Professor Alejandro Diaz-Bautista Economic Policy Convergence Mexico

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Convergence and Economic Growth considering Human Capital and R&D Spillovers in Mexico.
Alejandro Díaz-Bautista, Ph.D.
Professor of Economics and Researcher at COLEF.
Visiting Research Fellow and Guest Scholar, Center for U.S.-Mexican Studies, University of California San Diego (UCSD).
Graduate School of International Relations & Pacific Studies IR/PS, University of California, San Diego.

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Professor Alejandro Diaz-Bautista Economic Policy Convergence Mexico

  1. 1. Economic Policy in Latin America Convergence and Economic Growth considering Human Capital and R&D Spillovers in Mexico Alejandro Díaz-Bautista, Ph.D. Professor of Economics and Researcher at COLEF Visiting Research Fellow and Guest Scholar, Center for U.S.-Mexican Studies, University of California San Diego (UCSD). Graduate School of International Relations & Pacific Studies IR/PS University of California, San Diego
  2. 2. <ul><li>In the recent growth literature, the accumulation of human capital and R&D have gained a central role. This study tries to narrow the bridge between the fields of regional convergence theory, economic growth and human capital. Unlike traditional economic growth theories, which tend to focus on exogenous comparative advantage or technological differences among regions as causes for growth, regional economic growth emphasizes the roles of increasing returns to scale in production, human capital and R&D in determining the growth of economic activities. </li></ul>Introduction
  3. 3. Introduction <ul><li>The study considers the interaction of regional human capital and R&D economics following the recent work in economic growth and convergence. Using the recent developments in economic growth, the study centers on the regional convergence pattern in Mexico emphasizing the effects of human capital, R&D and interregional spillovers on growth. </li></ul><ul><li>The findings suggest the existence of some human capital and bounded knowledge spillovers across regional states in Mexico. </li></ul>
  4. 4. Solow <ul><li>Robert &quot;Bob&quot; Solow is an American economist particularly known for his work on the theory of economic growth. He was awarded the John Bates Clark Medal (in 1961) and the 1987 Nobel Prize in Economics. </li></ul><ul><li>Solow is Professor of Economics at MIT. </li></ul><ul><li>Robert Solow won the Nobel Prize for his analysis of economic growth. </li></ul>
  5. 5. Solow’s Economic Growth Model <ul><li>Solow extended the Harrod-Domar Growth model by: </li></ul><ul><li>Adding labor as a factor of production. </li></ul><ul><li>Requiring diminishing returns to labor and capital separately, and constant returns to scale for both factors combined. </li></ul><ul><li>Introducing a time-varying technology variable distinct from capital and labor. </li></ul><ul><li>The capital-output and capital-labor ratios are not fixed as they are in the Harrod-Domar model. These refinements allow increasing capital intensity to be distinguished from technological progress. </li></ul>
  6. 6. Solow’s Economic Growth Model <ul><li>The basic Solow (1956) model explains economic growth as a function of labor augmenting technological progress, population growth and the saving rate. </li></ul><ul><li>It shows that the capital stock per effective unit of labor, k, converges towards a steady state k* at which actual investment is equal to break-even investment. </li></ul><ul><li>The neoclassical Solow model implies that the steady state income per capita, (Y/L), depends positively on the saving rate and negatively on the population growth and depreciation rate. </li></ul>
  7. 9. Marshall <ul><li>Although classical and neoclassical economists treated knowledge as a disturbance category in their model specifications, Marshall (1965) was among the first neoclassical economists to state explicitly the importance of knowledge in economic affairs. Marshall (1965) states that capital consists in a great part of knowledge and organization, as knowledge is our most powerful engine of production. </li></ul>
