Transcript Competitiveness and Growth in Lat

Competitiveness and Growth in
El Salvador
Luis Felipe Zegarra
Universidad de Piura, CIUP (Lima, Peru)
Martha Rodríguez
Universidad del Pacifico, CIUP (Lima, Peru)
Carlos Acevedo
UNDP (San Salvador, El Salvador)
Background
• El Salvador implemented pro-market structural
reforms in early 1990s
• However, economic performance did not seem to
respond: GDP´s growth rate has been low in the
last 10 years
Stilized facts
• GDP growth rates high in early 1990s, but much
lower in 1995-2005.
• Slow growth for Central American standards.
• Low savings and investment rates.
• Slowdown of export sector.
• Slowdown of all productive sectors, especially
agriculture and manufacture.
Annual growth rates (%)
Latin America
México
South America
Argentina
Brazil
Chile
Peru
Others
Central America
El Salvador
Others
1990-95
3.7
1.5
1995-2000
3.1
5.5
2000-05
2.3
1.8
5.7
3.1
7.8
5.6
3.9
2.5
2.1
6.3
2.4
1.3
2.0
2.2
4.4
4.2
3.0
6.2
4.6
3.1
4.8
2.2
3.4
Notes and sources: GDP is in constant prices. For El Salvador, the source is CEPAL (2006a). For the
rest of countries, the sources are CEPAL (2003) for 1990-95 and 1995-2000, and CEPAL(2006a) for
2000-05.
Main questions
• Why has El Salvador grown so slowly?
• Why are investment rates so low?
General decision tree
Problem: Low growth rates of GDP
Slow growth of capital
Low returns to
to investment
Slow growth of labor
High cost of finance
Slow growth of land
Slow growth of TFP
Decision tree for low investment rates
Problem: low investment rates
Low returns to economic activity
Low social returns to
investment
Human
capital
Infrastructure
Innovation External
conditions
High cost of finance
Low appropriability
Tax
system
Micro
risks
Externalities
Macro
risks
Bad
local
finance
Bad
international
finance
Binding constraint: migration
• Migration has affected GDP growth through:
– Size of labor force
• Population
• Reservation wage
– Competitiveness of trade sector
• Quality of labor force (human capital)
• Remittances and real exchange rate (aggravated by inflexibility from
dollarization)
• Also: unfavorable external factors
• There is no much the government can do to solve these
problems.
• Then, it is crucial to deal with other problems
Other constraints
• Cost of capital
– For small firms
• Appropriability of returns
– High crime rates
– Fiscal sustainability
• Social returns to investment
– *** Low human capital ***
– Limitations in infrastructure
– Lack of technological adaptation
Why does El Salvador grow slowly?
Problem: Low growth rates of GDP
Slow growth of capital
Low returns to
to investment
Slow growth of labor
High cost of finance
Slow growth of land
Slow growth of TFP
Migration and labor force
• Migration has increased in recent years
• Significant impact on the size of labor force
Number of migrants (000)
1000
800
600
400
200
0
1951-55
1956-60
-200
Source: UNDP (2005)
1961-65
1966-70
1971-75
1976-80
1981-85
1986-90
1991-95
1996-2000
2000-05
Number of occupied workers (official)
3000000
2500000
2000000
1500000
1000000
500000
1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004
Migration and labor force
• Preliminary estimates (2007 census) indicate that
actual size of population is 1.3 million less than
previous official figures.
• Assuming the same growth rate of population for
labor force, we adjust the size of labor force.
