The Emergence of Latin America:
A Break with History?
Mauricio Cárdenas, Brookings Institution
Brookings Mountain West
University of Nevada, Las Vegas
March 1, 2011
“It is impossible to understand Latin America
without leaving it and observing it from afar with
your own eyes, noting at the same time the
myths and stereotypes that have been
constructed about it abroad”.
Mario Vargas-Llosa
The Paradoxes of Latin America.
Latin America: Facts and myths
• Latin America is no longer the stereotype of populism and
economic mismanagement, but it would be misleading to derive from the
recent progress some form of complacency.
• There are important ideological and economic differences within the region,
so generalizations tend to be misleading.
• In this lecture I would like to debunk some myths, while re-stating some
unpleasant facts that remain part of Latin America’s reality.
Latin America is economically relevant:
Similar to China in GDP with a smaller population (for 2009)
LAC & China Populations
1,400
LAC & China GDP (USD)
6000
1331
1,000
800
600
4985
5000
GDP (Billions current USD)
Population in Millions
1,200
579
4179
4000
3000
2000
400
1000
200
-
0
Latin America & Caribbean
China
Source: World Bank, World Development Indicators (2009)
Latin America & Caribbean
China
US Crude Oil Imports 2010
3%
2% 1%
4%
4%
33%
5%
LAC
CANADA
SAUDI ARABIA
NIGERIA
IRAQ
12%
ANGOLA
ALGERIA
RUSSIA
KUWAIT
UNITED KINGDOM
13%
23%
Source: US Energy Information Administration, February 25, 2011
Country
Canada
Mexico
China
Japan
United Kingdom
Germany
Korea, South
Brazil
Netherlands
Singapore
France
Hong Kong
Taiwan
Belgium
Australia
Switzerland
India
Italy
Malaysia
Colombia
Total 2010 Exports (in
billions of USD)
248.8
163.3
91.9
60.5
48.5
48.2
38.8
35.3
34.9
29.1
27.0
26.5
26.0
25.5
21.8
20.6
19.2
14.1
13.9
12.0
Seven countries in the region account for more than 80% of
the population and GDP
LAC & LAC7 Populations
LAC & LAC7 GDP (USD)
700
4500
4179
4000
500
400
578
3607
458
Venezuela
28
29
Peru
Mexico
107
Colombia
300
Chile
45
16
Brazil
Argentina
200
3500
100
326
130
3000
Venezuela
874
Peru
2500
2000
Mexico
234
163
Colombia
Chile
Brazil
1500
1000
193
0
GDP (Billions current USD)
Population in Millions
600
Argentina
1573
500
307
40
LAC7
0
Latin America & Caribbean
Source: World Bank, World Development Indicators (2009)
LAC7
Latin America & Caribbean
Latin America is now performing much better than the
developed countries
Trend GDP growth in LAC and High Income Countries
Stock Market Indexes, Jan 2007 = 100
6
Latin America
5
4
3
2
High
Income
1
Jan-08
Jan-06
Jan-04
Jan-02
Jan-00
Jan-98
Jan-96
Jan-94
Jan-92
Jan-90
Jan-88
Jan-86
Jan-84
Jan-82
Jan-80
0
Hyperinflations are long gone
Inflation (%)
Monetary policy interest rate (%)
23
9
8
7
18
6
13
4
Percent
3
8
2
1
3
0
-1
2005
2006
2007
2008
2009
2010
Brazil
Chile
Colombia
Mexico
Peru
United States
2011
Uruguay
Source: International Monetary Fund, World Economic Outlook; Central Bank
bulletins and Economist Intelligence Unit.
-2
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
2010f
Percent
5
Brasil
Chile
Colombia
Mexico
Peru
US
As well as Fiscal Populism
Fiscal Balance
Gross Nominal Liabilities
3
-1
2
-1
-3
-2
-3
% of GDP
% of GDP
2010
160
-5
-7
-9
2007
167
-1
-1
200
200
-9
-9
-10
120
98
80
63
100
89
89
74
71
47
-13
2007
40
-14
2010
-17
US
Euro
Japan
UK
OECD
LAC-7
33 33
0
US
Euro
Japan
UK
OECD
LAC-7
Source: Economist Intelligence Unit (EIU) and Consensus Forecast (Sep. 2009)
10
Disappointing long-term track record
GDP Per Capita of Selected Regions / US GDP per Capita
0.8
0.7
Alliance
for
Progress
Interwar
Period
Gold Standard
Period
US
Recovers
0.6
Washington
Dissensus
Lost
Decade
Imports
Substitution
Washington
Consensus
0.5
LAC/US
0.4
0.3
0.2
0.1
Asian Tigers/US
Source: Maddison (2009).
