SHIFTING WEALTH, CHINA AND THE LATIN AMERICAN …€¦ · SHIFTING WEALTH, CHINA AND THE LATIN...

SHIFTING WEALTH, CHINA AND THE LATIN AMERICAN CHALLENGE An OECD Perspective

Rolando Avendano OECD Development Centre

Universidad Autonoma de Mexico Mexico City – May 29 2012

2

Outline

1 Shifting Wealth: continuing despite hurdles

2 China and Latin America: recent dynamics

3 Overcoming the middle income trap

4 After the diagnostic: public policies to overcome the challenge

4

New Geography of Growth: The Four-speed World in the 1990s

Source: OECD Development Centre, Perspectives on Global Development 2012

The disappointing reality

5

A New Geography of Growth: The Four-speed World in the 2000s

Goodbye divergence, hello convergence?

Source: OECD Development Centre, Perspectives on Global Development 2012

6

Global middle class consumption: catching up in the developing world

Note: Global middle class consumption is defined here as household consumption between USD 10 and USD 100 PPP/day. Projections hold most recent distribution constant (from PovcalNet database) and assume consumption equals income growth (projected by a Cobb-Douglas production function, a model of RER convergence based on the Balassa-Samuelson model, and UN population projections). Source: OECD (2011) calculations based on Kharas (2010).

Global middle class consumption 2000-2050 (% of total)

7

History matters: Chinese economy in the long run

0 100

1 000

10 000

100 000

1 000 000

10 000 000

100 000 000

1700

1730

1760

1790

1820

1850

1880

1910

1940

1970

2000

2030

Comparative Levels of GDP, China and the United States, 1700-2030

(million 1990 International dollars)

USA

China

Source: OECD (2010), and Maddison (2007).

Gross Value Added and Labour Productivity in Agriculture, 1952-2003

(Index 1952=1)

Value added

Labour productivity

8

Myth: The main source of China’s compe66ve advantage is cheap labour

0

10

20

30

40

50

60

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Percen

t of G

DP

Investment in China

Investment in Fixed Assets

Gross fixed capital forma@on

0

10

20

30

40

50

60

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Percen

t a year

Return to Capital before and aAer taxes

Base case

Excluding urban residen@al housing, including inventories, before taxes

Excluding urban residen@al housing, including inventories, aHer taxes

Fixed Capital Investments in China as % of GDP and Return to Capital (1980-2006)

Source: Bai, Chong-‐En. C. Hsieh and Y. Qian. “The Return to Capital in China”. NBER Working Paper 12775. Na@onal Bureau of Economic Research. December 2006. Based on China Sta@s@cal Yearbook.

9

Shifting Wealth and World Development

Shifting wealth and world development

•  Analogy: Compare the world economy with a high jump event in track and field athletics. With the sustained growth of large emerging economies, the world economy has been moving from Straddle to Fosbury technique. World economy is more complex, but it can jump higher – grow faster – than before.

•  What will be the consequences of Fosbury for low and middle-income developing countries, the feet in the metaphor?

10

Herfindahl-Hirschman Index of concentration by Product

Note: Herfindahl-‐Hirschman index es@mated as the squared sum of market shares of exports of country i to country j on all 4-‐digit levels of goods, corrected by the number of exported goods. Nomenclature SITC Revision 3, 2012.

Source: OECD Development Centre, based on Comtrade (2012).

The rise of China s6ll poses the risk of overspecialisa6on for the region

11

Herfindahl-Hirschman Index of concentration by destination

Note: Herfindahl-‐Hirschman index es@mated as the squared sum of market shares of exports of country i to country j on all des@na@ons, corrected by the number of country parrtners. Nomenclature SITC Revision 3, 2012.

Source: OECD Development Centre, based on Comtrade (2012).

