Alternative Trade Strategies and Employment Implications: Chile

This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Trade and Employment in Developing Countries, Volume 1: Individual Studies Volume Author/Editor: Anne O. Krueger, Hal B. Lary, Terry Monson, and Narongchai Akrasanee, eds. Volume Publisher: University of Chicago Press Volume ISBN: 0-226-45492-4 Volume URL: http://www.nber.org/books/krue80-1 Publication Date: 1980 Chapter Title: Alternative Trade Strategies and Employment Implications: Chile Chapter Author: Vittorio Corbo, Patricio Meller Chapter URL: http://www.nber.org/chapters/c8732 Chapter pages in book: (p. 83 - 134) 3 Alternative Trade Strategies and Employment Implications: Chile Vittorio Corbo and Patricio Meller Introduction Chile is an important case study for this volume because it provides a clear example of the antiemployment biases of import substitution strategies in developing countries. Since World War 11, Chile has consistently used an overvalued currency, tariffs, and quantitative restrictions to promote manufactured import substitutes at the expense of agricultural and mining activities-whether for export or for domestic consumption. Under these policies, manufacturing output has increased at a modest pace, but manufacturing employment has shown little growth. For example, while manufacturing output was growing at an annual average rate close to 6 percent in the 1960s, manufacturing employment grew by slightly more than 3 percent annually. In fact, manufacturing employment in recent years is about the same as it was in the early 1950s. A study of these policies is warranted to determine why they failed to generate employment in Chile. More important, the Chilean experience may provide a sobering lesson for policymakers in other developing Vittorio Corbo is associated with Concordia University, Montreal, Canada; Patricio Meller is associated with CIEPLAN, Universidad de Chile, Santiago. We are especially grateful to Anne 0. Krueger and Hal Lary for detailed comments on earlier drafts of this study. We are also grateful to Narongchai Akrasanee, Hossein Askari, Ricardo Ffrench-Davis, James M. Henderson, Charles P. Kindleberger, Robert Lipsey, Constantine Michalopoulos, and Morton Stelcner for their comments. Seminars at CIEPLAN, Universite de Montreal, University of Texas at Austin, United States Agency for International Development, and the Development Research Center of the World Bank provided many valuable insights. Skillful research assistance was provided by Veronica Corbo, AIireza Mohajer Va Pessaran, and Josh M. Vrljicak. This study has been made possible by financial support provided by various institutions whose support is gratefully acknowledged: the USAID through funds provided to the NBER for this project, the Rockefeller Foundation, and the General Canada Council of Arts Research Funds of the Faculty of Arts and Sciences of Concordia University. 83 84 Vittorio Corbo/Patricio Meller countries whose employment problems are even more severe than those of Chile. The plan of this study follows that of other chapters in this volume. Section 3.1 below provides a brief overview of the Chilean economy and its trade regime;l section 3.2 presents the factor requirements estimates, and sections 3.3 and 3.4 analyze the effects of commodity and factor market distortions upon these factor requirements. Section 3.5 presents a dynamic analysis of factor proportions to determine the extent by which factor proportions responded to changes in trade policies during the 1960s. Our study focuses upon the period 1960-70, and within this period the emphasis is upon the subperiod 1966-68. The major reason for this choice was data availability, namely a census of manufactures for 1967, which allowed us to make estimates of factor requirements. That year is a typical one, and its data should adequately describe the import substitution regime, 3.1 General Characteristics of the Chilean Economy: An Overview 3.1.1 Post-World War I1 Policy Developments The two main events that shaped Chile’s trade policies and industrialization patterns in the mid-twentieth century were the Great Depression and World War 11. The fall in export earnings during the Depression (due mainly to price decreases) and the increase in the real foreign debt caused by the worldwide deflation created a strong drive for less dependence on the world economy. The interruption in international trade during and after World War I1 provided an additional incentive to developing countries to reduce their reliance on international trade through substituting domestic production for goods previously imported. A further impetus to this import substitution strategy (ISS) was given during the 1950s by the influence of the Economic Commission for Latin America (ECLA) under the leadership of R. Prebisch. Trade policies were influenced by the “Prebisch doctrine” concerning the longterm deterioration of the terms of trade of primary products (Askari and Corbo 1978). All of these events encouraged Chile and other Latin American countries to pursue the goal of industrialization through strong inducements for domestically oriented industrial programs. In attempting to implement the import substitution strategy, a set of policies was designed to shift the domestic terms of trade in favor of industry as opposed to agriculture and mining. The trade policy pursued was a combination of overvalued currency, tariffs, and quotas. This resulted in a structure of effective protection rates that, in addition to discrimirlating against exports (especially agricultural and mineral products) , was characterized by considerable dispersion in the rate of protection of industrial activities. Table 3.1 Sectoral Composition of Gross Domestic Product, 1950-70 Average Annual Growth Rate Percentage Distribution Economic Sector 1950-54 Agriculture, forestry, and fishing 15.5 Mining 6.2 Manufacturing 20.1 Construction 2.4 Electricity, gas, water, and sanitary services 0.9 Transportation, storage, and communication 6.0 Wholesale and retail trade 19.4 Finance 3.0 Ownership and dwellings 7.8 Public administration and defense 8.3 Services 10.4 Total 100.0 1955-59 1960-62 12.7 5.3 25.7 1.9 0.8 5.4 19.5 2.4 7.9 7.8 10.6 100.0 11.1 9.8 23.6 5.6 1.4 3.3 21.7 2.5 3.8 5.4 11.8 100.0 1963-65 10.4 10.1 25.0 5.8 1.6 4.3 20.9 2.4 3.7 5.0 10.8 100.0 1966-68 1969-70 1950-59 1960-70 10.3 9.9 25.0 4.8 1.7 4.4 21.1 2.7 3.5 5.0 10.8 100.0 9.3 10.6 25.3 4.9 1.6 4.6 21.3 4.1 3.2 4.8 10.3 100.0 -0.28 -0.11 8.14 -0.08 3.55 1.69 3.42 -1.19 3.74 1.83 3.21 3.35 2.55 4.87 5.42 2.38 6.28 8.62 4.13 9.35 2.34 3.15 3.09 4.40 Source: Instituto de Economia (1963, tables 7 and 8); ODEPLAN (1971b). Note: 1950-59 data were processed at 1960 market prices; 1960-70 data at 1965 market prices. 86 Vittorio Corbo/Patricio Meller 3.1.2 Growth and Structure of Production The effects of the ISS can be observed from changes in the relative shares of the agricultural and manufacturing sectors since 1950 (see table 3.1 ). Together these sectors maintained an almost constant share of GDP from 1950 to 1970 (about 35 percent). However, the relative share of manufacturing increased from 20 percent to about 25 percent while that of agriculture fell continuously from 15 to about 9 percent. Most of the increase in manufacturing’s relative share occurred in the late 1950s. Since then it has remained relatively constant. The real rate of growth of manufacturing output since World War I1 has been about 4 percent annually; that for agriculture has been about 2 percent. Within the manufacturing sectors, those activities that, as of 1969-70, had the largest share in manufacturing value added were food-processing, textiles, clathing and footwear, transportation equipment, chemicals, and basic metals (see table 3.2). These six activities accounted for about 55 percent of total value added. The growth rate for value added in the entire manufacturing sector was 5.64 percent for the decade 1960-70.2 However, there was a wide range in growth rates for individual activities. Five manufacturing activities had growth rates higher than 10 percent (paper and paper products, transportation equipment, electrical machinery and appliances, metal products, and chemicals). Five others had growth rates lower than 2 percent (clothing and footwear, printing and publishing, tobacco, leather and leather products, and furniture and fixtures). Two of these latter five industries have had negative growth rates. The clothing and footwear industry was the largest employer in the manufacturing sector in the 1960s, although its relative importance decreased over time. Other relatively important sources of manufacturing employment were food processing, textiles, furniture and fixtures, metal products, and transportation equipment. Together, these six industries generated more than 63 percent of industrial employment. The average annual growth rate of industrial employment was 3.14 percent during 1960-70. Six industries had employment growth rates over 5 percent (beverages, rubber products, petroleum and coal products, basic metals, electrical machinery and appliances, and chemicals). I n contrast, four industries had employment growth rates lower than 2 percent (clothing and footwear, furniture and fixtures, nonelectrical machinery, and nonmetallic mineral products). The weight of the clothing and footwear industry in total employment, combined with its low employment growth rate (0.26% ), has had a significant effect on the overall low manufacturing employment absorption. The low growth rate of manufacturing employment in Chile appears to be due to the fact that industries that had high (value added) growth Table 3.2 Sectoral Composition of Value Added and Employment in Manufacturing 1960-70 Average Annual Growth Rate Percentage Distribution (Annual Averages) Chilean Code Manufacturing Industry Total 1960-62 1963-65 1966-68 1969-70 1960-70 EmploymentValue Employ- Value Employ- Value Employ- Value Employ- Value Employ- Value-Added Added ment Added ment Added ment Added ment Added ment Elasticitya 11.87 11.71 3.92 2.12 2.43 0.29 10.75 9.17 13.87 24.50 11.09 12.37 2.84 3.66 1.97 0.29 10.84 9.48 12.15 21.41 12.09 12.82 3.18 4.05 1.92 0.28 10.53 9.66 10.49 19.65 20 21 22 23 24 Food processing Beverages Tobacco Textiles Clothing and footwear 25 26 27 28 29 Wood and wood products Furniture and fixtures Paper and paper products Printing and publishing Leather and leather products 3.79 4.75 2.00 3.35 1.98 5.40 7.17 1.71 2.39 1.34 4.15 4.25 2.30 2.89 1.64 5.36 7.14 1.05 2.12 1.37 4.18 3.18 3.77 2.53 1.36 5.56 6.60 1.20 2.39 1.48 30 31 32 33 34 Rubber products Chemicals Petroleum and coal products Nonmetallic mineral products Basic metals 1.82 5.08 1.88 5.81 7.81 0.70 3.37 0.60 3.71 2.47 2.24 5.22 1.93 5.26 9.08 0.70 3.40 0.63 3.52 2.71 2.23 6.53 2.10 4.46 6.26 0.92 3.79 0.79 3.41 3.11 6.28 4.55 1.28 4.65 1.10 4.12 8.06 2.60 3.70 0.26 0.66 4.27 2.99 3.99 2.51 1.20 5.75 7.05 5.95 -0.53 1.27 15.86 1.79 2.57 1.36 -0.51 3.81 1.07 4.25 3.99 3.91 0.50 2.22 7.16 2.31 4.58 6.21 0.99 3.92 0.78 3.32 3.31 7.83 5.15 7.04 1.96 6.91 0.98 0.50 0.86 0.88 3.39 12.30 12.49 3.33 3.06 1.63 0.28 9.93 9.50 9.70 19.63 8.02 10.26 8.23 2.23 2.04 1.77 2.03 0.80 0.24 ** b 0.27 2.23 ** b Table 3.2-continued Average Annual Growth Rate Percentage Distribution (Annual Averages) Chilean Code Manufacturing Industry Total 1960-70 Employment1960-62 1963-65 1966-68 1969-70 Value Employ- Value Employ- Value Employ- Value Employ- Value Employ- Value-Added Added ment Added ment Added ment Added ment Added ment Elasticitya ~~ 35 36 37 38 39 Metal products Machinery except electrical Electrical machinery and appliances Transportation equipment Other manufacturing Total percentage Total value added (million 1965 escudos) Total employment (thousands of persons) ~ ~~ 4.32 2.48 6.42 3.67 5.30 2.81 7.18 3.84 6.02 2.98 6.67 3.48 6.05 2.97 7.26 3.24 10.31 4.22 8.22 1.53 0.41 0.19 3.54 5.63 2.93 2.84 7.81 3.16 3.93 6.28 3.01 3.41 7.96 3.22 4.83 7.57 2.94 3.76 8.47 2.79 5.27 8.53 2.84 3.62 8.51 3.18 11.13 6.56 11.14 4.50 5.38 2.27 0.59 0.40 0.42 100.00 100.00 3,540.33 100.00 100.00 4,357.67 100.00 100.00 5,186.67 100.00 100.00 5.64 5,507.50 0.56 434.23 483.03 Source io Table 3.2: CORFO (1972, pp. 10-11). Note: Original data on value added were at 1965 market prices. aPercentage increase in employment for each 1 percent increase in value added. bNegative values ( * * ) have been omitted. 535.53 556.80 3.14 89 Alternative Trade Strategies and Employment Implications: Chile rates had low employment-value-added elasticities. Basic metals, printing and publishing, tobacco, and beverages had high elasticities, but, with the exception of beverages, value added in these industries grew by 2 percent or less annually. Conversely, industries with low employment elasticities were nonelectrical machinery, paper and paper products, and clothing and footwear, of which nonelectrical machinery and paper products grew at annual rates over 10 percent. 