November 7 th, 2010 Prepared for Presentation at the XLIV FELABAN Annual Assembly Punta del Este, Uruguay Ernesto Talvi Director Académico de CERES Non-Resident Senior Fellow, Brookings Institution Opportunities, Risks and Challenges Ahead Latin America’s Insertion in the Post-Financial Crisis Global Order:

OUTLINE I. The Global Economy and Latin America in the Aftermath of the Financial Crisis II. Latin America’s Insertion in the New Global Order III. Policy Challenges for the New Global Order  The Global Economy  Latin America

OUTLINE I. The Global Economy and Latin America in the Aftermath of the Financial Crisis II. Latin America’s Insertion in the New Global Order III. Policy Challenges for the New Global Order  The Global Economy  Latin America

THE GLOBAL ECONOMY Industrial Countries Emerging Markets 70% of World Output 30% of World Output

(quarterly, seasonally adjusted, at annual rates, in bn of US$) Aggregate Demand in the US Private Consumption ExportsPrivate Investment -9% Lehman’s Bankruptcy Beginning of Global Recovery Lehman’s Bankruptcy Beginning of Global Recovery -30% Lehman’s Bankruptcy Beginning of Global Recovery -15%Pre-Gobal Crisis Trend

Gross Domestic Product (quarterly, seasonally adjusted at annual rates, in bn of US$) Imports (quarterly, seasonally adjusted at annual rates, in bn of US$) Aggregate Supply in the US % Lehman’s Bankruptcy Beginning of Global Recovery Pre-Global Crisis Trend % Lehman’s Bankruptcy Beginning of Global Recovery Pre-Gobal Crisis Trend

3109 Fiscal Accounts in the US Fiscal RevenuesPrimary Expenditure (seasonally adjusted at annual rates, in bn of 2000 dollars) Fiscal Balance (in % of GDP, last 4 quarters) Mar-03 Oct-03 May-04 Dec-04 Jul-05 Feb-06 Sep-06 Apr-07 Nov-07 Jun-08Jan-09 Aug-09 Mar-10 Lehman’s Bankruptcy Beginning of Global Recovery 3992 Pre-Gobal Crisis Trend -22% Mar-03 Oct-03 May-04 Dec-04 Jul-05 Feb-06 Sep-06 Apr-07 Nov-07 Jun-08Jan-09 Aug-09 Mar-10 Lehman’s Bankruptcy Beginning of Global Recovery 7.7% Pre-Gobal Crisis Trend -12% -10% -8% -6% -4% -2% 0% Mar-03 Oct-03 May-04 Dec-04 Jul-05 Feb-06 Sep-06 Apr-07 Nov-07 Jun-08Jan-09 Aug-09 Mar-10 Lehman’s Bankruptcy Beginning of Global Recovery -2% -11%

-6% Sectoral & External Balances in the US Sectoral & External Balances in the US Gross Private Investment (in % of GDP, last 4 quarters) * Includes consumption of fixed capital Current Account (in % of GDP, last 4 quarters) Gross Private Saving* (in % of GDP, last 4 quarters) 11% 12% 13% 14% 15% 16% 17% 18% Lehman’s Bankruptcy Beginning of Global Recovery 18% 12% 13% 14% 15% 16% 17% 18% Lehman’s Bankruptcy Beginning of Global Recovery 14% 18% -7% -6% -5% -4% -3% -2% Lehman’s Bankruptcy Beginning of Global Recovery -3%

Aggregate Demand in China Private Consumption (bn of 1990 Yuans) Total Investment (bn of 1990 Yuans) Exports (bn of 1990 Yuans) Lehman’s Bankruptcy 6.5% Pre- Crisis Global Trend Lehman’s Bankruptcy 14.1% Lehman’s Bankruptcy -19.9% Pre- Crisis Global Trend

19% 8% 9% 14% 0% 7% 14% 21% GDP: 11.7% Change in Sources of Growth in China (Annual Growth) InvestmentConsumptionPublic Expenditure Exports 0% 16% 9% GDP: 9.3% ExportsInvestmentConsumptionPublic Expenditure 0% 7% 14% 21%

Fiscal Accounts in China Fiscal Revenues (in bn of 2000 Yuan) Primary Expenditure Fiscal Balance (in % of GDP) Lehman’s Bankruptcy % Pre-Crisis Global Trend Lehman’s Bankruptcy Pre-Crisis Global Trend 24% -3,0% -2,5% -2,0% -1,5% -1,0% -0,5% 0,0% 0,5% 1,0% % -2.8% Lehman’s Bankruptcy

