KSP Policy Recommendations for Ecuador 2012 - 04201210090122009078799

Policy Recommendations for Ecuador: Export Promotion, Industrialization

and Capacity Building

Policy Recomm

endations for Ecuador: Export Promotion, Industrialization and Capacity Building

2012

ISBN 978-89-8063-657-0(set)

Ministry of Strategy and Finance

Government Complex 2, Gwacheon, 427-725, Republic of Korea Tel. 82-2-2150-7732 www.mosf.go.krKorea Development Institute

130-740, P.O.Box 113 Hoegiro 47, Dongdaemun-gu, Seoul Tel. 82-2-958-4114 www.kdi.re.krCenter for International Economic Studies

137-940, A-1203, Samhomulsan Bldg., Yangjae 2-dong, Seocho-gu, Seoul Tel. 82-2-589-0099 www.cies.or.kr

Knowledge Sharing Program Center for International Development, KDI P.O. Box 113 Hoegiro 47, Dongdaemun-gu, Seoul, 130-740 Tel. 02-958-4224

cid.kdi.re.kr www.facebook.com/cidkdi

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2012

MINISTRY OF STRATEGYAND FINANCE Korea Development Institute

Policy Recommendations for Ecuador: Export Promotion, Industrialization and

Capacity Building

Policy Recommendations for Ecuador: Export Promotion, Industrialization and Capacity Building

Center for International Economic Studies(CIES)

Ministry of Strategy and Finance (MOSF), Republic of Korea

Korea Development Institute (KDI)

Secretary of National Planning and Development (SENPLADES),

The Republic of Ecuador

Secretary of National Planning and Development(SENPLADES) of Ecuador

MoonJoong Tcha, Executive Director, Center for International Development (CID), KDI

Taihee Lee, Director, Division of KSP Consultation, CID, KDI

Hongyul Han, Senior Fellow, CIES and Professor, Hanyang University

Joo Won Park, Research Associate, Division of KSP Consultation, CID, KDI

Nahyeon Bak, Researcher, CIES

Hongyul Han, Hanyang University/CIES

Jang Won Suh, Former managing director of UNIDO

Chapter 1. Hongyul Han, Professor, Hanyang University/CIES and Siwook Lee , Professor, Myongji

University

Chapter 2. Ho Saeng Rhee, Professor, Myongji University/CIES and Yoocheul Song, Professor,

Dongduk University/CIES

Chapter 3. Hongyul Han,Professor, Hanyang University/CIES and Insoo Kang, Professor, Sookmyung

University/CIES

Christopher Kim, The Graduate School of International Studies, Korea University

Project Title

Prepared by

Supported by

Prepared for

In cooperation with

Program Directors

Program Officer

Project Manager

Project Advisor

Authors

English Editor

Policy Recommendations for Ecuador: Export Promotion, Industrialization and Capacity Building

Government Publications Registration Number 11-1051000-000287-01ISBN 978-89-8063-631-0 94320

978-89-8063-657-0 (set)Copyright 2012 by Ministry of Strategy and Finance, the Republic of Korea

Policy Recommendations forEcuador: Export Promotion,

Industrialization and Capacity Building

2012

01-1051000-000287-01

Knowledge Sharing Program

MINISTRY OF STRATEGY AND FINANCE

Korea Development Institute

One of the key elements of Korea's development cooperation is the sharing of Korea's

development knowledge and experience (KSP: Knowledge Sharing Program). Korea's

Knowledge Sharing Program (KSP) was launched in 2004 by the Ministry of Strategy and

Finance (MOSF) and the Korea Development Institute (KDI). KSP aims to share Korea's

development experience and knowledge accumulated over the past decades to assist socio-

economic development of the partner countries. Former high-ranking government officials are

directly involved in policy consultations to share their intimate knowledge of development

challenges, and they complement the analytical work of policy experts and specialists who have

extensive experience in their fields. Through this program, Korea hopes to share development

experiences with partner countries on development policy making, economic management,

public-private partnership building, institution building, etc. The KSP project is expected to be a

new and unique model of international development cooperation. Korea's development

experiences, both its successes and failures, are expected to be a benchmark and guiding lesson

for recipient countries in managing their development challenges. By this project, mutual

understanding among policy makers of the two countries would be promoted, and human

networks of the two countries would be extended through the exchange of experts.

The objective of KSP Ecuador 2011 is to support the Ecuadorean government in effectively

implementing the goals of its National Development Plan through the sharing of Korea's

development experiences. In Particular, Korea's policy experiences in the course of preparing

and implementing its 5 Year Economic and Social Development Plans since the 1960s would be

a good reference in this exercise. The implementation of KSP Ecuador was mainly conducted in

close cooperation with Secretary of National Development Plan(SENPLADES). However, it is

necessary to have close interactions with many other stake holders within the country for the

success of the project.

I would like to take this opportunity to express my sincere gratitude to Senior Advisor Dr.

Jang-Won Suh and Project Manager Dr. Hongyul Han, as well as all the project consultants

including Dr. Hosaeng Rhee, Yoocheul Song, Insoo Kang and Siwook Lee for their immense

Preface

efforts in successfully completing the 2011 KSP with Ecuador. I am also grateful to Executive

Director Dr. MoonJoon Tcha and Program Dirctor Mr. Taihee Lee and Program Officer Ms.Joo

Won Park and Ms. Nahyun Kim, all of the members of the Center for International Development,

KDI and Ms. Nahyeon Bak and Ms. Saemi Lee, Mr. Donghyun Lee, all of program coordinators of

the Center for International Economic Studies for their excellent support for this Program. Lastly,

I extend my warmest thanks to the SENPLADES of Ecuador and other related ministries, program

coordinators and participants for showing active cooperation and great support.

I sincerely hope the final research results including policy recommendations on the selected

areas could be fully utilized to help Ecuador in achieving economic development in priority

areas in the near future.

Jinsoo Yoo

President

Center for International Economic Studies

Contents2011 KSP with Ecuador 13

Executive Summary 16

Chapter 1

Prioritizing Industries for Export Promotion

Summary 22

1. The Status of Ecuadorean Economy and National Economic Plan 23

1.1. Structure and Recent Performance 23

1.2. Selection Criteria of Priority Industries for Export Promotion 30

2. Analysis for Prioritizing the Strategic Industries 33

2.1. Rationales and Prioritization Criteria for Strategic Industries 33

2.2. Demand Analysis 39

2.3. Supply-side Analysis 47

2.4. Analysis of Dynamic Comparative Advantage 55

3. Short Term and Mid/Long Term Plan for Export Promotion 61

References 64

Appendix 66

Chapter 2

Policy Framework for Export Promotion of Ecuador

Summary 68

1. Overview of the Industrial and Trade Policy System of Ecuador 70

1.1. Policy Objectives and Strategies 70

1.2. Related Institutions and Coordination of Industrial and Trade Policies 79

2. Current Status of Export Promotion Measures 83

2.1. Incentive Measures for Production Capacity Improvement 85

2.2. Facilitation of Exports Financial and Non-financial Measures 99

3. Observations and Recommendations 101

Appendix 105

References 108

Chapter 3

Policy Recommendations for Export Promotion of Priority Industries

Summary 110

1. A Virtuous Cycle of Export and Economic Growth 111

2. Policy Recommendations 114

2.1. Overall Policy Framework 114

2.2. Elements of Export Promotion Policy 116

2.3. Recommendations by Measures: Policy and Implementation 120

References 142

Chapter 1

Industry Structure of Ecuador 25

Selected Macroeconomic Indicators, 2005-10 26

The 14 Industries for Export Promotion 32

Sector Description (ISIC Rev. 3 4 digit level) 36

Total Number of Sectors/Products for Analysis 37

Trends in Global Import Demand by Sectors (2002-09, current value) 40

Top 20 Subsectors in Terms of Global Import Demand Growth (2002-09) 41

CCIs for Major Exporting Markets of Ecuador (2009) 43

Top 5 Export Destinations of Ecuador: The Case of ISIC 0112 and 0113 45

Domestic Demand Structure 46

Value-added by Industries (Manufacturing Sector) 48

Technological Sophistication by Sectors 49

Employment and Wages by Industries (Manufacturing Sector) 51

Top 10 Exporting Sectors of Ecuador (2009) 57

Trade Volumes of Sub-sectors (2010, US $ Thousands) 58

Prioritizing Strategic Sectors: Demand and Supply-side Consideration 62

Prioritizing Strategic Sectors by Time Horizon 63

Industry Classification by Technological Sophistication (OECD) 64

Chapter 2

Classification of Priority Sectors 77

Typology of Export Promotion Measures 84

Export Promotion Measures of Ecuador 84

World Bank's Classification of Income Groups 85

Classification of the MSMEs 95

Margins of Preference to Domestic Suppliers, 2011 99

Contents | LIST OF Tables

Chapter 3

Example: Export Target by Sector of Korea in 1971 116

Implementation Plan of Export Promotion Measures:

An Illustration Based on Korea's Export Promotion Plan of 1971 117

Sources of National Investment Fund: Korea (Billion KR Won) 122

National Investment Fund: Sourcing and Management (Feb. 1976). 125

Details of NIF Investment (Feb. 1976). 126

Import Substitution of Inputs for Some Export Products 129

Share of Export Finance in the Total Loan 133

Comparison of Lending Rate between Export Finance and Commercial Rates 133

Evolution of Korea's Export Insurance System 136

Types and Performance of Korean Export Credit Insurance 139

Contents | LIST OF Figure

Chapter 1

Merchandise Trade 2005 and 2010 27

Prioritization Criteria for Strategic Sectors 38

Trends of CCIs for Major Exporting Markets of Ecuador 44

World Import Composition by Factor Intensity (2009) 54

Ecuadorian Export Composition by Factor Intensity (2009) 55

Revealed Comparative Advantage (RCA) Indices by Subsectors (2009) 60

Chapter 2

Trade Deficit of Ecuador 70

Fiscal Deficit of Ecuador 71

Industrial and Trade Policy Framework of Ecuador 72

Manufacturing, Value Added (2000-2010 Average) 73

Strategies for Productive Development 74

Institutional Framework for Productive Development and Trade Policies 81

Government Ministries of Ecuador 82

Gross Fixed Capital Formation relative to GDP 86

Gross Savings relative to GDP 86

Gross Fixed Capital Formation relative to GDP by the Private Sector 87

FDI relative to Gross Fixed Capital Formation 87

Ecuador's Savings - Investment Gap 88

Ecuador's Cumulative Savings - Investment Gap since 2000 88

Tariff Rates in Ecuador 97

Tariff Structure by Processing Status 98

Chapter 3

Illustration: A Virtuous Cycle of Export and Economic Growth 113

Elements of Export Promotion Policy 115

Target Areas for Policy to Strengthen Production Capacity 127

Basic Structure of Export Finance: An Illustration 131

Illustration of Export Finance for Special Sector 134

Contents | List of Box

Chapter 1

Commodity Complementarity Index (CCI) 42

Chapter 2

Main Characteristics of Korea's Trade Policies at the Early Stage of Development 75

Korea's Savings Investment Gap at the Early Stage of Economic Development 89

Composition of Credit Portfolio: Public Banks vs. Private Banks 89

Incentive Measures in the Code of Production, Trade and Investment 91

Maquila and Free Zone in Ecuador 93

Chapter 3

Korea's NIF Management Council 125

Korea's Case: National Investment Fund for HCI Drive 125

Ecuador's Case 126

Korea's Case: Support Measures for Profitability

and Export Earnings of Textile Industry (1971) 131

Korea's Export finances 133

Establishment of Planning Board 142

Monthly Briefings of Economic Trend (MBET) Meetings of Korea 143

KSP with Ecuador 2011013

In April 2010, the Korean Embassy in Ecuador informed the Ecuadorian Agency ofInternational Cooperation(AGECI) that The Ministry of Strategy and Finance of theRepublic of Korea made available a new program of cooperation called: "KnowledgeSharing Program KSP. In May 20th of 2010, AGECI presented Ecuador's interestedtopics to KOICA in Ecuador based on the consultation with SENPLADES. The initialtopics included; "strengthening of the process for the promotion of exports;economic crisis management improving the economic and development planningsystem". In June 30th of 2011, the Korean Embassy send an official letter to theMinistry of Foreign Affairs with a copy for the SENPLADES that the program wouldprovide technical assistant by sending a professional team of the Center forInternational Economic Studies(CIES) of Korea, to assist the successful implementationof the National Development through the sharing of development experiences ofKorea.

The Korean delegation, headed by the Former Managing Director of UNIDO, DR.Jangwon Suh paid a visit to Ecuador from June 29th July 10th, 2011 and met withRene Ramirez Gallegos, Minster of SENPLADES and Diego Martinez Vinueza, GeneralUndersecretary of Planning for Good Living, SENPLADES and related seniorgovernment officials. Upon the consultation between senior officials fromSENPLADES and experts from CIES of Korea, the following agenda were selected.


014Policy Recommendations for Export Promotion, Industrialization and Capacity Building

Both parties also agreed that the program will be conducted through thefollowing activities:

1. To elaborate a study and research about topics and national priorities ofEcuador in industrialization policies and export promotion strategy.

2. To organize and realize an expert's workshop about industrialization policiesand Ecuadorian export promotion strategies.

3. Visit of Ecuadorian experts to Korea and their participation in the experts'workshop on industrialization and stratesy and Ecuadorian export promotionpolicies.

4. To organize a dissemination seminar of the final report and study.

From October 16th to 23th 2012, an Ecuadorian delegation of 10 governmentofficials and experts visited Seoul to participate in the interim report by the Koreanconsulting team of CIES and capacity building workshop. The Ecuadorian team wasled by the Vice Minister Diego Martinez Vinueza and consisted of governmentofficials and experts from SENPLADES and other related government agencies.During the interim report session and workshops, Korean experts and Ecuadoriandelegation exchanged their views on the progress of the overall program. Also, theEcuadorian delegation made presentation on the current situation of industrial andexport promotion policy to the experts of CIES. The Ecuadorian delegation visitedvarious industrial sites in order to enhance understanding of Korea's industrial policyin practice.

From February 11th to February 18th, the Korean delegation visited Ecuador forfinal report and dissemination of the research output. The Minister of SENPLADESwelcomed the delegations and congratulated for the successful completion of theprogram. The Korean delegation presented the research output and policyrecommendations in a series of public seminar and workshops with governmentofficials from various government agencies. The Ecuadorian government organizedthe Inter-institutional Working Team(IWT) to collaborate with the Korean experts.Led by the SENPLADES, the IWT works to create and implement industrial policy andexport promotion policy measures based on the analysis and policy recommendationmade by the Korean experts of CIES. Also during the visit, government officials and

Consultation Topics Korean Researcher

Prioritizing Industries for Export PromotionDr. Hongyul Han

Dr. Siwook Lee

Policy Framework for Export Promotion of EcuadorDr. Hosaeng Rhee

Dr. Yoocheul SongPolicy Recommendations for Export Promotion of Priority

Industries

Dr. Hongyul Han

Dr. Insoo Kang

Program Officer Ms. Nahyeon Bak


experts of SENPLADES, CIES experts and KDI program director held a meeting inorder to develop agenda for the next step of KSP Ecuador.

Nahyeon BakProgram Officer for 2011 KSP with Ecuador


The Ministry of Strategy and Finance of the Republic of Korea (MOSF) and TheSecretary of National Planning and Development Strategy(SENPLADES) of Ecuadorhave launched a new program of cooperation, the Knowledge Sharing ProgramKSP. This program provides technical assistance by sending professional teams fromthe Center for International Economic Studies of Korea, to help with the successfulimplementation of national development through the sharing of the developmentexperiences of Korea. During Korean consultants' visit to Ecuador in July 2010,SENPLADES and CIES came up with an agreement on the agenda and activities of thisparticular project. This report is based on the following activities as agreed by bothparties:

1. To elaborate a study and research about topics and national priorities ofEcuador in industrialization policies and export promotion strategy.

2. To organize and realize an expert's workshop about industrialization policiesand Ecuadorian export promotion strategy.

3. Visit of Ecuadorian experts to Korea and their participation in the experts'workshop on industrialization and strategy and Ecuadorian export promotionpolicies.

4.To organize a dissemination seminar of the final report.

The central objective of this project is to provide the Ecuadorian government a reportentitled, "Policy Recommendation for Ecuador: Export Promotion, Industrializationand Capacity Building ."

Executive Summary

Hongyul Han (Hanyang University/CIES)

Executive Summary017

This report consists of the following three chapters:1. Prioritization of 14 Strategic Industries for Export Promotion Policies: Time

Framework, Policy Emphasis2. Assessment of the Current Status of Export Promotion Policies 3. Policy Recommendation for Export Promotion of Priority Industries

The first chapter re-examines strategic sectors for Ecuadorian industrial upgrading,focusing on manufacturing. It starts with nine manufacturing industries amongfourteen strategic sectors that SENPLADES selected. Based on a set of newprioritization criteria, a re-defined list of strategic sectors is developed. First, Chapter1 investigates the data for three subsectors within the strategic sectors identified bySENPLADES not only in terms of international trade but also on other domesticconsumption, production and employment in prioritizing strategic sectors.Considering this data together is largely consistent with the PND, since the key policyobjectives of the latter are multi-faceted, ranging from valued-added exportpromotion and employment creation to selective import substitution.

The advantage of this study is that it explicitly considers both demand-side andsupply-side factors, as well as potentials for dynamic comparative advantages. Indemand analysis, the chapter identifies which sectors have greater demand prospects,separately for domestic, regional and global markets. More specifically, weinvestigate global demand prospects by looking at the recent trends of world importgrowth at a sectoral level. As for supply-side consideration, the focus is made onvalue-added potential and technological sophistication, employment creationopportunity, industrial inter-linkages, and the linkage with resource endowment.These supply-side factors are important for transforming the existing vicious cycle ofprimary production and low wages to a virtuous cycle of value-added andemployment-generating production. Then, this chapter evaluates industrial inter-linkage backward and forward. Finally, the chapter looks at export connectedness asa major criterion for priority sector selection. This is important because developing anew exporting sector requires highly specific inputs such as technological knowledge,physical assets, intermediate inputs, infrastructure needs or other public goods. Oncethis exporting sector is established, then know-how to efficiently use such specificassets will spillover to other potential exporting sectors.