3.1.3 Characteristics of Chile’s Foreign Sector Despite its import substitution bias, trade is very important to Chile. Both exports and imports increased from 10 percent of GDP in the 1950s to about 14 percent in the 1960s. The foreign trade sector plays a crucial role as a source of tax revenues for the government (supplying more than 25 percent of the total). Moreover, export earnings play a crucial role in providing a continuous flow of imported raw materials, certain basic consumption goods (sugar, coffee, meat, wheat, etc.), and above all the bulk of the capital goods required for the smooth functioning and growth of the economy. The Composition of Trade A dominant feature of the Chilean trade is the high concentration of export earnings in just one product, ~ o p p e r By . ~ the end of the 1960s, copper represented about 80 percent of exports and yielded about U.S. $900 million in foreign exchange per year. Most of the increase in the Table 3.3 Foreign Trade Indicators, 1950-70 Merchandise Trade Surplus Yearly Average Time Exports/ Imports/ (Millions of U.S. Dollars) Periods GDP GDP Share of Copper in Commodity Exportsa Copper Price (U.S. Terms of Cents per Tradeb Pound) (1960 = 100) 1950-54 1955-59 1960-62 1963-65 1966-68 1969-70 50.4% 60.3 66.7 63.6 73.0 78.0 23.6 31.1 29.9 32.8 49.4 63.3 10.3% 9.9 13.5 13.7 13.6 13.7 8.9% 9.8 14.7 13.3 14.7 16.2 39.4 49.2 -79.9 - 2.1 116.3 157.9 92.8 99.5 100.4 104.4 133.4 153.3 Source: V. Corbo (1974, pp. 107-8); ODEPLAN (1971b). Note: Underlying data for 1950-59 were expressed in 1960 prices, and those for 1960-70 in 1965 prices. 81950-59 includes only large-scale copper mining; 1960-70 includes total copper mining exports. Manufactured copper goods are included in manufactured exports. bExport price index divided by import price index. 90 Vittorio Corbo/Patricio Meller export share from 10 to 14 percent of GDP was due to the increase in copper’s share, in turn caused by abnormally high prices of copper in the period 1965-70. The second important group of exports consists of iron ore and nitrates. Their importance has declined over time from close to a 30 percent share at the beginning of the 1950s to about 10 percent by the end of the 1960s (tabla 3.4). Manufactured exports were not quantitatively of major importance during 1950-70 either as a fraction of total Chilean exports (9.5 percent) or as a percentage of manufacturing output (less than 3 percent in 1967). This suggests that the external market did not play a major role in the Chilean industrialization of the 1950s and 1960s. The relatively more important manufactured exports were processed foods, paper and paper products, and basic metals. Together these three industries provided more than 65 percent of manufactured exports (see table 3.5). Within processed foods, meat products and fish products (such as fish meal and frozen seafood) were the most important. Within the paper industry, the most important export products were cellulose and paper itself. Both of these export groups maintained a high level throughout the period. On the other hand, exports of basic metals were very unstable both in volume and in the type of goods exported. Iron and steel products alternated with manufactured copper products as the main goods exported by this industry. Table 3.4 Composition and Growth of Commodity Exports,1950-70 Totalb Time Period Coppera 1950-54 1955-59 196&62 1963-65 1966-68 1969-70 Average annual growth rate (based on values in current US.Dollars) 1950-59 1960-70 50.35% 60.29 66.73 63.58 72.96 77.99 4.51 12.93 Rest of Mining 28.60% 22.95 19.38 19.51 13.41 10.02 - 1.25 2.88 Agriculture and Fishing 11.17% 7.98 5.48 4.28 2.64 2.55 -3.11 0.53 Manufacturing 9.55% 8.57 8.41 12.63 10.99 9.44 4.40 12.84 (Millions of U.S. Dollars at Current Prices-Annual Averages) 382.74b 439.18b 478.60 593.34 883.53 1,149.70 2.02 10.87 Source: Instituto de Economia (1963, p. 175); ODEPLAN (1971a, p. 421). aSee table 3.3, note a. bIncludes noncommercial exports which were 0.33 percent of total for years 1 9 5 s 54 and 0.21 percent for years 1955-59. Alternative Trade Strategies and Employment Implications: Chile 91 The bias of the import substitution policies is clearly seen in the commodity composition of imports shown in table 3.6. Intermediate products and investment goods had the highest shares, fluctuating around 50 percent and 30 percent during the 1960s; the share of consumer goods imports was about 16 percent by the end of the 1960s. The average annual growth rate for 1960-70, at current values measured in United States dollars, was nonetheless substantial-6.73 percent. In other words, even at the end of the 196Os, annual spending on consumer goods imports exceeded U.S. $150 million. About 45-50 percent of these imports consisted of manufactured food and agricultural products, while motor vehicles accounted for 10-14 percent. The Direction of Trade During the 1960s, Chile succeeded in diversifying the destination of its exports, although most (90 percent) exports still are destined for developed nations. In the early 1960s, exports to the United States made up 40 percent of total exports; by the end of the decade, the United Table 3.5 Composition of Industrial Exports, 1960-70 Percentage Distribution Chilean Code Manufacturing Industry 1960-62 1963-65 1966-68 1969-70 25.69 1.03 25.83 1.32 31.53 0.97 26.97 1.42 0.34 0.18 0.03 0.00 5.86 3.59 3.81 7.42 Paper and paper products Printing and publishing Leather and leather products, rubber products Chemicals 17.84 0.26 10.03 0.77 21.97 1.70 26.59 1.89 2.41 7.41 1.59 3.68 1.14 3.64 1.51 5.72 Petroleum and coal products Nonmetallic mineral products Basic metals Metal products and machinery, except electrical 1.81 0.00 31.12 1.68 0.05 47.30 1.oo 0.14 26.82 0.85 0.99 12.56 2.59 1.59 2.26 2.74 0.86 0.17 2.59 100.00 0.9 1 0.23 1.32 100.00 1.70 1.94 1.32 100.00 1.32 8.03 1.98 100.00 38.67 73.43 96.20 105.85 Food processing Beverages 20 21 clothing, and footwear Ei1 Textiles, Wood and wood products, 25 26 27 28 29 30 31 32 33 34 I I ::1 37 38 39 furniture and fixtures Electrical machinery and appliances Transportation equipment Other manufacturing Total Total (annual average in million US.dollars) Source: C O W 0 (1972, pp. 14-15); ODEPLAN (1971a,.p. 160). 92 Vittorio Corbo/Patricio Meller Table 3.6 Composition and Growth of Imports, 1950-70 Total Time Period 1950-54 1955-59 1960-62 1963-65 1966-68 1969-70 Average annual growth rate (based on values in current US.Dollars) 1950-59 1960-70 Consumer Goods Investment Goods Intermediate Products (Millions of U.S. Dollars at Current PricesAnnual Averages) 31.67% 29.73 15.14 13.11 13.16 16.11 25.38% 34.26 30.67 27.18 29.32 31.36 42.95% 36.01 54.19 59.71 57.52 52.53 342.46 417.24 535.30 588.20 760.93 955.75 3.61 6.73 9.62 7.50 0.93 6.52 4.26 6.83 ~~ Source: 1950-59, Instituto de Economia (1963, p. 199); 1960-70, ODEPLAN (1971a, p. 425). States share fell to 15 percent. The United Kingdom, France, and West Germany absorbed 33 percent of total exports in the early 1960s and 28 percent in the late 1960s. But the export share of other regions besides Latin America (mainly Japan and other European countries) rose from 20 to 45 percent. Exports to Latin American countries ranged around 10 percent of total exports over the decade. Similarly, most (75 percent) Chilean imports originate in developed nations, although the origins have changed over time. The share of United States imports in total imports fell from 50 to 35 percent between 1950 and 1970. Likewise, the share of imports from the United Kingdom, France, and West Germany fell from 25 to 20 percent in the same period, while imports from countries outside Latin America rose from 1 to 20 percent. The share of Latin America imports fell from 23 to 17 percent in the 1950s, then increased over the 1960s to about 25 percent of total imports. Balance of Payments Chile has had chronic balance of payments problems ever since World War 11. Although its merchandise trade balance has frequently been in surplus over this period (see table 3.3), its current account has continuously shown a deficit, largely because of repatriated profits on direct investment (mainly in large-scale copper mining) . The current account deficits have been financed by capital inflows, principally associated with direct investment in large-scale mining (in the 1950s) and central gov- 93 Alternative Trade Strategies and Employment Implications: Chile ernment borrowing (in the 1960s). As we will see (section 3.1.4), these balance of payments problems contributed heavily to the development of the Chilean import substitution strategy. 3.1.4 The Trade Regime The chronological history of Chile’s trade regime can be divided roughly into periods before and after 1955.4 Before 1955, policies were highly restrictive and enacted as ad hoc reactions to balance of payments problems. The policies after 1955 can best be described as “cycling,” that is, switching back and forth from restrictive to more liberalized trade regimes. Even in the more liberalized phases, however, import substitution remained the central policy focus. The Pre-I955 Period The effect of the Great Depression on the Chilean economy led to the adoption of highly restrictive, ad hoc measures that reacted to balance of payments problems within a context of fixed exchange rates and high rates of inflation. Import and export procedures were often subject to arbitrary, endless regulations. Furthermore, institutional changes, frequent policy alterations, and the numerous exceptions to established regulations provided very uncertain and unstable rules for importers and exporters. In brief, the period before 1956 was characterized mainly by ( 1 ) quantitative restrictions (import and export quotas) applied with varying degrees of intensity; ( 2 ) a large number of exceptions to the general regime that affected an important proportion of total imports (such exceptions being related to special regimes, bilateral trade and compensation agreements, exemptions for government agencies, regional accords, and so forth, and ( 3 ) the establishment of an exchange control system with an overvalued domestic currency. The Post-I955 Period Policies after 1955 “cycled” back and forth from more to less restriction. There were three attempts to liberalize the trade regime: 1956-58, 1959-61, and 1965-70 (Behrman 1976, pp. 27-34). In all three cases, liberalization was not a goal per se but was one of the components of an overall stabilization program. Internal concerns (mainly related to inflation and income distribution) were paramount in causing these changes, although the influences of foreign payment obligations, speculation against the currency, capital flight, and donor and creditor country pressures were also felt. As Behrman (1976, p, 300) states, “Foreign-sector policy generally has been much more an appendage of domestic policy, albeit an important appendage, rather than vice versa.” In general, policies during 1956-70 gradually simplified and rationalized the trade regime and, toward the end of the period, decreased 94 Vittorio Corbo/Patririo Meller some of the bias in favor of import substitution as opposed to exports. Several measures were taken in this direction: (1 ) the bureaucratic and administrative procedures of export and import regulations were gradually reduced; (2) steps were taken to unify and stabilize the exchange rate in real terms and to keep the exchange rate close to its equilibrium level (especially during the subperiod 1965-1970 when a sliding-peg system was used); (3) import restrictions were reduced;5 (4) some specific incentives for exports were introduced (e.g., a system of drawbacks up to 30 percent of the value of exports); and (5) improvements were made in the system of forecasting foreign exchange reserves and the balance of payments, thereby allowing more effective planning of external economic policies. Owing to the important role of copper in export earnings, however, developments in the world copper market frequently played the crucial role in shaping the outcome of foreign trade policies. Furthermore, there is some suggestion that changes in the trade regime in this period were in response to fluctuations in real copper export revenues. The Exchange Rate During 1960-70, the Chilean escudo was always overvalued. Although the nominal exchange rate (escudos per unit of foreign currency) was frequently increased, internal inflation quickly resulted in overvaluation of the currency. Even with the sliding-peg policy of 1965-70, which provided a stable real exchange rate, the cost of foreign exchange was below the long-run equilibrium level (Behrman 1976, pp. 60, 12930). Moreover, the wide dispersion in tariffs, quotas, and so on, disTable 3.7 PPP-PLD-EERs for Imports and Exports, 1952-70 (1969 Escudos per U.S. Dollar) Exports Time Periods Imports Copper Exportsa 1952-54 1955-59 1960-62 1963-65 1966-68 1969-70 9.12 10.60 3.39 7.58 8.37 8.42 8.63 8.95 10.29 10.57 10.59 10.84d Other Exports - b 8.91c 8.72 9.86 9.82 10.65 Source: Ffrench-Davis (1973, pp. 266, 269). Note: See chapter 1 for definition of terms. These rates do not include import premiums. See also note 7. aOnly large-scale copper mining. bNot available. CExcluding 1955. dData not available for 1970. 95 Alternative Trade Strategies and Employment Implications: Chile Table 3.8 PLD-EERs for Major Production Sectors, 1950-70 (1965 Escudos per U.S. Dollar) Manu- Time Periods Agriculture and Forestry Mining facturing 1950-54 1955-59 1960-62 1963-65 1966-68 1969-70 5.11 5.14 4.70 4.46 4.01 3.91 4.17 3.99 3.56 3.35 2.95 2.20 7.92 8.19 6.96 6.45 5.70 5.14 Source: Behrman (1976, pp. 340-47). Note: Data relate to imports. These rates are simple averages of exchange rates at a more disaggregate level (Behrman 1976, p. 347). See also note 7. criminated against exports and shifted the domestic terms of trade in favor of the manufacturing sector. The effective exchange rates shown in tables 3.7 and 3.8 provide empirical support for these propositions. Table 3.7 presents the effective exchange rates (EER) for imports and exports during 1952-70. Import EERs, which do not include premiums on import licenses, were higher than those for exports, although the difference decreased through time. Among exports there was discrimination in favor of noncopper exports that had an EER about 17 percent higher than the EER for large-scale copper mining. This rate applied only to the copper revenues used to buy domestic inputs and was mainly used as a tax for revenue purposes rather than to exploit any monopoly power in world copper marketss The gap between the EER for imports and that for exports other than copper almost closed by the end of the 1960s, when the Chilean government became a partner in the copper corporations. The EERs of table 3.8 show discrimination not only between exports and imports, but also between major Chilean production sectors. There was discrimination against mining and agriculture and discrimination in favor of manufacturing over the entire period.? Furthermore, mining was treated less favorably than agriculture, with EERs at least 20 percent lower than those of agriculture. These differences were undoubtedly further aggravated by quantitative restrictions. Eflective Rates of Protection Effective rates of protection (ERP) and domestic resource cost (DRC) estimates given in Behrman (1976, pp. 137-40) are summarized in table 3.9. Our estimates by trade category (discussed below, section 3.2) are found in table 3.10.