LEO 2016 at the Wilson Center Washington DC

Wilson CenterWashington DC, April 18, 2016

Latin American Economic Outlook 2016Towards a new partnership with China

Adriana Arreaza CAF, Development Bank of Latin AmericaAngel Melguizo OECD Development Centre

Latin American Economic Outlook 2016Towards a new partnership with China

• The new China: an opportunity in the context of the economic slowdown in Latin America for structural advances, beyond commodities trading

• What is needed• Economic diversification• Upgrading• Integration in global value chains (international and regional)

• Investment in skills and innovation, productive development policies and a deepening of financial flows (e.g. integration and infrastructure)

1 Macroeconomic outlook for Latin America

2

Opportunities from China: upgrading, difersification and integration

China’s new normal: new links with Latin America

3

Latin American Economic Outlook 2016

Growth has weakened in Latin America and the prospects for recovery are subdued

GDP growth in Latin America and the OECD (% annual)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-6

-4

-2

0

2

4

6

8

10

OECD Latin America

%

Source: OECD Economic Outlook 98 database for the OECD. For Latin America, 2000-2014 CEPALSTAT, and 2015-2017 Latin American Consesus Forecasts (March 2016)

Draged by external headwinds…

Weak global demand

Volatile financial markets

Lower commodity prices

Price of selected commodities (100 = 2005)

The end of the “commodity super cycle”

Source: OECD/CEPAL/CIAT/BID (2016), Revenue Statistics in Latin America and the Caribbean 2016

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20170

50

100

150

200

250

Minerals and metals Crude oil

Domestic factors also weigh on investment and growth

GDP growth by demand components in Latin America (% annual)

Source: CAF

2010 2011 2012 2013 2014-4

-2

0

2

4

6

8

10

-1.9 -1.4 -1 -0.80.6

3.72.0

0.4 0.8-0.6

4.5

3.7

3.2 2.41.1

Consumption Investment Net Exports GDP (market prices)

%

… as illustrated by differing positions within the economic cycle

Illustration of the cyclical position in Latin American economies (2015, deviation from trend using the HP filter)

Source: OECD/CEPAL/CAF (2015), Latin American Economic Outlook 2016: Towards a new partnership with China

1 2 3 4 5 6 7 8 9 10

11

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79

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82

-0.04

-0.03

-0.02

-0.01

0.00

0.01

0.02

0.03

0.04

Argentina

Bahamas

Barbados

Bolivia

Venezuela

Chile

Colombia

Costa Rica

Dominican Republic

Ecuador El SalvadorGuatemala

Honduras

Jamaica

Mexico

NicaraguaPanama

Paraguay

PeruTrinidad and Tobago

Uruguay

Brazil

Growth prospects for Latin American countries in the short term are of a very modest recovery, with some exceptions…

GDP growth in Latin American economies (% annual)

Source: For Brazil, Chile, Colombia, Mexico and the OECD: OECD Economic Outlook 98 database. For the Latin American region (LA), Argentina, Peru and Venezuela: Latin American Consesus Forecasts (March 2016)

-10

-8

-6

-4

-2

0

2

4

6

Argentina Brazil Chile Colombia Mexico Peru Venezuela LA OECD

2009-14 2015 2016 2017

… with risks tilted downwardsThe main risk remains a hard landing of the Chinese economy

GDP growth in Latin American economies with different scenarios for China (% annual)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

-4%

-2%

0%

2%

4%

6%

8%

Soft Landing Hard Landing

Note: Weighted average. Countries included: Argentina, Brazil, Chile, Mexico, Peru, Uruguay and Venezuela. The soft landing refers to a growth rate in China of 6,7% in 2015 that converges to 6,5% in 2018. The hard landing refers to a growth rate of 4,3%% in 2015 that converges to 5,5 in 2017.Source: OECD/CEPAL/CAF (2015), Latin American Economic Outlook 2016: Towards a new partnership with China based on CAF calculations and official data

What has been the policy response?

