## Monday, June 24, 2013

### Comentarios al Artículo de Bill Black: How Ecuador Won by Defying Neoliberal "Washington Consensus" Playbook

El artículo de Bill Black, profesor de economía y leyes en la Universidad de Missouri - Kansas City, analiza el desempeño económico del Ecuador y cómo éste, al ser destacable, no es consistente con el pobre índice de libertad económica de la fundación Heritage que ubica a Ecuador en el puesto 159/177.

Este post reproduce mi respuesta a los indicadores económicos y sociales presentados por el autor (@WilliamKBlack) en el artículo mencionado. El texto de mis comentarios a continuación:

Disclaimer: All the numbers presented in this analysis are my own and are based on official data from the Central Bank of Ecuador, the national institute of statistics, and the World Economic Outlook Database of the IMF. If you are interested in the source files, please email me to economiaenjeep at yahoo.com. I also cite my own work that has been posted to this blog. I have sent Bill Black an email with the link to this post.

The GDP rate of growth for 2011 was 7.4%, not 7.8% as shown in the article, and has declined to 5.0% in 2012. In fact, the median annual growth rate for the period 2007-2012 (President Correa’s mandate) is 4.2%, compared to 4.6% in the period 2001-2006. Even more, the volatility of GDP growth rates increased from 2.2% in 2001-2006 to 2.9% in 2007-2012. Hence, the economy is not only growing at lower rates under President Correa, but is also experiencing a less stable period.

Unemployment rates have been declining from 9.1% in March 2010 (after the world financial crisis hit Ecuador) to 4.61% in March 2013. The methodology for measuring unemployment changed in 2007, so the further back that we can go is to June 2007 when the unemployment rate was 7.49%. Despite the unemployment rate falling, and formal employment rising, there is still an important percentage of economically active population whose status is characterized by the government as underemployed (people employed in the informal sector or who work on an occasional basis). That percentage is 44.78% in March 2013. Hence, comparing the unemployment rate of Ecuador with those of other countries is not feasible, since the methodology for measuring unemployment is not uniform, and the underemployment segment in Ecuador helps camouflage the real situation of employment/unemployment.

But what is interesting about the evolution of the labor market in Ecuador, as presented by the National Institute of Statistics and Censuses (INEC in Spanish), is that the economically active population (PEA in Spanish) -that is divided into employed, unemployed and underemployed- has not changed (statistically) in five years. The confidence intervals for that measure are [6162071, 6509988] in December 2007 and [6418599, 6983926] in December 2012. Since they overlap, there is no evidence to conclude that the PEA has changed. Hence, I would use caution when referring to the labor market statistics computed by the governmental INEC.

As economists, we should not think about how much has been spent, but about the effectiveness of that spending. Economics is about the allocation of scarce resources. We need to have an indicator of the return of the public investment that the Ecuadorian government has implemented. What I can tell you about the public services in my country is that I would not take my children to a public school nor would I take them to a public hospital. I don’t want my children to be under qualified for this competitive world nor do I want them to die because of the unsanitary conditions of public hospitals and the inhuman treatment that is provided there. And the same is true for the children of most public officials: they are taken to private schools and hospitals. Only people who don’t have an alternative go to these places to experience the not-as-bad-as-before public education and health. But they are still terribly mistreated, and the massive public investment in these areas has not reflected a comparable improvement in the quality of services.
Moreover, from a macroeconomic perspective, the effect of public investment on the productivity of private investment has been detrimental [see a complete analysis here]. First of all, the contribution of total investment to GDP growth has remained constant at an average 1.7% in both 2001-2006 and 2007-2012 despite the massive increase in government spending that raised the government investment-GDP ratio from an average 5% in 2001-2006 to 11% in 2007-2012. Second, out of 1.7% of investment contribution to GDP growth, private investment contributed 1.4% of GDP growth on average in 2001-2006, while in 2007-2012 it represents an average -0.1%. This development goes against the theory that states that public investment increases the productivity of the private sector. That is a sign of how (in)effective public spending has been during these years. Additionally, before President Correa’s mandate, private investment represented an average share of 76% out of total investment, and now it represents only 55%. This could be interpreted as a crowding out effect.
An important characteristic of the Correa’s economic model is its dependency on oil prices. If you compute the correlation between the NON-oil GDP sector growth and oil prices in 2001-2006, you will find an insignificant correlation. If you compute the same correlation for 2007-2012, you will find a correlation above 0.8 [see a complete analysis here]. There you have a possibility to explain the higher volatility in GDP growth rates during President Correa’s mandate. I don’t believe that an economist would support a development model that depends on a commodity price. Chile and Norway have shown the world how to deal with the curse of the natural resources. That is a way to go, I think.
Finally, with respect to poverty and inequality, both indicators declined at faster paces during 2000-2006 than during 2007-2012 [see here]. Also, to compare with Peru (and Colombia), the per-capita GDP in current international dollars (PPP) in 2001-2006 grew 36% for Colombia, 40% for Peru, and 40% for Ecuador, while in the period 2007-2012 it grew 35% for Colombia, 51% for Peru, and 31% for Ecuador. Hence, Ecuador has been lagging behind Colombia and Peru, countries that already signed an FTA with the U.S.

