P.Krugman (1992) in ‘The counter counter revolution in the theory of economic develoment’ says:

¨In the 1950’s there was a rich field of research called Development Economics. Its main purpose was that of understanding why some countries are so much rich than others and to propose policies to increase their rate of economic growth. Such field of study no longer exists. ¨.

Globelics as an inter-disciplinary community studying social, institutional and economic change.

• Globelics research agenda has now come full circle into what Krugman called the High Development Theory Agenda of the 1950´s. It has returned to the likes of Hirschman or Myrdal or Weber, bringing back to central stage institutions, public goods,the environment and social inclusión, which neoclassical growth theory had left out in an attempt to describe growth as an equilibrium process.

• Evolutionary economics – and Globelics –have managed to change the focus, but growing on the basis of natural resources, securing environmental sustainability and caring for social inclusion bring up many new questions which new generations of the Globalics community will have to address in the future.

GLOBELICS 2014, Addis Ababa, Ethiopia.

A new visit to Development Economics in the present age of natural resource based economic growth

Macro and micro lessons from the Latin American experience.

JORGE KATZ jorgekatz39@gmail.com or jorgekatz@terra.cl

FEN,University of Chile

October 2014.

Issues to be discussed

• 1.´Stylized facts´ concerning the Latin American scenario. • 2.Independently of the macropolicy regime LA countries have not been ‘catching

up’ with the developed world in terms of GDP per capita.• 3 Conclusion: equilibrium macro ´fundamentals´ are necessary, but not sufficient

for ‘catching up’. They reduce macro uncertainty but do not induce sustainable growth with equity.

• 4.Growth has shifted from manufacturing to natural resource based sectors, but Dutch Disease and Tragedy of the Commons problems have emerged.

• 5.Sustainable and equitable growth demands policy interventions building up local capabilities, environmental sustainability and social inclusiveness, but this has to come within the constraint of balanced macro ‘fundamentals’. How can it?.

• 6.A tax reform is necessary to provide resources for public goods. The current Chilean policy experiment has to be seen as from this perspective: a tax reform collecting 3% of GDP and a long term program to improve quality of education.

A short visit to received growth theory.

Received theory reflects two quite different research agendas dealing with the determinants of economic growth. The two agendas do not speak to each other. On the one hand, the neoclassical equilibrium growth agenda, initiated by R.Solow (Nobel Prize 1988) in the 1950’s and thereafter advanced by New Growth Theory scholars. It is inspired in Newtonian physics. On the other hand, the neo-Schumpeterian agenda initiated by C.Freeman, R.Nelson, B.A.Lundval and else, inspired in Darwinian natural selection Both agendas have difficulties to deal with natural resource based growth, were ´commons´, environmental sustainability, collective action and government regulation play a key role determining the efficiency, environmental sustainability and social inclusiveness of development processes. Evolutionary Economics – mostly build upon stylized facts coming from the sphere of manufacturing - yet has to bring on board the economic, technological and institutional features of natural resource based growth and the dialogue between economics and ecology.

Lets begin by reviewing Latin American ‘stylized facts’

• 1.Per capita GDP has not ´converged´ to OCDE levels.(12 and 35 thousand U$S respectively, and much higher structural heterogeneity.

• 2. Ratio of GDP per capita between upper to lower quintile is 20-25 times in LA as against 6-8 times in OECD countries.

• 3.The rate of capital formation is lower than in the 1970’s.• 4.Macroeconomic volatility is high, higher than in the 1970´s.• 5.The economy has restructured into natural resource based sectors & services• 6.Terms of trade have improved due to the ‘China effect’, but impact upon low

and medium tech domestic manufacturing is negative, and increasing.• 7. Increasing imports of K goods, low domestic R&D & productivy growth• 8. New macro and micro problems - ‘Dutch Disease’ and ‘Tragedy of the

Commons’ – have emerged associated to natural resource based growth.• 9. The new growth regime involves the outward expansion of the natural

resource exploitation frontier but lacks institutions for environmental protection and for social inclusiveness.