Source: Datastream

Exchange rates have played part in the adjustment…

Exchange rate of Latin American currencias against the dollar (100 = March 2000)

Mar-01

Sep-01

Apr-02

Oct-02

Apr-03

Oct-03

Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14

Oct-14

Apr-15

Oct-15

50

70

90

110

130

150

170

190

210

Brazil Chile Colombia Mexico Peru

…but at a cost since inflation rates are beyond targets in most countries, limiting the scope for monetary stimulus

The inflation rate and targets in selected Latin American economies (%, December/December, 2015 and 2016)

Brazil Chile Colombia Mexico Peru Uruguay0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Inflation 2015 Inflation 2016 Upper limit Lower limit

Source: Datastream, Consensus Forecast and OECD Economic Outlook 98 database

There is not much space for fiscal stimulus eitherStructural balances are less robust now than they were last decade...


Fiscal impulse and output gap in Latin American economies (change in the structural primary fiscal balance, % GDP)

Argentina Brazil Chile Colombia Costa Rica Mexico Peru Uruguay-9

-7

-5

-3

-1

1

3

5

2007-2009-2014

Fiscal impulse Output Gap

… and debt levels have increased


Public debt in Latin American economies ( % GDP)

0

10

20

30

40

50

60

70

80

Ecuador Bolivia Brasil Panamá Colombia Perú Argentina Uruguay Paraguay Venezuela México Chile

2010 2014 2000

The current account deficit will remain high, and in some cases is no longer covered by direct investment

Current account balance in selected Latin American economies (% GDP)

Argentina Brazil Chile Colombia Dominican Rep.

El Salvador Guatemala Mexico Nicaragua Peru Uruguay Costa Rica-8

-7

-6

-5

-4

-3

-2

-1

0

1

2014 2015 2016 2017

Source: For Brazil, Chile, Colombia, Costa Rica and Mexico: OECD Economic Outlook 98 database. IMF World Economic Outlook database (October 2015) for the remaining countries

It is more than the cycleStructural issues that explain weakness in growth…

Trend growth in Latin American economies (% annual; HP filter)


0%

2%

4%

6%

8%

Arg

entin

a

Bol

ivia

Bra

sil

Chi

le

Col

ombi

a

Dom

Rep

Ecua

dor

Mex

ico

Pana

ma

Para

guay

Peru

Trin

idad

and

Toba

go

Uru

guay

Vene

zuel

a

1990-99 2000-09 2010-14 2015-19

The contribution of productivity to growth is scant …

Growth accounting: contribution of factor accumulation and total factor productivity to growth in Latin America (% annual)

80-85 85-90 90-95 95-00 00-05 05-10 10-15-4%

-2%

0%

2%

4%

6%

8%

K L PTF Y

Source: CAF (2015). The woes of productivity in Latin America. Work in progress.Note: Annual weighted average of Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico, Panama, Paraguay, Peru, Uruguay and Venezuela.

“Productivity isn’t everything, but in the long run it is almost everything” (P. Krugman)

Labour productivity in selected Latin American and Asian economies(% productivity of the US, 5 year moving average, PPP)

Source: Melguizo, A. y J.R. Perea (2015), “Skill gaps in emerging economies: An empirical analysis”, Working Paper No. 329, OECD Development Centre

0%

10%

20%

30%

40%

50%

60%

70%

Korea Latin America Chile Colombia China Mexico

Resuming strong and stable growth rates is neccesary to overcome the middle income trap

GDP per capita in a number of OECD, Asian and Latin American economies (GDP per capita, PPP in USD from 1990)

Source: OECD Development Centre (2016), “Overcoming the middle income trap in Latin America: The role of skills, infrastructure, finance and fiscal policy”. In progress

CHL URY ARG VEN CRI MEX COL BRA PER CHN SGP JPN KOR ESP PRT MYS0

5000

10000

15000

20000

25000

30000

35000

Low income

Middle income

High income

2014 1980 1950

• Economic growth in Latin America will continue to be weak in 2016 and 2017

• Given the structural characteristics of the region, the scope for demand (monetary and fiscal) policies is limited

