Territorial Convergence in Ecuador: the Role of Economic Sectors and Spatial Spillovers
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Territorial Convergence in Ecuador: The Role of Economic Sectors and Spatial Spillovers Rodrigo Mendieta Muñoz1, Nicola Pontarollo2 October, 2015 Abstract The paper analyses the subnational convergence process of Ecuador during the period 2007-2013 through a spatial panel econometric technique. The advantage of this technique is to provide a reliable estimation because it takes into account the spatial interaction in the territory. Ecuador is characterised by severe cantonal disparities, reflected in a heterogeneous economic and social geography that can undermine a balanced development and a positive spatial multiplier effect within the country. In this extent we measure the sectoral effects on economic growth proving that, despite the change of productive matrix pushed by the government, this process if far to be completed. In particular the country is too much focussed into low productive sectors which depress economic growth and the manufacture sector is too much concentrated in few areas, preventing its possible positive effect into the whole economy. Keywords: Subnational convergence, Panel Spatial Econometrics, Economic Sectors 1 Facultad de Ciencias Económicas y Administrativas and Grupo de Investigación en Economía Regional, University of Cuenca, Ecuador: [email protected] 2 Department of Economics, University of Verona, Italy, and Grupo de Investigación en Economía Regional, University of Cuenca, Ecuador. Email: [email protected] 1 1. Introduction Ecuador has been characterized by persisting severe cantonal disparities, reflected in a heterogeneous economic and social geography, which accounts for cantons with asymmetric characteristics in terms of productivity and competitiveness, as well as in terms of differentiated population and social dynamics (Mendieta, 2015a; Ramón-Mendieta et al., 2013; Alvarado, 2011). These asymmetries between subnational areas can inhibit the growth of domestic production and contribute to its instability (CEPAL, 2010), becoming a problem of circular causation that can undermine the future development of the whole country. This process of unbalanced growth justifies the implementation of compensatory territorial policies such as incentives for private investment, tax breaks, and provision of infrastructure in lagging provinces (Espina, 1994). This kind of interventions, that started in the 90s together with policies and reforms whose aim was to increase the decentralization and the autonomy in of the institutions that manage development, obtained limited benefits in terms of reduction of asymmetries (Barrera, 2007). From 2008, with the new constitution, the process of territorial compensation in Ecuador made another push, with the creation of the National Secretariat of Planning and Development (SENPLADES), which coordinates the processes of autonomy, promotes governance decentralization, and seeks to expand local development capacities. In this context, the Central Government has started the project called “Changing Productive Matrix” which wants to achieve “productive diversification based on adding value; promotion of the exports and their expansion in terms of products and destinations: substitution of imports, including the different actors; deconcentration of production from the existing poles to the territories, and the continuous improvement of productivity and competitiveness across all sectors of the economy” (Plan Nacional del Buen Vivir, PNBV, 2013 - 2017: 73). More explicitly, as a policy guideline, it aims at closing economic and social gaps at territorial level. In this extent, in the last two decades, considering that the prevailing growth and development theories could no longer explain empirical growth patterns, we assisted to a rethink of how economic development takes place and of its relation with economic geography. Globalization has made localities and their interaction more important for economic growth and prosperity (Rodríguez-Pose, 2011). The territory became an active part in the economic structure and the importance of aspects such as human capital and innovation (endogenous growth theory), agglomeration and distance (new economic geography), and institutions (institutional economics) was taken to the fore (Barca et al., 2012). This study focuses on the role of economic sectors into economic growth of the 221 Ecuadorian cantons using spatial econometric tools. The classical growth regression, thanks to the recent 2 development of high-quality statistics at subnational level, has been augmented including sectoral weights into the analysis. Ecuador is characterised by a relatively strong share of non-financial services and agriculture, while it is widely differentiated