Transcript The World of Forking Paths

Rethinking Reforms
How Latin America and the Caribbean can Escape
Suppressed World Economic Growth
The team:
Eduardo Cavallo
Eduardo Fernandez-Arias
Andres Fernandez-Martin
Luca Flabbi
Andrew Powell (Coordinator)
Alessandro Rebucci
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Contents
1. Global growth likely to be suppressed
2. LAC has little space for counter-cyclical fiscal or
monetary policy
3. There is space for reforms and payoffs may be large
2
On the World Economy
• The US is recovering but policy uncertainty remains
• European (including UK) growth constrained by fiscal
and in Europe’s periphery, competitive issues
• Japan continues with low growth, potential fiscal
issues, rates at zero bound and now a the monetary
experiment
• China may slow gradually and at some pt. rebalance
3
World output suppressed, below potential
11.7
12
2003-2007
2008-2012
2013-2017
9.3
10
Growth (percent)
8.5
8
6
4.8
4.2
4
2.9
2.9
2.7
2.2
1.1
2
0.6
-0.2
-1
World
Euro
US
China
4
Adding this up…
• World growth is likely to be lower than during the
Great Moderation for the next few years.
• If there is a negative shock, Advanced Economies
have little fiscal space to respond
• And there are doubts about the effectiveness of
more non-conventional monetary policy
• The world may even be at the doorstep of a Great
Suppression.
5
What does this mean for LAC? Growth may be
almost 1% below the Great Moderation
6
2003-2007
2008-2012
2013-2017
5.6
5.3
5
4.8
4.8
Growth (percent)
4.3
4.0
4
3.9
3.8
3.3
3.3
3
2.5
2
1
0.1
0
LAC-8
Caribbean-6
Central America-8
LAC
6
Observation 2
• LAC is a group of small open economies, the global
headwinds will have a negative impact
• While all projections are subject to uncertainty,
growth in LAC is likely to be almost 1% lower than
the Great Moderation period
• While there are differences across countries, most
countries in the region will be affected by
suppressed world economic growth
7
But LAC growth could exceed that of the ASEAN-5:
Through a concerted regional reform effort
7
6.2
6
Spillover effects:
0.8%
5.8
Own country
effort: 1.5%
4.8
Growth (percent)
5
3.9
4
• There are positive spillovers
between countries, due to trade
and other interactions.
• If all countries pursue a similar
reform effort, regional growth
would be boosted by 2.3%.
3
• LAC growth would then exceed
6% per annum, somewhat in
excess of that of the ASEAN-5*
2
1
0
ASEAN-5
LAC regional LAC 2003-2007 LAC baseline
reform effort
*ASEAN-5: Malaysia, Philippines,
Thailand and Vietnam.
8
If countries pursued a tailor-made reform agenda this
could counter a potential Great Suppression
• A one standard
deviation
growth shock in:
• US
• Europe
• China
• Japan
• Leads to a fall of
0.75% in global
growth to 3.4%
• This results in a
fall of 0.8% in
LAC growth
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Contents
1. Global growth likely to be suppressed
2. LAC has little space for counter-cyclical fiscal or
monetary policy
3. There is space for reforms and payoffs may be large
10
Spending has increased and fiscal balances have
deteriorated (typical LAC country)
Primary spending
Structural balance
3.0
26
2.5
25
2.0
24
1.5
23
1.0
22
0.5
21
0.0
Output gaps have essentially closed in LAC, what was seen as a successful countercyclical policy to confront the Great Recession may be seen as simply expansionary
Primary structural balance
(percentage of structural GDP)
Primary spending
(percentage of structural GDP)
27
11
There is less room for monetary action
Nominal interest rate index (Sep 07=100)
160
140
120
Quartile 1
Median
Quartile 3
The policy interest rate of
75% of countries in LAC lies
100
80
60
40
20
0
Other measures of monetary space have also tightened.
12
Reserves relative to the size of financial systems have
started to fall for most countries
1.5
Quartile 1
Median
Quartile 3
1.3
1.2
(Jan 2007=100)
Foreign reserves/M2 index
1.4
1.1
1.0
0.9
0.8
0.7
0.6
Reserves as a percentage of GDP have a similar trajectory, while reserves
expressed as months of imports have continued to rise.
13
Real exchange rates have appreciated
Real exchange rate (Jan 2007=100)
105
100
Quartile 1
Median
Quartile 3
95
90
85
80
75
70
Appreciation pressures, perhaps due to QE policies in the North and/or inflows
spurred by attractive investments in the South, may be accentuated by a
suboptimal mix of tight monetary and loose fiscal policy.
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Observation 3
• Most countries have little space for counter-cyclical
fiscal policies in case of a new downturn.
• LAC output gaps have closed, multipliers are then
reduced, even in the case of fiscal and monetary
space, these may not be the best tools to confront
medium term suppressed world growth.
• Given appreciation pressures, tighter fiscal and
looser monetary policy may be warranted.
• But such a policy mix will not boost growth, nor can
it be expected to do so.
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Contents
1. Global growth likely to be suppressed
2. LAC has little space for counter-cyclical fiscal or
monetary policy
3. There is space for reforms and payoffs may be
large
16
LAC’s productivity has declined against the US and
even more so vs. Emerging Asia
LAC relative to the US, 1960 - 2007
TFP Region/ TFP US
120
Latin America
Per capita
income gap
-5%
-10%
90
-15%
60
Percentage
Index 1980=100
100
70
Factor
accumulation
0%
Emerging Asia
110
80
Total factor
productivity
-14%
-20%
-25%
-26%
-30%
50
-35%
-40%
-37%
For the typical LAC country, two thirds of the LAC-US per capita income gap is
due to lagging productivity. Source: “The Age of Productivity”, IDB 2010.
