Promosalons

1
LATIN AMERICAThe political economy of the
possible
Javier Santiso Chief Development Economist
Deputy Director OECD Development Centre
Promosalons Paris ? 20 February 2006
2
LATIN AMERICA IN THE GARDEN OF DELIGHTS?
3
THE FLOOD OF PARADIGMS IN LATIN AMERICA

• Utopia in Latin America from a spacial search
  to a temporal search.
• A search which has impregnated the history of
  Latin American political economy from
  structuralism to monetarism, from Marxism to
  Liberalism. In the 20th Century the whole
  Continent was dancing a waltz of paradigms.
• The famous decalogue of the Washington Consensus
  yet another variation on this waltz.

4
FROM MARXISM TO LIBERALISM MODELS TO BE CREATED

• The great ideological storms (Isaiah Berlin).
• A few decades ago one of the key words in the
  entire continent was Revolution a projective
  concept which denotes a temporal Beyond.
• Whether Cuban or Chilean, Marxist or Liberal, the
  Revolution will feed the time of tomorrows and
  the sacrifices of the immediate present.
• The flood, as Albert Hirschman describes it,
  brought with it an angry desire to conclude,
  where rigid economic models constituted numerous
  invitations to design alternatives with no
  chiaroscuro either all or nothing.

5
DEMOCRACY AND THE MARKET THE NEW ALPHABET

• The transormations of the Latin American
  continent are now obvious.
• In the region as a whole, the conceptual and
  practical framework of political economies have
  been transformed.
• Democracy and the Market have taken over from
  Revolution and the State on the altar of
  references.
• To sum up, a complete vocabulary and grammar have
  disappeared from the political and economic
  repertoire allowing a new ideology to emerge.

6
THE GREAT TRANSFORMATION OF LATIN AMERICA

• The great transformation which took place in
  Latin America at the end of this century does not
  herald the arrival of the Good Liberal.
• There was no transfer from one paradigm to
  another, instead a new cognitive style emerged.
• We witness the failure of the whole idea of
  political utopia and the politicial economy of
  the impossible.
• The failure of a cognitive style of macroeconomy
  of populism, similar to the purist monetarism of
  the Chicago Boys has only been the defense and
  illustration of the same concept.

7
A BLESSING IN DISGUISE FOR LATIN AMERICA?

• Perhaps we should not spend too much time
  mourning the passing away of the great reforming
  impulses.
• A detailed study carried out by Hausmann and
  Rodrik in 2004, proves that most economic
  accelerations were not preceded by reforming
  big-bangs, or by marked politicial or economic
  ruptures.
• This empirical study covers a wide range of 83
  sustained world growth patterms between 1957 and
  1992 (above two percentage points over a period
  of at least eight years).

8
THE EMERGENCE OF THE POLITICAL ECONOMY OF THE
POSSIBLE

• The strategy used by Ulysses leaders know that
  they could be in danger of succumbing to the
  temptation of the sirens chanting the economic
  politics of the impossible.
• They are cautious and they tie themselves to the
  masts of the fiscal and monetary institutions
  they have contribute to build.
• Two strategies of development are being outlined
  and sometimes combined- in the region one is
  an anchor of endogenous credibility, coming from
  within, and the other isan anchor of exognous
  credibility, getting its inspiration from
  external factors.

9
THE POLITICAL ECONOMY OF THE POSSIBLETHE LATAM
SILENT TRANSFORMATION
10
1
1
Latin Americas Crusade
The Great Latin American Transformation
2
3
Conclusion
11
THE BIG CHALLENGE THE LIFE AFTER THE
WASHINGTON CONSENSUS
Index of Structural Reforms in Latin America
1.00
0.90
CEPAL
0.80
0.70
0.60
IDB
0.50
0.40
0.30
0.20
0.10
0.00
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000

CEPAL Latin American Economic Commission

IDB Inter American Development Bank
Source Based on CEPAL and IDB
12
A DISAPPOINTING PERFORMANCE IN THE REGION

• Not only was growth poor but it was also very
  volatile.

