland
FranceGermany
Greece
Hong Kong
Hungary
India
Indonesia
Iran
Ireland
Israel
Italy
Japan
KazakhstanMalaysia NetherlandsNew Zealand
Nigeria
Norway
Pakistan
Peru
PhilippinesPoland
PortugalRomania
Russia
Saudi Arabia
Singapore
Slovakia
South Africa
South KoreaSpain
Sri Lanka
Sweden
SwitzerlandTaiwanThailand
Turkey
Ukraine
United Kingdom
United States
Venezuela
Vietnam
Brazil
Mexico
020
4060
80Le
ndin
g to
pub
lic s
ect
or/to
tal l
end
ing_
__E
IU
7 8 9 10 11log( real GDP per capita)
correlation r = -0.3784, linear coefficient = -6.8918
The Brazilian syndrome
Extremely high tax rates No public savings, almost no investment Limited after-tax revenue by potential savers Imbalance between limited savings and
ample investment opportunities High real interest rate equilibrium …which worsens the fiscal imbalance
No FinanceNo returns
Appropriability Coordination
Lack ofcomplementary
factors
Savings Intermediation
No investment
Ex ante
Ex post
Human Capital
Infrastructure
What is the problem with banks ? High interest margin and bank spreads
Corrected for C/D and/or reserve requirements Low deposit mobilization
Deposit/GDP Low credit mobilization
Low Credit/Deposits High direct cost
Operating expenses / Assets High risk
Risk indexes High profits but low P/E ratios
Monopoly power High profits and high P/E ratios
Credit rationing
Deposit mobilization (Deposits/GDP)
Algeria
Argentina
Australia
Austria
Azerbaijan
Brazil
Bulgaria
Canada
Chile
China
Colombia
Czech RepublicDenmark
Ecuador
Egypt
Finland
France
Germany
Greece
Hungary
India
Indonesia
IranItaly
Japan
Kazakhstan
Malaysia
MexicoNigeria
Norway
Pakistan
Peru
PhilippinesPoland
Portugal
Romania
Russia
Saudi Arabia
Slovakia
South Africa
South Korea
Spain
Sri Lanka
Sweden
Thailand
Turkey
Ukraine
United Kingdom
United States
Venezuela
Vietnam
05
01
00D
EP
GD
P
7 8 9 10 11LYPCP
Algeria
Argentina
AustraliaAzerbaijan
Brazil
Bulgaria
Canada
Chile
China
Colombia
Czech Republic
Denmark
Ecuador
Egypt
Finland FranceGreece
Hungary
India
Indonesia IranItaly
Kazakhstan
Mexico
Nigeria
Norway
Pakistan
Peru
Philippines
Poland
Romania
Russia
Saudi Arabia
Slovakia
South AfricaSouth Korea
Sri Lanka
Sweden
Thailand
Turkey
Ukraine
United KingdomUnited States
Venezuela
Vietnam
-50
51
01
5R
AT
2R
EA
LS
M3
0 .2 .4 .6 .8 1DEPGDPSM3
Deposit mobilization vs. real interest rate, 2005
Real deposit rates vs. deposit cash flow (2004-2006)
Algeria
Argentina
AustraliaAustria
Azerbaijan
Belgium
Brazil
Bulgaria
Canada
ChileChina
Colombia
Czech Republic
DenmarkEcuador
Egypt
FinlandFranceGermanyGreece
Hong Kong
Hungary
India
Indonesia IranIreland
Israel
ItalyJapan
Kazakhstan
Malaysia
Mexico
Netherlands
New Zealand
Nigeria
Norway
Pakistan
Peru
Philippines
PolandPortugal
Romania
Russia
Saudi Arabia
SingaporeSlovakia
South AfricaSouth Korea
Spain
Sri Lanka
SwedenSwitzerland
Taiwan
Thailand
Turkey
Ukraine
United KingdomUnited States
Venezuela
Vietnam
-10
-50
51
01
5R
AT
2R
EA
LS
M3
0 10 20 30 40DCASHFLOWSM3
Lending to private sector vs. deposits, (% of GDP)
AlgeriaArgentina
Australia
Austria
AzerbaijanBrazil
Bulgaria
Canada
Chile
China
Colombia
Czech Republic
Denmark
EcuadorEgypt
Finland
France
GreeceHungary
India
Indonesia
Iran
Italy
Kazakhstan
MexicoNigeria
Norway
PakistanPeruPhilippinesPoland
Portugal
RomaniaRussia
Saudi ArabiaSlovakia
South Africa
South Korea
Spain
Sri Lanka
Sweden
Thailand
TurkeyUkraine
United Kingdom
United States
Venezuela
Vietnam
05
01
001
50
0 20 40 60 80 100DEPGDP
PRLOANGDP DEPGDP
Algeria
Argentina
Australia
Austria
Azerbaijan
Belgium
Bulgaria
Canada
Chile
China
Colombia
Czech Republic
Denmark
Ecuador
Egypt Finland
France
Germany
Greece
Hong Kong
HungaryIndia
Indonesia
IranIreland
IsraelItaly
Japan
Kazakhstan
Malaysia
Netherlands
New Zealand
Nigeria
Norway
Pakistan
Peru
PhilippinesPoland
Portugal
RomaniaRussia
Saudi Arabia
Singapore
SlovakiaSouth Africa
South KoreaSpain
Sri Lanka
SwedenSwitzerlandTaiwan
Thailand
TurkeyUkraine
United Kingdom
United States
Venezuela
Vietnam
Brazil
Mexico
02
46
8N
et i
nte
rest
ma
rgin
(ne
t int
ere
st in
c/a
sset
s)_
__E
IU
7 8 9 10 11log( real GDP per capita)
correlation r = -0.6499, linear coefficient = -1.0940
Is the banking system inefficient: Net interest margin (2005)
Bank spreads
AlbaniaAlgeria
Angola
Argentina
Armenia
Australia
Austria
Azerbaijan
Bahrain
Bangladesh
Belarus
BelgiumBelize
Bolivia
Bosnia and Hercegovina
Botswana
Brazil
Bulgaria
Cambodia
Cameroon
Canada
Cape Verde
Chad
ChileChina
Colombia
Congo (Brazzaville)Costa Rica
Cote d'Ivoire
Croatia
CyprusCzech Republic
Denmark
Dominican Republic
Ecuador
Egypt
El Salvador
Equatorial Guinea
EstoniaEthiopia
Finland
France
Gabon
Georgia GermanyGhanaGreece
Guatemala
Guinea
Guyana
Haiti
Honduras
Hong Kong
Hungary
Iceland
IndiaIndonesiaIran
Ireland
Israel
Italy
Jamaica
Japan
JordanKazakhstan
Kenya
Kuwait
Kyrgyz Republic
Laos
LatviaLebanon
Lesotho
Libya
Lithuania Luxembourg
