Catching up and Falling Down A Latin American Perspective

1

Catching up andCatching up and Falling Falling DownDownA Latin American PerspectiveA Latin American Perspective

Global Convergence Scenarios

Paris January 16 2006

Javier SantisoChief Development Economist & Deputy Director

OECD Development Centre

2

11 Latin America: Catching up versus falling downLatin America: Catching up versus falling down

Brazil and the old challenge of potential growthBrazil and the old challenge of potential growth22

Brazil in the new international economic orderBrazil in the new international economic order33

3

While Latin American countries While Latin American countries experienced a falling down …experienced a falling down …

1950

1960

1970

1980

1990

2000/06

2000/06

1990

1980 1970

1960

1950

1950

1960

1970

1980

1990

2000/06

-4

-3

-2

-1

0

1

2

3

-30 -10 10 30 50 70 90deviation (%) of GDP per capita with respect to world average

($ 1990)

GD

P p

er c

apita

gro

wth

min

us w

orld

per

cap

ita g

row

th

(% a

nnua

lized

)

Mexico Chile Brazil

Annual growth (%) calculated as the average annual growth rate for the last six decades; Deviation (%) in the beginning of each decadeSource: based on Groningen Growth and Development Centre and The Conference Board, Total Economy Database, 2005

4

Some, more than others, during Some, more than others, during the 1950-2005 period …the 1950-2005 period …

2000/06

1990

1980

1970 1960

1950

1950

19601970

1980

1990

2000/06

1980

1970

1960

1950

1990

2000/06

-6

-5

-4

-3

-2

-1

0

1

2

-50 0 50 100 150 200 250 300deviation (%) of GDP per capita with respect to world average

($ 1990)

GD

P p

er c

apita

gro

wth

min

us w

orld

per

cap

ita g

row

th

(% a

nnua

lized

)

Venezuela ArgentinaColombia


5

Deepening the gap between them Deepening the gap between them and developed countries …and developed countries …

1950

19601970

1980

1990

2000/061950

1960

1970

19802000/06

1990

2000/06

1990

1950

1960 1970

1980

-1,5

-0,5

0,5

1,5

2,5

3,5

4,5

50 100 150 200 250 300 350deviation (%) of GDP per capita with respect to world average

($ 1990)

GD

P p

er c

apita

gro

wth

min

us w

orld

per

cap

ita g

row

th

(% a

nnua

lized

)

Finland Norway Ireland


6

Deepening the gap with developed Deepening the gap with developed countries …countries …

2000/06

1990

1960

1970

1980

1950

1990

2000/06

1980

1970

1960

1950

2000/06

1990

1980

1970

1960

1950

-3,5

-2,5

-1,5

-0,5

0,5

1,5

2,5

3,5

4,5

0 50 100 150 200 250deviation (%) of GDP per capita with respect to world average

($ 1990)

GD

P p

er c

apita

gro

wth

min

us w

orld

per

cap

ita g

row

th

(% a

nnua

lized

)

Spain Portugal Italy


7

The Asian countries experienced The Asian countries experienced an historical jump.an historical jump.

1950

1960

1970

1980

1990

2000/06

1950

19601970

1980

19802000/06

-2,5

-1,5

-0,5

0,5

1,5

2,5

3,5

4,5

5,5

-85 -75 -65 -55 -45deviation (%) of GDP per capita with respect to world average

($ 1990)

GD

P p

er c

apita

gro

wth

min

us w

orld

per

cap

ita g

row

th

(% a

nnua

lized

)

China India


8




9

The lost decade of the 1980s became The lost decade of the 1980s became the lost decade of a quarter of a the lost decade of a quarter of a

centurycentury..

Throughout the 30 year period previous to 1980, Brazilian real GDP grew at an average rate of 7.4% each year. Following this period, growth has been disappointingly low.

Source: BBVA

5.3

5.5

5.7

5.9

6.1

6.3

6.5

6.7

6.9

7.1

7.3

19

61

19

64

19

67

19

70

19

73

19

76

19

79

19

82

19

85

19

88

19

91

19

94

19

97

20

00

20

03

GDP and Trend

Average growth (1961-1980) = 7,4%

Average growth (1981-2004) = 2,2%

log

10

The fall in capital accumulation The fall in capital accumulation partly explains the storypartly explains the story

Source: IPEA

Source: IPEA

Net Fixed Capital Stock(billions of 1999 Reales)

0

500

1000

1500

2000

2500

3000

3500

4000

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

Capital Stock Growth (%)

0%

2%

4%

6%

8%

10%

12%

1951

1955

1959

1963

1967

1971

1975

1979

1983

1987

1991

1995

1999

2003

Average 1950-80

Average 1980-03

11

Lower capital accumulation: Lower capital accumulation: investments costs grew until investments costs grew until

1990...1990...Investment prices over General price index

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

Source:based on Penn World Table

… afterwards they stabilized at a relatively high level.

