LAC s Long-Term Growth: Made in China?

Transcription

1 LAC s Long-Term Growth: Made in China? 2011 Annual Meetings IMF-World Bank Chief Economist Office Latin America and the Caribbean The World Bank Washington, DC 20 September

2 Main messages and results The region comes from a great decade: strong growth, lower poverty, less inequality, and greater resiliency to shocks Growth performance heterogeneity is mutating, with connections to China and quality of policies playing a key differentiating role LAC economies are hitting capacity constraints Growth is understandably slowing down from 6% in 2010 to 4.5% in 2011 and to 4% in 2012 Global risks and uncertainties have risen dramatically, mainly from Europe, introducing a downward bias and impairing forecasts Unprecedented reversal in sovereign risk perceptions: France is currently perceived as riskier than Brazil, Colombia, Mexico, and Peru Chile is perceived as low risk as Germany and Sweden 2

3 Main messages and results LAC is an innocent bystander vis-à-vis two scenarios Great downward re-coupling: financial markets spin out of control, commodity prices collapse, and a global recession ensues Continued real decoupling: prolonged low growth in advanced economies but EMs continue growing, as China expands and commodity prices stay high Shock absorption capacity in LAC is heterogeneous Inflation targeters have a strong first line of defense (if needed, through aggressive reduction in i-rates, flexible e-rates, and large international reserves) Caribbean and most Central American countries are the most vulnerable LAC can control its capacity to grow with equity Despite good 2000s, LAC ensnared in 100 years of growth solitude and is already hitting speed limits Comparing LAC-China and Tigers-Japan leads to mixed evaluation 3

4 Main messages and results The increasing connection to China has not been accompanied by increased capital accumulation Investment rates Average of 20% of GDP since the 1980s in contrast to 33% for the Tigers Physical capital Road density has expanded 30% since the 1980s for the Tigers and it has in fact declined by 15% for LAC countries Electricity installed capacity was about 17 percent below that of the Tigers in the 1980s and now it is almost 50 percent below Human capital Percentage of LAC population with tertiary education has risen (from 9.5 in 1990 to 14% in 2009) but pales relative to the Tigers (which rose from 10 to 20%) LAC has low expenditure per pupil in primary education (13% of GDP per capita for LAC and 16% for Tigers) and lower PISA scores (Tigers score 28% higher) 4

5 Main messages and results So far, China has not been a conduit for technological diffusion and knowledge spillovers There is no meaningful intra-industry trade between LAC and China IIT index: LAC at 0.2 and EAT at 0.6 Exports are concentrated by natural resources Chile and Costa Rica are exceptions Tigers to Japan are dominated by non-primary goods Imports from China are concentrated on unskilled-labor intensive goods Tigers import mostly skilled-intensive and technological-intensive products 5

6 Main messages and results There are some bright spots in several LAC country/sectors: mode of production of commodities is escaping the enclave syndrome Biotechnological revolution and connectivity in Argentina and Brazil Climbing the quality ladder in metal production Clusters effects in copper production and salmon farming in Chile LAC needs a larger productivity-oriented policy effort to compensate for structural impediments to competitive exchange rate The Tigers followed a different model: high domestic savings and limited integration into non-fdi international markets It is all about escaping the risks of the commodity curse Harnessing technological diffusion and learning spillovers via diversification Dealing with volatility Avoiding corrosion of institutions via rent-seeking 6

7 LAC s success High trend growth, reduction in poverty and income inequality 7% 6% Cyclical-adjusted Growth in Latin America and High-Income Countries Trend growth computed using the band-pass filter High-Income Latin America 5% 4% 3% 2% 1% 0% Per Capita GDP Growth and Poverty LAC Countries Gini Coefficient Cumulative Change From 2009 to ,000 Costa Rica Dominican Republic Moderate Poverty Rate US$ 4 a Day Poverty Headcount GDP Per Capita ,000 8,000 7,000 6,000 5,000 4,000 3,000 GDP Per Capita US Dollars Colombia Uruguay Honduras Bolivia Chile El Salvador Argentina Panama Latin America Mexico Brazil Peru Paraguay Source: LCSPP based on Socio-Economic Database for Latin America and the Caribbean (CEDLAS and The World Bank). 7