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

19501952

19541956

19581960

19621964

19661968

19701972

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

20100

10

20

30

40

50

60

70

80

Taiwan

Korea

ChileArgentina

Brasil

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

Income per capita ´lags behind´ OECD countries

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20082010

20120

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

ArgentinaBrazilChileMexicoDenmarkFinlandIrelandKorea, Republic of

year

curr

ent i

nter

natio

nal d

olla

rs

Source: Astorga & Katz, in Dutrenit and Sutz.

9

Fuente: Basado en datos de CEPAL.

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

2007

2008

2009

2010

2011

15

17

19

21

23

25

27

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 typical regional scenarioIlustasted by the Chilean case

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)VehiclesNatural 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

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

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

275.01990

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

1

2

3

4

0.430.6900000000000

07

1.1399999999999

6

1.3381630260950

1

2.68

3.95

Alternative macroeconomic policy regimes have not been capable of inducing ´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 their production and exports. Argentina expanded growth and employment all across but could not keep inflation at bay. X’s came from ‘old’ plants, without much new investment.

• None of the three countries managed closing up 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 regimeand could not substain its previous exchange rate policy

Neither Argentina, nore 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

On the other hand, the gap has been closing up in natural resource based sectors which now represent the ‘new modernity’

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 perspective1995-1996 2006-2007

ArgentinaBrazilChinaIndiaEEUU

ProducctionTons

HarvestedArea . Acre

ArgentinaBrazilChinaIndiaEEUU

Yield per acre.

ArgentinaBrazilChinaIndiaEEUU

12.48024.15013.500 4.47659.174

5.98010.950 8.127 4.81724.900

2.0872.2051.6610.9292.376

46.50059.00016.200 7.69086.770

15.90020.700 9.300 8.10030.190

2.925 2.850 1.742 0.947 2.874

Source: USDA

But: expanding the natural resource exploitation frontier is having 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

rou

nd

to

ns

Norway Chile UK Canada Faroe Island Australia

Overexploitation of pristine waters has brought about a negative response from the ecology.

Summing up : what are the major questions ahead? Lets mention four of them:

I. How to deal with China’s 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 entering energy and capital markets, taking agricultural land on lease, exploring gas and oil reserves, and else. How to deal with this? . China is by far the more important trade partner in LA today, with a GDP elasticity in the order of 0.3 for most countries in the region. . China is presently changing its long term priorities favouring domestic consumption rather than investment and exports. What impact can we expect this to have upon natural resource based Latin American exporters?.

II. How to deal with a more volatile world environment,III With a local policy regime that only cares for short term financial equilibriumIV. How to deal with the problems imposed by 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 traying to attract FDI – only cares for short term financial equilibrium.

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 natural resource overexploitation.

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 resources are also needed

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 in terms of countercyclical interventions

• These interventions should aim at maintaining the global balance of the economy, but resources are needed to address the building up of local capabilities and foreign competitiveness, on the one hand, and improving social equity, on the other.

• This demands coordination between short and long term policies keeping inflation at bay and also caring for building up domestic capabilities and improving social inclusion.

An interesting option : the current Chilean experiment.Short term equilibrium and long term change

1. The present Chilean policy experiment appears as an interesting attempt to bring together both these aspects : a tax reform that collects around 3% of GDP to be used to improve Education. But:

2. The FT and The Economist have mottled it ‘the new mediocrity’. Is it casual? The question then emerges :

3. How can structural change and social inclusion be attained in a democratic setting and in the present ideological environment?

Globelics as an inter-disciplinary community studying social, institutional and economic change.

• Globelics research agenda has now come full circle into what Krugman called the High Development Theory Agenda of the 1950´s. It has returned to the likes of Hirschman or Myrdal or Weber, bringing back to central stage institutions, public goods,the environment and social inclusión, which neoclassical growth theory had left out in an attempt to describe growth as an equilibrium process.

• Evolutionary economics – and Globelics –have managed to change the focus, but growing on the basis of natural resources, securing environmental sustainability and caring for social inclusion bring up many new questions which new generations of the Globalics community will have to address in the future.