* Note first that ERPs were high and varied widely not only from industry to industry but also over time. 96 Vittorio Corbo/Patricio Meller Table 3.9 Nominal Protection Rates, Effective Protection Rates, and Domestic Resource Costs in Chile, Twenty-eight Sectors, 1961, 1967, and 1968 (Percent) Protection Rates Nominal (NPRs) TradableGoodsSectors 1 Agriculture and forestry 2 Fishing 3 Coal mining 4 Iron mining 5 Copper mining 43 21 37 2 0 1 19 0 0 1 66 46 82 122 32 7 11 Tobacco 12 Textiles 13 Footwear and clothing 14 Wood and cork 15 Furniture 106 182 255 35 129 0 99 23 29 0 24 0 30 21 Petroleum and coal products 22 Nonmetallic mineral products 23 Basic metals 24 Metal products 25 Nonelectrical machinery 55 72 161 102 94 0 44 27 25 15 125 38 24 55 139 66 59 84 27 25 80 56 83 58 255 6 27 0 50 26 Electrical machinery 105 27 Transportation equipment 84 28 Other manufacturing 125 Equally weighted arithmetic mean Standard deviation Range Domestic Resource Costs (DRCs) 1961 1967 1968a 1961 1967 1968a 1961 19688 (1) (2) (3) (1) (2) (3) (1) (2) 6 Nitrate mining 7 Stone, clay, and sands 8 Other mining 9 Food products 10 Beverages 16 Paper and paper products 17 Printing and publishing I8 Leather and leather products 19 Rubber products 20 Chemical products Effective Protection Rates (EPRs) 50 25 31 - 7 - 14 - 7 250 111 - 12 - 10 180 60 - 6 -11 64 40 - 6 2,884 365 3 609 -23 141 -13 672 492 16 386 21 - 4 209 - 5 714 109 89 5 22 18 1,916 52 210 161 241 73 14 683 164 297 18 -20 304 64 14 12 1 35 92 76 162 26 150 21 18 111 101 164 18 11 30 82 97 47 2,109 77 356 55 75 47 45 1,140 28 253 259 b 41 95 82 -15 227 198 43 85 48 51 162 15 b 9 b 380 217 150 59 449 271 10 1 4 131 50 118 56 175 41 254 168 552 282 2,898 1,127 3 13 42 419 106 598 86 2,109 339 21 - Source: Behrman (1976, pp. 138-39). aFor subsectoral exports only. bValue was negative, indicating that the total foreign exchange cost per unit exceeds the foreign exchange final product price. 97 Alternative Trade Strategies and Employment Implications: Chile Table 3.10 Average Nominal and Effective Rates of Protection by Trade Category, HOS Manufactures, 1967 Trade Category ERP for Domestic Sales Range Exportables Importables Noncompeting imports Total 37% 267 155 233 -25% -15 -38 -38 ERP for Export Sales Range to 100% to 1,830 to 741 to 1,830 0% 2 6 4 -23% -23 - 9 -23 to 14% to 21 to22 to 22 Source: Based upon estimates in Corbo and Meller (1978a, appendix table IVA). Note: Averages are unweighted averages of estimates for activities within a category; for a discussion of trade categories, see section 3.2. Of the twenty manufacturing industries studied by Behrman (sectors 9 to 28 in table 3.9), half had ERPs greater than 100 percent in 1961. By 1967 the number of industries with such high E R P values had decreased to six. Manufacturing industries with consistently high ERPs were food processing, textiles, rubber products, electrical machinery, and transportation equipment. The relaxation of import restrictions during the 1960s is reflected in the decrease in the average ERPs from 254 percent to 168 percent in table 3.9. The bias against exports is clearly seen in table 3.10. There was no effective protection on exports (for export sales) , whereas importables received very high levels of protection (267 percent on domestic sales). In fact, exportable production for domestic sales had lower ERPs than importables, while export sales of importable production had positive ERPs. The DRC estimates (table 3.9) coincide with the ERPs. They are systematically lower in 1968 than in 1961. This decrease probably indicates an improvement in the production efficiency of the Chilean manufacturing industries over time. Thus the years for which our estimates of the employment-trade relationship are made, 1966-68, were probably ones of greater efficiency and smaller variance in incentives than had prevailed earlier. 3.1.5 The Chilean Labor Market Among the countries in the project, Chile’s labor force bears the greatest resemblance to that of developed countries. Chile is a highly urbanized country. Even by 1960, 69 percent of the population (then 7.5 million) was urbanized. Population growth during the decade 1960-70 was just over 2 percent annually so that, despite continued urbanization, urban population grew at the fairly moderate rate of 3.7 percent annually. By 1970, 83 percent of the population was urban. That such a high fraction of the population is already urban suggests that out-migration from rural areas cannot continue at past rates; so, in that sense, 98 Vittorio Corbo/Patricio Meller Chile’s need to create new jobs is less pressing than the need of developing countries where the fraction of the population under labor force \age is high, where the rate of population growth is more rapid, and where the fraction in rural areas is so great that important future out-migration to the cities can be expected. During the 1960s, manufacturing output grew at an average rate of about 5 percent. Manufacturing employment in Chile, however, was virtually constant, as can be seen from table 3.11; it was at about the same level in 1970 as in 1963, and currently it is below that level. Chile’s employment problem, therefore, is the failure of employment opportunities to grow. This has been reflected first in a substantial expansion in employment in the public sector, which has been an employer of last resort, and second in reported rates of open urban unemployment over 5 percent throughout most of the 1960s and even higher rates at Table 3.11 Year Chilean Labor Market Data Population (Thousands) (1) Labor Force (Thousands) (2) Manufacturing Employment (1970 = 100) Unemployment Rate (3) Real Wage Rate ( 1 9 7 0 ~100) (4) 4.9% - 7.1 8.0 7.9 7.0 55.7 59.2 62.0 56.9 59.2 106 104 104 104 98 6.4 6.1 4.7 4.9 5.0 64.1 75.6 81.7 86.9 92.5 2,950 3,021 3,094 3,168 3,244 100 97 108 111 107 6.1 3.8 3.1 4.8 9.2 100.0 119.3 108.2 71.3 67.6 3,321 3,405 3,490 3,578 100 91 94 93 14.5 13.7 12.7 10.9 65.7 70.3 88.3 99.4 1952 6,162 2,154 1960 1961 1962 1963 1964 7,583 7,773 7,961 8.147 8,330 2,427 2,475 2,523 2,572 2,622 96 97 98 100 103 1965 1966 1967 1968 1969 8,510 8,686 8,859 9,030 9,199 2,673 2,725 2,778 2,833 2,888 1970 1971 1972 1973 1974 9,369 9,539 9,711 9,887 10,068 1975 1976 1977 1978 10,253 10,443 10,639 10,840 928 7.5 Sources: Columns 1 to 3-from Ministerio de Hacienda, Exposici6n sobre el estado de la hacienda pcblica, January 1979; Column 4-from Departamento de Economia, Universidad de Chile, Comentarios sobre la situaci6n Econ6mica, second semester, 1978. EBased on manufacturing employment in Santiago, Valparaiso, and Vine del Mar. 99 Alternative Trade Strategies and Employment Implications: Chile present. Only during the Allende years did the unemployment rate fall, and that decline was accompanied by a growth of manufacturing employment not associated with output increases. There is ample reason on a priori grounds to believe that much of the failure of manufacturing and urban employment to grow in Chile may have been attributable to policies surrounding the determination of urban wages. As can be seen from table 3.1 1, urban wage rates in real terms almost doubled between 1960 and 1970, and that increase undoubtedly affected both the commodity composition of trade and the factor proportions with which outputs were produced. These subjects are discussed in more detail in section 3.4. 3.1.6 Inflation Another chronic problem for Chile has been its very high rate of inflation. During 1950-70, the average annual increase in the GDP price deflator was in the neighborhood of 35 percent. The various relaxations of the trade regime after 1955 invariably were reactions to high rates of inflation in the preceding years (see Behrman 1976, chap. 1, for discussion), and usually the annual rate of inflation improved during the periods of relaxed restrictions. For example, during 1956-6 1 the annual rate of increase in the GDP deflator fell from about 50 to 10 percent. As restrictions were tightened in 1962, inflation rose to about 40 percent per year, and with the loosening of restrictions in the late 1960s, inflation fell back to about 20 percent annually. Thus, lower rates of inflation appear to be related to more liberal trade policies. However, inflation outpaced the rather substantial devaluations throughout the period, and the currency was continually overvalued (as mentioned earlier), thus decreasing incentives to export and increasing the need for restrictions on imports. 3.1.7 Summary In the postwar era, Chile has consistently applied policies to encourage (with varying degrees of emphasis) the domestic production of manufactured goods previously imported. These policies have included, among other things, an overvalued currency, quantitative restrictions, and tariffs. Although they have been moderately successful in increasing domestic production of manufactures, they have not absorbed a significant amount of labor. 3.2 Trade Orientation, Factor Requirements, and Factor Proportions in Chilean Manufacturing In this section we estimate the factor requirements (labor, capital, and skill) embodied in the production of Chilean HOS manufacturing 100 Vittorio Corbo/Patricio Meller activities. For this purpose we first classify manufacturing industries at the four-digit International Standard Industrial Classification (ISIC) level as being Heckscher-Ohlin-Samuelson (HOS) or natural resource based (NREi) ,g then we separate the HOS manufacturing industries into trade categories-that is, exportable, importable, or noncompeting import industries. Factor requirements and factor proportions are estimated for the first two types of industries.lo 3.2.1 Classification of Industries by Trade Categories The Ti statistic is used to separate activities into their respective trade categories (see chap. 1 for discussion). Exportable industries are those with a negative Ti; importable industries are those with a Tifalling between 0 and 0.75, and noncompeting imports have a Ti of more than 0.75.11 To eliminate the effects of trade fluctuations, we used a threeyear average for exports and imports over 1966-68 in our calculations. With this procedure, seven four-digit industries were classified as exporting, sixty-six as import competing, and nine as noncompeting. That there are so few exporting HOS manufacturing industries is a reflection of the bias of the trade regime in favor of import-competing industries that prevailed in Chile for most of the 1950s and 1960s. The seven exporting industries are listed in table 3.12, which also gives a breakdown of exports by destination (DC and LDC) and estimates of factor intensities. Note the predominant role of canned fish in exports to DCs and pulp and paper in exports to LDCs. For both products, Chile had the opportunity to export the unprocessed counterpart (raw wood in the case of pulp and paper products, and fresh and simply preserved fish in the case of fish products), and thus we have initially classified both industries as HOS.12 However, two factor-requirements estimates for exports are given below. One includes, and the other excludes, pulp and paper. The separate estimates are made because pulp and paper may be considered a borderline HOS good and because it receives special preferences in LAFTA. As we will see, the results are sensitive to whether it is included. The principal importable industries are listed in table 3.13. A full listing of industries in all categories is found in the Appendix (table 3 .A. 1 ) , where their classification is indicated in each case by their Tistatistic. Using three-year averages centered on 1967, 46 percent of Chile’s total exports of manufactures, excluding copper products, went to DCs, and 54 percent went to LDCs. Within the LDCs, 99 percent went to Latin American Free Trade Association (LAFTA) members, and of this total 45 percent went to Argentina and 16 percent to Mexico.13 However, for the HOS exportables in table 3.9, only 16 percent went to DCs (44 percent if pulp and paper are excluded). Table 3.12 Characteristics of Chile’s HOS Export Industries Expor tsa (Thousands of U S. Dollars) ISIC Number Industry 3 113 31 14 3132 3133 331 1 341 1 3901 Canning and preserving of fruit and vegetables Canning, preserving, and processing of fish, crustaceans, and similar foods Wine industries Malt liquors and malt Sawmills, planing, and other wood mills Manufacture of pulp, paper, and paperboard Manufacture of jewelry and related articles Total DVA per Unit of output Factor Intensities Developed Developing Countries Countries Total Laborb Capitale Skilld .499 330 989 1,319 46.9 935.7 93.0 .582 .301 .623 ,411 SO7 .543 1,868 518 413 848 