8 LAC s success Stellar performance during the 2009 global downturn 0.04 Growth in Real GDP Middle Income Countries 0.04 Growth in Real GDP Latin America and the Caribbean T-6 T-5 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5 T+6 T-6 T-5 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5 T+6 Previous Cycles Current Cycle Previous Cycles Current Cycle LAC came out of the global crisis without balance sheet damage Notes: The figures represent the deviations from regional/group trend growth in real GDP on 13-quarter windows centered on previous and current troughs on real GDP. This figure depicts the behavior of real GDP in previous and current recession-recovery cycles. Sources: IMF s International Financial Statistics IFS, National Statistical Institutes and Central Banks, Haver Analytics. 8

9 LAC s uneven success Mutating regional heterogeneity Low-Growth Countries GDP Index 2002=100 Intermediate-Growth Countries GDP Index 2002= Actual 180 Actual Trend Trend High-Growth Countries GDP Index 2002= Actual Trend Sources: Potential GPD is computed as the average rate of growth between 2007 and Simple averages are used to construct the composite. The categorization of each group is as follow: Slow-growth are those countries that showed a less than 3.5% in their GDP real growth rate; Medium-growth are those between 3.5% and 10%: High-growth are those with 10% or more. For 2011 we used the last available forecast (Consensus Forecast June-2011). Sources: Consensus Forecast (June 2011); WEO (April 2011). 9

10 LAC s uneven success Where you are matters less than to whom you are connected Mean Growth Simple Average Mean Growth Simple Average Mean Growth Simple Average Max Min Low growth (13) 4.4% 2.3% 0.3% 2.9% -8.3% Intermediate growth (7) 4.4% 3.5% 2.8% 10.2% 4.9% High growth (12) 5.4% 5.2% 5.1% 27.8% 10.4% LAC (All Countries) 4.8% 3.7% 2.7% 27.8% -8.3% Low growth (<4%): Antigua and Barbuda, Bahamas, Barbados, Dominica, El Salvador, Grenada, Jamaica, Mexico, St. Kitts and Nevis, St. Vincent and the Grenadines, St. Lucia, Trinidad and Tobago, and Venezuela Intermediate growth (4%-10%): Belize, Costa Rica, Ecuador, Guatemala, Haiti, Honduras, and Nicaragua High growth (>10%): Argentina, Bolivia, Brazil, Chile, Colombia, Dominican Republic, Guyana, Panama, Paraguay, Peru, Suriname and Uruguay Sources: World Bank s World Development Indicators WDI (December 2010), IMF's World Economic Outlook WEO (April 2011), and Consensus Forecasts (June 2011) Latest available forecasts. Potential GDP is calculated computing the annual average real growth rate for the to 2007 GDP. Weighted averages (2007 Nominal GDP in USD Billions). 10

11 The cyclical recovery is giving rise to a more mature, albeit lower, growth dynamics in LAC and EMs Percent 12% 10% 8% 6% 4% 2% 0% High Income Annual Real GDP Growth Rate Weighted Averages South Africa Europe & Latin Central Asia America & Caribbean East Asian Tigers India China GDP per capita PPP 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 In PPP U$S Notes: Regional averages use 2007 nominal GDP on weights. Latest available forecasts are used. Sources: Consensus Forecasts (August and September 2011), Economist Intelligent Unit (September forecasts), Bloomberg, and IMF's World Economic Outlook (April 2011). 11

12 there is however large heterogeneity within LAC Annual Real GDP Growth Rate Growing Differences related to: -Quality of macro policies - Degree of openness - Abundance of natural resources - Linkages to China Percent 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Ant. & Barb. Venezuela Grenada Jamaica Trin. & Tob. Dominica El Salvador Belize Guatemala Honduras Ecuador Guyana Nicaragua Bolivia Costa Rica Colombia Suriname Chile Mexico LAC Dom. Rep. Brazil Panama Uruguay Peru Argentina Paraguay 2012 Notes: Regional averages use 2007 nominal GDP on weights. Latest available forecasts are used. Sources: Consensus Forecasts (August and September 2011), Economist Intelligent Unit (September forecasts), Bloomberg, and IMF's World Economic Outlook (April 2011). 12

