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The Political Economy of Integration Agreements and the
Crisis: Coping Strategies for Small States
Carol WiseUniversity of Southern California
Summary Burden of the crisis has fallen on
international trade Financial sectors and GDP growth took a hit
but are rebounding quickly The crisis has helped to highlight reform
success and effective strategies already underway
My focus: Chile & Peru
Summary: Chile & Peru Unilateral trade liberalization (Chile 1970s,
Peru 1990s) Pro-active approach to bilateral & mini-lateral
trade negotiations/agreements Simultaneous reform and modernization of
services Liberal FDI regime
Export-led Development Model Chile:
FTAs with Australia, Canada, China, Colombia, Costa Rica, El Salvador, Honduras, EFTA, Japan, Mexico, MERCOSUR, Panama, Peru, Republic of Korea, U.S.
Economic Association Agreements with Brunei, New Zealand, Singapore, EU
Partial Preferential Agreements: India, Peru, Ecuador, Colombia, Venezuela, Bolivia, Argentina
Export-led Development Model Peru:
FTAs: Canada, Chile, Singapore, U.S., (Signed but not yet in force: China, Thailand)
Framework Agreements: MERCOSUR-Peru, MERCOSUR-Andean Community
Partial Preferential Agreements: Andean Community – Argentina, Andean Community – Brazil, Chile, Cuba, Mexico
Merchandise Export Growth(percentage change in US$, seasonally adjusted annual
rates)
Developing Countries East Asia and the Pacific China Eastern Europe South Asia Latin America
-80
-60
-40
-20
0
20
40
60
80
100
1Q08
2Q08
3Q08
4Q08
1Q09
ECLAC – Latin America: the missing financial crisis p.12
International Bank Loans Outstanding
(change in billions of US$ adjusted for exchange rate changes)
Developing Countries Asia China India Eastern and Central Europe Russia Latin America Brazil
-250
-200
-150
-100
-50
0
50
100
150
200
1Q08
2Q08
3Q08
4Q08
1Q09
ECLAC – Latin America: the missing financial crisis p.12
Latin America's GDP Growth Deceleration
(percentage)
Latin America Mexico Argentina Peru Brazil Chile
-15
-10
-5
0
5
10
15
2007
2008
2009F
Cumulative Deceleration
ECLAC – Latin America: the missing financial crisis p.17
Chile vs LAC-7 GDP Growth and Investment Growth
2004 2005 2006 2007 2008
0
5
10
15
20
25
30
Chile GDP Growth (%)
LAC-7 GDP Growth (%)
Chile Investment Growth (%)
LAC-7 Investment Growth (%)
IADB - Latin American and Caribbean Macro Watch Country Table
Peru vs LAC-7 GDP Growth and Investment Growth
2004 2005 2006 2007 2008
0
5
10
15
20
25
30
Peru GDP Growth (%)
LAC-7 GDP Growth (%)
Peru Investment Growth (%)
LAC-7 Investment Growth (%)
IADB - Latin American and Caribbean Macro Watch Country Table
LAC-7, Peru, Chile: GDP per capita
2000 2001 2002 2003 2004 2005 2006 2007 2008
0
2000
4000
6000
8000
10000
12000
LAC-7 Average per capita GDP
Peru per capita GDP
Chile per capita GDP
IMF - World Economic Outlook Database
Chile vs LAC-7 External Accounts
2004 2005 2006 2007 2008
-8
-6
-4
-2
0
2
4
6
8
Chile Current Account (% of GDP)
LAC-7 Current Account (% of GDP)
Chile Capital Account (% of GDP)
LAC-7 Capital Account (% of GDP)
IADB - Latin American and Caribbean Macro Watch Country Table
Peru vs LAC-7 External Accounts
2004 2005 2006 2007 2008
-4
-2
0
2
4
6
8
10
Peru Current Account (% of GDP)
LAC-7 Current Account (% of GDP)
Peru Capital Account (% of GDP)
LAC-7 Capital Account (% of GDP)
IADB - Latin American and Caribbean Macro Watch Country Table
Chile vs LAC-7 FDI and International Reserves
2004 2005 2006 2007 2008
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
Chile FDI (Millions of US $s)
LAC-7 FDI (Millions of US $s)
2004 2005 2006 2007 2008
-3
-2
-1
0
1
2
3
4
5
Chile International Reserves (% of GDP)LAC-7 International Reserves (% of GDP)
IADB - Latin American and Caribbean Macro Watch Country Table
Peru vs LAC-7 FDI and International Reserves
2004 2005 2006 2007 2008
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
Peru FDI (Millions of US $s)
LAC-7 FDI (Millions of US $s)
2004 2005 2006 2007 2008
0
2
4
6
8
10
12
Peru International Reserves (% of GDP)LAC-7 International Reserves (% of GDP)
IADB - Latin American and Caribbean Macro Watch Country Table
Coping Strategies with FTAs Pragmatically negotiating over “old” & “new” trade
agenda within these agreements Prime example: each had negotiated separate
bilateral FTAs with the two largest markets in the world---the U.S. and China
In each case, the FTA with the U.S. focuses on the new trade agenda (investment, services, intellectual property)
While each country's China FTA is primarily about the old trade agenda (market access for primary goods)
What accounts for this dual approach?
In China, complementary endowment factors and the very simplicity of these agreements
With the U.S., ability and willingness of these countries to negotiate the new trade agenda
In both countries, policy makers are looking to reap gains from previous liberalization and reforms in areas that top the new trade agenda
Economic Freedom Ranking
Row 1
0
10
20
30
40
50
60
United States
Chile
Peru
Row 1
0
20
40
60
80
100
120
140
China
Chile
Peru
Heritage Foundation – 2009 Index of Economic Freedom
• United States: 6 Chile: 11
• Peru: 57 China: 132
Doing Business
Ease of Doing BusinessStarting a Business
Dealing with Construction PermitsRegistering Property
Protecting InvestorsEnforcing Contracts
0
20
40
60
80
100
120
140
LAC-7 average
Chile
Peru
The World Bank Group – Doing Business Economy Rankings
What lies beneath these indicators?
“Chile's financial system is among the region's and the world's most stable and developed. Banking is efficient, with strict limits on lending to a single debtor or group of related companies. Reforms that include capitalization requirements and shareholder obligations have increased competition and widened the range of operations for banks and other financial services.”
Heritage Foundation – 2009 Index of Economic Freedom
What lies beneath the indicators?
“Peru's financial sector continues to grow, becoming more competitive in providing a wide range of financial services for domestic business activity. The banking sector has undergone a transformation through consolidation. Credit to the private sector has increased steadily, and non-performing loans have declined to less than 5 percent of total loans. The government has strengthened prudential standards and disclosure requirements. Credit is allocated on market terms, and foreign investors can obtain credit in the domestic market.”
Heritage Foundation – 2009 Index of Economic Freedom
Conclusions, Coping Strategies• Countries in the region are reaping the gains
from prior liberalization, deregulation, reform
• In the case of Chile and Peru, we see a pro-active approach toward advancing on both the old and the new trade agenda
• Bilateral FTAs with China and the U.S. have proved to be effective coping tools vis-a-vis the recent crisis
In the medium run.....
• This is the most effective way for these states to counter the stagnation in trade negotiations at the multilateral level
• Could this be a possible path forward for other small open growing economies on the move?