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November 7th, 2010
Prepared for Presentation at the XLIV FELABAN Annual AssemblyPunta 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
(quarterly, seasonally adjusted, at annual rates, in bn of US$)
(quarterly, seasonally adjusted, at annual rates, in bn of US$)
(quarterly, seasonally adjusted, at annual rates, in bn of US$)
Aggregate Demand in the US
Private Consumption ExportsPrivate Investment
-9%
Lehman’s Bankruptcy
Beginning of Global Recovery
2000
2100
2200
2300
2400
2500
2600
2003 2004 2005 2006 2007 2008 2009 2010
Lehman’s Bankruptcy
Beginning of Global Recovery
-30%
400
450
500
550
600
650
2003 2004 2005 2006 2007 2008 2009 2010200
250
300
350
400
450
500
550
2003 2004 2005 2006 2007 2008 2009 2010
Lehman’s Bankruptcy
Beginning of Global Recovery
-15%Pre-Gobal Crisis Trend
Pre-Gobal Crisis Trend
Pre-Gobal Crisis Trend
Gross Domestic Product(quarterly, seasonally adjusted at
annual rates, in bn of US$)
Imports(quarterly, seasonally adjusted at
annual rates, in bn of US$)
Aggregate Supply in the US
2900
3000
3100
3200
3300
3400
3500
3600
3700
2003 2004 2005 2006 2007 2008 2009 2010
-8%
Lehman’s Bankruptcy
Beginning of Global Recovery
3602
3304
Pre-Global Crisis Trend
400
450
500
550
600
650
700
2003 2004 2005 2006 2007 2008 2009 2010
521
674
-23%
Lehman’s Bankruptcy
Beginning of Global Recovery
Pre-Gobal Crisis Trend
3109
Fiscal Accounts in the US
Fiscal Revenues Primary Expenditure(seasonally adjusted at annual rates,
in bn of 2000 dollars)(seasonally adjusted at annual rates,
in bn of 2000 dollars)
Fiscal Balance(in % of GDP, last 4 quarters)
2700
2900
3100
3300
3500
3700
3900
4100
Mar
-03
Oct
-03
May
-04
Dec
-04
Jul-0
5
Feb
-06
Sep
-06
Apr
-07
Nov
-07
Jun-
08
Jan-
09
Aug
-09
Mar
-10
Lehman’s Bankruptcy
Beginning of Global Recovery
3992
Pre-Gobal Crisis Trend
-22%
3000
3200
3400
3600
3800
4000
4200
Mar
-03
Oct
-03
May
-04
Dec
-04
Jul-0
5
Feb
-06
Sep
-06
Apr
-07
Nov
-07
Jun-
08
Jan-
09
Aug
-09
Mar
-10
Lehman’s Bankruptcy
Beginning of Global Recovery
7.7%
4027
3738
Pre-Gobal Crisis Trend
-12%
-10%
-8%
-6%
-4%
-2%
0%
Mar
-03
Oct
-03
May
-04
Dec
-04
Jul-0
5
Feb
-06
Sep
-06
Apr
-07
Nov
-07
Jun-
08
Jan-
09
Aug
-09
Mar
-10
Lehman’s Bankruptcy
Beginning of Global Recovery-2%
-11%
-6%
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%
2003 2004 2005 2006 2007 2008 2009 2010
Lehman’s Bankruptcy
Beginning of Global Recovery
18%
12%
13%
14%
15%
16%
17%
18%
2003 2004 2005 2006 2007 2008 2009 2010
Lehman’s Bankruptcy
Beginning of Global Recovery
14%
18%
-7%
-6%
-5%
-4%
-3%
-2%
2003 2004 2005 2006 2007 2008 2009 2010
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)
2600
3000
3400
3800
4200
4600
2003 2004 2005 2006 2007 2008 2009
Lehman’s Bankruptcy
6.5%
Pre- Crisis Global Trend
2500
3000
3500
4000
4500
5000
5500
6000
2003 2004 2005 2006 2007 2008 2009
Lehman’s Bankruptcy
14.1%
2000
2500
3000
3500
4000
4500
5000
5500
2003 2004 2005 2006 2007 2008 2009
Lehman’s Bankruptcy
-19.9%
Pre- Crisis Global Trend
Pre- Crisis Global Trend
19%
8%
9%
14%
0%
7%
14%
21%
GDP: 11.7%
2003-2007 2008-2009
Change in Sources of Growth in China(Annual Growth)
