1. ACCOUNTING FOR COINCIDENT GROWTH COLLAPSES: BRAZIL AND MEXICO SINCE THE EARLY 1980s Edmar Bacha and Regis Bonelli Conference in Honor of Albert Fishlow Casa das Garças, Rio de Janeiro 07/03/2014

2. SUMMARY Growth collapses: a periodization Capital accumulation and the growth collapses Decomposing labor productivity growth Brazil’s TFP’ and the terms of trade Productivity growth and structural heterogeneity (by region, tradability, firm size, and formality)

3. GDP per capita relative to the US: Convergence to 1980-81, divergence afterward (2014 US$, PPPs)

4. Mexico and Brazil — 10-year moving averages of GDP growth rates, 1950-2014 (% a.a.)

5. Growth periodization, 1950-2014 (% a.a.) Periods BrazilMexico Brazil's average GDP growth Mexico's average GDP growth Post WW-II Golden Age 1950-19801950-19817.4%6.8% Post-1980 Near Stagnation 1981-20141982-20142.6%2.2% Lost Decade 1981-19921982-19931.4%1.6% Reforms with Subpar Growth 1993-20031994-20012.8%3.0% China Syndrome 2004-20102002-20104.5%1.9% Day after the Great Recession 2011-2014 2.1%2.9%

6. Brazil — Capital stock and GDP growth rates, 1950-2014 (%)

7. Mexico — Capital stock and GDP growth rates, 1950-2014 (%)

8. Decomposition of the capital stock growth rate Start from: P i I = S, Where: P i is the implicit price deflator of gross capital formation, I is gross real investment, and S is total savings (domestic+foreign) in current prices. Inventory changes are assumed equal to zero. Divide both sides by P i K (where K is the capital stock): I/K = S/PiK Divide and multiply the right-hand side by P y Y (where P y is the implicit price deflator of GDP and Y is real GDP): I/K = (S/PyY)(Py/Pi)(Y/K) Subtract the capital stock depreciation rate (δ) from both sides, and rearrange to obtain: K' = s(1/p)v – δ Where: K’ = I/K – δ, s = S/PyY, and p = P i /P y

9. Brazil: Decomposition of K’, 1950-2014 BRAZIL YearsK'svpδ* Post WW-II Golden Age 1950-19808.8%19.4%0.5060.7843.6% Lost Decade 1981-19923.3%20.9%0.3571.0094.1% Reforms with Subpar Growth 1993-20032.1%18.3%0.3521.0134.2% China Syndrome 2004-20102.8%18.5%0.3821.0244.1% Day after the Great Recession 2011-20144.0%20.3%0.3830.9734.0% Post-1980 Near Stagnation 1981-20142.9%19.5%0.3641.0094.1%

10. Mexico: Decomposition of K’, 1950-2014 MEXICO Years K'svp* δ ** Post WW-II Golden Age 1950-1981 8.0%16.4%0.6560.7955.6% Lost Decade 1982-1993 3.3%17.3%0.4700.9155.6% Reforms with Subpar Growth 1994-2001 3.7%17.5%0.4430.8425.5% China Syndrome 2002-2010 3.5%22.2%0.4100.9676.0% Day after the Great Recession 2011-2014 2.8%21.5%0.3910.9196.3% Post-1980 Near Stagnation 1982-2014 3.4%18.5%0.4380.8875.8%

11. Brazil: Decomposition of output growth per worker y' = αk' + TFP’ Decomposition Brazily'L'alfa*k'TFP' 1951-804.2%3.1%2.5%1.7% 1981-92-0.8%2.2%0.7%-1.4% 1993-030.3%2.5%-0.2%0.4% 2004-102.2%0.5%0.2%2.0% 2011-141.1%1.0%1.3%-0.2% 1981-140.4%2.2%0.4%0.0%