Sectoral & External Balances in China Sectoral & External Balances in China Gross Investment (in % of GDP) Current Account (in % of GDP) Gross National Savings (in % of GDP) 0% 2% 4% 6% 8% 10% 12% Mar-10 Lehman’s Bankruptcy 11% 6% 35% 40% 45% 50% 55% Lehman’s Bankruptcy 54% 35% 40% 45% 50% Lehman’s Bankruptcy 48% 42%

United States China (Current Account; in % of GDP) (Current Account, in % of GDP) Unwinding of Global Imbalances 0% 2% 4% 6% 8% 10% 12% Mar % 4.5% -6.5% -7% -6% -5% -4% -3% -2% Beginning of Global Financial Crisis -3.0% -6.2% +3.2% Beginning of Global Financial Crisis

Commodities Prices World Interest Rates World Output Risk Premia Industrial Countries Emerging Markets THE GLOBAL ECONOMY

World Output and Domestic Demand Growth and Composition of World Domestic Demand Growth in World Output 0% 1% 2% 3% 4% 5% 6% 7% 8% % 3.8% 7.8% 51% 49% 1.6% 4.7% 6.2% 25% 75% Share Emerging Economies Industrial Countries 3.6% 5.2% 2.8% -0.6% 4.8% -1% 0% 1% 2% 3% 4% 5% 6% Period Average: 4.7% 2.3% (US$ PPP, annual rate, %) (US$, annual rate, %)

Industrial Countries BRICs Import Composition (% of total imports, 2009) BRICs includes Brazil, Russia, India and China Implications of the Shift in Composition of World Demand 15% 19% 36% 30% 14% 36% 25% 25% Raw materials Intermediate goods Consumer goods Capital goods Consumer goods Raw materials Intermediate goods

Aug-2010 FED Funds Rate (reference rate, %) World Interest Rates and Capital Markets US Treasury Yield Curve EMs Bond Yields (EMBI+, %) -1.4% 0% 1% 2% 3% 4% 5% 6% Dec-06 Mar-07 Jun-07 Sep-07Dec-07 Mar-08 Jun-08 Sep-08Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 2% 0.25% Lehman’s Bankruptcy Beginning of Global Recovery 0% 1% 2% 3% 4% 5% 6% 3m6m2y3y5y10y30y 4.9% 4.8% 4.1% 0.14%

Commodity Prices (Annual Average, 2005=100) Oil Food Source: IMF Metals 20% 28% 2%

OUTLINE I. The Global Economy and Latin America in the Aftermath of the Financial Crisis II. Latin America’s Insertion in the New Global Order III. Policy Challenges for the New Global Order  The Global Economy  Latin America

Brazil Mexico Industrial Countries Emerging Markets Commodities Prices World Interest Rates World Output Risk Premia THE GLOBAL ECONOMY & LATIN AMERICA

(quarterly, seasonally adjusted, bn of Pesos of 2003) Aggregate Demand in Mexico Private Consumption ExportsTotal Investment (quarterly, seasonally adjusted, bn of Pesos of 2003) Mar-03May-04Jul-05Sep-06Nov-07Jan-09 Mar-10 Beginning of Global Recovery -14.0% Mar-03May-04Jul-05Sep-06Nov-07Jan-09Mar-10 Beginning of Global Recovery Mar-03May-04Jul-05Sep-06Nov-07Jan-09Mar-10 Beginning of Global Recovery -16.3% -24.3% Pre-Global Crisis Trend Lehman’s Bankruptcy

Gross Domestic ProductImports Aggregate Supply in Mexico (quarterly, seasonally adjusted, in bn of Pesos of 2003) Mar-03May-04Jul-05Sep-06Nov-07Jan-09Mar-10 Beginning of Global Recovery -10.1% Mar-03May-04Jul-05Sep-06Nov-07Jan-09Mar-10 Beginning of Global Recovery -29.2% Lehman’s Bankruptcy Pre-Global Crisis Trend

Aggregate Demand in Brazil (quarterly, seasonally adjusted, average 1995=100) Private Consumption ExportsTotal Investment (quarterly, seasonally adjusted, average 1995=100) Lehman’s Bankruptcy +0.2% Beginning of Global Recovery Lehman’s Bankruptcy Beginning of Global Recovery +3.2% Lehman’s Bankruptcy Beginning of Global Recovery -26% Pre-Global Crisis Trend