Macedonia
Madagascar
Malawi
MalaysiaMalta
Mauritius
MexicoMoldova
MoroccoMozambique
Myanmar Namibia
Netherlands
New ZealandNicaraguaNigeria
NorwayOmanPakistan
Panama
Papua New Guinea
Paraguay
Peru
PhilippinesPoland
Portugal
Qatar
Romania
RussiaSaudi Arabia
Senegal
Seychelles
SingaporeSlovakiaSlovenia
South Africa
South KoreaSpain
Sri Lanka
Sudan
Swaziland
SwedenSwitzerlandSyria
Taiwan
Tajikistan
Tanzania
Thailand
The Gambia
Trinidad & Tobago
TurkeyTurkmenistan
Uganda
Ukraine
United Arab Emirates
United KingdomUnited States
Uruguay
VenezuelaVietnam
Yemen
YugoslaviaZambia
01
02
03
0S
PR
EA
D
7 8 9 10 11LYPCP
ArgentinaAustralia
Austria
Belgium
Bulgaria
Canada
Chile
China
Colombia
Czech Republic
Denmark
Ecuador
EgyptFinlandFranceGermany
Greece
Hong Kong
Hungary
India
Indonesia
Iran
Ireland
IsraelItaly
Japan
Kazakhstan
Malaysia NetherlandsNew Zealand
Nigeria
Norway
Pakistan
Peru
Philippines
Poland
Portugal
Romania
Russia
Saudi Arabia
Singapore
Slovakia
South Africa
Spain
Sri Lanka
SwedenSwitzerlandTaiwan
Thailand
Turkey
Ukraine
United Kingdom
United States
Venezuela
Vietnam
BrazilMexico
02
46
8O
per
atin
g e
xpe
nse
s/as
sets
___
EIU
7 8 9 10 11log( real GDP per capita)
correlation r = -0.5337, linear coefficient = -1.1103
Is the banking system inefficient (2003)
How risky are banks?
Algeria
Argentina
Australia
AzerbaijanBrazil
BulgariaChile
China
Colombia
Czech Republic
Ecuador
Egypt
Greece
Hong Kong
Hungary
India
Indonesia Iran
IsraelItaly
Kazakhstan
Malaysia
Mexico
New Zealand
Nigeria Pakistan
PeruPhilippines
PolandPortugal
Romania
Russia
Saudi Arabia
Singapore
Slovakia
South Africa
South KoreaSpain
Sri Lanka
Taiwan
Thailand
Turkey
Ukraine
Venezuela
Vietnam
20
40
60
80
Ba
nkin
g: O
vera
ll ris
k sc
ore
(1
00=
hig
h)_
__E
IU
7 8 9 10 11LYPCP
How about credit rationing?
Using Investment Climate Assessments in Morocco
“Out”: 53%
46.6
%53
.4%
“In”
“Out”
59%
41%Asked for
loan
Never asked for
loan
17%
83%Accepted
Rejected
39%
61%Don’t need
Can’t
69%
31%
Collateral issues
Profitability
83%
39%
61%
69%
31%
83%
39%
61%
69%
31%
Morocco: Are firms constrained by finance(Source: Najy Benhassine. Data from Investement Climate Assessment)
CoordinationMarket fail.
Ex ante
Hu
man
Cap
ital
Infr
astr
uct
ure
&
pu
bli
c g
oo
ds
(geo
gra
ph
y ?
)
Ex
ante
ris
ks
Tax
Lo
w p
rop
erty
ri
gh
ts,
crim
e &
co
rru
pti
on
Lo
w R
&D
Lo
w S
elf
dis
cove
ry
Low infrastructure wrt comparable
countries
High static markups & low
entry; in industries with entry costs
Expropriation
Low sophystication (EXPY) and few new industries
Inward migration high skills
Political risk, social risk
Social unrestGrowth
responds to new indus
High deposit interest rate
High spreadHigh returns to
educationTax policy risk
High taxes: Top marginal tax rate,
corporate tax, VAT
Open conflict
If it's high risk, then low profits
Procyclical mincerian returns
Growth elastic to infrastruct.
ChangeLabor market risks
Restrictive labor regulations
Corruption (illegal tax rate)
(Kaufman)
High operating expens /assets
Low tertiary for level of
developmentCongestion
History of expropriation
Inflation taxHigh protection
costs (ICA)
High correlation of growth with
TOTMonopoly
powers: high (P/E) ratio of
banks
Port quality. High losses in transport
(ICA)
High expectation of loosing future
profits
High returns to coordination
activities
Government failure
Short loan duration, credit rationingShocks to
infrastructure (hurricane, war)
Monopoly power, high markups.
Regulated entry
Low appropriability
Low net cash flow from banks Normal net cash flow from banks (dC/C - i)High lending interest rate
Investment elastic to interest rate
Access to external finance (EMBI, Default risk, CAD, Unsustainable
debt)
Small investment response to interest rate change
Ex postLack of complementary factors
Cost of doing business
Low to normal lending interest rate
Binding Finance Binding social returns
Lo
w a
gg
reg
ate
Sav
ing
s
Bad
fin
ance
Negative relation between growth
and current account.
Few products "nearby" to
move (openforest low)
Is it retuns or finance?
( - r)
Low FinanceLow returns
Appropriability Coordination
Lack ofcomplementary
factors
Savings Intermediation
Low investment
Ex ante
Ex post
Human Capital
Infrastructure
Low returns ?
Investment should be low Low Either low CAD, or low external debt Good access to external finance. Investment low in spite of access to finance Small investment response to interest rate
movements
KK
El Salvador: lending rates and investment rates
51
01
52
0
1980 1990 2000 2010year
Gross fixed investment (% of GDP)___EIU Lending interest rate (%)___EIU
Mexico: interest rates and investment 2000-2006
2000
2001
2002
20032004
2005
2006
51
01
52
0L
endi
ng in
tere
st r
ate
(%)_
__E
IU
19 19.5 20 20.5 21 21.5Gross fixed investment (% of GDP)___EIU
The decline in investment happened in the context of falling interest rates
CoordinationMarket fail.