2008
2002
1996
1990
1984
1978
1972
1966
1960
1954
1948
1942
1936
1930
1924
1918
1912
1906
1900
0
And much of it has to do with Total Factor Productivity
Growth decomposition 2000-2007
80%
70%
60%
47.8%
Percents
50%
40%
30%
Human Capital
Physical Capital
Labor Force/Population
TFP
20%
14.9%
7.2%
6.4%
5.5%
1.8%
2.9%
5.1%
2.4%
2.8%
4.7%
2.9%
3.3%
LAC-7 minus Venezuela
plus Uruguay
Rest of LAC
Emerging Asia (w/o
China)
10%
0%
3.4%
Notes: PCE: Peripheral core economies (Australia, Canada, New Zealand, Norway, Sweden).
Source: own calculations based on data from Blyde, Daude and Fernández-Arias (2009).
6.7%
23.5%
5.6%
6.3%
1.2%
3.3%
PCE
China
The good fortune of high commodity process
Commodity Prices
Oil WTI in Current US$, Wheat, Copper and Soybean: Index 01-Jan-05=100
350
Pandit's
Memo
130
Wheat
110
Copper
250
Soybean
90
200
70
150
50
100
Lehman
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
30
Oct-05
Jul-05
Apr-05
Oil (rhs)
50
Oil WTI, Current US$
300
Jan-05
Wheat, Copper and Soybean, 01-Jan-05=100
150
Subprime Bear Stearns
eruption
Democratic consolidation
Bolivia
Brazil
Chile
Colombia
Costa Rica
Dominican Rep
Ecuador
El Salvador
Guatemala
Guyana
Haiti
Honduras
Jamaica
Mexico
Nicaragua
Panama
Paraguay
Peru
Uruguay
-10
-5
0
5
10
-10
-5
0
5
10
-10
-5
0
5
10
-10
-5
0
5
10
Argentina
1900
1950
2000
1900
1950
2000
1900
-10
-5
0
5
10
Venezuela
1900
1950
2000
year
Source: Polity IV Project: Political Regime Characteristics and Transitions, 1800-2008 (2008)
Polity2 measure: Democracy – Autocracy (-10,+10)
1950
2000
1900
1950
2000
Average number of coups per country in LAC countries
Asia (non-Middle East)
LAC
OECD
0
.1
.2
.3
0
.1
.2
.3
Sub-Saharan Africa
1965
1975
1985
1995
2005
year
Source: Coups d’Etat, 1960-2006, Center for Systemic Peace (2007)
1965
1975
1985
1995
2005
Murder Rate per 100,000 people
Some progress in the reduction of inequality
Source: Gasparini et al. (2009) based on SEDLAC. v
20
-4.0
-0.6
-0.2
Total 17 countries
Total 12 countries
Honduras
1.0
Nicaragua
0.9
Costa Rica
1.0
Uruguay
Guatemala
Venezuela
Panama
-0.7
Argentina
-0.9
-0.9
El Salvador
-1.0
Peru
-3.1
-1.0
Mexico
-3.0
-1.0
Dominican Rep.
-2.0
-1.1
Chile
-1.4
-0.9
Bolivia
-1.0
Brazil
Paraguay
Ecuador
Annual percentage change in Gini (in %)
Annual Percentage Change in Gini Coefficient
4.0
3.0
2.0
2.2
1.0
0.0
0.1
-0.5
-1.1
21
A new middle class is emerging
Brazil Economic Classes Share (August 2008- December
2009; 2014 forecast)
60
50
40
30
Class AB (more than R 4807)
Class C (R 1115-4807)
Class D (804-1115)
20
10
0
Class E (R 0-804)
Household per capita income and its determinants
Per capita
household income
Proportion of adults in
the household
•FERTILITY
Household
income per adult
Household non-labor income
per adult
•RENTS & PROFITS
•REMITTANCES
•GOV. TRANSFFERS
Household labor
income per adult
Proportion of working adults
•PARTICIPATION IN LABOR
FORCE
•EMPLOYMENT OPPORT
Labor income per working adult
in the household
•WAGES BY SKILL/OTHER
•HOURS WORKED
23
Composition of adult population by education level
24
But a very large gap remains in the quality of education
550
Hong Kong
Macao, China
Mathematics score in PISA 2006
500
Azerbaijan
450
Finland
Korea
Netherlands
Switzerland
New Zealand
Belgium Japan
Australia
Denmark
Czech Republic
Estonia Austria
Slovenia
Iceland
Ireland Germany
Poland
Sweden
Norway
France UK
Hungary
Lithuania
Luxembourg
Slovak Republic
Latvia
Spain
United States
Croatia
Portugal
Greece
Italy
Israel
Uruguay
Turkey
Romania
400
Chile
Indonesia
Argentina
Thailand
Mexico
Bulgaria
Jordan
Brazil
Colombia
Tunisia
350
Kyrgyz Republic
300
0
5
10
15
20
25
30
Expenditure per student, primary (% of GDP per capita)
Source: Mathematics score from Pisa (2006). Expenditure per Student, primary (% GDP) is the most
recent data available in WDI (2004 for most of the countries). Public expenditure per student is the public
current spending on education divided by the total number of students in the primary level.
