HOW POLICIES CAN DRAMATICALLY CHANGE THE DEVELOPMENT OF EMERGING MARKETS

Alvaro Uribe Vélez

Issues to be addressed

1. The current context of Emerging Markets and the evolution of Latin America 1980-2012

2. Latin America between two policy paths3. The policy challenges in the region4. Lessons from the Colombian Experience

1. The current context of Emerging Markets and the evolution of Latin America 1980-2012

1. The current context of Emerging Markets and the evolution of Latin America 1980-2012

1. Emerging economies have become engines of economic growth.

2. During the last three decades developing countries have experienced a profound transformation driven by two components: On the one hand a rapid demographic transition. Since 1980

the World population has increased by 2.5 billion people and 95 percent of that growth has taken place in the developing World.

The other element has been a dynamic period of sustainable economic growth. In 1980 developing economies represented 33 percent of the World GDP and today that number is closed to 46 percent.

1. The current context of Emerging Markets and the evolution of Latin America 1980-2012

1. By 2050 19 of the top 30 economies by GDP will be countries that we currently describe as ‘emerging’

2. China and India will be the largest and third-largest economies in the world.

3. Eight countries – India, China, Brazil, Russia, Indonesia, Korea, Mexico and Turkey – will be responsible for most of global growth up to 2025

4. Emerging economies will account for 68% of global growth by 2030.

5. In 1980, 5% of goods were sourced globally. By 2000, this was 20%. By 2025, it will be 50%.

6. In 1980, world exports accounted for one-sixth of global GDP. Today it is a quarter. By 2030, it will have risen to a third.

7. By 2030 the urban middle class will rise to 42% of the global population. The number of people with daily income of $10 to $100 a day will rise from 1.8 billion today to 4.9 billion by 2030.

1. The current context of Emerging Markets and the evolution of Latin America 1980-2012

According to FAO: Demand for food could increase 50% by 2030

Demand for water has been projected to rise by 30% between 2000 and 2030

The International Energy Agency has said energy needs will grow by 40% by 2030. According to BP China represents 20.3% of the World Energy

Consumption (The world largest energy consumer in 2010 for the first time over the U.S)

Natural Gas consumption has experience its strongest consumption rate since 1984 (7.4%)

Coal share in world energy consumption has reached its highest level since 1970 (29.6%). China represents 49% of the world coal consumption.

In 2010 Global Biofuel consumption grew by 13.4%

How does Latin America fit in this panorama? Between 1980 and today some changes have occured…

1. The inflation tragedy is over: in 1985 regional inflation average was 159%, today is below 6%. This means that fiscal and monetary prudence have become policy principlkes.

2. Debt is no longer a threat: Debt to GDP ratios in the region have passed from 40% in 2002 to 20.4% in 2009

3. Between 2003 and 2007 the region experienced a growth average of 5%...the highest since 1967-1974

4. Democracy has expanded in the region with few exceptions…

5. Regional exports have increased 160% betwee 2002 and 2010

6. In 2008 the region faced a record number in FDI reaching almost 100 US$billion

1. The current context of Emerging Markets and the evolution of Latin America 1980-2012

1. The current context of Emerging Markets and the evolution of Latin America 1980-2012

Population

Close to 600 million people

Average age between 24 and

28

Per Capita Income in PPP

close to US$10.000

Poverty reduction

64% of our population is a expanding middle class.

During the last decade 40 million people have left

the poverty lineLife expectancy has

increased from 65 to 75 years.

Child mortality has been reduced by 50 per cent.

Literacy rates are above 94%.

Mobile phone penetration has increased by 78 per

cent.Internet access has increased by 33%

Healthcare coverage has increased by 50 percent.

water and sanitation coverage has reached

80%.

Commodities in time of Demand10 percent of the

World oil reserves.

6 percent of the World Gas reserves Almost 50 percent

of the World cooper reserves. 50 per cent of the

World silver reserves.

13% of the World iron reserves

26% of the World fertile land.

24% of the World beef supply.

Bio Reserves

20 per cent of the World

Biodiversity is concentrated in

the Amazon ring.

