Globalisation, development financing and “Chindia” in
Latin AmericaLatin American Economic Outlook 2008
Bern, 11th March 2008
Javier SantisoDirector & Chief Development Economist
OECD Development Centre
Swiss Agency for Development Cooperation
The OECD and Latin America: An emerging commitment
• Latin American market democracies matter for the OECD and its member countries
• The Latin American dimension at the OECD:
Mexico: Member since 1994; Chile: candidate since May 2007; Brazil: enhanced cooperation, May 2007
Economic Surveys:
Latin American Economic Outlook 2008
1992, 1995, 1997, 1998, 19992000, 2002, 2003, 2005, 2007
2003, 2005, 2007
2000, 2005, 2006
The Development Centre: A bridge between the OECD and emerging regions
• Membership of the Development CentreWith a Governing Board open to OECD non-membercountries, the Development Centre provides a frameworkfor dialogue and experience sharing with emergingregions all over the world.
• Three Latin American countries are members ofthe Centre:
– Mexico – Chile– Brazil
Latin American Economic Outlook: The key tools
• Informal Advisory Board: Scholars and policy makers fromLatin America and OECD countries enrich the analytical work ofthe project.
• Research and Publications: The Development Centrecollaborates with OECD experts, international organisations andvarious Latin American think-tanks.
• Dialogue Forum: Key government officials from OECD andLatin American countries share experiences about the design andimplementation of public policies.
China, India and the Challenge of Specialisation
II
III
I Fiscal Policy and Legitimacy
Pensions, Capital Markets and Corporate Governance
Source: OECD Development Centre, 2007. Based on IMF , Globalization and Inequality, 2007. OECD* includes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Japan, Korea, Netherlands, Norway, Singapore, Spain,Sweden, UK, US.
Economic growth is slower than in other regions and it has left out the poor
0
5
10
15
20
25
01234567
Q1 Q2 Q3 Q4 Q5
Sub-Saharan Africa
1994 2002 growth
0
5
10
15
20
25
01234567
Q1 Q2 Q3 Q4 Q5
Developing Asia
1992 2002 change
0
20
40
60
80
01234567
Q1 Q2 Q3 Q4 Q5
OECD*1990 2000 growth
0
5
10
15
20
25
-101234567
Q1 Q2 Q3 Q4 Q5
Latin America
1993 2003 change
GD
P per capita by quintile
GD
P per capita by quintile
GD
P per capita by quintile
GD
P per capita by quintile
Qui
ntile
ann
ual g
row
th
in G
DP
per c
apita
Qui
ntile
ann
ual g
row
th
in G
DP
per c
apita
Qui
ntile
ann
ual g
row
th
in G
DP
per c
apita
Qui
ntile
ann
ual g
row
th
in G
DP
per c
apita
Source: OECD Development Centre, 2007. Based on CEPALSTAT y ECLAC’s Panorama Social de América Latina 2006.
Improvements in inequality are slight or non existent
Argentina
Bolivia Brazil
Chile
Colombia
Costa Rica
Ecuador
El Salvador
Guatemala
Honduras
Mexico
NicaraguaPanamaParaguay
Peru
Dominican, R.
Uruguay
Venezuela
40%
45%
50%
55%
60%
65%
40% 45% 50% 55% 60% 65%
Gin
i coe
ffici
ent (
early
200
5 or
clo
sest
yea
r)
Gini coefficient (early 1990s)
deteriorations
improvements
Changes in inequality during the last decade
Source: OECD Development Centre, 2007. Based on data by Goñi, López, and Servén (2006)
Fiscal policy plays a very limited redistributive role, especially taxation
Gin
i coe
ffici
ent
Inequality before and after taxes and transfers
Poi
nts
of G
ini c
hang
e
(% c
hang
e in
ineq
ualit
y)
The effects of taxes and transfers
Public spending is a key instrument for tackling inequality
Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003) and ECLAC’s Panorama Social.
And also… in many cases social spending is regressive
Source: OECD Development Centre, 2007. Based on ECLAC’s Panorama Social .