67 4,044 31 416 1,363 1,334 16,945 21,078 1,899 934 1,363 1,747 17,793 67 25,122 69.5 55.1 21.5 121.2 22.4 112.7 1,575.9 2,218.7 487.4 934.9 1,846.1 208.5 93.6 143.9 87.1 223.1 147.4 480.9 Source: Corbo and Meller (1978a, appendix tables I11 A, I11 B, and I11 C ) . BAverage for 1966-68. For the value in escudos of these flows, see Corbo and Meller (1978a). bNumber of persons employed per million escudos of direct DVA. Thousand escudos of fixed assets per million escudos of direct DVA. dNumber of skill units per million escudos of direct DVA. Table 3.13 Characteristics of Chile’s Main Import-Competing Industries Importsa (Thousands of U.S. Dollars) ISIC Number Industry 3513 Synthetic resins, plastic materials, and manmade fibers 3514 Basic industrial organic chemicals, except fertilizer 3710 Iron and steel basic industries 381 1 Cutlery, hand tools, and general hardware 3813 Structural metal products 3824 Special industrial machinery and equipment 3829 Machinery and equipment except electrical n.e.c. 383 1 Electrical industrial machinery and apparatus 3843 Motor vehicles 3845 Repairs of aircrafts and aircraft parts Total DVA per Unit of output .562 .427 .465 .679 .488 .545 .615 .597 .587 .851 Developed Developing Countries Countries Total 12,632 14,863 25,357 22,074 28,718 33,506 331208 23,307 28,715 14,753 237,113 1,608 2,645 1,780 2,838 766 654 2,846 420 1,757 0 15,314 Source: Corbo and Meller (1978a, appendix tables I11 A, 111 B, and I11 C). aAverage for 1966-68. For the value in escudos of these flows, see Corbo and Meller ( 1 9 7 8 ~ ) . bNumber of persons employed per million escudos of direct DVA. Thousand escudos of fixed assets per million escudos of direct DVA. dNumber of skill units per million escudos of direct DVA. 14,264 17,642 27,166 24,285 29,672 34,356 36,271 23,772 30,559 14,753 252,427 Factor Intensities Laborb Capitale Skilld 28.7 38.7 34.4 67.7 71.5 66.1 42.5 54.0 20.3 83.0 1,173.4 3,204.6 1,914.4 542.4 773.2 626.8 642.4 379.7 237.0 127.4 103.6 245.2 243.8 198.0 235.1 202.2 160.3 190.3 90.1 348.7 103 Alternative Trade Strategies and Employment Implications: Chile Of Chile’s imports of manufactures, 86 percent of the total (both in the importable group and in other manufactures) came from DCs and 14 percent came from LDCs. For imports from developing countries, 85 percent came from LAFTA countries, of which 58 percent came from Argentina and 11 percent from Mexico. 3.2.2 Procedures In the estimates of factor requirements below, labor is measured by the number of persons employed. Capital is measured by the book value of fixed assets at 1967 prices less accumulated depreciation. Skill is approximated by dividing the wage bill by the unskilled wage in manufacturing to estimate the “blue collar” equivalent of the labor employed, then subtracting the number of persons actually employed (Corbo and Meller 1978a, appendix 11, table XV) .I4 We encounter two problems related to weights in computing factor requirements for a basket of tradables. The first centers on the proper basket to use as weights. There are three alternatives: trade flows, domestic production, or total supply (production plus imports). The use of a trade-flow basket assumes that an import substitution (export promotion) strategy is implemented by increasing importable (exportable) production in proportion to actual imports (exports). The domestic production basket assumes that an import substitution (export promotion) strategy increases importable (exportable) production in proportion to current production. Finally, the use of a total supply basket for importables assumes that an import substitution policy increases domestic importable production in proportion to current consumption patterns. The second problem is the choice of either value added or production weights. Leontief used value-of-production weights in his pioneering work on factors proportions of trade (Leontief 1953). But, since we focus upon HOS activities only, value-added weights are more appropriate for our purposes. Only value added in a given HOS manufacturing industry should be considered output of that industry, since the raw materials entering into the production are the output of other activities, principally NRB activities such agriculture and mining. Therefore using value-of-production weights may introduce an important NRB content into our HOS manufacturing activities. Value-added weights avoid this problem. We initially tried all three baskets for weighting factor requirements. The results for importable production differed only marginally among the three baskets. In contrast, the results for exportables did differ according to the weights used. Calculations using domestic production weights generated labor requirements substantially higher and capital and skill requirements substantially lower than for the other two baskets. We thus opt for the trade weights, since neither domestic production nor 104 Vittorio Corbo/Patricio Meller total supply weights can be used to study the implications of trade upon factor requirements. I n computing direct factor requirements in trade, as given in table 3.13, we use as weights the shares of each industry in the direct valueadded content of the basket of each tradable category considered. In computing direct plus indirect requirements, as in table 3.14, the weights are given by the shares of each industry in the direct plus home goods indirect value-added content of each category. Correspondingly, factor requirements cover only direct requirements in the first instance, whereas in the second they also include requirements in the home goods producing sectors that provide inputs directly and indirectly into the different tradable sectors.15 The results for labor requirements of importable products are very similar for DC and LDC weights. This is a consequence of the small variance in the sectoral labor to DVA coefficients and the large number of import-competing sectors considered. 3.2.3 Factor Requirements by Commodity Category The factor requirements estimates given in tables 3.14 and 3.15 generally conform to expectations of a multicountry, multicommodity model (Jones 1977; Krueger 1977). Specifically, a basket of exportables to DCs uses more labor (per unit of DVA) than any other tradable category. However, there is some ambiguity caused by pulp and paper. As we will see below, the ranking of labor intensities is sensitive to whether it is included. A major difference to be noted at the outset when comparing the results of table 3.14 with those of table 3.15 is the increase in labor requirements per unit of value added in all tradable categories when the computations include home goods indirect effects. This increase reflects the relatively high ratio of labor to value added in commercial services, which are an important supplier of inputs into the manufacturing sector. By contrast, capital requirements are moderately increased, and skill requirements are reduced, when measured on the broader basis. A quick inspection of tables 3.14 and 3.15 suffices to show that the most striking result is the very high capital/labor ratio (col. 5 ) of Chile’s HOS exports to other LDCs, much higher than for any other tradable category. It is more than twice as high as that for exports to DCs on a direct basis and still almost twice as high on a direct-plus-indirect basis. The difference stems from the much smaller labor inputs into HOS exports to LDCs rather than from differences in capital requirements. Like the capital/labor ratio, the skill/labor ratio is much higher in exports to LDCs than in exports to DCs, reflecting in this case both the lower labor content and the higher skill content of this trade flow. We also see that the results are heavily influenced by pulp and paper. In- Table 3.14 Direct Factor Requirements and Factor Proportions in Exportables and Import Competing Products by Destination and Origin of Trade Flows, 1966-68 Tradable Category" Weight$ ( 1) LaboF (2) Exportables Exports a. World b. DCs c. LDCs 34.09 61.00 28.92 Imports d. World e. DCs f. LDCs 42.59 42.59 42.45 Import competing products Ratio of Exports and imports g. World (a t d) 0.800 requirements h. DCs (b t e) 1.432 i. LDCs (c t f) 0.681 Capitald (3 1 (63.80) (71.40) (57.69) 1,642.6 1,555.6 1,659.3 (1,125.1) (1,477.3) (836.8) 851.5 793.2 1,151.2 (1.499) (1.676) (1.359) 1.929 1.961 1.441 Capital/Labor Ratio (5) = (3) + (2) Skille (4) 141.1 125.6 144.1 (125.0) (119.8) (129.4) 167.6 169.4 157.3 (1.321) (1.862) (.727) 0.842 0.741 0.916 48.18 25.50 57.37 (17.62) (20.69) (14.50) 19.99 18.62 27.12 (.746) (.707) (323) Note: Values in parentheses exclude pulp and paper from the HOS exportables and treat it as NRB. aSee tables 3.12 and 3.13 and appendix table 3.A.1 for composition of trade flows by major industries. bWeights used are the value-added content of the trade flows specified. CNumber of persons employed per million escudos of direct DVA. dThousand escudos of fixed assets per million escudos of direct DVA. eNumber of skill units per million escudos of direct DVA. 2.410 1.369 2.115 SkiWLabor Ratio (6) = (4) + (2) 4.14 2.06 4.98 (1.96) (1.68) (2.24) 3.93 3.98 3.71 (.881) (1.111) (.555) 1.053 (.498) 0.518 (.422) 1.342 (.604) Table 3.15 Direct Plus Home Goods Indirect Factor Requirements and Factor Proportions in Exportables and Import Competing Products by Destination and Origin of Trade Flows, 196-8 Tradable Categorya Weights& ( 1) Laborb (2) Exportables Exports a. World b. DCs C. LDCs 58.46 98.64 49.56 Imports d. World e. DCs f. LDCs 60.10 59.97 60.74 Import competing products Ratio of Exports and imports requirements g. World (a i d) 0.973 h. DCs ( b i e) 1.645 i. LDCs(c i f ) 0.816 Capitale (3) (95.73) (111.03) (84.61) 1,733.7 1,829.7 1,712.1 (1,438.5) (1,815.7) (1,164.2) 1.763 2,010 1.279 122.4 84.1 130.9 (83.8) (71.9) (92.4) 145.6 147.7 134.3 983.4 910.2 1,338.5 (1.591) (1.851) (1.393) CapitaWLabor Ratio ( 5 ) = (3) + (2) Skill* (4) (1.463) (1.995) (0.870) 0.841 0.569 0.975 29.65 18.55 34.55 (15.03) (16.35) (13.76) 16.36 15.18 22.04 (0.576) (0.487) (0.688) Note: Values in parentheses exclude pulp and paper from the HOS exportables and treat it as NRB. aSee table 3.11 for composition of trade flows and for weights used in computing factor coefficients. bNumber of persons employed per million escudos of direct plus home goods indirect DVA. CFixed assets per million escudos of direct plus home goods indirect DVA. dNumber of skill units per million escudos of direct plus home goods indirect DVA. 1.812 (0.919) 1.222 (1.077) 1.568 (0.624) Skill/Labor Ratio (6) = (4) i (2) 2.10 0.85 2.65 (.88) (.65) (1.09) 2.42 2.46 2.21 0.868 (0.364) 0.345 (0.264) 1.199 (0.493) 107 Alternative Trade Strategies and Employment Implications: Chile deed, when pulp and paper is excluded, the capital/labor ratio of Chile’s HOS exports to other LDCs is the lowest among all tradable categories. However, the skill/labor pattern does not change when pulp is excluded. It is also noteworthy that, when pulp and paper is included, the next highest capital/labor ratio is again found in Chile’s trade with other LDCs, this time in its imports or, more specifically, its production of HOS goods competing with imports from LDCs. For such goods the capital/labor ratio is almost 5 0 percent greater than that for HOS products competing with imports from DCs. In this comparison, unlike that for exports, the difference in the ratios stems entirely from the capital side. The difference in labor inputs per unit of value added is negligible. Moreover, in contrast to exports, skill requirements are lower and therefore the skill/labor ratio is lower in goods competing with imports from LDCs than in those competing with imports from DCs. It is interesting that, at least in the aggregated factor requirements of tables 3.14 and 3.15, skill requirements do not seem to be closely related to capital inputs. Observe next that Chile’s total exports of HOS goods (strongly influenced by the LDC component) embody far more capital and slightly €ess labor and skill than do total imports, the latter bekg much more heavily weighted by trade with developed countries. These results seem anomalous for a less developed country like Chile. However, they are somewhat more expected if we consider only its DC trade. In DC trade, exports are far more labor-intensive than import-competing products, as one would anticipate, although they also use much more capital per unit of value added.16 These results again are sensitive to the inclusion of pulp and paper. When this commodity category is excluded, Chile’s total exports embody far more labor and capital and less skill than its imports-this result is entirely due to the change in factor requirements in Chile’s trade with LDCs. Chile’s exports to LDCs now embody more labor and less capital and skill than its imports from LDCs. Sections 3.3 and 3.4 will consider some of the influences determining factor coefficients in Chile’s trade. More immediately, however, some light is thrown on the question by examining the commodity composition of its trade. As we already noted with regard to table 3.12, exports to LDCs and to the world as a whole are dominated by the value-added content of the pulp and paper group, requiring heavy capital inputs and little labor per unit of value added. On the import-competing side, the results for LDCs, as table 3.13 indicates, are strongly affected by the value-added content of the first three product groups-synthetic resins and fibers, industrial chemicals, and iron and steel-all of which also have high capital requirements and low labor requirements. It is likely that the composition and factor requirements of Chile’s manufacturing 108 Vittorio Corbo/Patricio Meller production and trade are strongly influenced by special trading arrangements within LAFTA, given the predominance of LAFTA trade in total LDC trade. 