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November 7 th , 2010

Latin America’s Insertion in the Post-Financial Crisis Global Order:. Opportunities, Risks and Challenges Ahead . Ernesto Talvi. Director Académico de CERES Non-Resident Senior Fellow, Brookings Institution. November 7 th , 2010. Prepared for Presentation at the XLIV FELABAN Annual Assembly

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November 7 th , 2010

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  1. Latin America’s Insertion in the Post-Financial Crisis Global Order: Opportunities, Risks and Challenges Ahead Ernesto Talvi Director Académico de CERES Non-Resident Senior Fellow, Brookings Institution November 7th, 2010 Prepared for Presentation at the XLIV FELABAN Annual Assembly Punta del Este, Uruguay

  2. OUTLINE I. The Global Economy and Latin America in the Aftermath of the Financial Crisis • The Global Economy • Latin America II. Latin America’s Insertion in the New Global Order III. Policy Challenges for the New Global Order

  3. OUTLINE I. The Global Economy and Latin America in the Aftermath of the Financial Crisis • The Global Economy • Latin America II. Latin America’s Insertion in the New Global Order III. Policy Challenges for the New Global Order

  4. 30% of World Output 70% of World Output THE GLOBAL ECONOMY Industrial Countries Emerging Markets

  5. Aggregate Demand in the US Private Consumption Private Investment Exports (quarterly, seasonally adjusted, at annual rates, in bn of US$) (quarterly, seasonally adjusted, at annual rates, in bn of US$) (quarterly, seasonally adjusted, at annual rates, in bn of US$) 550 2600 650 Lehman’s Bankruptcy Lehman’s Bankruptcy Lehman’s Bankruptcy 500 2500 Pre-Gobal Crisis Trend 600 Pre-Gobal Crisis Trend Pre-Gobal Crisis Trend -15% 450 -9% 2400 Beginning of Global Recovery 550 400 2300 350 500 -30% 2200 300 450 2100 250 Beginning of Global Recovery Beginning of Global Recovery 2000 400 200 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010

  6. Aggregate Supply in the US Gross Domestic Product Imports (quarterly, seasonally adjusted at annual rates, in bn of US$) (quarterly, seasonally adjusted at annual rates, in bn of US$) 700 3700 674 3602 3600 Lehman’s Bankruptcy Lehman’s Bankruptcy 650 -8% Pre-Gobal Crisis Trend 3500 Pre-Global Crisis Trend -23% 600 3400 550 3300 3304 521 3200 500 3100 Beginning of Global Recovery 450 3000 Beginning of Global Recovery 2900 400 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010

  7. Fiscal Accounts in the US Fiscal Revenues Primary Expenditure Fiscal Balance (seasonally adjusted at annual rates, in bn of 2000 dollars) (seasonally adjusted at annual rates, in bn of 2000 dollars) (in % of GDP, last 4 quarters) 0% 4200 4100 Lehman’s Bankruptcy 3992 Beginning of Global Recovery 4027 -2% 3900 4000 -2% Pre-Gobal Crisis Trend 7.7% 3700 3800 -4% -22% 3738 3500 3600 -6% Pre-Gobal Crisis Trend 3300 3400 -8% 3100 3109 3200 -10% 2900 Lehman’s Bankruptcy Lehman’s Bankruptcy Beginning of Global Recovery Beginning of Global Recovery -11% 3000 2700 -12% Jul-05 Jul-05 Jul-05 Oct-03 Apr-07 Oct-03 Apr-07 Oct-03 Apr-07 Jun-08 Jan-09 Jun-08 Jan-09 Jun-08 Jan-09 Mar-03 Mar-10 Mar-03 Mar-10 Mar-03 Mar-10 Feb-06 Feb-06 Feb-06 Dec-04 Nov-07 Dec-04 Nov-07 Dec-04 Nov-07 Sep-06 Aug-09 Sep-06 Aug-09 Sep-06 Aug-09 May-04 May-04 May-04

