LAS Seminar

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LAS Seminar
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LISTING OF LATIN AMERICAN COUNTRIES Argentina
Belize Bolivia Brazil Chile Colombia
Costa Rica Cuba Dominican Republic Ecuador
El Salvador Guatemala Honduras
Mexico Nicaragua Panama Paraguay
Peru Suriname Uruguay Venezuela (other)
French Guiana a colony LISTING OF CARIBBEAN
ISLAND NATIONS Anguilla - Antigua and Barbuda -
Aruba - Bahamas - Barbados - Bermuda - Cayman
Islands - Cuba - Dominica - Dominican Republic -
Grenada - Guadeloupe (French) - Guyana - Haiti -
Jamaica - Martinique (French) - Montserrat -
Netherlands Antilles - Puerto Rico - Saint Kitts
Nevis - Saint Lucia - Saint Vincent
Grenadines - Trinidad and Tobago - Turks and
Caicos Islands - Virgin Islands
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• Latin America Update (2009)
• In the five years from 2004 Latin Americas
  economies grew at an annual average rate of over
  5.
• Inflation remained generally low.
• Credit expanded and exports boomed.
• Proportion of people living in poverty fell from
  44 in 2002 to 33 in 2008.

• Until September Latin Americans could still hope
  that they would escape the worst of the downturn.
  
• But in the last three months of 08, Latin
  America has seen its stock markets crash,
  currencies wobble and credit start to dry up.
  That comes on top of falling exports and the
  plunge in the prices of the commodities it sells
  to the world.

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• Remittances (money being sent home by Latin
  Americans working abroad) has fallen sharply over
  the past year.
• In October, the IMF expected growth in the
  region next year of 3.2.
• In mid-December the World Bank forecast 2.1.
• The same day Morgan Stanley cut its forecast for
  the seven largest economies in 2009 from growth
  of 1.5 to a contraction of 0.4 (pessimistic).

• While 2009 will see a slowdown throughout Latin
  America, there will be significant variation.
• Brazils government still expects growth of 4
  next year (optimistic).
• Mexico may manage growth of 0.4.
• Peru will continue to outperform in its rate of
  GDP growth.
• What is driving this deceleration?

Growth forecasts from early September 2008.
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• Continuing steep fall in commodity prices from
  Venezuelan oil to Peruvian minerals, Chilean
  copper, Argentine soya and Brazilian iron ore and
  orange juice (exports have been a main driver
  over the past several years).
• Knock on effects from the global credit crisis
  (investors fleeing risk) banks in Latin America
  have turned cautiousfinancing conditions for
  governments have tightened as well as for the
  private sector.
• Many of the larger economies are entering the
  slowdown with stronger fiscal and
  balance-of-payments positions than in the past .
• Unlike the aggressive credit easing that took
  place in rich countries early in 2008, many of
  the regions central banks raised their benchmark
  interest rates as higher food and fuel prices
  caused inflation to spike.
• Still, policy makers must act cautiously due to
  Latin Americas economic legacy (capital flight,
  indebtedness, hyperinflation, etc.).
• Chile is a notable exception, having saved 21
  billion derived mainly from windfall copper
  revenues in reserve funds.
• Worse off are countries such as Venezuela and to
  a lesser extent Argentina that have squandered
  much of their commodity boom.

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• Many fear that Latin America will revert to its
  dictatorial and populist past that was often
  characterized by the seizing of foreign assets
  along with fiscal and monetary irresponsibility.
• This may be a concern for Venezuela, Bolivia and
  Ecuador, but throughout the region democracy has
  quickly formed deep roots.

• Results from a November 2008 Latinobarómetro
  poll (left) indicates that the countries of Latin
  America may not only be diverging economically in
  the coming years, but we may witness political
  divergence as well.
• Most Latin Americans see themselves as
  politically moderate, but they retain a yearning
  for strong leaders and expect the state to solve
  their problems.

