Ecuador - Development of manufacturing : policies, performance and outlook

Repor No. 41 2-EC Ecuador Development of Manufacturing: Policie's, Performance and Outlook Odobar 2,1990- Country Departbnent IV Latin America and the Caeibbean Region FOR OFFICIAL USE ONLY W "C~~~~~~~~~~~~~~flco Thk &zurrx4t has a msoided dbWbutkm arW be~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- o>y1 h-oths  CURRENCY EQUIVALENTS Currency Unit - Sucre (S/.) Average Exchange Rates (SucresIUS$)s Year Official Free 1985 96.50 116.29 1986 123.42 148.51 1987 170.97 193.80 1988 308.88 436.19 1989 542.09 568.18 1990 (09114) 829.80 900.00 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CEBCA Comision Equatoriana de Bienes de Capital CENDES Centro de Desarrollo CES Constant Elasticity of Substitution CGE Computable General Equilibrium Model CONAOE Consejo Nacional de Desarrollo CONACYT Comision Nacional de Ciencia y Techologia DFI Direct Foreign Investment DRC Domestic Resource Cost ECLA Economic Commission for Latin America GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product ICOR Incremental Capital-Output Ratio IECE Instituto de Ecuatoriano de Credito Estudiantil IESS Instituto Ecuatoriano de Seguridad Social INEC Instituto Nacional de Estadistica y Censos INEN Instituto Ecuatoriano de Normas Tecnicas INSOTEC Instituto de Investigaciones Socioeconomicas y Tecnologicos LE Large Enterprise MICIP Ministerio de Industrias Comercio e Integracion QR Quantitative Restriction RER Real Exchange R-+e SDE Small Developing k_onomy SECAP Servicio de Capacitacion Profesional SAM Social Accounting Matrix SSE Small Scale Enterprise TFP Total Factor Productivity  FOR OfIA Wu ONLY ECUADOR DEVELOPMENT OF MANUFACTURING POLICIES. PERFORMANCE AND OUTLOOK Table of Contents I . EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A. Manufacturing Development ..... . . . . . ............ . . 1 B. Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 C. Manufacturing Performance Outlook . .. . . . . . . . . . . .. 4 TI. MANUFACTURING DEVELOPHENT . . . . . . .. . . . . . . . ..... . 10 A. Historical Overviaew .l.v.er . i . .. . . . .. 10 B. Comparative Advantage .A.a.................... . 16 B. Trade Performance . . . . . . . . . . . . . . . . . . . . . . . 19 D. Efficiency of Manufacturing Production . . . . . . . . . . . . 21 III. THE ROLE OF POLICIES . . . . . . . . . . . . . . . . . . . . . . . . 30 A. Domestic Protection .... .......... .. . . . .. . 30 B. Exchange Rate Management . . . . . . . . . . . . . . 42 C. Factor Market Policies ..... . ........... . . . 46 D. Other Industrial Policies ..... . . . . ......... . 52 IV. THE OUTLOOK FOR INDUSTRIAL DEVELOPMENT AND POLICY RECOMMENDATIONS . 57 A. Comparative Advantage for Manufacturing . . . . . . . . . . . . 57 B. Improving Policies . . . . . . . . . . . . . . . . . . . . . . 57 C. The Government's Policy Program . . . . . . . . . . . . . . . . 59 D. Potential Gains from Policy Changes. . . . . . . . . . . . . . 65 STATISTICAL APPEIX . . . . . . . . . . . . . . . . . . . . . . . . . . 67 TECHNICAL ANNEXES .... . . .... . . . . . . . . . . . . . . .. 78 MAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 This report is based on the findings of a work program on the manufacturing sector in Ecuador. The main Mission visited Ecuador in November-December 1988. The report was written by Mauricio Carrizosa (Team Leader, LA4TF). Background work on industrial and trade policy and performance was undertaken by Dominique Hachette (Cons.), Julio Nogues (IECIT), and Elizabeth Sadoulet (Cons.). Jorge Sanguinetty (Cons.) prepared a contribution on business development. Katherine Whitmore (IENIN) provided an analysis of technology and total factor productivity growth. Processing of Industrial Survey Data Tapes was undertaken by Phyllis Kolmus (Cons.) rTb document ha a rstried disrbutionand may be ued by ecipients only in the peformae XoftheirofficidudueL Its contnts may not orwi be dickd witout Wod Bonk autoritin.  TEXTTABLES AND FXIGU Table 2.1s SOUR-ICES Of MANUACTUZW SECTOR GRO ..... . . . ... 13 Table 2.22 DISTRIBUTION OF MANUFACTURING VALUE ADDED AT CURKE MC8 ... *ooo**oo* * 14 Table2.3S I CATOSOFSOFACR ORgot EIDOUIENTS * * ............. 18 Table2.4: ICATORSOF TRADEE ................................ 19 Table 2.5: STRUCTURS OF EPRTS . .. . . .. . . . . . . . . . .. .. . 19 Table 2.6: IISTRIAL COUTRIES MANFACTURED MORTS FM SLCED ATIN-AMECANCOUNTRIES,N1980-67 0............ 20 Table 2.7s ICATRSOFPRODUCTIONU . . . *........ ...... 22 Table 2.8S DISTRIBUTION OF PFRMS, PLOMET AD VALU-ADD IN MAUACTURIN .o. . . ... . . . . . . . . . . .*. * * .0 25 Table 2.9s DISTRIUION OF IMNWFACTURG Aimo COTAGE SHOP, SMALL AND MEDIUM INSTRY, AND LAMGM INSRYs SELECTEDECONOMES AND YEARS * . . * * . . * . . * .. *. 26 Table 2.10s VALUE ADDED PER VOR33 IN MANUFACTURINBYT LEVEL OF RPLOYmHENT OF I8MS, 1980 * . . *. * . . . * . . . , . * 28 Table 2.11: TOTAL FACTOR PRODUCTVITY GROWTE IN MANUFACTURING . . . . 29 Table 3.1s NOMINAL PROTECTION, 1966-1988 . . . . . * 32 Table 3.2: PRIOR DEPOSITS 3 4 . * * * . * . * . . . 34 Table 3.3s QUANTITATIVE RESTRICTIONS ON IMPORTS . . . . . . . . . . . 36 Table 3.4: SUMMARY OF TRADE POLICY INDICATORS OF NIGULY INDTED COUNTRIES BEVORE, DURING. AND AFTER TU PAYM CRISIS . 38 Table 3.5: DISTRIBUTION OF MANUFACTURING FI1MS BY PROTECION AND EFFICI CY .. * * . * .*. * *o * .. . * . .. * * . .o * * 41 Figure2.1 GROSS DOMESTICRO DUCT...... ................ . 11 Figure2.2t SEAREOFANUFACTU IIN GDP .* * o ................... 11 Figure 2.3 IMORTS OF CAPITAL GOODS FORISTRY . .*....... . 24 Figure 2.4 VALUE-ADDED R WORKER IN MANUFACTURING ... . . . . . . 24 Figure 3.1s REAL EXCANGES AT .R ..T.............. . . . 44 Figure 3.2 IMORT TAXES . . . .................. . 44 Figure3.3: LABORCOSTINNANUFACTURING............... 50  DEVELOPM