Transcript Latin America`s Economic Challenges: Lessons for

Latin America’s Economic
Challenges: Lessons for Emerging
Economies
Nora Lustig (Tulane Univ) and Jaime
Ros (UNAM)
Wrap-up Workshop “How can China
avoid the middle-income trap?”
ADB/NSD Peking University
Beijing, February 24 and 25, 2011
What is the Latin American
“middle-income trap?”
Figure 1 – Latin America’s GDP Per Capita vs. the United States: 1900-2008
Source: “From Global Collapse to Recovery: Economic Adjustment and Growth Prospects in LAC,”
Chief Economist Office, Latin America and the Caribbean Region, World Bank, Spring Meetings,
Washington, DC, April 21, 2010.
LA Economic Performance
• In the last quarter of the 20th century, Latin America—
like many other parts of the developing world—
experienced a major shift in its development strategy.
• From the aftermath of the Second World War up until
the debt crisis of the 1980s, the region had embraced a
strategy of state-led industrialization, largely oriented
towards the domestic market: import substitution
industrialization.
• Following the 1980s debt crisis (and even earlier in a few
countries), state-led industrialization was replaced by a
new development model in which markets and
integration with the global economy took center stage.
LA Economic Performance
• The results of the new outward-oriented market-based
development strategy have been disappointing (Figure
1).
• Overall, the recent growth performance of Latin
America has been lackluster even if we leave aside the
“lost decade” of the 1980s.
• For the period 1990-2008, the average of Latin
America’s per capita GDP growth rate has been 1.8
percent per year, well below the 2.7 percent yearly
growth rate of the period 1950-1980 and less than the
average growth rate of the world economy.
Diverging Income per Capita
What factors “explain” the middleincome trap?
• Proximate factors:
– Inflationary bouts and recurrent economic crises
(balance of payments, debt, banking, currency,
financial crises)
– Slowdown in productivity growth; in particular,
slowdown in labor productivity growth in the service
sector
• Fundamental factors:
– Conjectures about the role of high inequality/social
and political exclusion of indigenous population
Table 1.1 Recurring Banking Crises, 1974-2003
Region
Average number of
crises per country
Latin America (excluding the Caribbean) 1.25
Latin America and the Caribbean
0.90
High-income OECD countries
0.21
High-income non-OECD countries
0.09
Eastern Europe and Central Asia
0.89
East Asia and the Pacific
0.38
South Asia
0.38
Middle East and North Africa
0.40
Sub-Saharan Africa
0.83
Source: Galindo, Izquierdo and Micco. 2004. Figure 1.5, p. 9.
Countries with recurrent
crises (percent)
35
27
0
0
11
8
0
0
13
Table 3.1 - Labor productivity growth in six Latin American countries since 1950
1950-19801/
1980-20052/
1980-19903/
1990-2005
Argentina
0.8
0.1
-3.2
2.4
Brazil
4.3
-0.4
-1.9
0.7
Chile
2.2
1.2
-1.6
2.9
Colombia
2.1
0.7
1.5
0.2
Mexico
3.2
-0.2
-2.4
1.1
Peru
2.4
0.0
-5.6
3.4
1/ 1950-1981 for Chile and Mexico; 1960-1981 for Peru
Macroeconomic Volatility and
Financial Instability
• Latin America has lived through macroeconomic crises
driven either by excesses of the state or the market.
• Fiscal crises affected countries such as Brazil and Mexico in
the early 1980s under state-led import substitution.
• But private-led financial crises affected the Southern cone
countries (Argentina, Chile and Uruguay) in the early 1980s,
Mexico (1994-95), Brazil (1999) and Argentina (2001-02)
under market-oriented strategies.
• There are lessons from crises which originated in
the private/financial sector but in which the state often
ended up with a large debt as a result of the insolvency of
the former.
• Financial and capital account liberalization have
their pitfalls and Latin America learned about them the
hard way.
Macroeconomic Volatility and Financial
Instability: Lessons for China?
• Fiscal crises--or fiscal duress--can “sneak in” through the
back door:
– Rescue of systemically critical sectors:
• Financial sector
– Rescue of subnational governments
– Unfunded spending commitments (public pensions)
• Underscores the importance of prudential regulation in
financial sector; monitoring and/or controlling volatile
capital inflows; monitoring the potential development of
“asset bubbles;” assess risks and contingent liabilities in
sensitive sectors (social insurance and private pension
plans; guarantees for privately held debt)
Inflation Targeting and Exchange Rate
Management
• Latin America has experimented with every
exchange rate regime on earth: fixed exchange
rates, crawling pegs, currency boards,
dollarization and flexible exchange rates
• In 1990s and 2000s there has been a shift
towards flexible exchange-rate regimes(see
Figure 2.1).