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• Latin Americans generally support democracy and
  its institutions, although many remain frustrated
  by the way their political systems work in
  practice (weak rule of law, widespread corruption
  and cronyism).
• General risks
• Biggest risk in the region is of abandoning the
  recent commitment to fiscal and monetary
  prudence.
• While most of the poorest are nowadays covered
  by government cash-transfer programs, those in
  the third to the fifth deciles of income
  distribution are now at risk of falling back
  into, or going deeper into, poverty.
• Corruption is still a major obstacleand may
  worsen in the short run.
• Update on the Caribbean
• On October 15th, in Barbados, 13 Caribbean
  countries approved a new Economic Partnership
  Agreement (EPA) with the European Union.
• The EPA involves only gradual changes to a
  trading relationship which goes back to colonial
  days. It grants almost all Caribbean exports
  duty-free and quota-free access to Europe. In
  return, the Caribbean will phase out duties on
  87 of European imports by 2033.

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• Until last year these countries have had one-way
  access to European market (since 1975 under the
  Lomé Convention, and its successor, the Cotonou
  agreement).

• Pattern of trade relations between Europe and
  the Caribbean was no longer in synch with the
  rules of the WTO.
• The agreement will help the Caribbean to develop
  new exports, and to rely less on old staples like
  bananas and sugar.
• US is still the largest trading partner with,
  and investor in, the region.
• Still, the most dynamic business opportunities
  in the coming decade will be between countries in
  the region and the EU.
• The big story for 2009 may be Cuba.

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Each year, Transparency International draws on
surveys of businessmen and country experts to
gauge perceptions of corruption in 180 countries
around the world. It defines corruption as the
abuse of public office for private gain. This
year, Chad shared the bottom slot with
Bangladesh. Corruption has declined significantly
over the past year in a number of countries,
including France, Hong Kong, Taiwan and
Nigeria. Transparency International
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Course Outline (For the Economics
section) Latin America from a Global
Perspective 1. Origin and Development of the
International Economic Order 2. Important
concepts to define understand 3. General
Economic Survey of the Region - 20th
Century a The import substitution trade
policy b The debt crisis of the 1980s 4.
Reforming Latin America in the 1990s 5.
Longer-term prospects the early 21st century
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Origin and Development of the International Eco.
Order (IEO) 1) Began with the industrial
revolution of the latter 18th century. 2) As the
industrial revolution unfolded, nations other
than those in Europe had two challenges To
imitate or to trade. - Opportunity to imitate was
immediate (N. America and other European
nations) - Opportunity to trade was delayed -
Reaction to there two challenges was the cleaver
which began to divide the world into industrial
and non-industrial countries. 3) Why didn't the
whole world immediately adopt the techniques of
the industrial revolution?
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- The most important is the dependence of an
industrial revolution on a prior or simultaneous
agricultural revolution. - A second constraint on
industrialization was the absence of an
investment climate. - Period of high colonialism
Import and export trade in many LDCs were
controlled by foreign hands (profits were in the
business complex of wholesaling, banking,
shipping and insurance). - Participation in
foreign trade whets the appetite for foreign
goods, in the process destroying local
industry. - Imperial power was of course an
obstacle in the colonial countries (India
British salt monopoly, Spain consulados) or
taxation (siphon off funds).
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• The increase in exports creates a vested,
  domestic interest of those who lived by primary
  production - small farmers as well as wealthy
  landowners - who after the initial economic
  pattern is set oppose measures for
  industrialization.
• In any given LDC, the development progress made
  between 1850-1929 depended on the relative
  political power of the industrial and
  agricultural interests.
• for example Argentina Australia
• 5) And so the world divided countries that
  industrialized and exported manufactures, and the
  other countries that exported agricultural and
  primary products.

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Concepts to Define Understand 1. Comparative
advantage - def A nation has a comparative
advantage over a trading partner in the
production of an item if it can produce that item
at a lower unit cost than its partner. Implication
s... a. Any country can increase its income by
trading, because the world market provides an
opportunity to buy some goods at relative prices
that are lower than those which would prevail at
home in the absence of trade. b. The smaller the
country the greater this potential gain from
trade, but all countries benefit to some extent.
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• c. A country will gain most by exporting
  commodities that it produces using its abundant
  factors of production most intensively, while
  importing those goods whose production would
  require more of the scarcer factors of
  production.
• Exchange rates - def the price of one nation's
  monetary unit in terms of the monetary unit of
  another country.
• a. Foreign exchange market a market in which
  buyers and sellers of bank deposits denominated
  in the monetary unit of many nations exchange
  their funds.
• - Exchange rates can be allowed to fluctuate
  freely, can be "managed" or can be pegged to the
  currency of a major trading partner.
• Graph

