1

BBVA Japan

Tokyo May 30th 2006

Javier SantisoChief Economist & Deputy Director

OECD Development Centre

LATIN AMERICA 2006:LATIN AMERICA 2006:Beyond Good Revolutionaries and Free MarketeersBeyond Good Revolutionaries and Free Marketeers

2

LATIN AMERICA: IN THE GARDEN OF LATIN AMERICA: IN THE GARDEN OF DELIGHTS?DELIGHTS?

3

Utopia in Latin America: from a spacial search to a temporal search.

A search which has impregnated the history of Latin American political economy: from structuralism to monetarism, from Marxism to Liberalism.

In the 20th Century the whole Continent was dancing a waltz of paradigms.

THE FLOOD OF PARADIGMS IN LATIN AMERICATHE FLOOD OF PARADIGMS IN LATIN AMERICA

4

The transformations of the Latin American continent are now obvious.

In the region as a whole, the conceptual and practical framework of political economies have been transformed.

Democracy and the Market have taken over from Revolution and the State on the altar of references.

To sum up, a complete vocabulary and grammar have disappeared from the political and economic repertoire allowing a new ideology to emerge.

DEMOCRACY AND THE MARKET: DEMOCRACY AND THE MARKET: THE NEW ALPHABETTHE NEW ALPHABET

5

THE EMERGENCE OF THE POLITICAL ECONOMY THE EMERGENCE OF THE POLITICAL ECONOMY OF THE POSSIBLEOF THE POSSIBLE

The strategy used by Ulysses: leaders know that they could be in danger of succumbing to the temptation of the sirens chanting the economic politics of the impossible.

They are cautious and they tie themselves to the masts of the fiscal and monetary institutions they have contribute to build.

Two strategies of development are being outlined – and sometimes combined-: one is an anchor of endogenous credibility, coming from within, and the other is an anchor of exognous credibility, coming from outside.

6

THE POLITICAL ECONOMY OF THE POSSIBLE:THE POLITICAL ECONOMY OF THE POSSIBLE:THE SILENT TRANSFORMATIONTHE SILENT TRANSFORMATION

Javier Santiso, Latin America's Political Economy of the PossibleBeyond Good Revolutionaries and Free-Marketeers, Cambridge, Mass., MIT Press, 2006.

7

11 Latin America’s CrusadeLatin America’s Crusade

The Great Latin American TransformationThe Great Latin American Transformation22

11

33 ConclusionConclusion

8

CEPAL: Latin American Economic Commission

THE BIG CHALLENGE: THE LIFE AFTER THE THE BIG CHALLENGE: THE LIFE AFTER THE “WASHINGTON CONSENSUS”“WASHINGTON CONSENSUS”

Index of Structural Reforms in Latin America

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

CEPAL

IDB

IDB: Inter American Development Bank

Source: Based on ECLAC and IADB

9

A DISAPPOINTING PERFORMANCE IN THE A DISAPPOINTING PERFORMANCE IN THE REGION…REGION…

Source: Based on World Bank

Not only was growth poor but it was also very volatile.

Sout East Asia 7.7%

World 3.3%

USA 3.1%

Latin America 2.8%

EU 2.3%

last 25 years

Latin America 2.3%

South East Asia 2.2%

USA 2.1%

EU 1.1%

World 1.0%

Volatibility of growth

last 25 years

Source: Based on World Bank

10

……THE CONSEQUENCE HAS BEEN A DIVERGENCE THE CONSEQUENCE HAS BEEN A DIVERGENCE IN THE EVOLUTION OF INCOME PER CAPITAIN THE EVOLUTION OF INCOME PER CAPITA

With the exception of the 70s when Latin America attained an average growth rate of 6% ...

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

70's 80's 90's 00's

Crecimiento promedio

Sudeste asiático

América Latina

EEUU

UE

… during succeeding decades the income per capita gap between the developped regions widened. 8600

29700

Evolución del PIB per cápita ($ PPP)

0

5000

10000

15000

20000

25000

30000

35000

40000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Fuente: BBVA en base a FMI

América Latina

UE (15)

EEUU

11

HOWEVER AN UPWARD TURN BEGAN WITH A HOWEVER AN UPWARD TURN BEGAN WITH A NEW CYCLE IN 2003-2006....NEW CYCLE IN 2003-2006....

Latin American Cycles

The last cycle in the region was very long (11 years), especially compared to previous ones which lasted 8 years.

Source : BBVA

8 años 8 años 11 años

1980

1987

1997

1983

19912003

Average LengthExpansions: 5,3 yearsDecelerations: 4 years

12

CHINA AND ASIA CONTRIBUTE ALSO TO CHINA AND ASIA CONTRIBUTE ALSO TO GROWTH IN LATIN AMERICAGROWTH IN LATIN AMERICA

Source: Based on domestic sources, before the revised figures released in Jnauary 2006.

