Latin America goes global

2

Latin America Today

2014

Number of Countries 32

Total GDP (US$ BN) 5,800

Total Population (MM) 525

Toal Imports (US$ BN) 1092

Total Exports (US$ BN) 958

Poverty headcount ratio at $2

a day (% of population) 9*

Cities over 5 MM Pop 8

Source: IMF and World Bank

*/ Poverty in 2011; based on 1990 income classification

3

Latin America in 1950-1980

Many countries were governed through military dictatorships.

Nationalism and prevailing economic theory favored

protecting domestic markets and “inward development”.

State intervention was intense, and state-owned corporations

flourished

Populist policies were frequently present

In many cases, macroeconomic stability was lost

Terrorism and armed rebel groups further damaged

economies

Rising population generated high poverty levels

4

Latin America’s 1970s and 1980s showed virtually no progress

0.00

5.00

10.00

15.00

20.00

25.00

30.00

195

0

195

2

195

4

195

6

195

8

196

0

196

2

196

4

196

6

196

8

197

0

197

2

197

4

197

6

197

8

198

0

198

2

198

4

198

6

198

8

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

4

Brazil

Colombia

Mexico

Peru

Chile

China

Barbados

Real Per Capita GDP, 1950-2014

(in thousands of 2005 US$, adjusted by Power Parity Purchase PPP)

Source: University of Pennsylvania/Penn World Tables

5

Most countries showed a downward trend and a

collapse of their economic growth

Cumulative real GDP Growth in Latin America, 1980-1990

(in percentage)

Source: IMF

34.1 30.3 29.9 28.6 26.9

24.1 21.7

19.4

14.4 13.5

8.1 6.0 5.8

-1.2 -3.3 -4.3

-10.0

-22.6

Co

lom

bia

Para

gu

ay

Jam

aic

a

Ch

ile

Ho

nd

ura

s

Co

sta

Ric

a

Bra

zil

Ecu

ad

or

Me

xic

o

Barb

ad

os

Uru

gu

ay

Pan

am

a

Gu

ate

ma

la

Ven

ezu

ela

Bo

liv

ia

Peru

Arg

en

tin

a

Tri

nid

ad

an

dT

ob

ag

o

6

…Mismanagement caused high inflation

Average inflation between 1980-1990

(in percentage)

Source: IMF

*/ Simple average inflation for Peru and Brazil

1117.7

336.3

65.2 60.8

36.3 27.7 25.6 23.7 23.3 23.0 20.3 17.5 14.5 11.0 5.7 1.8

Peru

Bra

zil

Me

xic

o

Uru

gu

ay

Ecu

ad

or

Para

gu

ay

Co

sta

Ric

a

Co

lom

bia

Ven

ezu

ela

Do

m.

Re

pu

blic

Ch

ile

Jam

aic

a

Gu

ate

ma

la

Tri

nid

ad

an

dT

ob

ag

o

Barb

ad

os

Pan

am

a

7

1985-1995: Structural reforms and a new era

Latin American countries carried out significant structural

reforms to overcome the “lost decade”.

The primary objective was to replace the development

model based on protection of the domestic markets and

state intervention. The policies were oriented to:

Macroeconomic stability: Improve fiscal conditions and control

inflation rates.

Integration: Increase export volume and foreign direct investment.

Privatizations: Reduce the number of state-owned enterprises and

its influence in production, promoting competitive markets.

8

Liberalization of trade regimes and productivity gains in

the infrastructure sector

Import tariff liberalization in Latin

America, 1985-2010

(in percentage)

