Transcript Stimulating growth, What should be done? - Inter

Stimulating growth,
What should be done?
The case of Colombia
María Teresa Ramírez
XXV Meeting of the Latin American Network of Central Banks and Finance Ministries,
Washington, May 17-18 2007
Outlook
1. Current Economic Growth
2. Is this rate of growth sustainable?
3. What should be done in the long run?
1. Current Economic Growth
Real Annual GDP Growth
10,0%
8,0%
6.8%
6,0%
4,0%
2,0%
0,0%
-2,0%
-4,0%
Source: DANE
The annual growth rate of GDP for 2006 was 6.8%,
higher than expected.
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
-6,0%
GDP by type of Expenditure
(Real annual % Growth)
Final Consumption
Households
Government
Gross capital formation
Gross fixed capital formation (GFCF)
GFCF excl. civil works
Civil works
Change in stocks
Domestic Demand
Total Exports
Total Imports
GDP
2006 a/
2004
2005
4,8
6,0
1,1
4,9
5,0
4,3
5,6
6,7
2,1
15,6
15,0
22,0
(7,9)
28,0
18,7
18,9
16,7
28,7
13,8
26,9
18,0
18,1
17,7
206,,3
6,6
7,4
9,9
10,0
19,8
7,0
19,9
7,8
21,3
4,9
4,7
6,8
Source: DANE, calculations by Banco de la República.
•This good performance is explained by a rise in gross fixed capital formation, in
particular in machinery, equipment, and construction, which contributed to the
increase in productivity.
•This growth was also driven by household consumption and external demand
(favorable terms of trade and the world economy growth).
GDP, by sector
(real annual %GDP)
2004
2005
2006 a/
2,0
2,7
2,8
7,2
12,4
29,4
(10,0)
7,6
6,2
4,8
1,4
1,9
2,1
5,0
3,9
11,8
3,5
27,3
7,2
4,7
3,6
3,9
3,1
0,6
3,0
10,8
14,4
12,1
17,8
10,7
9,4
1,4
2,2
10,3
8,4
(6,7)
Subtotal value added
4,5
4,2
6,3
GDP
4,9
4,7
6,8
10,6
3,1
11,5
2,1
12,5
4,1
5,0
4,8
3,5
5,5
7,6
6,3
Farming, forestry, hunting and fishing
Mining and quarrying
Electricity, gas and water
Manufacturing
Construction
Buildings
Civil work
Commerce, repairs, restaurants and hotels
Transport, storage and communication
Financial estabs., insurance, real estate and business services
Social, community and personal services
Financial intermediation services indirectly measured (FISIM)
Taxes less subsidies
Net FISIM financial services
Tradables
Nontradables
a/ Preliminar, Source: DANE, cálculos del Banco de la República.
• On the supply side, economic growth was explained by the good
performance of manufacturing and construction.
Two main causes behind the economic growth of
2006:
•An increase in investment
•An increase in productivity
Both generated by a high level of confidence and a
positive macroeconomic performance.
Are these sustainable?
•The potential economic growth in the next year will depend
on the possibility of maintaining the current levels of
investment and productivity.
•According to the economic models built by the Banco de la
República:
•Given an investment rate of 18% and an annual rate of
productivity growth of 0.8%, the rate of economic
growth is estimated at 4.7%.
• Given an investment rate above 20%, that enhances
productivity growth, the rate of economic growth is
estimated between 5 and 6%.
2. Is this rate of economic growth sustainable?
Total Investment % GDP
22,3
24
21,8
22
% GDP
20
18
Average 77-06:16,5%
16
14
12
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
10
Source: DNP and DANE. Banco de la República's calculations
• Historically, the Colombian economy has not been able to maintain
investment rates of 20% for more than three years.
•However, current conditions suggest that the recent rates could last
longer than in the past. Why?