Investment prices over General Price Index

0.5

0.7

0.9

1.1

1.3

1.5

Co

lom

bia

Bra

zil

Ch

ile

Per

u

Me

xic

o

Sp

ain

Ko

rea

Source: based on Penn World Table

12

Lower capital accumulation: capital utilization dropped

Installed Capacity Utilization (%)

70

72

74

76

78

80

82

84

86

88

90

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

Average 1950-80

Average 1980-04

Source: based in IBGE

13

Lower capital accumulation: Lower capital accumulation: decline in productivity of capital decline in productivity of capital due to due to decrease in total factor decrease in total factor

productivity productivity Total Productivity and Capital Productivity

4.65

4.7

4.75

4.8

4.85

4.9

4.95

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

log

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

Total Productivity Capital Productivity

Source: Based in IBGE

log

14

There was a decline in terms of trade but also a series of structural inefficiencies: Lack of infrastructures, high taxes, rigid labor market…

0.87

0.89

0.91

0.93

0.95

0.97

0.99

1.01

1.03

1.05

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

Excludes terms of trade Includes terms of trade

Total Factor Productivity(logs)

Source: BBVA

Lower capital accumulation: Lower capital accumulation: productivity fellproductivity fell

Pavement roads (% of the total)

0

20

40

60

80

100

Argentin

a

Brasil

Chile

Colom

bia

Méxi

coPerú

Uruguay

Venezuel

a

%

Source: World Bank

Latam mean

Source: Doing Business 2005

Dismissal costs (in weeks)

020406080

100120140160180

Brasi

l

Argen

tina

China

Corea del

Sur

Méx

ico

Venez

uela

India

Españ

aPer

úChile

Colom

bia

Uruguay

15

Other productivity issues: Other productivity issues: Temporal costs vs financial Temporal costs vs financial

costscostsNumber of days needed to open a

business

020406080

100120140160

Brasi

l

Venez

uela

Españ

aPer

úIn

dia

Argen

tina

Colom

bia

Méx

ico

China

Corea

del S

urChile

Uruguay

Money needed to open a business (en US$)

0

500

1000

1500

2000

2500

Españ

a

Uruguay

Corea

del S

ur

Méx

ico

Venez

uela

Perú

Colom

biaChile

Brasi

l

Argen

tina

India

China

Number of days needed to enforce a contract

0100200300400500600

Colom

biaPer

ú

Brasi

l

India

Venez

uela

Uruguay

Méx

ico

Argen

tina

Chile

China

Españ

a

Corea

del S

ur

Money needed toenforce a contract

0

500

1000

1500

2000

2500

Venez

uela

Españ

a

Uruguay

Chile

Argen

tina

Perú

Méx

ico

India

Corea

del S

ur

China

Colom

bia

Brasi

l

Source: Doing Business 2005

16

Other productivity issues: Other productivity issues: financial intermediationfinancial intermediation

Brazil:Free credit investment over

total

0%

15%

30%

45%

60%

75%ene

-97

ene

-98

ene

-99

ene

-00

ene

-01

ene

-02

ene

-03

ene

-04

The small margin for boosting investment towards profitable projects is a delicate issue.

17

Simulation: path of Brazilian GDP Simulation: path of Brazilian GDP with unchanged capital with unchanged capital

productivityproductivity

Due to the direct effect of productivity in GDP, if the 1980s level had remained unchanged, ceteris paribus, Brazil would be twice as rich today.

(Equivalent to Greece´s GDP per capita in PPPs).

0.8

1

1.2

1.4

1.6

1.8

2

2.2

2.4

2.6

197

8

198

0

198

2

198

4

198

6

198

8

199

0

199

2

199

4

199

6

199

8

200

0

Simulation

Real Value

GDP Evolution IndexBase 1980 = 1

Source: BBVA

18




19

The Chinese Dragon and the Indian Elephant are rapidly catching-up, while Brazil has only been recovering in recent years.

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

BRA CHI IND TUR

Real GDP per capita

Source: PWT

Real GDP pc

1980 2004 % yoy

China 1069 5150 6.77%India 1159 3097 4.18%Turkey 4272 7572 2.41% Brazil 6380 7801 0.84%

As a result, Brazilian growth has As a result, Brazilian growth has been lagging behind other been lagging behind other

emerging giantsemerging giants

20

Real GDP pc

1980 2004 % yoy

China 1069 5150 6.77%India 1159 3097 4.18%Turkey 4272 7572 2.41% Brazil 6380 7801 0.84%

US 21336 37233 2.35%

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

BRA CHI IND TUR USA

Real GDP per capita

Source: PWT

USA(right) The Chinese

Dragon and the Indian Elephant are rapidly catching-up, while Brazil has only been recovering in recent years.