• The move went together with the adoption of
inflation targeting monetary regimes.
Figure 2.1 – Exchange Rate Regimes in Latin America and the Caribbean
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Hard Pegs
Intermediate
Flexible
Free Fall
Exchange Rate Management: Lessons
for China?
• Flexible exchange rates-cum-inflation
targeting has been successful in
– Keeping inflation under control
– Weather external shocks
– Deal better with volatility of capital flows
• Caveat: there will be periods of real
appreciation that may hurt growth
Figure 2.3 - Average inflation and volatility (logarithmic scales)
10000
10000
1000
1000
100
100
10
10
1
1
0
1980
0
1982
1984
1986
1988
Average Inflation (1)
1990
1992
1994
1996
Time series volatility (2)
1998
2000
2002
2004
2006
2008
Cross sectional volatility (2)
Notes: (1) Calculated as the simple average of official annual inflation figures for Argentina, Brazil, Chile,
Colombia, Mexico, Perú, and Venezuela.
(2) Rolling 12 month standard deviation of average annual inflation.
(3) Cross sectional (across selected economies) standard deviation of annual inflation
Sources: Authors' calculations using National Statistical Office's and Central Bank's data.
0
Jul-84
Jan-95
Jul-93
Jan-92
Jul-90
Jan-89
Jul-87
Jan-86
Jul-05
Jul-08
Jul-08
Jan-07
Jul-02
Jan-04
Jul-05
Jan-07
Jul-99
0.2
0
Jan-01
0.4
0.2
Jan-04
0.6
Jan-98
1
Jul-02
0.8
Jan-01
1.2
Jul-96
Mexico
Jul-99
0.4
Jan-98
0.6
Jul-96
1.4
Jan-95
1.2
Jul-93
1.6
Jan-92
1.8
1.4
Jul-90
1.6
Jan-89
Colombia
Jul-87
0
Jan-86
0.5
Jul-81
1
Jan-83
1.5
Jul-84
0.8
Jan-80
2
Jul-81
Brazil
Jan-83
1
Jul-08
Jan-07
Jul-05
Jan-04
Jul-02
Jan-01
Jul-99
Jan-98
Jul-96
Jan-95
Jul-93
Jan-92
Jul-90
Jan-89
Jul-87
Jan-86
Jul-84
Jan-83
Jul-81
Jan-80
2.5
Jan-80
Jul-08
Jan-07
Jul-05
Jan-04
Jul-02
Jan-01
Jul-99
Jan-98
Jul-96
Jan-95
Jul-93
Jan-92
Jul-90
Jan-89
Jul-87
Jan-86
Jul-84
Jan-83
Jul-81
Jan-80
Figure 2.2 – Real Exchange Rate: Brazil, Chile, Colombia, Mexico and Peru
Chile
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
The link between inequality and the
middle-income trap in LA
• Latin America is the most unequal region
in the world
• Using Gini coefficient,
– 19 percent more unequal than Sub-Saharan Africa
– 37 percent more unequal than East Asia
– 65 percent more unequal than developed
countries
19
Gini Coefficient by Region (in %), 2004
60.0
55.0
53.2
Gini coefficient
50.0
44.7
45.0
40.0
35.0
32.2
38.9
38.9
39.1
South Asia
North Africa
and the
Middle East
East Asia and
the Pacific
33.6
30.0
25.0
20.0
High Incom e
Europe and
Central Asia
Sub-Saharan Latin Am erica
Africa
and the
Caribbean
20
Was high inequality a “fundamental” cause of
the middle-income trap in LA?
• Political Economy Dynamics: High inequality coupled
with high expectations of workers and pent-up
demands of secularly disenfranchised groups resulted
in:
macroeconomic populism
 high inflation and state-led balance of payments
crises: Argentina in early 1970s; Brazil in early 1980s;
Mexico 1976 and 1982; Peru in mid-1980s
Which triggered:
 military coups and center-right regimes
free-market fundamentalism (liberalization of capital
and financial markets) => market-led
financial/balance of payments crises: Argentina in late
1970s; Mexico 1994/95; Argentina 2001/02
Was high inequality a “fundamental” cause of
the middle-income trap in LA?
High inequality also resulted in democratically
elected radical left regimes (Chile in early 1970s;
Nicaragua in late 1970s) and Marxist guerrilla
movements, which triggered:
right-wing military coups => free-market
fundamentalism (liberalization of capital and
financial markets) => market-led
financial/balance of payments crises: Uruguay
in late 1970s; Chile in early 1980s
 civil conflict and civil wars => growth
collapses in Central America in the 1980s and
early 1990s
Was high inequality a “fundamental” cause of
the middle-income trap in LA?