12. Mexico: Decomposition of output growth per worker y' = αk' + TFP’ Decomposition Mexico y'L'alfa*k'TFP' 1951-1981 3.4%3.2%2.1%1.3% 1982-1993 -1.7%3.4%0.1%-1.8% 1994-2001 0.7%2.3%0.6%0.1% 2002-2010 0.3%1.6%0.9%-0.5% 2011-2014 1.0%1.9%0.4%0.6% 1982-2014 -0.2%2.5%0.5%-0.7%

13. Brazil — TFP’ and terms of trade (ToT) rate of change, 1981-2014

14. Brazil’s TFP’, terms of trade, and business cycles [IV* regression, 1981-2014] Dep. variable: TFP'34 obs. (1981-2014)Adjusted R-squared = 0.426 CoefficientsSt. ErrorStat tP-value Intercept2.850.923.100.004 Relative change ToT0.180.072.810.008 Capacity use gap (%)*-0.420.15-2.720.011

15. Regional dispersion of per capita incomes, Brazil and Mexico, 1989(90)-2011(13) (sigma=s.d. States’ per capita incomes/unweighted mean income)

16. Labor productivity ratios: Traded/non-traded relationship

17. Productivity growth by firm size (manufacturing, commerce and services) - Mexico, 1998-2008 Firm size Mexico: Productivity growth 1998-2008 (% a.a.) 0 - 10-6.5% 11 -30-2.2% 30 - 1000.2% 101 - 2502.9% 251 - 5002.4% 501 +5.9% Total2.0%

18. Productivity growth by firm size (manufacturing) - Brazil, 1996-2007 [incomplete] Firm size Productivity 2007 Productivity 1996 Productivty1996 (2007 prices) Brazil: Productivity growth 1996-2007 0 - 10 3.153 1182.629670.6% 10 - 29 168 33.9856.4% 30 - 99 92 36.5920.0% 100 - 249 156 55.61391.0% 250 - 499 219 67.61702.3% 500 + 325 100.42522.3% Total 242 76.61922.1%

19. Informality rates per State. Mexico, 2012

20. Informality rates per State. Brazil, 2012

21. Regression for States’ informality rates, Brazil and Mexico (2012) Dep. Var.: Informality Rate (%) R-square adjusted0.730 Standard error6.208 Observations59 27 BRA, 32 MEX CoefficientsStandard ErrorStat tP-value Intercept266.817.815.00.00% log (GDP pc PPP)-22.81.9-12.00.00% Dummy MEX10.51.76.30.00% Dummy Campeche50.07.46.70.00%

22. Labor informality rates, Brazil and Mexico, Selected years (%)

23. Summary (macro) Close association between GDP and K-growth collapses since the 1980s K-growth collapses not due to savings: culprits were lower output-capital ratios and higher relative prices of investment Near-secular stagnation of labor productivity is explained more or less equally by less capital deepening and TFP Terms of trade and business cycle são important determinants of Brazil’s measured TFP

24. Summary (meso) Significant “mesoeconomic” diferences: States’ per capita incomes dispersion increased in Mexico but decreased in Brazil Traded sector productivity is higher and increases much faster than non-traded sector productivity in Mexico. In Brazil traded sector productivity is lower but catchs up with non-traded sector productivity Large firms’ productivity increases much faster than small and medium sized firms in Mexico. In Brazil, large firms’ productivity increases at the average rate for all firms Informality is higher in Mexico than in Brazil, despite a higher per capita income. Informality remained constant in Mexico while in Brazil it declined substantially

25. Summary (overall) Mexico opened up its economy to trade and succeeded in developing a first- class industrial sector in the country’s richer Northern region. A similar domestic economic integration didn’t occur. The dynamism of the large exporting firms in the North did not feed back to the non-traded, informal, small and medium-sized firms in the country’s poorer Southern regions. The consequence was a very low labor productivity growth rate Brazil succeeded in reducing economic polarization in several dimensions. The problem was that in contrast to Mexico’s her high-productivity large- manufacturing firms did not integrate into the world economy and thus saw their productivity growth slow down. This provided a weak lever to move the rest of the economy up, and the country lingered on in a low overall productivity path, except when the commodity lottery dictated otherwise. Bottom line: integrate it both ways, domestically and internationally!