Brazil has also diverged with respect to the benchmark country, US.

As a result, Brazilian growth has As a result, Brazilian growth has been lagging behind other been lagging behind other

emerging giantsemerging giants

21

Trade openness and the catching Trade openness and the catching up processup process

Successful Asian emerging countries were able to simultaneously combine growth with a trade openness proccess.

Brazil has recently started to open up its economy.

In 2005 the trade surplus reached a record USD 45 billion, an increase of 33% yoy (in spite of a 13% appreciation of the Real).

-1,0

-0,8

-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8

1,0

0,0 0,2 0,4 0,6 0,8 1,0 1,2

Thailand Taiwan South Korea Japan India China

2001-04

1951-55

2001-04

1951-55

Trade openness and development

Real tradeopenness(as a % of GDP)

Dev

iation

ofRea

l GDP pe

rcap

ita with

resp

ectt

owor

ldav

erag

e(in

loga

rith

ms)

Source: BBVA using Penn World Tables and IMF data

1951-55

2001-04

0%

5%

10%

15%

20%

25%

30%

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Brazilian Real Trade Openness(as a % of GDP)

Source: BBVA

22

A trade exposure well balanced A trade exposure well balanced between US, Europe and Asia…between US, Europe and Asia…

China has become one of the main destinations for Brazilian exports.

0

1000

2000

3000

4000

5000

6000

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

Real Brazilian Exports towards China

mill

ions

of

1996

rea

les

Source: SECEX

Brazilian Exports Composition by Country of Destination

US 24.1% 1º US 18.3%

Argentina 11.8% 2º Argentina 8.9%

Germany 9.7% 3º Germany 8.1%

Italy 5.3% 4º China 5.9%

Japan 5.2% 5º Japan 4.6%

France 4.0% 6º France 3.6%

United Kingdom 2.5% 7º Italy 3.3%

Spain 2.4% 8º Algeria 3.1%

South Korea 2.1% 9º South Korea 2.8%

Algeria 2.0% 10º United Kingdom 2.2%

Venezuela 2.0% 11º Spain 1.9%

Canada 2.0% 12º Canada 1.4%

Sweden 1.9% 13º Sweden 1.3%

China 1.8% 14º Venezuela 0.3%

1999 2004

Increasing in importance

Decreasing in importance

23

……which underlines a process which underlines a process successfully implementedsuccessfully implemented

The structure of Brazilian exports is very similar to that of other Latin American countries.

Brazil is therefore exploiting its competitive advantage.

The main destination for Brazilian exports are those countries which Brazil does not compete with, and those which do not produce the goods that Brazil mainly exports.

0

10

20

30

40

50

60

70

80

90

100

Ecuad

or

Par

aguay

Bolivi

a

Ven

ezuel

a

Chile

Arg

entina

Uru

guay

Colo

mbia

Per

u

Indones

ia

Bra

zil

Can

ada

Net

her

lands

India

Thai

land

Spai

n

Mal

aysia

Mex

ico

Bel

giu

m

UK

Fran

ce US

Singap

ur

Ital

y

Chin

a

Ger

man

y

South

Kore

a

Taiw

an

Hong K

ong

Japan

Source: BBVA using WTO data

Agricultural, energetic and mining products Exports(% over total exports) (2003)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Braz

il

Boliv

ia

Colo

mbi

a

Ecua

dor

Arge

ntin

a

Uru

guay

Para

guay

Mex

ico

Peru

Chile

Vene

zuel

a

Source: BBVA using WTO data

Exports Conformity Index with the rest of LatAm Countries* (between 0 and 1) (2003)

24

Top 100 firms in Latin-America

45

40

8

31 1 1 1

0

10

20

30

40

50

Brazil Mexico Chile Argentina Ecuador Colombia Peru VenezuelaSource: America Economia 2005

Rk Local Private Firms Sector2004 (US$ Mill) 04/03 %

12 Vale do Rio Doce Mining 10.376,8 54,215 Empresas Ipiranga Petroleum/Gas 8.393,8 24,416 Odebrecht Holding 8.206,8 36,821 Gerdau Steel 7.382,9 59,622 Dist.Ipiranga Petroleum/Gas 7.200 22,228 Cia. Ipiranga Petroleum/Gas 6.121,3 23,530 Telemar Participaçoes Telecom 5.968,1 23,131 Telemar Norte Leste Telecom 5.882,3 24,232 Grupo Votorantim Holding 5.809,2 6,945 Grupo Pao de Açucar Trade 4.733,7 26,648 Usiminas Steel 4.607,4 53,749 Braskem Petrochemical 4.593,1 30,952 Ambev-CBD Drinks 4.523,4 20,762 Embraer Aerospace 3.854,4 69,563 Gerdau Açominas Steel 3.825,9 248,366 CSN Steel 3.691,8 52,972 Casas Bahia Trade 3.390,6 63,374 Varig Airlines 3.337,2 21,389 Grupo Camargo Correa Holding 2.795,6 8,5