Ex ante
Hu
man
Cap
ital
Infr
astr
uct
ure
&
pu
bli
c g
oo
ds
(geo
gra
ph
y ?
)
Ex
ante
ris
ks
Tax
Lo
w p
rop
erty
ri
gh
ts,
crim
e &
co
rru
pti
on
Lo
w R
&D
Lo
w S
elf
dis
cove
ry
Low infrastructure wrt comparable
countries
High static markups & low
entry; in industries with entry costs
Expropriation
Low sophystication (EXPY) and few new industries
Inward migration high skills
Political risk, social risk
Social unrestGrowth
responds to new indus
High deposit interest rate
High spreadHigh returns to
educationTax policy risk
High taxes: Top marginal tax rate,
corporate tax, VAT
Open conflict
If it's high risk, then low profits
Procyclical mincerian returns
Growth elastic to infrastruct.
ChangeLabor market risks
Restrictive labor regulations
Corruption (illegal tax rate)
(Kaufman)
High operating expens /assets
Low tertiary for level of
developmentCongestion
History of expropriation
Inflation taxHigh protection
costs (ICA)
High correlation of growth with
TOTMonopoly
powers: high (P/E) ratio of
banks
Returns decrease as education grows
Port quality. High losses in transport
(ICA)
High expectation of loosing future
profits
High returns to coordination
activities
Low growth and investment
Lack of complementary factors
Cost of doing business
Low to normal lending interest rate
Binding Finance Binding social returnsL
ow
ag
gre
gat
eS
avin
gs
Bad
fin
ance
Negative relation between growth
and current account.
Few products "nearby" to
move (openforest low)
Investment elastic to interest rate
Access to external finance (EMBI, Default risk, CAD, Unsustainable
debt)
Low investment response to interest rate change
Ex postGovernment failure
Growth Diagnostics : What signals are likely if X is binding?
Short loan duration, credit rationingShocks to
infrastructure (hurricane, war)
Monopoly power, high markups.
Regulated entry
Low appropriability
Low net cash flow from banks Normal net cash flow from banks (dC/C - i)High lending interest rate
No FinanceNo returns
Appropriability Coordination
Lack ofcomplementary
factors
Savings Intermediation
No investment
Ex ante
Ex post
Human Capital
Infrastructure
CoordinationMarket fail.
Ex ante
Hu
man
Cap
ital
Infr
astr
uct
ure
&
pu
bli
c g
oo
ds
(geo
gra
ph
y ?
)
Ex
ante
ris
ks
Tax
Lo
w p
rop
erty
ri
gh
ts,
crim
e &
co
rru
pti
on
Lo
w R
&D
Lo
w S
elf
dis
cove
ry
Low infrastructure wrt comparable
countries
High static markups & low
entry; in industries with entry costs
Expropriation
Low sophystication (EXPY) and few new industries
Inward migration high skills
Political risk, social risk
Social unrestGrowth
responds to new indus
High deposit interest rate
High spreadHigh returns to
educationTax policy risk
High taxes: Top marginal tax rate,
corporate tax, VAT
Open conflict
If it's high risk, then low profits
Procyclical mincerian returns
Growth elastic to infrastruct.
ChangeLabor market risks
Restrictive labor regulations
Corruption (illegal tax rate)
(Kaufman)
High operating expens /assets
Low tertiary for level of
developmentCongestion
History of expropriation
Inflation taxHigh protection
costs (ICA)
High correlation of growth with
TOTMonopoly
powers: high (P/E) ratio of
banks
Returns decrease as education grows
Port quality. High losses in transport
(ICA)
High expectation of losing future profits
High returns to coordination
activities
Lack of complementary factors
Cost of doing business
Low lending interest rate
Binding Finance Binding social returns
Lo
w a
gg
reg
ate
Sav
ing
s
Bad
fin
ance
Negative relation between growth
and current account.
Few products "nearby" to
move (openforest low)
Investment elastic to interest rate
Access to external finance (EMBI, Default risk, CAD, Unsustainable
debt)
Lack of investment response to interest rate change
Ex postGovernment failure
Short loan duration, credit rationingShocks to
infrastructure (hurricane, war)
Monopoly power, high markups.
Regulated entry
Low appropriability
Low net cash flow from banks High net cash flow from banks (dC/C - i)High lending interest rate
Ex ante risk of low appropriability
High margins (E) and low P/E ratio for existing activities
High risk indicators: Macroeconomic risk Expropriation risk, Labor market risk, social unrest, Political risk Legal and regulatory risk Tax policy risk
Why high markups for those who exist ?From a dynamic program prospective a firms
stays iff:
Value of being active Current profits Continuation value
)][max( 11
closedactiveactive
tttt VVEV
Are mark-ups high?