3.2.4 Net Factor Content of Trade Using the average composition of a basket of tradables, we estimated factor requirements of a marginal change of one million escudos of international value added (IVA) in import-competing goods and in exportables.17 In measuring the IVA content of exportables and importcompeting goods, we converted DVA values to IVA ones using effective rates of protection for each four-digit ISIC industry. There are several problems in this approach. We may find, for example, that within a fourdigit industry there are firms who export and firms who produce primarily for the domestic market. In a trade regime such as Chile’s in the 1960s, with tariffs and quotas on imports and without fully compensating subsidies to exports, the ERP for the importable firm would be higher than that for the exportable firm. An industrywide value conceals this variation. Second, there is no careful and complete study of ERPs in the mid-sixties. The E R P estimates given earlier (section 3.1) are taken from a variety of sources. For importable production, the only study available for this period is De la Cuadra (1974), which covers only ninety-two commodities, of which eighty-three are of industrial origin. We use a procedure similar to Behrman’s (1976) to allocate these commodities to a given four-digit ISIC sector.l* For exportable production, we use the rates given by Taylor and Bacha (1973), which pertain to the entire export production of a given three-digit ISIC manufacturing activity. Bearing these data problems in mind, we present the factor requirements of exportables by destination and of import-competing goods by origin, distinguishing between developed and developing countries in table 3.16. The most important result that emerges is that the local production of HOS goods competing with imports from LDCs uses more of each factor than the production of goods destined to exports of LDCs. What this result shows is that Chile saves on all factors by trading with LDCs. In effect, local production of HOS goods competing with imports from LDCs would use more of each of the three factors per unit of IVA than any of the other baskets. (This result should be interpreted cautiously because of the weakness of the E R P rates used.) Second, note that Chile’s total exports are more capital-intensive and less labor- and skill-intensive than its total imports. In bilateral comparisons we now find that exports to DCs are more capital-intensive and less labor- and skill-intensive than importable production competing with imports from DCs. Another robust result is that, within exportables, Table 3.16 Tradable Category" Direct and Direct Plus Home Goods Indirect Factor Requirements in Exportables and Import Competing Products by Destination and Origin of Trade Flows: Tradables at International Prices, 1966-68 Direct Laborb Capitale Skilld Labore Capital' Skillg Exports a. World b. DCs c. LDCs 36.95 63.41 31.61 1,780.4 1,617.2 1,813.4 152.9 130.6 157.5 52.75 78.58 46.06 1,564.2 1,457.6 1,591.5 110.4 67.0 121.7 Import competing products Imports d. World e. DCs f. LDCs 78.74 75.21 104.34 1,574.1 1,400.6 2,829.7 309.8 299.1 386.6 94.34 90.77 116.70 1,543.4 1,377.8 2,571.5 228.5 223.6 258.1 Ratio of requirements Exports and imports g. World (a + d) h. DCs ( b -F e) i. LDCs (c +- f ) Exportables Weights" Direct plus Home Goods Indirect 0.469 0.843 0.303 1.131 1.155 0.637 0.494 0.437 0.407 0.559 0.866 0.395 1.013 1.058 0.619 0.483 0.299 0.472 aSee tables 3.12 and 3.13 for composition of trade flows. Weights used are the international value-added content of the trade flows specified. bNumber of persons employed per million escudos of direct IVA. CFixed assets per million escudos of direct IVA. dNumber of skill units per million escudos of direct IVA. eNumber of persons employed per million escudos of direct plus home goods indirect IVA. fFixed assets per million escudos of direct plus home goods indirect IVA. gSkill units per million escudos of direct plus home goods indirect IVA. 110 Vittono Corbo/Patricio Meller the basket with DC weights is more labor-intensive and less skillintensive than the one with LDC weights. In terms of employment, we find that one million escudos of direct plus home goods indirect IVA in exports to DCs generates 78.58 jobs. Using an exchange rate of 5.132 escudos per dollar, the latter figure implies 40,327 jobs per 100 million dollars of IVA. This figure represents 10 percent of the manufacturing employment and about 1 percent of the total labor force in 1967. 3.3 Distortions in Commodity Markets: Protection and Factor Inputs In this section we analyze the effects of distortions in commodity markets upon factor requirements and the factor proportions of exportables and importables. Our approach to this problem is twofold. First, we group industries in each of the two tradable categories according to their level of protection, then compare factor requirements for industries above and below the median protection rate. Second, we undertake an econometric analysis of the effect of the protection system on factor requirements and proportions. This analysis also provides a test of the implications of the Heckscher-Ohlin-Samuelson (HOS) theory for the pattern of trade. We use the structure of effective protection as a measure of incentives accorded by the trade regime to different industrial activities. However, in the context of a general equilibrium model one can only show that the sector with the highest protection will attract resources. For the other sectors, nothing can be said a priori (see especially Bruno 1973). Nonetheless, empirical general equilibrium models built for some LDCs have shown that there is a high correlation between the partial equilibrium measure of ERP and the ex-post ERP derived from these models (Taylor and Black 1974; De Melo 1978). Thus the structure of effective protection can be used to capture the effects of Chile’s trade regime. Protection will generally affect factor requirements through two channels. First, it generates an overall import substitution or export promotion bias to the trade regime. Second, it may provide different incentives to individual activities within a commodity category. It thus may change the output mix of a given category, which in turn will change the overall factor requirements of that category. Both effects occurred during the period analyzed. The Chilean trade regime discriminated strongly in favor of import-competing activities. Furthermore, the wide range in ERPs within a category indicates that the regime affected the output mix of the category. Alternative Trade Strategies and Employment Implications: Chile 111 3.3.1 Factor Proportions in Above and Below Average Protected Industries In table 3.17 we present our calculations of factor requirements for more and less protected exportable and importable activities. Less (more) protected importables are those with ERPs below (above) the median ERP of 76 percent. Less (more) protected exportables have ERPs below (above) the median of 3 percent. The most important conclusion emanating from this table is that labor requirements in more protected activities are always below those of less protected activities. This is true for both importable and exportable categories and for both DC-LDC directions of trade. The trade regime thus appears to have encouraged industries with low labor requirements in both tradable categories. Considering Chile’s total trade, it is apparent that the more protected activities within each tradable category are more capital-intensive than less protected activities. Furthermore, the highest capital requirement per Table 3.17 Direct Plus Home Goods Indirect Factor Requirements and Factor Proportions in Exports and Import Competing Products by Destination and Origin of Trade Flows and Protection Levels, 1966-68 ~~~~~ Skill (4) Capital/ Labor Ratio (5) Skill/ Labor Ratio (6) Tradable Category Weights (1) Labor (2) Exportables Exports World DCs LDCs 44.39 64.45 42.95 Above Median Protection Level 1,852.6 151.8 41.73 1,682.3 189.2 26.10 1,864.8 149.1 43.42 3.42 2.94 3.47 World DCs LDCs 91.98 110.72 76.42 Below Median Protection Level 1,450.3 52.4 15.77 1,881.7 46.9 16.99 1,091.7 56.9 14.29 0.57 0.42 0.74 Imports World DCs LDCs 53.81 53.32 55.99 Above Median Protection Level 1,066.0 117.7 19.81 931.4 116.7 17.47 1,514.9 121.6 27.06 2.19 2.19 2.17 World DCs LDCs 67.72 66.93 73.78 Below Median Protection Level 883.4 179.3 13.04 888.0 180.2 13.27 854.8 169.2 11.59 2.65 2.69 2.29 Import competing products Capital (3) ~ N o t e : See tables 3.12 and 3.13 for composition of trade flows and for weights used in computing factor coefficients. 112 Vittorio Corbo/Patricio Meller unit of DVA is for the most protected exports to developing countries. This bundle also has the lowest labor requirements per unit of DVA.IQ Another characteristic evident in table 3.17 is the high capital-intensity of goods competing with imports from developing countries produced by the industries with above-median protection level. These findings strongly suggest that most of the trade within LAFTA countries is done in capitalintensive and highly protected commodities. Exports with above-median protection are more skill-intensive than exports with below-median protection. This result holds not only for total exports but also separately for exports to developed and to developing countries. On the other hand, the opposite result emerges in importable activities; those with above-median protection level have skill requirements on the average lower than sectors with below-median protection level. These results pertain to direct plus home goods indirect effects. Computations for direct effects alone show the same pattern, but the differences in employment requirements in exportables between industries with above- and below-median protection levels are somewhat more pronounced when indirect effects are included.20 This difference is due to the simultaneous operation of two forces: ( a ) very high shares of indirect value added in home goods; ( b ) higher labor intensity in home goods industries than in HOS industries and a differing importance of home goods in more and less protected tradable products. For the other primary factors, the pattern of results obtained for direct plus home good indirect effects is not affected. To generalize, these results indicate that the structure of protection has created a bias in favor of the production of low labor-intensive and high capital-intensive commodities in both trade categories. 3.3.2 An Econometric Study Next we proceed to a more disaggregated econometric analysis of the relation between net HOS imports (and also total imports), classified at a four-digit ISIC level, and factor inputs and protection of domestic production. The analysis is made separately for Chile’s total trade and for its DC trade. In addition to searching for further evidence of the influence of protection upon the composition of production, we want to test the hypothesis that, in its trade with developed countries, Chile is a net importer of skills and capital and a net exporter of (raw) labor. We apply regression techniques in a manner similar to that of Hufbauer (1970), Baldwin (1971), and Branson and Monoyios (1977). Our initial model expresses factor inputs as stocks. Later the problem of chosing the appropriate scaling is treated as a problem of testing for heteroskedasticity . The regression model is of the form: Table 3.18 Commodity Composition of Trade: Regression Estimates for Chile’s Trade with the World and with Developed Countries Explanatory Variables Equation Number Dependent Variable Constant 1.1 NM (World) M (World) NM (Developed ) M (Developed ) 12,124.1 (1.31) 15,505.9 (1.71) 14,277.3 (1.72) 15,757.7 ( 1.87) 1.2 1.3 1.4 H*Constant LM LS -9.01 K -9.80 (-3.81)** - 10.33 (-4.39)** -10.17 (-4.26)** 4.47 (4.71 ) * * 4.75 (5.1 1) ** 4.66 (5.47)** 4.63 (5.37)** - .046 .81) - .025 ( - .45) - .08 (- 1.52) - .07 ( - 1.34) H*LM H*LS H*K ( -3.43) * * (- ~ 1.1’ 1.3’ H”NM (World) H*M (Developed) 11,632.6 (1.55) 11,169.6 (1.72) -7.370 (-2.46) -8.113 (-3.02) * ** 3.84 (3.77) ** 4.00 (4.40) ** - .03 .49) - .06 ( - .99) (- F Ratio AVERP R2 708.3 (53) 312.1 (.24) 35.0 ~ 3 -75.96 (-.06) .337 8.6 .390 10.8 .351 9.2 .351 9.2 H*AVERP ) R2 ~~ 535.1 (.48) 68.22 ~07) .192 .224 Note: Terms in parentheses are t values. One asterisk and two asterisks indicate coefficients that, in a two-tailed test, are significantly different from zero at the .05 level and .01 level, respectively. The same convention applies for the testing of the whole model through F ratio test of R2. 