Source Based on World Bank
Source Based on World Bank
13
THE CONSEQUENCE HAS BEEN A DIVERGENCE IN THE
EVOLUTION OF INCOME PER CAPITA

• With the exception of the 70s when Latin America
  attained an average growth rate of 6 ...

14
HOWEVER, 2003 BROUGHT A CHANGE IN TENDENCY...

• During the second half of the 90s, the tendency
  in regional growth broke down and suffered a
  deceleration.
• Since 2003, the region is booming in a
  synchronised way.

Source BBVA
The indicator for the change in tendency is an
index of measurement for changes in the cycle.
It marks the beginning of expansive and recessive
stages of the economic cycles.
15
AN UPWARD TURN BEGAN WITH A NEW CYCLE IN
2004-2006....
Latin American Cycles

• The last cycle in the region was very long (11
  years), especially compared to previous ones
  which lasted 8 years.

Source BBVA
16
ARE WE REACHING A NEW CYCLE?
Cycles in Latin America

• Moreover, there were two sharp interruptions
  (the Tequila crisis in 1995 and the Russian
  crisis in 1998).

2004
Source BBVA
17
THE SCENARIO OF US AND WORLD ACTIVITY IS KEY
Cyclical Situation in USA and Latin America

• In spite of the fact that variable factors such
  as the cost of raw materials cause the opposite
  economic effect in Latin America as opposed to
  developped countries, regional growth is closely
  linked to the growth patterns of USA.

USA
Tendency
Latin America
Correlation 0,80
Source Based on ECLAC and IMF
18
THE WORLD OUTLOOK FOR THE FOLLOWING YEARS IS GOOD
World growth exLatam

• Growth in USA remained strong in 2005 and will
  keep growing in 2006.
• China will continue to boost world demand in 2006
  having grown 9,9 in 2005 and 9,6 on average
  over the last 25 years.

6
5
4
3
2
1
0
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Source OECD
Evolution of income percapita
(constant dollars in 1996)
9000
Brazil
8000
7000
6000
China
5000
4000
3000
2000
1000
0
19
CHINA CONTRIBUTE TO GROWTH IN LATIN AMERICA

• Growth of GDP in China
• (Annual percentage variation)

Exports to China in 2003 (Percentage of total)
Source Based on domestic sources, before the
revised figures released in Jnauary 2006.
20
COMMODITY BOOM HAS BEEN A BONANZA
Exports of commodities
BBVA-MAP Index of Latin America commodity prices
(100 jan03)
over total exports (2004)
170
160
Venezuela
83.1
150
Peru
70.7
140
Without oil
130
Chile
59.1
120
Colombia
46.3
110
TOTAL
100
Argentina
38.0
90
Brazil
29.6
80
70
Mexico
14.6
60
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Latam
31.2
Source BBVA
Source BBVA
21
BOOSTING GROWTH
GDP and BBVA MAP Latam
6
30
GDP growth

• The higher volatility in the price of these
  products is reflected in the cycle.

