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SHIFTING WEALTH, CHINA AND THE LATIN AMERICAN CHALLENGE An OECD Perspective
Rolando Avendano OECD Development Centre
Universidad Autonoma de Mexico Mexico City – May 29 2012
2
Outline
1 Shifting Wealth: continuing despite hurdles
2 China and Latin America: recent dynamics
3 Overcoming the middle income trap
4 After the diagnostic: public policies to overcome the challenge
3
4
New Geography of Growth: The Four-speed World in the 1990s
Source: OECD Development Centre, Perspectives on Global Development 2012
The disappointing reality
5
A New Geography of Growth: The Four-speed World in the 2000s
Goodbye divergence, hello convergence?
Source: OECD Development Centre, Perspectives on Global Development 2012
6
Global middle class consumption: catching up in the developing world
Note: Global middle class consumption is defined here as household consumption between USD 10 and USD 100 PPP/day. Projections hold most recent distribution constant (from PovcalNet database) and assume consumption equals income growth (projected by a Cobb-Douglas production function, a model of RER convergence based on the Balassa-Samuelson model, and UN population projections). Source: OECD (2011) calculations based on Kharas (2010).
Global middle class consumption 2000-2050 (% of total)
7
History matters: Chinese economy in the long run
0 100
1 000
10 000
100 000
1 000 000
10 000 000
100 000 000
1700
1730
1760
1790
1820
1850
1880
1910
1940
1970
2000
2030
Comparative Levels of GDP, China and the United States, 1700-2030
(million 1990 International dollars)
USA
China
Source: OECD (2010), and Maddison (2007).
Gross Value Added and Labour Productivity in Agriculture, 1952-2003
(Index 1952=1)
Value added
Labour productivity
8
Myth: The main source of China’s compe66ve advantage is cheap labour
0
10
20
30
40
50
60
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Percen
t of G
DP
Investment in China
Investment in Fixed Assets
Gross fixed capital forma@on
0
10
20
30
40
50
60
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Percen
t a year
Return to Capital before and aAer taxes
Base case
Excluding urban residen@al housing, including inventories, before taxes
Excluding urban residen@al housing, including inventories, aHer taxes
Fixed Capital Investments in China as % of GDP and Return to Capital (1980-2006)
Source: Bai, Chong-‐En. C. Hsieh and Y. Qian. “The Return to Capital in China”. NBER Working Paper 12775. Na@onal Bureau of Economic Research. December 2006. Based on China Sta@s@cal Yearbook.
9
Shifting Wealth and World Development
Shifting wealth and world development
• Analogy: Compare the world economy with a high jump event in track and field athletics. With the sustained growth of large emerging economies, the world economy has been moving from Straddle to Fosbury technique. World economy is more complex, but it can jump higher – grow faster – than before.
• What will be the consequences of Fosbury for low and middle-income developing countries, the feet in the metaphor?
10
Herfindahl-Hirschman Index of concentration by Product
Note: Herfindahl-‐Hirschman index es@mated as the squared sum of market shares of exports of country i to country j on all 4-‐digit levels of goods, corrected by the number of exported goods. Nomenclature SITC Revision 3, 2012.
Source: OECD Development Centre, based on Comtrade (2012).
The rise of China s6ll poses the risk of overspecialisa6on for the region
11
Herfindahl-Hirschman Index of concentration by destination
Note: Herfindahl-‐Hirschman index es@mated as the squared sum of market shares of exports of country i to country j on all des@na@ons, corrected by the number of country parrtners. Nomenclature SITC Revision 3, 2012.
Source: OECD Development Centre, based on Comtrade (2012).
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Argentina Brazil Chile Costa Rica Colombia Dominican Republic
Mexico Peru
Latin America and Caribbean
1990 1995 2000 2005 2010
0
0.05
0.1
0.15
0.2
0.25
China Indonesia India Korea Malaysia
East Asia
1990 1995 2000 2005 2010
Latam more resilient by diversifying its export des6na6ons
12
Export compe66on with China is rela6vely low, with some excep6ons
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Thai
land
Hun
gary
Kore
a, R
ep.