• To overcome the middle income trap, Latin America has to re-establish an agenda that promotes productivity for inclusive growth

• Close infrastructure gaps• Improve human capital and worker’s skills• Increase State capacity• Identify and mitigate frictions that impede the growth of

most productive enterprises and mobilizing factors to them

Latin American Economic Outlook 2016: macroeconomic outlook


2



3


Contribution to global growth: China vs. Latin America and the Caribbean (%)

Note: Latin America covers 32 economies of Latin America and the Caribbean. The advanced economies category covers 37 countries.Source: OECD/ECLAC/CAF based on data from the International Monetary Fund, World Economic Outlook Database, (database), (April 2015).

China will continue to be an engine for global growth

1991-1995 1996-2000 2001-2005 2006-2010 2011-20150

10

20

30

40

50

60

Advanced economies China India Latin America

Trade structure by technological intensity (%, 2014)

Note: The definition of the five categories of products is based on calculations of technological content according to Lall (2000).

Source: OECD/ECLAC/CAF based on the United Nations, United Nations Commodity Trade Statistics Database (COMTRADE).

Moving beyond raw materials and increasing the content of technology remains a challenge…

0

10

20

30

40

50

60

70

80

90

100

To China To the world From China From the world

Exports Imports

%

High-technology manufactures Medium-technology manufactures Low-technology manufactures Natural-resource-based manufactures Commodities

Participation in global value chains in Latin America and China (%)

Note: LAC6 covers Argentina, Brazil, Chile, Colombia, Costa Rica, and Mexico due to data availability. ‘Full sample’ covers 61 high- and middle-income countries.

Source: OECD/ECLAC/CAF based on the TiVA database, OECD/WTO (2015).

… as well as improving the position in global value chains

2000 2011 2000 2011 2000 2011LAC 6 China Full sample

0

10

20

30

40

50

60

GVC participation in % of gross exports

Forward participation Backward participation

%

Intraregional China Intraregional ChinaBackward linkages Forward linkages

0

2

4

6

8

10

12

14

16

18

Intraregional and China's share in Latin America's GVC linkages

2000 2011

%

‘Beyond trade’ I: Expanding financial flows

Loans from China and multinational organisations to Latin America (Millions USD)

Source: OECD/ECLAC/CAF based on annual reports (CAF, IDB, World Bank) and Gallagher and Myers (2014) for data on Chinese loans.

Note: Chinese loans include mainly loans granted by the CDB and the CHEXIM. Loans from the World Bank are comprised of the IBRD and the IDA. CAF loans concerning credit commitments and IDB data include loans and approved guarantees.

0

5000

10000

15000

20000

25000

30000

35000

40000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

WB CAF IDB China

Latin American Foreign Direct Investment inflows, 2009-13 (%)

‘Beyond trade’ II: FDI flows from China still low, but a growing opportunity

Brazil Mexico South America Caribbean0%

20%

40%

60%

80%

100%

Total FDI inflows to Latin America by sector, 2009-13

Services Manufactures Natural Resources

65%3%

10%

15%

4% 3%

China's outward FDI (2010)

Asia

Africa

Europe

Latin America

North America

Oceania

Source: OECD/ECLAC/CAF based on data from national sources and China’s National Bureau of Statistics.

‘Beyond trade’ III: Latin America has been ‘middle-income’ (as China today) for decades

The middle income trap in Latin America and the OECD(GDP per capita constant 1990 PPP dollars)

CHL URY ARG VEN CRI MEX COL BRA PER BOL CHN SGP JPN KOR ESP PRT MYS0

5000

10000

15000

20000

25000

30000

35000

Low

Middle

High

2014 1980 1950

Source: OECD/ECLAC/CAF (2015), Latin American Economic Outlook 2016: Towards a new partnership with China


2



3


Agriculture Mining and ores Manufacturing and services

Fossil fuels0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Baseline scenario Low-investment scenario Exports growth 2000-2010Annual growth

Projected Latin American exports by product(% annual growth until 2030, according to China’s growth scenarios)

Latin America needs to diversify and upgrade given the prospects for exports…


Food Opportunity Index in Latin America from Chinese demand

… although China’s consumption prospects will offer opportunities for Latin American exports in commodities and services

Note: The weighted average weight osilates between -2.4 and 2.1; the data correspond to the year 2013 and the Revision 4 of SITC.Source: OECD/ECLAC/CAF with data from the Comtrade and Agricultural Outlook 2014-2023 database of the OECD-FAO (2014).