5
20
4
10
3
0
2
-10
1
Crecim BBVA-MAP
-20
0

• Correlación 0,65

-1
-30
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source BBVA
The BBVA-MAP Latin America is a price indicator
for net exports of raw materials in the region.
22
1
1
Latin Americas Crusade
The Great Latin American Transformation
2
Conclusion
3
23
THE GREAT TRANSFORMATION THE MONETARY MAST
Inflation ()
250
200
150
100
50
0
Latin America
Total Emerging Markets
Source Based on IMF
24
With the sole exception of Venezuela, significant
advances are being achieved in the reduction of
fiscal deficit.In the last recessive phase the
consensus in fiscal discipline became apparent.
THE GREAT TRANSFORMATION THE FISCAL MAST
Public deficit ( over GDP)
4
2
0
-2
-4
-6
2004p
-8
1999
-10
-12
Source BBVA
25
THE GREAT TRANSFORMATION THE EXTERNAL ANCHOR
Commercial Openings in Latin America
Commercial Openings in 2004
50
45
Brazil
40
Peru
35
Colombia
30
Argentina
25
20
Uruguay
15
Venezuela
10
Chile
5
Mexico
0
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
0
10
20
30
40
50
60
70
2004 (e)
Source BBVA en base a fuentes nacionales
Source BBVA
Current Account Latam
2
1,3
0,7
1
0,1
sobre PIB
0
-0,5
-1
-2
-2,3
-2,5
-3
-3,1
-3,2
-4
-4,3
-5
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source BBVA
26
The political economy of the possible Chile
27
CHILE HAS INNOVATED IN ECONOMIC POLICY ...
Year Goal Adopted and Initial Inflation
45
Peru
40
35
30
Chile
25
Tasa de Inflación ()
20
Israel
Mexico
15
Rep. Czechj
Colombia
10
Island
Poland
UK
S.Africa
Canada
Spain
Korea
5
Norway
Suiza
N. Zealand
Finland
Brazil
Thailand
Australia
0
Suecia
1990
1992
1994
1996
1998
2000
2002
Source Central Bank of Chile
28
FAVOURING GRADUAL ADJUSTMENTS
Anual Inflation ()
35
30
25
20
15
10
5
0
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Source BBVA
29
AGAINST THE RAGE DE VOULOIR CONCLURE
Average Tariff
()
120
100
80
60
40
20
0
1960-64
1965-70
1971-73
1974-81
1982-84
1985-95
1995-00
2000-05
In the 1960s, there was already consensus in
favour of an opening. The debate centred on two
main issues The spread of opening and the
advantage/disadvantage of differentiated tariffs.
With the return of democracy, The process of
unilateral and joint reductions of tariffs was
complemented with bilateral treaties.
30
SUCCESSFUL POLICIES ARE CONTINUED PENSION SYSTEM
31
.. BUT WITH GRADUAL INCREASES
32
The political economy of the possible Mexico
33
MONETARY ANCHOR THE CENTRAL BANK A KEY ACTOR
FOR LOWERING INFLATION
Inflation
... Perspectives are now anchored at levels
around 4.
(Percentage)
140
120
100
80
60
40
20
0
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
As in the rest of the region inflation has been
considerably reduced ...
Source Banxico
34
FISCAL ANCHOR HEALTHY PUBLIC FINANCES
Public Sector financing requirements
(Percentage of GDP)
.. .. however, the government still depends on
oil to finance its expenditures.
20
15
10
5
Income from Oil
As a percentage of the total)
0
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
50
45
-5
40
35
-10
30
Public debt has been considerably reduced ...
25
20
15
10
5
0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source Banxico figures
35
EXTERNAL ANCHOR THE EMERGENCE OF A GLOBAL TRADER
Total Exports
... Which has resulted in a greater degree of
openness
200
180
160
140
120
100
80
Degree of Openness
60
((XM)/PIB)
40
60
20
55
0
1980/12
1984/12
1988/12
1992/12
1996/12
2000/12
2004/12
50
45
Mexican exports increased on average by 17 each
year between 1989 and 2004 ...
40
35
30
25
20
Source INEGI and Banxico
China
Chile
Mex
Tur
Col
Arg
Perú
Bra
Ind
36
THE COUNTRY NOW DEPENDS A LOT LESS ON RAW
MATERIALES
Exports
Herfindahl-Hirschman Index Exports by receiver
countries
200
(1986-1988 y 1999-2001).
1,0
180
0,9
160
0,8
140
0,7
0,6
120
No petroleras
0,5
100
0,4
80
0,3
60
0,2
40
0,1
20
0,0
Petroleras
Perú
Chile
0
Brasil
Bolivia
México
Ecuador
Uruguay
Paraguay
Venezuela
Argentina
Colombia
Costa Rica
Guatemala
Honduras
Nicaragua
