1. Growth and Structural Reforms: Stylized Facts and Findings Eduardo Lora Euro-Latin Research Network Meeting Madrid, October 2002 Research Department Inter-American Development Bank

2. Latin America’s Growth Record The Structural Reforms The Opinions on the Reforms The Effects of the Reforms Growth and Structural Reforms: Stylized Facts and Findings

3. Growth of GDP per capita -4% -2% 0% 2% 4% 6% 8% 1950s1960s1970s1980s1990s Developed East Asia Middle East East Europe LATIN AMERICA Rest of Asia Africa Source: RES-IDB Calculations, Penn World Tables (1998) Latin America’s growth has been dissapointing

4. GDP per capita (1987 US$, PPP) 0 2000 4000 6000 8000 10000 12000 14000 1950s1960s1970s1980s1990s Developed East Asia Middle East East Europe LATIN AMERICA Rest of Asia Africa Source: Penn World Tables (1998) Latin America has been left behind

5. Factor productivity is not increasing

6. -5%-4%-3%-2%-1%0%1%2%3% Haiti Jamaica Honduras Venezuela Nicaragua Colombia Mexico El Salvador Paraguay Ecuador Panama Trinidad y Tobago Guatemala Brazil Bolivia Costa Rica Barbados Peru Dominican Republic Uruguay Argentina Chile East Asia LATIN AMERICA Developed Annual growth of Total Factor Productivity (average 90's) Source: RES-IDB Calculations Productivity growth in the 90s …but falling, especially in the poorest countries

7. Growth is influenced by a host of factors ► Public institutions ► Macroeconomic stability ► Financial sector depth ► Infrastructure of public services ► Education ► Income distribution ► International environment

8. -0.5 0 0.5 1 1.5 2 Rule of law Corruption Developed Southeast Asia Middle Eastern Eastern Europe LATIN AMERICA Rest of Asia Africa Institutional quality Source: Kaufman (1999a) Latin America’s public institutions do not stand out

9. The rule of law is very weak World average = 0 1998 2001 -2 -1.5 -0.5 0 0.5 1 1.5 2 Chile Costa Rica Argentina Dominican Republic Panama Brazil Mexico Peru El Salvador Colombia Nicaragua Venezuela Guatemala Honduras Source: Kaufmann et al. (2001)

10. Volatility of Reserve Money Growth in the 90s (Regional Medians) 0510152025 South Asia Industrial Economies Middle East and North Africa Other East Asia and Pacific East Asia and Pacific 7 Latin America and Caribbean Sub-Saharan Africa Macro policies are very unstable

11. Average Private Domestic Credit in the 90s (Percent of GDP, Regional Medians) 020406080100120 Sub-Saharan Africa South Asia Latin America and Caribbean Middle East and North Africa Other East Asia and Pacific Industrial Economies East Asia and Pacific 7 Credit markets are underdeveloped

12. Credit to private sector (% of GDP) 93% 14% 35% 153% 316% 172% 188% 10%20%30%40%50%60%70%80%90% Chile Brazil Colombia México Argentina Perú Venezuela Expected for income level Gap Credit markets are underdeveloped

13. …and infrastructure provision is lagging -0.5 0.0 0.5 1.0 1.5 2.0 19901996-99 Infrastructure Index Developed East Asia Middle East East Europe LATIN AMERICA Rest of Asia Normalized indices of roads, electricity and telecommunications

14. Infrastructure Provision Index (covers electricity, water, roads and telephones) * Includes electricity generation, acces to improved water Fuente, paved roads and telephone mainlines. 12% 5% 39% 7% 17% 12% 2.83.03.33.53.84.0 Chile México Argentina Brazil Colombia Perú Expected for income level Gap …and infrastructure provision is lagging

15. Education is not growing fast enough

16. 20 25 30 35 40 45 50 55 60 1960197019801990 Gini Coefficients The worst income distribution worldwide Developed Southeast Asia Middle Eastern Eastern Europe LATIN AMERICA Rest of Asia Africa

