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11
The New Face of LAC and Challenges Ahead:The New Face of LAC and Challenges Ahead:Capital Inflows and CommoditiesCapital Inflows and Commodities
Augusto de la Torre
XXI Seminario Anual CIES 2010XXI Seminario Anual CIES 2010Lima, PerúLima, Perú
17 de diciembre del 201017 de diciembre del 2010
Chief Economist OfficeChief Economist OfficeLatin America and the CaribbeanLatin America and the CaribbeanThe World BankThe World Bank
AgendaAgenda
LAC breaking with the past: financially globalized yet resilient Resilience through the cycle
Driving forces of resilience and performance Policy-related and exogenous
Policy challenges Dealing with frothy capital inflows Harnessing benefits/avoiding risks of natural resource abundance
2
LAC breaking with the past: LAC breaking with the past: financially globalized yet resilientfinancially globalized yet resilient
3
Defining and measuring Defining and measuring resilienceresilience
Definition – resilience is the ability to: Withstand the initial external shock Engineer a fast and strong recovery Conduct counter-cyclical policies in bad and good times
Measurement – indirectly, through an outcome variable (GDP) that actually reflects a combination of factors … Size of the shock Degree of exposure to the shock Extent of resilience per se (“relative” resilience)
… which we sort out through econometric techniques and using appropriate comparators
4
Exposure to the shock: degree of financial globalizationExposure to the shock: degree of financial globalization
5Note: Financial openness is the amount of inflows and outflows of capital as a percentage of GDP. In this graph, Central America excludes Panama (an outlier due to its condition as offshore financial center). Source: IMF’s BOP
0
2
4
6
8
10
12
14
16
18
20
Other South Am. Countries
Central Am. + Dom. Rep.
Caribbean LAC-6 + URY
Per
cent
age
of G
DP
Financial Openess (Flows)Simple Averages
Exposure to the shock: degree of trade opennessExposure to the shock: degree of trade openness
6Note: Trade openness is the sum of exports and imports as a percentage of GDP. Source: IMF’s WDI
0
20
40
60
80
100
120
LAC-6 + URY Other South Am. Countries
Central Am. + Dom. Rep.
Caribbean
Per
cent
age
of G
DP
Trade OpennessSimple Average
Resilience: benchmarking LAC through the cycleResilience: benchmarking LAC through the cycle
Resilience in the downturn: not worse than the Asian TigersResilience in the downturn: not worse than the Asian Tigers Downturn was highly synchronized around the globe LAC was not immune, but its growth collapse (6.5 pp) was comparable to that
of the East Asian Tigers and significantly smaller than that of ECA (13 pp) Within LAC, the collapse was largest where trade openness is highest – the Caribbean (8.7 pp)
-- and smallest in the less financially globalized countries of South America (6.2 pp)
Resilience in the rebound: fast and strong growth recoveryResilience in the rebound: fast and strong growth recovery LAC’s recession was shorter compared to previous crises and the MIC average
Brazil led the LAC pack: industrial production started to recover in 3 months! Strong recovery: like other non-ECA MICs, LAC’s GDP in 2010 will be above its
2008 level (ECA: 1.7% below; HICs: 0.2% below) LAC’s GDP will be closer to potential than the East Asian Tigers (who have higher potential) Brazil, Peru, Argentina, Uruguay, Panama, and Dominican Republic lead the LAC pack
7
2009 growth collapse: LAC no worse than the East Asian 2009 growth collapse: LAC no worse than the East Asian Tigers, but particularly bad for the CaribbeanTigers, but particularly bad for the Caribbean
8Notes: Growth collapses are defined as growth in 2009 minus growth in 2007. Country groupings are simple averages. Haiti is not included among Caribbean countries. Source: IMF's WEO (October 2010)
-18%
-16%
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
An
t &
Bar
b
Gre
nad
a
Ven
ezu
ela
Par
agu
ay
Mex
ico
Pan
ama
Co
sta
Ric
a
Tri
n &
To
b
Ho
nd
ura
s
Per
u
El S
alv
ado
r
Arg
enti
na
LA
C
Bra
zil
Ch
ile
Gu
atem
ala
Co
lom
bia
Do
m R
ep
Uru
gu
ay
Nic
arag
ua
Jam
aica
Gu
yan
a
Do
min
ica
Su
rin
ame
Ecu
ado
r
Bel
ize
Bo
liv
ia
Per
cen
tag
e P
oin
ts
GDP Growth CollapsesAcross LAC Countries
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
ECA South Africa
HIC East Asian Tigers
LAC China India
Per
cen
tag
e P
oin
ts
GDP Growth CollapsesAcross Regions
-9.0%
-8.5%
-8.0%
-7.5%
-7.0%
-6.5%
-6.0%
-5.5%
-5.0%
Caribbean Central Am. + Dom. Rep.