  8. Sectoral & External Balances in the US Gross Private Saving* Gross Private Investment Current Account (in % of GDP, last 4 quarters) (in % of GDP, last 4 quarters) (in % of GDP, last 4 quarters) 18% -2% 18% 18% 18% Lehman’s Bankruptcy Beginning of Global Recovery 17% -3% 17% -3% 16% 16% -4% 15% 14% 15% -5% 13% 14% -6% 12% 14% -6% 12% Beginning of Global Recovery Lehman’s Bankruptcy Lehman’s Bankruptcy Beginning of Global Recovery 11% 13% -7% 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 * Includes consumption of fixed capital

  9. Aggregate Demand in China Exports Private Consumption Total Investment (bn of 1990 Yuans) (bn of 1990 Yuans) (bn of 1990 Yuans) 6000 4600 5500 Lehman’s Bankruptcy Lehman’s Bankruptcy Lehman’s Bankruptcy 6.5% 14.1% 5500 5000 -19.9% 4200 5000 4500 3800 4500 4000 Pre- Crisis Global Trend Pre- Crisis Global Trend 4000 3500 Pre- Crisis Global Trend 3400 3500 3000 3000 3000 2500 2500 2000 2600 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009

  10. 21% 14% 7% 0% Change in Sources of Growthin China (Annual Growth) 2003-2007 2008-2009 21% 19% 16% 14% 14% GDP: 11.7% 9% GDP: 9.3% 9% 9% 8% 7% 0% 0% Exports Investment Consumption Public Expenditure Exports Investment Consumption Public Expenditure

  11. Fiscal Accounts in China Fiscal Revenues Primary Expenditure Fiscal Balance (in % of GDP) (in bn of 2000 Yuan) (in bn of 2000 Yuan) 6500 5800 1,0% Lehman’s Bankruptcy Lehman’s Bankruptcy 1.9% 0.6% 24% 0,5% 5150 5400 0,0% 4500 -0,5% 4300 3850 Pre-Crisis Global Trend -1,0% Pre-Crisis Global Trend -1,5% 3200 3200 -2,0% 2550 -2,5% Lehman’s Bankruptcy -2.8% 1900 2100 -3,0% 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009

  12. Sectoral & External Balances in China Gross National Savings Gross Investment Current Account (in % of GDP) (in % of GDP) (in % of GDP) 50% 55% 12% 11% 54% 54% 48% 10% 50% 45% 8% 6% 45% 6% 42% 40% 4% 40% 2% Lehman’s Bankruptcy Lehman’s Bankruptcy Lehman’s Bankruptcy 35% 35% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Mar-10

  13. Unwinding of Global Imbalances United States China (Current Account, in % of GDP) (Current Account; in % of GDP) 12% -2% 11.0% Beginning of Global Financial Crisis -6.5% -3.0% 10% -3% 8% -4% 6% -5% 4.5% 4% +3.2% -6% 2% Beginning of Global Financial Crisis -6.2% 0% -7% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Mar-10

  14. THE GLOBAL ECONOMY World Output Industrial Countries World Interest Rates Emerging Markets Risk Premia Commodities Prices

  15. 4.8% World Output and Domestic Demand Growth in World Output Growth and Composition of World Domestic Demand (US$ PPP, annual rate, %) (US$, annual rate, %) 6% 7.8% 8% Emerging Economies Industrial Countries 5.2% 7% 5% Period Average: 4.7% 6.2% Share 6% 4.0% 51% Share 4% 1.6% 3.6% 25% 5% 2.8% 3% 4% Period Average: 2.3% 2% 3% Share Share 3.8% 49% 75% 2% 4.7% 1% 1% 0% 0% 2006 2010 -0.6% -1% 2003 2004 2005 2006 2007 2008 2009 2010

  16. Implications of the Shift in Composition of World Demand Import Composition (% of total imports, 2009) BRICs Industrial Countries Raw materials 15% Raw materials Capital goods 25% Capital goods 30% Intermediate goods 36% 19% Intermediate goods Consumer goods 25% Consumer goods 14% 36% BRICs includes Brazil, Russia, India and China

