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Economic Growth and Productivity in Brazil: An Industry Perspective forthcoming GGDC research memorandum

Introduction. Objective: Measure and analyze multi-factor productivity growth in Brazil at the industry level.Policy context:Import-substitution (roughly until 1980)Intermediate period of debt crisis (1980-1990)Washington consensus (1990-). Labor productivity Source: Timmer, Marcel P. an

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Economic Growth and Productivity in Brazil: An Industry Perspective forthcoming GGDC research memorandum

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    1. Economic Growth and Productivity in Brazil: An Industry Perspective (forthcoming GGDC research memorandum) Gaaitzen J. de Vries GGDC and Faculty of Economics and Business University of Groningen Presentation at World KLEMS Harvard University, August 20, 2010

    2. Introduction Objective: Measure and analyze multi-factor productivity growth in Brazil at the industry level. Policy context: Import-substitution (roughly until 1980) Intermediate period of debt crisis (1980-1990) Washington consensus (1990-) Ignore the intermediate period of debt crisis (1975-90) and focus on the differences between the periods of import-substitution (IS, 1950-1975) and Washington Consensus (WC, 1990-2005).  What do we see? Labor productivity under IS grew at a rate that is double the rate under WC. The rate of labor productivity growth within sectors (the component identified as “within” in the chart) was comparable under the two policy regimes. The worse overall performance under WC is accounted entirely by the fact that there was much less desirable structural change -- labor moving from low to high-productivity activities -- under WC than under IS. We already knew 1, and I have long suspected points 2 and 3 to be true as well.  But I had never seen the facts laid out so clearly. Here is what seems to have happened: For all its faults, IS promoted rapid structural change.  Labor moved from agriculture to industry, and within industry from lower-productivity activities to higher-productivity ones.  So much for the inherent inefficiency of IS policies! Under WC, firms and industries were able to accomplish a comparable rate of productivity growth, but they did so by shedding (rather than hiring) labor.  The displaced labor went not to higher-productivity activities, but to less productive lines of work such as informality and various services.  In other words, the WC ended up promoting the wrong kind of structural change. This account reinforces the centrality of structural change in driving rapid economic growth. It should also cause us to be wary of productivity studies that focus on what is happening within manufacturing alone.  After all, productivity within manufacturing can be stellar, but if manufacturing or other high productivity sectors as a whole are rapidly shedding labor, economy-wide productivity performance will be disappointing.  Ignore the intermediate period of debt crisis (1975-90) and focus on the differences between the periods of import-substitution (IS, 1950-1975) and Washington Consensus (WC, 1990-2005).  What do we see? Labor productivity under IS grew at a rate that is double the rate under WC. The rate of labor productivity growth within sectors (the component identified as “within” in the chart) was comparable under the two policy regimes. The worse overall performance under WC is accounted entirely by the fact that there was much less desirable structural change -- labor moving from low to high-productivity activities -- under WC than under IS. We already knew 1, and I have long suspected points 2 and 3 to be true as well.  But I had never seen the facts laid out so clearly. Here is what seems to have happened: For all its faults, IS promoted rapid structural change.  Labor moved from agriculture to industry, and within industry from lower-productivity activities to higher-productivity ones.  So much for the inherent inefficiency of IS policies! Under WC, firms and industries were able to accomplish a comparable rate of productivity growth, but they did so by shedding (rather than hiring) labor.  The displaced labor went not to higher-productivity activities, but to less productive lines of work such as informality and various services.  In other words, the WC ended up promoting the wrong kind of structural change. This account reinforces the centrality of structural change in driving rapid economic growth. It should also cause us to be wary of productivity studies that focus on what is happening within manufacturing alone.  After all, productivity within manufacturing can be stellar, but if manufacturing or other high productivity sectors as a whole are rapidly shedding labor, economy-wide productivity performance will be disappointing. 