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• - Demand side - People who want to import Chilean
  goods, or travel in Chile, or others who just
  want to hold pesos.
• When North Americans demand more Chilean
  vegetables, copper, wine, or whatever, (D curve
  shifts right) the price of the peso will rise in
  terms of dollars.
• - Supply side - those who want to import goods
  into Chile from the United States or hold .
• When Chileans demand more US cars or computers
  (S curve shifts right) the price (in ) of the
  Chilean peso will tend to decline (S of peso
  shifts r).
• c. Appreciation and depreciation of a currency

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• When country A's currency becomes more valuable
  relative to country B's, country A's currency is
  said to appreciate relative to that of country B
  - and country B's currency is said to depreciate
  relative to that of country A.
• 3. Balance of payments - Exports (X) Imports
  (M)
• BP PxX - PmM
• Px - vector of prices of exports
• Pm - vector of prices of imports
• Surplus excess of exports over imports
• Deficit excess of imports over exports
• 4. Import oriented trade policy (inward-looking
  trade policy... import substitution foreign trade
  policy)
• - The substitution of domestic production for
  imports of foreign manufactures.

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• - Was first explored by Latin American countries
  when their primary exports markets were severely
  disrupted, first by the Great Depression of the
  1930s and subsequently by the breakdown of
  commercial shipping during World War II.
• - Emerging from the war with fledgling
  industries, countries like Argentina, Brazil,
  Columbia, and Mexico began systematically to
  sustain these manufactures by erecting tariffs
  and other barriers to trade-competing imports
  from the US.
• Latin America developed import substitution
  regimes with a multitude of protective techniques
  that were later emulated by other developing
  countries.

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• 6. Export oriented trade policy (outward
• looking trade strategy)
• - Allows a nation to realize, as fully as
  possible, the inherent gains from their
  comparative advantage through free markets.
• Often means primary-export-led growth (drawbacks
  vulnerability due to volatile price swings)
• Hyperinflation - inflation (absolute increase in
  price level) at a very high rates of usually 200
  percent or more prevailing for at least one year.
• Caused by one thing government creating too
  much money relative to economic growth
  (seniorage).
• Inflation tax.
• Capital flight.

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General Economic Survey - The Golden Age
1870s to 1914. - Latin America's economy grew
consistently from 1900 to 1980, except for a
brief period during the 1930s. a. The growth rate
was slow until the 1950s (at which time it began
to increase). Import-substituting
Industrialization - Until 1929, economic growth
in most of Latin America was almost entirely
linked to the fortunes of export production. -
The Great Depression gt falling export volume
and prices gt created a severe recession
throughout the region in the 1930s. gt Marked
change in national economic policy
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(1) Certain governments introduced policies to
maintain the level of internal demand. (2) WWII
demand for Latin America's agricultural and
mineral products rose but imported manufactures
were scarce. Some of the unsatisfied demand began
to be filled by homemade products. (3) Following
the end of the war, most Latin American
governments formulated clear policies to foster
"import-substituting industrialization (ISI). -
Governments improved the region's transport
system and expanded the supply for electricity
and water. - They helped finance local industry
and welcomed foreign corporations willing to
establish factories in certain industries.
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Export-Oriented Industrialization - Starting in
the 1960s there was the beginnings of an
intellectual return to free trade thinking and
attempts were made to encourage Latin American
countries to export more to the developed
countries. - Stimulus here was the budding
success of the Asian Tigers or NICs (Hong Kong,
Korea, Singapore and Taiwan) who were
successfully penetrating MDNs markets. -
Encouraged by the advice of the World Bank,
several governments including those of Brazil and
Colombia began to reduce levels of domestic
protection and to give incentives to export
producers. 1 By 1970 this had become an
accepted way of sustaining industrial expansion.
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The Economic Crisis of the 1980s - No sooner had
export-oriented industrialization become a solid
plank in Latin America's development strategy,
that the debt crisis struck (1) Latin America's
path was externally chosen by the international
debt crises OPEC gt to Eurodollar market gt
to Latin America (to help finance the new
investments necessary to increase their export
capacity) gt tight monetary policy by US Federal
Reserve gt global slowdown gt LA exports fell gt
international banks would not renew loans or
extend additional credit gt nations could not
service debt gt technical default on debt (Debt
Crisis) - officially began with Mexico in 1982.
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• Apart from Peru, which refused to commit more
  than 10 of its export revenues to interest
  payments, most countries rescheduled their debts
  and accepted IMF conditions for additional loans.
• The International Monetary Fund
• International role of IMF is to extend emergency,
  short-term credit to member nations who get in
  trouble.
• Problem has a standard package that includes
• 1 Monetary and fiscal restraint along with
  devaluation.
• 2 Goal Reduce excess demand and to reorient
  the structure of national production away from
  imports and toward exports (low import content
  for which a domestic comparative advantage exists
  - often labor intensive manufactured goods or
  primary goods).