114 Vittorio Corbo/Patricio Meller NMi = PI where + PzLMi + p 3 L s ~+ p4Ki + p5 + ui, A VERPC NMi = Net imports (imports minus exports) in 1966-68 of sector i (at the four-digit ISIC level) in thousands of escudos, where each trade flow has been converted from dollars to escudos using its own exchange rate. L M , = Labor (raw) employed in sector i, in thousands of persons. LSC= Skill in sector i, in skill units. Ki= Capital stock in sector i, in thousands of escudos. AVERPC = Average effective rate of protection in sector i, as a percentage.21 i is a four-digit import-competing or exporting industry.22 To verify the hypothesis mentioned above, the signs of p2 and p5 must be negative and those of p3 and p4 positive.23 Table 3.18 summarizes our estimates. Equations 1.1 and 1.2 are estimated over seventy-three industries, of which sixty-six are importables and seven are exportables. The dependent variables are net imports and total imports. Equations 1.3 and 1.4 are estimated over seventy-three industries, but only DC trade is included. The dependent variables are the same as in 1.1 and l.2.24 All estimates yield highly significant coefficients (with proper signs) for LM and LS. No pattern is observed on signs of the capital and ERP variables. These results lead to the conclusion that, in trade in manufactures, Chile implicitly imports skill and exports labor. The results for physical capital are ambiguous. The protection system, however, has no effect upon net imports, according to these estimates. The “bad showing” of the protection variable may be due in part to a problem of measurement errors for this variable. As we mentioned before, the ERP estimates are imperfect. They may be used for ranking incentives for individual sectors but not for accurately measuring the absolute levels of protection. The next problem is to determine if the factor inputs and net imports should be scaled by some variable related to industry size. This question was raised by Stern (1975) and Harkness and Kyle (1975). Here, as in Branson and Monoyios (1977), we approach this question as an econometric problem of performing a constructive test for heteroskedasticity on the disturbances of equation 1. We test for heteroskedasticity and then reestimate-the equations using generalized least squares. This procedure is equivalent to deflating or scaling the data before performing the regression. We proceed to test for heteroskedasticity in the disturbances in equations 1.1 and 1.3 following the procedure outlined by Park ( 1966).25The scaling performed is equivalent to dividing the de- 115 Alternative Trade Strategies and Employment Implications: Chile pendent variable and the regressors by a function of production to express all variables in terms of intensities. The results incorporating the corrections for heteroskedasticity appear at the bottom of table 3.18. Comparing the corresponding equations, we see that our main conclusion is not affected by the scaling of the variables.28 The variables for raw labor and skill are significant with the proper signs; those for capital and protection are not significant. 3.4 Distortions in Factor Markets and Factor Requirements in Trade Here we analyze the effects of factor market distortions (caused by the trade regime itself) upon factor requirements in Chilean manufacturing. We ignore factor market distortions resulting from other causes. That is, any distortion in the price of labor or capital or both brought about by public policies (including direct government intervention) not associated specifically with the trade regime will be excluded. However, the methodology developed here can be applied to evaluate factor market distortions not associated with the trade regime. Our approach is to estimate production functions for each four-digit ISIC industry, then simulate the factor intensity under an undistorted factor price ratio. In the simulation, it is assumed that the only distortion is a subsidy to capital resulting from a preferential effective exchange rate for capital goods. For the period analyzed here, quantitative and other restrictions on capital goods imports were very minor (Ffrench-Davis 1973, pp. 96-107). 3.4.1 Technology in Chilean Manufacturing Elsewhere27we have estimated production functions at the four-digit ISIC level. Here our procedures and results are briefly summarized. Translog functions with three factors (labor, skill, and capital) were estimated for forty-four four-digit ISIC industriesz8 using cross-section data from the 1967 Chilean census of manufactures, disaggregated at the establishment level ( 11,468 establishments employing five or more persons.) We then tested the general translog model for constant returns to scale (CRTS). For forty-one out of forty-four sectors studied, the CRTS hypothesis could not be rejected at the 1 percent level. For these forty-one sectors, we tested further for a Cobb-Douglas technology. For thirty-five out of the forty-one sectors the Cobb-Douglas technology could not be rejected at the 1 percent level. For the six CRTS industries for which the Cobb-Douglas technology was rejected, we proceeded further to test for painvise linear and nonlinear ~eparability.~~ For the three sectors for which the CRTS hypothesis was rejected, we tested for complete global separability. In the three cases the null hypothesis was 116 Vittorio Corbo/Patricio Meller not rejected. For these three sectors we proceeded further to test for a Cobb-Douglas technology. In two cases the null hypothesis could not be rejected. In our simulations under CRTS for the thirty-five sectors for which a Cobb-Douglas technology was not rejected, we use the estimated CobbDouglas function. For the six CRTS sectors for which the Cobb-Douglas technology was rejected (ISICs 3211, 3311, 3420, 3812, 3824, and 3829), we approximated our technology by the estimated Cobb-Douglas function. This was done to avoid the need for solving a nonlinear system of equations. For the simulations of the three non-CRTS sectors, we used a nonCRTS Cobb-Douglas function. Again, only for two of these sectors was the Cobb-Douglas non-CRTS technology appropriate for use, based on the test results. For the third case (sector 3 117), we used a non-CRTS Cobb-Douglas as a local approximation to avoid the nonlinearities involved. Before we proceed to the simulation results, two complications should be noted. First, Cobb-Douglas functions could not be estimated for all seventy-three exporting and import-competing four-digit sectors because of insufficient observations in some sectors. The second problem is that the Cobb-Douglas function for sector 3559 was not well behaved; in particular, it is not monotonic in the capital input (i.e., there was a negative marginal product of capital). As a solution for these two problems, we approximated the technology for the sectors for which the function could not be estimated and for sector 3559. This was done by using for those sectors coefficients obtained as the simple average of the valueadded elasticities of primary factors of the four-digit Cobb-Douglas functions belonging to the same three-digit industry. The value of the elasticities used in the simulations appears in Corbo and Meller (1978a, table 17). 3.4.2 Simulating the Efl'ect of Factor Market Distortions Having obtained estimates of production functions in Chilean manufacturing, we solved for an expression relating factor intensities to factor prices (see Appendix A ) , then used an estimate of the subsidy to capital to adjust factor prices and trace the effects of the factor price adjustment upon factor intensities. All our estimates are for a cross section of 1967. Therefore, qc,i = qm,i= 1.0 (see Appendix A for notation). We assume further that ami = Pi and thus we obtain: 117 Alternative Trade Strategies and Employment Implications: Chile The value of xi for each of the seventy-three four-digit tradable sectors was obtained from the 1967 census of manufacture^.^^ To estimate e*/e, we need information on the equilibrium exchange rate and on the average tariff rate. The e*/e ratio is equal to 1.30 X 1.0543 where 1.30 is the ratio between the equilibrium and the official exchange rate for 1967 as estimated by Taylor and Bacha (1973). The 1.0543 is the ratio between the average exchange rate and the exchange rate on investment goods. Thus, this last factor corrects for the lower tariffs on investment goods than on other imports. On the other hand, the 1.30 factor corrects for an absolute distortion between the price of tradables and the price of home goods.31 Now we adjust the market price of capital for the subsidy, then make new estimates of factor requirements and factor proportions under the new factor price ratio. We have run simulations for both the direct requirements only and for direct plus indirect requirements of home goods. Since the types of findings are very similar, we present in table 3.19 only those for direct plus indirect requirements of home goods. A comparison of these estimates with those actually observed (see table 3.16) shows that, when the subsidy to capital is eliminated, capital requirements for both exportables and import-competing products decrease about 19-23 percent, labor requirements increase about 6-8 percent, and skill requirements increase about 6-8 percent. The decrease in the capital/ labor ratios is about 24-29 percent, and the skill/labor ratio remains practically constant.32The results imply that eliminating the preferential effective exchange rate on capital goods imports would have contributed significantly to creating employment in Chile’s manufacturing sector. 3.5 Factor Requirements in Manufacturing: A Dynamic Analysis of the 1960s The analysis of sections 3.2-4 centered upon the period 1966-68. In this section we extend our analysis to cover the entire decade of the 1960s. Two exercises are performed. First, we trace the evolution of the wage/rental ratio to determine how changes in relative factor prices might have affected factor requirements and altered the relative profitability of exportable and importable production. Second, we measure factor requirements in other periods of the 1960s to evaluate the robustness of our results for 1966-1968. In this regard our results indicate that the factor requirements for 1966-68 held, in general, throughout the decade. The composition of tradables will be affected by changes in the wage/ rental ratio, via changes in the overall profitability of individual industries. The evolution of the wage/rental ratio in 1960s is given in table Table 3.19 Direct Plus Home Goods Indirect Factor Requirements and Factor Proportions in Exportables and Import Competing Products by Destination and Origin of Trade Flows: Simulation Experiment Tradable Category Weights (1) Labor (2) Capital (3) Skill (4) Capital/Labor Ratio ( 5 ) = (3) + (2) Skill/Labor Ratio (6) = (4) f (2) Exportables Exports a. World b. DCs c. LDCs 62.94 105.61 53.49 1,348.1 1,472.2 1,320.5 132.5 90.4 141.8 21.42 13.94 24.69 2.10 0.86 2.65 Import competing products Imports d. World e. DCs f. LDCs 64.11 63.95 64.87 789.2 730.6 1,072.7 155.6 157.9 143.8 12.31 11.42 16.54 2.43 2.41 2.22 Ratio of requirements Ratio of exports to import requirements g. World (a -+ d) h. DCs (b + e) i. LDCs (c + f ) 0.982 1.651 0.825 1.708 2.015 1.211 0.852 0.573 0.986 1.740 1.221 1.493 0.864 0.348 1.194 Note: See tables 3.12 and 3.13 for composition of trade flows and for weights used in computing factor coefficients. See table 3.14 for units used in factor coefficients. 119 Alternative Trade Strategies and Employment Implications: Chile 3.20. Observe that it fell from 1960 to 1964, started to rise at the beginning of the Frei government (1965), declined slightly in 1967, then increased substantially in 1968 as the Frei government's stabilization program collapsed, After 1968 the wage/rental ratio decreased. From this evolution, we expect the production of labor-intensive goods to have been encouraged in the early 1960s, discouraged in the mid1960s, and encouraged again in the late 1960s. To evaluate the robustness of our results for 1966-68, we have calculated direct plus home goods requirements for trade flows in four of the five periods outlined in table 3.20 (the evolution on a direct basis is similar and is ignored here). These estimates are found by applying the estimated 1967 factor requirements to actual trade flows in each of these periods. The results of this exercise are given in table 3.21. Observe that the main feature of these results is that our findings for the period 1966-68 hold in general for the other three periods; namely, exports have higher labor requirements than imports. Second, differences in the factor intensity of exports reflect shifts in their composition as trade policies were changed over the decade. Owing to space limitations, we focus only upon baskets with world trade weights. For exportables, when we compare the first two periods, there is a slight decrease in all three factor requirements. Then, between the second and third periods, there is a decrease in labor requirements and an increase in capital and Table 3.20 Evolution of Wage/Reutal Ratio in Chilean Manufacturing Year Wage Rate (Escudos per Worker) Rental Price of Capital (Current Em per Em of Capital) 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 803.2 862.4 1,005.8 1,454.0 2,131.8 2,878.8 4,015.5 5,247.2 7,785.3 11,226.9 15,752.8 .0396 .0444 .0515 .0836 .I35 .160 .213 .292 .382 .585 .870 Wage/ Rental Ratio 20,282.8 19,432.2 19,530.1 17,392.3 15,791.1 17,992.5 18,852.1 20,380.4 19,191.3 18,106.7 Period Average 1 1 1 19,857'4 189461'2 167891.8 18y649.0 Sources: The wage rate in the industrial sector is taken from ODEPLAN (1971a, p. 182), and the rental price of capital is computed as described in M. Corbo (1974, pp. 154-55, p. 224). 120 Vittorio Corbo/Patricio Meller skill requirements. In terms of factor proportions, the capital/labor ratio and the skill/labor ratio increased by 34.9 percent and 49.6 percent, respectively, from the second to the third period (this period coincides with the increase in the wage/rental ratio of the Frei government). After 1968 there is an increase in the requirements of labor and skill and a slight decrease in capital requirements. Table 3.21 Direct Plus Home Goods Indirect Factor Requirements in Exports and Import Competing Products by Destination and Origin of Trade Flows: Dynamic Evolution Periods Weights 1962-63 Exports World DCs LDCs Imports World DCs LDCs 1964-65 1966-68 1969-70 Exports World DCs LDCs Imports World DCs LDCs Exports World DCs LDCs Imports World DCs LDCs Exports World DCs LDCs Imports World DCs LDCs Labor Capital Skill 77.56 113.06 74.13 1,738.3 1,912.6 1,740.0 113.2 55.4 121.2 60.91 61.55 56.55 1,030.6 892.9 1,804.5 155.8 158.2 138.2 75.15 111.45 81.54 1,651.6 1,802.1 1,613.0 105.2 74.8 99.4 59.08 60.16 54.25 1,153.8 941.6 2,008.3 145.2 146.2 139.6 58.46 98.64 49.56 1,733.7 1,829.1 1,712.1 122.4 84.1 130.9 60.10 59.97 60.74 983.4 910.2 1,338.5 145.6 147.7 134.3 62.32 105.04 59.62 1,781.4 1,842.4 1,772.6 139.6 97.8 141.6 60.71 60.7 1 59.78 987.7 927.6 1,338.7 150.9 150.4 138.2 Note: See tables 3.12 and 3.13 for composition of trade flows and for weights used in computing factor coefficients. See table 3.14 for units used in factor coefficients. 