Mex
ico
Mal
aysi
a
Uni
ted
Stat
es
Czec
h Re
publ
ic
Sing
apor
e
Rom
ania
Indo
nesi
a
Turk
ey
Pola
nd
Phili
ppin
es
Bulg
aria
Croa
tia
Japa
n
Indi
a
Slov
ak R
epub
lic
Spai
n
Cost
a Ric
a
Paki
stan
Braz
il
El S
alva
dor
Colo
mbi
a
Gua
tem
ala
Arge
ntin
a
Peru
Uru
guay
Hon
dura
s
Rus
sian
Pana
ma
Chile
Boliv
ia
Vene
zuel
a
Para
guay
Low
com
pet.
H
igh
com
pet.
Export Competition with China for selected countries (2000-09)
Note: CS and CC coefficients calculated with exports of country i and exports of country j (China).
Source: OECD Development Centre, based on WITS Database, 2012 .
13
What about compe66on in regional markets?
Trade Compe66on in South America (2000-‐08)
Note: CS and CC coefficients calculated with exports of country i and exports of country j to a specific region (in this case La@n America).
Source: OECD Development Centre, based on WITS Database, 2010.
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90
Argen@na Bolivia Chile Colombia Ecuador Peru Paraguay Uruguay Venezuela
Coef. Spe
cializa6
on ((0-‐1)
Brazil vs China Coef. of Specializa6on
14
Outline
1 Shifting Wealth: continuing despite hurdles
2 China and Latin America: recent dynamics
3 Overcoming the middle income trap
4 After the diagnostic: public policies to overcome the challenge
15
Economic growth has been relatively strong since 2003
-‐ 6.0
-‐ 4.0
-‐ 2.0
0.0
2.0
4.0
6.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
LAC OECD
Source: Own calculations based on ECLAC (2011) and OECD (2011), forecast as of November 2011.
• No decoupling
LATAM is still high beta. Correlation with OECD growth: 0.79
• But higher alpha?
Since 2004 LAC has grown 2.6 pps per annum more than the OECD
Annual real GDP growth by region (in percent)
16
Fast recovery in LATAM with no impact so far on potential growth
Source: Own calculations based on ECLAC, OECD and World Bank data.
• Impact was strong
Peak to through: 4.6 pps in LATAM versus 5.3 in OECD
• But swift recovery in LATAM
GDP reached pre-crisis GDP:
- 6 quarters after peak in LATAM
- In the OECD it took 15 quarters.
2011 Q3 (last figure):
- LAC-7 is 8.2 pps above peak
- OECD just 2.6 pps
Average annual growth since through:
- 4.3% LAC-7
- 2.3% in OECD
Quarterly real GDP (seasonally adjusted) Peak = 100
9092949698
100102104106108110
t-‐4
t-‐3
t-‐2
t-‐1 t
t+1
t+2
t+3
t+4
t+5
t+6
t+7
t+8
t+9
t+10
t+11
t+12
LAC-‐7 OECD
17
The global risk cycle is a key driver of LATAM business cycle
-5
-4
-3
-2
-1
0
1
2
3
0
10
20
30
40
50
60
70
80
98 99 00 01 02 03 04 05 06 07 08 09 10 11
Common Factor LAC-7 growth (LHS)VIX (RHS)
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Argentina Brazil Chile Colombia Mexico Peru Venezuela
Common factor VIX
Source: Own calculations based on Datastream.
Quarterly LAC-7 growth (y/y) and VIX Simple correlation coefficients
18
What is explains this resilience: Good policies or good luck?
Three main factors explain the new dynamics in the region:
• A lesson learnt the hard way: sustainable fiscal policy & stable monetary policy • Exposure versus resilience: the role of trade and financial openness
• The emergence of China: differences in head and tail winds within the region
19
Real channels: more exposure to external shocks
0.0
0.5
1.0
1.5
2.0
2.5
1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007
ARG BRA CHL COL CRI DOM MEX PER VEN
Exports contribution to growth Trade openness Remittances
Source: OECD (2010).
