This paper performs a Growth Diagnotic for Brazil. It shows that many aspects of the Brazilian economy have been improving including the macro picture, educational progress and the external front. Moreover, Brazil has many productive possibilities and high-return investments. Yet growth is hampered because of a relatively old-fashioned problem that has been solved in many other countries in the region: creating a financially viable st ate that does not over-borrow, over-tax or under-invest. We show that domestic saving is the binding constraint on growth and that it has a fiscal cause. Although things are trending in the right direction, the challenge is to exploit the current good times to create the fiscal basis for a sustained growth acceleration.
This paper presents a growth diagnostic of Peru. It notes that although Peru has recently enjoyed high rates of economic growth, this growth is actually a recovery from a significant and sustained growth collapse that began in the 1970s. The growth collapse was caused by a decline in export earnings due to the fall in international prices and an inadequate investment regime in export activities that led to a fall in market share. This situation led to collateral damage in the form of a balance of payments, fiscal and financial crisis, accompanied by hyperinflation and violence, but these aspects were corrected in the 1990s. However, the transformation of the export sector has been surprisingly small: the same activities that declined – mining and energy – are the ones that are leading the current recovery in exports to levels that in real per capita terms are similar to those achieved 30 years ago. We argue that the lack of structural transformation is associated with Peru’s position in a poorly connected part of the product space and this accentuates coordination failures in the movement to new activities. In addition, Peru’s current export package, is very capital intensive and generates few jobs, especially in urban areas where the bulk of the labor force is now located. This limits the welfare benefits of the current growth path. The key policy message is that the public sector must act to encourage the development of new export activities that better utilize the human resources of the country. This involves action on the macro front to achieve a more competitive real exchange rate, improvements in the capacity to solve coordination failures in the provision of specific public sector inputs and programs to stimulate investment in new tradable activities.
The main finding of this analysis is that Chile’s pattern of specialization implies little opportunities for easy movements to new activities. Chile is specialized in an extremely sparse part of the product space and has a relatively unsophisticated export package. Past growth has been surprisingly strong given this pattern of specialization, as has been performance in the services sector, and it appears that there does remain some room to continue growing through quality upgrading in existing products. However, Chile has little room to increase its market share in existing products, and its current export package does not offer a path to future structural transformation and growth. Furthermore, this isn’t due to Chile’s status as a natural resource-based economy, as the country lags in these dimensions even when compared to countries like Canada, Australia, and New Zealand. Movements to new sectors are necessary, but will be difficult given this pattern of specialization. This suggests that there should be some scope for public investment in the study and coordination of new export activities to fuel long-term economic growth.
Paraguay’s growth history is characterized by prolonged periods of stagnation, interrupted by a few small recessions and growth accelerations. These dynamics reveal that growth in Paraguay has been dependent on latching on to particular export goods enjoying favorable external conditions, rather than driven by macroeconomic or political cycles. Moreover, the country currently has significant room for further export growth in existing products, as well as many new export products that are nearby and have high potential. But these available channels to generate sustained growth have all gone unexploited. Our growth diagnostic indicates that the underlying obstacles that have prevented the country from developing many of the available opportunities are related to two constraints: the provision of infrastructure and a lack of appropriability due to corruption and a poor regulatory environment. The current environment is one where the only activities that can survive have to be un-intensive in infrastructure, and either unintensive in transactions requiring an efficient business environment or at least at a scale where informality and corruption is a viable alternative to institutional blockages. We provide policy recommendations that will help alleviate these problems, focusing on not only on institutional and infrastructure reforms in the abstract, but outlining a process of learning from the relevant private sector actors what sector-specific needs in the areas of regulations and infrastructure are the most important for achieving accelerated growth in Paraguay.
The Uruguayan economy is recovering from the 2002 financial crisis that disrupted its banking system, caused a collapse of its currency and seriously affected its fiscal solvency. The crisis was clearly associated with the collapse of the Argentine economy and its concomitant currency, banking and debt crises. Both were also related to the sudden stop that followed the Russian crisis of 1998, which prompted an important realignment of the real in January 1999, a fact that had exerted enormous pressure on bilateral exchange rates within Mercosur. In this post-crisis period, Uruguay now faces several challenges to attain a sustainable growth path. This report proposes a series of recommendations towards this end. Implementing a strategy to accelerate growth inevitably involves interventions at both the macro and the micro level. The macro level involves the maintenance of a stable and competitive real exchange rate, so as to create a stable and encouraging environment for export growth. The authors take up each of these elements of the growth strategy. They first focus on the design of incentive policies for economic diversification and promotion. Then they discuss next the macroeconomic complements, with special emphasis on maintaining a competitive and stable real exchange rate.
El Salvador is a star reformer. After the civil war of the 1980s, the country was able to adopt important political and institutional reforms. These included the incorporation of all political groups into the electoral process, the adoption of a new constitution, the elimination of the military police, the creation of a civilian police with members from both sides of the war, and the adoption of rules to strengthen the independence of the judiciary. On the economic front, the country consolidated its fiscal position, modernized its tax system, liberalized trade and banking, improved the regulation and supervision of its financial system, privatized most state productive assets including energy and telecommunications, and reformed its social security system in line with the Chilean model. It also expanded and granted local autonomy to the school system through the Community-Managed Schools Program (EDUCO). Finally, El Salvador dollarized its financial system in November 2000. Given the investment-grade rating earned by the country, domestic money market rates have converged to U.S. levels.
Unfortunately, El Salvador is not a star performer. Standard theory would predict that such an improvement in the institutional and regulatory environment should be followed by convergence to a higher income level. Instead, after an initial period of recovery that lasted until 1997, real gross national income per capita stagnated at levels comparable to those achieved by the country in the late 1970s. Its income relative to the United States has not recovered from the fall associated with the civil war and is just over half the ratio achieved in the late 1970s.
El Salvador is not alone in finding that reform efforts have had smaller-than-expected growth effects. With the exception of Chile, the effects of reform ongrowth throughout Latin America have been smaller than the initial estimates carried out in the mid-1990s.In this context, El Salvador is an interesting case, since it has been particularly effective in applying wide-ranging reforms.
This paper explores why these reforms have failed to produce more growth and what can be done about it.2 We begin by placing the economic choices faced by the incoming Salvadoran administration in a regional and historical perspective. The late 1980s and early 1990s in Latin America were preceded by a decade of stagnation, but coincided with a time of unusual confidence in the future. The collapse of communism, the failure of many interventionist policies in Latin America in the 1980s, and Chile’s success gave governments a clear idea of the road they wanted to leave and the road they wanted to take. Inadequate past performance and consensus on the road ahead led to a forceful policy agenda.