1 Reforming Latin American Economies Ricardo Ffrench-Davis University of Chile COMMISSION ON GROWTH AND DEVELOPMENT SEMINAR April 12, 2007

2 Source: IMF, World Economic Outlook Database (2006); World Bank, World Development Indicators (2006). Double divergence in economic development

3 After deep economic reforms a la Washington Consensus, Latin America’s economic performance, in terms of growth and equity, has delivered an economic and social failure… Need to reform the reforms in a pragmatic way. Source: ECLAC, expressed in US dollars at 1980 prices for , and at 1995 prices for EEUU= 1.8 Asia(6)=3.7 Mundo=1.3

4 No progress in social indicators. Sources: GDP per capita, poverty and population based on ECLAC data for 19 countries. Real wage regional index based on real indices provided for ECLAC for 12 countries, weighted by labor force in each year. Unemployment is calculated by ECLAC with information for 24 Latin American and Caribbean countries.

5 Real instability: Financial volatile flows have led fluctuations in aggregate demand and GDP. Source: ECLAC data. Includes 19 countries. Preliminary figures for 2006.

6 Medium-term cycles: the domestic instability has been the outcome of volatility in capital surges. Source: ECLAC.

7 Source: ECLAC data for 19 countries. Preliminary figure for Real instability has also been unfriendly for the productive sector via its negative impact on capital formation. As a result, the investment ratio has sharply declined with respect to the 1970s.

8 Meanwhile, in Chile: Source: Author’s calculations, based on Central Bank figures.

9 In fact, high real instability generates underutilization of potential GDP, what is a significant explanation of reduced productive investment ratio. Source: ECLAC and Hofman and Tapia (2004). Averages for Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru and Venezuela. The investment ratio measures the ratio between the fixed capital formation and the GDP. The output gap measures the difference between potential and actual GDP as a share of potential GDP.

10 Source: Authors' calculations for 16 countries, based on Morley, Machado and Pettinato (1999), and database of Economic Development Division, ECLAC. In a number of countries, trade liberalization was accompanied by the liberalization of the capital account. This liberalization prompted considerable exchange rate appreciation just when trade reforms urgently required the opposite: a compensatory depreciation.

11 In fact, capital flows have determined RER behavior in Latin America. RER medium-term instability has tended to weaken value-added in exports and its links with the rest of domestic economy. Source: Author’s calculations based on ECLAC figures. Real exchange rate defined in terms of dollars per unit of local currency.

12 Success in the volume and growth of exports, but meager performance in non-exported GDP. Source: based on official figures from ECLAC for 19 countries. Figures into brackets are estimates of points of GDP growth contributed by exports and non-exports, respectively. Export value-added was estimated by discounting the imported content in exports from gross exports of good and services. The imported content was assumed to be equal to the share of non-consumer imports of goods in total GDP; for Mexican maquila, we used actual figures of value- added.

13 Success in the volume and growth of exports, but meager performance in non-exported GDP. Source: Author's calculations based on Central Bank figures.