Investment Consumption PublicExpenditure
Exports
0%
16%
9% 9%GDP: 9.3%
Exports Investment Consumption PublicExpenditure
0%
7%
14%
21%
Fiscal Accounts in China
Fiscal Revenues(in bn of 2000 Yuan) (in bn of 2000 Yuan)
Primary Expenditure Fiscal Balance(in % of GDP)
Lehman’s Bankruptcy
1900
2550
3200
3850
4500
5150
5800
2003 2004 2005 2006 2007 2008 2009
1.9%
Pre-Crisis Global Trend
2100
3200
4300
5400
6500
2003 2004 2005 2006 2007 2008 2009
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%
2003 2004 2005 2006 2007 2008 2009
0.6%
-2.8%
Lehman’s Bankruptcy
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%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Mar
-10
Lehman’s Bankruptcy
11%
6%
35%
40%
45%
50%
55%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Lehman’s Bankruptcy
54% 54%
35%
40%
45%
50%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
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%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Mar-10
11.0%
4.5%
-6.5%
-7%
-6%
-5%
-4%
-3%
-2%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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%
2006 2010
4.0%
3.8%
7.8%
51%
49%
1.6%
4.7%
6.2%
25%
75%
Share
Share
Share
Share
Emerging Economies
Industrial Countries
3.6%
5.2%
2.8%
-0.6%
4.8%
-1%
0%
1%
2%
3%
4%
5%
6%
2003 2004 2005 2006 2007 2008 2009 2010
Period Average:4.7%
Period Average: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 goodsCapital goods
Consumergoods
Raw materials
Intermediate goods
6.8
5.4
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
2006 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
-07
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-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%
3m 6m 2y 3y 5y 10y 30y
4.9%4.8%
4.1%
0.14%
2006
2009
Commodity Prices(Annual Average, 2005=100)
Oil Food
Source: IMF
Metals
100
110
120
130
140
150
160
2006 2010
20%
100
110
120
130
140
150
160
2006 2010
28%
100
110
120
130
140
150
160
2006 2010
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)(quarterly, seasonally adjusted, bn
of Pesos of 2003)
4900
5500
6100
6700
7300
Mar-03 May-04 Jul-05 Sep-06 Nov-07 Jan-09 Mar-10
Beginning of Global Recovery
-14.0%
1300
1700
2100
2500
Mar-03 May-04 Jul-05 Sep-06 Nov-07 Jan-09 Mar-10
Beginning of Global Recovery
1600
2000
2400
2800
3200
3600
Mar-03 May-04 Jul-05 Sep-06 Nov-07 Jan-09 Mar-10
Beginning of Global Recovery
-16.3%
-24.3%Pre-Global Crisis Trend
Pre-Global Crisis Trend
Pre-Global Crisis Trend
Lehman’s Bankruptcy
Lehman’s Bankruptcy
Lehman’s Bankruptcy
Gross Domestic Product Imports
Aggregate Supply in Mexico
(quarterly, seasonally adjusted, in bn of Pesos of 2003) (quarterly, seasonally adjusted, in bn of Pesos of 2003)
7400
7900
8400
8900
9400
9900
Mar-03 May-04 Jul-05 Sep-06 Nov-07 Jan-09 Mar-10
Beginning of Global Recovery
-10.1%
1900
2200
2500
2800
3100
3400
3700
4000
Mar-03 May-04 Jul-05 Sep-06 Nov-07 Jan-09 Mar-10
Beginning of Global Recovery
-29.2%
Lehman’s Bankruptcy
Lehman’s Bankruptcy
Pre-Global Crisis Trend
Pre-Global Crisis Trend
Aggregate Demand in Brazil
(quarterly, seasonally adjusted, average 1995=100)
Private Consumption ExportsTotal Investment(quarterly, seasonally adjusted,