We use UNIDO data at the 2 digit level We calculate markup rates
Mark-up = (Value added – Wages)/Output We regress mark-up rates on GDP per
capita, sector dummies and country dummies We report the country dummies A high number implies that mark-ups are
higher than average
Country dummies in mark-up rates
ARG
AUS
AUT
BEN
BGD
BHS
BOL
BRA
BWA
CAN
CHL
CIVCMR
COL
CYP
DNK
DZA
ECU
EGY
ESP
ETH
FIN
FJIFRA
GAB
GBR
GHA
GRC
GTM
HKGHND
IDN
IND
IRN
ISL
ITA
JOR
JPN
KOR
KWT
LCA
LKA
MAC
MAR
MDG
MEX
MKDMLT
MNG
MUSMYS
NAM
NGANIC
NLDNOR
NPL
NZL
PAK PAN
PER
PHLPRI
PRT
RUS
SEN
SLV
SWE
SWZ
THA
TTO
TUN
TUR
TZA
UGA
URYUSA
VENZMB
ZWE
-.1
0.1
.2.3
coef
ficie
nt
2.5 3 3.5 4 4.5KKKK
Log of GDPpc 1990-2004
Ex-ante appropriability risk
Algeria
Argentina
AustraliaAustria
Azerbaijan
Belgium
Bulgaria
CanadaChile
China
Colombia
Czech Republic Denmark
Ecuador
Egypt
FinlandFranceGermanyGreeceHong KongHungary
India
Indonesia
Iran
IrelandIsraelItalyJapan
Kazakhstan
Malaysia
NetherlandsNew Zealand
Nigeria
Norway
PakistanPeruPhilippines
Poland Portugal
Romania
RussiaSaudi Arabia
SingaporeSlovakia
South Africa
South KoreaSpain
Sri Lanka
SwedenSwitzerlandTaiwanThailand
Turkey
Ukraine
United KingdomUnited States
Venezuela
Vietnam BrazilMexico
12
34
5E
xpro
pria
tion
risk
(5=
low
)__
_EIU
7 8 9 10 11log( real GDP per capita)
correlation r = 0.7109, linear coefficient = 0.7864
Is it expropriation risk ? (2005)
Ex-ante appropriability risk: Labor
Algeria
Argentina
Azerbaijan
Bulgaria
Chile
China
Colombia
Czech Republic
Ecuador
Egypt
Germany
Greece
Hong Kong
Hungary
India
Indonesia
Iran
Israel
Japan
KazakhstanMalaysia
Nigeria
Pakistan
Peru
Philippines
Poland
Romania
Russia
Saudi Arabia
Singapore
Slovakia
South Africa
South Korea
Sri Lanka
Taiwan
Thailand
TurkeyUkraine
United States
Venezuela
Vietnam
BrazilMexico
2030
4050
6070
Labo
ur m
arke
t ris
k (1
00=
hig
h)_
__E
IU
7 8 9 10 11log( real GDP per capita)
correlation r = -0.7754, linear coefficient = -13.3647
Risk in the labor market ? (2005)
Ex-ante appropriability risk: Tax
Algeria
Argentina
Azerbaijan
Bulgaria
ChileChina
Colombia
Czech Republic
Ecuador
Egypt Germany
Greece
Hong Kong
Hungary
India
Indonesia
Iran
Israel
Japan
Kazakhstan
Malaysia
Nigeria
Pakistan
Peru
Philippines
Poland
Romania
RussiaSaudi Arabia
Singapore
Slovakia
South AfricaSouth KoreaSri Lanka
Taiwan
Thailand
TurkeyUkraine
United States
Venezuela
Vietnam
Brazil
Mexico
020
4060
80T
ax
pol
icy
risk
(10
0=hi
gh)
___
EIU
7 8 9 10 11log( real GDP per capita)
correlation r = -0.4499, linear coefficient = -10.2982
Tax policy risk? (2005)
CoordinationMarket fail.
Ex ante
Hu
man
Cap
ital
Infr
astr
uct
ure
&
pu
bli
c g
oo
ds
(geo
gra
ph
y ?
)
Ex
ante
ris
ks
Tax
Lo
w p
rop
erty
ri
gh
ts,
crim
e &
co
rru
pti
on
Lo
w R
&D
Lo
w S
elf
dis
cove
ry
Low infrastructure wrt comparable
countries
High static markups & low
entry; in industries with entry costs
Expropriation
Low sophystication (EXPY) and few new industries
Inward migration high skills
Political risk, social risk
Social unrestGrowth
responds to new indus
High deposit interest rate
High spreadHigh returns to
educationTax policy risk
High taxes: Top marginal tax rate,
corporate tax, VAT
Open conflict
If it's high risk, then low profits
Procyclical mincerian returns
Growth elastic to infrastruct.
ChangeLabor market risks
Restrictive labor regulations
Corruption (illegal tax rate)
(Kaufman)
High operating expens /assets
Low tertiary for level of
developmentCongestion
History of expropriation
Inflation taxHigh protection
costs (ICA)
High correlation of growth with
TOTMonopoly
powers: high (P/E) ratio of
banks
Returns decrease as education grows
Port quality. High losses in transport
(ICA)
High expectation of loosing future
profits
High returns to coordination
activities
Low growth and investment
Lack of complementary factors
Cost of doing business
Low lending interest rate
Binding Finance Binding social returnsL
ow
ag
gre
gat
eS
avin
gs
Bad
fin
ance
Negative relation between growth
and current account.
Few products "nearby" to
move (openforest low)
Investment elastic to interest rate
Access to external finance (EMBI, Default risk, CAD, Unsustainable
debt)
Lack of investment response to interest rate change
Ex postGovernment failure
Growth Diagnostics : What signals are likely if X is binding?
Short loan duration, credit rationingShocks to
infrastructure (hurricane, war)
Monopoly power, high markups.
Regulated entry
Low appropriability
Low net cash flow from banks High net cash flow from banks (dC/C - i)High lending interest rate
Actual (ex post) low appropriability Low after tax earnings
High tax rates (Corporate , Top MIT, VAT…) Restrictiveness of labor laws. High unit labor costs Actual Conflict (War…) Protection costs (ICA ) Cost of doing business
Ex-post appropriability: Labor
Algeria Argentina
Australia
AustriaAzerbaijan BelgiumBulgaria
Canada
Chile
China
Colombia
Czech Republic
Denmark
Ecuador
Egypt
Finland
France
Germany
Greece
Hong Kong
Hungary
India
Indonesia Iran
IrelandIsrael
Italy
JapanKazakhstanMalaysia