LAC-6 + URY Other South Am. Countries
Per
cen
tag
e P
oin
ts
GDP Growth CollapsesWithin LAC Regions
Resilience: benchmarking LAC through the cycleResilience: benchmarking LAC through the cycle
Resilience in the downturn: not worse than the Asian TigersResilience in the downturn: not worse than the Asian Tigers Downturn was highly synchronized around the globe LAC was not immune, but its growth collapse (6.5 pp) was comparable to that
of the East Asian Tigers and significantly smaller than that of ECA (13 pp) Within LAC, the collapse was largest where trade openness is highest – the Caribbean (8.7 pp)
-- and smallest in the less financially globalized countries of South America (6.2 pp)
Resilience in the rebound: fast and strong growth recoveryResilience in the rebound: fast and strong growth recovery LAC’s recession was shorter compared to previous crises and the MIC average
Brazil led the LAC pack: industrial production started to recover in 3 months! Strong recovery: like other non-ECA MICs, LAC’s GDP in 2010 will be above its
2008 level (ECA: 1.7% below; HICs: 0.2% below) LAC’s GDP will be closer to potential than the East Asian Tigers (who have higher potential) Best performers are the financially globalized commodity exporters like BRA, PER, and URU
9
Size and duration of downturn: LAC better than its past Size and duration of downturn: LAC better than its past and ahead of the MIC average and ahead of the MIC average
10Notes: In the figures, period T stands for the Peak year in GDP business cycles. The sample of LAC countries includes: Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, and Venezuela. Sources: Calderón and Servén (2010), EIU, Haver Analytics, LAC Central Banks and Statistical Offices.
-4.5
-3.5
-2.5
-1.5
-0.5
0.5
T-8
T-6
T-4
T-2 T
T+
2
T+
4
T+
6
T+
8
Gro
wth
Rat
e (%
)
Latin America & the Caribbean
Historic cycle
Current cycle
-4.5
-3.5
-2.5
-1.5
-0.5
0.5
T-8
T-6
T-4
T-2 T
T+
2
T+
4
T+
6
T+
8
Gro
wth
Rat
e (%
)
Middle Income Countries
Historic cycle
Current cycle
-4.5
-3.5
-2.5
-1.5
-0.5
0.5
T-8
T-6
T-4
T-2 T
T+
2
T+
4
T+
6
T+
8
Gro
wth
Rat
e (%
)
High Income Countries
Historic cycle
Current cycle
Cyclical Growth Dynamics in a Comparative SettingCyclical Growth Dynamics in a Comparative Setting
Heterogeneity across LAC countries in terms of the length Heterogeneity across LAC countries in terms of the length of the recession (based on IP indexes)of the recession (based on IP indexes)
11Sources: World Bank’s Global Economic Monitor (Oct 2010).
0
2
4
6
8
10
12
14
16
18
Brazil Argentina Peru Uruguay MexicoVenezuela Chile Colombia
Num
ber o
f mon
ths
Speed of RecoveryMonths between peak and trough in IP Indexes
Strength of the recovery: LAC recovering potential output Strength of the recovery: LAC recovering potential output faster than the Tigers faster than the Tigers
12Notes: Trend GDP, used in Panels B and C, is defined as the GDP that each country would have attained if it had grown between 2008 and 2010 at the same pace as in between 2000 and 2007. Sources: Didier, Hevia, and Schmukler (2010).
-30%
-20%
-10%
0%
10%
20%
30%
Ant
. & B
arb.
Tri
n. &
Tob
.V
enez
uela
Gre
nada
Bel
ize
Hon
dura
sM
exic
oC
osta
Ric
aJa
mai
caE
l Sal
vado
rC
olom
bia
Nic
arag
uaC
hile
Gua
tem
ala
Ecu
ador
Dom
. Rep
.S
urin
ame
Par
agua
yB
razi
lP
anam
aD
omin
ica
Bol
ivia
Per
uG
uyan
aA
rgen
tina
Uru
guay
Per
cent
Expected GDP Levels Relative to Trend GDPLAC Countries
2010 2011
-20%
-15%
-10%
-5%
0%
5%
ECA HIC South Africa
East Asian Tigers
LAC China India
Per
cent
Expected GDP Levels Relative to Trend GDP
2010 2011
-5%
0%
5%
10%
15%
20%
25%
30%
35%
ECA HIC South Africa
LAC East Asian Tigers
India China
Per
cent
Expected GDP Levels in 2010 and 2011 Relative to GDP in 2008
2010 2011
Strength of the recovery: LAC growth in 2010 trails East Strength of the recovery: LAC growth in 2010 trails East Asia, but some LAC countries with Asian-like growth ratesAsia, but some LAC countries with Asian-like growth rates
13Country groupings are weighted averages. Haiti is not included among the Caribbean countries. Source: Consensus Forecasts (November 2010).
-6%
-4%
-2%
0%
2%
4%
6%
8%
LAC-6 + URY Other South Am. Countries
Central Am. + Dom. Rep.
Caribbean
2009 Real GDP Growth and Forecasts for 2010-11Annual GDP Real Growth Rate, Weighted Averages
2009 2010 2011
0%
2%
4%
6%
8%
10%
12%
HIC South Africa
ECA LAC East Asian Tigers
India China
GDP Growth Forecasts for 2010 and 2011Across Regions
2010 2011
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Ant
. & B
arb.
