1 IMF SEMINAR ON REFORMS AND GROWTH IN LATIN AMERICA High Level IMF Seminar on Reforms and Growth in Latin America Washington May 5th 2006

2 1 Macroeconomic Policies for Growth Building Social and Political Coalitions for Reform 2 Institutional Reform and Growth 3

3 Latin Americas growth remains not only low but also highly volatile… Source: OECD Development Centre, 2006 Based on International Financial Statistics, IMF 2005 Volatility calculated as standard deviation of GDP growth over 10-year periods Average

4 While Latin American countries experienced a falling down…

5 …some, more than others, during the period … …some, more than others, during the period …

6..deepening the gap between them and developed countries …

7 …deepening the gap with developed countries…

8 …the Asian countries experienced an historical jump

9 Three reasons why Latin America is not catching up: 1.1 Weak global trade integration Volatile natural resources endowments 1.2 Strong financial dependence 1.3

10 With the exception of Mexico and Chile Latin America still remains closed to exchanges… With the exception of Mexico and Chile Latin America still remains closed to exchanges… Source: OECD Development Centre, 2006 Based on Oxford Latin American History Database 1.1

11 …with a slight improvement in the last decade… …with a slight improvement in the last decade… Source: OECD Development Centre, 2006 Based on International Financial Statistics, IMF 1.1

12 …but falling behind world performance …but falling behind world performance Source: OECD Development Centre, 2006 Based on International Financial Statistics, IMF and Asian Development Bank 1.1

13 Three reasons why Latin America is not catching up: 1.1 Weak global trade integration Volatile natural resources endowments 1.2 Strong financial dependence 1.3

14 Latin America is endowed with natural resources and is dependent on commodity markets Latin America is endowed with natural resources and is dependent on commodity markets Source: OECD Development Centre, 2006 Based on Oxford Latin American History Database and IMF Pink Sheet 1.2

15 Growth relies on performance of primary products and price fluctuations… Growth relies on performance of primary products and price fluctuations… Source: BBVA; BBVA-MAP Latam index monitors the trading prices of commodities in the region 1.2 GDP and trading prices of commodities ( )

16 …as a result macroeconomic volatility has been a major issue for Latin America… …as a result macroeconomic volatility has been a major issue for Latin America… Average Source: Ricardo Haussmann and Helmut Reisen, OECD (1996) 1.2

17 …price volatility in particular has been historically high… …price volatility in particular has been historically high… Source: OECD Development Centre, 2006 Based on Oxford Latin American History Database and IMF Pink Sheet 1.2 Evolution of Price Volatility ( )

18 …although the situation has improved over recent years Source: IMF, 2005 Cyclical Volatility Estimates (standard deviations in %) 1.2

19 …current account imbalances remain persistent today …current account imbalances remain persistent today Average Source: OECD Development Centre, Current Account volatility ( )

20 Three reasons why Latin America is not catching up: 1.1 Weak global trade integration Volatile natural resources endowments 1.2 Strong financial dependence 1.3

21 Source: OECD Development Centre, 2006 Based on IMF, World Bank, National Data Debt ratios have decreased, but they remain high with respect to other economies… Debt ratios have decreased, but they remain high with respect to other economies… Average 1.3 Average debt ratios as percentage of exports ( )

22 The failure to boost internal savings rates is persistent in the region... The failure to boost internal savings rates is persistent in the region... Source: OECD Development Centre, 2006 Based on Global Development Finance, The World Bank,

23 …making Latin America still highly dependent on foreign capital …making Latin America still highly dependent on foreign capital Regional average Source: OECD Development Centre, 2006 Based on Global Development Finance, The World Bank, Net National savings by country ( )

24 Dependency of the region on external capital is not new… Dependency of the region on external capital is not new… Source: OECD Development Centre, 2006 Based on Foreign Capital in Latin America in the Nineteeth and Twentieth Centuries Taylor, A. (2003) 1.3

25 …and today Latin Americas investment ratios remain low and limit growth potential …and today Latin Americas investment ratios remain low and limit growth potential Source: International Financial Statistics,IMF and UNCTAD 1.3

26 Four policy lessons for Latin America: 2.1 Competitiveness Trade diversification 2.2 Financial integration 2.3 Macroeconomic stabilization 2.4

27 Source: C.HJ.Kwan, Nomura Institute of Capital Markets Research Source: OECD Development Centre, 2006 Based on Working Paper by Blázquez, Rodríguez and Santiso, 2006 Competition is increasingly important: China is a wake up call for more reforms in the region Competition is increasingly important: China is a wake up call for more reforms in the region 2.1 (2005) % of exports

28 Four policy lessons for Latin America: 2.1 Competitiveness Trade diversification 2.2 Financial integration 2.3 Macroeconomic stabilization 2.4

29 Trade diversification is required, so more financial independence from external capital flows Trade diversification is required, so more financial independence from external capital flows Source: BBVA; BBVA-MAP Latam index monitors the trading prices of commodities in the region Average 2.2

30 Four policy lessons for Latin America: 2.1 Competitiveness Trade diversification 2.2 Financial integration 2.3 Macroeconomic stabilization 2.4

31 There is still room for more local savings and deepening of financial markets There is still room for more local savings and deepening of financial markets Importance of Pension funds in the Economy (2004) Source: OECD Global Pension Statistics, Average