  8. 10. New Endogenous Growth Models <ul><li>In the eighties, the new endogenous growth theories were developed on the assumptions of imperfect competition between firms, the role of history, ideas and accidents, and the appearance of multiple equilibria in the markets. The existence of increasing returns for explaining sustained growth is supported and influenced by the research progress made in trade theory and industrial organization. </li></ul>
  9. 11. New Endogenous Growth Models <ul><li>Paul Romer (1986) defends the endogenous economic growth and increasing returns to scale view from location and knowledge accumulation perspectives. Some theoretical models of economic growth, such as Lucas (1988), Becker, Murphy and Tamura (1990), Rebelo (1991) , Barro and Lee (1993) and Mulligan and Sala-i-Martin (1992), emphasize the role of human capital in the form of educational attainment. </li></ul>
  10. 12. New Endogenous Growth Models <ul><li>In economics, endogenous growth theory or new growth theory was developed in the 1980s as a response to criticism of the neo-classical growth model. In neoclassical growth models, the long-run rate of economic growth is exogenously determined by either assuming a savings rate (the Solow model) or a rate of technical progress. </li></ul><ul><li>Endogenous growth theory tries to overcome this shortcoming by building macro models out of microeconomic foundations. Households are assumed to maximize utility subject to budget constraints while firms maximize profits. Crucial importance is usually given to the production of new technologies, R&D and human capital. </li></ul>
  11. 13. New Endogenous Growth Models <ul><li>During the last decade, several models of economic growth tend to emphasize the importance of investment in intangible assets as a major source of economic growth. Investment in research and development (R&D) and human capital has been ascribed to yield high social returns for the economy. </li></ul>
  12. 14. New Endogenous Growth Models <ul><li>Economies of scale exist in relation to capital, more specific in the production of human capital or knowledge and technology as in Romer (1986) and Krugman (1991). The marginal product of capital grows as the stock of capital expands. Put simply, the more we invest in knowledge the more the economy grows. </li></ul>
  13. 15. Economic Growth in Mexico <ul><li>Consequently, an important topic for Mexican economists who study the interaction of convergence and economic growth, is the interaction of R&D and human capital in regional growth. </li></ul>
  14. 16. Economic Convergence <ul><li>The catch-up effect, also called the theory of economic convergence, mentions that poorer economies tend to grow at faster rates than richer economies. </li></ul><ul><li>The theory states that all economies should in the long run converge in terms of per capita income and productivity. </li></ul>
  15. 22. Regional Convergence in the U.S. <ul><li>Recent research in the economic growth literature, such as Barro and Sala-i-Martin (1991) focused on the convergence of regional income in developed economies. They address the question of whether poor regions tend to converge toward rich ones. For the U.S. states, they estimate the rate of convergence of per capita personal income from 1880 to 1988 to be around 2 percent per year by looking within or across four geographical regions. </li></ul>
  16. 23. Regional Convergence in Europe <ul><li>Barro and Sala-i-Martin also find a rate of economic convergence of about 2 percent per year for per capita GDP across 73 regions of seven European countries from 1950 to 1985. </li></ul>
  17. 24. <ul><li>Professor’s Barro 1984 Macroeconomics textbook remains a standard for explaining the subject, and his 1995 book, with Columbia University economist Xavier Sala-i-Martin, on Economic Growth is a widely cited and read graduate-level textbook on the theory and evidence concerning long-run economic growth. </li></ul><ul><li>Barro's research in the 1990s was mainly focused on the theoretical and empirical determinants of economic growth: he gave fundamental contributions to the theory of endogenous growth, and was a pioneer in the econometric analysis of the main factors associated with growth in the modern era. </li></ul>
