UNU-MERIT CONFERENCE

26-28 November 2014.

Macro and micro lessons from the Latin American natural resource-based growth process.

JORGE KATZ

jorgekatz39@gmail.com or jorgekatz@terra.cl

FEN,University of Chile

Topics to be examined

• 1.‘Stylized facts’ . • 2.Aggregate convergence has not taken place, independently

of the macroeconomic policy regime countries have adopted. We have developed into 1/3 - 2/3 societies.

• 3.Convergence is taking place, however, in natural resource based activities, but associated to episodes of Dutch Disease, and of Tragedy of the Commons.

• 4.Four major current sources of concern: I. How to deal with the Chinese threat . II. Volatility of the world economy. III. The global fiscal balance of the economy and the need for public goods. IV Environmental sustainability and social inclusiveness.

‘Stylized facts’ descring the Latin American scenario

• 1.Per capita GDP has not ´converged´ to OCDE levels.(12 and 35 thousand

U$S) Convergence is taking place in natural resource based industries due to the ‘China effect’ and the new GM technological paradigm.

• 2. Much higher structural heterogeneity prevails. The ratio of GDP per capita between upper to lower quintile is 20-25 times in LA as against 6-8 times in OECD. The upper 30% lives better than the average european

• 3.The rate of capital formation has fallen vis a vis the 1970’s. • 4.Macroeconomic volatility is higher than in the 1970´s. • 5.The economy has restructured into natural resource based sectors &

services. Manufacturing is no longer the locus of modernity • 6.Terms of trade have improved due to the ‘China effect’, but low and

medium tech local industries can not compete with Chinese products. • 7. Imports of K goods have increased but domestic R&D efforts have not. • 8. The new growth regime involves the expansion of the natural resource

exploitation frontier but with frail institutions for environmental protection and for social inclusion.

GDP Per Capita Relative to the United States (PPP at current prices)

0

10

20

30

40

50

60

70

80

Taiwan

Korea

Chile Argentina

Brasil

Source: Penn Tables. A.Heston et.al. Univ. of Penn.

Income per capita ´lags behind´ OECD countries

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

curr

ent i

nter

natio

nal d

olla

rs

year

Argentina

Brazil

Chile

Mexico

Denmark

Finland

Ireland

Korea, Republic of

Source: Astorga & Katz, in Dutrenit and Sutz.

Average income per capita top quitile and lower quitile Heymann,Ramos)

Pib/habit. Top quitile Low quint. Argentina 11.775 45.749 1.832 Brasil 7.679 35.981 920 Chile 10.631 49.915 1.769 Mexico 9.046 39.021 1.383 Paises G7 29.015 71.051 11.354 Anglosaj. 30.473 82.880 9.321 EU-Japon 28.285 65.434 12.277

7

Fuente: Basado en datos de CEPAL.

15

17

19

21

23

25

27

1971

19

72

1973

19

74

1975

19

76

1977

19

78

1979

19

80

1981

19

82

1983

19

84

1985

19

86

1987

19

88

1989

19

90

1991

19

92

1993

19

94

1995

19

96

1997

19

98

1999

20

00

2001

20

02

2003

20

04

2005

20

06

2007

20

08

2009

20

10

2011

Latin America: Gross capital formation , 1970-2011 (En porcentaje del PIB)

23,5

17,6

18,5

17,6

21,3

Gross capital formation in LA 1970-2011

Source:R.french davis

TPF in Latin American . (Aravena et.al. Cepal, 2006)

-3

-2

-1

0

1

2

3

4

5

1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

PTF sin ajustar PTF ajustada

Differences in TPF across LA countries. (Aravena et.al. ECLAC, 2006)

0

1

2

3

4

5

6

Argentina Bolivia Brasil Chile Colombia Costa Rica Ecuador Mexico Peru Venezuela

1950 - 2005

Capital Trabajo PTF

The average regional scenario as ilustraste by the case of Chile

Productivity growth is very low

Latin American macro volatility. (Macro volatility induces a ´defensive´micro of low I and R&D expenditure)

Figure I.2Latin America (19): GDP and aggregate demand, 1990-2004

(annual growth rates, %)

-4

-2

0

2

4

6

8

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

GDP growthAggregate demand growth

Source: R.Ffrench Davis

CHANGES IN INDUSTRIAL STRUCTURE RESULTING FROM TRADE LIBERALIZACION AND MARKET DE-REGULATION

POLICIES.

