From Commodity Booms to the Knowledge Economy

Center for Hemispheric Policy, May 2008W. F. MaloneyOffice of the LAC Chief EconomistLatin America and the Caribbean RegionThe World Bank

The commodity boom has been kind to Latin America

Commodity Indexes

50

100

150

200

250

300

350

400

J an/01 J un/01 Nov/01 Apr/02 Sep/02 Feb/03 J ul/03 Dec/03 May/04 Oct/04 Mar/05 Aug/05 J an/06 J un/06 Nov/06 Apr/07 Sep/07 Feb/08

Soybean Crude Oil (WTI) Raw Sugar Coffee Wheat

Source: Bloomberg - Dow Jones-AIG Agriculture, Energy & Prec. Metals Sub-Indexes are quoted in USD.

And a large share of the recent high growth rates are due to this “good luck”

Long Run Cumulative Growth- Actual and Predicted % variation 2002/06

-5%

0%

5%

10%

15%

20%

25%

30%

35%

VEN ARG PER BRA BOL ECU COL URY MEX PRY PAN DOM GTM SLV HND NIC LAC

Actual Predicted

Source:WDI - Regression: dlog(gdp)=f(dlog(ToT),dlog(Ind.Prod.G7),dlog(US5Y),dlog(HighYield));1991-2002. Predicted: setting external factors to zero

The question: Can Latin America turn this luck into sustained growth?

Productivity Growth

-2

-1.5

-1

-0.5

0

0.5

1

1.5

Latin America OECD East Asia

1970s 1980s 1990s

r owth

Source: Calderon, Fajnzylber y Loayza (2002)

..And are we back to Prebisch’s concerns with our economic structure? The “resource curse” is probably a myth…but

LA underperforms in all sectors Forestry:

remains a dynamic sector in Sweden, and Finland. ..but Brazil or Chile?

1944 Haig report “Chile tremendous forestry potential” didn’t appear

LA under-performs

Minerals: can lead to dynamic industries Norway shows US petroleum based success

replicable… Discovers petroleum in 1969, now exports platforms;

“Norwegian school of thought” in oil exploration. Australia-exports more mining expertise than wine But LA stagnated

Brazil, Peru “mining underperformers” Wright (2001). Chile: Australia’s BHP discovered “la Escondida”

Agriculture: TFP growth faster in agriculture than manufacturing.. But LA underperforms in both…

…including “high tech” goods

Brazil and Mexico: IRCA in Aircraft and Computing Equipment

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

RC

A In

dex

in S

IC 3

72 (

18-y

r M

A)

Brazil AircraftsMexico Office Computing & Acctg.Brazil: Airplanes

Mexico: Computers

Comparative Advantage in Innovation

Taiwan: Computers

3.5!!!

Innovation is Central: Forestry remains a dynamic sector in Sweden, Finland

Nokia: Site of an early pulp mill in Finland

Learn how to learn

It’s not so much what we produce, but that we’re not producing at world class levels.. Why?

Deep historical roots: We started behind in literacy…

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Brazil

Jam

aica

Chile

Mex

ico

Costa R

ica

Argenti

na

Austra

lia

EE.UU.

Canada

Sweden

1870 1925

Sources : Mariscal and Sokoloff 2000, and Meredith 1995, Maloney 2007

… and valued poetry over engineering

Density of Engineers at the Turn of the 20th Century

Country Year Engineers per

100,000 workers Australia 1920 47

Chile 1930 6

Colombia 1887 8

Sweden 1890 84

United States 1920 128

Sources : Maloney 2007

Argentina

Chile

Uruguay

Tunisia

Thailand

M acao-China

Latvia

Indonesia

HongKong,China

Brazil

United States

Turkey

Switzerland

Sweden

Spain

Slovak Republic

Portugal

PolandNorway

New Zealand

Netherlands

Mexico

Japan

Italy

Ireland

Iceland

Hungary

Greece

GermanyFrance

Finland

DenmarkCzech Republic

Belgium

Austria

Australia

300

350

400

450

500

550

0 5 10 15 20 25 30 35 40

2003

PIS

A M

ath

Sco

re (

Mea

n)

2001 Expenditure per student, primary (% of GDP per capita)

We continue to under perform in education quality

LAC “underperforms in R&D

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

4 5 6 7 8 9 10 11

Log G DP pe r Capita

Pre

dic

ted

& O

bse

rved

R&

D/G

DP

IndiaArgentina

China

IsraelFinland

Korea

M exico

Source: Lederman and Maloney 2002 “ R&D and Development”

And what we invest generates little knowledge or growth

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

AR

G

BR

A

CH

L

CO

L

CR

I

ME

X

PE

R

UR

Y

VE

N

TW

N

KO

R

ISR

FIN

NO

R

Patents = B1R&D + Bp Country*R&D

Bosch, Lederman and Maloney (2007)

Partly because of low academic quality and

weak collaboration between university and firm

(interviews with entrepreneurs: scale 1-7)

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Arg Bra Chi Col CR Mex Chn Esp Cor Ind Irl Aus Sw e Isr Fin EUA

Qual of Scientif ic Inst. Collab. U-firms

Source: World Economic Forum

Latin Students Abroad: Still Condemned to Solitude?

Students Abroad per Million Tertiary Enrolled

0200400600800

10001200140016001800

Austra

liaBra

zil

Chile

New Z

ealan

d

China

Vietna

m

Colom

bia

Mex

icoIn

dia

Mala

ysia

Taiwan

Korea

Canad

a

Challenges to Reform

Lack of consensus on importance Chile, yes Mex, Col, Br- noise but not yet coherent

Consensus, but difficult political economy Chile- all agreed on macro, but micro haunted

by the ghosts of ‘73 Mex-balkanized policy making

US-LA post 08: An Alliance for Productivity?

End