1. 1 COMPETITIVENESS, SCIENCE, TECHNOLOGY AND INNOVATION: THE EXPERIENCE IN EL SALVADOR Manuel Hinds February 2007

2. 2 Agenda 1.The original conception 1995 a)The objectives b)The economic framework c)The institutional reforms 1.The modernization of the state 2.Private sector competitiveness 2.The implementation 3.The outcomes

3. 3 The original conception 1995

4. 4 To compete… Not based on low wages But on true competitiveness, based on: –Reducing all costs except wages –Modernizing the state –Modernizing the private sector Privatizing it Turning El Salvador into an international services center The knowledge economy Pump priming the process

5. 5 Reducing costs Fiscal prudence: investment grade by 1997 Macroeconomic stabilization: inflation at dollar levels by 1997 Reduction of protection, including tariffs, from average 46% (80+ in the late 1980s) to 6% average Introducing full competition in strategic sectors where the government had monopoly –Telecommunications: from 400,000 phones in 1998 to 4.5 million in 2006 (pop. 6 mill.) –Electricity Privatizing telecom and electricity Reducing interest rates and increasing maturities to dollar levels

6. 6 Modernizing the state Reducing the size of the state, in addition to privatizations –First reduction of staff in the late 1990s, 16% of the staff –Second stage in the early 2000s: Ministry of Public Works from 16,000 to 400 Streamlining of strategic services –Customs –Investment procedures

7. 7 Modernizing the private sector (1) Privatizing the private sector –Fundamental and by far the most difficult Turning El Salvador into an international logistics center –The only way to attain the volumes and quality of services needed to get lower prices in many services Financial Transportation Distribution

8. 8 Modernizing the private sector (2) The Knowledge economy –Connectivity Aimed at improving the productivity of the economy Three components –Creation of a competitive telecom market before privatizing –Telecenters (means) –E-government (initial content) –Technical schools (2004)

9. 9 The implementation

10. 10 Mixed implementation Economic frameworkLargely successful Modernization of the state Streamlining of key institutions Successful, sliding back E-governmentSubstantially planned till 2004, forgotten Modernizing the private sector Privatizing itSubstantially, still 2 kinds of entrepreneurs Logistics centerMixed implementation Knowledge societyConnectivity abandoned, technical centers

11. 11 The outcomes

12. 12 The Index of Economic Freedom Closing gap with Chile, then sliding back But still good at number 2 in Latin America

13. 13 In the Global Competitiveness Index, it was third in 2003, now it is fifth

14. 14 The Salvadoran GCI, by activity

15. 15 Network readiness SOURCE: World Economic Forum

16. 16 The current problems

17. 17 The political problem Who speaks passionately for STI among the political leaders of the developing countries? People talk about this in the leading developing regions –East Asia, South Asia and Eastern Europe In the lagging countries, politics is moving against globalization, liberalization… And toward more state intervention These are the issues in: –Latin America, with the resurgence of the radical left –Middle East –It has been the reality of Sub-Saharan Africa for most of the last forty or fifty years

18. 18 But the politicians… Are not the problem… They are the symptom

19. 19 The shape of society The new world that is emerging from Connectivity and STI is horizontal Developing societies are largely vertical –For long their economies based on vertical structures: protection, cozy arrangements between the state and private persons, enormous powers vested on the bureaucracy

20. 20 A perplex and spoiled private sector Very common complaints in developing countries after liberalization: –The government is not telling us what to do, what to plant, what to produce, at what prices –The government is not giving us the incentives to invest Meaning that it is not offering subsidies and privileges, guaranteeing that they would never lose The skills of the old investors’ class are not adequate for the new world –Their expertise was how to lobby the government to get privileges They are bound to disappear But in the meantime they are still politically powerful

21. 21 The natural allies of the old private investors in the lagging countries The politicians –Who see a crucial source of patronage disappearing with liberalization The bureaucrats –Who see their power diminishing radically as the government renounces to its ability to control the economy The general public –In these countries, they have captured the support of the general public

22. 22 What should be done?

23. 23 First and foremost… This is about convincing people –Keep on doing it –Show the evidence –Remember that the single most important factor determining the success or failure of projects is the country’s ownership of the project Focus on the social side of it, building human capital –Which is an equalizing activity Eventually, going back to the closed, paternalistic economies of the past will prove unsustainable –The ideas to move into the future must be there,waiting

24. 24 Scale down operational objectives, though not long-term ambitions Emphasize the role of knowledge and innovation in creating value added… –Not with rocket science but with simple cases that can be demonstrated in the reality of the country Rather than trying to transplant institutional settings from the developed to the developing countries –Focus on the substance, not the form –A project financing the use of universities to provide innovation to companies will soon fail if the university is incapable of producing any useful innovation –Do not design projects that require a degree of institutional development that you don’t have

25. 25 Operationally, focus on pilot projects To generate an emulation effect Rather than on large projects, which can sink in bureaucratic incompetence

26. 26 El Salvador: data

27. 27 Exports performance: total exports growth SOURCE: World Development Indicators, World Bank

28. 28 Exports performance: Manufactures exports % of merchandise exports SOURCE: World Development Indicators, World Bank

29. 29 Exports performance: manufactured exports growth, 1992-2004 SOURCE: World Development Indicators, World Bank

30. 30 Growth performance: manufacturing value added, 1992-2004 SOURCE: World Development Indicators, World Bank

31. 31 Growth performance: GDP in real terms, 1992 = 1 SOURCE: World Development Indicators, World Bank

32. 32 Growth performance: GDP in current PPP dollars, 1992 = 1 SOURCE: World Development Indicators, World Bank

33. 33 Growth performance: GDP in current dollars, 1992 = 1 SOURCE: World Development Indicators, World Bank

34. 34 The end of the interest rate discrimination El Salvador becomes investment grade Dollarization Source of basic data: International Financial Statistics of the IMF

35. 35 The reduction of the spread between lending and deposit rates Dollarization El Salvador Source of basic data: International Financial Statistics of the IMF