Argentina Brasil Chile Colombia México1970 1996 1970 1996 1970 1996 1970 1996 1970 1996

I 15.6 13.1 18.8 22.8 14.9 10.2 10.7 10.5 13.3 13.9

II 9.9 12.1 9.9 8.7 7.7 2.0 2.9 6.5 5.5 10.8

III+IV 36.2 45.7 35.8 42.4 43.2 56.2 45.7 51.2 46.8 46.5

V 38.2 29.0 35.5 26.1 34.2 31.6 40.7 31.8 34.4 28.8

I Industria metalmecánica (excluyendo automóviles, CIIU 381,382,383,385);II Equipo de transporte (CIIU 384)III+IV Alimentos, bebidas y tabaco (CIIU 311,313,314); (en el caso chileno, CIIU 372 ha sido excluido);

y IV Industrias procesadoras de recursos naturales (CIIU, 341, 351, 354, 355, 356, 371, 372)V Industrias “tradicionales” intensivas en mano de obra (CIIU 321, 322, 323, 324, 331, 332, 342,

352, 361, 362, 369, 390.

Metalworking activities. (Machinery and equipment) Vehicles Natural resource processing industries Foodstuffs, forestry, mining, acuaculture, horti and fruticulture, gas and oil, etc. Low skilled labour intensive industries. (Shoes, clothing, etc.)

Source: ECLAC, UN

Commodity prices 2000-2011 (Is China a ´bubble´ or a new model of the world economy?)

0

50

100

150

200

250

I 00

III 0

0

I 01

III 0

1

I 02

III 0

2

I 03

III 0

3

I 04

III 0

4

I 05

III 0

5

I 06

III 0

6

I 07

III 0

7

I 08

III 0

8

I 09

III 0

9

I 10

III 1

0

I 11

-60%

-40%

-20%

0%

20%

40%

60%

80%

Var. interanual (eje derecho)

Índice

Source: R.Jenkings

Unit labor costs 100=2000

Argentina

Brasil

Chile

Colombia

Perú

Uruguay

25.0

50.0

75.0

100.0

125.0

150.0

175.0

200.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Argentina Brasil Chile Colombia Perú Uruguay

Source: R.Frenkel and M.Rapetti.

The Real exchange rate vis a vis US. has worsened

Argentina

Brasil

Chile

Colombia Perú

Uruguay

25.0

50.0

75.0

100.0

125.0

150.0

175.0

200.0

225.0

250.0

275.019

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Argentina Brasil Chile Colombia Perú Uruguay

Source: (R.Frenkel and M.Rapetti, 2011)

Low R&D expenditure as a % of GDP, and scarce incidence upon domestic productivity growth.

0.43 0.69 1.14 1.34 2.68

3.95

0

1

2

3

4

Different macroeconomic policy regimes have failed

to induce ´catching up´.

• Brazil and Chile opted for an ´inflation targeting´ regime in the

2000´s. Argentina instead opted for a high and competitive real exchange rate (RER) regime.

• Brazil y Chile suffered the appreciation of the exchange rate and increasing commoditization of industrial output and exports. Argentina expanded growth and employment across the board,but could not keep inflation at bay. X’s came from ‘old’ plants, without much new investment.

• None of the three managed to close the relative productivity gap with the international frontier. Macro policies seem to be a necessary, but not a sufficient condition for that.

Argentina: exchange rate management after the 2002 devaluation.

Source: Katz & Bernat,2011

The expansion of Exports. (Argentina, Brasil Chile)

138,4

132,2

159,4

119,0

134,6

125,4 125,4

138,2

128,7

120,8

105,0

123,2

100,0

138,1

141,6

134,9

129,6

131,8

133,1

116,3

124,2121,0

90

100

110

120

130

140

150

160

170

2003 2004 2005 2006 2007 2008 2009 2010e

Argentina Brazil Chile

Source: Katz & Bernat, 2011

Annual inflation rate, Argentina, Brazil and Chile.

12,3%

9,8%

13,0%

22,0%

13,8%

23,1%

5,7%

3,1%4,3%

5,6%

7,8%7,1%

-1,4%

2,5%

6,1%

3,7%4,5%

5,9%

7,6%

9,3%

2,6%3,7%

2,4%1,1%

-5%

0%

5%

10%

15%

20%

25%

2003 2004 2005 2006 2007 2008 2009 2010e

Argentina Brazil Chile

After 2006 Argentina could not avoid moving into an inflationary regime and could not substain its previous exchange rate policy

Neither Argentina, nor Brazil or Chile, managed to close the relative productivity gap in manufacturing

10

20

30

40

50

60

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98

ARG BRA MEX COL PER CHI

But convergence is taking place in natural resource based sectors

1. Agricultural products : Soybean, wheat, maize.(Argentina, Brazil, Bolivia, Paraguay, Uruguay) 2. Mining activities. (Chile, Bolivia). 3. Oil and gas.(Ecuador, Colombia). 4. Aquaculture. (Chile) 5. Forestry products (Chile, Brazil, Uruguay). 6. Horto, fruticulture & wine.(Argentina, Chile, Uruguay), show :

New ´state of the art´ facilities have been erected featuring new process and production organization technologies. Subcontracting activities and KIBS have expanded and sophisticated natural resource based ´clusters´ are rapidly growing.