I will not argue about freedoms. It’s a matter of perception and everything is relative. Perhaps, for most people it is not important that the government controls the media, as a new law on the matter was passed this week, and that has been the subject of international preoccupation. Perhaps, having to pay obnoxious import taxes on consumption goods is only a matter of avoiding the off-equilibrium government spending to go away via imports, at the cost of having to pay almost double for goods that you can find very accessible in the U.S., including diapers, powdered formula for babies, dog food, shoes, clothes, cars, TVs, computers, cellular phones, etc. Perhaps, the poor don’t have to have these luxurious goods.
I don’t have anything to say about the Heritage’s “freedom” index. I certainly think that the freedoms in my country have been seriously affected under President Correa’s administration, but, again, that might be my perception only. What I do suggest and encourage you is to gain further insight about the economic data of Ecuador. Perhaps, after gaining more insight about the data, your economic analysis becomes more consistent.

1. Two comments have been made by @trivcap on Twitter with respect to the post. I reproduce them here:

1. a reduction in private investment is not negative; it depends on where the public and private investment is going and just because public investment increased doesn't mean it's the cause of reduction in private returns

2. and u compare growth post 2006 to prior; slight note: if growth dropped only 0.4% during the GFC that's outstanding; ur also picking your dates to benefit your conclusion: post 2000 growth would be fast b/c of a sharp prior drop 1999

I will answer them in order.

First:

The most significant declines of private investment in the US occurred during every single recession (http://research.stlouisfed.org/fred2/series/GPDI?cid=112). Saying that a decline in private investment is not a source of concern goes against the theory of business cycles. The economic theory has provided several arguments to show how investment is the first aggregate to react to recessions due to the expectations channel inherent in investment decisions. In the case of Ecuador, private investment experienced a level shift down starting in 2007 and has not recovered from that.

The main role of government investment is to increase the productivity of the private sector (see Glom and Ravikumar, 1997). Another role is to serve as a stabilizer during recessions. For example, in the case of the US, the ratio of government-private investment increases during recessions and declines in recoveries, as the theory predicts. But, the main role of public investment is to increase the productivity of private investment, as mentioned before. That means that government investment is not desirable per se, but as long as it helps the private sector to produce more.

In the case of Ecuador, the contribution of private investment to economic growth has suffered a substantial decline in the period 2007-2012 compared to the period 2001-2006. This has happened despite the increase of government investment in 6 percentage points of GDP. The economic theory would have predicted an increase in the productivity of the private sector, but that is not the case for private investment. The reasons for this development could be many: uncertainty as a byproduct of: ten changes in the tax code, the possibility of confiscation, an exit from dollarization, among others.

Second:

The reasons to compare the performance of the economy between the periods 2001-2006 and 2007-2012 are:

• The central bank has comparable quarterly data only from 2000
• The government compares (in the media) its investment indicators with those of the administrations immediately before.

