Growth and Structural Reforms:Stylized Facts and Findings
Eduardo LoraEuro-Latin Research Network Meeting
Madrid, October 2002
Research DepartmentInter-American Development Bank
Latin America’s Growth Record
The Structural Reforms
The Opinions on the Reforms
The Effects of the Reforms
Growth and Structural Reforms:Stylized Facts and Findings
Growth of GDP per capita
-4%
-2%
0%
2%
4%
6%
8%
1950s 1960s 1970s 1980s 1990s
Developed
East Asia
Middle East
East Europe
LATIN AMERICA
Rest of Asia
AfricaSource: RES-IDB Calculations, Penn World Tables (1998)
Latin America’s growth has been dissapointing
GDP per capita(1987 US$, PPP)
0
2000
4000
6000
8000
10000
12000
14000
1950s 1960s 1970s 1980s 1990s
Developed
East Asia
Middle East
East Europe
LATIN AMERICA
Rest of Asia
AfricaSource: Penn World Tables (1998)
Latin America has been left behind
Factor productivity is not increasing
TOTAL FACTOR PRODUCTIVITY, 1990s
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
Total Factor Productivity
Annu
al ra
te o
f gro
wth
%
Developedcountries
East Asia
Middle East
Eastern Europe
LATIN AMERICA
Rest of Asia
Africa
-5% -4% -3% -2% -1% 0% 1% 2% 3%HaitiJamaicaHondurasVenezuelaNicaraguaColombiaMexicoEl SalvadorParaguayEcuadorPanamaTrinidad y TobagoGuatemalaBrazilBolivia
Costa RicaBarbados
PeruDominican Republic
UruguayArgentina
ChileEast Asia
LATIN AMERICADeveloped
Annual growth of Total Factor Productivity (average 90's)Source: RES-IDB Calculations
Productivity growth in the 90s
…but falling, especially in the poorest countries
Growth is influenced by a host of factors
► Public institutions► Macroeconomic stability► Financial sector depth► Infrastructure of public services► Education ► Income distribution► International environment
-0.5
0
0.5
1
1.5
2
Rule of law Corruption
Developed
Southeast Asia
Middle Eastern
Eastern Europe
LATIN AMERICA
Rest of Asia
Africa
Institutional quality
Source: Kaufman (1999a)
Latin America’s public institutions do not stand out
The rule of law is very weak
World average = 0
1998
2001
-2 -1.5 -1 -0.5 0 0.5 1 1.5 2
Chile
Costa Rica
Argentina
Dominican Republic
Panama
Brazil
Mexico
Peru
El Salvador
Colombia
Nicaragua
Venezuela
Guatemala
Honduras
Source: Kaufmann et al. (2001)
Volatility of Reserve Money Growth in the 90s (Regional Medians)
0 5 10 15 20 25
South Asia
Industrial Economies
Middle East and North Africa
Other East Asia and Pacific
East Asia and Pacific 7
Latin America and Caribbean
Sub-Saharan Africa
Macro policies are very unstable
Average Private Domestic Credit in the 90s(Percent of GDP, Regional Medians)
0 20 40 60 80 100 120
Sub-Saharan Africa
South Asia
Latin America and Caribbean
Middle East and North Africa
Other East Asia and Pacific
Industrial Economies
East Asia and Pacific 7
Credit markets are underdeveloped
Credit to private sector (% of GDP)
93%
14%
35%
153%
316%
172%
188%
10% 20% 30% 40% 50% 60% 70% 80% 90%
Chile
Brazil
Colombia
México
Argentina
Perú
Venezuela
Expected for income levelGap
Credit markets are underdeveloped
…and infrastructure provision is lagging
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
1990 1996-99
Infra
stru
ctur
e In
dex
Developed
East Asia
Middle East
East Europe
LATIN AMERICA
Rest of Asia
Normalized indices of roads, electricity and telecommunications
Infrastructure Provision Index (covers electricity, water, roads and telephones)
* Includes electricity generation, acces to improved water Fuente , paved roads and telephone mainlines.
