Structural Change and Labor Productivity Growth in
Latin American Manufacturing Industries 1970±96
JORGE KATZ
*Economic Commission for Latin America and the Caribbean, Santiago, Chile
Summary. Ð This paper examines recent changes in the pattern of production specialization attained by Latin American manufacturing industries. Comparing Argentina, Brazil, Colombia, Chile and Mexico to the United States, the paper identi®es ``catching up'' and ``lagging behind'' industries during 1970±96. It considers the evolution of macro and micro forces that aect whether an industry manages to close down the gap with the international technological frontier. Evidence is presented showing that recent structural reforms did not result in a major discontinuity with the past. Rather, ``path dependency'' forces have acted as a major factor explaining dierential
performance among industries after recent changes in the global incentive regime. Ó 2000
Published by Elsevier Science Ltd.
Key words Ðproductivity growth, technological gaps, path dependency, structural reforms, Latin America
1. INTRODUCTION
Recent studies (Katz, Benavente, Crespi & Stumpo, 1997; Katz & Vera, 1997, 1999) examining some of the major changes that have taken place in the Latin American industrial sector during the last two decades have shown a major change in the pattern of production specialization of most economies. There has been a shift in favor of nontradable sectorsÐ those producing telecommunication, energy or ®nancial services, for exampleÐas well as toward natural resource-processing indus-triesÐproducing iron and steel, petrochemi-cals, nonferrous minerals, ®shmeal, vegetable oil, pulp and paper, etc. In addition, electronic and garmentmaquiladoras(assembly plants), as well as automobile producers, have grown quite rapidly throughout this period in response to ad hoc industrial policies applied by local economic authorities.
Large domestically-owned conglomerates, as well as subsidiaries from transnational corpo-rations (TNCs), have set up very modern, highly capital-intensive new production plants in the above mentioned ®elds. Leaving aside the case of nontradable goods and services, we notice that many of these new production facilities have become major exporters of industrial commodities to highly competitive world markets. Latin American ®rms act in
such markets as ``price takers,'' with little bargaining power and attaining low unit pro®t margins. Given the high degree of volatility shown by world prices of industrial commodi-ties, the external sector of most Latin American economies now stands on rather weak foun-dations which need to be taken into consider-ation when we examine the long-term sustainability of the recent restructuring of the regional production fabric.
In contrast to the above, labor-intensive industries producing ®nal consumer goods such as footwear or clothing, and engineering and R&D-intensive sectors producing capital goods, ®ne chemicals,1 or scienti®c instru-ments, have been shrinking and contracting (with the exception of the electronicmaquila). Following trade liberalization and market deregulation eorts the former have had a hard time competing with low-cost producers from,
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*The present paper has been written as part of a larger research program undertaken with ®nancial support from the German Technical Cooperation Agency (GTZ) and the International Cooperation Agency of the Netherlands. To both these agencies, as well as to W. Peres and N. Reinhardt for their useful comments on an earlier version of the paper, the author wishes to express his gratitude. The views hereby advanced are his exclusive responsibility.
say, China or Vietnam, where wage levels are just a fraction of those typically paid in Latin America, while the latter have been unsuccess-ful in keeping up with the pace of technological modernization in areas characterized by large R&D and engineering expenditure, short product life cycles and high rates of techno-logical obsolescence. As these industries have continued to incorporate the use of micropro-cessors, CNC technologies, new biotechnolog-ical know how, etc. at a breath-taking pace, Latin American ®rms have found themselves lagging further and further behind the worldÕs technological frontier. The capability of these ®rms to compete in the international market-place in such ®elds has lagged behind as a result of these trends.
In many countries of the region this process of change in the pattern of production specialization actually began during the late 1970s, i.e. prior to the so-called Debt Crisis, when the pace of domestic market-led growth began to slow-down. In othersÐparticularly ChileÐthe restructuring toward natural resource-processing industries clearly resulted from the major transformation in the global incentive regime which obtained after the mili-tary takeover of 1973. It is important therefore to understand that the change in the pattern of production specialization we are about to examine in this paper did not come about in each country of the region as a result of trade liberalization and market deregulation eorts. In many cases, such change was already in the making well before structural reform eorts actually began. 2
It is true, however, that in both cases a new relative price structure, less supportive of import substitution industrialization activities, has gained ground during the 1990s. Concom-itantly, the ¯ow of direct foreign investment and the process of capital formation have accelerated, under the impact of both a more liberalized and deregulated domestic institu-tional and economic environment and of a buoyant international capital market. Property rights in the area of natural resources have been strengthened and many institutions prototypi-cal of more developed industrial societiesÐ such as patent laws granting wider and stronger intellectual property rightsÐhave been gradu-ally adopted by most Latin American coun-tries.
In short, the regionÕs pattern of production specialization and its linkages with world markets are going through a major, and as yet
un®nished, transformation. Central to this process is a retreat to resource-based processing industries, to nontradable goods and services, to labor-intensive electronic and garment maquiladoras, and to vehicles and transport equipment receiving special ad hoc treatment from various governments in the region, nota-bly Mexico, Brazil, Argentina, Colombia, Venezuela and Chile.
Our purpose here is to examine how the emerging new industrial structure has performed in terms of labor productivity growth vis-a-vis more developed industrial economies. Is the Latin American industrial sector ``catching up'' or ``lagging behind'' relative to the worldÕs technological frontier? For the purpose of answering this question we shall use productivity growth in the US manufacturing sector as our benchmark.