Almost 50% of the World

potable water supply.

57% of the world primary

forest

Policy Changes match four range of opportunities

The change process and the potential for the years ahead has happen by accident and it is a consequence of the consistency, congruence and sense of urgency that a group of countries have adopted as their policy cornerstone. Brazil, Mexico, Colombia, Chile, Peru and Uruguay represent 70 per cent of the region’s population and 75% of the regional GDP.

This group of countries have common characteristics that explain their outstanding performance:

1. The strengthening of Liberal Democracy

2. The adoption of an institutional Framework in favor of foreign and national investment.

3. The construction of a sound and sustainable social safety net.

4. The expansion of export markets and the commercial integration with the World (FTA’s)

5. A public administration driven by results.

6. A sound Macroeconomic Administration driven by fiscal and monetary prudence.

7. Better regulatory environment

8. Construction of strategic infrastructure.

9. The consolidation of an innovation agenda leaded by an improvement in education.

10. A well capitalized financial sector and the constant expansion of financial services.

Today countries like Panama, Dominican Republic, Costa Rica, Salvador, Guatemala, Honduras, Belize, Paraguay, as well as most of the Caribbean States, are following that line of behavior

1. The current context of Emerging Markets and the evolution of Latin America 1980-2012

Policies have been the root of Latin American Changes

Building Modern

Democracies (5

parameters)Security

Freedoms and Private Initiative

Independent Institutions

Social Cohesion

People Participation

A dynamic Economic

transformation

Investment Target Policies

Maintaining Fiscal and Monetary transformation

Integrate commodity and

knowledge based economies.

Expand export markets

Create an Entrepreneurship culture (Innovation

agenda)

Closing Social Gaps

Improve education (quality, coverage,

vocational)

Insure Universal Healthcare

Formal Job creation

Access to Finance

Climate Change,

Environment and

Energy Sustainabilit

yExpand renewable sources

Install an energy efficiency

conscience

Improve waste management

Protect the Amazon Ring

Reduce Co2 Emissions

1. The current context of Emerging Markets and the evolution of Latin America 1980-2012

Despite the changes that have been achieved some important challenges remain…

2. Latin America between two policy paths

2. Latin America between two policy paths

The regional current Political Map is a “Tale of two cities” like the Charles Dickens Book… (The ALBA and the non Alba Model)

ALBA (Leaders: Venezuela, Ecuador,

Bolivia, Nicaragua and Cuba)

Anti-U.S

Anti-Free Trade

Lack of investment Confidence

Weak institutions

Political Insecurity

Ideology driven countries

Political Polarization

Modern Democratic Center Countries (Brazil, Colombia,

Peru, Chile, México, Uruguay, Paraguay, Panamá, Republic Dominican, Costa Rica, etc)

Cooperation with the U.S

Pro Free Trade

Investment Confidence

Independent Institutions

Political Stability

State Long Term Policies and Mgt by

Results

Organized Party Systems

The Democratic Center takes the lead: • Investment grade countries are in this Group: Mexico, Brazil, Chile, Colombia, Peru and Panama.• Countries with more market access through FTA’S are in this group• Countries with more FDI are in this group• Countries with more Middle Class Expansion are in this group.• Better fiscally sustainable social programs: Chile, Mexico, Brasil and Colombia.Only the group of Countries in the Democratic Center will become the regional active participants of the Emerging Markets Boom…some of the ALBA Members will see some benefits, but without solid long term development agendas, they will face transitory profits…

Venezuela

Inflation

Reduction in oil production

Brain drain

Social conflict

Insecurity

Private initiative in Jeopardy

Bolivia

Loss of citizen support

Quality of live deterioration

Lack of private initiative.

Loss in private investment

Ecuador

Press Liberties in danger

Lack of long term private

investment.

Political stability at the expense of higher tensions.

Oil driven political power

Nicaragua

Institutional deterioration

(Reelection without constitutional

authority)

Corruption

Private initiative: Uncertainty

Shameful Chavistas

2. Latin America between two policy paths

Bad policies are deteriorating the political and economic context in the ALBA Countries….