13 LAC s maturing cyclical recovery Some high-growth countries are hitting capacity constraints Inflation acceleration Average 3 months 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% Output Gap and Inflation Acceleration LAC Countries Peru High Growth Intermediate Growth Slow Growth Venezuela Chile Honduras Guatemala Nicaragua Jamaica Colombia Costa Rica Ecuador Mexico Panama Dominican Rep. Brazil Paraguay Uruguay Argentina v.2 Argentina -60.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% Output Gap 2011 forecast Real Effective Exchange Rate Weighted Averages, Index Jan-05 = Jul-07 Brazil Chile Feb-08 Monetary Policy Interest Rate Differential Spread w.r.t FED Funds rate, In Basis Points Colombia Peru Mexico Appreciation Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Sep-08 Apr-09 Jul-11 Nov-09 Jun-10 Jan-11 Aug-11 China East Asian Tigers ECA High Income LAC Euro Area Notes: The output gap is computed using the HP filter, considering annual data from 1980 until 2012 (forecast). The marked area in panel D captures countries with an output gap above +1 percent and with inflation accelerating 20 percent or more. Argentina v2, represents the average of the inflation rate in the Province of Santa Fe, the Province of Mendoza, and the Province of San Luis. Sources: Consensus Forecasts (August 2011) and IMF's World Economic Outlook (April 2011). 13

14 The European epicenter From drama to trauma CDS (5 years) in Europe In Basis Points Ireland+Greece+Portugal France UK Spain Italy Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Notes: In panel A, for Ireland we use the first CDS quote available (August 2008). Sources: Bloomberg. 14

15 The European epicenter The reversal of fortune reflects the C-G-D trap Argentina Venezuela Ukrain Kazakhastan Tukey Phillipines Indonesia Colombia Panama Peru Vietnam Brazil Russia Romania South Africa Bulgaria Mexico Croatia Thailand Hungary Korea Malaysia Chile Poland Italy Greece Ireland Slovak Rep Portugal Spain Belgium France Germany Sweden Global Sovereign CDS 31-Dec-2007, in basis points Greece Venezuela Portugal Argentina Ireland Ukraine Hungary Italy Croatia Vietnam Spain Romania Bulgaria Turkey Belgium Poland Kazakhastan Russia Indonesia Phillipines South Africa France Peru Brazil Mexico Colombia Thailand Slovak Rep Panama Korea Malaysia Chile Germany Sweden Global Sovereign CDS 16-Sep-2011, in basis points Notes: In panel A, for Ireland we use the first CDS quote available (August 2008). Sources: Bloomberg. 15

16 The US epicenter Feeble growth prospects: Keynes vs. Fischer Index base 100 = Iq US Economic Activity GDP Index base 100 = Iq trend Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Sources: Consensus Forecasts (August 2011) and Bloomberg. 16

17 The US epicenter Increased risk aversion and recurrent mood swings Market Trends and Volatility VIX Index and S&P VIX Index S&P 500 (rhs) Lehman Briothers QEI US Flash downgrade Crash/ PIGS Japan Jackson Hole (QEII) Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Sources: Consensus Forecasts (August 2011) and Bloomberg. 17

18 High uncertainty Coupled stock markets around the world 120 Stocks Markets 2011 In USD, Index base 100 = Jan Jan-11 Feb-11 Japan Brazil Germany Feb-11 Mar-11 Mar-11 Apr-11 S&P500 UK France Apr-11 May-11 May-11 Jun-11 Jun-11 Jul-11 Jul-11 Aug-11 Aug-11 Aug-11 Sep-11 Percent 100% 90% 80% 70% 60% 50% 40% Emerging Market Asset Returns and Common Factors Average R-Squared from Country Regressions Early Period ( ) Late Period (Jan-05 to Jul-08) Crisis (Aug-08 to Apr-09) 30% 20% 10% 0% Equity Foreign Exchange CDS Spreads Source: Bloomberg 18