Ven
ezue
la
Jam
aica
Gre
nada
El S
alva
dor
Tri
n. &
Tob
.
Dom
inic
a
Bel
ize
Gua
tem
ala
Ecu
ador
Hon
dura
s
Nic
arag
ua
Guy
ana
Cos
ta R
ica
Bol
ivia
Sur
inam
e
Dom
. Rep
.
Col
ombi
a
Mex
ico
Pan
ama
Chi
le
LA
C
Par
agua
y
Uru
guay
Bra
zil
Per
u
Arg
enti
na
GDP Growth Forecasts for 2010 and 2011Across LAC Countries
2010 2011
LAC: 2010 growth recovery has vastly exceeded LAC: 2010 growth recovery has vastly exceeded expectations… expectations…
14Source: Consensus Forecasts (March 2009 and November 2010).
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
South Africa
High Income
Europe & Central
Asia
China India Latin America & Caribbean
East Asian Tigers
Per
cent
age
Poi
nts
Difference in 2010 Growth ProjectionsNov-10 vs. Mar-09, Weighted Averages
3.1%
7.1%
5.7%8.4%
10.5%
3.9%
2.4%
Current growth rate projection for 2010
… … especially among the most financially globalized especially among the most financially globalized commodity exporting LAC countriescommodity exporting LAC countries
15Source: Consensus Forecasts (March 2009 and November 2010).
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Other South Am. Countries
Central Am. + Dom. Rep.
LAC-6 + URY
Per
cent
age
Poi
nts
Difference in 2010 Growth ProjectionsNov-10 vs. Mar-09, Weighted Averages
-1.2%
6.4%
3.5%
Current growth rate projection for 2010
Resilience: benchmarking LAC through the cycle (2)Resilience: benchmarking LAC through the cycle (2)
Shielding the poorShielding the poor While a year ago 10 million people were expected to fall into poverty ($4 a
day) in 2009, we now know (actual data) that only 2.1 million people did Poverty increased mainly in Mexico and some Central American Countries; it actually
continued to decline (at a lower rate) in Brazil, Peru, Uruguay
If poverty reduction is as elastic to growth as it was during the 2000-2007 expansion, 7 million Latinos will climb out of moderate poverty in 2010
Unexpectedly strong labor market performanceUnexpectedly strong labor market performance During 2009, the LAC unemployment rate increased much less than in ECA
and slightly more than in the East Asian Tigers ... ... the increase in unemployment given the decline in GDP was much milder
than in previous crises ... the trend towards labor market formalization was not reversed … … and all this despite constant or increasing real average wages
16
Shielding the poor: milder increase in poverty compared to Shielding the poor: milder increase in poverty compared to the past and heterogeneous effects within the regionthe past and heterogeneous effects within the region
Source: The World Bank, 2010. “Did Latin America learn to shield its poor from economic shocks?” Washington, DC: The World Bank, Latin America and the Caribbean Poverty Sector (LCSPP)
-8
-6
-4
-2
0
2
4
Andean Region Central America & Mexico
Cono Sur ExtendedP
erce
nta
ge P
oin
ts
Change in Moderate Poverty(US$ 4 a day)
2004 - 2005 2005 - 2006 2006 - 20072007 - 2008 2008 - 2009 2009 - 2010*
-4
-3
-2
-1
0
1
2
3
4
199
3 -
199
4
199
4 -
199
5
199
5 -
199
6
199
6 -
199
7
199
7 -
199
8
199
8 -
199
9
199
9 -
200
0
200
0 -
200
1
200
1 -
200
2
200
2 -
200
3
200
3 -
200
4
200
4 -
200
5
200
5 -
200
6
200
6 -
200
7
200
7 -
200
8
200
8 -
200
9
200
9 -2
010
*
Per
cen
tage
Po
ints
Change in Moderate Poverty(US$ 4 a day)
17
Resilience: benchmarking LAC through the cycle (2)Resilience: benchmarking LAC through the cycle (2)
Shielding the poorShielding the poor While a year ago 10 million people were expected to fall into poverty ($4 a
day) in 2009, we now know (actual data) that only 2.1 million people did Poverty increased mainly in Mexico and some Central American Countries; it actually
continued to decline (at a lower rate) in Brazil, Peru, Uruguay
If poverty reduction is as elastic to growth as it was during the 2000-2007 expansion, 7 million Latinos will climb out of moderate poverty in 2010
Unexpectedly strong labor market performanceUnexpectedly strong labor market performance During 2009, the LAC unemployment rate increased much less than in ECA
and slightly more than in the East Asian Tigers ... ... the increase in unemployment given the decline in GDP was much milder
than in previous crises ... the trend towards labor market formalization was not reversed … … and all this despite constant or increasing real average wages
18
Labor market performance: unemployment less responsive Labor market performance: unemployment less responsive to the downturn than previously in most of LACto the downturn than previously in most of LAC
19Note: Previous recession periods are: Argentina (1998.Q4 – 2002.Q2); Brazil (1997.Q4 – 1998.Q2); Chile (1998.Q3 – 1999.Q4); Colombia (1998.Q3 – 1999.Q4); Mexico (1995.Q1 – 1996.Q1), and Peru (1997.Q2 – 1999.Q1). Current recession periods are: Argentina (2008.Q3 – 2009.Q2); Brazil (2008.Q4 – 2009.Q2); Chile (2008.Q3 – 2009.Q3); Colombia (2008.Q3 – 2009.Q2); Mexico (2008.Q2 – 2009.Q2), and Peru (2008.Q2 – 2009.Q1). Source: LCRCE Staff calculations based on National Statistical Institutes data.