average 1995=100)(quarterly, seasonally adjusted,
average 1995=100)
90
105
120
135
150
165
180
2003 2004 2005 2006 2007 2008 2009 2010
Lehman’s Bankruptcy
+0.2%
Beginning of Global Recovery
100
110
120
130
140
150
160
170
2003 2004 2005 2006 2007 2008 2009 2010
Lehman’s Bankruptcy
Beginning of Global Recovery
+3.2%
160
190
220
250
280
310
340
2003 2004 2005 2006 2007 2008 2009 2010
Lehman’s Bankruptcy
Beginning of Global Recovery
-26%
Pre-Global Crisis Trend Pre-Global
Crisis Trend
Pre-Global Crisis Trend
Gross Domestic Product(quarterly, seasonally adjusted, average 1995=100)
Imports(quarterly, seasonally adjusted, average 1995=100)
Aggregate Supply in Brazil
110
120
130
140
150
160
2003 2004 2005 2006 2007 2008 2009 2010
Lehman’s Bankruptcy
Beginning of Global Recovery
0%
90
120
150
180
210
240
270
2003 2004 2005 2006 2007 2008 2009 2010
Lehman’s Bankruptcy
Beginning of Global Recovery
-2.2%
Pre-Global Crisis Trend
Pre-Global Crisis Trend
7.7%
Change in Sources of Growth in Brazil(Annual Growth)
2003-2007 2009
7.7%
6.9%
4.4%
3.1%
0%
3%
6%
9%
Exports Investment Consumption Public Expenditure
GDP: 4.2%
-4.1%
3.5%
5.6%
-5%
-3%
-1%
1%
3%
5%
7%
9%
Exports Investment Consumption Public Expenditure
GDP: 4.4%
Source: INEGI
60
70
80
90
100
110
120
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
-10
04-07 Average: 105
116
12%
Source: Getulio Vargas Foundation
30
35
40
45
50
55
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
-10
04-07 Average: 52
51
-2%
Mexico Brazil(Sep-05=100)(Jan-03=100)
Forward Looking Indicators: Consumer Confidence
Brazil
90
95
100
105
110
115
120
125
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
-10
05-07 Average: 106
15%
122
Source: Getulio Vargas Foundation
(Business Confidence Index, Sep-05=100)
Mexico
75
80
85
90
95
100
105
110
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
03-07 Average: 101
86
-15%
Source: INEGI
(Producer Confidence Index, Jan-03=100)
Forward Looking Indicators: Business Confidence
(Dec-06=100)
Mexico Brazil(Dec-06=100)
85
90
95
100
105
110
115
120
125
130
Dec
-06
Mar
-07
Jun-
07
Sep
-07
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Jun-
10
60
65
70
75
80
85
90
95
100
105
Dec
-06
Mar
-07
Jun-
07
Sep
-07
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Jun-
10
109
74
-26%
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
Com
mod
ity E
xpor
ts(%
of G
DP
)
Investment / Exports to Industrial Countries
Cluster Analysis
-1.5
-1
-0.5
0.5
1
1.5
2
2.5
0
-1.5 -1 -0.5 0 0.5 1 1.5 2 2.5
“Mexican Type” Cluster
“Brazilian Type” Cluster
The Aftermath of the Global Financial Crisis: Two Latin Americas?
“Mexican Type”
MexicoBahamasBarbadosBelizeCosta RicaDominican Rep.El SalvadorGuatemalaGuyanaHondurasJamaicaNicaraguaPanamaSuriname
“Brazilian Type”
Brazil
Argentina
Bolivia
Chile
Colombia
Ecuador
Paraguay
Peru
Trinidad and Tobago
Uruguay
Venezuela
Clusters
Net
Com
mod
ity E
xpor
ts(%
of G
DP
)
Investment / Exports to Industrial Countries
Cluster Analysis
-1.5
-1
-0.5
0.5
1
1.5
2
2.5
0
-1.5 -1 -0.5 0 0.5 1 1.5 2 2.5
“Mexican Type” Cluster
“Brazilian Type” Cluster
The Aftermath of the Global Financial Crisis: Two Latin Americas?
