To decouple or to couple? A question for Latin America Juan Carlos Moreno BridMatthew Hammill Deputy DirectorEconomic Affairs Officer ECLAC - MexicoESCAP – New Delhi IDEAS, Chennai, January 2012

One lens: the BPC growth model Harrod, Prebisch, Thirlwall, Gap models Long term growth must not generate an unsustainable balance of payments (vs Corden at al Does the Current Account matter?) BPC Specifications: levels or ratios, trade and factor payments from abroad X – M = 0, (X – M) / Y ≤ k, interests, remittances

Thirlwall’s model of BPC growth Income elasticity of imports External demand Effect of real exchange rate cum price elasticities of trade Income elasticity of imports

To overcome BPC Diversify external demand, Ratio of income elasticities, internal market industrial/trade policy, induce investment public infrastructure,income redistribution Real exchange rate: avoid persistent appreciation 4 Watch capital flows and key stock-flow ratios: Public, Private -bank and non bank- balance sheets!

Data: Latin America’s growth linked to the US economy,

LA ‘s recent growth … to decoupling? 6 Source: ECLAC Preliminary Overview of the Economies of Latin America and the Caribbean, 2012

Some opinions… pre 2010 “When the USA sneezes, Latin America catches a cold” Popular saying “What crisis? Go ask Bush?” Lula de Silva, President of Brazil, mid-Sep 2008 few weeks before stock market plunged 20%. Now the US caught the flu, Mexico a mild cold Mexico’s Central Bank late 2008 It is going to be an economic tsunami for us Same source, some months later 7

Some aggregate data and country evidence 8

LA’s exports grew faster than GDP Export-led growth 2.0? Tasas de crecimiento anual

Concentrated in USA and EU 10 Source: ECLAC Preliminary Overview of the Economies of Latin America and the Caribbean, 2012 Latin America: Geographical distribution of exports, (Percentage of total exports)

And rising share of primary inputs Fuente: Comisión Económica para América Latina y el Caribe (CEPAL), sobre la base de datos COMTRADE de Naciones Unidas.

LA’s imports grew faster than exports Annual average rates of growth, Income elasticity of imports rose, in some cases it doubled

The current account deficit widens (% GDP)

Investment ratio peaked in 2011, but is still low LATIN AMERICA: GROSS FIXED CAPITAL FORMATION (Dollars at constant 2005 prices as a percentage of GDP)

The BPC, decoupling, catching-up in ? Some evidence for selected Latin American countries 15

GDP per capita (% of USA), Mind the gap: don’t stand so close to me 16

Mexico’s Trade balance and growth 17

Argentina, Trade balance and economic growth Fuente: Elaboración con base en los indicadores del WDI.

Chile, Trade balance and growth Fuente: Elaboración con base en los indicadores del WDI.

To decouple or to couple? To overcome the BPC? A Latin American answer: Mañana, mañana, mañana…

Thank You 21 Juan Carlos Moreno-BridMatthew Hammill Deputy DirectorEconomic Affairs Officer ECLAC - MexicoESCAP – New Delhi IDEAS, Chennai, January 2012