0.0
0.5
1.0
1.5
2.0
2.5
Argentina Brazil Chile Colombia Mexico Peru
Semi-Elasticity of Unemployment with Respect to GDP Growth
Previous recession Current Recession
Driving forces of resilience and performanceDriving forces of resilience and performance
20
Driving forcesDriving forces
Policy related Silent revolution in macro policy frameworks Safer international financial integration Diversification of export markets – the China connection!
Exogenous Terms of trade Return of risk appetite in financial centers
21
The driving forces: policy-drivenThe driving forces: policy-driven
Silent revolution in macro-financial policy frameworksSilent revolution in macro-financial policy frameworks In a break with history, what used to be shock amplifiers were turned into
cushions: currency, banking system, fiscal process … and this enabled counter-cyclical policies, particularly in monetary policy
and to a lesser extent in fiscal policy No financial crises at home this time around
22
Notes: Panel C reports the average quarterly variation (in percentage points of GDP) of the cyclically-adjusted primary balance of LAC-6 countries during the global downturn associated to the 2008 - 2009 financial crisis and during previous crisis. Negative (positive) values indicate an expansion (contraction) in discretionary fiscal policy. Sources: IMF’s “Fiscal Monitor: Navigating the Fiscal Challenges Ahead” (May 2010), ECLAC, and Bloomberg for Panels A and B; and LCRCE staff calculations based on Haver Analytics, Datastream in Panel C.
LAC breaking with history: countercyclical macro policy LAC breaking with history: countercyclical macro policy
23
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
Cos
ta R
ica
Arg
enti
na
Para
guay
Gua
tem
ala
Mex
ico
Tri
n. &
Tob
.
Uru
guay
Hon
dura
s
Bar
bado
s
Bra
zil
Peru
Dom
. Rep
.
Col
ombi
a
Jam
aica
Chi
le
Per
cent
age
Poi
nts
Monetary PolicyChanges in Monetary Policy Rates
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Argentina Brazil Chile Colombia Mexico Peru Dom. Rep.
Variation in the cyclically-adjusted primary surplus(in percentage points of GDP)
In previous crises
During current global crisis
0%
2%
4%
6%
8%
10%
12%
14%
16%
Jul-
07
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-
08
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-
09
Sep
-09
Nov
-09
Jan-
10
Mar
-10
May
-10
Jul-
10
Sep
-10
Nov
-10
Monetary Policy RatesInflation-Targeting LAC Countries, in %
US Peru
Colombia
Chile
Brazil
Mexico
LAC and the East Asian Tigers: LAC and the East Asian Tigers: Flexible exchange rates cushioned the shock this time…Flexible exchange rates cushioned the shock this time…
24Notes: This figure depicts the behavior of the nominal exchange rate around crises episodes of external origin to the region in question. Sources: Didier, Hevia, and Schmukler (2010).
80
90
100
110
120
130
Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95
Inde
x Ju
l-97
= 1
00
East Asia & Pacific Previous Crisis
China Indonesia Korea, Rep. MalaysiaPhilippines Singapore Thailand
80
90
100
110
120
130
Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08
Inde
x Ju
l-97
= 1
00
East Asia & Pacific Current Crisis
China Indonesia Korea, Rep. MalaysiaPhilippines Singapore Thailand
80
90
100
110
120
130
Apr-97 May-97 Jun-97 Jul-97 Aug-97 Sep-97 Oct-97
Inde
x Ju
l-97
= 1
00
Latin America & Caribbean Previous Crisis
Argentina Brazil Chile ColombiaMexico Peru Venezuela Dom. Rep.
80
90
100
110
120
130
Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08
Inde
x Ju
l-97
= 1
00
Latin America & Caribbean Current Crisis
Argentina Brazil Chile Colombia
Mexico Peru Venezuela Dom. Rep.
… … not least because reduced currency mismatches helped not least because reduced currency mismatches helped dispel the “fear of floating” in most of LACdispel the “fear of floating” in most of LAC
0%
10%
20%
30%
40%
50%
60%
70%
80%
Corporate Banks
Corporate and Banks' Dedollarization in LAC
Source: Gozzi et al. (2009), IFS
Issues in Foreign Currency / Total Issues ForeignLiabilities / Broad Money
1990-1993
2006-2009
2001-20032006-2008
Note: GDP-weighted averages of the periodsnoted.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1998 2008 1998 2008 2002 2008
Mexico Colombia Brazil
Share of the Domestic and Foreign Public Debt in Total DebtSelected LAC Countries
Domestic Foreign
25Sources: Gozzi et al (2009), Reinhart, Rogoff and Savastano (2003), IFS.
