Productivity and Innovation Shortfalls in the Andean Region

This paper studies productivity in the Andean region in detail between 1990 and 2018. To do this, a growth accounting analysis is carried out, considering adjustments for quality and utilization of production factors. Subsequently, the paper explores whether the productivity gap between the Andean region and developed countries results from an innovation shortfall (low R&D investment level) or an accumulation problem. Several findings emerged. First, the absence of adjustments for quality and utilization of production factors generates more optimistic (and biased) estimates of TFP than when such adjustments are incorporated. Second, the link between productivity and the terms of trade has been heterogeneous across the Andean countries. Third, all Andean countries experience innovation shortfalls: innovation level is below expected due to the high cost of innovation adoption and to the policy distortions that have persisted over the last three decades. In that way, we warn of the diminishing contribution of productivity in the Andean countries' growth and highlight the need to establish more favorable conditions for innovation.