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Argentina Brazil Chile Costa Rica Colombia Dominican Republic

Mexico Peru

Latin America and Caribbean

1990 1995 2000 2005 2010

0

0.05

0.1

0.15

0.2

0.25

China Indonesia India Korea Malaysia

East Asia

1990 1995 2000 2005 2010

Latam more resilient by diversifying its export des6na6ons

12

Export compe66on with China is rela6vely low, with some excep6ons

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Thai

land

Hun

gary

Kore

a, R

ep.

Mex

ico

Mal

aysi

a

Uni

ted

Stat

es

Czec

h Re

publ

ic

Sing

apor

e

Rom

ania

Indo

nesi

a

Turk

ey

Pola

nd

Phili

ppin

es

Bulg

aria

Croa

tia

Japa

n

Indi

a

Slov

ak R

epub

lic

Spai

n

Cost

a Ric

a

Paki

stan

Braz

il

El S

alva

dor

Colo

mbi

a

Gua

tem

ala

Arge

ntin

a

Peru

Uru

guay

Hon

dura

s

Rus

sian

Pana

ma

Chile

Boliv

ia

Vene

zuel

a

Para

guay

Low

com

pet.

H

igh

com

pet.

Export Competition with China for selected countries (2000-09)

Note: CS and CC coefficients calculated with exports of country i and exports of country j (China).

Source: OECD Development Centre, based on WITS Database, 2012 .

13

What about compe66on in regional markets?

Trade Compe66on in South America (2000-‐08)

Note: CS and CC coefficients calculated with exports of country i and exports of country j to a specific region (in this case La@n America).

Source: OECD Development Centre, based on WITS Database, 2010.

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90

Argen@na Bolivia Chile Colombia Ecuador Peru Paraguay Uruguay Venezuela

Coef. Spe

cializa6

on ((0-‐1)

Brazil vs China Coef. of Specializa6on

14

Outline





15

Economic growth has been relatively strong since 2003

-‐ 6.0

-‐ 4.0

-‐ 2.0

0.0

2.0

4.0

6.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

LAC OECD

Source: Own calculations based on ECLAC (2011) and OECD (2011), forecast as of November 2011.

•  No decoupling

LATAM is still high beta. Correlation with OECD growth: 0.79

•  But higher alpha?

Since 2004 LAC has grown 2.6 pps per annum more than the OECD

Annual real GDP growth by region (in percent)

16

Fast recovery in LATAM with no impact so far on potential growth

Source: Own calculations based on ECLAC, OECD and World Bank data.

•  Impact was strong

Peak to through: 4.6 pps in LATAM versus 5.3 in OECD

•  But swift recovery in LATAM

GDP reached pre-crisis GDP:

-  6 quarters after peak in LATAM

-  In the OECD it took 15 quarters.

2011 Q3 (last figure):

- LAC-7 is 8.2 pps above peak

-  OECD just 2.6 pps

Average annual growth since through:

-  4.3% LAC-7

-  2.3% in OECD

Quarterly real GDP (seasonally adjusted) Peak = 100

9092949698

100102104106108110

t-‐4

t-‐3

t-‐2

t-‐1 t

t+1

t+2

t+3

t+4

t+5

t+6

t+7

t+8

t+9

t+10

t+11

t+12

LAC-‐7 OECD

17

The global risk cycle is a key driver of LATAM business cycle

-5

-4

-3

-2

-1

0

1

2

3

0

10

20

30

40

50

60

70

80

98 99 00 01 02 03 04 05 06 07 08 09 10 11

Common Factor LAC-7 growth (LHS)VIX (RHS)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Argentina Brazil Chile Colombia Mexico Peru Venezuela

Common factor VIX

Source: Own calculations based on Datastream.

Quarterly LAC-7 growth (y/y) and VIX Simple correlation coefficients

18

What is explains this resilience: Good policies or good luck?