LAC breaking with history: no systemic damage at homeLAC breaking with history: no systemic damage at home
26
Financial Crises Around the WorldFinancial Crises Around the World
The driving forces: policy-driven (2)The driving forces: policy-driven (2)
Safer international integration…Safer international integration… The region became a net creditor in debt and a net debtor in equity
… … in the midst of financial re-couplingin the midst of financial re-coupling While EM policy fundamentals boost economic resilience, they are not the
main drivers of financial asset performance EM asset returns have become more sensitive to common factors than to
differences in EM fundamentals The co-movement of asset returns across the world has increased over
time, reducing the gains of international portfolio diversification
27
LAC has migrated towards a safer form of integration into LAC has migrated towards a safer form of integration into international financial marketsinternational financial markets
-40%
-30%
-20%
-10%
0%
10%
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
Per
cen
t of
GD
P
A Safer Integration in LAC Finance
Net Debt Position vis-à-vis Rest of the World
Net Equity Position vis-à-vis Rest of the World
Net
Cre
dit
or
Net
Deb
tor
28Note: The net debt position (vis-à-vis ROW) is the sum of debt assets and reserves minus debt liabilities. In turn, the net equity position (vis-à-vis ROW) is the sum of net FDI assets and net portfolio equity assets. The sample ranges from 1990 to 2008. Source: Lane and Milesi-Ferretti (2007).
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Per
cent
of G
DP
A Safer Integration in PeruFinance
Net Equity Position vis-à-vis Rest of the World
Net Debt Position vis-à-vis Rest of the World
Net
Cre
dito
rN
et D
ebto
r
The driving forces: policy-driven (2)The driving forces: policy-driven (2)
Safer international integration…Safer international integration… The region became a net creditor in debt and a net debtor in equity
… … in the midst of financial re-couplingin the midst of financial re-coupling While EM policy fundamentals boost economic resilience, they are not the
main drivers of financial asset performance EM asset returns have become more sensitive to common factors than to
differences in EM fundamentals The co-movement of asset returns across the world has increased over
time, reducing the gains of international portfolio diversification
29
The variance of EM asset return is increasingly explained The variance of EM asset return is increasingly explained by common factorsby common factors
30Notes: A principal component is estimated for returns on equities, on foreign exchange spot contracts, and on CDS sovereign spreads. Then, country-specific returns for each asset class are regressed on its associated PC1 in order to get an R-squared. The average R-squared is being reported for countries within each region. See Levy Yeyati (2010) for more details. Sources: Bloomberg.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Equity Foreign Exchange CDS Spreads
Per
cent
Emerging Market Asset Returns and Common Factors Average R-Squared from Country Regressions
Early Period (2000-2005)Late Period (Jan-05 to Jul-08)Crisis (Aug-08 to Apr-09)
The driving forces: policy-driven (2)The driving forces: policy-driven (2)
Diversification of export marketsDiversification of export markets The share of the US and Europe in many LAC country exports has fallen, as
that of Asia has been rising
Real de-coupling from HIC and increased coupling with ChinaReal de-coupling from HIC and increased coupling with China Over time, economic activity in EMs has become less sensitive to economic
activity in HICs, and more sensitive to economic activity in China
31
The China connection: LAC countries has been sharply The China connection: LAC countries has been sharply intensifying trade and FDI links to Asia intensifying trade and FDI links to Asia
32Source: IMF’s Direction of Trade Statistics (DOTS).
0%
10%
20%
30%
40%
50%
60%
70%
80%
Su
rin
ame
Bar
bad
os
Jam
aica
Nic
arag
ua
Tri
n. &
To
b.
Ho
nd
ura
s
Gu
atem
ala
Mex
ico
Bah
amas
Gu
yan
a
Ecu
ado
r
Co
lom
bia
Bel
ize
Do
m. R
ep.
