1. NS4540 Winter Term 2016 Latin American Challenges
Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

2. Overview
Guillermo Ortiz, The Challenges to Achieving Sustainable Growth in Latin America, Brookings, November 2014
Main points
Initial economic recovery after the global recession has been disappointing
After strong growth before the crisis the pace of growth has slowed to rates considerably in recent years
Over time the region’s share of world GDP has dropped to 8.6% down from 11.4% in the 1980s
Fundamental for the region to undergo a supply-side structural reform agenda and achieve a sustainable path of higher growth rates similar to those right before the crisis

3. % World GDP (ppp)

4. Progress in Last Decade I
Improvements in Latin America During Last Decade
Many positive signs in recent years
From average annual inflation rate in LA over 200%
Average inflation since 2010 around 6%
Major improvements in debt structure and balance of payments
Total public sector debt peaked at 62% GDP in 2003
Declined to around 37% by 2012
Similar pattern for external sovereign debt
Reserve accumulation has increased significantly
Nine largest economies accumulated equivalent of 16% of GDP in international reserves during

5. Progress in Last Decade II

6. Progress in Last Decade III
Means some of the traditional components that hurt Latin America in the past
Large current account deficits and
Huge exposure to sudden stops have substantially improved over the last eight years
As a result balance sheets of most Latin American countries much stronger compared to a decade ago
Reflected in spreads of Latin American Debt
About half of what they were a decade ago
Significant milestone for region
For first time in very long time able to implement strong countercyclical monetary and fiscal polices in response to extreme external shocks

7. Progress in Last Decade IV

8. Progress in Last Decade V
Macroeconomic progress largely unprecedented and in start contrast to the 1990s
In the 1990s
High levels of indebtedness
Currency mismatches
Poorly capitalized financial systems
Tended to amplify external shocks and limit countercyclical policy intervention
As a result growth performance from 2003 to 2013 has been substantially better in most countries
The average growth rate of 4% per year almost twice the rate in the 1980s and 1990s

9. Progress in Last Decade VI

10. Reasons for Progress I
Heterogeneity and Reasons Behind Latin America’s Improvements
Major economies of Latin America with exception of Mexico are commodity exporters (57% of total exports)
Improvements in Latin America over last decade were to a great extent due to very favorable external condition
Increasing external demand led by advanced economies and China created favorable terms of trade for most Latin American countries
After advanced countries relaxed their monetary policy stance these countries became very attractive for large capital inflows in search of higher yields

11. Reasons for Progress II

12. Reasons for Progress III

13. Reasons for Progress IV
Domestically, labor accumulation played an important role in output growth
Factor accumulation accounted for 3.75% of annual GDP growth in
Capital accumulation from global capital inflows into financially integrated commodity exporters also played a part.
Today – external conditions are no longer as supportive as they used to be
Episodes of renewed volatility have exposed certain vulnerabilities in Latin America

14. Challenges Ahead I The New World
In recent years Latin America has experienced a rather complex cycle
Global economic conditions are not as favorable as they used to be
Commodity prices are declining
The reduction in monetary stimulus measures in some of the developed economies is reversing the flow of money Latin America attracted
Many Latin American economies facing a cycle of lower growth and higher inflation
Particularly those that have followed unorthodox polices and implemented no structural reforms

15. Challenges Ahead II Problems
Lower commodity prices will lead to lower government revenues
Public spending as a share of GDP has increased staidly since the financial crisis even though revenue growth has slowed
At same time pressures on expenditure are growing
Higher interest bills
Critical infrastructure needs and
Demands for better public services
Some supply constraints are starting to arise
Growth of physical capital expected to moderate as global interest rates rise and commodity prices stabilize
Contribution of labor will be constrained due to low unemployment rates and an aging population

16. Challenges Ahead III
In the longer term increasing growth will be a major challenge
Since 1980 Latin American income per capita relative to the U.S. has decreased by around 20%
During the same period developing Asia and the ASEAN-5 economies have increased their level of income per capita relative to the U.S. by 365% and 150% respectively
Inter America Development bank found that total factor productivity (TFP) is by far the most important determinant of the income gap between regions and the U.S.
Significantly TFP in Latin America declined by around 30% relative to the U.S. between 1980 and 2007
In emerging Asia TFP increased by about 20%

17. Challenges Ahead IV

18. Challenges Ahead V
In Latin America a significant misallocation of resources has caused low TFP
IDB found just a gradual adjustment in the allocation of resources to that of U.S. efficiency would have:
Translated into a gain of percent in TFP and
An additional 1% of annual GDP growth
Based on WEF data Latin America leads Central and Eastern European countries in macroeconomic environment and business sophistication.
In terms of institutions, infrastructure, health and education, labor and goods markets, financial sector development, technological readiness, and innovation lags these regions

19. Challenges Ahead VI
To rectify situation Latin America needs to implement structural reforms
Implies
Strengthening the institutional framework to secure property rights and eliminate corruption
Reforms should be focused on
developing infrastructure
Promoting deeper and more efficient financial markets
Increasing the quality of education
Further developing labor market and
Investing more in innovation and technology
In short countries must maintain the macroeconomic and financial stability achieved in past decade
At same time press ahead with structural reforms
Allow region to escape the middle income trap