12%
5%
39%
7%
17%
12%
2.8 3.0 3.3 3.5 3.8 4.0
Chile
México
Argentina
Brazil
Colombia
Perú
Expected for income levelGap
…and infrastructure provision is lagging
Education is not growing fast enough
0
1
2
3
4
5
6
7
8
9
10
1960 1965 1970 1975 1980 1985 1990 1995 1999
Aver
age
Year
s of
Edu
catio
n - P
op >
25
yrs
Developedcountries
East Asia
Middle East
EasternEurope
LATINAMERICA
Rest of Asia
Africa
20
25
30
35
40
45
50
55
60
1960 1970 1980 1990
Gini Coefficients
The worst income distribution worldwide
Developed
Southeast Asia
Middle Eastern
Eastern Europe
LATIN AMERICA
Rest of Asia
Africa
Volatility in Terms of Trade Growth in the 90s (Regional Medians)
0 2 4 6 8 10 12
East Asia and Pacific 7
Industrial Economies
Other East Asia and Pacific
South Asia
Middle East and North Africa
Latin America and Caribbean
Sub-Saharan Africa
Terms of trade are highly volatile
-60
-40
-20
0
20
40
60
80
100
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
…not to mention financial flows
Financial Flows to Latin America= Net Portfolio Investment + Othe Ner InvestmentSource: WEO, IMF
(Billions of real US dollars of May 2002, deflated by US CPI)
Latin America’s Growth Record
The Structural Reforms
The Opinions on the Reforms
The Effects of the Reforms
Growth and Structural Reforms:Stylized Facts and Findings
Structural reforms aimed at improving growth by easing the functioning of markets
► Trade policy: – Low and flat tariffs
► Financial policy:– Market-determined interest rates– Low reserve requirements– Effective regulation and supervision
► Tax policy:– Low income tax and VAT rates– Broad and effective tax bases
► Privatizations► Labor legislation:
– Flexibility on hiring and firing – Certainty of labor costs– Payroll taxes low and linked to individual benefits.
Structural Reform Index, average LAC
Reforms have not stopped
0.30
0.35
0.40
0.45
0.50
0.55
0.60
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
…but have been sharply skewed among areas
Progress of Reforms in Latin America (Margin of Reforms Put to Use)
0%
10%
20%
30%
40%
50%
60%
70%
80%
Trade Finance
Until 1989
Until 1994
Until 1999
Note:Progress in reforms is measured as that part of the potential for reform as of 1985 that was actually used by the years 1989, 1994 and 1999.
…but have been sharply skewed among areas
0%
10%
20%
30%
40%
50%
60%
70%
80%
Commercial Financial Tax Privatization
Until 1989
Until 1994
Until 1999
Note:Progress in reforms is measured as that part of the potential for reform as of 1985 that was actually used by the years 1989, 1994 and 1999.
Progress of Reforms in Latin America (Margin of Reforms Put to Use)
…but have been sharply skewed among areas
0%
10%
20%
30%
40%
50%
60%
70%
80%
Commercial Financial Tax Privatization Labor
Until 1989
Until 1994
Until 1999
Note:Progress in reforms is measured as that part of the potential for reform as of 1985 that was actually used by the years 1989, 1994 and 1999.
Progress of Reforms in Latin America (Margin of Reforms Put to Use)
…and across countriesStructural Reforms Index
(countries with the highest and the lowest indexes in 1999)
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
Argentina
Trinidad and Tobago
Peru
Jamaica
Bolivia
1999
1985
… …and across countries
(countries with the highest and the lowest indexes in 1999)
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
Uruguay
Mexico
Venezuela
Ecuador
Costa Rica
Regional Average
Argentina
Trinidad and Tobago
Peru
Jamaica
Bolivia
1999
1985
Structural Reforms Index
…especially on privatizationPrivatizations, cumulative value 1988-99 as % of GDP
0% 5% 10% 15% 20% 25%Uruguay
Paraguay
Costa RicaEcuador
HondurasChile
Rep. Dominicana
NicaraguaColombia
T&T
VenezuelaMexico
Guatemala
El SalvadorArgentina
Brazil
PeruBolivia
As % of GDP of 1999
Latin America’s Growth Record
The Structural Reforms
The Opinions on the Reforms
The Effects of the Reforms
Growth and Structural Reforms:Stylized Facts and Findings
The public opinion is very dissatisfied with the reforms
► Privatizations have been beneficial– Strongly agree 9%– Agree 20%– Disagree 37%– Strongly disagree 26%
► The State should leave productive activities to the private sector:– Strongly agree 18%– Agree 28%– Disagree 30%– Strongly disagree 14%
Source: Latinobarómetro, 2001
Disapproval has increased...
