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Improving Latin America´s international insertion (*) Fidel Jaramillo B. Vicepresident of Development Strategies and Chief Economist (*) Partially based.

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Presentation on theme: "Improving Latin America´s international insertion (*) Fidel Jaramillo B. Vicepresident of Development Strategies and Chief Economist (*) Partially based."— Presentation transcript:

1 Improving Latin America´s international insertion (*) Fidel Jaramillo B. Vicepresident of Development Strategies and Chief Economist (*) Partially based on CAF´s RED 2004 “Reflexiones para retomar el crecimiento: inserción internacional, transformación productiva e inclusión social” IADB Workshop, February 8th, 2005

2 Latin America introduced significant trade reforms in the 90´s... Structural reformas in Latin América (deeper reforms=1) Source: IADB, ´s *1990´s *2000´s * LAC26.5%13.1%13.5% Andean29.5%14.2%11.6% Mercosur40.4%14.2%12.7% OECD8.4%7.0%5.9% S.E. Asia22.1%13.8%10.8% China42.4%26.7%14.1% Average import tariff Source: World Bank, CAF, 2005 *1980´s,1990´s y 2000´s = average per decade of all available data

3 ...increased its openness to the world ´s *1990´s *2000´s * LAC31.7%40.6%48.3% Andean37.3%41.5%41.9% Mercosur17.8%19.1%28.1% OECD37.3%38.1%45.6% S.E. Asia88.4%119.7%137.3% China21.5%39.7%54.5% Trade Openness (Exports+Imports)/GDP Source: World Bank, CAF, 2005 *1980´s,1990´s y 2000´s = average per decade of all available data

4 ...and attracted capital flows, in particular FDI Capital flows to Latin America (in US$ billion) Source: IMF, WEO Sept ´s *1990´s *2000´s * LAC 0.9%2.2%3.5% Andean 0.7%2.7%3.1% Mercosur 0.7%1.9%3.8% OECD 0.7%1.4%3.3% S.E. Asia 1.4%3.5%3.6% China 0.6%4.1%3.9% Source: World Bank, CAF, 2005 *1980´s,1990´s y 2000´s = average per decade of all available data Foreign direct investment (in % of GDP)

5 The region improved its export performance... Export growth (average annual growth rates) Source: World Bank, CAF, 2005 *1980´s,1990´s y 2000´s = average per decade of all available data

6 …but its has been poor compared to other regions… Source: IMF 2004 (IFS CD-Rom) Exports Index (1990=100) % Latin AmericaS.E. AsiaChina Source: International Trade Statistics, OMC (2003) Latin America´s share on world trade

7 …and exports lack of diversification and value added Source: Handbook of Statistics, UNCTAD (2003)Source: Trade and Development Report, UNCTAD (2002) Variation in manufactured exports and value added by region ( ) Industrial countries Latin America China South East Asia Developing countries Latin America China South East Asia Developing countries Industrial countries Manufactured exports Value added porcentual points

8 Growth resumed, although at low and volatile rates... Sources: FMI (WEO, 2004), Consensus Forecasts, Latin America Business Monitor (Caribbean Report, Sept. 04), CAF (2004) Annual per capita GDP growth In Latin America 60´s 70´s 80´s 90´s 00-04(e) Source: World Bank, CAF, 2005 *1980´s,1990´s y 2000´s = average per decade of all available data Annual per capita GDP growth -selected countries-

9 ...and gap with industrialized countries continued to widen

10 Social conditions improved moderatly during the reform process... Source: ECLAC (2003) -0,25 -0,2 -0,15 -0,1 -0,05 0 0,05 0,1 MundoChinaAsiaAsia sin China América Latina África Source: Sala-i-Martin (2002) Change in poverty by decades

11 ...but inequality worsened in most Latin American countries Gini Index 1990´s *2000´s * Mercosur 55.8%56.8% LAC 54.0%54.5% Andean 50.1%52.2% China 40.3%44.7% OECD 36.0%40.4% S.E. Asia 37.9%34.8% Source: World Bank, CAF, 2005 *1990´s y 2000´s = average per decade of all available data