0

1

2

3

4

5

6

7

8

9

10

1997 1999 2001 2003 2005

Growth of GDP in China(Annual percentage

variation)

0

1

2

3

4

5

6

7

8

9

10

Chile

Arg

enti

na

Perú

Bra

sil

Uru

guay

Venezu

ela

Colo

mbia

Méxic

o

Exports to China in 2004(Percentage of total)

13

Venezuela 83.1%

Peru 70.7%

Chile 59.1%

Colombia 46.3%

Argentina 38.0%

Brazil 29.6%

Mexico 14.6%

Latam 31.2%

Source: Based BBVA

over total exports (2004)

Exports of commodities

60

70

80

90

100

110

120

130

140

150

160

170

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

Source: Based on BBVA

BBVA-MAP Index of Latin America commodity prices (100 =jan03)

TOTAL

Without oil

COMMODITY BOOM HAS BEEN A BONANZACOMMODITY BOOM HAS BEEN A BONANZA

14

11 Latin America’s CrusadeLatin America’s Crusade

The Great Latin American TransformationThe Great Latin American Transformation22

11

33 ConclusionConclusion

15

THE GREAT TRANSFORMATION: THE MONETARY MAST

0

50

100

150

200

250

Latin America Total Emerging Markets

Inflation (%)

Source: Based on IMF

16

*Central Government

By Country (2005)

-4.0%

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

-3.0*%

+0.3%

-4% -2% 0% 2% 4% 6%

Brasil

Colombia

Peru*

México

Venezuela*

Argentina*

Chile*

LAC-7: FISCAL BALANCE(SPNF, in % of GDP)

THE GREAT TRANSFORMATION: THE FISCAL ANCHOR

17

THE GREAT TRANSFORMATION: THE EXTERNAL ANCHOR

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

(e)

Trade openness in Latin America

Source: Based on BBVA

0% 10% 20% 30% 40% 50% 60% 70%

Mexico

Chile

Venezuela

Uruguay

Argentina

Colombia

Peru

Brazil

Trade openness in 2005

Source: OECD Development Centre

18

The political economy of the possible: ChileThe political economy of the possible: Chile

19

Evolution of the Pension System in Latin America (in % of GDP)

0%

5%

10%

15%

20%

25%

30%

1 2 3 4 5 6 7 8 9 1 11

Num. periods

ARGENTINA BOLIVIA COLOMBIACOSTA RICA CHILE EL SALVADORMEXICO PERU URUGUAY

Return of Democracy

GRADUALISM AND CONTINUISM: GRADUALISM AND CONTINUISM: PENSIONS REFORMSPENSIONS REFORMS

20

0%

10%

20%

30%

40%

50%

60%

70%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Num. periods

ARGENTINA BOLIVIA COLOMBIA COSTA RICA CHILE

EL SALVADOR MEXICO PERU URUGUAY

Retorno a democrácia

Evolution of Pension Funds in Latin America (in % of GDP)

GRADUALISM AND CONTINUISM: GRADUALISM AND CONTINUISM:

PENSIONS REFORMSPENSIONS REFORMS

21

CHILE: A MAJOR PERFORMER IN LATIN CHILE: A MAJOR PERFORMER IN LATIN AMERICA IN TERMS OF POLICY STABILITYAMERICA IN TERMS OF POLICY STABILITY

Source: IADB Politics of Policies Report, 2006Source: IADB Politics of Policies Report, 2006

Policy Stability Index (2005)

0 0.5 1 1.5 2 2.5 3 3.5 4

Venezuela

Argentina

Peru

Mexico

Colombia

Brazil

Chile

Stability Index (1-4 scale)

AverageAverage

22

The political economy of the possible: MexicoThe political economy of the possible: Mexico

23

EXTERNAL ANCHOR: THE EMERGENCE OF A EXTERNAL ANCHOR: THE EMERGENCE OF A GLOBAL TRADERGLOBAL TRADER

Mexican exports increased on average by 17% each year between 1989 and 2004 ...

Total Exports

0

20

40

60

80

100

120

140

160

180

200

1980/12 1984/12 1988/12 1992/12 1996/12 2000/12 2004/12

Degree of Openness((X+M)/PIB)

20

25

30

35

40

45

50

55

60

China Chile Mex Tur Col Arg Perú Bra Ind

... Which has resulted in a greater degree of openness

Source: INEGI and Banxico

24

THE COUNTRY NOW DEPENDS A LOT LESS ON THE COUNTRY NOW DEPENDS A LOT LESS ON RAW MATERIALESRAW MATERIALES

The export of manufactured goods grew on average between 1990 and 2000, about 28% per year and now accounts for 90% of total exports.

Exports

0

20

40

60

80

100

120

140

160

180

200

1980/12 1984/12 1988/12 1992/12 1996/12 2000/12 2004/12

Non Oil

Oil 0,0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0,9

1,0

25

The political economy of the possible: BrazilThe political economy of the possible: Brazil

26

EXTERNAL TRANSFORMATIONEXTERNAL TRANSFORMATION

Following the 1999 devaluation which give way to the floating of the real, the economy has gradually opened up, making it less vulnerable to external shocks.