For a study of this sort we should ideally be using estimates of total factor productivity growth. Figures for gross capital formation at the three-digit level of aggregation are unavailable, however, making it impossible to calculate such index. We have therefore decided to perform the comparison on the basis of labor productivity growth. Using for this purpose a data base recently put together at ECLAC we have examined the aggregate performance of the industrial sector of nine Latin American countries vis-a-vis the United
States over 1970±96. We continue with a more detailed comparison examining labor produc-tivity growth in 27 industries at the three-digit level of aggregation of the International Stan-dard Industrial Classi®cation of All Economic Activities (ISIC) for ®ve countriesÐArgentina, Brazil, Chile, Colombia and MexicoÐfor 1970±96. Special attention is given to the 1990s, as this is the period in which structural reform eorts were strengthened.
impact of economic reforms in the region. We believe this to be a major shortcoming. In our view, such linkages are crucial for the under-standing of the impact of structural reforms. A few suggestions for further research are advanced in the ®nal paragraphs of the paper.
2. THE ANALYTICAL FRAMEWORK OF THE PRESENT RESEARCH
Contemporary studies on economic growth show at least two dierent ways of approaching the issues we want to examine here. On the one hand, received literature oers us ``top-down'' explanations of growth of the type Solow developed in the 1950s and 1960s, which have recently reemerged within the framework of modern growth theory in the work of Barro and Sala-i-Martin (1995), Romer (1992), and others. These studies are based on the conven-tional microfoundations of the ``representative ®rm'' and on neoclassical ``growth accounting'' principles that rely on assumptions of perfect information, ``generic'' production functions, ``well-behaved'' ®rms, equilibrium growth paths, perfectly competitive markets, and production factors being paid their marginal productivity.
The explanation of why productivity growth is attained in such a stylized analytical frame-work is extremely simple. Historical and insti-tutional factors virtually play no role at all. It is precisely such degree of simpli®cation of reality and the elimination of market imperfections, uncertainty, etc. that allows us to have aggre-gate production, investment, consumption and saving functions on the basis of which to look at the behavior of the global economy. Contemporary growth theory has in recent years incorporated increasing returns to scale and externalities speci®ed at the industry level, i.e. outside the realm of any one speci®c ®rm. This allows the analyst to maintain the assumption of competitive behavior at the level of the individual production unit, and therefore to save the microfoundations of conventional price theory, even while increasing returns and externalities are being incorporated into our formal thinking about the growth process. But as Nelson has recently pointed out, modern growth theory still faces major diculties bringing on board both the role of institutions and of production organization, as both such topics still appear dicult to tackle through formal mathematical modeling. (Nelson, 1997).
Over the course of the last two decades an increasing number of economists have approached the study of innovation and productivity growth from an ``evolutionary'' perspective (e.g., Nelson & Winter, 1982; Dosi et al., 1988; Freeman, 1994; Metcalfe, 1997). These authors see productivity growth as the outcome of a process of natural selection among ®rms, rather than as the result of conventional maximizing behavior. The success and failure of dierent ®rms, imperfect infor-mation, uncertainty, trial and error are all central features of a screening mechanism which involves both quasi-genetic ``mutations'' (Nelson, 1995) and historical, cultural and institutional forces conditioning the economyÕs growth path over time. Here, growth is not the outcome of equilibrium behavior but is instead a ``cultural construct'' deeply embedded in the technological and institutional foundations of society. The growth story attains a historical and institutional atmosphere that is simply absent from the neoclassical account of the facts. Whereas the latter is based on conven-tional price theory, the ``evolutionary'' story has a large component of ``social anthropol-ogy'' that goes well beyond the scope of the professional economistÕs formal tool box.
units of technological and organizational knowledge and therefore do better through time. Market structure and performance change endogenously re¯ecting dierential processes of knowledge accumulation across ®rms.
Our research draws a great deal on recent ``evolutionary'' thinking. Macro, meso and micro variables, on the one hand, and the co-evolution of economic, institutional, and tech-nological forces, on the other, seem to us to be of crucial importance for the understanding of the impact trade liberalization and market deregulation eorts are having today in Latin America. We need to take into account indus-try-speci®c variables and institutions in order to understand how each particular sector reacts to changes in macroeconomic and regulatory signals. Moreover, we think that a micro-to-macro feedback mechanism (loop) needs to be incorporated in our growth models, re¯ecting the way in which the ``new'' features of the production structure in¯uenceÐthrough exports and investmentÐthe long-term sustain-ability of the new pattern of production specialization attained by the economy after structural reforms. The profession has not so far adequately explored many of these micro-to-macro relations.
3. LABOR PRODUCTIVITY GROWTH IN LATIN AMERICAN MANUFACTURING
INDUSTRY DURING 1970±96
Using a database recently prepared at ECLACÕs division of Production, Productivity
and Management covering 27 industries at the ISIC three-digit level of aggregation, we have estimated labor productivity growth (measured as value-added per capita) for Argentina, Brazil, Colombia, Chile, Costa Rica, Jamaica, Mexico, Peru, Uruguay for 1970±96. Similar data have been put together for the US manu-facturing sector in order to serve as a bench-mark for comparison in order to identify ``catching up'' and ``lagging behind'' countries and industries. While using US data might not always be our best possible point of reference, it nevertheless establishes an interesting and accessible benchmark for comparison.
