Why aren’t Brazil and Mexico rich?

Edmar Bacha and Regis Bonelli

Course on "Political, Social, and Economic Development in Brazil”

ILAS, Columbia University October 7, 2015

GDP per capita relative to US, 1950-2014 (convergence only through the early 1980s)

(2014 USD, PPPs)1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

0.20

0.25

0.30

0.35

0.40

0.45

0.50BRA / US MEX / US

27%

32%

Brazil and Mexico: GDP growth 10y moving average, 1950-2014 (% p.y.)

19

50

19

52

19

54

19

56

19

58

19

60

19

62

19

64

19

66

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

MEXICO BRAZIL

What went wrong?

• Growth collapses: periodization and role of capital accumulation

• Decomposition of labor productivity growth: capital deepening and total factor productivity (TFP)

• (Terms of trade role in measured TFP growth)• Structural heterogeneity of labor productivity growth.

Decomposition according to: 1. Regions 2. Traded and nontraded sectors3. Firm size 4. Labor informality

Brazil’s and Mexico’s growth periodization 1950-2014 (% a.a.)

Periods Brazil Mexico

Brazil's average

GDP growth

Mexico's average

GDP growth

Post WW-II Golden Age 1950-1980 1950-1981 7.4% 6.8%

Post-1980 Near Stagnation 1981-2014 1982-2014 2.6% 2.2%

Lost Decade 1981-1992 1982-1993 1.4% 1.6%

Reforms w/Subpar Growth 1993-2003 1994-2001 2.8% 3.0%

China Syndrome 2004-2010 2002-2010 4.5% 1.9%Day after Great Recession 2011-2014 2011-2014 2.1% 2.9%

Brazil: Capital stock and GDP growth rates, 1950-2014 (% p.y.)

19

50

19

52

19

54

19

56

19

58

19

60

19

62

19

64

19

66

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

K' Y'

Mexico: Capital stock and GDP growth rates, 1950-2014 (% p.y.)

195

0195

2195

4195

6195

8196

0196

2196

4196

6196

8197

0197

2197

4197

6197

8198

0198

2198

4198

6198

8199

0199

2199

4199

6199

8200

0200

2200

4200

6200

8201

0201

2201

4

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

K' Y'

Decomposition of capital accumulation

Decomposition of the capital stock growth rate (K’)From the savings-investment identity in current prices, we derive:

K' = s(1/p)v – δwhere:

s = savings rate (includes foreign savings but excludes inventory changes) p = relative price of investment (ratio between the deflators of fixed investment and GDP)v = output-capital ratioδ = depreciation rateIn the following, the terms in the right-hand-side are taken as given parameters (per period). No independent investment function!

Brazil: decomposition of K’

Mexico: decomposition of K’

GDP per worker growth

• Neoclassical analysis of the contributions of the increase in the capital-labor ratio and of total factor productivity (TFP) for the growth of GDP per worker

Brazil: periodization of output per worker growth y' = αk' + TFP’

Mexico: periodization of output per worker growth y' = αk' + TFP’

Parentheses: TFP growth in Brazil in 2004-2010:reforms or economic cycle plus terms of trade?

• Lisboa and Pessoa (2013) conjecture that the acceleration of TFP’ in 2004-10 would have been a consequence of the maturation of the economic reforms during the Cardoso administration and the first two years of Lula’s first term

• But the rapid increase of TFP could also have been a consequence of the rise of China, which beneffited Brazil and hurt Mexico

• Economic literature documents association between changes in the terms of trade and in TFP

• It also documents procyclicality of TFP

Brazil: TFP and terms of trade (levels, 1980=1)

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0.8

0.85

0.9

0.95

1

1.05

0.8

1

1.2

1.4

1.6TFP BRA nível ToT BRA nível

Mexico: TFP and terms of trade (levels, 1980=1)

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

0.75

0.8

0.85

0.9

0.95

1

1.05

0.45

0.55

0.65

0.75

0.85

0.95

1.05

TFP MEX nível ToT MEX nível

OLS regressions of TFP’ on ToT’ and GAP’ confirm such relationships

Brazil and Mexico, 1981-2014Brazil and Mexico, 1981-2014 (34 observations) Dep. Var. Dep. Var. Dep.Var. Dep. Var.

Variable TFP' Brazil (1) TFP' Brazil (2) TFP' Mexico (3) TFP' Mexico (4)

Constant -0,073 0,098 -0,210 -0,449(t-ratio) (-0,26) (-0,42) (-0,76) (-2,18)Terms of trade rate of change 0,080 0,065 0,177 0,092(t-ratio) (-1,94) (-1,93) (-4,63) (-2,95)Utilization gap change (Brazil) -0,915 (t-ratio) (-5,66) Output gap change (Bra) HP filter -0,876 (t-ratio) (-7,80) Unemployment rate change (Mex) -1,604 (t-ratio) (-5,50) Output gap change (Mex) HP filter -0,712(t-ratio) (-8,96)Adjusted R2 0,671 0,775 0,669 0,818Standard error of regression 1,60 1,33 1,58 1,18DW 1,68 1,21 1,90 1,61F-ratio 34,68 57,68 34,29 75,02

TFP-Brazil (level): (1) technical progress equals to zero between 1980 and 2014: post-1992 growth only compensates for the initial loss; (2) regression

(eq. 1) understimates cycle, leaving space for other explanatory variables19

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

14

0.8

0.9

1

1.1

Observed Fitted

TFP-Mexico (level): (1) technical progress falls in the lost decade, and remains at a level 20% below its initial value afterwards; (2) regression (eq.