Main conclusions of Chapter 1 are as follows:First, from a short-term perspective, a strong candidate for export promotion is

fresh and processed foods. Grain mill products (ISIC 1531), animal/vegetable oils & fats(ISIC 1514), dairy products (ISIC 1520) and other food products (ISIC 1549) arepotential subsectors to promote. Meantime, apparel & footwear and wood productsare worth to look at in the short-term promotion, under the caveat that these sectorsdo not have great demand perspectives. Second, processed metal products could be a


good candidate for the mid-term export promotion. Within the sector, suggestedsub-sectors for promotion are structural metal products (ISIC 2811), tanks &containers of metal (ISIC 2812), basic iron and steel (ISIC 2710) and other generalpurpose machinery (ISIC 2919). From a medium-term perspective, it is also plausible toconsider promoting petro-chemical (especially plastic & synthetic rubber; ISIC 2413)and bio-chemicals (fertilizers & nitrogen compounds; ISIC 2412, and soap, cleaning &cosmetic preparations; ISIC 2424). Lastly, in the long-run, developing sectors ofrelatively high technology contents, including technology (hardware), motors andbio-medicine, could be considered.

Chapter 2 analyzes and evaluates the overall policy framework forindustrialization and export promotion. The dollarized Ecuadorian economy dependson low value-added exports of primary products as its main source of foreigncurrency, which has made it very vulnerable to external shocks. The new governmenthas been in dire need to reduce its external dependency and has started toimplement a new development model. Since the adoption of the 2008 Constitution,Ecuador has been in the process of legal modifications and institutional changes,which has laid out its economic and social development frameworks and strategies.

The new industrial and trade policy framework intends to transform domesticproduction patterns for productivity improvement, quality employment, inclusive andsustainable development. Strategies for productive development are also set out,which include selective import substitution, productivity improvement and exportpromotion. These strategies are expected to transform the economy's pattern ofspecialization and help the economy overcome structural weaknesses in productionand trade, thereby, reducing the economy's external dependence.

Some sectors are considered a priority for productivity improvement, strategicimport substitution and export promotion. A variety of tax and non-tax incentiveshave been introduced for export promotion, especially in the priority sectors. Inaddition, the Competitiveness Improvement Plan for each priority sectors wasderived. The incentive measures can be categorized into measures for productioncapacity improvement, specific financial and non-financial facilitation of exports.These measures have been implemented over a very short period of one or two yearsat most.

Several remarks are made in the current policy framework for export promotionof Ecuador. Even though Ecuador is at the very early stage of the new industrial andtrade policy system, specific incentive measures and assistance programs that havebeen implemented need to be reviewed on a regular basis to monitor theireffectiveness in achieving the policy objectives. Bottlenecks that might hinder theeffectiveness of the measures have to be identified for improvement.

Executive Summary019Executive Summary019

There are fourteen priority sectors for import substitution and export promotion.It is not unclear how these sectors are classified to achieve the industrial and tradepolicy objectives. In order for the priority sectors to be more than a wish list, theyneed to be clearly characterized according to the policy objectives and time frames.The Competitiveness Improvement Plan for each priority sector need to be improvedto be a concrete and result-oriented roadmap tailored to the sector; including specificgoals, ways and means of resource mobilization, and concrete supportive measures.

There has been a little contribution of the private sector and FDI to the gross fixedcapital formation in Ecuador, while the gross domestic savings have exceeded thegross fixed capital formation. Since 2011, the government has employed taxincentives to induce private investment, especially in the priority sectors. It remains tobe seen whether tax incentives will turn out be effective in inducing new investment.In addition to the existing incentive measures, the government needs to devise otherways and means to mobilize and channel domestic savings and the FDI to the prioritysectors.

The public banks might consider offering export financing services on favorableterms for priority sectors and the MSMEs. Export insurance plays an important role inreducing the risks involved in the provision of export financing. As required by theCode of Production, a trade insurance system has to be established for exportfacilitation.

The national plan places great emphasis on inclusive development and introducedvarious preferential measures to support the MSMEs. For the measures to have agrowth effect on MSMEs with production and trade potential, they need to befocused on, and consistently applied to, the MSMEs that provide the most desirableperformance.

In the concluding Chapter 3, specific recommendations for export promotionpolicies are given based on the analysis of Chapters 1 and 2.

First, it is important to explicitly set up export targets by value for each prioritysectors. The export performance goals specifically assign all the responsiblegovernment agencies with detailed guidelines of policy measure execution. Oncethese goals are presented, all the responsible government agencies identify policyimplementation plans which include diagnosis of the effectiveness of existingmeasures and introduction of new ones in terms of expenditure, technical measuresand costs thereof, etc.

Second, as export promotion policy requires various resources (human, financial,technical), like other public policy, it is important to secure the necessary financial


resources, domestic and foreign, and channel them to target industries. Consideringthe saving-investment gap observed in many developing countries including Ecuador,this policy plays the role of compensation of capital market deficiencies. Therefore, itis recommended to establish a National Fund for Industrialization (NFI, (tentative)).The purpose of NFI will be to secure financial resources to support strategic industriesby either directly investing in those industries or providing loans to private investors.This will also supply the necessary resources to implement production and exportpromotion policy measures.

Third, it is recommended to implement policy measures to strengthen productioncapacity of priority industries. The measures need to target supporting keyinvestment decisions of existing firms to enhance their production capacity as well asnew entrants to the industries. The primary measure should be financial assistance.Specifically for the strengthening of production capacities, long-term loans will beprovided to the specific investments at subsidized interest rates. Government caninduce private industries to expand production capacity by policy measures that canhelp profitability of industrial activities. These measures aim at enhancing profitabilityand maximizing total foreign exchange earnings from exports. In this regard, while itis important to support exporters with respect to production and export activities, itshould be reminded that the assistant measures have these effects for only a limitedperiod of time. Therefore the assistance measures also need to focus onstrengthening long term international competitiveness. To this purpose, assistancemeasures should include upgrading the quality and value-added of exports.

Fourth, it is recommended to strengthen export finance and introduce exportinsurance. In addition to the strengthening of overall export financing, specificactivities to support include export finance for production and storage which is toprovide loans directly to production and storage activities as well as procurement ofinput materials. Export finance for procurement related to export activities will assistexporters when they purchase domestically, in relation to export activities, finishedgoods, raw and intermediate materials. Also it can be applicable when exportersimport those goods or materials. Finally, export financing may include specialprogram focusing on the development of a specific sector, such as food processing,wood processing and apparel industry. This type of program can facilitate thedevelopment of these sectors by directly reducing the business risk inherent in thoseindustries, including seasonal factors, price volatility and lack of expertise due tounderdevelopment of those industries.

Finally, based on the discussion on the improvement of policy coordination system ofexport promotion during the course of this project, the Inter-Institutional Working Teamwas created consisting of government officials and experts from various related ministries.

Policy Recommendations for Ecuador:Export Promotion, Industrialization and

Capacity Building

Prioritizing Industries for ExportPromotion

Chapter1

Summary1. The Status of Ecuadorean Economy and National Economic Plan2. Analysis for Prioritizing the Strategic Industries3. Short Term and Mid/Long Term Plan for Export Promotion

022Policy Recommendations for Ecuador: Export Promotion, Industrialization and Capacity Building

Summary

This chapter re-examines strategic sectors for the Ecuadorian industrial upgrading,focusing on manufacturing. It starts with nine manufacturing industries amongfourteen strategic sectors that SENPLADES selected. Based on a set of newprioritization criteria, a re-defined list of strategic sectors is developed. First, Chapter1 investigates the data for three subsectors within strategic sectors identified bySENPLADES not only in terms of international trade but also on domesticconsumption, production and employment in prioritizing strategic sectors.Considering these data together are largely consistent with the PND, since key policyobjectives of the latter are multi-faceted, ranging from valued-added exportpromotion and employment creation to selective import substitution.

The advantage of this study is that it explicitly considers both demand-side andsupply-side factors, as well as potentials for dynamic comparative advantages. Indemand analysis, it identifies sectors of greater demand prospects in domestic,regional and global markets respectively. More specifically, we investigate globaldemand prospects by looking at the recent trends of world import growth at adetailed industry level. As for supply-side consideration, the focus is made on value-added potential and technological sophistication, employment creation opportunity,industrial inter-linkages, and the linkage with resource endowment. These supply-side factors are important for transforming the existing vicious cycle of primaryproduction and low wages to a virtuous cycle of value-added and employment-

Prioritizing Industries for Export Promotion

Hongyul Han (CIES, Hanyang University)Siwook Lee (CIES, Myongji University)

Chapter 01

Chapter 1 _ Prioritizing Industries for Export Promotion023

generating production. Then, this chapter evaluates industrial inter-linkage backwardand forward. Finally, export connectedness as a major criterion for priority sectorselection is considered. This is important because developing a new exporting sectorrequires highly specific inputs such as technological knowledge, physical assets,intermediate inputs, infrastructure needs or other public goods.

The main conclusions of this chapter are as follows. First, from a short-termperspective, a strong candidate for export promotion is fresh and processed foods.Grain mill products (ISIC 1531), animal/vegetable oils & fats (ISIC 1514), dairy products(ISIC 1520) and other food products (ISIC 1549) are potential subsectors to promote.Meanwhile, apparel & footwear and wood products are worth to look at in theshort-term promotion, with the caveat that these sectors do not have great demandperspectives. Second, processed metal products could be a good candidate for themid-term export promotion. Within the sector, suggested sectors for promotion arestructural metal products (ISIC 2811), tanks & containers of metal (ISIC 2812), basiciron and steel (ISIC 2710) and other general purpose machinery (ISIC 2919). From amedium-term perspective, it is also plausible to consider promoting petro-chemical(especially plastic & synthetic rubber; ISIC 2413) and bio-chemicals (fertilizers &nitrogen compounds; ISIC 2412, and soap, cleaning & cosmetic preparations; ISIC2424). Lastly, in the long-run, developing sectors of relatively high technologycontents, including technology (hardware), motors and bio-medicine, should beconsidered.