We begin by looking at the aggregate picture for each one of the above mentioned countries. We then proceed to the three-digit level of aggregation, in order to attain a more detailed picture of the relative performance of dierent branches of manufacturing production in the regionvis-a-vistheir US counterpart.
(a) Labor productivity growth in manufacturing production in Latin America and the US
Our results in Table 1 show that, as far as manufacturing production is concerned, only three Latin American countriesÐArgentina, Colombia and MexicoÐhave managed to attain a rate of growth of labor productivity over the whole 1970±96 period higher than the one attained by the US industrial sector. In other words, only these three countries of the region have managed partially to reduce the relative labor productivity gap with the United States during the nearly three decades covered by our information.
Table 1. Output, employment and labor productivity growth in Latin American and US manufacturing production in 1970±90 and 1990±96a
Manufacturing output Employment Labor productivity
1970±96 1990±96 1970±96 1990±96 1970±96 1990±96
Argentina 1.18 4.87 )2.62 )3.15 3.80 8.02
Brazil 2.81 2.26 0.95 )6.41 1.86 8.67
Chile 2.76 6.40 1.51 3.49 1.25 2.91
Colombia 3.98 3.52 1.24 )0.22 2.74 3.74
Costa Ricab 4.39 n.a. 4.83 n.a.
)0.44 n.a
Jamaicab 0.11 n.a. 1.66 n.a.
)1.55 n.a
Mexico 3.79 2.27 0.91 )0.03 2.88 2.30
Peru 1.17 5.09 2.85 1.97 )1.68 3.12
Uruguay 0.61 )1.46 0.37 )8.58 0.24 7.12
United States
2.39 5.04 0.35 0.30 2.04 4.74
a
Source: Industrial Performance Analysis Program (PADI), ECLAC Division of Production Productivity and Management.
The data also show that the rate of growth of labor productivity in manufacturing produc-tion increased quite signi®cantly during the 1990s in all of the countries under consider-ation. This is particularly the case for Argen-tina, Brazil and Uruguay, where the acceleration of labor productivity growth in manufacturing production during the 1990s was especially strong. We notice, however, that in all three countries the faster rate of labor productivity growth of the 1990s is more the re¯ection of a very high rate of labor displacement from manufacturing industry than of a high rate of expansion of industrial production per se. In fact, manufacturing growth was not particularly strong in most of the countries under examination throughout the 1990s. In other words, the pattern we are trying to describe here does not seem to be one of rapid rates of productivity growth deriving from a major outward expansion of output, but rather of major ``labor saving'' restructuring eorts carried out by an industrial sector that is not growing very rapidly through time. 3
Table 2 presents the ratio of labor produc-tivity in manufacturing production in each of the countries under examination and in the United States, for 1970, 1980, 1990 and 1996. None of the Latin American countries had attained more than about one-third of US labor productivity in 1970. By the end of the period under consideration, only three coun-triesÐArgentina, Colombia and MexicoÐex-hibit signs of having partially reduced the labor productivity gap with the United States. Inter-estingly, much of the (small) improvement attained by Colombia and Mexico came about during the two decades prior to trade
liberal-ization and market deregulation eorts, i.e. in 1970±90. In the case of Argentina, about half of the relative improvement in labor productivity vis-a-vis the United States took place during
1970±90, i.e. prior to structural reforms, while the other half was obtained during the 1990s, i.e. concomitantly with trade liberalization and market deregulation eorts. Our ®gures also indicate that aggregate manufacturing labor productivity increased quite signi®cantly in Argentina during 1990±96 but that this was not the case for Mexico and Colombia. Brazil, on the other hand, does not show signi®cant improvement in labor productivityvis-a-visthe
United States during 1970±90, but achieved a major relative improvement during 1990±96. This improvement appears to be basically the outcome of a strong labor displacement phenomena.
In the cases of Chile (in spite of the fact that labor productivity has increased signi®cantly since the opening up and deregulation of the economy) and Costa Rica, no signs of relative improvement can be detected over time. Finally, the relative positions of Peru, Uruguay and Jamaica have clearly deteriorated.
(b) Labor productivity growth in Latin American and US industries during 1970±96
For a more detailed level of analysis, we have estimated labor productivity growth for 27 dierent branches of manufacturing production for Argentina, Brazil, Chile, Colombia and Mexico for 1970±96. We have then estimated through a simple logarithmic regression the long-term trend of each series. Dividing the coecient thus obtained by a similarly calcu-lated coecient for US industries covering the same period of time gives us an index of relative labor productivity. The results are presented in Table 3.