Current account exposure index
Note: Each indicator is scaled between 0 and 1, with higher values indicating a larger exposure. "
20
0.0
0.5
1.0
1.5
2.0
2.5
1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007
ARG BRA CHL COL CRI DOM MEX PER VEN
Current account deficit Debt/GDP Chinn and Ito index
External finance: more openness but mixed exposure
Source: OECD (2010).
Financial exposure index
Note: Each indicator is scaled between 0 and 1, with higher values indicating a larger exposure. "
21
Recovery in Latin America: What explains it?
Rela6ve Importance for LAC recovery
Note: Model includes leverage, exports, trade openness, BIS foreign claims to European banks, Chin-Ito index, financial integration index, budget balance, public debt, current account balance, asset and liabilities over GDP, net position,
Source: Avendano and Daude (forthcoming)
22
Solid fiscal positions are reflected by ratings
Source: Standard and Poorʼs, 2012 "
23
Recovery since the crisis & trade competition with China
Argentina
Bolivia
BrazilChile
Colombia
Costa Rica
El Salvador
Guatemala
Mexico
Panama
Paraguay Peru
Venezuela
-‐5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8Recovery since pre-‐crisis pe
ak (%
of p
eak level)
Coefficient of comformity (higher values = more competition with China)
Source: Datastream.
24
…with diverging effects across the continent
80
85
90
95
100
105
110
115
120
125
130
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
South America Central America
Source: OECD (2012).
Terms of trade (2005 = 100)!
25
Short-term outlook: economic growth
GDP growth in 2011 and monthly forecasts for 2012!
Source: Consensus forecast.
Growth moderation for 2012
• Partly policy-induced
• Euro-area problems are responsible for 0.5 – 1.0 pps reduction.
• Mainly through lower external demand.
• Average growth forecasts:
LAC Total OECD
2012 3.7 1.6
2013 4.0 2.2
0
1
2
3
4
5
6
7
8
9
Argentina Brazil Chile Colombia Mexico Peru Venezuela
2011 growth Mar-‐11 Jun-‐11 Sep-‐11 Dec-‐11 Feb-‐12
26
Outline
1 Shifting Wealth: continuing despite hurdles
2 China and Latin America: recent dynamics
3 Overcoming the middle income trap
4 After the diagnostic: public policies to overcome the challenge
27
1968 2002
Product Space: The “Structure” of export profiles
Bangladesh Korea
garments
Number of exported goods: Number of exported goods:
EXPY: EXPY: Poten@al EXPY: Poten@al EXPY:
54
6728 US$ 5168 US$
53
7501 US$ 5425 US$
28
Diversification vs Upgrading: Asia
• Large Asian markets: “45º line trackers”.
• Very low star@ng levels of diversifica@on and sophis@ca@on (except CHN).
• The size of the economy allows for developing a wide array of capabili@es.
• High diversifica@on, although a more limited record in terms of upgrading.
Source: Jankowska, A. Nagengast, A., Perea, J.R. “The Product Space and the Middle Income trap: Comparing Asia and Latin American Experiences. OECD Development Centre Working Paper No. 311.
29
• “2-‐stage structural transformers” (KOR, TWN): early and –at @mes-‐ intense increase in diversifica@on, to later focus on upgrading, while maintaining or even reducing the number of sectors where they par@cipate.
• Smaller countries (SGP, MYS) unable to reach the same level of diversifica@on, but successfully placing themselves in high Expy industries.
Diversification vs Upgrading: Asia
Source: Jankowska, A. Nagengast, A., Perea, J.R. “The Product Space and the Middle Income trap: Comparing Asia and Latin American Experiences. OECD Development Centre Working Paper No. 311.
30
Ø Central America follows a roughly similar palern, with CRI reaching a higher stage in product sophis@ca@on.