Now, is it invalid to compare 2001-2006 with 2007-2012? Not quite. Here are the reasons:

• After the 1999 recession, the highest rates of growth happened until the first quarter of 2001, not beyond.
• In terms of investment, it is the marginal contribution to growth what matters, not the average.
• If I incorporate rates of growth from 1990, although not directly comparable, the median annual growth rate until 2006 is 3.6%, compared to 4.2% from 2007. A hypothesis test for equality of means between 1990-2006 and 2007-2012 does not reject the null hypothesis (p-value 0.12).
• The price of oil in 1990-2006 averaged $21.7 ($16.7 in 1990 dollars), compared to $74.5 in 2007-2012 ($44.7 in 1990 dollars). There is a substantial difference in the price of oil -that sustains public investment under Correa, but a negligible difference in the GDP growth rates.

2. First, before to write about employment rates read about definitions, you are not honest with the definition of underemployment. An important proportion of underemployment belongs to quintile 4 and 5, hence mid and high level of income. Second, informality is not underemployment. Again, read definitions. Third, you talk about the reduction of economic active population and reduction of unemployment but you don't realize that that is a classic phenomenon even in US household survey. Read the reports of US, let's see if you also conclude that you should use with "caution" official data. Another clue: don't you think that PEA should change for other reasons? Have you check the level of studies @ people under 18 years old?

As a economist you should also talk about many other indexes as a result of the macroeconomic behavior, but I won't criticize that since you seem a classic macroeconomist.

@byronvillacis

1. Thanks for your comment, Byron.

First of all, the point of discussing employment/unemployment rates in this post was to comment on Bill's assertion that "unemployment is now down to 4.1%, the best in Latin America." The point that I make is that the unemployment rate of Ecuador is not directly comparable with the unemployment rates of the rest of Latin America. I will answer to your observations below.

The official definition of underemployment, according to INEC, (in Spanish) is:

"Personas que trabajaron o tuvieron un empleo durante el período de referencia considerado, pero estaban dispuestas y disponibles para modificar situación laboral a fin de aumentar la duración o la productividad de su trabajo, cumpliendo las siguientes condiciones:
• Haber trabajado menos de 40 horas.
• Desean trabajar más horas, es decir, tener otro empleo además de su empleo(s) actual(es).
• Estar disponibles para trabajar más horas. Incluyen adicionalmente otras formas de subempleo."

You may understand that reproducing this long definition in a post of this sort may complicate getting to the point (that the unemployment rate of Ecuador is not directly comparable with those of other countries).

However, is this definition really different from "people employed in the informal sector or who work on an occasional basis"? If you don't think so, please help me get the (long) official definition in a single (or couple) of lines, and I would be happy to replace it in the text. In any case, I don't think that the main point of the post with respect to the unemployment rate not being comparable is invalid.

I haven't said that the PEA has decreased. I have said that the confidence intervals don't allow to conclude that it has changed.

Now, you say that the reduction in the PEA is a "classic phenomenon even in US household survey.". Here is the graph of the civilian labor force in the U.S. for the most recent 10 years: (http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=CLF16OV&s[1][range]=10yrs) As you can see, the labor force stagnated after the great recession in 2009 (most likely because people drop the labor market after not finding employment for several months), and started to grow in late 2011. So, are you telling me that Ecuador is going through the same situation? Is this a "classic" phenomenon? Please, elaborate.

I do use the U.S. data with confidence. What I have suggested with respect to the employment data of Ecuador is to use caution. One of the reasons is that the confidence intervals are continually widening, making the statistics more uncertain as time goes by.

I have only referred to the indexes that Bill Black mentioned in his article, but I would be happy to talk about other indexes if you so desire. Could you tell me which ones?

Byron, are you implying that since I am a "classic" macroeconomist my analysis is not valid? By the way, what do you mean by a "classic" macroeconomist? Is that the opposite of a "Keynesian" macroeconomist? If that is the case, let me tell you that nowadays any empirical macroeconomist is neoKeynesian, except those who have abandoned economics at all.