In recent decades, productivity levels have been low in the Andean economies (Colombia, Venezuela, Ecuador, Peru, and Bolivia). One explanation for this is the limited development of the region’s export sector.
International trade accounts for just over 20% of the region’s GDP, far less than Asia, Europe, the rest of Latin America and the Caribbean (LAC), and even Sub-Saharan Africa.
Certain features of the Andean region’s export structure explain these low levels.
First, extractive activities like petroleum account for a large share of total exports, so the Andean countries’ export baskets are much more concentrated than that of LAC, as is also the case with Chile’s. The disproportionate weight of primary exports has made the Andean economies vulnerable to fluctuations in international product prices over the course of the economic cycle.
Second, nontraditional exports have been pushed into the background in every country except Colombia, such that the manufacturing sector accounts for just 15% of total exports.
Finally, most of Andean trade in manufactures is intraregional. For instance, over 60% of Ecuador’s industrial exports go to other Andean countries.
The limited development and diversification of exports is an obstacle to building productivity, because it tends to isolate firms from more advanced technologies and management practices, limits the potential of economies of scale, hinders participation in global value chains, raises the cost of imported capital goods and production inputs, and discourages foreign direct investment flows.
The IDB report Creciendo con productividad: una agenda para la región andina [Productive Growth: An Agenda for the Andean Region], identifies the public policies that have restricted the development of the export sector and proposes measures to expand it, diversify it, and turn it into a driver for growth and productivity. These include:
- Promoting more trade agreements with developed economies and strengthening export promotion agencies;
- Improving regulations, logistics, and infrastructure to bring down export costs;
- Reducing the use of tariffs and listing restrictive foreign trade regimes;
- Maintaining healthy macroeconomic policies.
The importance of trade agreements
The Andean countries are signatories to few international trade agreements and thus have only limited preferential access to larger markets.
Although in several of these countries a large percentage of exports do benefit from trade agreements, there is room for them to gain a greater share of larger markets through multilateral and bilateral agreements.
Although the Andean countries have implemented measures to reduce red tape and export formalities, there is still a major gap between them and the OECD countries in terms of time procedures at the border, the cost of exporting a container, regulatory barriers to trade, and nonagricultural tariff rates.
Single windows for foreign trade (VUCEs) need to be extended to all export procedures, and smaller companies should be facilitated through simplified regimes and advance audits.
Improvements also need to be made to the coverage and quality of road, airport, and port infrastructure, which is still precarious despite major public investments in some of these countries.
Export Promotion Agencies
Andean countries also need to strengthen the role of export promotion agencies.
These facilitated the entry to a greater number of countries and diversified the products exported in Peru, while in Colombia they reduced the information costs of the companies by packaging the advisory services, trade agenda, and fairs.
Tariff rates are higher and more volatile in LAC than in the OECD, and the Andean countries are no exception. These tariffs seek to protect certain industries or correct external imbalances caused by shock changes to commodity prices.
Other countries have resorted to restricting the export of certain products to prioritize domestic demand. These should be gradually lifted, as high tariff rates jeopardize productivity and exports by reducing the availability of intermediate inputs. Export restrictions may have the opposite effect, as they can cause local production to drop.
The positive shock to terms of trade in the Andean region in the 2000s led to a prolonged overvaluation of the real exchange rate. This affected the competitiveness of the non-traditional export sector and is a symptom of Dutch disease.
For this reason, natural resources need to be managed effectively through healthy exchange rates and fiscal policies that promote the most productive sectors, bolster the economy’s capacity to absorb external shocks, and provide fiscal room for investment in priority infrastructure for export activities.