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COMPETITIVENESS, SCIENCE, TECHNOLOGY AND INNOVATION: THE EXPERIENCE IN EL SALVADOR Manuel Hinds February 2007 1 Agenda 1. The original conception 1995 a) The objectives b) The economic framework c) The institutional reforms 1. The modernization of the state 2. Private sector competitiveness 2. The implementation 3. The outcomes 2 The original conception 1995 3 To compete… • Not based on low wages • But on true competitiveness, based on: – Reducing all costs except wages – Modernizing the state – Modernizing the private sector • Privatizing it • Turning El Salvador into an international services center • The knowledge economy • Pump priming the process 4 Reducing costs • Fiscal prudence: investment grade by 1997 • Macroeconomic stabilization: inflation at dollar levels by 1997 • Reduction of protection, including tariffs, from average 46% (80+ in the late 1980s) to 6% average • Introducing full competition in strategic sectors where the government had monopoly – Telecommunications: from 400,000 phones in 1998 to 4.5 million in 2006 (pop. 6 mill.) – Electricity • Privatizing telecom and electricity • Reducing interest rates and increasing maturities to dollar levels 5 Modernizing the state • Reducing the size of the state, in addition to privatizations – First reduction of staff in the late 1990s, 16% of the staff – Second stage in the early 2000s: • • Ministry of Public Works from 16,000 to 400 Streamlining of strategic services – Customs – Investment procedures 6 Modernizing the private sector (1) • Privatizing the private sector – Fundamental and by far the most difficult • Turning El Salvador into an international logistics center – The only way to attain the volumes and quality of services needed to get lower prices in many services • Financial • Transportation • Distribution 7 Modernizing the private sector (2) • The Knowledge economy – Connectivity • Aimed at improving the productivity of the economy • Three components – Creation of a competitive telecom market before privatizing – Telecenters (means) – E-government (initial content) – Technical schools (2004) 8 The implementation 9 Mixed implementation Economic framework Modernization of the state Largely successful Streamlining of key institutions Successful, sliding back E-government Substantially planned till 2004, forgotten Modernizing the private Privatizing it sector Logistics center Knowledge society Substantially, still 2 kinds of entrepreneurs Mixed implementation Connectivity abandoned, technical centers 10 The outcomes 11 The Index of Economic Freedom Closing gap with Chile, then sliding back Wall Street Journal-H eritage Foundation Scores 85 Chile 75 El Salvador U ruguay Mexic o 70 65 Average LA Brazil Argentina 60 55 50 45 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 40 1995 % of m arket freedom 80 But still good at number 2 in Latin America 12 In the Global Competitiveness Index, it was third in 2003, now it is fifth Global Competitiveness Index 2006 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 5.0 Chile Costa Rica Panama Mexico El Salvador Colombia Brazil Argentina Uruguay Peru Guatemala Republica Dominicana Venezuela Ecuador Honduras Nicaragua Bolivia Paraguay 13 The Salvadoran GCI, by activity Score First Stage Second Stage Overall competitiveness Infrastructure Institutions Markets efficiency Macro Technical readiness Entrepreneurs sophistication Health and primary education Innovation Superior education and capacitation Place in Latin America 3.51 3.75 3.8 4.32 4.44 3.27 4.13 6.41 2.89 3.51 5 3 4 4 7 7 9 10 10 11 14 Network readiness Rank 2005 20 30 40 50 60 70 80 90 100 110 120 Chile Brazil Mexico El Salv ador Colombia Uruguay Panama Costa Rica Argentina Venezuela Peru Dominican Republic Guatemala Honduras Ecuador Boliv ia Nicaragua Paraguay SOURCE: World Economic Forum 15 The current problems 16 The political problem • Who speaks passionately for STI among the political leaders of the developing countries? • People talk about this in the leading developing regions – East Asia, South Asia and Eastern Europe • In the lagging countries, politics is moving against globalization, liberalization… • And toward more state intervention • These are the issues in: – Latin America, with the resurgence of the radical left – Middle East – It has been the reality of Sub-Saharan Africa for most of the last forty or fifty years 17 But the politicians… • Are not the problem… • They are the symptom 18 The shape of society • The new world that is emerging from Connectivity and STI is horizontal • Developing societies are largely vertical – For long their economies based on vertical structures: • protection, • cozy arrangements between the state and private persons, • enormous powers vested on the bureaucracy 19 A perplex and spoiled private sector • Very common complaints in developing countries after liberalization: – The government is not telling us what to do, what to plant, what to produce, at what prices – The government is not giving us the incentives to invest • • Meaning that it is not offering subsidies and privileges, guaranteeing that they would never lose The skills of the old investors’ class are not adequate for the new world – Their