8.2 7.9 7.8 8.0 8.0
5.2 5.0 5.1 5.2 4.3
2.5 3.4 5.07.5
16.816.0 16.3
17.920.7
29.1
0
5
10
15
20
25
30
Poorest quintile (q1)
q2 q3 q4 Richest quintile (q5)
Tota
l spe
ndin
g (=
100)
an
d pe
rcen
tage
s
Social Security Health Education
% of citizens who trusttax revenue is well spent
(2003-05)
Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003, 2005) and World Bank Institute, Governance Indicators Database. Based on World Economic Forum, Global Competitiveness Report, 2003-2006.
The result is very limited political capital to work with… fiscal legitimacy is low
Firms’ assessment of theneutrality/composition of government
decisions/spending (2003-2006)
Fairer/Wiser
Unfair/ Wasteful
Fiscal policy is more efficient in Europe (even in its Latin countries) in reducing inequalities and stimulating social cohesion
Gin
i coe
ffici
ent
There is no Latin curse:Quality of fiscal policy is not a matter of DNA
Inequality before and after taxes and transfers
Source: OECD Development Centre, 2007. Based on data by Goñi, López, and Servén (2006).
Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003, 2005) and ECLAC’s Panorama Social
Social cohesion is becoming an increasingly important issue in the region
Argentina
BoliviaBrazil
Chile
Colombia
Costa Rica
Dominican Republic
Ecuador
El Salvador
Guatemala
Honduras
Mexico
Nicaragua
PanamaParaguay
Peru
Uruguay
Venezuela
0
5
10
15
20
25
30
35
0.4 0.45 0.5 0.55 0.6 0.65 0.7
Inequality (Gini coefficient 2000s)
Fisc
al le
gitim
acy
(% tr
ust t
axes
wel
l spe
nt)
Development financing: The importance of the link between fiscal policy,
democratic governance and development
Fiscal Legitimacy
Democratic Governance
Quality of fiscal policy
Economic DevelopmentGeneration of
tax revenue & effectiveness of
public expenditure
Source: OECD Development Centre, 2007. Based on Latinobarómetro (2003).
Argentina
Bolivia Brazil
Chile
Colombia
Costa Rica
Ecuador
El Salvador
Guatemala
Honduras
Mexico
Nicaragua
Panama
ParaguayPeru
Uruguay
Venezuela
0
5
10
15
20
25
30
35
40
45
50
0 5 10 15 20 25 30
Fiscal legitimacy (% who trust taxes are well spent)
Dem
ocra
tic p
erfo
rman
ce
(% s
atis
fied
with
dem
ocra
cy)
Fiscal policy can help democratic consolidation in Latin America
It is not simply a technical matter
Source: OECD Development Centre, 2007. Based on PISA (2003) and OECD Education at a Glance (2005)
Improving public spending is crucial (efficiency and progressivity)
Improving the efficiency and equity of public spending is a crucial challenge for the region
Education Expenditures and Performance
Mexico
NorwayPolandSlovak Republic
Spain United States
Brazil
Indonesia
Thailand
Tunisia
Uruguay
300
350
400
450
500
550
600
- 5,000 10,000 15,000 20,000 25,000 30,000
Annual expenditure on educational institutions per student (2001) in equivalent US dollars converted using PPPs, by level of education, based on full-time equivalents
Mat
hem
atic
s Sc
ore
(PIS
A 20
03)
Traditional weaknesses of fiscal policies in Latin America
• Tax revenue is generally low and tax structures unbalanced
• Direct taxation is particularly low
• Tax base is narrow (some of the reasons are informality and tax exemptions)
• Excessive reliance on volatile revenues from natural resources
• Countries still rely heavily on transfers from the central government
Fiscal Reforms in Latin America
• Results of the 1990s fiscal reforms have been mixed in part because many of the reforms were not fully implemented.
• Contrasting experiences of Brazil and Mexico suggest that rather than pursuing technical perfection, a wise approach to fiscal reform may involve focusing with perseverance on reforms that are feasible (“political economy of the possible)
Some recommendations
• Enhancing transparency and accountability in fiscal policy (role of independent third parties for auditing and evaluation – Local think tanks)
• Better, fairer and more public spending
• Broadening tax base and making tax systems fairer and more balanced (elimination of special exemptions in direct and indirect taxes, increasing direct taxation)
• Decentralisation – reinforcing the capacity, authority and accountability of sub-national government bodies, especially through their greater use of direct taxation to finance expenditure
China, India and the Challenge of Specialisation
II Pensions, Capital Markets and Corporate Governance
III
I Fiscal Policy and Legitimacy
Pension Reform in Latin American Countries
• Latin America is at the forefront of pension reform. – Chile launched the process in 1981 and many countries in Latin
America and Eastern and Central Europe have found inspiration in the Chilean experience.
