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NS4053 Winter Term 2013 Latin America

NS4053 Winter Term 2013 Latin America. Growth and Output Gaps. Recent Trends: Central America I. Recent Trends: Central America II. Recent Trends: Caribbean. Tracking Indexes: Mexico. Tracking Indexes: Brazil. Tracking Indexes: Argentina.

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NS4053 Winter Term 2013 Latin America

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  1. NS4053 Winter Term 2013Latin America

  2. Growth and Output Gaps

  3. Recent Trends: Central America I

  4. Recent Trends: Central America II

  5. Recent Trends: Caribbean

  6. Tracking Indexes: Mexico

  7. Tracking Indexes: Brazil

  8. Tracking Indexes: Argentina

  9. More Latin Americans are escaping poverty and moving into the middle class

  10. Growth Divide

  11. Region’s Trade Exposure (average 2009-11)

  12. IMF: Historical/Forecast October 2012

  13. Latin America/East Asia I • South American economies have been praised for the way they have confronted the global financial crisis • Countries such as Argentina, Peru and Brazil have benefitted from high commodity prices to achieve broad-based improvements in living standards • When placed in comparative and historical perspective, Latin America’s recent record seems less stellar. • LA diverges from East Asian newly industrializing countries in technological upgrading and productivity growth over last three decades. • Causes of the lag with East Asia include: • Less effective policies, • weaker institutions, and • lack of regional value chains explain recent differences

  14. Latin America/East Asia II • Specifically • Focus on primary products is limiting Latin American competitiveness and development prospects • Investment rates in Latin America continue to lag significantly • Institutional weakness and social discontent continue to limit prospects for LA structural reforms • After economic turmoil during second half of 1990s, Latin American countries, particularly South America have performed well recently • Growth Rates • While between 1998-2003, real GDP per capita in Dollars fell by annual average of -0.2% (world grew by 1.5%) • Between 2003-08 region grew (4.1%) – twice global rte of 2.2% • Expansion particularly rapid in Argentina, Peru, Uruguay and Venezuela – all of which performed better than at any time since the 1950s.

  15. Latin America/East Asia III • Limited Crisis Impact • Latin American countries have traditionally had difficulty coping with global shocks – have suffered repeatedly from financial crisis • However impact of global crisis since 2008 has been moderate • Most countries have maintained positive growth and even adopted anti-cyclical policies • In 2012 real GDP was expected to increase by 3.7% -- over twice that in developed countries • Income Distribution • Economic expansion has particularly benefitted the poor. • Household income per capita for poor families increased twice as fast as for rich families between 2002-07 • In same period, inequality remained stable or decreased in nearly all LA countries

  16. Latin America/East Asia IV • However LA performance less impressive when compared with East Asia • Labor Productivity • While newly industrializing East Asia (Korea, Taiwan, Hong Kong and Singapore) is catching up with US • Latin America has fallen behind • In 1977 labor productivity in Korea and Brazil was 27% US levels • By 2010 Korea’s productivity had reached 60% of US • Brazil’s was only 20% • In Taiwan labor productivity in manufacturing grew four times faster than Mexico between 1980-2010

  17. Latin America/East Asia V • Export Structure • East Asian countries have succeeded in export upgrading – moving from labor-intensive manufacturing to more sophisticated products • By 2000 almost one third of Korea’s exports were information and communication technology goods compared to under 1% in Argentina and Chile and under 5% in Brazil • By contrast, Latin America’s primary good specialization has intensified. • Between 2000-10 the share of primary exports increased from 72% to 93% in Bolivia; 42% to 64% in Brazil and 58% to 74% in Uruguay • Rankings of high tech manufactured exporters: Hong Kong(fifth), Singapore (sixth) and Korea (seventh) in the top ten

  18. Latin America/East Asia VI • Economic Growth • Between 2000-10 East Asia was the world’s fastest growing region – annual rate 8.2% • Latin America (2.2%) grew less than South Asia, the Middle East or Sub-Saharan Africa • More striking – China’s real GDP per capita was 52% of that of Brazil in 2010 compared to just 5% in 1998. • Underlying Causes • East Asia’s capacity to invest in capital goods and research and development (R&D) are behind the difference • Investment • Between 2000-10 gross capital formation was 36% in East Asia compared to 20% in Latin America • Higher investment contributed to higher aggregate demand, faster development of new manufacturing activities and rapid growth in labor productivity