Source: Eduardo Lora (2012) Inter-American Development Bank

0

5

10

15

20

25

30

35

40

45

198

5

198

7

198

9

199

1

199

3

199

5

199

7

199

9

200

1

200

3

200

5

200

7

200

9

20

10

Share of privatizations by infrastructure

sector, 1990-2009

9

Policies to strengthen the banking system and to

provide financial intermediaries market freedom

Freedom of financial contracts

Source: Eduardo Lora (2012) Inter-American Development Bank

Year of

generalized

liberalization

of interest

rates

Have authorities interfered with the following aspects of

financial contracts? Mandatory

loans to

selected

sectors? Duration

of loans

Amortization

scheme of

loans

Interest

payment

scheme

Maximum

interest rate

of loans

Maximum

interest rate

for loans in

arrears

Brazil 1989 Yes Yes Yes Yes

Chile 1985 Yes Yes

Colombia 1992 Yes Yes Yes Yes Yes Yes

Ecuador 1994 Yes Yes Yes Yes Yes

Guatemala 1995 Yes Yes

Mexico 1988 Yes Yes Yes Yes

Panama Before 1985 Yes Yes

Peru 1991 Yes Yes Yes

Uruguay 1985 Yes Yes

Venezuela 1989 Yes Yes Yes Yes

10

Cumulative real GDP Growth in Latin America, 1990-2000

(in percentage)

Source: IMF

91.6

75.2 72.1

67.8

61.6

47.6 47.2 47.0 44.6

41.9 39.2

32.9 30.4 30.0 29.1 27.1

24.6

10.5 7.4

Ch

ile

Do

m.

Rep

ub

lic

Pan

am

a

Co

sta

Ric

a

Tri

nid

ad

an

d T

ob

ag

o

Peru

Bo

liv

ia

Gu

ate

ma

la

Arg

en

tin

a

Ho

nd

ura

s

Me

xic

o

Co

lom

bia

Bra

zil

Ecu

ad

or

Uru

gu

ay

Ven

ezu

ela

Para

gu

ay

Jam

aic

a

Barb

ad

os

Economic growth exceeded figures from previous decades

11

…and significantly lower levels of inflation

Average inflation between, 2000-2014

Source: IMF

26.0

10.6 10.0 8.6 8.6

6.9 6.9 6.9 6.5 6.1 5.1 4.8 4.4 4.2

3.2 3.1 2.6

Ven

ezu

ela

Jam

aic

a

Do

m. R

ep

ub

lic

Co

sta

Ric

a

Uru

gu

ay

Para

gu

ay

Ecu

ad

or

Tri

nid

ad

an

d T

ob

ag

o

Bra

zil

Gu

ate

ma

la

Bo

liv

ia

Co

lom

bia

Me

xic

o

Barb

ad

os

Ch

ile

Pan

am

a

Peru

12

Reforms contributed to achieve higher productivity

levels

Productivity average growth rate, 1990-2000

(var.% of Total Factor Productivity)

Source: Conference Board

3.12

2.22 1.82

1.31 0.88 0.79 0.73 0.72 0.61 0.50 0.50 0.44

0.01

-0.01

-0.63 -0.78

-1.30 -1.67

Uru

guay

Trin

idad

an

dTo

bag

o

Arg

en

tin

a

Ch

ile

Gu

ate

mal

a

Bra

zil

Pe

ru

Bo

livia

Ve

ne

zue

la

Lati

n A

mer

ica

Do

m. R

ep

ub

lic

Co

sta

Ric

a

Me

xico

Ecu

ado

r

Jam

aica

Bar

bad

os

Co

lom

bia

St. L

uci

a

13

…Ample fiscal stability and discipline generates

confidence and attracts foreign investment

Debt stock reduction in Latin America,

2003-2011

(Current US$ BN)

Source: World Bank

Foreign direct investment in Latin

America, net inflows 2000-2012

(Current US$ BN)

Source: World Bank

0

5000

10000

15000

20000

25000

30000

2003 2004 2005 2006 2007 2008 2009 2010 2011

0

20

40

60

80

100

120

140

160

180

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

14

Notorious progress in poverty reduction

Poverty headcount ratio at $2 a day in PPP, 2005-2014

(in percentage of population)

Source: World Bank

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011 2012

Bolivia Brazil

Chile Colombia

Mexico Peru

15

Unemployment rate exhibits a trend decline, providing

productive sectors with additional workforce

Unemployment rate in Latin America and

the Caribbean, 2004-2014

(in percentage)