  17. 6% 5% 4% 3% 2% 1% 0% 3m 6m 2y 3y 5y 10y 30y World Interest Rates and Capital Markets FED Funds Rate (reference rate, %) US Treasury Yield Curve EMs Bond Yields (EMBI+, %) 6% 7.5 Lehman’s Bankruptcy Beginning of Global Recovery 6.8 7.0 4.9% 5% 4.8% -1.4% 6.5 2006 4% 6.0 4.1% 5.4 5.5 3% 5.0 2% 2% 4.5 2009 4.0 1% 3.5 0.25% 0.14% 0% 3.0 2006 Aug-2010 Jun-07 Jun-08 Jun-09 Jun-10 Mar-07 Mar-08 Mar-09 Mar-10 Dec-06 Sep-07 Dec-07 Sep-08 Dec-08 Dec-09 Sep-09

  18. 160 160 160 150 150 150 140 140 140 130 130 130 120 120 120 110 110 110 100 100 2006 2010 2006 2010 100 2006 2010 Commodity Prices (Annual Average, 2005=100) Food Oil Metals 2% 20% 28% Source: IMF

  19. OUTLINE I. The Global Economy and Latin America in the Aftermath of the Financial Crisis • The Global Economy • Latin America II. Latin America’s Insertion in the New Global Order III. Policy Challenges for the New Global Order

  20. THE GLOBAL ECONOMY & LATIN AMERICA World Output Industrial Countries World Interest Rates Emerging Markets Risk Premia Commodities Prices Mexico Brazil

  21. Aggregate Demand in Mexico Private Consumption Total Investment Exports (quarterly, seasonally adjusted, bn of Pesos of 2003) (quarterly, seasonally adjusted, bn of Pesos of 2003) (quarterly, seasonally adjusted, bn of Pesos of 2003) 3600 2500 Lehman’s Bankruptcy 7300 Lehman’s Bankruptcy Lehman’s Bankruptcy 3200 -16.3% 6700 Pre-Global Crisis Trend Pre-Global Crisis Trend -14.0% -24.3% Pre-Global Crisis Trend 2100 2800 6100 2400 1700 Beginning of Global Recovery Beginning of Global Recovery 5500 2000 Beginning of Global Recovery 4900 1300 1600 Mar-10 Mar-03 May-04 Jul-05 Sep-06 Nov-07 Jan-09 Mar-10 Mar-03 May-04 Jul-05 Sep-06 Nov-07 Jan-09 Mar-10 Mar-03 May-04 Jul-05 Sep-06 Nov-07 Jan-09

  22. Aggregate Supply in Mexico Gross Domestic Product Imports (quarterly, seasonally adjusted, in bn of Pesos of 2003) (quarterly, seasonally adjusted, in bn of Pesos of 2003) 4000 9900 Lehman’s Bankruptcy Lehman’s Bankruptcy 3700 -29.2% -10.1% 9400 3400 8900 3100 2800 Pre-Global Crisis Trend 8400 Pre-Global Crisis Trend 2500 7900 2200 Beginning of Global Recovery Beginning of Global Recovery 7400 1900 Mar-03 May-04 Jul-05 Sep-06 Nov-07 Jan-09 Mar-10 Mar-03 May-04 Jul-05 Sep-06 Nov-07 Jan-09 Mar-10

  23. Aggregate Demand in Brazil Private Consumption Total Investment Exports (quarterly, seasonally adjusted, average 1995=100) (quarterly, seasonally adjusted, average 1995=100) (quarterly, seasonally adjusted, average 1995=100) 170 340 180 Lehman’s Bankruptcy Lehman’s Bankruptcy Lehman’s Bankruptcy +0.2% 160 310 165 +3.2% Pre-Global Crisis Trend 150 150 280 -26% 140 135 250 130 Pre-Global Crisis Trend Pre-Global Crisis Trend 120 220 120 105 190 110 Beginning of Global Recovery Beginning of Global Recovery Beginning of Global Recovery 90 100 160 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010