in terms of manufactory, with some cantons and provinces in which it is very concentrated. Furthermore, Ecuador has still low infrastructure level in some areas of the country that represents a problem in allowing connectives and, finally, spatial diffusion of economic phenomena. In principle, widespread differences among neighbour locations could prevent and/or make relatively complicated the application of policies because their effects may be confined to a very limited spatial dimension. In this extent, to test for spatial spillovers and for the role of economic sectors in context of “Changing Productive Matrix” objective, the adopted methodology is a spatial panel data estimation (Elhorst, 2009). The paper is organised as follows. In the second section a brief overview of the economic structure of Ecuador is given. In the third section it is describe the empirical model and the estimation technique, while in fourth we illustrate the results of our analysis. In last part, finally, we discuss the conclusions of this research. 2. Approach to subnational economic disparities in Ecuador The Republic of Ecuador, located northwest of South America, between Colombia (north) and Peru (south), is divided into 24 provinces, 221 munipalities or cantons and 1,228 parishes, in an area of 283,500 squared kilometrs, with around 16 millions inhabitants. During the eighties and nineties, like many Latin American countries, Ecuador's economy was characterized by severe economic downturns. These were accompanied by political, social and institutional instability. At subnational level this performance is reflected in a sharp economic and social disparities (Mendieta, 2015a). In the last years, according to the PNBV, in order to smooth the territorial gaps, many strategies has been implemented such as an unprecedented level of public investment deployed throughout the country, especially on roads, hydroelectric projects and in various areas among which health and education, which was made possible from the significant government revenues derived mainly from high oil prices and a more efficient tax collection3. Also, through the Code of Land Management, Autonomy and Decentralization (COOTAD) in force since 2010, several institutional mechanisms that promote decentralization of governance, and seeks to expand the capacity for autonomy and local development have been implemented. 3 Since the seventies, the oil extraction is the most important activity for Ecuadorian economy. In 1974, oil represented 42.51% of public sector revenues, 62.01% of exports and 13.15% of national value added. By 2014, these proportions were 18.47%, 51.70% and 10.41% respectively (Central Bank of Ecuador, 2015). 3 Figure 1: Provinces of Ecuador ID Province Area (km2) 1 Azuay 8 639 2 Bolívar 3 254 3 Cañar 3 908 4 Carchi 3 699 5 Chimborazo 6 479 6 Cotopaxi 6 569 7 El Oro 5 988 8 Esmeraldas 14 893 9 Galápagos 8 010 10 Guayas 17 139 11 Imbabura 4 599 12 Loja 11 027 13 Los Ríos 6 254 14 Manabí 18 400 15 Morona 25 690 16 Napo 13 271 17 Orellana 20 773 18 Pastaza 29 520 19 Pichincha 9 494 20 Santa Elena 3 763 21 Santo Domingo 4 180 22 Sucumbíos 18 612 23 Tungurahua 3 334 24 Zamora 10 556 Source: authors’ elaboration on the basis of INEC. These actions and strategies begin to show their effects in terms of economic growth Martin (2012) and poverty reduction (Mideros, 2012). World Bank data, on the other hands, highlight that, from 2006 to 2011, the rate of extreme poverty was reduced from 16.9% to 7% and the Gini index decreased from 54% to 48.7%. In this extent, the economic growth can be considered inclusive, consistent with the Boston Consulting Group report according to which, from 2006 to 2012, Ecuador was the oil country that better transformed its oil wealth on well-being (Beal et al., 2012). But were these apparent positive results distributed equally within the country? Is it possible to speak of balanced results? Are these performances accompanied by a process of territorial convergence?. These questions implicitly imply to evaluate how national and local productive matrix has evolved in order to determine if the process of improvement in well-being is sustainable over time. This is shown in table 1 and 2 where we have the average sectoral weight by province in 2007 and 2013, respectively4. In addition, in the last two columns provincial Gross Value Added per capita (GVA/pop) and population per squared kilometer (Density) is reported. The data are provided by the 4 Following the indications of the Central Bank of Ecuador and some other authors, we excluded the gross value added related to oil production because it is does not create wealth in the cantons where it is produced (Mendieta, 2015a; Ramón- Mendieta et al., 2013). Provinces of Santa Elena and Santo Domingo were created after 2007 from the provinces