From Natural Resources to the Knowledge Economy

From Natural Resources to the Knowledge Economy Latin America and Caribbean Region The World Bank February 6, 2002 Trade and Job Quality Presentation at the Inter-American Dialogue Washington, DC

Questions Addressed In This Report Are natural resources destiny? Are natural resources a curse? Are workers worse off with free trade? What strategies and policies should a natural resource rich country follow in order to develop and improve the quality of jobs?

The Region s Comparative Advantage: More of the Same After Liberalization 1 0.8 0.6 0.4 0.2 0-0.2-0.4-0.6 Net Exports per Worker ('000 $US) Machines Chem. Capital Labor Forestry Cereals Animals Trop Agric Petro. Raw Mat. 1982 1984 1986 1988 1990 1992 1994 1996 Machines Chem. Capital Labor Forestry Cereals Animals Trop Agric Petro. Raw Mat. -0.8-1 Sample of 22 countries: Argentina, Barbados, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad & Tobago, Uruguay, Venezuela, RB.

100% 80% 60% 40% 20% 0% -20% -40% -60% -80% Mexico Changed Comparative Advantage With Petroleum NRs Are Not Destiny Chemicals Machinery Capital-Intensive Labor-Intensive Cereals Animals Tropical Agriculture Forestry Raw Materials Petroleum 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Year Share of Sum of (absolute value of) net exports

80% 60% 40% 20% 0% -20% -40% -60% -80% Costa Rica s Structure of Net Exports 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Years Chemicals Machinery Capital Int Labor Int Cereals Animals Tropical Agr Forest Raw Mat Petroleum Share of Sum of (absolute value of) net exports

NRs Are Not Destiny: Changing Comparative Advantage The statistical evidence from world trade: Labor-intensive manufactures are more easily acquired than other industries (ie, higher over-time variation than other industries) Fragmentation of production and FDI Least likely to develop: natural resources and tropical agriculture New endowments (e.g., ICT, knowledge, human capital, transport infrastructure, quality institutions) are key for manufacturing industries and agriculture New endowments are policy-sensitive

Knowledge As a Source of Comparative Advantage: Examples Firms learn from each other through information sharing, job hopping by trained employees, etc. Agglomeration around knowledge centers human capital and training are key. Examples of Jalisco and San José Will ICT reduce geographic clustering? A role for the public sector to promote R&D.

80% 60% 40% 20% 0% -20% -40% -60% -80% Chile s Success Based on Natural Resources They re Not a Curse Chemicals Machines Capital-Int. Labor-Int. Cereals Animals Trop. Agr. Forest Raw Mats Petro. 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Year Share of Sum of (absolute value of) net exports

0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 NRs Are Not a Curse: Export Diversification After Reforms 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Year LAC ASIA MENA ECA AFR OECD 1982 1981 1980 1979 1978 Index

Answers So Far Are natural resources destiny? No. Policysensitive new endowments explain a large share of world trade. Are natural resources a curse? No. LAC increased IIT and diversified exports in spite of continued dependence on NRs: good news for future growth. Next: the strongest evidence against the curse comes from history

Natural Resources: A Proven Path to Development Finland 80% 60% 40% 20% 0% -20% -40% -60% Year Chem Mach Cap-Int Labor -Int Cer eals Animals Trop Agr For est Raw Mat Petro US, Canada-NR based success. Swedes, Finnsintend to keep exporting natural resources. Finland-now moving into high tech. Australians-export mining know how. Can lead to knowledge industries even if no longer produce NR!

How about L.A. s Traditional Concerns with Natural Resource Dependence? Natural resource sectors show productivity growth potential. Productivity growth faster in agriculture than manufacturing. Mining discovery, processing - a knowledge industry. Forestry dynamic growth in Sweden, Finland. Terms of trade show no continuing decline. Sachs and Warner finding that 1970-1989 NR abundant countries grew slower. Unrepresentative period -1913-1950 NR grew faster. Tricky statistics.