1. The Status of Ecuadorean Economy andNational Economic Plan

1.1. Structure and Recent Performance

Ecuador has overcome many challenges of periodic economic crises and externalshocks like the global financial crisis and instability in the prices of natural resources.For the past few years, Ecuador has been able to maintain macro-economic stabilitythanks mostly to dollarization and increase in the petroleum prices. From 2002-06,the economy grew 5.5%, the highest five-year average in 25 years. After peaking at7.2% in 2008, Ecuador's GDP growth dropped to 0.4% in 2009, largely due to areduction in oil prices and oil output. The drop in the latter was related tolongstanding underinvestment in the sector, renegotiation of oil contracts, and anapparent decline in business confidence. However, growth rebounded to 3.6% in2010 and it is predicted to be 5.1% in 20111), largely due to higher oil prices, publicinvestment in infrastructure projects, and a strong rebound in domestic demand.2)

The dollarization of its currency in 2000 after the banking crisis led to stability, whichhelped Ecuador achieve solid economic performance through 2006.


The Ecuadorian economy is based on petroleum production, manufacturingprimarily for the domestic market, commerce, and agricultural production fordomestic consumption and export. Principal exports are petroleum, bananas, shrimp,flowers, and other primary agricultural products. The oil sector3) accounted for 14%-20% of GDP and more than half of export earnings. It also contributes 20%-30% ofgovernment revenues. Ecuador is also the world's largest exporter of bananas. The oiland agriculture sectors take 20% of total GDP while manufacturing sector takes only13%. The share of non-oil sector in GDP has decreased from 25% in 1990s to 20% in2010. 95% of non-oil exports are mostly consisted of banana, cocoa and flowers. Thischaracteristic of the Ecuadorian economy makes it highly vulnerable to externalshocks. However, dollarization of its legal tender since 2000 has contributed tomacroeconomic stability. Due to the monetary policy constraints by dollarization,fiscal policy is the main macroeconomic policy tool which is again subject to thediscipline by 2008 Constitution.

1) Ministry of Finance (2010).2) http://www.imf.org/external/country/ECU/index.htm?type=9998#56).3) Oil sector in Ecuador has been heavily reliant on foreign direct investment (FDI) traditionally, but

new government has tried to improve the national sovereignty.


Industry Structure of Ecuador

2005 2006 2007 2008 2009 2010

(Annual % change)GDP per economic activity at constant2000 prices

Agriculture, cattle, forestry, and hunting 5.1 3.5 4.4 5.2 0.7 -0.7

Fishing 25.5 14.1 2.4 6.5 5.4 1.9

Mining and quarrying(including oil extraction) 1.7 3.6 -8.3 0.0 -3.3 0.2

Manufacturing(excluding petroleum refinery) 9.2 7.1 4.9 8.1 -1.5 6.7

Petroleum refinery -5.8 -0.3 -3.4 7.9 3.1 -19.7

Electricity and water distribution 1.3 0.5 15.5 20.2 -12.2 1.4

Construction 7.3 3.8 0.1 13.8 5.4 6.7

Services 6.1 4.9 4.3 8.0 0.8 4.7

Wholesale and retail trade 5.8 5.1 3.2 6.6 -2.3 6.3

Transport, storage, and communication 2.3 5.2 3.1 5.4 3.7 2.5

Financial intermediation 18.3 20.6 8.0 11.2 1.7 17.3

Other servicesa 9.4 5.8 6.0 7.1 1.7 5.4

Indirectly measured services of financial intermediation

b 8.8 24.2 11.6 12.5 3.2 15.8

Government administration and defense 1.9 2.8 5.9 14.6 5.4 0.5

Other activities 4.9 5.5 5.0 11.3 0.3 5.5

(% of GDP)Share of sector in total employment

Agriculture, forestry and fishing .. .. 29.6 28.7 29.3 28.2

Mining .. .. 0.5 0.5 0.5 0.6

Manufacturing .. .. 10.9 11.3 10.7 11.2

Electricity and water distribution .. .. 0.4 0.4 0.5 0.5

Construction .. .. 6.5 6.6 6.8 6.4

Services .. .. 52.1 52.6 52.1 53.2

Wholesale and retail trade, personal services

.. .. 20.3 19.9 19.9 20.1

Transport, storage, and Communication

.. .. 5.6 5.5 5.7 5.9

Public administration, defense, and social security

.. .. 3.1 3.5 3.1 3.4

Financial intermediation .. .. 0.9 0.9 0.8 0.8

Other community, social, and personal service activity

.. .. 3.3 3.2 3.2 3.2

Other servicesc .. .. 18.9 19.6 19.4 19.8

Note: a. Includes accommodation, cafes and restaurants; communication; rental; business and households services;education and health.

b. According to statistical methodology, the percentage change of negative number is positive when theabsolute values of those number increase.

c. Other services include hotels and restaurants; real estate, business and rental activities; household services;education, social services, and health.

Source: WTO(2011),"Trade Policy Review: Report by the Secretariat" WT/TPR/S/254


Selected Macroeconomic Indicators, 2005-10

2005 2006 2007 2008 2009 2010

GDP per capita at current market price(US$)

2,795 3,110 3,345 3,927 3,715 4,082

Population(thousands)a 13,215 13,408 13,605 13,805 14,005 14,205

Overall government accounts (% change)

Real GDP(at 2000prices) 5.7 4.8 2.0 7.2 0.4 3.6

Consumption 6.8 5.2 3.9 7.4 -0.1 6.9

Gross fixed capital information 10.9 3.8 2.5 16.1 -4.3 10.2

Exports of goods and non-factor services 8.6 8.8 2.3 3.3 -5.9 2.3

Imports of goods and non-factor services 14.1 9.1 7.9 9.9 -11.6 16.3

Total unemployment rate(%) 7.9 7.8 7.4 6.9 8.5 7.6

Inflation(CPI, % change) 2.1 3.3 2.3 8.4 5.2 3.6

Discount rate of central bank(end-period) 3.0 2.9 5.6 5.1 0.2 0.2

Fiscal balance (% of GDP)

Total revenueb 16.4 16.5 18.7 25.5 22.3 25.8

Oil 4.2 4.1 3.9 8.6 4.4 7.6

Non-oil 12.1 12.4 14.8 16.9 17.8 18.2

Tax revenue 10.1 10.2 10.4 12.1 13.9 14.9

Total expenditurec 16.9 16.8 19.0 26.5 27.3 28.2

Current expenditure 12.8 12.8 13.2 15.7 17.2 17.1

Capital expenditure 4.1 4.0 5.8 10.9 10.2 11.1

Overall fiscal balance -0.5 -0.2 -0.1 -1.1 -5.1 -2.4

Central government debtd 10.0 7.9 7.1 6.7 5.5 8.0

External sector

Current account balance 1.3 4.2 3.7 2.5 -0.3 -3.3

Merchandise exports 28.3 31.6 32.7 35.9 27.7 31.2

Merchandise imports 26.3 27.4 28.7 33.0 27.4 33.9

Note: a. Data for the period 2008-10 are official projections from the National Statistics and Census Institute (INEC)b. According to IMF International Financial Statics.c. The IMF provides different data in the World Economic Outlook database (WEO): the general government

revenue represented (as a % of GDP) 24.4% in 2005; 27.2% in 2006; 29% in 2007; 33.7% in 2008; 29.8%in 2009; and 34.9% in 2010. The general government expenditure accounted for 23.7% of GDP in 2005;23.6% in 2006; 26.8% in 2007; 34.5% in 2008; 34.5% in 2009; and 35.5% in 2010. The generalgovernment gross debt was of 43.8% of the GDP in 2005; 35.4% in 2006; 33.2% in 2007; 26.3% in 2008;24.7% in 2009; and 20.4% in 2010.

d. According to Economy Watch. Source: WTO(2011), "Trade Policy Review: Report by the Secretariat" WT/TPR/S/254


The ratio of Ecuador's trade (exports and imports) in goods and services to GDPwas in the range 60%-75% between 2005 and 2010. In 2009, Ecuador was the world's73rd largest exporter and 75th importer of goods, and the 107th largest exporter and80th importer of services.4) Ecuador remains largely dependent on commodityexports, mainly crude oil and bananas. In 2010, crude oil accounted for the largestshare of total merchandise exports, with 51.2%, down from 54.7% in 2005. A drop of45.8% in 2009 reflected the period of renegotiation of oil company contracts andlack of investment in the sector.

Merchandise Trade 2005 and 2010

(a) Export (f.o.b.) by Product

(b) Import (c.i.f.) by Product

4) http://stat.wto.org/Home

60%

50%

40%

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2005

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Merchandise Trade 2005 and 2010

(c) Export (c.i.f.) by Main Origin and Destination

(d) Import (c.i.f.) by Main Origin and Destination

Note (a) Total: US$9.9 billion in 2005, US$17.5 billion in 2010b. According to IMF International Financial Statics.(b) Total:US$9.6 billion in 2005, US$20.6 billion in 2010(c) Total: US$9.9 billion in 2005, US$17.5 billion in 2010(d) Total: US$9.6 billion in 2005, US$20.6 billion in 2010

Source: UNSD, Comtrade database(SITC Rev.3).