Labor and GDP per-worker, 1990-2005
GDP
(million
colons 1990)
1990
2005
36,487
63,421
3.75
Official labor
Labor (thousands
GDP per-worker
occupied workers) (million colons 1990)
1,720
2,591
Adjusted labor
Labor (thousands
GDP per-worker
occupied workers) (million colons 1990)
21,214
24,477
Annual growth rates (%), 1990-2005
2.77
0.98
1,720
1,863
21,214
34,047
0.47
3.29
• Labor force grew by 0.47% per year (rather than 2.8%)
• GDP per worker grew by 3.29% per year (rather than
0.98%)
Annual growth rate of GDP per-capita
(%), 1990-2005
Venezuela
Uruguay
Peru
Paraguay
Panama
Nicaragua
Mexico
Honduras
Guatemala
El Salvador
Ecuador
Costa Rica
Colombia
Chile
Brazil
Bolivia
Argentina
-0.5
0.0
0.5
1.0
1.5
Source: CEPAL
* The actual growth rate of GDP per-capita is 1.8% per year in 1990-2005
2.0
2.5
3.0
3.5
4.0
4.5
Annual growth rate of real wages (%),
1990-2003
El Salvador
Venezuela
Uruguay
Peru
Paraguay
Nicaragua
Mexico
Costa Rica
Colombia
Chile
Brazil
Bolivia
Argentina
-5
Source: ILO, ECLAC
-4
-3
-2
-1
0
1
2
3
4
Gross-capital formation (% GDP), 2005
40
2000
2005
35
30
25
20
15
10
El Salvador
Low-middle income Latin American and East Asia and Pacific
Caribbean
• Investment rate in El Salvador is low
Source: World Bank
South Asia
Harvested land (has)
900000
850000
800000
750000
700000
650000
600000
550000
500000
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
Source: FAO
• Harvested land has declined for more than 10 years
2003
Decomposition of output
• What explains economic growth?
– Production factors (capital, labor, land)?
– Or total factor productivity (TFP)?
• Methodology:
– Cobb-Douglass production function: Q=AKβL αT1-α-β
– Kt=(1-δ)Kt-1+It
– Assumptions: β=0.36,α=0.54, δ=2.5%, r=15%.
Decomposition of GDP, 1990-2005
Official labor
Adjusted labor
Annual growth rates (%)
GDP Capital Labor
Land
Contribution to growth (%)
TFP Capital Labor
Land
3.75
3.75
0.46
1.70
5.22
5.22
2.77
0.47
-0.77
-0.77
1.88
1.88
1.50
0.25
-0.08
-0.08
• Labor and land explain much of the evolution of
GDP
• TFP grew by 1.7% per year (rather than 0.46%)
– % TFP consistent with structural reforms
Why does El Salvador grow slowly?
• Slowdown of labor force (migration)
• Low investment rates
• Decline in land usage
Why is investment in ES low?
Problem: low investment rates
Low returns to economic activity
Low social returns to
investment
Human
capital
Infrastructure
Innovation External
conditions
High cost of finance
Low appropriability
Tax
system
Micro
risks
Externalities
Macro
risks
Bad
local
finance
Bad
international
finance
I) Is cost of capital high?
National savings rate (% GDP), 2004
El Salvador
Costa Rica
Guatemala
Honduras
Nicaragua
Panama
Argentina
Brazil
Chile
Colombia
Ecuador
Peru
Uruguay
Venezuela
Mexico
0
5
10
15
20
Source: WDI, 2006
• Savings rate is low in El Salvador
25
30
35
Real interest rates (%), 2005
50
40
30
20
10
Brazil
Paraguay
Dominican Rep.
Costa Rica
Uruguay
Bolivia
Peru
LAC
Colombia
Honduras
Panama
Guatemala
Mexico
El Salvador
Ecuador
Nicaragua
Argentina
-10
Venezuela
0
-20
The World Bank, World Development Indicators
• If credit is a binding constraint, interest rate will be
high. However, it is low for LAC standards.
Credit access is limited for small and micro
enterprises
Main sources of financing for SMEs in El Salvador
11.9%
3.2%
Retained earnings
9.7%
Remittances
Credit from suppliers
Other
75.2%
Cost of capital-Summary
• Domestic savings rate in El Salvador is low.
• However, El Salvador has a relatively easier access to
credit than other countries.
• Credit is limited for small and micro enterprises.
For SME credit may be a binding constraint
II) Is appropriability of returns low?
•
•
•
•
Taxation
Institutions and micro risks
Macro risks
Externalities
Taxation
• Taxation system is not a binding constraint for
investment
– Taxes in El Salvador are low
– Tax administration doesn´t seem to be an obstacle to
investment
Profit tax rate (% profit), 2005
El Salvador
Costa Rica
Guatemala
Honduras
Nicaragua
Panama
Mexico
Argentina
Bolivia
Brazil
Chile
Colombia
Ecuador
Paraguay
Peru
Uruguay
Venezuela
0
Source: Doing Business, 2006
10
20
30
40
50
60
70
Institutions
• Institutions are pro-investment
• The main problem: crime
– Crime in El Salvador: one of the highest rates in the
world
Murders per 100,000 persons, 2002
Colombia
South Africa
Jamaica
Venezuela
El Salvador
Guatemala
Russian Federation
Kazakhstan
Mexico
Sri Lanka
Estonia
Belarus
Latvia
Papua New Guinea
Uganda
Thailand
Phillipines
USA
0
10
20
Source: Crime and Development in Central America (2002)
30
40
50
60
70
Index of property rights (0 to 100)
El Salvador
Costa Rica
Guatemala
Honduras
Nicaragua
Panama
Mexico
Argentina
Bolivia
Brazil
Chile
Colombia
Ecuador
Paraguay
Peru
Uruguay
Venezuela
20
30
40
50
60
Source: The Heritage Foundation, 2007
• Greater value means better PR
70
80
90
Index of corruption, 2006
El Salvador
Costa Rica
Guatemala
Honduras
Nicaragua
Panama
Mexico
Argentina
Bolivia
Brazil
Chile
Colombia
Ecuador
Paraguay
Peru
Uruguay
Venezuela
2
3
Source: Transparency International, 2006
4
5
6
• Greater value means lower corruption
7
8
Macro risks
• Inflation is low
• Fiscal deficit is low
• Vulnerabilities:
– Subject to external real shocks (dollarization)
– Fiscal sustainability is weak
Inflation rate (%), 2006
El Salvador
Costa Rica
Guatemala
Honduras
Nicaragua
Panama
Mexico
Argentina
Bolivia
Brazil
Chile
Colombia
Ecuador
Paraguay
Peru
Uruguay
Venezuela
0
Source: ECLAC
2
4
6
8
10
12
14
Fiscal sustainability
• Estimates on the primary balance required for
public debt sustainability.
• Vergara (2003) estimates a fiscal adjustment of
2.5% of GDP of the trend primary balance
Externalities
• Externalities may have affected self-discovery
• But externalities exist everywhere
• There is no strong evidence that externalities are the
binding constraint for growth
III) Are social returns to investment low?
•
•
•
•
Human capital
Infrastructure
External conditions
Technological adaptation
A) Human capital
• Low education of labor force: third major problem.
• Low schooling rates
Illiteracy rate (%), 15 years and more,
2002
El Salvador
Costa Rica
Guatemala
Honduras
Nicaragua
Panama
Mexico
Argentina
Bolivia
Brazil
Chile
Colombia
Ecuador
Paraguay
Peru
Uruguay
Venezuela
0
5
10
15
Source: The World Bank, World Development Indicators, 2006
• Illiteracy in El Salvador is high
20
25
Migration and education
• Migrants are better educated than non-migrants.
• Outflow of talented people.
Distribution of Salvadorans (%)
Tertiary education; 10.6%
Complete secondary; 3.7%
Complete primary or
incomplete secondary;
15.2%
No schooling or
incomplete primary;
70.5%
Source: International Data on Educational Attainment (Barro and Lee, 2000)
Distribution of migrants (%)
Tertiary education; 21.7%
Complete secondary
education; 27.9%
Source: UNDP
No education or
incomplete primary; 8.6%
Complete primary or
incomplete secondary;
41.8%
High-skilled workers
• Low percentage of population with tertiary
education
• Low availability of scientists and engineers
Population with tertiary education (%)
El Salvador
Costa Rica
Guatemala
Honduras
Nicaragua
Panama
Mexico
Argentina
Bolivia
Brazil
Chile
Colombia
Ecuador
Paraguay
Peru
Uruguay
Venezuela
5
7
9
11
13
Source: International Data on Educational Attainment (Barro and Lee, 2000)
15
17
19
21
23
Quality of education
• Quality of education in El Salvador is not high for
Latin American standards:
– Indicators of perception
– Returns to schooling of migrants in U.S.
Index of quality of education (1 to 7)
4.0
Public schools
Math and science education
3.5
3.0
2.5
Venezuela
Uruguay
Peru
Paraguay
Ecuador
Colombia
Chile
Brazil
Bolivia
Argentina
Panama
Nicaragua
Honduras
Guatemala
Costa Rica
El Salvador
1.5
Mexico
2.0
Note: The indexes measure the quality of public schools and math education. They range from 1 to 7, where a greater value indicates higher quality.
Source: World Economic Forum, The Global Competitiveness Report, 2005-06
Returns to schooling in U.S.
El Salvador
Costa Rica
Guatemala
Honduras
Panama
Mexico
Argentina
Brazil
Chile
Colombia
Ecuador
Peru
Uruguay
0.010
0.015
Source: Bratsberg & Terrel (2002)
0.020
0.025
0.030
0.035
0.040
0.045
0.050
0.055
Is low schooling rate a binding constraint?
• Marginal returns
– If low schooling is a binding constraint, then marginal
returns to schooling will be high
– Hausmann, et al: schooling is not a binding constraint;
but they don´t control for quality
– Our evidence: marginal returns to schooling are not
high, even after controlling for quality
• Survey data
– Education is not binding
Returns to education and quality
0.14
Guatemala
0.13
Peru
Ecuador
Brazil
Paraguay
Mexico
Chile
Returns to education
0.12
Panama
Colombia
Bolivia
Nicaragua
0.11
Honduras
El Salvador
0.10
Costa Rica
Argentina
0.09
Venezuela
Uruguay
0.08
0.07
Dominican Rep
0.06
1.5
2.0
2.5
3.0
Quality of education
Sources: World Economic Forum, 2005-06; Hausmann et al (2005)
3.5
4.0
4.5
Does the education system meet the needs
of a competitive system? Index (1 to 7)
El Salvador
Costa Rica
Guatemala
Honduras
Nicaragua
Panama
Mexico
Argentina
Bolivia
Brazil
Chile
Colombia
Ecuador
Paraguay
Peru
Uruguay
Venezuela
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
3.5
Note: This index measures the quality of the educational system, which indicates whether the educational system meets the needs of a competitive economy. It ranges between
1 and 7, where a greater value indicates that the educational system meets the needs of a competitive economy better.
Source: World Economic Forum, The Global Competitiveness Report, 2005-06
Human capital-summary
• El Salvador has low levels of human capital
• Low human capital represents a serious problem in
order to upgrade its productive structure (to
enhance productivity)
– Low tertiary education
– Lack of self-discovery
B) Infrastructure
• Roads, airports, ports, electricity
• Average: among the best in the region
• Main problems: roads, electricity
0
Chile
El Salvador
Mexico
Argentina
Dominican Rep.
Uruguay
Guatemala
Brazil
Venezuela
Colombia
Peru
Bolivia
Infrastructure gap: among the best
Infrastructure Gap
8
6
4
2
Main problems: roads, electricity
Infrastructure gap by sector
Chile
El Salvador
Mexico
Argentina
Dominican
Uruguay
Guatemala
Brazil
Venezuela
Colombia
Peru
Bolivia
Road Infrastructure
Gap
Port Infrastructure
Gap
Airport
Infrastructure Gap
Electricity
Infrastructure Gap
0
5
10
15
20
Infrastructure-summary
• El Salvador has good indicators of infrastructure
for Latin American standards.
• However, higher economic growth will require
greater investment in infrastructure.
C) External conditions
Decline in terms of trade in the last 10
years
Terms of trade (1990=100)
130
120
110
100
90
80
70
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Competition from China
• Chinese exports to the US has increased in the last
10 years
• Salvadorian maquila has been affected
External conditions-summary
• Unfavorable terms of trade
• Increasing competition from Chinese textiles
* Migration, remittances and RER *
• Migration has affected economic growth through:
– Slowdown of labor force
– Outflow of talented people
• Also: remittances and RER
– Migrants send remittances to their relatives in El
Salvador
– Inflow of remittances decreases real exchange rate
– Remittances have mostly funded consumption rather
than investment
Remittances (% GDP), 2005
Peru
Panama
Nicaragua
Mexico
Honduras
Guatemala
El Salvador
Ecuador
Costa Rica
Colombia
Brazil
Bolivia
Argentina
0
5
Source: World Development Indicators, 2006
10
15
20
25
Annual growth rate of RER (%), 19942006
Venezuela
Uruguay
Perú
Paraguay
Panamá
Nicaragua
México
Jamaica
Honduras
Guatemala
El Salvador
Ecuador
Costa Rica
Colombia
Chile
Brasil
Bolivia
Argentina
-3
-2
-1
0
1
2
Source: ECLAC, Estudio Económico de América Latina y el Caribe, 2005-06; 2002-03
3
4
5
6
7
Remittances and RER-summary
• Migration has increased remittances to El Salvador.
• The large flow of remittances has reduced the
RER, which has affected competitiveness of
Salvadoran trade sector.
• Remittances have mostly funded consumption
(non-traded prices, deficit on trade balance).
D) Technological adaptation
• Lack of innovation
• Lack of technological diffusion
– Low payments of royalties
– Low share of capital imports (% GDP)
– Low FDI (% GDP)
Classification by technological activity
High
Australia
Austria
Canada
Denmark
Finland
France
Germany
Holland
Hong Kong
Ireland
Israel
Japan
Norway
Singapore
Sweden
Switzerland
United Kingdom
USA
Moderate
Argentina
Brazil
Chile
Costa Rica
Czech Republic
Slovenia
Greece
Hungary
Mexico
Poland
Portugal
South Africa
Spain
Uruguay
Venezuela
Source: Lall (2003), CAF (2006)
Low
Bolivia
China
Colombia
Ecuador
Guatemala
Honduras
India
Indonesia
Nicaragua
Panama
Peru
Philippines
Saudi Arabia
Thailand
Insignificant
Bangladesh
Cameroon
El Salvador
Mozambique
Nigeria
Pakistan
Paraguay
Tanzania
Royalties and license fees payments and
receipts per-capita (US$), 2004
18
16
Payments
Receipts
14
12
10
8
6
4
2
0
Chile
Costa Rica
El Salvador
Source: The World Bank, Knowledge for Development Program
Guatemala
Nicaragua
Honduras
Latin America
Technological adaptation
• Innovation and technological diffusion in El
Salvador are very limited
• Efforts of innovation are concentrated in large
exporting firms
• Main constraints for innovation (Fusades´ survey):
– Lack of technological information
– Lack of technicians and skilled labor
* Product transformation and selfdiscovery*
• No diversification in the last 15 years
• Decline in agricultural exports, but no new
products
• Non-traditional exports have increased, but
remained concentrated in processors of rawmaterial and low-technology manufactures
Exports of El Salvador (US$ million)
4000
3500
Total
Traditional
Non-traditional
Maquila
3000
2500
2000
1500
1000
500
0
1991
1992
1993
1994
1995
Source: Banco Central de Reserva de El Salvador
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
EXPY (US$ 000)
12000
10000
8000
6000
4000
2000
Argentina
Chile
Colombia
El Salvador
Guatemala
Nicaragua
0
1975
Source: Hausmann & Klinger Data
1980
1985
• El Salvador: low EXPY
1990
1995
2000
2004
Product transformation
• Self-discovery is low in El Salvador
• Why?
– Human capital
– Distorting incentives
– Externalities? (what about other countries?)
• Some recent self-discovery: latest dynamism of
some new non-traditional exports
Conclusions
• Migration is the main binding constraint. It has
affected:
– Size of labor force
• Population
• Reservation wage
– Competitiveness of trade sector
• Human capital
• Remittances and RER
• Also: unfavorable external factors
Conclusions
• Important to deal with other conventional factors
that affect competitiveness of Salvadoran trade
sector:
–
–
–
–
–
–
Problems of access to credit to small firms
High crime rates
Unconsolidated fiscal sustainability
***Low shooling rates***
Limitations in infrastructure
Weak technological adaptation
Natural disasters
• Hurricane Mitchell (1998), two earthquakes
(2001), volcano and tropical storm (2005)
• Effects of eruption of volcano Ilamatepec and
tropical strom Stan (2005)
– Overall: More than 60,000 Has. (9.1% land size).
– Coffee: 43,500 Has. (27% of land size)
Imports (US$ million)
2 500
Consumption goods
Intermediate goods
Capital goods
2 000
1 500
1 000
500
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Sectorial growth
Total GDP
Agriculture & livestock
Manufacture
Commerce
Construction
Others
1990-95
6.2
1.4
5.7
8.7
7.5
7.8
1995-2000 2000-05
3.1
2.2
1.0
1.4
4.8
2.3
2.6
2.0
2.3
2.0
3.7
2.1
Source: Central Bank of El Salvador, website. Data is in constant prices.