  18. 25. Economic Convergence and Divergence in Mexico <ul><li>Mallick and Carayannis (1994), Juan Ramón and Rivera Bátiz (1996), Esquivel (1999), Messmacher (2000), Garcıá Verdú (2002) and Rodrıg and Sánchez-Reaza (2002) studied absolute convergence across Mexican states. They all tend to conclude that convergence was a feature across Mexican states up to the mid-eighties, but that this pattern broke down afterwards. Most of these studies, however, used samples including regional growth rates at most up to 1996, so that the post-NAFTA growth experience is not fully taken into account nor analyzed explicitly. Moreover, a conditional convergence analysis is not conducted in any of these studies, even when this would be the natural step to follow given the findings concerning an apparent breakdown of absolute convergence. </li></ul>
  19. 26. Díaz-Bautista (2003) Regional Growth Process in Mexico <ul><li>What is the role of human capital and R&D in the regional growth process of Mexico? Does human capital support the transmission of knowledge and therefore promote future growth? The empirical work attempts to provide new insights on the regional pattern of the interaction of the Mexican states over the 1970-2000 period. </li></ul>
  20. 27. <ul><li>For Mexico, there have been some advances in terms of education and R&D. Between 1970 and 1995; the illiterate population below 15 years of age diminished from 26 to 11 percent in Mexico. However, the human capital indicators for Mexico show a low level of matriculation in the elementary and high school age groups compared to other countries, as well as a low number of researchers per million inhabitants, which are shown in the next table. </li></ul>
  21. 29. Endogenous Growth Productive Capacity in Mexico
  22. 30. Economy based on knowledge <ul><li>Żółkiewski (1999), has mentioned that the XXI Century will be the century of economy based on knowledge, where expenditures for future development of scientists and researchers which includes expenditure on R&D and expenditure on education will drive economic growth. </li></ul><ul><li>When making international comparisons of R&D activities, Mexico ranks among the lowest in OECD countries. </li></ul>
  23. 32. <ul><li>In terms of gross domestic expenditures on R&D, Mexico ranks as one of the last countries within OECD in terms of the ratio of domestic expenditures on R&D activity to GDP and in terms of expenditures per capita. </li></ul>
  24. 38. The Empirical Analysis <ul><li>In this study, the analysis is focused on the regional interaction and convergence of human capital and R&D. The identification of the regional interaction structure is based on a generalized growth regression analysis that focuses on the relationship between regional income per capita growth and the human capital and R&D activity. The dependent variable is the average annual income per capita growth rate between 1970 and 2000 obtained from INEGI. </li></ul>
  25. 39. 20 21 22 24 25 26 27 28 29 30 31 32 23 Sector 2: Dynamic States With low per capita income Sector 1: Dynamic States With high income per capita Sector 3: Static States with Low per capita income Sector 4: Static States with high per capita income Regional per Capita Rate of Growth in México (1994-2000) , and per capita Income -2,5 -2,0 -1,5 -1,0 -0,5 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 5.000 10.000 15.000 20.000 25.000 30.000 35.000 P er cápita Income Rate of Growth (%) 1. A guasc alientes 2. B. California 3. B. Calif. Sur 4. Campeche 5. Coahuila de Z. 6. Colima 7. Chiapas 8. Chihuahua 9. D. F. 10. Durango 11. Guanajuato 12. Guerrero 13. Hidalgo 14. Jalisco 15. México 16. Michoacán de O. 17. Morelos 18. Nayarit 19. Nvo. León 20. Oaxaca 21. Puebla 22. Querétaro de A. 23. Quintana Roo 24. San Luis Potosí 25. Sinaloa 2 6. Sonora 27. Tabasco 28. Tamulipas 29. Tlaxcala 30. Veracruz 31. Yucatán 32. Zacatecas País 1 6 3 4 5 2 7 8 9 10 11 12 13 14 15 16 17 18 19
  26. 42. Regional Disparities in Development Fuente: Informe sobre Desarrollo Humano México 2002
  27. 43. México’s Regional HDI: Contrasts between the North and South Fuente: Informe sobre Desarrollo Humano México 2002
