Download Costa Rica is a strong candidate for high growth... However, GDP

Economic Growth in Costa Rica:
1950-2000
Andrés Rodríguez-Clare
Manrique Saenz
Alberto Trejos
Costa Rica is a strong candidate for high growth...
However, GDP per capita growth has been disappointing
Table 1.1
GDP per capita: Costa Rica and Selected Regions
(Growth Rate)
East Asia and
Latin AmeriOECD
Costa Rica
Pacific
World
1963-73
1973-80
1980-84
1984-99
4.3%
2.9%
-1.8%
2.1%
4.7%
4.6%
5.9%
6.0%
3.6%
2.8%
-2.2%
1.0%
4.4%
1.9%
1.9%
2.1%
3.3%
1.3%
0.8%
1.3%
1963-99
2.4%
5.3%
1.7%
2.6%
1.8%
Another puzzle: slowdown in growth
GDP Series and Growth Component (Growth
Rates)
20.00%
15.00%
10.00%
5.00%
-10.00%
GDP
Growth Component
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
1957
1954
-5.00%
1951
0.00%
Two questions:
• Why has Costa Rica grown so slowly in spite of prevailing
favorable conditions?
• What explains the mediocre growth performance during
the liberalization period (1984-2000) as opposed to former
periods?
Five sub-periods:
•
Transition from an agricultural exports model to an import
substitution scheme: 1950-1963
•
Incorporation to the CACM: 1963-1973
•
Growth of state enterprises and unsustainable macroeconomic
policy: 1973-1980
•
Crisis and stabilization: 1980-1984
•
Export promotion model and structural reforms: 1984-2000
After considerable stabilization and fiscal tightening, several
reforms were implemented during 1984-2000
1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
1985 1987 1989 1991 1993 1995 1997 1999
Total
Laboral
Financiero
Comercial
Privatizaciones
Tributario
First analysis: Participation rate
•
There is a high growth rate in participation rate (L/N).
Hence, the disappointing performance of this economy is
even more evident when we look at Y/L.
•
The growth reduction in L/N explains a small fraction of
the GDP/N slowdown observed between periods 196373 and 1984-2000
Table 3-1
Costa Rica
GDP per Capita Growth Decomposition
(into GDP per Worker and Workers per Capita)
GDP / N
GDP / L
L/N
1963-73
1973-80
1980-84
1984-2000
4.26%
2.92%
-1.77%
2.03%
3.47%
1.21%
-1.84%
1.41%
0.76%
1.69%
0.08%
0.61%
1963-2000
2.38%
1.57%
0.80%
Table 3-2
Costa Rica and Selected Regions
GDP per Capita Growth Decomposition 1963-2000
(into GDP/Labor Force and Labor Force/Population)
GDP / N
GDP/FL
FL/N
Costa Rica
2.4%
1.6%
0.7%
Brasil
Chile
México
2.5%
2.5%
2.0%
1.6%
1.9%
1.1%
0.8%
0.6%
0.9%
Hong Kong
Korea del Sur
Malasia
Singapur
5.0%
6.3%
4.0%
6.1%
4.1%
5.1%
3.5%
5.0%
0.8%
1.1%
0.5%
1.1%
EUA
Francia
Italia
Reino Unido
2.2%
2.5%
2.6%
2.1%
1.6%
2.3%
2.4%
1.9%
0.6%
0.1%
0.2%
0.2%
Source: World Bank, Instituto Nacional de Estadística y Censos, and Central Bank
Second Analysis: Growth Decomposition
•
The low growth rate in Y/L is due mainly to a low TFP
growth rate
GDP per Worker Growth Decomposition 1963-2000
Residual
GDP/L
K firms/L Schooling
TFP
Public K
Component
1.68%
0.83%
1.02%
-0.18%
-0.40%
0.22%
b) All factors of production contribute to the slowdown
GDP per Worker Slowdown Decomposition: Change in contributions
Between Periods 63-73 and 84-2000
GDP/L
K firms/L
Schooling
TFP
-1.86%
-0.77%
-0.25%
-0.85%
Residual
Public K
Component
-0.67%
-0.18%
Additional Questions:
•
Why does schooling contribution decrease?
- Reduction in schooling rate during the 80’s
•
Why does public capital contribution decrease?
- Fiscal restrictions during 80’s and 90’s
•
Why does private capital contribution decrease?
- High interest rates
d) Why does TFP contribution decrease?
Third analysis: By Sectors
¾ Low Y/L growth rate is due to slow growth in services, and
small size of agricultural and industrial sectors.