3. The policy challenges in the region

PeruHumala Challenges

Maintain Investment Confidence(The mining

royalty debate)

Improve social expenditure

targeting

Improve Labor markets• Combat informality

• Improve productivity

Continue with International insertion• Implement the

FTA with USA• Pacific Agenda

with Colombia, Chile and Mexico.

Challenges

Fiscal and Monetary Credibility

Institutional

quality

Capacity to

generate confidenc

e

Solve Public-Private

Conflicts

Trigger FDI

Argentina

Security

Human Insecurity

Legal Insecurity

Political insecurity

Individual Liberties

Property rights at risk

Limit freedom of expression

Limit freedom of

press

Independent

institutions

Courts controlled

by the Executive Branch.

Independent institutions

are controlled

by the Executive

father

One Party controls the Parliament

Citizen participati

on

Limited

Controlled

Instruments vital for political

pressure.

Social Cohesion

Class polarization

Fiscal policy is

unsustainable

Venezuela

Challenges

Regional integratio

n

Urban security

Drug consumpt

ion

Cost of money

Infrastructure

Weak Doing

Business Indicators

Foreign Policy

Brazil

Reform the Police Structure

Citizen participation in the fight

against organized

crime

Strengthen intelligence

Border affairs• Drug

Consumption• Assault Weapons

The security

challenge

Mexico

ChileTwo situations

Characteristics

Economic Stability

Political Stability

Investor Confidence

Innovation and

entrepreneurship agenda.

Quality of live and

opportunities

Youth distrust in Political

Parties and in Government.

Aggressive protests

Dependant on the China

effect

EcuadorThe political condition

Economic

4.5% Fiscal deficit

Oil price has been the driving force.

Investors distrust

4.5% inflation

PoliticalThe President has

concentrated more powers

Conflict with congress and with independent media will

deteriorate as the Government pushes more

interventionist reforms

There is not a clear opposition figure

Urban security has been deteriorating

Bolivia: new problems arise

EconomicPopulism platform loosing

popular support

Fiscal superavit driven by more tax collections

Economic Growth above 4.6% driven by Gas price

Inflation close to 9%

Investors distrust with the exception of foreign

governments corporations

Political2/3 of Congress

controlled by the President Coalition

Hunting of all opposition leaders

Confrontation with Santa Cruz Governor

Ruben Costas.

Next week 56 Supreme Court Judges will be

elected

International

Under the influence of Chavez

Improvement in the dialogue with the U.S

International Market Distrust

Country Homicides per 100K

Hab

Violence cost as % of GDP (Live years

lost due to handicapped

circumstances)

Private sector losses due to

insecurity (% sales)

Violence costs as % of

GDP

Number of gang

members

Number of gangs

Honduras 43 1,31% 4.5% 9.6% 36.000 112

Guatemala

45 1.43% 3.9% 7.7% 14.000 434

El Salvador

58 1.99% 4.5% 10% 10.500 4

Nicaragua

14 0.96% 3.1% 10% 4.500 268

Costa Rica

8 0.58% 3.6% 2.660 6

Panamá 11 0.63% 2.5% 1.385 94

Central America: The security Drama

Violence and organized crime

Not the same stories

A region of different development stories

The 7 giants (Brazil, Mexico, Argentina, Chile, Colombia,

Peru and Uruguay)a) 70 of the Region population.b) 85% of the Region GDPc) Poverty reductiond) High levels of investmente) Commercial integrationf) Institutional stability

Central Americaa) 3% of the Region GDP (US$163 Billion)b) 7% of the Region population (43 million)c) Income inequalityd) Moderate investment levelse) Low tax collectionsf) Fragile energy matrix

Caribbeana) 4% of the Region Populationb) 2% of the Region GDPc) Tourism dependenced) Natural disaster riskse) Low industrial basef) Need for long term access to markets

4. Lessons from the Colombian Experience

Security

28.837 homicides

2882 kidnappings

69 homicides per 100.000 habitants

1645 terrorist attacks

350 mayors out of their municipalities

158 municipalities without police

Economy

Average Economic Growth 1994-2001: 2.1%

GDP per Capita: US$2377

Investment as % of GDP: 16.5%

Exports: US$11.975 million

FDI: US$2.100 million

Inflation: 6.99%

Fiscal balance: -3.2%

SocialUnemployment: 16.2%

Health Coverage: 25 million Colombians.