  28. 45. <ul><li>The data on education used in the present study comes from the Secretaría de Educación Pública (2000), INEGI and the Ministry of Education website. The educational variables used to condition the data are the following: </li></ul><ul><li>Illiterate, refers to the percentage of people that know how to read and write. </li></ul><ul><li>Elementary is a variable that show the percentage of people with elementary studies completed. </li></ul><ul><li>Some junior high is a variable that refers to the percentage of people that have more that elementary studies, but haven’t finished junior high. </li></ul><ul><li>Finished Junior High refers to the percentage of people that completed a level of education in the National Educational System. </li></ul><ul><li>High School refers to the percentage of people that completed a level of education in the National Educational System. </li></ul><ul><li>College refers to the percentage of people that are in college or completed a level of education in University studies. </li></ul><ul><li>R&D activity is measured by the number of Researchers per state at the SNI (Sistema Nacional de Investigadores) in the year 2000 provided by CONACYT. </li></ul>
  29. 47. Empirical Results <ul><li>The results are based on generalized least squared regressions with and without R&D activity and by level of human capital. For the period 1970 to 1993, the conditional convergence parameter is the 1.4% positive and significant, while for the period 1970 to 2000 the parameter is close to 3.2% without considering the R&D activity. The results indicate that the states of Mexico can reach a level of long run income. For the period 1985-1993, the convergence parameter is negative 1.4%, but not significant indicating that states of Mexico were diverging in this short period from the long run level in income per capita. </li></ul>
  30. 48. Empirical Results <ul><li>The analysis made suggests that the convergent behavior across Mexican states’ per-capita output that was observed before 1985 broke down afterwards. As a consequence, a process of increasing economic differentiation across regions seems to have characterized the country from 1985 to 2000. </li></ul>
  31. 49. Contribution to National GDP in Mexico 1993 and 2002 (%)
  32. 50. Per Capita Income Divergence between Border States and rest of Mexico (% relation to Mexico City)
  33. 51. Empirical Results <ul><li>Only for the regression with the R&D, no regional significance of human capital can be detected. The result seems to be generated by the concentration of R&D in the Mexico City area, where more than 50% of all R&D activity is concentrated. </li></ul><ul><li>For the period 1970-1993 the half-life was 50.4 years. This is the number of years to cover half the distance of the logarithms of income per capita. However, the regressions yields non-significant coefficient for all explanatory variables, except for the convergence coefficient. The convergence coefficient confirms the findings of previous studies on conditional ß-convergence done in Mexico, which include Esquivel (1999), Díaz-Bautista (2000) and Messmacher (2000). </li></ul>
  34. 52. Empirical Results <ul><li>The empirical analysis provides empirical evidence for the hypothesis that R&D spillovers are regionally bounded and do not constitute a significant source of regional economic growth. The huge agglomeration in Mexico City can be assessed as the main origin of the non-existent R&D spillovers at a regional scale in Mexico. As for human capital, elementary education is starting to be an important factor that explains regional economic convergence in Mexico due to the similar coverage at the state level. </li></ul>
  35. 53. Maquiladoras and the Export Oriented Northern Border Regions <ul><li>A Maquiladora is an export oriented assembly plant in Mexico, especially one along the border between the United States and Mexico, to which foreign materials and parts are shipped and from which the finished product is returned to the original market. </li></ul><ul><li>A maquiladora or maquila is a factory that imports materials and equipment on a duty-free and tariff-free basis for assembly or manufacturing and then re-exports the assembled product, usually back to the originating country. </li></ul>
  36. 54. % of employment in export oriented industry by state Number of employees in export oriented industry by states (thousands) B.C. 38% (216) N.L. 18% (166) Tamps 30% (142) Coah. 26% (125) Son . 23% (75) Chih. 40% (251) Tlax. 25% (19) Q.R. 3% (4) Ags. 19% (30) Gto. 19% (63) Edo. Mex. 19% (188) Mor. 14% (18) D.F. 13% (282) Oax. 8% (8) Ver. 10% (37) Pue. 21% (82) Qro. 20% (86) Zac. 11% (10) Nay. 5% (3) Mich. 9% (19) Dgo. 12% (20) Sin. 9% (24) Jal. 11% (94) B.C.S. 12% (9) Yuc. 18% (35) S.L.P. 20% (37) Tab. 7% (6) Camp. 8% (7) Gro. 7% (8) Chis. 5% (5) Col. 4% (3) Hgo. 9% (13) THE IMPORTANCE OF THE EXPORT ORIENTED INDUSTRY BY STATES IN MEXICO National Average 15% (2,045) SOURCES: SE e INEGI (2003) Border Average 29.1% (975)
  37. 55. Conclusions <ul><li>The results confirm the empirical evidence on bounded non-existent knowledge spillovers, shown by the increased concentration of R&D activities in Mexico City. In other words, the findings suggest that regional growth is not determined by regional R&D activity, due to the lack of expenditures on R&D at the national and regional level, and to the increase concentration of R&D in the Mexico City Metropolitan Area. </li></ul><ul><li>The study confirms the qualitative hypothesis that R&D knowledge and human capital may spill over, but the regional extent of such knowledge spillovers may be bounded in Mexico. </li></ul>
  38. 56. Conclusions <ul><li>The concept of economic convergence is the tendency for income differences to narrow over time. </li></ul><ul><li>It can inform policy makers of the need for development policies to promote equity and economic growth. </li></ul><ul><li>It also mentions that economic disparities between regions may diminish naturally in the long run. </li></ul>
  39. 57. Conclusions <ul><li>For the last 50 years, the neoclassical growth model remained the most important model of regional economic growth. Solow (1956) shows how growth in the capital stock, labor force and exogenous advances in technology interact and how they affect the growth of output. The Solow growth model shows that in the long run, an economy’s rate of saving determines the size of its capital stock and thus its level of production. </li></ul><ul><li>Starting in the 1980’s, more sophisticated growth models have been developed. Unlike the neoclassical model, technological change is not assumed to be exogenous. </li></ul>
  40. 58. Conclusions <ul><li>The new endogenous growth models explain the sources of technologically driven productivity growth. In particular, the accumulation of knowledge plays a key role in driving productivity growth in these models. </li></ul><ul><li>One important implication of the new studies is that the location of research and development (R&D) activity may matter. If there are significant agglomeration effects associated with R&D activity, then the benefits of R&D are largely captured by the region in which R&D activity takes place. </li></ul><ul><li>Economic Policymakers need to have a greater appreciation for the role of ideas in a region’s or nation’s economic development. </li></ul>
  41. 59. References <ul><li>Barro R., Sala-i-Martin X (1991) Convergence across states and regions. Brookings Papers on Economic Activity 1991: 107–182 </li></ul><ul><li>Barro R., Sala-i-Martin X (2004) Economic growth (2nd ed). The MIT Press, Cambridge, MA. </li></ul><ul><li>Díaz-Bautista, Alejandro (2003), “Convergence and Economic Growth Considering Human Capital and R&D Spillovers”, Mexican Journal of Economics and Finance, ITESM, Volume 2, Number 2. </li></ul><ul><li>Romer, Paul M. (1986). Increasing Returns and Long-Run Growth , Journal of Political Economy, v. 94, pp. 1002-1037. </li></ul><ul><li>Solow, Robert, &quot;A Contribution to the Theory of Economic Growth.&quot; Quarterly Journal of Economics 70 (February 1956): 65-94. </li></ul><ul><li>Solow, Robert, &quot;Technical Change and the Aggregate Production Function.&quot; Review of Economics and Statistics 39 (August 1957): 312-20. </li></ul>
  42. 60. Economic Policy in Latin America Convergence and Economic Growth considering Human Capital and R&D Spillovers in Mexico Alejandro Díaz-Bautista, Ph.D. Professor of Economics and Researcher at COLEF Visiting Research Fellow and Guest Scholar, Center for U.S.-Mexican Studies, University of California San Diego (UCSD). Graduate School of International Relations & Pacific Studies IR/PS University of California, San Diego

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