Reforming Latin American
Economies
Ricardo Ffrench-Davis
University of Chile
COMMISSION ON GROWTH AND
DEVELOPMENT SEMINAR
April 12, 2007
1
Double divergence in economic development
Latin America versus Developed Countries, Per Capita GDP and Income Distribution, 2005
(US$, PPP)
40,000
35,000
P er Capita GDP
20% riches t v/s
30,000
20% po o res t
25,000
G-7 35.782
Per Capita GDP
20% richest v/s
20% poorest
7 times
(USA 8 times)
20,000
15,000
19 times
(USA 41.399)
10,000
8.392
5,000
0
Developed Countries (G-7)
Latin America (19)
2
Source: IMF, World Economic Outlook Database (2006); World Bank, World Development Indicators (2006).
After deep economic reforms a la Washington Consensus, Latin
America’s economic performance, in terms of growth and equity, has
delivered an economic and social failure…
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Uruguay
Venezuela
Latin America (19)
Total
Per capita
Per member of LF
Latin America: GDP growth, 1971-2006
(annual growth rates, %)
1971-80
1981-89
1990-97
1998-2003
2.8
-1.0
5.0
-1.3
8.6
2.3
2.0
1.5
2.5
2.8
7.0
2.7
5.4
3.7
3.9
1.1
6.5
1.4
3.1
2.9
3.9
-0.7
3.9
2.0
2.7
0.4
3.9
-2.1
1.8
-0.3
3.8
-2.7
5.6
3.0
1.7
1.3
-0.8
-1.5
3.2
1.4
0.5
1.3
-0.3
-1.1
2004-06
8.7
3.4
5.5
4.8
4.0
6.0
8.6
12.2
1990-2006
3.3
2.1
5.2
3.0
3.2
3.6
2.5
2.9
5.2
3.6
2.8
2.9
1.2
0.3
Source: ECLAC, expressed in US dollars at 1980 prices for 1971-89, and at 1995 prices for 1989-2006.
Need to reform the reforms in a pragmatic way.
EEUU= 1.8
Asia(6)=3.7
Mundo=1.3
3
No progress in social indicators.
Latin America: social indicators, 1980-2006
1980
1990
2006
GDP per
capita
(2000 US$)
3,663
3,232
4,027
Poverty
(millions)
(% of pop.)
136
40.5
200
48.3
211
38.5
Real wage
index
(1995=100)
102.7
96.2
96.8
Unemployment
(% of labor force)
7.7
7.2
8.7
Population
(millions)
343
423
548
Sources: GDP per capita, poverty and population based on ECLAC data for 19 countries.
Real wage regional index based on real indices provided for ECLAC for 12 countries, weighted by labor force in each year.
Unemployment is calculated by ECLAC with information for 24 Latin American and Caribbean countries.
4
Real instability: Financial volatile flows have led fluctuations in
aggregate demand and GDP.
Latin America (19): GDP and Aggregate Demand, 1990-2006
(annual growth rates, %)
8
6
4
2
-2
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
GDP growth
Aggregate demand growth
-4
5
Source: ECLAC data. Includes 19 countries. Preliminary figures for 2006.
Medium-term cycles: the domestic instability has been the
outcome of volatility in capital surges.
LATIN AMERICA: NET FOREIGN TRANSFERS, 1970-2005
(percentage of trend GDP, %)
4.0
NFT/GDP
Average
3.0
2.0
1.0
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
-1.0
1970
0.0
-2.0
-3.0
-4.0
Source: ECLAC.
6
Real instability has also been unfriendly for the productive sector via its
negative impact on capital formation. As a result, the investment ratio
has sharply declined with respect to the 1970s.
Latin America (19): Gross Fixed Capital Formation, 1970-2006
(% of GDP, scaled to 1995 prices)
29
27
25,6
% of GDP
25
23
21
20.0
19,2
19.3
19
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
15
1970
17
7
Source: ECLAC data for 19 countries. Preliminary figure for 2006.
Meanwhile, in Chile:
Chile: Gross Fixed Capital Formation, 1970-2006
(% GDP, 2003 prices)
25
23.0
22.8
19.7
20
18.2
15
14.0
12.9
10
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
5
Source: Author’s calculations, based on Central Bank figures.
8
In fact, high real instability generates underutilization of potential GDP,
what is a significant explanation of reduced productive investment ratio.
Latin America (9): output gap and investment ratio, 1970-2003
(prices of 1995)
27
Investment ratio
8
Investment ratio (%)
Output gap
25
6
4
23
2
21
0
19
-2
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
-4
1970
17
Output gap (% of potential GDP)
10
Source: ECLAC and Hofman and Tapia (2004).
Averages for Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru and Venezuela. The investment ratio measures the ratio between the
fixed capital formation and the GDP. The output gap measures the difference between potential and actual GDP as a share of potential GDP.
9
In a number of countries, trade liberalization was accompanied by the
liberalization of the capital account. This liberalization prompted considerable
exchange rate appreciation just when trade reforms urgently required the
opposite: a compensatory depreciation.
Latin America: Import liberalization and real exchange rate, 1987-2000
130
95
120
90
110
85
100
80
90
75
Real Exchange rate
80
Import liberalization, max=100
RER, 1987-90=100
(indices)
70
Import liberalization
70
65
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Source: Authors' calculations for 16 countries, based on Morley, Machado and Pettinato (1999), and database of Economic
Development Division, ECLAC.
2000
10
In fact, capital flows have determined RER behavior in Latin America.
RER medium-term instability has tended to weaken value-added in
exports and its links with the rest of domestic economy.
Latin Ame rica: Ne t capital inflows and re al e xchange rate , 1987-2004
(% of GDP; indice 1997=100)
110
6
5
4
90
3
2
80
1
70
0
Real exchange rate
-1
Net capital inflows
60
Net capital inflows (% of GDP)
Real exchange rate (1997=100)
100
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
50
1987
-2
-3
11
Source: Author’s calculations based on ECLAC figures. Real exchange rate defined in terms of dollars per unit of local currency.
Success in the volume and growth of exports, but meager
performance in non-exported GDP.
Latin America (19): Growth of exports and non-exported GDP, 1990-2005
(annual average growth rates, %)
1990-1997
1998-2003
2004-2005
1990-2005
GDP
3.2
1.2
5.1
2.7
Exports
8.3
(1.0)
5.4
(0.8)
9.2
(1.7)
7.3
(1.0)
Non-exports
2.5
(2.2)
0.5
(0.4)
4.2
(3.4)
1.9
(1.7)
Source: based on official figures from ECLAC for 19 countries.
Figures into brackets are estimates of points of GDP growth contributed by exports and non-exports, respectively. Export value-added
was estimated by discounting the imported content in exports from gross exports of good and services. The imported content was
assumed to be equal to the share of non-consumer imports of goods in total GDP; for Mexican maquila, we used actual figures of valueadded.
12
Success in the volume and growth of exports, but meager
performance in non-exported GDP.
1974-81
1982-89
1990-98
1999-2003
2004-05
1974-89
1990-2005
Chile: Growth of exports and non-exported GDP, 1990-2005
(annual average growth rates, %)
GDP
Exports
Non-exports
3,0
13,6
1,5
2,9
7,8
1,7
7,1
9,9
6,5
2,6
5,5
1,7
5,8
7,5
5,2
2,9
10,7
1,6
5,5
8,2
4,8
Source: Author's calculations based on Central Bank figures.
13