El Salvador
1980/12
1984/12
1988/12
1992/12
1996/12
2000/12
2004/12
1986-1988
1999-2001
The export of manufactured goods grew on average
between 1990 and 2000, about 28 per year and
now accounts for 90 of total exports.
37
MOREOVER, TLCAN HAS MEANT THAT THE COUNTRY HAS
BECOME ANCHORED TO THE ECONOMY OF USA
Recovery of GDP
(Índice100 maximum)
GDP in Mexico and Industrial Production in USA .
(Percentage of Anual Exchange)
110
10
1981
1985
1994
2000
105
8
6
Mexico GDP
100
4
2
95
0
90
-2
-4
US industrial production.
85
-6
Quarters after the crisis
-8
1996
1997
1998
1999
2000
2002
2003
2004
80
2001 p/
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Source INEGI and Banxico
The new productive structure has caused the
economic cycle to become more stable , and
volatility has become a thing of the past.
38
The political economy of the possible Brazil
39
EXTERNAL TRANSFORMATION
Following the 1999 devaluation which give way to
the floating of the real, the economy has
gradually opened up, making it less vulnerable to
external shocks.
Commercial opening
(Exports Imports) / GDP
30
25
20
15
10
5
0
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Source Based on BCB figures
40
TRADE OPENESS AND CATCHING UP PROCESS
Successful Asian emerging countries were able to
simultaneously combine growth with a trade
openness proccess. Brazil has recently started
to open up its economy. It is also obtaining
record trade surpluses nearly 45 billion dollars
in 2005 up 25 from the previous year.
41
BRAZILIAN FIRMS BEGAN TO EXPAND OVERSEAS
Top 100 firms in Latin-America
50
45
40
40
30
20
8
10
3
1
1
1
1
0
Brazil
Mexico
Chile
Argentina
Ecuador
Colombia
Peru
Venezuela
Source America Economia 2005
42
BRAZILIAN FIRMS RALLIED MEXICAN MULTILATINAS
The 50 more profitable firms
19
20
Number of firms in Forbes 2000
16
35
15
30
25
10
20
7
15
5
10
3
5
1
1
1
1
1
0
0
Brazil
Mexico
Chile
Argentina
Colombia
Ecuador
Panama
Peru
Venezuela
India
Spain
China
Brazil
Mexico
Chile
Source America Economia 2005
Source Forbes 2000
43
THE CHINESE BONANZA
Brazilian products hardly compete at all with
Chinese goods in international goods markets,
and, moreover, the tendency is for these levels
to drop.
Commercial Competition with China
0.70
Tailandia
0.65
Hungría
0.60
0.55
México
0.50
Coef de conformidad
Rep. Checa
0.45
EEUU
0.40
Polonia
0.35
Japón
0.30
0.25
España
Brazil
0.20
Commercial competition between China and Brazil
0.25
0.35
0.45
0.55
0.65
Coef de especialización
30
31
30
Source Blázquez, Rodríguez y Santiso, 2005
30
29
28
28
27
27
25
25
26
25
24
23
1998
1999
2000
2001
2002
2003
Source Blázquez, Rodríguez y Santiso, 2005
44
1
1
Latin Americas Crusade
The Great Latin American Transformation
2
3
Conclusion
45
Latin America 2006 The political cycle is back
Next presidential elections 2007 -
2009 2006 2004 - 2005
46
The timing game Political cycles and crises in
Latin America used to be synchronized, 1970-2000
Elections
Nominal exchange rate depreciation
Countrys Total
and government change
1989
17
1
Colombia
13
1,16
1990
14
2
Costa Rica
11
1991
3
3
Guatemala
11
1,14
1992
0
4
Ecuador
10
1,12
1993
10
5
Chile
10
1994
18
6
Peru
10
1,1
1995
6
7
Honduras
10
1,08
1996
8
8
Paraguay
9
1997
7
9
Brazil
9
1,06
1998
15
10
El Salvador
9
1,04
1999
12
11
Republica Dom.
9
2000
11
1,02
12
Uruguay
9
2001
4
13
Mexico
9
1
2002
13
14
Argentina
8
0,98
2003
8
15
Nicaragua
8
2004
6
16
Panama
8
0,96
2005
5
17
Venezuela
8
Source Frieden, Ghezzi y Stein, 2001
0,94
2006
11
18
Bolivia
7
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
47
During the period 2000-2005, some countries
achieved a decoupling The case of Mexico
Timing of Presidential Elections and Exchange
Rate Depreciations in Mexico, 1975-2000
Election Year
Election Year
Election Year
Source Jorge Blázquez and Javier Santiso, 2004.
48
While others had overcome the test of fire more
recently The case of Brazil
Source Based on Juan Martínez and Javier
Santiso, 2003.
49
Thank youfor your attention!