NetherlandsNew Zealand
Nigeria
Norway
Pakistan
Peru
Philippines
Poland
Portugal
RomaniaRussia
Saudi Arabia
SingaporeSlovakia
South Africa
South Korea
SpainSri Lanka
Sweden
Switzerland
Taiwan
Thailand
TurkeyUkraine
United KingdomUnited States
Venezuela
Vietnam BrazilMexico
12
34
5R
est
rict
iven
ess
of la
bou
r la
ws
(5=
low
)___
EIU
7 8 9 10 11log( real GDP per capita)
correlation r = 0.3690, linear coefficient = 0.3680
Restrictive labor laws (2005)
Argentina
Australia Austria
Belgium
Brazil
Bulgaria
Canada
ChileChina
Colombia
Czech Republic
Denmark
Ecuador
Finland
FranceGermany
GreeceHong Kong
Hungary
Indonesia
Ireland
Israel
Italy
Japan
Kazakhstan
Malaysia
Mexico
NetherlandsNew Zealand
Norway
Peru
Philippines
Poland
Portugal
RomaniaRussia
Singapore
Slovakia
South Korea
Spain
Sweden
Switzerland
Taiwan
ThailandUkraine
United Kingdom
United States
Venezuela
05
01
001
502
00O
vera
ll u
nit l
abo
ur c
osts
leve
l (in
dex,
US
=10
0)_
__E
IU
0 20000 40000 60000 80000 100000Overall productivity of labour (GDP at PPP, per worker, US$)_PPP__EIU
Are labor costs too high given productivity? 2006
Appropriability: rule of law
AGO
ALBARG
ARM
ATG
AUSAUT
AZE
BDI
BEL
BENBFA
BGD
BGR
BIH
BLR
BLZ
BOL
BRA
BWA
CAF
CAN
CHE
CHL
CHN
CIV
CMRCOG
COL
COM
CPV
CRI
CYPCZE
DEU
DJI
DMA
DNK
DOMDZAECU
EGY
ERI
ESPEST
ETH
FIN
FJI
FRA
GAB
GBR
GEO
GHA
GIN
GMB
GNB
GRC
GRD
GTM
GUY
HKG
HND
HRV
HTI
HUN
IDN
IND
IRL
IRN
ISL
ISRITA
JAM
JOR
JPN
KAZKEN KGZKHM
KNA KOR
LAO
LBN
LCA
LKALSO
LTU
LUX
LVA
MAR
MDA
MDG MEXMKD
MLI
MLT
MNG
MOZ MRT
MUS
MWI
MYS
NAM
NER
NGA
NIC
NLDNOR
NPL
NZL
PAK
PAN
PERPHLPNG
POL
PRT
PRY
ROM
RUSRWA
SAU
SDN
SEN
SGP
SLBSLE
SLV
SVK
SVN
SWE
SWZ
SYC
SYR
TCDTGO
THA
TJK
TKM
TON
TTOTUNTUR
TZA
UGA UKR
URY
USA
UZB
VCT
VEN
VNM
VUT
YEM
ZAF
ZAR
ZMB
PRY
-2-1
01
2 R
ule
of
La
w
2.5 3 3.5 4 4.5 5
Log(GDP pc)
… Ex post appropriability: corruption(“ilegal tax”)
AGO
ALB
ARGARM
ATG
AUSAUT
AZEBDI
BEL
BENBFA
BGD
BGR
BIH
BLR
BLZ
BOL
BRA
BWA
CAF
CANCHE
CHL
CHN
CIVCMR
COG
COL
COM
CPV
CRI CYP
CZE
DEU
DJI
DMA
DNK
DOMDZAECU
EGY
ERI
ESP
EST
ETH
FIN
FJI
FRA
GAB
GBR
GEO
GHA
GINGMBGNB
GRCGRD
GTM
GUY
HKG
HND
HRV
HTI
HUN
IDN
IND
IRL
IRN
ISL
ISRITA
JAM
JOR
JPN
KAZKEN KGZKHM
KNAKOR
LAO
LBN
LCA
LKALSO
LTU
LUX
LVAMAR
MDA
MDGMEX
MKDMLI
MLT
MNGMOZ
MRT
MUS
MWI
MYSNAM
NERNGA
NIC
NLDNOR
NPL
NZL
PAK
PAN
PERPHL
PNG
POL
PRT
PRY
ROM
RUS
RWA
SAU
SDN
SEN
SGP
SLB
SLE
SLV
SVK
SVN
SWE
SWZ
SYC
SYR
TCDTGO
THA
TJKTKM
TON
TTOTUN
TUR
TZAUGA
UKR
URY
USA
UZB
VCT
VENVNMVUT
YEM
ZAF
ZAR
ZMBPRY
-2-1
01
23
Con
trol
of C
orru
ptio
n
2.5 3 3.5 4 4.5 5LYPPPK
Log(GDP pc)
Who was the camel? GDP in Telecoms vs. Total in Paraguay
80
120
160
200
240
280
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004* 2005* 2006**
GDP per capita
GDP in telecoms, per capita
Paraguay: Who was the camel? Agriculture vs. Total
80
90
100
110
120
130
140
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004*
Agriculture GDP pc
Total GDP pc
No FinanceNo returns
Appropriability Coordination
Lack ofcomplementary
factors
Savings Intermediation
No investment
Ex ante
Ex post
Human Capital
Infrastructure
CoordinationMarket fail.
Ex ante
Hu
man
Cap
ital
Infr
astr
uct
ure
&
pu
bli
c g
oo
ds
(geo
gra
ph
y ?
)
Ex
ante
ris
ks
Tax
Lo
w p
rop
erty
ri
gh
ts,
crim
e &
co
rru
pti
on
Lo
w R
&D
Lo
w S
elf
dis
cove
ry
Low infrastructure wrt comparable
countries
High static markups & low
entry; in industries with entry costs
Expropriation
Low sophistication
(EXPY) and few new industries
Inward migration high skills
Political risk, social risk
Social unrestGrowth
responds to new indus
High deposit interest rate
High spreadHigh returns to
educationTax policy risk
High taxes: Top marginal tax rate,
corporate tax, VAT
Open conflict
If it's high risk, then low profits
Procyclical mincerian returns
Growth elastic to infrastruct.
ChangeLabor market risks
Restrictive labor regulations
Corruption (illegal tax rate)
(Kaufman)
High operating expens /assets
Low tertiary for level of
developmentCongestion
History of expropriation
Inflation taxHigh protection
costs (ICA)
High correlation of growth with
TOTMonopoly
powers: high (P/E) ratio of
banks
Returns decrease as education grows
Port quality. High losses in transport
(ICA)
High expectation of loosing future
profits
High returns to coordination
activities
Low growth and investment
Lack of complementary factors
Cost of doing business
Low lending interest rate
Binding Finance Binding social returnsL
ow
ag
gre
gat
eS
avin
gs
Bad
fin
ance
Negative relation between growth
and current account.
Few products "nearby" to
move (openforest low)
Investment elastic to interest rate
Access to external finance (EMBI, Default risk, CAD, Unsustainable
debt)
Lack of investment response to interest rate change
Ex postGovernment failure
Growth Diagnostics : What signals are likely if X is binding?
Short loan duration, credit rationingShocks to
infrastructure (hurricane, war)
Monopoly power, high markups.
Regulated entry
Low appropriability
Low net cash flow from banks High net cash flow from banks (dC/C - i)High lending interest rate
Coordination failures ?