3) captures correctly the TFP movements in the period 19

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

14

0.75

0.8

0.85

0.9

0.95

1

1.05

Observed Fitted

Growth and structural heterogeinity in four dimensions

• Paralelism in the evolution of macro variables is not replicated when structural evolution is observed in more detail:– By states, according to their per capita incomes– By traded and nontraded sectors– By firm size– By labor informality

• Analysis of structural heterogeneity evolution makes it clear that Mexico and Brazil each became unhappy in its own way

Regional dimension: disparity in the dispersion of per capita income by states

(sigma:standard deviation/unweighted mean)

0.46

0.50

0.54

0.58

0.62

0.66

0.70

0.74

0.78Sigma Mexico 1990 - 2013

Sigma Brazil 1990-2012

Traded v. nontraded sectors, 1989-2009:evolution of relative labor productivities

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0.7

0.9

1.1

1.3

1.5

1.7

1.9Bra trade /nontrad Mex trade /nontrad

Mexico: establishment size and productivity gains (McKinsey; Ind, Com, Serv)

Productivity growth increases strongly with firm size

Firm size Employment share (%) Productivity growth (%)

1998 1998-2008

0 - 10 40 -6.5

11 -30 11 -2.2

30 - 100 12 0.2

101 - 250 10 2.9

251 - 500 8 2.4

501 + 20 5.9

Total 100 2.0

Brazil: establishment size and productivity gains in manufacturing, 1996-2013

Inverse relationship between size and productivity growth

Average Productivity Growth Rates (% p.a.)

Firm size Employment share (ave. 2007-13)

1996-2007

2007-2013

1996-2013

Less than 10 employees 9.5 -- 3.8 --

10 to 29 13.5 -- 1.5 --

30 - 99 16.4 -2.3 0.5 -0.7

100 - 249 11.1 -1.3 -0.2 -1.2

250 - 499 8.6 0.0 -3.2 -1.3

500 + 40.8 0.0 -2.8 -0.7

Total 100.0 -0.3 -1.6 -0.7

Brazil: Microdata analysis also finds negative relationship between firm size and productivity gains in 1997-2010 in 18 out of 20 manufacturing

sectors (firms with 30+ employees)

Informality (informal workers/total employment)

• Informality rates by states, Mexico and Brazil• Two exercises:– Relationship between informality and states’ per

capita income– Evolution of informality rates

Mexico, 2012Informality by states

Oxa

caG

uerr

ero

Chia

pas

Hid

algo

Tlax

cala

Pueb

laM

icho

acán

de

Oca

mpo

Vera

cruz

de

Igna

cio

de la

Lla

veN

ayar

itZa

cate

cas

Mor

elos

Yuca

tán

Gua

naju

ato

Taba

sco

Cam

pech

eN

acio

nal

San

Luis

Pot

osí

Méx

ico

Dur

ango

Jalis

coCo

lima

Sina

loa

Qui

ntan

a Ro

oTa

mau

lipas

Agu

asca

lient

esQ

ueré

taro

Dis

trit

o Fe

dera

lSo

nora

Baja

Cal

iforn

iaCo

ahui

la d

e Za

rago

zaCh

ihua

hua

Nue

vo L

eón

Baja

Cal

iforn

ia S

ur

020406080

10080.0

59.6

42.0

Informal employment rates in the federative unities. Mexico, 2012

Brazil, 2012:Informality by states

Mara

nh

ão

Pia

uí

Pará

Ceará

Para

íba

Bah

ia

Acre

Am

azo

nas

To

can

tin

s

Serg

ipe

Ala

go

as

Rio

Gra

nd

e d

o N

ort

e

Ro

raim

a

Pern

am

bu

co

Ro

nd

ôn

ia

Am

ap

á

Nacio

nal

Go

iás

Esp

írit

o S

an

to

Mato

Gro

sso

Min

as G

era

is

Rio

Gra

nd

e d

o S

ul

Mato

Gro

sso

do S

ul

Para

ná

Rio

de J

an

eir

o

San

ta C

ata

rin

a

São

Pau

lo

Dis

trit

o F

ed

era

l0

20

40

60

80

10076.5

47.6

30.0

Informal employment rates by states. Brazil, 2012

Inverse relationship between informality and states’ per capita incomeFor each 10% increase in Ypc informality declines 2.3pp

Mexico has more informality than Brazil, despite being 15% richerDummy Campeche: distorting effect of oil extraction on Ypc

Dep. Var.: informality rate

Adjusted R-squared 0.730Standard error 6.208Observations 59 states

Coefficients SError Stat t P-valueIntercept 266.8 17.8 15.0 0,000%log (PIB pc PPP) -22.8 1.9 -12.0 0,000%Dummy MEX 10.5 1.7 6.3 0,000%Dummy Campeche 50.0 7.4 6.7 0,000%

Brazil and Mexico: informality rates since the 1990s

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

20

25

30

35

40

45

50

55

60

65

Brazil - PNAD MEX: tasa de ocupación em el sector informalRate of informality - INEGI

Tentative conclusions

• Mexico opened up its economy and succeeding in developing a 1st class industrial sector in the rich North, but didn’t achieve domestic integration– Dynamism of the big exporting firms did not propagate to the small, informal,

nontraded producing firms in the poor South. The result was stagnation of aggregate labor productivity

• Brazil managed to reduce polarization in several dimensions– But in contrast to Mexico its big manufacturing firms did not integrate into the

international economy and thus showed no gains in productivity – This generated little impulse for the rest of the economy, leading the country to

craw along a low productivity path—except when the commodity lottery dictated otherwise

• Lessons of the two experiences: domestic and international integration have to be pursued both at the same time—which seems easier said than done for big middle-income countries!