12 Latin America continued to be politically unstable... PERU BOLIVIA COLOMBIA ECUADOR VENEZUELA Probability of a sudden change in the government Source: Castilla, M. – CAF (2001) Correlation between instability and income

13 ...with weak rule of law and lack of confidence in most institutions Source: Kaufmann et al 2003Source: Latinobarómetro 2004 Confidence in Institutions Governance Indicators by Region (2002)

14 The key issue is how to resume and sustain long term growth that can help reducing poverty and inequality in Latin America

15 Latin America is betting on trade and regional integration... Agreements and negotiations WTO (Doha Round) Hemispheric agreements CAFTA Bilateral with the US FTAA Regional agreements CAN MERCOSUR CAN-MERCOSUR CAN-EU and MERCOSUR-EU Physical integration IIRSA Plan Puebla Panamá

16 ...but trade is not a panacea for growth Openness improves growth: Gallup, Radelet y Warner (1998), Dollar y Kray (2000)...through a more efficient resource allocation: Berg y Krueger (2003) However, causality is not so clear: Rodríguez y Sachs (1999)...and empirical evidence shows that effect in Latin America was transitory and effective in countries with better institutions: Lora y Panizza (2002) Correlación entre exportaciones y crecimiento Fuente: Banco Mundial, Indicadores de Desarrollo Mundial, 2003

17 ¿How to take advantage of the new wave of trade liberalization? Market accesss Productive transformation Social inclusion Fiscal viability Financial viability Political viability

18 Improving and diversifying access to markets

19 Latin America faces protectionism from industrial countries and also from within the region... Source: World Bank (2003). Global Economic Prospects Realizing the Development Promise of the Doha Agenda.

20 …so comprehensive negotiation strategies are needed to remove trade barriers a) Bilateral FTA´s: Consolidate unilateral trade preferences Access to protected sectors b) Multilateral (Doha, the development round): In theory, best alternative for small countries However, negotiations are stagnated c) Regional Strenghten integration, beyond trade (physical integration, macro coordination, factor movement, political integration) d) Non tradicional markets Asia, specially China

21 At the same time, increasing productivity should be a priority…

22 …to improve competitiveness and diversification Fuente: Informe Global de Competitividad Domestic agenda: trade capacity building -Effective export promotion -Insertion in global production chains (FDI) -Logistics and Infrastructure

23 Better insertion: productive transformation

24 Latin America’s comparative advantages lie in primary goods… Revealed Comparative Advantage Source: World Bank, World Development Indicators, 2003

25 ...which continue to be the likely winners of free trade agreements (Potential winners and losers from hemispheric integration) Fuente: The Economist Intelligence Unit, trabajo preparado para CAF

26 Abundance of natural resources is not the problem:...it is concentration... The “natural resources curse” debate. It is a curse: Prebisch (1959), Sachs and Warner (1997). It is not: Maloney (2002), Manzano y Rigobón (2001) Countries that concentrate their exports grow less, but abundance does not mean concentration (Manzano, 2004) Latin America has done very little to diversify Fuente: Manzano (2004)

27 Make the most of comparative advantages: -Do not turn your back to natural resources. It is crucial to increase valued added and diversification -Improve access and sustainable use of natural resources and strengthen related institutions Develop clusters around natural resources: -Improve business environment -Increase labor productivity -Use clusters to promote innovation and diversification...which need an explicit diversification strategy

28 Developing clusters around natural resources is crucial for diversification... Fuente: Manzano (2004)) Gráfico 3.13 : Etapa promedio de desarrollo de los clusters en la región Gas, Bolivia Aluminio, Venezuela Petróleo, Ecuador Harina de Pescado, Perú Minería, Bolivia Flores, Ecuador Hierro, Venezuela Madera, Bolivia Minería, Perú Camarón, Ecuador Soya, Bolivia Banano, Ecuador Espárragos, Perú Frutas, Colombia Petróleo, Venezuela Café, Colombia Flores, Colombia Etapa Stage 1: Extraction and export of natural resources, with minimum processing Stage 2: Activities of extraction and export with substitution of some inputs Stage 3: Export of some goods and services that were initially substituted Stage 4: Export of sophisticated goods and services. Some investment abroad