17. Volatility in Terms of Trade Growth in the 90s (Regional Medians) 024681012 East Asia and Pacific 7 Industrial Economies Other East Asia and Pacific South Asia Middle East and North Africa Latin America and Caribbean Sub-Saharan Africa Terms of trade are highly volatile

18. -60 -40 -20 0 20 40 60 80 100 1971197319751977197919811983198519871989199119931995199719992001 …not to mention financial flows Financial Flows to Latin America= Net Portfolio Investment + Othe Ner Investment Source: WEO, IMF (Billions of real US dollars of May 2002, deflated by US CPI)

19. Latin America’s Growth Record The Structural Reforms The Opinions on the Reforms The Effects of the Reforms Growth and Structural Reforms: Stylized Facts and Findings

20. Structural reforms aimed at improving growth by easing the functioning of markets ► Trade policy: –Low and flat tariffs ► Financial policy: –Market-determined interest rates –Low reserve requirements –Effective regulation and supervision ► Tax policy: –Low income tax and VAT rates –Broad and effective tax bases ► Privatizations ► Labor legislation: –Flexibility on hiring and firing –Certainty of labor costs –Payroll taxes low and linked to individual benefits.

21. Structural Reform Index, average LAC Reforms have not stopped 0.30 0.35 0.40 0.45 0.50 0.55 0.60 198519861987198819891990199119921993199419951996199719981999

22. …but have been sharply skewed among areas Progress of Reforms in Latin America(Margin of Reforms Put to Use) 0% 10% 20% 30% 40% 50% 60% 70% 80% TradeFinance Until 1989 Until 1994 Until 1999 Note:Progress in reforms is measured as that part of the potential for reform as of 1985 that was actually used by the years 1989, 1994 and 1999.

23. …but have been sharply skewed among areas 0% 10% 20% 30% 40% 50% 60% 70% 80% CommercialFinancialTaxPrivatization Until 1989 Until 1994 Until 1999 Note:Progress in reforms is measured as that part of the potential for reform as of 1985 that was actually used by the years 1989, 1994 and 1999. Progress of Reforms in Latin America(Margin of Reforms Put to Use)

24. …but have been sharply skewed among areas 0% 10% 20% 30% 40% 50% 60% 70% 80% CommercialFinancialTaxPrivatization Labor Until 1989 Until 1994 Until 1999 Note:Progress in reforms is measured as that part of the potential for reform as of 1985 that was actually used by the years 1989, 1994 and 1999. Progress of Reforms in Latin America(Margin of Reforms Put to Use)

25. …and across countries Structural Reforms Index (countries with the highest and the lowest indexes in 1999) 0.10.20.30.40.50.60.70.8 Argentina Trinidad and Tobago Peru Jamaica Bolivia 1999 1985

26. … …and across countries (countries with the highest and the lowest indexes in 1999) 0.10.20.30.40.50.60.70.8 Uruguay Mexico Venezuela Ecuador Costa Rica Regional Average Argentina Trinidad and Tobago Peru Jamaica Bolivia 1999 1985 Structural Reforms Index

27. …especially on privatization Privatizations, cumulative value 1988-99 as % of GDP 0%5%10%15%20%25% Uruguay Paraguay Costa Rica Ecuador Honduras Chile Rep. Dominicana Nicaragua Colombia T&T Venezuela Mexico Guatemala El Salvador Argentina Brazil Peru Bolivia As % of GDP of 1999

28. Latin America’s Growth Record The Structural Reforms The Opinions on the Reforms The Effects of the Reforms Growth and Structural Reforms: Stylized Facts and Findings

29. The public opinion is very dissatisfied with the reforms ► Privatizations have been beneficial –Strongly agree 9% –Agree20% –Disagree37% –Strongly disagree 26% ► The State should leave productive activities to the private sector: –Strongly agree 18% –Agree 28% –Disagree 30% –Strongly disagree14% Source: Latinobarómetro, 2001