Source: OIT

5

7

9

11

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

0

200

400

600

800

1000

1200

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

Exports of good and services in Latin

America and the Caribbean, 2000-2012

(in billions of constant dollars 2005)

Source: World Bank

16

…and contributed to the emergence of Latin

Multinationals

Source: Companies

Company Country Industry

Aje group Peru Alcoholic and nonalcoholic beverages

JBS-Friboi Brasil Meat processing

Vale Brasil Ore carrier

Lan Chile Airlines

Sigdo Koppers Chile Construction, petrochemical and

automobile

Cemex Mexico Building materials

Telmex Mexico Telecommunications

Alfa group Mexico Auto components, petrochemicals,

refrigerated foods, oil and natural gas

ISA Colombia Energy and telecommunications

Tenaris Argentina Manufacturing

Major Latin Multinationals

17

MILA: Subregional integrated market

The Latin American Integrated Market (MILA) began

operating in May, 2011*.

The integration of stock exchanges markets of Chile,

Colombia, Mexico and Peru aims to promote growth of

trading activity and a better exposure of their combined

markets.

Further alignment of trade, tax, and regulatory

environments is being actively pursued.

*/ In december 2014, entry of Mexico to MILA became official.

18

MILA: integrated market

Source: IMF, World Bank, MILA, BOVESPA

MILA Brazil

Number of Countries 4 1

Total GDP (US$ BN) 2,353 2,129

Total Population (MM) 194 206

Toal Imports (US$ BN) 645 335

Total Exports (US$ BN) 613 270

Cities over 5 MM Pop 4 2

Stock Market Cap. (US$ BN) 988 514

19

The top Latin American performers in the Doing

Business Index are the members of MILA

Market capitalization in MILA, 2014

(in billions of dollars)

Source: MILA

153.1

233.0

120.8

481.0

Colombia

Chile

Peru

Mexico

182

157

124

120

115

106

84

83

82

79

73

58

41

39

35

34

3

2

1

Venezuela

Bolivia

Argentina

Brazil

Ecuador

Barbados

Dominican…

Costa Rica

Uruguay

Trinidad & Tobago

Guatemala

Jamaica

Chile

Mexico

Peru

Colombia

Hong Kong

New Zealand

Singapore

Source: World Bank

Ease of doing business World Bank Index, 2015

(rank among 189 countries)

20

86 83

78

73

67

61 61

65

69

26 28

30 30 31 33 34 33

35

58

52

60 60

66

58

53

61

57

72

64

56 58

53

48

56 57

75

69

74

69 68 68 69 69 66

79

20

30

40

50

60

70

80

90

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Perú Chile México Brazil Colombia

Their competitiveness has improved but its

performance is stagnating

Evolution in the Global Competitiveness Index-WEF, 2007-2015

(ranking among the countries)

Source: World Economic Forum

139 131 134 133 142 144 148 N° countries 140 121

21

The pending agenda: more structural reforms

Deceleration in China in recent years and less attractiveness for FDI may lower growth in Latin America.

The need to implement further structural reforms to enhance economic prospects becomes imperative.

Pending policies address developing labor markets and education, establish inclusive economic and political institutions and increase foreign direct investments.

Finally, informality is a distinctive characteristic of the Latin America economy. It is necessary to implement reforms that effectively reduce informality and boost productivity and growth.

22

There is considerable space to implement further

reforms, especially in the labor market

How much of the reform margin has been used

Source: Eduardo Lora (2012) Inter-American Development Bank

*/ The reform margin is calculates as (Xt-X85)/(1-X85), where Xt is the average of the reform index in year t and X85 is the average of

the reform index in 1985

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Total Trade Financial Tax Privatizations Labor

Until 1994

Until 1999

Until 2004

Until 2009

23

The last years, Latin America has shown a slowdown

in productivity

Total Factor Productivity by emerging and developing economies 1990-2014

(index 1990=100)