Three main factors explain the new dynamics in the region:

•  A lesson learnt the hard way: sustainable fiscal policy & stable monetary policy •  Exposure versus resilience: the role of trade and financial openness

•  The emergence of China: differences in head and tail winds within the region

19

Real channels: more exposure to external shocks

0.0

0.5

1.0

1.5

2.0

2.5

1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007

ARG BRA CHL COL CRI DOM MEX PER VEN

Exports contribution to growth Trade openness Remittances

Source: OECD (2010).

Current account exposure index

Note: Each indicator is scaled between 0 and 1, with higher values indicating a larger exposure. "

20

0.0

0.5

1.0

1.5

2.0

2.5

1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007 1981 2007

ARG BRA CHL COL CRI DOM MEX PER VEN

Current account deficit Debt/GDP Chinn and Ito index

External finance: more openness but mixed exposure


Financial exposure index

Note: Each indicator is scaled between 0 and 1, with higher values indicating a larger exposure. "

21

Recovery in Latin America: What explains it?

Rela6ve Importance for LAC recovery

Note: Model includes leverage, exports, trade openness, BIS foreign claims to European banks, Chin-Ito index, financial integration index, budget balance, public debt, current account balance, asset and liabilities over GDP, net position,

Source: Avendano and Daude (forthcoming)

22

Solid fiscal positions are reflected by ratings

Source: Standard and Poorʼs, 2012 "

23

Recovery since the crisis & trade competition with China

Argentina

Bolivia

BrazilChile

Colombia

Costa Rica

El Salvador

Guatemala

Mexico

Panama

Paraguay Peru

Venezuela

-‐5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8Recovery since pre-‐crisis pe

ak (%

of p

eak level)

Coefficient of comformity (higher values = more competition with China)

Source: Datastream.

24

…with diverging effects across the continent

80

85

90

95

100

105

110

115

120

125

130

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

South America Central America


Terms of trade (2005 = 100)!

25

Short-term outlook: economic growth

GDP growth in 2011 and monthly forecasts for 2012!

Source: Consensus forecast.

Growth moderation for 2012

•  Partly policy-induced

•  Euro-area problems are responsible for 0.5 – 1.0 pps reduction.

•  Mainly through lower external demand.

•  Average growth forecasts:

LAC Total OECD

2012 3.7 1.6

2013 4.0 2.2

0

1

2

3

4

5

6

7

8

9

Argentina Brazil Chile Colombia Mexico Peru Venezuela

2011 growth Mar-‐11 Jun-‐11 Sep-‐11 Dec-‐11 Feb-‐12

26

Outline





27

1968 2002

Product Space: The “Structure” of export profiles

Bangladesh Korea

garments

Number of exported goods: Number of exported goods:

EXPY: EXPY: Poten@al EXPY: Poten@al EXPY:

54

6728 US$ 5168 US$

53

7501 US$ 5425 US$

28

Diversification vs Upgrading: Asia

•  Large Asian markets: “45º line trackers”.

• Very low star@ng levels of diversifica@on and sophis@ca@on (except CHN).

• The size of the economy allows for developing a wide array of capabili@es.

• High diversifica@on, although a more limited record in terms of upgrading.

Source: Jankowska, A. Nagengast, A., Perea, J.R. “The Product Space and the Middle Income trap: Comparing Asia and Latin American Experiences. OECD Development Centre Working Paper No. 311.

29

• “2-‐stage structural transformers” (KOR, TWN): early and –at @mes-‐ intense increase in diversifica@on, to later focus on upgrading, while maintaining or even reducing the number of sectors where they par@cipate.

• Smaller countries (SGP, MYS) unable to reach the same level of diversifica@on, but successfully placing themselves in high Expy industries.

Diversification vs Upgrading: Asia


30

Ø Central America follows a roughly similar palern, with CRI reaching a higher stage in product sophis@ca@on.