¾ The slowdown is associated with three factors:
¾ A lower growth rate in agriculture and industry
¾ A larger service sector
¾ A lower contribution to growth from labor shifts across
sectors.
Two questions follow:
First: Why is the TFP growth rate in the service sector so low?
•
•
It is not entirely a measurement problem
-
High TFP growth in services in industrial and East
Asian countries
-
K/L, wages
Problems in two sectors
-
Commerce, restaurants, and hotels
-
Comunal, social and personal services
Second: Why are the agricultural and industrial sectors so
small? The industrial sector is especially small in relation
to other economies. Hypotheses:
•
Small country with very recent trade liberalization
•
Relative price of services is high, probably reflecting
an appreciated real exchange rate
•
Problems with infrastructure and public services, as
well as high real interest rates, could have a strong
effect on industry than on services
What about Intel and FDI?
Table 5.5
Zona Franca
Value Added per Worker
(1995=100)
VA Zona Franca
adjusted for Intel
(US $ Millions)
1991
4275.2
1992
6557.1
1993
7043.4
1994
8619.5
1995
10610.7
1996
15179.1
1997
20327.3
1998
26568.1
1999
29813.6
2000
32916.3
1991-2000
Workers in
Zona Franca
(Thousands)
11.2
13.6
18.5
22.6
25.4
25.5
25.7
29.7
30.9
34.0
VA per
Worker
381713
482136
380725
381394
417745
595257
790947
894850
964841
968127
% Change in
VA per Worker
26.3%
-21.0%
0.2%
9.5%
42.5%
32.9%
13.1%
7.8%
0.3%
10.9%
Fourth Analysis: Statistical exercise
A higher international interest rate and a lower U.S.
growth rate explain most of the slowdown from 1963-73
to 1984-2000.
Cuadro 6.2
Dependent Variable:
Independent Variable
Constant
US growth
Change in TOT (t-1)
Prime Rate
R2
Observations
D-W
Costa Rican GDP Growth
Coefficient
Std Error
t-ratio
0.05478
0.68154
0.07991
-0.69670
0.00841
0.17415
0.03601
0.14401
6.52
3.91
2.22
-4.84
0.59500
40
1.54
Contribution of US growth, Terms of Trade and Prime Rate
to GDP Growth in Costa Rica
Average Contribution
Period Years
1
4
1963-1973
1984-2000
US growth
Change
TOT (t-1)
Prime rate
Average
Fitted
GDP
growth
Average
Observed
GDP
growth
2.9%
2.2%
-0.1%
0.1%
-1.6%
-3.6%
6.7%
4.2%
7.3%
4.7%
0.1%
-2.0%
-2.5%
-2.6%
Difference across periods 4 and 1
-0.7%
A VAR analysis on quarterly data for 1991-2000 period reinforces the importance of international conditions as
determinants of domestic growth.
U.S. growth and international real interest rate shocks
explain most of the downward deviation of GDP from its
projected level during 1995-1997.
Re s pue s ta %de l PIB a s hoc ks inte rnos , e xte rnos , y totale s obs e rvados
0.06
0.04
0.02
0.00
-0.02
-0.04
-0.06
-0.08
1992
1993
1994
total
1995
1996
internos
1997
1998
externos
1999
2000
Conclusions
• With regards to the slow growth question:
– Growth is even slower when we look at Y/L
– The main reason for slow Y/L growth is slow (even
negative!) TFP growth
– This appears related to slow growth of productivity in
services...
... as well as a large service sector when compared to
other similar countries
• Flip side: small size of the industrial sector
• Caution: a new export oriented services sector
Conclusions
• With regards to the slowdown question,
many factors help explain this phenomen:
–
–
–
–
–
Participation rate
Schooling
Public investment
Private investment
TFP
Conclusions
• The lower TFP growth appears related to:
– Lower shift share
– Lower growth in agriculture and industry
– Larger services sector
• Many of these factors could in turn be
explained by:
– Slower US growth
– Higher international interest rates
Policy recommendations
• Secondary enrollment rate and infrastructure
investment are already on the rise
• Important to reduce interest rate, for which:
– Fix fiscal problem
– Reform financial sector
• What to do – if anything – about small size of
industrial sector? Real exchange rate depreciation?
FTA with the US? Improve business climate?
Research questions
• Why is productivity growth in services so low?
– Hotels, restaurants – tourism?
– Compare labor productivity in different services with
other countries
• Why is the industrial sector so small?
– Trade liberalization too recent
– Real exchange rate appreciation
– Unfavorable business climate