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3 Monetary restraint reduces domestic demand
and reins in inflation. 4 Devaluation reduces
appeal of additional capital flight. 5
Government spending reduced (get rid of
government deficits). 6 Limit on wage rate
increases (in countries with high inflation there
are also price controls to help break inflation
psychology - Argentina, Brazil and Peru). 7
Overhaul tax structure to reduce loopholes for
wealthy and to make tax system more
efficient. 8 Cut subsidies and controls
(tariffs and quotas) gt open up economy to market
forces.
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• Reforming Latin America - the 1990s
• Region grew from 1992 through 2008 with few
  national exceptions (stalled in 99-02).
• Three pillars of the reform process
• 1 First pillar fiscal constraint across the
  region.
• 2 Second pillar has been apertura
  liberalization of markets.
• a For a generation Latin economics have been
  biased toward autarky high tariffs against
  imports production mainly for domestic markets.
• b Tariffs were slashed, licenses and other
  restrictions abolished. Regional trade
  accelerated Trade among the largest 11 Latin
  American countries has more than doubled since
  1989.

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- Financial sectors were opened up, interest rate
controls lifted, and many countries removed all
restrictions on capital flows gt stock markets
boomed (slowdown from 1999 to 2002booming again
late 2008) 3 Third pillar has been
privatization. a Sebastian Edwards - chief
Latin American economist at the World Bank
privatization has changed the economic landscape
more than any other single policy. b Sale of
state owned enterprises (SOEs) had two big
goals 1 gain revenue for the budget (and so
reinforce macroeconomic stabilization) and
2 improve efficiency.
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Cracks in the "miracle" - One important effect of
reform was a huge change in Latin America's
access to financial markets. Debt crisis days
gonewhen Latin American cut off from
international capital markets. - Since 1991 fresh
capital began pouring in. 1 Rich Latin
Americans who had stashed their savings abroad to
protect them from inflation and profligate
governments, began to bring them back. a Size
is difficult to determine, yet at its height in
the late 80s Latin American's had between 150
and 300 billion held abroad. In Venezuela, the
stock of flight capital was estimated to exceed
the country's GDP. b In 1989 Latin American's
had more private financial assets in the US than
did the Japanese.
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2 The repatriation had a profound effect it
was the first wave of money to help support the
"strategy" gt then foreign money began to flow
back in (FDI). 3 The bond and equity bonanza
transformed Latin America's financial fortunes by
the mid-90'sand lasted until recently. a
Problem a virtuous circle - inflow exaggerated
the apparent success of the reforms - LA leaders
proclaimed the booming markets as evidence that
they had turned a corner - attracted still more
capital. b Groundwork for another boom/bust
cycle had been laid.
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• Cracks
• On Dec. 20, 1994 the Mexican government announced
  a devaluation of the peso - mayhem ensued with
  the peso plunging 35 in the last three weeks of
  94 - continued to slide through the middle of
  1995 Financial crisis unlike anything seen since
  1980's.
• The financial collapse due mainly to weaknesses
  that the earlier boom had entirely covered up.