32 There is also still room for deeper financial integration : Source: Schularick, 2006 Based on GDP figures from Maddison (1995, 2001)) in 1990 international dollars (PPP), and gross foreign investment data from Woodruff (1966) and Wilkins (1989) for 1913/ Average 1913 Average 2000

33 Four policy lessons for Latin America: 2.1 Competitiveness Trade diversification 2.2 Financial integration 2.3 Macroeconomic stabilization 2.4

34 Source: Global Development Finance, The World Bank, 2005 Macroeconomic stabilization can still be improved: Macroeconomic stabilization can still be improved: 2.4

35 …stabilization through reserves can be difficult Source: OECD Development Center, 2006 Based on Global Development Finance, The World Bank, Average International Reserves ( )

36 Other stabilization mechanisms, such as fiscal, need to be enforced Other stabilization mechanisms, such as fiscal, need to be enforced Source: OECD Development Center, 2006 Based on Eduardo Lora, Inter-American Development Bank, 2006 Average 2.4

37 Concluding remarks There are lessons for enhancing convergence of Latin American countries: Competition is increasing: China is a wake up call to foster more reforms in Latin America towards competitiveness and productivity Trade diversification is needed and would help to reduce vulnerabilities of the region More financial integration is decisive as well as increasing financial independence Reforms aiming at macroeconomic stabilization are needed for raising growth on a sustained basis

38 3 Institutional Reform and Growth Building Social and Political Coalitions for Reform 2 Macroeconomic Policies for Growth 1

39 Democratic governments have reached stability, but they are still young Average Source: Javier Santiso, Latin Americas Political Economy of the Possible: Beyond Good Revolutionaries and Free Marketeers. MIT Press. Cambridge, Massachusetts, 2006 MIT Press. Cambridge, Massachusetts, 2006 Based on the Inter-American Development Bank

40 Political landscape may adjust as Latin America faces several elections in 2006… Source: Based on electoral authorities and local press

41 …with the impact of presidential elections being different across countries Source: IADB Politics of Policies Report, 2006 and UNDP, 2005 Average

42 Democratic temporality of mandates is important for the region… Source: Javier Santiso, Latin Americas Political Economy of the Possible: Beyond Good Revolutionaries and Free Marketeers. MIT Press. Cambridge, Massachusetts, 2006 MIT Press. Cambridge, Massachusetts, 2006 Based on the Inter-American Development Bank, 2006

43 …although economic performance becomes less dependent on political cycles… Source: OECD Development Centre. B ased on Banco de Mexico, 2006 B ased on Banco de Mexico, 2006

44 Governments continue to pursue structural reforms for boosting growth…

45 Governments need to enforce the continuity of their policies Source: IADB Politics of Policies Report, 2006 Average

46 Emerging democracies need to be consolidated: Source: IADB Politics of Policies Report, 2006 (2005)

47 …as they are decisive for the functioning of democracy and the quality of policies Source: IADB Politics of Policies Report, 2006 and UNDP, 2005

48 Concluding remarks Political developments are promising: Emerging democracies in Latin America are still consolidating Governments need to enforce the continuity of their economic policies Improving Congress capabilities will be crucial for the quality of these policies

49 3 Institutional Reform and Growth Building Social and Political Coalitions for Reform 2 Macroeconomic Policies for Growth 1

50 Latin Americas competitiveness lies behind other regions due to institutional flaws… 1. Registration requirements Average Source: Doing Business, The World Bank 2006

51 Policy towards the suppleness of labor regulations can still be enforced… 2. Labor market costs Average Source: Doing Business, The World Bank 2006

52 The fiscal setting is key to enhancing competitive markets in the region… 3. Fiscal barriers Average Source: Doing Business, The World Bank 2006

53 There is still room for improving business regulations Source: Doing Business, The World Bank Temporal indicators of business regulation Average

54 The institutional costs for productivity are not only financial but temporal… Number of days needed to open a business Brazil Venezuela Thailand Peru India Argentina Colombia México China South Korea Chile Uruguay Money needed to open a business (in US$) Spain Uruguay South Korea México Venezuela Peru Colombia Chile Brazil Argentina India China Number of days needed to enforce a contract Colombia Peru Brazil India Venezuela Uruguay México Argentina Chile China Spain South Korea Money needed to enforce a contract (in US$) Venezuela Spain Uruguay Chile Argentina Peru México India South Korea China Colombia Brazil Number of days UD$ US$ Source: Doing Business, The World Bank 2006

55 Low confidence in institutions affect their efficiency, and further reforms are needed Mean score given by business executives (World Economic Forum)) Average Source: IADB, 2006 Based on Latinobarometer (1996–2004), World Economic Forum (2005), and Saiegh (2005)

56 Investor protection is important, if not sufficient, for boosting investment Average Strength of investor protection (2005) Source: Doing Business, The World Bank 2006

57 Institutions are not the sole guarantee for improving the investment climate Source: World Bank and Cherchye and Moesen, 2005 Synthetic indicators of institutional quality (2005)

58 More importantly, the quality of policy making needs to be addressed… Source: IADB Politics of Policies Report, 2006 and World Economic Forum, 2005 Key features of Public Policies: Inter-regional comparison

59 Concluding remarks Strengthening the institutional framework is part of the process: Latin American institutions remain perfectible Institutional costs are not only financial but also temporal Although institutions are not the magic box (and tool) for better performance, improving the quality of the policy making process remains a pending issue

60 Thank you for your attention!