19 The US epicenter Downgrade but still the safe haven ( exorbitant privilege ) Gold and US T Gold 4.0% US T10 (rhs) 3.5% USD % 2.5% 2.0% Percent Japan US-EUR UK Currencies: 2011 Index base 100 = 1-Jan-2011 Brazil % Jan Dec-10 Jan-11 Mar-11 Apr-11 May-11 Jan-11 Jun-11 Feb-11 Jul-11 Feb-11 Aug-11 Mar-11 Mar-11 Apr-11 Apr-11 Sep-11 May-11 May-11 May-11 Jun-11 Jun-11 Jul-11 Jul-11 Aug-11 Aug-11 Sep-11 Source: Bloomberg 19

20 Growth prospects for LAC depend not only on the US and Europe, but also on China China Total Imports and CRB Index Total Imports US$ Billions China Total Imports CRB Index (rhs) CRB Index 25% 20% 15% China: Inflation and Industrial Production YoY % Inflation Industrial Production % Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11 5% 0% -5% Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sources: Bloomberg and Penn World Tables. 20

21 Bad scenario: global downward re-coupling LAC needs to hope for the best and prepare for the worst Robust monetary policy frameworks in LAC, mostly Shock absorption via e-rate flexibility/monetary policy independence Rate increases over the past 15 month gives the region room to maneuver How good are LAC s fiscal buffers? Comfortable public debt situation but insufficient fiscal flexibility Much less space among Central American and Caribbean countries How good are LAC s financial system buffers? Strong capital and liquidity positions Have systemic risks been brewing in the past year or so? How good are LAC s social safety nets? Ability to scale up social assistance programs vary widely in the region Social insurance frameworks are the weak link 21

22 Benign scenario: real decoupling continues Can LAC turn cyclical recovery into higher trend growth? High and sustained growth has eluded LAC for more than a century 90% 80% 70% Gold Standard Period GDP Per Capita of Relative to the US Weighted Averages Interwar Period ImportSubstitution Lost Washington Decade Consensus Washington Dissensus in striking contrast, not only the East Asia Tigers and their growth miracle years, but also other EAP countries and China more recently. 60% 50% 40% 30% 20% The BMW and Hyundai engines analogy 10% 0% LAC High Performance EAP Japan China Low Performance EAP Notes: In Panel B, High Performance EAP includes Korea Rep., Taiwan, Hong Kong, and Singapore; Low Performance EAP includes Indonesia, Philippines, Thailand, and Malaysia; LAC includes the following countries: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay, Venezuela, Bolivia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Nicaragua, Panama, and Paraguay. The weightsare calculated using the2007 nominal GDP. Source: Penn World Tables. 22

23 Long term growth performance in LAC by country groups 80% Diverging 80% Non-Converging 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% Venezuela Argentina Uruguay % Colombia Guatemala El Salvador Bolivia Paraguay 50% 45% 40% 35% 30% Semi-Converging 50% 45% 40% 35% 30% Fluctuating 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% Chile Dominican Republic Mexico Brazil Notes: Maddison ( ) was used from 1900 to 2006 and Real Per Capita GDP growth from WDI was used to calculate the levels from 2006 to Source: LCRCE Staff calculations based on Maddison (2007, 2009) and WDI. 23