121 Alternative Trade Strategies and Employment Implications: Chile For importable goods, labor and skill requirements are more stable throughout the four periods. Capital requirements for these goods increase from the first to the second period, then they decrease from the second to the third period. After 1968 they become fairly constant. This evolution is due to the changes in the composition of goods competing with imports from the developing world and, hence, changes in their capital requirements. Capital requirements of a basket of goods competing with imports from developing countries decreased substantially after the mid-1960s. These patterns are expected, given the “cycling” of the trade regime in the period. As we mentioned earlier, Chile’s trade regime was relatively liberal in the early 1960s, became more restrictive in the mid1960s, and became liberal again in the late 1960s. Presumably, then, factor requirements at the beginning and end of the decade ought to have better reflected its comparative advantage than factor requirements in the mid-1960s. That is, its labor requirements ought to have been higher and skill and capital requirements lower in periods of trade liberalization than in periods of trade restrictiveness. The estimates shown in table 3.21 generally coincide with these expectations. 3.6 Concluding Remarks The main conclusions of this study may be summarized as follows: 1. With regard to the composition and direction of Chile’s trade, one important feature is its failure to develop a significant volume of HOS exports, especially in trade with developed countries. This failure reflects in considerable part the strong emphasis over the last several decades on import substitution and hence on the production of import-competing HOS goods. The small size of the HOS component in Chile’s exports also reflects the country’s considerable endowment in natural resources and their major contribution to its exports, as exemplified by refined copper. Indeed, the natural resource factor plays also some role in the production of goods here treated as HOS exports, notably pulp and paper, which dominate exports to other LDCs-chiefly neighboring countries in LAFTA-and various fish, meat, and vegetable products figuring prominently in exports to developed countries. 2. The factor content of Chile’s trade in HOS goods is most strikingly marked by the high capital and low labor requirements of its exports to other LDCs and, therewith, the relatively small contribution made by those exports to employment in Chile. In particular, comparing the factor requirements and factor proportions of baskets of tradables with equal DVA content we have found: HOS exports to DCs are more labor- and capital-intensive and less skill-intensive than Chile’s production of HOS goods competing with 122 Vittorio Corbo/Patricio Meller imports from DCs. Thus, in its trade with DCs, Chile implicitly exports labor and capital and imports skill. HOS exports to LDCs are more capital-intensive and less labor- and skill-intensive than Chile’s production of HOS goods competing with imports from LDCs. The labor and capital requirements of Chile’s trade with LDCs are strongly dominated by pulp and paper, a commodity group that has had preferential treatment within LAFTA. Indeed, when exports of pulp and paper are excluded, we found that Chile’s HOS exports to LDCs are more labor-intensive and less capital- and skillintensive than its imports from LDCs. These results suggest that trading arrangements within LAFTA may have been such as to place demands on members’ scarce capital resources while giving less inducement to creation of employment. In exportables (including indirect effects), Chile’s exports to DCs are more capital-intensiveand less skill-intensive than export to LDCs. These patterns are not affected by the treatment of the pulp and paper sector. In import-competing products, Chile’s imports from DCs are more skill-intensive and less capital-intensive than imports from LDCs. Labor requirements are almost the same for both baskets. 3. The measurement of factor coefficients in terms of international value added is handicapped by lack of good data on effective protection needed for this calculation. Subject to these qualifications, it appears that Chile’s production of HOS goods competing with imports from other LDCs would use more labor, capital, and skill per unit of IVA than any of the other trade flows examined. Thus it appears that Chile saves on all factors through its trade with LDCs. 4. Analysis of the effects of trade regime on factor requirements and factor proportions, by major trade categories, indicates that in general the structure of protection has created a bias in favor of the production of low labor-intensive and high capital-intensive commodities. This applies to both exporting and import-competing industries. 5 . Concerning the effects of distortions in factor prices brought about by the trade regime and related commercial policies, we estimated an equilibrium price of capital services above the observed price. In studying the effect of this distortion on factor requirements, we find that, when the distortion is present, labor and skill requirements are about 6-8 percent lower and capital requirements are about 19-23 percent higher than without the distortion. The capital/labor ratio would thus be about 25 percent lower without distortions. 6. When we extend the study to other periods in the 1960s, we find that our results and conclusions are still valid for the decade as a whole. 7. As a concluding observation, we judge that a significant, though not spectacular, amount of employment could be created through export 123 Alternative Trade Strategies and Employment Implications: Chile expansion. Chilean exportables to the developed world generated about 40,000 employment opportunities per $100 million of IVA, which is probably a feasible annual increase in export levels; this would represent an annual increase in manufacturing employment of about 11 percent (equal to about 1 percent of the total labor force). The Chilean basket of exportables to developed countries would generate about 20 percent more employment opportunities per unit of IVA than the basket of exportables to LDCs. Appendix A: Relationship of Factor Intensities to Factor Prices Start with an aggregate production function at the industry level given by : Y i = Ai LM?‘ L S p K i a 3 . Then introduce the following first-order conditions for cost minimization: (A3 1 is the price of a unit where w is the wage rate of unskilled labor, of and is the price of capital services. Using equations ( A l ) , (A2), and (A3), solve for K i / Y i , LMi/Yi,and LSi/Y$ as a function of relative factor prices and the level of value added. These solutions are: (A5 1 124 Vittorio Corbo/Patkio Meller + (E; ->*)+ + (:; + + , a1 (A6) Ki--c Yi -. a2 a2 a1 a3 a2 >i) a2 a1 a3 1 - a1 - a2 - a3 where C r A i 1 - al x yi a1 - a2 - a3 + + a2 a3 Then, differentiating these expressions, we obtain the change in factor intensity as a function of the change in factor prices: + a1 + + + + + a2 a2 dln P8,i a3 a3 a1 a2 a3 a2 + + + a1 + + + a1 a2 dln a3 ) dln Pk,i . a2 a2 a3 These expressions are local approximations (i.e., valid only for a given level of output) around Yifor the non-CRTS case and global (independent of the level of output) with al a2 a3 = 1.0 for the CRTS case. + + Distortions in Price of Capital Services Next we must adjust the price of capital services upward to correct for the subsidy resulting from the existence of a preferential effective exchange rate for capital goods imports. 125 Alternative Trade Strategies and Employment Implications: Chile The market price of capital services is given by: + + + (A101 ph,i q c , i hi(ri 8s) q m , i (1 - hi) (Ti a$), where & is the share of construction in the total capital stock, 1 - & is the share of machinery and equipment in the total capital stock, qe,% (qm,i)is the price of one unit of construction (machinery and equipment), 8: (F)is the depreciation rate for construction (machinery and equipment) capital, and ri is the cost of capital. On the other hand, the distortion-free price of capital services is given by : e* (A1 1) p:,i = 4 c , i hi (Ti 83 q,n,i (1 - hi) ( Y i -I- a?) 7 + + 7 where e* is the equilibrium effective exchange rate and e the effective exchange rate for imported capital goods. Finally, the percentage change in the rental price of capital services resulting from eliminating the distortions is given by : Table 3.A.1 Foreign Trade Participation of Chilean Manufacturing Industrie+Computation Industry (ISIC) 311I Slaughtering, preparing and preserving meats 3112 Dairy products 3 113 Canning and preserving of fruits and vegetables 3114 Canning, preserving, and processing of fish, crustaceans, and similar foods 3 115 Vegetable and animal oils and fats 3116 Grain mill products 31 17 Manufacture of bakery products 31 18 Sugar factories and refineries 3119 Cocoa, chocolate, and sugar confectionery 3121 Manufacture of food products n.e.c. 3 122 Prepared animal feeds 3131 Distilling, rectifying, and blending of spirits 3132 Wine industries 3133 Malt liquors and malt 3134 Soft drinks and carbonated waters industries 3140 Tobacco manufactures 3211 Spinning, weaving, and finishing of textiles 3212 Made-up textile goods except wearing apparel 3213 Knitting mills 3214 Manufacture of carpets and rugs 3215 Cordage, rope, and twine of T Statistic Exportsa (Average, 1966-68) (1) Imports (Average, 1966-68) (2) Net Production (1967) (3) Consumption (4) Trade Classification Coefficients (4) - (3) (4) (5) 142,982 0 9,129 100,103 73,759 5,477 1,478,860 382,102 140,001 1,435,980 455,862 136,350 -.02986 .16180 -.02678 8,826 4,925 3,627 9 0 489 2,543 42 64,935 46,452 676 93,011 7,032 77,835 142,856 304,685 628,336 585,836 350,154 127,428 330,126 134,072 364,695 671,161 586,503 443,165 133,972 405,418 -.0655 1 0 26 8,205 11,935 0 0 48,909 132 13 0 0 907 2,662 114 26 9 263 171,440 69,419 1,877 1,493 20,391 87,247 153,225 432,174 161,916 171,246 172,548 1,278,940 26,524 413,309 22,281 22,723 88,153 155,861 424,083 150,007 171,255 172,811 1,401,470 95,811 415,172 23,775 43,114 .O 1028 .16454 .06390 .00113 .20987 .04884 A8571 .01691 -.O 1907 --.07938 .00005 .00152 .08743 .723 16 .00448 .0628 1 .47295 Table 3.A.1-continued Industry (ISIC) 3219 Textiles n.e.c. 3220 Wearing apparel, except footwear 3231 Tanneries and leather finishing 3233 Products of leather and leather substitutes except footwear 3240 Footwear, except vulcanized or molded rubber or plastic footwear 33 11 Sawmills, planing, and other wood mills 3312 Wooden and cane containers and small caneware 33 19 Wood and cork products n.e.c. 3320 Furniture and fixtures, except primarily of metal 3411 Pulp, paper, and paperboard 3412 Containers, and boxes of paper and paperboard 3419 Pulp, paper, and paperboard articles n.e.c. 3420 Printing, publishing, and allied industries 3511 Basic industrial inorganic chemicals, except fertilizers 3512 Fertilizers and pesticides 3513 Synthetic resins, plastic materials and man-made fibers except glass 35 14 Basic industrial organic chemicals, except fertilizers 3521 Paints, varnishes, and lacquers 3522 Drugs and medicines 3523 Soap and cleaning products, perfumes, cosmetics, and other toilet preparations 3529 Chemical products n.e.c. Exports8 (Average, 1966-68) (1) Trade Classification Coefficients *(4) - (3) (4) (5) Imports (Average, 1966-68) (2) Net Production (1967) (3) 13 40 0 30 2,484 28,783 13 4,500 1,584 587,654 202,442 31,894 4,055 616,397 202,455 36,364 .60946 .04663 .00006 .12291 493 12,167 14 801 369 10,076 1,741 3,434 75,481 58,265 374,045 506,528 19,565 19,971 163,909 383,627 496,102 22,985 94,652 221,805 .02497 -.02101 .14877 .78900 .26102 141,180 0 2,110 13,266 40,196 750 37,862 3,896 5,332 92,671 82,383 2 1,204 316,845 42,645 9,838 421,550 112,191 34,719 213,527 46,540 13,059 500,954 154,377 55,173 --.48386 .08370 .24666 .15850 .27326 .37072 24,120 3,705 0 130 109,190 134,742 7,938 83,140 182,965 16,459 128,250 248,174 268,035 147,496 136,188 331,184 .31738 .88841 .05828 .25064 15 3,942 8,528 51,020 270,317 137,645 278,829 184,723 .03052 ,25485 Consumption (4) Table 3.A.1-continued Trade Classification Coefficients (4) - (3) (4) (5) Exportsa (Average, 1966-68) (1) Imports (Average, 1966-68) (2) Net Production (1967) (3) 3530 Petroleum refineries 3540 Miscellaneous products of petroleum and coal 3551 Tire and tube industries 3559 Rubber products n.e.c. 3560 Plastic products n.e.c. 3610 Pottery, china, and earthenware 3620 Glass and glass products 3691 Structural clay products 3692 Cement, lime, and plaster 34 0 68 2,935 12,960 86 503 96 578 50,444 1,683 27,551 72,037 96,980 3,660 26,692 38,444 4,324 651,882 84,128 169,117 84,124 2 14,140 61,393 135,225 26,044 171,375 702,292 85,811 196,601 153,226 298,161 64,968 161,414 64,391 175,121 .07177 .01961 .13979 .45098 .28179 .05502 .16224 .59553 .02139 3695 Fiber-cement products 3699 Nonmetallic mineral products n.e.c. 3710 Iron and steel basic industries 3729 Nonferrous metal basic industries, except copper 