**
40%
45%
50%
55%
60%
65%
70%
Without education
02
Completedtechnical education
4
CompletedUniversityeducation
6Note: Author’s calculations based on Latinobarómetro, 1998, 2000 and 2001. Levels of significance for the group without education determined byTOBIT regressions(including dummies for countries and other variables): * 10%, ** 5%, *** 1%.
2000
1998
Negative Opinion of Privatization by Educational Level(Percentage that believes privatizations have not been beneficial)
Some secondaryeducation
Source: Lora and Panizza, 2002
…especially in the middle classes
**
*****
*********
*
40%
45%
50%
55%
60%
65%
70%
2000
1998
2001
Negative Opinion of Privatization by Educational Level(Percentage that believes privatizations have not been beneficial)
Without education
0 2
Completedtechnical education
4
CompletedUniversityeducation
6
Some secondaryeducation
Note: Author’s calculations based on Latinobarómetro, 1998, 2000 and 2001. Levels of significance for the group without education determined byTOBIT regressions(including dummies for countries and other variables): * 10%, ** 5%, *** 1%.
Source: Lora and Panizza, 2002
Privatization and corruption:An explosive blend
Corruption and Opposition to Privatization
Venezuela
Uruguay
Peru
Paraguay
Nicaragua
MexicoHonduras
Guatemala
El Salvador
Ecuador
Costa Rica
Colombia
Chile
Brazil
Bolivia
Argentina
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.45 0.5 0.55 0.6 0.65 0.7 0.75 0.8Opposed to Privatization (% that do not consider it beneficial)
Priv
atiz
atio
n In
dex
* Cor
rupt
ion
Inde
x
Source: Lora and Panizza, 2002
Latin America’s Growth Record
The Structural Reforms
The Opinions on the Reforms
The Effects of the Reforms
Growth and Structural Reforms:Stylized Facts and Findings
To what extent have reforms helped growth?
Authors Period Effect
Easterly, Loayza and Montiel 1991-93 vs. 86-90 2,2%*Lora and Barrera 1993-95 vs. 87-89 2,2%*Fernández-Arias and Montiel 1991-95 vs. 86-90 1,7%*
Loayza, Fajnzylber, Calderón 1996-99 vs. 86-90 1,9%*Lora and Panizza 1997-99 vs 85-87 0,7%
*Includes the effect of macro stabilization
Effect of Reforms on Growth
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1988-90 1991-93 1994-96 1997-99
To what extent have reforms helped growth?
Source: Lora and Panizza, 2002
Reforms have been advantageous for growth, but...
The effect has been small
…partly transitory
…and has depended crucially on the quality of institutions, and in particular on the rule of law
By how much did income increase?Cumulative Effect of Reforms on Income
-5% 0% 5% 10% 15% 20% 25% 30%
GuatemalaColombiaJamaicaEcuador
ParaguayEl SalvadorVenezuela
MexicoUruguay
Trinidad and TobagoPeru
Dominican Rep.ChileBrazil
BoliviaCosta RicaArgentina
Cumulative change, 1985-99Source: Lora and Panizza, 2002
Reforms have been advantageous for growth, but...
They can lead to macro instabilityFinancial liberalization and privatization without fiscal discipline or adequate regulation.
They can concentrate (even more) income
Scarce skilled laborThey can be (very) detrimental to certain groups
Summary
Growth has been disappointingGrowth foundations are still weakStructural reforms attempted to correct this……but have been incomplete and uneven…and have not received public opinion support
The reforms have been good for growth……but the effect has been small and transitory.
Basic Reading ListLoayza, N., P. Fajnzylber and C. Calderón. “Economic Growth in Latin
America and the Caribbean”, World Bank, unpublished, June 2002.Lora, E. and U. Panizza, “Structural Reforms Under Scrutiny”, IADB-
RES Working Paper 470, March 2002.Other Readings:Burki, S.J. and G.E. Perry, The Long March: A Reform Agenda for Latin
America and the Caribbean in the Next Decade, World Bank, 1997.IADB, Latin America After a Decade of Reforms, Economic and Social
Progress in Latin America, 1997.Stallings, B. and W. Peres. Crecimiento, Empleo y Equidad, Cepal,
Santiago de Chile, 2000.