24 Are the 2000s an exception to the rule? Growth and productivity picked up 7.0% 6.0% 5.0% Cyclical Adjusted Growth High-Income Latin America 4.0% 3.0% 2.0% 1.0% 0.0% Average TFP growth per year Avg Avg Avg Avg Avg Avg LAC 7 1.9% 0.4% -2.0% 0.2% 1.0% 0.3% Non - LAC 7 1.1% 0.5% -2.0% 0.1% 1.2% 0.2% Argentina 1.3% -0.2% -2.5% 2.0% 1.4% 0.4% Brazil 2.9% 3.2% -3.3% -1.7% 0.5% 0.3% Chile 1.5% 0.5% -0.5% 2.9% 0.5% 1.0% Colombia 1.4% 1.0% -1.3% 0.0% 1.3% 0.5% Mexico 2.0% 0.3% -0.9% -1.6% 0.3% 0.0% Peru 2.4% -0.2% -3.8% 0.5% 2.9% 0.4% Venezuela 2.1% -2.1% -1.6% -0.5% 0.2% -0.4% EAP 3.1% 2.1% 2.3% 1.3% 2.0% 2.2% China -0.5% 0.9% 1.6% 3.4% 6.2% 2.3% United States 0.9% -0.4% 1.1% 1.0% 0.6% 0.6% Japan 6.7% 1.1% 1.4% -0.7% 0.9% 1.9% Notes: In Panel B, High Performance EAP includes Korea Rep., Taiwan, Hong Kong, and Singapore; Low Performance EAP includes Indonesia, Philippines, Thailand, and Malaysia; LAC includes the following countries: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay, Venezuela, Bolivia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Nicaragua, Panama, and Paraguay. The weightsare calculated using the2007 nominal GDP. Source: Penn World Tables. 24

25 During the 2000s, the China Connection developed Can LAC leverage this connection further? Output Co-Movement Between LAC-7 and China 15-year rolling correlation of the Real GDP Growth ARG BRA COL MEX PER VEN CHL % 90% 80% Main Trade Partners % 60% 50% 40% 30% 20% 10% 0% Paraguay Chile Peru Brazil Costa Rica Uruguay Argentina Venezuela Ecuador Mexico Colombia Guatemala Bolivia Panama Suriname Nicaragua Jamaica El Salvador Grenada Honduras TTO Belize % of Total Trade RoW EU15 USA LAC CHN Notes: For Panel B, the sample of UE15 includes: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and the United Kingdom; the sample of LAC countries includes: Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Grenada, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad and Tobago, Uruguay, and Venezuela. Sources: WITS and World Bank World Development Indicators (WDI). 25

26 The China Connection in the long term Channels of growth spillovers Very important so far has been China s demand for LAC s exports Indirectly, its role in driving commodity prices For long-term growth, technological diffusion and learning become key determinants of productivity improvements Directly: Technology embodied in physical and human capital (direct channel) Indirectly: Knowledge dissemination through: Trade flows Capital flows Migration flows 26

27 A particularly telling connection for growth prospects East Asian Tigers and Japan Output Co-Movement Between EAP and Japan 15-year rolling correlation of the Real GDP Growth HKG KOR IDN MYS THA SGP % Main Trade Partnes % 80% 0 70% % of Total Trade 60% 50% 40% 30% World UE15 USA EAP JPN 20% 10% 0% Indonesia Thailand Korea Malaysia Philippines Taiwan Singapore HongKong Notes: For Panel B, the sample of UE15 includes: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the United Kingdom; the sample of EAP countries includes Hong Kong, Indonesia, Korea Rep., Malaysia, Philippines, Singapore, Taiwan and Thailand. Sources: WITS and WDI. 27

28 Can history repeat itself? An exploration of the nature of growth dynamics We focus on three sources of long-term growth: 1. Connection to growth poles and spillover effects TFP: LAC-7 vs. East Asian Tigers Simple avg, Index base 100 =1970 EAP, 2000 LAC LAC-7 EAP 2. Factor accumulation Trade and finance asymmetries t PPP Converted GDP Per Capita 2005 International Dollars Per Person LAC - 7 (1990): $ EAP (1960): $ t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9 t+10 t+11 t+12 t+13 t+14 t+15 t+16 t+17 t+18 t+19 t+20 Notes: LAC-7 includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. EAP includes Hong Kong, Indonesia, Korea Rep., Singapore, Taiwan, and Thailand. Sources: LCRCE Staff calculations based on Penn World Tables. 28