Bo
liv
ia
Par
agu
ay
Ecu
ado
r
Hai
ti
Pan
ama
Ven
ezu
ela
Uru
guay
Arg
enti
na
Bra
zil
Co
sta
Ric
a
Do
min
ica
Per
u
Ch
ile
Per
cent
LAC Exports to Selected Regions as % of total exports, 2008 data
EAP Euro Zone US
Real de-coupling: growth in EMs has become more Real de-coupling: growth in EMs has become more sensitive to China and less sensitive to the G-7sensitive to China and less sensitive to the G-7
LAC-7 CRB ChinaIndependent Variables: (1) (2) (3) (4) (5) (6) (7) (8)
0.432*** 1.636*** 0.988*** 1.936*** 0.960 0.052 0.327* 0.169(0.000) (0.000) (0.000) (0.000) (0.253) (0.592) (0.081) (0.435)0.146** -1.299*** -0.763*** -1.54*** 0.492** 0.487**(0.043) (0.000) (0.000) (0.000) (0.033) (0.039)
0.850*** 0.557*** 0.847*** 2.826*** 0.121* 0.050(0.000) (0.000) (0.000) (0.000) (0.067) (0.511)
0.420*** 0.174*** 0.535*** -0.153*** -0.223***(0.000) (0.006) (0.000) (0.005) (0.002)
0.091*** 0.060* 0.000 0.028*(0.000) (0.058) (0.000) (0.069)
0.013*** -0.023** 0.000 0.002(0.005) (0.012) (0.000) (0.611)
0.028*** -0.086*** -0.040*** -0.101*** -0.269*** 0.097***(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Observations 1357 1357 1357 264 63 64 264 264
R-squared 0.12 0.26 0.30 0.26 0.27 0.00 0.42 0.43
0.578*** 0.347*** 0.226*** 0.397*** 0.818*** 0.657***(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
1.270*** 0.731*** 1.382*** -0.054 -0.172(0.000) (0.000) (0.000) (0.579) (0.123)
α
G-7 + G-7, Late
China + China, Late
G-7
G-7, Late
China
China, Late
CRB
WTI
Emerging Markets Non-Euro Advanced EconomiesPanel Estimations Panel Estimations
33Notes: The late period goes from 2000 to 2009. Median sample estimations report the median values from country-by-country regressions. G-7 growth was computed as the average of individual growth rates weighed by the dollar GDP in the previous year. Non-Euro Advanced Economies include Australia, New Zealand, Norway, and Sweden. For panel regressions, ***,** and * denotes significance at a 1%, 5% and 10% respectively. P-values are reported in parentheses. Sources: IMF's IFS.
The co-movement of growth between LAC countries and The co-movement of growth between LAC countries and China has been clearly trending upward… China has been clearly trending upward…
34Source: National Authorities. Note: Solid colors reflect correlation values significant at a 10% confidence interval.
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1980 1984 1988 1992 1996 2000 2004 2008
Output Co-Movement Between LAC and China20 years rolling correlation of the Real GDP Growth
Brazil Chile Colombia
Mexico Peru Argentina
Panama Dom. Rep.
The driving forces: exogenous factorsThe driving forces: exogenous factors
Rebound in commodity pricesRebound in commodity prices Commodity prices started rebounding in Jan 09 and are at their 2007 level Asymmetric effects on the region (South America vs. Central America)
Pronounced move towards risk appetite in financial marketsPronounced move towards risk appetite in financial markets The comeback of risk appetite has contributed to strong capital inflows to
LAC, and intensified the strength of the recovery Capital inflows to the region in 2010 are already higher than those observed
in 2007
35
Commodity prices rebounded quickly, with asymmetric Commodity prices rebounded quickly, with asymmetric effects across the regioneffects across the region
36Source: Bloomberg.
30
50
70
90
110
130
150
50
100
150
200
250
300
350
Jan-05
May-0
5
Sep-05
Jan-06
May-0
6
Sep-06
Jan-07
May-0
7
Sep-07
Jan-08
May-0
8
Sep-08
Jan-09
May-0
9
Sep-09
Jan-10
May-1
0
Sep-10
Oil W
TI, C
urr
ent U
S$
Whea
t, C
opper
and S
oyb
ean, 01
-Jan
-05=
100
Commodity PricesOil WTI in Current US$, Wheat, Copper and Soybean: Index 01-Jan-05=100
Oil (rhs)
Copper
Wheat
Soybean
-40% -20% 0% 20% 40% 60% 80% 100% 120% 140%
HondurasDom. Rep.Dominica
NicaraguaCosta Rica
GuatemalaPanama
BrazilUruguay
MexicoArgentina
PeruColombia
Trin. and Tob.Paraguay
ChileEcuador
Bolivia
Cumulative Change in Terms of Trade
2008q4 - 2009q42001q4 - 2008q2
Around 93% of LAC’s population and 97% of its economic activity is in countries which
are net exporters….
The driving forces: exogenous factorsThe driving forces: exogenous factors
Rebound in commodity pricesRebound in commodity prices Commodity prices started rebounding in Jan 09 and are at their 2007 level Asymmetric effects on the region (South America vs. Central America)
Pronounced move towards risk appetite in financial marketsPronounced move towards risk appetite in financial markets The comeback of risk appetite has contributed to strong capital inflows to
LAC, and intensified the strength of the recovery Capital inflows to the region in 2010 are already higher than those observed
in 2007.
