1. 1 Catching up and Falling Down A Latin American Perspective Global Convergence Scenarios Paris January 16 2006 Javier Santiso Chief Development Economist & Deputy Director OECD Development Centre

2. 2 1 Latin America: Catching up versus falling down Brazil and the old challenge of potential growth 2 Brazil in the new international economic order 3

3. 3 While Latin American countries experienced a falling down …

4. 4 Some, more than others, during the 1950-2005 period … Some, more than others, during the 1950-2005 period …

5. 5 Deepening the gap between them and developed countries … Deepening the gap between them and developed countries …

6. 6 Deepening the gap with developed countries …

7. 7 The Asian countries experienced an historical jump.

8. 8 1 Latin America: Catching up versus falling down Brazil and the old challenge of potential growth 2 Brazil in the new international economic order 3

9. 9 The lost decade of the 1980s became the lost decade of a quarter of a century. Throughout the 30 year period previous to 1980, Brazilian real GDP grew at an average rate of 7.4% each year. Following this period, growth has been disappointingly low. Source: BBVA 5.3 5.5 5.7 5.9 6.1 6.3 6.5 6.7 6.9 7.1 7.3 196119641967 19701973197619791982198519881991199419972000 2003 GDP and Trend Average growth (1961-1980) = 7,4% Average growth (1981-2004) = 2,2% log

10. 10 The fall in capital accumulation partly explains the story Source: IPEA

11. 11 Lower capital accumulation: investments costs grew until 1990... … afterwards they stabilized at a relatively high level.

12. 12 Lower capital accumulation: capital utilization dropped Installed Capacity Utilization (%) 70 72 74 76 78 80 82 84 86 88 90 195019541958196219661970197419781982 19861990199419982002 Average 1950-80 Average 1980-04 Source: based in IBGE

13. 13 Lower capital accumulation: decline in productivity of capital due to decrease in total factor productivity Total Productivity and Capital Productivity 4.65 4.7 4.75 4.8 4.85 4.9 4.95 1978198019821984198619881990199219941996199820002002 2004 log -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0 Total Productivity Capital Productivity Source: Based in IBGE log

14. 14 There was a decline in terms of trade but also a series of structural inefficiencies: Lack of infrastructures, high taxes, rigid labor market… Lower capital accumulation: productivity fell

15. 15 Other productivity issues: Temporal costs vs financial costs Number of days needed to open a business 0 20 40 60 80 100 120 140 160 Brasil Venezuela España Perú India Argentina Colombia México China Corea del Sur Chile Uruguay Money needed to open a business (en US$) 0 500 1000 1500 2000 2500 España Uruguay Corea del Sur México Venezuela Perú Colombia Chile Brasil Argentina India China Number of days needed to enforce a contract 0 100 200 300 400 500 600 Colombia Perú Brasil India Venezuela Uruguay México Argentina Chile China España Corea del Sur Money needed to enforce a contract 0 500 1000 1500 2000 2500 Venezuela España Uruguay Chile Argentina Perú México India Corea del Sur China Colombia Brasil Source: Doing Business 2005

16. 16 Other productivity issues: financial intermediation The small margin for boosting investment towards profitable projects is a delicate issue.

17. 17 Simulation: path of Brazilian GDP with unchanged capital productivity Due to the direct effect of productivity in GDP, if the 1980s level had remained unchanged, ceteris paribus, Brazil would be twice as rich today. (Equivalent to Greece´s GDP per capita in PPPs).

18. 18 1 Latin America: Catching up versus falling down Brazil and the old challenge of potential growth 2 Brazil in the new international economic order 3

19. 19 The Chinese Dragon and the Indian Elephant are rapidly catching-up, while Brazil has only been recovering in recent years. Real GDP pc 19802004% yoy China106951506.77% India115930974.18% Turkey427275722.41% Brazil638078010.84% As a result, Brazilian growth has been lagging behind other emerging giants

20. 20 Real GDP pc 19802004% yoy China106951506.77% India115930974.18% Turkey427275722.41% Brazil638078010.84% US21336372332.35% The Chinese Dragon and the Indian Elephant are rapidly catching-up, while Brazil has only been recovering in recent years. Brazil has also diverged with respect to the benchmark country, US. As a result, Brazilian growth has been lagging behind other emerging giants

21. 21 Trade openness and the 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. In 2005 the trade surplus reached a record USD 45 billion, an increase of 33% yoy (in spite of a 13% appreciation of the Real).

22. 22 A trade exposure well balanced between US, Europe and Asia… China has become one of the main destinations for Brazilian exports. Increasing in importance Decreasing in importance

23. 23 …which underlines a process successfully implemented The structure of Brazilian exports is very similar to that of other Latin American countries. Brazil is therefore exploiting its competitive advantage. The main destination for Brazilian exports are those countries which Brazil does not compete with, and those which do not produce the goods that Brazil mainly exports.

24. 24 Top 100 firms in Latin-America 45 40 8 3 1111 0 10 20 30 40 50 BrazilMexicoChileArgentinaEcuadorColombiaPeruVenezuela Source: America Economia 2005 Brazilian firms are beginning to increase activities overseas Source: America Economia 2005

25. 25 Within the 50 companies that had greater profits in 2004, 19 are Brazilian, with an average utility over sales of 18%. The average ratio of exports over total sales was 32%. The 50 more profitable firms 19 16 7 3 11111 0 5 10 15 20 BrazilMexicoChileArgentinaColombiaEcuadorPanamaPeruVenezuela Source: America Economia 2005 Brazilian firms are beginning to increase activities overseas

26. 26 In worldwide terms Brazil is the Latin American country which had most firms listed in the Forbes 2000 report. Number of firms in Forbes 2000 0 5 10 15 20 25 30 35 IndiaSpainChinaBrazilMexicoChile Source: Forbes 2000 Brazilian firms are beginning to increase activities overseas

27. 27 Brazil is already quoted as being an example of macroeconomic pragmatism Source: BCB

28. 28 Some of the main challenges facing Brazil are to boost its productivity, diminish transaction costs and overcome inefficiencies. Conclusions Brazil is progressively opening its economy in order to avoid lagging behind the main catching up developing countries. There is an ever expanding economic pragmatism among Brazilian policy makers, who continuously adhere to the view of the political economy of the possible".

29. 29 Thank you for your attention!