  24. Aggregate Supply in Brazil Gross Domestic Product Imports (quarterly, seasonally adjusted, average 1995=100) (quarterly, seasonally adjusted, average 1995=100) 270 160 0% Lehman’s Bankruptcy Lehman’s Bankruptcy -2.2% 240 150 210 140 Pre-Global Crisis Trend 180 130 Pre-Global Crisis Trend 150 120 120 Beginning of Global Recovery Beginning of Global Recovery 90 110 2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009 2010

  25. Change in Sources of Growthin Brazil (Annual Growth) 2003-2007 2009 9% 9% 7.7% 7.7% 7% 6.9% 5.6% GDP: 4.4% 5% 6% 3.5% 3% 4.4% GDP: 4.2% 1% 3.1% 3% -1% -3% -4.1% 0% -5% Exports Investment Consumption Public Expenditure Exports Investment Consumption Public Expenditure

  26. Forward Looking Indicators: Consumer Confidence Mexico Brazil (Jan-03=100) (Sep-05=100) 55 120 116 04-07 Average: 52 -2% 12% 110 50 04-07 Average: 105 51 100 45 90 40 80 35 70 60 30 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 May-04 May-05 May-06 May-07 May-08 May-09 May-10 Jan-08 Jan-09 Jan-10 Jan-05 Jan-06 Jan-07 Jan-04 Sep-07 Sep-08 Sep-09 Sep-04 Sep-05 Sep-06 May-09 May-07 May-08 May-10 May-04 May-05 May-06 Source: Getulio Vargas Foundation Source: INEGI

  27. 110 105 100 95 90 85 80 75 Jul-07 Jul-09 Jul-08 Jul-10 Jul-03 Jul-04 Jul-05 Jul-06 Jan-08 Jan-09 Jan-10 Jan-07 Jan-03 Jan-04 Jan-05 Jan-06 Forward Looking Indicators: Business Confidence Mexico Brazil (Producer Confidence Index, Jan-03=100) (Business Confidence Index, Sep-05=100) 122 125 120 03-07 Average: 101 115 15% -15% 110 05-07 Average: 106 105 86 100 95 90 Jan-10 Jan-08 Jan-09 Jan-06 Jan-07 Sep-09 Sep-10 Sep-06 Sep-07 Sep-05 Sep-08 May-09 May-10 May-08 May-06 May-07 Source: INEGI Source: Getulio Vargas Foundation

  28. Forward Looking Indicators: Real Exchange Rate Mexico Brazil (Dec-06=100) (Dec-06=100) 130 105 125 100 120 95 115 90 -26% 109 110 85 105 80 9% 100 75 74 95 70 90 65 85 60 Jun-09 Jun-10 Jun-07 Jun-10 Mar-07 Mar-09 Mar-10 Mar-10 Jun-08 Mar-08 Jun-08 Jun-07 Jun-09 Sep-09 Dec-09 Mar-07 Mar-08 Mar-09 Sep-07 Sep-09 Dec-06 Dec-07 Dec-09 Dec-06 Dec-07 Dec-08 Dec-08 Sep-08 Sep-08 Sep-07

  29. ‘Brazilian Type’ Cluster ‘Mexican Type’ Cluster The Aftermath of the Global Financial Crisis: Two Latin Americas? • Net Exporters of Commodities • Low Exposure of Exports of Goods and Services to Industrial Countries • High Weight of Interest-Sensitive Components in Aggregate Demand • Net Importers of Commodities • High Exposure of Exports of Goods and Services to Industrial Countries • Low Weight of Interest-Sensitive Components in Aggregate Demand

  30. The Aftermath of the Global Financial Crisis: Two Latin Americas? Cluster Analysis Clusters “Mexican Type” Mexico Bahamas Barbados Belize Costa Rica Dominican Rep. El Salvador Guatemala Guyana Honduras Jamaica Nicaragua Panama Suriname “Brazilian Type” Brazil Argentina Bolivia Chile Colombia Ecuador Paraguay Peru Trinidad and Tobago Uruguay Venezuela 2.5 “Brazilian Type” Cluster 2 1.5 1 Net Commodity Exports (% of GDP) 0.5 0 -0.5 -1 “Mexican Type” Cluster -1.5 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 Investment / Exports to Industrial Countries

