Transcript LATIN AMERICA

LATIN AMERICA:
IS IT MOVING FORWARD?
Ricardo Hausmann
Kennedy School of Government
Harvard University
Outline
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Structural reform and growth
Demographic window of opportunity
Financial Turmoil and contagion
‘Original sin’: an interpretation of the problem
The boom in FDI: what does it mean?
The recovery in Latin America
Prospects for long-run growth
Latin America recovered in the 1990s
GDP Growth
6
5
porcentaje
4
3
2
1
0
1965-70
Fuente: IDB
1971-80
1981-90
1991-98
Based on significant structural reform
Avance de las políticas estructurales
80%
Variación relativo al máximo
Trade
60%
Financial
40%
20%
0%
Fuente: Lora, 1997
…that is still incomplete by area
Avance de las políticas estructurales
80%
Variación relativo al máximo
Trade
60%
Financial
40%
Tax
Privatization
20%
Labor
0%
Fuente: Lora, 1997
More reforms, more growth
Cambios en Tasas de Crecimiento
Cambios en Crecimiento y en
Políticas Estructurales (1993-95 vs. 1987-89)
15%
Perú
10%
Nicaragua
El Salvador
5%
Argentina
Trinidad and Tobago
Brazil
Bolivia Ecuador
Guatemala
Colombia
0%
Costa RicaUruguay
Venezuela
-5%
0%
República Dominicana
Paraguay
Honduras
Mexico
Chile
Jamaica
5%
10%
15%
20%
25%
30%
Cambios en Indices de Política
Fuente: Lora y Barrera, 1997
35%
40%
1997 was a very good year
Real GDP Growth
(Average 8 Largest Economies)
6.0
6.0
5.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
90
91
92
93
94
95
96
97
0.0
…but then came a bad streak
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Asian Financial crisis
Collapse in the terms of trade
El Niño
Russian crisis and contagion
Hurricanes Georges and Mitch
Brazilian crisis
35
Index 01/02/97 = 100
1/2/99
12/2/98
11/2/98
10/2/98
Hong Kong
9/2/98
8/2/98
7/2/98
6/2/98
5/2/98
4/2/98
3/2/98
2/2/98
1/2/98
12/2/97
Thailand
11/2/97
10/2/97
9/2/97
8/2/97
7/2/97
6/2/97
5/2/97
4/2/97
3/2/97
2/2/97
1/2/97
The collapse in the terms of trade
Commodity Prices
125
115
Copper
105
95
Wheat
85
75
65
Oil
55
45
Russia
100
Source: JP Morgan.
3-Dec-98
3-Oct-98
3-Aug-98
3-Jun-98
3-Apr-98
3-Feb-98
3-Dec-97
3-Oct-97
3-Aug-97
500
3-Jun-97
3-Apr-97
3-Feb-97
3-Dec-96
3-Oct-96
3-Aug-96
3-Jun-96
3-Apr-96
3-Feb-96
3-Dec-95
3-Oct-95
3-Aug-95
3-Jun-95
3-Apr-95
3-Feb-95
3-Dec-94
3-Oct-94
Major financial shocks… and recovery
Latin Eurobond Index Spread (1994-98)
1,700
1,700
1,500
(Mexico)
1,500
1,300
1,300
1,100
(Russia)
1,100
900
900
700
700
(Hong Kong)
500
300
300
100
Private capital inflows collapsed
Net Capital Inflows and Commodity Prices
130
95
125
90
120
Capital Flows
85
80
115
75
110
70
105
65
60
100
55
95
50
90
45
40
85
1991
1992
1993
1994
1995
1996
1997
1998
1999
Non-fuel commodity prices
100
…when they were most needed
Net Capital Inflows and Commodity Prices
130
95
125
90
120
Capital Flows
85
80
115
75
110
70
105
65
60
100
55
95
50
90
45
40
85
1991
1992
1993
1994
1995
1996
1997
1998
1999
Non-fuel commodity prices
100
…only marginally offset by
official financing ...
90
80
70
60
50
40
30
20
10
0
-10
-20
1997
Private Net Flows
1998
Official Inflows
1999
Acum of Reserves
CAD
…causing a collapse in imports
Trade and Current Account
(excl. Mexico)
160
140
120
100
80
60
40
20
0.
1991
1992
1993
1994
1995
1996
1997
1998
1999
-20
-40
-60
-80
Exports(-Mex)
Imports(-Mex)
Trade Balance(-Mex)
CA(-Mex)
…that exceeded the fall in exports
Comparing Recessions
(absolute change between periods)
35
Imports
25
Exports
15
Trade Balance
5
-5
-15
-25
-35
Source: WEO
1994-1995
1997-1999
…and caused a collapse in growth
Real Growth in Latin America
6
5
4
3
2
1
0
1991
Source: WEO
1992
1993
1994
1995
1996
1997
1998
1999
…that affected most countries
Fall in Growth (Average 1999-98 vs 1997)
Venezuela
Argentina
Ecuador
Chile
Guyana
Peru
Western Hemisphere
Uruguay
Mexico
Brazil
Colombia
Suriname
El Salvador
Dominican Rep.
