1. 1 Promosalons Paris 20 February 2006 Javier Santiso Chief Development Economist & Deputy Director OECD Development Centre LATIN AMERICA: The political economy of the possible

2. 2 LATIN AMERICA: IN THE GARDEN OF DELIGHTS?

3. 3 Utopia in Latin America: from a spacial search to a temporal search. A search which has impregnated the history of Latin American political economy: from structuralism to monetarism, from Marxism to Liberalism. In the 20th Century the whole Continent was dancing a waltz of paradigms. The famous decalogue of the Washington Consensus: yet another variation on this waltz. THE FLOOD OF PARADIGMS IN LATIN AMERICA

4. 4 FROM MARXISM TO LIBERALISM: MODELS TO BE CREATED The great ideological storms (Isaiah Berlin). A few decades ago one of the key words in the entire continent was Revolution; a projective concept which denotes a temporal Beyond. Whether Cuban or Chilean, Marxist or Liberal, the Revolution will feed the time of tomorrows and the sacrifices of the immediate present. The flood, as Albert Hirschman describes it, brought with it an angry desire to conclude, where rigid economic models constituted numerous invitations to design alternatives with no chiaroscuro; either all or nothing.

5. 5 The transormations of the Latin American continent are now obvious. In the region as a whole, the conceptual and practical framework of political economies have been transformed. Democracy and the Market have taken over from Revolution and the State on the altar of references. To sum up, a complete vocabulary and grammar have disappeared from the political and economic repertoire allowing a new ideology to emerge. DEMOCRACY AND THE MARKET: THE NEW ALPHABET

6. 6 The great transformation which took place in Latin America at the end of this century does not herald the arrival of the Good Liberal. There was no transfer from one paradigm to another, instead a new cognitive style emerged. We witness the failure of the whole idea of political utopia and the politicial economy of the impossible. The failure of a cognitive style of macroeconomy of populism, similar to the purist monetarism of the Chicago Boys has only been the defense and illustration of the same concept. THE GREAT TRANSFORMATION OF LATIN AMERICA

7. 7 Perhaps we should not spend too much time mourning the passing away of the great reforming impulses. A detailed study carried out by Hausmann and Rodrik in 2004, proves that most economic accelerations were not preceded by reforming big-bangs, or by marked politicial or economic ruptures. This empirical study covers a wide range of 83 sustained world growth patterms between 1957 and 1992 (above two percentage points over a period of at least eight years). A BLESSING IN DISGUISE FOR LATIN AMERICA?

8. 8 THE EMERGENCE OF THE POLITICAL ECONOMY OF THE POSSIBLE The strategy used by Ulysses: leaders know that they could be in danger of succumbing to the temptation of the sirens chanting the economic politics of the impossible. They are cautious and they tie themselves to the masts of the fiscal and monetary institutions they have contribute to build. Two strategies of development are being outlined – and sometimes combined- in the region: one is an anchor of endogenous credibility, coming from within, and the other isan anchor of exognous credibility, getting its inspiration from external factors.

9. 9 THE POLITICAL ECONOMY OF THE POSSIBLE: THE LATAM SILENT TRANSFORMATION

10. 10 1 Latin Americas Crusade The Great Latin American Transformation 2 1 3 Conclusion

11. 11 CEPAL: Latin American Economic Commission THE BIG CHALLENGE: THE LIFE AFTER THE WASHINGTON CONSENSUS Index of Structural Reforms in Latin America 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1970 1972 19741976 1978 19801982 1984 19861988 1990 19921994199619982000 CEPAL IDB IDB: Inter American Development Bank Source: Based on CEPAL and IDB

12. 12 A DISAPPOINTING PERFORMANCE IN THE REGION… Source: Based on World Bank Not only was growth poor but it was also very volatile. Source: Based on World Bank

13. 13 …THE CONSEQUENCE HAS BEEN A DIVERGENCE IN THE EVOLUTION OF INCOME PER CAPITA With the exception of the 70s when Latin America attained an average growth rate of 6%... … during succeeding decades the income per capita gap between the developped regions widened. 8600 29700

14. 14 HOWEVER, 2003 BROUGHT A CHANGE IN TENDENCY... Source: BBVA During the second half of the 90s, the tendency in regional growth broke down and suffered a deceleration. Since 2003, the region is booming in a synchronised way. The indicator for the change in tendency is an index of measurement for changes in the cycle. It marks the beginning of expansive and recessive stages of the economic cycles.