37
38Sources: Bloomberg
A swing from risk aversion to risk appetite is boosting A swing from risk aversion to risk appetite is boosting capital flows to EMscapital flows to EMs
0
10
20
30
40
50
60
70
80
90
100
Jan-
02
Jun-
02
Nov
-02
Apr
-03
Sep-
03
Feb-
04
Jul-
04
Dec
-04
May
-05
Oct
-05
Mar
-06
Aug
-06
Jan-
07
Jun-
07
Nov
-07
Apr
-08
Sep-
08
Feb-
09
Jul-
09
Dec
-09
May
-10
Oct
-10
VIXCBOE Volatility Index
Lehman
Citi's Memo Greece
-2
-1
0
1
2
3
4
5
6
Jan-
02
Jun-
02
Nov
-02
Apr
-03
Sep-
03
Feb-
04
Jul-
04
Dec
-04
May
-05
Oct
-05
Mar
-06
Aug
-06
Jan-
07
Jun-
07
Nov
-07
Apr
-08
Sep-
08
Feb-
09
Jul-
09
Dec
-09
May
-10
Oct
-10
Financial Conditions Indexes
United States Financial Stress
St Louis Federal Reserve Bank Financial Stress Index
Lehman
Citi's Memo Greece
Capital flows to LAC have surged in 2010 to levels higher Capital flows to LAC have surged in 2010 to levels higher than those observed in 2007than those observed in 2007
39Source: National BOP data. LAC-7 countries comprise Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
Policy challenges Policy challenges (Assuming the HICs do not drag all down)(Assuming the HICs do not drag all down)
40
Capital inflows - where is the problem?Capital inflows - where is the problem?
Surging capital flows to LAC are a problem inasmuch as they entail: Distortions that give rise to global imbalances – an international coordination failure Mood swings/exuberance that underpin “frothy” and unduly volatile flows – a collective
cognition failure Potentially lasting impact on the LT growth and systemic stability of the recipient countries –
negative externalities
Uncoordinated responses to global imbalances and center-periphery asymmetries in output gaps…
…raise currency appreciation pressures in LAC more than otherwise…
FX intervention to resist currency appreciation is the dominant response in the larger LAC countries
Monetary policy is currently over-burdened
41
Capital inflows surge and global rebalancingCapital inflows surge and global rebalancing
42
HIC-EM asymmetry:output gap & inflation pressures
Interest rate differentials / risk appetite comeback
“Frothy” capital inflow surge to EMs
EM resistance to appreciation (to dollar depreciation)
Lower than otherwise interest rates in HICs QE2
• Global coordination failureGlobal coordination failure• What is good for a particular nation is not necessarily good for the worldWhat is good for a particular nation is not necessarily good for the world
Global imbalances
Currency appreciation pressures are already felt and Currency appreciation pressures are already felt and bound to intensify in several LAC countries…bound to intensify in several LAC countries…
43Note: The Exchange Market Pressure Index is the weighted average of year-on-year percentage changes in: (a) the nominal exchange rate of the local currency vis-à-vis the US dollar (such that an increase represents an appreciation of the LAC currency), and (b) the level of international reserves. The weights are given by the inverse of the annual standard deviation of the changes in the nominal exchange rate and the standard deviation of the changes in reserves. An increase in the Exchange Market Pressure index signals appreciation pressures and/or accumulation of reserves. Source: LCRCE Staff calculations based on IMF’s IFS. Figures updated until October 2010
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Jan-
00
Sep-
00
May
-01
Jan-
02
Sep-
02
May
-03
Jan-
04
Sep-
04
May
-05
Jan-
06
Sep-
06
May
-07
Jan-
08
Sep-
08
May
-09
Jan-
10
Sep-
10
Brazil
Appreciation pressures Reserve Accumulation Exchange Market Pressure
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
Jan-
00
Sep-
00
May
-01
Jan-
02
Sep-
02
May
-03
Jan-
04
Sep-
04
May
-05
Jan-
06
Sep-
06
May
-07
Jan-
08
Sep-
08
May
-09
Jan-
10
Sep-
10
Chile
Appreciation pressures Reserve Accumulation Exchange Market Pressure
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Jan-
00
Sep-
00
May
-01
Jan-
02
Sep-
02
May
-03
Jan-
04
Sep-
04
May
-05
Jan-
06
Sep-
06
May
-07
Jan-
08
Sep-
08
May
-09
Jan-
10
Sep-
10
Colombia
Appreciation pressures Reserve Accumulation Exchange Market Pressure
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
Jan-
00
Sep-
00
May
-01
Jan-
02
Sep-
02
May
-03
Jan-
04
Sep-
04
May
-05
Jan-
06
Sep-
06
May
-07
Jan-
08
Sep-
08
May
-09
Jan-
10
Sep-
10
Mexico
Appreciation pressures Reserve Accumulation Exchange Market Pressure
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Jan-
00
Sep-
00
May
-01
Jan-
02
Sep-
02
May
-03
Jan-
04
Sep-
04
May
-05
Jan-
06
Sep-
06
May
-07
Jan-
08
Sep-
08
May
-09
Jan-
10
Sep-
10
Peru
Appreciation pressures Reserve Accumulation Exchange Market Pressure
Policy options: two unpalatable corner solutionsPolicy options: two unpalatable corner solutions
Allow an overshooting appreciation of the nominal exchange rate until the interest rate differential reflects expected depreciation Pros: conceptually clean; consistent with low inflation target; and easy to implement,
at least technically Cons: (i) consumption feast now with adverse growth effects later (irreversiblilities
and non-fundamentals driven inflows) (ii) first-mover disadvantage: an even greater appreciation would be needed if the emerging country is the only one to do it (prisoner’s dilemma)
Lower policy interest rates until differential disappears and let inflation do the trick Pros: it would result in less real exchange rate overshooting (inflation adjusts sluggishly
compared to the nominal exchange rate) Cons: it would sacrifice 20 years of monetary virtuousness, with lasting adverse effects on
central bank credibility
44
First-best solution: tectonic change in policy mix First-best solution: tectonic change in policy mix
Loosen monetary to eliminate interest rate differential…
… and tighten fiscal and macro-prudential policies sufficiently to anchor inflation expectations
Macro-prudential policy To induce the internalization of risks both to the financial sector and the economy, thereby
affecting the business cycle itself Options: counter-cyclical provisions/capital; lower LTV ratios; tax on whole-sale ST funding;
tax on external & domestic credit; etc.