Belize
Bahamas
Panama
Grenada
Honduras
Paraguay
Trinidad&Tob
Guatemala
Dominica
Nicaragua
Bolivia
Barbados
Haiti
Jamaica
Costa Rica
-2
0
2
4
6
8
10
Latin America: no Fireworks
Since the East Asian crisis
• No systemic banking crises
• No widespread currency crises
• No inflationary crises
• No debt crisis
• No reversal of reforms
Exceptions
• Ecuador is a real exception
• Brazil: not really an exception, just a
currency realignment that has not generated
any other symptom
• Colombia? Venezuela?
Capital flows have been recovering
4.0
Figure 12a: Net Private Capital Inflows, Portfolio, FDI and Loans in Latin America, 1996-2000
3.5
Private Capital Inflows
3.0
2.5
2.0
FDI
1.5
Portfolio
1.0
0.5
Loans
0.0
1996
-0.5
-1.0
Note: As percentage of GDP.
Source: Balance of Payments, IMF.
1997
1998
1999
2000
30
Source: Goldman Sahcs Commodity Indexes
05/17/00
04/17/00
03/16/00
02/15/00
01/14/00
12/15/99
11/15/99
10/14/99
09/14/99
08/13/99
07/14/99
06/14/99
05/13/99
40
04/13/99
03/12/99
02/10/99
90
01/11/99
12/10/98
11/10/98
10/09/98
09/09/98
08/10/98
07/09/98
06/09/98
05/08/98
04/08/98
03/09/98
02/05/98
01/06/98
12/05/97
11/05/97
10/06/97
09/04/97
08/05/97
07/04/97
06/04/97
05/05/97
04/03/97
03/04/97
01/31/97
01/01/97
Commodity prices have stopped
falling
Commodity Indexes
(Index Jan 97=100)
120
110
100
Agricultural
80
70
60
50
Energy
World outlook looks good
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Continued recovery in Europe
…and in East Asia
…mild recovery in Japan
…and a roaring US economy
…and the region is expected to
recover
Real Growth in Latin America
Annual percent change
6
5
4
%
3
2
1
0
1991
Source: WEO
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
What will the future bring?
• Are we facing another boom?
• Will it be followed by another crisis?
• …or will it be sustained?
Four scenarios ahead
Dangerous
Safe
Deep
Boom - Crisis
High, sustained
flows
Shalow
Mild boomcrisis
No boomno crisis
The origin of crises:
the mainstream approach
• Booms and crises were caused by moral
hazard
• and an inadequate perception of risks
Mainstream View #1
Shallow and safe
• Large recent losses
• …and changes to international financial
architecture:
– lower bail-outs, more bail-ins
– more flexible exchange rates
• …will reduce moral hazard, giving rise to a
more moderate but sustainable scenario.
Mainstream View # 2
Deep and dangerous
• Booms and crises are caused by moral
hazard
• ...but nothing substantial has changed
• …so we will get another boom, followed by
another crisis
The origin of crises:
the mismatch approach
• Crises are not caused by moral hazard.
• They are caused by mismatches which leave
countries vulnerable to self-fulfilling attacks.
– ORIGINAL SIN: unable to borrow internationally in own
currency
• Changes in architecture have made things worse
• The mismatches are in the stocks, not in the flows.
Original sin: World Comparison
Debt in Currency X Over Debt in Country X, 1998
(Money Market Instruments and Bonds)
United States
Luxembourg
Switzerland
Japan
Italy
South Africa
New Zealand
United Kingdom
Germany
France
Portugal
Hong Kong
Netherlands
Australia
Denmark
Poland
Spain
Canada
Greece
Taiwan
Belgium
Ireland
Sweden
Finland
Cyprus
Norway
Austria
Singapore
Argentina
Indonesia
Thailand
Mexico
Malaysia
Source: BIS
0
0.5
1
1.5
2
2.5
View # 3
Shallow and dangerous
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•
•
•
•
Countries do not deal with the mismatches
Risks are perceived as high,
Flows will be low
...but still a crisis.
Deep and dangerous also a possibility if the
market focuses on the good equilibrium
View #4
Deep and Safe
• Countries deal with the mismatches:
– developing the ability to borrow internationally
in their own currency
– adopting common currency that does not have
original sin.