Pension affiliates: 4.5 million

Poverty: 57%

Education Coverage: Primary 97%, High school:

57%, University: 24%.

Mobil Phone Lines: 4.6 million

Internet coverage: 1.9 million

Ten years ago Colombia was a fragile state…The Colombian Paradox: a long and stable democracy in a permanent threat from terrorist groups, drug dealers and

organized crime…

Colombia faced a Confidence DeficitThe elusive quest for

peaceMany governments exhausted all their

political capital attempting to reach

peace through political dialogue…the result

was military strengthening from illegal armed groups and a rapid growth in

their criminal activities (68% thought the

country was going in a negative track)

Terrorist Groups (Guerrillas and

Paramilitaries) had created a sense of

defeat in the Colombian people.

Fear impacted in the Colombian people

Mindset

The lack of investment

The drain of human capital

The sense of danger in Colombian roads.

The expansion of massive kidnappings created an emotional

domino effect

Building Confidence became our priority

We introduced a comprehensive policy framework…

Social Cohesi

on

Investment with fraternit

y

Democratic Security

Confidence

Security as a Democratic Value

Security for all

Confront all

criminal organizati

ons

Security without martial

law

Security with

freedoms and

human rights

protection

Security in coordinati

on with the people

Investment Target

Security:HumanLegal

Political

Sound Macroeconomic

s

Incentives

Access to

markets

Competitiveness factors:• Infrastructure

• Regulation• Connectivity• Logistical chain

Social Cohesion

Highest quality in education

Universal healthcare

Access to Finance

Stable Jobs and

entrepreneurial spirit

Connectivity

Our policy achievements generated a turning point

Indicator 2002 2010

Homicides 28838 7400

Kidnappings 2882 123

Homicides per 100K Habitants

69 16.3

Terrorist attacks

1645 250

Municipalities without mayors

presence

350 0

Municipalities without

police

158 0

Indicator 2002 2010

Average Economic Growth

2.1% 4.3%

GDP per Capita

2377 5300

Invest % GDP

16.5% 24.6%

Exports US$11.000

US$ 39.000

FDI US$2.100

US$ 7.000

Inflation 6.9% 2.5%

Indicator 2002 2010

Unemployment

16.2% 11.6%

Health Coverage

25.1 million

43.1 million

Pension affiliates

4.5 million 7.1 million

Poverty 57% 38%

Education coverage (Primary, Hs, University)

97%57%24%

100%79.4%35.5%

Mobile phone users

4.6 million lines

41 million lines

• Reached the highest economic growth in more than 20 years.

• The largest education, health and connectivity coverage in its history.

• The largest poverty reduction in Colombian history

• The biggest FDI rates in history• The lowest violence records in 30

years

• Expanded the middle class• Highest exports in

Colombian History.• Paramilitary groups

dismantled• FARC structure severely

dismantled• Per Capita income more

than doubled

Colombia’s current challenges

Security

Maintain Macro-Vision and Micro-

Management

Continue dismantling all

terrorist organizations

Continue dismantling drug cartels apparatus.

Strengthen Citizen Security agendas

with local authorities

Economic

Face new trends of currency

appreciationMaintain and

increase FDI flows (Security,

incentives and stability rules)Fiscal Policy to

face new countercyclical

challenges

Increase tax collections

Expand new trade markets through

FTA’s

Social Cohesi

onFight labor

informality and create quality jobs

Insure education and health quality

Expand vocational training coverage

Create Entrepreneurial Family Transfers

program

Political

Judicial reform.

Strengthen Democratic Center

Improve local institutional

capacity

New law implementation

(Victims and land)

Prevent the emergence of

populist movements

WWW.ALVAROURIBEVELEZ.COM

Miami March 2012