0

0.2

0.4

0.6

0.8

1

1.2

Projections of the population with tertiary education in China and Latin America, (number of people)

Expanding and improving skills is an increasingly important factor

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

LAC (high graduation) LAC (baseline) China (high graduation) China (baseline)


Skills is the new currency for modernization and competitiveness

Students with higher education by field in China and Latin America (%)

Source: OECD/ECLAC/CAF with data from the Bureau of National Statistics (China) and World Bank Edstats (Education Statistics).

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

China LAC

Other Humanities, social sciences, law and education STEM

Beyond coverage: quality and pertinence (soft skills, bridges with the labour market)

Performance on PISA tests by students from China, Latin America and OECD (points)

Note: The sample from China includes 21 003 students from 621 schools in 11 provinces and municipalities (Fangshan district of Beijing and Tianjin municipality, Hainan, Hebei, Hubei, Jiangsu, Jilin, Ningxia, Sichuan, Yunnan and Zhejiang provinces).

Source: PISA database and OECD Economic Survey China (2015).

0

100

200

300

400

500

600

Scenarios for China to finance Latin America

Countries

Traditional Diversified

ARG BRA ECU VEN ADDITIONAL COUNTRIES

Sectors

Targeted

Infrastructure (transport, energy, telecoms)

SCENARIO 1 (TODAY) SCENARIO 2 (BASELINE)

Extractive

Diversified

Technological innovation

SCENARIO 3 (NEW SECTORS) SCENARIO 4 (NEW SECTORS AND COUNTRIES)Green technologies

Information technologies

Chinese financing in Latin America will (should?) move towards greater diversification

Source: OECD/CEPAL/CAF (2015), Latin American Economic Outlook 2016: Towards a new partnership with China.

This diversification will take place at the sector level (FDI) and country level (loans)

LoansOriented to countries:• With less access to international markets• Rich in natural resources• Willing to accumulate debt in renminbi

Baseline scenario: geographic expansion, with the same sectoral concentration

Foreign direct investmentOriented to countries not receiving bilateral loansDiverse sectoral approach: telecommunications, energy, agriculture, manufacturing, innovation.

Baseline scenario: expansion into new sectors in countries which receive loans (e.g. Brazil) and countries which do not receive loans (e.g. Chile)

Trade• China is already the primary trading partner of Brazil, Chile and Peru• Growth prospects in several markets: food and agriculture, services and

tourism

Investment • Various investment initiatives: China-Mexico bi-national energy fund, Integral

Strategic Alliance in Argentina, China-Brasil Bi-lateral Fund, China-CELAC loan programme

Policy dialogue and co-operation• Co-operation programmes: food technology in Argentina, Joint Action Plan

2015-21 in Brazil, CONICYT-China agreement in Chile for science and technology, agreement with Peru for water resource management (…)

Summing upOpportunities from a new relationship Latin America- China…

… that can be optimised through policy responses

• New Productive Development PoliciesUpgrade GVCs and develop services and logisticsDevelop food and agriculture sectors with higher valu-added

• Skill developmentReinforce vocacional training and training in the private sectorImprove information mechanisms to promote enrolment in STI

• Consolidate a regional strategy with ChinaUse the regional platforms (e.g. Pacific Alliance, Mercosur, CELAC, Caricom) Take advantage of China’s investment to reduce gaps in infrastructure Improve regulatory frameworks to:

• Favour regional integration• Reduce the environmental impact of extractive industries

Thank you!

Access the full publication here:http://www.latameconomy.org/es/outlook/

LEO 2016 at the Wilson Center Washington DC

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