  19. Latin America/East Asia VII • Technological Effort • Between 1996-2007, Latin America spend 0.4% of GDP on R&D compared to 1.2% in six Asian Countries • This generated divergent result in terms of knowledge creation • Latin America only has 0.5 patents per million inhabitants • The same six Asian Countries have 30.5 and • The mature economies have 132.6 • Industrialization • While the contribution of manufacturing to total production has decreased or stagnated in most Latin American countries, it has increased steadily in East Asia • Comparing Brazil, China and India • In 1980 Brazil had more than half of combined production • In 2010 it accounted for less than 10%

  20. Latin America/East Asia VIII • Problem: a lagging manufacturing sector may • reduce opportunities for knowledge accumulation and • the creation of more linkages and spillovers between different economic activities • Structural Change • Employment in East Asia has concentrated in high productivity manufacturing activities • By contrast, in Latin America high productivity activieis in mining and other natural resources create few jobs • Low productive services absorb a growing number of workers • Latin America thus faces diminishing opportunities for productivity growth and rapid economic expansion.

  21. Latin America/East Asia IX • Some of these differences can be explained by initial endowments (abundant resources in LA) and relative prices • However political factors may be even more important • State Capacity • Countries like Korea and Taiwan have more effective public institutions than LA counterparts • In East Asia merit based civil service and decision making concentrated in small, leading institutions • In most Latin American countries imorovements in recent decades have been minimal – concentrated in a few institutions like central banks and labor ministries • During 2000 left wing governments generally reluctant to introduce civil service reforms

  22. Latin America/East Asia X • Limited Governance Reforms due to: • More urgent political priorities like the expansion of social programs • Unwillingness to eliminate discretionary political appointments • Opposition by pubic servants themselves in areas like education – Mexico in particular • Pragmatic Policies • Economic reforms in East Asia – more pragmatic and consistent than in Latin America • Trade liberalization and financial deregulation have occurred gradually and only when the economy was ready. • Argentina the most extreme case in terms of policy discontinuity – aggressive deregulation and privatization followed by sharp reversal in recent years. • China and other East Asian countries have also been more pragmatic in managing financial flows in recent years – selective capital controls

  23. Latin America/East Asia XI • National Champions • While East Asia’s leading firms concentrate in medium and high-tech sectors, most Latin American firms: • Produce natural resources and resource-intensive manufactures • Generally invest little in R&D • In Mexico private R&D reaches only 0.17% of GDP – Telmex dominates telephone services but has registered no recent patents • In Brazil the median investment in R&D among the eight largest groups was just 0.23% of total sales • Only mining giant Vale and Banking group Itau above 1.0%

  24. Latin America/East Asia XII • Global Conditions and Social Pressures • In Latin America, the combination of high commodity prices and high levels of inequality and social discontent have created incentives to focus on redistribution • Countries like Bolivia, Ecuador and even Argentina have concentrated on redistributing the growing rents from natural resources to reduce inequality and confront social demands • Unfortunately this has reduced the opportunities and desire to implement social change • In China, high economic growth and political repression have reduced demands for redistribution • Other East Asian countries are gradually combining redistributive and industrial policies.

  25. Latin America/East Asia XIII • Regional Differences • Differences between East Asia and Latin America extend to organization of regional trade and investment flows • East Asia has developed regional value chains linking manufacturing production between neighboring counties. • In Latin America, despite integrationist political rhetoric, economic links are absent • Between 2000-08, 50% of East Asian exports went to regional neighbors compared to less than 18% in Latin America • In 2008, East Asia received 45% of exports from Korea, 47% of those from Japan, 50% of those from China and 56% of those from Taiwan • In Mercosur – Latin America’s most developed regional market those percentages are below 15%.

  26. Latin America/East Asia XIV • The composition on intra-regional exports also differs. Between 2000-08, 60% of Asian intra-regional exports were machinery and manufacturing exports compared to less than 40% for Latin America • In East Asia, regional leaders like Japan and Korea have built close relations with suppliers in countries like Vietnam • -responding to rising domestic labor costs by relocating different stages in production process • In Latin America, large countries have limited relations with small neighbors • Argentina fundamentally exports primary goods to China and elsewhere • Brazil also exports primary goods to the rest of the world and capital intensive manufacturing goods produced with local inputs or inputs from developed countries • Mexico is a major manufacturing exporter but is more integrated with the United States than with its Central American neighbors

  27. Latin America/East Asia XV • Differential regional integration patterns result in asymmetric growth processes • In Latin America the expansion of global demand boosts primary goods sales to the rest of the world • However does not a significant regional multiplier effect • In East Asia any increase in demand for Korean, Japanese and even Chinese goods has a direct positive impact on exports from neighboring courtiers. • The development of regional markets also has a positive effect on learning and innovation • Knowledge generated by Korean or Japanese leading firms has some spillover effects on suppliers in poorer neighbors. • In Latin America – much lesser extent. Brazil contributing to specialization in small economies – Bolivia by investing in the gas sector.