Gross Domestic Product (quarterly, seasonally adjusted, average 1995=100) Imports (quarterly, seasonally adjusted, average 1995=100) Aggregate Supply in Brazil Lehman’s Bankruptcy Beginning of Global Recovery 0% Lehman’s Bankruptcy Beginning of Global Recovery -2.2% Pre-Global Crisis Trend

7.7% Change in Sources of Growth in Brazil (Annual Growth) % 6.9% 4.4% 3.1% 0% 3% 6% 9% ExportsInvestmentConsumptionPublic Expenditure GDP: 4.2% -4.1% 3.5% 5.6% -5% -3% -1% 1% 3% 5% 7% 9% ExportsInvestmentConsumptionPublic Expenditure GDP: 4.4%

Source: INEGI Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May Average: % Source: Getulio Vargas Foundation Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May Average: % Mexico Brazil (Sep-05=100) (Jan-03=100) Forward Looking Indicators: Consumer Confidence

Brazil Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep Average: % 122 Source: Getulio Vargas Foundation (Business Confidence Index, Sep-05=100) Mexico Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul Average: % Source: INEGI (Producer Confidence Index, Jan-03=100) Forward Looking Indicators: Business Confidence

(Dec-06=100) Mexico Brazil (Dec-06=100) Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09Dec-09 Mar-10 Jun Dec-06 Mar-07 Jun-07 Sep-07Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09Dec-09 Mar-10 Jun % 9% Forward Looking Indicators: Real Exchange Rate

The Aftermath of the Global Financial Crisis: Two Latin Americas? Net Exporters of Commodities Low Exposure of Exports of Goods and Services to Industrial Countries High Weight of Interest-Sensitive Components in Aggregate Demand Net Importers of Commodities High Exposure of Exports of Goods and Services to Industrial Countries Low Weight of Interest-Sensitive Components in Aggregate Demand ‘Brazilian Type’ Cluster‘Mexican Type’ Cluster

Net Commodity Exports (% of GDP) Investment / Exports to Industrial Countries Cluster Analysis “Mexican Type” Cluster “Brazilian Type” Cluster The Aftermath of the Global Financial Crisis: Two Latin Americas? “Mexican Type” Mexico Bahamas Barbados Belize Costa Rica Dominican Rep. El Salvador Guatemala Guyana Honduras Jamaica Nicaragua Panama Suriname “Brazilian Type” Brazil Argentina Bolivia Chile Colombia Ecuador Paraguay Peru Trinidad and Tobago Uruguay Venezuela Clusters

Net Commodity Exports (% of GDP) Investment / Exports to Industrial Countries Cluster Analysis “Mexican Type” Cluster “Brazilian Type” Cluster The Aftermath of the Global Financial Crisis: Two Latin Americas? Average Growth * 4.9% 2.7% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% Latin America Average: 3,4% “Mexican Type” Cluster “Brazilian Type” Cluster** (GDP, annual rates) * Source: Latin Focus and WEO ** Excludes Venezuela

OUTLINE I. The Global Economy and Latin America in the Aftermath of the Financial Crisis II. Latin America’s Insertion in the New Global Order III. Policy Challenges for the New Global Order  The Global Economy  Latin America

THE NEW GLOBAL ECONOMIC ORDER:  Political Risks  Economic Risks  Nationalism  Populism  Extreme Right Movements  Xenophobia  Currency Wars (Competitive Devaluations)  Trade Wars (Protectionism)  Financial Panic RISKS TREATHENING GLOBAL COOPERATION

: LATIN AMERICA´S DECADE? THE NEW GLOBAL ECONOMIC ORDER Change in trade patterns due to a reallocation of world output and world demand from industrial countries to emerging markets that have a high propensity to consume primary commodities  A New Global Economic Order emerging after the global crisis with the following features: Under the assumption that global cooperation prevails, Latin America will likely face very favorable conditions due to:

BRICs Rest of Emerging Markets Industrial Countries Change in Latin America's Trade Patterns Variation (LAC-7) BRICs includes Brazil, Russia, India and China LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 93% of Latin America’s GDP. -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% Total Exports: 1% 72% 13% -7% Industrial Countries 57% 26% BRICs 17% Rest of EMs BRICs 11% Industrial Countries 65% 24% Rest of EMs Exports by Destination (LAC-7)

Trade Patterns in Brazil Variation BRICs includes Brazil, Russia, India and China Industrial Countries 42% 41% BRICs 18% Rest of EMs Exports by Destination 113% 8% -5% -10% 10% 30% 50% 70% 90% 110% Total Exports: 11% BRICs Rest of Emerging Markets Industrial Countries 9% 49% 42% BRICs Rest of EMs Industrial Countries