Source: Conference Board

80

100

120

140

160

180

200

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

Latin America

China

Other Developing Asia

Middle East & North Africa

Sub-Saharan Africa

Russia, Central Asia and Southeast Europe

24

WEF: “There is a sense of urgency for the region to overcome

its productivity challenges to enhance competitiveness”

Global competitiveness index, 2015-2016

(ranking among 140 countries)

Source: World Economic Forum

132

17

106

98

89

86

78

75

73

69

61

57

52

35

3

2

1

Venezuela

Bolivia

Argentina

Dominican…

Trinidad &…

Jamaica

Guatemala

Brazil

Uruguay

Peru

Colombia

Mexico

Costa Rica

Chile

United States

Singapore

Switzerland 1.56

1.11

0.77 0.74

0.52

0.31

Eu

rop

e a

nd

Cen

tral

Asia

Su

b-S

ah

ara

n A

fric

a

Eas

t A

sia

& P

ac

ific

Lati

n A

meri

ca a

nd

the

Ca

rib

bea

n

So

uth

As

ia

Mid

dle

Ea

st,

No

rth

Afr

ica,

an

d P

ak

ista

n

Source: World Bank-Doing Business

Average change in distance to frontier

score between 2013-2014

25

Informality transforms into less-efficient firms, high

worker turnover and a less-educated workforce

Average size of the shadow economy, 1999-2007

(in % of total economy)

Source: Schneider 2012, The Shadow Economy and Work in the Shadow: What do we (not Know?

66.1 63.5

58

50.6 50.5

39 37.3

34.8 33.8 33.4 32.4 30

25.7 25.3

19.3

Bo

liv

ia

Pan

am

a

Peru

Uru

gu

ay

Gu

ate

ma

la

Bra

zil

Co

lom

bia

Jam

aic

a

Ven

ezu

ela

,

Tri

nid

ad

an

d t

ob

ag

o

Ecu

ad

or

Me

xic

o

Co

sta

ric

a

Arg

en

tin

a

Ch

ile

26

That explains the drops in the Labor Market Efficiency

Pillar of the WEF and the slowdown in job creation

Labor Market Efficiency Pillar, 2015-2016

(gains and drops in positions)

Source: World Economic Forum Source: OIT

Expected employment growth by regions

in Latin America, 2013-2019

(in percentage)

-13

-13

-13

-13

-7

-5

-2

-2

-1

0

4

4

6

7

Brazil

Chile

Costa Rica

Peru

Jamaica

Guatemala

Bolivia

Colombia

Dom. Republic

Trinidad and Tobago

Argentina

Venezuela

Uruguay

Mexico

27

THIS WEEK: The Trans-Pacific Partnership (TPP)

After five years of negotiations, the United States, Mexico,

Chile, Peru and 8 other pacific rim nations reached a free

trade agreement.

The TPP ties together roughly 40 percent of the global

economy and it’s estimated that will see more than 18,000

tariffs on American products reduced to zero.

Also, will establish minimum standards for the protection of

intellectual property, workers and the environment.

However, the TPP still needs to be ratified by US Congress

28

Exports of goods and services in Latin

America and the Caribbean, 2000-2015e

(in percent change)

Source: IMF Source: World Bank

Mexico, Chile and Peru total exports of good

and services, 2014

(% of total exports in Latin America and the

Caribbean)

8.0

0.6

2.0

5.0

10.7

7.2

5.6

3.6

-0.1

-9.4

9.8

6.0

2.3 2.0 1.3

4.1

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5e

The Trans-Pacific Partnership (TPP)

30.6

6.3

3.3

Mexico Chile Peru

29

New challenges for LatAm: 2016 and the future

From its average 4% growth in the golden decade, 2015

will probably result in less than 1% growth rate.

The China/commodity pull factors seem to be out of the

game for a long cycle.

Further development will demand better education,

productivity, and overall competitiveness .

Social and political instability may threaten the economy

when fiscal policies tighten to adjust to the “new normal”.

Progress of MILA and other regional integration efforts

will have to endure an adverse cycle.

Thanks