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2005

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While the share of manufactured items in total imports has decreased, the shareof fuels rose from 12% in 2005 to 21.3% in 2010, due to refining capacity constraints.Despite Ecuador's increased emphasis on integration with neighboring LatinAmerican trading partners, its main, albeit declining, single export market andsupplier remain the U.S. The EU is Ecuador's main nonoil export market. America,mainly the United States, remains Ecuador's largest supplier, although its share intotal merchandise imports fell considerably. While China's share in total importsincreased from 6.5% in 2005 to 7.8% in 2010, making it the fourth most importantsource of imports. The shares of Colombia and Brazil diminished considerably, from14.4% to 9.8% and from 7.1% to 4.1%, respectively. Ecuador remains a net importerof services, running a deficit in the service account.


1.2. Selection Criteria of Priority Industries for ExportPromotion

Ecuador's PND is a blue print for long-term socio-economic development ofEcuador. SENPLADES is the leading government agency responsible for theimplementation of PND. PND covers 12 extensive areas of social and economicdevelopment including social integration, regional integration, political reform,resource development, education, etc.

In the context of economic development, nine strategies are presented in PND(2009-2013). They include:

Democratization of the Means of Production, (Re)distribution of Wealth, andDiversification of the Forms of Property and Organization

Transformation of the Economy's Model of Specialization through the SelectiveSubstitution of Imports

Increase of Real Productivity and Diversification of Exports, Exporters andMarkets

Ecuador's Strategic and Sovereign Insertion in the World, and Latin AmericanIntegration

The Transformation of Higher Education and the Transfer of Knowledge inScience, Technology and Innovation

Connectivity and Telecommunications for the Information and KnowledgeSociety

Change of Energy Matrix Investment for Good Living within Sustainable Macroeconomics Inclusion, Social Protection and Security, and Guarantee of Rights within the

Framework of the Constitution

The strategies reflected in the Plan show a strong government will to transformthe current economic structure which is heavily dependent on primary resources to amore diversified one. Specifically, Ecuador places a high priority on importsubstitution and promotion of domestic industries as well as increasing domesticeffective demand through real wage increase.

Ecuador's PND places high priority on export promotion policy as a key strategy. Itreflects the current economic structure of Ecuador; specialization based on resourceextraction and the production of raw materials which limits the possibilities ofachieving "Good Living." The heavy dependence on primary sectors make theeconomy vulnerable to the volatile changes foreign demand and international prices.Export promotion aims at transforming Ecuador's primary and extractive export-ledeconomic model to a virtuous cycle of value-generating production, improved humancapabilities, enhanced performance, better wages, recovered domestic demand,


reduced external dependence, and increased sovereignty. Ecuador has a long list ofexpectations from the implementation of the Plan;

Generate Higher Productivity; Generate Greater Added Value; Have High Production Chains; Permit the Democratization of the Means of Production; Have Low Environmental Impact (reduced pollution and environmental

deterioration); Replace Traditionally Imported Products; Create Jobs; Enhance the Capabilities and Potential of the Population; Encourage Food Sovereignty; Promote Energy Efficiency and Sovereignty; Improve the Infrastructure for National Productivity and Access to Information

Technologies and Knowledge, and Sophisticate and Diversify the Export Product and Market Structure.

Ecuador continues to prioritize industries for promotional incentives in order tochange its industrial production structure. In doing so, it specifies the criteria that isnecessary to achieve a paradigm shift. The criteria are reflected by the followingindicators in choosing strategic industries. Table 1-3 shows the list of strategicindustries based on these criteria.5)

1. Employment Generation2. Quality of Work3. Level of Market Concentration4. Internal Consumption5. Food Sovereignty6. Environmental Impact

5) The study of industry selection was led by SENPLADES. For detailed methodology applied, seeIncercion economica de Ecuador a Niel Mundial tomo, SENPLADES(2010)


The 14 Industries for Export Promotion

Tourism5520 Restaurants, bars and canteens

6304 Activities of travel agencies, tour organizers and tour guides

Pharmaceutical and Biomedical2423 Manufacture of pharmaceuticals, medicinal chemicals and botanical products

Renewable Energy (Bioenergy, Biofuels and Alternative)4010 Production, collection and distribution of electricity

Construction 4520 Construction of entire buildings or parts of buildings, civil engineering works

Transportation & Logistics6010 Transport by rail

6023 Freight transportation by road

6110 Sea and coastal water transport

6210 Regular transportation by air

Metalworking2720 Manufacture of basic precious and nonferrous metals

2893 Manufacture of cutlery, hand tools and general hardware

2710 Manufacture of basic iron and steel

2811 Manufacture of structural metal products

2899 Manufacture of other fabricated metal products

2812 Manufacture of tanks, reservoirs and containers of metal

2919 Manufacture of other general purpose machinery

2925 Manufacture of machinery for food processing, beverages and snuff

Apparel & Footwear1810 Manufacture of wearing apparel, except fur apparel

1920 Manufacture of footwear

Motor vehicles, bodies, and parts3410 Manufacture of motor vehicles

3420 Manufacture of bodies for motor vehicles, manufacture of trailers

Petrochemicals - Plastics and synthetic rubber2520 Manufacture of plastic products and articles

2413 Manufacture of plastics in primary forms and synthetic rubber

Biochemical

2424Manufacture of soap and detergents, cleaning and polishing preparations,perfumes and toilet preparations

2411 Manufacture of basic chemicals, except fertilizers and nitrogen compounds

2412 Manufacture of fertilizers and nitrogen compounds

Processed wood products2101 Manufacture of pulp, paper and cardboard

2109 Manufacture of other articles of paper and cardboard

3610 Manufacture of furniture of any material


2. Analysis for Prioritizing the StrategicIndustries

2.1. Rationales and Prioritization Criteria for StrategicIndustries

The current structure of economic specialization, based on resource extraction andthe production of raw materials substantially limits the possibilities of achieving thelong-term good living of the Ecuadorian economy. The NDP clearly emphasizes theimportance of changing the economy's pattern of accumulation by transforming thevicious cycle of primary production, low human capacities, decreasing performances,low wages, scarce domestic demand, and external dependence; to a virtuous cycle ofvalue-generating production, improved human capabilities, enhanced performance,better wages, recovered domestic demand, reduced external dependence, and

The 14 Industries for Export Promotion

Fresh and processed foods

111 Growing of cereals and other crops

1514 Processing of oils and fats of vegetable or animal

1511 Meat and meat products

1531 Manufacture of grain mill products

0113 Growing of fruit, nuts and plants used for making drinks and spices

1520 Manufacture of dairy products

1541 Manufacture of bakery

1542 Sugar processing

0112 Cultivation of vegetables, horticultural specialties and nursery products

1549 Manufacture of other food products

1543 Manufacture of cocoa, chocolate and confectionery

0122 Raising of other domestic animals, production of animal products

1532 Elaboracinde almidones y de productos derivados del almidn

0121 Farming of cattle, sheep, goats, horses, asses, mules and hinnies, dairy farming

1533 Manufacture of prepared animal feeds

Technology: Hardware3190 Manufacture of other electrical equipment

3130 Manufacture of insulated wire and cable

3220Manufacture of television and radio transmitters and apparatus for line telephonyand line telegraphy

Source: Incercion economica de Ecuador a Niel Mundial tomo, SENPLADES(2010)


increased sovereignty.

There are two different approaches to pursue industrial upgrading (Belloca and DiMaio, 2011). The first one, so-called "functional approach," is to focus on correctingmarket failures with an impact on the whole national economy without distortingresource allocation between sectors. The related policies generally consist of buildingappropriate infrastructures, improving information dissemination, and enhancing thefunctioning of capital markets, among many others.

The second, often called the"selective approach," is to alter resource allocationwithin the economy in order to favor some sectors or regions rather than others.While the legitimacy of such policy still remains controversial within the academiccommunity, there exists some convincing historical evidence supporting the selectiveapproach.

In fact, as far as export-led economic growth is concerned, a vast amount ofrelated literature suggests that not only exporting but also what to export reallymatters (for instance, Hausman et al, 2007). Some production patterns may be moreconducive than others to promote industrial upgrading and diversification. Since theinputs and public goods that different industries need vary greatly, it is important toprioritize a number of key sectors that require assets that can be used in a wide rangeof goods other than those already in production (Rodrik, 2006). This is even more sofor developing countries at the early stage of development, given the observationthat most of these countries often face various financial and resource constraints.

In this context, the Ecuadorian Ministry for the Coordination of Production,Competitiveness & Commercialization identified fifteen strategic sectors: flowers,processed fruits & vegetables, agriculture, fish, forestry, metal products, tourism,logistics & transport, biofuels, software & consulting, textiles, leather & footwear,ceramics, construction, and artisan products. And, as mentioned earlier, the NationalSecretary of Planning and Development (SENPLADES) has recently proposed fourteenstrategic sectors; including fresh and processed foods, processed wood products,apparel & footwear, metal working, motor vehicles bodies & parts, petrochemicals(mostly plastics), biochemical, pharmaceutical and biomedical, electronics (bothhardware and software), renewable energy, environmental services, construction,transportation & logistics, and tourism. Such sectorial prioritization has been pursuedby using not only quantitative but also qualitative analysis.