expertise was how to lobby the government to get privileges • They are bound to disappear • But in the meantime they are still politically powerful 20 The natural allies of the old private investors in the lagging countries • The politicians – • The bureaucrats – • Who see a crucial source of patronage disappearing with liberalization Who see their power diminishing radically as the government renounces to its ability to control the economy The general public – In these countries, they have captured the support of the general public 21 What should be done? 22 First and foremost… • • This is about convincing people – Keep on doing it – Show the evidence – Remember that the single most important factor determining the success or failure of projects is the country’s ownership of the project Focus on the social side of it, building human capital – • Which is an equalizing activity Eventually, going back to the closed, paternalistic economies of the past will prove unsustainable – The ideas to move into the future must be there,waiting 23 Scale down operational objectives, though not long-term ambitions • Emphasize the role of knowledge and innovation in creating value added… – • Not with rocket science but with simple cases that can be demonstrated in the reality of the country Rather than trying to transplant institutional settings from the developed to the developing countries – Focus on the substance, not the form – A project financing the use of universities to provide innovation to companies will soon fail if the university is incapable of producing any useful innovation – Do not design projects that require a degree of institutional development that you don’t have 24 Operationally, focus on pilot projects • To generate an emulation effect • Rather than on large projects, which can sink in bureaucratic incompetence 25 El Salvador: data 26 Exports performance: total exports growth Exports of goods and services, 1992 = 1 6 Argentina Bolivia Brazil Chile Colombia Costa Rica Dominican Republic Ecuador El Salvador Guatemala Honduras Latin America & Caribbean Mexico Nicaragua Panama Paraguay Peru Uruguay Venezuela, RB 5 1992 = 1 4 3 2 1 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 0 SOURCE: World Development Indicators, World Bank 27 Exports performance: Manufactures exports % of merchandise exports Manufactures exports (% of merchandise exports) 90% Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Honduras Latin America & Caribbean Mexico Nicaragua Panama Paraguay Peru Uruguay Venezuela, RB 80% 60% 50% 40% 30% 20% 10% 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 0% 1992 % of merchandise exports 70% SOURCE: World Development Indicators, World Bank 28 Exports performance: manufactured exports growth, 1992-2004 Manufactured exports 14 ARGENTINA BOLIVIA BRAZIL CHILE COLOMBIA COSTA RICA ECUADOR EL SALVADOR GUATEMALA HONDURAS MEXICO NICARAGUA PANAMA PARAGUAY PERU URUGUAY VENEZUELA, REP. BOL. 12 1992 = 1 10 8 6 4 2 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 0 SOURCE: World Development Indicators, World Bank 29 Growth performance: manufacturing value added, 1992-2004 Manufacturing, value added (current US$), 1992 = 1 3 Argentina Bolivia Brazil Chile Colombia Costa Rica Dominican Republic Ecuador El Salvador Guatemala Honduras Latin America & Caribbean Mexico Nicaragua Panama Paraguay Peru Uruguay Venezuela, RB 2.5 1.5 1 0.5 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 0 1992 1992 = 1 2 SOURCE: World Development Indicators, World Bank 30 Growth performance: GDP in real terms, 1992 = 1 1.6 1.5 1.4 Brazil El Salvador Latin America & Caribbean Mexico Colombia Argentina 1.3 1.2 1.1 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1 1992 GDP at 2000 Dollars (changes equal to those of constant domestic prices) Growth in real terms, 1992 = 1 SOURCE: World Development Indicators, World Bank 31 Growth performance: GDP in current PPP dollars, 1992 = 1 GDP Current PPP Dollars, 1992 = 1 2.3 2.1 1992 = 1 1.9 Argentina Brazil Colombia El Salvador Latin America & Caribbean Mexico 1.7 1.5 1.3 1.1 SOURCE: World Development Indicators, World Bank 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 0.9 32 Growth performance: GDP in current dollars, 1992 = 1 GDP Current Dollars, 1992 = 1 3 2.5 1992 = 1 2 Argentina Brazil Colombia El Salvador Latin America & Caribbean Mexico 1.5 1 0.5 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 0 SOURCE: World Development Indicators, World Bank 33 The end of the interest rate discrimination El Salvador: Interest rates in dollar equivalent 30% El Salvador becomes investment grade 25% Dollarization 20% DEPOSIT RATE COLONES DEPOSIT RATE DOLLARS LENDING RATE COLONES LENDING RATE DOLLARS 15% 10% 5% 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 0% Source of basic data: International Financial Statistics of the IMF 34 The reduction of the spread between lending and deposit rates ES & US: Spread lending / deposit rates 12% Dollarization El Salvador 10% 8.4% 8% US SPREAD LENDING / DEPOSIT ES SPREAD LENDING / DEPOSITS 6% SPREAD ES / US AVERAGE LATIN AMERICA WITHOUT BRAZIL 4% 3.0% 2.7% 2% 1.6% 0.7% 0.3% 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 0% Source of basic data: International Financial Statistics of the IMF 35