29 Factor accumulation: LAC lags Not enough investments nor savings Overall, trade and financial connections are unlikely to spur growth if not accompanied by: Investments Human capital formation Innovation, technological adoption and adaptation 40% 35% 30% 25% LAC-7 EAP Investment Decade Average 35% 30% 25% LAC-7 EAP Gross Domestic Savings Decade Average % of GDP 20% 15% % of GDP 20% 15% 10% 10% 5% 5% 0% 1960's 1970's 1980's 1990's 2000's 0% 1960's 1970's 1980's 1990's 2000's Notes: In Panel A, EAP includes Hong Kong, Indonesia, Korea Rep., Malaysia, Singapore, and Thailand. In Panel B, EAP includes Hong Kong, Indonesia, Korea Rep., Malaysia, Singapore, Taiwan, and Thailand. Both in Panel A and B, LAC-7 includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. Sources: WDI, Penn World Tables, and The International Energy Agency (IEA). 29

30 Factor accumulation Infrastructure gaps have widened Electricity Installed Capacity Simple Average In thousands of KW per 1000 people EAP LAC7 + URY Index base 100 = 1960 Index base 100 = EAP LAC-7 + URY Road Density Simple Average Notes: In Panel A, EAP includes Hong Kong, Indonesia, Korea Rep., Malaysia, Singapore, and Thailand. In Panel B, EAP includes Hong Kong, Indonesia, Korea Rep., Malaysia, Singapore, Taiwan, and Thailand. Both in Panel A and B, LAC-7 includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. Sources: WDI, Penn World Tables, and The International Energy Agency (IEA). 30

31 Factor accumulation Tertiary education has much less coverage in LAC 14.2 LAC East Asian Tigers LAC East Asian Tigers Source: Author s calculation based on Household datasets. 31

32 Factor accumulation Investment per student in LAC yields less learning Mathematics score in PISA IDN AZE MAC URY Education Gap ROM SVK TUR ARG CHL CZE HKG FIN KOR NLD NZL CHE AUS BEL JPN EST AUT DNK SVN DEU ISL IRL FRA GBR NOR POL SWE HUN LTU LUX ESP LVA USA GRC HRV PRT ITA THA JOR BRA MEX BGR COL TUN ISR 300 KGZ Expenditure per student, primary (% of GDP per capita) Sources: OECD, UNESCO, and World Bank. 32

33 Growth poles and technology diffusion The degree of intra-industry trade with growth poles Intra-Industry Trade Index with China 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Intra-Industry Trade and Total Trade with China 2009 SLV JAM NIC GTM DOM MEX CRI TTO COL BRA HND VEN GUY BOL ARG ECU URY PRY CHL PER LAC-7 Caribbean Other South America Central America 0% 0% 10% 20% 30% 40% 50% % of Total Trade with China Intra-Industry Trade Index with Japan 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Intra-Industry Trade and Total Trade with Japan 1990 IDN HKG PAK BGD TWN PHL MYS KOR LKA 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% THA % of the Total Trade with Japan NPL Source: WITS. 33

34 Growth poles and technology diffusion Composition of imports from growth poles 100% Share of Factor Intensity Categories in Imports LAC and China, % Share of Factor Intensity Categories in Imports EAP and Japan, % 90% 80% 80% % of Total Trade with China 70% 60% 50% 40% 30% 20% % of Total Trade with Japan 70% 60% 50% 40% 30% 20% Technology intensive products Human-capital intensive products Unskilled-labor intensive products Natural-ressource intensive products 10% 10% Primary products 0% 0% Panama El Salvador Guatemala Guyana Chile Costa Rica Dom. Rep. Jamaica Honduras Uruguay Venezuela Colombia Nicaragua Peru Bolivia Paraguay Ecuador Argentina Brazil Mexico Hong Kong Philippines Korea Rep. Singapore Malaysia Indonesia Thailand Notes: Only countries with more than 5% of total trade with China are reported. For Panel E and F, the factor intensity classification of product of Hinloopen and Van Marrewijk is used. Source: WITS. 34