On the other hand, adopting the concept of "export connectedness6),", Hausmanand Klinger (2009) also suggests a list of promising sectors that would allow Ecuador

6) details for export connectedness will be discussed later in this section.


to accelerate its transformation process, given its current economic structure; theseare clothing, plastic products, agricultural products like fruit & seafood, foodpreparations, condiments & spices, and wood products.

Among this selection, the first two, both done by the Ecuadorian governmentalagencies, are based not only on data analysis but also on various qualitative economicand political considerations. One of the advantages of this approach is that selectionis comprehensive in scope, including key service sectors in the strategic lists. At thesame time, however, as Hausman and Klinger (2009) claim, the downside of such anapproach is that it does not allow for the systematic consideration of all potentialsectors at a more disaggregated level.

Taking these into account, we re-examine the strategic sectors for the Ecuadorianindustrial upgrading, focusing on manufacturing.7) We start with nine manufacturingindustries among fourteen strategic sectors that SENPLADES selected and, basing aset of new prioritization criteria, we re-define the list of strategic sectors to bedeveloped.

Our approach here has a number of advantages over the previously existingworks. First of all, we introduce a more extensive range of quantitative data toanalyze the strategic value for each sectorial candidate. As depicted in Table 1-1, weconsider a total of thirty seven subsectors within nine manufacturing industries forour analysis.

7) Since rigorous quantitative analysis of the service sectors at the same level of the manufacturingsector is nearly impossible, we will focus on a more qualitative consideration of the service sectorat the end of this chapter.


Sector Description (ISIC Rev.3 - 4 digit level)

Sector ISIC Description

Fresh andprocessed foods

0112Growing of vegetables, horticultural specialties and nurseryproducts

0113 Growing of fruit, nuts, beverage and spice crops

0121 Farming of cattle, sheep, goats, horses and mules; dairy farming

1511 Processing/preserving of meat

1514 Vegetable and animal oils and fats

1520 Dairy products

1531 Grain mill products

1532 Starches and starch products

1533 Prepared animal feeds

1541 Bakery products

1542 Sugar

1543 Cocoa, chocolate and sugar confectionery

1549 Other food products n.e.c.

Apparel andFootwear

1810 Wearing apparel, except fur apparel

1820 Dressing & dyeing of fur; processing of fur

Processed woodproducts

2101 Pulp, paper and paperboard

2109 Other articles of paper and paperboard

3610 Furniture

Bio-chemicals

2411 Basic chemicals, except fertilizers

2412 Fertilizers and nitrogen compounds

2424 Soap, cleaning & cosmetic preparations

Bio-medicine 2423 Pharmaceuticals, medicinal chemicals and botanical products

Petro-chemicals2413 Plastics in primary forms; synthetic rubber

2520 Plastic products

Processed metalproducts

2710 Basic iron and steel

2720 Basic precious and non-ferrous metals

2811 Structural metal products

2812 Tanks, reservoirs and containers of metal

2893 Cutlery, hand tools and general hardware

2899 Other fabricated metal products n.e.c.

2919 Other general purpose machinery

2925 Food/beverage/tobacco processing machinery

Technology :Hardware

3130 Insulated wire and cable

3190 Other electrical equipment n.e.c.

3220 TV/radio transmitters; line comm. apparatus

Motors3410 Motor vehicles

3420 Automobile bodies, trailers & semi-trailers


We investigate the data for these subsectors not only in terms of internationaltrade, on which Hausman and Klinger (2009) mainly focus, but also on domesticconsumption, production and employment in prioritizing strategic sectors.Consideration of there factors together is consistent with the NDP, since key policyobjectives of the latter are multi-faceted, ranging from valued-added exportpromotion and employment creation to selective import substitution, etc.

As shown in Table 1-4, these thirty seven subsectors (ISIC revision 3, 4-digit)contain a total of 2,274 internationally tradable products (HS 2002, 6-digit), of whichEcuador exported about one half of them in 2009.8) Based on these highlydisaggregated data, we also examine the current structure of Ecuadorian trade andfigure out potential high value-added exporting sectors.

Second, our analysis is relatively more systematic and comprehensive than otherexisting ones. As depicted in Figure 1-2, we explicitly consider both demand-side andsupply-side factors, as well as potentials for dynamic comparative advantages.

8) The HS 6 digit-level trade data are the most disaggregated ones among internationally availabletrade statistics.

Total Number of Sectors/Products for Analysis

Strategic SectorSub-sector

ISIC(4-digit)

World Ecuador (Exports)

HS(2009)(6-digit)

HS(2002)(6-digit)

HS(2009)(6-digit)

1. Fresh and processed foods 13 371 166 210

2. Apparel and Footwear 2 261 128 173

3. Processed wood products 3 130 55 72

4. Bio-chemicals 3 542 78 155

5. Petro-chemicals 2 140 58 93

6. Bio-medicine 1 117 27 43

7. Processed metal products 8 611 141 327

8. Technology : Hardware 3 64 25 47

9. Motors 2 30 7 16

Total 37 2,274 685 1,136


In demand analysis, we quantitatively identify sectors with greater demandprospects in domestic, regional and global markets sepaiately. More specifically, weinvestigate global demand prospects by looking at the recent trends of world importgrowth at a sectorial level. For a regional demand, we examine the correlationbetween Ecuadorian export specialization of the nine strategic manufacturing sectorsand other countries' import specialization using the Commodity ComplementarityIndices (hereafter CCI). CCI correlates economy i's export specialization pattern witheconomy j's import specialization pattern across the spectrum of all trade products.We examine CCI for each of the major trading partners, including the US, Canada,EU, Japan, Brazil and Mexico. Finally, for domestic demand, we look at the currentsize of domestic consumption for each subsector, changes in a ratio of output toconsumption and those in import share in domestic consumption over time.

For supply-side consideration, we focus on value-added potential andtechnological sophistication, employment creation opportunity, industrial inter-linkages, and the linkage with resource endowment. These supply-side factors areimportant for transforming the existing vicious cycle of primary production and lowwages into a virtuous cycle of value-added and employment-generating production.We examine the current status of production and employment structure of Ecuadorat a sectorial level and try to pick up which sectors are more conducive to achievingthe key objectives of the NDP. Special attentions are drawn to the dynamics of theshare of value-added to output and that of wages in value-added in recent years.

Industrial inter-linkage - backward and forward - should be one of the mostimportant criteria in selection, even though we could not sufficiently consider it in

Demand- aide factors Supply-side factors

1. Market Damand 2. Industrial Potential

2. DynamicComparative Advantage

Industrial upgrading& good Living

Global demandRegional demandDomestic demand

Value-added & Technological Sophistication

Employment CreationIndustrial inter-LinkageResource endowment

Current CompetitivenessExport Connectedness

Prioritization Criteria for Strategic Sectors


selection, largely due to the lack of the relevant information. As a matter of fact, theextent of spillovers of developing a new exporting product to the rest of theeconomy highly depends upon specific patterns of export diversification, input-output coefficients of the production under given production technology as well asthe domestic utilization of the commodity.

Finally, following Hausman and Klinger (2009), we also consider exportconnectedness as a major criterion for priority sector selection. Generally, developinga new exporting sector requires highly specific inputs such as technologicalknowledge, physical assets, intermediate inputs, and infrastructure needs or otherpublic goods. Once this exporting sector is established, then know-how to efficientlyuse such specific assets will spillover to other potential exporting sectors.

Likewise the assets and capabilities needed to produce one exporting good areimperfect substitutes for those needed to produce another good, but this degree ofspecificity will vary. Spillovers are more likely in technologically "neighboring"products or more closely connected products. This implies that properly choosing aflagship sector for export promotion, of which the potential for spillovers is high, isimperative as export specialization patterns are more conducive than others topromote spillovers and industrial upgrading.

In the following subsections, we present our analytic results for strategic sectorselection, basing on the previously mentioned criteria.

2.2. Demand Analysis

2.2.1. Global Demand

The challenge of industrial diversification is quite daunting, and achievingindustrial diversification is a rather difficult task. However, recent history providessome useful guidance suggesting the effectiveness of the export-based industrialdiversification, especially for a developing country where the domestic market size isrelatively small, like Ecuador. The outward-oriented diversification strategy helps toovercome domestic demand shortage.

Table 1-6 presents the recent trends of global import demand for each of the nineEcuadorian potential strategic industries. As depicted in the table, global demand forthese sectors grew at 10.3% annually over the periods of 2002-09. The fastestgrowing sectors in terms of global import demand are bio-medicine, processed metalproducts, technology: hardware, and bio-chemicals. Specifically, the world importdemand for bio-medicine (ISIC 2423) increased at 13.7% annually, resulting in itsshare in total global imports increased by 0.8 percent point over the period of


concern. On the other hand, the motor industry, which once had the largest share inglobal import demand among 9 strategic sectors in 2002, grew much less with anannual growth of 3.8%.

Among thirty seven subsectors, there exist a number of sectors that reveal higherspectacular growth than bio-medicine. As shown in Table 1-7, these are grain millproducts (ISIC 1531), animal/vegetable oils & fats (1514), structural metal products(2811), fertilizers (2412), other food products (1549), and tanks & metal containers(2812).

Hence we can conclude that, as far as global demand is concerned, a highprospect can be given to fresh and processed foods, processed metal products, bio-chemicals and bio-medicine among the nine strategic manufacturing industries.

