Download Augusto de la Torre-Presentation- Competition and economic growth

Competition and Economic Growth
Augusto de la Torre and Ana Cusolito
International Conference on “Challenges and Strategies for Promoting
Economic Growth”
Mexico City, Mexico
October 2009
Structure of presentation
Growth in LAC: the record
The formal approach to growth
The policy approach to growth
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1. Growth in LAC: The Record
An elusive road to convergence…
GDP per capita
LAC GDP per capita/ U.S GDP per capita
Asian Tigers GDP per capita/U.S GDP per capita
Mexico GDP per capita/U.S GDP per capita
0.7
0.6
0.5
Gold Standard
Interwar
US recovery
Alliance forImports
Substitution
progress
Lost
decade
Washington Washington
Consensus
Dissensus
0.4
0.3
0.2
0.1
1900
1902
1904
1906
1908
1910
1912
1914
1916
1918
1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
0
Source: Historical Statistics of the World Economy. 2009. A. Maddison.
Note: The aggregated GDP per capita is a simple average of the countries in the region. GDP per capita for the United States and Latin America are in levels. 8
LAC: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay and Venezuela; Asian Tigers: Hong Kong (China), Indonesia, Malaysia, Singapore, South Korea,
Taiwan (China), Thailand. Before 1950, the Asian Tigers sample varies. From 1950 on, Asian Tigers comprise all the seven countries.
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Accumulation
U.S investment share of GDP
LAC investment share of GDP
Asian Tigers investment share of GDP
Mexico investment share of GDP
0.3
0.25
0.2
0.15
0.1
0.05
0
Source: The World Bank.
Note: The aggregated investment share of GDP is the ratio between total investment of the region and total output of the region. 8 LAC countries:
Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay and Venezuela; 6 Asian Tigers countries: Hong Kong (China), Indonesia, Malaysia, Singapore,
Taiwan (China), Thailand.
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Productivity
LAC TFP/U.S TFP
Asian Tigers TFP/U.S TFP
Mexico TFP/U.S TFP
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Source: The World Bank.
Note: TFP is a simple average of the countries in the region. 8 LAC countries: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay and Venezuela; 6
Asian Tigers countries: Hong Kong (China), Indonesia, Malaysia, Singapore, Taiwan (China), Thailand.
6
2. The Formal Approach to Growth
Where is competition?…
Accumulation
Initially, growth theory focused on the accumulation of physical
and human capital
Links between factor accumulation and economic incentives
were not explicitly developed
Competition was hidden in this framework
Technological change was treated as an exogenous process,
independent of economic incentives
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Accumulation
Two key theoretical features of accumulation-driven growth
Growth of income per capita converges to the rate of technological change
In the transition to the steady state, the growth rate of income per capita is
lower the higher the capital-labor ratio
Empirically, accumulation not the dominant force behind growth
It explains at best 50% of the differences in countries’ per capita income
levels and long-run growth rates
Productivity (the “Solow residual”) dominates over accumulation
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Productivity
Focus shifts towards the “Solow residual” (1957), where the
mystery of growth seems to reside
Understanding the residual and making it endogenous – let the
quest begin!
Innovation (Schumpeter)
Trade and market integration (A. Smith and Ricardo)
Institutions (Douglas North)
What is the role of competition?
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Innovation
“…the major source of economic growth in developed countries
has been science-based technology…” (Simon Kuznets, 1966)
Technological change affects productivity growth
Advances in methods of production
Discoveries of new, and improvements of existing, intermediate inputs
Qualitative gains in business organization, processes, marketing
techniques
Scale effects, knowledge spillovers, network and other
externalities are central to the technological innovation magic
Can help explain rising LT growth rates
11
Innovation and competition
Competition and innovation – not always a happy marriage
Competition is the “stick” but “carrots” are also needed
Innovation found to be an inverted-U function of competition –
depending on closeness to the innovation frontier
Markups (Aghion et al. 2005)
In neck-and-neck industries the escape-competition effect induces innovation
In unleveled industries the Schumpeterian effect reduces innovation (laggard
industries too far from the frontier)
Entry (Aghion et al, 2009)
Incumbents in technologically advanced industries react positively to firm entry
by innovating more, but not in laggard industries
12
Market integration and trade
Behind the magic of productivity is the magic of markets
Coordination through price signals of myriads of decentralized decisions
The invisible hand effect obtains where relative prices adequately reflect
relative scarcities, relative returns, relative risks
Gains from division of labor and specialization
Clusters and Marshallian externalities
International trade can boost the role of markets
Market size effects for inputs and outputs
Learning by doing and knowledge diffusion
Competition plays a crucial role in this perspective
It oils the functioning of markets
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Market integration and trade
International integration is associated with per capita income
14
Institutions
“…Institutions are the rules of the game in a society or, more
formally, are the humanly devised constraints that shape human
interactions” (Douglass North, 2009)
Arguably, institutions are a more fundamental determinant of
productivity growth – condition of possibility for
Sustained, vigorous innovation
Open, contestable, competitive markets (Rajan & Zingales, 2003)
Open societies (Popper)
Dealing with market failures (principal-agent frictions; individual-society
frictions)
Poor institutions can clearly undermine growth
Feedback loops between institutions and competition
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3. The Policy Approach to Growth
State Dirigism, Washington Consensus, Growth Diagnostics,
Growth Agnostics…
Accumulation and state dirigism
Early development theorists doubted that underdeveloped
markets could lead to vigorous accumulation
Predominant role given to the state
At the end of accumulation – Marx’s dream
In the early stages of development (Rosenstein-Rodin, Gerschenkron,
Rostow)
Accumulation-oriented policies (soviet-style or ISI) paid little
regard to competition
…and much regard to “gaps” and “icor” in development planning
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Washington Consensus
The introduction of the WC involved…
A swing to market-oriented policies – favoring macroeconomic stability,
liberalization, and privatization
An implicit assumption of a one-to-one correspondence from generic policy
packages to growth outcomes
A major role for competition!