Diversification vs Upgrading: Latin America


31

Adapta6on strategies towards Chinese compe66on: Looking at the firm

Source: Alonso, A. Avendano, R. Estrada, J. “Adapting to the Rise of China: How Can Latin American Companies Succeed? ”. OECD/World Economic Forum Working Paper. 2009.

High value-‐added niche to achieve global scale Products with high vola6lity and customiza6on needs

32

La6n American companies have started to adapt to new value chains

Source: Alonso, A. Avendano, R. Estrada, J. “Adapting to the Rise of China: How Can Latin American Companies Succeed? ”. OECD/World Economic Forum Working Paper. April 2008.

Upstream value chain integra6on

33

Outline




4 After the diagnostic: policies to overcome the challenge

34

Next fiscal steps: reducing pro-cyclicality

-‐0.06

-‐0.04

-‐0.02

0.00

0.02

0.04

0.06

0.08

-‐0.30 -‐0.20 -‐0.10 0.00 0.10 0.20

Variatio

n of cyclically adjusted primary

balance

Output gap

MEX

CHL

URUARG

CRI PER

COL

BRA

-‐0.06

-‐0.05

-‐0.04

-‐0.03

-‐0.02

-‐0.01

0.00

0.01

0.02

0.03

0.04

-‐0.10 -‐0.05 0.00 0.05 0.10

Variatio

n of cyclically adjusted primary

balance

Output gap

Output gap and change in structural balance 1990 - 2009! Output gap and change in structural balance in 2009!

Source: Daude et al (2011).

35

Education: focus on quality and equity

100806040200

20406080

100Argentina

Brazil

Chile

Colombia

Mexico

Panama

Peru

Trinidad and

Tob

ago

Uruguay

Latin

America and the

Carib

bean

OECD

Percen

tage of students

Level 1 Below level 1 Level 2 Level 3 Level 4 Level 5

Distribution of test score in PISA reading tests, according to socioeconomic and cultural household background quartiles, 2009!

Source: Based on data from PISA 2009. Note: The distribu@on by performance levels in La@n America and OECD refers to the simple mean of alainment level weighted at the na@onal level for par@cipa@ng countries in PISA 2009.

36

Innovation: Increase efforts to strengthen national innovation strategies

China

India

Russian Federation

South Africa

0

1

2

3

4

5

0 10 20 30 40 50 60 70 80 90

Investmen

t in R&

D (% of G

DP)

Investment in R&D financed by the private sector (%)

Latin America and the Caribbean OECD Other emerging countries

R&D Investment as percentage of GDP!

37

0.0

500,000.0

1,000,000.0

1,500,000.0

2,000,000.0

2,500,000.0

3,000,000.0

Value Initial Contract Value Renegotiations

Value including renegotiations

Infrastructure: beyond resources, better regulation and coordination

Source: Bitrán E., S. Nieto-‐Parra and J.S. Robledo (2011). Note: Values in Millions of constant Pesos of Dic/09

Colombia: Cost increase from renego6a6ons

38

Summing up

•  Shifting Wealth is an established phenomenon with sustained effects, and Latin America needs to position in it.

•  LATAM resilience: countries have built more buffers. Financial and trade openness

have increased exposure to external shocks.

•  Adaption strategies to Chinese competition are heterogeneous, depending on the sector and firms and country capabilities.

•  Overcoming the “middle income trap” that Latin America is facing requires active public policies in innovation, education and infrastructure.

•  Breaking away from the middle income trap has, almost always, encompassed an upgrading of the export base towards manufacturing.