• The market can support large, sustainable
flows
FDI has been booming
FDI Flows 1990-1999
80000
70000
Millions US$
60000
50000
40000
New FDI
30000
M&A,privatization
20000
10000
0
Source: ECLAC
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999a
…but in the context of declining
total flows
Net Commercial Capital Flows and Its Composition for Latin America
120
1.2
FDI / Total Flows (%)
100
1
80
0.8
60
0.6
FDI
40
0.4
20
0.2
0
0
1996
Source: IIF
1997
1998
1999
Percentage
US$ Billions
Net Commercial
Flows
Is FDI like good cholesterol?
Conventional wisdom
• Capital is like cholesterol
• Good cholesterol FDI
– Brings technology, market access, managerial
skills
– It is “bolted down”
– It is attracted by long-term prospects and good
institutions
Conventional wisdom
• Bad cholesterol “Hot” portfolio money
– Driven by short-term speculative considerations
– Affected by moral hazard
– First to flee
More development,
more foreign capital
Foreign Capital Stock and Income
Developed
Foreign Capital Stock / GDP
60%
50%
40%
30%
LATIN AMERICA
20%
East Asia
10%
Africa
East Europe
Asia
0%
-10%
2.5
3.0
3.5
GDP per capita (log)
4.0
*Data refers to stocks of 1997 in current dollars and GDP in PPP current dollars. The GDP per capita is a weighted average of countries for the same year.
Source: IFS, WB and RES-IDB.
4.5
…but a smaller FDI share
Composition of Foreign Capital Stock and Income
100%
FDI / Total Capital Flows
Africa
80%
60%
Asia
East Asia
40%
LATIN AMERICA
East Europe
20%
0%
2.5
3.0
3.5
GDP per capita (log)
Developed
4.0
*Data refers to stocks of 1997 in current dollars and GDP in PPP current dollars. The GDP per capita is a weighted average of countries for the same year.
Source: IFS, WB and RES-IDB.
4.5
FDI/GDP: Outcome of opposite
forces
FDI Stock and Income
8%
LATIN AMERICA
7%
East Asia
6%
FDI/GDP
Developed
5%
East Europe
4%
Africa
3%
Asia
2%
2.5
3.0
3.5
GDP per capita (log)
*Data refers to stocks of 1997 in current dollars and GDP in PPP current dollars. The GDP per capita is a weighted average of countries for the same year.
Source: IFS, WB and RES-IDB.
4.0
4.5
Richer, larger, more open economies
don’t have higher FDI-shares
Correlations with Volume and Composition of Capital Flows
0.8
Volume
0.6
0.4
FDI/GDP
0.2
0.0
-0.2
-0.4
Composition
-0.6
Income
Size
Openness
Riskier countries get less capital,
but a larger share of FDI
Correlations with Volume and Composition of Capital Flows
0.6
Composition
0.4
0.2
FDI/GDP
0.0
-0.2
Volume
-0.4
-0.6
Country Risk
Resource rich, distant countries don’t
get more capital, but higher FDI-share
Correlations with Volume and Composition of Capital Flows
0.6
Composition
0.4
0.2
FDI/GDP
0.0
-0.2
Volume
-0.4
-0.6
Subsoil Resources
Distance
Better finance, better institutions don’t
beget more FDI-share
Correlations with Volume and Composition of Capital Flows
0.8
0.6
0.4
Volume
FDI/GDP
0.2
0.0
-0.2
-0.4
Composition
-0.6
Financial Development
Quality of Institutions
Original sin increases FDI-share
Correlations with Volume and Composition of Capital Flows
Composition
0.4
0.2
FDI/GDP
Volume
0.0
-0.2
-0.4
Original Sin
“Good things” are associated
with more foreign capital inflows
but a lower share of FDI
Controlling for income, size and
openness, lower risk and better
institutions do not increase the share
of FDI
Hypothesis
• FDI is booming because firms are redefining their
shape so as to circumvent lousy debt markets
• FDI is a solution to the mismatch problem caused
by original sin
– Long term and no currency denomination
• FDI may also limit liquidity problems
• Implications for optimal financial structures
– IPOs to domestic market or M&A to a strategic
investor?
Looking into the more distant
future
Structural reforms are continuing
Bank Supervision
Pensions Funds
Capital Market
Privatiz. & Regulations
Comercial(X,M)
Foreign Investment
Education
Tax Sistem
Justice
Labor
Property Rights
Health
0
0.2
0.4
0.6
0.8
Source: Survey. Note: Difference with respect to 3 years ago (based on scale 0-5)
1
1.2
Latin America has a Demographic
Window of Opportunity
Adjusted dependency ratio
1.6
Adjusted dependency ratio
1.5
1.4
1.3
1.2
Window of opportunity
1.1
1.0
0.9
0.8
0.7
1950
1960
Source: Duryea and Székely (1998)
1970
1980
1990
2000 2010 2020 2030 2040
2050
¿What does demographic
opportunity imply?
• More work
• More savings
• More education
THE OPPORTUNITY TO BE THE FASTEST GROWING
REGION IN THE WORLD