Table 3 clearly shows Latin American industries ``catching up'' or ``falling behind'' the US labor productivity standard. An index larger than one indicates that the industry of reference has managed to grow faster in terms of labor productivity than its US counterpart throughout the period, whereas an index smaller than one depicts the opposite situation. Given the fact that labor productivity in most of these industries was not more than 30% or 40% of US labor productivity in our base year (1970), a large indexÐsay, around twoÐ indicates that the gap was signi®cantly reduced, even though, in absolute terms, labor
Table 2. Relative labor productivity in Latin American manufacturing production vis-a-vis the United Statesa
Country 1970 1980 1990 1996
Argentina 0.42 0.41 0.55 0.67
Brazil 0.28 0.26 0.29 0.37
Chileb 0.25 0.24 0.23 0.20
Colombia 0.29 0.25 0.37 0.34
Costa Rica ) ) 0.15 0.14
Jamaicac 0.26 0.16 0.16 0.13
Mexicod 0.32 0.30 0.44 0.38
Peru 0.33 0.25 0.16 0.15
Uruguaya 0.35 0.22 0.20 0.22
aSource: PADI, ECLAC. b
Data until 1995.
c
Data until 1992.
productivity could continue to be below the US level in 1996. These industries are considered to be ``catching up'' to the US standard. On the other hand, a number, say, equal to or smaller than 0.80 suggests that the relative gap between the two has expanded signi®cantly through time, and the industry is ``falling behind.''
Six dierent branches of industryÐmarked with ``f'' in the table for identi®cationÐappear in Argentina as ``catching up'' with the US standard during 1970±96. Five industries attained a similarly ``successful'' performance in Colombia, four in Mexico, three in Brazil and two in Chile. On the other hand, four sectorsÐmarked ``e'' in Table 3Ðshow clear signs of ``falling behind'' the US standard: in Argentina and Brazil, ®ve in Colombia, six in Mexico and 11 in Chile. Argentine industries have done the best and Chilean ones the worst
in ``catching up'' with the US standard. Brazil, Colombia and Mexico fall somewhere in between these two extremes.
What explains the dierences in the produc-tivity performance of individual industries within each country? One hypothesis is that the fastest-growing industries were the ones that did better in terms of reducing the original labor productivity gap with their US counter-part, while the ``lagging behind'' industries tended to be those that attained a worse than average growth performance. In order to test this hypothesis, we estimated in a cross-section regression the ordinary least squares (OLS) relationship between the coecients reported in Table 3 and the observed rate of growth of each industry in each country throughout the period under consideration. The results, shown in Table 4, tend to con®rm our a priori
expecta-Table 3. Relative labor productivity in Latin American manufacturing production vis-a-vis the United States, 1970±96, 27 branches of industrya
ISIC Category Argentina Brazilb Chilec Colombia Mexicod
311 Food manufacturing 1.10 1.14 0.67e 0.93 1.21
313 Beverage industries 1.04 0.72e 0.91 0.79e 0.83
314 Tobacco manuf. 0.74e 0.21e 0.76e 0.28e 0.38e
321 Textiles 1.67 1.43 0.77e 1.23 0.75e
322 Wearing and apparel 1.17 1.20 0.75e 1.30 1.85
323 Leather products 1.38 0.93 0.45e 0.58e 0.97
324 Footwear 0.78e 1.13 0.65e 1.03 0.72e
331 Wood products 0.55e 0.87 0.97 0.94 0.94
332 Furniture 2.69f 1.40 1.13 0.85 0.96
341 Pulp and paper 0.99 1.26 1.10 1.12 1.03
342 Printing/publishing 1.21 0.86 1.43 0.89 1.03
351 Chemicals 1.92 1.18 1.79 1.09 0.88
352 Chemical products 1.98 0.60e 0.97 0.86 0.58e
353 Petroleum re®neries 1.22 1.57 3.35f 0.28e 0.30e
354 Petroleum and coal 1.85 2.07f 2.14f 2.10f 1.55
355 Rubber products 1.55 2.55f 0.41e 1.36 1.24
356 Plastics 0.81 1.25 0.51e 1.50 1.25
361 Pottery and china 1.33 1.20 0.45e 2.24f 2.47f
362 Glass products 1.91 1.92 1.67 1.57 1.60
369 Non-metallic minerals 2.35f 1.28 1.68 1.36 1.39
371 Iron and steel 2.54f 1.97 1.33 2.82f 1.54
372 Nonferrous metals 1.28 2.50f 0.43e 1.92 2.39f
381 Metal products 2.07f 1.78 1.22 1.79 1.39
382 Non-electrical mach 1.91 1.12 1.31 0.75e 0.72e
383 Electrical machinery 2.68f 1.97 0.94 0.99 1.76
384 Transport equipment 2.00f 1.33 0.76e 2.07f 1.81
385 Scienti®c instruments 1.29 1.48 1.22 3.27f 3.81f
390 Other industries 0.52e 0.76e 0.92 1.26 2.19f
aSource: PADI, ECLAC. b
1996/1970.
c1995/1970. d1994/1970. e
60:80 ``falling behind'' industries.
f
tion that the interindustry variance in the rate of growth constitutes an important part of the explanation of why some sectors ``catch up'' with labor productivity levels in the United States, while other sectors ``lag behind'' in relative terms.
An adequate explanation of interindustry dierences in the degree of productivity convergence must therefore include an expla-nation of why some sectors grow faster than others through time. This could be the conse-quence of both macro and sector-speci®c forces. On the one hand, we could a priori expect macro forces to play a signi®cant role inducing some sectors in the economy to grow faster than others. Indeed, the NEM is predi-cated on an expectation that trade liberaliza-tion will induce a shift in resource allocaliberaliza-tion along comparative advantage lines, i.e. toward labor intensive and/or natural resource-inten-sive industries. On the other hand, sector speci®c forcesÐthe ``localized'' institutional and regulatory environment in which each particular industry operates, the ad hoc treat-ment each sector manages to get from local economic authorities, etc.Ðcould also be expected to in¯uence interindustry dierences in growth performance. Thus, both macro and sector-speci®c variables may in¯uence why some sectors ``catch up'' and others ``fall behind'' in the process of economic growth.