  31. 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% The Aftermath of the Global Financial Crisis: Two Latin Americas? Cluster Analysis Average Growth 2010-2011* (GDP, annual rates) 2.5 4.9% “Brazilian Type” Cluster 2 1.5 Latin America Average: 3,4% 1 Net Commodity Exports (% of GDP) 2.7% 0.5 0 -0.5 -1 “Mexican Type” Cluster -1.5 “Mexican Type” Cluster “Brazilian Type” Cluster** -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 Investment / Exports to Industrial Countries * Source: Latin Focus and WEO ** Excludes Venezuela

  32. OUTLINE I. The Global Economy and Latin America in the Aftermath of the Financial Crisis • The Global Economy • Latin America II. Latin America’s Insertion in the New Global Order III. Policy Challenges for the New Global Order

  33. THE NEW GLOBAL ECONOMIC ORDER: RISKS TREATHENING GLOBAL COOPERATION • Political Risks • Nationalism • Populism • Extreme Right Movements • Xenophobia • Economic Risks • Currency Wars (Competitive Devaluations) • Trade Wars (Protectionism) • Financial Panic

  34. THE NEW GLOBAL ECONOMIC ORDER 2010-2020: LATIN AMERICA´S DECADE? Under the assumption that global cooperation prevails, Latin America will likely face very favorable conditions due to: • A New Global Economic Order emerging after the global crisis with the following features: • Change in trade patterns due to a reallocation of world output and world demand from industrial countries to emerging markets that have a high propensity to consume primary commodities

  35. Change in Latin America's Trade Patterns Exports by Destination (LAC-7) Variation 2006-2009 (LAC-7) 2006 80% 72% BRICs 70% 11% Rest of EMs 60% 24% Industrial Countries 50% 65% 40% 2009 30% BRICs 20% 13% 17% 10% Industrial Countries Total Exports: 1% 57% 26% Rest of EMs 0% -7% -10% Rest of Emerging Markets Industrial Countries BRICs BRICs includes Brazil, Russia, India and China LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 93% of Latin America’s GDP.

  36. 113% 110% 90% 70% 50% 30% Total Exports: 11% 8% 10% -5% -10% Trade Patterns in Brazil Exports by Destination Variation 2006-2009 2006 BRICs 9% Rest of EMs Industrial Countries 42% 49% 2009 BRICs 18% Industrial Countries 42% 41% Rest of EMs Rest of Emerging Markets Industrial Countries BRICs BRICs includes Brazil, Russia, India and China

  37. Rest of EMs BRICs 1.4% 5% Industrial Countries Rest of EMs BRICs 5.8% 93.6% 2.6% Industrial Countries 91.6% Trade Patterns in Mexico Exports by Destination Variation 2006-2009 2006 70% 63% 60% 50% 40% 30% 2009 20% 8% 10% 0% Total Exports: -7.8% -10% -10% -20% Rest of Emerging Markets Industrial Countries BRICs BRICs includes Brazil, Russia, India and China

  38. a j 5% 4% 3% 2% 1% 0% ∆ -1% = å GDP * j Change in Latin America's Trade Patterns: Looking Ahead Exports & External Demand (LAC-7, ED and Exports Variation, in %) Exports by Destination (LAC-7) 15% 2009 10% BRICs 17% Industrial Countries 5% 57% 26% Rest of EMs Exports Variation (left axis) 0% 2013* External Demand Variation (right axis) R2= 70% -5% BRICs 23% -10% 1998 2006 2007 2008 2009 1991 1992 1993 1994 1995 1996 1997 1999 2000 2001 2002 2003 2004 2005 Industrial Countries Rest of EMs 25% 52% ∆Ext. Demand = Exports to Country j / Total Exports a j ∆ = GDP Variation of country j GDP j BRICs includes Brazil, Russia, India and China LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 93% of Latin America’s GDP.