Diversification vs Upgrading: Latin America
Source: Jankowska, A. Nagengast, A., Perea, J.R. “The Product Space and the Middle Income trap: Comparing Asia and Latin American Experiences. OECD Development Centre Working Paper No. 311.
31
Adapta6on strategies towards Chinese compe66on: Looking at the firm
Source: Alonso, A. Avendano, R. Estrada, J. “Adapting to the Rise of China: How Can Latin American Companies Succeed? ”. OECD/World Economic Forum Working Paper. 2009.
High value-‐added niche to achieve global scale Products with high vola6lity and customiza6on needs
32
La6n American companies have started to adapt to new value chains
Source: Alonso, A. Avendano, R. Estrada, J. “Adapting to the Rise of China: How Can Latin American Companies Succeed? ”. OECD/World Economic Forum Working Paper. April 2008.
Upstream value chain integra6on
33
Outline
1 Shifting Wealth: continuing despite hurdles
2 China and Latin America: recent dynamics
3 Overcoming the middle income trap
4 After the diagnostic: policies to overcome the challenge
34
Next fiscal steps: reducing pro-cyclicality
-‐0.06
-‐0.04
-‐0.02
0.00
0.02
0.04
0.06
0.08
-‐0.30 -‐0.20 -‐0.10 0.00 0.10 0.20
Variatio
n of cyclically adjusted primary
balance
Output gap
MEX
CHL
URUARG
CRI PER
COL
BRA
-‐0.06
-‐0.05
-‐0.04
-‐0.03
-‐0.02
-‐0.01
0.00
0.01
0.02
0.03
0.04
-‐0.10 -‐0.05 0.00 0.05 0.10
Variatio
n of cyclically adjusted primary
balance
Output gap
Output gap and change in structural balance 1990 - 2009! Output gap and change in structural balance in 2009!
Source: Daude et al (2011).
35
Education: focus on quality and equity
100806040200
20406080
100Argentina
Brazil
Chile
Colombia
Mexico
Panama
Peru
Trinidad and
Tob
ago
Uruguay
Latin
America and the
Carib
bean
OECD
Percen
tage of students
Level 1 Below level 1 Level 2 Level 3 Level 4 Level 5
Distribution of test score in PISA reading tests, according to socioeconomic and cultural household background quartiles, 2009!
Source: Based on data from PISA 2009. Note: The distribu@on by performance levels in La@n America and OECD refers to the simple mean of alainment level weighted at the na@onal level for par@cipa@ng countries in PISA 2009.
36
Innovation: Increase efforts to strengthen national innovation strategies
China
India
Russian Federation
South Africa
0
1
2
3
4
5
0 10 20 30 40 50 60 70 80 90
Investmen
t in R&
D (% of G
DP)
Investment in R&D financed by the private sector (%)
Latin America and the Caribbean OECD Other emerging countries
R&D Investment as percentage of GDP!
37
0.0
500,000.0
1,000,000.0
1,500,000.0
2,000,000.0
2,500,000.0
3,000,000.0
Value Initial Contract Value Renegotiations
Value including renegotiations
Infrastructure: beyond resources, better regulation and coordination
Source: Bitrán E., S. Nieto-‐Parra and J.S. Robledo (2011). Note: Values in Millions of constant Pesos of Dic/09
Colombia: Cost increase from renego6a6ons
38
Summing up
• Shifting Wealth is an established phenomenon with sustained effects, and Latin America needs to position in it.
• LATAM resilience: countries have built more buffers. Financial and trade openness
have increased exposure to external shocks.
• Adaption strategies to Chinese competition are heterogeneous, depending on the sector and firms and country capabilities.
• Overcoming the “middle income trap” that Latin America is facing requires active public policies in innovation, education and infrastructure.
• Breaking away from the middle income trap has, almost always, encompassed an upgrading of the export base towards manufacturing.