– Economic crises, particularly the 1980 debt crisis, civil
wars and alienation of private sector
=> low levels of capital accumulation => slower
productivity growth because sectors with increasing
returns, economies of scale and/or externalities failed
to expand
– Recurrent crises and inflationary bouts
=> exchange rate as a price-stabilizer => periodic real
appreciations => lower profitability: domestic firms
found it harder to compete with imports and exportoriented firms find it hard to compete in the
international markets
=> Ill-conceived market-oriented reforms which, with the
exception of Chile, ended up hurting productivity
growth
In 1980s and 1990s, inequality was on the
rise (Gini coefficient, 2009)
60
Gini coefficient
55
50
45
40
0
35
=
Early 90s
Mid. 90s
Early 2000s
Mid. 2000s
But, in the last ten years…
• Inequality in most Latin American countries
(12 out of 17) has declined (roughly at 1% a
year).
• Decline is robust to period selected.
• Decline has continued despite global financial
crisis.
• While inequality declined in most of LA, it rose
in other parts of the world.
25
Change in Gini Coefficient: 2000-2007
(in %)
Change in Gini Coefficient: Three yr
averages at end points
2.50
2.02
2.00
1.43
1.02
1.00
0.68
0.46
0.50
0.30 0.25
0.05
0.00
-0.50
-0.52
-0.35 -0.33
-0.24
-0.49
-0.72
-1.00
-1.05 -1.05 -1.02 -1.01
-0.81
-0.95 -0.94 -0.91
-1.50
-1.48
OECD-30
South Africa
India
China
Total 17
Total 13
Nicaragua
Honduras
Uruguay
Guatemala
Venezuela
Costa Rica
Dominican Republic
Bolivia
Mexico
Brazil
Panama
Peru
Ecuador
Chile
Argentina
Paraguay
-2.00
El Salvador
Annual Percent Change
1.50
Change in Gini Coefficient: 2000-2009
(includes info for global recession
year when feasible)
2.50
2.02
2.00
1.43
Annual Percent Change
1.50
1.02
1.00
0.50
0.30 0.25
0.28
0.05 0.08
0.00
-0.05
-0.50
-0.36
-0.77
-1.00
-1.07 -0.99
-0.24
-0.63
-0.66
-0.94
-0.97
-1.31 -1.29 -1.27
-1.50
-1.49
OECD-30
South Africa
India
China
Total 17
Total 13
Nicaragua
Uruguay
Costa Rica
Guatemala
Honduras
Venezuela
Bolivia
Chile
Mexico
Panama
Dominican Rep.
Brazil
Argentina
El Salvador
Peru
Paraguay
-1.71
Ecuador
-2.00
Brazil
Chile
Mexico
102.00
100.00
98.00
96.00
94.00
92.00
90.00
88.00
86.00
84.00
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Argentina
El Salvador
Panama
Peru
115.00
110.00
105.00
100.00
95.00
90.00
85.00
80.00
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
The decline in inequality has been
widespread
The decline took place in:
 Persistently high inequality countries (Brazil) and
normally low inequality countries (Argentina)
 Fast growing countries (Chile and Peru), slow
growing countries (Brazil and Mexico) and
countries recovering from crisis (Argentina and
Venezuela)
 Countries with left populist governments
(Argentina), left social-democratic governments
(e.g., Brazil, Chile) and center-right governments
(e.g., Mexico and Peru)
31
Main Questions: Why has inequality
declined in Latin America? Are there
factors in common?
In-depth analysis in four countries:
Argentina (urban; 2/3 of pop)
Brazil
Mexico
Peru
Source: Lopez-Calva and Lustig, eds., Declining Inequality in Latin
America: a Decade of Progress?, Brookings Institution Press,
2010
32
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
Argentina (urban areas)
0.54
45
0.52
40
0.50
35
0.48
30
0.46
0.44
25
0.42
20
Evolution of the degree of inequality in per capita income:
Brazil, 1995-2009
0.65
0.634
0.64
1981-2009
0.63
0.615
0.62
0.612
Gini coefficient
0.61
0.599
0.60
0.588
0.589
0.582
0.594
0.600
0.602
0.600
0.598
0.596
0.59
0.58
0.599
0.592 0.594
0.580
0.587
0.587
0.581
0.569
0.566
0.57
0.56
0.560
0.552
0.55
0.544
0.54
0.539
0.53
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Mexico
Peru
Decline is robust
• Decline in inequality is statistically significant
and significant in terms of order of magnitude
• There is Lorenz dominance (unambiguous
decline independently of choice of inequality
measure)
• Robust to income concept (e.g., monetary vs.