Pros: (i) gets individual country to its first-best (first mover advantage); (ii) increased inflows, if any, would tend to be of the good kind (FDI)
Cons: (i) self-defeating in the aggregate if everybody does it; (ii) major political economy constraints to implementation
45
The pragmatic hybrid solution can be improvedThe pragmatic hybrid solution can be improved
The hybrid approach – do a little bit of every thing according to what is politically and technically feasible … FX intervention; tolerance on inflation targets to dampen increases in interest rates;
controls on inflows; some taming of fiscal expansion; some macro-prudential
… can be improved by rebalancing in favor of fiscal and, especially, macro-prudential policies to relieve burden on central banks Fiscal policy has become pro-cyclical in many LAC countries during 2010 Macro-prudential – LAC is in a learning-by-doing mode
Pros: option value of wait and see; limit first mover disadvantage
Cons: larger scope for distortions/dead-weight losses associated with expanded use of macro prudential to compensate for insufficient fiscal
Some global coordination may be forthcoming (G20) and would help, but Further push is needed to ensure it happens and LAC should play a role in that push Even if happens, it would be insufficient to solve LAC’s policy mix problem
46
Can LAC break with its past and use its natural resources Can LAC break with its past and use its natural resources to turn the cyclical recovery into higher long-run growth?to turn the cyclical recovery into higher long-run growth?
47Source: Maddison (2009) and IFS’s WEO (October 2010)
0%
10%
20%
30%
40%
50%
60%
70%
80%
19
00
19
06
19
12
19
18
19
24
19
30
19
36
19
42
19
48
19
54
19
60
19
66
19
72
19
78
19
84
19
90
19
96
20
02
20
08
Relative GDP Per Capita of Selected Regions relative to the US
Asian Tigers/US
LAC/US
Gold Standard Period
Interwar Period Import Substitution
WashingtonConsensus
WashingtonDissensus
LostDecade
Peru/US
The latest commodity price boom has been unusually The latest commodity price boom has been unusually broad-based and long-lastingbroad-based and long-lasting
The most comprehensive in terms of the number of commodities it affected…
… and the number of countries it benefited
For LAC, it has been the longest lasting boom since records have been kept
48
Source: World Bank staff calculations based on export commodity price data from Cunha, Prada and Sinnott (2009a, 2009b).
Note: The figure represents the share of the LAC-7 economies Top 16 commodities experiencing a price “boom” for each period of time. Booms and bust in commodity prices were defined following the Bry-Brochan cycle dating exercise. The figure also shows the boom-bust intervals for the overall commodities index.
LAC-7 Economies: Share of Commodities Experiencing a Boom
Natural resource curse hypothesis: should LAC worry Natural resource curse hypothesis: should LAC worry about becoming the granary and mine of China?about becoming the granary and mine of China?
Three valid concerns … Productivity/growth trap
Technical upgrading, spillovers, linkages, diversification? Institutional/political trap
Rent-seeking behavior, institutional capture, reduced resource mobilization efforts? Complications associated with decentralization (ear-marking)?
Environmental and social sustainability
And one red herring (Prebisch-Singer Hypothesis) Recent econometric evidence does not support theory that commodity prices are
on downward trend and, even if so, that it would adversely affect growth
49
Long term savingsLong term savings – needed to convert natural capital into – needed to convert natural capital into other forms of wealth … even if prices were not volatileother forms of wealth … even if prices were not volatile
Sad reality: savings negatively correlated with resource rents Too much of the rent is consumed,
not invested
Harsh reality: difficult to save High social discount rate, given
pressing development needs Difficulties in organizing collective
action in inter-temporal horizon
The pace of local investment of LT savings matter – to avoid Dutch Disease 50
BRA PERNIC
ARG
COL
ECU
MEX
TTO
DOM
BOL
HND
GTM VEN
CHL
-40
-20
020
40A
djus
ted
net s
avin
g (%
of G
NI)
0 20 40 60 80 100Non-renewable resource rents (% of GNI)
And short term volatility requires other strategiesAnd short term volatility requires other strategies
Self protection: reduce income volatility through diversification
Market insurance to hedge price volatility
Self insurance (saving) to smooth fiscal spending and act counter-cyclically
Not easy, but Chile’s experience shows that saving out of windfalls (to use in downturns) can have economic and political pay offs
51
52
Thank youThank you
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