15. 15 AN UPWARD TURN BEGAN WITH A NEW CYCLE IN 2004-2006.... Latin American Cycles The last cycle in the region was very long (11 years), especially compared to previous ones which lasted 8 years. Source : BBVA 8 años 11 años 1980 1987 1997 1983 1991 2003 Average Length Expansions:5,3 years Decelerations:4 years

16. 16 ARE WE REACHING A NEW CYCLE? Cycles in Latin America Source: BBVA 8 años 11 años Moreover, there were two sharp interruptions (the Tequila crisis in 1995 and the Russian crisis in 1998). 2004

17. 17 THE SCENARIO OF US AND WORLD ACTIVITY IS KEY In spite of the fact that variable factors such as the cost of raw materials cause the opposite economic effect in Latin America as opposed to developped countries, regional growth is closely linked to the growth patterns of USA. Correlation = 0,80 Cyclical Situation in USA and Latin America Source: Based on ECLAC and IMF USA Latin America Tendency

18. 18 THE WORLD OUTLOOK FOR THE FOLLOWING YEARS IS GOOD 0 1 2 3 4 5 6 19811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006 World growth exLatam % Source: OECD Growth in USA remained strong in 2005 and will keep growing in 2006. China will continue to boost world demand in 2006 having grown 9,9% in 2005 and 9,6% on average over the last 25 years. Evolution of income percapita (constant dollars in 1996) 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 Brazil China

19. 19 CHINA CONTRIBUTE TO GROWTH IN LATIN AMERICA Source: Based on domestic sources, before the revised figures released in Jnauary 2006. Growth of GDP in China (Annual percentage variation) Exports to China in 2003 (Percentage of total)

20. 20 Venezuela 83.1% Peru 70.7% Chile 59.1% Colombia 46.3% Argentina 38.0% Brazil 29.6% Mexico 14.6% Latam31.2% Source: BBVA over total exports (2004) Exports of commodities 60 70 80 90 100 110 120 130 140 150 160 170 1996199719981999200020012002200320042005 Source: BBVA BBVA-MAP Index of Latin America commodity prices (100 =jan03) TOTAL Without oil COMMODITY BOOM HAS BEEN A BONANZA

21. 21 … BOOSTING GROWTH The higher volatility in the price of these products is reflected in the cycle. -1% 0% 1% 2% 3% 4% 5% 6% 19911992199319941995199619971998199920002001200220032004 -30% -20% -10% 0% 10% 20% 30% GDP and BBVA MAP Latam Source: BBVA GDP growth Crecim BBVA-MAP The BBVA-MAP Latin America is a price indicator for net exports of raw materials in the region. Correlación = 0,65

22. 22 1 Latin Americas Crusade The Great Latin American Transformation 2 1 3 Conclusion

23. 23 THE GREAT TRANSFORMATION: THE MONETARY MAST 0 50 100 150 200 250 Latin AmericaTotal Emerging Markets Inflation (%) Source: Based on IMF

24. 24 With the sole exception of Venezuela, significant advances are being achieved in the reduction of fiscal deficit. In the last recessive phase the consensus in fiscal discipline became apparent. THE GREAT TRANSFORMATION: THE FISCAL MAST -12% -10% -8% -6% -4% -2% 0% 2% 4% Public deficit (% over GDP) 1999 2004p Source : BBVA

25. 25 THE GREAT TRANSFORMATION: THE EXTERNAL ANCHOR 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 197419761978198019821984198619881990199219941996199820002002 2004 (e) Commercial Openings in Latin America Source: BBVA 0%10%20%30%40%50%60%70% Mexico Chile Venezuela Uruguay Argentina Colombia Peru Brazil Commercial Openings in 2004 Source: BBVA en base a fuentes nacionales -3,2 -4,3 -3,1 -2,3 -2,5 -0,5 0,1 1,3 0,7 -5 -4 -3 -2 0 1 2 199719981999200020012002200320042005 Current Account Latam Source BBVA % sobre PIB

26. 26 The political economy of the possible: Chile

27. 27 CHILE HAS INNOVATED IN ECONOMIC POLICY... Year Goal Adopted and Initial Inflation Chile Canada N. Zealand Israel UK Finland Suecia Spain Australia Rep. Czechj Korea Poland S.Africa Brazil Thailand Suiza Island Norway Colombia Mexico Peru 0 5 10 15 20 25 30 35 40 45 1990199219941996199820002002 Tasa de Inflación (%) Source: Central Bank of Chile