Obstacles to productive transformation Low EXPY Low Openforest (value and size) Country dummy of prob of transition to new
products Low investments in R&D…
Paraguay: Low EXPY…
ALB
ARG
ARM
AUS
AUT
AZE
BDI
BEN
BFA
BGD
BGRBHR
BHS
BLRBLZ
BOL
BRA
BRB
CAF
CAN
CHL
CHN
CIV
CMR
COL
CRI
CYPCZE
DEUDNK
DOMDZA
ECU
EGY
ESP
EST
ETH
FIN
FJIGAB
GBR
GEO
GHA
GINGMB
GRC
GTMGUY
HKG
HND
HRV
HTI
HUN
IDN
IND
IRL
IRN
ISLISR
ITA
JAMJOR
JPN
KAZ
KEN
KGZ
KNA
KOR
LBN
LKA
LTULVA
MACMAR
MDA
MDG
MEX
MLI
MLT
MNGMOZ
MUS
MWI
MYS
NCL
NER
NGA
NIC
NLD
NOR
NPL
NZL
OMN
PAK
PAN
PER
PHL
PNG
POL PRT
PRY
ROMRUS
RWA
SAU
SDN
SEN
SGP
SLE
SLV
SVK SVNSWE
SYR
TGO
THA
TJK
TKM
TTOTUR
TZA
UGA
UKRURY
USA
VENWSM
ZAF
ZMB
ZWE
PRY
7.5
88.
59
9.5
10
Log(
EX
PY
)
2.5 3 3.5 4 4.5
Log(GDP per Capita PPP)
Conditional on EXPY, unsurprising growth performance
e(
gro
wth
gdp
| X
,lexp
y19
92 )
+ b
*lex
py1
992
lexpy1992
Residuals Linear prediction
8.10487 9.83871
.31443
.429625
MDG
PRY
BGD
JAM
ECU
BOL LCA
LKA
COL
HTI
PER
KEN
IDN
BLZ
CHL
DZASAU
OMNTUR
TTO
IND
GRC
ROM
THA
CYP
CHN
HRV
PRT
MYS
BRA
HUN
AUS
MEX
ESP
KOR
NZL
SGP
NLD
CANUSADNKSWE
DEU
IRL
FINISL
CHE
Hausmann, Hwang y Rodrik (2006)
Slow progress in EXPY
EXPY, Comparative
0
2000
4000
6000
8000
10000
12000
14000
16000
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Argentina
Brazil
Colombia
Mexico
Peru
Paraguay
El Salvador
Uruguay
Low open forest
ALB
ARG
ARM
AUS
AUT
BDI
BENBFA
BGD
BGR
BIH
BLR
BOL
BRA
CAF
CAN
CHL
CHN
CIV
CMR
COL
CRI
CZEDEU
DNK
DOM
DZA
ECU
EGY
ESP
ETH
FIN
GBR
GEO
GHA
GIN
GRC
GTM
HKG
HND
HRV
HTI
HUN
IDN
INDIRL
IRN
ISR
ITA
JAMJOR
JPN
KAZ
KENKGZ
KOR
LBNLKA
LTU
LVAMARMDA
MDG
MEX
MLI
MNGMOZ
MWI
MYS
NERNGA
NIC
NLD
NOR
NPL
NZL
OMN
PAK PANPER
PHL
PNG
POL
PRT
PRY
ROM
RUS
RWA
SAUSDNSEN
SGP
SLE
SLV
SVKSWE
SYR
TGO
THA
TJKTKM
TUR
TZA
UGA
UKRURY
USA
VEN
ZAF
ZMB
ZWE
PRY
11
12
13
14
15
lno
pe
n_
fore
st1b
2.5 3 3.5 4 4.5LYPPPK
lnopen_forest1b lnopen_forest1b
Open Forest, Comparative
0
200000400000
600000
800000
10000001200000
1400000
16000001800000
2000000
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
Argentina
Brazil
Colombia
Mexico
Peru
Paraguay
El Salvador
Uruguay
Slow progress in open forest
Few new products since 1989
Product Year Millions of US$
Sesame 1991 28.7
Rape 1993 6.7
Other wheat 2001 35.3
Cigarettes 1992 9.8
Used agricultural machinery
1992 11,8
Ferrous scrap 1993 8.2
Non-ferrous scrap 1992 9.8
Plastic containers 1992 16.2
Soybeancycle
However,…..
Paraguay has a negative and significant country dummy in the H&K probit regressions Controlling for the position in the product space,
structural transformation has been surprisingly low This means that there are relatively nearby
products (to the sectors that are currently occupied) that haven’t been exploited
No FinanceNo returns
Appropriability Coordination
Lack ofcomplementary
factors
Savings Intermediation
No investment
Ex ante
Ex post
Human Capital
Infrastructure
CoordinationMarket fail.
Ex ante
Hu
man
Cap
ital
Infr
astr
uct
ure
&
pu
bli
c g
oo
ds
(geo
gra
ph
y ?
)
Ex
ante
ris
ks
Tax
Lo
w p
rop
erty
ri
gh
ts,
crim
e &
co
rru
pti
on
Lo
w R
&D
Lo
w S
elf
dis
cove
ry
Low infrastructure wrt comparable
countries
High static markups & low
entry; in industries with entry costs
Expropriation
Low sophystication (EXPY) and few new industries
Inward migration high skills
Political risk, social risk
Social unrestGrowth
responds to new indus
High deposit interest rate
High spreadHigh returns to
educationTax policy risk
High taxes: Top marginal tax rate,
corporate tax, VAT
Open conflict
If it's high risk, then low profits
Procyclical mincerian returns
Growth elastic to infrastruct.
ChangeLabor market risks
Restrictive labor regulations
Corruption (illegal tax rate)
(Kaufman)
High operating expens /assets
Low tertiary for level of
developmentCongestion
History of expropriation
Inflation taxHigh protection
costs (ICA)
High correlation of growth with
TOTMonopoly
powers: high (P/E) ratio of
banks
Port quality. High losses in transport
(ICA)
High expectation of loosing future
profits
High returns to coordination
activities
Government failure
Growth Diagnostics : What signals are likely if X is binding?
Short loan duration, credit rationingShocks to
infrastructure (hurricane, war)
Monopoly power, high markups.
Regulated entry
Low appropriability
Low net cash flow from banks High net cash flow from banks (dC/C - i)High lending interest rate
Investment elastic to interest rate
Access to external finance (EMBI, Default risk, CAD, Unsustainable
debt)
Lack of investment response to interest rate change
Ex post
Low growth and investment
Lack of complementary factors
Cost of doing business
Low returns to capital, low lending interest rate
Binding Finance Binding social returnsL
ow
ag
gre
gat
eS
avin
gs
Bad
fin
ance
Negative relation between growth
and current account.