29 …which can be a tool for increased productivity and innovation Networking in clusters can lead to collective actions to increase productivity Governments can play a role to articulate cluster members New sectors or activities around an existing cluster may be discovered Innovation systems should work together to provide services and solutions to clusters Incentives for FDI to contribute to the innovation process

30 Social inclusion: opportunities and participation

31 There is concern about the impact of trade reforms on income distribution... Although openness is positive for growth, it may have distributional effects: urban-rural, skilled- unskilled, sectorial and regional Moreover, there is a perception that openness may hurt the poor: Foro Social de Porto Alegre, Catholic Church Income inequality in the 90´s Uruguay Argentina Brasil Worsened Improved Colombia Costa Rica

32 ...given the increase of disparities during the 90´s Fuente: Cepal, 2003 Source Onudi *1970´s,1980´s y 1990´s = promedio de esos años. 1990* es ese año o el más cercano y 2000* ese año o el último disponible. Income polarization by deciles (Income of top 10%/ income of bottom 10%) Wage polarization in manufacture (average wage of top 10%/average wage of bottom 10%)

33 Although empirical evidence is not conclusive... Correlation between inequality and openness (change in Gini vs. change in trade openness) Uruguay Brasil Uzbekistán Paraguay Venezuela Inequality and openness by region (change in Gini vs. change in trade openness)

34 ...resuming growth requires and agenda to tackle inequality... Source: Indicadores de Desarrollo Mundial, Banco Mundial (2003a), Deininger-Squire (1996) y WIDER (2000) Growth and inequality ,10,20,30,40,50,60,7 Coeficiente GINI Crecimiento del PIB per cápita PPP (promedio 90-99) LAC S.E. Asia Eastern Europe Chile China México Venezuela Ucrania Brasil Argentina Colombia Polonia Corea  Inequality is bad for growth: Barro (1999), Alesina and Perotti (1996) ...leads to redistributive politics and social conflicts: Alesina y Rodrik (1993) ...reduces capacity to face adverse shocks Rodrik (1999)

35 1.Creation of opportunities Access to microcredit, property and business opportunities for the poor, social investment funds, corporate social responsability, social capital 2.Social safety nets Protection of vulnerable population against economic volatility and trade adjustment, efficieny and protection of social investment 3.Long term policies Education, health and labor markets Toward a comprehensive strategy based in opportunities and participation

36 Fiscal, financial and political feasibility

37 Feasibility of the strategy Depends on resources to finance fiscal costs and private investment. Requires macro stability and political consensus Fiscal: improve tax collection, refocus of public expenditure, liability management, and institutional strengthening Financial: increase domestic savings and improve financial intermediation, capital markets development, attraction of foreign savings, in particular LT and FDI Politics: political stability, democratic governance and political parties, community participation and consensus builiding

38 The issue of political leadership and the electoral calendar Presidential Approval Rates Sources: Kissinger McLarty AssociatesLatinobarómetro 2004, The Gallup Organization (EEUU), Consultores 21 y Greenberg-Quinlan-Rosner- Researching(Venezuela), CNT y Dresdner-Kleinwort-wasserstein(Brasil), Cedatros (Ecuador), Consulta Mitofksky (México), Apoyo Opinión y Mercado S.A. (Perú), Consultora Equis (Argentina-Inicio), Ipsos-Mora y Araujo (Argentina-Actual), Invamer Gallup (Colombia), Apoyo, Opinión y Mercado Bolivia. Several presidential elections will take place in years Chile (2005) Brasil, Mexico, Ecuador, Peru, Colombia, Venezuela (2006) Although central issues continue to be employment and poverty, trade agenda is becoming more important in the political debate

39 In summary... Market accesss Productive transformation Social inclusion Fiscal viability Financial viability Political viability

40 Thanks Fidel Jaramillo February 8 th, 2005


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