  28. Latin America/East Asia XVI • In East Asia informal economic integration has led to gradual but significant advances in political integration within ASEAN and other agreements • In Latin America bycontrast, insufficient economic integration has limited the success of poligical agreemtns like Mercosur or the Andean Commnity • In recent ears South America’s integration efforts have focused on non-trade issues like monetary and financial integration, infrastructure and military cooperation. • Yet long term success of thse processes may be minimalunless accompanied by advances in regional trade and investment.

  29. Latin America/East Asia XVII • Outlook • Advances in many South American countries in particular in recent years should not be minimized. • Region has increased taxes • Managed macroeconomic policy more effective and • Created successful social programs • Still most countries have failed to • Accelerate capital accumulation, • Invest in R&D and • Promote structural change towards sectors with higher technological content and more value added • The extent to which new policies will be implement in the future remains unclear • In some countries like Brazil, Chile and more recently Mexico, policy makers are trying to address some of these problems • Still the speed of reform may be insufficient to catch up with East Asia’s leaders and divergence may continue in the medium term.

  30. RGE Forecasts, December 2012

  31. Risks to RGE Forecasts

  32. Latin America: Poverty/Inequality I • Poverty continues to decline in Latin America • but at a slower pace – • progress on reducing region’s highly unequal income distribution has also slowed • Self employment is highest among the extremely poor, increasing their vulnerability to economic slowdown • Inequality remains a key issue • In Brazil and Chile, the richest 10% receive close to 40% of national income • Poverty rate dropped to 28.8% in 2012 from 29.4% in 2011 and 31% in 2010 • Reduction occurred despite a deceleration of regional growth. • Reflects strong labor markets – regional unemployment may have dropped (to 6.7%) slightly from 2011 (7.3)%

  33. Latin America: Poverty/Inequality II

  34. Latin America: Poverty/Inequality III • Poverty characteristics • As poverty drops, the characteristics of the poor change • Policies need to be ever more finely targeted to be efficient • Urban vs. rural: • Almost three quarters of poor live in an urban area but, among the extremely poor, this drops to about half • Age: • Children (up to age 17) account for • 51% of extremely poor and 45% of the p;oor • as compared to 38% of the vulnerable p;opulation (income between 100% and 150% of the poverty line) and • just 23% of the non vulnerable

  35. Latin America: Poverty Inequality III • Education • Estimated 45% of the poor (as well as the vulnerable) did not complete secondary education • Among the extremely poor half did not finish primary school • Education coverage has increased rapidly in recent years – 88% of children not complete primary schooling • Figure for secondary at 33% remains low • In 2011, 29% of the vulnerable population had higher education (complete or incomplete) up from 19% in 1999 • The fact they remain vulnerable indicated that increased education alone does not guarantee socioeconomic mobility • Can actually be a cause of frustration and discontent

  36. Latin America: Poverty/Inequality IV • Growth vs, Distribution • The inequality of income distribution in LAC – where as a simple average for 18 countries, • the richest 10% receives 32% of National Income and • the poorest 40% only 15% • Has been improving in recent years – slowly • Between 2002 and 2011, nine countries saw an annual reduction of at least 1% in their Gini coefficient • Led by Argentina, Bolivia, Nicaragua and Venezuela where annual drop reached over 2% • However trend slowed in 2011 when only five countries – Argentina, Brazil, Colombia, Ecuador and Uruguay – saw a statistically significant decrease

  37. Latin America: Poverty/Inequality V • Important variateions between countries in the contribution that improved income distribution has made to poverty reduction: • Distribution led poverty reduction • Between 2008-11 a reduction in income inequality was more important than growth in reducing poverty in brazil (where it accounted for 66% of the reduction) • Bolivia (65%), Ecuador (64%) and Uruguay (55%) • While in El Salvador, Mexico, Nicaragua and Venezuela it tended to offset the impact of a drop in real personal income