100 CPFL Energía Electricity 2.537,8 21

Sales

Brazilian firms are beginning to increase activities overseas

Source: America Economia 2005

25

Within the 50 companies that had greater profits in 2004, 19 are Brazilian, with an average utility over sales of 18%. The average ratio of exports over total sales was 32%.

The 50 more profitable firms

19

16

7

3

1 1 1 1 1

0

5

10

15

20

Brazil Mexico Chile Argentina Colombia Ecuador Panama Peru VenezuelaSource: America Economia 2005

Rk Firm Sector Exports04 (US$ Mill) % of sales % of sales

3 Petrobras Petroleum 6.728,7 16,5 11,212 Vale do Rio Doce Mining 2.433,5 23,5 30,632 Grupo Votorantim Holding 1.544,6 26,6 18,948 Usiminas Steel 1.137,3 24,7 9,121 Gerdau Steel 1.066,7 14,4 11,663 Gerdau Açominas Steel 935,6 24,5 22,440 Telesp Telecom 821,7 16,4 -66 CSN Steel 746,6 20,2 20,2

144 CST Steel 611,9 31,9 53,594 Cemig Electricity 521,7 19,4 -20 Electrobras Electricity 487,2 6,5 -62 Embraer Aerospace 473,1 12,3 86,952 Ambev-CBB Drinks 437,6 9,7 -

208 Aracruz Celulose Paper 402,5 31,3 61,8102 Balgo Mineira Steel 391,6 15,5 -143 Cosipa Steel 363,2 18,8 33,531 Telemar Norte Leste Telecom 345,5 5,9 -16 Odebrecht Holding 320,2 3,9 -

Utility

Source: America Economia 2005


26

In worldwide terms Brazil is the Latin American country which had most firms listed in the Forbes 2000 report.

Number of firms in Forbes 2000

0

5

10

15

20

25

30

35

India Spain China Brazil Mexico Chile

Source: Forbes 2000

Rk Firm Sector Sales ($bill) Profit ($bill) Assets ($M.m.) Market value($bill)208 Banco Bradesco Group Banking 17,38 1,15 69,63 13,42256 Banco do Brasil Banking 15,05 1,14 89,99 9,59361 Vale do Rio Doce Materials 6,72 1,56 12,83 40,32477 Itazsa Banking 7,08 0,54 42,3 6,49601 Unibanco Group Banking 7,34 0,48 29,88 4,4807 Eletrobras Utilities 6,7 0,11 40,78 7,86

1.049 CSN-Cia Siderurgica Materials 2,41 0,36 7,56 7,341.064 Usiminas Materials 2,99 0,45 4,91 6,011.090 Tele Norte Leste Telecom 4,84 0,07 9,73 7,571.170 Braskem Chemicals 4,16 0,26 5,49 4,121.424 Cemig Utilities 1,94 0,41 5,1 3,441.467 Embraer Aerospace & Defense 2,27 0,2 4,37 6,091.496 Metalurgica Gerdau Materials 4,62 0,2 4,69 1,991.501 Siderurgica de Tubarao Materials 1,92 0,61 3,81 2,991.697 Sabesp Utilities 1,42 0,29 5,67 1,731.779 CESP Utilities 0,6 0,22 6,57 0,361.860 Aracruz Celulose Materials 1,17 0,23 3,53 3,481.948 Ipiranga Oil & Gas operations 5,88 0,03 0,98 0,39

Source: Forbes 2000


27

Brazil is already quoted as being an example of macroeconomic

pragmatism

-2

-1

0

1

2

3

4

5

6

7

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

% o

f G

DP

Public Sector Primary Surplus(12 month acum.)

Plan RealHiperinflation Flexible FX

Source: BCB

1119

916

247716211973

980

0

50

100

150

200

250

300

350

400

450

500

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

%

Inflation IPCA

Source: BCB

28

Some of the main challenges facing Brazil are to boost its productivity, diminish transaction costs and overcome inefficiencies.

Conclusions

Brazil is progressively opening its economy in order to avoid lagging behind the main catching up developing countries.

There is an ever expanding economic pragmatism among Brazilian policy makers, who continuously adhere to the view of “the political economy of the possible".

29

Thank youThank youfor your attention!for your attention!

Documents

Catching up and Falling Down A Latin American Perspective