Transcript Slide 1

LAS Seminar
LISTING OF LATIN AMERICAN COUNTRIES
Argentina
Bolivia
Chile
Costa Rica
Dominican Republic
El Salvador
Honduras
Nicaragua
Paraguay
Suriname
Venezuela
Belize
Brazil
Colombia
Cuba
Ecuador
Guatemala
Mexico
Panama
Peru
Uruguay
(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
Country
Argentina
GDP
valuation
GDP per
Income
Poverty
Human
Environment
Quality
Annual
based on PPP
capita
equality
Index
Development
Performance
of life
economic
2008 Current
(PPP)
(2001-06)
2005
2008
2008
2005
growth (%)
Billions
USD
2008 USD
Gini index
HPI-1 %
HDI
EPI
index
2007
$570.53
$14,354.00
51.3
4.1
0.860 (H)
81.8
6.469
8.7
$43.45
$4,332.00
60.1
13.6
0.723 (M)
64.7
5.492
4.6
$1,975.90
$10,298.00
57
9.7
0.807 (H)
82.7
6.47
5.4
Chile
$246.48
$14,688.00
54.9
3.7
0.874 (H)
83.4
6.789
5.1
Colombia
$402.46
$8,336.00
58.6
7.9
0.787 (M)
88.3
6.176
7.7
Costa Rica
$48.92
$10,832.00
49.8
4.4
0.847 (H)
90.5
6.624
7.3
N/A
N/A
N/A
4.7
0.855 (H)
80.7
N/A
N/A
Dominican
Republic
$76.19
$8,558.00
51.6
10.5
0.768 (M)
83
5.63
8.5
Ecuador
$104.67
$7,518.00
53.6
8.7
0.807 (H)
84.4
6.272
2.5
El Salvador
$43.89
$6,052.00
52.4
15.1
0.747 (M)
77.2
6.164
4.7
Guatemala
$66.84
$4,899.00
55.1
22.5
0.696 (M)
76.7
5.321
5.7
Haiti
$11.68
$1,292.00
59.2
59.2
0.521 (M)
60.7
4.09
3.2
Honduras
$32.67
$4,085.00
53.8
16.5
0.714 (M)
75.4
5.25
6.3
$1,550.26
$14,581.00
46.1
6.8
0.842 (H)
79.8
6.766
3.2
Nicaragua
$16.75
$2,704.00
43.1
17.9
0.710 (M)
73.4
5.663
3.8
Panama
$38.31
$11,255.00
56.1
8
0.832 (H)
83.1
6.361
11.5
Paraguay
$29.34
$4,767.00
58.4
8.8
0.752 (M)
77.7
5.756
6.8
$244.69
$8,584.00
52
11.6
0.788 (M)
78.1
6.216
8.9
$40.66
$12,707.00
44.9
3.5
0.859 (H)
82.3
6.368
7.4
Bolivia
Brazil
Cuba
Mexico
Peru
Uruguay
Latin America Update (2009)
• In the five years from 2004 Latin America’s 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.
• 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.
• Brazil’s 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.
• 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 cautious…financing 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 region’s 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 America’s 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.
• Many fear that Latin America will revert to it’s 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.
• 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 cashtransfer 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 obstacle…and 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 dutyfree and quota-free access to Europe. In return, the Caribbean will phase
out duties on 87% of European imports by 2033.
• 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).
Trade between US and Caribbean Countries
• 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.
Millions of US $ (2007)
Import
$240
$9
Bahamas
$2,473
$523
Barbados
$457
$40
Belize
$234
$113
Dominica
$84
$2
Grenada
$83
$9
$188
$147
$2,318
$789
St. Kitts and Nevis
$203
$61
St. Lucia
$166
$36
$69
$1
$306
$136
Trinidad and Tobago
$1,779
$9,342
Dominican Republic
$6,091
$4,328
Haiti
$711
$500
Cuba
$447
$0
Aruba
$529
$3,070
Bermuda
$660
$24
$2,082
$810
Antigua and Barbuda
Guyana
• US is still the largest trading partner with,
and investor in, the region.
Jamaica
• Still, the most dynamic business
opportunities in the coming decade will be
between countries in the region and the EU.
St. Vincent and
Grenadines
• The big story for 2009 may be Cuba.
Export
Suriname
Netherlands Antilles
CORRUPTION PERCEPTIONS INDEX: 2008
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
country
country
rank
2008 CPI
score
109
Argentina
2.9
102
Bolivia
3
80
Brazil
3.5
23
Chile
6.9
70
Colombia
3.8
47
Costa Rica
5.1
65
Cuba
4.3
102
Dominican Republic
3
151
Ecuador
2
67
El Salvador
3.9
96
Guatemala
3.1
177
Haiti
1.4
126
Honduras
2.6
72
Mexico
3.6
134
Nicaragua
2.5
85
Panama
3.4
138
Paraguay
2.4
72
Peru
3.6
23
Uruguay
6.9
158
Venezuela
1.9
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
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 nonindustrial countries.
3)
Why didn't the whole world immediately adopt the
techniques of the industrial revolution?
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).
- 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.
4) 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.
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.
Implications...
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.
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
- Demand side - People who want to import Chilean
goods, or travel in Chile, or others who just want to hold
pesos.
(1) 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 $.
(1) 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 …
- 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.
- 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.
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)
7. 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.
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” => falling export volume and
prices => created a severe recession throughout the region
in the 1930s.
=> Marked change in national economic policy:
(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 "importsubstituting 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.
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.
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 => $ to Eurodollar market
=> to Latin America (to help finance the new investments
necessary to increase their export capacity) => tight
monetary policy by US Federal Reserve => global
slowdown => LA exports fell => international banks
would not renew loans or extend additional credit =>
nations could not service debt => technical default on debt
(Debt Crisis) - officially began with Mexico in 1982.
- 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, shortterm 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).
[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) => open
up economy to market forces.
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.
- Financial sectors were opened up, interest rate controls
lifted, and many countries removed all restrictions on
capital flows => stock markets boomed (slowdown from
1999 to 2002…booming 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.
Cracks in the "miracle"
- One important effect of reform was a huge change in
Latin America's access to financial markets. Debt crisis
days gone…when 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.
[2] The repatriation had a profound effect: it was the first
wave of money to help support the "strategy" => 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's…and 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.
Cracks …
1. 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.
2. The financial collapse due mainly to weaknesses that the
earlier boom had entirely covered up.
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 (didn’t 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).
[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.
[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.
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 => chronic inflation (often of the
“hyper” variety).
e. Too little saving: preference for consumption over saving
and investment.
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.
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.
[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 growth…happening 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.
- 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.
- 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.
5. 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.
- El Fin -