… and a faith in growth accounting
“…the growth recovery experienced by most countries in the region in the past
decade [1990s] was largely the result of structural and stabilization reforms that
positively affected the economy’s overall productivity” (Loayza et al., 2005)
Extending the WC paradigm?
Growth policies focused on “best practices,” indices, score cards,
standards and codes
18
The WC reforms LAC
19
WC in practice – liberalization emphasis
20
WC in practice – financial liberalization
More
liberalization
3.0
2.5
G-7
Rest of Western
Europe
Southeast Asia
2.0
Latin America
1.5
Less
1.0
liberalization
0.5
1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001
The liberalization index is calculated as the simple average of three indices (liberalization of the capital account, domestic financial
sector, and stock market) that range between 1 and 3, where 1 means no liberalization and 3 means full liberalization. These data are then
aggregated as the simple average between countries of each region.
Source: Whither Latin American Capital Markets?, 2004.
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Ease of Doing Business Indicators
LAC procedures to start a business/U.S procedures to start a
business
LAC days to start a business/U.S days to start a business
Mexico procedures to start a business/ U.S procedures to start a
business
Mexico days to start a business/U.S days to start a business
2.2
2
1.8
1.6
1.4
1.2
1
2004
2005
2006
2007
2008
2009
13
12
11
10
9
8
7
6
5
4
2004
2005
2006
2007
2008
2009
Sources: Doing Business. The World Bank.
Note: The graph in the left displays the ratio between the number of procedures needed to start a business in LAC and that of the U. S. The graph in the right displays the ratio between the
number of days required to complete all legal procedures to start a business in LAC and that of the U.S. LAC measures are calculated as a simple average of the measures corresponding to each
country (Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominica Rep., Ecuador, El Salvador, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, and Venezuela).
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Doing Exporting Business Indicators
LAC number of documents for export/U.S number of documents for export
Mexico number of documents for export/U.S number of documents for export
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1
2006
1.6
1.5
1.4
1.3
1.2
1.1
1
0.9
0.8
2007
LAC Cost for export (US$ per container)/U.S Cost for export
(US$ per container)
Mexico Cost for export (US$ per container)/U.S Cost for export
(US$ per container)
2006
2007
2008
2009
2008
2009
LAC number of days for export/U.S number of days for
export
Mexico number of days for export/U.S number of days for
export
4.1
3.9
3.7
3.5
3.3
3.1
2.9
2.7
2.5
2006
2007
2008
2009
Sources: Doing Business. The World Bank.
Note: The graph at the top displays the ratio between the number of documents for export in LAC and that of the U. S. The graph at the bottom (left) displays the ratio between the cost for
export (US$ per container) in LAC and that of the U.S. The graph at the bottom (right) displays the ratio between the number of days needed to complete all the documents required for export in
LAC and that of the U.S. LAC measures are calculated as a simple average of the measures corresponding to each country (Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominica Rep.,
Ecuador, El Salvador, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, and Venezuela).
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Deconstructing – cracks in the paradigm
Copious empirical research on determinants of growth leaves
little guidance for specific policy and reform packages
Evidence that policy packages have predictable, robust, and systematic
effects on national growth rates is quite weak (Rodrick, 2006)
There is no empirically robust predictor of growth
Empirical results sensitive to changes in country samples, control variables,
and econometric specifications (Levine and Renelt, 1992; Rodriguez and
Rodrik, 1999; Ciccone and Jarocinski, 2007)
Much of the variance that explains difference in countries’ growth rates is
random – imitation of good experiences is not a good strategy (Easterly)
Tailoring is of the essence: reforms associated with growth in one country
are not linked to growth in another
Conventional reform packages too obsessed with efficiency losses did not
pay enough attention to stimulating the dynamic forces
Growth agnosticism?
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Reconstructing?
What ignites growth is different that what sustains growth
“Growth accelerations” – few, seeming simple, difficult to predict, and
highly idiosyncratic things matter (Hausmann, Pritchett & Rodrik, 2004)
But “first principles” seem essential to sustain growth (Rodrik 2003)
Sound money, debt viability, property rights
“Growth diagnostics” (HRV, 2005)
Tailored to country circumstances
Indirect effects matter
Focus on identifying binding constraint to growth, rather than on distance
to best practices
Intended to avoid “laundry list” of policies, but policies not really discussed
Where is competition?
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So, where do we stand?
Illustrative referents: Growth Commission Report (GCR, 2008)
and Growing Pains (CGD, 2009)
“Growth foundations” (CGD) and “commonalities” in successful growth
cases (GCR) include
Well-functioning markets: incentives and coordination via price signals, oiled by
competition
But policy packages must be tailored to individual countries
“It is hard to know how the economy will respond to a policy” (GCR)
Complex tensions, trade-offs, complementarities between policies and growth
foundations (CGD)
A “smart” and “active” government is equally crucial, arguably going
beyond generic improvements of the “enabling environment”
Competition – absolutely necessary by far from sufficient
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