28. 28 … FAVOURING GRADUAL ADJUSTMENTS … Anual Inflation (%) 0 5 10 15 20 25 30 35 19831985198719891991199319951997199920012003 Source: BBVA

29. 29 … AGAINST THE RAGE DE VOULOIR CONCLURE 0 20 40 60 80 100 120 1960-641965-701971-731974-811982-841985-951995-002000-05 Average Tariff (%) CountrySubscribedValidity Bolivia06/04/199307/07/1993 Colombia06/12/199301/01/1994 Ecuador20/12/199401/01/1995 Mercosur25/06/199601/10/1996 Perú22/06/199801/07/1998 Cuba21/08/1998 Venezuela02/04/199301/07/1993 Canadá05/12/199605/07/1997 Corea del Sur15/02/200301/04/2004 Costa Rica18/10/199914/02/2002 El Salvador18/10/199903/06/2002 EEUU06/06/200301/01/2004 Guatemala18/10/1999 Honduras18/10/1999 México01/10/199801/08/1999 Nicaragua18/10/1999 UE18/11/200201/02/2003. Free Trade Agreements In the 1960s, there was already consensus in favour of an opening. The debate centred on two main issues: The spread of opening and the advantage/disadvantage of differentiated tariffs. With the return of democracy, The process of unilateral and joint reductions of tariffs was complemented with bilateral treaties.

30. 30 Evolution of the Pension System in Latin America (in % of GDP) 0% 5% 10% 15% 20% 25% 30% 123456789111 Num. periods ARGENTINABOLIVIACOLOMBIA COSTA RICACHILEEL SALVADOR MEXICOPERUURUGUAY Return of Democracy SUCCESSFUL POLICIES ARE CONTINUED: PENSION SYSTEM

31. 31 ….. BUT WITH GRADUAL INCREASES

32. 32 The political economy of the possible: Mexico

33. 33 MONETARY ANCHOR: THE CENTRAL BANK A KEY ACTOR FOR LOWERING INFLATION Source: Banxico Inflation (Percentage) 0 20 40 60 80 100 120 140 19781980198219841986198819901992199419961998200020022004... Perspectives are now anchored at levels around 4%. As in the rest of the region inflation has been considerably reduced...

34. 34 FISCAL ANCHOR: HEALTHY PUBLIC FINANCES Source: Banxico figures Public Sector financing requirements (Percentage of GDP) -10 -5 0 5 10 15 20 19781980198219841986198819901992199419961998200020022004 Income from Oil As a percentage of the total) 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 1986198719881989199019911992199319941995199619971998199920002001200220032004.... however, the government still depends on oil to finance its expenditures. Public debt has been considerably reduced...

35. 35 EXTERNAL ANCHOR: THE EMERGENCE OF A GLOBAL TRADER Mexican exports increased on average by 17% each year between 1989 and 2004... Total Exports 0 20 40 60 80 100 120 140 160 180 200 1980/121984/121988/121992/121996/122000/122004/12 Degree of Openness ((X+M)/PIB) 20 25 30 35 40 45 50 55 60 ChinaChileMexTurColArgPerúBraInd... Which has resulted in a greater degree of openness Source: INEGI and Banxico

36. 36 THE COUNTRY NOW DEPENDS A LOT LESS ON RAW MATERIALES The export of manufactured goods grew on average between 1990 and 2000, about 28% per year and now accounts for 90% of total exports. Exports 0 20 40 60 80 100 120 140 160 180 200 1980/121984/121988/121992/121996/122000/122004/12 No petroleras Petroleras 0,0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1,0 Argentina Bolivia Brasil Chile Colombia Costa Rica Ecuador El Salvador Guatemala Honduras México Nicaragua Paraguay Perú Uruguay Venezuela 1986-19881999-2001 Herfindahl-Hirschman Index Exports by receiver countries (1986-1988 y 1999-2001).