38 11 Cutlery, hand tools, and general hardware 38 12 Furniture and fixtures primarily of metal 3813 Structural metal products 3814 Metal containers and metal housewares 3815 Cable, wire, and their products 3819 Fabricated metal products except machinery and equipment n.e.c. 3822 Agricultural machinery and equipment 3823 Metal and woodworking machinery 0 268 52,046 87,772 822 0 1,529 20 0 867 26,607 290,745 98,924 165,033 2,929 201,641 11,553 3,208 49,685 90,141 697,687 17,466 40,464 102,244 160,244 272,287 97,424 50,552 116,480 936,386 28,618 204,675 105,173 360,356 283,8 19 100,632 .01714 .22612 .25491 .38969 30229 .02784 .55531 .04063 .03187 170 27 14 8,447 25,871 65,823 116,803 44,147 31,014 125,080 69,990 96,823 .06617 .36924 .67968 Industry (ISIC) Consumption (4) Table 3.A.1-conlinued Industry (ISIC) 3824 Special industrial machinery and equipment except metal and woodworking machinery 3825 Office, computing, and accounting machinery 3829 Machinery and equipment except electrical n.e.c. 383 1 Electrical industrial machinery and apparatus 3832 Radio, television, and communication equipment and apparatus 3833 Electrical appliances and housewares 3839 Electrical apparatus and supplies n.e.c. 3841 Shipbuilding and repairing 3842 Railroad equipment 3843 Motor vehicles 3844 Motorcycles and bicycles 3845 Repairing of aircraft and manufacture of aircraft parts 3849 Transport equipment n.e.c. 3851 Professional and scientific equipment n.e.c. 3852 Photographic and optical goods 3901 Jewelry and related articles 3902 Musical instruments 3903 Sporting and athletic goods 3909 Manufacturing industries n.e.c. *Columns 1-4 are in thousands of escudos. Exportsa (Average, 1966-68) (1) Imports (Average, 1966-68) (2) Net Production (1967) (3) Consumption (4) Trade Classification Coefficients (4) - (3) (4) (5) 428 673 4,859 653 233,472 56,608 246,485 246.552 19,829 38,290 420,363 41,605 252,873 94,225 661,989 287,503 .92158 59363 .36500 35528 3,920 0 11,326 0 127,020 2,987 75,277 677 285,359 27,612 141,881 89,428 408,458 30,599 205,832 90,105 .30137 .09761 .3 1069 .00750 11 366 0 1,076 0 288 78 743 11 55 0 84,098 338,911 3,671 163,616 233 105,647 18,665 111 4,869 6,455 11,867 178,597 594,367 15,702 10,923 2,724 16,976 15,920 19,119 1,024 1,483 64,650 262,685 932,912 19,373 173,464 2,957 122,334 34,508 18,487 5,882 7,882 76,517 .32010 .36289 .18948 .93703 .07875 .86123 53865 --.03419 .82586 3 1 186 .15508 130 Vittorio Corbo/Patricio Meller Notes 1. We recommend Behrman (1976) and Corbo (1974) to the reader interested in greater detail on Chilean economic development. A more detailed analysis of alternative trade strategies and employment in Chile and the complete set of data used in this study are found in Corbo and Meller (1978a), available for the cost of reproduction from the National Bureau of Economic Research. 2. Note that this value is slightly different from that given in table 3.1, owing to different data sources. 3. Most studies indicate conclusively that Chile has a comparative advantage in the production of this resource-based commodity. Hence there is need to design a policy to stabilize copper earnings. This is readily seen by the fact that changes in the price of copper have an important effect upon trade surpluses (see table 3.3). The high copper prices in the late 1960s allowed the banking system to accumulate, by 1970, the highest level of net international reserves in twenty years (U.S. $343.5 million). Also, one should note the impressive improvement in Chile’s terms of trade at the end of the 1960s (table 3.3). This behavior depends in a very important way upon the trend in the price of copper. 4. For a more detailed analysis see Ffrench-Davis (1973) and Behrman (1976). 5. The main tools to control imports were: (1) import restrictions with a list of “allowed goods”; (2) prior deposits on imports; and (3) tariffs, generally high but with a wide range of rates. 6. The major reason for this type of discrimination was the foreign ownership of large-scale copper mining. Thus the exchange rate was used as a device to tax large-scale copper mining. 7. It will be noted that EERs in tables 3.7 and 3.8 show different levels and different time trends. The difference in levels arises because table 3.7 is in terms of 1969 escudos per dollar, whereas table 3.8 is in 1965 escudos. The difference in trends arises because the EERs in table 3.7 are “purchasing-power-parity-adjusted” ( i s . , multiplied by the ratio of the foreign price level to the domestic price level), whereas the EERs in table 3.8 are “price-level-deflated” (i.e., deflated by the Chilean GDP deflator). Furthermore, the sources cited for the tables report quite different methodologies for computing the EERs. Behrman’s EERs are based on direct price comparisons for 220 commodities between Chile and the United States. Ffrench-Davis’s EERs are based on comparisons of the total cost of imported commodities with their c.i.f. prices. Thus, he transforms each explicit import cost into an ad valorem tariff equivalent that is added to the c.i.f. price. 8. All estimates use price comparisons to estimate nominal protection and the Corden method to calculate ERPs. 9. See chapter 1 for a discussion of this distinction. Particularly important among the products here classified in the NRB category are refined copper (ISIC 3721) and meat meal and fish meal (SITC 081.4, which, for Chile, consists mainly of fish meal). 10. In Corbo and Meller (1978a) we also study the factor proportions and requirements of noncompeting import industries. 11. We also experimented with 0.90 as a cutoff point for the classification of industries in the import-competing and noncompeting import categories. The factor requirements in import-competing industries were only marginally affected when this alternative was used. 12. Indeed, over the period studied Chile did export significant amounts of both raw wood and fresh or simply preserved fish (such exports being here classified as NRB). 131 Alternative Trade Strategies and Employment Implications: Chile 13. For details of these trade flows by four-digit ISIC sectors and by countries, see Appendix I, section 111, of Corbo and Meller ( 1 9 7 8 ~ ) . 14. This way of defining “skill” assumes that all differences in wage rates within the manufacturing sector can be attributed to skill differences and that there i s perfect substitution among different types of labor. The only evidence we have for Chile on earnings within the manufacturing sector (M. Corbo 1974), shows that a substantial proportion of the variance in labor earnings can be accounted for by human capital characteristics of the labor force. This way of measuring skill has been popularized by Grfliches and used extensively in the testing of trade theories (see especially Stem 1975). 15. The treatment of home goods in computing factor requirements has been discussed in the introductory chapter of this volume. For Chile a problem arises because of the lack of a cost structure for each of the eighty-two four-digit ISIC industries used in computing direct factor requirements. There is available, however, a fifty-four-sector input-output table for 1962. Of the fifty-four sectors, twenty are manufacturing sectors that correspond closely to the ISIC classification at the three-digit level. We use this source to compute value added and factor requirement multipliers at the level of disaggregation provided by the 1-0 table. For details on the derivation of these multipliers see Corbo and Meller (1978a, chap. 3). Then we use the same multiplier for all four-digit industries belonging to a given three-digit industry of the 1-0 table. This procedure assumes that each fourdigit industry belonging to a three-digit group has the same intermediate structure with respect to home goods. 16. Initially (Corbo and Meller 19780, chap. 3 ) we treated Argentina and Mexico separately, but the factor requirement of Chile’s trade with these two countries was not too different from the ones for Chile’s trade with other LDCs. Thus we decided to include these two countries in the LDC group. 17. This procedure assumes that the marginal basket uses the same technology as the average one (see Lydall 1975, pp. 26-27, for a discussion of the validity of this assumption) and that the output mix is the same. For effective rates of protection see Corbo and Meller (1978a, Appendix I, table IV-A). 18. For effective rates of protection see Corbo and Meller (1978n, Appendix I, table IV-A). 19. These results are again dominated by the ERP of, and factor requirements in, the pulp, paper, and paperboard industry. 20. We also computed direct plus total indirect effects, and the pattern of results is similar to the one for direct plus home goods indirect effects. The difference in labor requirements by protection level within a given tradable category was even higher than for direct plus home goods indirect effects owing to the greater labor intensity of agricultural products that have a heavier weight as inputs in the industries with lower protection level. 21. This variable is defined as the weighted average of the effective rate of protection of import-competing industries (ERPM) and the effective rate of protection of exporting industries (ERPX) , where the weights are import-competing production and exports, respectively. 22. We also used, as did Baldwin (1971), a concentration index as an explanatory variable, but it was never significant. 23. The simple eorrelation in the sample between LM and LS is 0.90, and between LS and K it is 0.63, both of which are significantly different from zero a t the .01 level. Furthermore, N M is positively correlated with LM, LS, and K: the simple correlation coefficients are 0.26, 0.46, and 0.32, respectively, all of them significant at a .01 level. 132 Vittorio Corbo/Patricio Meller 24. On the other hand, when we ran equations using total exports as dependent variables the results were very poor, and they are not reproduced in the table. No coefficient was significantly different from zero a t the .05 significance level. These results are due in part to the behavior of the dependent variable. In nineteen out of the seventy-three exporting and import-competing tradable sectors, total exports are zero, and in many other sectors they are very small. Furthermore, it is meaningless to estimate this equation for exporting sectors only, because of the small number of degrees of freedom available. 25. In the Park test, the squared residuals of the original regression are regressed on a function of some size variable. In our computations, we used as a size variable the output of the sector and the consumption of the sector. The results were better for the first variable, and they are the ones we present here. We proceed now with one equation at a time. When the residuals of equation 1.1 were regressed as a function of PRO, the best fit was for the following equation: R2 = .039, e2$ = 1.396 x 100 6221.7 PRO (1.05) (1.69) where e, is the residual of the regression and PRO is production. In the case of the residuals of equation 1.3, the best fit was for the following equation: e2%= 1.018 x lo9 5436.58 PRO R2 .040. ( 9 01 (1.73) The correction for heteroskedasticity is performed by creating a diagonal matrix H whose ith diagonal element (&) is given by the reciprocal of the square root of the right-hand side terms in the equations for e2, above. Then all the original variables are premultiplied by the diagonal matrix H . This procedure is equivalent to a deflation of the original variables. 26. We also used ERPM in the equation for imports, but the results were of the same form; that is, the protection variable was never significant even at a .I0 level. 27. Corbo and Meller (1978q 6 ) . For a fuller discussion of the implications of technology for the pattern of trade see Corbo and Meller (1978b). 28. We could not estimate a production function for all the seventy-three exporting and import-competing sectors owing to a lack of degrees of freedom for some sectors. 29. For details of the results see Corbo and Meller ( 1 9 7 8 ~ ) . 30. Instituto Nacional de Estadisticas (1970, pp. 40-45). 31. In Corbo and Meller (1978a), we also simulate the joint effect of this increase in the price of capital services together with a 10 percent decrease in the minimum wage rate. 32. We have also studied the effect of distortions on factor requirements and factor proportions measuring value added at international prices. When compared with the results of table 3.16, the same pattern emerges: the removal of distortions yields a 6-8 percent iiicrease in labor and skill requirements and a substantial decrease in capital requirements. This pattern of results is found for both the direct effect and the direct plus home goods indirect effect. As in section 3.3. we also grouped the tradables by protection level and studied the factor requirements and factor proportions of trade for two sets, one with tradables with rate of protection above the median and the other with rate of protection below the median. When we compare the results with those in section 3.3, the pattern is again similar for corresponding baskets; we observe an increase in labor and skill requirements and a substantial decrease in capital requirements and in the capitalAabor ratios. For details of these results see Corbo and Meller ( 1 9 7 8 ~ ) . + + 133 Alternative Trade Strategies and Employment Implications: Chile - It should be mentioned that these simulation results correspond to the substitution effect, that is, movements along an isoquant. The full effect on factor requirements, measured above, would therefore take time to materialize. 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