    3. Labor productivity Source: Timmer, Marcel P. and Gaaitzen J. de Vries (2009), "Structural Change and Growth Accelerations in Asia and Latin America: A New Sectoral Data Set“ Cliometrica, vol 3 (issue 2) pp. 165-190. Figure from IADB (2010), The Age of Productivity: Transforming Economies from the Bottom Up. Palgrave MacMillan. Labor productivity under IS grew at a rate that is double the rate under WC. The rate of labor productivity growth within sectors (the component identified as “within” in the chart) was comparable under the two policy regimes. The worse overall performance under WC is accounted entirely by the fact that there was much less desirable structural change -- labor moving from low to high-productivity activities -- under WC than under IS. We already knew 1, and I have long suspected points 2 and 3 to be true as well.  But I had never seen the facts laid out so clearly. Here is what seems to have happened: For all its faults, IS promoted rapid structural change.  Labor moved from agriculture to industry, and within industry from lower-productivity activities to higher-productivity ones.  So much for the inherent inefficiency of IS policies! Under WC, firms and industries were able to accomplish a comparable rate of productivity growth, but they did so by shedding (rather than hiring) labor.  The displaced labor went not to higher-productivity activities, but to less productive lines of work such as informality and various services.  In other words, the WC ended up promoting the wrong kind of structural change. This account reinforces the centrality of structural change in driving rapid economic growth. It should also cause us to be wary of productivity studies that focus on what is happening within manufacturing alone.  After all, productivity within manufacturing can be stellar, but if manufacturing or other high productivity sectors as a whole are rapidly shedding labor, economy-wide productivity performance will be disappointing.  Labor productivity under IS grew at a rate that is double the rate under WC. The rate of labor productivity growth within sectors (the component identified as “within” in the chart) was comparable under the two policy regimes. The worse overall performance under WC is accounted entirely by the fact that there was much less desirable structural change -- labor moving from low to high-productivity activities -- under WC than under IS. We already knew 1, and I have long suspected points 2 and 3 to be true as well.  But I had never seen the facts laid out so clearly. Here is what seems to have happened: For all its faults, IS promoted rapid structural change.  Labor moved from agriculture to industry, and within industry from lower-productivity activities to higher-productivity ones.  So much for the inherent inefficiency of IS policies! Under WC, firms and industries were able to accomplish a comparable rate of productivity growth, but they did so by shedding (rather than hiring) labor.  The displaced labor went not to higher-productivity activities, but to less productive lines of work such as informality and various services.  In other words, the WC ended up promoting the wrong kind of structural change. This account reinforces the centrality of structural change in driving rapid economic growth. It should also cause us to be wary of productivity studies that focus on what is happening within manufacturing alone.  After all, productivity within manufacturing can be stellar, but if manufacturing or other high productivity sectors as a whole are rapidly shedding labor, economy-wide productivity performance will be disappointing. 

    4. Data (1) : National accounts GObas, IIpur, VAbas, COMP, GOS, TXSP Industry deflators for GO, VA, and II Data availability: 1980 – 1989: GGDC 10-sector database 1990 – 1999: constant and current SUTs (43 industries) 2000 – 2007: constant and current SUTs (55 industries) Additional data: PIA (shares various industries 1990-1999) PAC (shares 50t52) PAS (shares 60t63, shares 71t95 1990-1999)

    5. Data (2): Labor EMP: - 1980 - 1989: GGDC 10-sector database - 1990 - 1999: SUTs (43 industries) - 2000 – 2007: SUTs (55 industries) EMPE: 1990 – 2003: ratio EMP and EMPE from IOTs (43 industries) Labor compensation: COMP + compensation of self-employment (informal-formal wage ratio estimated from PNAD) Labor Quality (to be included): - Decadal population census data - Trend from household survey (PNAD) Additional data for shares: PIA, PAC, and PAS.

    6. Data (3): Capital GFCF by asset type from NA/SUTs 1990-2007 in current and constant prices Software estimated from US software-hardware equipment ratio Investment coefficients by asset type and industry from the 2005 investment matrix for Brazil (Freitas et al. 2009) Consistency with the national accounts is obtained using RAS Historical national accounts with GFCF by asset type in current and constant prices from 1901 onwards Initial capital stock is imputed using the steady-state assumption for the capital-output ratio (Easterly and Levine 2001)

    7. Method Growth accounting methodology Jorgenson and Griliches (1967) Input-output framework: Jorgenson, Gallop, and Fraumeni (1987) Detailed exposition of the methodology: Chapter 3 in Timmer, M.P., M. O’Mahony, B. van Ark and R. Inklaar (2010, forthcoming), Economic Growth in Europe, Cambridge University Press.

    8. Preliminary results

    9. Concluding remarks Preliminary results suggest the following: Substantial MFP growth in manufacturing after liberalization Low MFP growth in services industries Much further work needed: Results are preliminary and should be carefully examined Include labor quality Distinguish between formal and informal employment at the industry level Extend time series backwards (difficult due to hyperinflation)

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