39

Thank you! www.oecd.org/dev

40

ANNEX

41

Access to Finance: A priority for firms

Domes6c Credit to Private Sector (share of GDP)

Source: World Bank WDI

42

Inflation remains low, stable and predictable in IT economies

-‐10-‐505

10152025303540

1/1/20

07

6/1/20

07

11/1/200

7

4/1/20

08

9/1/20

08

2/1/20

09

7/1/20

09

12/1/200

9

5/1/20

10

10/1/201

0

3/1/20

11

8/1/20

11

1/1/20

12

CPI change (YoY

)

Inflation -‐ Targeting countries

Brazil Chile ColombiaMexico Peru

-‐10-‐505

10152025303540

1/1/20

07

6/1/20

07

11/1/200

7

4/1/20

08

9/1/20

08

2/1/20

09

7/1/20

09

12/1/200

9

5/1/20

10

10/1/201

0

3/1/20

11

8/1/20

11

1/1/20

12

CPI change (YoY

)

Inflation -‐ Non targeting countries

Argentina Venezuela

Source: Datastream.

43

In inflation targeting economies monetary policy was used counter-cyclically

0

5

10

15

20

25

1/1/20

07

6/1/20

07

11/1/200

7

4/1/20

08

9/1/20

08

2/1/20

09

7/1/20

09

12/1/200

9

5/1/20

10

10/1/201

0

3/1/20

11

8/1/20

11

1/1/20

12

rate (%

)

Interest rates -‐ Targeting countries

Brazil Chile Colombia Mexico Peru

0

5

10

15

20

25

1/1/20

07

6/1/20

07

11/1/200

7

4/1/20

08

9/1/20

08

2/1/20

09

7/1/20

09

12/1/200

9

5/1/20

10

10/1/201

0

3/1/20

11

8/1/20

11

1/1/20

12

rate (%

)

Interest rates -‐ Non targeting countries

Argentina Venezuela

Source: Datastream.

44

Source: Datastream.

…without losing credibility

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Brazil

0.0

1.0

2.0

3.0

4.0

5.0

ChileInflation (y-‐on-‐y)Expected inflation (12-‐months ahead)Target

0.00.51.01.52.02.53.03.54.04.55.0

Colombia

0.00.51.01.52.02.53.03.54.04.55.0

Mexico

0.00.51.01.52.02.53.03.54.04.55.0

Peru

45

The Chinese economy today: Technological upgrade

Source: Alonso, A. Avendano, R. Estrada, J. “Adapting to the Rise of China: How Can Latin American Companies Succeed? ”. OECD/World Economic Forum Working Paper. 2009.

46

Medium term objective: Macro performance and risk perception

0

500

1000

1500

2000

2500

1/1/20

07

7/1/20

07

1/1/20

08

7/1/20

08

1/1/20

09

7/1/20

09

1/1/20

10

7/1/20

10

1/1/20

11

7/1/20

11

1/1/20

12

bps

Spreads -‐ Non inflation targeting countries

Argentina Venezuela

0

100

200

300

400

500

600

1/1/20

07

7/1/20

07

1/1/20

08

7/1/20

08

1/1/20

09

7/1/20

09

1/1/20

10

7/1/20

10

1/1/20

11

7/1/20

11

1/1/20

12

bps

Spreads -‐ Inflation targeting countriesBrazil Chile ColombiaMexico Peru

Source: Datastream.

47

Fiscal policy does little to reduce inequalities in Latin America

•  Tax revenues are biased towards non-progressive taxes

•  In particular, personal income tax is low in the region

•  Low l eve l s o f soc i a l expenditures

•  Targeting could also be improved

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Argentina

Brazil

Chile

Colombia

Mexico

Peru

OECD

Market income After taxes and transfers

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

Chile

Mexico

OECD

Market income

+ Cash transfers

-‐ Income tax

+ Education (in-‐kind)

+ Health (in-‐kind)

Income inequality and fiscal redistribu6on effects of different policy instruments (GINI indices)

Source: OECD (2008a) for non-‐La@n American OECD countries, OECD (2008b) for Argen@na, Brazil, Colombia and Peru, and es@ma@ons based on household surveys for Chile and Mexico.

SHIFTING WEALTH, CHINA AND THE LATIN AMERICAN …€¦ · SHIFTING WEALTH, CHINA AND THE LATIN...

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