2.2.2. Regional Demand

One of the most robust stylized facts on international trade is that bilateral tradevolumes are largely determined by the sizes of GDP and the distance between twotrading countries. A country trades more with other countries that have a relativelybigger GDP size and geographically close to it. In addition, other things being equal,trade volume is larger for countries with a similar GDP size. This implies that one alsoneeds to pay attention to import demand dynamics at a regional level for exportpromotion and diversification.

Trends in Global Import Demand by Sectors (2002-09, current value)

Strategic SectorShare in Total Imports (World) Annual

Growth Rate(2002-09)2002(A) 2009(B) B-A

Fresh and processed foods 6.6% 5.4% -1.2%p 7.3%

Apparel and Footwear 3.4% 2.6% -0.8%p 6.0%

Processed wood products 2.5% 1.9% -0.5%p 6.4%

Bio-chemicals 3.8% 4.0% 0.2%p 11.1%

Petro-chemicals 3.3% 3.2% -0.1%p 10.0%

Bio-medicine 3.2% 3.9% 0.8%p 13.7%

Processed metal products 7.2% 7.9% 0.7%p 11.8%

Technology : Hardware 3.5% 3.8% 0.2%p 11.3%

Motors 7.5% 4.9% -2.6%p 3.8%

Total - - - 10.3%

Source: Author's own calculation using the UN Comtrade data


The need for such attention to regional demand has become increasinglyimperative, due to the impact of the recent global economic crisis. The globalfinancial crisis, and the resulting global economic downturn, had a debilitatingimpact on the strength and dynamism of many Western economies. While Westerncountries still serve as major destinations for exports, the balance of economic poweris shifting decidedly from the West to developing economies leading the globaleconomic recovery.

Although Ecuadorian export destinations are not concentrated towards westernmarkets, relative to other developing countries, it is important to carefully watchdemand dynamics at a regional/country level. In the short-term perspective, oneneeds to examine the correlation between Ecuadorian export specialization andother countries' import specialization. It is more plausible to expand exports ifEcuador competitively product match the demand structure of a specific country orregion. For a long-term perspective, similar work has to be done to target potentialstrategic sectors.

Top 20 Subsectors in Terms of Global Import Demand Growth (2002-09)

Sub sector Sector Annualgrowth Sub sector sectorAnnualgrowth

1Grain mill products

(1531) Food 17.9% 11

Basic iron & steel(2710)

Metal 12.6%

2Animal/Vegetable oils &

fats (1514) Food 17.5% 12

Bakery products(1541)

Food 12.3%

3Structural metal products

(2811) Metal 16.1% 13

Coca & chocolate(1543)

Food 11.5%

4 Fertilizers (2412) Bio-

chemical15.9% 14

Soap, detergents &toilette preparations

(2424)

Bio-chemical

11.5%

5Other food products

(1549) Food 14.2% 15 Animal feeds (1533) Food 11.1%

6Tanks & Metal containers

(2812) Metal 13.9% 16

Starch products(1532)

Food 11.0%

7 Pharmaceutical (2423) Bio-

Medicine13.7% 17

Sugar processing(1542)

Food 10.9%

8Basic Precious/

nonferrous metal (2720) Metal 13.6% 18

Plastic & syntheticrubber (2413)

Petro-chemical

10.8%

9 Dairy products (1520) Food 13.1% 19Basic chemicals

(2411) Bio-

chemical10.4%

10 TV & Radio, etc (3220) Hardware 12.7% 20Other general

purpose machinery(2919)

Metal 10.3%

Source: Author's own calculation using the UN Comtrade data


In this context, we investigate the correlation between Ecuadorian exportspecialization and other countries' import specialization, using the CommodityComplementarity Indices (hereafter CCI). The CCI correlates economy i's exportspecialization pattern with economy j's import specialization pattern across thespectrum of all trade products (See Box 1-1, for more detail). We do this for each ofmajor export destination, including the U.S., the European Union, Canada, Japan,Brazil and Mexico.9)

Box 1-1. Commodity Complementarity Index (CCI)10)

Commodity Complementarity Index (CCI hereafter) correlates economy is exportspecialization pattern with economy js import specialization pattern across the spectrum ofall trade products. CCI is a trade-weighted measure for sector of the degree to which the

relative export share structure of economy is exports corresponds with the relativeimport share structure of economy js imports across all commodities within thesector S.

where

share of product k in sector S for global exports

share of k in sector S for is exports, relative to share of k in sector S forglobal exports

share of k in sector S for js imports, relative to share of k in sector S forglobal imports

Note that is Balassa's revealed comparative advantage indices. CCI equal to onerepresents a threshold, with a value greater (less) than one showing a greater (lesser) level ofcomplementarity in the composition of what exporter i exports and what importer j importsthan the average pair of countries.

9) While China is currently one of the most dynamic economies, we did not include it in the analysis,taking into account the current competitiveness, the level of factor costs as well as geographicaldistance.

10) The key reference for the contents of this box is Vollrath and Johnston (2001).


CCIs for Major Exporting Markets of Ecuador (2009)

ISIC Rev. 3 Countries for CCI>1

Fresh andprocessed foods

0112 EU(1.63), Japan(1.46)

0113 EU(1.75), Japan(1.73)

0121 Canada(8.46), Mexico(5.78), Japan(5.69), U.S.(1.68)

1511 -

1514 Mexico(1.29)

1520 Brazil(1.75)1

1531 Japan (1.38)

1532 Japan (1.39)

1533 Brazil(1.94), Mexico(1.46)

1541 Brazil(2.48), Mexico(1.11), U.S.(1.08)

1542 -

1543 EU(1.75)

1549 EU(1.40), U.S.(1.26)

Apparel andFootwear

1810 Mexico(6.62), Brazil(4.52)

1820 Japan(2.89), EU(1.35), Brazil(1.19)

Processed woodproducts

2101 Mexico(1.96)

2109 -

3610 -

Bio-chemicals

2411 -

2412 Japan(1.86), Canada(1.27), Mexico(1.17)

2424 Canada(1.03)

Bio-medicine 2423 -

Petro-chemicals2413 Canada(1.15)

2520 Canada(1.02), U.S.(1.03), Japan(1.01)

Processed metalproducts

2710 Canada(1.82), U.S.(1.52)

2720 Canada(1.80)

2811 Mexico(2.23), Canada(1.80)

2812 U.S.(1.59), Mexico(1.26), Canada(1.19), EU(1.11), Japan(1.10)

2899 -

2911 -

2919 U.S.(1.15), Brazil(1.14), Mexico(1.06)

2925 Mexico(1.41), Brazil(1.22)


3130 -

3190 Canada(1.89)

3220 U.S.(1.07), Mexico(1.04)

Motors3410 Brazil(1.87), Canada(1.71)1, EU(1.30)

3420 Brazil(2.72), U.S.(2.29), EU(1.05)

Note: 1) As of 2008Source: Author's calculation based on the U.N. Comtrade database


Table 1-8 reports CCI estimation results at sectorial level. We report only countriesthat reveal CCIs are higher than 1, which can be regarded as potentially promisingmarkets to increase Ecuadorian exports for each sector.

If CCI is greater than 1, it means there is a greater complementarity betweenEcuadorian exports and an importing country's imports than the average pair ofcountries. In case of fresh and processed foods, the EU, Japan and Brazil show arelatively high degree of complementarity with Ecuadorian exports than other majorimporters. Similarly, Ecuadorian export specialization pattern for apparel andfootwear matches fairly well with the import patterns of Mexico, Brazil and Japan,etc.

One thing that we would like to mention here is that the CCI analysis does notexplicitly take into account trade costs and competitive situation with otherexporting countries in a specific market. This is a clear methodological limitation ofthe CCI analysis. For example, even though the US and the EU shows a greatcomplementarity with the Ecuadorian exports for a number of sectors, it is stilluncertain whether there is a competitive situation with other exporting countries,notably China, in these markets. Nonetheless the estimation results here can serve asa good reference for figuring out potential export destination.

For example, in Figure 1-3, the complementarity between Ecuadorian exports andJapanese imports for ISIC 0112 and 0113 has improved over the late 2000s. Thisindicates that, other thing being equal, Ecuador has a higher chance to expand itsexports to Japan. However, in Table 1-6, the share of Ecuadorian export to Japan hasdeclined. Given such observation and estimation results, the government could re-examine what bottlenecks against export expansion to Japan and implement policysupport for export promotion.

2.0

1.5

1.0

0.5

0.0

2.0

1.5

1.0

0.5

0.02002 2003 2004 2005 2006 2007 2008 2009 2002 2003 2004 2005 2006 2007 2008 2009

Brazil Canada EUJapan Mexico US

Brazil Canada EUJapan Mexico US

Trends of CCIs for Major Exporting Markets of Ecuador

Source: Author's calculation based on the U.N. Comtrade database


2.2.3. Domestic Demand

Domestic demand should be another important criterion for strategic sectorselection. Although the paucity of domestic demand is a compelling reason for anoutward-looking growth strategy at the early stage of economic development, thestructure of domestic demand is still an important factor to consider for industrialtargeting. This is even more so for Ecuador, since the NDP explicitly emphasizes aselective import substitution strategy.

Table 1-10 reports the current structure of domestic demand for potentialstrategic industries. In 2007, motor vehicles (ISIC 3410) and basic iron and steel (ISIC2710) reveal a relatively larger presence in domestic consumption, followed byvegetable and animal oils and fats (ISIC 1514), plastic products (ISIC 2520),pharmaceuticals, medicinal chemicals and botanical products (ISIC 2423), preparedanimal feeds (ISIC 1533), and plastics in primary forms (ISIC 2413) .

Among these sectors, the share of imports in domestic consumption is high inmotor vehicles (ISIC 3410), basic iron and steel (ISIC 2710), pharmaceuticals, medicinalchemicals and botanical products (ISIC 2423) and, most notably, and plastics inprimary forms (ISIC 2413).

Top 5 Export Destinations of Ecuador: The Case of ISIC 0112 and 0113

Vegetables, horticultural specialties andnursery products (ISIC 0112)

Fruit, nuts, beverage and spice crops (ISIC 0113)

2005 2009 2005 2009

1 US 55.8% US 41.0% US 25.6% US 27.2%

2 Netherlands 11.8% Russia 16.9% Italy 20.7% Russia 19.4%

3 Russia 9.7% Netherlands 14.2% Russia 20.4% Italy 15.3%

4 Germany 3.9% Germany 3.7% Germany 11.6% Germany 9.6%

5 Canada 2.6% Italy 3.6% India 4.0% India 5.6%

6 Japan 2.2% Japan 3.1% Japan 2.8% Netherlands 4.3%

(11) Japan 1.4%

Source: U.N. Comtrade database


Domestic Demand Structure

ISIC

Apparentconsumption in

2007

Ratio of output toapparent

consumption

Import as % ofapparent

consumption

Exports as % ofoutput

Total(US$'000)

Per-capita(US$) 2000 2007 2000 2007 2000 2007

Fresh andprocessed

foods

1511 203,683 16 1.01 0.92 2.57 10.02 3.52 1.86

1514 877,240 66 0.86 0.86 18.19 28.55 5.25 16.99

1520 305,037 23 0.99 0.98 2.24 3.07 1.48 1.5

1531 291,521 22 1 1.14 3.37 6.28 3.52 17.54

1532 17,927 2 ... 0.16 ... 85.27 ... 8.65

1533 708,764 54 0.93 0.96 8.12 4.96 0.79 0.95

1541 171,517 13 0.96 0.86 12.65 17.97 8.63 4.29

1542 292,930 22 1.03 1 2.87 2.46 5.59 2.49

1543 262,293 20 1.68 1.14 14.01 17.41 48.86 27.77

1549 237,024 18 0.94 0.9 39.17 56.81 35.27 52.11

Apparel andFootwear

1810 293,329 22 0.93 0.56 29.76 48.03 24.39 7.91

1820 448 1 0.98 0.96 2.11 4.32 0 0.64

Processedwood

products

2101 ... ... 0.27 ... 76.93 ... 12.98 ...

2109 336,949 26 0.87 0.82 17.94 20.55 5.92 3.19

3610 256,936 20 0.99 0.8 6.83 23.52 6.25 4.71

Bio-chemicals

2411 - - - - - - - -

2412 306,773 23 0.39 0.35 60.65 65.82 0.14 1.36

2424 386,440 29 0.72 0.46 37.45 59.39 13.13 12.24

Bio-medicine 2423 780,412 59 0.53 0.3 54.51 73.84 14.46 12.78

Petro-chemicals

2413 470,536 36 0.18 0.08 84.51 92.35 12.26 8.91

2520 835,762 63 0.87 0.84 21.46 23.96 9.54 9.79

Processedmetal

products

2710 1,190,40 90 0.48 0.36 54.48 65.31 5.31 3.78

2720 341,241 26 0.56 0.81 72.02 44.36 49.71 31.68

2811 88,877 7 0.77 0.8 29.04 24.44 7.77 6.12

2812 38,318 3 0.67 0.86 43.87 15.29 16.34 1.99

2893 ... ... 0.07 ... 96.57 ... 53.7 ...

2899 374,063 29 0.81 0.68 23.7 38.73 5.29 9.32

2919 204,739 16 0.05 0.07 95.45 96.12 15.24 44.56

2925 ... ... 0.03 ... 98.65 ... 55.5 ...


3130 187,268 15 0.67 0.5 50.79 59.14 26.47 18.51

3190 ... ... 0.01 ... 99.62 ... 31.35 ...

3220 ... ... 0.01 ... 99.26 ... 45.22 ...

Motors3410 1,658,042 125 0.7 0.45 53.35 69.48 33.23 32.04

3420 36,276 3 0.76 0.8 24.47 20.85 0.08 0.87

Source: UNIDO database


The other sectors that have a relatively large domestic consumption with highimport dependency are fertilizers and nitrogen compounds (ISIC 2412), soap, cleaning& cosmetic preparations (ISIC 2424), other food products (ISIC 1549), and othergeneral purpose machinery (ISIC 2919).

2.3. Supply-side Analysis

2.3.1. Value-added Potential and Technological Sophistication

The PND emphasizes the importance of productivity improvement withoutaffecting the impact on labor and the environment negatively. Here in order tofigure out which sectors have great potentials for productivity enhancement, weconsider several measures, such as the industry size, dynamics of productivity growth,the value-added/output ratio and technological sophistication of each sector.11)

Table 1-11 reports value-added information on potential strategic sectors. Interms of valued-added total, processed meat, fish, fruit, vegetables (ISIC 151)represents the largest share among these sectors. However, its share in totalmanufacturing value-added decreased from 53.7% in 2002 to 28.6% in 2007. This ispartly due to expansion of petroleum sector during the periods, but also due todeclining labor productivity at annual rate of 11.7% in the sector.

On the other hand, there are several potential strategic sectors that showed rapidlabor productivity growth over the periods of 2002-2007; those are basic precious andnon-ferrous metals (ISIC 2720), other electrical equipment (ISIC 3190), automobilebodies, trailers (ISIC 3420), dressing & dyeing processing of fur (ISIC 1820) and basiciron & steel (ISIC 2710). In particular, labor productivity in the sector of basic iron &steel (ISIC 2710) has enhanced with an annual growth rate of 25.0%. As of 2007, thissector is posited as the most productive sector among the thirty seven subsectors thatwe focused on. Value-added per employees in 2007 reached at US$53,769, which isslightly higher than that of processed meat, fish, fruit, vegetables (ISIC 151).

11) Unfortunately we only have labor productivity data on a nominal value-term.


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Another aspect we pay attention to is the share of value-added relative to output.Since, other things being equal, developing sectors with the higher value added-output ratio would be more consistent with key objectives of the PND. Strongcandidates in this respect are dressing & dyeing processing of fur (ISIC 1820),processed meat, fish, fruit, vegetables (ISIC 151), wearing apparel, except fur apparel(ISIC 1810), TV/Radio transmitters (ISIC 3220), general purpose machinery (ISIC 291),other chemicals (ISIC 242), other food products (ISIC 154), and plastic products (ISIC2520).

Finally, Table 1-12 classifies potential strategic industries based on theirtechnological sophistication. Fresh and processed foods, apparel & footwear andprocessed wood products can be classified as low tech industries, while the remainingindustries, except bio-medicine, are medium high or medium low industries.

Taking into account the aforementioned dynamics of productivity growth, thevalue-added/output ratio and technological sophistication, we pick up the followingsectors as potential candidates for core strategic sectors;

Basic precious and non-ferrous metals (ISIC 2720) Other electrical equipment (ISIC 3190) Automobile bodies, trailers (ISIC 3420) Dressing & dyeing processing of fur (ISIC 1820) Basic iron & steel (ISIC 2710)

12) Industries are classified based on OECD technology classification, which is presented in AppendixTable A1 in this chapter.

Technological Sophistication by Sectors

Sector ISIC Tech-level

Fresh and processed foods 01/ 15 Low-tech

Apparel and Footwear 18/19 Low-tech

Processed wood products 21/36 Low-tech

Bio-chemicals 24 Medium high-tech

Petro-chemicals 24/25 Medium high-tech/Medium low-tech

Bio-medicine 2423 High-tech

Processed metal products 27/28/29 Medium low-tech/Medium high-tech

Technology : Hardware 31/32 Medium high-tech/High-tech

Motors 34 Medium high-tech


TV/Radio transmitters (ISIC 3220) General purpose machinery (ISIC 291)

2.3.2. Employment Creation Potential

The creation of stable, fair, and dignified work and employment is a key objectiveof the National Plan for Good Living. Hence, exploring opportunities foremployment creation by developing strategic sectors is also an important concern.Information on employment creation potential can be obtained by looking throughemployment multipliers using Input/Output Tables. Since we unfortunately could notget relevant Input/Output Tables for Ecuador, we adopt an alternative approach toexamine employment impact. Specifically, we look at the employment size, wagelevel and the share of wages in value added for each sector.

As shown in Table 1-13, as in the case of value-added, processed meat, fish, fruit,vegetables (ISIC 151) represents the largest employment share among these sectors,accounting for about one-fourth of total manufacturing employment in 2007. Thesector of other food products (ISIC 154) is also an important sector for employment,which hires around 10% of total manufacturing employment. Over the periods of2002-07, grain mill products (ISIC 153) has expanded most rapidly, followed by basicprecious & non-ferrous metals (ISIC 2720), and motor vehicles (ISIC 3410).

On the other hand, wage level per employees is the highest in sectors of basic iron& steel (I

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