Source: Based on BCB figures

0%

5%

10%

15%

20%

25%

30%

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Trade Opennes(Exports + Imports) / GDP

27

Number of firms in Forbes 2000

0

5

10

15

20

25

30

35

India Spain China Brazil Mexico Chile

Source: Forbes 2000

BRAZILIAN FIRMS RALLIED MEXICAN BRAZILIAN FIRMS RALLIED MEXICAN MULTILATINASMULTILATINAS

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 Venezuela

Source: America Economia 2005

28

11 Latin America’s CrusadeLatin America’s Crusade

The Great Latin American TransformationThe Great Latin American Transformation22

11

33 ConclusionConclusion

29

VENEZUELA

ECUADOR

PERÚ

PARAGUAY

ARGENTINA

URUGUAY

MÉXICO

BRAZIL

COLOMBIA

CHILE

EL SALVADOR

NICARAGUA

HONDURAS

COSTA RICA

GUATEMALA

PANAMÁ

REPÚBLICA DOMINICANA

BOLIVIA

Next presidential elections

2007 - 200920062004 - 2005

Latin America 2006: The political cycle is Latin America 2006: The political cycle is backback

30

The timing game: Political cycles and crises The timing game: Political cycles and crises in Latin America used to be synchronized, in Latin America used to be synchronized,

1970-20001970-2000

Nominal exchange rate depreciationand government change

0,94

0,96

0,98

1

1,02

1,04

1,06

1,08

1,1

1,12

1,14

1,16

-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9

Source: Frieden, Ghezzi y Stein, 2001

Country`s Total Elections 1 Colombia 13 1989 172 Costa Rica 11 1990 143 Guatemala 11 1991 34 Ecuador 10 1992 05 Chile 10 1993 106Peru 10 1994 187 Honduras 10 1995 68 Paraguay 9 1996 89Brazil 9 1997 7

10 El Salvador 9 1998 1511Republica Dom. 9 1999 1212 Uruguay 9 2000 1113Mexico 9 2001 414 Argentina 8 2002 1315 Nicaragua 8 2003 816Panama 8 2004 617 Venezuela 8 2005 518 Bolivia 7 2006 11

31

During the period 2000-2006, some During the period 2000-2006, some countries achieved a decoupling: The case countries achieved a decoupling: The case

of Mexicoof Mexico

-30

-20

-10

0

10

20

30

40

50

60

7001

/01/

1975

01/1

0/19

76

01/0

7/19

78

01/0

4/19

80

01/0

1/19

82

01/1

0/19

83

01/0

7/19

85

01/0

4/19

87

01/0

1/19

89

01/1

0/19

90

01/0

7/19

92

01/0

4/19

94

01/0

1/19

96

01/1

0/19

97

01/0

7/19

99

01/0

4/20

01

Source: Jorge Blázquez and Javier Santiso, 2004.

Timing of Presidential Elections and Timing of Presidential Elections and Exchange Rate Depreciations in Mexico, Exchange Rate Depreciations in Mexico,

1975-20001975-2000 Election Year

Election Year

Election Year

32

While others had overcome the test of While others had overcome the test of fire more recently: The case of Brazilfire more recently: The case of Brazil

20%

25%

30%

35%

40%

45%

-180

-80

20

120

220

320

420

520

bp

Voter intention for Lula in the opinion polls

(left)

Spread Brazil-Emerging Countries and Electoral Polls1994

20%

22%

24%

26%

28%

30%

32%

-100

-50

0

50

100

150

200

pb.

Voter intention for Lula in the opinion polls

(left)

Spread Brazil-Emerging Countries and Electoral Polls1998

Source: Based on Juan Martínez and Javier Santiso, 2003.

20%

25%

30%

35%

40%

45%

0

200

400

600

800

1000

1200

1400

Voter intention for Lula in the opinion polls

(left)

bp.Spread Brazil-Emerging Countries and Electoral Polls2002

Source: Datafolha, JP Morgan

33

Emerging Democracies in Latin America: Emerging Democracies in Latin America: Trends and issuesTrends and issues

AverageAverage

Source: Javier Santiso, “Latin America’s Political Economy of the Possible: Beyond Good Revolutionaries and Free Marketeers”.

MIT Press. Cambridge, Massachusetts, 2006

Based on the Inter-American Development Bank

Democratic regimes in Latin America since transition (1978-2005)

0

5

10

15

20

25

30

35

40

Colombia Venezuela Peru Mexico Argentina Brazil Chile

Yea

rs

34

The quality of policy making: The quality of policy making: A pending issue for Latin AmericanA pending issue for Latin American

Source: IADB Politics of Policies Report, 2006 and World Economic Forum, 2005

0 0.5 1 1.5 2 2.5 3 3.5 4

Stability

Enforcement andimplementation

Public regardedness

Efficiency

Policy index

Scale 1-4

OECD

East Asia

LatinAmerica

Key features of Public Policies: Inter-regional comparison

35

BBVA Japan

Tokyo May 30th 2006

Javier SantisoChief Economist & Deputy Director

OECD Development Centre

LATIN AMERICA 2006:LATIN AMERICA 2006:Beyond Good Revolutionaries and Free MarketeersBeyond Good Revolutionaries and Free Marketeers