Trade Patterns in Mexico Variation BRICs includes Brazil, Russia, India and China Exports by Destination 93.6% 1.4% 5% BRICs Rest of EMs Industrial Countries Industrial Countries BRICs 2.6% 91.6% 5.8% Rest of EMs 63% 8% -10% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% Total Exports: -7.8% BRICs Rest of Emerging Markets Industrial Countries

∆ Ext. Demand   * j  j GDP ∆ j  = Exports to Country j / Total Exports = GDP Variation of country j j GDP ∆ R 2 = 70% Exports Variation (left axis) External Demand Variation (right axis) -1% 0% 1% 2% 3% 4% 5% 0% -10% -5% 5% 10% 15% Industrial Countries 57% 26% BRICs 17% Rest of EMs 2013* Industrial Countries BRICs Rest of EMs 52% 25% 23% Exports & External Demand (LAC-7, ED and Exports Variation, in %) BRICs includes Brazil, Russia, India and China LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 93% of Latin America’s GDP. Exports by Destination (LAC-7) Change in Latin America's Trade Patterns: Looking Ahead

: LATIN AMERICA´S DECADE? Ample availability of relatively cheap credit and capital due to a reallocation of world savings towards EMs in general and Latin America in particular THE NEW GLOBAL ECONOMIC ORDER Change in trade patterns due to a reallocation of world output and world demand from industrial countries to emerging markets that have a high propensity to consume primary commodities  A New Global Economic Order emerging after the global crisis with the following features: Under the assumption that global cooperation prevails, Latin America will likely face very favorable conditions due to:

LAC Brazil 52 Capital Inflows (LAC-7, Cumulative quarterly capital inflows, billions of US$) LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. Main Capital Inflows Recipients (LAC-7, Mar-10) Pre Global -Crisis Maximum Level: Mar Dec-2006 Billions of US$ Beginning of Global Recovery Lehman Brothers Bankruptcy Inflows Shares GDP Shares Argentina 1% Others 22% Mexico 22% Brazil 55% Mexico 24% Others 22% Brazil 45% Argentina 8% Capital Flows to Latin America Pre-Global Crisis Trend

Mar-03Mar-04Mar-05Mar-06Mar-07Mar-08Mar-09Mar Beginning of Global Recovery Lehman’s Bankruptcy Dec-06 LAC-7 Billions of US$ 26 Brazil 65 Mar Composition of Capital Flows to Latin America Financial Inflows (LAC-7, Cumulative quarterly capital inflows, billions of US$) Mar-03Mar-04Mar-05Mar-06Mar-07Mar-08Mar-09Mar Beginning of Global Recovery Lehman’s Bankruptcy FDI Inflows (LAC-7, Cumulative quarterly capital inflows, billions of US$) Dec-06 Mar-10 Inflows by Type FDI Inflows 63% Financial Inflows 37% Financial Inflows 68% FDI Inflows 32% Dec-06 LAC-7 Billions of US$ 85 Brazil 138 Mar (LAC-7) Pre Global -Crisis Maximum Level: 134 Pre Global -Crisis Maximum Level: 110 Pre-Global Crisis Trend

2006 (% of total FDI) BRICs includes Brazil, Russia, India and China 2009 Capital Flows to Latin America: FDI by Country of Origin 0.1% 8.7% 92% Rest of EMs 0.3% 6.8% 93% Rest of EMs BRICs Brazil Industrial Countries Industrial Countries 0.3% 1.0% 98.7% Rest of EMs BRICs 1.1% 0.6% 98.8% Rest of EMs BRICs Mexico Industrial Countries Industrial Countries

Manufacturing Industries Agriculture 2006 (% of total FDI) 2009 Capital Flows to Latin America: FDI by Sector PeruMexico Agriculture 8% Services 19% 43% Extractive Activities 30% Manufacturing Industries 50% 48% 0% 2% Extractive Activities Services Manufacturing Industries 0% 57% 42% 0% Services Extractive Activities 38% 57% 0% 5% Agriculture Extractive Activities Manufacturing Industries Services