  38. Latin America: Poverty/Inequality VI • Growth Led poverty reduction • In Paraguay growth accounted for 95% of reduction in poverty, Peru (76%) Argentina and Colombia (73%) and Chile (61%) • In Honduras, Panama and the Dominican republic, growth prevented an increase in poverty that would have otherwise have occurred as a result of deterioration in distribution • Assessment: • Given labor income represents around three-quarter of the total income of Latin American households, diversification of regions production structure into sectors offering more and better opportunities for formal employment key for reductions in poverty and income inequality

  39. Latin American Defense Spending I • Latin American defense spending has been rising for a decade despite lack of any conventional military conflicts in region • Growth now moderating as global slowdown forces governments to prioritize other spending requirements. • A shift to combat drug trafficking and organized crime will affect the level and type of defense sending • The move to smaller-scale operations will be beneficial for budgets which are suffering as a result of global economic downturn • Higher defense spending could put greater pressure on social and infrastructure investment – particularly in smaller economies.

  40. Latin American Defense Spending II • High spenders have traditionally been: • Brazil and Chile, with • Venezuela and Colombia stepping up sharply in last decade • In absolute terms brazil allocated by far the most budget to defense -- $35.4 billion in 2011 more than three times as much as Venezuela • However Brazil’s sending as a percentage of GDP (1.6%) puts it in line with most of the region and and below some other countries • High spenders as a percentage of GDP • Chile (3.2%) • Colombia and Ecuador (both 3.6%)

  41. Latin American Defense Spending III • Brazil • Although country faces no conventional military threat, it has always maintained a large military • Given its geography of expanse of remote terrain military has steadily taken on a less conventional role • Especially in areas bordering on Bolivia, Argentina and Paraguay where shipment s of illegal drugs frequently flow • Brazil’s military also being deployed in civilian situations such as operations to counter organized crime in the slums of Rio and Sao Paulo • Military has established a presents in many of these areas alongside Federal police as part of an ongong policy of pacification • Will continue as government attempting to reduce urban crime

  42. Latin American Defense Expenditures IV • Colombia • Colombia’s military expenditures were $12.7 billion in 2012 – one of the highest in the region at 3.6% GDP in 2010 • Military operations have been stepped up sharply since 2002 given offensive to defeat the FARC insurgents and re-occupy territory • Also more funding has gone to policy to patrol the reclaimed areas and crack down on organized crime gangs, particularly those involved in drug trafficking • The police force falls under the Ministry of Defense in Colombia, which is not always the case across the region – police budgets are incorporated into the overall military budget.

  43. Latin American Defense Expenditures V • Venezuela • Despite rising rates of crime, drivers behind high military spending are more political than security-focused • Chavez has built up support for his Bolivarian Revolution within the military as a means of defending himself from perceived enemies • Increasing military budgets has allowed for frequent pay increases as well as a major procurement program • Although details have not been disclosed Chavez has • Spend an estimated $4.4 billion on equipment from Russia since 2007 • In 2011 Russia granted Venezuela a further $4 billion credit line for purchases up to 2013 • Much of Venezuela’s procurement is off-budget and not reflected in official defense budget figures • Official figures (1.9% GDP) are considerably biased on the low side

  44. Latin American Defense Expenditures VI • Budgets for 2013 suggest defense expenditure will continue to grow, but at a slower pace • Brazil’s spending has been slowing since 2010 in effort to control inflation and free up funds for other requirements • Many other countries moderating defense expenditures as result of economic pressures stemming from global slowdown • However Colombia’s spending will continue to rise, with ongoing peace process with the FARC making it imperative for government to retain offensive capability as negotiating tactic • Spending will continue to rise (20% from 2012) in Peru as country grapples with drug trafficking and organized crime and remnants of Sendero Luminoso insurgency

  45. Latin American Defense Expenditures VII • Peru’s military also taking on a civilian policing role in some areas, particularly where local protests have become increasingly frequent – Conga mining project • Conversion of military toward civilian policing is also important in Mexico – counter drug cartels since 2006 • However Mexico’s military spending is low (0.5% GDP in 2010) and expected to remain low at around $6 billion under new PRI administration • Central American countries increasing military spending to counter high levels of crime; • Guatemala will increase military spending by 23% in 2013 • Lesser increases in El Salvador • Increases in military spending come at a high cost in such small economies.

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