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c. Unique aspects 1 Speed with which capital
fled the country. 2 The "tequila effect" -
ripple effects - Argentina affected the most. 3
After US bailout, talk of creating or adapting
international institutions to cope with such
problems in the future (didnt happen). 2.
Brazil broke its peg (of the real) to the dollar
in January 1999. - Unique aspects 1 Again,
speed with which capital fled the country. 2
IMF organized bailout (42 billion dollars!). 3
The Brazilian economy went into a recession in
1999 came out of it in 2000 (been growing
since).
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4 But the political-economic effects of the
devalued real impacted regional trade, with
Argentina suffering a prolonged recession (began
in 2000 and in late 2001 turned into a crisis
depression environment in 2002). 3. After a
series of political and economic crises, Ecuador
decided to abandon their currency and adopt the
US dollar (2000). 1 For different reasons, El
Salvador followed in 2001 and also adopted the US
dollar as their national currency. Reason to
access international financial markets. 4.
Argentina After a bout of hyperinflation in the
early 1990s, decided to introduce the new peso
and to peg it at par to the US dollar.
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1 Between the Brazilian devaluation and the
strong US dollar, the Argentine economy spun into
a deep recession. 2 After a series of political
crises in response to public demonstrations,
Argentina defaulted on 190 billion in debt in
early January 2002. 3 The government announced
a limited devaluation and slapped on capital and
currency exchange controls. 4 Economy bottomed
in early 2003 and has experienced robust growth
since. 5. Nothing really new in these
developments crises of local and foreign
confidence are endemic to Latin America. - Few
other places in the world come near to Latin
America's record of political and economic
instability.
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6. Causes of this instability are complex and
disputed a. Exceptionally wide income
inequality. b. Colonial legacy of centralized
state bureaucracy that preceded rather than
followed the development of civil society. c.
Combination of "short-termism (i.e. populism)
with a State directed model of development
adopted after the depression of the 30s creates a
volatile mixture Too much economic meddling by
governments that are too unstable. d. Add to this
profligate government spending financed, in part
by printing money gt chronic inflation (often of
the hyper variety). e. Too little saving
preference for consumption over saving and
investment.
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• f. Because of unpredictable inflation, those who
  could save, the rich, have done so overseas.
  What saving takes place within the country is
  scooped up by the governments.
• g. Financial markets are weak - Too many
  financial crises too little trust. Domestic
  capital markets are not deep.
• Long term prospects
• 1. Latin America's reliance on foreign capital is
  worrying.
• Low savings, 20 of GDP, as compared to 34 for
  East Asia ... and it's dropping in region.
• 2. Despite downsizing, remaining bureaucracies
  are politicized and often corrupt. Legal reform
  has hardly been touched.

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3. Too many people are still very poor Latin
America has the world's most skewed distribution
of income. Gini Coefficients - The wealthiest
1/5 of the population in Mexico is 27 times
richer than the poorest in Argentina, 16 times
richer (in Asia the figure is between 5 and
10). - There is little evidence that the economic
turnaround of the past few years have reached the
bottom of society (infrastructure in country is
still primitive). - For many, the wrenching
changes brought by privatization, trade
liberalization and monetary and fiscal prudence
has meant bankruptcy, unemployment or the loss of
state handouts.
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b Education is inadequate Latin governments
spend too much, relatively on higher education,
and too little on primary schools (especially in
poor areas). 4. Ironically, Robin Hood like
practices that have been common in Latin America
swings in populist regimes and policies in
reaction to the self-serving myopia of the
traditional elite often resulted in large
transfer programs did not increase productivity
and strained fiscal resources (both bad for
growthhappening in Venezuela right now). - Net
result is persistence of high-level inequality
and an unrealized growth potential. - Recent
studies indicate that, at least in Latin America,
high inequality may be a constraint on growth.
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• Alongside the practical matters, Latin America
  badly needs to build confidence in the
  institutions of public life. They are attempting
  to combine democracy with market economics in
  deeply unequal societies.
• Since 2002 elections have tended to tilt toward
  left wing politicians and political parties
  (socialist or communist e.g. Lula of Brazil)
• The voices of discontent have been unable to
  articulate more persuasive ways forward yet the
  fact cannot be ignored discontent springs from
  huge social need.
• - Rise again of populism e.g. Hugo Chavez in
  Venezuela has been fanning resentment of
  neoliberalism and US regional policy.

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• - Deep cynicism The immediate winners from
  privatization are usually the well-off (often the
  president's cronies). Further, police forces and
  law courts will seldom be popular if everyone
  knows that crime will go unpunished (or be
  committed) because their officials can be bought
  (they are also under funded and inefficient).
• Fact habits and institutions cannot be
  transformed overnight.
• The fundamental outlook is favorable
• yet the poor cannot eat "fundamentals".
• - What the poor and middle class see is the
  region's gap between incomes widening further.

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- El Fin -