: LATIN AMERICA´S DECADE? Ample availability of relatively cheap credit and capital due to a reallocation of world savings towards EMs in general and Latin America in particular A new financial architecture that will reduce the risk of contagion and the probability of liquidity crises in EMs in general and Latin America in particular THE NEW GLOBAL ECONOMIC ORDER Change in trade patterns due to a reallocation of world output and world demand from industrial countries to emerging markets that have a high propensity to consume primary commodities  A New Global Economic Order emerging after the global crisis with the following features: Under the assumption that global cooperation prevails, Latin America will likely face very favorable conditions due to:

 At the multilateral level, institutionalization and improvement of ILOLR mechanisms used during the global crisis, with the following features:  The IMF and MDBs are endowed with adequate resources for the task  These features would constitute the basis for a de facto incentive- compatible ‘Long-Term Stability Pact’ for EMs SpeedSpeed PowerPower AutomaticityAutomaticity Ex-ante eligibilityEx-ante eligibility  At the country level, adoption of macroeconomic policy frameworks to promote stability and gain ex-ante access to ILOLR facilities * 1. Izquierdo, A. and Talvi, E “A Stability Pact à la Maastricht for Emerging Markets”, 2. Izquierdo, A. and Talvi, E. (coords.), “Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis In Latin America”, Inter-American Development Bank, Washignton DC. 3. Izquierdo, A. and Talvi, E. (coords.), “The Aftermath of the Crisis. Policy Lessons and Challenges Ahead for Latin America and the Caribbean”, Inter American Development Bank, Washignton DC. TOWARDS A NEW FINANCIAL ARCHITECTURE FOR EMERGING MARKETS: KEY FEATURES*

: LATIN AMERICA´S DECADE? Ample availability of relatively cheap credit and capital due to a reallocation of world savings towards EMs in general and Latin America in particular  An initial situation in Latin America characterized by a combination of relatively strong macroeconomic fundamentals and a gradual process of increasing democratization and institutionalization, which place the region in a favorable position to become a preferred destination for capital inflows A new financial architecture that will reduce the risk of contagion and the probability of liquidity crises in EMs in general and Latin America in particular THE NEW GLOBAL ECONOMIC ORDER Change in trade patterns due to a reallocation of world output and world demand from industrial countries to emerging markets that have a high propensity to consume primary commodities  A New Global Economic Order emerging after the global crisis with the following features: Under the assumption that global cooperation prevails, Latin America will likely face very favorable conditions due to:

India 5% EA-5 7% EM Europe 19% Rest EMs 16% China 17% LAC 12% Middle East 23% 2006 Middle East 8% (Share of GDP 16%) China 25% (Share of GDP 27%) Rest of EMs 12% (Share of GDP 13%) EM Europe 9% (Share of GDP 9%) EA-5 12% (Share of GDP 7%) India 8% (Share of GDP 7%) LAC 25% (Share of GDP 20%) Losers Winners % 25% 2% 0% -48% -67% -76% -80% -60% -40% -20% 0% 20% 40% 60% LACEA-5IndiaChinaRest of EMs EM Europe Middle East (share in total capital inflows to EMs) Variation (% variation) Main Capital Inflows Recipients Capital Inflows to EMs EA-5 includes Indonesia, Malaysia, Thailand, The Philippines and Vietnam. EM Europe refers to Central and Eastern Europe as defined by WEO Capital Inflows to EMs: -30% Source: WEO

OUTLINE I. The Global Economy and Latin America in the Aftermath of the Financial Crisis II. Latin America’s Insertion in the New Global Order III. Policy Challenges for the New Global Order  The Global Economy  Latin America

 Rethink international trade policy for the new global context POLICY CHALLENGES FOR LATIN AMERICA  Avoid financial bubbles caused by strong capital inflows that may make countries prone to crisis  Take advantage of the bonanza to develop physical, technological and institutional infrastructure and to invest in human capital in order to lay a sound foundation for self-sustained, productivity-induced growth when favorable external conditions subside  Remove distortions to facilitate intra-firm and intra-sector restructuring that will be necessary to accommodate the change in trade patterns and the new constellation of relative prices  Respond efficiently to the legitimate social claims for redistribution that will emerge in a context in which, a high-commodity-price/low–cost-of-capital driven expansion, is likely to produce a deterioration in the distribution of income THE NEW GLOBAL ECONOMIC ORDER:  Protect political institutions from the potential corrosive effects of commodity price booms

November 7 th, 2010 Prepared for Presentation at the XLIV FELABAN Annual Assembly Punta del Este, Uruguay Ernesto Talvi Director Académico de CERES Non-Resident Senior Fellow, Brookings Institution Opportunities, Risks and Challenges Ahead Latin America’s Insertion in the Post-Financial Crisis Global Order: