Archive for manufacturing

20060328 – Peru’s economic trickle down proves elusive

Posted in 3 Cables with tags , , , , , , , , , , , , , , , , , on June 9, 2009 by Farid Matuk

By Robin Emmott

AYACUCHO, Peru (Reuters) – Business has rarely been slower at Marlene Quispe’s underwear shop in the central Andes as the only thing that the rows of socks and bras seem to attract nowadays is dust from the street outside.

As Peru’s economy is set to record its fifth consecutive year of strong growth in 2006 — a feat almost unheard of in the country’s cyclical boom and bust history — ordinary Peruvians say they are seeing little or no benefit, making the economy a central issue in the upcoming April 9 presidential elections.

“There’s no prosperity here and we want change,” Quispe said as she sorted through piles of bras. “A lot of people are tired of waiting for this trickle down,” Quispe said.

That view is echoed around Peru despite encouraging signs such as new shopping centers and restaurants in Lima as well as robust commerce in towns near the country’s gold and copper mines. Yet job growth has proven elusive in an economy that expanded 6.7 percent last year.

Much to the chagrin of business leaders, presidential front-runner Ollanta Humala says the only way to bring the benefits of this growth to ordinary Peruvians is to increase state control over the economy.

He has received strong support from the poor as a protest vote for the country’s traditional economic policies.

“The idea that there is a trickle-down effect to the poor from economic growth is just an invention by Mister President (Alejandro Toledo),” said Omar Quezada, president of the Ayacucho region in central Peru, where 35 percent of the population is illiterate.

“We haven’t seen a large public works project in this region in the past five years,” he added.

Toledo, who took office in 2001 promising jobs and a better life for the poor, has argued that it is only a matter of time before the benefits of economic growth are widespread.

But economists say that despite average gross domestic product (GDP) growth of 4.5 percent over the past 15 years, the work force is growing at 3 percent a year, meaning new graduates are barely being absorbed into the job market.

“Peru’s poverty levels have barely fallen, the new jobs on offer are low-skilled and all we’ve really achieved is stability,” said Elmer Cuba, chief economist at Lima-based consultant Macroconsult. “People are exasperated.”


Many Peruvians say their frustration is heightened by the fact that since 1990, successive governments have done just what foreign economists told them to — privatize, liberalize and open the economy up to foreign investment.

Peru’s problem is that its mining and export-based sectors are the drivers of growth and people outside of those industries are not benefiting from high international prices for commodities and precious metals.

“The economy is simply not broad-based enough,” said Javier Zuniga, head of Lima University postgraduate business school.

Although Peru’s powerful mining sector generates more than half the country’s exports and accounts for 6 percent of GDP, it employs less than 1 percent of the working population.

According to Farid Matuk, head of the government’s National Statistics Institute, around 14 times more investment is required to create one job in the mining sector than in manufacturing, where Peru has traditionally been weak.

Partly as a result, the jobless rate in Lima, home to almost a third of the population, was 9 percent in February, or almost 1 percentage point higher than a low in Toledo’s government of 8 percent in October 2002.

Even that figure fails to take into account that half of Peru’s 13 million working population is underemployed, or not working the hours they want to, forcing them into lower-paid positions below their qualifications.

The solution that candidates pledge is red-hot growth over the next five-year presidential period and big job creation.


Most ambitiously, center-right lawyer Lourdes Flores, who is in second place in the polls, has promised GDP growth of at least 7 percent a year and 650,000 new jobs annually.

But center-left former President Alan Garcia, who is third in the polls, says meeting such goals are impossible.

“You would need to grow almost 14 percent a year to create 650,000 jobs annually,” said Enrique Cornejo, an aide to Garcia.

Nevertheless, he also promises annual growth of 7 percent, a figure Peru last reached briefly in 1998.

With Peru’s current economic structure, analysts say such a pace of growth would generate around 350,000 new jobs a year, or just enough to keep up with new entrants into the job market.

Humala, a former military commander who wants to restrict foreign investment in Peru, sees the solution in revising contracts in key mining and gas industries to increase state control, raise taxes and redistribute income to the poor.

Businesses and investors say that would scare off investment. A similar strategy employed by a Peruvian military government in the 1970s sent the economy spiraling into a 30-year slide.

Economists instead recommend measures such as cutting the bureaucracy that stifles entrepreneurship, helping unregistered businesses leave the informal sector, diversifying away from mining and cutting the bloated state payroll.

Around 90 percent of Peru’s budget goes to public sector salaries and debt servicing, leaving little room for government investment, which can help fuel economic growth.


Cointegration, Dependency and Manufacturing (24-IV-09)

Posted in 04 - Abril, Año 2009 with tags , , , , , , , , , , , , , , , , , , , , , , , , , , on April 24, 2009 by Farid Matuk

Chile - USA (1981-2008)

Chile - USA (1981-2008)

Peru - USA (1981 - 2008)

Peru - USA (1981 - 2008)

These graphs show –for a naked eye- a similar cycle over time, besides differences on timing and amplitude, there is a similar number of boom and boost processes. A first question to analyze is the existence of cointegration between those series, and if the answer is affirmative to evaluate the dependency of some from one.


Cointegration concept comes from econometrics and it is related to time series which evolve over time in a similar pattern, cointegration does not imply causality between the variables analyzed, it implies a similar concept of parallel lines in geometry.


On the other side dependency theory in economics, implies the existence of a center and a periphery, equivalent to solar system in astronomy, the planets does not have exact orbits, but they are not comets drifting on the outer space. The dependency concept tells of an economy that is the center for periphery economies, which essentially are tied up to the evolution of the center.


This note founds that Chile and Peru manufacturing sector are periphery economic activities to the USA industrial sector on the long run, obviously in the short run a periphery sector may drift away, but sooner or later return to its orbit. A simulation is run from August 2006 up to December 2008, when Peru has a new presidential tenure in July 28th 2006, which shows a Peru industrial sector drifting-up, and then a forecast is made to evaluate how much economic contraction will face Peru to be back on track.


The monthly series are taken from International Monetary Fund’s International Financial Statistics Compact Disk disseminated March 2009. Only series from Chile and Peru are chosen from South America due lack of availability for other countries, only USA series will be taken from 24 advanced economies (IMF lingo), as center country. The series start in January 1979 because Peru is the constraint, until December 2008 because is most recent available data from USA. The codes are […66EY.ZF…] for Chile and Peru, and […66…ZF…] for USA; which is available here.


A first step is taking logarithm of each series, then to evaluate the existence of unit root for each one, which is accepted. A cointegration test between Chile, Peru and USA is rejected with zero lags, but a loop from 1 to 60 lags is run to find 12 lags (a calendar year) as appropriate to accept cointegration between the analyzed variables. The evaluation is constraint until July 2006, since Peru has a new presidential tenure since August 2006.


Two approaches were tried to model the dependency of Peru and Chile to USA. The unsuccessful one was an Error Correction Model (ECM) which shows a strong equilibrium relationship between Peru and Chile, but the equilibrium error component was nil for Chile equation and strong for Peru; but in any circumstance was possible to reject a null hypothesis for USA inclusion in the equilibrium relationship or in the equilibrium error.


The second and successful approach was a Vector Autoregressive (VAR) model with USA as exogenous component. The lag period was 12, since this length was found as adequate on the cointegration analysis described above. The computer code in RATS is here, and the output results are here.


The first null hypothesis tested for no relation between Chile and Peru is rejected for each equation and therefore the naked eye observation was correct. A second set of null hypothesis for each USA coefficient being zero in both equations is carried out, to find them rejected and to conclude that USA industrial sector has influence on Chile and Peru manufacturing sector, in the impact multipliers. A third set of null hypothesis for equilibrium multipliers of USA being zero is carried out, to find them accepted; this unexpected outcome is interpreted as neutrality on the long run of the level of USA industrial activity for Chile and Peru manufacturing sectors, only if USA variable become constant which never have been observed. A fourth set of null hypothesis for equilibrium unitary elasticity between Chile and Peru is carried out, to find them rejected; this outcome allows concluding that USA individual shocks in Chile and Peru become permanent for the level of manufacturing activity.


Those four sets of null hypothesis are re-run with a Seemly Unrelated Regression (SUR) model with similar specification in order to evaluate cross equation restrictions. The previous four null hypotheses are evaluated and similar conclusions are obtained. The fifth null hypothesis of USA impact coefficients with similar values vis-à-vis for Chile and Peru is carried out, to find them rejected; this outcome allows concluding differentiated short run impact between Chile and Peru, nevertheless for both countries the equilibrium multiplier for USA is zero. Finally, a sixth null hypothesis for null intercept in Chile and Peru is carried out and accepted; this outcome allows to conclude that long run average level of manufacturing in Chile and Peru is the long run multiplier of Peru and Chile –respectively- multiply by the average level of industrial activity in USA.


The third and sixth null hypotheses are imposed in a new estimation on the SUR model in order to produce a forecast outside the boundaries of the estimation, which are January 1979 and July 2006. The forecast values are plotted in graphs for Chile and Peru showing an interesting feature which differentiates Chile and Peru; while Chile forecast values are close to observed values, Peru forecast values are systematically below observed values.


A first econometric conclusion is the existence of cointegration between Chile, Peru, and USA. A second econometric conclusion is the dependency of Chile and Peru with USA which is coherent with the economic dependency theory. A third conclusion is Chile manufacturing sector is on track, and its contraction will mirror USA industrial contraction. A fourth conclusion is Peru manufacturing sector is off track, and its contraction will be more than proportional to USA industrial contraction.



Chile Forecast (August 2006 - December 2008)

Chile Forecast (August 2006 - December 2008)

Peru Forecast (August 2006 - December 2008)

Peru Forecast (August 2006 - December 2008)

Chile and Peru gap between observed and forecast values

Chile and Peru gap between observed and forecast values

We are in the same boat (17-III-09)

Posted in 03 - Marzo, Año 2009 with tags , , , , , , , , , , , , , , , , on March 17, 2009 by Farid Matuk

In July 2007, I did a series of graphs with quarterly data that I copy below with IFS compact disk from International Monetary Fund, in order to find how syncronizated was Peru and the countries around it with the industrialized countries.

The spreadsheet is here, the tab called “Data” contains all numbers for the graph, and the numbers above the red line are taken from IMF compact disk with no modification, column F contains IMF codes for each variable.

Besides obvious lags, the syncronization is evident and only differences are due to national policies of how to face boom and bust cycles. The most pathetic example is Peru with Garcia’s first term where the policy was against the tide, and economic failure established a regional record.

Colombia - Peru (Manufacturing Production)

Colombia - Peru (Manufacturing Production)

In this graph is possible to see how maximum and minimum values through the cycle are in sync between Colombia and Peru for manufacturing production.

Chile - Peru (Manufacturing Production)

Chile - Peru (Manufacturing Production)

In this graph is possible to see how maximum and minimum values through the cycle are in sync between Chile and Peru for manufacturing production.

Just a Coincidence?

Next three graphs show the relation of Colombia, Chile, and Peru manufacturing production index with the IMF’s Advanced Economies industrial production index.

Advanced Economies - Colombia (Manufacturing Production)

Advanced Economies - Colombia (Manufacturing Production)

Advanced Economies - Chile (Manufacturing Production)

Advanced Economies - Chile (Manufacturing Production)

Advanced Economies - Peru (Manufacturing Production)

Advanced Economies - Peru (Manufacturing Production)

In the graphs for Colombia and Chile, for early 90s there is breakdown in the relation between both countries and the Advanced Economies, an explanation for this could be find in graph below that shows a similar gap between USA and the Advanced Economies. Therefore Colombia and Chile are more in sync with USA than with the Advanced Economies.

Advanced Economies - USA (Manufacturing Production)

Advanced Economies - USA (Manufacturing Production)

Finally, in Peru graph is possible to see how Garcia in his first term (1985-1990) had two all time records, one for maximum manufacturing production with a peak of 8% in the beginning of his tenure and other for minimum manufacturing production with a trough of -10% at the end of his tenure.

And now again, Garcia likes to sail against the tide and for sure as before Peru will sink at unthinkable degree, due to Garcia manic need to negate external reality.