total)
37
Over the last years, the income of the Brazilian poor has been growing
as fast as per capita GDP in China while the income of the richest has
been growing as fast as per capita GDP in Germany
Distribution of countries according to the average per capita GDP
growth rate between 1990 and 2005
15
Average annual growth rate (%)
13
11
China
9
Brazilian bottom 10%
7
5
3
Germany
1
Brazilian top 10%
-1
-3
Haiti
-5
0
5
10
15
20
25
30
35
40
45
50
55
60
Distribution of countries (%)
65
70
75
80
85
90
95
100
Proximate and fundamental determinants
of changes in inequality
• Useful framework: to consider the ‘proximate’
factors that affect the distribution of income at
the individual and household level:
1. Socio-demographic factors
2. Distribution of assets and personal
characteristics
3. Return to assets and characteristics
4. Transfers (private and public)
39
Decomposition results
• Demographics: Changes in the ratio of
adults per household were equalizing,
albeit the orders of magnitude were
generally small except for Peru.
• Labor force participation: With the
exception of Peru, changes in labor force
participation (the proportion of working
adults) were equalizing. This effect was
stronger in Argentina.
40
Decomposition results
• Labor income (Earnings): In Argentina, Brazil, and Mexico
between 44% and 65% of the decline in overall inequality is due
to a reduction in inequality in earnings per working adult . In
Peru, however, changes in earnings inequality were
unequalizing at the household level (but not so at the individual
workers’ level).
• Non-labor income: Changes in the distribution of non-labor
income were equalizing; the contribution of this factor was
quite high in Brazil and Peru (45% and 90%, respectively).
41
Why has earnings inequality declined?
• Educational upgrading and a more equal
distribution of educational attainment have been
equalizing (quantity effect). No “paradox of
progress” this time.
• Changes in the steepness of the returns to
education curve have been equalizing at the
individual workers level (price effect). Except for
Peru, they have been equalizing at the household
level too.
42
44
Why has the skill premium declined?
• Increase in relative demand for skilled labor
petered out: Fading of the unequalizing effect of
skill-biased technical change in the 1990s:
Argentina, Mexico & Peru.
• Decline in relative supply of low-skilled workers:
Expansion of basic education since the 1990s:
Brazil, Mexico and Peru .
45
46
Why has non-labor income inequality
declined?
• The equalizing contribution of government
transfers increased over time (both at the
national level as well as for urban and, especially,
rural households). By 2006 transfers became the
income source with the largest equalizing effect
of all the income sources considered.
• Remittances became more equalizing too but
with a smaller effect than government transfers.
• Both more than offset the increasingly
unequalizing impact of pensions.
47
Why has inequality in non-labor
incomes declined?
 In the four countries government transfers to
the poor rose and public spending became
more progressive
▪ In Argentina, the safety net program Jefes y Jefas de
Hogar.
▪ In Brazil and Mexico, large-scale conditional cash
transfers Bolsa Familia and Oportunidades => can
account for between 10 and 20 percent of reduction in
overall inequality. An effective redistributive machine
because they cost around .5% of GDP.
▪ In Peru, in-kind transfers for food programs and health.
Also access to basic infrastructure for the poor rose.
48
Argentina: Distributional impact
of Conditional cash transfers
49
50
Conclusions
• In the race between skill-biased technological change
and educational upgrading, in the last ten years the
latter has taken the lead (Tinbergen’s hypothesis)
• Perhaps as a consequence of democratization and
political competition, government (cash and in-kind)
transfers have become more generous and targeted
to the poor
51
Is Inequality Likely to Continue to
Fall?
• Despite the observed progress, inequality continues to be
very high and the bulk of government spending is not
progressive.
• The decline in inequality resulting from the educational
upgrade of the population will eventually hit the ‘access to
tertiary education barrier’ which is much more difficult to
overcome: inequality in quality and ‘opportunity cost’ are
high and costly to address.
• Making public spending more progressive in the future is
likely to face more political resistance (entitlements of
some powerful groups).
52
Has the link between high inequality and
bad political economy dynamics been
broken?
• Inequality has been on the decline, but is the
decline sufficient to prevent bad policies?
• Too early to declare victory, evidence is mixed:
– in 2000s elections were won by “risky” policymakers
in Argentina, Bolivia, Ecuador, Nicaragua and
Venezuela;
– however, elections were won also by a “new” social
democratic left which succeeded in combining macro
stability, redistribution and growth (Brazil, Chile,
Paraguay and Uruguay)
Thank you!