• More efforts are needed in refining the mechanisms in various countries to improve: – 1) commercial practices 2) competence and administration of
pension funds 3) investment regulations and 4) the contributions paid by members.
• Improving the social dimension of pension reform is also necessary to: – 1) extend coverage 2) ensure timely payment of contributions 3)
enhance efficiency of management of funds and 4) reduce costs to members.
Pension reform has had a mixed impact on national savings
8
12
16
20
24
28
32
-2 -1 0 1 2 3 4 5 6 7 8
Argentina Chile Colombia Mexico Peru
Savi
ng /
GD
P (%
)
Years since start of Reform
Mexico
Mexico
Chile
Chile
Colombia
Colombia
ArgentinaArgentina
Peru
Peru
Source: OECD Development Centre (2007), based on World Bank Development Indicators.
But they have become a force for the development and deepening of financial marketsPension Fund Assets as percentage of GDP, 2006
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
ChileBrazil
ColombiaPeru
ArgentinaMexico
HungaryCzech Rep.
EstoniaLatvia
United StatesUK
CanadaJaponSpain
France
Latin America
Other Emerging Economies
Advanced Economies
Source: OECD Development Centre (2007), based on Global Pension Statistics database.
Impact on capital markets
• On financial securities markets
• On the creation of new instruments
• Increasing the size and the depth of the local stock market
• Modernisation of trading systems in stock exchanges
• Reducing volatility of transactions
• Reducing costs faced by enterprises
• Creating greater competition between the institutional investors in the market
• Improving the allocation of financial resources
• On the development of the life – insurance industry
The importance of strengthening the Governance of Pension Funds
The quality of the governance of the pension funds is critically important not only for the own financial performance and the
benefits they provide to their members, but also for the considerable indirect impact on the quality of corporate governance of the
enterprises in which pension funds invest.
Governance of
Pension Funds
Corporate Governance
China, India and the Challenge of Specialisation
II Pensions, Capital Markets and Corporate Governance
III
I Fiscal Policy and Legitimacy
Emerging economies are increasingly present on the global scene
Source: OECD Development Centre, based on Maddison (2003) “The World Economy Historical Statistics”
When the OECD was founded, its member countries accounted for 75% of world GDP, today they represent 55% of world GDP
Source: C.HJ.Kwan, Nomura Institute of Capital Markets ResearchSource: OECD Development Centre, 2006
Based on Working Paper by Blázquez, Rodríguez and Santiso, 2006
China and India could be angels rather than demonsfor Latin America’s commercial development
% o
f exp
orts
% o
f exp
orts
Asian countries competition* vs. Chinese exports to US, % , 2005
010203040506070
Latin American countries competition* vs. Chinese main export products, 2005
0%
10%20%
30%40%
50%60%
The Asian boom has had a strong impact on the trade balance of several Latin American countries
Source: OECD Development Centre, based on WITS Database, 2007.
0
200
400
600
800
1 000
1 200
1998 2001 2003 2005
$ m
illio
ns
China’s and India’s rising demand for Latin American commodities (1998-2005)
Agricultural Raw Materials
Food
Ores & Metals
0
400
800
1200
1600
2000
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Pric
e in
dex
(197
0=10
0)
Increasing commodities prices(1900-2005)
Aluminium Coffee
Copper Petroleum
0
200
400
600
800
1000
1997 1998 1999 2000 2001 2002 2003 2004 2005
$ m
illio
ns
Rise in Indian imports from Latin America (1997-2005)
Sugar/mollasses/honey
Copper ores/concentrates
Fixed veg oil/fat, soft
0
2 000
4 000
6 000
8 000
10 000
0
20 000
40 000
60 000
80 000
100 000
120 000
1998 1999 2000 2001 2002 2003 2004 2005
$ m
illio
ns
.
$ m
illio
ns .