What determines Total Factor Productivity (TFP)?
Incentives: tax and social systems and institutions
Inputs
Efficiency in
allocation
Labor
Infrastructure
Capital
Land
Input Quality:
•
•
•
•
•
Education
Skills
Training
Technology
Innovation
TFP
Complementarities
between inputs
The potential gains from allocating resources more
efficiently are very significant
Mexico '04
Venezuela
Venezuela '01
Mexico
Bolivia '01
Uruguay
El Salvador '05
Argentina
Argentina '02
Bolivia
Uruguay '05
El Salvador
Ecuador '05
Colombia
Chile '06
Colombia '98
Ecuador
United States '97
Chile
0
50
100
Difference in TFP from the optimum
If the median country allocated
resources as efficiently as the US,
there would be a 20% increase in TFP.
1st Quintile=0.6
0.0
0.5
1.0
4th Quintile=1.3
1.5
2.0
2.5
Increase in growth (percent)
Translated into growth, the median
country would grow by an additional 1%
per annum over ten years as a result of
reforms that improve resource allocation.
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Where should LAC focus reform efforts?
Financial
Liberalization
Trade
Privatizations
Reform index developed
by Eduardo Lora
Taxes
Labor
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Change in reforms index relative to 1985
1999
2009
Reforms in tax systems and labor markets have lagged behind other areas.
20
Recent IDB work: on taxation and on education
21
In this report the focus is on:
1. Labor markets
2. Infrastructure
22
LAC labor markets are highly informal
Share of labor force in the informal sector
90
80
70
Average = 56%
Percent
60
50
40
30
20
10
0
Informal workers: those who do not contribute to social security.
23
Informality is associated with lower productivity
Productivity in informal vs. formal legal firms
Number of employees
0-5
6-10
11-50
50+
0
-10
-20
-30
-40
Informal firms with salaried
workers (ilegal)
-50
Informal family firms (legal)
-60
-70
Note: Comparisons for a universe of 3.6 million
Mexican firms grouped at 6-digit level,2008
• Informal firms tend to be less
productive than formal ones
• Informal firms invest less in
labor training, technology
adoption and innovation
• Informality goes hand in hand
with lower human capital
accumulation, more labor
rotation
• Informal firms evade
regulations, restricting access
to credit
• Informal firms tend to be very
small and underexploit
economies of scale and scope
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Infrastructure: perception that in LAC quality is low
Quality of infrastructure index, 1-7 scale
Latin America
and the
Caribbean
Emerging Asia
Advanced
Economies
0
1
2
3
4
5
6
25
Infrastructure investment has fallen
6
% of GDP
Estimated gap
such that
infrastructure
per worker
converges to
that of Korea
5
4
3
2
1
0
1980's
1990's
Gap
Private
2000's
Public
• Investment in infrastructure
exceeded 3% of GDP in the
1980’s and 1990’s
• It has fallen to about 2.5%
in the 2000’s
• To close the infrastructure
gap, investment of 5% of
GDP may be required
• Given fiscal constraints,
private investment needs to
be boosted
• This requires frameworks to
make these investments
attractive to investors 26
Moreover, domestic savings in LAC are low
50
Gross domestic savings (percent of GDP)
45
40
The country with the
highest savings in LAC has
lower savings than any
country in Emerging Asia
Maximum
35
30
25
20
Median
15
10
5
0
Minimum
Advanced Economies
Sub Saharan Africa
Emerging Asia
LAC
The median savings rate in LAC is lower than that of Emerging Asia and Advanced Economies and
almost the same as countries in Sub Saharan Africa
27
And LAC has not been able to sustain current account
deficits to fill the savings gap
16
Current Account Deficit (% GDP, 2011)
14
12
10
75th Percentile
8
6
Over the last 30 years, only 7
countries in LAC have been
able to sustain for more than
5 years the current account
deficit needed to finance the
estimated infrastructure gap
4
Median
2
25th Percentile
0
LAC-26
LAC-26 with the required
investment
28
Conclusions
• Given world growth LAC is close to its potential, LAC
needs to enhance that potential.
• Countries are in different positions, reform efforts to
boost growth should be tailor-made to the needs and
context of each country; there is no “one-size-fits-all”.
• Two areas where the region lags are labor markets
and infrastructure.
• Payoffs to more structural reforms may be large and
would be boosted by regional spillovers.
29
But LAC growth could exceed that of the ASEAN-5:
Through a concerted regional reform effort
7
6.2
6
Spillover effects:
0.8%
5.8
Own country
effort: 1.5%
4.8
Growth (percent)
5
3.9
4
• There are positive spillovers
between countries, due to trade
and other interactions.
• If all countries pursue a similar
reform effort, regional growth
would be boosted by 2.3%.
3
• LAC growth would then exceed
6% per annum, somewhat in
excess of that of the ASEAN-5*
2
1
0
ASEAN-5
LAC regional LAC 2003-2007 LAC baseline
reform effort
*ASEAN-5: Malaysia, Philippines,
Thailand and Vietnam.30
Rethinking Reforms
How Latin America and the Caribbean can Escape
Suppressed World Economic Growth
Thank you
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