Soybean production (Tons) and productivity (Tons/acre).

Comparative perspective 1995-1996 2006-2007

Argentina Brazil China India EEUU

Producction Tons

Harvested Area . Acre

Argentina Brazil China India EEUU

Yield per acre.

Argentina Brazil China India EEUU

12.480 24.150 13.500 4.476 59.174

5.980 10.950 8.127 4.817 24.900

2.087 2.205 1.661 0.929 2.376

46.500 59.000 16.200 7.690 86.770

15.900 20.700 9.300 8.100 30.190

2.925 2.850 1.742 0.947 2.874

Source: USDA

Expanding the natural resource exploitation frontier has resulted in major environmental consequences

Salmon farming in Chile as an example.

0

100

200

300

400

500

600

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

000

roun

d to

ns

Norway Chile UK Canada Faroe Island Australia

Negative environmental effects reflect a negative response from the ecology.

Main policy issues now facing Latin America. I will mention just four:

1. How to deal with the Chinese threat?. . China is today the major source of demand for natural resource based industrial commodities. It affects world prices and terms of trade. . China is today a major source of supply of low and medium tech industrial goods. The trade balance has become strongly negative. . China is now aggresively entering energy, mining, agricultural and capital markets, taking agricultural land on lease, exploring gas and oil reserves, and offering financial help. How should the region deal with this? . How to negotiate with China in a ‘beauty context’ scenario?. . What impact should different countries expect from changes in the Chinese domestic policy scenarios.

II. How to deal with a more volatile world environment. Trade and FDI. III How to reconcile short term financial equilibrium and long term structural issues? IV. How to deal with the problems of a natural resource based growth model

1. Trade liberalization forced the return to natural comparative advantages

leaving less space for macroeconomic policies aiming at ´catching up´. 2. The ´inflation targeting´ regime –adopted out of ´fear of inflation´ and to

attract FDI – does not care for structural change and social inclusion. 3. The apreciation of the exchange rate has deteriorated the competitive

position of emerging nations. 4. Capital goods imports have substituted for local machinery prodution

and also for R&D efforts. 5. Environmental protection has deteriorated due to overexploitation of

natural resources 6. Manufacturing activities have lost share in GDP and the expansion of the

natural resource exploitation frontier with scarce provision of public goods is having negative consequences upon the environment and also upon social inclusivness.

Monetary, fiscal and exchange rate policies are needed

to sustain the RER, but financing is also required for ‘industrial’ and social policies.

• A competitive RER is needed for growth but it affects the rate of inflation.

• For such reason fiscal and monetary interventions are needed to keep inflation at bay.

• These interventions should aim at maintaining the global balance of the economy, but considering that resources are needed to build up of local technological capabilities and competitiveness, and also to improve social equity.

• This demands coordination between short and long term policies sustaining the global balance of the economy but financing the building up of domestic technical capabilities and improving social inclusion.

Industrial and social policies are required to improve competitiveness and social inclusion.

• There is a widely accepted view that industrial and natural resource based growth are somewhat incompatible.

• However, natural resources demand ´location specific´specialized equipment and knowledge intensive services which can not be brought from abroad.

• Natural resources – soil, water, the bio-sphere - are in constant change and transformation in response to an increasing rate of exploitation. The dialogue between economics an the ecology demands collective understanding, regulation and public goods.

• The expansion in the rate of exploitation of natural resources with inadequate supply of public goods produces environmental degradation and welfare loses at the community level.

The current Chilean macro/micro policy package as an option to deal with the situation, but denigrated

by the international press.

1. The current Chilean policy appears as a valuable attempt to bring together macro stability and social reforms : a tax reform collecting 3% of GDP to be used to improve Education.

2. The FT and The Economist have denigrated it by calling it ‘the new mediocrity’. Is it right?

3. The question then emerges : How can economic growth, structural change and social inclusion be made compatible with macro stability in the present age of financial equilibrium policy thinking?