Average Growth 2010-2011*
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
2010-2020: 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:
BRICsRest of
Emerging Markets
Industrial Countries
Change in Latin America's Trade Patterns
Variation 2006-2009(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%
2006
2009
IndustrialCountries
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 2006-2009
BRICs includes Brazil, Russia, India and China
2006
2009
IndustrialCountries
42% 41%
BRICs
18%
Rest of EMs
Exports by Destination
113%
8%
-5%-10%
10%
30%
50%
70%
90%
110%
Total Exports: 11%
BRICsRest of
Emerging Markets
Industrial Countries
9%
49%42%
BRICs
Rest of EMsIndustrialCountries
Trade Patterns in Mexico
Variation 2006-2009
BRICs includes Brazil, Russia, India and China
2006
2009
Exports by Destination
93.6%
1.4% 5%BRICs
Rest of EMs
IndustrialCountries
IndustrialCountries
BRICs2.6%
91.6%
5.8%Rest of EMs
63%
8%
-10%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Total Exports: -7.8%
BRICsRest of
Emerging Markets
Industrial Countries
∆ Ext. Demand å= * ja jGDP∆
ja = Exports to Country j / Total Exports= GDP Variation of country jjGDP∆
R2= 70%
Exports Variation(left axis)
External Demand Variation
(right axis)
-1%
0%
1%
2%
3%
4%
5%
0%
-10%
-5%
5%
10%
15%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2009
Industrial Countries
57% 26%
BRICs
17%
Rest of EMs
2013*
Industrial Countries
BRICs
Rest of EMs52% 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
2010-2020: 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-7
112Brazil 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)
0
50
100
150
200
250
2003 2004 2005 2006 2007 2008 2009 2010
205 204
63
Pre Global -Crisis Maximum Level: 237
204
Mar-2010
97
Dec-2006
Billions of US$
Beginning of Global Recovery
Lehman Brothers Bankruptcy
Inflows Shares
GDP Shares
Argentina1%Others
22%
Mexico22%
Brazil55%
Mexico24%
Others22%
Brazil45%
Argentina 8%
Capital Flows to Latin America
Pre-Global Crisis Trend
35
52
69
86
103
120
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
102
65
Beginning of Global Recovery
Lehman’s Bankruptcy
Dec-06
LAC-7
Billions of US$
26Brazil
65
Mar-10
19
61
Composition of Capital Flows to Latin America
Financial Inflows(LAC-7, Cumulative quarterly capital inflows,
billions of US$)
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
-50
-25
0
25
50
75
100
125
150
Beginning of Global Recovery
Lehman’s Bankruptcy
103
138
-30
FDI Inflows(LAC-7, Cumulative quarterly capital inflows,
billions of US$)
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$
85Brazil
138
Mar-10
34
36
(LAC-7)
Pre Global -Crisis Maximum Level: 134
Pre Global -Crisis Maximum Level: 110
Pre-Global Crisis Trend
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 EMsBRICs
BRICs
Brazil
IndustrialCountries
IndustrialCountries
0.3% 1.0%
98.7%
Rest of EMsBRICs
1.1% 0.6%
98.8%
Rest of EMsBRICs
Mexico
IndustrialCountries
IndustrialCountries
ManufacturingIndustries
Agriculture
Agriculture
2006
(% of total FDI)
2009
Capital Flows to Latin America: FDI by Sector
Peru Mexico
Agriculture
8%Services
19%
43%
Extractive Activities
30%
ManufacturingIndustries
50%
48%
0%
2%
Extractive Activities
Services
ManufacturingIndustries
0%
57%
42%
0%
Services
Extractive Activities
38%
57%
0%
5%
Agriculture Extractive Activities
ManufacturingIndustries
Services
2010-2020: 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
• Speed
• Power
• Automaticity
• Ex-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. 2009. “A Stability Pact à la Maastricht for Emerging Markets” , www.voxEU.org 2. Izquierdo, A. and Talvi, E. (coords.), 2009. “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.), 2010. “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*
2010-2020: 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 EMs16%
China17%
LAC12%
Middle East23%
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%)
LosersWinners
2009
52%
25%
2% 0%
-48%
-67%
-76%-80%
-60%
-40%
-20%
0%
20%
40%
60%
LAC EA-5 India China Rest of EMs
EM Europe
Middle East
(share in total capital inflows to EMs)
Variation 2006- 2009 (% 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 7th, 2010
Prepared for Presentation at the XLIV FELABAN Annual AssemblyPunta 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:
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