Some Remarks on Productivity in LA

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Some Remarks onProductivity in LA

• Santiago Levy.

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In a half century, LA did not close the income
gap vs US
Fuente Fernández Arias y Rodriguez Apolinar
(2014).
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South Korea certainly did!
Fuente Fernández Arias y Rodriguez Apolinar
(2014).
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• The lag vs. the US is fully due to TFP, as in
  relative terms the Region accumulated more human
  and physical capital.
• Koreas spectacular development is due to
• TFP increased between 2 and 3 times more
  than in LA, and
• factor accumulation was also between 2 and
  3 times higher.
• If TFP in LA had increased as in Korea, today its
  income per capita would be 2.4 times higher and
  if it had increased as in the US, 1.4 times
  higher.
• Beyond short run macro issues and world commodity
  cycles, LAs growth problem is mostly a
  productivity problem.
• The importance of focusing on productivity even
  stronger now, as conditions in the world economy
  not as favorable to LA as in the last few years.

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Three basic stories

• Story 1 Misallocation of physical and human
  capital Y A.F(K,hL),
• Aggregate TFP is weighted average of firms TFP,
  with weights being share of resources absorbed by
  each firm.
• Misallocation reflects obstacles to resources
  flowing to it most productive use distortions
  needs to be interpreted in a broad sense.
• Large list of obstacles (distortions) factor
  markets, product markets,, but also market
  failures not corrected by the State.
• Function A. very complex affects intensive and
  extensive margins.
• Physical and human capital accumulation
  potentially a function of A. so that Y
  A.FK(A), h(A)L but this needs more work.
• Pay-off to removing obstacles (distortions)
  potentially large in short to medium run, but
  eventually peters out as economy approaches
  frontier (although frontier can be endogenous to
  distortions)

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• Evidence suggests LA has more distortions than
  US
• Without distortions (in a broad sense) MRP of K
  and L same in all firms in all sectors.
• 
  Dispersion in MRP of K and L (p90 p10)l
• 
  (manufactures, firms with 10 or more workers)

Source IDB(2010).
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Sector productivity comparisons, US vs. Mexico

• If distortions in Mexico were similar to the
  US, manufacturing TFP would be 36 higher.

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• Story 2 Investment in human capital Y
  AhF(K,L)
• Emphasis on low quality of human capital in LA.
• On schooling evidence from PISA, but less
  evidence about skills.
• More recently, emphasis on motivations and
  mechanisms for acquisition of skills cognitive
  and non-cognitive).
• A bit of puzzle with evidence about returns to
  education and narrowing skills differentials.
• Story 3 Investment in physical capital Y
  AKF(K,L)
• Often the view held implicitly by many
  policymakers
• View associated with Kaldor and others, with
  economies of scale relevant
• Relatively little empirical evidence
• Emphasis also on infrastructure as impediments to
  TFP growth
• Less emphasis on quality of investment and
  composition
• More of a macro story about uncertainty, savings,
  access to capital markets

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Some evidence that LA invests inefficiently
Source Fernández Arias y Rodriguez Apolinar
(2014).
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A productivity agenda two tasks with different
times

• 
  Task 1. Channel resources to their most
  productive use
• 
  
• TFP
• 
  Task 2. Increase quantity and quality of
  human capital
• 
  
• Task 1 yields results in short run, although its
  relevance varies from country to country. It may
  also be part of task 2, if it improves the
  returns to education and to the acquisition of
  skills. Also, critical for cohorts of workers
  already in the labor force.
• Task 2 probably more long run (but skill
  acquisition in labor market may really matter).
  Essential for long term productive
  transformation.
• Lack of clarity in public policy agenda leads to
  inconsistent efforts.

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What does task 1 imply?

• Systematic revision of all elements of the
  economic environment, particularly with regards
  to labor, credit and taxes.
• Key question does policy X contribute to
  resources flowing to their most productive use?
• This is a big task, as we are talking about a
  large quantitty of policies, programs,
  regulations and institutions (many Xs!), behind
  which there are deeply rooted social agreements,
  powerful vested interests, and strong ideological
  beliefs.
• Empirical evidence for some LA countries shows
  that some policies foster the creation and
  survival of unproductive firms, limit the growth
  of productive firms, promotie informality,,
  although a lot depends on context and the
  institutions of each country.

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What does task 2 imply?

• Thinking of human capital as a life-cycle
  phenomenon, beyond formal schooling.
• Education quality is central. Available
  indicators (PISA) show great lags vs. Asia and
  OECD.
• Need for revision of education and training
  programs. Technically complex and pollitically
  difficult.
• Tasks 1 and 2 are complementary. Focusing on task
  2 but ignoring task 1 will waste resources
  (engineers as taxi drives), or lose them (brain
  drain).
• Conversely, focusing only on task 1 will
  eventually lead to slow growth for lack of human
  resources for productive transformation.

0 a 18 years
19 to 24
25 to 65

Pertinent technical education School to work
transition
ECD and
Quality primary and secondary
Permanent labor training
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Raising productivity is difficult

• No silver bullet nor magic wand. Unlikely that
  any single policy reform will be enough (labor,
  credit, trade, industrial, etc.).
• Cannot be achieved only with good macro policy
  (but very difficult to achieve without it).
• Cannot be achieved only by physical investments
  (but it is likely that investment will be less
  dynamic and more inefficient in its absence).
• Requires a re-think of policy instruments used
  for redistribution, particularly those focused on
  the labor market, to avoid costly trade-offs
  between redistribution and productivity.
• Requires substantive changes to sensitive public
  policies in areas like taxation and education.
• While there are general principles (task 1 and
  task 2), there are no recipes need specific
  country focus given large heterogeneity between
  LA countries.
• Needs pragmatism, a scarce commodity in a Region
  characterized by policy discussions with strong
  ideological content.

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• Needs an integral view that aligns all
  instruments of public policy in the same
  direction.
• (Need to expel Penelope from Macondo!)
• In the end, a countrys productivity is a
  reflection of its institutions, policies,
  programs and regulations which in turn are a
  refelction of a soial and political context.
• Productivity, then, is a social phenomenon. It
  reflects how socities organize themselves to
  educate, produce and redistribute. It reflects if
  incentives are aligned in the direction of
  producing wealth or extracting rents.
• LA has lagged behing Asia and has not closed the
  income gap vs. the US not because those countries
  work more, but because their institutions and
  policies have been much more conducive to create
  quality human capital and to channel resources to
  their most productive use.