Growth and Inclusion in Latin America and the Caribbean Eric Parrado Chief Economist

1. Growth and Inclusion in Latin America and the Caribbean Eric Parrado Chief Economist Inter-American Development Bank @eric_parrado Inclusive Growth and Expanding the Middle Class in Latin America The Dialogue Washington DC - May 22, 2019

2. The long run perspective: LAC is loosing ground Income per-capita, relative to the United States Source: IDB 2018. A Mandate to Grow. Average annual growth rates (in percent). Regional averages are computed as a simple average by country over the period

3. The long run perspective: LAC is loosing ground Income per-capita, relative to the United States Source: IDB 2018. A Mandate to Grow. Average annual growth rates (in percent). Regional averages are computed as a simple average by country over the period

4. Drivers: LAC lags in investment Net Investment Rates (% of GDP). Averages 1960-2017 Source: IDB 2018. A Mandate to Grow. Average annual growth rates (in percent). Regional averages are computed as a simple average by country over the period

5. Drivers: LAC lags in skills % of students that achieve at least the lowest benchmark in Math 95% 100% 93% 90% 80% Latin America and the Caribbean 80% 71% 70% 66% Comparison Countries (similar GDP/head) 60% PERCENTAGE OF STUDENTS 50% 50% Developed Countries 35% 40% 30% 30% US 20% 10% CHILDHOOD (TIMMS – 4TH GRADERS/SERCE – 3RD GRADERS) ADOLESCENCE (PISA – 15 YEARS OLD) Source: Learning Better. Public Policies for Skills Development. DIA 2017. Countries in each category are grouped as follows: TIMMS/SERCE – (Latin America and theCaribbean) Argentina, Brazil, Chile, Colombia, Costa Rica, DominicanRepublic, Ecuador, El Salvador, Guatemala, Mexico, Nicaragua, Panama, Paraguay, Peru, and Uruguay. (Comparison countries) Algeria, Armenia, Georgia, Hungary, Kazakhstan, Latvia, Morocco, and Tunisia. (Developed countries) Australia, Austria, Denmark, England, Germany, Hong Kong, Italy, Japan, Netherlands, New Zealand, Norway, Scotland, Singapore, and Sweden. PISA – (Latin America and the Caribbean) Brazil, Chile, Colombia, Dominican Republic, Mexico, Peru, and Uruguay. (Comparison Countries) Albania, Algeria, Bulgaria, Croatia, Georgia, Hungary, Indonesia, Latvia, Macedonia, Montenegro, Poland, Romania, Thailand, Tunisia, and Turkey.

6. What has driven long-run economic growth? Source: IDB 2018. A Mandate to Grow. Average annual growth rates (in percent). Regional averages are computed as a simple average by country over the period

7. What has driven long-run economic growth? Source: IDB 2018. A Mandate to Grow. Average annual growth rates (in percent). Regional averages are computed as a simple average by country over the period

8. Growth and cycle in LAC 3 clear periods: 1961-1983 1984-1999 2000-2017 Latin American GDP per Capita Growth. 2% Source: IDB 2018. A Mandate to Grow. Average annual growth rates (in percent). Regional averages are computed as a simple average by country over the period

9. A Closer look at the 2000s:It is possible to grow with equity Source: Messina, Julián; Silva, Joana C. G.. 2018. Wage inequality in Latin America : understanding the past to prepare for the future. Latin American development forum series. Regional averages are simple unweighted averages

10. The rise of the Latin American middle class Source. LAC Equity Lab tabulations SEDLAC (CEDLAS and the World Bank) and World Development Indicators. Note. The regional aggregates are unweighted averages of each poverty rate using 2011 purchasing power parity conversion rates (Poverty $5.5, Vulnerable $5.5-$13, and Middle Class $13-$70) from 17 countries (Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay). To analyze the same set of countries every year, interpolation was applied when country data were not available for a given year.

11. The rise of the Latin American middle class Source. LAC Equity Lab tabulations SEDLAC (CEDLAS and the World Bank) and World Development Indicators. Note. The regional aggregates are unweighted averages of each poverty rate using 2011 purchasing power parity conversion rates (Poverty $5.5, Vulnerable $5.5-$13, and Middle Class $13-$70) from 17 countries (Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay). To analyze the same set of countries every year, interpolation was applied when country data were not available for a given year.