25
Private vs. public education:
Performance and socioeconomic status
Source: OECD (2006).
26
A way to measure progress towards development
Variables used in the rankings:
Real GDP growth
Inflation, average CPI (%)
Cyclically adjusted fiscal balance (%GDP)
Net external debt (%GDP)
Net external financing needs/CAR (%)
Public sector external debt (%GDP)
Emerging market bond spreads (bp)
Gini coefficient (%)
Human development index
Composite world governance indicator
Stable Growth
Policy Track Record
Financial
vulnerabilities
Development
factors
6
60
5
50
4
40
3
30
2
20
1
10
0
Taiwan
Singapore
Developed (avg)
Malaysia
China
Korea
Peru
Thailand
Israel
Czech Republic
Chile
Lithuania
Poland
Estonia
Philippines
India
Colombia
South Africa
Hungary
Bulgaria
Latvia
Brazil
Mexico
Egypt
Uruguay
Vietnam
Indonesia
Argentina
Ukraine
Venezuela
Romania
Russia
Turkey
Ecuador
Vietnam
China
Egypt
India
Indonesia
Philippines
Poland
Korea
South Africa
Malaysia
Developed (avg)
Thailand
Peru
Brazil
Chile
Singapore
Bulgaria
Israel
Taiwan
Russia
Czech Republic
Colombia
Romania
Ecuador
Hungary
Lithuania
Estonia
Mexico
Ukraine
Turkey
Latvia
Argentina
Uruguay
Venezuela
Graduation scorecard: Core program
Risk adjusted GDP
Risk adjusted CPI
0
Notes: Risk adjusted GDP is constructed as the mean of the real GDP growth (19992009)/standard deviation real GDP growth (1999-2009); Risk adjusted CPI is constructed as the
mean of the CPI inflation rate (1999-2009)/standard deviation of the CPI inflation rate (19992009)
Source: The Economist Intelligence Unit and IMF World Economic Outlook Data Base, April 2010.
-4
-1.5
-5
-2
5
4
2
1
0.5
0
0
-1
-3
Singapore
Chile
Estonia
Czech Republic
Hungary
Taiwan
Korea
Lithuania
Uruguay
Latvia
Poland
Israel
Malaysia
Bulgaria
Romania
Brazil
Turkey
Mexico
India
Argentina
Thailand
Peru
Colombia
Ukraine
China
Philippines
Indonesia
Egypt
Vietnam
Russia
Ecuador
Venezuela
South Africa
Developed (avg)
Russia
Bulgaria
Chile
Brazil
Argentina
Colombia
Peru
Turkey
Israel
Estonia
Mexico
Taiwan
Philippines
Singapore
Uruguay
Poland
South Africa
Indonesia
Thailand
Hungary
Korea
Ukraine
Lithuania
China
Latvia
Egypt
Vietnam
Romania
Czech Republic
India
Ecuador
Malaysia
Venezuela
Graduation scorecard: the hard sciences
Cyclically adjusted fiscal
balance (%GDP)
World Governance Indicators
2
3
1.5
1
-2
-0.5
-1
Notes: Cyclically adjusted fiscal balance estimated as the intercept from a regression of the
primary surplus on cyclical output, where the latter is obtained from the log-linear de-trending of
real GDP. The Economist Intelligence Unit and Kaufmann, Kraay and Mastruzzi (2009).
Governance Matters VIII
Graduation scorecard: Final report
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
Sources: The Economist Intelligence Unit; IMF World Economic Outlook, April 2010; Bank of
International Settlements; Moody's; World Bank Global Economic Monitor and World
Development Indicators; Human Development Report 2009; Kaufmann, D., Kraay, A., Mastruzzi,
M. (2009) Governance Matters VIII.
Venezuela
Ecuador
Latvia
Romania
Ukraine
Lithuania
Turkey
South Africa
Russia
Hungary
Argentina
Colombia
Philippines
Estonia
Uruguay
Indonesia
Mexico
Czech Republic
Bulgaria
India
Egypt
Vietnam
Peru
Thailand
Poland
Malaysia
Brazil
Israel
Korea
China
Chile
Taiwan
Singapore
0.0
Bottom-line
– Macro policy framework is exemplary.
– But difficult to get GDP growth above 5 percent without
generating inflationary pressures. Low potential growth.
– Effects of new dependency from China are not fully clear.
– Central America has very different challenges compared to
South America.
– The positive trends suggest that this can become Latin
America’s decade.