Why Has LAC Done So Poorly? TFP growth (1967-1992) 8 Fr ance Agriculture Venezuela El Salvador Sr i Lanka Jamaica 6 4 2 India 0-6 -4-2 0 2 4 6 8 Average -2 Denmar k Turkey Sweden Austr ia Tunisia Greece Colombia Chile South Af r ica Canada UK Kenya Pakistan Philipines Peru USA Australia developing countr ies Sample Average Finland It a ly Indonesia Egypt Japan Taiwan Netherlands Average developed countr ies Kor ea Trinidad &Tobago Costa Rica -4 Manufacturing

Key: Not just WHAT You Produce, but HOW You Produce It Must understand barriers to technological adoption in ALL sectors. Productivity differences are largest determinant of GDP/capita. Productivity growth effects are key benefit of trade liberalization Trade barriers, monopolistic structures, labor rigidities. Swedish unions- insist on aggressive adoption of new technologies and outward stance.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Brazil Latin America: Weak Knowledge Literacy Rates Jamaica Chile 1870 1925 Mexico Costa Rica Argentina Australia United States Canada Infrastructure Low human capital. Exclusionary institutions. Weak engineering base. Sweden-mature engineering base by 1850. Chile-serious copper engineers only 1950. Leads to dependence on foreigners for know how and adaptation: Aussies discover la Escondida. Scandanavia,Australia have Knowledge clusters : think tanks, universities, etc. in mining, forestry Sweden

LAC's share and Rates of Growth 30% 13% 20% 12% Rates of growth : World and LAC 11% 10% 10% 0% 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 9% -10% -20% LAC's share in Total Tourism Receipts 8% 7% 6% -30% 5% -40% 4%

Real tourism receipts per tourist-day 0.3 0.25 0.2 0.15 0.1 Anguilla Antigua and Barbuda Aruba Bahamas Barbados Bermuda Curacao Ma rt inique 0.05 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Estimated Spending per Tourist dep. var.: real tourism Arrivals Arrivals* occ.rate* receipts stay rooms overnight (a,b,c) 673.4 71.7 53.4 (5.83) (3.83) (3.62) cruise passenger 254.3 330.3 368.4 (2.48) (3.03) (3.48) time * overnight(a,b,c) -19.2-2.7 0.5 -(1.75) -(1.44) (1.61) time * cruise passenger -13.9-20.6-18.2 -(1.47) -(2.08) -(1.85) constant -7.2-6.3 18 -(.67) -(.55) (1.13) R-sq 0.38 0.2 0.16 Obs. 342 332 248 (t-values) Note: Variables are in differences. Regressions include a complete set of time dumm

Volatility of export revenue (standard deviation of growth rate) 4 3.5 3 2.5 2 1.5 1 0.5 0 Barbados Belize Dominica Dominican Republic Grenada Haiti Jamaica St Kitts and Nevis St Lucia St Vincent and Grenadines Trinidad and Tobago Tourism Tropical Agriculture Petroleum & Gas

Estimated real exchange rate elasticities Long Run RER Elasticity Value Annual Change Controlling by Total Tourists 0.51-7.7% Controlling by GDP per capita 0.60-9.2% Differentiated islands 0.34 - Non-differentiated islands 0.53-7.9%

Import Substitution Created Two Non-Dynamic Sectors Protectionism created industry without capacity for productivity growth. Countries turned their backs to natural resources. Neglected possibilities. Tariffs structures and taxes discourage growth. Neither sector dynamic.

Has Trade Brought Good Jobs to Latin America? Unemployment Job quality Wages Distribution Protection/Informality New type of jobs Export processing zones Tele-services Tourism Non-traditional agriculture How do women and indigenous groups plug in?

Unemployment Clear reallocation effects which are painful but probably transitory. No evidence for long run rise in unemployment. Unemployment not consistently higher than 1970s with exception of Argentina and Colombia. The most open economies, Mexico and Chile are at their LR levels and not especially high. Global cross section shows no evidence of relation with openness although in LAC.