30. Disapproval has increased... ** 40% 45% 50% 55% 60% 65% 70% Without education 0 2 Completed technical education 4 Completed University education 6 Note: Author’s calculations based on Latinobarómetro, 1998, 2000 and 2001. Levels of significance for the group without education determined by TOBIT regressions(including dummies for countries and other variables): * 10%, ** 5%, *** 1%. 2000 1998 Negative Opinion of Privatization by Educational Level (Percentage that believes privatizations have not been beneficial) Some secondary education Source: Lora and Panizza, 2002

31. …especially in the middle classes ** *** * 40% 45% 50% 55% 60% 65% 70% 2000 1998 2001 Negative Opinion of Privatization by Educational Level (Percentage that believes privatizations have not been beneficial) Without education 0 2 Completed technical education 4 Completed University education 6 Some secondary education Note: Author’s calculations based on Latinobarómetro, 1998, 2000 and 2001. Levels of significance for the group without education determined by TOBIT regressions(including dummies for countries and other variables): * 10%, ** 5%, *** 1%. Source: Lora and Panizza, 2002

32. Privatization and corruption: An explosive blend Corruption and Opposition to Privatization Venezuela Uruguay Peru Paraguay Nicaragua Mexico Honduras Guatemala El Salvador Ecuador Costa Rica Colombia Chile Brazil Bolivia Argentina -0.5 -0.4 -0.3 -0.2 -0.1 0 0.1 0.2 0.450.50.550.60.650.70.750.8 Opposed to Privatization (% that do not consider it beneficial) Privatization Index * Corruption Index Source: Lora and Panizza, 2002

33. Latin America’s Growth Record The Structural Reforms The Opinions on the Reforms The Effects of the Reforms Growth and Structural Reforms: Stylized Facts and Findings

34. To what extent have reforms helped growth? AuthorsPeriodEffect Easterly, Loayza and Montiel1991-93 vs. 86-902,2%* Lora and Barrera1993-95 vs. 87-892,2%* Fernández-Arias and Montiel1991-95 vs. 86-901,7%* Loayza, Fajnzylber, Calderón1996-99 vs. 86-901,9%* Lora and Panizza1997-99 vs 85-870,7% *Includes the effect of macro stabilization

35. Effect of Reforms on Growth 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1988-901991-931994-961997-99 To what extent have reforms helped growth? Source: Lora and Panizza, 2002

36. Reforms have been advantageous for growth, but... The effect has been small …partly transitory …and has depended crucially on the quality of institutions, and in particular on the rule of law

37. By how much did income increase? Cumulative Effect of Reforms on Income -5%0%5%10%15%20%25%30% Guatemala Colombia Jamaica Ecuador Paraguay El Salvador Venezuela Mexico Uruguay Trinidad and Tobago Peru Dominican Rep. Chile Brazil Bolivia Costa Rica Argentina Cumulative change, 1985-99 Source: Lora and Panizza, 2002

38. Reforms have been advantageous for growth, but... They can lead to macro instability Financial liberalization and privatization without fiscal discipline or adequate regulation. They can concentrate (even more) income Scarce skilled labor They can be (very) detrimental to certain groups

39. Summary Growth has been disappointing Growth foundations are still weak Structural reforms attempted to correct this… …but have been incomplete and uneven …and have not received public opinion support The reforms have been good for growth… …but the effect has been small and transitory.

40. Basic Reading List Loayza, N., P. Fajnzylber and C. Calderón. “Economic Growth in Latin America and the Caribbean”, World Bank, unpublished, June 2002. Lora, E. and U. Panizza, “Structural Reforms Under Scrutiny”, IADB- RES Working Paper 470, March 2002. Other Readings: Burki, S.J. and G.E. Perry, The Long March: A Reform Agenda for Latin America and the Caribbean in the Next Decade, World Bank, 1997. IADB, Latin America After a Decade of Reforms, Economic and Social Progress in Latin America, 1997. Stallings, B. and W. Peres. Crecimiento, Empleo y Equidad, Cepal, Santiago de Chile, 2000.