Few products "nearby" to
move (openforest low)
Low social returns:Lack of complementary factors Marginal returns to private capital must be
low Inadequate human capital
Returns to human capital must be high Returns are highly pro-cyclical
Inadequate Infrastructure Low infrastructure quality / rating but no growth Indications of congestion, concern
Educacion Promedio al 2000 segun Fecha de Nacimiento
5.96.2
6.7
7.2
7.6
8.0
8.4
8.7
9.3
6.2
6.9
7.9
8.2
9.0
9.5
10.1
10.610.8
4.8
5.6
6.6
7.2
8.5
8.9
9.49.5
9.9
4.3
5.0
5.9
6.7
7.3
7.6
8.1
8.5
9.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
1,935 1,940 1,945 1,950 1,955 1,960 1,965 1,970 1,975 1,980 1,985
Paraguay Peru Mexico Colombia
In many countries, schooling quantity is increasing
Average schooling of cohort by year of birth
PIB real per capitamiles de pesos de 1993
13.0
13.5
14.0
14.5
15.0
15.5
16.0
16.5
17.0
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
Mexico’s GDP per capita
Retornos a la Educacion (MINCER)
11.7%
12.4%12.0%
12.7%
10.7%
11.4%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
1990 1992 1994 1996 1998 2000 2002 2004
Paraguay Mexico Peru Colombia
In Mexico, returns are high and cyclical
Mincerian returns, urban males
Average real wages did not decline in Average real wages did not decline in the 2001-2003 recessionthe 2001-2003 recession
Log of Average Wages
7.79
7.87
7.43
7.51
7.74 7.73
7.88
7.3
7.4
7.5
7.6
7.7
7.8
7.9
8.0
1992 1994 1996 1998 2000 2002 2004
Implication
If Mexico’s growth had been maintained post-2000, what would have happened to wage premia?
Is it infrastructure?
GDP per capita and Infrastructure quality
Algeria
Argentina
AustraliaAustria
Azerbaijan
Belgium
BrazilBulgaria
Canada
Chile
ChinaColombia
Czech Republic
Denmark
EcuadorEgypt
FinlandFranceGermanyGreece
Hong Kong
Hungary
IndiaIndonesia
Iran
Ireland
IsraelItaly Japan
KazakhstanMalaysiaMexico
Netherlands
New Zealand
Nigeria
Norway
Pakistan
Peru
Philippines
Poland
Portugal
Romania
RussiaSaudi Arabia
Singapore
Slovakia
South Africa
South KoreaSpain
Sri Lanka
SwedenSwitzerlandTaiwan
ThailandTurkeyUkraine
United Kingdom
United States
Venezuela
Vietnam
78
91
01
1L
YP
CP
.5 1 1.5 2 2.5LINRT
Is infrastructure a constraint on GDPpc?
Algeria
Argentina
Australia
Austria
Azerbaijan
Belgium
Brazil
Bulgaria
Canada
Chile
China
Colombia
Czech RepublicDenmark
EcuadorEgypt
FinlandFrance
Germany
Greece
Hong Kong
HungaryIndia
Indonesia
IranIreland
Israel
Italy
Japan
Kazakhstan
Malaysia
MexicoNetherlands
New Zealand
Nigeria
Norway
Pakistan
Peru
Philippines
PolandPortugal
Romania
Russia
Saudi Arabia
Singapore
Slovakia
South Africa
South Korea
Spain
Sri Lanka
Sweden
Switzerland
Taiwan
Thailand
Turkey
Ukraine
United Kingdom
United States
Venezuela
Vietnam
-.5
0.5
Dev
iati
ons
from
pre
dict
ed G
DP
pc
.5 1 1.5 2 2.5Log of EIU Infrastructure rating
Higher income thanexpected given INFRA
Lower income thanexpected, given INFRA
Better measures
Use ICAs Do a Rajan & Zingales type analysis using
either UNIDO or ICA datasets
CoordinationMarket fail.
Ex ante
Hu
man
Cap
ital
Infr
astr
uct
ure
&
pu
bli
c g
oo
ds
(geo
gra
ph
y ?
)
Ex
ante
ris
ks
Tax
Lo
w p
rop
erty
ri
gh
ts,
crim
e &
co
rru
pti
on
Lo
w R
&D
Lo
w S
elf
dis
cove
ry
Low infrastructure wrt comparable
countries
High static markups & low
entry; in industries with entry costs
Expropriation
Low sophystication (EXPY) and few new industries
Inward migration high skills
Political risk, social risk
Social unrestGrowth
responds to new indus
High deposit interest rate
High spreadHigh returns to
educationTax policy risk
High taxes: Top marginal tax rate,
corporate tax, VAT
Open conflict
If it's high risk, then low profits
Procyclical mincerian returns
Growth elastic to infrastruct.
ChangeLabor market risks
Restrictive labor regulations
Corruption (illegal tax rate)
(Kaufman)
High operating expens /assets
Low tertiary for level of
developmentCongestion
History of expropriation
Inflation taxHigh protection
costs (ICA)
High correlation of growth with
TOTMonopoly
powers: high (P/E) ratio of
banks
Returns decrease as education grows
Port quality. High losses in transport
(ICA)
High expectation of loosing future
profits
High returns to coordination
activities
Low growth and investment
Lack of complementary factors
Cost of doing business
Low lending interest rate
Binding Finance Binding social returnsL
ow
ag
gre
gat
eS
avin
gs
Bad
fin
ance
Negative relation between growth
and current account.
Few products "nearby" to
move (openforest low)
Investment elastic to interest rate
Access to external finance (EMBI, Default risk, CAD, Unsustainable
debt)
Lack of investment response to interest rate change
Ex postGovernment failure
Growth Diagnostics : What signals are likely if X is binding?
Short loan duration, credit rationingShocks to
infrastructure (hurricane, war)
Monopoly power, high markups.
Regulated entry
Low appropriability
Low net cash flow from banks High net cash flow from banks (dC/C - i)High lending interest rate
Is it low appropriability?
Macro risksWhat are macro risks?
•It is the risk of loosing the ability to capture returns because of a sudden change in relative prices.•Which price?: tradable/non tradable, domestic/foreign assets, interest rates, real wages
•What to look for: •Risk of inflation accelerating?•Risk of a depreciation?•Risk of a sudden increase in interest rates?
•What could trigger it?•Is there a misalignment in the real exchange rate?•Are the fiscal accounts sustainable (what is happening to the public debt)•Is your country vulnerable to negative external shocks?
III. Posit a syndrome
The syndrome to symptoms approach Posit a syndrome Analytically derive the observable symptoms
of that syndrome Empirically check that those symptoms are
present in the data Is there an alternative syndrome that can
account for this? What symptoms would allow a differential diagnostic?