No Long Run Relationship Between Openness and Unemployment Employment and Openness - 1998 3 2.5 X + M / GDP 2 1.5 Nicaragua 1 Honduras Costa Rica Barbados Trinidad & Tobago Panama 0.5 Mexico Chile Peru Uruguay Venezuela Ecuador Argentina Colombia Brazil 0 0 2 4 6 8 10 12 14 16 18 20 Unemployment rate (%) LAC countries Rest of the World

Wages Have grown throughout the region Are higher in exporting and import competing industries Are not different between natural resource and other industries

Wage Distribution: Worsens but.. Chile & Mexico 6 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 6 Only weak direct relationship to trade Chilean spread 5 4 3 2 5 4 3 2 Mexican spread Short run trade off-higher between job quality and distribution Increased inequality is not permanent 1 1 0 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 Chile (1970-1996) Mexico (1987-1999)

Rising Informality Not Obviously Due to Trade New industries not more informal Export and import competing industries more formal Natural resource industries not more informal Little subcontracting by big firms Partly due to labor market rigidities Partly due to non-tradeables (e.g. construction) booms of early 1990s

Main Policy Recommendations Foster openness to trade, market access and FDI flows. Build new endowments Human capital and Knowledge Better institutions Public infrastructure Play to your strengths: don t turn your back on your natural advantages In the long run, increasing productivity is only path to increasing job quality.

Openness to Trade, Market Access and FDI Trade promotes innovation and skills, leads to export diversification and higher intra industry trade (all of which are linked to future growth) and realize the potential of natural advantages. Secure market access is crucial for realizing the potential of trade and investment flows. New development round: agriculture, services. Trade agreements with OECD countries: ALCA, EU. (NAFTA and CBI have permitted Mexico, CA and CB full use of locational advantages ). Trade agreements among LAC countries (Mercosur has served as platform for new exports).

Openness to Trade, Market Access and FDI FDI bring technology transfers and allow taking advantage of new opportunities for fragmentation of production (due to reduction of transportation and communications costs) Enabling environment for FDI: FDI flows respond to better institutions, human capital, public infrastructure and knowledge clusters There is a role for special regimes (like EPZ s) that reduce transaction costs and enhance credibility of policies, as well as for active promotion

Building New Comparative Advantages Education and lifelong learning Quality & coverage of basic education Technical education and training Access to higher education Knowledge networks Promote R&D Protect intellectual property Links between universities and the private sector Information and communications technology Competition in telecom and access to internet

Human Capital: Losing the Race 50 45 40 39.8 44.0 43 43.6 35 33.0 31.3 30 27.1 25 20 18.1 16 19.9 17.1 18.1 15 10 6.9 10.9 9.7 5 0 ls60 ls70 ls80 ls90 ls99 LAC East Asia OECD

Human Capital Quality: Even Worse International Scores in Maths and Science 650 600 Korea 550 500 Thai USA Australia Canada 450 400 Chile Indo 350 300 Maths Science

The Knowledge Gap 3.5 3 2.5 2 1.5 1 0.5 0 Knowledge Index by Regions,1999 medianlac medianasia medianeca medianoecd Notes: Index is first prin.comp. of: (1) R&D expenditures, (2) engineers and scientists, (3) patents by residents in US and (4) world. Missing data imputed using region dummies, period dummies, and GDPpc -0.5-1 -1.5

Building New Comparative Advantages Quality of public institutions Law and order Property rights Transparency and credibility Efficiency of public services Absence of corruption Quality of public infrastructure Private participation: quality of regulation, concessions, etc Quality of public investment

Institutional Gaps 2.0 1.5 1.0 0.5 LAC EAP OECD 0.0-0.5-1.0 Voice and Accountability Political Instability and Violence Government Effectiveness Regulatory Burden Rule of Law Graft

Play to Your Strengths Natural resources based activities can lead growth for long periods of time. They can have high productivity growth, technical spillovers and forward and backward linkages. Can become a knowledge industry. Key is to complement with good institutions, human capital and knowledge. Such endowments can even increase the stock of (economically meaningful) natural resources. Take advantage of locational advantages (fragmentation) and natural beauty, culture, etc.

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