A New Latin America, an Old Growth Problem?

Chief Economist OfficeLatin America and the Caribbean

Augusto de la Torre

31o Congreso Latinoamericano de Comercio Exterior

1-2 de junio de 2015San José, Costa Rica

Where are we?Not in Kansas anymore

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The deceleration in LAC was unexpectedly large, abrupt, and more pronounced than in other emerging regions…

GDP Growth and Forecasts by Region

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…yet not uniformly distributed, hitting the commodity exporters much harder

GDP Growth Estimates and Forecasts

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The deceleration went in tandem with the big China and commodities cycle, yet in an amplified way

LAC, China, and U.S. Growth, and Commodities

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The amplification was due to a sharp contraction in investment, but employment effects are lagging

Sources: Authors’ calculations from national sources.

LAC: Investment Contribution to GDP Growth

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A New Latin America…

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After a decade of remarkable pro-poor growth…

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…and an unexpectedly large decline in income inequality…

Latin America: Changes in the Gini Index of Income Inequality2003–2012

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… Latin America finds itself with a deeply changed social structure

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Pobre ($4USD al día)

Evolution of the Social Structure in Latin America

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Latin America is a middle income region on the way to a middle class region

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A new macro-financial immune system has helped Latin America overcome the “original sin”…

Currency/Monetary Policy

Banking/Prudential Policy

Debt/Fiscal Policy

Before Now

Weak/non credible/pro-cyclical

Fragile/unsound

Fragile/unviable/pro-cyclical

Credible/countercyclical

Sounder

More viable/less pro-cyclical

Latin America’s New Macro-Financial Immune System

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… and the macro-financial improvement was buttressed by a safer form of international financial integration…

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Net Equity Positions Net Debt Positions

LAC’s Asset Liability Positions vis-à-vis the Rest of the World

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… all of which moved Latin America out of recurrent macro-financial crises and into a better “asset class”

Source: Institutional Investor database

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Incidence of Crises: Latin America and South East Asia

LAC SEA

Lost Decade Washington Consensus Golden Decade

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Country Risk Ratings Simple Averages

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Lost Decade Washington Consensus Golden Decade

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…with the same old growth problem?

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The reconfiguration of external factors is here to stay; hence, LAC as a whole is back to low growth

LAC: Average Growth by Period and Forecast

China’s growth settling around 7 percent.

G-7’s growth picking up, mainly due to the U.S.

Yet, uncertainty still looms: The new equilibrium of commodity

prices is hard to know Europe and Japan can drag G-7’s

growth Strong dollar appreciation could

undercut US growth momentum

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China and the commodity cycle explain most of the growth fluctuations in LAC but not the mean

Sources: Authors’ calculations from Bloomberg and national sources.

LAC’s Growth Largely Explained by External Factors

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Source: Maddison & WDI

Is LAC returning to the “hundred years of growth solitude” syndrome?

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Source: Maddison & WDI

Low growth has been a LAC-wide malady

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Chile Panama

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Fluctuating

Semi-Converging

Nose Divers

Flat Liners

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Growth issue #1: firm dynamics – a growth stunting problem in formal firms explains the smallness syndrome

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Número de Trabajadores Promedio, por Edad de la Empresa

EAP4 ECA High Income LAC

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Growth issue #1: firm dynamics – innovation and growth deficit affects the entire spectrum of firms in LAC

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1 2 3 4 5Management

USABrazil

Management Scores in Brazil and USA, circa 2010

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Growth issue #2: low quality of trade connections, which in part reflect a weak integration into GVCs

Notes: The directed links correspond to exports from one country to another as a percentage of the source country’s total exports. Source: LCRCE’s Flagship (2014) based on IMF’s DOTS.

Density Maps of Region-Centered Trade Networks, 2011

East Asia LAC

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Growth issue #3: LAC is a saving-constrained region

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LAC1 SEA MICs

Saving Rates: LAC and the East Asian MICs

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Growth issue #3: low saving leads to low investment and low growth

Fuentes: UNSTAT y WDI.

Brechas del ahorro, tipo de cambio, crecimiento e inversión1990–2012

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Growth with equity issue #4: poor quality public education has long-term and persistent un-equalizing effects

Student Performance in PISA Tests and Inter-Generational Mobility, 2009

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Thank you!

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A new Latin America in a new global landscape for the real economy, where the South is no longer in the periphery…

Sources: Authors’ calculations based on IMF’s DOTS.

1980 2012

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