A few syndromes
The over-borrowing state The over-taxing state The under-investing state The under-protecting state Growth collapses Lack of self-discovery Insufficient competition The under-educated country
CoordinationMarket fail.
Ex ante
Hu
man
Cap
ital
Infr
astr
uct
ure
&
pu
bli
c g
oo
ds
(geo
gra
ph
y ?
)
Ex
ante
ris
ks
Tax
Lo
w p
rop
erty
ri
gh
ts,
crim
e &
co
rru
pti
on
Lo
w R
&D
Lo
w S
elf
dis
cove
ry
•The over-borrowing state XX X X
•The over-taxing state X X XX
•The under-investing state XX X X
•The under-protecting state XX X
•Growth collapse X X XX
•The under-educated country XX
Government failureEx post
Syndrome
What constraints are likely in some growth syndromes ?
Low growth and investment
Binding Finance Binding social returns
Lo
w a
gg
reg
ate
Sav
ing
s
Bad
fin
ance
Lack of complementary
factors
Low appropriability
Example: Peru’s growth collapse Is Peru a case of an adverse shock to the
export sector… …in a country with low open forest… …that consequently had a difficult time
recovering? Let’s check the facts
1960
1961
19621963
19641965
19661967
19681969
197019711972
1973
197419751976
1977
1978
19791980
1981
1982
1983
19841985
1986
1987
1988
1989
19901991
1992
1993
1994
19951996
1997
199819992000
2001
20022003
2004
3.5
53
.63
.65
3.7
3.7
5L
YP
CL
CU
K
5.2 5.4 5.6 5.8 6 6.2LXPCKUS
There was a big export collapse Log of Real Exports pc
1979-1983
-40%
1979-1993
81 %
Export sophistication in Peru is low…
…but open forest in 1980 (when the collapse happened) was not terrible
ARG AUS
AUT
BDI
BEN
BFABGD
BGR
BHRBHS
BLZBOL
BRA
BRB
CAF
CAN
CHL
CHN
CIVCMR
COL
CRICYP
DNK
DOM
DZA
ECUEGY
ESP
FIN
FJI
GAB
GBR
GHA
GMB
GRCGTM
GUY
HKG
HND
HTI
HUN
IDN
IND
IRL
IRN
ISL
ISR
ITA
JAM
JOR
JPN
KENKNA
KOR
LKA
MAR
MDG
MEX
MLI
MLT
MOZ
MUSMWI
MYS
NCLNER
NIC
NLD
NOR
NPL
NZL
OMN
PAK
PANPER
PHL
PNG
PRT
PRY
RWA
SDN
SEN
SGP
SLE
SLV
SWE
SYR
TGO
THA
TTO
TUR URY
USA
VEN
ZAF
ZMB
ZWE
PER
11
12
13
14
15
lno
pen_
fore
st1b
2.5 3 3.5 4 4.5LYPPPK
lnopen_forest1b lnopen_forest1b
1960 200019801970
Agrarian Reform
Cotton and sugar collapse
Fishing nationalized
Fall ofPescaPeru
Colapso Pesca(natural 72)
End of mining concessions
…or is it a case of property rights?
Mining exportscollapse
PetroPeru Collapse in oil exports
1990
Conclusion
Part of the collapse in exports was self-induced The country lost market share in the products it exported
At a time when structural transformation was key, property rights became a problem
The recovery has been lead by the same sectors that collapsed
Associated with stronger property rights… …at a substantial cost in terms of GNI
Very low taxation of natural resource sectors …and the property rights cycle may not be broken
Over-borrowing state: symptoms The state generates an environment of high interest
rates There is a large government deficit …that crowds out private investment Exhaustion of external finance Growth is sensitive to the availability of external
savings Extreme example: Brazil
What do we observe?
Limited external creditworthiness Very high interest rates Domestic financial conditions very related to
external conditions Growth very sensitive to external financial
conditions
Why low savings?
Very high tax burden No government savings Very little after-tax income to save with …but a healthy return on investment So the interest rate must be very high to
prevent greater investment Should government lower taxes to improve
the business environment?
Taxes as a share of GDP
ggrevgdpweo
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Haiti
Guatemala
Costa Rica
Dominican Republic
El Salvador
Peru
Paraguay
Chile
Bahamas, The
Mexico
Trinidad & Tobago
Jamaica
Panama
Belize
Nicaragua
Bolivia
Argentina
Ecuador
Venezuela
Honduras
Colombia
Uruguay
Suriname
Guyana
Barbados
Brazil
Government spending is very high
Log of GDP per capita PPP
Gen
era
l Gove
rnm
en
t E
xpe
nditu
reas
a s
hare
of G
DP
7.40593 9.6058
.111271
.504702
ARG
BLZBOL
BRA
BRB
CHL
COL
CRIDOM
ECU
GTM
GUY
HND
HTI
JAM
MEXNICPAN
PERPRYSLV
TTO
URY
VEN
High cost of finance
Low return to economic activity
Low social returns
Low appropriability
government failures
market failures
poor
geography
low human capital
bad infrastructure
Micro risks
property rights, corruption,
taxes
macro risks: financial,
monetary, fiscal instability
information externalities:
“self
-
discovery”
coordination externalities
Poor intermediation
-
The over-borrowing state
Low domestic savings
Over-borrowing state: Policy Implications Improving the investment climate is not critical
There is an excess of investment in spite of distortions Lowering taxes to improve the investment climate isn’t
worth it Closing the deficit to be able to lower interest rates
is the key Ideally by cutting inefficient spending Second best: distortionary taxes
Over-taxing state: symptoms
The tax rate is too large relative to the social returns to investment
Investment is low Interest rates are low Significant informality Example: Barbados
Fiscal receipts of 40%, very low interest rates, access to international financial markets growth of 1%
High cost of finance
Low return to economic activity
Low social returns
Low appropriability
government failures
market failures
poor
geography
low human capital
bad infrastructure
Micro risks
property rights, corruption,
taxes
macro risks: financial,
monetary, fiscal instability
information externalities:
“self
-
discovery”
coordination externalities
bad international finance
bad local finance
low domestic saving
poor inter
-
mediation
The over-taxing state
Over-taxing state: Policy Implications
Lowering taxes is crucial
…in areas where they are most distortionary
…even at the cost of increasing the deficit
Under-investing state: Symptoms The economy is constrained by a lack of
infrastructure Private returns are limited by access to
infrastructure Low interest rates Congestion Example: India