Rise in mineral exports from Latin America (1998-2005)
Petroleum and products (left)Copper ores/concentrates (right)Nickel ores/concs/etc (right)
The rise of China and India also represents a wake-up call: The challenges of specialisation
Source: OECD Development Centre, 2007. Based on WITS and Comtrade data.
Latin America risks to fall on an excessive
raw-material specialisation
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Uni
ted
Stat
esKo
rea,
Rep
.M
alay
sia
Sing
apor
eTh
aila
ndJa
pan
Mex
ico
Phili
ppin
esIn
done
sia
Chin
aH
unga
ryCz
ech
Rep
ublic
Rus
sian
Fed
erat
ion
Arge
ntin
aBr
azil
Colo
mbi
aSp
ain
Pola
ndVe
nezu
ela
Slov
ak R
epub
licRom
ania
Bulg
aria
Croa
tiaEl
Sal
vado
rIn
dia
Turk
eyCo
sta
Ric
aG
uate
mal
aCh
ilePe
ruU
rugu
ayBo
livia
Paki
stan
Pana
ma
Hon
dura
sPa
ragu
ay
Low
com
pet.
H
igh
com
pet.
Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China, India).
Source: OECD Development Centre, based on WITS Database, 2007.
Trade complementarities with China remain unexplored today…
Trade Opportunities with China for selected countries (2000-05)
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Colo
mbi
aVe
nezu
ela
Rus
sian
Fed
erat
ion
Indo
nesi
aAr
gent
ina
Mex
ico
Mal
aysi
aU
nite
d St
ates
Peru
Chin
aKo
rea,
Rep
.Th
aila
ndG
uate
mal
aSi
ngap
ore
Japa
nSp
ain
Braz
ilCz
ech
Rep
ublic
Boliv
iaPo
land
Bulg
aria
Hun
gary
Croa
tiaSl
ovak
Rep
ublic
Rom
ania
Phili
ppin
esTu
rkey
Cost
a Ric
aCh
ileU
rugu
ayEl
Sal
vado
rH
ondu
ras
Paki
stan
Pana
ma
Para
guay
Low
com
pet.
H
igh
com
pet.
Major economies in the region have a lot to win from increasing trade with Indian partners
Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China, India).
Source: OECD Development Centre, based on WITS Database, 2007.
Trade Opportunities with India for selected countries (2000-05)
Beyond commodities: Trade potential to export to China and India
There are also substantial opportunities for intra-industry trade:
• Mexico: telecommunications equipment and electric circuit equipment
• Brazil: aircraft, telecommunications equipment and motor-vehicle parts
• Colombia: manufacturing sectors
• Argentina: Processed food
Agriculture and agri-business are probably among the most promising areas for Latin America
in terms of trade potential with India and China
11,700 Km
Mexico is more competitive in manufacturing more sophisticated products which require short delivery times
Shipping time
24 Days
160 Km
4 Days
Mexico benefits from its geographic proximity to its major export markets
Exploiting comparative advantages: The proximity to export markets
Infrastructure is a serious drawback for Latin America’s trade development
Source: Doing Business Report. World Bank, 2007.
05
10152025303540
Col
ombi
a
Ven
ezue
la
Indi
a
Peru
Ave
rage
LA
C
Chi
le
Chi
na
Bra
zil
Mex
ico
Arg
entin
a
Day
s
Time for exports
0
400
800
1200
1600
2000
Col
ombi
a
Arg
entin
a
Ave
rage
LA
C
Mex
ico
Bra
zil
Indi
a
Peru
Ven
ezue
la
Chi
le
Chi
na
$ pe
r co
ntai
ner
Cost of exports
0
1
2
3
4
5
6
7
Latin America and C.
India China Eastern Europe East Asian NIC's
Infr
astr
uctu
re In
dica
tor
Regional performance in the infrastructure pillar
Ways to deal with Dutch disease and other challenges
• Introducing new mechanisms to prevent appreciation (stabilisation funds, counter – cyclical fiscal rules, issuing of debt)
• Diversification
• Innovation
• Involving the private sector in R&D
• Infrastructure
Latin American Economic Outlook 2009and more
• Fiscal Policy and development.
•Migration and development.
• Innovation and development.
Latin American Economic Outlook 2008
www.oecd.org/dev/leo
Thank youMerciObrigadoGracias