We have previously noted that the aggregate productivity performance of dierent countries in the region vis-a-vis the United States does
not appear to be exclusively determined by recent trade liberalization and market deregu-lation eorts. The data previously presented show that part of the ``catching up'' attained by the industrial sector of Argentina, Colombia and Mexico during the period under consider-ation was already ``in the making'' during 1970±90 and that it would be somewhat misleading to assign it exclusively to recent market-oriented reforms. Do the three-digit data con®rm such a picture? In order to throw
light upon this question, we have calculated the same index of relative industry productivity performance for 1970±90. Our results are presented in Table 5.
By comparing Tables 3 and 5 we con®rm our previous ®nding, i.e. that in many cases the ``catching up'' or the ``falling behind'' of certain industries was already ``in the cards'' before trade liberalization and market deregulation measures were actually introduced by the various governments in the region. ``Path dependency'' appears to be a strong structural feature of production systems, which induces us a priorito expect that industries that did well in terms of ``catching up'' with international labor productivity standards after trade liberalization and market deregulation eorts would tend to be those that were already doing wellÐrelative to US labor productivity growthÐbefore structural reforms. We would also expect that industries that ``lagged behind'' prior to chan-ges in the global incentive regime would tend to be the same as those that ``lagged behind'' US labor productivity growth rates after structural reforms. Consider the case for Argentina. From the six industries that appear as ``catching up'' sectorsÐISIC 332, 369, 371, 381, 383, and 384 in Table 3Ðfour of them were already doing quite well in ``catching up'' with the US productivity standard before trade liberaliza-tion and market deregulaliberaliza-tion eorts. On the other hand, all four of the ``lagging behind'' industries of 1970±90 continued to be ``failure stories'' after trade liberalization and market deregulation eortsÐISIC 314, 324, 331, and 390.
In order to test in a simple way the idea that industries that did better than average in the pastÐin terms of closing the relative labor productivity gap with their US counterpartÐ tend to be the same as those that did better than average under the NEM, we have estimated the simple product moment correlation coecient between the two columns for each country in Tables 3 and 5. The resultsÐr0.80 for Table 4. Crossindustry regressions between relative productivity growth and the rate of growth of output, 1970±96
Regression coecient S.E. R2 F-test Degrees of freedom
Argentina 0.77 0.13 0.59 33.56 23
Brazil 1.13 0.06 0.95 419.05 22
Chile 0.68 0.14 0.55 22.39 20
Colombia 0.89 0.25 0.33 12.59 25
Argentina, 0.70 for Brazil, 0.83 for Chile, 0.86 for Colombia and 0.94 for MexicoÐcon®rm the fact that the ``path dependency'' hypothesis has strong explanatory power in all ®ve of the countries. In other words, even if it is indis-putable that the market-oriented structural reforms of the 1990s introduced stronger competitive discipline into local markets for manufacturing products, it is somewhat misleading to argue that said reforms intro-duced a major discontinuity with respect to the past when we look at which industries tended to ``catch up'' and which ones tended to ``fall behind'' during the ISI period and under the NEM. On average, they tend to be the same, regardless of the change in the global incentive regimen.
We leave here our examination of the ``rela-tive convergence'' question and whether or not recent market-oriented structural reforms constitute the explanation of why some coun-tries and induscoun-tries did better than others
throughout the 1990s. Having presented statistical evidence in support of the ``path dependency'' view of the growth process we now turn to the exploration of other meso and micro features of the process of structural change we are hereby trying to describe. The ``entry'' and ``exit'' of ®rms to and from the market and changes in the pattern of produc-tion specializaproduc-tion appear as two dimensions demanding further exploration if we are to account correctly for interindustry and inter-country dierences in labor productivity growth in recent years.
(c) Inter and intraindustry changes in Latin American manufacturing production during
1970±96
The way in which the structure of industry responds to changes in the incentive regimeÐ both to macroeconomic signals as well as to sector-speci®c institutional and regulatory
Table 5. Relative labor productivity of Latin American industries vis-a-vis the United States, 1970±90, 27 branches of industrya
ISIC Argentina Brazil Chile Colombia Mexico
311 Food manufacturing 0.96 0.91 0.72b 1.19 1.34
313 Beverage industries 0.87 0.78b 0.89 0.94 1.14
314 Tobacco manuf. 0.72b 0.36b 1.41 1.11 0.69b
321 Textile manufactures 1.40 1.48 0.85 1.48 1.01
322 Wearing and apparel 0.80b 1.06 0.80 1.01 2.44c
323 Leather products 0.78b 1.17 1.12 1.06 2.20b
324 Footwear 0.62b 1.0 0.65b 1.63 .93
331 Wood 0.57b 0.65b 1.45 1.39 1.29
332 Furniture 1.88 1.0 1.00. 0.89 1.12
341 Pulp and paper 0.85 1.20 1.61 1.50 1.40
342 Printing/publishing 1.09 0.74b 1.27 1.08 1.35
351 Chemicals 1.78 1.12 3.10b 1.42 1.16
352 Chemical products 1.80 0.70b 1.15 1.01 0.79b
353 Petroleum re®neries 0.60b 1.44 3.56b 0.36b 0.41b
354 Petroleum and coal 1.29 1.80 1.47 2.84b 2.00b
355 Rubber products 1.00 0.95 0.66b 1.39 1.21
356 Plastics 0.60b 0.86 0.73b 1.40 1.45
361 Pottery and china 0.65b 0.80 0.25b 1.96 2.45b
362 Glass products 1.52 1.37 2.10b 1.69 1.68
369 Non-metallic minerals 1.19 0.85 1.50 1.69 1.69
371 Iron and steel 1.70 1.42 1.30 3.34b 2.17b
372 Nonferrous metals 1.15 1.53 0.68b 2.10b 2.37b
381 Metal products 1.75 1.08 1.14 1.28 1.40
382 Non-electrical machinery 1.47 1.03 1.00 0.79b 0.74b
383 Electrical machinery 1.79 1.14 1.00 1.20 1.82
384 Transport equipment 1.01 0.83 1.00 1.44 1.81
385 Scienti®c instruments 1.78 1.46 0.81 2.76b 4.35b
390 Other industries 0.76b 0.86 0.66b 1.47 2.39b
aSource: PADI, ECLAC. b
P2:0 ``Catching up'' industries.