  39. THE NEW GLOBAL ECONOMIC ORDER 2010-2020: LATIN AMERICA´S DECADE? Under the assumption that global cooperation prevails, Latin America will likely face very favorable conditions due to: • A New Global Economic Order emerging after the global crisis with the following features: • Change in trade patterns due to a reallocation of world output and world demand from industrial countries to emerging markets that have a high propensity to consume primary commodities • Ample availability of relatively cheap credit and capital due to a reallocation of world savings towards EMs in general and Latin America in particular

  40. Others 22% Mexico 22% Brazil 55% Capital Flows to Latin America Capital Inflows Main Capital Inflows Recipients (LAC-7, Cumulative quarterly capital inflows, billions of US$) (LAC-7, Mar-10) 250 GDP Shares Pre Global -Crisis Maximum Level: 237 Others 22% 205 204 Mexico 24% 200 Billions of US$ Argentina 8% Dec-2006 Mar-2010 LAC-7 97 204 Brazil 45% Brazil 52 112 150 Inflows Shares Pre-Global Crisis Trend 100 Argentina 1% 63 50 Beginning of Global Recovery Lehman Brothers Bankruptcy 0 2003 2004 2005 2006 2007 2008 2009 2010 LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.

  41. Billions of US$ Billions of US$ Dec-06 Dec-06 Mar-10 Mar-10 LAC-7 LAC-7 36 61 138 65 Brazil Brazil 19 34 85 26 Composition of Capital Flows to Latin America Financial Inflows Inflows by Type FDI Inflows (LAC-7, Cumulative quarterly capital inflows, billions of US$) (LAC-7) (LAC-7, Cumulative quarterly capital inflows, billions of US$) 150 120 Dec-06 Pre Global -Crisis Maximum Level: 134 138 Pre Global -Crisis Maximum Level: 110 125 102 103 103 Financial Inflows 37% 100 FDI Inflows 63% 75 86 50 Mar-10 Pre-Global Crisis Trend 69 25 65 Pre-Global Crisis Trend 0 FDI Inflows 32% 52 Financial Inflows 68% -25 Beginning of Global Recovery -30 Lehman’s Bankruptcy Beginning of Global Recovery Lehman’s Bankruptcy -50 35 Mar-04 Mar-03 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

  42. Capital Flows to Latin America: FDI by Country of Origin (% of total FDI) Brazil Mexico Rest of EMs BRICs BRICs 1.0% Rest of EMs 0.3% 0.1% 8.7% 2006 Industrial Countries Industrial Countries 98.7% 92% Rest of EMs BRICs Rest of EMs 0.6% 1.1% BRICs 6.8% 0.3% 2009 Industrial Countries Industrial Countries 98.8% 93% BRICs includes Brazil, Russia, India and China

  43. Capital Flows to Latin America: FDI by Sector (% of total FDI) Peru Mexico Agriculture Extractive Activities Agriculture 0% 2% 8% Services 19% Services 2006 Extractive Activities 48% Manufacturing Industries Manufacturing Industries 43% 50% 30% Agriculture Agriculture Extractive Activities 0% 0% 5% Services 42% Services 2009 Manufacturing Industries Extractive Activities 57% 38% 57% Manufacturing Industries 0%

  44. THE NEW GLOBAL ECONOMIC ORDER 2010-2020: LATIN AMERICA´S DECADE? Under the assumption that global cooperation prevails, Latin America will likely face very favorable conditions due to: • A New Global Economic Order emerging after the global crisis with the following features: • Change in trade patterns due to a reallocation of world output and world demand from industrial countries to emerging markets that have a high propensity to consume primary commodities • Ample availability of relatively cheap credit and capital due to a reallocation of world savings towards EMs in general and Latin America in particular • A new financial architecture that will reduce the risk of contagion and the probability of liquidity crises in EMs in general and Latin America in particular