37. 37 MOREOVER, TLCAN HAS MEANT THAT THE COUNTRY HAS BECOME ANCHORED TO THE ECONOMY OF USA The new productive structure has caused the economic cycle to become more stable, and volatility has become a thing of the past. GDP in Mexico and Industrial Production in USA. (Percentage of Anual Exchange) -8 -6 -4 -2 0 2 4 6 8 10 19961997199819992000 2001 p/ 200220032004 Mexico GDP US industrial production. Recovery of GDP (Índice=100 maximum) 80 85 90 95 100 105 110 -201234567891011121314 1981198519942000 Quarters after the crisis Source: INEGI and Banxico

38. 38 The political economy of the possible: Brazil

39. 39 EXTERNAL TRANSFORMATION Following the 1999 devaluation which give way to the floating of the real, the economy has gradually opened up, making it less vulnerable to external shocks. Source: Based on BCB figures 0% 5% 10% 15% 20% 25% 30% 19771979198119831985198719891991199319951997199920012003 Commercial opening (Exports + Imports) / GDP

40. 40 TRADE OPENESS AND CATCHING UP PROCESS Successful Asian emerging countries were able to simultaneously combine growth with a trade openness proccess. Brazil has recently started to open up its economy. It is also obtaining record trade surpluses: nearly 45 billion dollars in 2005; up 25% from the previous year.

41. 41 Top 100 firms in Latin-America 45 40 8 3 1111 0 10 20 30 40 50 BrazilMexicoChileArgentinaEcuadorColombiaPeruVenezuela Source: America Economia 2005 BRAZILIAN FIRMS BEGAN TO EXPAND OVERSEAS

42. 42 Number of firms in Forbes 2000 0 5 10 15 20 25 30 35 IndiaSpainChinaBrazilMexicoChile Source: Forbes 2000 BRAZILIAN FIRMS RALLIED MEXICAN MULTILATINAS The 50 more profitable firms 19 16 7 3 11111 0 5 10 15 20 BrazilMexicoChileArgentinaColombiaEcuadorPanamaPeruVenezuela Source: America Economia 2005

43. 43 THE CHINESE BONANZA Brazilian products hardly compete at all with Chinese goods in international goods markets, and, moreover, the tendency is for these levels to drop. Commercial Competition with China 0.20 0.25 0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.250.350.450.550.65 México Source: Blázquez, Rodríguez y Santiso, 2005 Tailandia Hungría EEUU Rep. Checa España Polonia Japón Brazil Coef de conformidad Coef de especialización Commercial competition between China and Brazil 25% 27% 30% 28% 25% 23% 24% 25% 26% 27% 28% 29% 30% 31% 199819992000200120022003 Source: Blázquez, Rodríguez y Santiso, 2005

44. 44 1 Latin Americas Crusade The Great Latin American Transformation 2 1 3 Conclusion

45. 45 VENEZUELA ECUADOR PERÚ PARAGUAY ARGENTINA URUGUAY MÉXICO BRAZIL COLOMBIA CHILE EL SALVADOR NICARAGUA HONDURAS COSTA RICA GUATEMALA PANAMÁ REPÚBLICA DOMINICANA BOLIVIA Next presidential elections 2007 - 2009 2006 2004 - 2005 Latin America 2006: The political cycle is back

46. 46 The timing game: Political cycles and crises in Latin America used to be synchronized, 1970-2000 Nominal exchange rate depreciation and government change 0,94 0,96 0,98 1 1,02 1,04 1,06 1,08 1,1 1,12 1,14 1,16 -9-8-7-6-5-4-3-20123456789 Source: Frieden, Ghezzi y Stein, 2001 Country`s Total Elections 1Colombia13 198917 2Costa Rica11 199014 3Guatemala11 19913 4Ecuador10 19920 5Chile10 199310 6Peru10 199418 7Honduras10 19956 8Paraguay9 19968 9Brazil9 19977 10El Salvador9 199815 11Republica Dom.9 199912 Uruguay9 200011 13Mexico9 20014 14Argentina8 200213 15Nicaragua8 20038 16Panama8 20046 17Venezuela8 20055 18Bolivia7 200611

47. 47 During the period 2000-2005, some countries achieved a decoupling: The case of Mexico Source: Jorge Blázquez and Javier Santiso, 2004. Timing of Presidential Elections and Exchange Rate Depreciations in Mexico, 1975-2000 Election Year

48. 48 While others had overcome the test of fire more recently: The case of Brazil Source: Based on Juan Martínez and Javier Santiso, 2003.

49. 49 Thank you for your attention!