forcesÐinvolves at least two dierent adjust-ment mechanisms that need to be dierentiated from each other and examined separately. On the one hand, each individual industry must be seen as going through a complex process of change in structure and performance as a result of the ``entry'' and ``exit'' of ®rms. On the other hand, the relative weight of dierent industries has to be imagined as changing through time as a result of changes in the global incentive regime.
Most attention has so far focused on the interindustry restructuring process anticipated in response to the NEM. The devaluation of the exchange rate, a higher interest rate, lower taris, etc which belong in the structural adjustment policy package were clearly expec-ted to aect industries dierently depending on their market orientation, resource inten-sity, and import content. In the 1980s, Latin American import-substituting industries producing for local markets simultaneously had to face the contraction of domestic demand due to macroeconomic stabilization policies, and the massive arrival of cheaper (and often better) foreign substitutes. On the other hand, natural resource-processing industries, catering for exports, bene®ted from a highly elastic external demand as well as from the devalua-tion of the local currency. Under such circum-stances we could expecta priorithat the former group of industries would be the one that suered the most as a result of trade liberal-ization and market deregulation eorts, while resource-processing industries and foodstus producers would bene®t the most from such measures. Looking at the ®ve countries under examination we notice that three of themÐ Argentina, Colombia and ChileЮt very well with the abovea prioriexpectation. The eect is somewhat less clear in the case of Mexico, due to the major expansion of the auto industry and by the electronicmaquiladorasafter 1986.
Table 6 illustrates the extent to whichÐwith the already mentioned exception of MexicoÐ the production of foodstus and of natural resource-based industrial commodities has become central to the pattern of Latin Ameri-can production specialization. It also shows, however, that much of the change in that direction took place before the 1990s, con®rming the fact that much of what we presently observe in the region was not exclu-sively the outcome of recent market-oriented structural reforms. Longstanding historical trends seem to underlie the currently observed
pattern of production specialization. The aggregate weight of raw material-processing industries and of the foodstu sector increased signi®cantly over time in all of these countries except Mexico. On the other hand, the data also show that the relative weight of the auto industry has increased in Argentina, Colombia and Mexico, and maintained its relative share in Brazil. Together with a clear retrenchment to natural comparative advantages, the current pattern of production specialization also seems to be the result ofad hocindustrial policies (as in the case of the automobile industry) that have strongly in¯uenced the pattern of indus-trial restructuring of Latin America over the last two decades.
In parallel to the above we have to consider the issue of intraindustry ``®rm demography,'' which has to do with dierences in ®rmsÕ adaptive capabilities and strategies within each industry. Some ®rms are clearly more ``out-ward-going'' and ``proactive'' in their ``read-ing'' of the signals emerging from the global and sector-speci®c environment in which they operate, while others are more conservative, ``passive'' and ``defensive'' in their reaction. Moreover, given that we are dealing with situ-ations in which signi®cant market failures prevail, hindering access to capital and tech-nologyÐparticularly among small and medium enterprisesÐwe have to accept that some actors could have had easier access to the resources they needed for restructuring, while others probably had greater diculties getting ®nance and know-how for their technological upgrad-ing. It should not, therefore, come as a surprise that some ®rms did well and gained ground within their sector of activity while others ``lagged behind,'' or even disappeared alto-gether from the marketplace.
Large inter®rm dierences in production eciency can be observed when we examine any particular ®eld of manufacturing produc-tion. Capital goods and organizational tech-nologies dier a great deal from one ®rm to the next, and the intraindustry degree of heteroge-neity might well be much higher than the one we would a priori expect on the basis of conventional price theory, which predicates similar patterns of reaction from similarly endowed ®rms. Using British data, for exam-ple, Salter cited inter®rm dierences in unit production costs on the order of 7:1 (Salter, 1960).
Table 6. Structure of industrial value-added in selected Latin American countries, 1970, 1990, 1996a;b
Argentina Brazil Chile Colombia Mexico
1970 1990 1996 1970 1990 1986 1970 1990 1996 1970 1990 1996 1970 1990 1996
I 15.6 14.3 13.1 18.8 22.9 22.8 14.9 10.1 10.2 10.7 9.6 10.5 13.3 12.3 13.9
II 9.9 8.5 12.1 9.9 7.0 8.7 7.7 2.3 2.0 2.9 4.3 6.5 5.5 9.5 10.8
III+IV 36.2 46.7 45.7 35.8 39.6 42.4 43.2 55.5 56.2 45.7 51.1 51.2 46.8 46.8 46.5
V 38.2 30.5 29.0 35.5 30.5 26.1 34.2 32.0 31.6 40.7 34.9 31.8 34.4 31.4 28.8
a
Source: PADI, ECLAC.
bThe groups used here are as follows (with reference numbers added): I. metalworking and engineering intensive industries, except motor vehicles (ISIC 381, 382, 383,
385); II. motor vehicles (ISIC 384); III. food, beverages and tobacco (ISIC 311, 313, 314); IV. natural resource-processing industries (ISIC 341, 351, 354, 355, 356, 371, 372); V. labor-intensive industries (ISIC 321, 322, 323, 324, 331, 332, 342, 352, 361, 362, 369, 39).
WORLD
DEVELO
describing the ``evolutionary'' dynamics of any given sector of production. New ®rms entering the market bring with them more ecient production technologies which allow them to reduce production costs and market prices. As a result, their entry triggers changes in market structure and performance which eventually force the less ecient ®rms in the sector to leave the market when they can no longer cover their variable costs of production out of the market price.
Although SalterÕs model provides a useful ®rst approximation of an ``evolutionary'' story of the sort we want here to develop, it is much too simple for our purposes. The model assumes that an equilibrium situation prevails only to be disrupted by the arrival of a superior new technology that puts in motion a ``steady state'' demographic transition. Imagine now a much more turbulent situation in whichÐas a result of trade liberalization and market dere-gulationÐchanges take place not just in the technology of the sector but in many other variables such as the price of imported substi-tutes, the rate of interest, the cost of the capital goods, etc. Each and every one of the above changes aects the expected rate of return on investment, altering both risks and opportuni-ties as seen by the individual entrepreneur.
It is to be expected that the response of dierent ®rms will vary a great deal depending on how each one perceives ongoing events and also as a result of their dierent access to capital and technology markets. Some entre-preneurs will adopt a ``defensive'' attitude and refrain from taking risks, while others will respond proactively and seek to expand their share in the industryÕs output, turning the new circumstances into their bene®t. Many ®rms will simply die and exit the market. A small number might be expected to react ``defensibly'' introducing ``minor'' organizational changes in their daily routines, trying to cope with stron-ger competitive threads but without commit-ting themselves to major new investments. Finally, only a very small minority could be expected to react ``proactively'' introducing major changes in their daily routines, or investing in new production facilities. The industryÕs overall labor productivity would improve both as a result of new and more modern plants entering the market, but also as a result of ``defensive'' and ``minor'' adapta-tions on the part of preexisting ®rms, and of the death of many others that simply could not cope with the new rules of the game.
Does the empirical evidence support this kind of a priori thinking? We believe it does. We cannot, within the scope of the present paper, discuss at any length dierent industry studies available to us at ECLAC that clearly support our ``appreciative story.'' We will, therefore, limit ourselves to discuss one partic-ular example: the recent evolution of the Argentine Iron and Steel industry. We have previously seen that labor productivity in this sector has improved dramatically in the last three decades. The Iron and Steel sector is one of the six industrial sectors in which Argentina has managed to close down signi®cantly the relative productivity gap with the United States during the course of the period hereby under consideration.4Similar cases could be found in relation to the Chilean pulp and paper sector, to the Brazilian or Argentine vegetable oil industry, etc. (Katz, 1999).
Concomitantly with the drop in aggregate manufacturing investment as a percentage of GDP, investment in the Iron and Steel industry increased signi®cantly in Argentina during the 1980s, con®rming the fact that sector-speci®c forces played an important role in explaining company behavior in this sector throughout that decade. Two large ``state of the art'' integrated steel mills came on stream by the end of the decade. The entry to the market of these two plants signi®cantly altered the structure and performance of the sector, forc-ing a large number of small and medium-size mills to close down. Most of these ®rms were actually taken over by the two large domestic conglomerates that now control the industry. Furthermore, the privatization of a large state-owned steel millÐSomisaÐalso occurred during those years as part of the overall industry restructuring process. One of the above mentioned domestic conglomerates took over Somisa, scrapped a large part of its outmoded equipment, and absorbed the valu-able parts of its inventories into its own oper-ation. Table 7 presents the relevant information on this case.
others ``lag behind'' in the process of economic growth. It is only at the meso and micro level that the dynamics of growth can be under-stood, as it involves the co-evolution of macro and sector-speci®c economic, institutional and technological forces interacting in complex manners that cannot be easily perceived if we proceed exclusively from a macro perspective.
We can now combine the two parts of our argument in order to advance an ``apprecia-tive'' account of the recent process of industrial restructuring Latin American countries have been going through. Both macroeconomic and sector-speci®c variables have simultaneously been at work inducing changes in the pattern of production specialization attained by each one of the economies in the region as well as the intraindustry pattern of ®rm survival and production organization. Some sectors and ®rms have been able to adapt themselves better than others to changes in the global incentive regime and in the sector-speci®c institutional and regulatory environment. The evidence presented in this paper leads us to believe that those that did so tend to be industries that were already doing well, i.e. where accumulated technological capabilities have been the larger. In addition, those related to the processing of natural resources, i.e. closer to natural comparative advantages, and/or those that bene®ted the most from ad hoc preferential treatment on the part of economic authorities, such as the auto industry. In addition, the ``entry'' and ``exit'' of ®rms to and from the market has been instrumental in signi®cantly changing the structure and performance of each industry as well as the observed degree of business concentration.
A micro-to-macro approach to these issues provides considerable insights for the under-standing of the highly heterogeneous pattern of industrial restructuring Latin American coun-tries have been going through over the course of the last two decades as well as of the dierent patterns of success and failure that countries and industries have been experiencing through time.
4. CONCLUSIONS AND SUGGESTIONS FOR FUTURE RESEARCH
We have argued throughout this paper that the growth path of any given economy appears to be determined by the co-evolution of macro, meso and microeconomic forces emerging from the economic, institutional and technological spheres of human interaction. The way in which recent changes in the global incentive regime and institutional environment have aected dierent sectors in the econ-omy and, vice versa, the mechanism by which sector-speci®c changes are currently in¯uenc-ing the long-term sustainability of recent structural reforms, is still largely uncharted territory within the realm of economic analysis.
The empirical evidence presented in previous sections of this paper suggests that, throughout the process of adjustment to the NEM, dierent sets of forces have been simultaneously at work. On the one hand, the historically-accu-mulated production capabilities and degree of maturity that dierent countries and industries have managed to attain prior to recent market-oriented structural reforms have undoubtedly in¯uenced the success or failure of dierent countries and industries. On the other hand, an intraindustry ``selection'' process that has winnowed ®rms has also been at work. Many ®rms have been forced to leave the market, which now features a much higher rate of participation of large domestically-owned conglomerates and of local subsidiaries of transnational corporations. Numerous SMEs have been forced to close down, in many cases not as a result of their long-term ineciency, but as a consequence of imperfect factor markets which precluded their access to long-term ®nance and engineering and managerial know-how. New ®rms entering the market have brought with them ``world class'' equipment and product designs, having therefore signi®-cantly closed the gap with the worldÕs techno-logical frontier.
Table 7. Number of plants in ArgentinaÕs iron and steel industry, 1975±92a
1975 1980 1985 1990 1992
Integrated 2 4 4 4 4
Semi-integrated 10 5 2 2 1
Rollings mills 47 38 36 33 21
Industry-wide total 59 47 42 39 26
Finally, the pattern of production special-ization has gradually shifted in the direction of natural comparative advantagesÐraw material processing industries and labor-intensive maquiladorasÐas well as in favor of specially protected sectors such as in the case of the auto industry.
Many new problems of structure and behavior have emerged during the course of the above mentioned industrial restructuring process. Among them, the following seem to be worth mentioning as requiring further research: (a) new forms of structural unemployment which result from the rapid transition toward CNC technologies featuring a strong labor-saving bias; (b) chronic long-term imbalances in the external sector of the economy related both to a rapidly expanding demand for imported capital goods and to a pattern of production specialization which strongly emphasizes highly volatile markets for
indus-trial commodities; (c) a growing degree of business concentration deriving from the fact that many small and middle-size enterprises have been forced to leave the market, which now remains in the hands of large domestic conglomerates and/or local subsidiaries of transnational corporations.
The macro lens with which economists have so far discussed the impact of structural reforms strongly preclude identifying many of the new eciency and equity problems deriving from recent structural changes. Fail-ure to recognize them and to introduce early policy actions to reduce their impact will strongly aect the long-term sustainability of recent actions in favor of trade liberaliza-tion and market deregulaliberaliza-tions. Further, micro and meso research into these questions is urgently needed if we are to identify correctly the main elements of a policy agenda for the future.
NOTES
1. Not pharmaceutical products, which is an altogether dierent industry as far as production organization is concerned.
2. The distinction is important for yet another reason. In ChileÐi.e. the case in which structural reforms have been more clearly instrumental in bringing about the observed changes in the pattern of production special-ization in favor of natural resource-processing indus-triesÐthe process has been found to be related to the development of a new entrepreneurial class. This groupÐyounger, technically skilled and outward-go-ingÐerected in the late 1980s a large number of new production facilities catering to world demand in some of the above mentioned areas. Contrary to such expe-rience, in the case of Argentina or Brazil the expansion of exports of resource-based industrial commodities came about from manufacturing plants built up by already-existing large domestic conglomerates which invested with the purpose of supplying the local market
and did so under the inducement of conventional import substitution incentives. It was the major contraction of aggregate demand in the early 1980s that forced many of these conglomerates to move into exports.
3. It is important to notice that the interindustry
correlation coecient between productivity growth and employment comes up as negative in each and every country under examination. Moreover, in some casesÐ notably Argentina, Brazil or ColombiaÐthe rate of unemployment has reached historical peaks in recent years, in the range of 15±18% of the total labor force.
4. The US failure in upgrading its steel industry
throughout the 1980s obviously plays an important role here, further illustrating the fact that it is the complex interplay between domestic and external forces that we need to understand if we are successfully to explain the results we have previously reported.
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