12%
Investment in machinery and equipment and housing
constructions % PIB
Machinery and equipment
Construction
10%
The actual peak in investment
is concentrated on machinery
and equipment …
% GDP
8%
6%
4%
2%
0%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: DNP and DANE. Banco de la República's calculations.
Industrial Exports/ Total Exports (%)
45
40
38%
35
30
%
25
20
15
10
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
… which current destination
is targeting export activities.
Source: DANE. Banco de la República's calculations
Changes in the macroeconomic balance (%)
1992-1995
Savings - Investment = current account balance
Domestic Savings
Total Investment
Public Sector
Public Savings
Public Investment
Private Sector
Private Savings
Private Investment
1996-1997
2003-2006
(6,7)
(0,5)
(0,9)
(1,5)
5,2
(0,3)
0,5
0,8
(6,4)
(2,0)
4,4
(5,4)
(4,9)
(2,6)
(5,7)
(3,1)
2,1
0,3
(1,8)
5,0
5,9
1,9
3,8
1,9
(2,8)
1,2
4,0
Source: Banco de la Repúbica, MHCP and DNP.
One of the main differences with the last decade was the way in which the rate of investment
was financed:
Similar rates of investment but financed in a different way
1992-1995:
Fall in domestic savings (1.5%),
with a high current account deficit (6.7% GDP)
2003-2006:
Increase in domestic savings (5%),
with a low current account deficit (0.9% GDP)
•What is the risk? Deterioration in the fiscal balance as well as in the current account balance
• Approval of TLC (FTA)?
… What about the productivity?
Solow Residual: annual rate of growth (%)
3,00
2,00
1,00
0,00
-1,00
-2,00
-3,00
-4,00
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
-5,00
Source: Banco de la República
• With the surge of investment, in particular in machinery and equipment and
the actual level of confidence as a result of the improvement in security, it is
likely that the economy will exhibit productivity rates of growth above 1.5%
per year.
3. What should be done in the long run?
The question here is:
what should be done to maintain high investment rates
and productivity growth in the long run?
• Focus on the following issues
1. Institutions and security
2. Competitiveness' Policy
3. Capital market development
4. Education for growth
5. Infrastructure
• All of the above plus a stable macroeconomic environment.
Costa Rica
Venezuela
Uruguay
Estados Unidos
Peru
Paraguay
Panama
Nicaragua
Mexico
Jamaica
Honduras
Guatemala
El Salvador
Ecuador
Rep Dominicana
Source: www.freetheworld.com
Colombia
Chile
Canada
Brasil
Venezuela
Uruguay
United Kingdom
United States
Spain
Peru
Paraguay
Panama
Mexico
Japan
Jamaica
Honduras
Germany
10
9
8
7
6
5
4
3
2
1
0
Bolivia
Argentina
Guatemala
El Salvador
Ecuador
Rep Dominicana
Costa Rica
Colombia
Chile
Canada
Bolivia
Brasil
Argentina
1. Institutions and Security:
Legal System and Property Rights 2004
0 (lowest) - 10 (highest)
Law and Order 2004; 0 (lowest) - 10 (highest)
12
10
8
6
4
2
0
• Two of the most critical areas are Law and Order and Property Rights. One of
the main incentives to investors is precisely to have their property rights
guarantied.
Colombia: Extortive Kidnapping Rate (per 100,000 population)
The literature (Cárdenas,
2007, Suarez, 2006)
identifies the violence as
one of the main causes of
the low productivity
growth in Colombia.
7,0
6,0
5,0
4,0
3,0
2,0
1,0
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
0,0
Sources: DIJIN-Fondelibertad, DNP-DJS-CEGAI
Colombia: Homicide Rate (per 100,000 population)
90,0
80,0
70,0
60,0
50,0
40,0
30,0
20,0
10,0
Sources: DNP, Sanchez et al, Policía Nacional
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
1957
1955
1953
1951
1949
1947
0,0
Although the indicators
have fallen, it is important
to continue the reduction
of crime and violence to
obtain higher levels of
economic growth.
2. Competitiveness' Policy
•Low Competitiveness
Global Competitiveness Index
2006 Rank (125 countries)
120
100
65
80
60
40
20
Paraguay
Bolivia
Nicaragua
Honduras
Ecuador
Venezuela
Dominican Rep
Guatemala
Peru
Uruguay
Argentina
Brasil
Colombia
El Salvador
Jamaica
Mexico
Panama
Costa Rica
Spain
Chile
Korea
Canada
United Kingdom
Germany
Japan
United States
0
Source: World Economic Forum, Global Competitiveness Report, 2005-2006, www.weforum.org
• Colombia obtained the 65th place in the GCI among 125 countries.
Research & Development (R&D)
Expenditures (% of GDP)
Researchers per Thousand Labour
Force
Country
2004
Argentina
3,00
Brazil
1,55
Chile
2,96
Colombia
0,63
Costa Rica
0,61
Cuba
1,09
Ecuador
2,84
El Salvador
0,10
Spain
4,92
Nicaragua
0,12
Panama
0,37
Paraguay
0,31
Venezuela
0,59
Latin America and
1,43
Caribbean
Ibero America
2,13
Source: Red de Indicadores de Ciencia y
Tecnología. www.ricyt.ar
Country
2000-2003
Argentina
Bolivia
Brazil
Canada
Chile
Colombia
Costa Rica
Cuba
Ecuador
Spain
México
Panamá
Perú
Paraguay
Trinidad &Tobago
Estados Unidos
Uruguay
Venezuela
Latin America and
Caribbean
OECD
Source: Human Development Report 2006
Invention Coefficient (patents
applicated by residents per 100,000
population)
0,4
0,3
1,0
1,9
0,6
0,2
0,4
0,6
0,1
1,1
0,4
0,3
0,1
0,1
0,1
2,6
0,3
0,3
0,6
2,5
Country
2004
Argentina
2,10
Brazil
5,99
Chile
3,70
Colombia
0,19
Costa Rica
1,24
Cuba
1,11
Ecuador
0,38
Guatemala
0,07
México
0,54
Nicaragua
0,05
Panamá
0,60
Perú
0,14
Paraguay
0,31
El Salvador
0,49
Trinidad &Tobago
0,23
Estados Unidos
64,54
Venezuela
0,89
Latin America
2,57
Latin America and
Caribbean
2,50
Ibero America
3,00
Source: Red de Indicadores de Ciencia
y Tecnología. www.ricyt.ar
• The indicators of R&D are very low in Colombia, even for Latin
American standards.
• Low invention
Colombian Exports: Textiles and Garments, Flowers and Coffee
3500
3000
Millions of Dollars (FOB)
2500
Coffee
2000
1500
1000
Textiles and
Garments
500
Flowers
Ene-07
Jul-05
Ene-04
Jul-02
Ene-01
Jul-99
Ene-98
Jul-96
Ene-95
Jul-93
Ene-92
Jul-90
Ene-89
Jul-87
Ene-86
Jul-84
Ene-83
Jul-81
Ene-80
Jul-78
Ene-77
Jul-75
Ene-74
Jul-72
Ene-71
0
Sources: DANE, Banco de la República
• It is only until recently that sectors such as flowers and textiles are
playing the dynamic role that the coffee sector had in the past.
High-technology exports (% of manufactured exports) in 2004
40,0
35,0
30,0
25,0
20,0
15,0
10,0
5,0
Source: World Bank, World Develpment Indicators, 2006.
• Low high technology exports.
LA & C
Venezuela
Uruguay
United
States
Peru
Paraguay
Mexico
Ecuador
Costa Rica
Colombia
Chile
Canada
Brazil
Argentina
0,0
• In summary,
• Low competitiveness, lack of innovation and research
& development could jeopardized growth.
• The goal is to foster competitiveness,
• Appropriate rules of the game
• Informality
Formal and Informal Occupation (% of total employment)
Seven metropolitan areas
Informality has increased
since the middle of the
nineties.
0,65
0,60
0,55
0,50
Despite good economic
performance, informality
remains high and stable.
0,45
0,40
formal
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
Mar-94
Mar-93
Mar-92
Mar-91
Mar-90
Mar-89
Mar-88
Mar-87
Mar-86
Mar-85
Mar-84
0,35
informal
Sources: DANE, ENH, ECH
Compared with other countries
informality is high.
Informal Sector (share of GDP)
2005
Colombia
39,1
Chile
19,8
Costa Rica
26,2
Czech Republic
19,1
Mexico
30,0
Turkey
32,1
Source: Doing Business, The World Bank 2005
•This high level of informality could affect the productivity of the
country:
• Technology can only be transferred to the formal sector
(Prescott, 2003)
• Informality could affect the incentives to accumulate human
capital
• Low plant size (sacrifices scale economies)
• Low physical capital accumulation
• Low access to financial market.
• Why is the informal sector large in Colombia?
•According to Arango et al (2007) the main causes of informality in
the country are found in structural and regulatory issues, regarding:
•High tax rates to labor income and capital income
•High labor costs
•The existence of subsidies that promote informality
•Education costs relatively high (opportunity costs)
•High search cost
•Therefore, it is necessary to modify the actual scheme of
incentives and to promote law enforcement.
3. Capital Markets development:
Market Capitalization
(relative to GDP)
1990
1995
2000
Brazil
3,6
21,0
37,6
Peru
3,1
22,0
20,0
Colombia
3,5
19,4
11,4
Chile
44,9
113,3
80,0
United Kingdom
85,8
124,0
179,2
United States
53,2
93,4
154,7
Belgium
33,2
37,9
80,0
Canada
42,1
63,0
119,1
France
25,8
33,6
110,6
Spain
21,8
33,9
89,8
Source: WB-WDI; 1995: Chong & FLDS (2007)
2002
27,4
23,7
11,9
74,2
119,0
106,4
52,0
80,5
67,6
70,7
2005
60,0
42,0
38,0
120,0
• Colombia presents low market capitalization relative to GDP. But it is
increasing.
Number of listed Companies*
1990
1995
2000
2002
2004
2005
Brazil
581
543
459
399
390
381
Peru
294
246
230
202
224
224
Colombia
80
190
126
114
106
98
Chile
215
284
258
254
240
246
United Kingdom
1.701
2.078
1.904
1.701
United States
6.599
7.671
7.524
5.685
Belgium
182
143
174
143
Canada
1.144
1.196
1.418
3.756
France
578
450
808
772
Spain
427
362
1.019
2.986
*At year-end. Only includes equity issuers
Sources: 1990-2002: WB-WDI; 2004-2005: Federación Interamericana de Bolsas
• In Colombia the relative increase in market capitalization does not
come from new firms.
• Delisting since the middle of the nineties
Trading Value
(% GDP)
2004
Argentina
5
Brazil
20
Mexico
10
Chile
18
Colombia
1<
Peru
1<
Venezuela
1<
Source: Chong & FLDS (2007)
• Colombia also presents a structural low trading value (% of GDP).
• In summary,
• The development of the capital market in Colombia is
considerably lagged for international standards.
• To maintain high growth rates it is necessary to deepen the capital
market in the country. A profound capital market is important to
allocate resources to investment projects and to better firm
financing.
• One way could be to encourage good corporate governance:
• Promoting good corporate governance is an instrument to
enhance investor’s protection which contributes to the
development and transparency of capital markets.
• Linked to the above is the role of private pension funds as the
largest institutional investors that need better diversified portfolios.
4. Education for growth:
School Level of the Labor Force (%)
Colombia 2005
No Education
4,1
Primary (incomplete)
12,1
Primary (complete)
15,6
Secondary (incomplete)
23,4
Secondary (complete)
26,5
Tertiary (incomplete)
7,6
Tertiary (complete)
10,6
Source: DNP
• According to the National Planning Department, over 50% of the labor
force has not completed secondary school.
•To obtain higher rates of economic growth it is necessary to have a more
qualified labor force.
Primary
Secondary
Venezuela
Uruguay
United States
Paraguay
Panama
Nicaragua
Mexico
Guatemala
El Salvador
Dom. Republic
Cuba
Costa Rica
Colombia
Chile
Canada
Brazil
160
140
120
100
80
60
40
20
0
Argentina
School Enrollment (% Gross) 2002-2004
Tertiary
Source: WB, WDI 2006
• In fact, school enrollments in secondary and tertiary education are
relative low in Colombia…
…. And also presents less years of schooling than most of the
countries in the sample.
Average years of schooling, 2000 (population aged 15 and over)
United States
United King.
Spain
Norway
Italy
France
Canada
India
Korea
Mexico
El Salvador
Dom. Rep
Chile
Colombia
Argentina
Brazil
Kenya
Israel
0,00
2,00
4,00
Source: Barrro -Lee, http://www.cid.harvard.edu/ciddata/ciddata.html
6,00
8,00
10,00
12,00
Public Spending on Education (% of GDP) 2002-2004
7
6
5
4
3
2
1
Uruguay
United
States
Portugal
Peru
Paraguay
Panama
Nicaragua
Mexico
El Salvador
Dom
Republic
Costa Rica
Colombia
Chile
Argentina
0
Source: WB, WBI 2006
•Although, the current public expenditure on education is high for Latin
American standards… This suggests efficiency and quality issues.
•According to the International Association for the Evaluation of
Educational Achievement, that measures education quality, Colombia
presents one of the lowest performance in a sample of 41 countries.
• According to López (2006), in 2004 only 59% of high school
graduated students were admitted to college or some form of
higher education.
• For the poorest population this admission rate was 16% while
for the richest 95%.
• In addition, the unemployment rate of high school graduated
students that do not attend college, was 45% for the poorest
population and 23% for the richest.
• The target of the country should be to enhance tertiary education to
qualify the labor force.
Students in Tertiary Education with Access to Credit (%) 2006
40
35
30
25
20
15
10
United States
United
Kingdom
Phlippines
Peru
Mexico
Jamaica
China
Canada
Brazil
0
Colombia
5
Source: Bloom (2007)
• For instance, Colombia must guarantee the access and permanence of
poor students in higher education by granting them financial support that
will reduce their opportunity cost.
… Also, tertiary education institutions should encourage their teachers to
complete higher degrees by giving the right incentive structure.
Colombia: Teachers By Degree (%)
Tertiary Education
Public
Private
1992
2002
1992
2002
Tec/Tech
8,03
3,74
12,25
2,36
Professional
59,40
45,28
62,68
44,30
Specialized
14,16
31,88
13,95
34,10
Master
18,41
19,10
8,99
16,67
Ph. D
2,51
3,73
2,13
2,57
Source: MERPD, 2006
5. Infrastructure:
Roads, paved % of total roads (1999-2003)
100,0
90,0
80,0
70,0
60,0
50,0
40,0
30,0
20,0
10,0
Sub-sahara
Africa
South Asia
MENA
LA&C
Europe
East Asia
&Pac
Peru
Mexico
Ecuador
Costa Rica
Chile
Colombia
Brazil
0,0
Source: World Bank, World Develpment Indicators, 2004 and 2006.
• Colombia presents one of the lowest indicators of transport
infrastructure quality.
• The deficient transport infrastructure in Colombia
constitutes one of the main restrictions to economic growth
in the long run.
• To generate an adequate infrastructure to promote growth
it is necessary to consolidate, integrate and modernize the
road network and to extend the capacity of the ports as well
as modernize them (Ramírez, 2006).
•These projects are expensive and require many years for
their development.