  45. TOWARDS A NEW FINANCIAL ARCHITECTURE FOR EMERGING MARKETS: KEY FEATURES* • At the multilateral level, institutionalization and improvement of ILOLR mechanisms used during the global crisis, with the following features: • Ex-ante eligibility • Automaticity • Speed • Power • At the country level, adoption of macroeconomic policy frameworks to promote stability and gain ex-ante access to ILOLR facilities • The IMF and MDBs are endowed with adequate resources for the task • These features would constitute the basis for a de facto incentive-compatible ‘Long-Term Stability Pact’ for EMs * 1. Izquierdo, A. and Talvi, E. 2009. “A Stability Pact à la Maastricht for Emerging Markets” , www.voxEU.org 2. Izquierdo, A. and Talvi, E. (coords.), 2009. “Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis In Latin America”, Inter-American Development Bank, Washignton DC. 3. Izquierdo, A. and Talvi, E. (coords.), 2010. “The Aftermath of the Crisis. Policy Lessons and Challenges Ahead for Latin America and the Caribbean”, Inter American Development Bank, Washignton DC.

  46. THE NEW GLOBAL ECONOMIC ORDER 2010-2020: LATIN AMERICA´S DECADE? Under the assumption that global cooperation prevails, Latin America will likely face very favorable conditions due to: • A New Global Economic Order emerging after the global crisis with the following features: • Change in trade patterns due to a reallocation of world output and world demand from industrial countries to emerging markets that have a high propensity to consume primary commodities • Ample availability of relatively cheap credit and capital due to a reallocation of world savings towards EMs in general and Latin America in particular • A new financial architecture that will reduce the risk of contagion and the probability of liquidity crises in EMs in general and Latin America in particular • An initial situation in Latin America characterized by a combination of relatively strong macroeconomic fundamentals and a gradual process of increasing democratization and institutionalization, which place the region in a favorable position to become a preferred destination for capital inflows

  47. EA-5 7% LAC Middle East 12% 23% Capital Inflows to EMs Variation 2006- 2009 Main Capital Inflows Recipients (% variation) (share in total capital inflows to EMs) 2006 60% 52% Rest EMs 16% China 17% 40% EM Europe 25% 19% 20% India 5% 2% 0% 0% 2009 -20% Winners Losers Capital Inflows to EMs: -30% -40% China 25% (Share of GDP 27%) Rest of EMs 12% (Share of GDP 13%) -48% -60% India 8% (Share of GDP 7%) EM Europe 9% (Share of GDP 9%) -67% -80% -76% LAC EA-5 India China Rest of EMs EM Europe Middle East Middle East 8% (Share of GDP 16%) LAC 25% (Share of GDP 20%) EA-5 12% (Share of GDP 7%) Source: WEO EA-5 includes Indonesia, Malaysia, Thailand, The Philippines and Vietnam. EM Europe refers to Central and Eastern Europe as defined by WEO

  48. OUTLINE I. The Global Economy and Latin America in the Aftermath of the Financial Crisis • The Global Economy • Latin America II. Latin America’s Insertion in the New Global Order III. Policy Challenges for the New Global Order

  49. THE NEW GLOBAL ECONOMIC ORDER: POLICY CHALLENGES FOR LATIN AMERICA • Avoid financial bubbles caused by strong capital inflows that may make countries prone to crisis • Rethink international trade policy for the new global context • Remove distortions to facilitate intra-firm and intra-sector restructuring that will be necessary to accommodate the change in trade patterns and the new constellation of relative prices • Take advantage of the bonanza to develop physical, technological and institutional infrastructure and to invest in human capital in order to lay a sound foundation for self-sustained, productivity-induced growth when favorable external conditions subside • Respond efficiently to the legitimate social claims for redistribution that will emerge in a context in which, a high-commodity-price/low–cost-of-capital driven expansion, is likely to produce a deterioration in the distribution of income • Protect political institutions from the potential corrosive effects of commodity price booms

  50. Latin America’s Insertion in the Post-Financial Crisis Global Order: Opportunities, Risks and Challenges Ahead Ernesto Talvi Director Académico de CERES Non-Resident Senior Fellow, Brookings Institution November 7th, 2010 Prepared for Presentation at the XLIV FELABAN Annual Assembly Punta del Este, Uruguay

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