35 Growth poles and technology diffusion Composition of exports to growth poles % of Primary Exports to China 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Primary Exports and Total Export to China 2009 ECU URY ARG HND VEN BRA PER GUY GTM BOL COL DOM NIC PAN TTO MEX SLV JAM CHL PRY GRD CRI 0% 0% 10% 20% 30% 40% 50% % of Total Trade with China LAC-7 Caribbean South America Central America % of Primary Exports to Japan 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% BGD NPL Primary Exports and Total Trade to Japan 1990 LKA HKG MYS PHL TWN 0% 0% 10% 20% 30% 40% 50% KOR THA % of Total Trade with Japan IDN Source: WITS. 35

36 Growth poles and technology diffusion The FDI channel playing an even more limited role The Japan-Tigers connection Large FDI flows driven by pull and push factors Flows over time shifted to labor-intensive to capital- and technologyintensive industries Growing connections among Tigers The LAC-China connection Very limited flows and mostly concentrated on resource-intensive sectors Recently: small investments appeared in manufacturing and transport Few connections developing among LAC countries that export to China Overall, little evidence that China is fostering productivity growth in the LAC region as Japan did for the East Asian Tigers. 36

37 Connections and virtuous cycles LAC pales in comparison to the Tigers. The role of global value chains: direct and indirect benefits Direct: employment generation, export generation Indirect: catalysts for not only technology and knowledge enhancement, but also capacity-building and economic development more widely East Asian Tigers thrived in creating virtuous cycles Electronics and semiconductors in Taiwan; automotive components in Korea And more recently garments, footwear, toys in China; pharmaceuticals & IT in India LAC s is not inserted into these global production chains... Some have argued that this is due to an excessive commoditydependence ( curse ) 37

38 But there are some hopeful signs in LAC Commodity production per se is not inferior to others Biotechnological revolution and connectivity in Argentina and Brazil Climbing the quality ladder in metal production Clusters of activity (employment, SMEs) around copper production and salmon farming in Chile Improved institutions and policy frameworks enhance the chances of avoiding the natural resource curse and rather raise the hopes of realizing the blessing LAC Metal Market Share along the Value Chain Worked Share Worked Quality Unwrought Share Unwrought Quality Ore Share Ore Quality 2003 Source: Mandel (2009). 38

39 LAC is significantly behind in innovation 0.02% Average Number of Patents Per Capita 0.01% 0.01% EAP LAC 0.01% 0.01% 0.00% 0.00% Notes: The sample of EAP countries includes: Hong Kong. China, Korea Rep., Indonesia, Malaysia, Philippines, Singapore, Taiwan, and Thailand. The sample of LAC countries includes: Antigua and Barbuda, Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Suriname, Trinidad and Tobago, Uruguay, and Venezuela. Source: UNIDO. 39

40 The trade and financial asymmetries give rise to additional constrains for LAC LAC needs to make a larger productivity-enhancing policy effort to compensate for structural impediments (low domestic savings and high degree of financial globalization) to a competitive exchange rate. East Asian Tigers: large trade openness but relatively closed to non-fdi capital flows Financial Openness Partial Liberalization 200% 180% 160% 140% EAP LAC-7 Trade Openness Export plus Imports as % of GDP % 100% EAP LAC-7 80% 60% 40% 20% 0 0% Notes: In Panel A, EAP countries are Hong Kong, Indonesia, Korea Rep., Malaysia, Philippines, Taiwan, and Thailand. Sources: Kaminsky and Schmukler (2002) and Lane and Milesi-Ferretti (2007). 40

41 Policy challenges ahead In the short run, at a major crossroads depending on the global scenarios Either way, a successful management of the cycle is essential to break free from the historical low levels of real growth LAC bumps against structural speed limits at comparatively low growth rates Productive capacity in LAC lacks the efficiency and flexibility to accommodate robust long-run growth rates Could the region turn natural resources and the China Connection into a blessing? Saving for stabilization and asset building Diversification avoiding the enclave syndrome Institutions avoiding corrosive effects of rent-seeking 41

42 Thank you 42