39
Thank you! www.oecd.org/dev
40
ANNEX
41
Access to Finance: A priority for firms
Domes6c Credit to Private Sector (share of GDP)
Source: World Bank WDI
42
Inflation remains low, stable and predictable in IT economies
-‐10-‐505
10152025303540
1/1/20
07
6/1/20
07
11/1/200
7
4/1/20
08
9/1/20
08
2/1/20
09
7/1/20
09
12/1/200
9
5/1/20
10
10/1/201
0
3/1/20
11
8/1/20
11
1/1/20
12
CPI change (YoY
)
Inflation -‐ Targeting countries
Brazil Chile ColombiaMexico Peru
-‐10-‐505
10152025303540
1/1/20
07
6/1/20
07
11/1/200
7
4/1/20
08
9/1/20
08
2/1/20
09
7/1/20
09
12/1/200
9
5/1/20
10
10/1/201
0
3/1/20
11
8/1/20
11
1/1/20
12
CPI change (YoY
)
Inflation -‐ Non targeting countries
Argentina Venezuela
Source: Datastream.
43
In inflation targeting economies monetary policy was used counter-cyclically
0
5
10
15
20
25
1/1/20
07
6/1/20
07
11/1/200
7
4/1/20
08
9/1/20
08
2/1/20
09
7/1/20
09
12/1/200
9
5/1/20
10
10/1/201
0
3/1/20
11
8/1/20
11
1/1/20
12
rate (%
)
Interest rates -‐ Targeting countries
Brazil Chile Colombia Mexico Peru
0
5
10
15
20
25
1/1/20
07
6/1/20
07
11/1/200
7
4/1/20
08
9/1/20
08
2/1/20
09
7/1/20
09
12/1/200
9
5/1/20
10
10/1/201
0
3/1/20
11
8/1/20
11
1/1/20
12
rate (%
)
Interest rates -‐ Non targeting countries
Argentina Venezuela
Source: Datastream.
44
Source: Datastream.
…without losing credibility
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Brazil
0.0
1.0
2.0
3.0
4.0
5.0
ChileInflation (y-‐on-‐y)Expected inflation (12-‐months ahead)Target
0.00.51.01.52.02.53.03.54.04.55.0
Colombia
0.00.51.01.52.02.53.03.54.04.55.0
Mexico
0.00.51.01.52.02.53.03.54.04.55.0
Peru
45
The Chinese economy today: Technological upgrade
Source: Alonso, A. Avendano, R. Estrada, J. “Adapting to the Rise of China: How Can Latin American Companies Succeed? ”. OECD/World Economic Forum Working Paper. 2009.
46
Medium term objective: Macro performance and risk perception
0
500
1000
1500
2000
2500
1/1/20
07
7/1/20
07
1/1/20
08
7/1/20
08
1/1/20
09
7/1/20
09
1/1/20
10
7/1/20
10
1/1/20
11
7/1/20
11
1/1/20
12
bps
Spreads -‐ Non inflation targeting countries
Argentina Venezuela
0
100
200
300
400
500
600
1/1/20
07
7/1/20
07
1/1/20
08
7/1/20
08
1/1/20
09
7/1/20
09
1/1/20
10
7/1/20
10
1/1/20
11
7/1/20
11
1/1/20
12
bps
Spreads -‐ Inflation targeting countriesBrazil Chile ColombiaMexico Peru
Source: Datastream.
47
Fiscal policy does little to reduce inequalities in Latin America
• Tax revenues are biased towards non-progressive taxes
• In particular, personal income tax is low in the region
• Low l eve l s o f soc i a l expenditures
• Targeting could also be improved
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
Argentina
Brazil
Chile
Colombia
Mexico
Peru
OECD
Market income After taxes and transfers
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
Chile
Mexico
OECD
Market income
+ Cash transfers
-‐ Income tax
+ Education (in-‐kind)
+ Health (in-‐kind)
Income inequality and fiscal redistribu6on effects of different policy instruments (GINI indices)
Source: OECD (2008a) for non-‐La@n American OECD countries, OECD (2008b) for Argen@na, Brazil, Colombia and Peru, and es@ma@ons based on household surveys for Chile and Mexico.