12. How did inequality decline? Wages were the engine of inclusive growth Decomposition of the Evolution of Household Income Inequality circa 2001 - 2012 Source: Cord, L., O. Barriga, L. Lucchetti, C. Rodriguez-Castelan, L. Sousa, D. Valderrama (2014) “Inequality Stagnation in Latin America in the Aftermath of the Global Financial Crisis”. World Bank Unpublished Document.

13. The phenomenon is regional, but faster inequality decline (and growth) in South America Wage inequality and real wages South America Central America and Mexico Source: Messina, Julián; Silva, Joana C. G.. 2018. Wage inequality in Latin America : understanding the past to prepare for the future. Latin American development forum series. Regional averages are simple unweighted averages

14. Marked regional differences in social progress South America CAM & the Caribbean Source. LAC Equity Lab tabulations SEDLAC (CEDLAS and the World Bank) and World Development Indicators. Note. The regional aggregates are unweighted averages of each poverty rate using 2011 purchasing power parity conversion rates (Poverty $5.5, Vulnerable $5.5-$13, and Middle Class $13-$70). South Cone includes Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay; CAM & the Caribbean includes Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama). To analyze the same set of countries every year, interpolation was applied when country data were not available for a given year. CAM=Central America and Mexico.

15. Growth in South America fueled by significant increase in terms of trade Change in Domestic Demand and Terms of Trade, 2005–2011 1.2 1 0.8 Change in Domestic Demand 0.6 0.4 0.2 0 -0.5 0 1 0.5 1.5 Change in Terms of Trade Source: Messina, Julián; Silva, Joana C. G.. 2018. Wage inequality in Latin America : understanding the past to prepare for the future. Latin American development forum series. Regional averages are simple unweighted averages

16. Summing Up • The region has shown lackluster growth over the last 60 years • The 2000s were an exception that brought about remarkable social gains • Triggered by the commodity boom – a one shot event? • To continue making progress we need to ignite growth • This calls for an agenda to boost TFP

17. Summing Up • We know what to do…

18. Growth and Inclusion in Latin America and the Caribbean Eric Parrado Chief Economist Inter-American Development Bank @eric_parrado Inclusive Growth and Expanding the Middle Class in Latin America The Dialogue Washington DC - May 22, 2019

19. Sources of growth Y: GDP TFP: Productivity K: Capital L: Labor Y = TFP + a*K + b*L

20. Sources of growth: Capital (K) • Infrastructure (DIA 2020) • Spending (DIA 2018) • Savings (DIA 2016) • Taxes (DIA 2013) • Housing (DIA 2012) • Debt (IPES 2007, 2005)

21. Sources of growth: Labor (L) • Education (DIA 2017) • Early years (DIA 2015) • Quality of life (DIA 2009) • Inclusion (IPES 2008) • Goods jobs wanted (IPES 2004)

22. Sources of growth: Total Factor Productivity (TFP) • Integration (DIA 2019) • Productive development (DIA 2014) • New technologies (2011) • Productivity (DIA 2010)

23. Iftheregionwouldhaveinvested more… Growth in Latin America and the Caribbean with Emerging Asia’s investment rates LAC invests an additional 7% of GDP per year GDP would have been twice as high as observed Source: IDB calculations based on PWT 9.0 database. Simple averages by country.

24. …and if the region would have invested better Growth in the Region with the investment efficiency of Emerging Asia LAC matches the investment efficiency of Emerging Asia GDP would have been almost twice as high as observed Source: IDB calculations based on PWT 9.0 database. Simple averages by country.

25. Investing more and better would have produced yet higher growth Growth in the Region with both Emerging Asia’s investment rate and efficiency LAC invests as much and as efficiently as Emerging Asia GDP would have been 5.6 times higher than observed Source: IDB calculations based on PWT 9.0 database. Simple averages by country.

26. Drivers: In LAC, the vast majority of firms are small % of employment % of establishments …..but account for substantial employment Source: IDB 2018. A Mandate to Grow. Average annual growth rates (in percent). Regional averages are computed as a simple average by country over the period

27. Credit constraints: expensive intermediation (reflecting inefficiency, lack of scale or risk) The spread remains a significant component of the lending interest rate

28. LAC social policies have not been effective to reduce inequality Differences in Income Inequality Before and After Government Taxes and Transfers: Latin America and the Caribbean vs. OECD and EU Source: IDB DIA report “Better Spending for Better Lives”, A. Izquierdo, C. Pessino, and G. Vuletin, editors (2018).