Perspiration and Inspiration: Two Centuries of Chilean Growth in Perspective
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Version: 8 August 2014 For EHA 74th Meeting DRAFT. DO NOT QUOTE Perspiration and Inspiration: Two Centuries of Chilean Growth in Perspective José Díaz1 Gert Wagner Department of Economics and Eh Clio Lab, Pontificia Universidad Católica de Chile ABSTRACT This paper presents yearly growth accounting estimates for Chile extending over the 19th and 20th centuries with input availability and overall efficiency as direct determinants of output. Results are compared with a benchmark based on growth accounting estimates obtained from the literature, the selection criteria including three aspects: year-to-year estimates, equivalent factor definitions, and a time span of at least 150 years. Due to these restrictions the benchmark turns out to be mainly a sample of today's developed countries. The main findings obtained with respect to the benchmark are: (1) In the long run, Chilean TFP contribution to GDP growth is significantly lower; (2) long period averages hide huge and variable differences when various time subdivisions are explored; (3) Chilean economy is highly volatile; and (4) in 68% of the years when Chilean growth of GDP and TFP were positives the benchmark show a similar performance, a coincidence that fall substantially when Chilean growth of GDP and TFP were negatives. The paper also provides TFP estimates incorporating human capital and a quality index of physical capital revealing a lower TFP growth respect to the version with non adjusted productive factors. JEL codes: N16, O47, O54 Keywords: Chile, sources of growth, productivity We are grateful for comments from Rodrigo Cerda, Francisco Gallego, Felipe González, Rolf Lüders, Rodrigo Fuentes, Aristides Torche, Klaus Schmidt-Hebbel and Luis Felipe Lagos. Matías Tapia, Rodrigo Wagner and two anonymous referees read and commented on a previous version. Drafts were presented at the XVth World Economic History Congress (Utrecht 2009); CLADHE II preparation meeting at ECLAC (Santiago 2009); CLADHE II (México 2010); and the Meeting of the Society of Chilean Economists (Talca 2010). Financial support from CONICYT/Programa de Investigación Asociativa (Project SOC 1102) and Millenium Science Initiative, Chilean Ministry of Planning (Project P07S-016 F) is acknowledged. The authors bear sole responsibility for the contents of this paper. 1 [email protected] Version: 8 August 2014 For EHA 74th Meeting DRAFT. DO NOT QUOTE 1 Introduction In 1810, when Chile’s political independence process began, per capita income amounted to 40% of the corresponding U.S. level. The following two decades were characterized by wars and power struggles, but at the same time the basic ingredients allowing the establishment of a working government emerged. Based on the previously existing property rights system and favorable world demand conditions (Bulmer-Thomas 1994), a healthy investment climate was observed by 1830, as illustrated by the rapid development of the port of Valparaíso (Véliz 1961), and in 1833 the country's per capita product recovered its 1810 level.1 Over the next 180 years or so, the economy expanded at an average annual rate equal to 1.59% in per capita terms, somewhat below the corresponding 1.74% experienced by the U.S. for the same period.2 Currently, Chile's per capita income amounts to 30% of the U.S. benchmark, a consequence of two aspects: the initial difference in 1810 and the diverging growth process over the following centuries.3 The case is consistent with two notions: first, changes in world income distribution are a rather recent phenomenon in 1 In 1833, the fundamental pillars of a centralized state system had been established. A republican system for selecting and replacing political authorities, stable government control over the armed forces and a solid public revenue structure based mainly on foreign trade taxes were capable of sustaining a growing fiscal budget. 2 Over the two last centuries, average per capita income in Chile increased about 20 times, from 108 in 1833 (100 in 1810) to 2,332 in 2010. However, when measuring Chilean per capita income in relation to the U.S., there was a decline during the same time period. There was some convergence between the two countries in the 19th century. Starting around World War I, the relative position of Chile worsened substantially and it has only been in the last 25 or so years the country's average per capital income has once again begun to converge toward the levels of wealthy countries (see Díaz, Lüders and Wagner 2007) 3 Relative income levels from the EH Clio Lab (Díaz, Lüders and Wagner 2010) differ from Maddison’s estimates, since they refer to different base years for PPP income calculations. Furthermore, Maddison’s data for U.S. growth are somewhat lower, in particular, we believe, due to wartime rates during the 1939-45 period. With the Maddison data and for 1820, Chile’s per capita income was 55% of the U.S. level, while according to Díaz, Lüders and Wagner (2010), it was significantly lower at 34% (lower than in 1810 due to the war of independence). 1 Version: 8 August 2014 For EHA 74th Meeting DRAFT. DO NOT QUOTE which 20th century developments played a significant role (Acemoglu 2009), and second, it fits into an older perspective where already in the early 19th century significant differences existed (see, for example, Bértola and Ocampo 2010). Growth over these two centuries has not been stable in Chile. By Latin American standards the country's performance in the early 19th was exceptional meanwhile in the 20th century it was strongly affected by the de-globalization process that took place from 1913 to 1952. The country also experimented with a package of heterodox economic policies including import substitution and price controls, policies lasting far beyond the retreat in globalization. It was only in the latter decades of the 20th century that relative growth was recovered. In relative terms , therefore, the country has not experienced development: even so Chile’s income has increased substantially other countries income also experienced expansions over these two centuries. The obvious question to ask is for reasons behind such a development. Answering it is in our opinion an ambitious adventure, a project whose expected results are possibly nil. But it seems possible to make improvements in the description of the growth process that eventually may bring a better understanding of the underlying situation. This, therefore is the general objective of the present paper and for doing this we plan to concentrate on productivity, after all a measure where differences between developed and developing countries seem to be quite significant. In what follows the paper concentrates on Chilean growth in a long period perspective stretching over nearly 180 years , doing this with the help of traditional growth accounting framework. Total product growth rates can be decomposed into a factor accumulation element and an overall productivity measure, that is, total-factor productivity (TFP), where these 2 Version: 8 August 2014 For EHA 74th Meeting DRAFT. DO NOT QUOTE estimates represent the above mentioned underlying elements. Results so obtained are endogenous indicators that should be distinguished from the exogenous causes of underlying growth trends, where for example, institutions, geography (including underlying natural resource endowments), and technological and cultural development receive a great deal of attention. Growth accounting amplifies the informative content provided by income growth series by identifying the underlying elements that sustain income growth expansions. Both resource availability and overall productivity are the foundations of a broader description of the growth process, although TFP seems to be receiving more attention. This is somewhat surprising, as its residual character and the notion that there may be thousands of circumstances behind the evolution of this indicator confer on it a certain degree of indeterminacy (Harberger 1998). It is the association with technical change, innovation, reallocation of resource employment and other cost-reducing and/or value-increasing devices, we believe, that explains why it has been given greater emphasis. One additional aspect behind its popularity might be empirical. In comparing the growth trends of rich and poor countries, many studies have found that the share accounted by TFP expansions turns out being significantly higher among the former group. In a developed country sample stretching over almost 120 years, Cette et al. (2009) find that TFP’s contribution to total growth ranges from 44% to 81%. Spain, a relative latecomer, also registers a contribution above 50% (Prados and Rosés, 2009). Lower- income countries generally do not fit into this pattern and when they do, it is only for short periods. According to Hofman (1998) and for a sample of six Latin American countries 3 Version: 8 August 2014 For EHA 74th Meeting DRAFT. DO NOT QUOTE from 1950 to 1973, the contribution of the growth accounting residuals is only 20%.4 Easterly and Levine (2001), for a broad Latin American sample over a somewhat more extensive period (1940-1980), find a contribution of TFP to growth equal to 27%. These figures are merely examples, but nevertheless they confirm the general impression: the presence of a significant gap associated with income levels. But TFP’s contribution along the development path of a particular country, rich or poor, is also far from homogeneous. For example, the contribution of TFP to growth for France, Japan, the United Kingdom and the United States is 50% from 1890 to 1913 (simple average), then rising to 87% in the 1913-1950 period and declining from 1950 to 1980. Argentina and Brazil, after showing almost identical TFP contributions from 1950 to 1973, diverge radically in the second half of the 1980s and the early 1990s. China is another case that illustrates this sort of instability: its TFP contribution to growth fell from 72% in the 1952-57 period to -42% in the following eight years (Perkins and Rawski, 2008).